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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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 number 000-23877
Heritage Commerce Corp
(Exact name of Registrant as Specified in its Charter)
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150 Almaden Boulevard
San Jose, California 95113
(408) 947-6900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
PREFERRED SHARE PURCHASE RIGHTS |
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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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Rigistrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the stock held by non-affiliates of the Registrant, based upon the closing price of its common stock as of June 28, 2002 ($9.60 per share), as reported on the Nasdaq National Market System, was approximately $99.5 million.
As of March 25, 2003, there were 11,222,564 shares of the Registrant's common stock (no par value)
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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HERITAGE COMMERCE CORP
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2002
Part I. |
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Page |
Item 1. |
Business | |
Item 2. |
Properties | |
Item 3. |
Legal Proceedings | |
Item 4. |
Submission of Matters to a Vote of Security Holders | |
Part II. |
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Item 5. |
Market for the Registrant's Common Equity and Related Stockholder Matters | |
Item 6. |
Selected Financial Data | |
Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7a. |
Quantitative and Qualitative Disclosures About Market Risks | |
Item 8. |
Financial Statements and Supplementary Data | |
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | |
Part III. |
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Item 10. |
Directors and Executive Officers of the Registrant | |
Item 11. |
Executive Compensation | |
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. |
Certain Relationships and Related Transactions | |
Item 14. |
Controls and Procedures | |
Part IV. |
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Item 15. |
Exhibits, Financial Statement Schedules and Reports on Form 8-K |
Signatures and Certifications Under Section 302 of the Sarbanes - Oxley Act |
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Financial Statements |
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Exhibit Index |
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PART I
ITEM 1 - BUSINESS
Discussions of certain matters in this Report on Form 10- K 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 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", "assume," "plan," "predict," "forecast" 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. The 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. All of the Company's operations and most of its customers are located in California. In addition, other events, including those of September 11, 2001, the threat of terrorism or the impact of potential military conflicts have increased the uncertainty related to the national and California economic outlook and could have an effect on the future operations of the Company or its customers, including borrowers. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.
Heritage Commerce Corp (the "Company") is registered with the Board of Governors of the Federal Reserve System ("FRB") as a Bank Holding Company under the Bank Holding Company Act ("BHCA"). The Company was organized in 1997 to be the holding Company for Heritage Bank of Commerce ("HBC"). In 1998 the Company also became the holding Company for Heritage Bank East Bay ("HBEB"); in January 2000 the Company became the holding Company for Heritage Bank South Valley ("HBSV"); and in October 2000 the Company became the holding Company for Bank of Los Altos ("BLA"). HBC, HBEB, HBSV, and BLA are sometimes collectively referred to herein as the "Banks".
During 2002, the Company's Board of Directors approved the merger of three of its wholly owned commercial bank subsidiaries into the Company's original wholly owned bank subsidiary, HBC. On January 1, 2003, HBEB, HBSV, and BLA were merged into HBC. The former HBEB, HBSV, and BLA now operate as divisions of HBC and continue to serve their local markets and communities under their current names.
The Internet address of the Company's website is "http://www.heritagecommercecorp.com." In 1998 the Company began making available free of charge through the Company's website, the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports. The Company makes these reports available on its website on the same day they appear on the SEC's website.
On June 6, 2001, HBSV opened a full service branch in Gilroy, California. The Gilroy office offers a complete line of custom tailored business and personal banking services and products.
General Banking Services
The Company's customer base consists primarily of small to medium-sized businesses and their owners, managers, and employees residing in Santa Clara, Alameda, and Contra Costa counties. Businesses served include manufacturers, distributors, contractors, professional corporations/partnerships, and service businesses. The Company had approximately 14,900 deposit accounts at December 31, 2002.
The Company offers a range of loans, primarily commercial, including real estate, construction, Small Business Administration (SBA), inventory and accounts receivable, and equipment loans. The Company also accepts checking, savings, and time deposits; NOW and money market deposit accounts; and provides travelers' checks, safe deposit, and other customary non-deposit banking services. The Company does not have a trust department.
HBC's main and executive offices and the Company's offices are located at 150 Almaden Boulevard, San Jose, California 95113. In addition, HBEB is located at 3077 Stevenson Blvd., Fremont, California 94538, HBSV is located at 18625 Sutter Drive, Morgan Hill, California 95037, and BLA is located at 4546 El Camino Real, Los Altos, California 94022. See Item 2 -"PROPERTIES." The Company's primary market area is Santa Clara, Alameda, and Contra Costa counties. The Company serves a secondary market consisting of the South Bay portion of the San Francisco Bay area and portions of other counties contiguous to its primary market area.
Recent management change
Effective February 1, 2003, the Company's Board of Directors elected Mr. Phillip R. Boyce as Chairman of the Board of Heritage Commerce Corp and its subsidiary bank, HBC. Mr. Brad L. Smith remains CEO of Heritage Commerce Corp and was appointed CEO of HBC by the Board of Directors at their January 2003 meeting. Mr. John McGrath remains President of HBC.
William Nethercott, Lane Lawson, and Robert Holden remain as President and CEO of HBEB, HBSV, and BLA divisions, which will continue to serve their local markets and communities.
In November 2002 Philip L. Griffin, the Company's Chief Information Officer, was promoted to Executive Vice President. Mr. Griffin joined the Company as a Senior Vice President in October 2000, and oversees the Company's Information/Data Services function.
The banking and financial services business in California generally, and in the Company's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the consolidation among financial service providers. The Company competes for loans, deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Company. In order to compete with the other financial service providers, the Company principally relies upon local promotional activities, personal relationships established by officers, directors, and employees with its customers, and specialized services tailored to meet its customers' needs. In those instances where the Company is unable to accommodate a customer's needs, the Company seeks to arrange for such loans on a participation basis with other financial institutions or to have those services provided in whole or in part by its correspondent banks. See Item 1 - "BUSINESS - Supervision And Regulation."
General
Bank holding companies and banks are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the deposit insurance fund and not for the benefit of stockholders of the Company. Set forth below is a summary of certain laws that relate to the regulation of the Company and HBC. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
As a registered bank holding company, the Company is subject to the supervision of, and regular inspection by, the Federal Reserve Board (FRB). Historically the activities of bank holding companies, such as the Company, have been limited by the BHCA to banking, managing or controlling banks, furnishing services to or performing services for their subsidiaries, or any other activity which the FRB deems to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the FRB is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition, or gains in efficiency that outweigh the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Generally, bank holding companies are required to give notice to or obtain prior approval from FRB to engage in any new activity or to acquire more than 5% of any class of voting stock of any bank. For discussion of the expansion of the powers of bank holding companies, see "Gramm-Leach-Bliley Act" below. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiary, HBC, are subject to examination by, and may be required to file reports with, the California Department of Financial Institutions (the "Department").
The Company's common stock is registered with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As such, the Company is subject to the information, proxy solicitation, insider trading, and other requirements and restrictions of the Exchange Act.
Deposit accounts at HBC are insured by the Federal Deposit Insurance Corporation (FDIC), which currently insures deposits to a maximum of $100,000 per depositor. For this protection, HBC pays a semi-annual assessment and are subject to the rules and regulations of the FDIC pertaining to deposit insurance and other matters.
As of January 1, 2003, the Company completed the merger of three of its wholly owned commercial bank subsidiaries into HBC, the Company's first and largest bank in San Jose. HBEB, HBSV and BLA became divisions of HBC and will continue to serve their local markets and communities.
As of December 31, 2002, HBC, HBEB, HBSV, and BLA were California state-chartered banks and members of the Federal Reserve System; subsequent to the mergers, HBC remains a California state-chartered member bank. State banks chartered in California that are members of the FRB are subject to regulation, supervision and regular examination by the Department and by the FRB. The regulations of the Department and the FRB continue to govern most aspects of HBC's business, including reporting requirements, activities, investments, loans, borrowings, certain check-clearing activities, branching, mergers and acquisitions, reserves against deposits, and other areas.Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act of 1999 (the "GLB Act") became effective March 11, 2000. The GLB Act repeals two provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and Section 32, which restricts officer, director, or employee interlocks between a member bank and any Company or person "primarily engaged" in specified securities activities. In addition, the GLB Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHCA framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a Financial Holding Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Generally, the GLB Act:
In order for the Company to take advantage of the ability to affiliate with other financial services providers, the Company must become a "Financial Holding Company" as permitted under an amendment to BHCA. To become a Financial Holding Company, the Company would file a declaration with the FRB, electing to engage in activities permissible for Financial Holding Companies and certifying that it is eligible to do so because its insured depository institution subsidiary is well-capitalized and well-managed. In addition, the FRB must also determine that the insured depository institution subsidiary of the Company has at least a "Satisfactory" CRA rating. The Company currently meets the requirements to make an election to become a Financial Holding Company. The Company's management has not determined at this time whether it will seek an election to become a Financial Holding Company. The Company is examining its strategic business plan to determine whether, based on market conditions, the relative financial conditions of the company and its subsidiaries, regulatory capital requirements, general economic conditions, and other factors, the Company desires to utilize any of the expanded powers provided in the GLB Act.
The GLB Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance Company portfolio investment, real estate development, real estate investment, or merchant banking, all of which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the BHCA or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its depository institution affiliates, must be "well-capitalized" and "well-managed." The total assets of all financial subsidiaries may not exceed the lesser of 45% of a bank's total assets, or $50 billion. A national bank must exclude from its assets and equity all equity investments, including retained earnings, in a financial subsidiary. The assets of the subsidiary may not be consolidated with the bank's assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.
The GLB Act provides that designated federal regulatory agencies, including the FDIC, the FRB, the OCC and the SEC, must publish regulations to implement certain provisions of the Act. These agencies have cooperated in the release of rules that establish minimum requirements to be followed by financial institutions for protecting the privacy of financial information provided by consumers. The FDIC's rule requires a financial institution to (i) provide notice to customers about its privacy policies and practices, (ii) describe the conditions under which the institution may disclose nonpublic personal information about consumers to nonaffiliated third parties, and (iii) provide a method for consumers to prevent the financial institution from disclosing information to nonaffiliated third parties by "opting out" of that disclosure.
The GLB Act also includes a new section of the Federal Deposit Insurance Act governing subsidiaries of state banks that engage in "activities as principal that would only be permissible" for a national bank to conduct in a financial subsidiary. It expressly preserves the ability of a state bank to retain all existing subsidiaries. Because California permits commercial banks chartered by the state to engage in any activity permissible for national banks, HBC will be permitted to form subsidiaries to engage in the activities authorized by the GLB Act, to the same extent as a national bank. In order to form a financial subsidiary, the bank must be well-capitalized, and the bank would be subject to the same capital deduction, risk management and affiliate transaction rules are applicable to national banks.
The Company does not believe that the GLB Act has had or will have a material adverse effect on our operations in the near-term. However, to the extent that the GLB Act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The GLB Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company faces from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and HBC.
Limitations on Dividends
The Company's ability to pay cash dividends is dependent on dividends paid to it by HBC. Under California law the holders of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available therefor, subject to certain restrictions. A California corporation such as the Company may make a distribution to its shareholders if its retained earnings will equal at least the amount of the proposed distribution. California law further provides that in the event sufficient retained earnings are not available for the proposed distribution a corporation may nevertheless make a distribution to its shareholders if, after giving effect to the distribution, it meets two conditions, which generally stated are as follows: (i) the corporation's assets must equal at least 125% of its liabilities; and (ii) the corporation's current assets must equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and before interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, then the corporation's current assets must equal at least 125% of its current liabilities. Most bank holding companies are unable to meet this test.
The payment of cash dividends by the Company depends on various factors, including the earnings and capital requirements of itself and its subsidiaries, and other financial conditions. The primary source of funds for payment of dividends by the Company to its shareholders will be the receipt of dividends and management fees from HBC. The Company has no present intention of paying cash dividends in the foreseeable future. The legal ability of HBC to pay dividends is subject to restrictions set forth in the California banking law and regulations of the FDIC. No assurance can be given that HBC will pay dividends at any time. For restrictions applicable to HBC, see Item 5 - "MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - Dividends."
Safety and Soundness Standards
The federal banking agencies have adopted guidelines establishing standards for safety and soundness. The guidelines are designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, earnings, asset quality, asset growth, and compensation, fees and benefits. The guidelines establish the safety and soundness standards that the agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If an institution fails to comply with a safety and soundness standard, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan or to implement an accepted plan may result in enforcement action.
"Source Of Strength" Policy
According to FRB policy, bank holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary.
Capital Adequacy Guidelines
Federal banking agencies have adopted risk-based capital guidelines for insured banks and bank holding companies. These guidelines require a minimum risk-based capital ratio of 8%, with at least 4% in the form of "Tier 1" capital. Tier 1 capital consists of common equity, non- cumulative perpetual preferred stock, trust preferred securities, and minority interests in the equity accounts of consolidated subsidiaries and excludes goodwill. "Tier 2" capital consists of cumulative perpetual preferred stock, limited-life preferred stock, mandatory convertible securities, subordinated debt and (subject to a limit of 1.25% of risk-weighted assets) general loan loss reserves.
The guidelines make regulatory capital requirements more sensitive to the differences in risk profiles among banking institutions, take off-balance sheet items into account when assessing capital adequacy and minimize disincentives to holding liquid low-risk assets. In addition, the regulations may require some banking institutions to increase the level of their common shareholders' equity. Banking regulators have also instituted minimum leverage ratio guidelines for financial institutions. The leverage ratio guidelines require maintenance of a minimum ratio of 3% Tier 1 capital to total assets for the most highly rated bank holding Company organizations. Institutions that are less highly rated, anticipating significant growth, or subject to other significant risks will be required to maintain capital levels ranging from 1% to 2% above the 3% minimum.
The following table presents the capital ratios of the Company computed in accordance with applicable regulatory guidelines and compared to the standards for minimum capital adequacy requirements under the FDIC's prompt corrective action authority as of December 31, 2002:
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December 31, 2002 |
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Actual |
For Capital Adequacy Purposes |
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Amount |
Ratio |
Amount |
Ratio |
Total risk-based capital/risk-weighted assets |
$ 113,177,000 |
13.4% |
$ 67,568,000 |
(greater than or equal to) 8.0% |
Federal banking agencies, including the FRB and the FDIC, have adopted regulations implementing a system of prompt corrective action pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The regulations establish five capital categories for banks based on the capital measures indicated below:
Capital Category |
Total Risk-Based Capital Ratio |
Tier 1 Risk-Based Capital Ratio |
Tier 1 Leverage Ratio |
Well capitalized |
10.0% |
6.0% |
5.0% |
(1) Tangible equity to total assets less than 2.0%
As of December 31, 2002, management believes the Company's capital met all minimum regulatory requirements and that the Company's subsidiary Banks were all considered "well capitalized" under the regulatory framework for prompt corrective action.
The regulations establish procedures for classification of financial institutions within the capital categories, filing and reviewing capital restoration plans required under the regulations and procedures for issuance of directives by the appropriate regulatory agency, among other matters. See Item 1 - "BUSINESS - Supervision and Regulation - Prompt Corrective Action."
The appropriate federal banking agency, after notice and an opportunity for a hearing, is authorized to treat a well capitalized, adequately capitalized or undercapitalized insured depository institution as if it had a lower capital-based classification if it is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Thus, an adequately capitalized institution can be subject to the restrictions on undercapitalized institutions (provided that a capital restoration plan cannot be required of the institution) described below and an undercapitalized institution can be subject to the restrictions applicable to significantly undercapitalized institutions described below. See Item 1 - "BUSINESS - Supervision And Regulation - Prompt Corrective Action."
An insured depository institution cannot make a capital distribution (as broadly defined to include, among other items, dividends, redemption and other repurchases of stock), or pay management fees to any person who controls the institution, if thereafter it would be undercapitalized. The appropriate federal banking agency, however, may (after consultation with the FDIC) permit an insured depository institution to repurchase, redeem, retire or otherwise acquire its shares if such action (i) is taken in connection with the issuance of additional shares or obligations in at least an equivalent amount and (ii) will reduce the institution's financial obligations or otherwise improve its financial condition. An undercapitalized institution is also generally prohibited from increasing its average total assets. An undercapitalized institution is also generally prohibited from making any acquisitions, establishing any branches or engaging in any new line of business except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the appropriate federal banking agency is given authority with respect to any undercapitalized depository institution to take any of the actions it is required to or may take with respect to a significantly undercapitalized institution as described below if it determines "that those actions are necessary to carry out the purpose" of FDICIA.
The federal banking agencies have adopted a joint agency policy statement to provide guidance on managing interest rate risk. The statement indicated that the adequacy and effectiveness of a bank's interest rate risk management process and the level of its interest rate exposures are critical factors in the agencies' evaluation of the bank's capital adequacy. If a bank has material weaknesses in its risk management process or high levels of exposure relative to its capital, the agencies will direct it to take corrective action. Such directives may include recommendations or directions to raise additional capital, strengthen management expertise, improve management information and measurement systems, reduce level of exposure or some combination of these actions.
The federal banking agencies have issued an interagency policy statement that, among other things, establishes certain benchmark ratios of loan loss reserves to certain classified assets. The benchmark set forth by such policy statement is the sum of (i) 100% of assets classified loss; (ii) 50% of assets classified doubtful; (iii) 15% of assets classified substandard; and (iv) estimated credit losses on other assets over the upcoming 12 months. This amount is neither a "floor" nor a "safe harbor" level for an institution's allowance for loan losses.
Insurance Premiums and Assessments
Pursuant to FDICIA, the FDIC has developed a risk- based assessment system, under which the assessment rate for an insured depository institution will vary according to the level of risk incurred on its activities. An institution's risk category is based upon whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. Each insured depository institution is also to be assigned to one of the following "supervisory subgroups": group A, B or C. Group A institutions are financially sound institutions with few minor weaknesses; Group B institutions are institutions that demonstrate weaknesses which, if not corrected, could result in significant deterioration; and Group C institutions are institutions for which there is a substantial probability that the FDIC will suffer a loss in connection with the institution unless effective action is taken to correct the areas of weakness.
The FDIC assigns each Bank Insurance Fund (BIF) member institution an annual FDIC assessment rate, summarized below (assessment figures are expressed in terms of cents per $100 in deposits):
Capital Category |
Group A |
Group B |
Group C |
Well capitalized |
0 (1)3 10 |
3 |
17 |
At December 31, 2002, HBC's, HBEB's, HBSV's, and BLA's assessment rates were all equivalent to that of a well capitalized, group A institution.
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1, 1997, HBC began paying, in addition to their normal deposit insurance premium as a member of the BIF, an assessment that is used toward the retirement of the Financing Corporation bonds ("FICO Bonds") issued in the 1980s to assist in the recovery of the savings and loan industry. Members of the Savings Association Insurance Fund ("SAIF"), also pay an assessment, which generally has been calculated at a higher rate than the assessment paid by banks. Under the Paperwork Reduction Act, the FDIC is not permitted to establish SAIF assessment rates that are lower than comparable BIF assessment rates. Effective January 1, 2000, the rate paid to retire the FICO Bonds became equal for members of the BIF and the SAIF. The Paperwork Reduction Act also provided for the merging of the BIF and the SAIF by January 1, 1999 provided there were no financial institutions still chartered as savings associations at that time. However, as of January 1, 2003, there were still financial institutions chartered as savings associations.
In February 2000 the FDIC announced that it was refining the system by which it assesses the risks that are presented to the deposit insurance fund by certain financial institutions. The refinements are intended to identify institutions with a typically high-risk profiles from among those institutions in the best-rated premium category, and to determine whether there are unresolved supervisory concerns regarding the risk-management practices of those institutions. The FDIC is concerned about institutions that exhibit characteristics such as rapid asset growth (especially when concentrated in potentially risky, high-yielding lending areas), significant concentrations in high-risk assets, and recent changes in business mix. The FDIC has noted that although such institutions may be well-capitalized and exhibit good earnings when the economy is strong, they often experience deteriorating financial conditions when economic conditions are less favorable. As a result, institutions whose practices are determined to exhibit risky traits under the refined risk assessment system will be assessed higher insurance premiums. These rules are not expected to have a significant impact on HBC.
Prompt Corrective Action
The FDIC has authority: (1) to request that an institution's regulatory agency take enforcement action against it based upon an examination by the FDIC or the agency, (2) if no action is taken within 60 days and the FDIC determines that the institution is in an unsafe or unsound condition or that failure to take the action will result in continuance of unsafe or unsound practices, to order the action against the institution, and (3) to exercise this enforcement authority under "exigent circumstances" merely upon notification to the institution's appropriate regulatory agency. This authority gives the FDIC the same enforcement powers with respect to any institution and its subsidiaries and affiliates as such institution's appropriate regulatory agency has with respect to those entities.
An undercapitalized institution is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. The plan must specify (i) the steps the institution will take to become adequately capitalized, (ii) the capital levels to be attained each year, (iii) how the institution will comply with any regulatory sanctions then in effect against the institution, and (iv) the types and levels of activities in which the institution will engage. The banking agency may not accept a capital restoration plan unless the agency determines, among other things, that the plan "is based on realistic assumptions, and is likely to succeed in restoring the institution's capital" and "would not appreciably increase the risk . . . to which the institution is exposed." A requisite element of an acceptable capital restoration plan for an undercapitalized institution is a guaranty by its parent holding Company that the institution will comply with such capital restoration plan. Liability with respect to this guaranty is limited to the lesser of (i) five percent of the institution's assets at the time when it became undercapitalized and (ii) the amount necessary to bring the institution into capital compliance with "all capital standards applicable to [it]" as of the time when the institution fails to comply with the plan. The guaranty liability is limited to companies controlling the undercapitalized institution and does not affect other affiliates. In the event of a bank holding Company's bankruptcy, any commitment by the bank holding Company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment over the claims of other creditors, including the holders of the Company's long-term debt.
FDICIA provides that the appropriate federal regulatory agency must require an insured depository institution that (i) is significantly undercapitalized or (ii) is undercapitalized and either fails to submit an acceptable capital restoration plan within the time period allowed by regulation or fails in any material respect to implement a capital restoration plan accepted by the appropriate federal banking agency to take one or more of the following actions: (i) sell enough shares, including voting shares, to become adequately capitalized; (ii) merge with (or be sold to) another institution (or holding Company), but only if grounds exist for appointing a conservator or receiver; (iii) restrict certain transactions with banking affiliates as if the "sister bank" exception to the requirements of Section 23A of the Federal Reserve Act did not exist; (iv) otherwise restrict transactions with bank or non-bank affiliates; (v) restrict interest rates that the institution pays on deposits to "prevailing rates" in the institution's "region"; (vi) restrict asset growth or reduce total assets; (vii) alter, reduce or terminate activities; (viii) hold a new election of directors; (ix) dismiss any director or senior executive officer who held office for more than 180 days immediately before the institution became undercapitalized, provided that in requiring dismissal of a director or senior executive officer, the agency must comply with certain procedural requirements, including the opportunity for an appeal in which the director or officer will have the burden of proving his or her value to the institution; (x) employ "qualified" senior executive officers; (xi) cease accepting deposits from correspondent depository institutions; (xii) divest certain non-depository affiliates which pose a danger to the institution; (xiii) be divested by a parent holding Company; and (xiv) take any other action which the agency determines would better carry out the purposes of the prompt corrective action provisions.
In addition to the foregoing sanctions, without the prior approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to any senior executive officer or increase the rate of compensation for such an officer without regulatory approval. Furthermore, in the case of an undercapitalized institution that has failed to submit or implement an acceptable capital restoration plan, the appropriate federal banking agency cannot approve any such bonus.
Not later than 90 days after an institution becomes critically undercapitalized, the appropriate federal banking agency for the institution must appoint a receiver or a conservator, unless the agency, with the concurrence of the FDIC, determines that the purposes of the prompt corrective action provisions would be better served by another course of action. Any alternative determination must be documented by the agency and reassessed on a periodic basis. Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the FDIC determines that the institution has a positive net worth, is in compliance with a capital plan, is profitable or has a sustainable upward trend in earnings and is reducing its ratio of non-performing loans to total loans and the head of the appropriate federal banking agency and the chairperson of the FDIC certify that the institution is viable and not expected to fail.
The FDIC is required, by regulation or order, to restrict the activities of such critically undercapitalized institutions. The restrictions must include prohibitions on the institution's doing any of the following without prior FDIC approval: entering into any material transactions not in the usual course of business; extending credit for any highly leveraged transaction; engaging in any "covered transaction" (as defined in Section 23A of the Federal Reserve Act) with an affiliate; paying "excessive compensation or bonuses"; and paying interest on "new or renewed liabilities" that would increase the institution's average cost of funds to a level significantly exceeding prevailing rates in the market.
Brokered Deposits
A bank cannot accept brokered deposits (defined to include payment of an interest rate more than 75 basis points above prevailing rates) unless (i) it is well capitalized or (ii) it is adequately capitalized and receives a waiver from the FDIC. A bank that cannot receive brokered deposits also cannot offer "pass-through" insurance on certain employee benefit accounts unless certain specified procedures are followed. In addition, a bank that is "adequately capitalized" may not pay an interest rate on any deposits in excess of 75 basis points over certain prevailing market rates. There are no such restrictions on a bank that is "well capitalized."
Federal Reserve Borrowings
The FRB may not make advances to an undercapitalized institution for more than 60 days in any 120-day period without a viability certification by a federal banking agency or by the Chairman of the FRB after an examination by the FRB. If an institution is deemed critically undercapitalized, an extension of FRB credit cannot continue for more than five days without demand for payment unless the FRB is willing to accept responsibility for any resulting loss to the FDIC. As a practical matter, this provision is likely to mean that FRB credit will not be extended beyond the limitations in this provision.
Potential Enforcement Actions; Supervisory Agreements
Banks and their institution-affiliated parties may be subject to potential enforcement actions by the FRB, the FDIC or the Office of the Comptroller of the Currency (OCC) for unsafe or unsound practices in conducting their businesses, or for violations of any law, rule or regulation or provision, any consent order with any agency, any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance of deposits, the imposition of civil money penalties and removal and prohibition orders against institution- affiliated parties.
Interstate Banking
Interstate Banking and Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-Neal Act) authorizes interstate banking and interstate branching, subject to certain state options.
Limitations on Concentrations. An interstate banking application may not be approved if the applicant and its depository institution affiliates would control more than 10% of insured deposits nationwide or more than 30% of insured deposits in the state in which the bank to be acquired is located. These limits do not apply to mergers solely between affiliates. States may waive the 30% cap on a nondiscriminatory basis. Nondiscriminatory state caps on deposit market share of a depository institution and its affiliates are not affected by the regulation.
Agency Authority. A bank subsidiary of a bank holding Company can be authorized to receive deposits, renew time deposits, close loans, service loans and receive payments on loans as an agent for a depository institution affiliate without being deemed a branch of the affiliate. Banks are not permitted to engage, as agent for an affiliate, in any activity as agent that it could not conduct as a principal, or to have an affiliate, as its agent, conduct any activity that it could not conduct directly, under federal or state law.
Host State Regulation. The Riegle-Neal Amendments Act of 1997 amended federal law to provide that branches of state banks that operate in other states will be governed in most cases by the laws of the home state, rather than the laws of the host state. Exceptions are that a host state may apply its own laws of community reinvestment, consumer protection, fair lending and interstate branching. Host states cannot supplement or restrict powers granted by a bank's home state. The amendment will assure state-chartered banks with interstate branches uniform treatment in most areas of their operation.
Community Reinvestment Act. Community Reinvestment Act (CRA) evaluations are required for each state in which an interstate bank has a branch. Interstate banks are prohibited from using out-of-state branches "primarily for the purpose of deposit production." Federal banking agencies have adopted regulations to ensure that interstate branches are being operated with a view to the needs of the host communities.
Foreign Banks. Foreign banks are able to branch to the same extent as U.S. domestic banks. Interstate branches acquired by foreign banks are subject to the CRA to the extent the acquired branch was subject to the CRA before the acquisition.
California Law. California has enacted state legislation in accordance with authority under the Riegle-Neal Act. This state law permits banks headquartered outside California to acquire or merge with California banks that have been in existence for at least five years, and thereby establish one or more California branch offices. An out-of-state bank may not enter California by acquiring one or more branches of a California bank or other operations constituting less than the whole bank. The law authorizes waiver of the 30% limit on state-wide market share for deposits as permitted by the Riegle-Neal Act. The law also authorizes California state-licensed banks to conduct certain banking activities (including receipt of deposits and loan payments and conducting loan closings) on an agency basis on behalf of out-of- state banks and to have out-of-state banks conduct similar agency activities on their behalf.
Tie-in Arrangements and Transactions with Affiliated Persons
A bank is prohibited from certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, a bank may not condition an extension of credit on a promise by its customer to obtain other services provided by it, its holding Company or other subsidiaries (if any), or on a promise by its customer not to obtain other services from a competitor.
Directors, officers and principal shareholders of the Company, and the companies with which they are associated, may conduct banking transactions with the Company in the ordinary course of business. Any loans and commitments to loans included in such transactions must be made in accordance with applicable law, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar creditworthiness, and on terms not involving more than the normal risk of collectibility or presenting other unfavorable features.
Community Reinvestment Act
Pursuant to the Community Reinvestment Act of 1977, the federal regulatory agencies that oversee the banking industry are required to use their authority to encourage financial institutions to help meet the credit needs of the local communities in which such institutions are chartered, consistent with safe and sound banking practices.
When conducting an examination of a financial institution such as HBC, the agencies assess the institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. This record is taken into account in an agency's evaluation of an application for creation or relocation of domestic branches or for merger with another institution. Failure to address the credit needs of a bank's community may also result in the imposition of certain other regulatory sanctions, including a requirement that corrective action be taken.
The federal banking agencies determine a bank's CRA rating by evaluating its performance on lending, service, and investment tests, with the lending test as the most important. The tests are to be applied in an "assessment context" that is developed by the agency for a particular institution. The assessment context takes into account demographic data about the community, the community's characteristics and needs, the institution's capacities and constraints, the institution's product offerings and business strategy, the institution's prior performance, and data on similarly situated lenders. Since the assessment context is developed by the regulatory agencies, a particular bank will not know until it is examined whether its CRA programs and efforts have been sufficient.
Larger institutions are required to compile and report certain data on their lending activities in order to measure performance. Some of this data is also required under other laws, such as the Equal Credit Opportunity Act. Small institutions (those institutions with less than $250 million in assets) are now being examined on a "streamlined assessment method." The streamlined method focuses on the institution's loan to deposit ratio, degree of local lending, record of lending to borrowers and neighborhoods of differing income levels, and record of responding to complaints. Large and small institutions have the option of being evaluated for CRA purposes in relation to their own pre-approved strategic plan. Such a strategic plan must be submitted to the institution's regulator three months before its effective date and be published for public comment.
Environmental Regulation
Federal, state, and local regulations regarding the discharge of materials into the environment may have an impact on the Company. Under federal law, liability for environmental damage and the cost of cleanup may be imposed on any person or entity who is an owner or operator of contaminated property. State law provisions impose substantially similar requirements. Both federal and state laws provide generally that a lender who is not actively involved in contaminating a property will not be liable to clean up the property, even if the lender has a security interest in the property or becomes an owner of the property through foreclosure, provided certain conditions are observed.
The Economic Growth Act includes protection for lenders from liability under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980. The Economic Growth Act specifies the actions a lender may take with respect to lending and foreclosure activities without incurring environmental cleanup liability or responsibility. Typical contractual provisions regarding environmental issues in the loan documentation and due diligence inspections will not lead to lender liability for cleanup, and a lender may foreclose on contaminated property, so long as it merely maintains the property and moves to divest it at the earliest possible time.
Under California law, a lender generally will not be liable to the State for the cost associated with cleaning up contaminated property unless the lender realized some benefit from the property, failed to divest the property promptly, caused or contributed to the release of the hazardous materials, or made the loan primarily for purposes of investing in the property.
The extent of the protection provided by both the federal and state lender protection statutes depend on their interpretation by administrative agencies and courts. The Company cannot predict whether it will be adequately protected for the types of loans made by it. In addition, the Company is still subject to the risks that a borrower's financial position will be impaired by liability under the environmental laws and that property securing a loan made by the Company may be environmentally impaired and not provide adequate security for the Company. The Company attempts to protect its position against environmental risks by performing prudent due diligence. Environmental questionnaires and information on the use of toxic substances are requested as part of its underwriting procedures. The Company lends based on its evaluation of the collateral, net worth of the borrower, and the borrower's capacity for unforeseen business interruptions or risks.
Limitation on Activities
FDICIA prohibits state chartered-banks and their subsidiaries from engaging, as principal, in activities not permissible by national banks and their subsidiaries, unless the bank's primary federal regulator determines the activity poses no significant risk to the BIF and the state bank is and continues to be adequately capitalized. Similarly, state bank subsidiaries may not engage, as principal, in activities impermissible by subsidiaries of national banks. This prohibition extends to acquiring or retaining any investment, including those that would otherwise be permissible under California law.
The State Bank Parity Act, eliminates certain disparities between California state chartered banks and federally chartered national banks by authorizing the Commissioner to address such disparities through a streamlined rulemaking process. The Commissioner has taken action pursuant to the Parity Act to authorize, among other matters, previously impermissible share repurchases by state banks, subject to the prior approval of the Commissioner.
In November 1996, the OCC issued final regulations permitting national banks to engage in a wider range of activities through subsidiaries. "Eligible institutions" (those national banks that are well-capitalized, have a high overall rating and a satisfactory CRA rating, and are not subject to an enforcement order) may engage in activities related to banking through operating subsidiaries after going through a new expedited application process. In addition, the new regulations include a provision whereby a national bank may apply to the OCC to engage in an activity through a subsidiary in which the bank itself may not engage. In determining whether to permit the subsidiary to engage in the activity, the OCC will evaluate why the bank itself is not permitted to engage in the activity and whether a Congressional purpose will be frustrated if the OCC permits the subsidiary to engage in the activity. The State Bank Parity Act may permit state-licensed banks to engage in similar new activities, subject to the discretion of the Commissioner.
State Bank Sales of Non-Deposit Investment and Insurance Products
Securities activities of state non-member banks, as well as the activities of their subsidiaries and affiliates, are governed by the GLB Act and by guidelines and regulations issued by the securities and financial institution regulatory agencies. These agencies have taken the position that bank sales of alternative investment products, such as mutual funds and annuities, raise substantial bank safety and soundness concerns involving consumer confusion over the nature of the products offered, as well as the potential for mismanagement of sales programs which could expose a bank to liability under the antifraud provisions of federal securities laws.
Accordingly, the agencies have issued guidelines that require, among other things, the establishment of a compliance and audit program to monitor a bank's mutual funds sales activities and its compliance with applicable federal securities laws; the provision of full disclosures to customers about the risks of such investments, including the possible loss of the customer's principal investment; and the conduct of securities activities of bank subsidiaries or affiliates in separate and distinct locations. In addition, the guidelines prohibit bank employees involved in deposit-taking activities from selling investment products or giving investment advice. Banks are also required to establish a qualitative standard for the selection and marketing of the investments offered by the bank, and to maintain appropriate documentation regarding the suitability of investments recommended to bank customers.
California state-licensed banks have authority to engage in the insurance business as an agent or broker, but not as an insurance underwriter.
Change in Senior Executives or Board Members
Certain banks and bank holding companies are required to file a notice with their primary regulator prior to (i) adding or replacing a member of the board of directors, or (ii) the employment of or a change in the responsibilities of a senior executive officer. Notice is required if the bank or holding company is failing to meet its minimum capital standards or is otherwise in a "troubled condition", as defined in FDIC regulations, has undergone a change in control within the past two years, or has received its bank charter within the past two years.
Impact of Economic Conditions and Monetary Policies
The earnings and growth of the Company will be affected by general economic conditions, both domestic and international, and by the monetary and fiscal policies of the United States Government and its agencies, particularly the FRB. One function of the FRB is to regulate the national supply of bank credit in order to mitigate recessionary and inflationary pressures. Among the instruments of monetary policy used to implement those objectives are open market transactions in United States Government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements held by depository institutions. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, the effect, if any, of such policies on the future business and earnings of the Company cannot be accurately predicted.
Cross-Institution Assessments
Any insured depository institution owned by the Company can be assessed for losses incurred by the FDIC in connection with assistance provided to, or the failure of, any other depository institution owned by the Company.
Audit Requirements
Like all California state-chartered commercial banks, HBC is required to have an annual independent audit and to prepare all financial statements in accordance with generally accepted accounting principles. HBC is also required to have an independent audit committee comprised entirely of outside directors. Under National Association of Securities Dealers (NASD) on- time certifications, the Company has certified that the audit committee has adopted a formal written charter and meets the requisite number of directors, independence and qualification standards. The Company's stock is listed on Nasdaq.
Other Consumer Protection Laws and Regulations
The bank regulatory agencies closely monitor an institution's compliance with consumer protection laws and regulations. The examination and enforcement activities conducted by these agencies are intense, and banks have been advised to focus on compliance with consumer protection laws and their implementing regulations. The federal Interagency Task Force on Fair Lending has issued a policy statement on discrimination in home mortgage lending which describes three methods that federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In addition to CRA and fair lending requirements, HBC is subject to numerous other federal consumer protection statutes and regulations. Due to heightened regulatory concern related to compliance with consumer protection laws and regulations generally, HBC may incur additional compliance costs or be required to expend additional funds for investments in the local communities it serves.
USA PATRIOT Act
On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act").
Part of the USA Patriot Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA").
IMLAFATA authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to banks, bank holding companies, and/or other financial institutions. These measures may include enhanced recordkeeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions.
Among its other provisions, IMLAFATA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks; and (iii) avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, IMLAFATA contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. IMLAFATA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours. IMLAFATA also amends the Bank Holding Company Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing an application under these acts.
Regulations adopted pursuant to IMLAFATA implement minimum standards to verify customer identity, to encourage cooperation among financial institutions, federal banking agencies, and law enforcement authorities regarding possible money laundering or terrorist activities, to prohibit the anonymous use of "concentration accounts," and to require all covered financial institutions to have in place a Bank Secrecy Act compliance program.
The Company is establishing policies and procedures to ensure compliance with the IMLAFATA. As of the date of this filing, the Company has not determined the impact that IMLAFATA will have on the Company's operations.
Regulation W
On December 12, 2002, the FRB adopted Regulation W, the rule that comprehensively implements sections 23A and 23B of the Federal Reserve Act. The rule is effective April 1, 2003.
Sections 23A and 23B and Regulation W limit the risks to a bank from transactions between the bank and its affiliates and limit the ability of a bank to transfer to its affiliates the benefits arising from the bank's access to insured deposits, the payment system and the discount window and other benefits of the FRB. The statute and rule impose quantitative and qualitative limits on the ability of a bank to extend credit to, or engage in certain other transactions with, an affiliate (and a nonaffiliate if an affiliate benefits from the transaction). However, certain transactions that generally do not expose a bank to undue risk or abuse the safety net are exempted from coverage under Regulation W.
Historically, a subsidiary of a bank was not considered an affiliate for purposes of Sections 23A and 23B, since their activities were limited to activities permissible for the bank itself. The GLB Act authorized "financial subsidiaries" that may engage in activities not permissible for a bank. These financial subsidiaries are now considered affiliates. Certain transactions between a financial subsidiary and another affiliate of a bank are also covered by sections 23A and 23B under Regulation W.
Regulation W has certain exemptions, including:
The final rule contains new valuation rules for a bank's investments in, and acquisitions of, affiliates.
The FRB expects examiners and other supervisory staff to review intercompany transactions closely for compliance with the statutes and Regulation W and to resolve any violations or potential violations quickly.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the "Act"), which implemented legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the Act places certain restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. All services being provided to a public company audit client will require preapproval by the company's audit committee. In addition, the Act makes certain changes to the requirements for partner rotation after a period of time. The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. In addition, under the Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
Under the Act, longer prison terms will apply to corporate executives who
violate federal securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restatement of a company's financial statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
SEC as a result of any judicial or administrative action under the Act be
deposited to a fund for the benefit of harmed investors. The legislation
accelerates the time frame for disclosures by public companies, as they must
immediately disclose any material changes in their financial condition or
operations. Directors and executive officers must also provide information for
most changes in ownership in a company's securities generally within two
business days of the change.
The Act also increases responsibilities and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm." Audit Committee members must be
independent and are absolutely barred from accepting consulting, advisory or
other compensatory fees from the issuer. In addition, companies must disclose
whether at least one member of the committee is an "audit committee financial
expert" (as defined by the SEC) and if not, why not. A company's registered
public accounting firm will be prohibited from performing audit services for a
company if the company's chief executive officer, chief financial officer,
comptroller, chief accounting officer or any person serving in equivalent
positions had been employed by the auditor and participated in the company's
audit during the year preceding the audit initiation date. The Act also
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company's financial statements for the purpose of rendering the financial
statements materially misleading. The Act also requires the SEC to prescribe
rules requiring inclusion of any internal control report and assessment by
management in the annual report to shareholders. The Act will require the
company's registered public accounting firm that issues the audit report to
attest to and report on management's assessment of the company's internal
controls.
Although the Company anticipates that it will incur additional expense in
complying with the provisions of the Act, management does not expect that
compliance will have a material impact on the Company's financial condition or
results of operations.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Company, HBC and the banking industry in general are pending, and additional initiatives may be proposed or introduced, before the United States Congress, the California legislature and other governmental bodies in the future. For example, from time to time consumer legislation has been proposed in Congress which would require banks to offer basic, low-cost financial services to meet minimum client needs. In addition, the various banking regulatory agencies often adopt new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulations may be enacted or the extent to which the business of the Company and HBC would be affected thereby.
At December 31, 2002, the Company had 214 full- time employees. The Company's employees are not represented by any union or collective bargaining agreement and the Company believes its employee relations are satisfactory.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
In addition to the other information contained financial condition in this report, the following risks may affect the Company. If any of these risks occurs, our business, financial condition or operating results could be adversely affected.
Changes in market interest rates may adversely affect the Company's performance
The Company's earnings are impacted by changing interest rates. Changes in interest rates impact the demand for new loans, the credit profile of existing loans, the rates received on loans and securities and rates paid on deposits and securities and borrowings. The Board of Governors of the Federal Reserve System reduced the short-term interest rates 475 basis points during 2001 and another 50 basis points in November 2002. Any further reductions will continue to have a negative effect on the Company's net interest margin and net interest income.
Business focus and economic conditions in the San Francisco Bay Area could adversely affect the Company's operations
All of the Company's operations and vast majority of its customers are located in the Bay Area of California. A continued deterioration in economic and business conditions in the Bay Area, particularly in the technology and real estate industries on which these areas depend, could have a material adverse impact on the quality of the Company's loan portfolio and the demand for the Company's products and services, which in turn may have a material adverse effect on the Company's results of operations. A downturn in the national economy might further exacerbate local economic conditions.
The banking and financial services business in California generally, and in the Company's market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the consolidation among financial service providers. The Company competes for loans, deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Company. In order to compete with the other financial service providers, the Company principally relies upon local promotional activities, personal relationships established by officers, directors, and employees with its customers, and specialized services tailored to meet its customers' needs. In those instances where the Company is unable to accommodate a customer's needs, the Company seeks to arrange for such loans on a participation basis with other financial institutions or to have those services provided in whole or in part by its correspondent banks.
Both residential and commercial real estate in the Bay Area will continue to be under pressure because of the region's heavy dependence on technology. Job and spending cuts have been extensive in the Bay Area's high- tech industries. Many of the Bay Area's service industries are also severely affected by the tech sector. The drop in job and income growth has had an impact on the real estate market. Further deterioration in the Bay Area job market will tend to adversely affect the quality of the Company's loan portfolio.
The main and executive offices of the Company and the offices of HBC, are located at 150 Almaden Boulevard in San Jose, California 95113, and at 100 Park Center Plaza, Suite 300, also in San Jose, California 95113. HBEB, a division of HBC, is located at 3077 Stevenson Boulevard in Fremont, California 94538, with a branch office located at 310 Hartz Road in Danville, California 94526. HBSV, also a division of HBC, is located at 18625 Sutter Boulevard in Morgan Hill, California 95037, with a branch office at 737 First Street in Gilroy, California 95020. BLA, another division of HBC, is located at 4546 El Camino Real in Los Altos, California 94022, with branch offices located at 369 S. San Antonio Road in Los Altos, California 94022, and at 175 E. El Camino Real in Mountain View, California 94040.
HBC
The main office of HBC is located at 150 Almaden Boulevard in San Jose, California and is subleased under a non-cancelable operating lease dated February 12, 1996 with a non-affiliated third party. The primary operating area consists of approximately 13,511 square feet of Class-A office space in a 15-story building in downtown San Jose, and covers the entire usable ground floor and a portion of the second floor. The sublease arrangement for the primary operating area is a "partial gross lease" for 15 years commencing June 8, 1996 and expiring on February 28, 2010. The current monthly rent payment for this space is $25,535 and is subject to change in 2006 based on fair rental value at that time. The Company has reserved the right to terminate the sublease in 2006, subject to the terms and conditions established for early termination.
In January of 1997, The Company leased approximately 1,255 square feet of office space located next to the primary operating area located at 150 Almaden Boulevard in San Jose, California for meetings, staff training and marketing events. The current monthly rent payment for this space is $3,137 and is subject to annual increases of 3% until the lease expires on February 28, 2010.
In August of 1997, The Company subleased approximately 2,175 square feet of office space located on the second floor at 150 Almaden Boulevard in San Jose, California. The current monthly rent payment for this space is $4,785 and is subject to change in 2006 based on fair rental value at that time. The sublease expires on February 28, 2010, however The Company has reserved the right to terminate the sublease in 2006, subject to the terms and conditions established for early termination.
In June of 1998, The Company leased approximately 5,623 square feet of office space located at 100 Park Center Plaza in San Jose, California. The current monthly rent payment for this space is $12,651 until the lease expires on May 31, 2003. The Company has reserved the right to extend the lease for a single additional period of (3) three years.
In April of 2000, The Company leased approximately 12,824 square feet of office space located on the third floor at 150 Almaden Boulevard in San Jose, California. The current monthly rent payment for this space is $46,243 and is subject to annual increases of 3% until the lease expires on February 28, 2010.
In May of 2002, The Company subleased approximately 6,731 square feet of office space located on the second floor at 150 Almaden Boulevard in San Jose, California. The current monthly rent payment for this space is $14,808 and is subject to change in 2006 based fair rental value at that time. The sublease expires on February 28, 2010, however The Company has reserved the right to terminate the sublease in 2006, subject to the terms and conditions established for early termination.
HBC - Loan Production Offices
In August of 2000, The Company leased space for a loan production office located at 740 Front Street in Santa Cruz, California 95060. The lease covers approximately 2,176 square feet of office space and expires on July 31, 2005. The current monthly rent payment for this space is $4,379 and is subject to annual increases based on the Consumer Price Index of the Bureau of Labor Statistics as defined in the lease agreement.
In April of 2002, The Company renewed its lease for a loan production office located at 23 E. Beach Street in Watsonville, California 95076. The lease covers approximately 147 square feet of office space and expires on April 30, 2003. The current monthly rent payment for this space is $230.
In July of 2002, The Company leased space for (2) loan production offices located at 450 North Brand Boulevard in Glendale, California 91203. Each office is leased under a separate lease agreement, each consisting of approximately 132 square feet of office space. Both leases expire on June 30, 2003, however The Company has reserved the right to extend each lease for multiple additional periods of (1) year each. The current monthly rent payment for each office is $1,435.
In December of 2002, The Company renewed its lease for a loan production office located at 8788 Elk Grove Boulevard in Elk Grove, California 95624. The lease consists of approximately 224 square feet of office space and expires on December 1, 2003, however The Company has reserved the right to extend the lease for a single additional period of (1) one year. The current monthly rent payment for this space is $619.
In February of 2003, The Company renewed its lease for a loan production office located at 285 W. Shaw Avenue in Fresno, California 93720. The lease consists of approximately 336 square feet and expires on February 29, 2004. The current monthly rent payment for this space is $456.80.
HBEB
In November of 1997, HBEB leased approximately 6,590 square feet of space for its primary office in a stand alone office building located at 3077 Stevenson Boulevard in Fremont, California. The current monthly rent payment for this space is $15,421 and is subject to annual increases of 4% until the lease expires on October 24, 2007. HBEB has reserved the right to extend the term of the lease for (2) two successive periods of (5) five years.
In September of 1999, HBEB subleased an additional 2,700 square feet of space for a branch office in a one-story multi-tenant building located at 310 Hartz Avenue in Danville, California. The current monthly rent payment for this space is $7,902, subject to annual increases of 4% until the lease expires on December 31, 2007.
In March of 1999, HBSV leased approximately 7,260 square feet of space for its primary office in a one-story multi-tenant office building located at 18625 Sutter Boulevard in Morgan Hill, California. The current monthly rent payment is $11,676 and is subject to adjustments every 36 months based on the Consumer Price Index of the Labor of Statistics as defined in the lease agreement, until the lease expires on October 31, 2014.
In January of 2001, HBSV leased an additional 2,200 square feet of space for a branch office in a one-story multi-tenant shopping center located at 737 First Street in Gilroy, California. The current monthly rent payment is $3,244 and is subject to change annually based on the Consumer Price Index of the Bureau of Labor Statistics as defined in the lease agreement. The lease expires on December 31, 2006, however Heritage has reserved the right to extend the term of the lease for an additional period of (5) five years.
BLA
In February of 1995, BLA leased approximately 7,889 square feet of space for its primary office in a two-story multi-tenant shopping center located at 4546 El Camino Real in Los Altos, California. In October of 2001, the lease was amended to return 795 square feet to the Landlord, leaving 7,094 square feet remaining. The current monthly rent payment for this space is $13,735 and is subject to annual increases based on the Consumer Price Index of the Bureau of Labor Statistics as defined in the lease agreement. The lease expires on September 30, 2008, however BLA has reserved the right to extend the term of the lease for an additional period of (5) five years.
In January of 1998, BLA lease an additional 4,840 square feet of space for a branch office in a multi-tenant shopping center located at 175 E. El Camino Real in Mountain View, California. The current monthly rent payment for this space is $12,334 and is subject to annual increases based on the Consumer Price Index of the Bureau of Labor Statistics as defined in the lease agreement. The lease expires on January 31, 2008, however BLA has reserved the right to extend the lease period (2) two times by periods of (5) five years each.
In September of 1998, BLA leased an additional 3,471 square feet of space for a branch office in a one-story stand-alone office building located at 369 S. San Antonio Road in Los Altos, California. The current monthly rent payment for this space is $14,212 and is subject to annual increases of 4% until the lease expires on September 30, 2008. BLA has reserved the right to extend the term of the lease (2) two times for periods of (5) years each.
For additional information on operating leases and rent expense, refer to Note 11 of the Company's Consolidated Financial Statements, beginning on page 75 of this Report on Form 10-K.
The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advice of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during the fourth quarter of the year ended December 31, 2002.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq National Market under the symbol "HTBK." Everen Securities, Hoefer & Arnett, Incorporated, Sutro & Co., Incorporated and Van Kasper & Company have acted as market makers for the Common Stock. These market makers have committed to make a market for the Company's Common Stock, although they may discontinue making a market at any time. No assurance can be given that an active trading market will be sustained for the Common Stock at any time in the future.
The information in the following table for 2002 and 2001 indicates the high and low bid prices for the Common Stock, based upon information provided by the Nasdaq National Market. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Quarter |
High |
Low |
Year ended December 31, 2002: |
|
|
Fourth quarter |
$ 8.85 |
$ 8.37 |
Third quarter |
$ 9.65 |
$ 7.45 |
Second quarter |
$ 10.25 |
$ 8.30 |
First quarter |
$ 8.91 |
$ 7.10 |
Year ended December 31, 2001: |
|
|
Fourth quarter |
$ 8.00 |
$ 6.55 |
Third quarter |
$ 8.50 |
$ 6.50 |
Second quarter |
$ 9.38 |
$ 7.82 |
First quarter |
$ 9.69 |
$ 7.75 |
As of March 25, 2003, there were approximately 1,200 holders of Common Stock. There are no other classes of common equity outstanding.
DIVIDENDS
Under California law, the holders of common stock of a bank are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available therefor. The California Banking Law provides that a state-licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the bank's retained earnings, or (ii) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders during such period. However, a bank, with the prior approval of the Department may make a distribution to its shareholders of an amount not to exceed the greater of (i) a bank's retained earnings, (ii) its net income for its last fiscal year, or (iii) its net income for the current fiscal year. In the event that the Department determines that the shareholders' equity of a bank is inadequate or that the making of a distribution by a bank would be unsafe or unsound, the Department may order a bank to refrain from making such a proposed distribution.
The FDIC and the Department have authority to prohibit a bank from engaging in business practices that are considered to be unsafe or unsound. Depending upon the financial condition of a bank and upon other factors, the FDIC or the Department could assert that payments of dividends or other payments by a bank might be such an unsafe or unsound practice. The FRB has similar authority with respect to a bank holding company.
For regulatory restrictions on payment of dividends by the Company, see Item 1- "BUSINESS - Regulation and Supervision - Limitations on Dividends."
To date, the Company has not paid cash dividends. It is the current policy of the Company to retain earnings to increase its capital to support growth. Payment of cash dividends in the future will depend upon the Company's earnings and financial condition and other factors deemed relevant by management. Accordingly, it is likely that no cash dividends from the Company will be paid in the foreseeable future.
The Company distributed a 10% stock dividend on February 21, 2000. All share and per share information has been retroactively adjusted to reflect the stock dividends.
MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY GRANTOR TRUST
To enhance regulatory capital and to provide liquidity the Company issued the following mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trusts: In the first quarter of 2000, the Company issued $7,000,000 aggregate principal amount of 10.875% subordinated debentures due on March 8, 2030 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2000, the Company issued $7,000,000 aggregate principal amount of 10.60% subordinated debentures due on September 7, 2030 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2001, the Company issued $5,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on July 31, 2031 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2002, the Company issued $4,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on September 26, 2032 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. Under applicable regulatory guidelines, the Trust Preferred securities currently qualify as Tier I capital. See "Footnote 8 to the Consolidated Financial Statements" on page 54.
ITEM 6 - SELECTED FINANCIAL DATA
The following table presents a summary of selected financial information that should be read in conjunction with the Company's consolidated financial statements and notes thereto included under Item 8 - "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."
SELECTED FINANCIAL DATA
AT AND FOR YEAR ENDED DECEMBER 31, (Dollars in thousands, except per share --------------------------------------------------------------- amounts and ratios) 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- INCOME STATEMENT DATA: Interest income........................ $ 52,756 $ 65,005 $ 67,921 $ 45,418 $ 38,193 Interest expense....................... 15,237 24,366 25,101 15,398 12,048 ----------- ----------- ----------- ----------- ----------- Net interest income before provision for probable loan losses............ 37,519 40,639 42,820 30,020 26,145 Provision for probable loan losses..... 2,663 1,910 3,159 2,198 1,806 ----------- ----------- ----------- ----------- ----------- Net interest income after provision for probable loan losses............ 34,856 38,729 39,661 27,822 24,339 Noninterest income..................... 9,030 6,297 2,877 6,051 3,178 Noninterest expenses................... 33,209 33,348 34,060 26,598 21,744 ----------- ----------- ----------- ----------- ----------- Income before income taxes............. 10,677 11,678 8,478 7,275 5,773 Provision for income taxes............. 3,500 4,410 3,049 2,606 2,267 ----------- ----------- ----------- ----------- ----------- Net income............................. $ 7,177 $ 7,268 $ 5,429 $ 4,669 $ 3,506 =========== =========== =========== =========== =========== PER SHARE DATA(1): Basic net income(2).................... $ 0.64 $ 0.66 $ 0.51 $ 0.47 $ 0.39 Diluted net income(3).................. $ 0.63 $ 0.64 $ 0.49 $ 0.43 $ 0.35 Book value(4).......................... $ 7.39 $ 6.71 $ 6.01 $ 5.81 $ 4.45 Weighted average number of shares outstanding - basic................. 11,157,287 11,082,157 10,607,584 9,885,036 8,990,769 Weighted average number of shares outstanding - diluted............... 11,417,972 11,379,721 11,108,329 10,922,977 9,916,907 Shares outstanding at period end....... 11,214,414 11,114,967 10,939,124 9,737,739 9,433,773 BALANCE SHEET DATA: Investment securities.................. $ 126,443 $ 106,810 $ 110,802 $ 74,819 $ 127,217 Net loans.............................. $ 660,680 $ 621,763 $ 601,130 $ 394,729 $ 332,862 Allowance for probable loan losses..... $ 13,227 $ 11,154 $ 9,651 $ 6,511 $ 5,069 Total assets........................... $ 958,752 $ 912,730 $ 846,224 $ 677,233 $ 581,404 Total deposits......................... $ 841,936 $ 807,908 $ 738,186 $ 601,420 $ 509,916 Other borrowed funds................... $ -- $ -- $ 18,000 $ 12,000 $ 22,500 Trust preferred securities............. $ 23,000 $ 19,000 $ 14,000 $ -- $ -- Total shareholders' equity............. $ 82,865 $ 74,574 $ 65,733 $ 56,544 $ 41,991 SELECTED PERFORMANCE RATIOS: Return on average assets(5)............ 0.77 % 0.84 % 0.70 % 0.79 % 0.74 % Return on average equity............... 9.14 % 10.23 % 9.07 % 9.68 % 9.60 % Net interest margin.................... 4.39 % 5.00 % 5.95 % 5.56 % 6.03 % Efficiency............................. 71.34 % 71.05 % 74.53 % 73.74 % 74.15 % Average net loans as a percentage of average deposits................. 77.95 % 78.21 % 75.44 % 71.88 % 62.35 % Average total shareholders' equity as a percentage of average total assets.. 8.46 % 8.18 % 7.69 % 8.15 % 7.68 % SELECTED ASSET QUALITY RATIOS(6): Net loan charge-offs to average loans.. 0.09 % 0.07 % -- % 0.20 % -- % Allowance for loan losses to total loan 1.96 % 1.76 % 1.58 % 1.62 % 1.50 % CAPITAL RATIOS(7): Tier 1 risk-based...................... 12.2 % 11.8 % 10.5 % 11.3 % 9.4 % Total risk-based....................... 13.4 % 13.0 % 11.7 % 12.5 % 10.5 % Leverage............................... 10.8 % 10.2 % 9.3 % 8.5 % 7.3 %
Notes:
 
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed or incorporated by reference in this Annual Report on Form 10-K including, but not limited to matters described in this section are forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. See "Item 1 - Business - Forward-looking Statements"
Critical Accounting Policies
General
HCC's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In certain instances, we use a discount factor and prepayment assumptions to determine the present value of assets and liabilities. A change in the discount factor or prepayment spreads could increase or decrease the values of those assets and liabilities which would result in either a beneficial or adverse impact to our financial results. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. The Company applies Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations to account for its stock option plan awards. Other estimates that we use are related to the expected useful lives of our depreciable assets. In addition GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting. (1) Statement of Financial Accounting Standards (SFAS) No. 5 "Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", which requires that losses be accrued based on the differences between that value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
The Company's allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses an historical loss view as an indicator of future losses and, as a result formula losses could differ from the loss incurred in the future. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, and fair market value of collateral are used to estimate those losses. The use of these values is inherently subjective and our actual losses could differ from the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowances. For further information regarding our allowance for credit losses, see Allowance for Probable Loan Losses on page 38.
Loan Sales and Servicing
The amounts of gains recorded on sales of loans and the initial recording of servicing assets and interest only strips is based on the estimated fair values of the respective components. In recording the initial value of the servicing assets and the fair value of the I/O strips receivable, the Company uses estimates which are made based on management's expectations of future prepayment and discount rates. For the year ended December 31, 2002, management's estimate of constant prepayment rate ("CPR") was 14% and the weighted average discount rate assumption was 10%. These prepayment and discount rates were based on current market conditions and historical performance of the various pools. If actual prepayments with respect to sold loans occur more quickly than projected the carrying value of the servicing assets may have to be adjusted through a charge to earnings. A corresponding decrease in the value of the I/O strip receivable would also be expected.
Stock Based Compensation
Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company's stock at the date of the grant over the amount required to be paid to the Company by the optionee upon exercising the option. Because the Company's stock option plan provides for the issuance of options at a price of no less than the fair market value at the date of the grant, no compensation cost is required to be recognized for the stock option plan on the date of grant. For further information see Note 1 to the Consolidated Financial Statements in "Item 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8- K".
OVERVIEW
For the year ended December 31, 2002, consolidated net income was $7,177,000, or $0.63 per diluted share compared to $7,268,000, or $0.64 per diluted share and $5,429,000, or $0.49 per diluted share for the years ended December 31, 2001 and 2000, respectively. The decrease in 2002 from 2001 was primarily a result of the full year effect of the declining interest rate environment that impacted the Company's net interest margin. Although the level of earning assets increased during 2002, the growth was not able to offset the impact of the declining rates. The overall effect on net income was eased by the increase in noninterest income from gains on sales of loans and securities, services charges and other fees, servicing income and other noninterest income. The increase in 2001 over 2000 was primarily a result of the growth in the level of earning assets, funded by new deposits and the gains on sales of SBA loans and securities offset by the effects of the declining interest rate environment.
Average interest earning assets for 2002 were up 5% over 2001. The increase was primarily attributable to growth in loans. The average rate on interest earning assets decreased to 6.17% in 2002 from 7.99% in 2001 and 9.43% in 2000 reflective of the FRB's 50 basis points reduction in 2002 and 475 basis point reduction in 2001 in short term interest rates. Average interest bearing liabilities for 2002 were up 6% over 2001, with the increase primarily attributable to growth in interest bearing demand deposits, savings and money-market accounts and brokered deposits offset by a decrease in time deposits. The Company's average rate paid on interest bearing liabilities decreased to 2.43% in 2002 from 4.12% in 2001 and 4.75% in 2000, reflective of the declining interest rate environment in 2002 and 2001, and the timing of the Company's repricing of its interest bearing deposits. As a result, net interest margin decreased 61 basis points to 4.39% in 2002, compared to a 95 basis point decrease to 5.00% in 2001 from 5.95% in 2000.
Total noninterest income was $9,030,000 in 2002, compared to $6,297,000 in 2001, and $2,877,000 in 2000. The primary components of noninterest income in 2002 included $2,262,000 in gains on sales of SBA loans, $1,036,000 in gains on sales of securities, $1,113,000 in other investments, primarily due to the increase in the cash surrender value of Corporate Owned Life Insurance, $1,324,000 in servicing income, and $1,425,000 in service charges and other fees. Noninterest income in 2001 included $1,758,000 in gains on sales of SBA loans, $732,000 in gains on sales of securities, $967,000 in service charges and other fees, and $1,029,000 in the increase in the cash surrender value of Corporate Owned Life Insurance. Noninterest income in 2000 included $716,000 in service charges and other fees, and $778,000 in the increase in the cash surrender value of Corporate Owned Life Insurance.
Total noninterest expense was $33,209,000 in 2002, down slightly from $33,348,000 in 2001, and $34,060,000 in 2000. Salaries and employee benefits, the single largest component of operating expenses, was $18,116,000 for 2002, consistent with $18,120,000 for 2001, and $16,127,000 in 2000. Decreases in client services expenses and advertising and promotion were offset by increases in the other areas of noninterest expenses. For 2001 compared to 2000, the decrease of $3,164,000 in pretax merger-related expenses relating to the merger with Western Holdings Bancorp was offset by increases in salaries and benefits of $1,993,000, occupancy and equipment expenses of $572,000, and advertising and promotion expenses, loan origination costs, and stationery and supplies of $512,000 in support of the overall growth in the Company.
Total assets as of December 31, 2002 were $958,752,000, an increase of $46,022,000, or 5%, from $912,730,000 as of December 31, 2001. Total deposits as of December 31, 2002 were $841,936,000, an increase of $34,028,000, or 4%, from $807,908,000 as of December 31, 2001.
Total loan portfolio as of December 31, 2002 was $673,907,000, an increase of $40,990,000, or 6%, compared to $632,917,000 as of December 31, 2001. The Company's allowance for probable loan losses was $13,227,000, or 1.96%, of total loans as of December 31, 2002, compared to $11,154,000, or 1.76%, of total loans at December 31, 2001.
Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing, restructured loans and foreclosed assets. As of December 31, 2002, nonperforming assets were $4,571,000. As of December 31, 2001 and 2000 the Company had no nonperforming assets.
The Company's shareholders' equity at December 31, 2002 was $82,865,000 compared with $74,574,000 as of December 31, 2001, an 11% increase, which reflects net earnings of $7,177,000 in 2002, the proceeds from exercise of stock options and the increase in the unrealized gain on securities available- for-sale. Book value per share increased 10% to $7.39 as of December 31, 2002, compared to $6.71 as of December 31, 2001 and $6.01 as of December 31, 2000. The Company's leverage capital ratio increased to 10.8% at December 31, 2002, from 10.2% at December 31, 2001 and 9.3% at December 31, 2000, primarily due to the growth in shareholders' equity and the additional Tier I capital from the $4.0 million of trust preferred securities issued in 2002.
Return on average equity for the year ended December 31, 2002 was 9.14%, compared to 10.23% for 2001 and 9.07% for 2000. Return on average assets in 2002 was 0.77%, compared to 0.84% in 2001. Return on average assets was 0.70% in 2000.
NET INTEREST INCOME AND NET INTEREST MARGIN
The following table presents the average amounts outstanding for the major categories of the Company's balance sheet, the average interest rates earned or paid thereon, and the resulting net yield on average interest earning assets for the periods indicated. Average balances are based on daily averages.
Year Ended December 31, ---------------------------------------------------------------------------------------------------- 2002 2001 2000 -------------------------------- -------------------------------- -------------------------------- Interest Average Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate - ----------------------------------- ---------- --------- --------- ---------- --------- --------- ---------- --------- --------- ASSETS: Loans, gross(1).................... $ 675,295 $ 46,609 6.90% $ 645,632 $ 57,153 8.85%$ 537,317 $ 56,709 10.55% Investment securities(2)........... 111,428 5,076 4.56% 96,340 5,269 5.47% 101,211 6,188 6.12% Interest bearing deposits in banks... 6,758 88 1.30% 5,094 157 3.08% 1,330 66 4.97% Federal funds sold................. 61,191 983 1.61% 66,490 2,426 3.65% 80,073 4,958 6.19% ---------- --------- ---------- --------- ---------- --------- Total interest earning assets... 854,672 52,756 6.17% 813,556 65,005 7.99% 719,931 67,921 9.43% --------- --------- --------- Cash and due from banks............ 37,522 28,795 35,429 Premises and equipment, net........ 5,596 6,024 6,803 Other assets....................... 29,993 20,249 17,026 ---------- ---------- ---------- Total assets.................... $ 927,783 $ 868,624 $ 779,189 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Demand, interest bearing........... $ 81,011 $ 719 0.89% $ 69,634 $ 1,099 1.58%$ 55,616 $ 1,014 1.82% Savings and money-market........... 275,217 4,778 1.74% 227,344 7,014 3.09% 228,336 9,496 4.16% Time deposits, under $100.......... 56,097 1,762 3.14% 78,910 4,237 5.37% 73,058 4,273 5.85% Time deposits, $100 and over....... 129,702 3,572 2.75% 166,268 8,606 5.18% 151,275 8,701 5.75% Brokered deposits.................. 65,183 2,522 3.87% 30,843 1,641 5.32% 10,544 690 6.55% Other borrowings................... 20,784 1,884 9.06% 18,545 1,769 9.54% 9,617 927 9.64% ---------- --------- ---------- --------- ---------- --------- Total interest bearing liabilities................... 627,994 15,237 2.43% 591,544 24,366 4.12% 528,446 25,101 4.75% --------- --------- --------- Demand deposits.................... 211,195 204,114 183,422 Other liabilities.................. 10,079 1,910 7,433 ---------- ---------- ---------- Total liabilities............... 849,268 797,568 719,301 Shareholders' equity............... 78,515 71,056 59,888 ---------- ---------- ---------- Total liabilities and shareholders' equity......... $ 927,783 $ 868,624 $ 779,189 ========== ========== ========== Net interest income / margin....... $ 37,519 4.39% $ 40,639 5.00% $ 42,820 5.95% ========= ========= =========
(1) Yields and amounts earned on loans include loan fees of $4,544,000, $4,532,000, and $4,065,000 for the years ended December 31, 2002, 2001, and 2000. Nonaccrual loans of $4,571,000 for the year ended December 31, 2002, and zero for the years ended December 31, 2001 and 2000 are included in the average balance calculations above.
(2) Interest income is reflected on an actual basis, not a fully taxable equivalent basis and does not include a fair value adjustment.
Net interest income for the year ended December 31, 2002 decreased $3,120,000, or 8%, to $37,519,000, compared to $40,639,000 for 2001. Net interest income for the year ended December 31, 2001 decreased $2,181,000, or 5%, from $42,820,000 reported for 2000. The decreases for both years were due primarily to reductions in the short term interest rate. These reductions immediately affected the rates applicable to the majority of the Company's loans; however, the Company's ability to reprice its interest earning liabilities lagged the repricing of its interest earning assets. The decline in net interest income in 2002 was mitigated by the overall increase in the volume of earning assets which contributed a net $1,931,000. However, the rate decline decreased net interest income by $5,051,000. Average interest earning assets were up $41,116,000, or 5%, in 2002 to $854,672,000 from $813,556,000 for 2001. The yield on interest earning assets in 2002 was 6.17%, compared to 7.99% in 2001, and 9.43% in 2000.
The Company's average interest bearing liabilities were up $36,450,000, or 6%, in 2002 to $627,994,000 compared to $591,544,000 for 2001. The rate paid on interest bearing liabilities in 2002 was 2.43%, compared to 4.12% in 2001, and 4.75% in 2000.
The following tables show the changes in interest income resulting from changes in the volume of interest earning assets and interest- bearing 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, for 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.
Years Ended December 31, ------------------------------------------------------------------ 2002 versus 2001 2001 versus 2000 -------------------------------- -------------------------------- Increase (Decrease) Due Increase (Decrease) Due to Change In: to Change In: -------------------------------- -------------------------------- Average Average Net Average Average Net (Dollars in thousands) Volume Rate Change Volume Rate Change ---------- --------- --------- ---------- --------- --------- INTEREST EARNING ASSETS: Loans, gross..................... $ 2,047 $ (12,591) $ (10,544) $ 9,600 $ (9,156) $ 444 Investment securities............ 687 (880) (193) (266) (653) (919) Interest bearing deposits in banks 22 (91) (69) 116 (25) 91 Federal funds sold............... (85) (1,358) (1,443) (496) (2,036) (2,532) ---------- --------- --------- ---------- --------- --------- Total interest earning assets...... $ 2,671 $ (14,920) $ (12,249) $ 8,954 $ (11,870) $ (2,916) ---------- --------- --------- ---------- --------- --------- INTEREST BEARING LIABILITIES: Demand, interest bearing......... $ 101 $ (481) $ (380) $ 221 $ (136) $ 85 Savings and money-market......... 831 (3,067) (2,236) (31) (2,451) (2,482) Time deposits, under $100........ (717) (1,758) (2,475) 314 (350) (36) Time deposits, $100 and over..... (1,007) (4,027) (5,034) 776 (871) (95) Brokered deposits................ 1,329 (448) 881 1,080 (129) 951 Other borrowings................. 203 (88) 115 875 (33) 842 ---------- --------- --------- ---------- --------- --------- Total interest bearing liabilities. $ 740 $ (9,869) $ (9,129) $ 3,235 $ (3,970) $ (735) ---------- --------- --------- ---------- --------- --------- Net interest income................ $ 1,931 $ (5,051) $ (3,120) $ 5,719 $ (7,900) $ (2,181) ========== ========= ========= ========== ========= =========
PROVISION FOR PROBABLE LOAN LOSSES
The provision for probable loan losses represents the current period expense associated with maintaining an appropriate allowance for credit losses. The loan loss provision and level of allowance for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in the Company's market area. Periodic fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for probable loan losses; however, actual loan losses may vary from current estimates.
For 2002, the provision for probable loan losses was $2,663,000, compared to $1,910,000 for 2001 and $3,159,000 for 2000. The allowance for probable loan losses represented 1.96%, 1.76%, and 1.58% of total loans at December 31, 2002, 2001, and 2000, respectively. See "Allowance for Probable Loan Losses" on page 38 for additional information.
NONINTEREST INCOME
The following table sets forth the various components of the Company's noninterest income:
Increase (Decrease) -------------------------------------------- Years Ended December 31, 2002 versus 2001 2001 versus 2000 -------------------------------- --------------------- --------------------- (Dollars in thousands) 2002 2001 2000 Amount Percent Amount Percent ---------- --------- --------- ---------- --------- --------- ---------- Gain on sale of loans.............. $ 2,262 $ 1,758 $ -- $ 504 29 %$ 1,758 -- % Service charges and other fees..... 1,425 967 716 458 47 % 251 35 % Servicing income................... 1,324 721 236 603 84 % 485 206 % Other investments.................. 1,113 1,029 778 84 8 % 251 32 % Gain on sale of securities available-for-sale............... 1,036 732 44 304 42 % 688 1,564 % Gain on sale of credit card portfolio.................. 172 -- -- 172 -- % -- -- % Other income....................... 1,698 1,090 1,103 608 56 % (13) (1)% ---------- --------- --------- ---------- --------- Total.............................. $ 9,030 $ 6,297 $ 2,877 $ 2,733 43 %$ 3,420 119 % ========== ========= ========= ========== =========
Noninterest income for the year ended December 31, 2002 was $9,030,000, compared to $6,297,000 for 2001 and $2,877,000 for 2000. The increase in 2002 was primarily due to increased sales of SBA loans increasing the gain by $504,000, an increase in service charges and other fees of $458,000, an increase in gains on servicing income of $603,000, and an increase in gains on sales of securities of $304,000, compared to the same period in 2001. The increased sales of SBA loans were attributable to the strategic focus in 2002 on increasing SBA origination and to take advantage of the favorable market conditions for sales of the guaranteed portions. The interest rate environment in 2002 provided the opportunity for the Company to realize gains on the sale of loans and securities. The increases in service charges and fees were primarily the result of an increase in activity resulting from the growth of the Company. The increases in other investment income of $84,000 was primarily the result of increases in the cash surrender value of the Corporate Owned Life Insurance policies, which provides a funding source for the Company's Supplemental Executive Retirement Plan. In additional, noninterest income included a $172,000 gain on sale of the Company's credit card portfolio in 2002.
The increase in 2001 over 2000 was primarily due to an increase in gains on sales of SBA loans of $1,758,000, an increase in gains on sales of securities of $688,000, an increase in service charges and fees of $251,000, an increase in servicing income of $485,000, and an increase of other investment of $251,000. These increases were due to the focus on increasing SBA origination, the favorable market conditions for sales of loans and securities, the increased activity from the growth in the Company and increases in the cash surrender value of the Corporate Owned Life Insurance policies.
NONINTEREST EXPENSES
The following table sets forth the various components of the Company's noninterest expenses:
Increase (Decrease) -------------------------------------------- Years Ended December 31, 2002 versus 2001 2001 versus 2000 -------------------------------- --------------------- --------------------- (Dollars in thousands) 2002 2001 2000 Amount Percent Amount Percent ---------- --------- --------- ---------- --------- --------- ---------- Salaries and benefits.............. $ 18,116 $ 18,120 $ 16,127 $ (4) 0 %$ 1,993 12 % Occupancy.......................... 3,168 2,847 2,399 321 11 % 448 19 % Professional fees.................. 1,563 1,447 1,861 116 8 % (414) (22)% Furniture and equipment............ 1,503 1,453 1,329 50 3 % 124 9 % Loan origination costs............. 1,277 1,335 1,011 (58) (4)% 324 32 % Client services.................... 1,100 1,889 1,839 (789) (42)% 50 3 % Advertising and promotion.......... 737 1,116 1,029 (379) (34)% 87 8 % Stationery & supplies.............. 345 489 388 (144) (29)% 101 26 % Telephone ......................... 338 358 359 (20) (6)% (1) 0 % Merger-related costs............... -- -- 3,164 -- -- % (3,164) (100)% Other.............................. 5,062 4,294 4,554 768 18 % (260) (6)% ---------- --------- --------- ---------- --------- Total.............................. $ 33,209 $ 33,348 $ 34,060 $ (139) 0 %$ (712) (2)% ========== ========= ========= ========== =========
The following table indicates the percentage of noninterest expenses in each category:
Years Ended December 31, ------------------------------------------------------------------ 2002 2001 2000 --------------------- --------------------- -------------------- % of % of % of (Dollars in thousands) Amount Total Amount Total Amount Total ---------- --------- --------- ---------- --------- --------- Salaries and benefits.............. $ 18,116 55% $ 18,120 54% $ 16,127 47% Occupancy.......................... 3,168 10% 2,847 9% 2,399 7% Professional fees.................. 1,563 5% 1,447 4% 1,861 5% Furniture and equipment............ 1,503 5% 1,453 4% 1,329 4% Loan origination costs............. 1,277 4% 1,335 4% 1,011 3% Client services.................... 1,100 3% 1,889 6% 1,839 5% Advertising and promotion.......... 737 2% 1,116 3% 1,029 3% Stationery & supplies.............. 345 1% 489 1% 388 1% Telephone ......................... 338 1% 358 1% 359 1% Merger-related costs............... -- -- -- -- 3,164 9% Other.............................. 5,062 14% 4,294 14% 4,554 15% ---------- --------- --------- ---------- --------- --------- Total.............................. $ 33,209 100% $ 33,348 100% $ 34,060 100% ========== ========= ========= ========== ========= =========
Noninterest expenses for the year ended December 31, 2002 were $33,209,000, down slightly from $33,348,000 for the year ended December 31, 2001, which was down $712,000, or 2%, from $34,060,000 for the year ended December 31, 2000.
Salaries and employee benefits, the single largest component of noninterest expenses, were $18,116,000 for the year ended December 31, 2002, consistent with the $18,120,000 for 2001. The increase in occupancy and equipment expenses of $371,000 and increases in professional fees of $116,000 was in support of the overall growth of the Company. In 2002, client services expense decreased $789,000 due to a reduction in both the level and pricing for certain of these services during 2002. Other noninterest expenses increased $768,000 in 2002 compared to 2001. Advertising and promotion fees decreased $379,000 as certain sponsorships were discontinued in 2002. The most significant change in 2001 over 2000 was the decrease in pretax merger-related expenses due to the merger with Western Holdings Bancorp in 2000 of $3,164,000. This decrease was offset by increases in salaries and benefits of $1,993,000, primarily due to normal merit increases and increase in the number of employees in 2001. The other increases in 2001 in occupancy, equipment, advertising and promotion, loan origination costs and stationary and supplies was in support of the overall growth of the Company and the addition of new facilities.
PROVISION FOR INCOME TAXES
The Company files consolidated federal and combined state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws.
The provision for income taxes was $3,500,000, $4,410,000, $3,049,000 for the years ended December 31, 2002, 2001, and 2000, respectively. The Company's effective tax rates were 32.8%, 37.8%, and 36.0% for the years ended December 31, 2002, 2001, and 2000, respectively. The effective tax rates are lower than the statutory rate of 42% primarily due to the Company purchasing additional Corporate Owned Life Insurance policies on executive officers of the Company, low income housing tax credits, and changes in the level of investments in municipal securities.
FINANCIAL CONDITION
At December 31, 2002, the Company's total assets were $958,752,000, an increase of 5% from $912,730,000 at December 31, 2001. Total portfolio loans were $673,907,000, an increase of 6% from December 31, 2001, and total deposits were $841,936,000, an increase of 4% from December 31, 2001. The increases reflect the continued internal growth of the Company.
SECURITIES PORTFOLIO
The following table sets forth the carrying value of investment securities at the dates indicated:
Years Ended December 31, ------------------------------- (Dollars in thousands) 2002 2001 2000 --------- --------- --------- Securities available-for-sale (at fair value) U.S. Treasury................................... $ 4,740 $ 3,593 $ 8,524 U.S. Government Agencies........................ 48,029 53,762 48,202 Municipals...................................... 12,134 9,273 14,297 Mortgage-backed securities...................... 44,774 22,839 18,870 CMOs.............................................. 14,134 -- -- Corporate bonds................................... 2,632 2,067 -- Other debt securities........................... -- -- 1,001 --------- --------- --------- Total securities available-for-sale.......... $ 126,443 $ 91,534 $ 90,894 ========= ========= ========= Securities held-to-maturity (at amortized cost) Mortgage-backed securities...................... $ -- $ 4,381 $ 5,783 CMOs............................................ -- 893 2,215 Municipals...................................... -- 10,002 11,910 --------- --------- --------- Total securities held-to-maturity.......... $ -- $ 15,276 $ 19,908 ========= ========= =========
The following table summarizes the amounts and distribution of the Company's investment securities and the weighted average yields as of December 31, 2002:
December 31, 2002 -------------------------------------------------------------------------------------------- Maturity -------------------------------------------------------------------------------------------- After One Year After Five Years and Within and Within Within One Year Five Years Ten Years After Ten Years Total ---------------- ---------------- ---------------- ---------------- ---------------- (Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Securities available-for-sale: U.S. treasury............. $ 1,417 1.56 % $ 3,323 2.09 % $ -- -- % $ -- -- % $ 4,740 1.94 % U.S. Government Agencies.. 21,947 5.35 % 26,082 3.28 % -- -- % -- -- % 48,029 4.22 % Municipals - taxable........ 1,127 6.67 % 556 6.45 % -- -- % -- -- % 1,683 6.59 % Municipals - tax exempt... 1,290 4.84 % 6,204 4.41 % 2,957 4.48 % -- -- % 10,451 4.48 % Mortgage-backed securities -- -- % -- -- % 1,267 5.33 % 43,507 4.95 % 44,774 4.96 % CMOs........................ -- -- % -- -- % 2,059 4.65 % 12,075 3.77 % 14,134 3.90 % Corporate bonds............. -- -- % 2,632 4.36 % -- -- % -- -- % 2,632 4.36 % -------- -------- -------- -------- -------- Total available-for-sale $ 25,781 5.18 % $ 38,797 3.47 % $ 6,283 4.71 % $ 55,582 4.69 % $126,443 4.42 % ======== ======== ======== ======== ========
Note: Yields on tax exempt municipal securities are not presented on a fully tax equivalent basis.
During 2002, the Company transferred all of its securities categorized as held-to-maturity to the available-for-sale category. The amortized cost of the transferred securities was $12,778,000 and the related unrealized holding gain was $841,000. The Company transferred these securities to increase liquid assets and to increase the ability for possible sale of these securities in the future and currently intends to classify all new purchases of securities as available-for-sale.
As of December 31, 2002, the only securities held by the Company where the aggregate book value of the Company's investment in securities of a single issuer exceeded 10% of the Company's shareholders' equity were direct obligations of the U.S. government or U.S. government agencies.
Securities are pledged to meet requirements imposed as a condition of deposit by some depositors, such as political subdivisions (public funds) or of other funds such as bankruptcy trustee deposits. Securities with amortized cost of $29,710,000 and $20,084,000 as of December 31, 2002 and 2001 were pledged to secure public and certain other deposits as required by law or contract.
LOANS
Total loans (exclusive of loans held for sale) grew to $673,907,000 at December 31, 2002, up 6% from $632,917,000 at December 31, 2001, adding to the increase of 4% from $610,781,000 at December 31, 2000. The Company's allowance for loan losses was $13,227,000, or 1.96% of total loans, as of December 31, 2002, as compared to $11,154,000, or 1.76% of total loans, at December 31, 2001, and $9,651,000, or 1.58% of total loans, at December 31, 2000. As of December 31, 2002, the Company had $4,571,000 in nonperforming assets. As of December 31, 2001 and 2000, the Company had no nonperforming assets.
The loan portfolio is primarily composed of commercial loans to companies principally engaged in manufacturing, wholesale and service businesses and real estate lending, with the balance in consumer loans. 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. Real estate values in portions of Santa Clara County and neighboring San Mateo County are among the highest in the country at present. 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 presents the Company's loans outstanding at year-end by loan type:
December 31, --------------------------------------------------------------------------------------------- % of % of % of % of % of (Dollars in thousands) 2002 Total 2001 Total 2000 Total 1999 Total 1998 Total --------- ------- --------- ------- --------- ------- --------- ------- --------- ------- Commercial................... $ 263,144 39% $ 208,713 33% $ 200,846 33% $ 141,101 35% $ 95,587 28% Real estate - mortgage....... 259,974 38% 246,119 39% 230,468 38% 153,518 38% 100,870 30% Real estate - land and construction................ 147,822 22% 174,077 27% 171,325 28% 96,868 24% 86,102 25% Consumer..................... 2,850 1% 3,833 1% 8,172 1% 10,048 3% 55,656 17% --------- ------- --------- ------- --------- ------- --------- ------- --------- ------- Total loans.................. 673,790 100% 632,742 100% 610,811 100% 401,535 100% 338,215 100% Deferred loan costs (fees)... 117 175 (30) (295) (284) Allowance for loan losses.... (13,227) (11,154) (9,651) (6,511) (5,069) --------- --------- --------- --------- --------- Loans, net................... $ 660,680 $ 621,763 $ 601,130 $ 394,729 $ 332,862 ========= ========= ========= ========= =========
The change in the Company's loan portfolio is primarily due to the increase in the commercial and real estate mortgage loan portfolio offset by a decline in consumer loans due to the sale of the credit card portfolio in 2002 and the normal maturation on the real estate land and construction loans. The increase in the commercial and real estate mortgage loan portfolios is due to the Company's continued expansion and focus on originating these types of loans.
The Company's commercial loans are made for working capital, financing the purchase of equipment or for other business purposes. Such loans include loans with maturities ranging from thirty days to one year and "term loans," with maturities normally ranging from one to five years. Short-term business loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans normally provide for floating interest rates, with monthly payments of both principal and interest.
The Company is an active participant in the Small Business Administration (SBA) and California guaranteed lending programs, and has been approved by the SBA as a lender under the Preferred Loan Program. The Company regularly makes SBA-guaranteed loans and considers such loans to be investment loans; however, the guaranteed portion of these loans may be sold in the secondary market depending on market conditions and, once it is determined they will be sold, are classified as held for sale and carried at the lower of cost or market. In the event of the sale of a guaranteed portion SBA loan, the Company retains the servicing rights for the sold portion. As of December 31, 2002, 2001, and 2000, $83.0 million, $50.1 million and $12.3 million, respectively, in SBA loans were serviced by the Company for others.
The Company's real estate term loans consist primarily of loans made based on the borrower's cash flow and are secured by deeds of trust on commercial and residential property to provide a secondary source of repayment. It is the Company's policy to restrict real estate term loans to no more than 80% of the lower of the property's appraised value or the purchase price of the property, depending on the type of property and its utilization. The Company offers both fixed and floating rate loans. Maturities on such loans are generally restricted to between five and ten years (on an amortization ranging from fifteen to twenty-five years with a balloon payment due at maturity); however, SBA and certain other real estate loans easily sold in the secondary market may be granted for longer maturities.
The Company's real estate land and construction loans are primarily interim loans made by the Company to finance the construction of commercial and single family residential properties. These loans are typically short term. The Company utilizes underwriting guidelines to assess the likelihood of repayment from sources such as sale of the property or permanent mortgage financing prior to making the construction loan.
The Company makes consumer loans for the purpose of financing automobiles, various types of consumer goods, and other personal purposes. Additionally, the Company makes equity lines of credit and equity loans available to its clientele. Consumer loans generally provide for the monthly payment of principal and interest. Most of the Company's consumer loans are secured by the personal property being purchased, or, in the instances of equity loans or lines, real property.
With certain exceptions, the Banks are permitted to make extensions of its credit to any one borrowing entity up to 15% of the Banks' capital and reserves for unsecured loans and up to 25% of the Banks' capital and reserves for secured loans. For HBC these lending limits were $8.9 million and $14.9 million at December 31, 2002. For HBEB these lending limits were $2.0 million and $3.3 million at December 31, 2002. For HBSV these lending limits were $1.2 million and $2.0 million at December 31, 2002. For BLA these lending limits were $4.3 million and $7.2 million at December 31, 2002.
The Company does not have any concentrations in its loan portfolio by industry or group of industries, however, 61% and 66% of its net loans were secured by real property as of December 31, 2002 and 2001. This is attributed to a strong local real estate market and the Company's continued focus on these types of lending.
The following table presents the maturity distribution of the Company's loans as of December 31, 2001. 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. As of December 31, 2002, approximately 90% of the Company's loan portfolio consisted of floating interest rate loans.
Over One Due in Year But One Year Less Than Over (Dollars in thousands) or Less Five Years Five Years Total - --------------------------------------------- --------- --------- --------- --------- Commercial................................... $ 246,876 $ 15,011 $ 1,257 $ 263,144 Real estate - mortgage....................... 186,567 65,049 8,358 259,974 Real estate - land and construction.......... 147,822 -- -- 147,822 Consumer..................................... 2,542 308 -- 2,850 --------- --------- --------- --------- Total loans............................. 583,807 80,368 9,615 673,790 ========= ========= ========= ========= Loans with variable interest rates........... 559,612 45,295 2,149 607,056 Loans with fixed interest rates.............. 24,195 35,073 7,466 66,734 --------- --------- --------- --------- Total loans............................. $ 583,807 $ 80,368 $ 9,615 $ 673,790 ========= ========= ========= =========
HBC, HBEB, HBSV, and BLA are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk, in excess of the amounts recognized in the balance sheets.
HBC's exposure to credit loss in the event of non-performance of the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. HBC uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Credit risk is the possibility that a loss may occur because a party to a transaction failed to perform according to the terms of the contract. HBC controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures. Management does not anticipate any significant losses as a result of these transactions.
Commitments to extend credit as of December 31, were as follows:
(Dollars in thousands) 2002 2001 ---------- ---------- Commitments to extend credit......................... $ 303,510 $ 275,796 Standby letters of credit............................ 3,817 2,526 ---------- ---------- $ 307,327 $ 278,322 ========== ==========
Commitments to extend credit are agreements to lend to a client as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. HBC evaluates each client's creditworthiness on a case-by- case basis. The amount of collateral obtained, if deemed necessary by HBC upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include cash, marketable securities, accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and/or residential properties. Fair value of these instruments is not material.
Standby letters of credit are written conditional commitments issued by HBC to guaranty the performance of a client to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. Fair value of these instruments is not material.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing, troubled debt restructurings and other real estate owned. Management generally places loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is generally reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where HBC have granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. Other real estate owned ("OREO") consists of real property acquired through foreclosure on the related underlying defaulted loans. The following table shows nonperforming assets at the dates indicated:
December 31, ----------------------------------------------------- (Dollars in thousands) 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Nonaccrual loans............................. $ 4,571 $ -- $ -- $ 1,402 $ 1,354 Loans 90 days past due and still accruing.... -- -- -- -- -- Restructured loans........................... -- -- -- --------- --------- --------- --------- --------- Total nonperforming loans................. 4,571 -- -- 1,402 1,354 Foreclosed assets............................ -- -- -- -- -- --------- --------- --------- --------- --------- Total nonperforming assets................ $ 4,571 $ -- $ -- $ 1,402 $ 1,354 ========= ========= ========= ========= ========= Nonperforming assets as a percentage of period end loans plus foreclosed assets.. 0.68% -- -- 0.35% 0.40%
As of December 31, 2002, the Company had $4,571,000 in loans on nonaccrual status, which were considered impaired loans. The impaired loans had a related valuation allowance of $356,000 as of December 31, 2002. For the year ended December 31, 2002, the average recorded investment in loans for which impairment has been recognized was approximately $2,235,000. The Company had no loans past due 90 days or more and still accruing interest and no restructured loans as of December 31, 2002. As of December 31, 2001 and 2000, the Company had no loans on nonaccrual status, no significant loans past due 90 days or more and still accruing interest, no restructured loans, no foreclosed assets, and no impaired loans. The increase in the nonaccrual loans at December 31, 2002 compared to December 31, 2001 is primarily the result of the placement of one commercial real estate loan nonaccrual status during 2002. For the year ended December 31, 2002, 2001 and 2000, the Company had no foregone interest income on nonaccrual loans. For the year ended December 31, 2002, the Company recognized $134,000 in interest income for cash payments received on nonaccrual loans, compared to zero for both the years ended December 31, 2001 and 2000.
The Company assigns to all of its loans a risk grade consistent with the system recommended by regulatory agencies. Grades range from "Pass" to "Loss" depending on credit quality, with "Pass" representing loans that involve an acceptable degree of risk. Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes periodic loan by loan review for certain loans to evaluate the level of impairment as well as detailed reviews of other loans (either individually or in pools) based on 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, size and complexity of the loans, recent loss experience in particular segments of the portfolio, bank regulatory examination results, and current economic conditions in the Company's marketplace, in particular the state of the technology industry and the real estate market.
This process attempts to assess the risk of loss inherent in the portfolio by segregating loans into four components for purposes of determining an appropriate level of the allowance: "watch," "special mention," "substandard" and "doubtful." Additionally, the Company maintains a program for regularly scheduled reviews of certain new and renewed loans by an outside loan review consultant. Any loans identified during an external review process that expose the Company to increased risk are appropriately downgraded and an increase in the allowance for loan losses is established for such loans. Further, the Company is examined periodically by the FDIC, FRB, and the Department, at which time a further review of loan quality is conducted.
Loans that demonstrate a weakness, for which there is a possibility of loss if the weakness is not corrected, are categorized as "classified." Classified loans include all loans considered as special mention, substandard, and doubtful and may result from problems specific to a borrower's business or from economic downturns that affect the borrower's ability to repay or that cause a decline in the value of the underlying collateral (particularly real estate).
As of December 31, 2002, classified loans were $27,915,000. These loans constituted 4% of total loans and 29% of capital and reserves as of that date. At December 31, 2001, the principal balance of classified loans was $14,594,000. These loans constituted 2% of total loans and 17% of capital and reserves at that date. As of December 31, 2000, the principal balance of classified loans was $5,632,000. These loans constituted 1% of total loans and 7% of capital and reserves as of that date. During the first quarter of 2003, the Bank identified an $8.3 million commencial credit with risks identified that create doubt about full future repayment under the original terms of the agreement. Although still performing and on an accrual basis, the Company has established a specfic reserve for this loan. Other than this loan and the loans already classified at December 31, 2002, the Company has not identified any potantial problem loans which would result in these loans being included as nonperforming or classified loans at a future date.
ALLOWANCE FOR PROBABLE LOAN LOSSES
It is the policy of management to maintain the allowance for probable loan losses at a level adequate for 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 allowance is adequate. However, the loan portfolio can be adversely affected if California economic conditions and the real estate market in the Company's market area were to weaken. Also any weakness of a prolonged nature in the technology industry would have a negative impact on the local market. The effect of such events although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect the Company's future growth and profitability. 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. See "Provision for probable loan losses" on page 30.
The following table summarizes the Company's loan loss experience as well as provisions and charges to the allowance for loan losses and certain pertinent ratios for the periods indicated:
(Dollars in thousands) 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Balance, beginning of period................. $ 11,154 $ 9,651 $ 6,511 $ 5,069 $ 3,270 Charge-offs: Commercial.......................... (936) (708) (52) (203) (108) Real estate - mortgage.............. -- -- -- -- -- Real estate - land and construction. -- -- -- -- -- Consumer............................ -- (1) -- (629) (71) --------- --------- --------- --------- --------- Total charge-offs............................ (936) (709) (52) (832) (179) Recoveries: Commercial.......................... 346 301 33 67 137 Real estate - mortgage.............. -- -- -- -- -- Real estate - land and construction. -- -- -- -- -- Consumer............................ -- 1 -- 9 35 --------- --------- --------- --------- --------- Total recoveries............................. 346 302 33 76 172 --------- --------- --------- --------- --------- Net charge-offs.............................. (590) (407) (19) (756) (7) Provision for loan losses.................... 2,663 1,910 3,159 2,198 1,806 --------- --------- --------- --------- --------- Balance, end of period....................... $ 13,227 $ 11,154 $ 9,651 $ 6,511 $ 5,069 ========= ========= ========= ========= ========= RATIOS: Net charge-offs to average loans outstanding................................ 0.09 % 0.07 % -- % 0.20 % -- % Allowance for loan losses to average loans. 2.07 % 1.84 % 1.80 % 1.71 % 1.87 % Allowance for loan losses to total loans at end of period..................... 1.96 % 1.76 % 1.58 % 1.62 % 1.50 % Allowance for loan losses to nonperforming loans........................ 289 % -- % -- % 464 % 374 %
Charge-offs reflect the realization of losses in the portfolio that were recognized previously though provisions for loan losses. The net charge-offs in 2002 were $590,000, compared to $407,000 in 2001, $19,000 in 2000, $756,000 in 1999 and $7,000 in 1998. The increase in net charge-offs in 2002 was primarily due to the increase in commercial loan charge-offs. However, historical net charge-offs are not necessarily indicative of the amount of net charge-offs that the Company will realize in the future.
The following table summarizes the allocation of the allowance for loan losses (ALL) by loan type and the allocation as a percent of loans outstanding in each loan category at the dates indicated:
December 31, ------------------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------------ ------------------ ------------------ ------------------ ------------------ Percent Percent Percent Percent Percent of ALL of ALL of ALL of ALL of ALL in each in each in each in each in each category category category category category to total to total to total to total to total (Dollars in thousands) Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Commercial................ $ 6,349 2.41 % $ 5,489 2.63 % $ 4,244 2.11 % $ 3,069 2.18 % $ 1,961 2.05 % Real estate - mortgage.... 2,411 0.93 % 1,420 0.58 % 1,509 0.65 % 1,025 0.67 % 617 0.61 % Real estate - land and construction............. 3,574 2.42 % 3,066 1.76 % 2,084 1.22 % 1,343 1.39 % 1,173 1.36 % Consumer.................. 47 1.63 % 102 2.66 % 158 1.93 % 170 1.69 % 1,245 2.24 % Unallocated............... 846 -- % 1,077 -- % 1,656 -- % 904 -- % 73 -- % --------- --------- --------- --------- --------- Total..................... $ 13,227 1.96 % $ 11,154 1.76 % $ 9,651 1.58 % $ 6,511 1.62 % $ 5,069 1.50 % ========= ========= ========= ========= =========
The increase in the allowance for probable loan losses reflects the growth in the Company's overall level of loans, primarily in the commercial and real estate loan portfolio.
Loans are charged against the allowance when management believes that the collectibility of the principal is doubtful. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include specific allowances, the formula allowance and the unallocated allowance.
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss may be incurred in excess of the amount determined by the application of the formula allowance. As of December 31, 2002, nonperforming loans had a related specific valuation allowance of $356,000. There were no specific allowances allocated as of December 31, 2001 as the Company did not have any impaired loans.
The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on management's experience and may be adjusted for significant factors that, in management's judgment, may affect the collectibility of the portfolio as of the evaluation date. Due to the Company's limited historical loss experience, management utilizes their prior industry experience to determine the loss factor for each category of loan. The formula allowance on December 31, 2002 was $12,381,000, compared to $10,077,000 on December 31, 2001. The increase was attributable to several factors, most notably a growth in total loans and an increase in certain factors used to estimate the reserve allocations.
The unallocated allowance is based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. As of December 31, 2002, the Company's unallocated allowance was $846,000, compared to $1,077,000 on December 31, 2001. The decrease in the unallocated allowance was due to the Company's pro-active efforts in addressing the potential impact of changing economic conditions within the market place through an increase in the factors affecting the formula reserve allocations. In evaluating the appropriateness of the unallocated allowance, management considered the following factors:
Bank's Lending Policies and Procedures - Changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices. Range of potential impact $85,000 - $151,000
Economic Conditions - Changes in national and local economic and business conditions, trends, and developments, including the condition of various market segments. Range of potential impact $141,000 - $251,000
Changes in the Bank's Lending Management and Staff - Changes in the experience, ability and depth of lending management and other relevant staff. Range of potential impact $113,000 - $203,000
Changes in Trend and Volume of Past Due and Classified Loans - - Changes in the trend of the volume and severity of past due and classified loans; and trends in the volume of nonaccrual loans, troubled debt restructurings and other loan modifications. Range of potential impact $169,000 - - $303,000
Quality of the Bank's Loan Review System - Changes in the quality of the Bank's loan review system and the degree of oversight by the Bank's Board of Directors. Range of potential impact $28,000 - $50,000
Credit Concentrations - The existence and effect of any concentrations of credit and changes in the level of such concentrations. Range of potential impact $56,000 - $100,000
There can be no assurance that the adverse impact of any of these conditions on the Bank will not be in excess of the ranges set forth above.
The current business, economic, and real estate markets along with the seasoning of the portfolio and the nature and duration of the current business cycle will effect the amount of unallocated reserve.
In an effort to improve its analysis of risk factors associated with its loan portfolio, the Company continues to monitor and to make appropriate changes to its internal loan policies. These efforts better enable the Company to assess risk factors prior to granting new loans and to assess the sufficiency of the allowance for loan losses.
Management believes that it has adequately provided an allowance for estimated probable losses in the credit portfolio. Significant deterioration in Northern California real property values or economic downturns could impact future operating results, liquidity or capital resources and require additional provisions to the allowance or cause losses in excess of the allowance.
DEPOSITS
Total deposits were $841,936,000 at December 31, 2002, an increase of $34,028,000, or 4%, compared to $807,908,000 at December 31, 2001. The largest increase was in savings and money market deposits, which increased $60,423,000 to $290,417,000 at December 31, 2002, as compared to $229,994,000 at December 31, 2001. Noninterest bearing deposits increased $41,979,000 to $248,616,000 at December 31, 2002 compared to $206,637,000 at December 31, 2001. Interest bearing demand deposits increased $13,780,000 to $94,309,000 at December 31, 2002, as compared to $80,529,000 at December 31, 2001. Time deposits decreased $82,154,000 to $208,594,000 at December 31, 2002, as compared to $290,748,000 at December 31, 2001.
The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated:
Years ended December 31, ----------------------------------------------------------- 2002 2001 2000 ----------------- ------------------ ------------------ Average Average Average Average Rate Average Rate Average Rate (Dollars in thousands) Balance Paid Balance Paid Balance Paid --------- ------- --------- -------- --------- -------- Demand, noninterest bearing........... $ 211,195 -- % $ 204,114 -- % $ 183,422 -- % Demand, interest bearing.............. 81,011 0.89 % 69,634 1.58 % 55,616 1.82 % Savings and money market.............. 275,217 1.74 % 227,344 3.09 % 228,336 4.16 % Time deposits, under $100............. 56,097 3.14 % 78,910 5.37 % 73,058 5.85 % Time deposits, $100 and over.......... 129,702 2.75 % 166,268 5.18 % 151,275 5.75 % Time deposits - Brokered Deposits..... 65,183 3.87 % 30,843 5.32 % 10,544 6.55 % --------- --------- --------- Total average deposits................ $ 818,405 1.63 % $ 777,113 2.91 % $ 702,251 3.44 % ========= ========= =========
As of December 31, 2002, the Company had a deposit mix of 34% in savings and money market accounts, 25% in time deposits, 11% in interest bearing demand accounts, and 30% in noninterest bearing demand deposits. On the same date, approximately $5,257,000, or less than 1%, of deposits were from public sources, and approximately $90,510,000, or 11%, of deposits were from title companies. As of December 31, 2001, the Company had a deposit mix of 28% in savings and money market accounts, 36% in time deposits, 10% in interest bearing demand accounts, and 26% in noninterest bearing demand deposits. On the same date, approximately $6,499,000, or less than 1%, of deposits were from public sources, and approximately $65,792,000, or 8%, of deposits were from title companies.
The Company obtains deposits from a cross- section of the communities it serves. The Company's business is not seasonal in nature. The Company had brokered deposits totaling approximately $47,640,000 at December 31, 2002 and $67,995,000 at December 31, 2001. These brokered deposits generally mature within one-year period. The Company is not dependent upon funds from sources outside the United States.
The following table indicates the maturity schedule of the Company's time deposits of $100,000 or more as of December 31, 2002:
% of (Dollars in thousands) Balance Total --------- ------- Three months or less.................. $ 72,553 45 % Over three months through six months.. 49,105 30 % Over six months through twelve months. 18,786 12 % Over twelve months.................... 21,809 13 % --------- ------- Total....................... $ 162,253 100 % ========= =======
The Company focuses primarily on servicing business deposit 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.
LIQUIDITY AND ASSET/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. As of December 31, 2002, the Company's primary liquidity ratio was 16.47%, comprised of $64.6 million in investment securities available-for-sale of maturities (or probable calls) of up to five years, less $15.0 million of securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $44.0 million, and $42.6 million in cash and due from banks, as a percentage of total unsecured deposits of $827.0 million. As of December 31, 2001, the Company's primary liquidity ratio was 20.27%, comprised of $65.2 million in investment securities available-for-sale of maturities (or probable calls) of up to five years, less $9.8 million of securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $71.6 million, and $34.7 million in cash and due from banks, as a percentage of total unsecured deposits of $789.1 million. As of December 31, 2000, the Company's primary liquidity ratio was 15.04%, comprised of $61.2 million in investment securities available-for-sale of maturities (or probable calls) of up to five years, less $12.0 million securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $19.3 million, and $40.8 million in cash and due from banks, as a percentage of total unsecured deposits of $726.2 million.
The following table summarizes the Company's borrowings under its federal funds purchased, security repurchase arrangements and lines of credit for the periods indicated:
2002 2001 2000 (Dollars in thousands) ------------ ------------ ------------ Average balance during the year............ $ 770 $ 2,436 $ 2,020 Average interest rate during the year...... 1.77% 5.80% 5.17% Maximum month-end balance during the year.. $ -- $ -- $ 18,000 Average rate at December 31................ -- -- 5.13%
The Company has Federal funds purchase lines and lines of credit of totaling $56,000,000. As of December 31, 2002, the Company had no borrowings from the FHLB.
CAPITAL RESOURCES
The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the Company:
December 31, ---------------------------------- (Dollars in thousands) 2002 2001 2000 ---------- ---------- ---------- Capital components: Tier 1 Capital............. $ 102,614 $ 91,598 $ 78,982 Tier 2 Capital............. 10,563 9,664 9,427 ---------- ---------- ---------- Total risk-based capital... $ 113,177 $ 101,262 $ 88,409 ========== ========== ========== Risk-weighted assets.......... $ 842,399 $ 779,060 $ 753,947 Quarterly average assets...... $ 950,091 $ 898,020 $ 850,072 MINIMUM REGULATORY REQUIREMENTS ----------- Capital ratios: Total risk-based capital...... 13.4% 13.0% 11.7% 8.0% Tier 1 risk-based capital..... 12.2% 11.8% 10.5% 4.0% Leverage ratio(1)............. 10.8% 10.2% 9.3% 4.0%
(1) Tier 1 capital divided by average assets (excluding goodwill).
The table above presents the capital ratios of the Company computed in accordance with applicable regulatory guidelines and compared to the standards for minimum capital adequacy requirements under the FDIC's prompt corrective action authority as of December 31, 2002. The risk-based and leverage capital ratios are defined in Item 1 - "Business - Supervision and Regulation - Capital Adequacy Guidelines" on page 8.
At December 31, 2002, 2001 and 2000, the Company's capital met all minimum regulatory requirements. As of December 31, 2002, 2001 and 2000, management believes that HBC, HBEB, HBSV, and BLA were considered "well capitalized" under the regulatory framework for prompt corrective action.
To enhance regulatory capital and to provide liquidity the Company issued the following mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trusts: In the first quarter of 2000, the Company issued $7,000,000 aggregate principal amount of 10.875% subordinated debentures due on March 8, 2030 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2000, the Company issued $7,000,000 aggregate principal amount of 10.60% subordinated debentures due on September 7, 2030 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2001, the Company issued $5,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on July 31, 2031 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. In the third quarter of 2002, the Company issued $4,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures due on September 26, 2032 to a subsidiary trust, which in turn issued a similar amount of trust preferred securities. Under applicable regulatory guidelines, the Trust Preferred securities currently qualify as Tier I capital.
MARKET RISK
Market risk is the risk of loss to future earnings, to fair values, or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market risk sensitive instruments. Market risk is attributed to all market risk sensitive financial instruments, including securities, loans, deposits, borrowings, its trading activities for its own account, and its role as a financial intermediary in customer-related transactions. The objective of market risk management is to avoid excessive exposure of the Company's earnings and equity to loss and to reduce the volatility inherent in certain financial instruments.
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 table below sets forth the interest rate sensitivity of the Company's interest earning assets and interest bearing liabilities as of December 31, 2002, 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 Due in Due Within Three After One Three to Twelve to Five Due After Not Rate- (Dollars in thousands) Months Months Years Five Years Sensitive Total ---------- ---------- ---------- ---------- ---------- ---------- INTEREST EARNING ASSETS: Federal funds sold.................... $ 44,000 $ -- $ -- $ -- $ -- $ 44,000 Interest bearing deposits in banks...... 7,022 -- -- -- -- 7,022 Securities............................ 2,817 22,964 38,797 61,865 -- 126,443 Total loans, including loans held-for-sale, net of deferred cost 528,044 83,964 80,368 9,615 -- 701,991 ---------- ---------- ---------- ---------- ---------- ---------- Total interest earning assets.......... 581,883 106,928 119,165 71,480 -- 879,456 Cash and due from banks................ -- -- -- -- 35,610 35,610 Other assets........................... -- -- -- -- 43,686 43,686 ---------- ---------- ---------- ---------- ---------- ---------- Total assets........................... $ 581,883 $ 106,928 $ 119,165 $ 71,480 $ 79,296 $ 958,752 ========== ========== ========== ========== ========== ========== INTEREST BEARING LIABILITIES: Demand, interest bearing.............. $ 94,309 $ -- $ -- $ -- $ -- $ 94,309 Savings and money market.............. 290,417 -- -- -- -- 290,417 Time deposits......................... 90,844 89,902 27,848 -- -- 208,594 Mandatorily redeemable cumulative trust preferred securities.......... -- -- -- 23,000 -- 23,000 ---------- ---------- ---------- ---------- ---------- ---------- Total interest bearing liabilities..... 475,570 89,902 27,848 23,000 -- 616,320 Demand noninterest bearing............. 85,817 -- -- -- 162,799 248,616 Accrual interest payable and other liabilities................ -- -- -- -- 10,951 10,951 Shareholders' equity................... -- -- -- -- 82,865 82,865 ---------- ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity............................... $ 561,387 $ 89,902 $ 27,848 $ 23,000 $ 256,615 $ 958,752 ========== ========== ========== ========== ========== ========== Interest rate sensitivity GAP.......... $ 20,496 $ 17,026 $ 91,317 $ 48,480 $ (177,319) $ -- ========== ========== ========== ========== ========== ========== Cumulative interest rate sensitivity GAP...................... $ 20,496 $ 37,522 $ 128,839 $ 177,319 $ -- $ -- Cumulative interest rate sensitivity GAP ratio................ 2.14 % 3.91 % 13.44 % 18.49 % -- % -- %
Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity gap report may not provide a complete assessment of the exposure to changes in interest rates. To supplement traditional GAP analysis, the Company performs simulation modeling to estimate the potential effects of changing interest rate environments.
The process allows the Company to explore the complex relationships within the GAP over time and various interest rate environments. For additional information on the Company's simulation model and the methodology used to estimate the potential effects of changing interest rates, see Item 7A - "Quantitative and qualitative disclosures about market risk" below.
Liquidity risk represents the potential for loss as a result of limitations on the Company's ability to adjust for future cash flows, to meet the needs of depositors and borrowers, and to fund operations on a timely and cost-effective basis. The liquidity policy approved by the board requires annual review of the Company's liquidity by the asset/liability committee, which is composed of senior executives, and the finance and investment committee of the board of directors.
The Company's internal asset/liability committee and the finance and investment committee of the board each meet monthly to monitor the Company's investments, liquidity needs and to oversee its asset/liability management. The Company evaluates the rates offered on its deposit products on a weekly basis.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, the Company's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of the Company's assets and liabilities, and the market value of all interest-earning assets, other than those which have a short term to maturity. Since all of the Company's interest-bearing assets and liabilities are located at HBC, all of the Company's interest rate risk exposure lies at that level, as well. As a result, all interest rate risk management procedures are performed at HBC's level. Based upon the nature of the Company's operations, the Company is not subject to foreign exchange or commodity price risk. The Company has no market risk sensitive instruments held for trading purposes. As of December 31, 2002, the Company does not use interest rate derivatives to hedge its interest rate risk.
The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee (ALCO). Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent, and that the goal is to identify and accept the risks. Management uses two methodologies to manage interest rate risk: 1) a standard GAP analysis; and 2) an interest rate shock simulation model.
The detail from the Company's GAP analysis is shown in Item 7, above, and is not discussed here. The Company applies a market value (MV) methodology to gauge its interest rate risk exposure as derived from its simulation model. Generally, MV is the discounted present value of the difference between incoming cash flows on interest earning assets and other investments and outgoing cash flows on interest bearing liabilities and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the MV which would result from a theoretical 200 basis point (1 basis point equals 0.01%) change in market interest rates. Both a 200 basis point increase and a 200 basis point decrease in market rates are considered.
At December 31, 2002, it was estimated that the Company's MV would increase 13.19% in the event of a 200 basis point increase in market interest rates. The Company's MV at the same date would decrease 14.02% in the event of a 200 basis point decrease in market interest rates.
Presented below, as of December 31, 2002 and 2001, is an analysis of the Company's interest rate risk as measured by changes in MV for instantaneous and sustained parallel shifts of 200 basis points in market interest rates:
2002 2001 --------------------------------------------- --------------------------------------------- Market Value as a % of Market Value as a % of $ Change % Change Present Value of Assets $ Change % Change Present Value of Assets (Dollars in thousands) in Market in Market ---------------------- in Market in Market ---------------------- Change in rates Value Value MV Ratio Change (bp) Value Value MV Ratio Change (bp) - --------------------- ---------- ---------- --------- ----------- ---------- ---------- --------- ----------- + 200 bp............ $ 16,686 13.19 % 14.9 % 173 $ 12,254 9.63 % 15.3 % 134 0 bp............ $ -- -- % 13.1 % -- $ -- -- % 14.0 % -- - 200 bp............ $ (17,734) (14.02)% 11.3 % (184) $ (14,344) (11.27)% 12.4 % (157)
Management believes that the MV methodology overcomes three shortcomings of the typical maturity gap methodology. First, it does not use arbitrary repricing intervals and accounts for all expected future cash flows. Second, because the MV method projects cash flows of each financial instrument under different interest rate environments, it can incorporate the effect of embedded options on an institutions' interest rate risk exposure. Third, it allows interest rates on different instruments to change by varying amounts in response to a change in market interest rates, resulting in more accurate estimates of cash flows.
However, as with any method of gauging interest rate risk, there are certain shortcomings inherent to the MV methodology. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react the same to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change in general market rates. Additionally, the MV methodology does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan clients' ability to service their debt. All of these factors are considered in monitoring the Company's exposure to interest rate risk.
Liquidity risk represents the potential for loss as a result of limitations on our ability to adjust our future cash flows to meet the needs of depositors and borrowers and to fund operations on a timely and cost- effective basis. The Liquidity Policy approved by the Board requires annual review of the Company's liquidity by the Asset/Liability Committee, which is composed of senior executives, and the Finance and Investment Committee of the Board of Directors.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and independent auditors' report are set forth on pages 55 through 86, which follows Item 15 - "Exhibits, Financial Statement Schedules, and Reports on Form 8-K."
The following table discloses the Company's selected quarterly financial data.
For the Quarter Ended ------------------------------------------------------------------------------------------------ December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2002 2002 2002 2002 2001 2001 2001 2001 ----------- ------------ --------- --------- ----------- ------------ --------- --------- Interest income......... $ 13,344 $ 13,051 $ 13,290 $ 13,071 $ 14,198 $ 15,855 $ 16,807 $ 18,145 Interest expense........ 3,296 3,655 3,994 4,292 5,250 5,803 6,231 7,082 ----------- ------------ --------- --------- ----------- ------------ --------- --------- Net interest income..... 10,048 9,396 9,296 8,779 8,948 10,052 10,576 11,063 Provision for loan losses................ 597 750 640 675 576 279 528 527 ----------- ------------ --------- --------- ----------- ------------ --------- --------- Net interest income after provision........ 9,451 8,646 8,656 8,104 8,372 9,773 10,048 10,536 Noninterest income...... 2,793 2,360 1,987 1,890 1,543 1,825 1,691 1,238 Noninterest expense..... 8,846 8,346 8,317 7,701 7,725 8,687 8,669 8,267 ----------- ------------ --------- --------- ----------- ------------ --------- --------- Net income before taxes. 3,398 2,660 2,326 2,293 2,190 2,911 3,070 3,507 Provision for income taxes................. 1,107 848 765 780 816 1,088 1,180 1,326 ----------- ------------ --------- --------- ----------- ------------ --------- --------- Net income.............. $ 2,291 $ 1,812 $ 1,561 $ 1,513 $ 1,374 $ 1,823 $ 1,890 $ 2,181 =========== ============ ========= ========= =========== ============ ========= ========= Net income per share basic................. $ 0.20 $ 0.16 $ 0.14 $ 0.14 $ 0.12 $ 0.17 $ 0.17 $ 0.20 Net income per share diluted............... $ 0.20 $ 0.16 $ 0.14 $ 0.13 $ 0.12 $ 0.16 $ 0.17 $ 0.19
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the Company's Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders for incorporation of information concerning directors and persons nominated to become directors of the Company. Information concerning executive officers of the Company also included in the Company's Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the text under the caption "Executive Compensation" in the Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning ownership of the equity stock of the Company by certain beneficial owners and management is incorporated by reference from the text under the caption "Proposal One - Election of Directors" in the Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions with officers, directors, and the Company is incorporated by reference from the text under the caption "Transactions with Management and Others" in the Proxy Statement for the May 22, 2003 Annual Meeting of Shareholders.
ITEM 14 - CONTROLS AND PROCEDURES
(a)
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Exchange Act, within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective.(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above
, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Financial Statements of the Company and the independent auditors' report are set forth on pages 55 through 86.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All schedules to the Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in the Financial Statements or accompanying notes.
(a)(3) EXHIBITS
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Incorporated by Reference to Form |
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Filed Herewith |
8-A Dated |
10-Q Dated |
10-K Dated |
Exhibit No. |
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2.1 |
Agreement and Plan of Merger and Reorganization dated as of May 9, 2000 between Heritage Commerce Corp and Western Holdings Bancorp (incorporated by reference from Annex A of the registration statement on Form S- 4, Registration No. 333- 40384, filed with the Commission on June 29, 2000) |
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3.1 |
Heritage Commerce Corp Restated Articles of Incorporation as Amended effective June 29, 2001 |
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6-30-01 |
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3.1 |
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3.2 |
Heritage Commerce Corp Bylaws as amended to September 27, 2001 |
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9-30-01 |
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3.2 |
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4.1 |
The indenture, dated as of March 23, 2000, between Heritage Commerce Corp, as Issuer, and the Bank of New York, as Trustee |
4-6-01 (10-K/A Amendment No. 1) |
4.1 |
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4.2 |
Amended and restated Declaration of Trust, Heritage Capital Trust I, dated as of March 23, 2000 |
4-6-01 (10-K/A Amendment No. 1) |
4.2 |
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4.3 |
The indenture, date as of September 7, 2000, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
4-6-01 (10-K/A Amendment No. 1) |
4.3 |
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4.4 |
Amended and restated Declaration of Trust by and among State Street Bank and Trust Company of Connecticut, National Association, as Institutional Trustee, and Heritage Commerce Corp, as Sponsor |
4-6-01 (10-K/A Amendment No. 1) |
4.4 |
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4.5 |
Heritage Commerce Corp Rights Agreement dated as of November 1, 2001, including Form of Right Certificate attached thereto as Exhibit B |
11-15-01 |
4.5 |
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4.6 |
The indenture, dated as of July 31, 2001, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
3/28/02 |
4.6 |
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4.7 |
The indenture, dated as of July 31, 2001, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
3/28/02 |
4.7 |
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4.8 |
The indenture, dated as of September 26, 2002, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
X |
4.8 |
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4.9 |
The indenture, dated as of July 31, 2001, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
X |
4.9 |
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10.1 |
Real Property Leases for properties located at 150 Almaden Blvd., San Jose and 100 Park Center Plaza, San Jose. |
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3-5-98 |
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10.1 |
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10.2 |
Employment agreement with Mr. Rossell dated June 8, 1994* |
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3-5-98 |
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10.2 |
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10.3 |
Employment agreement with Mr. Gionfriddo dated June 8, 1994 * |
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3-5-98 |
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10.3 |
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10.4 |
Amendment No. 2 to Employment Agreement with Mr. Gionfriddo * |
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3-31-98 |
10.4 |
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10.5 |
Employment agreement with Mr. Conniff dated April 30, 1998 * |
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3-31-99 |
10.5 |
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10.6 |
Employment agreement with Mr. Nethercott dated April 16, 1998 * |
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3-31-99 |
10.6 |
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10.7 |
Employment agreement with Mr. McGovern dated July 16, 1998 * |
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3-31-99 |
10.7 |
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21.1 |
Subsidiaries of the registrant |
X |
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23.1 |
Consent of Deloitte & Touche LLP |
X |
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99.1 |
Certification of Registrant's Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
X |
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99.2 |
Certification of Registrant's Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
X |
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Registrant filed Current Reports on Form 8-K dated January 23, 2003 under Item 5, to report its year end 2002 financial results, and containing condensed summarized statements of financial position and results of operations.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.
|
Heritage Commerce Corp |
DATE: March 28, 2003 |
BY: /s/ Brad Smith Brad Smith Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
Signature |
Title |
Date |
/s/ FRANK BISCEGLIA Frank Bisceglia |
Director |
March 28, 2003 |
/s/ JAMES BLAIR James Blair |
Director |
March 28, 2003 |
/s/ PHILIP R. BOYCE Philip R. Boyce |
Director and Chairman of the Board |
March 28, 2003 |
/s/ RICHARD CONNIFF Richard Conniff |
Director and President of the Company and Chief Operating Officer |
March 28, 2003 |
/s/ WILLIAM DEL BIAGGIO, JR. William Del Biaggio, Jr. |
Director |
March 28, 2003 |
/s/ ANNEKE DURY Anneke Dury |
Director |
March 28, 2003 |
/s/ ROY LAVE Roy Lave |
Director |
March 28, 2003 |
/s/ LAWRENCE D. MCGOVERN Lawrence D. McGovern |
Executive Vice President and Chief Financial Officer, Principal Financial and Accounting Officer |
March 28, 2003 |
/s/ LON NORMANDIN Lon Normandin |
Director |
March 28, 2003 |
/s/ JACK PECKHAM Jack Peckham |
Director |
March 28, 2003 |
/s/ HUMPHREY POLANEN Humphrey Polanen |
Director |
March 28, 2003 |
/s/ KIRK ROSSMANN Kirk Rossmann |
Director |
March 28, 2003 |
/s/ BRAD L. SMITH Brad L. Smith |
Director and Chief Executive Officer |
March 28, 2003 |
/s/ CHARLES TOENISKOETTER Charles Toeniskoetter |
Director |
March 28, 2003 |
CERTIFICATION
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Brad L. Smith, Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Heritage Commerce Corp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Brad L. Smith
Brad L. Smith
Chief Executive Officer
CERTIFICATION
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Lawrence D. McGovern, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Heritage Commerce Corp;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Lawrence D. McGovern
Lawrence D. McGovern
Chief Financial Officer
HERITAGE COMMERCE CORP
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
|
Page |
Independent Auditors' Report |
|
Consolidated Balance Sheets as of December 31, 2002 and 2001 |
|
Consolidated Income Statements for the years ended December 31, 2002, 2001 and 2000 |
|
Consolidated Statements of Changes in Shareholders' Equity as of December 31, 2002, 2001 and 2000 |
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Consolidated Statements of Cash Flows as of December 31, 2002, 2001 and 2000 |
|
Notes to Consolidated Financial Statements |
To the Board of Directors and Shareholders of
Heritage Commerce Corp:
We have audited the accompanying consolidated balance sheets of Heritage Commerce Corp and subsidiaries (the "Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Heritage Commerce Corp and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Jose, California
January 22, 2003
HERITAGE COMMERCE CORP
CONSOLIDATED BALANCE SHEETS
December 31, ---------------------- 2002 2001 (Dollars in thousands) ---------- ---------- ASSETS Cash and due from banks................................................. $ 42,632 $ 34,719 Federal funds sold...................................................... 44,000 71,600 ---------- ---------- Total cash and cash equivalents........................ 86,632 106,319 Securities available-for-sale, at fair value............................ 126,443 91,534 Securities held-to-maturity, at amortized cost.......................... -- 15,276 (fair value of $15,708 for 2001) Loans held for sale, at lower of cost or market......................... 28,084 32,461 Loans, net of deferred costs of $117 for 2002 and deferred costs of $175 for 2001................................... 673,907 632,917 Allowance for probable loan losses...................................... (13,227) (11,154) ---------- ---------- Loans, net............................................. 660,680 621,763 Premises and equipment, net............................................. 5,194 5,470 Accrued interest receivable and other assets............................ 24,549 15,128 Other investments....................................................... 27,170 24,779 ---------- ---------- TOTAL................................................... $ 958,752 $ 912,730 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Demand, noninterest bearing...................................... $ 248,616 $ 206,637 Demand, interest bearing......................................... 94,309 80,529 Savings and money market......................................... 290,417 229,994 Time deposits, under $100........................................ 46,341 72,608 Time deposits, $100 and over..................................... 162,253 218,140 ---------- ---------- Total deposits........................................................ 841,936 807,908 Accrued interest payable and other liabilities........................ 10,951 11,248 Mandatorily redeemable cumulative trust preferred securities of subsidiary grantor trust........................... 23,000 19,000 ---------- ---------- Total liabilities...................................... 875,887 838,156 ---------- ---------- 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 outstanding: 11,214,414 in 2002 and 11,114,967 in 2001............. 63,957 63,536 Accumulated other comprehensive income, net of taxes................. 1,714 1,021 Retained earnings..................................................... 17,194 10,017 ---------- ---------- Total shareholders' equity............................. 82,865 74,574 ---------- ---------- TOTAL.................................................. $ 958,752 $ 912,730 ========== ==========
See notes to consolidated financial statements.
HERITAGE COMMERCE CORP
CONSOLIDATED INCOME STATEMENTS
Years ended December 31, ---------------------------------- (Amounts in thousands, except per share data) 2002 2001 2000 ---------- ---------- ---------- Interest income: Loans, including fees............................................ $ 46,609 $ 57,153 $ 56,709 Securities, taxable.............................................. 4,576 4,399 5,571 Securities, non-taxable.......................................... 500 870 617 Interest bearing deposits in banks................................. 88 157 66 Federal funds sold............................................... 983 2,426 4,958 ---------- ---------- ---------- Total interest income.............................................. 52,756 65,005 67,921 ---------- ---------- ---------- Interest expense: Deposits......................................................... 13,353 22,597 24,174 Mandatorily redeemable trust preferred securities................ 1,871 1,644 823 Other............................................................ 13 125 104 ---------- ---------- ---------- Total interest expense............................................. 15,237 24,366 25,101 ---------- ---------- ---------- Net interest income before provision for probable loan losses...... 37,519 40,639 42,820 Provision for probable loan losses................................. 2,663 1,910 3,159 ---------- ---------- ---------- Net interest income after provision for probable loan losses....... 34,856 38,729 39,661 ---------- ---------- ---------- Noninterest income: Gain on sale of loans............................................ 2,262 1,758 -- Service charges and other fees on deposit accounts............... 1,425 967 716 Servicing income................................................. 1,324 721 236 Other investments................................................ 1,113 1,029 778 Gain on sales of securities available-for-sale................... 1,036 732 44 Gain on sale of credit card portfolio............................ 172 -- -- Other............................................................ 1,698 1,090 1,103 ---------- ---------- ---------- Total noninterest income........................................... 9,030 6,297 2,877 ---------- ---------- ---------- Noninterest expenses: Salaries and employee benefits................................... 18,116 18,120 16,127 Occupancy........................................................ 3,168 2,847 2,399 Professional fees................................................ 1,563 1,447 1,861 Furniture and equipment.......................................... 1,503 1,453 1,329 Loan origination costs............................................. 1,277 1,335 1,011 Client services.................................................. 1,100 1,889 1,839 Advertising and promotion........................................ 737 1,116 1,029 Stationery & supplies............................................ 345 489 388 Telephone........................................................ 338 358 359 Merger-related costs............................................. -- -- 3,164 Other............................................................ 5,062 4,294 4,554 ---------- ---------- ---------- Total noninterest expenses......................................... 33,209 33,348 34,060 ---------- ---------- ---------- Income before provision for income taxes........................... 10,677 11,678 8,478 Provision for income taxes......................................... 3,500 4,410 3,049 ---------- ---------- ---------- Net income......................................................... $ 7,177 $ 7,268 $ 5,429 ========== ========== ========== Earnings per share: Basic........................................................... $ 0.64 $ 0.66 $ 0.51 Diluted......................................................... $ 0.63 $ 0.64 $ 0.49
See notes to consolidated financial statements.
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
Accumulated Other Common Stock Comprehensive Total Other ---------------------- Income Retained Shareholders'Comprehensive (Dollars in thousands) Shares Amount (Net of Taxes) Earnings Equity Income ----------- --------- ------------- ---------- ----------- ------------ BALANCES, JANUARY 1, 2000...... 9,737,739 $ 51,206 $ (1,254) $ 6,592 $ 56,544 Net income...................... -- -- -- 5,429 5,429 $ 5,429 Net change in unrealized loss on securities available-for-sale, net of reclassification adjustment and taxes....................... -- -- 1,769 -- 1,769 1,769 ------------ Total comprehensive income... $ 7,198 ============ Stock dividend.................. 639,444 9,272 -- (9,272) -- Cash paid for factional shares.. (325) (3) -- -- (3) Stock options exercised......... 562,266 1,994 -- -- 1,994 ----------- --------- ------------- ---------- ----------- BALANCES, DECEMBER 31, 2000..... 10,939,124 62,469 515 2,749 65,733 Net income...................... -- -- -- 7,268 7,268 $ 7,268 Net change in unrealized gain on securities available-for-sale, net of reclassification adjustment and taxes....................... -- -- 506 -- 506 506 ------------ Total comprehensive income... $ 7,774 ============ Stock options exercised......... 175,843 1,067 -- -- 1,067 ----------- --------- ------------- ---------- ----------- BALANCES, DECEMBER 31, 2001..... 11,114,967 63,536 1,021 10,017 74,574 Net income...................... -- -- -- 7,177 7,177 $ 7,177 Net change in unrealized gain on securities available-for-sale, net of reclassification adjustment and taxes....................... -- -- 693 -- 693 693 ------------ Total comprehensive income... $ 7,870 ============ Stock options exercised......... 99,447 421 -- -- 421 ----------- --------- ------------- ---------- ----------- BALANCES, DECEMBER 31, 2002..... 11,214,414 $ 63,957 $ 1,714 $ 17,194 $ 82,865 =========== ========= ============= ========== ===========
See notes to consolidated financial statements.
HERITAGE COMMERCE CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------------- (Dollars in thousands) 2002 2001 2000 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................... $ 7,177 $ 7,268 $ 5,429 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss on disposals of property and equipment....................... (100) -- -- Depreciation and amortization..................................... 1,828 1,527 777 Provision for probable loan losses................................ 2,663 1,910 3,159 Gain on sales of securities available-for-sale (AFS).............. (1,036) (732) (44) Provision for deferred income taxes............................... (1,188) 2,451 391 Amortization / accretion of discounts and premiums on securities.. 230 (668) 92 Gain on sale of loans............................................. 2262 1758 -- Proceeds from sales of loans held for sale........................ 47,676 40,855 -- Originations of loans held for sale............................... (66,108) (52,411) (13,845) Maturities of loans held for sale................................. 20,547 13,268 157 Effect of changes in: Accrued interest receivable and other assets................... (8,005) (4,260) (3,772) Accrued interest payable and other liabilities................. (782) 671 2,606 --------- --------- --------- Net cash provided by (used in) operating activities.................. 5,164 11,637 (5,050) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in loans................................................ (41,581) (22,543) (209,563) Purchases of securities available-for-sale (AFS)..................... (84,260) (82,098) (52,042) Maturities/Paydowns/Calls of securities available-for-sale (AFS)..... 24,575 24,484 5,230 Proceeds from sales of securities available-for-sale (AFS)........... 40,033 59,080 9,937 Maturities/Paydowns/Calls of securities held-to-maturity (HTM)....... 1,776 4,631 3,040 Purchases and earnings of corporate-owned life insurance..... ....... (1,863) (5,989) (3,763) Purchase of premises and equipment................................... (1,452) (908) (1,180) Redemption (purchase) of other investment............................ (528) 167 (521) --------- --------- --------- Net cash used in investing activities................................ (63,300) (23,176) (248,862) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits............................................. 34,028 69,722 136,766 Proceeds from issuance of mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust.............................. 4,000 5,000 14,000 Net proceeds from issuance of common stock........................... 421 1,067 1,991 Net change in FHLB borrowings........................................ -- (18,000) 6,000 --------- --------- --------- Net cash provided by financing activities............................ 38,449 57,789 158,757 --------- --------- --------- Net increase (decrease) in cash and cash equivalents................. (19,687) 46,250 (95,155) Cash and cash equivalents, beginning of year......................... 106,319 60,069 155,224 --------- --------- --------- Cash and cash equivalents, end of year............................... $ 86,632 $ 106,319 $ 60,069 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest......................................................... $ 17,327 $ 24,287 $ 17,324 Income taxes..................................................... $ 4,480 $ 6,600 $ 5,974 Supplemental schedule of non-cash investing and financing activity: Transfer from retained earnings to common stock for stock dividend... $ -- $ -- $ 9,272 Transfer of investment securities from HTM to AFS.................... $ 13,619 $ -- $ --
See notes to consolidated financial statements.
HERITAGE COMMERCE CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
Heritage Commerce Corp (the "Company") operates as the bank holding company for four subsidiary banks: Heritage Bank of Commerce ("HBC"), Heritage Bank East Bay ("HBEB"), Heritage Bank South Valley ("HBSV"), and Bank of Los Altos ("BLA") (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 and Alameda Counties, California. HBC was incorporated on November 23, 1993 and commenced operations on June 8, 1994. HBEB was incorporated on October 21, 1998 and commenced operations on December 7, 1998. HBSV was incorporated on December 1, 1999 and commenced operations on January 18, 2000. The merger between Heritage Commerce Corp and Western Holdings Bancorp and its subsidiary, BLA, was effective on October 1, 2000, resulting in BLA operating as a wholly owned subsidiary of the Company. The merger was accounted for as a pooling-of-interests and all amounts have been restated on a historical basis as if the companies had been combined for all periods presented. During 2000, the Company formed two subsidiaries, Heritage Capital Trust I and Heritage Statutory Trust I, during 2001, formed Heritage Statutory Trust II, and during 2002, formed Heritage Statutory Trust III, which are Delaware statutory business trusts formed for the exclusive purpose of issuing and selling trust preferred securities.
During 2002, the Company's Board of Directors approved the merger of three of its wholly owned commercial bank subsidiaries into the Company's original wholly owned bank subsidiary. On January 1, 2003, HBEB, HBSV, and BLA were merged into HBC. HBEB, HBSV, and BLA now operate as divisions of HBC and continue to serve their local markets and communities under their current names.
The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America ("GAAP") and prevailing practices within the banking industry.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiary banks. All significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with remaining terms to maturity of three months or less from the date of acquisition to be cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold and purchased for one-day periods.
Securities
The Company classifies its securities into two categories, available-for-sale and held-to-maturity, at the time of purchase. Securities available-for-sale are recorded at fair value with a corresponding recognition of the net unrealized holding gain or loss, net of income taxes, as a net amount within accumulated other comprehensive income, which is a separate component of shareholders' equity, until realized. Securities held-to-maturity is recorded at amortized cost that are based on the Company's positive intent and ability to hold the securities to maturity. As of December 31, 2002, all the Company's securities were classified as available-for-sale securities.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the corresponding establishment of a new cost basis for the security.
Premiums and discounts are amortized, or accreted, over the life of the related investment security as an adjustment to income using a method that approximates the interest method. Interest income is recognized when earned. Realized gains and losses for securities classified as available-for- sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Loans Held for Sale
The Company holds for sale the guaranteed portion of certain Small Business Administration (SBA) loans. These loans are carried at the lower of cost or market, based on the aggregate value of the portfolio.
Gains or losses on SBA loans held for sale are recognized upon completion of the sale, and are based on the difference between the net sales proceeds and the relative fair value of the guaranteed portion of the loan sold compared to the relative fair value of the unguaranteed portion.
The servicing assets that result from the sale of SBA loans, sold with servicing rights retained, are amortized over the lives of the loans using a method approximating the interest method.
The Company accounts for the transfer and servicing of financial assets based on the financial and servicing assets it controls and liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. Servicing assets are measured at their fair value and are amortized in proportion to and over the period of net servicing income and are assessed for impairment on an ongoing basis. Impairment is determined by stratifying the servicing rights based on interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance. Any servicing assets in excess of the contractually specified servicing fees have been reclassified at fair value as an interest- only (I/O) strip receivable and treated like an available for sale security. The servicing asset, net of any required valuation allowance, and I/O strip receivable are included in other assets.
Loans
Loans are stated at the principal amount outstanding net of deferred loan origination fees and costs. The majority of the Company's loans are at variable interest rates. Interest on loans is credited to income using the effective yield interest method.
Generally, if a loan is classified as non-accrual, the accrual of interest is discontinued, any accrued and unpaid interest is reversed, and the amortization of deferred loan fees and costs is discontinued. Loans are classified as non-accrual when the payment of principal or interest is 90 days past due, unless the amount is well secured and in the process of collection. Any interest or principal payments received on nonaccrual loans are applied toward reduction of principal. Nonaccrual loans generally are not returned to performing status until the obligation is brought current, has performed in accordance with the contract terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
Renegotiated loans are those in which the Company has formally restructured a significant portion of the loan. The remaining portion is charged off, with a concession either in the form of below market rate financing, or debt forgiveness on the charged off portion. Loans that have been renegotiated and have not met specific performance standards for payment are classified as renegotiated loans within the classification of nonperforming assets. Upon payment performance, such loans may be transferred from nonperforming status to accrual status. At December 31, 2002 and 2001 the Company did not have any renegotiated loans outstanding.
Non-refundable loan fees and direct origination costs are deferred and recognized over the expected lives of the related loans using the effective yield interest method.
Allowance for Probable Loan Losses
The Company maintains an allowance for probable loan losses to absorb probable losses inherent in the loan portfolio. The allowance is based on ongoing, monthly assessments of the probable estimated losses. Loans are charged against the allowance when management believes that the collectibility of the principal is doubtful. The allowance is increased by the provision for loan losses, which is charged against current period operating results and decreased by the amount of charge-offs, net of recoveries. The Company's methodology for assessing the appropriateness of the allowance consists of several key elements, which include the formula allowance, specific allowances and the unallocated allowance.
The formula allowance is calculated by applying loss factors to outstanding loans and certain unused commitments. Loss factors are based on the Company's historical loss experience and may be adjusted for significant factors that, in management's judgment, affect the collectibility of the portfolio as of the evaluation date.
Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has been incurred in excess of the amount determined by the application of the formula allowance. The allowance also incorporates the results of measuring impaired loans. Management considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the note agreement. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the note's effective interest rate, or the fair value of the collateral if the loan is collateral dependent.
The unallocated allowance is based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance may include existing general economic and business conditions affecting the key lending areas of the Company, in particular the technology industry and the real estate market, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the loan portfolio, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results.
Premises and Equipment
Premises and equipment are stated at cost. Depreciation and amortization are computed on a straight-line basis over the lesser of the lease terms or estimated useful lives of five to fifteen years, if appropriate. The Company evaluates the recoverability of long-lived assets on an on-going basis.
Equipment Under Operating Leases to Others
Equipment under operating leases where the Company is the lessor are carried at cost less accumulated depreciation based on the terms of the leases and is included in other assets.
Other Investments
Other investments consist of FRB and FHLB stock and the cash surrender value of life insurance policies for certain officers and directors of the Company and its subsidiary banks.
Income Taxes
The Company files consolidated federal and combined state income tax returns. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred taxes, which arise principally from temporary differences between the period in which certain income and expenses are recognized for financial accounting purposes and the period in which they affect taxable income, are included in the amounts provided for income taxes. Under this method, the computation of the net deferred tax liability or asset gives current recognition to changes in the tax laws.
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 years 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:
Years ended December 31, ------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Weighted average common shares outstanding - used in computing basic earnings per share................ 11,157,287 11,082,157 10,607,584 Dilutive effect of stock options outstanding, using the treasury stock method...................... 260,685 297,564 500,745 ----------- ----------- ----------- Shares used in computing diluted earnings per share.. 11,417,972 11,379,721 11,108,329 =========== =========== ===========
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. No compensation expense has been recognized in the financial statements for employee stock arrangements, as the Company's stock option plan provides for the issuance of options at a price of no less than the fair market value at the date of the grant.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method at the grant date of all stock options. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock option awards. Those models also require subjective assumptions, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, 84 months; risk-free interest rate, 1.2% for 2002, 1.7% for 2001 and 5.7% for 2000; stock volatility of 27% in 2002, 31% in 2001 and 35% in 2000; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach, and forfeitures are recognized as they occur.
Had compensation expense for the Company's stock option plan been determined under the requirements of SFAS No. 123 the Company's pro forma net income and earnings per common share would have been as follows:
Years ended December 31, --------------------------------- (Amounts in thousands, except per share data) 2002 2001 2000 ---------- ---------- --------- Net income As reported...................................... $ 7,177 $ 7,268 $ 5,429 Less: Compensation expense for amortization of fair value of ........................ stock awards, net of taxes................... (752) (625) (594) Pro forma........................................ $ 6,425 $ 6,643 $ 4,835 Net income per common share - basic As reported...................................... $ 0.64 $ 0.66 $ 0.51 Pro forma........................................ $ 0.58 $ 0.60 $ 0.46 Net income per common share - diluted As reported...................................... $ 0.63 $ 0.64 $ 0.49 Pro forma........................................ $ 0.56 $ 0.58 $ 0.44
Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which represents the changes in its net assets during the period from non-owner sources. The Company's sources of other comprehensive income are unrealized gain and loss on securities available-for-sale and I/O strips, which are treated like available-for-sale securities, and are presented net of tax. 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 incomes as unrealized holding gains and losses in the period in which they are excluded from comprehensive income of the current period. The following is a summary of the components of other comprehensive income.
Years ended December 31, ------------------------------------- (Dollars in thousands) 2002 2001 2000 ----------- ----------- ----------- Net income........................................... $ 7,177 $ 7,268 $ 5,429 ----------- ----------- ----------- Other comprehensive income, net of tax: Net unrealized holding gain on available-for-sale securities during the year......................... 1,389 961 1,797 Less: reclassification adjustment for realized gains on available for sale securities included in net income during the year...................... 696 455 28 ----------- ----------- ----------- Other comprehensive income .......................... 693 506 1,769 ----------- ----------- ----------- Comprehensive income................................. $ 7,870 $ 7,774 $ 7,198 =========== =========== ===========
Derivative Instruments and Hedging Activities
The Company, in conjunction with relationships with five of its borrowers, has received warrants to purchase preferred and common stock of these companies, subject to certain restrictions. The Company has determined that such warrants represent embedded derivatives and as such has estimated the value of the warrants and included this amount in other assets. The Company did not enter into freestanding derivatives contracts and was not involved in any hedging activities during 2002, 2001 and 2000.
Segment Reporting
HBC, HBEB, HBSV, and BLA are commercial banks, which offer similar products to customers located in Santa Clara, Alameda, and Contra Costa counties of California. No customer accounts for more than 10 percent of revenue for HBC, HBEB, HBSV, BLA or the Company. Management evaluates the Company's performance as a whole and does not allocate resources based on the performance of different lending or transaction activities. Accordingly, the Company and its subsidiary banks all operate as one business segment.
Reclassifications
Certain amounts in the 2001 and 2000 financial statements have been reclassified to conform to the 2002 presentation. These reclassifications had no impact on shareholders' equity or net income.
Business Combinations and Goodwill and Other Intangible Asset
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business Combinations" which addresses the elimination of pooling accounting treatment in business combinations and the financial accounting and reporting for acquired goodwill and other intangible assets at acquisition and SFAS No142, "Goodwill and Other Intangible Assets" which addresses financial accounting and reporting for acquired goodwill and other intangible assets at acquisition in transactions other than business combinations covered by SFAS No.141, and the accounting treatment of goodwill and other intangible assets after acquisition and initial recognition in the financial statements. The adoption of these statements did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows.
Impairment or Disposal of Long-Lived Assets
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting For The Impairment Or Disposal Of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of" and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting The Results Of Operations - Reporting The Effects Of Disposal Of A Segment Of A Business, And Extraordinary, Unusual and Infrequently Occurring Events And Transactions". SFAS No. 144 unifies the accounting treatment for various types of long-lived assets to be disposed of, and resolves implementation issues related to SFAS No. 121. The adoption of SFAS No. 144 did not have a material effect on the Company's financial position, results of operations, or cash flows.
Sale-Leaseback Transactions
Effective April 1, 2002, the Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 rescinds and amends these statements to eliminate any inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions including clarification that gains or losses from normal extinguishments of debt need not be classified as extraordinary items. The adoption of SFAS No. 145 did not have a material effect on the Company's financial position, results of operations, or cash flows.
Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized.
Acquisitions of Certain Financial Institutions
Effective October 1, 2002, the Company adopted SFAS No. 147, "Acquisitions of Certain Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No.9", which removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires those transactions be accounted for in accordance with FASB Statements No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". This Statement is effective for acquisitions on or after October 1, 2002 with earlier application permitted for the transition provisions for previously recorded unidentifiable intangible assets. The adoption of SFAS No. 147 did not have a material effect on the Company's financial position, results of operations, or cash flows.
Stock Based Compensation - Transition and Disclosure
Effective December 31, 2002 the Company adopted SFAS No. 148, "Accounting for Stock Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No, 123", which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of No. 123 to require prominent disclosures in both annual and interim financial statements within the Significant Accounting Policies footnote about the method of accounting for stock-based employee compensation and the effect of the method used (intrinsic value or fair value) on reported results. The Company continues to account for stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and presents the required disclosures in accordance with SFAS No. 123 as amended by SFAS No. 148. The adoption of SFAS No. 148 did not have a material effect on the Company's financial position, results of operations, or cash flows.
(2) BUSINESS COMBINATIONS
In October 2000, the Company merged with Western Holdings Bancorp and its wholly owned subsidiary, BLA, which became a wholly owned subsidiary of Heritage Commerce Corp. Upon consummation of the merger, the outstanding common shares of Western Holdings Bancorp were converted into an aggregate of approximately 3,392,000 shares of Heritage Commerce Corp's common stock based on an exchange ratio of 1.2264 shares of Heritage Commerce Corp common stock for each share of Western Holdings Bancorp common stock. The transaction was accounted for as a pooling-of-interests.
(3) SECURITIES
The amortized cost and estimated fair value of securities as of December 31, 2002 were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- Securities available-for-sale: U.S. Treasury............................... $ 4,727 $ 13 $ -- $ 4,740 U.S. Government Agencies.................... 47,072 957 -- 48,029 Municipals.................................. 11,382 752 -- 12,134 FHLMC and FNMA mortgage-backed securities... 40,969 290 -- 41,259 GNMA mortgage-backed securities............. 3,378 137 -- 3,515 CMOs.......................................... 14,023 111 -- 14,134 Corporate bonds............................... 2,548 84 -- 2,632 ----------- ----------- ----------- ----------- Total securities available-for-sale............. $ 124,099 $ 2,344 $ -- $ 126,443 =========== =========== =========== ===========
The amortized cost and estimated fair value of securities as of December 31, 2001 were as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ----------- ----------- ----------- ----------- Securities available-for-sale: U.S. Treasury............................... $ 3,568 $ 25 $ -- $ 3,593 U.S. Government Agencies.................... 52,656 1,106 -- 53,762 Municipals.................................. 8,938 335 -- 9,273 FHLMC and FNMA mortgage-backed securities... 9,997 102 -- 10,099 GNMA mortgage-backed securities............. 12,768 -- 28 12,740 Corporate bonds............................. 2,046 21 -- 2,067 ----------- ----------- ----------- ----------- Total securities available-for-sale............. $ 89,973 $ 1,589 $ 28 $ 91,534 =========== =========== =========== =========== Securities held-to-maturity: Municipals.................................. $ 10,002 $ 375 $ -- $ 10,377 FHLMC and FNMA mortgage-backed securities... 2,475 22 -- 2,497 GNMA mortgage-backed securities............. 1,906 18 -- 1,924 CMOs........................................ 893 17 -- 910 ----------- ----------- ----------- ----------- Total securities held-to-maturity............... $ 15,276 $ 432 $ -- $ 15,708 =========== =========== =========== ===========
During 2002, the Company transferred all of its securities categorized as held-to-maturity to the available-for-sale category. The amortized cost of the transferred securities was $12,778,000 and the related unrealized holding gain, which has been included as a component of accumulated comprehensive income, was $841,000. The Company transferred these securities to increase liquid assets and to increase the ability for possible sale of these securities in the future and currently intends to classify all new purchases of securities as available-for-sale.
The amortized cost and estimated fair values of securities as of December 31, 2002 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or pre-pay obligations with or without call or pre-payment penalties.
Available-for-sale ------------------------ Estimated Amortized Fair (Dollars in thousands) Cost Value ----------- ----------- Due within one year............................. $ 25,304 $ 25,781 Due after one through five years................ 37,709 38,797 Due after five through ten years................ 5,950 6,283 Due after ten years............................. 55,136 55,582 ----------- ----------- Total........................................... $ 124,099 $ 126,443 =========== ===========
Sales of securities available-for-sale resulted in gross realized gains of $1,036,000, $732,000, and $44,000 during the years ended December 31, 2002, 2001, and 2000, respectively.
Sales of securities available-for-sale did not result in any gross realized losses for the years ended December 31, 2002, 2001 and 2000.
Securities with amortized cost of $29,710,000 and $20,084,000 as of December 31, 2002 and 2001 were pledged to secure public and certain other deposits as required by law or contract.
(4) LOANS
Loans as of December 31 were as follows:
(Dollars in thousands) 2002 2001 ----------- ----------- Loans held for sale............................. $ 28,084 $ 32,461 =========== =========== Loans held for investment Commercial.................................... $ 263,144 $ 208,713 Real estate - mortgage........................ 259,974 246,119 Real estate - land and construction........... 147,822 174,077 Consumer...................................... 2,850 3,833 ----------- ----------- Total loans..................................... 673,790 632,742 Deferred loan costs............................. 117 175 Allowance for probable loan losses.............. (13,227) (11,154) ----------- ----------- Loans, net...................................... $ 660,680 $ 621,763 =========== ===========
Changes in the allowance for probable loan losses were as follows:
Years ended December 31, ------------------------------------- (Dollars in thousands) 2002 2001 2000 ----------- ----------- ----------- Balance, beginning of year...................... $ 11,154 $ 9,651 $ 6,511 ----------- ----------- ----------- Loans charged-off............................... (936) (709) (52) Recoveries...................................... 346 302 33 ----------- ----------- ----------- Net loans charged-off........................... (590) (407) (19) Provision for probable loan losses.............. 2,663 1,910 3,159 ----------- ----------- ----------- Balance, end of year............................ $ 13,227 $ 11,154 $ 9,651 =========== =========== ===========
As of December 31, 2002, the Company had $4,571,000 in loans on nonaccrual status, which were considered impaired loans. The impaired loans had a related valuation allowance of $356,000 as of December 31, 2002. For the year ended December 31, 2002, the average recorded investment in loans for which impairment has been recognized was approximately $2,235,000. The Company had no loans past due 90 days or more and still accruing interest and no restructured loans as of December 31, 2002. As of December 31, 2001 and 2000, the Company had no loans on nonaccrual status, no significant loans past due 90 days or more and still accruing interest, no restructured loans, no foreclosed assets, and no impaired loans. The increase in the nonaccrual loans at December 31, 2002 compared to December 31, 2001 is primarily the result of the placement of one commercial real estate loan nonaccrual status during 2002. For the year ended December 31, 2002, 2001 and 2000, the Company had no foregone interest income on nonaccrual loans. For the year ended December 31, 2002, the Company recognized $134,000 in interest income for cash paymentss received on nonaccrual loans, compared to zero for both the years ended December 31, 2001 and 2000.
Concentrations of credit risk arise when a number of clients are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, wholesale, and service) and real estate lending, with the balance in consumer loans. 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.
HBC, HBEB, HBSV, and BLA make loans to executive officers, directors, and their affiliates in the ordinary course of business. These transactions were on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties and do not involve more than normal risk or unfavorable terms for the Bank.
The following table presents the loans outstanding to related parties for the years ended December 31, 2002 and 2001.
(Dollars in thousands) 2002 2001 ----------- ----------- Beginning balance............................... $ 4,077 $ 2,075 Advances on loans during the year............... 7,203 3,214 Repayment on loans during the year.............. (125) (1,212) ----------- ----------- Ending balance.................................. $ 11,155 $ 4,077 =========== ===========
Loan Servicing
At December 31, 2002 and 2001, the Company serviced loans guaranteed by the Small Business Administration which it had sold to the secondary market of approximately $83,008,000 and $50,178,000.
At December 31, 2002 and 2001, the balance of the servicing assets was $1,538,000 and $783,000, respectively. There was no valuation allowance as of December 31, 2002 and 2001. At December 31, 2002 and 2001, the balance of the I/O strip receivable was $2,839,000 net of an unrealized gain of $463,000 and $2,142,000 net of an unrealized loss of $28,000. These assets represent the servicing spread generated from the sold guaranteed portions of SBA loans. Servicing income from these loans was $1,318,000 and $366,000 in 2002 and 2001 and not significant in 2000. Amortization of the related assets for 2002 and 2001 was $837,000 and $643,000, respectively. In recording the initial value of the servicing assets and the fair value of the I/O strips receivable, the Company uses estimates which are made based on management's expectations of future prepayment and discount rates. For the year ended December 31, 2002, management's estimate of constant prepayment rate ("CPR") was 14% and the weighted average discount rate assumption was 10%. These prepayment and discount rates were based on current market conditions and historical performance of the various loan pools. If actual prepayments with respect to sold loans occur more quickly than projected the carrying value of the servicing assets may have to be adjusted through a charge to earnings. A corresponding decrease in the value of the I/O strip receivable would also be expected.
(5) PREMISES AND EQUIPMENT
Premises and equipment as of December 31 were as follows:
(Dollars in thousands) 2002 2001 ----------- ----------- Furniture and equipment......................... $ 5,175 $ 6,882 Leasehold improvements.......................... 4,285 3,949 ----------- ----------- 9,460 10,831 Accumulated depreciation and amortization....... (4,266) (5,361) ----------- ----------- Premises and equipment, net..................... $ 5,194 $ 5,470 =========== ===========
Depreciation expense was $1,828,000 and $1,527,000, and $777,000 for the years ended December 31, 2002, 2001, and 2000, respectively.
(6) DEPOSITS
At December 31, 2002, the scheduled maturities of time deposits were as follows:
(Dollars in thousands) Year - ------------------------------------------------ 2003............................................ $ 180,746 2004............................................ 22,426 2005.............................................. 5,170 2006 and After.................................... 252 ----------- Total time deposits............................. $ 208,594 ===========
(7) BORROWING ARRANGEMENTS
FHLB Borrowings & Available Lines of Credit
The Company maintains a collateralized line of credit with the Federal Home Loan Bank (the FHLB) of San Francisco. Under this line, the Company can borrow from the FHLB on a short-term (typically overnight) or long-term (over one year) basis. As of December 31, 2002, the Company had no borrowing outstanding from FHLB. At December 31, 2002, the Company has federal funds purchase lines and lines of credit available of $56,000,000.
December 31, ------------------------------------- (Dollars in thousands) 2002 2001 2000 ----------- ----------- ----------- FHLB short-term borrowings...................... $ -- $ -- $ 18,000
Information concerning borrowings under the above arrangements is as follows:
December 31, ------------------------------------- (Dollars in thousands) 2002 2001 2000 ----------- ----------- ----------- Average balance during the year................. $ 770 $ 2,436 $ 2,020 Average interest rate during the year........... 1.77% 5.80% 5.17% Maximum month-end balance during the year ...... $ $ -- $ 18,000 Average rate at December 31..................... -- 5.13%
(8) 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 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 10.875% 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 10.875%, 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.
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 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.
Heritage Capital Statutory Trust II
Heritage Capital Statutory Trust II is a Delaware business trust formed by Heritage Commerce Corp for the purpose of issuing Company obligated mandatorily redeemable cumulative trust preferred securities.
During the third quarter of 2001, Heritage Capital Statutory Trust II issued 5,000 Floating Rate Capital Securities, with a liquidation value of $1,000 per security to the Company for gross proceeds of $5,000,000. The entire proceeds of the issuance were invested by Heritage Capital Statutory Trust II in $5,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures, with identical maturity, repricing and payment terms as the Floating Rate Capital Securities (the "Subordinated Debentures") issued by the Company. The Subordinated Debentures represent the sole assets of Heritage Capital Statutory Trust II. The Subordinated Debentures mature on July 31, 2031, bear an initial interest rate of 7.29% (based on 3-month LIBOR plus 3.58%) and the current interest rate is 5.34%, repricing and payable semi-annually, and are redeemable by the Company at a premium beginning on or after July 31, 2006 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 July 31, 2011 with proper notification. The Floating Rate Capital 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 July 31, 2031. The Subordinated Debentures bear the same terms and interest rates as the Floating Rate Capital Securities.
Holders of the Floating Rate Capital Securities are entitled to cumulative cash distribution on the liquidation amount of $1,000 per security beginning on July 31, 2001 and ending on October 31, 2001 at an initial rate per annum of 7.29% and shall bear interest for each successive period beginning on (and including) October 31, 2001, and each succeeding Distribution Payment Date and ending at the next succeeding Distribution Payment Date at a rate per annum equal to the 3-month LIBOR, plus 3.58% (current interest rate 5.34%); provided , however, that prior to July 31, 2011, such annual rate shall not exceed 12.50%. The distributions on the Floating Rate Capital Securities are treated as interest expense in the consolidated income statements. 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 Floating Rate Capital Securities issued in the offering were sold in private transactions pursuant to an applicable exemptions from registration under the Securities Act of 1933, as amended. The Company has guaranteed on a subordinated basis, distributions and other payments due on the Floating Rate Capital 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 Floating Rate Capital Securities.
Heritage Capital Statutory Trust III
Heritage Capital Statutory Trust III is a Delaware business trust formed by the Company for the purpose of issuing Company obligated mandatorily redeemable cumulative trust preferred securities.
During the third quarter of 2002, Heritage Capital Statutory Trust III issued 4,000 Floating Rate Capital Securities, with a liquidation value of $1,000 per security to the Company for gross proceeds of $4,000,000. The entire proceeds of the issuance were invested by Heritage Capital Statutory Trust III in $4,000,000 aggregate principal amount of Floating Rate Junior Subordinated Deferrable Interest Debentures, with identical maturity, repricing and payment terms as the Floating Rate Capital Securities (the "Subordinated Debentures") issued by the Company. The Subordinated Debentures represent the sole assets of Heritage Capital Statutory Trust III. The Subordinated Debentures mature on September 26, 2032, bear an initial interest rate of 5.22% (based on 3-month LIBOR plus 3.40%) (current interest rate 4.80%), repricing and payable semi-annually, and are redeemable by the Company at a premium beginning on or after September 26, 2007 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 26, 2012 with proper notification. The Floating Rate Capital 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 26, 2032. The Subordinated Debentures bear the same terms and interest rates as the Floating Rate Capital Securities.
Holders of the Floating Rate Capital Securities are entitled to cumulative cash distributions on the liquidation amount of $1,000 per security beginning on September 26, 2002 and ending on December 26, 2002 at an initial rate per annum of 5.22% and for each quarter thereafter at an annualized rate equal to the 3-month LIBOR, plus 3.40%. However, through September 26, 2007 the rate may not exceed 11.90%. The distributions on the Floating Rate Capital Securities are treated as interest expense in the consolidated income statements. 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 Floating Rate Capital Securities issued in the offering were sold in private transactions pursuant to an applicable exemptions from registration under the Securities Act of 1933, as amended. The Company has guaranteed on a subordinated basis, distributions and other payments due on the Floating Rate Capital 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 Floating Rate Capital Securities.
The total amount of Trust Preferred Securities outstanding at December 31, 2002, 2001 and 2000 was $23,000,000, $19,000,000 and $14,000,000, respectively. The amount of deferred costs at December 31, 2002, 2001 and 2000 was $647,000, $548,000 and $413,000, respectively. The amortization of the deferred costs at December 31, 2002, 2001 and 2000 was $31,000, $16,000 and $13,000, respectively.
(9) INCOME TAXES
The provision for income taxes for the years ended December 31, consisted of the following:
December 31, ------------------------------------- (Dollars in thousands) 2002 2001 2000 ----------- ----------- ----------- Current: Federal....................................... $ 3,696 $ 534 $ 2,052 State......................................... 992 1,425 606 ----------- ----------- ----------- Total current................................... 4,688 1,959 2,658 ----------- ----------- ----------- Deferred: Federal....................................... (830) 1,911 184 State......................................... (358) 540 207 ----------- ----------- ----------- Total deferred.................................. (1,188) 2,451 391 ----------- ----------- ----------- Provision for income taxes...................... $ 3,500 $ 4,410 $ 3,049 =========== =========== ===========
The effective tax rate differs from the federal statutory rate for the years ended December 31, as follows:
December 31, ------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Statutory federal income tax rate............... 35.0 % 35.0 % 35.0 % State income taxes, net of federal tax benefit.. 4.5 4.9 3.1 Merger cost..................................... -- -- 6.9 Non-taxable interest income..................... (1.6) (2.2) (3.2) Officers' life insurance........................ (3.5) (3.0) (3.1) Other........................................... (1.6) 3.1 (2.7) ----------- ----------- ----------- Effective tax rate.............................. 32.8 % 37.8 % 36.0 % =========== =========== ===========
Net deferred tax asset as of December 31 consists of the following:
December 31, ------------------------ (Dollars in thousands) 2002 2001 ----------- ----------- Deferred tax assets: Allowance for loan losses................... $ 5,376 $ 4,546 Accrued expenses............................ 1,185 1,142 State income taxes.......................... 347 484 Net operating loss carryforward............. 306 396 Other....................................... 426 511 ----------- ----------- Total deferred tax assets....................... 7,640 7,079 ----------- ----------- Deferred tax liabilities: Securities available-for-sale............... (1,142) (609) Loan fees................................... (112) (143) Other....................................... -- (596) ----------- ----------- Total deferred tax liabilities.................. (1,254) (1,348) ----------- ----------- Net deferred tax assets......................... $ 6,386 $ 5,731 =========== ===========
The Company believes that it is more likely than not that it will realize the above deferred tax assets in future periods; therefore, no valuation allowance has been provided against its deferred tax assets.
The Company has net operating loss carryforwards of $875,590 for federal income tax purposes. The net operating losses expire in 2005. These losses related to the entity that was the predecessor of the BLA, and are subject to restrictions as a result of the change of control that limits the maximum annual recovery of the net operating loss to $290,275. Management has determined that valuation allowance is not necessary.
(10) STOCK BASED COMPENSATION
The Company has a stock option plan (the Plan) for directors, officers, and key employees. The Plan provides for the grant of incentive and non-qualified stock options. The Plan provides that the option price for both incentive and non-qualified stock options will be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally, options vest over four years. All options expire no later than ten years from the date of grant. As of December 31, 2002, there are 241,682 shares available for future grants under the Plan. Option activity under the Plan is as follows:
Weighted Number Average of Exercise Shares Price ----------- --------- Options Outstanding at January 1, 2000 (1,475,340 exercisable at a weighted average exercise price of $5.22).. 1,956,234 $ 6.26 Granted (weighted average fair value of $5.14)......................... 246,144 $ 8.17 Exercised.............................................................. (562,475) $ 3.27 Cancelled.............................................................. (66,070) $ 9.14 ----------- --------- Options Outstanding at December 31, 2000 (1,086,985 exercisable at a weighted average exercise price of $6.54).. 1,573,833 $ 7.79 Granted (weighted average fair value of $3.14)......................... 181,500 $ 8.22 Exercised.............................................................. (175,842) $ 3.70 Cancelled.............................................................. (32,840) $ 10.78 ----------- --------- Options Outstanding at December 31, 2001 (1,148,381 exercisable at weighted average exercise price of $7.69).... 1,546,651 $ 8.25 Granted (weighted average fair value of $2.70)......................... 300,500 $ 8.63 Exercised.............................................................. (99,447) $ 2.80 Cancelled.............................................................. (149,692) $ 11.14 ----------- --------- Options Outstanding at December 31, 2002 (1,144,948 exercisable at weighted average exercise price of $8.18).... 1,598,012 $ 8.39 ===========
Additional information regarding options outstanding under the Plan as of December 31, 2002 is as follows:
Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (Yrs.) Price Exercisable Price - ------------------- ------------- ----------- --------- ------------ --------- $ 1.42 - $4.41.... 318,655 1.98 $ 2.97 318,655 $ 2.97 $ 4.42 - $5.32.... 54,889 4.45 $ 5.23 54,889 $ 5.23 $ 5.33 - $9.70.... 755,973 7.92 $ 8.76 366,680 $ 8.98 $ 9.71 - $16.37... 468,495 6.55 $ 11.83 404,724 $ 11.95 ------------- ------------ $ 1.42 - $16.37... 1,598,012 6.21 $ 8.39 1,144,948 $ 8.18 ============= ============
As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock option arrangements.
(11) LEASES
Equipment Under Operating Leases as Lessor
The Company acts as the lessor for certain equipment under operating leases, which are included in other assets in the statement of financial position. These leases represent a pool of equipment leases, primarily electronic testing equipment, purchased in 2002 from a third party, who also services the leases. The agreement with the third party is for 5 years, however, under the terms of the purchase agreement, the third party has the option to repurchase all of the leases beginning at the end of the third year at a predetermined price.
(Dollars in thousands) Equipment under operating leases.................. $ 5,000 Accumulated depreciation.......................... 83 ------------ Equipment under operating leases, net............. $ 4,917 ============
For the year ended December 31, 2002, depreciation expense was $83,400 and rental revenue on the lease was $103,000.
Minimum future rents to be received under this pooled lease purchase agreement assuming the repurchase option is not exercised are as followings:
(Dollars in thousands) Year ending December 31, - ----------------------------------------------------- 2003.............................................. $ 1,238 2004.............................................. 1,238 2005.............................................. 1,238 2006.............................................. 1,238 2007.............................................. 1,135 ---------- Total..............................................$ 6,087 ==========
Operating Leases
The Company leases its premises under non-cancelable operating leases with terms, including renewal options, ranging from five to fifteen years. Future minimum payments under the agreements are as follows:
(Dollars in thousands) Year ending December 31, - ----------------------------------------------------- 2003.............................................. $ 2,283 2004.............................................. 2,235 2005.............................................. 2,251 2006.............................................. 1,809 2007.............................................. 1,680 Thereafter.......................................... 3,250 ---------- Total............................................... $ 13,508 ==========
Rent expense under operating leases was $2,467,000, $2,201,000, and $1,676,000, during the years ended December 31, 2002, 2001, and 2000. Rent expense was reduced by deferred rent concessions on one of the Company's locations of $46,000 for the year ended December 31, 2002, 2001, and 2000.
(12) BENEFIT PLANS
The Company offers a 401(k) savings plan. All salaried employees are eligible to contribute up to 20% of their pre-tax compensation (to a maximum of $10,500 in 2002) to the plan through salary deductions under Section 401(k) of the Internal Revenue Code. Beginning in 2001, the Company matched up to $1,500 for each employee's contributions. Contributions paid were $304,000 and $313,000 in 2002 and 2001.
The Company also sponsors an employee stock ownership plan. The plan allows the Company to purchase shares on the open market and award those shares to certain employees in lieu of paying cash bonuses. To be eligible to receive an award of shares under this plan, an employee must have worked at least 1,000 hours during the year and must be employed by the Company, or its subsidiaries, on December 31. Awards under this plan generally vest over four years. During 2002, 2001 and 2000, the Company made contributions of $358,000, $244,000, and $250,000 into the Plan. The amount contributed was recognized as salaries and benefits expense in the Company's financial statements. On September 7, 2001, the ESOP borrowed $1,000,000 from an unaffiliated third party lender in order to fund the purchase of common stock of the Company. This loan is being repaid with annual installments of principal of $250,000 until September 7, 2005, at which time all outstanding balance on principal together with accrued interest is due and payable. An annual rate of interest, equal to Prime rate plus 0.50% floating on a daily basis, is due on the first day of each month. The funds for repayment will be primarily coming from the Company's contributions to the ESOP over a similar time period. The loan is collaterized by the 127,000 shares of the Company's common stock held by the ESOP. At December 31, 2002, the ESOP owned approximately 202,400 shares of the Company's stock.
The Company also has a nonqualified deferred compensation plan for the directors ("Deferral Plan"). Under the Deferral Plan, a participating director may defer up to 100% of his monthly board fees into the Deferral Plan for up to ten years. Amounts deferred earn interest at the rate of 8% per annum. The director may elect a distribution schedule of up to ten years with interest accruing (at the same 8%) on the declining balance. The Company's deferred compensation obligation of $250,000 and $192,000 as of December 31, 2002 and 2001 is included in "Accrued interest payable and other liabilities".
The Company has purchased life insurance policies on the lives of directors who have agreed to participate in the Deferral Plan. It is expected that the earnings on these policies will offset the cost of the program. In addition, the Company will receive death benefit payments upon the death of the director. The proceeds will permit the Company to "complete" the deferral program as the director originally intended if he dies prior to the completion of the deferral program. The disbursement of deferred fees is accelerated at death and commences one month after the director dies.
In the event of the director's disability prior to attainment of his benefit eligibility date, the director may request that the Board permit him to receive an immediate disability benefit equal to the annualized value of the director's deferral account.
The Company has a supplemental retirement plan covering key executives and directors (Plan). The Plan is a nonqualified defined benefit plan and is unsecured and unfunded and there are no Plan assets. The Company has purchased insurance on the lives of the directors and executive officers in the plan and intends to use the cash values of these policies ($23,898,000 and $22,034,000 at December 31, 2002 and 2001, respectively) to pay the retirement obligations. The accrued pension obligation was $3,475,000 and $2,596,000 as of December 31, 2002 and 2001, respectively, and is included in "Accrued interest payable and other liabilities".
The following table sets forth the unqualified supplemental retirement defined benefit pension plan's status at December 31:
(Dollars in thousands) 2002 2001 Change in projected benefit obligation Projected benefit obligation at beginning of year.. $ 2,399 $ 2,150 Service cost....................................... 636 378 Interest cost...................................... 153 113 Actuarial gain..................................... 162 (242) ---------- ---------- Projected benefit obligation at end of year........ $ 3,350 $ 2,399 ========== ========== (Dollars in thousands) 2002 2001 Change in Plan assets Fair value of Plan assets at beginning of year.... $ -- $ -- Fair value of Plan assets at end of year.......... $ -- $ -- Funding Unfunded Status................................... $ (3,350) $ (2,399) Unrecognized net actuarial (gain)/loss............ (125) (197) ---------- ---------- Accrued pension cost.............................. $ (3,475) $ (2,596) ========== ========== Weighted-average assumptions as of December 31 Discount rate..................................... 7.00% 7.00% Rate of compensation increase..................... N/A N/A Expected return on Plan assets.................... N/A N/A
The elements of pension costs for the unqualified supplemental retirement defined benefit pension plan at December 31, 2002 was as following:
(Dollars in thousands) 2002 2001 Components of net periodic benefits cost Service cost...................................... $ 636 $ 378 Interest cost..................................... 153 113 Amortization of (gain)/loss....................... 130 (25) ---------- ---------- Net periodic benefit cost......................... $ 919 $ 466 ========== ==========
The net periodic pension cost was determined using the following assumptions:
2002 2001 Discount rate........................................ 7.00% 7.00% Rate of compensation increase........................ N/A N/A Expected return on Plan assets....................... N/A N/A
(13) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation techniques may have a material effect on the estimated fair value amounts.
The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 2002 and 2001 were as follows:
2002 2001 Estimated Estimated Carrying Fair Carrying Fair (Dollars in thousands) Amounts Value Amounts Value ---------- ---------- --------- --------- Assets Cash and cash equivalents.......................... $ 86,632 $ 86,632 $ 106,319 $ 106,319 Securities......................................... 126,443 126,443 106,810 107,242 Loans, including loans held for sale, net.......... 688,764 690,231 654,224 657,336 Other investments.................................. 27,170 27,170 24,779 24,779 Liabilities Time deposits...................................... $ 208,594 $ 211,198 $ 290,748 $ 295,732 Other deposits..................................... 633,342 633,342 517,160 517,160 Mandatorily redeemable cumulative trusts preferred securities...................... 23,000 24,716 19,000 19,727
The following methods and assumptions were used to estimate the fair value in the table, above:
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturities of these instruments.
Securities
The fair value of securities is estimated based on bid market prices. The fair value of certain municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on such dealer quotations.
Loans, net
Loans with similar financial characteristics are grouped together for purposes of estimating their fair value. Loans are segregated by type such as commercial, term real estate, residential construction, and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms.
The fair value of performing, fixed rate loans is calculated by discounting scheduled future cash flows using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value of variable rate loans is the carrying amount as these loans generally reprice within 90 days. The fair value calculations are adjusted by the allowance for possible loan losses.
Other Investments
Other investments consist of FRB and FHLB stock and the cash surrender value of the Company Owned Life Insurance policies. The carrying amount represents a reasonable estimate of fair value.
Deposits
The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings, and money market accounts, approximates the amount payable on demand. The fair value of the demand deposit intangible has not been included in the fair value estimate. The carrying amount approximates the fair value of time deposits with a remaining maturity of less than 90 days. The fair value of all other time deposits is calculated based on discounting the future cash flows using rates currently offered by the Bank for time deposits with similar remaining maturities.
Commitments to Fund Loans/Standby Letters of Credit
The fair values of commitments are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The amounts of and differences between the carrying value of commitments to fund loans or stand by letters of credit and their fair value is not significant and therefore is not included in the table above.
Mandatorily Redeemable Cumulative Trust Preferred Securities of Subsidiary Grantor Trust
The fair value of Mandatorily Redeemable Cumulative Trust Preferred Securities of Subsidiary Grantor Trust was determined based on the current market value for like kind instruments of a similar maturity and structure.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(14) COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
HBC, HBEB, HBSV, and BLA are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk, in excess of the amounts recognized in the balance sheets.
HBC's exposure to credit loss in the event of non-performance of the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. HBC uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Credit risk is the possibility that a loss may occur because a party to a transaction failed to perform according to the terms of the contract. HBC controls the credit risk of these transactions through credit approvals, limits, and monitoring procedures. Management does not anticipate any significant losses as a result of these transactions.
Commitments to extend credit as of December 31, were as follows:
(Dollars in thousands) 2002 2001 ---------- ---------- Commitments to extend credit......................... $ 303,510 $ 275,796 Standby letters of credit............................ 3,817 2,526 ---------- ---------- $ 307,327 $ 278,322 ========== ==========
Commitments to extend credit are agreements to lend to a client as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. HBC evaluates each client's creditworthiness on a case-by- case basis. The amount of collateral obtained, if deemed necessary by HBC upon the extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include cash, marketable securities, accounts receivable, inventory, property, plant and equipment, income-producing commercial properties, and/or residential properties. Fair value of these instruments is not material.
Standby letters of credit are written with conditional commitments issued by HBC to guaranty the performance of a client to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients.
Claims
The Company is involved in certain legal actions arising from normal business activities. Management, based upon the advise of legal counsel, believes the ultimate resolution of all pending legal actions will not have a material effect on the financial statements of the Company.
(15) REGULATORY MATTERS
The Company and its subsidiary Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and HBC must meet specific capital guidelines that involve quantitative measures of the Company's and HBC's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and HBC's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and HBC to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2002, the Company and HBC meets all capital adequacy guidelines to which it is subject.
The most recent notification from the FDIC for HBC as of December 31, 2002 and 2001 categorized HBC, HBEB, HBSV, and BLA as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" HBC must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.
The Company's actual capital amounts and ratios are presented in the table.
Actual For Capital Adequacy Purposes -------------------- ------------------------------------------ (Dollars in thousands) Amount Ratio Amount Ratio --------- --------- --------- ------------------------------- As of December 31, 2002 Total Capital................ $ 113,177 13.4% $ 67,568 (greater than or equal to) 8.0% (to risk-weighted assets) Tier 1 Capital............... $ 102,614 12.2% $ 33,645 (greater than or equal to) 4.0% (to risk-weighted assets) Tier 1 Capital............... $ 102,614 10.8% $ 38,005 (greater than or equal to) 4.0% (to average assets) As of December 31, 2001 Total Capital................ $ 101,262 13.0% $ 62,315 (greater than or equal to) 8.0% (to risk-weighted assets) Tier 1 Capital............... $ 91,598 11.8% $ 31,162 (greater than or equal to) 4.0% (to risk-weighted assets) Tier 1 Capital............... $ 91,598 10.2% $ 35,921 (greater than or equal to) 4.0% (to average assets)
HBC's actual capital amounts and ratios are also presented in the table.
To Be Well-Capitalized Under Prompt Actual For Capital Adequacy Purposes Corrective Action Provisions -------------------- ------------------------------------------ ------------------------------------------ (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- ------------------------------- --------- ------------------------------- As of December 31, 2002 Total Capital................ $ 56,182 13.0% $ 34,574 (greater than or equal to) 8.0% $ 43,217 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital............... $ 50,749 11.7% $ 17,350 (greater than or equal to) 4.0% $ 26,025 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital............... $ 50,749 10.6% $ 19,151 (greater than or equal to) 4.0% $ 23,938 (greater than or equal to) 5.0% (to average assets) As of December 31, 2001 Total Capital................ $ 50,441 12.7% $ 31,749 (greater than or equal to) 8.0% $ 39,686 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital............... $ 45,460 11.5% $ 15,881 (greater than or equal to) 4.0% $ 23,822 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital............... $ 45,460 9.7% $ 18,746 (greater than or equal to) 4.0% $ 23,433 (greater than or equal to) 5.0% (to average assets)
HBEB's actual capital amounts and ratios are also presented in the table.
To Be Well-Capitalized Under Prompt Actual For Capital Adequacy Purposes Corrective Action Provisions -------------------- ------------------------------------------ ------------------------------------------ (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- ------------------------------- --------- ------------------------------- As of December 31, 2002 Total Capital................ $ 12,666 11.3% $ 8,967 (greater than or equal to) 8.0% $ 11,209 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital............... $ 11,263 10.0% $ 4,505 (greater than or equal to) 4.0% $ 6,758 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital............... $ 11,263 7.9% $ 5,703 (greater than or equal to) 4.0% $ 7,128 (greater than or equal to) 5.0% (to average assets) As of December 31, 2001 Total Capital................ $ 12,105 11.6% $ 8,377 (greater than or equal to) 8.0% $ 10,471 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital............... $ 10,847 10.4% $ 4,188 (greater than or equal to) 4.0% $ 6,282 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital............... $ 10,847 8.4% $ 5,171 (greater than or equal to) 4.0% $ 6,464 (greater than or equal to) 5.0% (to average assets)
HBSV's actual capital amounts and ratios are also presented in the table.
To Be Well-Capitalized Under Prompt Actual For Capital Adequacy Purposes Corrective Action Provisions -------------------- ------------------------------------------ ------------------------------------------ (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- ------------------------------- --------- ------------------------------- As of December 31, 2002 Total Capital.................$ 7,628 11.6% $ 5,261 (greater than or equal to) 8.0% $ 6,576 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital................$ 6,803 10.3% $ 2,642 (greater than or equal to) 4.0% $ 3,963 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital................$ 6,803 9.3% $ 2,926 (greater than or equal to) 4.0% $ 3,658 (greater than or equal to) 5.0% (to average assets) As of December 31, 2001 Total Capital.................$ 7,462 13.0% $ 4,585 (greater than or equal to) 8.0% $ 5,731 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital................$ 6,745 11.8% $ 2,292 (greater than or equal to) 4.0% $ 3,438 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital................$ 6,745 9.9% $ 2,731 (greater than or equal to) 4.0% $ 3,413 (greater than or equal to) 5.0% (to average assets)
BLA's actual capital amounts and ratios are also presented in the table.
To Be Well-Capitalized Under Prompt Actual For Capital Adequacy Purposes Corrective Action Provisions -------------------- ------------------------------------------ ------------------------------------------ (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio --------- --------- --------- ------------------------------- --------- ------------------------------- As of December 31, 2002 Total Capital................ $ 28,259 11.8% $ 19,159 (greater than or equal to) 8.0% $ 23,948 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital............... $ 25,270 10.6% $ 9,536 (greater than or equal to) 4.0% $ 14,304 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital............... $ 25,270 9.4% $ 10,753 (greater than or equal to) 4.0% $ 13,441 (greater than or equal to) 5.0% (to average assets) As of December 31, 2001 Total Capital................ $ 25,068 11.0% $ 18,231 (greater than or equal to) 8.0% $ 22,789 (greater than or equal to) 10.0% (to risk-weighted assets) Tier 1 Capital............... $ 22,359 9.8% $ 9,117 (greater than or equal to) 4.0% $ 13,675 (greater than or equal to) 6.0% (to risk-weighted assets) Tier 1 Capital............... $ 22,359 8.5% $ 10,485 (greater than or equal to) 4.0% $ 13,106 (greater than or equal to) 5.0% (to average assets)
The Company is required to maintain reserves with the Federal Reserve Bank of San Francisco. Reserve requirements are based on a percentage of certain deposits. As of December 31, 2002, the Company maintained reserves of $8.3 million in the form of vault cash and balances at the Federal Reserve Bank of San Francisco, which satisfied the regulatory requirements.
Under California law, the holders of common stock are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available therefor. The California Banking Law provides that a state-licensed bank may not make a cash distribution to its shareholders in excess of the lesser of the following: (i) the bank's retained earnings, or (ii) the bank's net income for its last three fiscal years, less the amount of any distributions made by the bank to its shareholders during such period. However, a bank, with the prior approval of the Commissioner, may make a distribution to its shareholders of an amount not to exceed the greater of (i) a bank's retained earnings, (ii) its net income for its last fiscal year, or (iii) its net income for the current fiscal year. In the event that the Commissioner determines that the shareholders' equity of a bank is inadequate or that the making of a distribution by a bank would be unsafe or unsound, the Commissioner may order a bank to refrain from making such a proposed distribution. At December 31, 2002, the amount available for such dividend without prior written approval was approximately $17,101,000 for HBC, zero for HBEB and HBSV, and $7,524,000 for BLA. Similar restrictions apply to the amounts and sum of loans advances and other transfers of funds from HBC to the Company.
(16) PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The condensed financial statements of Heritage Commerce Corp (parent company only) follow:
CONDENSED BALANCE SHEETS
December 31, December 31, 2002 2001 (Amounts in thousands) ------------ ------------ Cash and cash equivalents........................................ $ 9,133 $ 5,747 Investment in and advancements to subsidiaries................... 96,655 87,106 Other assets..................................................... 2,517 2,963 ------------ ------------ Total.................................................... $ 108,305 $ 95,816 ============ ============ Liabilities...................................................... $ 1,738 $ 1,664 Amounts due to nonbank subsidiaries.............................. 23,702 19,578 Shareholders' equity............................................. 82,865 74,574 ------------ ------------ Total.................................................... $ 108,305 $ 95,816 ============ ============
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended, ---------------------------------------- December 31, December 31, December 31, 2002 2001 2000 (Amounts in thousands) ------------ ------------ ------------ Dividends from Bank subsidiaries................................. $ -- $ -- $ 250 Interest income.................................................. 95 141 243 Management and service fees...................................... 10,747 8,573 6,995 Other income..................................................... -- -- 100 Interest expense................................................. -- -- (2) Other expenses................................................... (13,096) (12,923) (10,552) ------------ ------------ ------------ Loss before equity in net income of subsidiary banks............. (2,254) (4,209) (2,966) Equity in undistributed net income of subsidiaries............... 8,692 9,897 7,218 Income tax benefit (expense)..................................... 739 1,580 1,177 ------------ ------------ ------------ Net income....................................................... 7,177 7,268 5,429 Other comprehensive income....................................... 693 506 1,769 ------------ ------------ ------------ Comprehensive income............................................. $ 7,870 $ 7,774 $ 7,198 ============ ============ ============
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended, ---------------------------------------- December 31, December 31, December 31, 2002 2001 2000 (Amounts in thousands) ------------ ------------ ------------ Cash flows from operating activities: Net Income....................................................... $ 7,177 $ 7,268 $ 5,429 Adjustments to reconcile net income to net cash provided by (used in) operations: Provision for deferred income taxes........................... (739) (1,580) (1,177) Equity in undistributed losses of subsidiaries................ (8,692) (9,897) (7,218) Net change in other assets.................................... (416) 84 (1,177) Net change in other liabilities............................... 1,635 809 1,653 ------------ ------------ ------------ Net cash used in by operating activities (1,035) (3,316) (2,490) Cash flows from investing activities: Other (dividends received from Bank subsidiaries)............. -- -- (17,079) Cash distributed to Bank subsidiaries........................ -- (2,750) -- Net cash used in investing activities ------------ ------------ ------------ -- (2,750) (17,079) Cash flows from financing activities: Proceeds from issuance of common stock........................ 421 1,067 1,991 Proceeds from issuance of long-term debt...................... 4,000 5,000 14,000 Repayments of other short-term borrowings..................... -- -- (2,000) ------------ ------------ ------------ Net cash provided by financing activities........................ 4,421 6,067 13,991 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents............. 3,386 1 (5,578) Cash and cash equivalents, beginning of year..................... 5,747 5,746 11,324 ------------ ------------ ------------ Cash and cash equivalents, end of year........................... $ 9,133 $ 5,747 $ 5,746 ============ ============ ============
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Incorporated by Reference to Form |
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Filed Herewith |
8-A Dated |
10-Q Dated |
10-K Dated |
Exhibit No. |
2.1 |
Agreement and Plan of Merger and Reorganization dated as of May 9, 2000 between Heritage Commerce Corp and Western Holdings Bancorp (incorporated by reference from Annex A of the registration statement on Form S- 4, Registration No. 333- 40384, filed with the Commission on June 29, 2000) |
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3.1 |
Heritage Commerce Corp Restated Articles of Incorporation as Amended effective June 29, 2001 |
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6-30-01 |
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3.1 |
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3.2 |
Heritage Commerce Corp Bylaws as amended to September 27, 2001 |
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9-30-01 |
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3.2 |
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4.1 |
The indenture, dated as of March 23, 2000, between Heritage Commerce Corp, as Issuer, and the Bank of New York, as Trustee |
4-6-01 (10-K/A Amendment No. 1) |
4.1 |
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4.2 |
Amended and restated Declaration of Trust, Heritage Capital Trust I, dated as of March 23, 2000 |
4-6-01 (10-K/A Amendment No. 1) |
4.2 |
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4.3 |
The indenture, date as of September 7, 2000, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
4-6-01 (10-K/A Amendment No. 1) |
4.3 |
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4.4 |
Amended and restated Declaration of Trust by and among State Street Bank and Trust Company of Connecticut, National Association, as Institutional Trustee, and Heritage Commerce Corp, as Sponsor |
4-6-01 (10-K/A Amendment No. 1) |
4.4 |
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4.5 |
Heritage Commerce Corp Rights Agreement dated as of November 1, 2001, including Form of Right Certificate attached thereto as Exhibit B |
11-15-01 |
4.5 |
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4.6 |
The indenture, dated as of July 31, 2001, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
3/28/02 |
4.6 |
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4.7 |
The indenture, dated as of July 31, 2001, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
3/28/02 |
4.7 |
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4.8 |
The indenture, dated as of September 26, 2002, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
X |
4.8 |
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4.9 |
The indenture, dated as of July 31, 2001, between Heritage Commerce Corp, as Issuer, and State Street Bank and Trust Company, of Connecticut, National Association, as Trustee |
X |
4.9 |
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10.1 |
Real Property Leases for properties located at 150 Almaden Blvd., San Jose and 100 Park Center Plaza, San Jose. |
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3-5-98 |
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10.1 |
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10.2 |
Employment agreement with Mr. Rossell dated June 8, 1994* |
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3-5-98 |
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10.2 |
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10.3 |
Employment agreement with Mr. Gionfriddo dated June 8, 1994 * |
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3-5-98 |
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10.3 |
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10.4 |
Amendment No. 2 to Employment Agreement with Mr. Gionfriddo * |
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3-31-98 |
10.4 |
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10.5 |
Employment agreement with Mr. Conniff dated April 30, 1998 * |
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3-31-99 |
10.5 |
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10.6 |
Employment agreement with Mr. Nethercott dated April 16, 1998 * |
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3-31-99 |
10.6 |
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10.7 |
Employment agreement with Mr. McGovern dated July 16, 1998 * |
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3-31-99 |
10.7 |
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21.1 |
Subsidiaries of the registrant |
X |
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23.1 |
Consent of Deloitte & Touche LLP |
X |
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99.1 |
Certification of Registrant's Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
X |
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99.2 |
Certification of Registrant's Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
X |
* Management contract or compensatory plan or arrangement.
Exhibit 4.8
HERITAGE COMMERCE CORP,
as Issuer
INDENTURE
Dated as of September 26, 2002
State Street Bank and Trust Company OF CONNECTICUT, NATIONAL ASSOCIATION,
as Trustee
FLOATING RATE JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
DUE 2032
TABLE OF CONTENTS
Page
ARTICLE I. DEFINITIONS *
Section 1.1. Definitions. *
ARTICLE II. DEBENTURES *
Section 2.1. Authentication and Dating. *
Section 2.2. Form of Trustee's Certificate of Authentication. *
Section 2.3. Form and Denomination of Debentures. *
Section 2.4. Execution of Debentures. *
Section 2.5. Exchange and Registration of Transfer of Debentures. *
Section 2.6. Mutilated, Destroyed, Lost or Stolen Debentures. *
Section 2.7. Temporary Debentures. *
Section 2.8. Payment of Interest and Additional Interest. *
Section 2.9. Cancellation of Debentures Paid, etc. *
Section 2.10. Computation of Interest. *
Section 2.11. Extension of Interest Payment Period. *
Section 2.12. CUSIP Numbers. *
ARTICLE III. PARTICULAR COVENANTS OF THE COMPANY *
Section 3.1. Payment of Principal, Premium and Interest; Agreed Treatment of the Debentures. *
Section 3.2. Offices for Notices and Payments, etc. *
Section 3.3. Appointments to Fill Vacancies in Trustee's Office. *
Section 3.4. Provision as to Paying Agent. *
Section 3.5. Certificate to Trustee. *
Section 3.6. Additional Sums. *
Section 3.7. Compliance with Consolidation Provisions. *
Section 3.8. Limitation on Dividends. *
Section 3.9. Covenants as to the Trust. *
Section 3.10. Additional Junior Indebtedness. *
ARTICLE IV. SECURITYHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE *
Section 4.1. Securityholders' Lists. *
Section 4.2. Preservation and Disclosure of Lists. *
ARTICLE V. REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT *
Section 5.1. Events of Default. *
Section 5.2. Payment of Debentures on Default; Suit Therefor. *
Section 5.3. Application of Moneys Collected by Trustee. *
Section 5.4. Proceedings by Securityholders. *
Section 5.5. Proceedings by Trustee. *
Section 5.6. Remedies Cumulative and Continuing; Delay or Omission Not a Waiver. *
Section 5.7. Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. *
Section 5.8. Notice of Defaults. *
Section 5.9. Undertaking to Pay Costs. *
ARTICLE VI. CONCERNING THE TRUSTEE *
Section 6.1. Duties and Responsibilities of Trustee. *
Section 6.2. Reliance on Documents, Opinions, etc. *
Section 6.3. No Responsibility for Recitals, etc. *
Section 6.4. Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debentures. *
Section 6.5. Moneys to be Held in Trust. *
Section 6.6. Compensation and Expenses of Trustee. *
Section 6.7. Officers' Certificate as Evidence. *
Section 6.8. Eligibility of Trustee. *
Section 6.9. Resignation or Removal of Trustee *
Section 6.10. Acceptance by Successor Trustee. *
Section 6.11. Succession by Merger, etc. *
Section 6.12. Authenticating Agents. *
ARTICLE VII. CONCERNING THE SECURITYHOLDERS *
Section 7.1. Action by Securityholders. *
Section 7.2. Proof of Execution by Securityholders. *
Section 7.3. Who Are Deemed Absolute Owners. *
Section 7.4. Debentures Owned by Company Deemed Not Outstanding. *
Section 7.5. Revocation of Consents; Future Holders Bound. *
ARTICLE VIII. SECURITYHOLDERS' MEETINGS *
Section 8.1. Purposes of Meetings. *
Section 8.2. Call of Meetings by Trustee. *
Section 8.3. Call of Meetings by Company or Securityholders. *
Section 8.4. Qualifications for Voting. *
Section 8.5. Regulations. *
Section 8.6. Voting. *
Section 8.7. Quorum; Actions. *
ARTICLE IX. SUPPLEMENTAL INDENTURES *
Section 9.1. Supplemental Indentures without Consent of Securityholders. *
Section 9.2. Supplemental Indentures with Consent of Securityholders. *
Section 9.3. Effect of Supplemental Indentures. *
Section 9.4. Notation on Debentures. *
Section 9.5. Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee. *
ARTICLE X. REDEMPTION OF SECURITIES *
Section 10.1. Optional Redemption. *
Section 10.2. Special Event Redemption. *
Section 10.3. Notice of Redemption; Selection of Debentures. *
Section 10.4. Payment of Debentures Called for Redemption. *
ARTICLE XI. CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE *
Section 11.1. Company May Consolidate, etc., on Certain Terms. *
Section 11.2. Successor Entity to be Substituted. *
Section 11.3. Opinion of Counsel to be Given to Trustee. *
ARTICLE XII. SATISFACTION AND DISCHARGE OF INDENTURE *
Section 12.1. Discharge of Indenture. *
Section 12.2. Deposited Moneys to be Held in Trust by Trustee. *
Section 12.3. Paying Agent to Repay Moneys Held. *
Section 12.4. Return of Unclaimed Moneys. *
ARTICLE XIII. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS *
Section 13.1. Indenture and Debentures Solely Corporate Obligations. *
ARTICLE XIV. MISCELLANEOUS PROVISIONS *
Section 14.1. Successors. *
Section 14.2. Official Acts by Successor Entity. *
Section 14.3. Surrender of Company Powers. *
Section 14.4. Addresses for Notices, etc. *
Section 14.5. Governing Law. *
Section 14.6. Evidence of Compliance with Conditions Precedent. *
Section 14.7. Non-Business Days. *
Section 14.8. Table of Contents, Headings, etc. *
Section 14.9. Execution in Counterparts. *
Section 14.10. Separability. *
Section 14.11. Assignment. *
Section 14.12. Acknowledgment of Rights. *
ARTICLE XV. SUBORDINATION OF DEBENTURES *
Section 15.1. Agreement to Subordinate. *
Section 15.2. Default on Senior Indebtedness. *
Section 15.3. Liquidation, Dissolution, Bankruptcy. *
Section 15.4. Subrogation. *
Section 15.5. Trustee to Effectuate Subordination. *
Section 15.6. Notice by the Company. *
Section 15.7. Rights of the Trustee; Holders of Senior Indebtedness. *
Section 15.8. Subordination May Not Be Impaired. *
Exhibit A Form of Junior Subordinated Deferrable Interest Debenture
THIS INDENTURE, dated as of September 26, 2002, between Heritage Commerce Corp, a California corporation (the "Company"), and State Street Bank and Trust Company of Connecticut, National Association, a national banking association organized under the laws of the United States of America, as debenture trustee (the "Trustee").
WITNESSETH:
WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 (the "Debentures") under this Indenture to provide, among other things, for the execution and authentication, delivery and administration thereof, and the Company has duly authorized the execution of this Indenture; and
WHEREAS, all acts and things necessary to make this Indenture a valid agreement according to its terms, have been done and performed;
NOW, THEREFORE, This Indenture Witnesseth:
In consideration of the premises, and the purchase of the Debentures by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debentures as follows:
ARTICLE I
DEFINITIONS
The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles and the term "generally accepted accounting principles" means such accounting principles as are generally accepted in the United States at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.
"Additional Interest" means interest, if any, that shall accrue on any interest on the Debentures the payment of which has not been made on the applicable Interest Payment Date and which shall accrue at the Interest Rate, compounded quarterly (to the extent permitted by law).
"Additional Junior Indebtedness" means, without duplication and other than the Debentures, any indebtedness, liabilities or obligations of the Company, or any Subsidiary of the Company, under debt securities (or guarantees in respect of debt securities) initially issued after the date of this Indenture to any trust, or a trustee of a trust, partnership or other entity affiliated with the Company that is, directly or indirectly, a finance subsidiary (as such term is defined in Rule 3a-5 under the Investment Company Act of 1940) or other financing vehicle of the Company or any Subsidiary of the Company in connection with the issuance by that entity of preferred securities or other securities that are eligible to qualify for Tier 1 capital treatment (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or, if the Company is not a bank holding company, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability of the Company to treat all or any portion of the Additional Junior Indebtedness as Tier 1 capital shall not disqualify it as Additional Junior Indebtedness if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve now or may hereafter accord Tier 1 capital treatment (including the Debentures) in excess of the amount which may qualify for treatment as Tier 1 capital under applicable capital adequacy guidelines.
"Additional Sums" has the meaning set forth in Section 3.6.
"Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder.
"Authenticating Agent" means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12.
"Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.
"Board of Directors" means the board of directors or the executive committee or any other duly authorized designated officers of the Company.
"Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification and delivered to the Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in New York City or Hartford, Connecticut are permitted or required by any applicable law to close.
"Capital Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with Common Securities issued by the Trust; provided, however, that upon the occurrence and continuance of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities.
"Capital Securities Guarantee" means the guarantee agreement that the Company enters into with State Street Bank and Trust Company of Connecticut, National Association, as guarantee trustee, or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust.
"Capital Treatment Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of any amendment to, or change (including any announced prospective change) in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Company will not, within 90 days of the date of such opinion be entitled to treat an amount equal to the aggregate liquidation amount of the Debentures as "Tier 1 Capital" (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Company (or if the Company is not a bank holding company, such guidelines applied to the Company as if the Company were subject to such guidelines); provided, however, that the inability of the Company to treat all or any portion of the liquidation amount of the Debentures as Tier l Capital shall not constitute the basis for a Capital Treatment Event, if such inability results from the Company having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve or OTS, as applicable, may now or hereafter accord Tier 1 Capital treatment in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines; provided further, however, that the distribution of Debentures in connection with the liquidation of the Trust shall not in and of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event.
"Certificate" means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company.
"Common Securities" means undivided beneficial interests in the assets of the Trust which rank pari passu with Capital Securities issued by the Trust; provided, however, that upon the occurrence and continuance of an Event of Default (as defined in the Declaration), the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities.
"Company" means Heritage Commerce Corp, a California corporation, and, subject to the provisions of Article XI, shall include its successors and assigns.
"Coupon Rate" has the meaning set forth in Section 2.8.
"Debenture" or "Debentures" has the meaning stated in the first recital of this Indenture.
"Debenture Register" has the meaning specified in Section 2.5.
"Declaration" means the Amended and Restated Declaration of Trust of the Trust, as amended or supplemented from time to time.
"Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default.
"Defaulted Interest" has the meaning set forth in Section 2.8.
"Distribution Period" has the meaning set forth in Section 2.8.
"Determination Date" has the meaning set forth in Section 2.10.
"Event of Default" means any event specified in Section 5.1, continued for the period of time, if any, and after the giving of the notice, if any, therein designated.
"Extension Period" has the meaning set forth in Section 2.11.
"Federal Reserve" means the Board of Governors of the Federal Reserve System and any successor federal agency that is primarily responsible for regulating the activities of bank holding companies.
"Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both.
"Institutional Trustee" has the meaning set forth in the Declaration.
"Interest Payment Date" means each March 26, June 26, September 26 and December 26 during the term of this Indenture.
"Interest Rate" means for the period beginning on (and including) the date of original issuance and ending on (but excluding) December 26, 2002 the rate per annum of 5.220% and for each Distribution Period thereafter, the Coupon Rate.
"Investment Company Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Debentures.
"Liquidation Amount" means the stated amount of $1,000.00 per Trust Security.
"Maturity Date" means September 26, 2032.
"Officers' Certificate" means a certificate signed by the Chairman of the Board, the Chief Executive Officer, the Vice Chairman, the President, any Managing Director or any Vice President, and by the Treasurer, an Assistant Treasurer, the Comptroller, an Assistant Comptroller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section.
"Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.6 if and to the extent required by the provisions of such Section.
"OTS" means the Office of Thrift Supervision and any successor federal agency that is primarily responsible for regulating the activities of savings and loan holding companies.
The term "outstanding," when used with reference to Debentures, means, subject to the provisions of Section 7.4, as of any particular time, all Debentures authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except:
(a) Debentures theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation;
(b) Debentures, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that, if such Debentures, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Section 10.3 or provision satisfactory to the Trustee shall have been made for giving such notice; and
(c) Debentures paid pursuant to Section 2.6 or in lieu of or in substitution for which other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Company and the Trustee is presented that any such Debentures are held by bona fide holders in due course.
"Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.
"Predecessor Security" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for purposes of this definition, any Debenture authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture.
"Principal Office of the Trustee," or other similar term, means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at the time of the execution of this Indenture shall be 225 Asylum Street, Goodwin Square, Hartford, Connecticut 06103.
"Redemption Date" has the meaning set forth in Section 10.1.
"Redemption Price" means 100% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest on such Debentures to the Redemption Date.
"Responsible Officer" means, with respect to the Trustee, any officer within the Principal Office of the Trustee, including any vice-president, any assistant vice- president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject.
"Securities Act" means the Securities Act of 1933, as amended from time to time or any successor legislation.
"Securityholder," "holder of Debentures," or other similar terms, means any Person in whose name at the time a particular Debenture is registered on the register kept by the Company or the Trustee for that purpose in accordance with the terms hereof.
"Senior Indebtedness" means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement; (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), whether incurred on or prior to the date of this Indenture or thereafter incurred. Notwithstanding the foregoing, "Senior Indebtedness" shall not include (1) any Additional Junior Indebtedness, (2) Debentures issued pursuant to this Indenture and guarantees in respect of such Debentures, (3) trade accounts payable of the Company arising in the ordinary course of business (such trade accounts payable being pari passu in right of payment to the Debentures), or (4) obligations with respect to which (a) in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are pari passu, junior or otherwise not superior in right of payment to the Debentures and (b) the Company, prior to the issuance thereof, has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve (if the Company is a bank holding company) or the OTS (if the Company is a savings and loan holding company). Senior Indebtedness shall continue to be Senior Indebtedness and be entitled to the subordination provisions irrespective of any amendment, modification or waiver of any term of such Senior Indebtedness.
"Special Event" means any of a Capital Treatment Event, an Investment Company Event or a Tax Event.
"Special Redemption Date" has the meaning set forth in Section 10.2.
"Special Redemption Price" means (i) 107.5% of the principal amount of the Debentures being redeemed on a Special Redemption Date that occurs before September 26, 2007 and (ii) 100% of the principal amount of the Debentures being redeemed on a Special Redemption Date that occurs on September 26, 2007 or after, plus accrued and unpaid interest on such Debentures to the Special Redemption Date.
"Subsidiary" means with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture or similar entity, at least a majority of the outstanding partnership or similar interests of which shall at the time be owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.
"Tax Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, field service advice, regulatory procedure, notice or announcement, including any notice or announcement of intent to adopt such procedures or regulations (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Company on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges.
"3-Month LIBOR" has the meaning set forth in Section 2.10.
"Telerate Page 3750" has the meaning set forth in Section 2.10.
"Trust" shall mean Heritage Commerce Corp Statutory Trust III, a Connecticut statutory trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debentures under this Indenture, of which the Company is the sponsor.
"Trust Securities" means Common Securities and Capital Securities of the Trust.
"Trustee" means State Street Bank and Trust Company of Connecticut, National Association, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder.
ARTICLE II
DEBENTURES
Upon the execution and delivery of this Indenture, or from time to time thereafter, Debentures in an aggregate principal amount not in excess of $4,124,000 may be executed and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debentures to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Chief Executive Officer, Vice Chairman, the President, one of its Managing Directors or one of its Vice Presidents without any further action by the Company hereunder. In authenticating such Debentures, and accepting the additional responsibilities under this Indenture in relation to such Debentures, the Trustee shall be entitled to receive, and (subject to Section 6.1) shall be fully protected in relying upon:
The Trustee shall have the right to decline to authenticate and deliver any Debentures under this Section if the Trustee, being advised in writing by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders.
The definitive Debentures shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debentures, as evidenced by their execution of such Debentures.
The Trustee's certificate of authentication on all Debentures shall be in substantially the following form:
This is one of the Debentures referred to in the within-mentioned Indenture.
State Street Bank and Trust Company of Connecticut, National Association, as Trustee
By
Authorized Signer
The Debentures shall be substantially in the form of Exhibit A attached hereto. The Debentures shall be in registered, certificated form without coupons and in minimum denominations of $500,000.00 and any multiple of $1,000.00 in excess thereof. Any attempted transfer of the Debentures in a block having an aggregate principal amount of less than $500,000.00 shall be deemed to be voided and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a holder of such Debentures for any purpose, including, but not limited to the receipt of payments on such Debentures, and such purported transferee shall be deemed to have no interest whatsoever in such Debentures. The Debentures shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof.
The Debentures shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Chief Executive Officer, Vice Chairman, President, one of its Managing Directors or one of its Executive Vice Presidents, Senior Vice Presidents or Vice Presidents. Only such Debentures as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized signer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture.
In case any officer of the Company who shall have signed any of the Debentures shall cease to be such officer before the Debentures so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debentures nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debentures had not ceased to be such officer of the Company; and any Debenture may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debenture, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer.
Every Debenture shall be dated the date of its authentication.
The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.2, a register (the "Debenture Register") for the Debentures issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debentures as in this Article II provided. The Debenture Register shall be in written form or in any other form capable of being converted into written form within a reasonable time.
Debentures to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.2, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debenture or Debentures which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount. Registration or registration of transfer of any Debenture by the Trustee or by any agent of the Company appointed pursuant to Section 3.2, and delivery of such Debenture, shall be deemed to complete the registration or registration of transfer of such Debenture.
All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing.
No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith.
The Company or the Trustee shall not be required to exchange or register a transfer of any Debenture for a period of 15 days next preceding the date of selection of Debentures for redemption.
Notwithstanding anything herein to the contrary, Debentures may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company, upon the advice of counsel expert in securities law, in accordance with applicable law:
THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96- 23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $500,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER.
THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.
In case any Debenture shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debenture bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debenture and of the ownership thereof.
The Trustee may authenticate any such substituted Debenture and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debenture which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Debenture and of the ownership thereof.
Every substituted Debenture issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any such Debenture is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. All Debentures shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender.
Pending the preparation of definitive Debentures, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debentures that are typed, printed or lithographed. Temporary Debentures shall be issuable in any authorized denomination, and substantially in the form of the definitive Debentures in lieu of which they are issued but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company. Every such temporary Debenture shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debentures. Without unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debentures and thereupon any or all temporary Debentures may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.2, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debentures a like aggregate principal amount of such definitive Debentures. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debentures shall in all respects be entitled to the same benefits under this Indenture as definitive Debentures authenticated and delivered hereunder.
Interest at the Interest Rate and any Additional Interest on any Debenture that is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Debentures shall be paid to the Person in whose name said Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment except that interest and any Additional Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. In the event that any Debenture or portion thereof is called for redemption and the redemption date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debenture will be paid upon presentation and surrender of such Debenture.
Each Debenture shall bear interest for the period beginning on (and including) the date of original issuance and ending on (but excluding) December 26, 2002 at a rate per annum of 5.220%, and shall bear interest for each successive period beginning on (and including) December 26, 2002, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each, a "Distribution Period") at a rate per annum equal to the 3- Month LIBOR, determined as described in Section 2.10, plus 3.400% (the "Coupon Rate"); provided, however, that prior to September 26, 2007, the Coupon Rate shall not exceed 11.90%, applied to the principal amount thereof, until the principal thereof becomes due and payable, and on any overdue principal and to the extent that payment of such interest is enforceable under applicable law (without duplication) on any overdue installment of interest at the Interest Rate compounded quarterly. Interest shall be payable (subject to any relevant Extension Period) quarterly in arrears on each Interest Payment Date with the first installment of interest to be paid on December 26, 2002.
Any interest on any Debenture, including Additional Interest, that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing at least 25 days prior to the date of the proposed payment of the amount of Defaulted Interest proposed to be paid on each such Debenture and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at its address as it appears in the Debenture Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Debentures (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable.
The Company may make payment of any Defaulted Interest on any Debentures in any other lawful manner after notice given by the Company to the Trustee of the proposed payment method; provided, however, the Trustee in its sole discretion deems such payment method to be practical.
Any interest scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debentures.
The term "regular record date" as used in this Section shall mean the close of business on the 15th day next preceding the applicable Interest Payment Date.
Subject to the foregoing provisions of this Section, each Debenture delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debenture shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debenture.
All Debentures surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debentures shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debentures canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debentures unless the Company otherwise directs the Trustee in writing. If the Company shall acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are surrendered to the Trustee for cancellation.
The amount of interest payable for the Distribution Period commencing on December 26, 2002 and each succeeding Distribution Period will be calculated by applying the Interest Rate to the principal amount outstanding at the commencement of the Distribution Period and multiplying each such amount by the actual number of days in the Distribution Period concerned divided by 360. In the event that any date on which interest is payable on the Debentures is not a Business Day, then payment of interest payable on such date shall be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)).
(1) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date (as defined below). "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits;
(2) if such rate cannot be identified on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations;
(3) if fewer than two such quotations are provided as requested in clause (2) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and
(4) if fewer than two such quotations are provided as requested in clause (3) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period.
If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date.
(b) The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law.
So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided further, however, that during any such Extension Period, the Company shall not and shall not permit any Affiliate to (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's or such Affiliate's capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (i) or (ii) above, (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (f) payments under the Capital Securities Guarantee). Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest to the extent permitted by applicable law. The Company must give the Trustee notice of its election to begin or extend an Extension Period at least 5 Business Days prior to the regular record date (as such term is used in Section 2.8) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period. The Trustee shall give notice of the Company's election to begin a new Extension Period to the Securityholders.
The Company in issuing the Debentures may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a convenience to Securityholders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers.
ARTICLE III
PARTICULAR COVENANTS OF THE COMPANY
So long as any of the Debentures remain outstanding, the Company will maintain in Hartford, Connecticut, an office or agency where the Debentures may be presented for payment, an office or agency where the Debentures may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Company in respect of the Debentures or of this Indenture may be served. The Company will give to the Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Company in a notice to the Trustee, or specified as contemplated by Section 2.5, such office or agency for all of the above purposes shall be the office or agency of the Trustee. In case the Company shall fail to maintain any such office or agency in Hartford, Connecticut, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee.
In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Hartford, Connecticut, where the Debentures may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Hartford, Connecticut, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof.
The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.9, a Trustee, so that there shall at all times be a Trustee hereunder.
Whenever the Company shall have one or more paying agents for the Debentures, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on the Debentures, deposit with a paying agent a sum sufficient to pay the principal, premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act.
The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debentures are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default during such fiscal year by the Company in the performance of any covenants contained herein, stating whether or not they have knowledge of any such default and, if so, specifying each such default of which the signers have knowledge and the nature and status thereof.
If and for so long as the Trust is the holder of all Debentures and the Trust is required to pay any additional taxes, duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts ("Additional Sums") on the Debentures as shall be required so that the net amounts received and retained by the Trust after paying taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust would have received if no such taxes, duties, assessments or other governmental charges had been imposed. Whenever in this Indenture or the Debentures there is a reference in any context to the payment of principal of or interest on the Debentures, such mention shall be deemed to include mention of payments of the Additional Sums provided for in this paragraph to the extent that, in such context, Additional Sums are, were or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Sums in those provisions hereof where such express mention is not made; provided, however, that the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Sums that may be due and payable.
The Company will not, while any of the Debentures remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article XI hereof are complied with.
If Debentures are initially issued to the Trust or a trustee of such trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such period, or any extension thereof, shall be continuing, then the Company shall not, and shall not allow any Affiliate of the Company to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or its Affiliates' capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, if any, (2) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (3) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee).
For so long as the Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall, except in connection with a distribution of Debentures to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, cause the Trust (a) to remain a statutory trust, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes, and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debentures.
The Company shall not, and it shall not cause or permit any Subsidiary of the Company to, incur, issue or be obligated on any Additional Junior Indebtedness, either directly or indirectly, by way of guarantee, suretyship or otherwise, other than: (i) Additional Junior Indebtedness that, by its terms, is expressly stated to be either junior and subordinate or pari passu in all respects to the Debentures, and (ii) Additional Junior Indebtedness of which the Company has notified (and, if then required under the applicable guidelines of the regulating entity, has received approval from) the Federal Reserve, if the Company is a bank holding company, or the OTS, if the Company is a savings and loan holding company.
ARTICLE IV
SECURITYHOLDERS' LISTS AND REPORTS
BY THE COMPANY AND THE TRUSTEE
The Company covenants and agrees that it will furnish or caused to be furnished to the Trustee:
except that no such lists need be furnished under this Section 4.1 so long as the Trustee is in possession thereof by reason of its acting as Debenture registrar.
If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 4.2 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debentures, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, said Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Trustee shall be relieved of any obligation or duty to such applicants respecting their application.
ARTICLE V
REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
UPON AN EVENT OF DEFAULT
"Event of Default," wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):
If an Event of Default occurs and is continuing with respect to the Debentures, then, and in each and every such case, unless the principal of the Debentures shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debentures and the interest accrued thereon, if any, to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable.
The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures and the principal of and premium, if any, on the Debentures which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and Additional Interest) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.6, and if any and all Events of Default under this Indenture, other than the non- payment of the principal of or premium, if any, on Debentures which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon.
In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the Trustee and the holders of the Debentures shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debentures shall continue as though no such proceeding had been taken.
The Company covenants that upon the occurrence of an Event of Default pursuant to Section 5.1(a) or Section 5.1(b) then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debentures the whole amount that then shall have become due and payable on all Debentures for principal and premium, if any, or interest, or both, as the case may be, with Additional Interest accrued on the Debentures (to the extent that payment of such interest is enforceable under applicable law and, if the Debentures are held by the Trust or a trustee of such Trust, without duplication of any other amounts paid by the Trust or a trustee in respect thereof); and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys and counsel, and any other amounts due to the Trustee under Section 6.6. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on such Debentures and collect in the manner provided by law out of the property of the Company or any other obligor on such Debentures wherever situated the moneys adjudged or decreed to be payable.
In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Debentures under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debentures, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debentures shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 5.2, shall be entitled and empowered, by intervention in such proceedings or otherwise,
(i) to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Debentures and, in case of any judicial proceedings,
(ii) to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.6), and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debentures, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debentures in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or Person performing similar functions in comparable proceedings,
(iii) to collect and receive any moneys or other property payable or deliverable on any such claims, and
(iv) to distribute the same after the deduction of its charges and expenses.
Any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.6.
Nothing herein contained shall be construed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding.
All rights of action and of asserting claims under this Indenture, or under any of the Debentures, may be enforced by the Trustee without the possession of any of the Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Debentures.
In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the holders of the Debentures, and it shall not be necessary to make any holders of the Debentures parties to any such proceedings.
Any moneys collected by the Trustee pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debentures in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid:
First: To the payment of costs and expenses incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.6;
Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV;
Third: To the payment of the amounts then due and unpaid upon Debentures for principal (and premium, if any), and interest on the Debentures, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debentures for principal (and premium, if any) and interest, respectively; and
Fourth: The balance, if any, to the Company.
No holder of any Debenture shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debentures and unless the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding.
Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debenture to receive payment of the principal of, premium, if any, and interest, on such Debenture when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder and by accepting a Debenture hereunder it is expressly understood, intended and covenanted by the taker and holder of every Debenture with every other such taker and holder and the Trustee, that no one or more holders of Debentures shall have any right in any manner whatsoever by virtue or by availing itself of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity.
In case of an Event of Default hereunder the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law.
Except as otherwise provided in Section 2.6, all powers and remedies given by this Article V to the Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Trustee or the holders of the Debentures, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Debentures, and no delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.4, every power and remedy given by this Article V or by law to the Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Securityholders.
No delay or omission of the Trustee or any Securityholder to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to any Securityholder may be exercised from time to time, and as often as may be deemed expedient, by the Trustee (in accordance with its duties under Section 6.1 hereof) or by such holder, as the case may be.
The holders of a majority in aggregate principal amount of the Debentures affected (voting as one class) at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debentures; provided, however, that (subject to the provisions of Section 6.1) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability.
The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may on behalf of the holders of all of the Debentures waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debentures, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9; provided, however, that if the Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver, provided, further, that if the consent of the holder of each outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section, said default or Event of Default shall for all purposes of the Debentures and this Indenture be deemed to have been cured and to be not continuing.
The Trustee shall, within 90 days after the actual knowledge by a Responsible Officer of the Trustee of the occurrence of a default with respect to the Debentures, mail to all Securityholders, as the names and addresses of such holders appear upon the Debenture Register, notice of all defaults with respect to the Debentures known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.8 being hereby defined to be the events specified in clauses (a), (b), (c), (d), (e) and (f) of Section 5.1, not including periods of grace, if any, provided for therein); provided, however, that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders.
All parties to this Indenture agree, and each holder of any Debenture by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; provided, however, that the provisions of this Section 5.9 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debentures outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debenture against the Company on or after the same shall have become due and payable.
ARTICLE VI
CONCERNING THE TRUSTEE
With respect to the holders of Debentures issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debentures and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debentures, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Debentures has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.
No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that:
None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is ground for believing that the repayment of such funds or liability is not assured to it under the terms of this Indenture or indemnity satisfactory to the Trustee against such risk is not reasonably assured to it.
Except as otherwise provided in Section 6.1:
The recitals contained herein and in the Debentures (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company, and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debentures. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debentures or the proceeds of any Debentures authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture.
The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Debenture registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debenture registrar.
Subject to the provisions of Section 12.4, all moneys received by the Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time upon the written order of the Company, signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President, a Managing Director, a Vice President, the Treasurer or an Assistant Treasurer of the Company.
The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Company and the Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or willful misconduct. The Company also covenants to indemnify each of the Trustee or any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee) incurred without negligence or willful misconduct on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability. The obligations of the Company under this Section 6.6 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures.
Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.1(d), Section 5.1(e) or Section 5.1(f), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law.
The provisions of this Section shall survive the resignation or removal of the Trustee and the defeasance or other termination of this Indenture.
Notwithstanding anything in this Indenture or any Debenture to the contrary, the Trustee shall have no obligation whatsoever to advance funds to pay any principal of or interest on or other amounts with respect to the Debentures or otherwise advance funds to or on behalf of the Company.
Except as otherwise provided in Sections 6.1 and 6.2, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or willful misconduct on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof.
The Trustee hereunder shall at all times be a corporation organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia or a corporation or other Person authorized under such laws to exercise corporate trust powers, having (or whose obligations under this Indenture are guaranteed by an affiliate having) a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000.00) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.8 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent records of condition so published.
The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee.
In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.8, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.9.
If the Trustee has or shall acquire any "conflicting interest" within the meaning of 310(b) of the Trust Indenture Act of 1939, the Trustee shall either eliminate such interest or resign, to the extent and in the manner described by this Indenture.
then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.9, any Securityholder who has been a bona fide holder of a Debenture or Debentures for at least 6 months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint successor Trustee.
Any successor Trustee appointed as provided in Section 6.9 shall execute, acknowledge and deliver to the Company and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 6.6, execute and deliver an instrument transferring to such successor Trustee all the rights and powers of the Trustee so ceasing to act and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee thereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.6.
If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debentures as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee.
No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall be eligible under the provisions of Section 6.8.
In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder.
Upon acceptance of appointment by a successor Trustee as provided in this Section 6.10, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debentures at their addresses as they shall appear on the Debenture Register. If the Company fails to mail such notice within 10 Business Days after the acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be mailed at the expense of the Company.
Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided such corporation shall be otherwise eligible and qualified under this Article.
In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debentures shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debentures so authenticated; and in case at that time any of the Debentures shall not have been authenticated, any successor to the Trustee may authenticate such Debentures either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debentures or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation.
There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debentures issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debentures; provided, however, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debentures. Any such Authenticating Agent shall at all times be a corporation organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $50,000,000.00 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.12 the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section.
Any corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.12 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent.
Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debentures by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debentures as the names and addresses of such holders appear on the Debenture Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities with respect to the Debentures of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein.
The Company agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Trustee.
ARTICLE VII
CONCERNING THE SECURITYHOLDERS
Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Debentures voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders or (d) by any other method the Trustee deems satisfactory.
If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debentures for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Debentures have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debentures shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than 6 months after the record date.
Subject to the provisions of Section 6.1, 6.2 and 8.5, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The ownership of Debentures shall be proved by the Debenture Register or by a certificate of the Debenture registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary.
The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.6.
Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture.
In determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent or waiver under this Indenture, Debentures which are owned by the Company or any other obligor on the Debentures or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debentures shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, however, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debentures which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Debentures and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee.
At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 7.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.1) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.1) of a Debenture (or any Debenture issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.2, revoke such action so far as concerns such Debenture (or so far as concerns the principal amount represented by any exchanged or substituted Debenture). Except as aforesaid any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture or any Debenture issued in exchange or substitution therefor.
ARTICLE VIII
SECURITYHOLDERS' MEETINGS
A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes:
The Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.1, to be held at such time and at such place as the Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Debentures affected at their addresses as they shall appear on the Debentures Register and, if the Company is not a holder of Debentures, to the Company. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting.
In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debentures, as the case may be, then outstanding, shall have requested the Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company or such Securityholders may determine the time and the place for such meeting and may call such meeting to take any action authorized in Section 8.1, by mailing notice thereof as provided in Section 8.2.
To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Debentures with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debentures. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.
Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debentures and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit.
The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.3, in which case the Company or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting.
Subject to the provisions of Section 7.4, at any meeting each holder of Debentures with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000.00 principal amount of Debentures held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debenture challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him or instruments in writing as aforesaid duly designating him as the Person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.2 or 8.3 may be adjourned from time to time by a majority of those present, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice.
The vote upon any resolution submitted to any meeting of holders of Debentures with respect to which such meeting is being held shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Debentures held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more Persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.2. The record shall show the serial numbers of the Debentures voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the matters therein stated.
The Persons entitled to vote a majority in principal amount of the Debentures then outstanding shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding, the Persons holding or representing such specified percentage in principal amount of the Debentures then outstanding will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.2, except that such notice need be given only once not less than 5 days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Debentures then outstanding which shall constitute a quorum.
Except as limited by the provisos in the first paragraph of Section 9.2, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of a majority in principal amount of the Debentures then outstanding; provided, however, that, except as limited by the provisos in the first paragraph of Section 9.2, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action which this Indenture expressly provides may be given by the holders of not less than a specified percentage in principal amount of the Debentures then outstanding may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of a not less than such specified percentage in principal amount of the Debentures then outstanding.
Any resolution passed or decision taken at any meeting of holders of Debentures duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting.
ARTICLE IX
SUPPLEMENTAL INDENTURES
The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes:
The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this Section 9.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 9.2.
With the consent (evidenced as provided in Section 7.1) of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture; provided further, however, that if the Debentures are held by a trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities shall have consented to such supplemental indenture; provided further, however, that if the consent of the Securityholder of each outstanding Debenture is required, such supplemental indenture shall not be effective until each holder of the Trust Securities shall have consented to such supplemental indenture.
Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture.
Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Debenture Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture.
It shall not be necessary for the consent of the Securityholders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof.
Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes.
Debentures authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debentures then outstanding.
The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall, in addition to the documents required by Section 14.6, receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof.
ARTICLE X
REDEMPTION OF SECURITIES
The Company shall have the right (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS if then required under applicable capital guidelines or policies of the OTS), to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any March 26, June 26, September 26 or December 26 on or after September 26, 2007 (the "Redemption Date"), at the Redemption Price.
If a Special Event shall occur and be continuing, the Company shall have the right (subject to the receipt by the Company of prior approval (i) if the Company is a bank holding company, from the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve or (ii) if the Company is a savings and loan holding company, from the OTS if then required under applicable capital guidelines or policies of the OTS) to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event (the "Special Redemption Date") at the Special Redemption Price.
In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debentures, it shall cause to be mailed a notice of such redemption at least 30 and not more than 60 days prior to the Redemption Date or the Special Redemption Date to the holders of Debentures so to be redeemed as a whole or in part at their last addresses as the same appear on the Debenture Register. Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Debenture designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debenture.
Each such notice of redemption shall specify the CUSIP number, if any, of the Debentures to be redeemed, the Redemption Date or the Special Redemption Date, as applicable, the Redemption Price or the Special Redemption Price, as applicable, at which Debentures are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Debentures are to be redeemed the notice of redemption shall specify the numbers of the Debentures to be redeemed. In case the Debentures are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof will be issued.
Prior to 10:00 a.m. New York City time on the Redemption Date or Special Redemption Date, as applicable, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date or the Special Redemption Date, as applicable, all the Debentures so called for redemption at the appropriate Redemption Price or Special Redemption Price, together with accrued interest to the Redemption Date or Special Redemption Date, as applicable.
If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Redemption Date or Special Redemption Date, as applicable, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed.
If notice of redemption has been given as provided in Section 10.3, the Debentures or portions of Debentures with respect to which such notice has been given shall become due and payable on the Redemption Date or Special Redemption Date, as applicable, and at the place or places stated in such notice at the applicable Redemption Price or Special Redemption Price, together with interest accrued to the Redemption Date or Special Redemption Date, as applicable, and on and after said date (unless the Company shall default in the payment of such Debentures at the Redemption Price or Special Redemption Price, as applicable, together with interest accrued to said date) interest on the Debentures or portions of Debentures so called for redemption shall cease to accrue. On presentation and surrender of such Debentures at a place of payment specified in said notice, such Debentures or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price or Special Redemption Price, together with interest accrued thereon to the Redemption Date or Special Redemption Date, as applicable.
Upon presentation of any Debenture redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debenture or Debentures of authorized denominations, in principal amount equal to the unredeemed portion of the Debenture so presented.
ARTICLE XI
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
Nothing contained in this Indenture or in the Debentures shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property or capital stock of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of (and premium, if any) and interest on all of the Debentures in accordance with their terms, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property or capital stock.
In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debentures and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debentures. Such successor entity thereupon may cause to be signed, and may issue in its own name, any or all of the Debentures issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debentures which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debentures which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debentures so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debentures had been issued at the date of the execution hereof.
The Trustee, subject to the provisions of Sections 6.1 and 6.2, shall receive, in addition to the Opinion of Counsel required by Section 9.5, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI.
ARTICLE XII
SATISFACTION AND DISCHARGE OF INDENTURE
When
(a) the Company shall deliver to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) and not theretofore canceled, or
(b) all the Debentures not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within 1 year or are to be called for redemption within 1 year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debentures (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.6) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Debentures (1) theretofore repaid to the Company in accordance with the provisions of Section 12.4, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws,
and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.5, 2.6, 2.8, 3.1, 3.2, 3.4, 6.6, 6.8, 6.9 and 12.4 hereof shall survive until such Debentures shall mature and be paid. Thereafter, Sections 6.6 and 12.4 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture. The Company agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debentures.
Subject to the provisions of Section 12.4, all moneys deposited with the Trustee pursuant to Section 12.1 shall be held in trust in a non-interest bearing account and applied by it to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debentures for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest.
Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Debentures (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys.
Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debentures and not applied but remaining unclaimed by the holders of Debentures for 2 years after the date upon which the principal of, and premium, if any, or interest on such Debentures, as the case may be, shall have become due and payable, shall, subject to applicable escheatment laws, be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debentures shall thereafter look only to the Company for any payment which such holder may be entitled to collect, and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease.
ARTICLE XIII
IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debentures.
ARTICLE XIV
MISCELLANEOUS PROVISIONS
All the covenants, stipulations, promises and agreements of the Company in this Indenture shall bind its successors and assigns whether so expressed or not.
Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company.
The Company by instrument in writing executed by authority of at least 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor.
Any notice, consent, direction, request, authorization, waiver or demand which by any provision of this Indenture is required or permitted to be given, made, furnished or served by the Trustee or by the Securityholders on or to the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company, 150 Almaden Boulevard, San Jose, CA 95113, Attention: Larry McGovern. Any notice, consent, direction, request, authorization, waiver or demand by any Securityholder or the Company to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of the Trustee, addressed to the Trustee, 225 Asylum Street, Goodwin Square, Hartford, Connecticut 06103 Attention: Vice President, Corporate Trust Department, with a copy to State Street Bank and Trust Company, P.O. Box 778, Boston, Massachusetts 02102-0778, Attention: Paul D. Allen, Corporate Trust Department. Any notice, consent, direction, request, authorization, waiver or demand on or to any Securityholder shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the address set forth in the Debenture Register.
This Indenture and each Debenture shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State, without regard to conflict of laws principles thereof.
Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with.
Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not in the opinion of such person, such condition or covenant has been complied with.
In any case where the date of payment of interest on or principal of the Debentures will be a day that is not a Business Day, the payment of such interest on or principal of the Debentures need not be made on such date but may be made on the next succeeding Business Day, except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the original date of payment, and no interest shall accrue for the period from and after such date.
The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof.
This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument.
In case any one or more of the provisions contained in this Indenture or in the Debentures shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debentures, but this Indenture and such Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein.
The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto.
The Company agrees that, with respect to any Debentures held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debentures held as the assets of such Trust after the holders of a majority in Liquidation Amount of the Capital Securities of such Trust have so directed such Institutional Trustee, a holder of record of such Capital Securities may, to the fullest extent permitted by law, institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debentures on the date such interest (or premium, if any) or principal is otherwise payable (or in the case of redemption, on the redemption date), the Company agrees that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of (or premium, if any) or interest on the Debentures having an aggregate principal amount equal to the aggregate Liquidation Amount of the Capital Securities of such holder on or after the respective due date specified in the Debentures.
ARTICLE XV
SUBORDINATION OF DEBENTURES
The Company covenants and agrees, and each holder of Debentures by such Securityholder's acceptance thereof likewise covenants and agrees, that all Debentures shall be issued subject to the provisions of this Article XV; and each holder of a Debenture, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions.
The payment by the Company of the principal of, and premium, if any, and interest on all Debentures shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, whether outstanding at the date of this Indenture or thereafter incurred; provided, however, that the Debentures shall rank pari passu in right of payment with the Company's Junior Subordinated Debentures due March 8, 2030 issued pursuant to an Indenture dated as of March 8, 2000 by and between the Company and Bank of New York; the Company's Junior Subordinated Deferrable Interest Debentures due September 7, 2030 issued pursuant to an Indenture dated as of September 7, 2000 by and between the Company and State Street Bank and Trust Company of Connecticut, N.A.; and the Company's Junior Subordinated Deferrable Interest Debentures due July 31, 2031 issued pursuant to an Indenture dated as of July 31, 2001 by and between the Company and State Street Bank and Trust Company of Connecticut, N.A.
No provision of this Article XV shall prevent the occurrence of any default or Event of Default hereunder.
In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default and such acceleration has not been rescinded or canceled, then, in either case, no payment shall be made by the Company with respect to the principal (including redemption) of, or premium, if any, or interest on the Debentures.
In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.2, such payment shall, subject to Section 15.7, be held in trust for the benefit of, and shall be paid over or delivered to, the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness.
Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debentures. Upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay such Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Trustee.
In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness, remaining unpaid to the extent necessary to pay such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness.
For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Debentures to the payment of all Senior Indebtedness, that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XI of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XI of this Indenture. Nothing in Section 15.2 or in this Section shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6 of this Indenture.
Subject to the payment in full of all Senior Indebtedness, the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debentures shall be paid in full. For the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debentures be deemed to be a payment or distribution by the Company to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand.
Nothing contained in this Article XV or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Debentures, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debentures the principal of (and premium, if any) and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Debentures and creditors of the Company, other than the holders of Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Company, received upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company referred to in this Article XV, the Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV.
Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes.
The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Trustee shall not have received the notice provided for in this Section at least 2 Business Days prior to the date upon which by the terms hereof any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest on any Debenture), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within 2 Business Days prior to such date.
The Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.
The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder.
With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise.
Nothing in this Article XV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6.
No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with.
Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Debentures to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Company, and any other Person.
Signatures appear on the following page
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written.
HERITAGE COMMERCE CORP
By _________________________
Name:
Title:
STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL ASSOCIATION, as Trustee
By _________________________
Name:
Title:
EXHIBIT A
FORM OF JUNIOR SUBORDINATED DEBENTURE
[FORM OF FACE OF SECURITY]
THIS SECURITY IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IT IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $500,000.00 AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER.
THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATE AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.
Floating Rate Junior Subordinated Deferrable Interest Debenture
of
Heritage Commerce Corp
September 26, 2002
Heritage Commerce Corp, a California corporation (the "Company" which term includes any successor Person under the Indenture hereinafter referred to), for value received promises to pay to State Street Bank and Trust Company of Connecticut, National Association, not in its individual capacity but solely as Institutional Trustee for Heritage Commerce Corp Statutory Trust III (the "Holder") or registered assigns, the principal sum of four million one hundred twenty-four thousand dollars ($4,124,000) on September 26, 2032, and to pay interest on said principal sum from September 26, 2002, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, quarterly (subject to deferral as set forth herein) in arrears on March 26, June 26, September 26 and December 26 of each year commencing December 26, 2002, at an annual rate equal to 5.220% beginning on (and including) the date of original issuance and ending on (but excluding) December 26, 2002 and at an annual rate for each successive period beginning on (and including) December 26, 2002, and each succeeding Interest Payment Date, and ending on (but excluding) the next succeeding Interest Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 3.400% (the "Coupon Rate"); provided, however, that prior to September 26, 2007, the Coupon Rate shall not exceed 11.90%, applied to the principal amount hereof, until the principal hereof is paid or duly provided for or made available for payment, and on any overdue principal and (without duplication) on any overdue installment of interest at the same rate per annum, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment. The amount of interest payable for any period will be computed on the basis of the actual number of days in the Distribution Period concerned divided by 360. In the event that any date on which interest is payable on this Debenture is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date the payment was originally payable. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, which shall be fifteen days prior to the day on which the relevant Interest Payment Date occurs. Any such interest installment not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such regular record date and may be paid to the Person in whose name this Debenture (or one or more Predecessor Securities) is registered at the close of business on a special record date.
"3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3- Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period.
The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law.
All percentages resulting from any calculations on the Debentures will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one- millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)).
The principal of and interest on this Debenture shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made by check mailed to the registered holder at such address as shall appear in the Debenture Register if a request for a wire transfer by such holder has not been received by the Company or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debenture is the Institutional Trustee, the payment of the principal of and interest on this Debenture will be made in immediately available funds at such place and to such account as may be designated by the Trustee.
So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, and without causing an Event of Default, to defer payments of interest on the Debentures by extending the interest payment period on the Debentures at any time and from time to time during the term of the Debentures, for up to 20 consecutive quarterly periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest (including Additional Interest) shall be due and payable. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date; provided further, however, that during any such Extension Period, the Company shall not and shall not permit any Affiliate to engage in any of the activities or transactions described on the reverse side hereof and in the Indenture. Prior to the termination of any Extension Period, the Company may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. The Company must give the Trustee notice of its election to begin or extend an Extension Period at least 5 Business Days prior to the regular record date (as such term is used in Section 2.8 of the Indenture) immediately preceding the Interest Payment Date with respect to which interest on the Debentures would have been payable except for the election to begin or extend such Extension Period.
The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.
This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee.
The provisions of this Debenture are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place.
IN WITNESS WHEREOF, the Company has duly executed this certificate.
HERITAGE COMMERCE CORP
By:____________________
Name:
#9;Title:
CERTIFICATE OF AUTHENTICATION
This is one of the Debentures referred to in the within-mentioned Indenture.
State Street Bank and Trust Company of Connecticut, National Association, as Trustee
By:____________________
Authorized Officer
[FORM OF REVERSE OF DEBENTURE]
This Debenture is one of the floating rate junior subordinated deferrable interest debentures of the Company, all issued or to be issued under and pursuant to the Indenture dated as of September 26, 2002 (the "Indenture"), duly executed and delivered between the Company and the Trustee, to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures. The Debentures are limited in aggregate principal amount as specified in the Indenture.
Upon the occurrence and continuation of a Special Event prior to September 26, 2007, the Company shall have the right to redeem the Debentures in whole, but not in part, at any Interest Payment Date, within 120 days following the occurrence of such Special Event, at the Special Redemption Price.
In addition, the Company shall have the right to redeem the Debentures, in whole or in part, but in all cases in a principal amount with integral multiples of $1,000.00, on any Interest Payment Date on or after September 26, 2007, at the Redemption Price.
Prior to 10:00 a.m. New York City time on the Redemption Date or Special Redemption Date, as applicable, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the Redemption Date or the Special Redemption Date, as applicable, all the Debentures so called for redemption at the appropriate Redemption Price or Special Redemption Price, together with accrued interest to the Redemption Date or Special Redemption Date, as applicable.
If all, or less than all, the Debentures are to be redeemed, the Company will give the Trustee notice not less than 45 nor more than 60 days, respectively, prior to the Redemption Date or Special Redemption Date, as applicable, as to the aggregate principal amount of Debentures to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debentures or portions thereof (in integral multiples of $1,000.00) to be redeemed.
Notwithstanding the foregoing, any redemption of Debentures by the Company shall be subject to the receipt of any and all required regulatory approvals.
In case an Event of Default shall have occurred and be continuing, upon demand of the Trustee, the principal of all of the Debentures shall become due and payable in the manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures at the time outstanding, to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall without the consent of the holders of each Debenture then outstanding and affected thereby (i) change the fixed maturity of any Debenture, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debentures, or impair or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debentures the holders of which are required to consent to any such supplemental indenture.
The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Debentures at the time outstanding on behalf of the holders of all of the Debentures to waive (or modify any previously granted waiver of) any past default or Event of Default, and its consequences, except a default (a) in the payment of principal of, premium, if any, or interest on any of the Debentures, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debenture affected, or (c) in respect of the covenants contained in Section 3.9 of the Indenture; provided, however, that if the Debentures are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in Liquidation Amount of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver, provided, further, that if the consent of the holder of each outstanding Debenture is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust shall have consented to such waiver. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of the Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by the Indenture, said default or Event of Default shall for all purposes of the Debentures and the Indenture be deemed to have been cured and to be not continuing.
No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest, including Additional Interest, on this Debenture at the time and place and at the rate and in the money herein prescribed.
The Company has agreed that if Debentures are initially issued to the Trust or a trustee of such trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debentures continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee, or (iii) the Company shall have given notice of its election to defer payments of interest on the Debentures by extending the interest payment period as provided herein and such Extension Period, or any extension thereof, shall be continuing, then the Company shall not, and shall not allow any Affiliate of the Company to, (x) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or its Affiliates' capital stock (other than payments of dividends or distributions to the Company) or make any guarantee payments with respect to the foregoing or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company or any Affiliate that rank pari passu in all respects with or junior in interest to the Debentures (other than, with respect to clauses (x) and (y) above, (1) repurchases, redemptions or other acquisitions of shares of capital stock of the Company in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock) as consideration in an acquisition transaction entered into prior to the applicable Extension Period, if any, (2) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (3) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (4) any declaration of a dividend in connection with any stockholders' rights plan, or the issuance of rights, stock or other property under any stockholders' rights plan, or the redemption or repurchase of rights pursuant thereto, (5) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock and any cash payments in lieu of fractional shares issued in connection therewith, or (6) payments under the Capital Securities Guarantee).
The Debentures are issuable only in registered, certificated form without coupons and in minimum denominations of $500,000.00 and any multiple of $1,000.00 in excess thereof. As provided in the Indenture and subject to the transfer restrictions and limitations as may be contained herein and therein from time to time, this Debenture is transferable by the holder hereof on the Debenture Register of the Company. Upon due presentment for registration of transfer of any Debenture at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.2 of the Indenture, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debenture for a like aggregate principal amount. All Debentures presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee or the Authenticating Agent duly executed by the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debentures, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith.
Prior to due presentment for registration of transfer of any Debenture, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debenture registrar may deem the Person in whose name such Debenture shall be registered upon the Debenture Register to be, and may treat him as, the absolute owner of such Debenture (whether or not such Debenture shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debenture registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his order shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Debenture.
No recourse for the payment of the principal of or premium, if any, or interest on any Debenture, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or in any supplemental indenture, or in any such Debenture, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Company or of any successor Person of the Company, either directly or through the Company or any successor Person of the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Debentures.
Capitalized terms used and not defined in this Debenture shall have the meanings assigned in the Indenture dated as of the date of original issuance of this Debenture between the Trustee and the Company.
THE INDENTURE AND THE DEBENTURES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF.
HERITAGE COMMERCE CORP
4,000 Capital Securities
Floating Rate Capital Securities
(Liquidation Amount $1,000.00 per Capital Security)
PLACEMENT AGREEMENT
____________________
September 18, 2002
FTN Financial Capital Markets
845 Crossover Lane, Suite 150
Memphis, Tennessee 38117
Keefe, Bruyette & Woods, Inc.
787 7th Avenue
4th Floor
New York, New York 10019
Ladies and Gentlemen:
Heritage Commerce Corp, a California corporation (the "Company"), and its financing subsidiary, Heritage Commerce Corp Statutory Trust III, a Connecticut statutory trust (the "Trust," and hereinafter together with the Company, the "Offerors"), hereby confirm their agreement (this "Agreement") with you as placement agents (the "Placement Agents"), as follows:
ARTICLE I
Issuance and Sale of
Securities.
The Offerors propose to issue and sell at the Closing (as defined in Section Section 17.3(a) hereof) 4,000 of the Trust's Floating Rate Capital Securities, with a liquidation amount of $1,000.00 per capital security (the "Capital Securities"), to Preferred Term Securities VII, Ltd., a company with limited liability established under the laws of the Cayman Islands (the "Purchaser") pursuant to the terms of a Subscription Agreement entered into, or to be entered into on or prior to the Closing Date (as defined in Section Section 17.3(a) hereof), between the Offerors and the Purchaser (the "Subscription Agreement"), the form of which is attached hereto as Exhibit A and incorporated herein by this reference.
The Capital Securities shall be fully and unconditionally guaranteed on a subordinated basis by the Company with respect to distributions and amounts payable upon liquidation, redemption or repayment (the "Guarantee") pursuant and subject to the Guarantee Agreement (the "Guarantee Agreement"), to be dated as of the Closing Date and executed and delivered by the Company and State Street Bank and Trust Company of Connecticut, National Association ("State Street"), as trustee (the "Guarantee Trustee"), for the benefit from time to time of the holders of the Capital Securities. The entire proceeds from the sale by the Trust to the holders of the Capital Securities shall be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the "Common Securities"), and shall be used by the Trust to purchase $4,124,000 in principal amount of the Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Debentures") of the Company. The Capital Securities and the Common Securities for the Trust shall be issued pursuant to an Amended and Restated Declaration of Trust among State Street, as institutional trustee (the "Institutional Trustee"), the Administrators named therein, and the Company, to be dated as of the Closing Date and in substantially the form heretofore delivered to the Placement Agents (the "Trust Agreement"). The Debentures shall be issued pursuant to an Indenture (the "Indenture"), to be dated as of the Closing Date, between the Company and State Street, as indenture trustee (the "Indenture Trustee"). The documents identified in this Section 1.2 and in Section 1.1 are referred to herein as the "Operative Documents."
The Capital Securities shall be offered and sold by the Trust directly to the Purchaser without registration of any of the Capital Securities, the Debentures or the Guarantee under the Securities Act of 1933, as amended (the "Securities Act"), or any other applicable securities laws in reliance upon exemptions from the registration requirements of the Securities Act and other applicable securities laws. The Offerors agree that this Agreement shall be incorporated by reference into the Subscription Agreement and the Purchaser shall be entitled to each of the benefits of the Placement Agents and the Purchaser under this Agreement and shall be entitled to enforce obligations of the Offerors under this Agreement as fully as if the Purchaser were a party to this Agreement. The Offerors and the Placement Agents have entered into this Agreement to set forth their understanding as to their relationship and their respective rights, duties and obligations.
Upon original issuance thereof, and until such time as the same is no longer required under the applicable requirements of the Securities Act, the Capital Securities and Debentures certificates shall each contain a legend as required pursuant to any of the Operative Documents.
ARTICLE II
Purchase of Capital Securities.
From the date hereof until the Closing Date (which date may be extended by mutual agreement of the Offerors and the Placement Agents), the Offerors hereby grant to the Placement Agents the exclusive right to arrange for the sale of the Capital Securities to the Purchaser at a purchase price of $1,000.00 per Capital Security.
The Offerors hereby agree to evidence their acceptance of the subscription by countersigning a copy of the Subscription Agreement and returning the same to the Placement Agents.
The sale and purchase of the Capital Securities by the Offerors to the Purchaser shall take place at a closing (the "Closing") at the offices of Lewis, Rice & Fingersh, L.C., at 10:00 a.m. (St. Louis time) on September 26, 2002, or such other business day as may be agreed upon by the Offerors and the Placement Agents (the "Closing Date"); provided, however, that in no event shall the Closing Date occur later than September 27, 2002 unless consented to by the Purchaser. Payment by the Purchaser shall be payable in the manner set forth in the Subscription Agreement and shall be made prior to or on the Closing Date.
The certificate for the Capital Securities shall be in definitive form, registered in the name of the Purchaser and in the aggregate amount of the Capital Securities purchased by the Purchaser.
The Offerors shall deposit the certificate representing the Capital Securities with the Institutional Trustee or other appropriate party prior to the Closing Date.
Because the proceeds from the sale of the Capital Securities shall be used to purchase the Debentures from the Company, the Company shall pay an aggregate of $30.00 for each $1,000.00 of principal amount of Debentures sold to the Trust (excluding the Debentures related to the Common Securities purchased by the Company). Of this amount, $15.00 for each $1,000.00 of principal amount of Debentures shall be payable to FTN Financial Capital Markets and $15.00 for each $1,000.00 of principal amount of Debentures shall be payable to Keefe, Bruyette & Woods, Inc. Such amount shall be delivered to the Trustee or such other person designated by the Placement Agents on the Closing Date and shall be allocated between and paid to the respective Placement Agents as directed by the Placement Agents.
Whether or not this Agreement is terminated or the sale of the Capital Securities is consummated, the Company hereby covenants and agrees that it shall pay or cause to be paid (directly or by reimbursement) all reasonable costs and expenses incident to the performance of the obligations of the Offerors under this Agreement, including all fees, expenses and disbursements of counsel and accountants for the Offerors; the reasonable costs and charges of any trustee, transfer agent or registrar and the fees and disbursements of counsel to any trustee, transfer agent or registrar in each case only to the extent attributable to the Debentures and the Capital Securities; all reasonable expenses incurred by the Offerors incident to the preparation, execution and delivery of the Trust Agreement, the Indenture, and the Guarantee; and all other reasonable costs and expenses incident to the performance of the obligations of the Company hereunder and under the Trust Agreement.
If any of the conditions to the Closing specified in this Agreement shall not have been fulfilled to the satisfaction of the Placement Agents or if the Closing shall not have occurred on or before 10:00 a.m. (St. Louis time) on September 27, 2002, then each party hereto, notwithstanding anything to the contrary in this Agreement, shall be relieved of all further obligations under this Agreement without thereby waiving any rights it may have by reason of such nonfulfillment or failure; provided, however, that the obligations of the parties under Sections Section 17.4(b), 7.5 and 9 shall not be so relieved and shall continue in full force and effect.
ARTICLE III
Closing Conditions.
The obligations of the Purchaser and the Placement Agents on the Closing Date shall be subject to the accuracy, at and as of the Closing Date, of the representations and warranties of the Offerors contained in this Agreement, to the accuracy, at and as of the Closing Date, of the statements of the Offerors made in any certificates pursuant to this Agreement, to the performance by the Offerors of their respective obligations under this Agreement, to compliance, at and as of the Closing Date, by the Offerors with their respective agreements herein contained, and to the following further conditions:
On the Closing Date, the Placement Agents shall have received the following favorable opinions, each dated as of the Closing Date: (a) from Bingham McCutchen LLP, counsel for the Offerors and addressed to the Purchaser and the Placement Agents in substantially the form set forth on Exhibit B-1 attached hereto and incorporated herein by this reference, (b) from Bingham McCutchen LLP, special Connecticut counsel to the Offerors and addressed to the Purchaser, the Placement Agents and the Offerors, in substantially the form set forth on Exhibit B-2 attached hereto and incorporated herein by this reference and (c) from Lewis, Rice & Fingersh, L.C., special tax counsel to the Offerors, and addressed to the Placement Agents and the Offerors, in substantially the form set forth on Exhibit B-3 attached hereto and incorporated herein by this reference, subject to the receipt by Lewis, Rice & Fingersh, L.C. of a representation letter from the Company in the form set forth in Exhibit B-3 completed in a manner reasonably satisfactory to Lewis, Rice & Fingersh, L.C. (collectively, the "Offerors' Counsel Opinions"). In rendering the Offerors' Counsel Opinions, counsel to the Offerors may rely as to factual matters upon certificates or other documents furnished by officers, directors and trustees of the Offerors (copies of which shall be delivered to the Placement Agents and the Purchaser) and by government officials, and upon such other documents as counsel to the Offerors may, in their reasonable opinion, deem appropriate as a basis for the Offerors' Counsel Opinions. Counsel to the Offerors may specify the jurisdictions in which they are admitted to practice and that they are not admitted to practice in any other jurisdiction and are not experts in the law of any other jurisdiction. If the Offerors' counsel is not admitted to practice in the State of New York, the opinion of Offerors' counsel may assume, for purposes of the opinion, that the laws of the State of New York are substantively identical, in all respects material to the opinion, to the internal laws of the state in which such counsel is admitted to practice. Such Offerors' Counsel Opinions shall not state that they are to be governed or qualified by, or that they are otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
At the Closing Date, the Purchaser and the Placement Agents shall have received certificates from the Chief Executive Officer of the Company, dated as of the Closing Date, stating that (i) the representations and warranties of the Offerors set forth in Section 5 hereof are true and correct as of the Closing Date and that the Offerors have complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Date, (ii) since the date of this Agreement the Offerors have not incurred any liability or obligation, direct or contingent, or entered into any material transactions, other than in the ordinary course of business, which is material to the Offerors, and (iii) covering such other matters as the Placement Agents may reasonably request.
At the Closing Date, the Purchaser and the Placement Agents shall have received a certificate of one or more Administrators of the Trust, dated as of the Closing Date, stating that the representations and warranties of the Trust set forth in Section 5 are true and correct as of the Closing Date and that the Trust has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date.
The purchase of and payment for the Capital Securities as described in this Agreement and pursuant to the Subscription Agreement shall (a) not be prohibited by any applicable law or governmental regulation, (b) not subject the Purchaser or the Placement Agents to any penalty or, in the reasonable judgment of the Purchaser and the Placement Agents, other onerous condition under or pursuant to any applicable law or governmental regulation, and (c) be permitted by the laws and regulations of the jurisdictions to which the Purchaser and the Placement Agents are subject.
The Company and the Trust shall have received all consents, permits and other authorizations, and made all such filings and declarations, as may be required from any person or entity pursuant to any law, statute, regulation or rule (federal, state, local and foreign), or pursuant to any agreement, order or decree to which the Company or the Trust is a party or to which either is subject, in connection with the transactions contemplated by this Agreement.
The Purchaser shall have sold securities issued by the Purchaser in an amount such that the net proceeds of such sale shall be (i) available on the Closing Date and (ii) in an amount sufficient to purchase the Capital Securities and all other capital or similar securities contemplated in agreements similar to this Agreement and the Subscription Agreement.
Prior to or on the Closing Date, the Offerors shall have furnished to the Placement Agents such further information, certificates, opinions and documents addressed to the Purchaser and the Placement Agents, which the Placement Agents may reasonably request, including, without limitation, a complete set of the Operative Documents or any other documents or certificates required by this Section 3; and all proceedings taken by the Offerors in connection with the issuance, offer and sale of the Capital Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Placement Agents.
If any condition specified in this Section 3 shall not have been fulfilled when and as required in this Agreement, or if any of the opinions or certificates mentioned above or elsewhere in this Agreement shall not be reasonably satisfactory in form and substance to the Placement Agents, this Agreement may be terminated by the Placement Agents by notice to the Offerors at any time at or prior to the Closing Date. Notice of such termination shall be given to the Offerors in writing or by telephone or facsimile confirmed in writing.
ARTICLE IV
Conditions to the Offerors'
Obligations.
The obligations of the Offerors to sell the Capital Securities to the Purchaser and consummate the transactions contemplated by this Agreement shall be subject to the accuracy, at and as of the Closing Date, of the representations and warranties of the Placement Agents contained in this Agreement and to the following further conditions:
The Offerors shall have received from the Placement Agents an executed copy of this Agreement.
The Placement Agents shall have fulfilled all of their other obligations and duties required to be fulfilled under this Agreement prior to or at the Closing.
ARTICLE V
Representations and Warranties of the
Offerors.
Except as set forth on the Disclosure Schedule (as defined in Section 11.1) attached hereto, if any, the Offerors jointly and severally represent and warrant to the Placement Agents and the Purchaser as of the date hereof and as of the Closing Date as follows:
The Trust has been duly created and is validly existing in good standing as a statutory trust under the Connecticut Statutory Trust Act (the "Statutory Trust Act") with the power and authority to own property and to conduct the business it transacts and proposes to transact and to enter into and perform its obligations under the Operative Documents. The Trust is duly qualified to transact business as a foreign entity and is in good standing in each jurisdiction in which such qualification is necessary, except where the failure to so qualify or be in good standing would not have a material adverse effect on the Trust. The Trust is not a party to or otherwise bound by any agreement other than the Operative Documents. The Trust is and will, under current law, be classified for federal income tax purposes as a grantor trust and not as an association taxable as a corporation.
The Trust Agreement has been duly authorized by the Company and, on the Closing Date, will have been duly executed and delivered by the Company and the Administrators of the Trust, and, assuming due authorization, execution and delivery by the Institutional Trustee, will be a valid and binding obligation of the Company and such Administrators, enforceable against them in accordance with its terms, subject to (a) applicable bankruptcy, insolvency, moratorium, receivership, reorganization, liquidation and other laws relating to or affecting creditors' rights generally, and (b) general principles of equity (regardless of whether considered and applied in a proceeding in equity or at law) ("Bankruptcy and Equity"). Each of the Administrators of the Trust is an employee or a director of the Company or of a financial institution subsidiary of the Company and has been duly authorized by the Company to execute and deliver the Trust Agreement.
Each of the Guarantee and the Indenture has been duly authorized by the Company and, on the Closing Date will have been duly executed and delivered by the Company, and, assuming due authorization, execution and delivery by the Guarantee Trustee, in the case of the Guarantee, and by the Indenture Trustee, in the case of the Indenture, will be a valid and binding obligation of the Company enforceable against it in accordance with its terms, subject to Bankruptcy and Equity.
The Capital Securities and the Common Securities have been duly authorized by the Trust Agreement and, when issued and delivered against payment therefor on the Closing Date to the Purchaser, in the case of the Capital Securities, and to the Company, in the case of the Common Securities, will be validly issued and represent undivided beneficial interests in the assets of the Trust. None of the Capital Securities or the Common Securities is subject to preemptive or other similar rights. On the Closing Date, all of the issued and outstanding Common Securities will be directly owned by the Company free and clear of any pledge, security interest, claim, lien or other encumbrance.
The Debentures have been duly authorized by the Company and, at the Closing Date, will have been duly executed and delivered to the Indenture Trustee for authentication in accordance with the Indenture, and, when authenticated in the manner provided for in the Indenture and delivered against payment therefor by the Trust, will constitute valid and binding obligations of the Company entitled to the benefits of the Indenture enforceable against the Company in accordance with their terms, subject to Bankruptcy and Equity.
This Agreement has been duly authorized, executed and delivered by the Company and the Trust and constitutes the valid and binding obligation of the Company and the Trust, enforceable against the Company and the Trust in accordance with its terms, subject to Bankruptcy and Equity.
The Trust is not in violation of the Trust Agreement or, to the knowledge of the Administrators, any provision of the Statutory Trust Act. The execution, delivery and performance by the Company or the Trust of this Agreement or the Operative Documents to which it is a party, and the consummation of the transactions contemplated herein or therein and the use of the proceeds therefrom, will not conflict with or constitute a breach of, or a default under, or result in the creation or imposition of any lien, charge or other encumbrance upon any property or assets of the Trust, the Company or any of the Company's Subsidiaries (as defined in Section 5.11 hereof) pursuant to any contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Trust, the Company or any of its Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of any of them is subject, except for a conflict, breach, default, lien, charge or encumbrance which could not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect nor will such action result in any violation of the Trust Agreement or the Statutory Trust Act or require the consent, approval, authorization or order of any court or governmental agency or body. As used herein, the term "Material Adverse Effect" means any one or more effects that individually or in the aggregate are material and adverse to the Offeror's ability to consummate the transactions contemplated herein or in the Operative Documents or any one or more effects that individually or in the aggregate are material and adverse to the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company and its Subsidiaries taken as whole, whether or not occurring in the ordinary course of business.
The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of California, with all requisite corporate power and authority to own its properties and conduct the business it transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its activities requires such qualification, except where the failure of the Company to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect.
Each of the Company's significant subsidiaries (as defined in Section 1-02(w) of Regulation S-X to the Securities Act (the "Significant Subsidiaries")) is listed in Exhibit C attached hereto and incorporated herein by this reference. Each Significant Subsidiary has been duly organized and is validly existing and in good standing under the laws of the jurisdiction in which it is chartered or organized, with all requisite power and authority to own its properties and conduct the business it transacts and proposes to transact, and is duly qualified to transact business and is in good standing as a foreign entity in each jurisdiction where the nature of its activities requires such qualification, except where the failure of any such Significant Subsidiary to be so qualified would not, singly or in the aggregate, have a Material Adverse Effect. All of the issued and outstanding shares of capital stock of the Significant Subsidiaries (a) have been duly authorized and are validly issued, (b) are fully paid and nonassessable, and (c) are wholly owned, directly or indirectly, by the Company free and clear of any security interest, mortgage, pledge, lien, encumbrance, restriction upon voting or transfer, preemptive rights, claim, equity or other defect.
The Company and each of its subsidiaries (as defined in Section 1-02(x) of Regulation S-X to the Securities Act (the "Subsidiaries")) have all requisite power and authority, and all necessary authorizations, approvals, orders, licenses, certificates and permits of and from regulatory or governmental officials, bodies and tribunals, to own or lease their respective properties and to conduct their respective businesses as now being conducted, except such authorizations, approvals, orders, licenses, certificates and permits which, if not obtained and maintained, would not, singly or in the aggregate, have a Material Adverse Effect, and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such authorizations, approvals, orders, licenses, certificates or permits which, singly or in the aggregate, if the failure to be so licensed or approved is the subject of an unfavorable decision, ruling or finding, would, singly or in the aggregate, have a Material Adverse Effect; and the Company and its Subsidiaries are in compliance with all applicable laws, rules, regulations and orders and consents, the violation of which would, singly or in the aggregate, have a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries is in violation of its respective articles or certificate of incorporation, charter or by-laws or similar organizational documents or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which either the Company or any of its Subsidiaries is a party, or by which it or any of them may be bound or to which any of the property or assets of the Company or any of its Subsidiaries is subject, the effect of which violation or default in performance or observance would have, singly or in the aggregate, a Material Adverse Effect.
The Company is duly registered (i) as a bank holding company or financial holding company under the Bank Holding Company Act of 1956, as amended, and the regulations of the Board of Governors of the Federal Reserve System or (ii) as a savings and loan holding company under the Home Owners' Loan Act of 1933, as amended, and the regulations of the Office of Thrift Supervision, and the deposit accounts of the Company's Subsidiary depository institutions are insured by the Federal Deposit Insurance Corporation ("FDIC") to the fullest extent permitted by law and the rules and regulations of the FDIC, and no proceedings for the termination of such insurance are pending or threatened.
Since the respective dates of the Financial Statements and the FR Y-9C, there has been no material adverse change or development with respect to the financial condition or earnings of the Company and all of its Subsidiaries, taken as a whole.
(d) The accountants of the Company who certified the Financial Statements are independent public accountants of the Company and its Subsidiaries within the meaning of the Securities Act and the rules and regulations thereunder.
Neither the Company nor any of its Subsidiaries is subject or is party to, or has received any notice or advice that any of them may become subject or party to, any investigation with respect to, any cease-and-desist order, agreement, consent agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been since January 1, 1999, a recipient of any supervisory letter from, or since January 1, 1999, has adopted any board resolutions at the request of, any Regulatory Agency (as defined below) that currently restricts in any material respect the conduct of their business or that in any material manner relates to their capital adequacy, their credit policies, their ability or authority to pay dividends or make distributions to their shareholders or make payments of principal or interest on their debt obligations, their management or their business (each, a "Regulatory Agreement"), nor has the Company or any of its Subsidiaries been advised since January 1, 1999, by any Regulatory Agency that it is considering issuing or requesting any such Regulatory Agreement. There is no material unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of the Company or any of its Subsidiaries. As used herein, the term "Regulatory Agency" means any federal or state agency charged with the supervision or regulation of depository institutions, bank, financial or savings and loan holding companies, or engaged in the insurance of depository institution deposits, or any court, administrative agency or commission or other governmental agency, authority or instrumentality having supervisory or regulatory authority with respect to the Company or any of its Subsidiaries.
Since December 31, 2001, there has been no material adverse change or development with respect to the condition (financial or otherwise), earnings, affairs, business, prospects or results of operations of the Company or its Subsidiaries on a consolidated basis, whether or not arising in the ordinary course of business.
Neither the Company nor any of its Subsidiaries has any material liability, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes (and there is no past or present fact, situation, circumstance, condition or other basis for any present or future action, suit, proceeding, hearing, charge, complaint, claim or demand against the Company or its Subsidiaries giving rise to any such liability), except (i) for liabilities set forth in the Financial Statements and (ii) normal fluctuation in the amount of the liabilities referred to in clause (i) above occurring in the ordinary course of business of the Company and all of its Subsidiaries since the date of the most recent balance sheet included in the Financial Statements.
No charge, investigation, action, suit or proceeding is pending or, to the knowledge of the Offerors, threatened, against or affecting the Company or its Subsidiaries or any of their respective properties before or by any courts or any regulatory, administrative or governmental official, commission, board, agency or other authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could have, singly or in the aggregate, a Material Adverse Effect.
The Company has no present intention to exercise its option to defer payments of interest on the Debentures as provided in the Indenture. The Company believes that the likelihood that it would exercise its right to defer payments of interest on the Debentures as provided in the Indenture at any time during which the Debentures are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's capital stock and on the Company's ability to make any payments of principal, interest or premium on, or repay, repurchase or redeem, any of its debt securities that rank pari passu in all respects with, or junior in interest to, the Debentures.
ARTICLE VI
Representations and Warranties of the Placement
Agents.
Each Placement Agent represents and warrants to the Offerors as to itself (but not as to the other Placement Agent) as follows:
The Placement Agent has all requisite power and authority to enter into this Agreement, and this Agreement has been duly and validly authorized, executed and delivered by the Placement Agent and constitutes the legal, valid and binding agreement of the Placement Agent, enforceable against the Placement Agent in accordance with its terms, subject to Bankruptcy and Equity and except as any indemnification or contribution provisions thereof may be limited under applicable securities laws.
In the case of the offer and sale of the Capital Securities, no form of general solicitation or general advertising was used by the Placement Agent or its representatives including, but not limited to, advertisements, articles, notices or other communications published in any newspaper, magazine or similar medium or broadcast over television or radio or any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. Neither the Placement Agent nor its representatives have engaged or will engage in any "directed selling efforts" within the meaning of Regulation S with respect to the Capital Securities.
The Placement Agent has made such reasonable inquiry as is necessary to determine that the Purchaser is acquiring the Capital Securities for its own account, that the Purchaser does not intend to distribute the Capital Securities in contravention of the Securities Act or any other applicable securities laws, and that the Purchaser is not a "U.S. person" as that term is defined under Rule 902 of the Securities Act.
The Placement Agent has not offered or sold and will not arrange for the offer or sale of the Capital Securities except (i) in an offshore transaction complying with Rule 903 of Regulation S, or (ii) to those the Placement Agent reasonably believes are "accredited investors" (as defined in Rule 501 of Regulation D), or (iii) in any other manner that does not require registration of the Capital Securities under the Securities Act. In connection with each such sale, the Placement Agent has taken or will take reasonable steps to ensure that the Purchaser is aware that (a) such sale is being made in reliance on an exemption under the Securities Act and (b) future transfers of the Capital Securities will not be made except in compliance with applicable securities laws.
Neither the Placement Agent nor its representatives will include any non-public information about the Company, the Trust or any of their affiliates in any registration statement, prospectus, offering circular or private placement memorandum used in connection with any purchase of Capital Securities without the prior written consent of the Trust and the Company.
ARTICLE VII
Covenants of the
Offerors.
The Offerors covenant and agree with the Placement Agents and the Purchaser as follows:
During the period from the date of this Agreement to the Closing Date, the Offerors shall use their best efforts and take all action necessary or appropriate to cause their representations and warranties contained in Section 5 hereof to be true as of the Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of the Closing Date.
The Offerors and their Affiliates shall not nor shall any of them permit any person acting on their behalf (other than the Placement Agents), to directly or indirectly (i) sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) that would or could be integrated with the sale of the Capital Securities in a manner that would require the registration under the Securities Act of the Securities or (ii) make offers or sales of any such Security, or solicit offers to buy any such Security, under circumstances that would require the registration of any of such Securities under the Securities Act.
The Trust shall use the proceeds from the sale of the Capital Securities to purchase the Debentures from the Company.
The Offerors shall not engage, or permit any Subsidiary to engage, in any activity which would cause it or any Subsidiary to be an "investment company" under the provisions of the Investment Company Act.
If the sale of the Capital Securities provided for herein is not consummated (i) because any condition set forth in Section 3 hereof is not satisfied, or (ii) because of any refusal, inability or failure on the part of the Company or the Trust to perform any agreement herein or comply with any provision hereof other than by reason of a breach by the Placement Agents, the Company shall reimburse the Placement Agents upon demand for all of their pro rata share of out-of-pocket expenses (including reasonable fees and disbursements of counsel) in an amount not to exceed $50,000.00 that shall have been incurred by them in connection with the proposed purchase and sale of the Capital Securities. Notwithstanding the foregoing, the Company shall have no obligation to reimburse the Placement Agents for their out-of-pocket expenses if the sale of the Capital Securities fails to occur because the condition set forth in Section Section 18.6 is not satisfied or because either of the Placement Agents fails to fulfill a condition set forth in ARTICLE XIX.
In connection with any offer or sale of any of the Securities, the Offerors shall not, nor shall either of them permit any of their Affiliates or any person acting on their behalf, other than the Placement Agents, to, (i) engage in any "directed selling efforts" within the meaning of Regulation S, or (ii) engage in any form of general solicitation or general advertising (as defined in Regulation D).
So long as any of the Securities are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Offerors will, during any period in which they are not subject to and in compliance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the Offerors are not exempt from such reporting requirements pursuant to and in compliance with Rule 12g3-2(b) under the Exchange Act, provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser in connection with any proposed transfer, any information required to be provided by Rule 144A(d)(4) under the Securities Act, if applicable. This covenant is intended to be for the benefit of the holders, and the prospective purchasers designated by such holders, from time to time of such restricted securities. The information provided by the Offerors pursuant to this Section 7.7 will not, at the date thereof, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
Within 50 days of the end of each calendar year quarter and within 100 days of the end of each calendar year during which the Debentures are issued and outstanding, the Offerors shall submit to The Bank of New York a completed quarterly report in the form attached hereto as Exhibit D. The Offerors acknowledge and agree that The Bank of New York and its successors and assigns is a third party beneficiary of this Section Section 22.8
ARTICLE VIII
Covenants of the Placement Agents.
The Placement Agents covenant and agree with the Offerors that, during the period from the date of this Agreement to the Closing Date, the Placement Agents shall use their best efforts and take all action necessary or appropriate to cause their representations and warranties contained in Section 6 to be true as of Closing Date, after giving effect to the transactions contemplated by this Agreement, as if made on and as of the Closing Date. The Placement Agents further covenant and agree not to engage in hedging transactions with respect to the Capital Securities unless such transactions are conducted in compliance with the Securities Act.
ARTICLE IX
Indemnification.
The Offerors shall jointly and severally indemnify and hold harmless the Placement Agents and the Purchaser and each of their respective agents, employees, officers and directors and each person that controls either of the Placement Agents or the Purchaser within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, and agents, employees, officers and directors or any such controlling person of either of the Placement Agents or the Purchaser (each such person or entity, an "Indemnified Party") from and against any and all losses, claims, damages, judgments, liabilities or expenses, joint or several, to which such Indemnified Party may become subject under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Offerors), insofar as such losses, claims, damages, judgments, liabilities or expenses (or actions in respect thereof) arise out of, or are based upon, or relate to, in whole or in part, (a) any untrue statement or alleged untrue statement of a material fact contained in any information (whether written or oral) or documents executed in favor of, furnished or made available to the Placement Agents or the Purchaser by the Offerors, or (b) any omission or alleged omission to state in any information (whether written or oral) or documents executed in favor of, furnished or made available to the Placement Agents or the Purchaser by the Offerors a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each Indemnified Party for any legal and other expenses as such expenses are reasonably incurred by such Indemnified Party in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, judgments, liability, expense or action described in this Section 9.1. In addition to their other obligations under this Section 9, the Offerors hereby agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of, or based upon, or related to the matters described above in this Section 9.1, they shall reimburse each Indemnified Party on a quarterly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, each Indemnified Party shall promptly return such amounts to the Offerors together with interest, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by First Tennessee Bank, N.A. (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Indemnified Party within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request.
Promptly after receipt by an Indemnified Party under this Section 9 of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the Offerors under this Section 9, notify the Offerors in writing of the commencement thereof; but, subject to Section 9.4, the omission to so notify the Offerors shall not relieve them from any liability pursuant to Section 9.1 which the Offerors may have to any Indemnified Party unless and to the extent that the Offerors did not otherwise learn of such action and such failure by the Indemnified Party results in the forfeiture by the Offerors of substantial rights and defenses. In case any such action is brought against any Indemnified Party and such Indemnified Party seeks or intends to seek indemnity from the Offerors, the Offerors shall be entitled to participate in, and, to the extent that they may wish, to assume the defense thereof with counsel reasonably satisfactory to such Indemnified Party; provided, however, if the defendants in any such action include both the Indemnified Party and the Offerors and the Indemnified Party shall have reasonably concluded that there may be a conflict between the positions of the Offerors and the Indemnified Party in conducting the defense of any such action or that there may be legal defenses available to it and/or other Indemnified Parties which are different from or additional to those available to the Offerors, the Indemnified Party shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such Indemnified Party. Upon receipt of notice from the Offerors to such Indemnified Party of their election to so assume the defense of such action and approval by the Indemnified Party of counsel, the Offerors shall not be liable to such Indemnified Party under this Section 9 for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof unless (i) the Indemnified Party shall have employed such counsel in connection with the assumption of legal defenses in accordance with the proviso in the preceding sentence (it being understood, however, that the Offerors shall not be liable for the expenses of more than one separate counsel representing the Indemnified Parties who are parties to such action), or (ii) the Offerors shall not have employed counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel of such Indemnified Party shall be at the expense of the Offerors.
If the indemnification provided for in this Section 9 is required by its terms, but is for any reason held to be unavailable to or otherwise insufficient to hold harmless an Indemnified Party under Section 9.1 in respect of any losses, claims, damages, liabilities or expenses referred to herein or therein, then the Offerors shall contribute to the amount paid or payable by such Indemnified Party as a result of any losses, claims, damages, judgments, liabilities or expenses referred to herein (i) in such proportion as is appropriate to reflect the relative benefits received by the Offerors, on the one hand, and the Indemnified Party, on the other hand, from the offering of such Capital Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Offerors, on the one hand, and the Placement Agents, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein or other breaches which resulted in such losses, claims, damages, judgments, liabilities or expenses, as well as any other relevant equitable considerations. The respective relative benefits received by the Offerors, on the one hand, and the Placement Agents, on the other hand, shall be deemed to be in the same proportion, in the case of the Offerors, as the total price paid to the Offerors for the Capital Securities sold by the Offerors to the Purchaser (net of the compensation paid to the Placement Agents hereunder, but before deducting expenses), and in the case of the Placement Agents, as the compensation received by them, bears to the total of such amounts paid to the Offerors and received by the Placement Agents as compensation. The relative fault of the Offerors and the Placement Agents shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or the omission or alleged omission of a material fact or the inaccurate or the alleged inaccurate representation and/or warranty relates to information supplied by the Offerors or the Placement Agents and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The provisions set forth in Section Section 24.2 with respect to notice of commencement of any action shall apply if a claim for contribution is made under this Section Section 24.3; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section Section 24.2 for purposes of indemnification. The Offerors and the Placement Agents agree that it would not be just and equitable if contribution pursuant to this Section Section 24.3 were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in this Section Section 24.3. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages, judgments, liabilities or expenses referred to in this Section Section 24.3 shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. In no event shall the liability of the Placement Agents hereunder be greater in amount than the dollar amount of the compensation (net of payment of all expenses) received by the Placement Agents upon the sale of the Capital Securities giving rise to such obligation. No person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section 9 are in addition to any liability that the Offerors may otherwise have to any Indemnified Party.
The Company shall indemnify and hold harmless the Trust against all loss, liability, claim, damage and expense whatsoever, as due from the Trust under Sections 9.1 through 9.4 hereof.
ARTICLE X
Rights and Responsibilities of Placement
Agents.
In performing their duties under this Agreement, the Placement Agents shall be entitled to rely upon any notice, signature or writing which they shall in good faith believe to be genuine and to be signed or presented by a proper party or parties. The Placement Agents may rely upon any opinions or certificates or other documents delivered by the Offerors or their counsel or designees to either the Placement Agents or the Purchaser.
In connection with the performance of their duties under this Agreement, the Placement Agents shall not be liable for any error of judgment or any action taken or omitted to be taken unless the Placement Agents were grossly negligent or engaged in willful misconduct in connection with such performance or non-performance. No provision of this Agreement shall require the Placement Agents to expend or risk their own funds or otherwise incur any financial liability on behalf of the Purchaser in connection with the performance of any of their duties hereunder. The Placement Agents shall be under no obligation to exercise any of the rights or powers vested in them by this Agreement.
ARTICLE XI
Miscellaneous.
The term "Disclosure Schedule," as used herein, means the schedule, if any, attached to this Agreement that sets forth items the disclosure of which is necessary or appropriate as an exception to one or more representations or warranties contained in Section 5 hereof; provided, that any item set forth in the Disclosure Schedule as an exception to a representation or warranty shall be deemed an admission by the Offerors that such item represents an exception, fact, event or circumstance that is reasonably likely to result in a Material Adverse Effect. The Disclosure Schedule shall be arranged in paragraphs corresponding to the section numbers contained in Section 5. Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein unless the Disclosure Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the immediately preceding sentence, the mere listing (or inclusion of a copy) of a document or other item in the Disclosure Schedule shall not be deemed adequate to disclose an exception to a representation or warranty made herein unless the representation or warranty has to do with the existence of the document or other item itself. Information provided by the Company in response to any due diligence questionnaire shall not be deemed part of the Disclosure Schedule and shall not be deemed to be an exception to one or more representations or warranties contained in Section 5 hereof unless such information is specifically included on the Disclosure Schedule in accordance with the provisions of this Section 11.1.
Prior to the Closing, and thereafter with respect to matters pertaining to this Agreement only, all notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier or overnight air courier guaranteeing next day delivery:
if to the Placement Agents, to:
FTN Financial Capital Markets
845 Crossover Lane, Suite 150
Memphis, Tennessee 38117
Telecopier: 901-435-4706
Telephone: 800-456-5460
Attention: James D. Wingett
and
Keefe, Bruyette & Woods, Inc.
787 7th Avenue
4th Floor
New York, New York 10019
Telecopier: 212-403-2000
Telephone: 212-403-1004
Attention: Mitchell Kleinman, General Counsel
with a copy to:
Lewis, Rice & Fingersh, L.C.
500 North Broadway, Suite 2000
St. Louis, Missouri 63102
Telecopier: 314-241-6056
Telephone: 314-444-7600
Attention: Thomas C. Erb, Esq.
and
Sidley Austin Brown & Wood LLP
787 7th Avenue
New York, New York 10019
Telecopier: 212-839-5599
Telephone: 212-839-5300
Attention: Renwick Martin, Esq.
if to the Offerors, to:
Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 98113
Telecopier: 408-947-6919
Telephone: 408-494-4562
Attention: Larry McGovern
with a copy to:
Bingham McCutchen LLP
Three Embarcadero Center
San Francisco, CA 94111
Telecopier: 415-393-2286
Telephone: 415-393-2180
Attention: Keith Ungles, Esq.
All such notices and communications shall be deemed to have been duly given (i) at the time delivered by hand, if personally delivered, (ii) five business days after being deposited in the mail, postage prepaid, if mailed, (iii) when answered back, if telexed, (iv) the next business day after being telecopied, or (v) the next business day after timely delivery to a courier, if sent by overnight air courier guaranteeing next day delivery. From and after the Closing, the foregoing notice provisions shall be superseded by any notice provisions of the Operative Documents under which notice is given. The Placement Agents, the Company, and their respective counsel, may change their respective notice addresses from time to time by written notice to all of the foregoing persons.
Except as expressly set forth herein, this Agreement is made solely for the benefit of the Placement Agents, the Purchaser and the Offerors and any person controlling the Placement Agents, the Purchaser or the Offerors and their respective successors and assigns; and no other person shall acquire or have any right under or by virtue of this Agreement. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties.
This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.
The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAWS PERTAINING TO CONFLICTS OF LAWS) OF THE STATE OF NEW YORK.
This Agreement, together with the Operative Documents and the other documents delivered in connection with the transactions contemplated by this Agreement, is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, together with the Operative Documents and the other documents delivered in connection with the transaction contemplated by this Agreement, supersedes all prior agreements and understandings between the parties with respect to such subject matter.
In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected, it being intended that all of the Placement Agents' and the Purchaser's rights and privileges shall be enforceable to the fullest extent permitted by law.
Signatures appear on the following page
If this Agreement is satisfactory to you, please so indicate by signing the acceptance of this Agreement and deliver such counterpart to the Offerors whereupon this Agreement will become binding between us in accordance with its terms.
Very truly yours,
HERITAGE COMMERCE CORP
By:_______________________
Name:____________________
Title:___________________
HERITAGE COMMERCE CORP STATUTORY TRUST III
By:_______________________
Name:____________________
Title: Administrator
CONFIRMED AND ACCEPTED,
as of the date first set forth above
FTN FINANCIAL CAPITAL MARKETS,
a division of First Tennessee Bank, N.A.,
as a Placement Agent
By:_______________________
Name:____________________
Title:___________________
KEEFE, BRUYETTE & WOODS, INC.
a New York corporation, as a Placement Agent
By:_______________________
Name:____________________
Title:___________________
EXHIBIT A
FORM OF SUBSCRIPTION AGREEMENT
HERITAGE COMMERCE CORP STATUTORY TRUST III
HERITAGE COMMERCE CORP
SUBSCRIPTION AGREEMENT
September 26, 2002
THIS SUBSCRIPTION AGREEMENT (this "Agreement") made among Heritage Commerce Corp Statutory Trust III (the "Trust"), a statutory trust created under the Connecticut Statutory Trust Act (Chapter 615 of Title 34 of the Connecticut General Statutes, Section 500, et seq.), Heritage Commerce Corp, a California corporation, with its principal offices located at 150 Almaden Boulevard, San Jose, CA 95113 (the "Company" and, collectively with the Trust, the "Offerors"), and Preferred Term Securities VII, Ltd. (the "Purchaser").
RECITALS:
ARTICLE I
PURCHASE AND SALE OF CAPITAL SECURITIES
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PURCHASER
ARTICLE III
MISCELLANEOUS
To the Offerors: Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 95113
Attention: Larry McGovern
Fax: 408-947-6919
To the Purchaser: Preferred Term Securities VII, Ltd.
c/o QSPV Limited
P.O. Box 1093 GT
Queensgate House
South Church Street
George Town, Grand Cayman
Cayman Islands
Attention: The Directors
Fax: 345-945-7100
Unless otherwise expressly provided herein, notices shall be deemed to have been given on the date of mailing, except notice of change of address, which shall be deemed to have been given when received.
Signatures appear on the following page
IN WITNESS WHEREOF, I have set my hand the day and year first written above.
PREFERRED TERM SECURITIES VII, LTD.
By: ________________
Print Name: ________________
Title: ___________________
IN WITNESS WHEREOF, this Agreement is agreed to and accepted as of the day and year first written above.
HERITAGE COMMERCE CORP
By:_______________________
Name:____________________
Title:___________________
HERITAGE COMMERCE CORP STATUTORY TRUST III
By:_______________________
Name:____________________
Title: Administrator
EXHIBIT B-1
FORM OF COMPANY COUNSEL OPINION
September 26, 2002
Preferred Term Securities VII, Ltd. |
FTN Financial Capital Markets |
c/o QSPV Limited |
845 Crossover Lane, Suite 150 |
P. O. Box 1093 GT |
Memphis, Tennessee 38117 |
Queensgate House |
|
South Church Street |
Keefe, Bruyette & Woods, Inc. |
George Town, Grand Cayman |
787 7th Avenue |
Cayman Islands |
4th Floor |
New York, New York 10019 |
Ladies and Gentlemen:
We have acted as counsel to Heritage Commerce Corp (the "Company"), a California corporation in connection with a certain Placement Agreement, dated September 18, 2002, (the "Placement Agreement"), between the Company and Heritage Commerce Corp Statutory Trust III (the "Trust"), on one hand, and FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc. (the "Placement Agents"), on the other hand. Pursuant to the Placement Agreement, and subject to the terms and conditions stated therein, the Trust will issue and sell to Preferred Term Securities VII, Ltd. (the "Purchaser"), $4,000,000 aggregate principal amount of Floating Rate Capital Securities (liquidation amount $1,000.00 per capital security) (the "Capital Securities").
Capitalized terms used herein and not otherwise defined shall have the same meanings ascribed to them in the Placement Agreement.
The law covered by the opinions expressed herein is limited to the law of the United States of America and of the State of California.
We have made such investigations of law as, in our judgment, were necessary to render the following opinions. We have also reviewed (a) the Company's Articles of Incorporation, as amended, and its By-Laws, as amended; and (b) such corporate documents, records, information and certificates of the Company and its Subsidiaries, certificates of public officials or government authorities and other documents as we have deemed necessary or appropriate as a basis for the opinions hereinafter expressed. As to certain facts material to our opinions, we have relied, with your permission, upon statements, certificates or representations, including those delivered or made in connection with the above-referenced transaction, of officers and other representatives of the Company and its Subsidiaries and the Trust.
As used herein, the phrase "to our knowledge" or "to the best of our knowledge" or other similar phrase means the actual knowledge of the attorneys who have had active involvement in the transactions described above or who have prepared or signed this opinion letter, or who otherwise have devoted substantial attention to legal matters for the Company.
Based upon and subject to the foregoing and the further qualifications set forth below, we are of the opinion as of the date hereof that:
1. The Company is validly existing and in good standing under the laws of the State of California and is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. Each of the Significant Subsidiaries is validly existing and in good standing under the laws of its jurisdiction of organization. Each of the Company and the Significant Subsidiaries has full corporate power and authority to own or lease its properties and to conduct its business as such business is currently conducted in all material respects. To the best of our knowledge, all outstanding shares of capital stock of the Significant Subsidiaries have been duly authorized and validly issued, and are fully paid and nonassessable except to the extent such shares may be deemed assessable under 12 U.S.C. Section 1831o or 12 U.S.C. Section 55, and are owned of record and beneficially, directly or indirectly, by the Company.
2. The issuance, sale and delivery of the Debentures in accordance with the terms and conditions of the Placement Agreement and the Operative Documents have been duly authorized by all necessary actions of the Company. The issuance, sale and delivery of the Debentures by the Company and the issuance, sale and delivery of the Trust Securities by the Trust do not give rise to any preemptive or other rights to subscribe for or to purchase any shares of capital stock or equity securities of the Company or the Significant Subsidiaries pursuant to the corporate Articles of Incorporation or Charter, By-Laws or other governing documents of the Company or the Significant Subsidiaries, or, to the best of our knowledge, any agreement or other instrument to which either Company or the Subsidiaries is a party or by which the Company or the Significant Subsidiaries may be bound.
3. The Company has all requisite corporate power to enter into and perform its obligations under the Placement Agreement and the Subscription Agreement, and the Placement Agreement and the Subscription Agreement have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company enforceable in accordance with their terms, except as the enforcement thereof may be limited by general principles of equity and by bankruptcy or other laws affecting creditors' rights generally, and except as the indemnification and contribution provisions thereof may be limited under applicable laws and certain remedies may not be available in the case of a non-material breach.
4. Each of the Indenture, the Trust Agreement and the Guarantee Agreement has been duly authorized, executed and delivered by the Company, and is a valid and legally binding obligation of the Company enforceable in accordance with its terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity.
5. The Debentures have been duly authorized, executed and delivered by the Company, are entitled to the benefits of the Indenture and are legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization, receivership, moratorium and other laws affecting the rights and remedies of creditors generally and of general principles of equity.
6. To the best of our knowledge, neither the Company, the Trust, nor any other Subsidiaries of the Company is in breach or violation of, or default under, with or without notice or lapse of time or both, its Articles of Incorporation or Charter, By-Laws or other governing documents (including without limitation, the Trust Agreement). The execution, delivery and performance of the Placement Agreement and the Operative Documents and the consummation of the transactions contemplated by the Placement Agreement and the Operative Documents do not and will not (i) result in the creation or imposition of any material lien, claim, charge, encumbrance or restriction upon any property or assets of the Company or its Subsidiaries, or (ii) conflict with, constitute a material breach or violation of, or constitute a material default under, with or without notice or lapse of time or both, any of the terms, provisions or conditions of (A) the Articles of Incorporation or Charter, By-Laws or other governing documents of the Company or its Subsidiaries, or (B) to the best of our knowledge, any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease, franchise, license or any other agreement or instrument to which the Company or its Subsidiaries is a party or by which any of them or any of their respective properties may be bound or (C) any order, decree, judgment, franchise, license, permit, rule or regulation of any court, arbitrator, government, or governmental agency or instrumentality, domestic or foreign, known to us having jurisdiction over the Company or its Subsidiaries or any of their respective properties which, in the case of each of (i) or (ii) above, is material to the Company and its Subsidiaries on a consolidated basis.
7. Except for filings, registrations or qualifications that may be required by applicable securities laws, no authorization, approval, consent or order of, or filing, registration or qualification with, any person (including, without limitation, any court, governmental body or authority) is required under the laws of the State of California in connection with the transactions contemplated by the Placement Agreement and the Operative Documents in connection with the offer and sale of the Capital Securities as contemplated by the Placement Agreement and the Operative Documents.
8. To the best of our knowledge (i) no action, suit or proceeding at law or in equity is pending or threatened to which the Offerors or their Subsidiaries are or may be a party, and (ii) no action, suit or proceeding is pending or threatened against or affecting the Offerors or their Subsidiaries or any of their properties, before or by any court or governmental official, commission, board or other administrative agency, authority or body, or any arbitrator, wherein an unfavorable decision, ruling or finding could reasonably be expected to have a material adverse effect on the consummation of the transactions contemplated by the Placement Agreement and the Operative Documents or the issuance and sale of the Capital Securities as contemplated therein or the condition (financial or otherwise), earnings, affairs, business, or results of operations of the Offerors and their Subsidiaries on a consolidated basis.
9. Assuming the truth and accuracy of the representations and warranties of the Placement Agents in the Placement Agreement and the Purchaser in the Subscription Agreement, it is not necessary in connection with the offering, sale and delivery of the Capital Securities, the Debentures and the Guarantee Agreement (or the Guarantee) to register the same under the Securities Act of 1933, as amended, under the circumstances contemplated in the Placement Agreement and the Subscription Agreement.
10. Neither the Company nor the Trust is or after giving effect to the offering and sale of the Capital Securities and the consummation of the transactions described in the Placement Agreement will be, an "investment company" or an entity "controlled" by an "investment company," in each case within the meaning of the Investment Company Act of 1940, as amended, without regard to Section 3(c) of such Act.
The opinion expressed in the first two sentences of numbered paragraph 1 of this Opinion Letter is based solely upon certain certificates and confirmations issued by the applicable governmental officer or authority with respect to each of the Company and the Significant Subsidiaries.
With respect to the foregoing opinions, since no member of this firm is actively engaged in the practice of law in the States of Connecticut or New York, we do not express any opinions as to the laws of such states and have (i) relied, with your approval, upon the opinion of Bingham McCutchen LLP with respect to matters of Connecticut law and (ii) assumed, with your approval and without rendering any opinion to such effect, that the laws of the State of New York, in all respects material to this opinion, are substantively identical to the laws of the State of California, without regard to conflict of law provisions.
This opinion is rendered to you solely pursuant to Section 3.1(a) of the Placement Agreement. As such, it may be relied upon by you only and may not be used or relied upon by any other person for any purpose whatsoever without our prior written consent.
Very truly yours,
EXHIBIT B-2
FORM OF CONNECTICUT COUNSEL OPINION
TO THE PARTIES LISTED
ON SCHEDULE I HERETO
Ladies and Gentlemen:
We have acted as special counsel in the State of Connecticut (the "State") for Heritage Commerce Corp Statutory Trust III (the "Trust"), a Connecticut statutory trust formed pursuant to the Amended and Restated Declaration of Trust (the "Trust Agreement") dated as of the date hereof, among Heritage Commerce Corp, a California corporation (the "Sponsor"), State Street Bank and Trust Company of Connecticut, National Association, a national banking association ("State Street"), in its capacity as Institutional Trustee (the "Institutional Trustee"), and Richard L. Conniff, Lawrence D. McGovern and Brad L. Smith, each, an individual, (each, an "Administrator") in connection with the issuance by the Trust to the Holders (as defined in the Trust Agreement) of its capital securities (the "Capital Securities") pursuant to the Placement Agreement dated as of September 18, 2002 (the "Placement Agreement"), the issuance by the Trust to the Sponsor of its Common Securities, pursuant to the Trust Agreement and the acquisition by the Trust from the Sponsor of Debentures, issued pursuant to the Indenture dated as of the date hereof (the "Indenture").
The Institutional Trustee has requested that we deliver this opinion to you in accordance with Section 3.1(b) of the Placement Agreement. Capitalized terms not otherwise defined herein shall have the meanings specified in, or defined by reference in or set forth in the Operative Documents (as defined below).
Our representation of the Trust has been as special counsel for the limited purposes stated above. As to all matters of fact (including factual conclusions and characterizations and descriptions of purpose, intention or other state of mind), we have relied, with your permission, entirely upon (i) the representations and warranties of the parties set forth in the Operative Documents and (ii) certificates delivered to us by the management of State Street, and have assumed, with your permission, without independent inquiry, the accuracy of those representations, warranties and certificates.
We have examined the following documents to which the Trust is a party, each of which is dated the date hereof, unless otherwise noted:
(i) the Trust Agreement;
(ii) the Placement Agreement;
(iii) the Subscription Agreement;
(iv) the Certificate of Common Securities;
(v) the Certificate of Capital Securities;
(vi) the Guarantee Agreement;
(vii) the Certificate of Trust; and
(viii) a Certificate of Legal Existence for the Trust obtained from the Secretary of State of the State of Connecticut dated September 13, 2002 (the "Certificate of Legal Existence").
The documents referenced in subparagraphs (i) through (vii) above are hereinafter referred to collectively as the "Operative Documents."
We have also examined originals, or copies, certified or otherwise identified to our satisfaction, of such other corporate and public records and agreements, instruments, certificates and other documents as we have deemed necessary or appropriate for the purposes of rendering this opinion. For purposes of our opinion rendered in paragraph 1 below, with respect to the legal existence of the Trust, our opinion relies entirely upon and is limited by the Certificate of Legal Existence, which is attached hereto as Exhibit A.
We have assumed, with your permission, the genuineness of all signatures (other than those on behalf of State Street, the Guarantee Trustee, Indenture Trustee, Institutional Trustee and the Trust), the conformity of the originals of all documents reviewed by us as copies, the authenticity and completeness of all original documents reviewed by us in original or copy form and the legal competence of each individual executing any document (other than those individuals executing documents on behalf of State Street, the Guarantee Trustee, Indenture Trustee, Institutional Trustee and the Trust).
When an opinion set forth below is given to the best of our knowledge, or to our knowledge, or with reference to matters of which we are aware or which are known to use, or with another similar qualification, the relevant knowledge or awareness is limited to the actual knowledge or awareness of the individual lawyers in the firm who have participated directly and substantively in the specific transactions to which this opinion relates and without any special or additional investigation undertaken for the purposes of this opinion except as indicated herein.
For the purposes of this opinion we have made such examination of law as we have deemed necessary. The opinions expressed below are limited solely to the internal substantive laws of the State (as applied by courts located in the State without regard to choice of law) and we express no opinion as to the laws of any other jurisdiction. To the extent to which this opinion deals with matters governed by or relating to the laws of any other state or jurisdiction, we have assumed, with your permission, that the Operative Documents are governed by the internal substantive laws of the State.
We express no opinion as to (i) the effect of suretyship defenses, or defenses in the nature thereof, with respect to the obligations of any applicable guarantor, joint obligor, surety, accommodation party, or other secondary obligor or any provisions of the Trust Agreement with respect to indemnification or contribution and (ii) the accuracy or completeness of any exhibits or schedules to the Operative Documents. No opinion is given herein as to the choice of law or internal substantive rules of law that any court or other tribunal may apply to the transactions contemplated by the Operative Documents. No opinion is expressed herein as to the application or effect of federal securities laws or as to the securities or so-called "Blue Sky" laws of Connecticut or of any other state or other jurisdiction.
Our opinion, with your permission, is further subject to the following exceptions, qualifications and assumptions:
(a) We have assumed without any independent investigation that (i) each party to the Operative Documents, other than State Street, the Guarantee Trustee, Indenture Trustee, Institutional Trustee and the Trust, as applicable, at all times relevant thereto, is validly existing and in good standing under the laws of the jurisdiction in which it is organized, and is qualified to do business and in good standing under the laws of each jurisdiction where such qualification is required generally or necessary in order for such party to enforce its rights under such Operative Documents, (ii) each party to the Operative Documents, at all times relevant thereto, had and has the full power, authority and legal right under its certificate of incorporation, partnership agreement, by-laws, and other governing organizational documents, and the applicable corporate, partnership, or other enterprise legislation and other applicable laws, as the case may be (other than State Street, the Guarantee Trustee, Indenture Trustee, Institutional Trustee or the Trust) to execute, deliver and to perform its obligations under, the Operative Documents, and (iii) each party to the Operative Documents other than State Street, the Guarantee Trustee, Indenture Trustee, Institutional Trustee or the Trust has duly executed and delivered each of such agreements and instruments to which it is a party and that the execution and delivery of such agreements and instruments and the transactions contemplated thereby have been duly authorized by proper corporate or other organizational proceedings as to each such party.
(b) We have assumed without any independent investigation (i) that the Institutional Trustee, the Sponsor and the Administrators have received the agreed to and stated consideration for the incurrence of the obligations applicable to it under the Trust Agreement and each of the other Operative Documents, (ii) that each of the Operative Documents (other than the Trust Agreement) is a valid, binding and enforceable obligation of each party thereto other than the Trust, State Street and the Institutional Trustee, as applicable; and, for the purposes of this opinion letter, we herein also assume that each of the Operative Documents (other than the Trust Agreement) constitutes a valid, binding and enforceable obligation of State Street, the Guarantee Trustee and the Indenture Trustee, as applicable under Connecticut and federal law (as to which such matters we are delivering to you a separate opinion letter on this date, which is subject to the assumptions, qualifications and limitations set forth therein).
(c) The enforcement of any obligations of State Street, the Sponsor and the Administrators, as applicable, under the Trust Agreement and the obligations of the Trust under the other Operative Documents may be limited by the receivership, conservatorship and supervisory powers of depository institution regulatory agencies generally, as well as by bankruptcy, insolvency, reorganization, moratorium, marshaling or other laws and rules of law affecting the enforcement generally of creditors' rights and remedies (including such as may deny giving effect to waivers of debtors' or guarantors' rights); and we express no opinion as to the status under any fraudulent conveyance laws or fraudulent transfer laws of any of the obligations of State Street, the Sponsor, the Administrators or the Trust under any of the Operative Documents.
(d) We express no opinion as to the enforceability of any particular provision of the Trust Agreement or the other Operative Documents relating to remedies after default.
(e) We express no opinion as the availability of any specific or equitable relief of any kind.
(f) The enforcement of any rights may in all cases be subject to an implied duty of good faith and fair dealing and to general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity).
(g) We express no opinion as to the enforceability of any particular provision of any of the Operative Documents relating to (i) waivers of rights to object to jurisdiction or venue, or consents to jurisdiction or venue, (ii) waivers of rights to (or methods of) service of process, or rights to trial by jury, or other rights or benefits bestowed by operation of law, (iii) waivers of any applicable defenses, setoffs, recoupments, or counterclaims, (iv) waivers or variations of provisions which are not capable of waiver or variation under Sections 1-102(3), 9-501(3) or other provisions of the Uniform Commercial Code ("UCC") of the State, (v) the grant of powers of attorney to any person or entity, or (vi) exculpation or exoneration clauses, indemnity clauses, and clauses relating to releases or waivers of unmatured claims or rights.
(h) We express no opinion as to the effect of events occurring, circumstances arising, or changes of law becoming effective or occurring, after the date hereof on the matters addressed in this opinion letter, and we assume no responsibility to inform you of additional or changed facts, or changes in law, of which we may become aware.
(i) We express no opinion as to any requirement that any party to the Operative Documents (or any other persons or entities purportedly entitled to the benefits thereof) qualify or register to do business in any jurisdiction in order to be able to enforce its rights thereunder or obtain the benefits thereof.
Based upon the foregoing and subject to the limitations and qualifications set forth herein, we are of the opinion that:
This opinion is rendered solely for the benefit of those institutions listed on Schedule I hereto and their successors and assigns in connection with the transactions contemplated by the Operative Documents and may not be used or relied upon by any other person or for any other purpose.
Very truly yours,
BINGHAM MCCUTCHEN LLP
SCHEDULE I
State Street Bank and Trust Company of Connecticut, National Association
State Street Bank and Trust Company
FTN Financial Capital Markets
Keefe, Bruyette & Woods, Inc.
Preferred Term Securities VII, Ltd.
Preferred Term Securities VII, Inc.
Lewis, Rice & Fingersh, L.C.
Heritage Commerce Corp
Bingham McCutchen LLP
EXHIBIT A TO EXHIBIT B-2
CERTIFICATE OF LEGAL EXISTENCE
(See Tab No. 6)
EXHIBIT B-3
FORM OF TAX COUNSEL OPINION
Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 95113
Heritage Commerce Corp Statutory Trust III
c/o Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 95113
FTN Financial Capital Markets
845 Crossover Lane, Suite 150
Memphis, Tennessee 38117
Keefe, Bruyette & Woods, Inc.
787 7th Avenue
4th Floor
New York, New York 10019
Ladies and Gentlemen:
We have acted as special tax counsel to Heritage Commerce Corp and to Heritage Commerce Corp Statutory Trust III in connection with the proposed issuance of (i) Floating Rate Capital Securities, liquidation amount $1,000.00 per Capital Security (the "Capital Securities") of Heritage Commerce Corp Statutory Trust III, a statutory business trust created under the laws of Connecticut (the "Trust"), pursuant to the terms of the Amended and Restated Declaration of Trust dated as of the date hereof by Heritage Commerce Corp, a California corporation (the "Company"), State Street Bank and Trust Company of Connecticut, National Association, as institutional trustee, and Richard L. Conniff, Lawrence D. McGovern and Brad L. Smith, as Administrators (the "Trust Agreement"), (ii) Junior Subordinated Deferrable Interest Debentures (the "Corresponding Debentures") of the Company issued pursuant to the terms of an Indenture dated as of the date hereof from the Company to State Street Bank and Trust Company of Connecticut, National Association, as trustee (the "Indenture"), which Debentures are to be sold by the Company to the Trust, and (iii) the Guarantee Agreement of the Company with respect to the Capital Securities dated as of the date hereof (the "Guarantee") between the Company and State Street Bank and Trust Company of Connecticut, National Association, as guarantee trustee. The Capital Securities and the Corresponding Debentures are to be issued as contemplated by the Offering Circular (the "Offering Circular") dated September 18, 2002 prepared by Preferred Term Securities VII, Ltd., an entity formed under the Companies Law of the Cayman Islands, and Preferred Term Securities VII, Inc., a Delaware corporation.
We have examined originals or copies, certified or otherwise identified to our satisfaction, of documents, corporate records and other instruments as we have deemed necessary or appropriate for purposes of this opinion including (i) the Offering Circular, (ii) the Indenture, (iii) the form of the Corresponding Debentures attached as an exhibit to the Indenture, (iv) the Trust Agreement, (v) the Guarantee, and (vi) the form of Capital Securities Certificate attached as an exhibit to the Trust Agreement (collectively the "Documents"). Furthermore, we have relied upon certain representations made by the Company and upon the opinion of Bingham McCutchen LLP as to certain matters of Connecticut law. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, the authenticity of the originals of such latter documents, the genuineness of all signatures and the correctness of all representations made therein. We have further assumed that there are no agreements or understandings contemplated therein other than those contained in the Documents.
Based upon the foregoing, and assuming (i) that the final Documents will be substantially identical to the forms examined, (ii) full compliance with all the terms of the final Documents, and (iii) the accuracy of representations made by the Company and delivered to us, we are of the opinion that:
(a) The Corresponding Debentures will be classified as indebtedness of the Company for U.S. federal income tax purposes.
(b) The Trust will be characterized as a grantor trust and not as an association taxable as a corporation for U.S. federal income tax purposes.
The opinions expressed above are based on existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing Treasury regulations, published interpretations by the Internal Revenue Service of the Code and such Treasury regulations, and existing court decisions, any of which could be changed at any time. Any such changes may or may not be retroactively applied, and may result in federal income tax consequences that differ from those reflected in the opinions set forth above. We note that there is no authority directly on point dealing with securities such as the Capital Securities or with transactions of the type described herein, and that the authorities on which this opinion is based are subject to various interpretations. Further, you should be aware that opinions of counsel have no official status and are not binding on the Internal Revenue Service or the courts. Accordingly, we can provide no assurance that the interpretation of the federal income tax laws set forth in our opinions will prevail if challenged by the IRS in an administrative or judicial proceeding.
We have also assumed that each transaction contemplated herein will be carried out strictly in accordance with the Documents. Any variance in the facts may result in Federal income tax consequences that differ from those reflected in the opinions set forth above.
Additionally, we undertake no obligation to update this opinion in the event there is either a change in the legal authorities, in the facts (including the taking of any action by any party to any of the transactions described in the Documents relating to such transactions) or in the Documents on which this opinion is based, or an inaccuracy in any of the representations upon which we have relied in rendering this opinion.
We express no opinion with respect to any matter not specifically addressed by the foregoing opinions, including state or local tax consequences, or any federal, state, or local issue not specifically referred to and discussed above including, without limitation, the effect on the matters covered by this opinion of the laws of any other jurisdiction.
This letter is delivered for the benefit of the specified addressees and may not be relied upon by any other person. No portion of this letter may be quoted or otherwise referred to in any document or delivered to any other person or entity without the express written consent of Lewis, Rice & Fingersh, L.C. This opinion letter is rendered as of the date set forth above.
Very truly yours,
LEWIS, RICE & FINGERSH, L.C.
Lewis, Rice & Fingersh, L.C.
500 N. Broadway, Suite 2000
St. Louis, Missouri 63102
Attention: Lawrence H. Weltman, Esq.
Re: Representations Concerning the Issuance of Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Debentures") to Heritage Commerce Corp Statutory Trust III (the "Trust") and Sale of Trust Securities (the "Trust Securities") of the Trust
Ladies and Gentlemen:
In accordance with your request, Heritage Commerce Corp (the "Company") hereby makes the following representations in connection with the preparation of your opinion letter as to the United States federal income tax consequences of the issuance by the Company of the Debentures to the Trust and the sale of the Trust Securities.
Company hereby represents that:
The above representations are accurate as of the date below and will continue to be accurate through the issuance of the Trust Securities, unless you are otherwise notified by us in writing. The undersigned understands that you will rely on the foregoing in connection with rendering certain legal opinions, and possesses the authority to make the representations set forth in this letter on behalf of the Company.
Very truly yours,
HERITAGE COMMERCE CORP
Date: September 20, 2002 By: ___________________________________
Title: ___________________________________
EXHIBIT C
SIGNIFICANT SUBSIDIARIES
Heritage Bank of Commerce
Heritage Bank East Bay
Heritage Bank South Valley
Bank of Los Altos
EXHIBIT D
FORM OF QUARTERLY REPORT
Preferred Term Securities VII, Ltd.
c/o The Bank of New York
Collateralized Debt Obligation Group
101 Barclay Street, 8E
New York, New York 10286
Attention: Franco B. Talavera
CDO Relationship Manager
BANK HOLDING COMPANY
As of [March 31, June 30, September 30 or December 31], 20__
Tier 1 to Risk Weighted Assets _________%
Ratio of Double Leverage _________%
Non-Performing Assets to Loans and OREO _________%
Ratio of Reserves to Non-Performing Loans _________%
Ratio of Net Charge-Offs to Loans _________%
Return on Average Assets (annualized)** _________%
Net Interest Margin (annualized)** _________%
Efficiency Ratio _________%
Ratio of Loans to Assets _________%
Ratio of Loans to Deposits _________%
Total Assets $_________
Year to Date Income $_________
___________________
*A table describing the quarterly report calculation procedures is provided on page D-2
** To annualize Return on Average Assets and Net Interest Margin do the following:
1st Quarter-multiply income statement item by 4, then divide by balance sheet item(s)
2nd Quarter-multiply income statement item by 2,then divide by balance sheet item(s)
3rd Quarter-divide income statement item by 3, then multiply by 4, then divide by balance sheet item(s)
4th Quarter-should already be an annual number
NO ADJUSTMENT SHOULD BE MADE TO BALANCE SHEET ITEMS
Financial Definitions
Report Item |
Corresponding FRY-9C or LP Line Items with Line Item corresponding Schedules |
Description of Calculation |
"Tier 1 Capital" to Risk Weighted Assets |
BHCK7206 Schedule HC-R |
Tier 1 Risk Ratio: Core Capital (Tier 1)/ Risk-Adjusted Assets |
Ratio of Double Leverage |
(BHCP0365)/(BHCP3210) Schedule PC in the LP |
Total equity investments in subsidiaries divided by the total equity capital. This field is calculated at the parent company level. "Subsidiaries" include bank, bank holding company, and nonbank subsidiaries. |
Non-Performing Assets to Loans and OREO |
(BHCK5525-BHCK3506+BHCK5526-BHCK3507+BHCK2744)/(BHCK2122+BHCK2744) Schedules HC-C, HC-M & HC-N |
Total Nonperforming Assets (NPLs+Foreclosed Real Estate+Other Nonaccrual & Repossessed Assets)/ Total Loans + Foreclosed Real Estate |
Ratio of Reserves to Non-Performing Loans |
(BHCK3123+BHCK3128)/(BHCK5525-BHCK3506+BHCK5526-BHCK3507) Schedules HC & HC-N |
Total Loan Loss and Allocated Transfer Risk Reserves/ Total Nonperforming Loans (Nonaccrual + Restructured) |
Ratio of Net Charge-Offs to Loans |
(BHCK4635-BHCK4605)/(BHCK3516) Schedules HI-B & HC-K |
Net charge offs for the period as a percentage of average loans. |
Return on Assets |
(BHCK4340/BHCK3368) Schedules HI & HC-K |
Net Income as a percentage of Assets. |
Net Interest Margin |
(BHCK4519)/(BHCK3515+BHCK3365+BHCK3516+BHCK3401+BHCKB985) Schedules HI Memorandum and HC-K |
(Net Interest Income Fully Taxable Equivalent, if available / Average Earning Assets) |
Efficiency Ratio |
(BHCK4093)/(BHCK4519+BHCK4079) Schedule HI |
(Noninterest Expense)/ (Net Interest Income Fully Taxable Equivalent, if available, plus Noninterest Income) |
Ratio of Loans to Assets |
(BHCKB528+BHCK5369)/BHCK2170) Schedule HC |
Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/ Total Assets |
Ratio of Loans to Deposits |
(BHCKB528+BHCK5369)/(BHDM6631+BHDM6636+BHFN6631+BHFN6636) Schedule HC |
Total Loans & Leases (Net of Unearned Income & Gross of Reserve)/ Total Deposits (Includes Domestic and Foreign Deposits) |
Total Assets |
(BHCK2170) Schedule HC |
The sum of total assets. Includes cash and balances due from depository institutions; securities; federal funds sold and securities purchased under agreements to resell; loans and lease financing receivables; trading assets; premises and fixed assets; other real estate owned; investments in unconsolidated subsidiaries and associated companies; customer's liability on acceptances outstanding; intangible assets; and other assets. |
Net Income |
(BHCK4300) Schedule HI |
The sum of income (loss) before extraordinary items and other adjustments and extraordinary items; and other adjustments, net of income taxes. |
Exhibit 4.9
AMENDED AND RESTATED DECLARATION
0F TRUST
by and among
STATE STREET BANK AND TRUST COMPANY
OF CONNECTICUT, NATIONAL ASSOCIATION,
as Institutional Trustee,
HERITAGE COMMERCE CORP,
as Sponsor,
and
RICHARD L. CONIFF, LAWRENCE D. MCGOVERN
and BRAD L. SMITH,
as Administrators,
Dated as of September 26, 2002
TABLE OF CONTENTS
Page
ARTICLE I INTERPRETATION AND DEFINITIONS
*Section 1.1.
Definitions.ARTICLE II ORGANIZATION
*Section 2.1.
Name. *Section 2.2.
Office. *Section 2.3.
Purpose. *Section 2.4.
Authority. *Section 2.5.
Title to Property of the Trust. *Section 2.6.
Powers and Duties of the Institutional Trustee and the Administrators. *Section 2.7.
Prohibition of Actions by the Trust and the Institutional Trustee. *Section 2.8.
Powers and Duties of the Institutional Trustee. *Section 2.9.
Certain Duties and Responsibilities of the Institutional Trustee and Administrators. *Section 2.10.
Certain Rights of Institutional Trustee. *Section 2.11.
Execution of Documents. *Section 2.12.
Not Responsible for Recitals or Issuance of Securities. *Section 2.13.
Duration of Trust. *Section 2.14.
Mergers. *ARTICLE III SPONSOR
*Section 3.1.
Sponsor's Purchase of Common Securities. *Section 3.2.
Responsibilities of the Sponsor. *Section 3.3.
Expenses. *Section 3.4.
Right to Proceed. *ARTICLE IV INSTITUTIONAL TRUSTEE AND ADMINISTRATORS
*Section 4.1.
Institutional Trustee; Eligibility. *Section 4.2.
Administrators. *Section 4.3.
Appointment, Removal and Resignation of Institutional Trustee and Administrators. *Section 4.4.
Institutional Trustee Vacancies. *Section 4.5.
Effect of Vacancies. *Section 4.6.
Meetings of the Institutional Trustee and the Administrators. *Section 4.7.
Delegation of Power. *Section 4.8.
Conversion, Consolidation or Succession to Business. *ARTICLE V DISTRIBUTIONS
*Section 5.1.
Distributions. *ARTICLE VI ISSUANCE OF SECURITIES
*Section 6.1.
General Provisions Regarding Securities. *Section 6.2.
Paying Agent, Transfer Agent and Registrar. *Section 6.3.
Form and Dating. *Section 6.4.
Mutilated, Destroyed, Lost or Stolen Certificates. *Section 6.5.
Temporary Securities. *Section 6.6.
Cancellation. *Section 6.7.
Rights of Holders; Waivers of Past Defaults. *ARTICLE VII DISSOLUTION AND TERMINATION OF TRUST
*Section 7.1.
Dissolution and Termination of Trust. *ARTICLE VIII TRANSFER OF INTERESTS
*Section 8.1.
General. *Section 8.2.
Transfer Procedures and Restrictions. *Section 8.3.
Deemed Security Holders. *ARTICLE IX LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, INSTITUTIONAL TRUSTEE OR OTHERS
*Section 9.1.
Liability. *Section 9.2.
Exculpation. *Section 9.3.
Fiduciary Duty. *Section 9.4.
Indemnification. *Section 9.5.
Outside Businesses. *Section 9.6.
Compensation; Fee. *ARTICLE X ACCOUNTING
*Section 10.1.
Fiscal Year. *Section 10.2.
Certain Accounting Matters. *Section 10.3.
Banking. *Section 10.4.
Withholding. *ARTICLE XI AMENDMENTS AND MEETINGS
*Section 11.1.
Amendments. *Section 11.2.
Meetings of the Holders of Securities; Action by Written Consent. *ARTICLE XII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE
*Section 12.1.
Representations and Warranties of Institutional Trustee. *ARTICLE XIII MISCELLANEOUS
*Section 13.1.
Notices. *Section 13.2.
Governing Law. *Section 13.3.
Intention of the Parties. *Section 13.4.
Headings. *Section 13.5.
Successors and Assigns. *Section 13.6.
Partial Enforceability. *Section 13.7.
Counterparts. *
Annex I Terms of Securities
Exhibit A-1 Form of Capital Security Certificate
Exhibit A-2 Form of Common Security Certificate
Exhibit B Specimen of Initial Debenture
Exhibit C Placement Agreement
AMENDED AND RESTATED
DECLARATION OF TRUST
OF
HERITAGE COMMERCE CORP STATUTORY TRUST III
September 26, 2002
AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") dated and effective as of September 26, 2002, by the Institutional Trustee (as defined herein), the Administrators (as defined herein), the Sponsor (as defined herein) and by the holders, from time to time, of undivided beneficial interests in the Trust (as defined herein) to be issued pursuant to this Declaration;
WHEREAS, the Institutional Trustee, the Administrators and the Sponsor established Heritage Commerce Corp Statutory Trust III (the "Trust"), a statutory trust under the Statutory Trust Act (as defined herein) pursuant to a Declaration of Trust dated as of September 12, 2002 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Connecticut on September 12, 2002, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain debentures of the Debenture Issuer (as defined herein);
WHEREAS, as of the date hereof, no interests in the Trust have been issued; and
WHEREAS, the Institutional Trustee, the Administrators and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration;
NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a statutory trust under the Statutory Trust Act and that this Declaration constitutes the governing instrument of such statutory trust, the Institutional Trustee declares that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration. The parties hereto hereby agree as follows:
ARTICLE I
INTERPRETATION AND DEFINITIONS
"Additional Interest" has the meaning set forth in the Indenture.
"Administrative Action" has the meaning set forth in paragraph 4(a) of Annex I.
"Administrators" means each of Richard L. Conniff, Lawrence D. McGovern and Brad L. Smith, solely in such Person's capacity as Administrator of the Trust created and continued hereunder and not in such Person's individual capacity, or such Administrator's successor in interest in such capacity, or any successor appointed as herein provided.
"Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder.
"Authorized Officer" of a Person means any Person that is authorized to bind such Person.
"Bankruptcy Event" means, with respect to any Person:
(a) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of such Person or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or
(b) such Person shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of such Person of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due.
"Business Day" means any day other than Saturday, Sunday or any other day on which banking institutions in New York City or Hartford, Connecticut are permitted or required by any applicable law to close.
"Capital Securities" has the meaning set forth in paragraph 1(a) of Annex I.
"Capital Security Certificate" means a definitive Certificate in fully registered form representing a Capital Security substantially in the form of Exhibit A- 1.
"Capital Treatment Event" has the meaning set forth in paragraph 4(a) of Annex I.
"Certificate" means any certificate evidencing Securities.
"Closing Date" has the meaning set forth in the Placement Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation.
"Common Securities" has the meaning set forth in paragraph 1(b) of Annex I.
"Common Security Certificate" means a definitive Certificate in fully registered form representing a Common Security substantially in the form of Exhibit A- 2.
"Company Indemnified Person" means (a) any Administrator; (b) any Affiliate of any Administrator; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrator; or (d) any officer, employee or agent of the Trust or its Affiliates.
"Corporate Trust Office" means the office of the Institutional Trustee at which the corporate trust business of the Institutional Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Declaration is located at 225 Asylum Street, Goodwin Square, Hartford, Connecticut 06103.
"Coupon Rate" has the meaning set forth in paragraph 2(a) of Annex I.
"Covered Person" means: (a) any Administrator, officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) any of the Trust's Affiliates; and (b) any Holder of Securities.
"Creditor" has the meaning set forth in Section 3.3.
"Debenture Issuer" means Heritage Commerce Corp, a California corporation, in its capacity as issuer of the Debentures under the Indenture.
"Debenture Trustee" means State Street Bank and Trust Company of Connecticut, National Association, as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee.
"Debentures" means the Floating Rate Junior Subordinated Deferrable Interest Debentures due 2032 to be issued by the Debenture Issuer under the Indenture.
"Defaulted Interest" has the meaning set forth in the Indenture.
"Determination Date" has the meaning set forth in paragraph 4(a) of Annex I.
"Direct Action" has the meaning set forth in Section 2.8(d).
"Distribution" means a distribution payable to Holders of Securities in accordance with Section 5.1.
"Distribution Payment Date" has the meaning set forth in paragraph 2(b) of Annex I.
"Distribution Period" has the meaning set forth in paragraph 2(a) of Annex I.
"Distribution Rate" means, for the period beginning on (and including) the date of original issuance and ending on (but excluding) December 26, 2002, 5.220%, and for the period beginning on (and including) December 26, 2002 and thereafter, the Coupon Rate.
"Event of Default" means any one of the following events (whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):
(a) the occurrence of an Indenture Event of Default; or
(b) default by the Trust in the payment of any Redemption Price of any Security when it becomes due and payable; or
(c) default in the performance, or breach, in any material respect, of any covenant or warranty of the Institutional Trustee in this Declaration (other than those specified in clause (a) or (b) above) and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail to the Institutional Trustee and to the Sponsor by the Holders of at least 25% in aggregate liquidation amount of the outstanding Capital Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or
(d) the occurrence of a Bankruptcy Event with respect to the Institutional Trustee if a successor Institutional Trustee has not been appointed within 90 days thereof.
"Extension Period" has the meaning set forth in paragraph 2(b) of Annex I.
"Federal Reserve" has the meaning set forth in paragraph 3 of Annex I.
"Fiduciary Indemnified Person" shall mean the Institutional Trustee, any Affiliate of the Institutional Trustee and any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Institutional Trustee.
"Fiscal Year" has the meaning set forth in Section 10.1.
"Guarantee" means the guarantee agreement to be dated as of the Closing Date, of the Sponsor in respect of the Capital Securities.
"Holder" means a Person in whose name a Certificate representing a Security is registered, such Person being a beneficial owner within the meaning of the Statutory Trust Act.
"Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person.
"Indenture" means the Indenture dated as of the Closing Date, between the Debenture Issuer and the Debenture Trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued, as such Indenture and any supplemental indenture may be amended, supplemented or otherwise modified from time to time.
"Indenture Event of Default" means an "Event of Default" as defined in the Indenture.
"Institutional Trustee" means the Trustee meeting the eligibility requirements set forth in Section 4.1.
"Interest" means any interest due on the Debentures including any Additional Interest and Defaulted Interest.
"Investment Company" means an investment company as defined in the Investment Company Act.
"Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation.
"Investment Company Event" has the meaning set forth in paragraph 4(a) of Annex I.
"Liquidation" has the meaning set forth in paragraph 3 of Annex I.
"Liquidation Distribution" has the meaning set forth in paragraph 3 of Annex I.
"Majority in liquidation amount of the Securities" means Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class.
"Maturity Date" has the meaning set forth in paragraph 4(a) of Annex I.
"Officers' Certificates" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant providing for it in this Declaration shall include:
(a) a statement that each officer signing the Certificate has read the covenant or condition and the definitions relating thereto;
(b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Certificate;
(c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with.
"OTS" has the meaning set forth in paragraph 3 of Annex I.
"Paying Agent" has the meaning specified in Section 6.2.
"Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature.
"Placement Agreement" means the Placement Agreement relating to the offering and sale of Capital Securities in the form of Exhibit C.
"Property Account" has the meaning set forth in Section 2.8(c).
"Pro Rata" has the meaning set forth in paragraph 8 of Annex I.
"Quorum" means a majority of the Administrators or, if there are only two Administrators, both of them.
"Redemption Date" has the meaning set forth in paragraph 4(a) of Annex I.
"Redemption/Distribution Notice" has the meaning set forth in paragraph 4(e) of Annex I.
"Redemption Price" has the meaning set forth in paragraph 4(a) of Annex I.
"Registrar" has the meaning set forth in Section 6.2.
"Responsible Officer" means, with respect to the Institutional Trustee, any officer within the Corporate Trust Office of the Institutional Trustee, including any vice-president, any assistant vice-president, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Corporate Trust Office of the Institutional Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject.
"Restricted Securities Legend" has the meaning set forth in Section 8.2(b).
"Rule 3a-5" means Rule 3a-5 under the Investment Company Act.
"Rule 3a-7" means Rule 3a-7 under the Investment Company Act.
"Securities" means the Common Securities and the Capital Securities.
"Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation.
"Special Event" has the meaning set forth in paragraph 4(a) of Annex I.
"Special Redemption Date" has the meaning set forth in paragraph 4(a) of Annex I.
"Special Redemption Price" has the meaning set forth in paragraph 4(a) of Annex I.
"Sponsor" means Heritage Commerce Corp, a California corporation, or any successor entity in a merger, consolidation or amalgamation, in its capacity as sponsor of the Trust.
"Statutory Trust Act" means Chapter 615 of Title 34 of the Connecticut General Statutes, Sections 500, et seq. as may be amended from time to time.
"Successor Entity" has the meaning set forth in Section 2.14(b).
"Successor Institutional Trustee" has the meaning set forth in Section 4.3(a).
"Successor Securities" has the meaning set forth in Section 2.14(b).
"Super Majority" has the meaning set forth in paragraph 5(b) of Annex I.
"Tax Event" has the meaning set forth in paragraph 4(a) of Annex I.
"10% in liquidation amount of the Securities" means Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class.
"3-Month LIBOR" has the meaning set forth in paragraph 4(a) of Annex I.
"Transfer Agent" has the meaning set forth in Section 6.2.
"Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
"Trust Property" means (a) the Debentures, (b) any cash on deposit in, or owing to, the Property Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Institutional Trustee pursuant to the trusts of this Declaration.
"U.S. Person" means a United States Person as defined in Section 7701(a)(30) of the Code.
ARTICLE II
ORGANIZATION
The Institutional Trustee must exercise the powers set forth in this Section 2.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 2.3, and the Institutional Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 2.3.
Subject to the provisions of Section 2.9:
ARTICLE III
SPONSOR
In connection with the offering, sale and issuance of the Debentures to the Trust and in connection with the sale of the Securities by the Trust, the Sponsor, in its capacity as Debenture Issuer, shall:
The Sponsor's obligations under this Section 3.3 shall be for the benefit of, and shall be enforceable by, any Person to whom such debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor has received notice hereof. Any such Creditor may enforce the Sponsor's obligations under this Section 3.3 directly against the Sponsor and the Sponsor irrevocably waives any right or remedy to require that any such Creditor take any action against the Trust or any other Person before proceeding against the Sponsor. The Sponsor agrees to execute such additional agreements as may be necessary or desirable in order to give full effect to the provisions of this Section 3.3.
ARTICLE IV
INSTITUTIONAL TRUSTEE AND ADMINISTRATORS
Subject to the immediately preceding paragraph, the Institutional Trustee may resign at any time by giving written notice thereof to the Holders of the Securities and by appointing a Successor Institutional Trustee. Upon the resignation of the Institutional Trustee, the Institutional Trustee shall appoint a successor by requesting from at least three Persons meeting the eligibility requirements, its expenses and charges to serve as the successor Institutional Trustee on a form provided by the Administrators, and selecting the Person who agrees to the lowest expense and charges (the "Successor Institutional Trustee"). If the instrument of acceptance by the Successor Institutional Trustee required by this Section 4.3 shall not have been delivered to the Institutional Trustee within 60 days after the giving of such notice of resignation or delivery of the instrument of removal, the Institutional Trustee may petition, at the expense of the Trust, any Federal, state or District of Columbia court of competent jurisdiction for the appointment of a Successor Institutional Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Institutional Trustee. The Institutional Trustee shall have no liability for the selection of such successor pursuant to this Section 4.3.
The Institutional Trustee may be removed by the act of the Holders of a Majority in liquidation amount of the Capital Securities, delivered to the Institutional Trustee (in its individual capacity and on behalf of the Trust) if an Event of Default shall have occurred and be continuing. If the Institutional Trustee shall be so removed, the Holders of Capital Securities, by act of the Holders of a Majority in liquidation amount of the Capital Securities then outstanding delivered to the Institutional Trustee, shall promptly appoint a Successor Institutional Trustee, and such Successor Institutional Trustee shall comply with the applicable requirements of this Section 4.3. If no Successor Institutional Trustee shall have been so appointed by the Holders of a Majority in liquidation amount of the Capital Securities and accepted appointment in the manner required by this Section 4.3, within 30 days after delivery of an instrument of removal, any Holder who has been a Holder of the Securities for at least 6 months may, on behalf of himself and all others similarly situated, petition any Federal, state or District of Columbia court of competent jurisdiction for the appointment of the Successor Institutional Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Institutional Trustee.
The Institutional Trustee shall give notice of its resignation and removal and each appointment of a Successor Institutional Trustee to all Holders in the manner provided in Section 13.1(d) and shall give notice to the Sponsor. Each notice shall include the name of the Successor Institutional Trustee and the address of its Corporate Trust Office.
ARTICLE V
DISTRIBUTIONS
ARTICLE VI
ISSUANCE OF SECURITIES
The Capital Securities are being offered and sold by the Trust pursuant to the Placement Agreement in definitive, registered form without coupons and with the Restricted Securities Legend.
If:
then, in the absence of notice that such Certificate shall have been acquired by a protected purchaser, an Administrator on behalf of the Trust shall execute (and in the case of a Capital Security Certificate, the Institutional Trustee shall authenticate) and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under this Section 6.4, the Registrar or the Administrators may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Certificate issued pursuant to this Section shall constitute conclusive evidence of an ownership interest in the relevant Securities, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time.
The Holders of at least a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default or Event of Default, except a default or Event of Default in the payment of principal or interest (unless such default or Event of Default has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Debenture Trustee) or a default or Event of Default in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Debenture. No such rescission shall affect any subsequent default or impair any right consequent thereon.
Upon receipt by the Institutional Trustee of written notice declaring such an acceleration, or rescission and annulment thereof, by Holders of any part of the Capital Securities, a record date shall be established for determining Holders of outstanding Capital Securities entitled to join in such notice, which record date shall be at the close of business on the day the Institutional Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day that is 90 days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice that has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 6.7.
ARTICLE VII
DISSOLUTION AND TERMINATION OF TRUST
ARTICLE VIII
TRANSFER OF INTERESTS
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE SPONSOR OR THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE SPONSOR'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE SPONSOR OR THE TRUST. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $500,000.00 (500 SECURITIES) AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER.
THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.
ARTICLE IX
LIMITATION OF LIABILITY OF
HOLDERS OF SECURITIES, INSTITUTIONAL TRUSTEE OR OTHERS
The Sponsor agrees:
The provisions of this Section 9.6 shall survive the dissolution of the Trust and the termination of this Declaration and the removal or resignation of the Institutional Trustee.
No Trustee may claim any lien or charge on any property of the Trust as a result of any amount due pursuant to this Section 9.6.
ARTICLE X
ACCOUNTING
The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code.
ARTICLE XI
AMENDMENTS AND MEETINGS
provided, however, that no such modification, elimination or addition referred to in clauses (i), (ii) or (iii) shall adversely affect in any material respect the powers, preferences or special rights of Holders of Capital Securities.
ARTICLE XII
REPRESENTATIONS OF INSTITUTIONAL TRUSTEE
ARTICLE XIII
MISCELLANEOUS
Heritage Commerce Corp Statutory Trust III
c/o Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 95113
Attention: Larry McGovern
Telecopy: 408-947-6919
State Street Bank and Trust Company of Connecticut, National Association
225 Asylum Street, Goodwin Square
Hartford, Connecticut 06103
Attention: Vice President, Corporate Trust Department
Telecopy: 860-244-1889
With a copy to:
State Street Bank and Trust Company
P.O. Box 778
Boston, Massachusetts 02102-0778
Attention: Paul D. Allen, Corporate Trust Department
Telecopy: 617-662-1462
Heritage Commerce Corp
150 Almaden Boulevard
San Jose, CA 95113
Attention: Larry McGovern
Telecopy: 408-947-6919
All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver.
Signatures appear on the following page
IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written.
STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL ASSOCIATION,
as Institutional Trustee
By: _________________________
Name:
Title:
HERITAGE COMMERCE CORP, as Sponsor
By: _________________________
Name:
Title:
HERITAGE COMMERCE CORP STATUTORY TRUST III
By: _________________________
Administrator
By: _________________________
Administrator
By: _________________________
Administrator
ANNEX I
TERMS OF SECURITIES
Pursuant to Section 6.1 of the Amended and Restated Declaration of Trust, dated as of September 26, 2002 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities and the Common Securities are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration):
The Sponsor, as the Holder of all of the Common Securities, has the right at any time to dissolve the Trust (including, without limitation, upon the occurrence of a Special Event), subject to the receipt by the Debenture Issuer of prior approval from the Board of Governors of the Federal Reserve System and any successor federal agency that is primarily responsible for regulating the activities of the Sponsor (the "Federal Reserve"), if the Sponsor is a bank holding company, or from the Office of Thrift Supervision and any successor federal agency that is primarily responsible for regulating the activities of Sponsor, (the "OTS") if the Sponsor is a savings and loan holding company, in either case if then required under applicable capital guidelines or policies of the Federal Reserve or OTS, as applicable, and, after satisfaction of liabilities to creditors of the Trust, cause the Debentures to be distributed to the Holders of the Securities on a Pro Rata basis in accordance with the aggregate stated liquidation amount thereof.
If a Liquidation of the Trust occurs as described in clause (i), (ii), (iii) or (v) in Section 7.1(a) of the Declaration, the Trust shall be liquidated by the Institutional Trustee as expeditiously as it determines to be possible by distributing, after satisfaction of liabilities to creditors of the Trust, to the Holders of the Securities, the Debentures on a Pro Rata basis to the extent not satisfied by the Debenture Issuer, unless such distribution is determined by the Institutional Trustee not to be practical, in which event such Holders will be entitled to receive out of the assets of the Trust available for distribution to the Holders, after satisfaction of liabilities of creditors of the Trust to the extent not satisfied by the Debenture Issuer, an amount equal to the Liquidation Distribution. An early Liquidation of the Trust pursuant to clause (iv) of Section 7.1(a) of the Declaration shall occur if the Institutional Trustee determines that such Liquidation is possible by distributing, after satisfaction of liabilities to creditors of Trust, to the Holders of the Securities on a Pro Rata basis, the Debentures, and such distribution occurs.
If, upon any such Liquidation the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on such Capital Securities shall be paid to the Holders of the Trust Securities on a Pro Rata basis, except that if an Event of Default has occurred and is continuing, the Capital Securities shall have a preference over the Common Securities with regard to such distributions.
After the date for any distribution of the Debentures upon dissolution of the Trust (i) the Securities of the Trust will be deemed to be no longer outstanding, (ii) upon surrender of a Holder's Securities certificate, such Holder of the Securities will receive a certificate representing the Debentures to be delivered upon such distribution, and (iii) any certificates representing the Securities still outstanding will be deemed to represent undivided beneficial interests in such of the Debentures as have an aggregate principal amount equal to the aggregate stated liquidation amount with an interest rate identical to the Distribution Rate of, and bearing accrued and unpaid interest equal to accrued and unpaid distributions on, the Securities until such certificates are presented to the Debenture Issuer or its agent for transfer or reissuance (and until such certificates are so surrendered, no payments of interest or principal shall be made to Holders of Securities in respect of any payments due and payable under the Debentures; provided, however that such failure to pay shall not be deemed to be an Event of Default and shall not entitle the Holder to the benefits of the Guarantee), and (iv) all rights of Holders of Securities under the Declaration shall cease, except the right of such Holders to receive Debentures upon surrender of certificates representing such Securities.
"3-Month LIBOR" means the London interbank offered interest rate for three-month, U.S. dollar deposits determined by the Debenture Trustee in the following order of priority:
(1) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date (as defined below). "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits;
(2) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations;
(3) if fewer than two such quotations are provided as requested in clause (2) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and
(4) if fewer than two such quotations are provided as requested in clause (3) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period.
If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date.
The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law.
"Capital Treatment Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of any amendment to, or change (including any announced prospective change) in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or as the result of any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that the Sponsor will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate liquidation amount of the Debentures as "Tier 1 Capital" (or its then equivalent) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to the Sponsor (or if the Sponsor is not a bank holding company, such guidelines applied to the Sponsor as if the Sponsor were subject to such guidelines); provided, however, that the inability of the Sponsor to treat all or any portion of the liquidation amount of the Debentures as Tier l Capital shall not constitute the basis for a Capital Treatment Event, if such inability results from the Sponsor having cumulative preferred stock, minority interests in consolidated subsidiaries, or any other class of security or interest which the Federal Reserve or OTS, as applicable, may now or hereafter accord Tier 1 Capital treatment in excess of the amount which may now or hereafter qualify for treatment as Tier 1 Capital under applicable capital adequacy guidelines; provided further, however, that the distribution of Debentures in connection with the Liquidation of the Trust shall not in and of itself constitute a Capital Treatment Event unless such Liquidation shall have occurred in connection with a Tax Event or an Investment Company Event.
"Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the particular Distribution Period for which a Coupon Rate is being determined.
"Investment Company Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation or written change (including any announced prospective change) in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within 90 days of the date of such opinion, will be considered an Investment Company that is required to be registered under the Investment Company Act which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Debentures.
"Maturity Date" means September 26, 2032.
"Redemption Date" shall mean the date fixed for the redemption of Capital Securities, which shall be March 26, June 26, September 26 or December 26 commencing September 26, 2007.
"Redemption Price" means 100% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest on such Debentures to the Redemption Date.
"Special Event" means a Tax Event, an Investment Company Event or a Capital Treatment Event.
"Special Redemption Date" means a date on which a Special Event redemption occurs, which shall be March 26, June 26, September 26 or December 26.
"Special Redemption Price" means (i) 107.5% of the principal amount of the Debentures being redeemed on a Special Redemption Date that occurs before September 26, 2007 and (ii) 100% of the principal amount of the Debentures being redeemed on a Special Redemption Date that occurs on September 26, 2007 or after, plus, in each case, accrued and unpaid interest on such Debentures to the Special Redemption Date.
"Tax Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement (including any private letter ruling, technical advice memorandum, field service advice, regulatory procedure, notice or announcement including any notice or announcement of intent to adopt such procedures or regulations (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Debenture Issuer or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, there is more than an insubstantial risk that: (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures; (ii) interest payable by the Debenture Issuer on the Debentures is not, or within 90 days of the date of such opinion, will not be, deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes; or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges.
In the event the consent of the Institutional Trustee, as the holder of the Debentures is required under the Indenture with respect to any amendment, modification or termination of the Indenture, the Institutional Trustee shall request the direction of the Holders of the Securities with respect to such amendment modification or termination and shall vote with respect to such amendment, modification or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require the consent of a Super-Majority, the Institutional Trustee may only give such consent at the direction of the Holders of at least the proportion in liquidation amount of the Securities outstanding which the relevant Super-Majority represents of the aggregate principal amount of the Debentures outstanding. The Institutional Trustee shall not take any such action in accordance with the directions of the Holders of the Securities unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes.
A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Event of Default hereunder. Any required approval or direction of Holders of the Capital Securities may be given at a separate meeting of Holders of the Capital Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Institutional Trustee will cause a notice of any meeting at which Holders of the Capital Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of the Capital Securities. Each such notice will include a statement setting forth the following information (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Capital Securities will be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities.
Notwithstanding that Holders of the Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not entitle the Holder thereof to vote or consent and shall, for purposes of such vote or consent, be treated as if such Capital Securities were not outstanding.
In no event will Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Sponsor as the Holder of all of the Common Securities of the Trust. Under certain circumstances as more fully described in the Declaration, Holders of Capital Securities have the right to vote to appoint, remove or replace the Institutional Trustee.
Any approval or direction of Holders of the Common Securities may be given at a separate meeting of Holders of the Common Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Administrators will cause a notice of any meeting at which Holders of the Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of the Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents.
No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities.
EXHIBIT A-1
FORM OF CAPITAL SECURITY CERTIFICATE
[FORM OF FACE OF SECURITY]
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY ONLY (A) TO THE SPONSOR OR THE TRUST, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A IN ACCORDANCE WITH RULE 144A, (D) TO A NON-U.S. PERSON IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 (AS APPLICABLE) OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE SPONSOR'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE SPONSOR OR THE TRUST. HEDGING TRANSACTIONS INVOLVING THIS SECURITY MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.
THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $500,000.00 (500 SECURITIES) AND MULTIPLES OF $1,000.00 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $500,000.00 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER.
THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS.
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS.
Certificate Number P-1 4,000 Capital Securities
September 26, 2002
Certificate Evidencing Floating Rate Capital Securities
of
Heritage Commerce Corp Statutory Trust III
(liquidation amount $1,000.00 per Capital Security)
Heritage Commerce Corp Statutory Trust III, a statutory trust created under the laws of the State of Connecticut (the "Trust"), hereby certifies that Hare & Co. (the "Holder"), as the nominee of The Bank of New York, indenture trustee under the Indenture dated as of September 26, 2002 among Preferred Term Securities VII, Ltd., Preferred Term Securities VII, Inc. and The Bank of New York is the registered owner of capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, (liquidation amount $1,000.00 per capital security) (the "Capital Securities"). Subject to the Declaration (as defined below), the Capital Securities are transferable on the books and records of the Trust in person or by a duly authorized attorney, upon surrender of this Certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities represented hereby are issued pursuant to, and shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of September 26, 2002, among Richard L. Conniff, Lawrence D. McGovern and Brad L. Smith as Administrators, State Street Bank and Trust Company of Connecticut, National Association, as Institutional Trustee, Heritage Commerce Corp, as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to such amended and restated declaration as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Trust at its principal place of business.
Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder.
By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures.
This Capital Security is governed by, and construed in accordance with, the laws of the State of Connecticut, without regard to principles of conflict of laws.
Signatures appear on following page
IN WITNESS WHEREOF, the Trust has duly executed this certificate.
HERITAGE COMMERCE CORP STATUTORY TRUST III
By:____________________
Name:
Title: Administrator
CERTIFICATE OF AUTHENTICATION
This is one of the Capital Securities referred to in the within-mentioned Declaration.
STATE STREET BANK AND TRUST COMPANY OF CONNECTICUT, NATIONAL ASSOCIATION,
as the Institutional Trustee
By: ____________________________
Authorized Officer
[FORM OF REVERSE OF SECURITY]
Distributions payable on each Capital Security will be payable at an annual rate equal to 5.220% beginning on (and including) the date of original issuance and ending on (but excluding) December 26, 2002 and at an annual rate for each successive period beginning on (and including) December 26, 2002, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 3.400% (the "Coupon Rate"); provided, however, that prior to September 26, 2007, the Coupon Rate shall not exceed 11.90%, applied to the stated liquidation amount of $1,000.00 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than a quarterly period will bear interest thereon compounded quarterly at the Distribution Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes payments of Interest and any principal on the Debentures held by the Institutional Trustee unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. In the event that any date on which a Distribution is payable on this Capital Security is not a Business Day, then a payment of the Distribution payable on such date will be made on the next succeeding day which is a Business Day (and without any Distribution or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date the payment was originally payable. The amount of interest payable for any Distribution Period will be calculated by applying the Coupon Rate to the principal amount outstanding at the commencement of the Distribution Period and multiplying each such amount by the actual number of days in the Distribution Period concerned divided by 360.
"3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3- Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date.
The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law.
All percentages resulting from any calculations on the Capital Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one- millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)).
Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on March 26, June 26, September 26 and December 26 of each year, commencing on December 26, 2002. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 20 consecutive quarterly periods (each an "Extension Period") on the Debentures, subject to the conditions described below, although such interest would continue to accrue on the Debentures at an annual rate equal to the Distribution Rate compounded quarterly to the extent permitted by law during any Extension Period. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period the Debenture Issuer shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee.
The Capital Securities shall be redeemable as provided in the Declaration.
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to:
(Insert assignee's social security or tax identification number)
(Insert address and zip code of assignee) and irrevocably appoints
agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her.
Date:
Signature:
(Sign exactly as your name appears on the other side of this Capital Security Certificate)
Signature Guarantee:1
____________
1 Signature must be guaranteed by an "eligible guarantor institution" that is a bank,
stockbroker, savings and loan association or credit union meeting the requirements of the Security
registrar, which requirements include membership or participation in the Securities Transfer Agents
Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the
Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities
Exchange Act of 1934, as amended.
EXHIBIT A-2
FORM OF COMMON SECURITY CERTIFICATE
THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION.
THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT IN COMPLIANCE WITH SECTION 8.1 OF THE DECLARATION.
Certificate Number C-1 124 Common Securities
September 26, 2002
Certificate Evidencing Floating Rate Common Securities
of
Heritage Commerce Corp Statutory Trust III
Heritage Commerce Corp Statutory Trust III, a statutory trust created under the laws of the State of Connecticut (the "Trust"), hereby certifies that Heritage Commerce Corp (the "Holder") is the registered owner of common securities of the Trust representing undivided beneficial interests in the assets of the Trust (the "Common Securities"). The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued pursuant to, and shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of September 26, 2002, among Richard L. Conniff, Lawrence D. McGovern and Brad L. Smith, as Administrators, State Street Bank and Trust Company of Connecticut, National Association, as Institutional Trustee, Heritage Commerce Corp as Sponsor, and the holders from time to time of undivided beneficial interest in the assets of the Trust including the designation of the terms of the Common Securities as set forth in Annex I to such amended and restated declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business.
As set forth in the Declaration, where an Event of Default has occurred and is continuing, the rights of Holders of Common Securities to payment in respect of Distributions and payments upon Liquidation, redemption or otherwise are subordinated to the rights of payment of Holders of the Capital Securities.
Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder.
By acceptance of this Certificate, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of undivided beneficial ownership in the Debentures.
This Common Security is governed by, and construed in accordance with, the laws of the State of Connecticut, without regard to principles of conflict of laws.
IN WITNESS WHEREOF, the Trust has duly executed this certificate.
HERITAGE COMMERCE CORP STATUTORY TRUST III
By: _________________________
Name:
Title: Administrator
[FORM OF REVERSE OF SECURITY]
Distributions payable on each Common Security will be identical in amount to the Distributions payable on each Capital Security, which is at an annual rate equal to 5.220% beginning on (and including) the date of original issuance and ending on (but excluding) December 26, 2002 and at an annual rate for each successive period beginning on (and including) December 26, 2002, and each succeeding Distribution Payment Date, and ending on (but excluding) the next succeeding Distribution Payment Date (each a "Distribution Period"), equal to 3-Month LIBOR, determined as described below, plus 3.400% (the "Coupon Rate"); provided, however, that prior to September 26, 2007, the Coupon Rate shall not exceed 11.90%, applied to the stated liquidation amount of $1,000.00 per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Distributions in arrears for more than one quarterly period will bear interest thereon compounded at the Distribution Rate (to the extent permitted by applicable law). The term "Distributions" as used herein includes payments of Interest and any principal on the Debentures held by the Institutional Trustee unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available therefor. As used herein, "Determination Date" means the date that is two London Banking Days (i.e., a business day in which dealings in deposits in U.S. dollars are transacted in the London interbank market) preceding the commencement of the relevant Distribution Period. In the event that any date on which a Distribution is payable on this Common Security is not a Business Day, then a payment of the Distribution payable on such date will be made on the next succeeding day which is a Business Day (and without any Distribution or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date the payment was originally payable. The amount of interest payable for any Distribution Period will be calculated by applying the Coupon Rate to the principal amount outstanding at the commencement of the Distribution Period and multiplying each such amount by the actual number of days in the Distribution Period concerned divided by 360.
"3-Month LIBOR" as used herein, means the London interbank offered interest rate for three-month U.S. dollar deposits determined by the Debenture Trustee in the following order of priority: (i) the rate (expressed as a percentage per annum) for U.S. dollar deposits having a three-month maturity that appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date ("Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service or such other page as may replace Page 3750 on that service or such other service or services as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying London interbank offered rates for U.S. dollar deposits); (ii) if such rate cannot be identified on the related Determination Date, the Debenture Trustee will request the principal London offices of four leading banks in the London interbank market to provide such banks' offered quotations (expressed as percentages per annum) to prime banks in the London interbank market for U.S. dollar deposits having a three-month maturity as of 11:00 a.m. (London time) on such Determination Date. If at least two quotations are provided, 3- Month LIBOR will be the arithmetic mean of such quotations; (iii) if fewer than two such quotations are provided as requested in clause (ii) above, the Debenture Trustee will request four major New York City banks to provide such banks' offered quotations (expressed as percentages per annum) to leading European banks for loans in U.S. dollars as of 11:00 a.m. (London time) on such Determination Date. If at least two such quotations are provided, 3-Month LIBOR will be the arithmetic mean of such quotations; and (iv) if fewer than two such quotations are provided as requested in clause (iii) above, 3-Month LIBOR will be a 3-Month LIBOR determined with respect to the Distribution Period immediately preceding such current Distribution Period. If the rate for U.S. dollar deposits having a three-month maturity that initially appears on Telerate Page 3750 as of 11:00 a.m. (London time) on the related Determination Date is superseded on the Telerate Page 3750 by a corrected rate by 12:00 noon (London time) on such Determination Date, then the corrected rate as so substituted on the applicable page will be the applicable 3-Month LIBOR for such Determination Date.
The Coupon Rate for any Distribution Period will at no time be higher than the maximum rate then permitted by New York law as the same may be modified by United States law.
All percentages resulting from any calculations on the Common Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one- millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward)).
Except as otherwise described below, Distributions on the Common Securities will be cumulative, will accrue from the date of original issuance and will be payable quarterly in arrears on March 26, June 26, September 26 and December 26 of each year, commencing on December 26, 2002. The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 20 consecutive quarterly periods (each an "Extension Period") on the Debentures, subject to the conditions described below, although such interest would continue to accrue on the Debentures at an annual rate equal to the Distribution Rate compounded quarterly to the extent permitted by law during any Extension Period. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Sponsor shall pay all interest then accrued and unpaid on the Debentures (together with Additional Interest thereon); provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Sponsor may further extend such period, provided that such period together with all such previous and further consecutive extensions thereof shall not exceed 20 consecutive quarterly periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest and Additional Interest, the Sponsor may commence a new Extension Period, subject to the foregoing requirements. No interest or Additional Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Additional Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee.
The Common Securities shall be redeemable as provided in the Declaration.
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this Common Security Certificate to:
____________________________________
(Insert assignee's social security or tax identification number)
____________________________________
(Insert address and zip code of assignee) and irrevocably appoints
____________________________________
agent to transfer this Common Security Certificate on the books of the Trust. The agent may substitute another to act for him or her.
Date: ______________________
Signature: _____________________________
(Sign exactly as your name appears on the other side of this Common Security Certificate)
Signature: _________________________
(Sign exactly as your name appears on the other side of this common Security Certificate)
Signature Guarantee:2
____________
2 Signature must be guaranteed by an "eligible guarantor institution" that is a bank,
stockbroker, savings and loan association or credit union, meeting the requirements of the Security
registrar, which requirements include membership or participation in the Securities Transfer Agents
Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the
Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities
Exchange Act of 1934, as amended.
EXHIBIT B
SPECIMEN OF INITIAL DEBENTURE
(See Tab No. 16)
EXHIBIT C
PLACEMENT AGREEMENT
(See Tab No. 1)
Exhibit 21.1
Subsidiaries of the registrant
Bank subsidiary
Heritage Bank of Commerce -- State of Incorporation, California
Non-bank subsidiaries
1. Heritage Capital Trust I
2. Heritage Statutory Trust I
3. Heritage Statutory Trust II
4. Heritage Statutory Trust III
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-65884 of Heritage Commerce Corp on Form S-8 and in Registration Statement of No. 333-40384 of Heritage Commerce Corp on Form S-4 of our report dated January 22, 2003, appearing in this Annual Report on Form 10-K of Heritage Commerce Corp for the year ended December 31, 2002.
/s/ Deloitte & Touche LLP
San Jose, California
March 27, 2003
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Heritage Commerce Corp (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Brad L. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to Heritage Commerce Corp and will be retained by Heritage Commerce Corp and furnished to the Securities and Exchange Commission or its staff upon request.
March 28, 2003
/s/ Brad L. Smith
Brad L. Smith
Chief Executive Officer
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Heritage Commerce Corp (the "Company") on Form 10-K for the year ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Lawrence D. McGovern, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to Heritage Commerce Corp and will be retained by Heritage Commerce Corp and furnished to the Securities and Exchange Commission or its staff upon request.
March 28, 2003
/s/ Lawrence D. McGovern
Lawrence D. McGovern
Chief Financial Officer
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