-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GglshsooYUp7+kxpPymI1I0Afp44khXrnvi8TFBh8vIDt4b0vVtIcxilf4TKJOQU Pg37yS+2wK3Vl7hRGDktqA== 0001053352-99-000013.txt : 19990816 0001053352-99-000013.hdr.sgml : 19990816 ACCESSION NUMBER: 0001053352-99-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE COMMERCE CORP CENTRAL INDEX KEY: 0001053352 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770469558 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23877 FILM NUMBER: 99687951 BUSINESS ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089476900 MAIL ADDRESS: STREET 1: 150 ALMADEN BOULEVARD CITY: SAN JOSE STATE: CA ZIP: 95113 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 Or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transitional period from to Commission File No. 000-23877 HERITAGE COMMERCE CORP (Exact name of registrant as specified in its charter) California 77-0469558 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 150 Almaden Blvd., San Jose, California 95113 (Address of principal executive offices) (Zip Code) (408) 947-6900 (Registrant's telephone number, including area code) None (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: The Registrant had 5,594,669 shares of Common Stock outstanding on August 13, 1999. HERITAGE COMMERCE CORP AND SUBSIDIARIES QUARTERLY REPORT ON FORM 10-Q Table of Contents Part I - Financial Information Page Item 1. Condensed Consolidated Statements of Financial Condition At June 30, 1999 and December 31, 1998 1 Condensed Consolidated Statements of Income For the three months ended June 30, 1999 and 1998 2 Condensed Consolidated Statements of Cash Flows For the three months ended June 30, 1999 and 1998 3 Condensed Consolidated Notes to Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Part II - Other Information Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21
HERITAGE COMMERCE CORP AND SUBSIDIARIES Condensed Consolidated Statements of Financial Condition ASSETS June 30, 1999 December 31, 1998 (Unaudited) Cash and due from banks $ 21,098,000 $ 18,039,000 Federal funds sold 59,120,000 28,600,000 Total cash and cash equivalents 80,218,000 46,639,000 Securities available-for-sale, at fair value 31,631,000 50,249,000 Securities held-to-maturity, at amortized cost (fair value of $13,783,000 and $27,240,000, respectively) 13,856,000 26,544,000 Loan held for sale, at fair value 11,675,000 33,079,000 Loans 245,336,000 236,307,000 Allowance for loan losses (4,337,000) (3,825,000) Loans, net 240,999,000 232,482,000 Premises and equipment, net 3,103,000 3,238,000 Accrued interest receivable and other assets 12,593,000 7,240,000 Other investments 9,140,000 5,460,000 TOTAL $ 403,215,000 $ 404,931,000 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Deposits Demand, noninterest bearing $ 124,160,000 $ 120,854,000 Demand, interest bearing 9,171,000 9,035,000 Savings and money market 129,095,000 131,518,000 Time deposits, under $100,000 38,785,000 29,793,000 Time deposits, $100,000 and over 63,381,000 58,847,000 Total deposits 364,592,000 350,047,000 Deposits held for sale --- 18,911,000 Accrued interest payable and other liabilities 7,150,000 5,276,000 Total liabilities 371,742,000 374,234,000 Commitments and contingencies Shareholders' equity: Preferred Stock, 10,000,000 shares authorized; none outstanding --- --- Common Stock, no par value; 30,000,000 shares authorized; Shares issued and outstanding: 5,592,184 at June 30, 1999 and 5,554,552 at December 31, 1998 29,642,000 29,418,000 Accumulated other comprehensive (loss) income, net of taxes (92,000) 658,000 Retained Earnings 1,923,000 621,000 Total shareholders' equity 31,473,000 30,697,000 TOTAL $ 403,215,000 $ 404,931,000 See notes to condensed consolidated financial statements
HERITAGE COMMERCE CORP AND SUBSIDIARIES Condensed Consolidated Statements of Income (Unaudited) Three months ended June 30, Six months ended June 30, 1999 1998 1999 1998 Interest income: Loans, including fees $ 6,218,000 $ 4,206,000 $ 12,249,000 $ 7,756,000 Securities, taxable 450,000 1,380,000 1,075,000 2,613,000 Securities, non-taxable 146,000 168,000 319,000 288,000 Federal funds sold 311,000 295,000 647,000 512,000 Total interest income 7,125,000 6,049,000 14,290,000 11,169,000 Interest expense: Deposits 2,211,000 1,667,000 4,371,000 3,009,000 Other --- --- 11,000 --- Total interest expense 2,211,000 1,667,000 4,382,000 3,009,000 Net interest income before provision for loan losses 4,914,000 4,382,000 9,908,000 8,160,000 Provision for loan losses 484,000 350,000 1,127,000 510,000 Net interest income after provision for loan losses 4,430,000 4,032,000 8,781,000 7,650,000 Other income: Gain on sale of loans held-for-sale 84,000 49,000 250,000 50,000 Gain on sale of securities available-for-sale 233,000 49,000 1,004,000 67,000 Service charges and other fees 73,000 48,000 142,000 98,000 Other investment income 49,000 57,000 128,000 109,000 Other income 248,000 40,000 387,000 50,000 Total other income 687,000 243,000 1,911,000 374,000 Other expenses: Salaries and employee benefits 2,542,000 1,790,000 4,963,000 3,370,000 Client services 135,000 559,000 797,000 919,000 Furniture and equipment 283,000 183,000 580,000 353,000 Advertising and promotion 227,000 189,000 376,000 369,000 Occupancy 261,000 191,000 493,000 342,000 Professional fees 75,000 149,000 245,000 313,000 Loan origination costs 140,000 114,000 257,000 195,000 Stationery & supplies 56,000 53,000 135,000 108,000 Telephone expense 54,000 35,000 104,000 81,000 Software subscriptions 60,000 14,000 84,000 30,000 Other 330,000 185,000 717,000 400,000 Total other expenses 4,163,000 3,462,000 8,751,000 6,480,000 Net income before income taxes 954,000 813,000 1,941,000 1,544,000 Income taxes 280,000 283,000 640,000 561,000 Net income $ 674,000 $ 530,000 $ 1,301,000 $ 983,000 Earnings per share: Basic $ 0.12 $ 0.11 $ 0.23 $ 0.19 Diluted $ 0.11 $ 0.09 $ 0.20 $ 0.16 See notes to condensed consolidated financial statements
HERITAGE COMMERCE CORP Condensed Consolidated Statements of Cash Flows (Unaudited) Six Months ended June 30, 1999 1998 Cash flows from operating activities: Net income $ 1,301,000 $ 913,000 Adjustments to reconcile net income to net cash used by operating activities: Depreciation and amortization 414,000 271,000 Provision for loan losses 1,127,000 510,000 Gain on sale of securities available-for-sale (1,004,000) (67,000) Net amortization of premiums/accretion of discounts (234,000) 37,000 Proceeds from sales of loans 4,785,000 (33,000) Originations of loans held for sale --- (2,157,000) Maturities of loans held for sale --- 67,000 Increase in accrued interest receivable and other assets (5,502,000) (861,000) Decrease in accrued interest payable and other liabilities 2,367,000 225,000 Net cash provided by (used by) operating activities 3,254,000 (1,095,000) Cash flows from investing activities: Net decrease (increase) in loans 6,975,000 (39,290,000) Purchases of investment securities available-for-sale (26,334,000) (23,971,000) Maturities of investment securities available-for-sale 7,005,000 7,513,000 Sales of investment securities available-for-sale 49,512,000 2,067,000 Purchases of investment securities held-to-maturity --- (7,014,000) Maturities of investment securities held-to-maturity 1,115,000 5,311,000 Purchases of corporate owned life insurance (3,528,000) (809,000) Capital expenditures (278,000) (1,235,000) Net cash provided by (used by) investing activities 34,467,000 (57,428,000) Cash flows from financing activities: Net (decrease) increase in deposits (4,366,000) 80,673,000 Proceeds from exercise of stock options 224,000 --- Net cash (used by) provided by financing activities (4,142,000) 80,673,000 Net increase in cash and cash equivalents 33,579,000 22,150,000 Cash and cash equivalents, beginning of period 46,639,000 43,185,000 Cash and cash equivalents, end of period $ 80,218,000 $ 65,335,000 Other cash flow information: Interest paid in cash $ 4,786,000 $ 2,876,000 Income taxes paid in cash $ 1,710,000 $ 521,000 See notes to condensed consolidated financial statements
HERITAGE COMMERCE CORP AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements June 30, 1999 (Unaudited) 1) Basis of Presentation The unaudited condensed consolidated financial statements of Heritage Commerce Corp and its wholly owned subsidiaries, Heritage Bank of Commerce and Heritage Bank East Bay, have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by generally accepted accounting principles for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K Annual Report for the year ended December 31, 1998. In the Company's opinion, all adjustments necessary for a fair presentation of these condensed consolidated financial statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to current year presentation. The results for the three months and six months ended June 30, 1999 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 1999. 2) Share and Per Share Amounts Earnings per common share (basic) are calculated based on the weighted average number of shares outstanding during the period. Earnings per common and common equivalent share (diluted) are calculated based on the weighted average number of shares outstanding during the period, plus equivalent shares representing the dilutive effect of stock options using the treasuring stock method. All share numbers have been restated for the stock split in February, 1999. Reconciliation of weighted average shares used in computing earnings per share are as follows:
Three months end June 30, Six months ended June 30, 1999 1998 1999 1998 Weighted average common shares outstanding 5,582,308 4,943,844 5,569,613 5,242,516 Diluted effect of stock options outstanding 781,801 736,325 817,744 728,853 Shares used in computing diluted earnings per share 6,364,109 5,680,169 6,387,357 5,971,369
3) Adoption of FAS 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133 , "Accounting for Derivative Instruments and Hedging Activities." The Company adopted the provisions of SFAS No. 133 effective February 1, 1999. Because of the Company's minimal use of derivatives, the adoption of SFAS No. 133 did not significantly impact the Company's earnings or financial position. As allowed by SFAS No. 133 the Company transferred approximately $11.67 million of certain securities from the held-to-maturity to available-for-sale classification. The realized and unrealized gains on the securities transferred were not material to the Company. 4) Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which requires that an enterprise report and display, by major components and as a single total, the change in its net assets during the period from non-owner sources. This Statement is effective for fiscal years beginning after December 15, 1997. The adoption of this Statement in the second quarter of 1999 resulted in a change in the financial statement presentation, but did not have an impact on the Company's consolidated financial position, results of operations or cash flows. Certain amounts in the prior period have been reclassified to conform to the current presentation under SFAS No. 130. Total comprehensive income for the three months ended June 30, 1999 and 1998 was $357,000 and $623,000, respectively. Total comprehensive income for the six months ended June 30, 1999 and 1998 was $551,000 and $1,111,000, respectively. The following is a summary of the components of accumulated other comprehensive income:
For the Three Months Ended For the Six Months Ended June 30, 1999 June 30, 1998 June 30,1999 June 30,1998 Net Income $ 674,000 $ 530,000 $ 1,301,000 $ 983,000 Other comprehensive income, net of tax: Net unrealized gain (loss) on securities available-for-sale during the period (84,000) 142,000 254,000 195,000 Less: reclassification adjustment for realized gains on available-for-sale securities included in net income during the period (233,000) (49,000) (1,004,000) (67,000) Other comprehensive income (loss) (317,000) 93,000 (750,000) 128,000 Comprehensive income $ 357,000 $ 623,000 $ 551,000 $ 1,111,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Net income for the quarter and six months ended June 30, 1999 was $674,000 and $1,301,000, or $0.11 and $0.20 per diluted share, as compared to net income of $530,000 and $983,000, or $0.09 and $0.16 per diluted share, for the same period in 1998. The increase was attributable to growth in the level of average earning assets overall, and of loans in particular, funded by new deposits at favorable weighted average rates of interest. Return on average assets annualized for the first six months of 1999 and 1998 was 0.72% and 0.69%. Annualized return on average equity for the first six months of 1999 was 8.41%, compared to 8.65% for the first six months of 1998. Average interest earning assets for the quarter and six months ended June 30, 1999 were up $51,861,000 and $73,479,000, or 19% and 28% over 1998, with much of the increase primarily attributable to growth in loans. The average rate earned on loans in the second quarter and six months of 1999 was 9.72% and 9.79%, compared to 10.98% and 10.87% in the second quarter and six months of 1998. The average rate on earning assets was 8.65% and 8.67% for the quarter and six months ended June 30, 1999, compared to 8.71% and 8.71% for the quarter and six months ended June 30, 1998. Average interest bearing liabilities increased $47,481,000 and $65,831,000, or 27% and 40% from three months and six months ended June 30, 1998 to the same periods in 1999, with the increase attributable to growth in interest bearing demand deposits, money market accounts, growth in time deposits of $100,000 or more, and growth in time deposits in support of the internet credit card program. The average rate paid on interest bearing liabilities increased to 3.92% and 3.85% from 3.74% and 3.70% at the three and six months ended June 30, 1999 and 1998, respectively. The Company's net interest margin was 5.97% and 6.02% in the second quarter and six months ended June 30, 1999, compared with 6.31% and 6.36% in the second quarter and the six months ended June 30, 1998. The Company's non-performing assets increased to $1,776,000 at June 30, 1999 from zero at June 30, 1998, due to local market conditions and the increase in size of the loan portfolio. Shareholders' equity increased $776,000 to $31,473,000, or 7.81% of assets, at June 30, 1999, from $30,697,000 or 7.58% of assets, at December 31, 1998. The Company's Tier 1 and total risk-based capital ratios were 9.8% and 11.1% at June 30, 1999, compared to 9.2% and 10.4%, respectively, at December 31, 1998, and 11.5% and 13.0%, respectively, at June 30, 1998. Due to the overall growth in total assets, more specifically the growth in the loan portfolio, the Company's leverage capital ratio stood at 8.6% at June 30, 1999. This compares with a leverage ratio of 9.0% at December 31, 1998 and 7.2% at June 30, 1998. RESULTS OF OPERATIONS Net Interest Income and Net Interest Margin The following table presents the Company's average balance sheet, net interest income and the resultant yields for the periods presented:
For the Three Months Ended For the Three Months Ended June 30, 1999 June 30, 1998 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets: Loans, gross $ 256,633 $ 6,218 9.72% $ 153,643 $ 4,206 10.98% Investments securities 46,845 596 5.10% 102,986 1,548 6.03% Federal funds sold 26,937 311 4.63% 21,925 295 5.40% Total interest earning assets $ 330,415 $ 7,125 8.65% $ 278,554 $ 6,049 8.71% Cash and due from banks 15,420 21,644 Premises and equipment, net 3,136 2,813 Other assets 15,918 6,224 Total assets $ 364,889 $ 309,235 Liabilities and shareholders' equity: Deposits: Demand, interest bearing $ 10,280 $ 40 1.55% $ 6,921 $ 34 1.97% Savings and Money market 116,719 941 3.23% 113,090 908 3.22% Time deposits, less than $100,000 33,125 431 5.22% 9,694 121 5.02% Time deposits, $100,000 and over 59,895 710 4.75% 48,968 604 4.95% Brokered Deposits 6,135 89 5.85% - - - Total interest bearing liabilities $ 226,154 $ 2,211 3.92% $ 178,673 $ 1,667 3.74% Demand deposits 102,233 104,990 Other liabilities 5,180 2,461 Total liabilities 107,413 107,451 Shareholders' equity 31,322 23,111 Total liabilities and shareholders' equity $ 364,889 $ 309,235 Net interest income/margin $ 4,914 5.97% $ 4,382 6.31% Note: Yields and amounts earned on loans include loan fees of $476,000 and $362,000 for the three month periods ended June 30, 1999 and 1998, respectively. For the Six Months Ended For the Six Months Ended June 30, 1999 June 30, 1998 Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Assets: Loans, gross $ 252,354 $ 12,249 9.79% $ 143,917 $ 7,756 10.87% Investments securities 51,857 1,394 5.42% 95,721 2,901 6.11% Federal funds sold 27,981 647 4.67% 19,075 512 5.42% Total interest earning assets $ 332,192 $ 14,290 8.67% $ 258,713 $ 11,169 8.71% Cash and due from banks 16,226 20,587 Premises and equipment, net 3,184 2,557 Other assets 14,159 5,884 Total assets $ 365,761 $ 287,741 Liabilities and shareholders' equity: Deposits: Demand, interest bearing $ 9,870 $ 74 1.51% $ 6,565 $ 63 1.93% Savings and Money market 123,952 1,928 3.14% 104,413 1,646 3.18% Time deposits, less than $100,000 32,854 857 5.26% 8,609 207 4.84% Time deposits, $100,000 and over 56,318 1,340 4.80% 44,272 1,093 4.98% Brokered Deposits 6,150 172 5.64% - - - Other borrowings 552 11 4.00% 6 - 11.35% Total interest bearing liabilities $ 229,696 $ 4,382 3.85% $ 163,865 $ 3,009 3.70% Demand deposits 99,583 98,541 Other liabilities 5,299 2,412 Total liabilities 104,882 100,953 Shareholders' equity 31,183 22,923 Total liabilities and shareholders' equity $ 365,761 $ 287,741 Net interest income/margin $ 9,908 6.02% $ 8,160 6.36% Note: Yields and amounts earned on loans include loan fees of $932,000 and $639,000 for the six month periods ended June 30, 1999 and 1998, respectively.
The Company's net interest income for the second quarter and six months end of 1999 was $4,914,000 and $9,908,000, an increase of $532,000 and $1,748,000 over the second quarter and six months end of 1998. When compared to the second quarter and six months end of 1998, average earning assets increased by $51,861,000 and $73,479,000. The net yield on average earning assets was 5.97% and 6.02% in the second quarter and the first six months of 1999, compared to 6.31% and 6.36% in the second quarter and the first six months of 1998. The increase in net interest income was primarily due to an increase in the volume of interest earning assets, primarily loans. The following table sets forth an analysis of the changes in interest income and interest expense. The total change is shown in the column designated "Net Change" and is allocated in the columns to the left, to the portions respectively attributable to volume changes and rate changes that occurred during the period indicated. Changes due to both volume and rate have been allocated between the volume and rate categories in proportion to the relationship of the changes due solely to the changes in volume and rate, respectively.
Three Months Ended June 30 1999 vs. 1998 Increase (Decrease) Due to Change In: Average Average Net (Dollars in thousands) Volume Rate Change Interest earning assets Loans, gross $ 2,495 $ (483) $ 2,012 Investments securities (716) (236) (952) Federal funds sold 58 (42) 16 Total interest earning assets $ 1,837 $ (761) $ 1,076 Interest bearing liabilities Demand, interest bearing $ 13 $ (7) $ 6 Money Market and Savings 30 3 33 Time deposits, less than $100,000 305 5 310 Time deposits, $100,000 and over 130 (24) 106 Brokered Deposits 89 - 89 Total interest bearing liabilities $ 567 $ (23) $ 544 Net interest income $ 1,270 $ (738) $ 532 Six Months Ended June 30 1999 vs. 1998 Increase (Decrease) Due to Change In: Average Average Net (Dollars in thousands) Volume Rate Change Interest earning assets Loans, gross $ 5,262 $ (769) $ 4,493 Investments securities (1,179) (328) (1,507) Federal funds sold 205 (70) 135 Total interest earning assets $ 4,288 $(1,167) $ 3,121 Interest bearing liabilities Demand, interest bearing $ 25 $ (14) $ 11 Money Market and Savings 302 (20) 282 Time deposits, less than $100,000 632 18 650 Time deposits, $100,000 and over 286 (39) 247 Brokered Deposits 172 - 172 Other borrowings 11 - 11 Total interest bearing liabilities $ 1,428 $ (55) $ 1,373 Net interest income $ 2,860 $(1,112) $ 1,748
Provision for Loan Losses During the second quarter of 1999, the provision for loan losses was $484,000, up $134,000 from $350,000 for the second quarter of 1998. The increase in the provision was due to the overall growth of the loan portfolio. Noninterest Income The following table sets forth the various components of the Company's noninterest income for the periods indicated:
Increase Three months ended June 30 1999 versus 1998 (Dollars in thousands) 1999 1998 Amount Percent Service charges and other fees $ 73 $ 48 $ 25 52% Gain on sale of securities available-for-sale 233 49 184 375% Gain on sale of loans 84 49 35 71% Other investment income 49 57 (8) (14%) Other income 248 40 208 520% Total $ 687 $ 243 $ 444 183% Increase Six months ended June 30 1999 versus 1998 (Dollars in thousands) 1999 1998 Amount Percent Service charges and other fees $ 142 $ 98 $ 44 45% Gain on sale of securities available-for-sale 1,004 67 937 1,399% Gain on sale of loans 250 50 200 400% Other investment income 128 109 19 17% Other income 387 50 337 674% Total $ 1,911 $ 374 $ 1,537 411%
Noninterest income for the second quarter and the first six months ended June 30, 1999 was $687,000 and $1,911,000, up $444,000, or 183%, and $1,537,000, or 411%, from $243,000 and $374,000 for the second quarter and the six months ended June 30, 1998. This increase was primarily the result of gains recognized on the sale of securities available-for-sale (up $184,000 and $937,000) and the increase in other income (up $151,000 and $337,000). The sale of securities represents favorable market conditions to sell securities. The increase in other income is primarily due to fee income associated with the Company's internet credit card program. Noninterest Expense The following table sets forth the various components of the Company's noninterest expenses for the periods indicated:
For The Three Months Ended June 30, Percent Increase Increase (Dollars in thousands) 1999 1998 (Decrease) (Decrease) Salaries and benefits $ 2,542 $ 1,790 $ 752 42% Client services 135 559 (424) (76%) Furniture and equipment 283 183 100 55% Occupancy 261 191 70 37% Advertising and promotion 227 189 38 20% Loan origination costs 140 114 26 23% Professional fees 75 149 (74) (50%) Stationery & Supplies 56 53 3 6% Telephone expense 54 35 19 54% Software subscriptions 60 14 46 329% All other 330 185 145 78% Total $ 4,163 $ 3,462 $ 701 20%
For The Six Months Ended June 30, Percent Increase Increase (Dollars in thousands) 1999 1998 (Decrease) (Decrease) Salaries and benefits $ 4,963 $ 3,370 $ 1,593 47% Client services 797 919 (122) (13%) Furniture and equipment 580 353 227 64% Occupancy 493 342 151 44% Advertising and promotion 376 369 7 2% Loan origination costs 257 195 62 32% Professional fees 245 313 (68) (22%) Stationery & Supplies 135 108 27 25% Telephone expense 104 81 23 28% Software subscriptions 84 30 54 183% All other 717 400 317 79% Total $ 8,751 $ 6,480 $ 2,271 35%
Noninterest expenses for the second quarter of 1999 were $4,163,000, up $701,000, or 20%, from $3,462,000 for the second quarter of 1998. Nonintrest expenses for the first six months of 1999 were $8,751,000, up $2,271,000,or 35%, from $6,480,000 for the first six months of 1998. The increase in noninterest expenses reflects the growth in infrastructure to support the Company's loan and deposit growth and the opening of a branch office in the South Valley in city of Morgan Hill, California. Noninterest expenses consist primarily of salaries and employee benefits (61% and 52% of total noninterest expenses for the second quarter of 1999 and 1998, respectively; 57% and 52% of total noninterest expenses for the six months ended June 30, 1999 and 1998, respectively) and client services (3% and 16% of total non-interest expenses for the second quarter of 1999 and 1998, respectively; 9% and 14% of total noninterest expenses for the first six months of 1999 and 1998, respectively). The increase in salaries and benefits expenses was primarily attributable to an increase in the number of employees. The Company employed 152 people at June 30, 1999, up 39 from 113 employees at June 30, 1998. Client services expenses include courier and armored car costs, imprinted check costs, and other client services costs, all of which are directly related to the amount of funds on deposit at the Company. Due to lower balances in these accounts in the second quarter of 1999, the expense was less than the previous year. The increase in furniture and equipment expenses and in occupancy expenses was primarily attributable to an increase in the number of employees and new banking locations. FINANCIAL CONDITION Total assets increased 15% to $403,215,000 at June 30, 1999, compared to $349,674,000 at June 30, 1998. The growth was primarily due to increases in the Company's loan portfolio funded by growth in deposits. Securities Portfolio The following table summarizes the composition of the Company's investment securities and the weighted average yields at June 30, 1999: June 30, 1999 Maturity After One Year After Five Years Within and Within and Within Total One Year Five Years Ten Years After Ten Years Amortized Cost (Dollars in thousands) Amount Yiel Amount Yield Amount Yield Amount Yield Amount Yield Securities available-for-sale: U.S. Treasury $ 16,075 4.75% $ 10,085 5.19% $ --- --- $ --- --- $ 26,160 4.92% Municipals - taxable --- --- 457 6.51% --- --- --- --- 457 6.51% Municipals - non-taxable --- --- --- --- 2,843 4.69% 2,171 4.78% 5,014 4.73% Total available-for-sale $ 16,075 4.75% $ 10,542 5.25% $ 2,843 4.69% $ 2,171 4.78% $ 31,631 4.91% Securities held-to-maturity: Municipals - taxable $ 1,000 6.34% $ 4,919 6.48% $ 516 6.45% --- --- $ 6,435 6.46% Municipals - non taxable --- --- 267 4.90% 6,036 4.51% 1,118 4.59% 7,421 4.54% Total held-to-maturity $ 1,000 6.34% $ 5,186 6.40% $ 6,552 4.66% $ 1,118 4.59% $ 13,856 5.43% Total securities $ 17,074 4.85% $ 15,729 5.63% $ 9,395 4.68% $ 3,289 4.72% $ 45,487 5.08% Note: Yield on non-taxable municipal securities are not a fully tax equivalent basis.
Loans Total gross loans increased 4% to $245,336,000 at June 30, 1999, as compared to $236,307,000 at December 31, 1998. The increase in loan balances was due to the business development efforts of the Company's loan teams. The following table indicates the Company's loan portfolio for the periods indicated:
June 30 % of December 31, % of (Dollars in thousands) 1999 Total 1998 Total Commercial $ 99,130 40% $ 79,567 34% Real estate - mortgage 61,516 25% 57,216 24% Real estate - land and construction 61,239 25% 49,270 21% Consumer 23,512 10% 50,349 21% Total loans 245,397 100% 236,402 100% Deferred loan fees (61) (95) Allowance for loan losses (4,337) (3,825) Loans, net $ 240,999 $ 232,482
The change in the Company's loan portfolio is primarily due to the increase in the commercial loan portfolio offset by a decline in the consumer credit card portfolio. The Company's loan portfolio is concentrated in commercial (primarily to companies engaged in manufacturing, wholesale, and service businesses) and real estate lending, with the balance in consumer loans. However, while no specific industry concentration is considered significant, the Company's lending operations are located in the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans. In February 1998, the Company entered into a contract with Internet Access Financial Corporation to provide a credit card over the Internet. The customers for the credit cards were not limited to Northern California, the Companys' primarily market area, as the product was available to anyone across the country. The growth in 1998 in the consumer loan portfolio was attributable to the introduction of this Internet credit card. As noted in the above table, the consumer loans category declined from $50,349,000 to $ 23,512,000 at June 30, 1999. Subsequent to June 30, 1999, the Company sold the outstanding Internet credit card loan balance of approximately $22 million to Internet Access Financial Corporation. The Company has continued its relationship with Internet AccessFinancial Corporation as a provider of certain administrative services to them in conjunctionwith the issuance of credit cards. The following table sets forth the maturity distribution of the Company's loans at June 30, 1999: Over One Year Over Due in One But Less Than Five (Dollars in thousands) Year or Less Five Years Years Total Commercial $ 92,309 $ 6,466 $ 173 $ 98,948 Real estate-mortgage 26,255 19,107 16,154 61,516 Real estate-land and construction 61,239 --- --- 61,239 Consumer 22,729 888 16 23,633 Total loans $ 202,532 $ 26,461 $ 16,343 $ 245,336 Loans with variable interest rates $ 167,336 $ 5,952 $ 308 $ 173,596 Loans with fixed interest rates 35,196 20,509 16,035 71,740 Total $ 202,532 $ 26,461 $ 16,343 $ 245,336 Note: Total shown is net of deferred loan fees of $61,000 at June 30, 1999.
The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the western edition of The Wall Street Journal. At June 30, 1999, approximately 71% of the Company's loan portfolio consisted of floating interest rate loans. Allowance for Loan Losses Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes an assessment of the following factors: past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Management has established an evaluation process designed to determine the adequacy of the allowance for loan losses. This process attempts to assess the risk of loss inherent in the portfolio by segregating the allowance for loan losses into four components: "watch", "special mention", "substandard" and "doubtful". It is the policy of management to maintain the allowance for loan losses at a level adequate for known and future risks inherent in the loan portfolio. Based on information currently available to analyze loan loss delinquency and a history of actual charge-offs, management believes that the loan loss provision and allowance are adequate; however, no assurance of the ultimate level of credit losses can be given with any certainty. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. The following table summarizes the Companys' loan loss experience as well as transactions in the allowance for loan losses and certain pertinent ratios for the periods indicated:
Year ended Six months ended June 30, December 31, (Dollars in thousands) 1999 1998 1998 Balance, beginning of period/year $ 3,825 $ 2,285 $ 2,285 Charge-offs (616) (6) (173) Less recoveries 1 95 137 Net loans charged-off (615) 89 (36) Provision for loan losses 1,127 510 1,576 Balance, end of period/year $ 4,337 $ 2,884 $ 3,825 Ratios: Net charge-offs to average loans outstanding 0.24% 0.06% 0.02% Allowance for loan losses to average loans 1.72% 1.88% 2.11% Allowance for loan losses to total loans 1.77% 1.69% 1.62% Allowance for loan losses to non-performing loans 244% N/A 297%
The increase in charge-offs relates primarily to the Company's consumer credit card portfolio. The following table summarizes the allocation of the allowance for loan losses by loan type and the allocated allowance as a percent of loans outstanding in each loan category at the dates indicated:
June 30, 1999 June 30, 1998 December 31, 1998 Percent of Percent of Percent of loans in each loans in each loans in each category to category to category to (Dollars in thousands) Amount total loans Amount total loans Amount total loans Commercial $ 2,113 2.13% $ 1,256 1.67% $ 1,567 1.98% Real estate - mortgage 238 0.39% 175 0.40% 224 0.39% Real estate - land and construction 972 1.59% 614 1.51% 815 1.65% Consumer 1,014 4.31% 105 0.99% 1,146 2.28% Unallocated --- --- 734 --- 73 --- Total $ 4,337 1.77% $ 2,884 1.69% $ 3,825 1.62%
The increase in the allowance for loan losses reflects increasing on a percentage basis the reserve for the Company's consumer credit card portfolio. It also reflects the increase in non-performing assets in the general loan portfolio. The Company maintains an allowance for loan losses to provide for estimated losses in the loan portfolio. Additions to the allowance are made by charges to operating expenses in the form of a provision for loan losses. All loans that are judged to be uncollectable are charged against the allowance and any recoveries are credited to the allowance. Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes an assessment of the following factors: past 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. Deposits Deposits totaled $364,592,000 at June 30, 1999, an increase of 4%, as compared to total deposits of $350,047,000 at December 31, 1998. The increase in deposits was primarily due to increases in time deposit accounts. Noninterest bearing deposits were $124,160,000 at June 30, 1999, an increase of 3%, as compared to $120,854,000 at December 31, 1998. Interest bearing deposits were $240,432,000 at June 30, 1999, an increase of 5% as compared to $229,193,000 at December 31, 1998. The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated:
Six months ended Year ended June 30, 1999 December 31, 1998 Average Average Average Average (Dollars in thousands) Balance Rate Paid Balance Rate Paid Demand, non-interest bearing $ 99,583 --- $ 102,834 --- Demand, interest bearing 9,870 1.51% 7,368 1.85% Saving and money market 123,952 3.14% 122,157 3.46% Time deposits less than $100,000 32,854 5.26% 16,638 5.28% Time deposits, $100,000 and over 56,318 4.80% 48,861 5.04% Brokered deposits 6,150 5.64% 3,826 5.87% Total average deposits $ 328,727 2.68% $ 301,684 2.63%
Deposit Concentration and Deposit Volatility The following table indicates the maturity schedule of the Company's time deposit of $100,000 or more as of June 30, 1999.
(Dollars in thousands) Balance % of Total Three months or less $ 36,402 57% Over three months through twelve months 20,010 32% Over twelve months 6,969 11% Total $ 63,381 100%
The Company focuses primarily on servicing business accounts that are frequently over $100,000 in average size. Certain types of accounts that the Company makes available are typically in excess of $100,000 in average balance per account, and certain types of business clients whom the Company serves typically carry deposits in excess of $100,000 on average. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to ensure its ability to fund deposit withdrawals. Interest Rate Risk The planning of asset and liability maturities is an integral part of the management of an institution's net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or investments or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates in relatively short maturities. The following table sets forth the interest rate sensitivity of the Company's interest-earning assets and interest-bearing liabilities at June 30, 1999, using the rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or when it is scheduled to mature within the specified time frame:
Within Due in Three Due After Three to Twelve One to Five Due After Not Rate- (Dollars in thousands) Months Months Years Five Years Sensitive Total Interest earning assets: Federal funds sold $ 59,120 $ --- $ --- $ --- $ --- $ 59,120 Securities 8,015 9,059 15,729 12,684 --- 45,487 Total loans 184,029 30,178 26,461 16,343 --- 257,011 Total interest earning assets 251,164 39,237 42,190 29,027 --- 361,618 Cash and due from banks 21,098 21,098 Other assets 20,499 20,499 Total assets $ 251,164 $ 39,237 $ 42,190 $ 29,027 $ 41,597 $ 403,215 Interest bearing liabilities: Demand, interest bearing $ 9,171 $ --- $ --- $ --- $ --- $ 9,171 Savings and money market 129,095 --- --- --- --- 129,095 Time deposits 53,607 39,841 8,718 --- --- 102,166 Total interest bearing liabilities 191,873 39,841 8,718 --- --- 240,432 Noninterest demand deposits 124,160 124,160 Other liabilities 7,150 7,150 Shareholders' equity 31,473 31,473 Total liabilities and shareholders' equity $ 191,873 $ 39,841 $ 8,718 $ --- $ 162,783 $ 403,215 Interest rate sensitivity GAP $ 59,291 $ (604) $ 33,472 $ 29,027 $(121,186) --- Cumulative interest rate sensitivity GAP $ 59,291 $ 58,687 $ 92,159 $ 121,186 --- --- Cumulative interest rate sensitivity GAP ratio 14.70% 14.55% 22.86% 30.05%
The foregoing table demonstrates that the Company had a positive cumulative one year gap of $58.7 million, or 14.6% of total assets, at June 30, 1999. In theory, this would indicate that $58.7 million more in assets than liabilities would reprice if there was a change in interest rates over the next year. If interest rates were to increase, the positive gap would tend to result in a higher net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net margin without affecting interest rate sensitivity. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis table. These prepayments may have significant effects on the Company's net interest margin. Because of these factors, an interest sensitivity gap report may not provide a complete assessment of the Company's exposure to changes in interest rates. Liquidity and Liability Management To meet liquidity needs, the Company maintains a portion of its funds in cash deposits in other banks, in Federal funds sold, and in investment securities. At June 30, 1999, the Company's primary liquidity ratio was 27.08%, comprised of $26.6 million in investment securities available-for-sale of maturity (or probable calls) of up to five years, less $11.1 million of securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $59.1 million, and $21.1 million in cash and due from banks, as a percentage of total unsecured deposits of $353.5 million. Capital Resources The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the Company:
June 30, December 31, (Dollars in thousands) 1999 1998 1998 Capital components: Tier 1 Capital $ 31,400 $ 22,817 $ 29,850 Tier 2 Capital 4,004 2,884 3,825 Total risk-based capital $ 35,404 $ 25,701 $ 33,675 Risk-weighted assets $ 319,953 $ 198,183 $ 323,688 Average assets $ 364,447 $ 315,095 $ 332,062 Minimum Regulatory Requirements Capital ratios: Total risk-based capital 11.1% 13.0% 10.4% 8.0% Tier 1 risk-based capital 9.8% 11.5% 9.2% 4.0% Leverage ratio (1) 8.6% 7.2% 9.0% 4.0% (1) Tier 1 capital divided by average assets (excluding goodwill).
On June 1, 1999, Heritage Commerce Corp (the "Company") announced that it has received an order from the Securities and Exchange Commission declaring its recently filed Registration Statement effective as of June 1, 1999, and permitting the Company to begin a public stock offering on that date. The Company intends to sell up to 700,000 new shares at a price of $15.00 per share on a best effort basis. Year 2000 The possible inability of computers, software, and other equipment utilizing microprocessors to recognize and properly process data fields containing a two-digit year is commonly referred to as the year 2000 problem. On January 1, 2000, such systems may be unable to accurately process certain date-based information. This discussion of the implications of the year 2000 problem for the Company contains numerous forward-looking statements based on inherently uncertain information. The cost of the project and the date on which the Company plans to complete the internal year 2000 modifications are based on management's best estimates of future events. The Company cannot guarantee these estimates and actual results could differ. Although management believes it will be able to make the necessary modifications in advance, failure to modify the systems may have a material adverse effect on the Company. The Company has developed a plan to assess its year 2000 preparedness, consisting of the following phases: - Awareness of the year 2000 problems - Risk assessment of internal and external systems - Renovation of problems found in the risk assessment phase - Validation of renovated systems - Implementation of validated systems Resolution of the year 2000 problem is among the Company's highest priorities, and the Company is preparing for the century change with a comprehensive enterprise-wide year 2000 program. The Company has identified all of the major systems and has sought external and internal resources to renovate and test the systems. The Company is testing purchased software and systems supported by external parties as part of the program. The Company is evaluating customers and vendors that have significant relationships with the Company to determine whether they are adequately preparing for the year 2000. In addition, the Company is developing contingency plans to reduce the impact of some potential events that may occur. The Company cannot guarantee, however, that the systems of vendors or customers with whom it does business will be completed on a timely basis, or that contingency plans will shield operations from failures that may occur. The Company has identified over 90 individual year-2000 projects. The projects vary in size, importance and materiality, from large undertakings, such as remediating complicated data systems, to smaller, but still important, projects such as installing compliant computer utility systems. All of the projects currently identified have begun, and approximately 95% have been completed. The Company assigns projects a priority, indicating the importance of the function to the Company's continuing operation. This prioritization facilitates reporting on projects based on their relative importance. The Company has prioritized projects as "High Priority - In House", "High Priority - Not In House" and "Medium Priority". Both High Priority categories have projects classified as "Mission Critical". Mission Critical projects are defined as: - systems vital to the continuance of a broad core business activity; - functions, the interruption of which for longer than 3 days would threaten the Company's viability; or - functions that provide the environment and infrastructure necessary to continue the broad core business activities. Testing of all mission critical systems was complete as of March 12, 1999 and the Company has completed a follow-up assessment of many of its clients' year 2000 preparedness. Currently, the Company's focus is on vendor follow-up and contingency plans. The Company has communicated with all vendors with whom it does significant business to determine their year 2000 compliance readiness and the extent to which the Company is vulnerable to any third-party year 2000 risks. Of all the vendors that present year 2000 risks, approximately 75% have passed testing. The Company does not significantly rely on "embedded technology" in its critical processes. All building systems in the Company's main offices use mechanical systems rather than embedded technology and therefore do not pose any year 2000 risk. Risks The principal risks associated with the year 2000 problem can be grouped into three categories: - the Company does not successfully ready its operations for the next century, - disruption of the Company's operations due to operational failures of third parties, and - business interruption among fund providers and obligors such that expected funding and repayment does not take place The only risk largely under the Company's control is preparing the Company's internal operations for the year 2000. The Company, like other financial institutions, is heavily dependent on its computer systems. The complexity of these systems and their interdependence make it impractical to convert to alternative systems without interruptions if necessary modifications are not completed on schedule. Management believes the Company will be able to make the necessary modifications on schedule. Failure of third parties may jeopardize the Company's operations, but the seriousness of this risk depends on the nature and duration of the failures. The most serious impact on the Company's operations from vendors would result if basic services such as telecommunications, electric power, and services provided by other financial institutions and governmental agencies were disrupted. Some public disclosure about readiness preparation among basic infrastructure and other suppliers is now available. The Company is unable, however, to estimate the likelihood of significant disruptions among its basic infrastructure suppliers. In view of the unknown probability of occurrence and impact on its operations, the Company considers the loss of basic infrastructure services to be the most reasonably likely worst case year 2000 scenario. Operational failures among the Company's customers could affect their ability to continue to provide funding or meet obligations when due. The information the Company develops in the customer assessments described earlier allows the Company to identify those customers that exhibit a risk of not making adequate preparations for the century change. The Company is taking appropriate actions to manage these risks. Contingency Plans The Company is developing year 2000 remediation contingency plans and business resumption contingency plans specific to the year 2000. Remediation contingency plans address the actions the Company would take if the current approach to remediating a system is falling behind schedule or otherwise appears to be in jeopardy of failing to deliver year 2000-ready systems when needed. Business resumption contingency plans address the actions that the Company would take if critical business functions cannot be carried out in the normal manner upon entering the next century due to system or supplier failure. Cost The total cost to the Company of year 2000 compliance issues, which includes testing, system replacement and any anticipated lost revenue, has been approximately $20,000 and is not anticipated to increase substantially through the completion of all projects. These costs and the date on which the Company plans to complete the year 2000 modifications and testing process are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes have occurred during the quarter to the Company's market risk profile or information. For further information refer to the Company's annual report on Form 10-K. Part II - Other Information Item 1. - Legal Proceedings To the best of the Company's knowledge, there are no pending legal proceedings to which the Company is a party which may have a materially adverse effect on the Company's financial condition, results of operations, or cash flows. Item 4. - Submission of Matters to a Vote of Security Holders The Company held its 1999 Annual Meeting of Shareholders on May 27, 1999 (the "1999 Annual Meeting"). There were 5,561,656 issued and outstanding shares of Company Common Stock on April 8, 1999, the Record Date for the 1999 Annual Meeting. Each of the shares voting at the meeting was entitled to one vote. At the 1999 Annual Meeting, the following actions were taken: Election of Directors At the 1999 Annual Meeting, eighteen directors of the Company were elected. The following chart indicates the number of shares cast for each elected director:
Name of director Votes for Votes withheld Frank G. Bisceglia 4,337,108 992 James R. Blair 4,321,486 16,614 Arthur C. Carmichael, Jr. 4,321,486 16,614 Richard L. Conniff 4,335,716 2,384 William Del Biaggio, Jr. 4,337,108 992 Anneke Dury 4,337,623 447 Tracey A. Enfantino 4,334,731 3,369 Glenn A. George 4,337,858 242 Robert P. Gionfriddo 4,335,025 3,075 P. Michael Hunt 4,337,108 992 John Larsen 4,334,966 3,134 Louis O. Normandin 4,337,108 992 Jack L. Peckham 4,327,516 10,584 Robert W. Peters 4,336,466 1,634 Humphrey P. Polanen 4,322,236 15,864 John E. Rossell III 4,337,858 242 Kirk Rossman 4,322,386 15,714 Brad Smith 4,337,858 242
Amendment of the Company's Stock Option Plan: The following chart indicates the results of the vote on the approval of the amendment to the Company's Restated 1994 Tandem Stock Option Plan. This amendment is for an increase in the number of shares available for grants of stock options to directors and key employees of the Company. FOR 4,148,472 AGAINST 109,714 Ratification of Auditors The following chart indicates the result of the vote on the ratification of the Board of Directors' selection of Deloitte & Touche LLP to serve as the Company's independent auditors for the fiscal year ending December 31, 1999. FOR 4,325,441 AGAINST 7,029 Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits included with this filing: Exhibit Number Name 10.1 Employment agreement January 1, 1999 with William B. Nethercott 10.2 Employment agreement January 1, 1999 with Denise Van Houten 10.3 Employment agreement January 1, 1999 with Richard L. Conniff 27.1 Financial Data Schedule (b) Reports on Form 8-K On July 21, 1999 the Company filed Form 8-K to report Robert Gionfriddo's new role as Banking Consultant to Heritage Commerce Corp and Heritage Bank of Commerce announces promotion of Daniel P. Myers to EVP/COO. On July 21, 1999, the Company filed its quarterly earnings press release with the SEC on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Heritage Commerce Corp (Registrant) Aug 13, 1999 /s/ John E. Rossell Date John E. Rossell, III, President and CEO Aug 13, 1999 /s/ Lawrence D. McGovern Date Lawrence D. McGovern, Chief Financial Officer EX-10.1 2 EMPLOYMENT AGREEMENT This employment agreement (the "Agreement") supercedes the agreement dated April 16, 1998, is effective as of January 1, 1999 (the "Effective Date"), and is executed on May 27, 1999, by and between Heritage Commerce Corp ("HCC") and its wholly owned subsidiary, Heritage Bank East Bay ("HBEB"), a California banking corporation, and Mr. William B. Nethercott on the following terms and conditions: 1. Position. Mr. Nethercott has been duly elected to serve as Executive Vice President and Chief Operating Officer ("COO") of HBEB. Mr. Nethercott will be subject to the direction of the CEO of HBEB and, by extension, the Board of Directors of HBEB. As employed hereunder, the term "Bank" is intended to mean HCC and/or any of its subsidiaries, as applicable. The term "Management" is intended to mean the CEO of HCC and/or, as applicable, those duly appointed management committees vested with decision-making authority. The term "Board" will, unless more narrowly defined in the context of its immediate usage, mean any and all boards of directors with purview over the matter at hand. Mr. Nethercott will set a high standard of conduct of courtesy and concern, of professional and personal discretion and responsibility, forthrightness, thrift, modesty and hard work. In light of this role with the Bank and the Bank's position in the industry, Mr. Nethercott will serve as a model for all employees of the Bank. Given your role with the Bank and your responsibility relative to the Bank's presence and stature in the community, Mr. Nethercott will, at all times, emulate this high standard of conduct in order to develop and enhance the Bank's reputation and image. Mr. Nethercott will comply with all pertinent regulatory standards as may affect the Bank. Mr. Nethercott will devote his entire productive time, attention and energy to the business of the Bank. In a manner and with such results as are consistent with his compensation and position, Mr. Nethercott will service the Bank's existing relationships and cultivate and foster new relationships for the Bank. Such new relationships will be consistent with the Bank's mission and will generally improve the Bank's share of market, volume of business, profitability and return of assets. Mr. Nethercott will at all times keep the Board and appropriate members of the Bank's management informed of his activities in the community. He will introduce his customers and potential customers and other business and civic contacts to appropriate members of the Bank's management and to appropriate Board members and to other employees of the Bank in order to enhance and solidify the Bank's prospects and position. Mr. Nethercott will exercise diligence with respect to the control of the direct and indirect costs of his activities on behalf of the Bank. In Addition to the above, Mr. Nethercott will: (a) be responsible for the operation of the Bank, its properties and related interest in accordance with the direction of the CEO, the management philosophy of the Board, the basic objectives of the Board and policy as established by the various Board committees; (b) be responsible to the CEO and the Board for operating the Bank on a profitable basis and for the attainment of profit goals established by the Board; (c) exercise diligence with respect to the control of the costs of operation and other expenses directly or indirectly involving interests of the Bank; (d) be responsible for achieving the broad objectives of business development, including growth of both loans and deposits as well as fee or deposit compensated products of the Bank; (e) be responsible for the loan portfolio, for budgeting, finance and accounting, and for strategic planning of the bank; and (f) be responsible for forming and developing the staff in a manner consistent with the Bank's immediate needs and strategic goals. 2. Term. Subject to Paragraph 12 below, the Term of this Agreement will be three years from the Effective Date hereof. At maturity, and annually thereafter, unless otherwise amended or terminated, this Agreement will automatically renew for a term of one year. Upon the termination of Mr. Nethercott's employment, neither he nor the Bank will have any further obligation to the other, except as set forth in Paragraphs 5, 9, 12, 13, 14, 15, 17, 18, and 24 herein. 3. Base Salary. For the Term of this Agreement while he is an employee, the Bank will pay Mr. Nethercott $95,000 per year ("Base Salary"), in accordance with the Bank's normal payroll procedures, less appropriate withholdings, taxes and similar deductions. The Base Salary will be reviewed annually by the CEO of HBEB and the CEO of HCC and is subject to alteration only at the direction of those individuals. 4. Performance Bonuses. From time to time, but not less than annually, subject to the discretion of the Board, the Bank will undertake, in good faith, to pay performance bonuses during the Term of this Agreement. The Bank will not be obligated to pay any specific amount pursuant to this Paragraph. Mr. Nethercott will be eligible for Performance Bonuses and the Bank will, in good faith, pay Performance Bonuses in amounts that it deems reasonable. If Performance Bonuses are paid, the amounts of such generally will be comparable to those for similarly placed executives at similarly situated financial institutions, and will be based on Mr. Nethercott's overall performance and that of the Bank, including such factors as growth, profitability, loan quality, adequacy of the loan loss reserve and the satisfactory nature of regulatory examinations. 5. Incentive Stock Options. The Board of HCC has granted to Mr. Nethercott incentive stock options to acquire shares of HCC's common stock, pursuant to the Heritage Commerce Corp 1994 Tandem Stock Option Plan and to that certain Stock Option Agreement dated 4/16/98. The Board, in its discretion, may grant such additional options, as it deems appropriate in order to recognize performance for the preceding year and in order to provide Mr. Nethercott with the incentive to sustain and enhance the operational performance of the Bank for the future. 6. Automobile Allowance. During the Term of this Agreement, the Bank will pay Mr. Nethercott a $450 monthly auto allowance plus gas reimbursement. 7. Medical Insurance. The Bank will provide medical insurance to Mr. Nethercott and his family with options and coverage consistent with those of the Bank's group medical plan as in effect from time to time. 8. Life Insurance, Disability Insurance and Supplemental Retirement Plan. The Bank will provide Mr. Nethercott life insurance and disability insurance to the same extent the Bank provides such insurance to its executive officers. Mr. Nethercott will be entitled to designate the beneficiary of the life insurance provided by this Paragraph. The Bank will provide Mr. Nethercott with a Supplemental Executive Retirement Plan (SERP), according to the terms of a separate agreement, by and between Mr. Nethercott and the Bank. The Board, in its discretion, may from time to time grant to Mr. Nethercott additional life insurance, disability insurance, and/or SERP benefits as it deems appropriate to his position and/or performance. 9. Indemnification by the Bank. The Bank will indemnify and hold Mr. Nethercott harmless pursuant to those certain Indemnification Agreements dated October 29, 1998 and executed by Mr. Nethercott and HCC and also to the extent provided for in the Bank's bylaws as to officers and/or directors of the Bank and HCC. 10. Monthly Expense Account. Subject to the Bank's Expense Reimbursement Policy, the Bank will reimburse Mr. Nethercott for his reasonable and necessary business expenses incurred in furthering the Bank's interests. 11. Vacation. During the period of this Agreement, Mr. Nethercott will accrue vacation consistent with the personnel policy of the Bank, but in no event at a rate of less than four weeks per year. In the event that while he is an employee, he receives any compensation in lieu of accrued vacation, such payment will not be included in severance calculations called for in Paragraph 12.1, Termination without Cause, or in Paragraph 12.2, Change of Control, hereunder. 12. Termination and Severance. Each party has the right to terminate Mr. Nethercott's employment with the Bank prior to the end of the Term specified in Paragraph 2 with or without cause at any time. For purposes of this Agreement, cause will arise if (i) he willfully breaches or habitually neglects the duties which he is required to perform under this Agreement, (ii) he commits an intentional act that has a material detrimental effect on the reputation or business of the Bank, or (iii) he is convicted of a felony or commits any material and actionable act of dishonesty, fraud, or intentional material misrepresentation in the performance of his duties under this Agreement. If the Bank decides to terminate Mr. Nethercott's employment for cause, the Bank will provide him with notice specifying the grounds for termination, accompanied by a brief written statement stating the relevant facts supporting such grounds. Upon termination of his employment for cause, Mr. Nethercott will not be entitled to any further amounts under this Agreement, except for the Base Salary accrued and unpaid vacation pay and any rights under the stock option plan earned through his last day of employment. 12.1 Termination Without Cause. If the Bank terminates Mr. Nethercott's employment without cause, the Bank will provide him the following, as his full and final severance: (i) a lump sum payment within 10 days after termination date, equal to one half his annual Base Salary and his Average Annual Performance Bonus paid (as defined below), if any, less withholding deductions, and (ii) if he is covered under the Bank's standard group medical and dental plan at the time of his termination, the Bank will continue to provide equivalent coverage to Mr. Nethercott, through C.O.B.R.A., for up to 6 months, as needed, after the date of his termination, at no cost to Mr. Nethercott; and (iii) with regard to any group life insurance and/or any group disability benefits enjoyed by Mr. Nethercott immediately prior to his severance, except as provided hereunder, the Bank will continue to provide such benefits for 12 months at no cost to Mr. Nethercott; and (iv) except as provided hereunder, the Bank will continue to pay for 12 months the premiums on any discreet supplemental life insurance and/or disability insurance policies carried by the Bank for Mr. Nethercott's benefit, in amounts and with coverage equivalent to coverage provided immediately prior to Mr. Nethercott's last day of employment, at no cost to Mr. Nethercott (thereafter, the Bank will freely assign such policies to Mr. Nethercott, and he will be responsible for all premium payments, if he so chooses). For purposes of this Agreement, a termination resulting from Mr. Nethercott's death or disability (as defined hereunder) will be considered Termination Without Cause. Disability will be effective hereunder if it causes Mr. Nethercott's absence from work for 90 days out of any consecutive 6-month period. 12.2 Change of Control. If Mr. Nethercott's employment is terminated without cause or terminates at Mr. Nethercott's election as a result of a material change in his compensation, benefits, title, responsibility or location, and such termination occurs within 30 days before, or 6 months following, a Change of Control (as hereafter defined), Mr. Nethercott will be entitled to the following benefits and compensation: (i) a lump sum payment within 10 days after termination date, equal to his annual Base Salary and his Average Annual Performance Bonus paid (as defined below), if any, less withholding deductions, and (ii) if he is covered under the Bank's standard group medical and dental plan at the time of his termination, the Bank will continue to provide equivalent coverage to Mr. Nethercott, through C.O.B.R.A., for up to 12 months, as needed, after the date of his termination, at no cost to Mr. Nethercott; and (iii) with regard to any group life insurance and/or any group disability benefits enjoyed by Mr. Nethercott immediately prior to his severance, except as provided hereunder, the Bank will continue to provide such benefits for 12 months at no cost to Mr. Nethercott; and (iv) except as provided hereunder, the Bank will continue to pay for 12 months the premiums on any discrete supplemental life insurance and/or disability insurance policies carried by the Bank for Mr. Nethercott's benefit, in amounts and with coverage equivalent to coverage provided immediately prior to Mr. Nethercott's last day of employment, at no cost to Mr. Nethercott (thereafter, the Bank will freely assign such policies to Mr. Nethercott, and he will be responsible for all premium payments, if he so chooses); (v) the Bank will reimburse Mr. Nethercott for bona-fide, professional out-placement services, not to exceed $3,000. The term "Change of Control" will mean the occurrence of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change of Control" has occurred to mean HCC, HBEB or any parent bank holding company organized at the direction of HCC or HBEB to own 100% of the outstanding common stock of HCC or HBEB): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in response to any other form or report to the regulatory agencies or governmental authorities having jurisdiction over the Employer or any stock exchange on which the Employer's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Employer in which the Employer does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Employer having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Employer, reflected in the most recent balance sheet of the Employer; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Employer representing twenty-five (25%) or more of the combined voting power of the Employer's then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Employer's shareholders, of each new director is approved by a vote of at least three- quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there will not be a "Change of Control" for purposes of the Agreement if the event which would otherwise come within the meaning of the term: "Change of Control" involves (i) a reorganization at the direction of the Employer solely to form a parent bank holding company which owns 100% of the Employer's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Employer or its parent holding company which is the party that acquires "control," as described above. 12.3 Voluntary Termination. If Mr. Nethercott decides of his own volition to terminate his employment under this Agreement prior to the end of the Term he will provide the Bank with one month's prior written notice; provided however, upon receiving such notice, the Bank may terminate his employment immediately. Upon voluntary termination of his employment, Mr. Nethercott will not be entitled to any further amounts under this Agreement, except for the Base Salary accrued and unpaid vacation pay and any rights under the stock option plan earned through his last day of employment. Provided that Nethercott tenders proper notice of voluntary termination under the term of this Agreement, for purposes of determining accrued salary and unpaid vacation pay only, the last day of employment will be one month from the Bank's receipt of written notice to voluntarily terminate employment. 12.4 Other Termination Matters. As to the Bank's obligations under Paragraph 12, the term "as needed" refers to Mr. Nethercott's continuing respective status as otherwise uninsured. Should he become employed, and become so insured as a result of his employment, the Bank would, from that moment forward, be released from its related insurance or insurance premium reimbursement obligations. As to the Bank's obligations under 12.1 (iii), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12 consecutive monthly installments, as needed by Mr. Nethercott, a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Nethercott's employment. As to the Bank's obligations under 12.1 (iv), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12 consecutive monthly installments a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Nethercott's employment. Under no circumstances will the Bank be under obligation to assign to Mr. Nethercott policies, which it does not possess, or which are otherwise non-assignable. As to the Bank's obligations under 12.2 (iii), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12 consecutive monthly installments, as needed by Mr. Nethercott, a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Nethercott's employment. As to the Bank's obligations under 12.2 (iv), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Nethercott in 12 consecutive monthly installments a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Nethercott's employment. Under no circumstances will the Bank be under obligation to assign to Mr. Nethercott policies, which it does not possess, or which are otherwise non-assignable. The term "Average Annual Performance Bonus," as used herein, will be calculated as of Mr. Nethercott's last date of employment and will mean the higher of (i) Mr. Nethercott's annual performance bonuses averaged from the date of this Agreement, or (ii) the average of his three most recent annual performance bonuses. 13. Confidential and Proprietary Information. Mr. Nethercott agrees that all Bank information, including but not limited to that which is directly or indirectly related to the Bank's financial status, profitability, deposit base, portfolio size and quality as well as its customers and prospective customers is confidential and proprietary to the Bank and that he will maintain such information as confidential at all times during and after his employment. Mr. Nethercott agrees that as a condition of employment, he will execute such form of confidentiality agreement as the Board may adopt from time to time for senior officers of the Bank, which agreement must be consistent with and not exceed the provisions of this Paragraph. 14. No Conflicting Agreements. Mr. Nethercott represents that his performance of all of the terms of this Agreement and any service to be rendered as an employee of the Bank does not and will not breach any fiduciary or other duty or any covenant, agreement or understanding, including without limitation, any agreement relating to any proprietary information, knowledge or data acquired by him in confidence, trust or otherwise, prior to his employment by the Bank to which he is a party or by the terms of which he may be bound. Mr. Nethercott covenants and agrees that he will not disclose to the Bank, or induce the Bank to use, any proprietary information, knowledge or data, belonging to any previous employer or others and that he will disclose to the Bank the term and subject of any prior confidentiality agreement or agreements he has entered into. Mr. Nethercott further covenants and agrees not to enter into any agreement or understanding, either written or oral, in conflict with the provisions of this Agreement. Further, Mr. Nethercott agrees that for a period of one year after termination, pursuant either to Paragraph 12.1 (Termination Without Cause) or Paragraph 12.2 (Change of Control), he will not (i) directly or indirectly solicit the services of any employee of the Bank or directly or indirectly encourage any employee to discontinue his or her employment with the Bank, or (ii) directly or indirectly solicit or encourage any customer of the Bank to curtail in any way the business that customer does with the Bank. 15. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Bank and any of its successors and assigns. In view of the personal nature of the services to be performed under this Agreement by Mr. Nethercott, he will not have the right to assign or transfer any of his rights, obligations or benefits under this Agreement, except as otherwise noted herein. 16. Governing Law. This Agreement will at all times and in all respects be governed by the laws of the State of California applicable to transactions wholly performed in California between California residents. 17. Mediation. Prior to engaging in any legal or equitable litigation or other dispute resolution process, regarding any of the terms and conditions of this agreement between the parties, or concerning the subject matter of the agreement between the parties, each party specifically agrees to engage, in good faith, in a mediation process at the expense of the Bank, complying with the procedures provided for under California Evidence Code, Sections 1115 through and including 1125 as then currently in effect. Using a mediator selected by both parties, the parties further and specifically agree to use their best efforts to reach a mutually agreeable resolution of the matter at such mediation. The parties understand and specifically agree that should any party(ies) to this Agreement refuse to participate in mediation for any reason, the other party(ies) will be entitled to seek a court order to enforce this provision in any court of appropriate jurisdiction requiring the dissenting party to attend, participate, and to make a good faith effort in the mediation process to reach a mutually agreeable resolution of the matter. 18. Arbitration In the event of any dispute or claim relating to or arising out of Mr. Nethercott's employment with the Bank (or any of its subsidiaries), this Agreement, or any termination of Mr. Nethercott's employment (including, but not limited to, any claims of breach of contract, wrongful termination, or age, disability or other discrimination or harassment), which dispute cannot be resolved by mediation pursuant to Paragraph 17, Mr. Nethercott and the Bank agree that all such disputes will be resolved exclusively by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. Mr. Nethercott and the Bank hereby knowingly and willingly waive their respective rights to have such disputes tried to a judge or jury. This arbitration provision will not apply to a claim for injunctive relief by either party to this Agreement. 19. Advice to Seek Counsel. Mr. Nethercott acknowledges that the Bank has advised him that this Agreement imposes legal obligations upon him and that he should consult with legal counsel with regard to this Agreement. The Bank will bear the cost of such legal review up to a maximum of $500. 20. Notices. Any notice required to be given hereunder will be sufficient if in writing and sent by certified or registered mail, return receipt requested, first class postage paid. The applicable address for the Bank is at its principal office in San Jose, attention to the CEO. Mr. Nethercott's address will be as shown on the Bank's records. Notices will be deemed given when actually received, or three days after mailing, whichever is earlier. 21. Entire Agreement. Except as provided in Paragraphs 5, 8, 9 and 13, this Agreement and any attachments hereto contain the entire agreement and understanding by and between the Bank and Mr. Nethercott. With respect to the subject matter herein, no representation, promise, agreement or understanding, written or oral, not herein contained will be of any force or effect. No modification hereof will be valid or binding unless in writing and signed by the party intended to be bound. No waiver of any provision of this Agreement will be valid unless in writing and signed by the party against whom such waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time will be deemed a waiver of any other provision of this Agreement, or will be deemed a valid waiver of any of such provision at any other time. If any provision of this Agreement is held by a court of competent jurisdiction or an arbitration body to be invalid, void or unenforceable, the remaining provisions of this Agreement will, nonetheless, continue in full force without being impaired or invalidated in any way. 22. Headings. The headings and other captions in this Agreement are for convenience and reference only and will not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 23. Regulatory Approval. In the event that any regulatory authority with jurisdiction over the Bank will disapprove any provision of this Agreement, then the parties hereto will use their best efforts, acting in good faith, to amend the Agreement in a manner that will be acceptable to the parties and to the regulatory authorities. 24. Other Attorney's Fees Clause. If any legal action or any arbitration or other proceeding is brought for the enforcement of this agreement or because of any dispute or alleged breach, the successful or prevailing party will be entitled to recover reasonable attorney fees and other costs incurred in that action or proceeding, in addition to any other relief which they may be entitled to. In witness hereof, the Bank and Mr. Nethercott have duly executed this Agreement and it is effective as of the day and year first set forth above. HERITAGE BANK EAST BAY By: /s/ Richard L. Conniff Date: May 27, 1999 Title: President and CEO HERITAGE COMMERCE CORP By: /s/ John E. Rossell Date: May 27, 1999 Title: President and CEO ACCEPTED BY: /s/ William B. Nethercott Date: May 27, 1999 William B. Nethercott EX-10.2 3 EMPLOYMENT AGREEMENT This employment agreement (the "Agreement") is entered into as of January 1, 1999, (the "Effective Date"), by and between Heritage Commerce Corp (the "Company") and its wholly owned subsidiary, Heritage Bank of Commerce ("HBC") a California banking corporation and Denise Van Houten (DVH), on the following terms and conditions. 1. Duty and Position. DVH will be Senior Vice President, Construction Lending, (SVP) at Heritage Bank of Commerce. DVH will be subject to the direction of the CEO of HBC and, by extension, the Board of Directors of HBC. The term "Bank" is intended to mean Company and/or any of its subsidiaries, as applicable. The term "Management" is intended to mean the CEO/and or, as applicable, those duly appointed management committees vested with decision-making authority. The term "Board" will, unless more narrowly defined in the context of its immediate usage, mean any and all boards of directors with purview over the matter at hand. The Parties agree that during the term of this Agreement, DVH may serve as a senior officer of HBC or other subsidiaries of Company. Although DVH's specific job description may change from time to time, the terms and conditions of the Agreement as defined in Sections 2 through 24 will remain in full force and effect. The SVP will set a high standard of conduct of courtesy and concern, of professional and personal discretion and responsibility, forthrightness, thrift, modesty and hard work and serve as a model for all employees of the bank. The SVP will comply with all pertinent regulatory standards as may affect the Bank. The SVP will devote her entire productive time, attention and energy to the business of the Bank. In a manner and with such results as are consistent with her compensation and position, DVH will service the Bank's existing relationships and cultivate and foster new relationships for the Bank. Such new relationships will be consistent with the Bank's policies and mission and will generally improve the Bank's share of market, volume of business, profitability and return of assets. The SVP will, at all times, keep the Board and appropriate members of the Bank's management informed of all of her activities undertaken in context of her role, including her activities in the community. She will introduce her customers and potential customers and other business and civic contacts to appropriate members of the Bank's management and to appropriate Board members and to other employees of the Bank in order to enhance and solidify the Bank's prospects and position. The SVP will exercise diligence with respect to the control of the direct and indirect costs of her activities on behalf of the Bank and of those of her staff. In Addition to the above, DVH will: (a) be a member of all committees of the Bank to which she is duly appointed. (b) be responsive to the directives of management which are in accordance with the objectives and/or policies of the Board and pertinent regulatory authorities and/or standards. (c) exercise diligence with respect to the control of the costs of operation and other expenses directly or indirectly involving interests of the Bank; (d) be responsible for achieving assigned objectives of the Bank for profitability and business development; (e) be responsible for the quality of the assigned loan portfolio; and (f) be responsible for budgeting, planning and management of staff as may be called for by her position. The provisions of paragraph 1 of this Agreement do not purport to constitute a job description, which is subject to change, from time to time, as may be documented by the records of the Human Resources Department. 2. Term. The Term of this Agreement will be three years from the Effective Date hereof. At maturity, and annually thereafter, unless otherwise amended or terminated, this Agreement will automatically renew for a term of one year. Upon the termination of DVH's employment, neither she nor the Bank will have any further obligation to the other, except as set forth in Paragraphs 5, 13. 1, 13.2, 16, 17,18 and 19 herein. 3. Base Salary. For the Term of this Agreement while she is an employee, the Bank will pay DVH $100,000 per year ("Base Salary"), in accordance with the Bank's normal payroll procedures, less appropriate withholdings, taxes and similar deductions. The Base Salary will be reviewed annually by the CEO and at his discretion, by the Personnel and Planning Committee of the Heritage Commerce Corp Board. 4. Performance Bonuses. From time to time, but not less than annually, subject to the discretion of the Board, the Bank will undertake, in good faith, to pay performance bonuses during the Term of this Agreement. The Bank will not be obligated to pay any specific amount pursuant to this section, except however, that DVH will be paid not less than $20,000 as her bonus for 1998 performance. Subsequent bonuses will be based on DVH's overall performance and that of the Bank, including such factors as profitability, deposit base, loan portfolio size and quality, adequacy of the loan loss reserve, the capital position of the Bank and the satisfactory nature of regulatory examinations and loan reviews. 5. Incentive Stock Options. As of the effective date of this Agreement, the Board of the Company has granted to DVH, incentive stock options to acquire 13,450 shares of the Company's common stock. These options were granted pursuant to the Heritage Commerce Corp 1994 Tandem Stock Option Plan and three stock Option Agreements by and between DVH and the bank, dated 9/28/94, 5/23/96 and 12/18/97. The Board, in its discretion, may grant such additional options, as it deems appropriate in order to recognize performance and in order to provide her with the incentive to sustain and enhance the operational performance of the Bank for the future. 6. Automobile Allowance. During the Term of this Agreement, the Bank will pay DVH a $300.00 monthly auto allowance. 7. Medical Insurance. The Bank will provide medical insurance to DVH and her family with options and coverage consistent with those of the Bank's group medical plan as in effect from time to time. 8. Life Insurance and Supplemental Executive Retirement Plan (SERP). The Bank will provide DVH life insurance to the same extent the Bank provides life insurance to its executive officers. She will be entitled to designate the beneficiary of the life insurance provided by this section. As this Agreement goes to signature, the Bank is in the process of offering a SERP to DVH. The SERP is pursuant to a separate agreement dated 1/15/99, which defines all of its terms and conditions. This Agreement makes no representations or warranties regarding the SERP, except to attest to the intention of the Bank to offer such to DVH. 9. Disability Insurance. The Bank will provide DVH long-term disability insurance to the same extent the Bank provides such disability insurance to its executive officers. 10. Indemnification by the Bank. The Bank and Company will indemnify and hold DVH harmless to the extent provided in the Bank's and Company's by-laws for officers and directors. 11. Monthly Expenses Account. Subject to the Bank's Expense Reimbursement Policy, the Bank will reimburse DVH for her reasonable and necessary business expenses incurred in furthering the Bank's interests, including automobile fuel used in the performance of this agreement. She will prepare and submit expense reports promptly. 12. Vacation. During the period of this Agreement, DVH will accrue not less than four weeks vacation, subject to and consistent with the personnel policy of the Bank. In the event that while she is an employee, she receives any compensation in lieu of accrued vacation, such payment will be considered cash compensation in addition to Base Salary and will not be included in severance calculations called for in Section 13.1, Termination without Cause, or in Section 13.2, Change of Control, hereunder. 13. Termination and Severance. Each party has the right to terminate DVH's employment with the Bank prior to the end of the Term specified in paragraph 2 with or without cause at any time. For purposes of this Agreement, cause will arise if (i) she willfully breaches or habitually neglect the duties which she is required to perform under this Agreement, (ii) commits an intentional act that has a material detrimental effect on the reputation or business of the Bank, or (iii) she is convicted of a felony or commits any such act of dishonesty, fraud, or intentional material misrepresentation as would prevent effective performance of her duties under this Agreement. If the Bank decides to terminate DVH's employment for cause, the Bank will provide her with notice specifying the grounds for termination, accompanied by a written statement stating the relevant facts supporting such grounds. Upon termination of her employment for cause, she will not be entitled to any further amounts except for the Base Salary earned through her last day of employment. 13.1 Termination Without Cause. If the Bank terminates DVH's employment without cause, the Bank will provide her the following, and her full and final severance: (i) a lump sum payment within 10 days after termination date, equal to one-half of her annual Base Salary, (ii) if she is covered under the Bank's standard group medical and dental plan at the time of her termination, the Bank will continue to provide equivalent coverage through C.O.B.R.A. for 6 months, as needed, after the date of termination at no cost to DVH; (thereafter, DVH will be responsible for such payments if she so chooses) (iii) with regard to any group life insurance and /or any group disability benefits enjoyed by DVH immediately prior to her severance, except as provided hereunder, the Bank will continue to provide such benefits for 6 months at no cost to DVH; and (iv) except as provided hereunder, the Bank will continue to pay for 6 months the premiums on any discreet supplemental life insurance and/or disability insurance policies carried by the Bank for DVH's benefit, in amounts and with coverage equivalent to coverage provided immediately prior to DVH's last day of employment, at no cost to DVH (thereafter, the Bank will freely assign such policies to DVH, and she will be responsible for all premium payments, if she so chooses). 13.2 Change of Control. If DVH's employment is terminated without cause or terminates at DVH's election as a result of a material change in her compensation, benefits, title, responsibility or location, and such termination occurs within 30 days before, or 6 months following, a Change of Control (as hereafter defined), DVH will be considered terminated without cause and will be entitled to the benefits and compensation described in Section 13.1, Termination Without Cause. The term "Change in Control" will mean the occurrence of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change in Control" has occurred to include any parent bank holding company organized at the direction of the Employer to own 100% of the Employer's outstanding common stock): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in response to any other form or report to the regulatory agencies or governmental authorities having jurisdiction over the Employer or any stock exchange on which the Employer's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Employer in which the Employer does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Employer having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Employer, reflected in the most recent balance sheet of the Employer; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Employer representing twenty-five (25%) or more of the combined voting power of the Employer's then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Employer's shareholders, of each new director is approved by a vote of at least three-quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there will not be a "Change of Control" for purposes of the Agreement if the event which would otherwise come within the meaning of the term: "Change of Control" involves (i) a reorganization at the direction of the Employer solely to form a parent bank holding company which owns 100% of the Employer's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Employer or its parent holding company which is the party that acquires "control", as described above. 13.3 Voluntary Termination. If DVH decides of her own volition to terminate her employment under this Agreement prior to the end of the Term, the Bank will be entitled to, and she will provide the Bank with, one month's prior written notice; provided however, upon receiving such notice, the Bank may terminate her employment immediately and pay her for the one-month period that the notice otherwise would have run, in addition to all other amounts then due and payable under this Agreement. 13.4 Other Termination Matters. As to the Bank's obligations under Paragraph 13, the term "as needed" refers to DVH's continuing respective status as otherwise uninsured. Should she become employed, and become so insured as a result of her employment, the Bank would, from that moment forward, be released from its related insurance or insurance premium reimbursement obligations. As to the Bank's obligations under 13.1 (iii) and 13.2, the Bank may, in the alternative, in its sole discretion, elect to pay to DVH in 6 consecutive monthly installments, as needed by DVH, a monthly amount equal to the Bank's monthly cost of providing such respective coverage during DVH's employment. As to the Bank's obligations under 13.1 (iv) and 13.2, the Bank may, in the alternative, in its sole discretion, elect to pay to DVH in 6 consecutive monthly installments a monthly amount equal to the Bank's monthly cost of providing such respective coverage during DVH's employment. Under no circumstances will the Bank be under obligation to assign to DVH policies, which it does not possess, or which are otherwise non-assignable. 14. Confidential and Proprietary Information. DVH agrees that all information, including but not limited to that which is directly or indirectly related to the Bank's financial status, profitability, deposit base, portfolio size, yield and quality as well as its customers and prospective customers is confidential and proprietary to the Bank and that she will maintain such information as confidential. DVH agrees that as a condition of employment, she will execute such form of confidentiality agreement as the Board may adopt from time to time for senior officers of the Bank. 15. No Conflicting Agreements. DVH represents that her performance of all of the terms of this Agreement and any service to be rendered as an employee of the Bank does not and will not breach any fiduciary or other duty or any covenant, agreement or understanding, including without limitation, any agreement relating to any proprietary information, knowledge or data acquired by her in confidence, trust or otherwise, prior to her employment by the Bank to which she is a party or by the terms of which she may be bound. DVH covenants and agrees that she will not disclose to the Bank, or induce the Bank to use, any proprietary information, knowledge or data, belonging to any previous employer or others and that she will disclose to the Bank the term and subject of any prior confidentiality agreement or agreements she has entered into. DVH further covenants and agrees not to enter into any agreement or understanding, either written or oral, in conflict with the provisions of this Agreement. Further, DVH agrees that for a period of one year after payment of full and final severance, pursuant either to Section 13.1 (Termination Without Cause) or Section 13.2 (Change of Control), she will not (i) directly solicit the services of any employee of the Bank or directly encourage any employee to discontinue her or her employment with the Bank, or (ii) directly solicit or encourage any customer of the Bank to curtail in any way the business that customer does with the Bank. 16. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Bank and any of its successors and assigns. In view of the personal nature of the services to be performed under this Agreement by DVH, she will not have the right to assign or transfer any of her rights, obligations or benefits under this Agreement, except as otherwise noted herein. 17. Governing Law. This Agreement will at all times and in all respects be governed by the laws of the State of California applicable to transactions wholly performed in California between California residents. 18. Mediation. Prior to engaging in any legal or equitable litigation or other dispute resolution process, regarding any of the terms and conditions of this agreement between the parties, or concerning the subject matter of the agreement between the parties, each party specifically agrees to engage, in good faith, in a mediation process at the expense of the Bank, complying with the procedures provided for under California Evidence Code, Sections 1115 through and including 1125 as then currently in effect. The parties further and specifically agree to use their best efforts to reach a mutually agreeable resolution of the matter. The parties understand and specifically agree that should any party(ies) to this Agreement refuse to participate in mediation for any reason, the other party(ies) will be entitles to seek a court order to enforce this provision in any court of appropriate jurisdiction requiring the dissenting party to attend, participate, and to make a good faith effort in the mediation process to reach a mutually agreeable resolution of the matter. Parties to this Agreement agree to use the American Arbitration Association model for any and all employment mediation. 19. Arbitration. In the event of any dispute or claim relating to or arising out of DVH's employment with the Bank (or any of its subsidiaries), this Agreement, or any termination of DVH's employment (including, but not limited to, any claims of breach of contract, wrongful termination, or age, disability or other discrimination or harassment), which dispute cannot be resolved by mediation pursuant to Paragraph 18, DVH and the Bank agree that all such disputes will be resolved exclusively by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. DVH and the Bank hereby knowingly and willingly waive their respective rights to have such disputes tried to a judge or jury. This arbitration provision will not apply to a claim for injunctive relief by either party to this Agreement. 20. Advice to Seek Counsel. DVH acknowledges that the Bank has advised her that this Agreement imposes legal obligations upon her and that she should consult with legal counsel with regard to this Agreement. 21. Notices. Any notice required to be given hereunder will be sufficient if in writing and sent by certified or registered mail, return receipt requested, first class postage paid. The applicable address for the Bank is at its principal office in San Jose, attention to the CEO. DVH's address will be as shown on the Bank's records. Notices will be deemed given when actually received, or three days after mailing, whichever is earlier. 22. Entire Agreement. This Agreement and any attachments hereto contain the entire agreement and understanding by and between the Bank and DVH and with respect to the subject matter herein, and no representation, promise, agreement or understanding, written or oral, not herein contained will be of any force or effect. No modification hereof will be valid or binding unless in writing and signed by the party intended to be bound. No waiver of any provision of this Agreement will be valid unless in writing and signed by the party against whom such waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time will be deemed a waiver of any other provision of this Agreement, or will be deemed a valid waiver of any of such provision at any other time. If any provision of this Agreement is held by a court of competent jurisdiction or an arbitration body to be invalid, void or unenforceable, the remaining provisions of this Agreement will, nonetheless, continue in full force without being impaired or invalidated in any way. 23. Headings. The headings and other captions in this Agreement are for convenience and reference only and will not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 24. Regulatory Approval. In the event that any regulatory authority with jurisdiction over the Bank will disapprove any provision of this Agreement, then the parties hereto will use their best efforts, acting in good faith, to amend the Agreement in a manner that will be acceptable to the parties and to the regulatory authorities. In witness whereof, the Bank and Denise Van Houten have duly executed this Agreement and it is effective as of the day and year first set forth above. HERITAGE BANK OF COMMERCE By: /S/ John E. Rossell Date: April 6, 1999 Title: President and CEO ACCEPTED BY: /s/ Denise Van Houten Date: April 6, 1999 Denise Van Houten EX-10.3 4 EMPLOYMENT AGREEMENT This employment agreement (the "Agreement") supercedes the agreement dated April 30, 1998, is effective as of January 1, 1999 (the "Effective Date"), and is executed on May 14, 1999, by and between Heritage Commerce Corp ("HCC"), a California corporation, and Mr. Richard L. Conniff on the following terms and conditions: 1. Position. Mr. Conniff has been duly elected to the Board of Directors of HCC ("HCC Board"). During the term of this Agreement, the HCC Board will continue to present Mr. Conniff on the HCC slate of individuals nominated for election by shareholders to the post of Director. Mr. Conniff will serve as President and CEO of Heritage Bank East Bay. Mr. Conniff will be subject to the direction of the CEO of HCC and, by extension, the HCC Board. Notwithstanding the foregoing reporting responsibility, Mr. Conniff will also be responsible to the Board of Directors of Heritage Bank East Bay. As employed hereunder, the term "Bank" is intended to mean HCC and/or any of its subsidiaries, as applicable. The term "Management" is intended to mean the CEO of HCC and/or, as applicable, those duly appointed management committees vested with decision-making authority. The term "Board" will, unless more narrowly defined in the context of its immediate usage, mean any and all boards of directors with purview over the matter at hand. Mr. Conniff will set a high standard of conduct of courtesy and concern, of professional and personal discretion and responsibility, forthrightness, thrift, modesty and hard work. In light of this role with the Bank and the Bank's position in the industry, Mr. Conniff will serve as a model for all employees of the Bank. Given his role with the Bank and his responsibility relative to the Bank's presence and stature in the community, Mr. Conniff will, at all times, emulate this high standard of conduct in order to develop and enhance the Bank's reputation and image. Mr. Conniff will comply with all pertinent regulatory standards as may affect the Bank. Mr. Conniff will devote his entire productive time, attention and energy to the business of the Bank. In a manner and with such results as are consistent with his compensation and position, Mr. Conniff will service the Bank's existing relationships and cultivate and foster new relationships for the Bank. Such new relationships will be consistent with the Bank's mission and will generally improve the Bank's share of market, volume of business, profitability and return of assets. Mr. Conniff will at all times keep the Board and appropriate members of the Bank's management informed of all of his activities undertaken in context of his role, including his activities in the community. He will introduce his customers and potential customers and other business and civic contacts to appropriate members of the Bank's management and to appropriate Board members and to other employees of the Bank in order to enhance and solidify the Bank's prospects and position. Mr. Conniff will exercise diligence with respect to the control of the direct and indirect costs of his activities on behalf of the Bank. In Addition to the above, Mr. Conniff will: (a) be a member of all committees of the East Bay Board and of the Company Board to which he is duly appointed, except any audit committee; (b) be responsible for the operation of the Bank, its properties and related interests in accordance with the directives of management and in accordance with the objectives and/or policies of the Board; (c) exercise diligence with respect to the control of the costs of operation and other expenses directly or indirectly involving interests of the Bank; (d) be responsible for achieving the broad objectives of the Bank for profitability and business development; (e) be responsible for the quality of the loan portfolio; and (f) be responsible for budgeting, finance, accounting, planning and for forming and developing the staff in a manner consistent with the Bank's immediate needs and strategic goals. 2. Term. Subject to Paragraph 12 below, the Term of this Agreement will be three years from the Effective Date hereof. At maturity, and annually thereafter, unless otherwise amended or terminated, this Agreement will automatically renew for a term of one year. Upon the termination of Mr. Conniff's employment, neither he nor the Bank will have any further obligation to the other, except as set forth in Paragraphs 5, 9, 12, 13, 14, 15, 17, 18, and 24 herein. 3. Base Salary. For the Term of this Agreement while he is an employee, the Bank will pay Mr. Conniff $125,000 per year ("Base Salary"), in accordance with the Bank's normal payroll procedures, less appropriate withholdings, taxes and similar deductions. The Base Salary will be reviewed annually by the CEO of HCC and the Personnel and Planning Committee of the HCC Board and is subject to alteration only at the direction of those individuals. 4. Performance Bonuses. From time to time, but not less than annually, subject to the discretion of the Board, the Bank will undertake, in good faith, to pay performance bonuses during the Term of this Agreement. The Bank will not be obligated to pay any specific amount pursuant to this Paragraph. Mr. Conniff will be eligible for Performance Bonuses and the Bank will, in good faith, pay Performance Bonuses in amounts that it deems reasonable. If Performance Bonuses are paid, the amounts of such generally will be comparable to those for similarly placed executives at similarly situated financial institutions, and will be based on Mr. Conniff's overall performance and that of the Bank, including such factors as growth, profitability, loan quality, adequacy of the loan loss reserve and the satisfactory nature of regulatory examinations. 5. Incentive Stock Options. The Board of HCC has granted to Mr. Conniff incentive stock options to acquire shares of HCC's common stock, pursuant to the Heritage Commerce Corp 1994 Tandem Stock Option Plan and to those two certain Stock Option Agreements dated 4/30/98 and 9/17/98. The Board, in its discretion, may grant such additional options, as it deems appropriate in order to recognize performance for the preceding year and in order to provide Mr. Conniff with the incentive to sustain and enhance the operational performance of the Bank for the future. 6. Automobile Allowance. During the Term of this Agreement, the Bank will pay Mr. Conniff a $500 monthly auto allowance plus gas reimbursement. 7. Medical Insurance. The Bank will provide medical insurance to Mr. Conniff and his family with options and coverage consistent with those of the Bank's group medical plan as in effect from time to time. 8. Life Insurance, Disability Insurance and Supplemental Retirement Plan. The Bank will provide Mr. Conniff life insurance and disability insurance to the same extent the Bank provides such insurance to its executive officers. Mr. Conniff will be entitled to designate the beneficiary of the life insurance provided by this Paragraph. The Bank will provide Mr. Conniff with a Supplemental Executive Retirement Plan (SERP) and a Split Dollar Life Insurance Policy, according to the terms of separate agreements, by and between Mr. Conniff and the Bank. The Board, in its discretion, may from time to time grant to Mr. Conniff additional life insurance, disability insurance, and/or SERP benefits as it deems appropriate to his position and/or performance. 9. Indemnification by the Bank. The Bank will indemnify and hold Mr. Conniff harmless pursuant to those certain Indemnification Agreements dated October 29, 1998 and executed by Mr. Conniff and HCC and also to the extent provided for in the Bank's bylaws as to officers and/or directors of the Bank and HCC. 10. Monthly Expense Account. Subject to the Bank's Expense Reimbursement Policy, the Bank will reimburse Mr. Conniff for his reasonable and necessary business expenses, including membership in the Silicon Valley Capital Club, incurred in furthering the Bank's interests. 11. Vacation. During the period of this Agreement, Mr. Conniff will accrue vacation consistent with the personnel policy of the Bank, but in no event at a rate of less than four weeks per year. In the event that while he is an employee, he receives any compensation in lieu of accrued vacation, such payment will not be included in severance calculations called for in Paragraph 12.1, Termination without Cause, or in Paragraph 12.2, Change of Control, hereunder. 12. Termination and Severance. Each party has the right to terminate Mr. Conniff's employment with the Bank prior to the end of the Term specified in Paragraph 2 with or without cause at any time. For purposes of this Agreement, cause will arise if (i) he willfully breaches or habitually neglects the duties which he is required to perform under this Agreement, (ii) he commits an intentional act that has a material detrimental effect on the reputation or business of the Bank, or (iii) he is convicted of a felony or commits any material and actionable act of dishonesty, fraud, or intentional material misrepresentation in the performance of his duties under this Agreement. If the Bank decides to terminate Mr. Conniff's employment for cause, the Bank will provide him with notice specifying the grounds for termination, accompanied by a brief written statement stating the relevant facts supporting such grounds. Upon termination of his employment for cause, Mr. Conniff will not be entitled to any further amounts under this Agreement, except for the Base Salary accrued and unpaid vacation pay and any rights under the stock option plan earned through his last day of employment. 12.1 Termination Without Cause. If the Bank terminates Mr. Conniff's employment without cause, the Bank will provide him the following, as his full and final severance: (i) a lump sum payment within 10 days after termination date, equal to his annual Base Salary, annual auto allowance and Average Annual Performance Bonus paid (as defined below), if any, less withholding deductions, and (ii) if he is covered under the Bank's standard group medical and dental plan at the time of his termination, the Bank will continue to provide equivalent coverage to Mr. Conniff, through C.O.B.R.A., for up to 12 months, as needed, after the date of his termination, at no cost to Mr. Conniff; and (iii) with regard to any group life insurance and/or any group disability benefits enjoyed by Mr. Conniff immediately prior to his severance, except as provided hereunder, the Bank will continue to provide such benefits for 12 months at no cost to Mr. Conniff; and (iv) except as provided hereunder, the Bank will continue to pay for 12 months the premiums on any discreet supplemental life insurance and/or disability insurance policies carried by the Bank for Mr. Conniff's benefit, in amounts and with coverage equivalent to coverage provided immediately prior to Mr. Conniff's last day of employment, at no cost to Mr. Conniff (thereafter, the Bank will freely assign such policies to Mr. Conniff, and he will be responsible for all premium payments, if he so chooses); (v) the Bank will reimburse Mr. Conniff for bona-fide, professional out-placement services, not to exceed $5,000. For purposes of this Agreement, a termination resulting from Mr. Conniff's death or disability (as defined hereunder) will be considered Termination Without Cause. Disability will be effective hereunder if it causes Mr. Conniff's absence from work for 90 days out of any consecutive 6-month period. 12.2 Change of Control. If Mr. Conniff's employment is terminated without cause or terminates at Mr. Conniff's election as a result of a material change in his compensation, benefits, title, responsibility or location, and such termination occurs within 60 days before, or 12 months following, a Change of Control (as hereafter defined), Mr. Conniff will be entitled to the following benefits and compensation: (i) a lump sum payment within 10 days after termination date, equal to twice the aggregate of his annual Base Salary, annual auto allowance and Average Annual Performance Bonus paid (as defined below), if any, less withholding deductions, and (ii) if he is covered under the Bank's standard group medical and dental plan at the time of his termination, the Bank will continue to provide equivalent coverage to Mr. Conniff, through C.O.B.R.A., for up to 18 months, as needed, after the date of his termination, at no cost to Mr. Conniff; and (iii) with regard to any group life insurance and/or any group disability benefits enjoyed by Mr. Conniff immediately prior to his severance, except as provided hereunder, the Bank will continue to provide such benefits for 18 months at no cost to Mr. Conniff; and (iv) except as provided hereunder, the Bank will continue to pay for 18 months the premiums on any discrete supplemental life insurance and/or disability insurance policies carried by the Bank for Mr. Conniff's benefit, in amounts and with coverage equivalent to coverage provided immediately prior to Mr. Conniff's last day of employment, at no cost to Mr. Conniff (thereafter, the Bank will freely assign such policies to Mr. Conniff, and he will be responsible for all premium payments, if he so chooses); (v) the Bank will reimburse Mr. Conniff for bona-fide, professional out-placement services, not to exceed $5,000. The term "Change of Control" will mean the occurrence of any of the following events with respect to the Employer (with the term "Employer" being defined for purposes of determining whether a "Change of Control" has occurred to mean HCC, HBC or any parent bank holding company organized at the direction of HCC or HBC to own 100% of the outstanding common stock of HCC or HBC): (i) a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or in response to any other form or report to the regulatory agencies or governmental authorities having jurisdiction over the Employer or any stock exchange on which the Employer's shares are listed which requires the reporting of a change in control; (ii) any merger, consolidation or reorganization of the Employer in which the Employer does not survive; (iii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) of any assets of the Employer having an aggregate fair market value of fifty percent (50%) of the total value of the assets of the Employer, reflected in the most recent balance sheet of the Employer; (iv) a transaction whereby any "person" (as such term is used in the Exchange Act) or any individual, corporation, partnership, trust or any other entity becomes the beneficial owner, directly or indirectly, of securities of the Employer representing twenty-five (25%) or more of the combined voting power of the Employer's then outstanding securities; or (v) a situation where, in any one-year period, individuals who at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Employer's shareholders, of each new director is approved by a vote of at least three- quarters (3/4) of the directors then still in office who were directors at the beginning of the period. Notwithstanding the foregoing or anything else contained herein to the contrary, there will not be a "Change of Control" for purposes of the Agreement if the event which would otherwise come within the meaning of the term: "Change of Control" involves (i) a reorganization at the direction of the Employer solely to form a parent bank holding company which owns 100% of the Employer's common stock following the reorganization, or (ii) an Employee Stock Ownership Plan sponsored by the Employer or its parent holding company which is the party that acquires "control," as described above. 12.3 Voluntary Termination. If Mr. Conniff decides of his own volition to terminate his employment under this Agreement prior to the end of the Term he will provide the Bank with one month's prior written notice; provided however, upon receiving such notice, the Bank may terminate his employment immediately. Upon voluntary termination of his employment, Mr. Conniff will not be entitled to any further amounts under this Agreement, except for the Base Salary accrued and unpaid vacation pay and any rights under the stock option plan earned through his last day of employment. 12.4 Other Termination Matters. As to the Bank's obligations under Paragraph 12, the term "as needed" refers to Mr. Conniff's continuing respective status as otherwise uninsured. Should he become employed, and become so insured as a result of his employment, the Bank would, from that moment forward, be released from its related insurance or insurance premium reimbursement obligations. As to the Bank's obligations under 12.1 (iii), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Conniff in 12 consecutive monthly installments, as needed by Mr. Conniff, a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Conniff's employment. As to the Bank's obligations under 12.1 (iv), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Conniff in 12 consecutive monthly installments a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Conniff's employment. Under no circumstances will the Bank be under obligation to assign to Mr. Conniff policies that it does not possess, or which are otherwise non-assignable. As to the Bank's obligations under 12.2 (iii), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Conniff in 18 consecutive monthly installments, as needed by Mr. Conniff, a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Conniff's employment. As to the Bank's obligations under 12.2 (iv), the Bank may, in the alternative, in its sole discretion, elect to pay to Mr. Conniff in 18 consecutive monthly installments a monthly amount equal to the Bank's monthly cost of providing such respective coverage during Mr. Conniff's employment. Under no circumstances will the Bank be under obligation to assign to Mr. Conniff policies that it does not possess, or which are otherwise non-assignable. The term "Average Annual Performance Bonus," as used herein, will be calculated as of Mr. Conniff's last date of employment and will mean the higher of (i) Mr. Conniff's annual performance bonuses averaged from the date of this Agreement, or (ii) the average of his three most recent annual performance bonuses. 13. Confidential and Proprietary Information. Mr. Conniff agrees that all Bank information, including but not limited to that which is directly or indirectly related to the Bank's financial status, profitability, deposit base, portfolio size and quality as well as its customers and prospective customers is confidential and proprietary to the Bank and that he will maintain such information as confidential at all times during and after his employment. Mr. Conniff agrees that as a condition of employment, he will execute such form of confidentiality agreement as the Board may adopt from time to time for senior officers of the Bank, which agreement must be consistent with and not exceed the provisions of this Paragraph. 14. No Conflicting Agreements. Mr. Conniff represents that his performance of all of the terms of this Agreement and any service to be rendered as an employee of the Bank does not and will not breach any fiduciary or other duty or any covenant, agreement or understanding, including without limitation, any agreement relating to any proprietary information, knowledge or data acquired by him in confidence, trust or otherwise, prior to his employment by the Bank to which he is a party or by the terms of which he may be bound. Mr. Conniff covenants and agrees that he will not disclose to the Bank, or induce the Bank to use, any proprietary information, knowledge or data, belonging to any previous employer or others and that he will disclose to the Bank the term and subject of any prior confidentiality agreement or agreements he has entered into. Mr. Conniff further covenants and agrees not to enter into any agreement or understanding, either written or oral, in conflict with the provisions of this Agreement. Further, Mr. Conniff agrees that for a period of one year after termination, pursuant either to Paragraph 12.1 (Termination Without Cause) or Paragraph 12.2 (Change of Control), he will not (i) directly or indirectly solicit the services of any employee of the Bank or directly or indirectly encourage any employee to discontinue his or her employment with the Bank, or (ii) directly or indirectly solicit or encourage any customer of the Bank to curtail in any way the business that customer does with the Bank. 15. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Bank and any of its successors and assigns. In view of the personal nature of the services to be performed under this Agreement by Mr. Conniff, he will not have the right to assign or transfer any of his rights, obligations or benefits under this Agreement, except as otherwise noted herein. 16. Governing Law. This Agreement will at all times and in all respects be governed by the laws of the State of California applicable to transactions wholly performed in California between California residents. 17. Mediation. Prior to engaging in any legal or equitable litigation or other dispute resolution process, regarding any of the terms and conditions of this agreement between the parties, or concerning the subject matter of the agreement between the parties, each party specifically agrees to engage, in good faith, in a mediation process at the expense of the Bank, complying with the procedures provided for under California Evidence Code, Sections 1115 through and including 1125 as then currently in effect. Using a mediator selected by both parties, the parties further and specifically agree to use their best efforts to reach a mutually agreeable resolution of the matter at such mediation. The parties understand and specifically agree that should any party(ies) to this Agreement refuse to participate in mediation for any reason, the other party(ies) will be entitled to seek a court order to enforce this provision in any court of appropriate jurisdiction requiring the dissenting party to attend, participate, and to make a good faith effort in the mediation process to reach a mutually agreeable resolution of the matter. 18. Arbitration In the event of any dispute or claim relating to or arising out of Mr. Conniff's employment with the Bank (or any of its subsidiaries), this Agreement, or any termination of Mr. Conniff's employment (including, but not limited to, any claims of breach of contract, wrongful termination, or age, disability or other discrimination or harassment), which dispute cannot be resolved by mediation pursuant to Paragraph 17, Mr. Conniff and the Bank agree that all such disputes will be resolved exclusively by binding arbitration conducted by the American Arbitration Association in Santa Clara County, California. Mr. Conniff and the Bank hereby knowingly and willingly waive their respective rights to have such disputes tried to a judge or jury. This arbitration provision will not apply to a claim for injunctive relief by either party to this Agreement. 19. Advice to Seek Counsel. Mr. Conniff acknowledges that the Bank has advised him that this Agreement imposes legal obligations upon him and that he should consult with legal counsel with regard to this Agreement. The Bank will bear the cost of such legal review up to a maximum of $500. 20. Notices. Any notice required to be given hereunder will be sufficient if in writing and sent by certified or registered mail, return receipt requested, first class postage paid. The applicable address for the Bank is at its principal office in San Jose, attention to the CEO. Mr. Conniff's address will be as shown on the Bank's records. Notices will be deemed given when actually received, or three days after mailing, whichever is earlier. 21. Entire Agreement. Except as provided in Paragraphs 5, 8, 9 and 13, this Agreement and any attachments hereto contain the entire agreement and understanding by and between the Bank and Mr. Conniff. With respect to the subject matter herein, no representation, promise, agreement or understanding, written or oral, not herein contained will be of any force or effect. No modification hereof will be valid or binding unless in writing and signed by the party intended to be bound. No waiver of any provision of this Agreement will be valid unless in writing and signed by the party against whom such waiver is sought to be enforced. No valid waiver of any provision of this Agreement at any time will be deemed a waiver of any other provision of this Agreement, or will be deemed a valid waiver of any of such provision at any other time. If any provision of this Agreement is held by a court of competent jurisdiction or an arbitration body to be invalid, void or unenforceable, the remaining provisions of this Agreement will, nonetheless, continue in full force without being impaired or invalidated in any way. 22. Headings. The headings and other captions in this Agreement are for convenience and reference only and will not be used in interpreting, construing or enforcing any of the provisions of this Agreement. 23. Regulatory Approval. In the event that any regulatory authority with jurisdiction over the Bank will disapprove any provision of this Agreement, then the parties hereto will use their best efforts, acting in good faith, to amend the Agreement in a manner that will be acceptable to the parties and to the regulatory authorities. 24. Other Attorney's Fees Clause. If any legal action or any arbitration or other proceeding is brought for the enforcement of this agreement or because of any dispute or alleged breach, the successful or prevailing party will be entitled to recover reasonable attorney fees and other costs incurred in that action or proceeding, in addition to any other relief which they may be entitled to. In witness hereof, the Bank and Mr. Conniff have duly executed this Agreement and it is effective as of the day and year first set forth above. HERITAGE COMMERCE CORP By: /S/ John E. Rossell Date: May 14, 1999 Title: President and CEO ACCEPTED BY: /s/ Richard L. Conniff Date: May 14, 1999 Richard L. Conniff EX-27 5
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HERITAGE COMMERCE CORP UNAUDITED FINANCIAL STATEMENTS AT JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1999 JUN-30-1999 294,000 240,432,000 59,120,000 0 13,856,000 13,856,000 13,783,000 245,336,000 4,337,000 403,215,000 364,592,000 0 7,150,000 0 0 0 29,642,000 1,831,000 403,215,000 12,249,000 1,394,000 647,000 14,290,000 4,371,000 4,382,000 9,908,000 1,127,000 1,004,000 8,751,000 1,941,000 1,941,000 0 0 1,301,000 0.23 0.20 6.02 0 0 0 0 3,825,000 616,000 1,000 4,337,000 4,337,000 0 0
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