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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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[ ] Soliciting Material Pursuant to ss.240.14a-12
Heritage Commerce Corp
________________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
________________________________________________________________________________
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From: Brad Smith
Sent: Monday, April 26, 2004 12:05 PM
To: Bank Employees
Subject: Important Message
** High Priority **
I wanted to take a moment to make all Heritage Bankers aware of an issue that
has surfaced recently and will surely come up to many of you in the form of
questions from customers, Heritage shareholders and friends during the next few
weeks.
Late Friday afternoon, a group calling themselves the "Concerned Shareholders
Committee of Heritage Commerce Corp" filed documents with the SEC (Securities
and Exchange) that effectively gives them the opportunity to place a proxy
ballot in front of Heritage shareholders that is substantially different than
the proxy that was forwarded to shareholders earlier by our own Board of
Directors. Specifically, the proxy from this dissident group seeks shareholder
approval to unseat two of our Directors and increase the size of the Board from
its current 12 members to 13, effectively placing three of their own members on
the Heritage Board. Their "platform" for pursuit of this proxy contest centers
around their own perceptions regarding the following: poor financial
performance; lack of strategic plan; and weak corporate governance.
I want all Heritage Bankers to know that your Board and Management vigorously
oppose the proxy proposal from these dissidents and we will actively work to
convince shareholders to vote the proxy forwarded to them earlier. In fact, we
ask that all Heritage Bankers that are Heritage shareholders support our own
proxy by voting your shares using the "white" card that has been forwarded to
you. Although our opposition will be a necessary and important part of Board and
Senior Management's work from now until our Annual Meeting of Shareholders
scheduled for May 27th, it is absolutely imperative that we all continue "on
course" with service to our customers and development of new business
opportunities. We will be communicating more details on our position regarding
the issues raised by the dissidents with our shareholders in the near future. We
find this proxy contest to be ill-founded and uninformed and believe that our
track record to date gives our entire Heritage management and staff tremendous
credibility. For your review, I have attached our first quarter press release
that was issued Friday afternoon and will follow with subsequent releases that
may occur as we proceed forward on this proxy issue.
It is important that any questions that may be asked of you by customers,
prospects and/or shareholders regarding this issue during the course of your day
be directed to Rebecca Levey (494-4513). She will coordinate the response from
the appropriate party. If you have any questions regarding this issue, please
contact me and I will be happy to respond. Once again, it is important that we
proceed with "business as usual". Please contact me if you have any questions or
comments.
Brad L. Smith
Chief Executive Officer
PRESS RELEASE
HERITAGE FOR ADDITIONAL INFORMATION, CONTACT:
COMMERCE CORP ____________________________________
Brad Smith, CEO.......(408) 947-6900
Rebecca Levey SVP/Marketing...(408) 494-4513
________________________________________________________________________________
For Immediate Release: April 23, 2004
HERITAGE COMMERCE CORP REPORTS 1Q04 NET INCOME OF $2.0 MILLION,
OR $0.17 EPS; CORE DEPOSITS INCREASE 13% TO $776 MILLION
San Jose, CA - April 23, 2004 - Heritage Commerce Corp (the "Company") (Nasdaq:
HTBK), parent company of Heritage Bank of Commerce, today reported first quarter
net income increased 4%, as assets increased 12% and core deposits rose 13%
boosted by a strong start for its new Los Gatos office and solid contribution
from all divisions/offices. Net income was $2.0 million, or $0.17 diluted per
share, compared to $1.9 million, or $0.17 diluted per share, in the first
quarter ended March 31, 2003.
"The first quarter puts us well on our way to achieving our strategic plan for
the year," said Brad L. Smith, CEO. "Our focus over the past decade has been to
build a solid business banking franchise and quickly capture the banking
business of the region's entrepreneurs. We have invested heavily in the
infrastructure and talent that provides the high-level of service and breadth of
products required to meet the needs of the closely-held business professional.
With this infrastructure in place, we are now shifting our focus to optimize
profitability and shareholder value. Frankly, we won't be satisfied until we
reach performance in the top quartile of our peers, which is the overall goal of
our strategic plan."
FINANCIAL HIGHLIGHTS (1Q04 versus 1Q03):
o Assets increased 12% to $1.06 billion.
o Net interest income after provision for loan losses increased 10% to $9.2
million.
o Servicing income from loans rose 19% to $505,000.
o Income from service charges and account fees increased 15% to $473,000.
o Net income increased 4% to $2.0 million, or $0.17 per diluted share.
o Core deposits, excluding time deposits $100,000 and over, grew 13% to $776
million.
o Nonperforming assets were unchanged at $4.8 million, or 0.45% of total assets.
o Commercial loans increased 7% to $276 million, or 41 % of gross loans.
ECONOMIC DEVELOPMENTS
"When we established Heritage Bank of Commerce in 1994 with $14 million in
capital, we set an ambitious goal of growing assets to $1 billion within ten
years. Due to the hard work and dedication of our team, we achieved that goal in
9 years, crossing the billion dollar mark in December," Smith said.
"The difficult regional economic conditions coupled with an unfavorable interest
rate environment constrained loan growth and dampened profitability in the past
few years. In spite of this difficult climate, we've made strong, even
extraordinary, progress in building the institution," said Richard L. Conniff,
C00.
"The recent positive reports on job growth and the state economic recovery are
good news for us," said Smith. The Silicon Valley SAN JOSE BUSINESS JOURNAL
reported in a March 26, 2004 article, "...the unemployment rate in Santa Clara
County dropped to 6.8% in February from 7.1% in January. ... manufacturing
employment overall showed its first increase (in February) since December 2000 .
.... Employment in the information sector was up 1%. Internet, Web service and
hosting employment was also up 1 %. Telecommunications jumped 1.9%."
"We are beginning to see strengthening demand for new loans, particularly for
residential and small commercial construction projects," said Smith. "The SBA's
decision to restore funding levels for small business owners is also a very
positive sign. As one of the top ten SBA lenders in California, the temporary,
yet severe, curtailment of SBA
________________________________________________________________________________
150 Almaden Boulevard o San Jose, CA 95113 o (408) 947-6900 o fax (408) 947-6910
lending limits imposed during the first quarter reduced our SBA loan
originations by 32% to $12.5 million from $18.3 million a year ago. Fortunately,
demand in this sector appears to have been delayed rather than eliminated, and
our SBA loan pipeline is very strong. In the first quarter, we opened a new SBA
lending office in Irvine, expanding our business lending presence in Southern
California."
ACCOMPLISHMENTS REVIEW
In its first decade of operations, Heritage Commerce Corp has generated strong
growth. The following highlights a few of the accomplishments of the past six
years:
o Net income's compounded average growth rate (CAGR) was 18% from 1997 to 2003.
o Earnings per share have grown at a CAGR of 14% since 1997.
o Assets grew at a CAGR of 17% in the past six years.
o Deposits posted a CAGR of 15% from 1997 to 2003.
o The loan portfolio showed a CAGR of 22% in the past six years.
o Asset quality has remained well above that of similar sized banks, both in
California and nationwide.
- Nonperforming loans to total loans are well below peers.
- Loan loss reserves to total loans continue to be well above the peer
average.
FIRST QUARTER OPERATING RESULTS
Net interest income totaled $9.8 million in 1 Q04 compared to $9.7 million in 1
Q03. A 21 % decrease in interest expense offset a 4% decrease in interest
income. Net interest margin was 4.38% and has been gradually improving over the
last few quarters, up 4 basis points from 4Q03 and 37 basis points higher than
the all-time low of 4.01% reported in 3Q03. "We have positioned our portfolio to
benefit from rising interest rates, in anticipation of improving economic
activity and the likely associated change in Fed monetary policy," said Richard
Conniff, Chief Operating Officer. "It appears that an upturn in rates is
approaching, and the margin compression we've experienced in the past three
years will stabilize and margins may begin to expand."
First quarter 2004 noninterest income dropped 17% to $2.5 million from $3.0
million in the first quarter of the previous year. Gain on sale of SBA loans
increased 31 %, loan servicing income increased 19%, and service charges and
other fees grew 15% in the first quarter of 2004 compared to the like period a
year ago. Offsetting these gains were lower gain on sale of securities, which
decreased $213,000 and a $244,000 drop in residential mortgage loan brokering
fees. "We also reclassified an equipment lease into a direct financing lease,
which is now included in loans. As a result, the payment amounts are now
recorded as principle and interest payments rather than noninterest income and
expenses," Conniff explained.
Operating expenses were $8.7 million for the first quarter of 2004, a 2%
increase from the year-ago quarter, and a 4% decline from the preceding quarter.
"With our branch footprint now established, earnings optimization, cost
containment and productivity improvement are now our focus. We invested heavily
in the last two quarters in a new outsourced data processing platform and
anticipate savings of approximately $200,000 pre-tax per year, going forward,"
said Larry McGovern, CFO. "Outsourcing data processing cost $335,000 in 4Q03 and
$195,000 in 1Q04. In addition, the Los Gatos branch, opened in December 2003, is
now beginning to contribute to revenues. With the investment in a new technology
platform complete and as our new branch begins contributing to revenues, we
anticipate improvements in our efficiency ratio in the remainder of the year."
Heritage Commerce Corp's efficiency ratio was 71.01% in the first quarter of
2004 compared to 73.96% in the prior quarter and 67.25% in the year ago quarter.
CAPITAL MANAGEMENT AND CREDIT QUALITY
At March 31, 2004, total assets increased 12% to $1.06 billion from $943 million
at March 31, 2003. In the first quarter, total deposits grew 7% to $885 million
from $825 million a year ago. More importantly, core deposits, the lowest-cost
funding source for the company, increased 13% to $776 million from $688 million
at the end of the first quarter of 2003. Noninterest bearing deposits grew 17%
to $288 million, representing 33% of total deposits, whereas a year ago they
represented 30% of total deposits. "Our entire branch team is focused on
building core deposits, and I am proud of the success they produced this
quarter. Our Los Gatos branch has over $11 million in deposits in its first four
months of operation and is off to a splendid start," Smith noted.
Total loans grew 3% in 1Q04, with commercial real estate mortgage loans up 15%
and commercial loans up 7% from the first quarter of 2003. "Our commercial real
estate loans are primarily mini-perm loans, which amortize on a long-term
schedule with a five to seven year renewal/refinance period. This type of loan
provides affordable payments for the borrower and allows newer projects to
establish an income history prior to placement of permanent financing. For the
lender, mini-perm loans offer solid yields and the opportunity to review and
reprice the loan at regular intervals," Smith noted.
Real estate construction loans were flat at $101 million when compared to the
prior quarter, but down 28% from the same period a year ago. "Construction loans
turn over relatively quickly, as projects are completed and sold or refinanced,"
said Smith. "Softness in the local commercial real estate market has made it
more difficult to maintain that portion of the construction loan portfolio.
Residential real estate, however, has not only held its value, but has also
shown enormous resilience in this economic cycle. Continuing strong demand for
residential housing in the face of limited supply remains a solid support for
our construction lending department."
Credit quality remained strong in the first quarter with nonperforming assets
(NPA) unchanged from a year ago at $4.8 million, or 0.45% of total assets, and
nonperforming loans (NPL) to gross loans were 0.72% versus 0.74% for the year
earlier period. Excluding SBA guarantees on the nonperforming loans, NPA/Assets
was 0.42% and NPL/Gross Loans was 0.67%. The allowance for loan and lease losses
was $12.2 million, or 1.81% of total loans and represents 253% of nonperforming
loans, at March 31, 2004.
As reported in the Form 10-K for the fiscal year ended December 31, 2003, during
the first quarter the Company identified a $4 million unsecured commercial line
of credit with risks that created doubt about full repayment under the original
terms of the agreement. During the first quarter of 2004, the loan was placed on
nonaccrual and a specific reserve was established. Subsequent to placement on
nonaccrual, the Company was advised that the borrower had filed for bankruptcy
protection. Although the Company continues to negotiate with the borrower within
the framework of the bankruptcy, $2.0 million was charged-off during 1Q04, and a
specific reserve of $1.0 million was established for the remaining balance of
$2.0 million.
Shareholders' equity increased 11 % to $93 million, or $8.12 per share at March
31, 2004, compared to $84 million, or $7.50 per share, a year earlier. Capital
ratios continue to be above the well-capitalized guidelines established by
regulatory agencies, The Company's leverage ratio at March 31, 2004, was 11.54%
compared to 11.25% at March 31, 2003.
HERITAGE COMMERCE CORP, a bank holding company established in February 1998, is
the parent company of Heritage BANK OF Commerce, headquartered in San Jose with
an office located in Los Gatos. HERITAGE BANK OF COMMERCE is an independent full
service community business bank with three divisions: Heritage BANK EAST BAY, in
Fremont and Danville; Heritage BANK SOUTH Valley in Morgan Hill and Gilroy, and
BANK OF LOS ALTOS, with two locations in Los Altos and one in Mountain View.
Additionally, Heritage Capital Group, the bank's asset based lending division,
has offices in San Jose and Los Angeles. Heritage Bank of Commerce is also an
SBA Preferred Lender ranked the third largest SBA lender in Northern California,
eighth in the State, and has SBA Loan Production Offices in San Jose, Fresno,
Santa Cruz, Elk Grove, Watsonville, Chico, Glendale, Irvine and Pittsburg,
California.
________________________________________________________________________________
FORWARD LOOKING STATEMENT DISCLAIMER
This release may contain forward-looking statements that are subject to risks
and uncertainties. Such risks and uncertainties may include but are not
necessarily limited to fluctuations in interest rates and monetary policy
established by the Federal Reserve, inflation, government regulations, general
economic conditions, competition within the business areas in which the Company
is conducting its operations, including the real estate market in California,
results of bankruptcy proceedings in which the Company is an unsecured creditor,
and other factors beyond the Company's control. Such risks and uncertainties
could cause results for subsequent interim periods or for the entire year to
differ materially from those indicated. For a discussion of factors which could
cause results to differ, please see the Company's reports on Forms 10-K and 10-0
as filed with the Securities and Exchange Commission and the Company's press
releases. Readers should not place undue reliance on the forward-looking
statements, which reflect management's view only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect subsequent events or circumstances.
CONSOLIDATED INCOME STATEMENT 3-Month Period Ended: Percent Change From:
______________________________________ ________________________
(IN $000'S, UNAUDITED) 3/31/2004 12/31/2003 3/31/2003 12/31/2003 3/31/2003
Interest Income $ 11,984 $ 12,219 $ 12,448 -2% -4%
Interest Expense 2,189 2,309 2,773 -5% -21%
_________ __________ _________
Net Interest Income 9,795 9,910 9,675 -1% 1%
Provision for Loan Losses 600 400 1,300 50% -54%
_________ __________ _________
Net Interest Income after Loan Loss Provision 9,195 9,510 8,375 -3% 10%
Noninterest Income:
Gain on Sale of Loans 727 523 557 39% 31%
Servicing Income 505 480 425 5% 19%
Service Charges and Other Fees 473 478 411 -1% 15%
Appreciation of Corporate Owned Life Insurance 329 260 334 27% -1%
Equipment Leasing 0 267 310 -100% -100%
Gain on Sale of Securities Available-for-Sale 212 203 425 4% -50%
Mortgage Brokerage Fees 119 161 363 -26% -67%
Other 109 114 139 -4% -22%
_________ __________ _________
Total Noninterest Income 2,474 2,486 2,964 0% -17%
Noninterest Expense:
Salaries & Employee Benefits 4,720 4,311 4,704 9% 0%
Occupancy & Equipment 1,287 1,465 1,210 -12% 6%
Other 2,705 3,268 2,586 -17% 5%
_________ __________ _________
Total Noninterest Expense 8,712 9,044 8,500 -4% 2%
Income Before Taxes 2,957 2,952 2,839 0% 4%
Provision for Income Taxes 950 910 910 4% 4%
_________ __________ _________
NET INCOME $ 2,007 $ 2,042 $ 1,929 -2% 4%
========= ========== =========
PER SHARE DATA 3-Month Period Ended: Percent Change From:
______________________________________ ________________________
(UNAUDITED) 3/31/2004 12/31/2003 3/31/2003 12/31/2003 3/31/2003
Basic Earnings Per Share $ 0.18 $ 0.18 $ 0.17 0% 6%
Diluted Earnings Per Share $ 0.17 $ 0.17 $ 0.17 0% 0%
Weighted Average Basic Shares Outstanding 11,375,388 11,280,892 11,135,467 1% 2%
Weighted Average Diluted Shares Outstanding 11,798,329 11,697,883 11,396,899 1% 4%
Common Shares Outstanding 11,495,008 11,381,037 11,222,564 1% 2%
Book Value Per Share $ 8.12 $ 7.89 $ 7.50 3% 8%
Tangible Book Value Per Share $ 8.12 $ 7.89 $ 7.50 3% 8%
KEY FINANCIAL RATIOS 3-Month Period Ended: Percent Change From:
______________________________________ ________________________
(UNAUDITED) 3/31/2004 12/31/2003 3/31/2003 12/31/2003 3/31/2003
Return on Average Equity 8.83% 9.18% 9.32% -4% -5%
Return on Average Assets 0.82% 0.82% 0.85% 0% -4%
Net Interest Margin 4.38% 4.34% 4.64% 1% -6%
Efficiency Ratio 71.01% 72.96% 67.25% -3% 6%
AVERAGE BALANCES 3-Month Period Ended: Percent Change From:
______________________________________ ________________________
(IN $000'S, UNAUDITED) 3/31/2004 12/31/2003 3/31/2003 12/31/2003 3/31/2003
Average Assets $ 979,787 $ 989,646 $ 922,956 -1% 6%
Average Earning Assets $ 898,992 $ 905,932 $ 846,099 -1% 6%
Average Gross Loans & Leases $ 660,446 $ 654,322 $ 663,361 1% 0%
Average Deposits $ 824,714 $ 838,463 $ 804,008 -2% 3%
Average Equity $ 91,380 $ 88,278 $ 83,948 4% 9%
_______________________________________________________________________________
150 Almaden Boulevard o San Jose, California 95113 o (408) 947-6900 o fax (408)
947-6910
CONSOLIDATED BALANCE SHEET End Of Period: Percent Change From:
______________________________________ ________________________
(IN $000'S, UNAUDITED) 3/31/2004 12/31/2003 3/31/2003 12/31/2003 3/31/2003
ASSETS
Cash and Due from Banks $ 51,725 $ 42,017 $ 42,663 23% 21%
Fed Funds Sold 67,700 72,200 81,300 -6% -17%
Investment Securities 207,213 155,977 102,392 33% 102%
Loans Held For Sale 25,512 30,638 26,776 -17% -5%
Loans:
Real Estate - Mortgage 287,833 276,908 250,668 4% 15%
Real Estate- Land and Construction 101,389 101,082 141,165 0% -28%
Commercial Loans 275,536 281,561 256,359 -2% 7%
Direct Financing Lease 3,749 3,931 0 -5% N/A
Consumer Loans 1,715 1,743 2,823 -2% -39%
__________ __________ _________
Gross Loans 670,222 665,225 651,015 1% 3%
Deferred Loan Costs 517 863 511 -40% 1%
__________ __________ _________
Loans, Net of Deferred Costs 670,739 666,088 651,526 1% 3%
Allowance for Loan Losses (12,151) (13,451) (14,247) -10% -15%
__________ __________ _________
Net Loans 658,588 652,637 637,279 1% 3%
Premises & Equipment, Net 3,711 4,034 4,880 -8% -24%
Accrued Interest Receivable and Other Assets 46,274 45,698 47,825 1% -3%
__________ __________ _________
TOTAL ASSETS $1,060,723 $1,003,201 $ 943,115 6% 12%
========== ========== =========
LIABILITIES & SHAREHOLDER'S EQUITY
Liabilities:
Deposits
Demand Deposits - Noninterest Bearing $ 287,633 $ 238,423 $ 245,203 21% 17%
Demand Deposits - Interest Bearing 108,764 105,260 94,499 3% 15%
Savings/ Money Market 340,212 345,886 303,278 -2% 12%
Time Deposits, Under $100 39,724 39,869 45,154 0% -12%
Time Deposits, $100 and Over 108,652 105,972 136,492 3% -20%
__________ __________ _________
Total Deposits 884,985 835,410 824,626 6% 7%
Other Borrowings 48,600 43,600 0 11% N/A
Notes Payable To Subsidiary Grantor Trusts 23,702 23,702 23,000 0% 3%
Accrued Interest Payable and Other Liabilities 10,057 10,643 11,346 -6% -11%
__________ __________ _________
Total Liabilities 967,344 913,355 858,972 6% 13%
Shareholders' Equity:
Common Stock 65,395 64,791 63,657 1% 3%
Accumulated Other Comprehensive Income, Net of
Taxes 1,000 79 1,362 1,166% -27%
Retained Earnings 26,984 24,976 19,124 8% 41%
__________ __________ _________
Total Shareholders' Equity 93,379 89,846 84,143 4% 11%
__________ __________ _________
TOTAL LIABILITIES FR SHAREHOLDERS' EQUITY $1,060,723 $1,003,201 $ 943,115 6% 12%
========== ========== =========
CREDIT QUALITY DATA End Of Period: Percent Change From:
______________________________________ ________________________
(IN $000'S, UNAUDITED) 3/31/2004 12/31/2003 3/31/2003 12/31/2003 3/31/2003
Nonaccrual Loans $ 4,171 $ 3,972 $ 4,800 5% -13%
Over 90 Days Past Due and Still Accruing 630 608 0 4% N/A
Other Real Estate Owned 0 0 0 0% 0%
_________ __________ _________
TOTAL NONPERFORMING ASSETS $ 4,801 $ 4,580 $ 4,800 5% 0%
========= ========== =========
Net Charge-offs/(Recoveries) 1,901 (12) 280 N/M N/M
Net Charge-offs/(Recoveries) as Percent of Average
Loans 1.16% -0.01% 0.17% N/M N/M
Allowance for Loan Losses to Total Loans 1.81 % 2.02% 2.19% -10% -17%
Allowance for Loan Losses to Nonperforming Loans 253.04% 293.69% 296.81% -14% -15%
Nonperforming Assets to Total Assets 0.45% 0.46% 0.51% -2% -11%
Nonperforming Loans to Total Loans 0.72% 0.69% 0.74% 4% -3%
OTHER PERIOD-END STATISTICS End Of Period: Percent Change From:
______________________________________ ________________________
(IN $000'S, UNAUDITED) 3/31/2004 12/31/2003 3/31/2003 12/31/2003 3/31/2003
Shareholders' Equity / Total Assets 8.80% 8.96% 8.92% -2% -1%
Loan to Deposit Ratio 75.79% 79.73% 79.01% -5% -4%
Noninterest Bearing Deposits / Total Deposits 32.50% 28.54% 29.74% 14% 9%
Leverage Ratio 11.54% 11.17% 11.25% 3% 3%