Heritage Commerce Corp.
Annual Report 2008

Plain-text annual report

li^sssmsmm ..feii>^^ W';)(x;>^'": <)C'X)< K W' ) 'Y YY" Y \X \ /\ y ' \ /\ / ' \ /\ .GE M ER COMMERCE CORP 2009 Notice of Annual Meeting of Shareholders, May 28, 2009 2009 Projcy Statement of Heritage Commerce Corp 2008 Annual Report on Form 10-K i^^i^^^^ )&' w yx w w '^M%CW:WM:M:M M'W^^'M^ WM. i^fe^^^i^M Filings Services APR 24 2009 SNL Financial, LC 1-800-969-4121 To our SharehoLderd April 20, 2009 Dear Fellow Shareholders, It was a year for the record books, and the pundits will no doubt be writing about the historic events of 2008 for years to come. While no one can predict the magnitude ofthis recession, there is no doubt the United States is facing a serious economic situation. While Heritage Commerce Corp and its subsidiary, Heritage Bank of Commerce, are certainly not immune to the turmoil in the financial markets, we have maintained a solid capital position and steady market growth. In 2008 we earned $1.8 million, or SO. 13 per diluted common share, which was well below 2007's profits of $14,1 million, or $1,12 per diluted common share. There were two primary reasons for the lower level of profits in 2008 compared to 2007, First, the prime rate was reduced by 500 basis points—8.25% to 3.25%—from September 18, 2007, through December 31, 2008, resulting in margin compression. Second, the allowance for loan losses on our balance sheet doubled to $25 million or 2.00% oftotal loans, with the 2008 provision for loan losses totaling $15.5 million and net charge-offs of $2.7 million. Thie initiatives we launched in 2007 proved their worth in 2008, The acquisition of Diablo Valley Bank, the expansion into Walnut Creek and the rebuilding and expansion ofour lending teams were all important contributors to our growth in 2008, Overall, we grew our loan portfolio by 20% and our deposit base by 8% year-over-year. Loan demand remains solid although, with lower real estate values and reduced net worth of many loan applicants, there are fewer qualified borrowers today than there were before. The economic downturn has negatively impacted the asset quality ofour loan portfolio, particularly for land and construction loans that make up about 21% ofour total loans. Our SBA portfolio is performing in line with the general economy, Nonperforming assets were 2,74% oftotal assets at year end and, as a result, we are staying focused on loan quality. In November, we were approved for the U,S. Treasury's Capital Purchase Program and we raised $40 million in new capital through the placement ofpreferred shares. As a well-capitalized institution, both before and after receiving these funds, we chose to participate in this program to provide the additional capital base to increase our ability to meet the needs ofthe customers and communities we serve. Until we fully understand the length and depth ofthis recession, we felt it prudent to accept the government's investment. Healthier community banks were key recipients of the funds. We began deploying these funds almost immediately and from November 21, 2008, to December 31, 2008, we made more than $32 million (or 80% of CPP money) in new loan commitments and $46 million in renewed loan commitments. In an effort to preserve capital in these difficult economic times and maintain our ability to lend money to local businesses, we decided to reduce the dividend paid on our common stock. Our commitment to our shareholders, customers, and communities is to deploy the capital wisely and to continue to build a strong and vibrant franchise in our markets. We are working hard to prudently manage your Company through these disconcerting economic times. We are extremely proud ofour employees. As our 2008 growth demonstrates, everyone on our team has gone the extra mile to be more efficient and diligent, and has worked hard not to be distracted by industry turmoil. In an effort to ensure we control our costs appropriately, the executive management team will not receive any bonuses for 2008 performance or salary raises for 2009. We will be celebrating our 15th anniversary this year, although in a different way than in years past. The wonderful anniversary party we have hosted each ofthe past 14 years will not be held this year. Instead, we will save a portion ofthe cost to conserve capital and we will use a portion of the savings to make significant contributions to several local charities to help those less fortunate in our community. We believe that being a good corporate citizen is more important than ever. As we renew our commitment to our loyal shareholders, employees, customers, and local communities, we invite you to join our management team in recognizing the accomplishments we have achieved at our upcoming annual shareholders' meeting on May 28, 2009, at 1:00 p.m. We look forward to seeing you there. We thank you for your banking business and for your investment in Heritage Commerce Corp, We know that times are difficult right now, and all indications are that these challenges will remain for all or most of 2009. Nevertheless, we believe that our future is bright and that together, we can persevere and emerge from these challenging times. In closing, we leave you with the words of wisdom that Warren Buffet penned in his shareholder letter this year; "Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's hest days lie ahead. " Sincerely, ack W. Conner Chairman ofthe Board Walter T Kaczmarek President and Chief Executive Officer Corporate In^ formation B o a rd of Directors Jack W. Conner, Chairman Frank G. Bisceglia James R. Blair John J, Hounslow Walter T. Kaczmarek Mark E. Lefanowicz Robert T. Moles Louis ("Lon") O. Normandin Humphrey P. Polanen Charles J. Toeniskoetter Ranson W. Webster Executive M a n a g e m e nt Walter T. Kaczmarek President ChiefExecutive Officer William J. Del Biaggio, Jr, Executive Vice President Founding Chairman James A. Mayer Executive Vice President East Bay Division Lawrence D, McGovern Executive Vice President ChiefFinancial Officer Michael R. Ong Executive Vice President Chief Credit Officer Raymond Parker Executive Vice President Banking Division Subsidiary B a nk Offices H e r i t a ge B a nk of C o m m e r ce San Jose Main 150 Almaden Boulevard San Jose, CA 95113 408.947.6900 1 10 tl 'VI 11^ 387 Diablo Road Danville, CA 94526 925.314.2851 Fremont 3077 Stevenson Boulevard Fremont, CA 94538 510.445.0400 Gilroy 7598 Monterey Street Suite 110 Gilroy, CA 95020 408.842.8310 Los Altos 419 S. San Antonio Road Los Altos, CA 94022 650,941,9300 Los Gatos 15575 Los Gatos Boulevard Building B Los Gatos, CA 95032 408.356.6190 Morgan Hill Cochrane Business Ranch 18625 Sutter Boulevard Morgan Hill, CA 95037 408.778.2320 Mountain View 175 East El Camino Real Mountain View, CA 94040 650.941.9300 Pleasanton 300 Main Street Pleasanton, CA 94566 925.314.2876 Walnut Creek 101 Ygnacio Valley Road Suite 100 Walnut Creek, CA 94596 925.930.9287 H e r i t a ge C o m m e r ce C o rp Investor Relations C o n t a ct Janet R. Walworth Senior Vice President General Counsel 1 Corporate Secretary Transfer Agent Wells Fargo Bank, N.A. Shareowner Services North Concord Exchange Street South St. Paul, Minnesota 55164 1,800.468.9716 I n d e p e n d e nt A u d i t o rs Crowe Horwath LLP One Mid America Plaza Suite 700 Oak Brook, Illinois 60522 630,574.7878 C o r p o r a te C o u n s el Buchalter Nemer A Professional Corporation 1000 Wilshire Boulevard Suite 1500 Los Angeles, California 90017 213.891.0700 To get further information on Heritage Commerce Corp, or to receive regular financial updates, please visit our web site heritagecommercecorp.com and click on "Information Request." heritagebankofcommerce.com f^ Equal Housing Lender Member FDIC V\/\A.?%A/N I^JI y.m 

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