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(Amended by Sec Act Rel No. 7331; Exch Act Rel No. 37692, eff. 10/7/96.) 2
HERITAGE COMMERCE CORP
Commerce Corp
April 17, 2001
5, 2005
Dear Shareholder:
We are pleased to enclose our 2000 Annual Report and2004 Form 10K,10-K, Notice of 20012005 Annual Meeting, Proxy Statement and Form of Proxy.
You are cordially invited to attend the 20012005 Annual Meeting of Shareholders, which will be held at 3:00 p.m.9:30 a.m. on Thursday, May 24, 2001,26, 2005, at Heritage Commerce Corp's offices, located at 150 Almaden Boulevard, San Jose, California, 95113.
The accompanying Notice of Annual Meeting and Proxy Statement provide information pertaining to the matters to be considered and acted upon at the Meeting.
Your continued support is appreciated and we hope you will attend the Annual Meeting. Whether or not you are personally present, it is very important that your shares be represented at the Meeting. Accordingly, please sign, date, and mail the enclosed Proxy promptly. If you wish to vote in accordance with the Board of Directors' recommendations, it is not necessary to specify your choices. You may simply sign, date and return the enclosed proxy card.
Sincerely,
William J. Del Biaggio, Jr. | Richard L. Conniff |
150 Almaden Boulevard, San Jose, California 95113 -· Telephone (408) 947-6900 -· Fax (408) 947-6910 3
HERITAGE COMMERCE CORP
PRELIMINARY
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Commerce Corp
Notice of Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Heritage Commerce Corp ("Commerce Corp") will be held at Commerce Corp's offices, located at 150 Almaden Boulevard, San Jose, California 95113 on May 24, 2001,26, 2005, at 3:00 p.m.9:30 a.m., for the following purposes:
1. To approve an amendment to the Commerce Corp Bylaws to declassify the Board of Directors so that each director would stand for re-election on an annual basis.
2. To approve an amendment to the Commerce Corp Articles of Incorporation to reinstate cumulative voting for shareholders of Commerce Corp.
3. To elect the following nominees to serve as directors of Commerce Corp untilfor a three-year term expiring in 2008, or if Proposal I is adopted, for terms expiring at the next2006 Annual Meeting of Shareholders and until their successors
shall be elected and qualified:
Jack W. Conner
Richard L. Conniff
Charles J. Toeniskoetter
Ranson W. Webster
4. To approve a proposal to amend the Heritage Commerce Corp Restated 1994
Tandem Stock Option Plan to increase the number of shares available for
grants of options under the Plan.
5. To ratify the Board of Directors'Audit Committee's selection of Deloitte & Touche, LLP, independent certifiedregistered public accountants,accounting firm, to serve as the Company'sCommerce Corp's auditors for the fiscal year ending December 31, 2001.
6.2005.
5. To consider and transact such other business as may properly be brought before the meeting.
Shareholders of record at the close of business on April 10, 2001March 30, 2005 are entitled to notice of and to vote at the meeting.
Provisions of the Bylaws of Commerce Corp govern nominations for election of members of the Board of Directors, as follows:
Nominations
Nomination for election of members of the Board of Directorsdirectors may be made by the Board of Directors or by any holder of any outstanding class of capital stock of the corporationCorporation entitled to vote for the election of directors. Notice of intention to make any nominations (other than for persons named in the notice
of any meeting called for the election of directors) are required toshall be made in writing and toshall be delivered or mailed to the presidentPresident of the corporation by the
later of: (i) the close of businessCorporation not less than 21 days nor more than 60 days prior to any meeting of stockholdersshareholders called for the election of directors, or (ii) ten days after the date of mailing
ofdirectors; provided, however, that if less than 21 days' notice is given to shareholders, such notice of intention to nominate shall be mailed or delivered to the President of the Corporation not later than the close of business on the tenth day following the day on which the notice of such meeting is sent by third class mail (if permitted by law), no notice of intention to stockholders.make nominations shall be required. Such notification mustshall contain the following information to the extent known to the notifying stockholder: (a)shareholder: (i) the name and address of each proposed nominee; (b)(ii) the principal occupation of each proposed nominee; (c)(iii) the number of shares of capital stock of the corporationCorporation owned by each proposed nominee; (d)(iv) the name and residence address of the notifying stockholder; (e)shareholder; (v) the number of shares of capital stock of the corporationCorporation owned by the notifying stockholder; (f)shareholder; (vi) the number of shares of capital stock of any bank, bank holding company, savings and loan association or other depository institution owned beneficially by the nominee or by the notifying stockholdershareholder and the identities and locations of any such institutions; (g)(vii) whether the proposed nominee has ever been convicted of or pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust, filed a petition in bankruptcy or been adjudged bankrupt; and (h)(viii) a statement regarding the nominee's compliance with Section 2.3 [Qualification of Directors]the Bylaws.
Nominees for the Board of these
4
Bylaws. The notification shall be signed byDirectors must meet certain qualifications set forth in Section 2.3 of Commerce Corp's Bylaws, which prohibit the nominating stockholder and by
each nominee, and shall be accompanied by a written consent to be named as a
nominee for election as a director from each proposed nominee. Nominations not
made in accordance with these procedures shall be disregarded by the Chairman of the meeting, and upon his instructions, the inspectors of election shall
disregard all votes cast for each such nominee. The foregoing requirements do
not apply to the nomination of aany person to replace a proposed nominee who has
become unable to serve asis a director, betweenexecutive officer, branch manager or trustee for any unaffiliated commercial bank, savings bank, trust company, savings and loan association, building and loan association, industrial bank or credit union that is engaged in business in (i) any city, town or village in which the last day for giving noticecorporation or any affiliate or subsidiary thereof has offices, or (ii) any city, town or village adjacent to a city, town or village in accordance with this paragraph andwhich the date of election of directors if the
procedure noted in this paragraph was followed with respect to the nomination of
the proposed nominee.
corporation or any affiliate or subsidiary thereof has offices.
All shareholders are cordially invited to attend the meeting in person. To ensure your representation at the meeting, you are requested to date, execute and return the enclosed proxy card, without delay, in the enclosed postage-paid envelope whether or not you plan to attend the meeting. Any shareholder present at the meeting may vote personally on all matters brought before the meeting. If you elect to vote personally at the meeting, your proxy will not be used.
BY ORDER OF THE BOARD OF DIRECTORS
/s/
Rebecca A. Levey
Rebecca A. Levey
Corporate Secretary
April 17, 2001
5, 2005
San Jose, California
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN THE ENCLOSED POSTAGE-PAID ENVELOPE. 5
PRELIMINARY
PROXY STATEMENT
OF
HERITAGE COMMERCE CORP
Commerce Corp
150 ALMADEN BOULEVARD
SAN JOSE, CALIFORNIAAlmaden Boulevard · San Jose, California 95113
TELEPHONE
Telephone (408) 947-6900 FAX· Fax (408) 947-6910
This statement is furnished in connection with the solicitation of proxies to be used by the Board of Directors of Heritage Commerce Corp ("Commerce Corp") at the Annual Meeting of Shareholders of the CompanyCommerce Corp to be held at the Company'sCommerce Corp's offices, 150 Almaden Boulevard, San Jose, California, on May 24, 2001,26, 2005, at 3:00
p.m.9:30 a.m., and at any adjournments or postponements thereof ("Meeting"(the "Meeting").
This Proxy Statement and the accompanying form of proxy are being mailed to shareholders on or about April 17, 2001.
5, 2005.
A form of proxy for voting your shares at the Meeting is enclosed. Any shareholder who executes and delivers a proxy has the right to revoke it at any time before it is voted by filing with the Corporate Secretary of Commerce Corp, an instrument revoking said proxy or a duly executed proxy bearing a later date. In addition, the powers of the proxyholders will be revoked if the person executing the proxy is present at the Meeting and advises the Chairman of his or her election to vote in person. Unless revoked, all shares represented by a properly executed proxy received prior to the Meeting will be voted as specified by each shareholder in the proxy. If no specifications are given by a shareholder, then the proxy will be voted in favor of electionProposal I (declassification of nominees
specified,the Board of Directors), in favor of the proposal to eliminateProposal II (reinstatement of cumulative voting,voting), in favor of the proposal to classify the BoardProposal III (election of Directors,nominees specified), and in favor of the proposal to
increase the number of shares available for grants of stock options, in favor of
theProposal IV (the ratification of the Board's selection of independent accountants,registered public accountants), and in the discretion of the Board, on suchProposal V (such other business as may properly come before the Meeting as described below.
below).
The proxy also confers discretionary authority to vote the shares represented thereby on any matter that was not known at the time this Proxy Statement was mailed which may properly be presented for action at the Meeting
and may include: action with respect to procedural matters pertaining to the
conduct of the Meeting and election of any person to any office for which a bona
fide nominee is named herein, if such nominee is unable to serve or for good
cause will not serve.
Meeting.
The enclosed proxy is being solicited by Commerce Corp's Board of Directors and the cost of the solicitation is being borne by Commerce Corp. The principal solicitation of proxies is being made by mail, although additional solicitation may be made by telephone, telegraph,email, facsimile or personal visits by directors, officers and employees of Commerce Corp and its subsidiary banks.
bank.
PURPOSE OF THE MEETING
The Meeting is being held for the following purposes:
1. To elect 15 directors (the entireapprove an amendment to the Commerce Corp Bylaws to declassify the Board of Directors) to serve until the
nextDirectors so that each director would stand for re-election on an annual meeting of shareholders and until their successors shall be
elected and qualified.
basis.
2. To approve a proposalan amendment to amendthe Commerce Corp'sCorp Articles of Incorporation to eliminate the availability ofreinstate cumulative voting in the electionfor shareholders of Commerce Corp's directors.
Corp.
3. To approve a proposalelect the following nominees to amend Commerce Corp's Bylaws to provide for
classificationserve as directors of Commerce Corp's BoardCorp for a three-year term expiring in 2008, or if Proposal I is adopted, for terms expiring at the 2006 Annual Meeting of Directors into three classes
for purposes of the election of directors.
Shareholders:
Jack W. Conner
Richard L. Conniff
Charles J. Toeniskoetter
Ranson W. Webster
4. To approve a proposal to amend the Heritage Commerce Corp Restated 1994
Tandem Stock Option Plan to increase the number of shares available for
grants of options under the Plan.
5. To ratify the Board of Directors'Audit Committee's selection of Deloitte & Touche, LLP, independent certifiedregistered public accountants,accounting firm, to serve as Commerce Corps'Corp's auditors for the fiscal year ending December 31, 2001.
6.2005.
5. To consider and transact such other business as may properly be brought before the meeting. 6
VOTING SECURITIES
Shareholders of record as of the close of business on April 10, 2001March 30, 2005 ("Record Date") will be entitled to notice of and to vote at the Meeting. As of April 2, 2001, the CompanyMarch 30, 2005, Commerce Corp had 11,076,95511,495,008 shares of common stock outstanding.
Unless otherwise noted, all per share information has been adjusted to reflect a
ten percent stock dividend paid to shareholders of record as of February 5,
1996, a five percent stock dividend paid to shareholders of record as of
February 5, 1997, a three for two stock split paid to shareholders of record as
of August 1, 1997, a three for two stock split paid to shareholders of record as
of February 5, 1999, and a ten percent stock dividend paid to shareholders of
record as of February 7, 2000. Each shareholder of record is entitled to one vote, in person or by proxy, for each share held on all matters to come before the meeting, except that
shareholders may have cumulative voting rights with respect to the election of
directors.
Cumulative voting allows the shareholder to cast a number of votes equal to
the number of directors to be elected, 15, multiplied by the number of votes
held by the shareholder on the Record Date. This total number of votes may be
cast for one nominee or may be distributed among as many candidates as the
shareholder desires.
Pursuant to California law, no shareholder may cumulate votes for a
candidate unless such candidate or candidates' names have been placed in
nomination prior to the voting and the shareholder has given notice at the
Meeting prior to the voting of the shareholder's intention to cumulate the
shareholder's votes. If any shareholder has given such notice, all the
shareholders may cumulate their votes for the candidates who have been
nominated.
The Board of Directors does not, at this time, intend to give such notice
or to cumulate the votes it may hold pursuant to the proxies solicited herein
unless the required notice by a shareholder is given. In the event such notice
is provided, the votes represented by proxies delivered pursuant to this Proxy
Statement may be cumulated in the discretion of proxyholders, in accordance with
the recommendationsmeeting.
Proposal I (declassification of the Board of Directors. Therefore, discretionary
authority to cumulate votes in such event is solicited in this Proxy Statement.Directors) and Proposal II (reinstatement of cumulative voting) require the approval of a majority of the issued and outstanding shares of common stock. In the election of directors, the 15four candidates receiving the highest number of votes will be elected. Broker non-votes (i.e., shares held by brokers
or nominees which are represented at the meeting but with respect to which the
broker or nominee is not authorized to vote on a particular proposal) and
abstentions will not be counted, except for quorum purposes, and will have no
effect on the election of directors. Approval of the proposals to eliminate
cumulative voting and to classify the Board of Directors require approval by
shareholders holding at least a majority of the outstanding shares of common
stock. Approval of the proposal to increase the number of shares available for
grants of stock options and ratificationRatification of the selection of Deloitte & Touche, LLP as Commerce Corp's auditors requireindependent registered public accounting firm requires the affirmative vote of a majority of all shares represented and voting at the Meeting. In determining whether the
requisite shareholder approval has been receivedAbstentions and broker non-votes will be counted as present for the eliminationpurpose of cumulativedetermining if a quorum is present. Broker non-votes occur when a nominee holding shares for a beneficial owner does not vote on a particular matter because the nominee does not have discretionary voting power with respect to that matter and classificationhas not received instructions from the beneficial owner. In accordance with the laws of the BoardState of Directors, abstentionsCalifornia: (a) with respect to Proposal I and Proposal II, broker non-voter willnon-votes have the same effect as a vote against the proposal. In
determining whether the requisite shareholder approval has been received for
amendmentsuch proposals, and (b) with respect to Proposal III (the election of the Stock Option Plandirectors), and Proposal IV (the ratification of the selection of
auditors,Commerce Corp's independent registered public accounting firm), abstentions will have the same effect as a vote against the matter and broker non-votes are not deemed "votes cast" and accordingly, do not have the effect of votes in opposition, but they do have the practical effect of reducing the number of affirmative votes required to achieve a majority for such matter by reducing the total number of shares from which the majority is calculated.
CORPORATE GOVERNANCE
Board of Directors
Annual Meeting Attendance
All directors are expected to attend each annual meeting of Commerce Corp's shareholders, unless attendance is prevented by an emergency. All of Commerce Corp's directors who were in office at that time attended Commerce Corp's 2004 annual meeting of shareholders with the exception of Frank G. Bisceglia and James R. Blair.
Board Independence
Each of the following members of our Board of Directors has been determined by the Board to be independent under the rules of NASDAQ governing the independence of directors, as follows:
Frank G. Bisceglia
James R. Blair
Jack W. Conner
Anneke Dury
Roy E. Lave
Robert Moles
Louis ("Lon") O. Normandin
Jack L. Peckham
Humphrey P. Polanen
Kirk M. Rossmann
Charles J. Toeniskoetter
Ranson W. Webster
Therefore, a majority of the directors are independent, as required by the rules of NASDAQ.
Contacting the Board
Shareholders may address inquiries to any of Commerce Corp's directors or the full Board by writing to the Corporate Secretary, Heritage Commerce Corp, 150 Almaden Boulevard, San Jose, California 95113-9940. Each communication from a shareholder should include the following information in order to permit shareholder status to be confirmed and to provide an address to forward a response if deemed appropriate:
- The name, mailing address and telephone number of the shareholder sending the communication;
- If the shareholder is not a record holder of our common stock, the name of the record holder of our common stock beneficially owned must be identified along with the shareholder.
Our Corporate Secretary will forward all appropriate communications to the Board or individual members of the Board specified in the communication. Our Corporate Secretary may (but is not required to) review all correspondence addressed to the Board or any individual member of the Board, for any inappropriate correspondence more suitably directed to management. Communications may be deemed inappropriate for this purpose if it is reasonably apparent from the face of the correspondence that it relates principally to a customer dispute. Our policies regarding the handling of security holder communications were approved by a majority of our independent directors.
Nomination of Directors
Commerce Corp has a Corporate Governance and Nominating Committee. The principal duties of the Corporate Governance and Nominating Committee are described in the section of this Proxy Statement labeled "Committees of the Board of Directors of Heritage Commerce Corp - Corporate Governance and Nominating Committee" on page 19 of this Proxy Statement. The duties of the Corporate Governance and Nominating Committee include the recommendation of candidates for election to Commerce Corp's Board of Directors. The Corporate Governance and Nominating Committee met ten times during 2004. All the members of the Committee are independent under the rules of NASDAQ. The Committee has a charter which is available on Commerce Corp's website at http://www.heritagecommercecorp.com.
The Corporate Governance and Nominating Committee's minimum qualifications for a director are persons of high ethical character and who have both personal and professional integrity, which are consistent with the image and values of Commerce Corp. In addition, Section 2.3 of Commerce Corp's bylaws provides that no person shall be a member of the Board of Directors who is a director, executive officer, branch manager or trustee for any unaffiliated commercial bank, savings bank, trust company, savings and loan association, building and loan association, industrial bank or credit union that is engaged in business in (i) any city, town or village in which the corporation or any affiliate or subsidiary thereof has offices, or (ii) any city, town or village adjacent to a city, town or village in which the corporation or any affiliate or subsidiary thereof has offices.
For those proposed director nominees who meet the minimum qualifications, the Corporate Governance and Nominating Committee then assesses the proposed nominee's specific qualifications, evaluates his or her independence, and considers other factors including skills, geographic location, considerations of diversity, standards of integrity and ability and willingness to commit to serving on the Board for an extended period of time and to dedicate adequate time and attention to the affairs of Commerce Corp as necessary to properly discharge his or her duties.
The Corporate Governance and Nominating Committee does not have a separate policy for consideration of any director candidates recommended by shareholders. Instead, the Corporate Governance and Nominating Committee considers any candidate meeting the requirements for nomination by a shareholder set forth in Commerce Corp's bylaws (as well as applicable laws and regulations) in the same manner as any other director candidate. The Corporate Governance and Nominating Committee believes that requiring shareholder recommendations for director candidates to comply with the requirements for nominations in accordance with Commerce Corp's bylaws ensures that the Corporate Governance and Nominating Committee receives at least the minimum information necessary for it to begin an appropriate evaluation of any such director nominee.
Commerce Corp will consider director nominees recommended by shareholders who adhere to the following procedure. Commerce Corp's Bylaws provide that any shareholder must give written notice to the President of Commerce Corp of an intention to nominate a director at a shareholder meeting. Generally, notice of intention to make any nominations shall be made in writing and must be delivered or mailed to the President of Commerce Corp not less than 21 days nor more than 60 days prior to any meeting of shareholders called for the election of directors. Nominees for the Board of Directors must meet the qualifications set forth in Section 2.3 of Commerce Corp's Bylaws as noted above. The Bylaws contain additional requirements for nominations. A copy of the requirements is available upon request directed to the President, Heritage Commerce Corp, 150 Almaden Boulevard, San Jose, California 95113.
The Corporate Governance and Nominating Committee's goal is to recommend candidates for the Board of Directors that bring a variety of perspectives and skill derived from high quality business and professional experience. Each candidate should be prepared to represent the best interests of all shareholders and not just one particular constituency or interest group. At the same time, the Corporate Governance and Nominating Committee and the entire Board of Directors recognize that larger numbers of directors create additional challenges and expense and believe that the recent reduction in size of the Board from fourteen to eleven members is the right size for our Board of Directors at this time.
Commerce Corp identifies new director candidates through recommendations from existing directors and through other business associates of Commerce Corp. Commerce Corp considers nominees of shareholders in the same manner as other nominees.
Of this year's nominees for director, Charles J. Toeniskoetter and Richard Conniff were elected to the Board at the 2002 Annual Meeting. Jack W. Conner and Ranson W. Webster were appointed to the Board in 2004. Jack Conner was recommended by Charles J. Toeniskoetter, a non-management director, and Ranson Webster was recommended by William J. Del Biaggio, Jr., Chairman and Interim Chief Executive Officer of Commerce Corp.
Code of Ethics
Commerce Corp has adopted an Executive and Principal Financial Officers Code of Ethics governing the conduct of its Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Controller. Commerce Corp has posted the Executive and Principal Financial Officers Code of Ethics on its website and it may be accessed at the following address:http://www.heritagecommercecorp.com. Also, Commerce Corp has adopted a separate Code of Ethics which governs the conduct of all directors, officers and employees and which also may be accessed at the internet address referenced above.
PROPOSALS I AND II
AMENDMENTS TO COMMERCE CORP'S ARTICLES OF INCORPORATION AND BYLAWS
At a meeting of the Corporate Governance and Nominating Committee on February 24, 2005, the Corporate Governance and Nominating Committee recommended to the Board of Directors that the Bylaws be amended to eliminate the classified structure of the Board of Directors so that all directors are elected annually. The Corporate Governance and Nominating Committee also recommended that the Articles of Incorporation be amended to reinstate cumulative voting for the election of directors. The provisions for a classified Board structure and eliminating cumulative voting were originally approved by the Board of Directors and then by the shareholders at the 2001 Annual Shareholders Meeting. During 2004 the Corporate Governance and Nominating Committee reviewed various provisions of Commerce Corp's Articles of Incorporation and Bylaws with the goal of improving Commerce Corp's corporate governance practices and conforming those practices to current best practices. In this regard the Corporate Governance and Nominating Committee also recommended to the Board of Directors that Commerce Corp redeem its shareholder rights plan, and the Board of Directors at its February 24, 2005 meeting approved resolutions for the redemption of Commerce Corp's shareholder rights plan. The redemption became effective on February 24, 2005. At its meeting on February 24, 2005, the Board approved resolutions to approve the foregoing amendments to the Bylaws and Articles of Incorporation. The form of the proposed amendments to the Bylaws and Articles of Incorporation are set forth in Exhibit A and Exhibit B, respectively, to the proxy statement.
Each of the amendments to the Articles of Incorporation and Bylaws is a separate proposal and is independent from the other. Therefore, if Commerce Corp receives sufficient votes to approve less than both of the proposed amendments to the Articles and Bylaws, only those amendments to the Articles or Bylaws approved by shareholders will be disregardedmade. However, failure to obtain sufficient votes to approve one amendment will not defeat the other amendment to the extent sufficient votes are cast in their favor.
Each proposal requires the affirmative vote of at least a majority of the issued and outstanding shares of Commerce Corp's Common Stock.
These proposals are not a response to any current attempt to acquire control of Commerce Corp, or current effort by a shareholder or group of shareholders to remove any director or otherwise gain representation for any special interest of the Board of Directors.
Proposal I - Declassification of the Board of Directors
Section 2.9, paragraph (b) of Commerce Corp's Bylaws provides that the Board of Directors be divided into three classes, as nearly equal in number as possible, with members of each class serving three-year terms. To implement an annual election of all directors, Commerce Corp's Bylaws must be amended.
Section 2.9, paragraph (b) of the Bylaws also includes a provision that the vote of the holders of a majority of the outstanding shares of Commerce Corp is required to amend or repeal paragraph (b). This voting requirement was designed to protect the classified Board structure.
The Board of Directors believes that annual elections of directors will give the shareholders of Commerce Corp a greater opportunity to evaluate the performance of Commerce Corp's directors by allowing them to vote on each director annually rather than once every three years.
Proponents of classified boards of directors believe that they help maintain continuity of experience and, as a result, may assist a company in long-term strategic planning. Additionally, supporters argue that a classified board may encourage a person seeking control of a company to initiate arm's-length discussions with management and the board, who may be in a position to negotiate a higher price or more favorable terms for shareholders or to seek to prevent a takeover that the board believes is not in the best interests of shareholders.
Nevertheless, because classified board structures do not permit annual shareholder election of all directors, these structures have recently been subject to criticism from a corporate governance perspective. Opponents of classified structures believe that they limit the ability of shareholders to elect directors and exercise influence over a company and may discourage takeover proposals and proxy contests that could have the effect of increasing shareholder value. The election of directors is the primary avenue for shareholders to influence corporate governance policies and to hold management accountable for the implementation of those policies. A non-classified board structure enables shareholders to hold all directors accountable on an annual basis, rather than over a three-year period. In light of these views, a number of major corporations have determined that principles of good corporate governance dictate that all directors of a corporation should be elected annually.
The Board of Directors considered the advantages and disadvantages of the classified structure, and in reaching its determination to propose the declassification of the Board of Directors, it concluded that the benefits of a classified structure were outweighed by the following considerations:
- The Board's belief that providing Commerce Corp's shareholders with the opportunity annually to register their views on the collective performance of the Board of Directors and on each director individually will further Commerce Corp's goal of ensuring that its corporate governance policies conform to current best practices and maximize accountability to shareholders; and
- The Board's belief that, because there is no limit to the number of terms an individual may serve, the continuity and stability of the Board's membership should not be materially affected by the declassification of the Board of Directors.
Under California law, members of the Board of Directors may be removed for cause or without cause. In the case of a board of directors that is not classified, no director may be removed by the shareholders if the votes cast against such removal (or, if done by written consent, the votes eligible to be cast by the non-consenting shareholder) would have been sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if the action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected (the "Relevant Number of Directors"). In the case of classified boards, the relevant number of Directors is (i) the number of directors elected at the most recent Annual Meeting of shareholders or, if greater, (ii) the number sought to be removed. It should be noted that this removal provision applies equally to corporations that permit cumulative voting and to those that do not. The By-laws are also being amended to conform to California law.
If the shareholders approve this proposal, each of the four directors who are elected this year will be elected for a one-year term that will expire next year at the 2006 Annual Meeting of Shareholders. In addition, if this proposal is adopted, any director subsequently appointed by the Board of Directors as a result of a newly-created directorship or to fill a vacancy on the Board of Directors would hold office only until the next annual meeting. Each of the incumbent directors has agreed to stand for re-election at the 2006 Annual Meeting if nominated by the Corporate Governance and Nominating Committee, and if not nominated in 2006 to resign from the Board. In addition, the majority voting requirement would no longer be necessary to protect the classified structure of the Board of Directors, the proposal would also delete such majority voting requirement in this provision of the Bylaws. The amendment to the Bylaws will become effective upon approval by the shareholders.
The Corporate Governance and Nominating Committee and the full Board of Directors of Commerce Corp have concluded that it would be in the best interests of Commerce Corp and its shareholders to declassify the Board of Directors and have unanimously approved the proposed amendment to the Bylaws attached hereto as Exhibit A.
Proposal II- Reinstatement of Cumulative Voting For Shareholders
Article VII of Commerce Corp's Articles of Incorporation provides that no effectholder of any class of stock of Commerce Corp shall be entitled to cumulate votes at any election of directors of Commerce Corp. To permit cumulative voting, the Articles of Incorporation must be amended. Cumulative voting entitles a shareholder to cast as many votes as there are directors to be elected multiplied by the number of shares registered in such shareholder's name. The shareholder may cast all of such votes for a single nominee or may distribute them among any two or more nominees. Under California law, shareholders of a corporation have the right to cumulative voting unless a corporation has outstanding shares listed on the outcomeNew York Stock Exchange or the American Stock Exchange, or has outstanding securities qualified for trading on the NASDAQ National Market and opts out of cumulative voting by prohibiting cumulative voting in the Articles of Incorporation.
Proponents for eliminating cumulative voting believe that cumulative voting could make it possible for an individual shareholder or group of shareholders with special interests to elect one or more directors to the Board of Directors. Such a shareholder group could have goals that were inconsistent, and could conflict, with the interests and goals of the vote.
2
7
majority of Commerce Corp's shareholders. Any director elected by such a narrow constituency could disrupt and impair the efficient functioning of the Board of Directors, which may undermine its ability to work effectively as a governing body on behalf of the common interests of all shareholders. Moreover, a director elected by cumulative voting may feel an obligation to represent the special interest groups that elected them rather than all shareholders generally.
Nevertheless, because cumulative voting allows a significant group of shareholders to elect a director or directors of its choice - safeguarding minority shareholder interests and bringing independent perspectives to board decisions - companies have received criticism from a corporate governance perspective for not promoting cumulative voting and in some cases eliminating cumulative voting. Proponents for cumulative voting believe that the minority interests of shareholders benefit from opportunities to pool votes together in order to elect one or more persons to the Board of Directors, especially when management or other insiders own significant amounts of Commerce Corp's outstanding shares. In light of these views, a number of major corporations have maintained cumulative voting rights for shareholders.
The Board of Directors considered the advantages and disadvantages of cumulative voting, and in reaching its determination to propose the reinstatement of cumulative voting it concluded that the benefits of eliminating cumulative voting were outweighed by the following considerations:
- Cumulative voting is a protection afforded minority shareholders to have a voice, or seat on the Board of Directors;
- All members of the Board of Directors have a fiduciary duty to act on behalf of the interest of all shareholders and not just the interests of a particular shareholder group or special interest group; and
- The elimination of cumulative voting could be viewed as discouraging takeover proposals and proxy contests that could have the effect of increasing shareholder value.
Subject to the approval of the shareholders, the Articles of Incorporation will be amended to give effect to the amendment approved by the shareholders at the Annual Meeting. The Amendment will be effective at such time as Commerce Corp files a Certificate of Amendment with the Secretary of State of California. It is expected that such filing will take place on or shortly after the date of the Annual Meeting.
The Corporate Governance and Nominating Committee and the full Board of Directors of Commerce Corp have concluded that it would be in the best interests of Commerce Corp and its shareholders to reinstate cumulative voting, and have unanimously approved the proposed amendment to the Articles of Incorporation attached hereto as Exhibit B.
PROPOSAL 1
ELECTION OF DIRECTORS
III
The Bylaws of Commerce Corp provide that the number of directors shall not be less than 11 nor more than 21. By resolution, the Board of Directors has fixed the number of directors at 15.
11.
The Bylaws of Commerce Corp provide the procedure for nominations and election of the Board of Directors. This procedure is printed in full in the Notice of Annual Meeting of Shareholders accompanying this Proxy Statement. Nominations not made in accordance with the procedures may be disregarded by the Chairman of the Meeting, and upon his instructions, the Inspector of Election shall disregard all votes cast for such nominees.
The 15 persons named below
Four directors are to be elected at the Annual Meeting. If the shareholders approve Proposal I to declassify the Board of Directors, these directors will be nominated for election as directors to
servehold office until the next Annual Meeting of 2006 and until their successors are duly elected and qualified. However, ifIf the shareholders do not approve Proposal 3 is approvedI, such directors will hold office until the Annual Meeting of 2008 and the Board of Directors is
classified into three classes with staggered three year terms (see "PROPOSAL
3 -- CLASSIFICATION OF BOARD OF DIRECTORS"), Class I Directors will beuntil their successors are elected for an initial one-year term, Class II Directors will be elected for an initial
two-year term, and Class III Directors will be elected for an initial three-year
term. Votes will be cast in such a way as to effect the election of all nominees
or as many as possible under the rules of cumulative voting.qualified. If any nominee should become unable or unwilling to serve as a director, either (i) the proxies will be voted at the Meeting for such substitute nominees as shall be designated by the Board
of Directors, or (ii) the number of nominees may be reduced.Board. The Board of
Directors presently has no knowledge that any of the nominees will be unable or unwilling to serve. The 15 nominees receivingCommerce Corp Corporate Governance and Nominating Committee and the highest numberfull Board of votes atDirectors have nominated the Meeting shallfollowing persons to serve on the Board of Directors. Each of the following is currently serving on the Board of Directors:
Jack W. Conner
Richard L. Conniff
Charles J. Toeniskoetter
Ranson W. Webster
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE PROXY HOLDERS INTEND TO VOTE ALL PROXIES THEY HOLD IN FAVOR OF ELECTION OF EACH OF THE NOMINEES. YOU ARE URGED TO VOTE FOR PROPOSAL III: TO ELECT THE FOUR NOMINEES SET FORTH HEREIN: JACK W. CONNER, RICHARD L. CONNIFF, CHARLES J. TOENISKOETTER AND RANSON W. WEBSTER. IF NO INSTRUCTION IS GIVEN, THE PROXY HOLDERS INTEND TO VOTE FOR EACH NOMINEE LISTED.
The following table provides information with respect to each person nominated and recommended to be elected.
NOMINEES FOR DIRECTOR
The persons named below have been nominatedelected by the current Board, as well as existing directors of Directors for election as directors to serve untilCommerce Corp whose terms do not expire at the next Annual Meeting and
until their successors are duly elected and qualified. For information
pertaining to stock ownershiptime of the Meeting.
|
| Position With Commerce Corp |
|
Present Term Expires * |
Principal Occupation, Business Experience During Past Five Years and Other Information |
Frank G. Bisceglia | 59 | Director | 1994 | 2007 | Senior Vice President - Investments, Senior Portfolio Manager, Portfolio Management Program at UBS Financial Services, Inc., a full service securities firm. |
James R. Blair | 60 | Director | 1994 | 2006 | President of Renco Properties, Inc., a real estate development company. |
Jack W. Conner | 65 | Director | 2004 | 2008 | Founder, President and Director of Plaza Bank of Commerce from 1979 to 1991; Chairman and CEO of Comerica California from 1991 until his retirement in 1998; Director until 2002. |
Richard L. Conniff | 58 | Director, President and COO | 1998 | 2005 | President and COO of Heritage Commerce Corp since 2000; President and Chief Executive Officer of Heritage Bank East Bay, a wholly-owned subsidiary of Heritage Commerce Corp, from 1998 to 2000; President and Chief Executive Officer of Acacia Bank, an industrial loan company, from 1997 to 1998; and Senior Vice President and Chief Financial Officer of South Valley Bancorporation from 1995 to 1997. |
William J. Del Biaggio, Jr. | 64 | Chairman, and Interim Chief Executive Officer | 1994 | 2006 | Chairman and Interim CEO of Heritage Commerce Corp since 2004; Business Development Officer of Heritage Commerce Corp since 2002. |
Anneke Dury | 60 | Director | 1994 | 2006 | Independent Financial Consultant for various Santa Clara County technology companies. |
Roy E. Lave | 69 | Director | 2000 | 2006 | Director, Bank of Los Altos, from 1995 to 2002; Chief Executive Officer of Systan, Inc., a consulting firm, since 1966; Founding Chair, Los Altos Community Foundation, 1991 to present; tenured professor of engineering at Stanford University from 1962 to 1974. |
Robert Moles | 50 | Director | 2004 | 2008 | Chairman of Intero Real Estate Services, Inc., a full-service real estate firm since 2002. Prior to joining Intero, served as President and CEO of the Real Estate Franchise Group of Cendant Corporation, the largest franchiser of residential and commercial real estate brokerage offices in the world. Prior to joining Cendant, served as President & CEO of Contempo Realty, Inc. in Santa Clara, California. |
Louis ["Lon"] O. Normandin | 70 | Director | 1994 | 2007 | Owner and Chairman of Normandin Chrysler Jeep. |
Jack L. Peckham | 63 | Director | 1994 | 2006 | CEO of Elastic Workspace Software, Inc. since January 2003; President and CEO of Alpine Microsystems since November 1, 2001; President and CEO of Timpani Networks, Inc. from 1999 to 2002; President and CEO of Lightspeed Semiconductor from 1998 to 2000; Vice President and General Manager of Atmel Corporation, a semiconductor manufacturing company, from 1985 to 1998. |
Humphrey P. Polanen | 55 | Director | 1994 | 2007 | CEO of Sandhill IT Security Acquisition Corp, a publicly listed company since 2004. Managing Director of Internet Venture Partners BV, an investment firm, from 2000 to 2004; President and CEO of Trustworks Systems, a network security company, from 1998 to 1999; General Manager of Network Security Products and Internet Commerce Groups, Sun Microsystems, a computer systems company, from 1995 to 1998. |
Kirk M. Rossmann | 57 | Director | 2002 | 2006 | Chief Executive Officer of B/T Management Group, LLC, a holding company for property management and steel fabrication, since 1996; and President of American Welding Supply, an electronic and industrial gas supplier, from 1975 to 1996. |
Charles J. Toeniskoetter | 60 | Director | 2002 | 2005 | Chairman and CEO of Toeniskoetter & Breeding, Inc., Development, a Silicon Valley real estate development and investment company. Chairman of TBI Construction & Construction Management, Inc., a Silicon Valley commercial construction company. Member of the Board of Directors of Redwood Trust, Inc. (New York Stock Exchange) and SJW Corp. (American Stock Exchange). |
Ranson W. Webster | 60 | Director | 2004 | 2005 | Founded Computing Resources, Inc. ("CRT") in 1978, a privately held general purpose service bureau specializing in automating accounting functions. In 1999 CRT merged with Intuit, Inc., the maker of QuickBooks and Quicken financial software. In 1998 founded Evergreen Capital, LLC, an early stage investment company focused on Internet and biotech companies. |
* - If Proposal I is approved, each of the nominees, reference can be madedirectors has agreed to stand for re-election at the "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" section2006 Annual Meeting of this Proxy Statement. The column headed "Name/Class" indicates whetherShareholders if nominated by the nominee isCorporate Governance and Nominating Committee, and if not nominated as a Class I, Class II or Class III director in 2006 to resign from the event
Proposal 3 is approved.
There are no family relationships among any of Commerce Corp's Executive Officers, Directors or Director nominees.
No director or nominee chosen by the Board of Directors is a director of
any other company with a class of securities registered pursuant to Section 12
of the Securities Exchange Act of 1934, or subject to the requirements of
Section 15(d) of such Act or of any company registered as an investment company
under the Investment Company Act of 1940.
DESIGNATION OF CLASSES IF PROPOSAL 3 IS APPROVED
If one or more persons other than management's nominees are nominated and
receive sufficient votes to be elected and Proposal 3 is approved, such person
or persons will be deemed elected to the class of directors for which
management's nominee who was not elected was proposed. If two or more of
management's nominees are not elected, the other persons elected shall be
entitled to select, in order of the number of votes cast in their favor, the
class to which they are elected from the classes to which fewer than all of the
management's nominees were elected. Accordingly, a person other than a nominee
of management may receive more votes than any of management's nominees for a
particular class, e.g., Class III, but if all of management's nominees for Class
III are among the 15 candidates receiving the greatest number of votes, such
nominees will be elected as Class III directors and the other person elected to
the Board must select from a class to which fewer than all of management's
nominees were elected.
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10
Nominees.
EXECUTIVE OFFICERS OF COMMERCE CORP
Set forth below is certain information with respect to the Executive Officers of Commerce Corp.
Name | Age | Position | Officer Since |
Richard L. Conniff | 58 | President and Chief Operating Officer | 1998 |
Kenneth A. Corsello | 54 | Executive Vice President and Chief Credit Officer | 1995 |
William J. Del Biaggio, Jr. | 64 | Chairman of the Board and Interim Chief Executive Officer | 2004 |
Lawrence D. McGovern | 50 | Executive Vice President and Chief Financial Officer | 1998 |
Kenneth A. Corsello has served as an Executive Vice President since 1996, as Chief Credit Officer of Heritage Bank of Commerce since 1995, and as Chief Credit Officer of Heritage Commerce Corp since 1998. From 1994 to 1995 Mr. Corsello served as Senior Vice President/Credit Administrator with Cupertino National Bank, and from 1990 to 1994 as a Department Head with the Federal Deposit Insurance Corporation.
Lawrence D. McGovern has served as Executive Vice President and Chief Financial Officer of Heritage Commerce Corp since July 1998. From August 1997 to
June 1998, Mr. McGovern served
1 Includes service as an independent financial analystofficer of Heritage Bank of Commerce prior to the organization of Commerce Corp as the holding company for several
companies. From 1995 to 1997, Mr. McGovern served as Chief Financial Officer of
Business & Professionalthe Bank and from 1994 to 1995, as Chief Financial Officer
of Capitol Bank.
in 1997.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the Record DateFebruary 15, 2005 pertaining to beneficial ownership of Commerce Corp's common stock (the sole class of stock
outstanding) by persons known to Commerce Corp to own five percent or more of Commerce Corp's common stock, current directors of Commerce Corp, nominees to be elected to the Board of Directors, the officers named in the Summary Compensation Table presented in this Proxy Statement and all directors and officers(1)officers1 of Commerce Corp as a group. This information has been obtained from Commerce Corp's records, or from information furnished directly by the individual or entity to Commerce Corp.
For purposes of the following table, shares issuable pursuant to stock options which may be exercised within 60 days of the Record DateFebruary 15, 2005 are deemed to be issued and outstanding and have been treated as outstanding in determining the amount and nature of beneficial ownership and in calculating the percentage of ownership of those individuals possessing such interest, but not for any other individuals. Thus, the total number of shares considered to be outstanding
for the purposes of this table may vary depending upon the individual's
particular circumstance.
As used throughout this Proxy Statement, the terms "Officer" and "Executive Officer" refer to the Chairman of the Board and Chief Executive Officer; the President and Chief Operating Officer; the Executive Vice President and Chief Credit Officer; and the Executive Vice President and Chief Financial Officer. Name of Beneficial Relationship Shares Beneficially Exercisable Frank G. Bisceglia Director 113,294 (4) 19,499 1.0% James R. Blair Director 62,995 (5) 19,499 0.5% Jack W. Conner Director 1,873 873 0.1% Richard L. Conniff President, COO, & Director 96,026 (6) 76,506 0.8% Kenneth A. Corsello Executive Vice President & CCO 48,336 4,870 0.4% William J. Del Biaggio, Jr. Chairman and Interim Chief Executive Officer 155,714 (7) 19,499 1.3% Anneke Dury Director 48,375 (8) 14,548 0.4% Roy E. Lave Director 118,358 (9) 21,070 1.0% Lawrence D. McGovern Executive Vice President & CFO 59,515 (10) 57,865 0.5% Robert Moles Director 79,456 (11) 873 0.7% Louis ("Lon") O. Normandin Director 141,753 (12) 744 1.2% Jack L. Peckham Director 141,433 (13) 19,499 1.2% Humphrey P. Polanen Director 33,780 (14) 14,549 0.3% Kirk M. Rossmann Director 82,167 (15) 19,499 0.7% Charles J. Toeniskoetter Director 24,422 (16) 9,764 0.2% Ranson W. Webster Director 433,807 1,664 3.7% All directors and executive officers (16 in number) 1,641,304 300,821 13.7%
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11
SHARES
BENEFICIALLY PERCENT
RELATIONSHIP WITH OWNED EXERCISABLE OF CLASS
NAME OF BENEFICIAL OWNER(1) COMMERCE CORP (2),(3) OPTIONS (3)
--------------------------- ----------------- ------------ ----------- ----------
Richard L. Conniff......................... President, COO, & 53,527(7) 43,007 0.4
Director
Kenneth A. Corsello........................ Executive Vice 48,779(8) 703 0.4
President & CCO
William J. Del Biaggio, Jr. ............... Director 168,615(9) 34,861 1.5
Anneke Dury................................ Director 43,727(10) 9,900 0.4
Kurt G. Hammerstrom........................ Director 142,790(11) 6,330 1.3
John W. Larsen............................. Director 17,606(12) 11,006 0.2
Roy E. Lave................................ Director 112,411(13) 14,123 1.0
Lawrence D. McGovern....................... Executive Vice 33,825(14) 32,175 0.3
President & CFO
Louis ("Lon") O. Normandin................. Director 140,146(15) 14,850 1.3
Jack L. Peckham............................ Director 200,660(16) 29,143 1.8
Robert W. Peters........................... Director 226,086(17) 3,300 2.0
Humphrey P. Polanen........................ Director 68,592(18) 34,861 0.6
Brad L. Smith.............................. Chairman, CEO, & 63,128(19) 55,795 0.6
Director
Howard J. Weiland.......................... Director 83,288(20) 14,123 0.8
All directors and executive officers as a group (17 in
number)..................................................... 1,830,668 368,948 16.4%
- ---------------
(1)
Owner1
With
Commerce Corp
Owned2,3
Options;
Percent of
Class3
(2)
COMMITTEES OF THE BOARD OF DIRECTORS
OF HERITAGE COMMERCE CORP
AUDIT COMMITTEE
The members of the Audit Committee in 2004 were Anneke Dury, Louis ("Lon") O. Normandin, Jack L. Peckham and Humphrey P. Polanen, Committee Chair. In 2005, the members are Jack W. Conner, Louis ("Lon") O. Normandin, Jack L. Peckham and Humphrey P. Polanen, Committee Chair. All Audit Committee members are independent as Community Property.
specified by NASDAQ's listing standards.
The Audit Committee provides oversight of our financial, accounting and reporting process, our system of internal accounting and financial controls, and our compliance with related legal and regulatory requirements, the appointment, engagement, termination and oversight of our independent auditors, including conducting a review of their independency, reviewing and approving the planned scope of our annual audit, overseeing the independent auditor's work, reviewing and pre- approving any audit and non-audit services that may be performed by them, reviewing with management and our independent auditors the adequacy of our internal financial controls, and reviewing our critical accounting policies and the application of accounting principles. Each member of the Audit Committee meets the independence criteria prescribed by applicable law and the rules of the Securities and Exchange Commission for audit committee membership and is independent within the meaning of the NASDAQ listing standards. Each Audit Committee member meets the NASDAQ's financial knowledge requirements. The Audit Committee operates pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and the related rules of the SEC and NASDAQ. A copy of the Audit Committee Charter is attached as Exhibit C to this Proxy Statement. The Audit Committee met six times during 2004.
Audit Committee Financial Expert
The Board of Directors has determined that Mr. Jack W. Conner has: (i) an understanding of generally accepted accounting principles and financial statements; (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal control over financial reporting; and (v) an understanding of audit committee functions.
Therefore, the Board has determined that Mr. Jack W. Conner meets the definition of "audit committee financial expert" under the rules of the SEC and is "financially sophisticated" under NASDAQ rules. The designation of a person as an audit committee financial expert does not result in the person being deemed an expert for any purpose, including under Section 11 of the Securities Act of 1933. The designation does not impose on the person any duties, obligations or liability greater than those imposed on any other audit committee member or any other director and does not affect the duties, obligations or liability of any other member of the Audit Committee or Board of Directors.
CORPORATE GOVERNANCE AND NOMINATING COMMITTEE
The members of the Corporate Governance and Nominating Committee in 2004 were Anneke Dury, Louis ("Lon") O. Normandin, Humphrey P. Polanen, Kirk M. Rossmann, Charles J. Toeniskoetter and Ranson W. Webster, Committee Chair. In 2005, the members are Louis ("Lon") O. Normandin, Humphrey P. Polanen, Charles J. Toeniskoetter and Ranson W. Webster, Committee Chair. All Committee members are independent under the rules of NASDAQ.
The principal duties of the Corporate Governance and Nominating Committee are the development of corporate governance principles for Commerce Corp, the establishment of requirements and qualifications for Board membership, and the recommendation of candidates for election to Commerce Corp's Board of Directors. The Corporate Governance and Nominating Committee has a charter which is available on the Commerce Corp website and it may be accessed at the following address:www.heritagecommercecorp.com. The Corporate Governance and Nominating Committee met ten times during 2004.
COMPENSATION AND BENEFITS COMMITTEE
The members of the Compensation and Benefits Committee in 2004 were Frank G. Bisceglia, Roy E. Lave, Committee Chair, Jack L. Peckham, Kirk M. Rossmann and Ranson W. Webster. In 2005, the members are Frank G. Bisceglia, Jack L. Peckham, and Ranson W. Webster. All committee members are independent under the rules of NASDAQ.
The Committee is primarily responsible for determining the compensation of directors, executive officers and other officers of Commerce Corp and Heritage Bank of Commerce. For executive officers and directors, the Committee is responsible for evaluating, reviewing and recommending to the Board compensation levels, equity and non-equity incentive compensation, and performance based compensation plans. The Committee also oversees the Commerce Corp welfare benefit plans, retirement benefit plans, all employment and personnel policies and procedures including employment contracts. The Compensation and Benefits Committee met six times during 2004.
LOAN COMMITTEE
The members of the Loan Committee are Frank G. Bisceglia, Committee Chair, James R. Blair, Jack W. Conner, Roy E. Lave, Robert Moles, Louis ("Lon") O. Normandin, and Charles J. Toeniskoetter. The Loan Committee is responsible for the approval and supervision of loans and the development of Commerce Corp's loan policies and procedures. The Loan Committee met thirty-four times during 2004.
FINANCE AND INVESTMENT COMMITTEE
The members of the Finance and Investment Committee are Anneke Dury, Committee Chair, Frank G. Bisceglia, James R. Blair, Jack W. Conner, Richard L. Conniff, and William J. Del Biaggio, Jr.
The Finance and Investment Committee is responsible for the development of policies and procedures related to liquidity and asset-liability management, supervision of Commerce Corp's investments and preparation of Commerce Corp's annual budget. The Finance and Investment Committee met twelve times during 2004.
STRATEGIC ISSUES COMMITTEE
The members of the Strategic Issues Committee in 2004 were Frank G. Bisceglia, Richard L. Conniff, William J. Del Biaggio, Jr., Anneke Dury, Roy E. Lave, Charles J. Toeniskoetter, Committee Chair. In 2005, the members are James R. Blair, Jack W. Conner, Richard L. Conniff, William J. Del Biaggio, Jr., Anneke Dury, Robert Moles, Charles J. Toeniskoetter, Committee Chair, and Ranson W. Webster.
The principal duties of the Strategic Issues Committee are to provide oversight and guidance to Senior Management regarding the strategic direction of Commerce Corp, including development of the overall Strategic Business Plan. The Strategic Issues Committee met one time during 2004.
DIRECTOR ATTENDANCE AT BOARD MEETINGS
During 2004, Commerce Corp's Board of Directors held twelve regular meetings and four special meetings. Each director attended at least 75 percent of the aggregate of: (1) the total number of meetings of the Board of Directors; and (2) the total number of meetings of Board committees on which that director served.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Commerce Corp's directors, executive officers and persons who own more than ten percent of a registered class of Commerce Corp's equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of common stock and other equity securities of Commerce Corp. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish Commerce Corp with copies of all Section 16(a) forms they file.
To Commerce Corp's knowledge, based solely on review of the copies of such reports furnished to Commerce Corp and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were complied with during the year ended December 31, 2004, except that Kenneth Corsello and Lawrence McGovern inadvertently filed one late report with regard to a filing for the grant of stock options under the 1994 Stock Option Plan.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
There are no existing or proposed material transactions between Commerce Corp and any of Commerce Corp's directors, executive officers, nominees for election as a director, or the immediate family or associates of any of the foregoing persons.
INDEBTEDNESS OF MANAGEMENT
Some of Commerce Corp's directors and executive officers, as well as their immediate family and associates, are customers of, and have had banking transactions with, the banking subsidiaries of Commerce Corp (i.e.,Corp's subsidiary Heritage Bank of Commerce Heritage Bank East Bay, Heritage Bank South Valley, and Bank
of Los Altos, collectively referred to herein as the "Banks"(the "Bank") in the ordinary course of business, and the Banks expectBank expects to have such ordinary banking transactions with these persons in the future. In the opinion of management of Commerce Corp and the Banks,Bank, all loans and commitments to lend included in such transactions were made in the ordinary course of business on the same terms, including interest rates and collateral, as those prevailing for comparable transactions with other persons of similar creditworthiness, and do not involve more than the normal risk of collectability or present other unfavorable features. Loans to individual directors and officers must comply with the Banks'Bank's lending policies and statutory lending limits. In addition, prior approval of the Banks' BoardsBank's Board of Directors is required for all such loans.
COMMITTEES OF THE BOARD OF DIRECTORS
OF HERITAGE COMMERCE CORP
AUDIT COMMITTEE
EXECUTIVE COMPENSATION
The members of the Audit Committee are Humphrey P. Polanen, Committee
Chairman, John W. Larsen, Louis ("Lon") O. Normandin, Jack L. Peckham, Robert W.
Peters, and Howard J. Weiland, Committee Vice-Chairman.
The principal duties of the Audit Committee are the following: (i)
recommend the firm of independent certified public accountants for appointment
by the Board; (ii) meet with the independent certified public accountants to
review and approve the scope of their audit engagement and the fees related to
such work; (iii) meet with Commerce Corp's financial management, internal audit
management and independent certified public accountants to review matters
relating to internal accounting controls, the internal audit program, accounting
practices and procedures and other matters relating to the financial condition
of Commerce Corp and its subsidiaries; and (iv) periodically report to the Board
any conclusions or recommendations that the Audit Committee may have with
respect to such matters. The Board of Directors has adopted
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13
a written charterfollowing table provides for the Audit Committee. A copyperiods shown summary information concerning compensation paid or accrued by us or on behalf of Commerce Corp's Audit
Committee Charter is included as Annex C to this Proxy Statement. The Audit
Committee met three times during 2000.
PERSONNEL AND PLANNING COMMITTEE
The membersour Chief Executive Officer and each of the Personnel and Planning Committee are Robert W. Peters,
Committee Chairman, Hugh P. Barton, Frank G. Bisceglia, Richard L. Conniff,
William J. Del Biaggio, Jr., Roy E. Lave, Jack L. Peckham, and Brad L. Smith.
The principal duties of the Personnel and Planning Committee are (i) the
selection, recruitment and performance evaluation of executive personnel; (ii)
making recommendations to the Board regarding the salary, benefits and incentive
compensation to beour four highest paid to executive officers of the Company and its subsidiary
banks; (iii) the development of corporate-wide compensation and benefits
policies; (iv) the development of the Company's personnel policies; (v) the
Company's compliance with laws and regulations pertaining to personnel,
compensation and employment matters; (vi) the development and presentation to
the Board for approval of the Company's mission statement and strategic plan;
(vii) the development of employee training and internal communications programs;
and (viii) in cooperation with the Company's Loan Committee, the development of
social responsibility programs and policies, including, but not limited to,
policies designed to ensure the Company's compliance with all state and federal
laws and regulations pertaining to equal employment opportunity, equal credit
opportunity and the Company's efforts to meet the credit needs of the
communities in which the Company and its subsidiaries do business. The Personnel
and Planning Committee met four times during 2000.
LOAN COMMITTEE
The members of the Loan Committee are Frank G. Bisceglia, Committee
Chairman, James R. Blair, Richard L. Conniff, Kenneth A. Corsello, William J.
Del Biaggio, Jr., Roy E. Lave, Louis O. ("Lon") Normandin, and Brad L. Smith.
The Loan Committee is responsible for the approval and supervision of loans and
the development of the Company's loan policies and procedures. The Loan
Committee met thirty-seven times during 2000.
FINANCE AND INVESTMENT COMMITTEE
The members of the Finance and Investment Committee are Anneke Dury,
Committee Chairwoman, Frank G. Bisceglia, James R. Blair, Richard L. Conniff,
William J. Del Biaggio, Jr., Robert W. Peters, Brad L. Smith, and Howard J.
Weiland.
The Finance and Investment Committee is responsible for the development of
policies and procedures related to liquidity and asset-liability management,
supervision of the Company's investments and preparation of the Company's annual
budget. The Finance and Investment Committee met thirteen times during 2000.
The Company and its subsidiary Banks do not have executive or nominating
committees. The Board of Directors performs the functions of these committees.
During 2000, the Company's Board of Directors held eleven regular meetings
and two special meetings. Except for James R. Blair, Louis O. ("Lon") Normandin,
Jack L. Peckham, Robert W. Peters, and Humphrey P. Polanen, each director
attended at least 75 percent of the aggregate of: (1) the total number of
meetings of the Board of Directors; and (2) the total number of meetings of
board committees on which that director served.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Commerce
Corp's directors and executive officers and persons who own more than ten
percent of a registered class of Commerce Corp's equity securities, to file with
the Securities and Exchange Commission initial reports of ownership and reports
of
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14
changes in ownership of common stock and other equity securities of Commerce
Corp. Officers, directors and greater than ten percent shareholders are required
by SEC regulations to furnish Commerce Corp with copies of all Section 16(a)
forms they file.
To Commerce Corp's knowledge, based solely on review of the copies of such
reports furnished to Commerce Corp and written representations that no other
reports were required, during the year ended December 31, 2000; all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with, except as follows: Directors
Frank G. Bisceglia and Robert W. Peters each filed one Form 4 Statement of
Changes in Beneficial Ownership with the Securities and Exchange Commission
after the date upon which the filing was due.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
During 2000 Commerce Corp paid a director, William J. Del Biaggio, Jr.,
$65,000 in connection with the terms of a consulting agreement pursuant to which
Mr. Del Biaggio assisted with business development activities for Commerce
Corp's subsidiary banks.
There are no other existing or proposed material transactions between
Commerce Corp and any of Commerce Corp's directors,two former executive officers nominees
for election(collectively referred to as a director, or the immediate family or associates of any of the
foregoing persons.
CHANGE IN CONTROL
Management is not aware of any arrangements, including the pledge by any
person of shares of Commerce Corp, the operation of which may at a subsequent
date result in a change in control of Commerce Corp.
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EXECUTIVE COMPENSATION
The following information is furnished with respect to each"named executive officer of the Company whose aggregate cash compensation during 2000 exceeded
$100,000.
officers").
SUMMARY COMPENSATION TABLE
|
| Annual Compensation | Long Term Compensation |
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|
|
|
|
| Awards | Payouts |
| |||
Name and principal position |
Year |
Salary(1) |
Bonus(1) | Other Annual Compensation(2) | Restricted Stock Awards | Options / SARs# | LTIP Payouts | All Other Compensation(3)(4) | ||
William J. DelBiaggio, Jr. | 2004 | $ 135,000 | $ 65,578 | $ 12,547 | --- | --- | --- | $ 4,875 | ||
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Brad L. Smith (5) | 2004 | $ 75,117 | $ 70,000 | $ 34,821 | --- | 10,000 | --- | $ 1,124,384 | ||
Former CEO | 2003 | $ 220,000 | $ 50,500 | $ 12,700 | --- | --- | --- | $ 6,500 | ||
Heritage Commerce Corp | 2002 | $ 220,000 | $ 52,000 | $ 8,400 | --- | 7,500 | --- | $ 7,500 | ||
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Richard L. Conniff | 2004 | $ 204,166 | $ 60,000 | $ 9,708 | --- | 10,000 | --- | $ 6,604 | ||
President and COO | 2003 | $ 200,000 | $ 45,000 | $ 9,100 | --- | --- | --- | $ 6,500 | ||
Heritage Commerce Corp | 2002 | $ 200,000 | $ 46,000 | $ 9,100 | --- | 7,500 | --- | $ 7,500 | ||
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Kenneth A. Corsello | 2004 | $ 153,833 | $ 33,465 | $ 7,407 | --- | 7,500 | --- | $ 5,345 | ||
Executive Vice President/ | 2003 | $ 145,500 | $ 31,600 | $ 7,100 | --- | --- | --- | $ 5,137 | ||
Chief Credit Officer | 2002 | $ 132,200 | $ 39,700 | $ 6,800 | --- | 7,000 | --- | $ 5,500 | ||
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Philip L. Griffin (6) | 2004 | $ 129,190 | $ 33,657 | $ 11,210 | --- | 3,000 | --- | $ 131,710 | ||
Former EVP/ | 2003 | $ 146,300 | $ 30,700 | $ 3,700 | --- | --- | --- | $ 4,857 | ||
Chief Information Officer | 2002 | $ 138,333 | $ 38,100 | $ 600 | --- | 5,000 | --- | $ 5,600 | ||
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Lawrence D. McGovern | 2004 | $ 171,833 | $ 35,765 | $ 10,278 | --- | 7,500 | --- | $ 5,795 | ||
Executive Vice President/ | 2003 | $ 155,500 | $ 35,200 | $ 8,700 | --- | --- | --- | $ 5,400 | ||
Chief Financial Officer | 2002 | $ 152,500 | $ 42,100 | $ 8,200 | --- | 9,000 | --- | $ 6,100 | ||
- Amounts shown include cash
and non-cashcompensation earned and received by executive officers.(2) - Amounts include an automobile allowance pursuant to the terms of each executive officer's employment, payments for unused vacation
moving expenses paid,and insurance benefits.(3) Amounts shown are contractual obligations paid to Mr. Rossell based on compensation agreements reached with Commerce Corp in previous years.Commerce Corp pays the cost of premiums on life insurance policies insuring all employees, including executive officers,in amountsfor coverage of approximately two times their annual salaries. The policies are payable to the officer's designated beneficiary(ies). In addition, Commerce Corp provides certain incidental personal benefits to executive officers. The incremental cost to Commerce Corp of providing such benefits totheeach executiveofficersofficer named above did not, for the fiscal year ended December 31,2000,2004, exceed the lesser of $50,000 or ten percent of thecompensationsalary and bonus paid to suchofficers.officer. - Amounts include an employer matching contribution under Commerce Corp's 401(k) plan, and include all severance pay, if any.
- Amounts include Employee Stock Ownership Plan contributions for William J. Del Biaggio, Jr., Brad L. Smith, Richard L. Conniff, Kenneth A. Corsello, Philip L. Griffin and Lawrence D. McGovern totaling $3,375, zero, $5,104, $3,845, zero and $4,295, respectively.
- Resigned his position with Commerce Corp on May 4, 2004. Other Compensation includes severance pay pursuant to an employment agreement and acceleration of certain retirement benefits related to a Supplemental Employee Retirement Plan.
- Resigned his position with Commerce Corp on November 16, 2004. Other Compensation includes severance pay pursuant to an employment agreement and acceleration of certain retirement benefits related to a Supplemental Employee Retirement Plan.
STOCK OPTION PLAN
In 1994, the Board of Directors adopted the Heritage Bank of Commerce 1994 Tandem Stock Option Plan ("(the "1994 Plan") in order to promote the long-term success of the Bank and the creation of shareholder value. In 1998, the 1994 Plan was restated and adopted by Commerce Corp as the successor corporation to Heritage Bank of Commerce. The 1994 Plan authorizesexpired on June 8, 2004. As a result, in 2004 the Board of Directors adopted the Heritage Commerce Corp 2004 Stock Option Plan ("2004 Plan"), which obtained shareholder approval in 2004. The 1994 Plan and the 2004 Plan authorize Commerce Corp to grant stock options to officers, employees and directors of Commerce Corp and its affiliates.
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The following table shows options granted in 20002004 to executive officers named in the Summary Compensation Table. The grant date present value dollar amount was computed in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
OPTION GRANTS IN LAST FISCAL YEAR
|
| % of Total Options |
|
|
|
Richard L. Conniff | 10,000
| 5.00% | $13.35 | 4/22/2014 | $133,500 |
Kenneth A. Corsello
| 7,500 | 4.07% | $14.11 | 5/27/2014 | $105,825 |
Philip L. Griffin | 3,000 | 1.63% | $14.11 | 5/27/2014 | $42,330 |
Lawrence D. McGovern | 7,500 | 4.07% | $14.11 | 5/27/2014 | $105,825 |
Brad L. Smith | 10,000 | 5.00% | $13.35 | 4/22/2014 | $133,500 |
The following table delineates options exercised by the named Executive Officers and the value of their unexercised options at December 31, 2004:
1 In accordance with Securities and Exchange Commission rules, the Black-Scholes option pricing model was used to estimate the Grant Date Present Value assuming (i) an expected volatility of 35%27%; (ii) a risk-free interest rate of 5.7%1.19%; and (iii) an option term of 7 years. This is a theoretical value for stock options. The actual value of the options will depend on the market value of Common Stock when the options are exercised.
The following table delineates options exercised by executive officers
named in the Summary Compensation Table and the values of unexercised options at
December 31, 2000:
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
|
|
| Number of unexercised options at Year End | Value of unexercised in-the-money options at Year End (2) |
Name | Shares acquired on exercise (#) | Value realized ($) (1) | Exercisable/ Unexercisable | Exercisable/ Unexercisable |
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Smith | 96,839 | 296,490 | N/A | N/A |
DelBiaggio | N/A | N/A | 18,954/3,396 | $179,200/$35,700 |
Conniff | N/A | N/A | 75,072/11,828 | $692,300/$84,200 |
Corsello | 8,005 | 25,171 | 3,818/8,677 | $31,800/$53,200 |
Griffin | N/A | N/A | 13,560/ N/A | $124,900/ N/A |
McGovern | N/A | N/A | 56,667/9,333 | $539,700/$59,400 |
McGrath | 13,000 | 83,850 | 17,747/4,253 | $199,500/$20,900 |
(1) The fair market value of our common stock on the date of exercise minus the exercise price.
(2) The fair market value of our common stock on December 31, 2004 was $19.02. The values in this table represent the fair market value of our common stock minus the exercise price.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth the number and weighted-average exercise price of securities to be issued upon exercise of outstanding options, warrants and rights, and the number of securities remaining available for future issuance under equity compensation plans, at December 31, 2004:
Plan category | No. of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted average exercise price of outstanding options, warrants and rights | No. of securities remain-ing available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | (b) | (c) |
Equity compensation plans approved by securities holders | 986,975 (1) | $10.23 | 276,500 |
Equity compensation plans not approved by security holders | N/A | N/A | N/A |
- Consists of 963,475 options to acquire shares of common stock issued under Commerce Corp's 1994 Stock Option Plan, and 23,500 options under the 2004 Plan.
401(k) PLAN
Plan
The Board of Directors has established an employee benefit plan under Section 401(k) of the Internal Revenue Code of 1986. The purpose of the 401(k) plan is to encourage employees to save for retirement. Eligible employees may make contributions to the plan subject to the limitations of Section 401(k) of the Internal Revenue Code of 1986.as amended. The Plan trustees administer the Plan. EMPLOYEE STOCK OWNERSHIP PLAN
Commerce Corp matches the first $1,500 of each employee's contributions. For named executive officers, these amounts are included in the Summary Compensation Table under "All Other Compensation."
Employee Stock Ownership Plan
In 1997, Heritage Bank of Commerce initiated an employee stock ownership plan ("Stock Ownership Plan"). The Stock Ownership Plan was subsequently adopted by Commerce Corp as the successor corporation to Heritage Bank of Commerce. The Stock Ownership Plan allows Commerce Corp, at its option, to purchase shares of Commerce Corp Common Stock on the open market and award those shares to certain employees. To be eligible to receive an award of shares under the Stock Ownership Plan, an employee must have worked at least 1,000 hours during the year and must be employed by the CompanyCommerce Corp on December 31. Awards under the Stock Ownership Plan generally vest over four years. During 2000,2004, Commerce Corp contributed $250,000$450,000 to the Stock Ownership Plan, with contributions to William J. Del Biaggio, Jr., Brad L. Smith, Richard L. Conniff, Kenneth A. Corsello, Philip L. Griffin and Lawrence D. McGovern Kenneth B. Silveira,totaling $3,375, zero, $5,104, $3,845, zero and Brad L. Smith totaling $4,500, $3,400, $4,200, $2,600, and $5,100,$4,295, respectively. These amounts are included in the Summary Compensation Table in the column entitled "Bonus."All Other Compensation."
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EMPLOYMENT CONTRACTS
Employment Contracts
Richard L. Conniff, Commerce Corp President and Chief Operating Officer of Commerce Corp, is employed under the terms of a written three-year employment contract dated January 1, 1999August 20, 2001 which provides for the following: a currentfollowing as of December 31, 2004: base salary of $200,000$205,000 per year; bonuses paid based upon the performance of Commerce Corp awarded in the sole discretion of the Board of Directors; a car allowance; insurance; and severance compensation benefits in the event Commerce Corp terminates Mr. Conniff's employment without cause. Lawrence D. McGovern, Commerce Corp'sIf Mr. Conniff's employment is terminated without cause, he will be entitled to a severance package that includes a payment equal to his base salary, auto allowance and average annual performance bonus (as defined in his agreement), medical and life insurance. If Mr. Conniff's employment is terminated without cause or terminates at his 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 twelve months following a change of control, he will be entitled to an amount equal to two times his base salary, auto allowance and average annual performance bonus, medical insurance benefits and life insurance benefits.
Kenneth A. Corsello, Executive Vice President and Chief FinancialCredit Officer of Commerce Corp, is employed under the terms of a written three-year employment contract dated July 16, 1998May 11, 2001 which provides for the following: a
currentfollowing as of December 31, 2004: base salary of $150,000$155,000 per year;year, which was increased for 2005 to $170,000; bonuses paid based upon the performance of Commerce Corp awarded in the sole discretion of the Board of Directors; a car allowance; insurance; and severance compensation benefits in the event Commerce Corp terminates Mr. McGovern'sCorsello's employment without cause.
Brad L. Smith, Chairman of the Board
Lawrence D. McGovern, Executive Vice President and Chief ExecutiveFinancial Officer of Commerce Corp, is employed under the terms of a written three-year employment contract dated January 1, 1999July 16, 1998 which is renewable annually and provides for the following: a currentfollowing as of December 31, 2004: base salary of $220,000$175,000 per year;year, which was increased for 2005 to $170,000; bonuses paid based upon the performance of Commerce Corp, awarded in the sole discretion of the Board of Directors; a car allowance; insurance; and severance compensation benefits in the event Commerce Corp terminates Mr. Smith'sMcGovern's employment without cause.
cause, he will be entitled to a severance package that includes a payment equal to his base salary, auto allowance and average annual performance bonus (as defined in his agreement); provided however, if termination results from a change in control, he would be entitled to one and one half times these amounts.
Pursuant to the terms of a written employment agreement between Commerce Corp and John E. Rossell III,Philip L. Griffin, Mr. RossellGriffin received severance compensation in the amount of $422,000$130,660 upon termination of his employment on JuneNovember 16, 2000. 2004.This amount is set forth in the Summary Compensation Table in the column labeled "All Other Compensation."
SUPPLEMENTARY RETIREMENT PLAN FOR DIRECTORS, INCLUDING EXECUTIVE OFFICERS
During 1999, the Company converted its existing
Supplementary Retirement Plan for Directors and Executive Officers
Commerce Corp has a supplemental retirement plan (the "Plan") covering key executives and directors. The Plan is a nonqualified key executive
officer and director defined contribution retirement and death benefit plan to a defined benefit plan ("Plan"). The Planand is unsecured and unfunded and there are no Plan assets. The CompanyCommerce Corp has purchased insurance on the lives of the directors and executive officers who participate in the Plan and intends to use the cash values of those policies ($15,983,00026,303,000 and $12,219,000$25,273,000 at December 31, 20002004 and 1999,2003, respectively) to pay the retirement obligations that accrue pursuant to the plan. The Company'sCommerce Corp's total accrued pension obligation was $2,125,000$7,745,000 and $510,000$4,129,000 as of December 31, 20002004 and 1999,2003, respectively. The formula by which benefits are determined for the executive officers and directors who participate in the Plan is based on a combination of the individual's position within the Company,Commerce Corp, their age at the time when their retirement benefits become fully vested, and the amount of their benefits available under thea previous non-qualified defined contribution plan. The estimated annual benefits payable upon retirement at normal retirement age for Richard L. Conniff, Kenneth A. Corsello, William J. Del Biaggio, Jr., Philip L. Griffin, Lawrence D. McGovern, and Brad L. Smith are $62,000, $48,000, $68,000, and
$92,000,$100,000, $47,508, $11,000, $8,794, $68,291, $125,000, respectively. The death benefit for participants in the Plan is an endorsement to the individual's beneficiaries of 80% of the net-at-risk insurance amount (i.e., the amount of the death benefit in excess of cash value of the underlying insurance policy).
Upon termination of the employment of John E. Rossell III in June 2000,
Commerce Corp accelerated the vesting of the retirement benefits payable to Mr.
Rossell under the Plan. Upon retirement at age 62, Mr. Rossell will receive
estimated annual retirement benefits of $108,000.
DIRECTOR FEES AND DIRECTOR FEE DEFERRAL PLAN
Director Fees and Director Fee Deferral Plan
During 2000,2004, Commerce Corp paid retainers and fees to twonon-employee directors. In January 2003, the Board changed its compensation to non-employee directors to bring it more in line with that of comparable banking institutions. Beginning in January 2003, non-employee directors were paid a monthly retainer of $2,000 and $500 for their
services during 2000, for a total of $23,465. Fees areeach Board committee meeting attended. Total fees paid to non-employee directors pursuant to a director compensation program, which allocates fees among
participating directors based on the extent and nature of each director's
committee memberships, attendance, and/or that director's chairmanship of one of
the various committees of the Board. The total annual cost of the program for
2000 was approximately $130,000.
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in 2004 were $446,000.
An option of the director compensation program is the deferral of fees ("Deferral Plan"). Under the Deferral Plan, a participating director may defer up to 100% of theirhis or her board fees into the Deferral Plan for up to ten years from the date of the first deferral. Amounts deferred earn interest at the rate of 8% per annum. The director may elect a distribution schedule of up to ten years, with interest accruing (at the same 8%) on the declining balance. A participating director is eligible to begin receiving benefits upon retirement.
Commerce Corp has purchased life insurance policies on the lives of directors who have agreed to participate in the Deferral Plan. It is expected that the earnings on these policies will offset the cost of the program. In addition, Commerce Corp will receive death benefit payments upon the death of the director. The proceeds will permit Commerce Corp to "complete" the Deferral Plan as the director originally intended if the director dies prior to the completion of the Deferral Plan. The disbursement of deferred fees is accelerated at death and commences one month after the director dies.
In the event of the director's disability prior to attainment of his benefit eligibility date, the director may request that the Board permit him to receive an immediate disability benefit equal to the annualized value of the director's deferral account.
To date, eighttwo of the directors have elected to deferare currently deferring their fees. For the years 1998, 1999,2002, 2003 and 2000,2004, Commerce Corp recordedaccrued expenses of $134,000,
$42,000,$54,000, $75,000 and $67,000,$75,000, respectively, to account for its obligation to pay deferred fees.
COMPENSATION COMMITTEE REPORT
Compensation Committee Report
The PersonnelCompensation and PlanningBenefits Committee, acting as a compensation committee in accordance with applicable requirements, has provided the following report to the Board of Directors of Commerce Corp.
REPORT ON SENIOR EXECUTIVE COMPENSATION
BY THE PERSONNEL AND PLANNING COMMITTEE OF THE BOARD OF DIRECTORS
The
Report on Senior Executive Compensation
by the Compensation and Benefits Committee of the PersonnelBoard of Directors
Overview
The objectives of the Heritage Commerce Corp (the "Company") executive compensation policies are to ensure that executives are provided incentives and Planningcompensated in a way that advances both short- and long-term interests of shareholders while also ensuring that Commerce Corp is able to attract and retain qualified executive management. To these ends the Committee seeks to align executive compensation with Commerce Corp's performance and to motivate executive officers to achieve Commerce Corp's business objectives.
Commerce Corp approaches these objectives through three key components:
- base salary
- a performance-based annual bonus payable in cash
- periodic grants of long-term stock-based compensation through stock options
Annual Base Salaries
Each year the performance of all executive officers is reviewed by the Chief Executive Officer and recommended salary adjustments are reviewed by the Committee. When reviewing these recommendations, the Committee takes several factors into account, including the executive's experience, responsibilities, management abilities and job performance, as well as the performance of Commerce Corp as a whole and current market conditions. The Committee also reviews compensation surveys and other data to enable the Committee to compare Commerce Corp's compensation packages with those of similarly-situated companies in the banking industry. The base salaries paid to Richard L. Conniff, Kenneth A. Corsello, and Lawrence D. McGovern are pursuant to existing contracts.
Annual Incentive Compensation
Commerce Corp established a bonus plan for its five highest paid executive officers for 2004. These executives are eligible for target bonuses which are expressed as a percentage of their respective base salaries which increase as the level of performance of established goals increases. The bonuses are tied directly to the satisfaction of overall Company performance for the year. Early in 2004 management presented to the Committee performance goals based on the 2004 budget. For 2004 Commerce Corp performance goals ("Performance Goals") were established for:
- net income
- return on equity
- growth of total assets
- loan growth
For each Performance Goal, a threshold, target and maximum performance measure is established. Each goal is given a weighting with net income having the most significant weighting. Commerce Corp must satisfy a Performance Goal at the threshold level before any bonus may be paid. If not all of the Performance Goals are satisfied at the threshold level, then those Performance Goals that are satisfied at the threshold level are weighted and a partial payment of the bonus will be paid for satisfying some, but not all of the Performance Goals. As Performance Goals meet or exceed the threshold, target and maximum performance levels, the participants earn a greater percentage of their base salary as a bonus. The Committee agreed that notwithstanding the satisfaction of the Performance Goals, if the return on equity for 2004 does not meet the Performance Goal threshold no bonus will be paid. The maximum bonus that may be paid varies from 90% of base salary for the chief executive officer, 60% of base salary for the chief operating officer to 50% for the other executives. In addition to a performance bonus based on the achievement of the Performance Goals, the Committee has the discretion to award up to 15% of an executive's base salary for performance related to the completion of personal objectives established for the executive either by the chief executive officer or the Board throughout the year.
Upon completion of the year end financial statements, the chief executive officer and chief operating officer will prepare an analysis of the achievement of the quantitative measures for the year and make recommendations for bonuses for quantitative measures for each executive. These results will be presented to the Committee and upon the Committee's approval the bonuses are paid. The Committee may exercise its judgment whether to reflect or exclude the impact of unusual or infrequently occurring events reported in Commerce Corp's public filings. In this regard, the Committee considered the pro forma effect on certain of the Performance Goals resulting from the change in corporate management that took place earlier in 2004, the restructuring of Commerce Corp' management and severance expenses that resulted from the restructure. Based on the pro forma adjustments all of the Performance Goals for 2004 were satisfied and bonuses were paid to the participating executives.
Long Term Incentive Compensation
The Committee believes that employee stock ownership is a significant incentive in building shareholder wealth and aligning the interests of employees and shareholders. Stock options will only have value if Commerce Corp's stock price increases. In addition, Commerce Corp utilizes vesting periods for stock options to encourage key employees to continue in Commerce Corp's employ.
The Board of Directors adopted Commerce Corp's 2004 Stock Option Plan and the shareholders approved the plan at the 2004 Annual shareholders Meeting (the "2004 Stock Option Plan"). The 2004 Stock Option Plan was adopted to replace Commerce Corp's 1994 Tandem Stock Option Plan. The 2004 Stock Option Plan will assist Commerce Corp in attracting, retaining and rewarding valued employees and directors by offering them a greater stake in Commerce Corp's success and to encourage ownership in Company stock by these employees and directors. The Committee administers the 2004 Stock Option Plan on behalf of the Board of Directors with regard to executive officers and has discretion to determine which individuals are eligible to receive option awards, the time or times when the option awards are to be made, the number of shares subject to each award, the status of any grant as either an incentive stock option or a non-qualified stock option, the vesting schedule in effect for the option award, the term for which any option is to remain outstanding and the other principal terms and conditions of each option. Generally, stock options recommended by the Committee have an exercise price equal to the fair market value of a share on the day the options are granted. The options generally vest within one to four years and expire ten years after the date of grant, contingent on the employee's continued employment with Commerce Corp. Each year Commerce Corp's Chief Executive Officer will make periodic recommendations with respect to the level of stock options to be granted to each eligible employee, and the Committee reviews and approves those recommendations based on a variety of factors related to the recognition of contributions or potential contributions to the business interests of Commerce Corp. Commerce Corp has established a policy for determining the range of options that may be granted employees including the executive officers, based on the position of the employee within Commerce Corp and the purpose of the grant (i.e., hiring, performance or retention)
Compensation of Chief Executive Officer
On May 4, 2004, William J. Del. Biaggio, Jr. was appointed Chairman of the Board and interim Chief Executive Officer under the terms of a settlement agreement reached between Commerce Corp and certain shareholders who commenced a proxy contest in connection with the 2004 Annual Shareholders meeting. At the time of his appointment Mr. Del Biaggio agreed to a salary and bonus package at an annual rate of $145,000 and a potential bonus of up to 35% of his base salary. On September 30, 2004, the Board of Directors approved the increase of Mr. Del Biaggio's salary to $150,000 per year plus a bonus of $12,500 per month to be paid until the earlier of December 31, 2004 or the appointment of a permanent Chief Executive Officer.
Commerce Corp is currently conducting a search for a Chief Executive Officer. The compensation to be paid to the new chief executive officer will be a matter of negotiation between the prospective candidate and Commerce Corp.
Independent Consultant
In 2005 the Committee intends to engage an independent consultant to review and make recommendations on the entire executive compensation program for Commerce Corp.
Heritage Commerce Corp.
Compensation and Benefits Committee
Frank G. Bisceglia
Roy E. Lave, Chairman
Jack L. Peckham
Kirk M. Rossmann
Ranson Webster
The Compensation Committee report on executive compensation shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statementproxy statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that Commerce Corp
specifically incorporates the information contained in the report by reference, and shall not otherwise be deemed filed under suchthese acts.
Commerce Corp's general compensation strategy for senior executive officers
is to pay annual
Compensation and long term compensation which is competitive with executives
in similar positions at peer group companies, taking into appropriate account
Commerce Corp's forward progress, its overall financial conditionBenefits Committee Interlocks and its
performance relative to companies in similar circumstances. In determining
compensation levels, Commerce Corp obtains salary survey information regarding
executive salary levels for comparable companies through many sources, including
banking industry associates and independent compensation consultants.
Additionally, Commerce Corp ties incentive compensation levels to financial
performance goals of Commerce Corp.
The compensation policy of Commerce Corp is designed to attract and retain
highly qualified personnel and to provide meaningful incentives for measurable
performance. The components of executive compensation include base salary, an
incentive bonus plan, non-plan bonuses, stock options and a supplemental
executive retirement plan.
Commerce Corp's senior executive compensation is determined by the
Personnel and Planning Committee of the Board of Directors and by the Board
itself. Brad L. Smith, Commerce Corp's Chairman and Chief Executive Officer, andInsider Participation
During 2004 Richard L. Conniff, Commerce Corp's President and Chief Operating Officer, are
currently membersserved on the Board's Compensation and Benefits Committee. Mr. Conniff resigned from the Committee effective February 2, 2004. The Compensation and Benefits Committee is responsible for recommending changes in executive officer salaries and other forms of bothcompensation to Commerce Corp's Board of Directors. Mr. Conniff did not participate as a voting member of the Compensation and Benefits Committee or the Board of Directors and the Personnel and Planning
Committee, but do not participate inwith respect to matters related to executivetheir own compensation.
The Committee meets a minimum of four times per year. Salaries and other
compensation are reviewed annually. Any significant increases or other changes
to compensation or benefits are approved by the Board of Directors. Incentive
bonus awards are determined by the Committee in January or February and
recommended to the full Board for immediate action. Compensation for a newly
hired executive may be established by the Committee at a special meeting.
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In its discretion, Commerce Corp pays annual incentive bonuses to its
senior executives after receiving a recommendation to do so by the Personnel and
Planning Committee of the Board. The decision to pay, and the amount of payment,
is based upon an assessment of the institution's performance in the context of
the plan and with reference to the executive's base wages, as well as to peer
group patterns.
HERITAGE COMMERCE CORP DIRECTORS
PERSONNEL AND PLANNING COMMITTEE
Hugh P. Barton
Frank G. Bisceglia
Richard L. Conniff
William J. Del Biaggio, Jr.
Roy E. Lave
Jack L. Peckham
Robert W. Peters, Chairman
Brad L. Smith
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PERFORMANCE GRAPH
Performance Graph
The following graph compares the stock performance of Heritage Bank of
Commerce Corp from December 31, 1995 to January 31, 1998 and of Commerce Corp from
February 1, 19981999 to December 31, 2000,2004, to the performance of several specific industry indices. For the Company's 1998 proxy statement, theThe performance of the S&P 500 index, Nasdaq Stock Index and S&P RegionalNasdaq Bank indiciesStocks were used as comparisons to the Company'sCommerce Corp's stock performance. Management believes that a performance comparison to the
Nasdaq Stock Index and the Nasdaq Bank Stocks providethese indices provides meaningful information and has therefore included those comparisons in the following graph.
HERITAGE COMMERCE CORP STOCK PRICE PERFORMANCE*
[PERFORMANCE GRAPH]
Period Ending Index 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 Heritage Commerce Corp* 100.00 63.60 53.62 59.40 84.56 130.76 S&P 500* 100.00 89.86 78.14 59.88 75.68 82.49 NASDAQ - Total US* 100.00 60.71 47.93 32.82 49.23 53.46 NASDAQ Bank Index* 100.00 114.67 126.35 131.93 171.42 190.26 * - Source: SNL Financial Bank Information Group (434) 977-1600
PROPOSAL 1: TO ELECT
THE FIFTEEN NOMINEES SET FORTH HEREIN TO SERVE UNTIL THE NEXT ANNUAL MEETING OF
THE SHAREHOLDERS AND UNTIL THEIR RESPECTIVE SUCCESSORS SHALL BE ELECTED AND
QUALIFIED: HUGH P. BARTON, FRANK G. BISCEGLIA, JAMES R. BLAIR, RICHARD L.
CONNIFF, WILLIAM J. DEL BIAGGIO, JR., ANNEKE DURY, KURT G. HAMMERSTROM, JOHN W.
LARSEN, ROY E. LAVE, LOUIS ("LON") O. NORMANDIN, JACK L. PECKHAM, ROBERT W.
PETERS, HUMPHREY P. POLANEN, BRAD L. SMITH, AND HOWARD J. WEILAND. IF NO
INSTRUCTION IS GIVEN, THE BOARD OF DIRECTORS INTENDS TO VOTE FOR EACH NOMINEE
LISTED.
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PROPOSAL 2
ELIMINATION OF CUMULATIVE VOTING
The California General Corporation Law permits California corporations with
widely traded securities, such as Commerce Corp, to provide, with the approval
of their shareholders, for majority rule voting in electing directors in lieu of
cumulative voting.
The Board of Directors believes that cumulative voting is not an
appropriate method of corporate governance for Commerce Corp. For a discussion
of the reasons for the Board's conclusion, please see the discussion below under
"Reasons for the Proposed Amendment." Accordingly, the Board of Directors has
adopted and is submitting for shareholder approval, an amendment to Commerce
Corp's Articles of Incorporation (the "Articles") which, if approved by the
shareholders, would provide for majority rule voting in electing Commerce Corp's
directors by eliminating cumulative voting commencing with the next Annual
Meeting of Commerce Corp. The text of the proposed amendment to the Articles is
set forth in Annex A to this Proxy Statement.
A description of mandatory cumulative and majority rule voting and a
summary of the reasons for the Board's recommendation of the proposed amendment
and certain other considerations concerning the proposed amendment are set forth
below.
MANDATORY CUMULATIVE VOTING AND MAJORITY RULE VOTING
Mandatory cumulative voting in the election of directors may currently be
invoked by any shareholder of Commerce Corp complying with statutory notice
requirements. Under cumulative voting, holders of shares of Commerce Corp's
Common Stock are entitled to a number of votes per share equal to the number of
directors to be elected and all directors are voted upon simultaneously. Holders
of shares may cast all of their votes for a single director candidate or
distribute them among two or more director candidates.
As a consequence of cumulative voting, shareholders representing a
relatively small number of the voting shares have the power to nominate and
elect one or more directors. For example, if, as in the case of Commerce Corp,
fifteen directors are to be elected at an annual meeting, a shareholder or group
of shareholders holding one vote more than 6.25% of the voting shares could
nominate and elect one director by cumulating and casting their fifteen votes
per share only for their single candidate. This is so even if shareholders
holding just under 93.75% of the voting shares are opposed to the election of
that candidate and cast their vote to elect fifteen other director candidates.
With majority rule voting, a nominee could not be elected without a
majority of shareholder votes. Under majority rule voting, shareholders are
entitled to only one vote per share in the election of directors and each
director is voted upon separately. Consequently, through majority rule voting,
the only director candidates who could be elected are those who receive support
from a majority of the shares voting, and the shareholders holding in excess of
50% of the voting shares would be able to elect all of the directors.
REASONS FOR THE PROPOSED AMENDMENT
The Board of Directors believes that approval of the proposed amendment is
in the best interests of Commerce Corp and its shareholders.
The Board of Directors believes that every director of a publicly-held
corporation should represent the interests of a majority of shareholders. It
believes that directors elected by a minority shareholder or group of
shareholders through cumulative voting are likely to be partisans of the
particular interest group that elected them rather than representatives of a
majority of shareholders. Such partisanship could disrupt the management of
Commerce Corp and prevent it from operating in the most effective manner.
Further, the election of directors who view themselves as representing or
answerable to a particular minority constituency could introduce an element of
discord on the Board of Directors, impair the ability of the directors to work
effectively and discourage qualified independent individuals from serving as
directors. By providing for
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majority rule voting in electing directors, approval of the proposed amendment
will help ensure that each director acts in the best interests of a majority of
shareholders rather than the best interest of a minority shareholder or group of
shareholders. Implementation of majority rule voting will increase the ability
of all of the holders of a large number of shares of Common Stock to elect all
of the directors of Commerce Corp.
OTHER EFFECTS
Approval of the proposed amendment may render more difficult any attempt by
a holder or group of holders of a significant number of voting shares, but less
than a majority, to monitor, change or influence the management or policies of
Commerce Corp. In addition, under certain circumstances, the proposed amendment,
along with other measures that may be viewed as having anti-takeover effects,
may discourage an unfriendly acquisition or business combination involving
Commerce Corp that a shareholder might consider to be in such shareholder's best
interest, including an unfriendly acquisition or business combination that might
result in a premium over the market price for the shares held by the
shareholder. For example, the proposed amendment may discourage the accumulation
of large minority shareholdings (as a prelude to an unfriendly acquisition or
business combination proposal or otherwise) by persons who would not effect that
acquisition without being assured of representation on the Board of Directors.
Approval of the proposed amendment requires the favorable vote of the
holders of a majority of the outstanding shares of Commerce Corp's Common Stock
entitled to vote.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE ADVANTAGES OF THE PROPOSED
AMENDMENT IMPLEMENTING MAJORITY RULE VOTING GREATLY OUTWEIGH THE POSSIBLE
DISADVANTAGES OF THE AMENDMENT. ACCORDINGLY, THE BOARD OF DIRECTORS HAS APPROVED
THE PROPOSED AMENDMENT AND RECOMMENDS APPROVAL BY SHAREHOLDERS.
PROPOSAL 3
CLASSIFICATION OF BOARD OF DIRECTORS
The shareholders are being asked to approve an amendment to Commerce Corp's
Bylaws providing for classification of the Board of Directors into three
classes, each consisting of a number of directors equal as nearly as practicable
to one-third the total number of directors. If this Proposal 3 is approved each
class of directors will be subject to election every third year and will serve
for a three-year term. Currently, all of Commerce Corp's directors are elected
each year for a one-year term.
The Board of Directors believes that this amendment to the Bylaws is in the
best interests of Commerce Corp and its shareholders. Board classification will
help lend continuity and stability to the management of Commerce Corp. Following
adoption of the classified board structure, at any given time at least
two-thirds of the members of the Board of Directors will generally have had
prior experience as directors of Commerce Corp. The Board believes that this
will facilitate long-range planning, strategy and policy and will have a
positive impact on customer and employee loyalty. Commerce Corp has not
historically had problems with either the continuity or stability of its Board
of Directors.
In anticipation of the possible approval of this Proposal 3, the Board of
Directors has, for purposes of initial implementation, designated three classes
of directors for election at the Annual Meeting. If this Proposal 3 is approved,
Class I will be elected initially for a one-year term expiring at the 2002
Annual Meeting of Shareholders; Class II will be elected initially for a
two-year term expiring at the 2003 Annual Meeting of Shareholders; and Class III
will be elected for a three-year term expiring at the Annual Meeting of
Shareholders to be held in the year 2004; and, in each case, until their
successors are duly elected and qualified. Commencing with the Annual Meeting of
Shareholders scheduled to occur in May 2002, directors
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elected to Class I would serve for a three-year term and until their successors
are duly elected and qualified, subject to any decrease in the total number of
authorized directors, as described above. Subsequently in years 2003 and 2004,
directors elected to Class II and Class III, respectively, would also be elected
for a three-year term and until their successors are duly elected and qualified.
Classification of the Board of Directors is permitted by Section 301.5 of
the California Corporations Code. Under Section 301.5, a qualifying California
corporation, such as Commerce Corp, may divide its board of directors into two
or three classes, with one-half or one-third of the directors, respectively,
elected at each annual meeting (or as near to one-half or one-third as
practicable). The authorized number of directors must be not less than six in
the case of a two-class board and not less than nine in the case of a
three-class board. Classified boards of directors are permitted under the
corporate law of a majority of states, and Commerce Corp believes that well over
one-half of Fortune 500 companies provide for classified boards.
The text of the proposed amendment to the Bylaws is set forth in Annex B to
this Proxy Statement.
EFFECT OF CLASSIFICATION OF BOARD
If adopted, the classification of the Board will apply to every subsequent
election of directors for so long as at least six directors are authorized under
Commerce Corp's Bylaws, Commerce Corp continues to be eligible under state law
to maintain a classified board, and the classification provision is not amended.
Commerce Corp's Bylaws provide that the Board of Directors shall consist of not
less than 11 and not more than 21 directors, with the exact number of directors
currently set at 15. So long as the Board continues to consist of at least nine
authorized directors, and Commerce Corp continues to be eligible under state law
to maintain a classified board, after initial implementation of the classified
Board, directors will serve for a term of three years rather than one year, and
one-third of the directors (or as near to one-third as practicable) will be
elected each year.
In the event that the number of directors increases, the increase will be
apportioned by the Board among the classes of directors to make each class as
nearly equal in number as possible. If the number of authorized directors is
decreased to at least six but less than nine, the directors will be apportioned
by the Board between two classes, each consisting of one-half of the directors
or as close an approximation as possible, directors will serve for a term of two
years, and one-half the directors (or as near to one-half as practicable) will
be elected each year. In any event, a decrease in the number of directors cannot
shorten the term of any incumbent director. Vacancies in the Board created by
any resignation, removal or other reason, or by an increase in the size of the
Board, may be filled for the remainder of the term by the vote of the majority
of the directors remaining in office or by the vote of holders of a majority of
the outstanding shares of Commerce Corp's Common Stock.
Under California law, members of the Board of Directors may be removed by
the Board of Directors for cause (defined to be a felony conviction or court
declaration of unsound mind), by the shareholders without cause or by court
order for fraudulent or dishonest acts or gross abuse of authority or
discretion. In the case of a board of directors that is not classified, no
director may be removed by the shareholders if the votes cast against such
removal (or, if done by written consent, the votes eligible to be cast by the
non-consenting shareholders) would have been sufficient to elect such director
if voted cumulatively at an election at which the same total number of votes
were cast (or, if the action is taken by written consent, all shares entitled to
vote were voted) and the entire number of directors authorized at the time of
the director's most recent election were then being elected (the "Relevant
Number of Directors"). In the case of classified boards, the Relevant Number of
Directors is (i) the number of directors elected at the most recent Annual
Meeting of shareholders or, if greater, (ii) the number sought to be removed. It
should be noted that this removal provision applies equally to corporations that
permit cumulative voting and to those that do not.
OTHER EFFECTS
Public companies are potentially subject to attempts by various individuals
and entities to acquire significant minority positions in the company with the
intent either of obtaining actual control of the company
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by electing their own slate of directors, or of achieving some other goal, such
as the repurchase of their shares by the company at a premium. Public companies
also are potentially subject to inadequately priced or coercive bids for control
through majority share ownership. These prospective acquirors may be in a
position to elect a company's entire board of directors through a proxy contest
or otherwise, even though they do not own a majority of the company's
outstanding shares at the time. If this proposal is approved, a majority of
Commerce Corp's directors could not be removed by those persons until two annual
meetings of shareholders have occurred, unless the removal was for cause and the
requisite vote was obtained. By providing this additional time to the Board of
Directors and eliminating the possibility of rapid removal of the Board, the
directors of Commerce Corp will have the necessary time to most effectively
satisfy their responsibility to the Commerce Corp shareholders to evaluate any
proposal and to assess and develop alternatives without the pressure created by
the threat of imminent removal. In addition, this proposal, by providing that
directors will serve three-year terms rather than one-year terms, will enhance
continuity and stability in the composition of Commerce Corp's Board of
Directors and in the policies formulated by the Board. The Board believes that
this, in turn, will permit it to more effectively represent the interests of all
shareholders, including responding to demands or actions by any shareholder or
group. Following adoption of the classified board structure, at any given time
at least two-thirds of the members of the Board of Directors will generally have
had prior experience as directors of Commerce Corp. The Board believes that this
will facilitate long-range planning, strategy and policy and will have a
positive impact on customer and employee loyalty. Commerce Corp has not
historically had problems with either the continuity or stability of its Board
of Directors.
The classification of the Board of Directors will have the effect of making
it more difficult to replace incumbent directors. So long as the Board is
classified into three classes, a minimum of three annual meetings of
shareholders would generally be required to replace the entire Board, absent
intervening vacancies. While the proposal is not intended as a
takeover-resistive measure in response to a specific threat, it may discourage
the acquisition of large blocks of Commerce Corp's shares by causing it to take
longer for a person or group of persons who acquire a block of shares to effect
a change in management.
If this proposal is approved and implemented, a shareholder or group of
shareholders seeking to replace a majority of the directors on the Board will
generally need to influence the voting of at least a majority of the outstanding
shares at two consecutive annual meetings. In addition, Commerce Corp has other
corporate attributes that may also have the effect of helping Commerce Corp to
resist an unfriendly acquisition. These include existing provisions in Commerce
Corp's Articles of Incorporation and Bylaws eliminating, subject to specified
exceptions, the liability of directors for monetary damages and the proposed
provision eliminating cumulative voting; provisions in the Articles and Bylaws
providing for indemnification of directors and officers; and provisions in the
Bylaws requiring advance notice of nomination of a candidate for election to the
Board of Directors of Commerce Corp when the nomination is made by a person
other than the Board.
This proposal is not in response to any attempt to acquire control of
Commerce Corp. However, the Board believes that adopting this proposal is
prudent, advantageous and in the best interests of shareholders because it will
give the Board more time to fulfill its responsibilities to shareholders, and it
will provide greater assurance of continuity and stability in the composition
and policies of the Board of Directors. The Board also believes the advantages
outweigh any disadvantage relating to discouraging potential acquirors from
attempting to obtain control of Commerce Corp.
Approval of the proposed amendment requires the favorable vote of the
holders of a majority of the outstanding shares of Commerce Corp's Common Stock.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS BELIEVES THAT THE ADVANTAGES OF THE PROPOSED
AMENDMENT CLASSIFYING THE BOARD OF DIRECTORS FOR PURPOSES OF THE ELECTION OF
DIRECTORS GREATLY OUTWEIGH THE POSSIBLE DISADVANTAGES OF THE AMENDMENT.
ACCORDINGLY, THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED
AMENDMENT AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS APPROVE IT.
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SUMMARY OF POTENTIAL EFFECT OF PROPOSALS 2 AND 3
If Proposals 2 and 3 are both approved and implemented, a shareholder or
group of shareholders seeking to replace a majority of the directors on the
Board will generally need to influence the voting of at least a majority of the
outstanding shares at three consecutive annual meetings. In addition, Commerce
Corp has other corporate attributes that may also have the effect of helping
Commerce Corp to resist an unfriendly acquisition. These include provisions in
Commerce Corp's Articles eliminating the ability of shareholders to take action
by written consent of the shareholders; provisions in Commerce Corp's Articles
and Bylaws eliminating, subject to certain exceptions, the liability of
directors for monetary damages; provisions in the Bylaws and agreements
providing for indemnification of directors and officers; and benefit plans for
directors, executives and key employees that accelerate benefits upon a change
in control of Commerce Corp.
The Proposals are not in response to any attempt to acquire control of
Commerce Corp, nor is Commerce Corp aware of any such attempt.
PROPOSAL 4
INCREASE IN THE NUMBER OF SHARES
AVAILABLE FOR GRANTS OF STOCK OPTIONS
At present Commerce Corp has reserved 2,261,260 shares of Common Stock for
issuance under the Heritage Commerce Corp Restated 1994 Tandem Stock Option Plan
(the "Plan"). This number includes shares issued upon exercise of options.
Proposal 4 provides for an increase of 500,000 shares reserved under the Plan,
so that the total number of shares reserved, including shares previously issued
upon exercise of options, will be 2,761,260.
The purpose of the Plan is to promote the long-term success of Commerce
Corp and the creation of shareholder value. The Plan authorizes Commerce Corp to
grant options that qualify as incentive stock options ("ISOs") under the
Internal Revenue Code of 1986 and nonqualified stock options ("NSOs") to key
employees of Commerce Corp and its affiliated companies. Nonemployee directors
are only eligible to receive NSOs.
The Plan currently sets aside 2,261,260 authorized, but unissued, shares of
Commerce Corp's Common Stock for grant at not less than the greater of $3.50
share or an amount per share that approximates the fair market value of Commerce
Corp's Common Stock on the date each option is granted. In addition, if an ISO
is granted to an officer or key employee of Commerce Corp who, at the time of
the grant, owns more than 10 percent of Commerce Corp's Common Stock, the
exercise price of the options must be not less than the greater of $3.85 share
or 110 percent of the fair market value of Commerce Corp's Common Stock at the
time the option is granted. On April 2, 2001, the closing sale price of Commerce
Corp's Common Stock as reported on Nasdaq was $9.25 per share.
All options granted expire not later than ten years from the date of grant.
To the extent that the aggregate fair market value of stock with respect to
which ISOs are exercisable for the first time by any individual during any
calendar year exceeds $100,000, such options are treated as NSOs. The Personnel
and Planning Committee, a committee appointed by the Board, administers the
Plan.
Neither the optionee nor Commerce Corp will incur any federal tax
consequences as a result of the grant of an option. The optionee will have no
taxable income upon exercising an ISO (except that the alternative minimum tax
may apply), and Commerce Corp will receive no deduction when an ISO is
exercised. Upon exercising an NSO, the optionee generally must recognize
ordinary income equal to the "spread" between the exercise price and the fair
market value of Commerce Corp's Common Stock on the date of exercise, and
Commerce Corp will be entitled to a business expense deduction for the same
amount. In the case of an employee, the option spread at the time an NSO is
exercised is subject to income tax withholding, but the optionee generally may
elect to satisfy the withholding tax obligation by having shares of Common Stock
withheld from those purchased under the NSO. The tax treatment of a disposition
of option shares acquired under the Plan depends on how long the shares have
been held and on whether such shares were acquired by
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exercising an ISO or by exercising an NSO. Commerce Corp will not be entitled to
a deduction in connection with a disposition of option shares, except in the
case of a disposition of shares acquired under an ISO before the applicable ISO
holding period has been satisfied.
As of April 2, 2001, options to purchase 1,471,882 shares have been granted
by the Board of Directors and are outstanding, and options to purchase an
additional 725,636 shares have been exercised by option holders, leaving 63,742
shares of the 2,261,260 shares now authorized currently available for further
grants of options. The Board of Directors is seeking shareholder approval to
increase the number of options authorized under the Plan in order to ensure that
sufficient options will be available to adequately compensate Commerce Corp's
employees and directors as the Company expands its business and adds additional
employees. The Board therefore requests that the shareholders authorize the
issuance of up to an additional 500,000 options, which would bring the total
number of options available under the Plan to 563,742. The Board has not yet
determined that it will allocate the additional options authorized by this
proposal to any particular individuals or groups of individuals among those
otherwise eligible to receive grants of options.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS INTENDS TO VOTE ALL PROXIES HELD BY IT IN FAVOR OF
INCREASING THE NUMBER OF SHARES AVAILABLE FOR GRANTS OF OPTIONS UNDER THE PLAN.
YOU ARE URGED TO VOTE FOR PROPOSAL 4: TO APPROVE THE INCREASE IN THE NUMBER OF
SHARES AVAILABLE FOR GRANTS OF OPTIONS UNDER THE HERITAGE COMMERCE CORP RESTATED
1994 TANDEM STOCK OPTION PLAN.
PROPOSAL 5
IV
RATIFICATION OF SELECTION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
ACCOUNTING FIRM
At the 20012005 Annual Meeting of Shareholders, the following resolution will be subject to ratification by a simple majority vote of the shares represented at the meeting:
RESOLVED, that the selection of Deloitte & Touche, LLP as the independent certifiedregistered public accountantsaccounting firm of Heritage Commerce Corp for the fiscal year ending December 31, 20012005 is hereby ratified.
If ratification is not achieved, the selection of an independent certifiedregistered public accountantaccounting firm will be reconsidered and made by the Board of Directors.Audit Committee. Even if the selection is ratified, the Board of DirectorsAudit Committee reserves the right and, in its discretion, may direct the appointment of any other independent certifiedregistered public accounting firm at any time if the BoardAudit Committee decides that such a change would be in the best interests of the Corporation and its shareholders.
The services provided by Deloitte & Touche, LLP include the examination and reporting of the financial status of Commerce Corp. These services have been furnished at customary rates and terms. There are no existing direct or indirect agreements or understandings that fix a limit on current or future fees for these audit services.
A representative of Deloitte & Touche, LLP is expected to attend the 20012005 Annual Meeting of Shareholders. The representative will have the opportunity to make a statement, if desired,he or she desires, and is expected to be available to respond to appropriate shareholder inquiries.
AUDIT COMMITTEE REPORT
Audit Committee Report
In accordance with its written charter adopted by Heritage Commerce Corp's Board of Directors (Board), the Heritage Commerce Corp Audit Committee (Committee) assists the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, and financial reporting practices of the Company.Commerce Corp. During fiscal 2000,2004, the Committee met threesix times, and the Committee chair, as
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27 representative of the Committee, discussed the interim financial information contained in each quarterly earnings announcement with the CFO, controller and independent auditors prior to public release.
In discharging its oversight responsibility as to the audit process, the Audit Committee obtained from the independent auditors a formal written statement describing all relationships between the auditors and the CompanyCommerce Corp that might bear on the auditors' independence consistent with Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees," discussed with the auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditors' independence. The Committee also discussed with management, the internal auditors and the independent auditors the quality and adequacy of the Company'sCommerce Corp's internal controls and the internal audit function'sfunctions, organization, responsibilities, budget and staffing and concurred in the appointment of a new director of internal audit.staffing. The Committee reviewed with both the independent and the internal auditors their audit plans, audit scope, and identification of audit risks.
The Committee discussed and reviewed with the independent auditors all communications required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees" and, with and without management present, discussed and reviewed the results of the independent auditors' examination of the financial statements. The Committee also discussed the results of the internal audit examinations.
The Committee reviewed the audited financial statements of the CompanyCommerce Corp as of and for fiscal year ended December 31, 20002004 with management and the independent auditors. Management has the responsibility for the preparation of the Company'sCommerce Corp's financial statements and the independent auditors have the responsibility for the examination of those statements.
Based on the above-mentioned review and discussion with management and the independent auditors, the Committee recommended to the Board that the Company'sCommerce Corp's audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2000,2004, for filing with the Securities and Exchange Commission. The Committee also recommended the reappointment, subject to shareholder approval, of the independent auditors and the Board concurred in such recommendation.
March 22, 2001
Anneke Dury
Humphrey P. Polanen, Chairman
Louis ("Lon") O.
Jack L. Peckham
March, 2005
The Audit Committee report shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933 or the Securities Act of 1934, and shall not otherwise be deemed filed under these acts.
Independent Registered Public Accounting Firm Fees
The following table summarizes the aggregate fees billed to the company for the fiscal year ending 2000Heritage Commerce Corp by the Company's principalindependent auditor:
Category of Services | Fiscal Year 2003 | Fiscal Year 2004 |
Audit Fees (1) | $266,000 | $567,000 |
Audit-Related Fees (2) | 36,000 | 32,000 |
Tax Fees (3) | 63,000 | 171,000 |
All Other Fees (4) | 10,000 | -0- |
Total accounting fees | 375,000 | $770,000 |
(1) Fees for audit services for 2004 and 2003 consisted of the audit of Commerce Corp's annual financial statements, review of financial statements included in Commerce Corp's Quarterly Reports on Form 10-Q, and consents and other services related to Securities and Exchange Commission ("SEC") matters. For 2004, this also included the attestation assessment related to management's assertion on the effectiveness of Commerce Corp's financial reporting controls as required by section 404 of the Sarbanes-Oxley Act 0f 2002.
(2) Fees for audit related services for 2004 and 2003 consisted of financial accounting and reporting consultations and audits of Commerce Corp's employee benefit plans.
(3) Fees for tax services for 2004 and 2003 consisted of tax compliance and tax planning and advice.
- Fees for tax compliance services totaled $156,000 and $53,000 in 2004 and 2003, respectively. Tax compliance services are those rendered based upon facts already in existence or transactions that have already occurred to document, compute, and obtain government approval for amounts to be included in tax filings. Such services consisted primarily of federal and state income tax return assistance and assistance with tax credits.
- Fees for tax planning and advice services totaled $15,000 and $10,000 in 2004 and 2003, respectively. Tax planning and advice services are those rendered with respect to proposed transactions or that alter a transaction to obtain a particular tax result. Such services consisted of planning related to bank owned life insurance, certain tax credits and deferred compensation planning.
(4) Fees for all other services in 2003 consisted of permitted non-audit services related to corporate governance matters.
The ratio of tax planning and advice fees and all other fees to audit fees, audit related fees and tax compliance fees was 2.9% and 5.6% for 2004 and 2003, respectively.
In considering the nature of the services provided by the independent registered public accounting firm, Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu, and their respective affiliates (collectively,
"Deloitte"):
Approval Policy
The services performed by the independent registered public accounting firm in 2004 were approved in accordance with the approval policies and procedures adopted by the Audit Committee. This policy describes the permitted audit, audit-related, tax, and other services (collectively, the "Disclosure Categories") that the independent registered public accounting firm may perform. The policy requires a description of the services expected to be performed by the independent registered public accounting firm in each of the Disclosure Categories be presented to the Audit Committee for approval.
Services provided by the independent auditors were approved following the policies and procedures of the Audit Committee.
Any requests for audit, audit-related, tax, and other services not previously approved must be submitted to the Audit Committee for specific approval and cannot commence until such approval has been granted. Normally, approval is compatible with maintainingprovided at regularly scheduled meetings. However, the principal accountant's independence.
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authority to grant specific approval between meetings, as necessary, has been delegated to the Chairman of the Audit Committee. The Chairman must update the Audit Committee at the next regularly scheduled meeting of any services that were granted specific approval.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS INTENDSPROXY HOLDERS INTEND TO VOTE ALL PROXIES HELD BY ITTHEY HOLD IN FAVOR OF APPROVING THE RATIFICATION OF DELOITTE & TOUCHE, LLP AS COMMERCE CORP'S AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 20012005 (UNLESS THE SHAREHOLDERS DIRECT OTHERWISE). YOU ARE URGED TO VOTE FOR PROPOSAL 5:4: TO RATIFY THE BOARD'S
SELECTIONAPPOINTMENT OF DELOITTE & TOUCHE, LLP TO SERVE AS COMMERCE CORP'S AUDITORS FOR THE FISCAL YEAR ENDING DECEMBER 31, 2001.
OTHER BUSINESS
2005.
Other Business
If any matters not referred to in this Proxy Statement come before the meeting, including matters incident to the conduct of the meeting, the proxy holders will vote the shares represented by proxies in accordance with their best judgment. Management is not aware of any other business to come before the meeting and, as of the date of the preparation of this Proxy Statement, no shareholder has submitted to management any proposal to be acted upon at the meeting.
SHAREHOLDER PROPOSALS
Shareholder Proposals
Under certain circumstances, shareholders are entitled to present proposals at shareholders' meetings, provided that the proposal is presented in a timely manner and in a form that complies with applicable regulations. Any shareholder proposals intended to be presented for consideration at the 20022006 Annual Meeting of Shareholders, and to be included in Commerce Corp's Proxy Statement for that meeting, must be received by Commerce Corp no later than December 18, 20019, 2005 in a form that complies with applicable regulations. Shareholder proposals may not be
included in the Proxy Statement for the 2002 Annual Meeting or presented at the
shareholder meeting unless certain conditions are met. Shareholder proposals are subject to regulation under Federal securities laws.
A copy of Commerce Corp's annual report on Form 10-K (excluding exhibits) is being sent to shareholders along with this Proxy Statement. To obtain an additional copy without charge, please contact Rebecca Levey at (408) 947-6900.
HERITAGE COMMERCE CORP
/s/
Rebecca A. Levey
Rebecca A. Levey
Corporate Secretary
San Jose, California
April 17, 2001
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ANNEX5, 2005
EXHIBIT A
TEXT OF
HERITAGE COMMERCE CORP
PROPOSED AMENDMENTAMENDMENTS TO ARTICLES OF INCORPORATION
The Articles of Incorporation of this Company shall beBYLAWS
Section 2.9 is hereby amended by adding
thereto a new Article Seven, whichdeleting subparagraph (b). Section 2.9 shall read as set forth below:
ARTICLE VII
No holder of any class of stock of the corporation shall be entitled to
cumulate votes at any election of directors of the corporation.
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ANNEX B
TEXT OF PROPOSED AMENDMENT TO BYLAWS
Section 2.9 of the Bylaws of the Company shall be amended in its entirety to read as follows:
SECTION
2.9 -- NOMINATION, CLASSIFICATION, ELECTION AND TERM OF OFFICE.
Nomination, Election and Term of Office.
(a) Nomination for election of directors may be made by the Board of Directors or by any holder of any outstanding class of capital stock of the Corporation entitled to vote for the election of directors. Notice of intention to make any nominations shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than 21 days nor more than 60 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days' notice is given to shareholders, such notice of intention to nominate shall be mailed or delivered to the President of the Corporation not later than the close of business on the tenth day following the day on which the notice of such meeting is sent by third class mail (if permitted by law), no notice of intention to make nominations shall be required. Such notification shall contain the following information to the extent known to the notifying shareholder:
(a)
(1) the name and address of each proposed nominee;
(b)
(2) the principal occupation of each proposed nominee;
(c)
(3) the number of shares of capital stock of the Corporation owned by each proposed nominee;
(d)
(4) the name and residence address of the notifying shareholder, and
(e)shareholder;
(5) the number of shares of capital stock of the Corporation owned by the notifying shareholder.
(f)shareholder;
(6) the number of shares of capital stock of any bank, bank holding company, savings and loan association or other depository institution owned beneficially by the nominee or by the notifying shareholder and the identities and locations of any such institutions.
(g)institutions;
(7) whether the proposed nominee has ever been convicted of or pleaded nolo contendere to any criminal offense involving dishonesty or breach of trust, filed a petition in bankruptcy or been adjudged bankrupt.
(h)bankrupt; and
(8) a statement regarding the nominee's compliance with Section 2.3 of these Bylaws.
Nominations not made in accordance herewith may, in the discretion of the Chairman of the meeting, be disregarded and upon the Chairman's instructions, the inspectors of election can disregard all votes cast for each such nominee. A copy of this paragraph shall be set forth in a notice to shareholders of any meeting at which directors are to be elected.
(b) InDirectors shall be elected at each annual meeting of the eventshareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.
Section 2.10 is hereby amended to read in its entirety as follows:
2.10 Removal.
(a) Any or all of the directors may be removed without cause if such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote at an election of directors, subject to the following:
(1) No director may be removed (unless the entire board is removed) when the votes cast against removal, or not consenting in writing to the removal, would be sufficient to elect the director if voted cumulatively at an election at which the same total number of votes were cast (or, if the action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected.
(2) When by the provisions of the Articles the holders of the shares of any class or series, voting as a class or series, are entitled to elect one or more directors, any director so elected may be removed only by the applicable vote of the holders of the shares of that class or series.
(b) Any reduction of the authorized number of directors or amendment reducing the number of classes of directors does not remove any director prior to the expiration of the director's term of office.
EXHIBIT B
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
HERITAGE COMMERCE CORP
Larry D. McGovern and Rebecca A. Levey certify that:
1. They are the duly elected and acting Executive Vice President and Chief Financial Officer and Secretary, respectively, of Heritage Commerce Corp., a California corporation.
2. The Restated Articles of Incorporation of this corporation are amended by deleting in its entirety ARTICLE VII.
3. The foregoing amendment of Restated Articles of Incorporation has been duly approved by the board of directors.
4. The foregoing amendment of Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902, Corporations Code. The total number of outstanding shares entitled to vote with respect to the amendment was _____________________ common shares. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.
Dated: April 5, 2005
________________________
Larry D. McGovern
Executive Vice President
and Chief Financial Officer
________________________
Rebecca A. Levey,
Secretary
EXHIBIT C
HERITAGE COMMERCE CORP
AUDIT COMMITTEE CHARTER
HERITAGE COMMERCE CORP
PREAMBLE
WHEREAS, onMarch 16, 2000, this Board of Directors adopted a charter for the Audit Committee of the Board (the "Charter") and subsequently adopted amendments to the Charter onMarch 22, 2001, March 28, 2002 and April 16, 2003; and
WHEREAS, on July 30, 2002, the Sarbanes Oxley Act of 2002 ("Sarbanes-Oxley") became effective, which amended the Securities Exchange Act of 1934 in certain respects and established certain duties for the audit committees of public companies, and the Securities and Exchange Commission ("SEC") has adopted certain rules and regulations thereunder; and
WHEREAS, NASDAQ has further amended its rules with respect to the composition, duties and responsibilities of the audit committees of public companies; and
WHEREAS, this Board of Directors believes that it is in the best interests of Commerce Corp and its shareholders to adopt amendments to the Charter and to Commerce Corp's practices in relation to its Audit Committee to conform to Sarbanes-Oxley, the rules of the SEC and the amended rules of NASDAQ;
NOW, THEREFORE, BE IT RESOLVED, that the following resolutions be and they hereby are adopted.
AMENDED CHARTER FOR AUDIT COMMITTEE
Adoption of Amended Charter
RESOLVED, that effective as of March 31, 2004the amended Charter attached to these resolutions as Annex A (the "Amended Charter") is hereby adopted and approved as the Charter for the Audit Committee of Commerce Corp, which the Committee is directed to follow in the performance of its duties on behalf of Commerce Corp.
Authority of Audit Committee under Amended Charter
FURTHER RESOLVED, that the Audit Committee and each of its members is authorized to communicate directly and/or privately with Commerce Corp's directors, officers, employees, consultants, agents, internal auditors, independent auditors, attorneys-in-fact, counsel and advisors of Commerce Corp and any and all third parties, in the performance of the Committee's functions as set forth in these resolutions and in the Amended Charter.
FURTHER RESOLVED, that Commerce Corp's directors, officers, employees, consultants, agents, internal auditors, independent auditors, attorneys-in-fact, counsel and advisors of Commerce Corp are hereby directed to render full cooperation to the Audit Committee in the performance of its duties as set forth in these resolutions and in the Amended Charter.
FURTHER RESOLVED, that the Chair of the Audit Committee is hereby authorized and empowered to expend corporate funds to retain and secure independent auditors for Commerce Corp and such consultants, advisors, attorneys, investigatory services or other expert advice and assistance, and to fund ordinary administrative expenses of the Audit Committee, as are necessary or appropriate to carry out its duties under these resolutions and the Amended Charter, and in connection therewith the Chair of the Audit Committee is hereby authorized and empowered to sign, execute and deliver any and all such checks, drafts, vouchers, receipts, notes, documents, contracts and any other instruments whatsoever as he or she shall deem appropriate, in the name and on behalf of Commerce Corp.
Indemnification
FURTHER RESOLVED, that each member of the Audit Committee is hereby indemnified by Commerce Corp to the full extent provided by law in connection with any loss, damage, expense, cost, settlement, charge or liability incurred directly or indirectly in connection with the duties and responsibilities of such member under these resolutions and the Amended Charter, as the same may be revised or amended from time to time.
FURTHER RESOLVED, that no revision, amendment, termination or cancellation of such resolutions or the Amended Charter shall be fixedconsidered a revocation of any indemnity which would exist as to any action or omission of any such person which occurred prior to such revision, amendment, termination or cancellation.
FURTHER RESOLVED, that the foregoing indemnity shall be in addition to any indemnity to which a member of the Audit Committee may be entitled under Commerce Corp's articles of incorporation or by- laws, or under any statute, regulation, policy of insurance, contract or other provisions or arrangements.
Direction to Directors and Officers
FURTHER RESOLVED, that prior to the effective date of the Amended Charter, the Audit Committee is directed to meet with Commerce Corp's Chief Financial Officer, counsel, Controller, Vice President, Audit Liaison Officer, Corporate Compliance Manager and independent auditor, for the purpose of planning the initiation of the Audit Committee's responsibilities under the Amended Charter.
Omnibus Resolutions
FURTHER RESOLVED, that Commerce Corp and its directors and officers are authorized, empowered and directed to do or cause to be done all acts and things deemed necessary or advisable to enable Commerce Corp to comply with Sarbanes-Oxley, the federal securities laws and any requirements of the SEC, and with any requirements of NASDAQ or any other exchange or market on or through which Commerce Corp's securities may now or hereafter be traded or listed for trading, as the same shall exist on the date of the adoption of these resolutions or as the same shall be amended, supplemented or interpreted hereafter, with respect to the matters set forth in these resolutions and in the Amended Charter, including, but not limited to, the filing of the Amended Charter with such bodies, and the distribution or disclosure of the same to any party at nine (9)such times and in such manner, as may be required by applicable statutes, rules and regulations.
FURTHER RESOLVED, that each of the officers of Commerce Corp, acting in consultation with and under the direction of the Chair of the Audit Committee, be and hereby is authorized, empowered and directed to execute any and all documents and to take any and all actions as are necessary or more,appropriate to carry out the intent and purposes of any and all of the foregoing resolutions and of the Amended Charter.
Heritage Commerce Corp
Audit Committee Charter
(As adopted/amended by the Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist of
one-thirdon March 31 , 2004)
I.PURPOSE
The purpose of the directors or as close an approximation as possible. The initial
term of office of the directors of Class I shall expire at the annual meeting to
be held during fiscal year 2002, the initial term of office of the directors of
Class II shall expire at the annual meeting to be held during fiscal 2003 and
the initial term of office of the directors of Class III shall expire at the
annual meeting to be held during fiscal year 2004. At each annual meeting,
commencing with the annual meeting to be held during fiscal year 2002, each of
the successors to the directors of the class whose term shall have expired at
such annual meeting shall be elected for a term running until the third annual
meeting next succeeding his or her election and until his or her successor shall
have been duly elected and qualified.
In the event that the authorized number of directors shall be fixed with at
least six but less than nine, the Board of Directors shall be divided into two
classes, designated Class I and Class II. Each class shall consist of one-half
of directors or as close an approximation as possible. At each annual meeting,
each of the successors to the directors of the class whose term shall have
expired at such annual meeting shall be elected for a term running until the
second annual meeting next succeeding his or her election and until his or her
successor shall have been duly elected and qualified.
26
31
Notwithstanding the rule that the classes shall be as nearly equal in
number of directors as possible, in the event of any change in the authorized
number of directors, each director then continuing to serve as such shall
nevertheless continue as a director of the class of which he or she is a member
until the expiration of his or her current term, or his or her prior death,
resignation or removal.
At each annual election, the directors chosen to succeed those whose terms
then expire shall be of the same class as the directors they succeed, unless, by
reason of any intervening changes in the authorized number of directors, the
Board of Directors shall designate one or more directorships whose term then
expires as directorships of another class in order more nearly to achieve
equality of number of directors among the classes.
This section may only be amended or repealed by approval of the Board of
Directors and the outstanding shares (as defined in Section 152 of the
California General Corporation Law) voting as a single class, notwithstanding
Section 903 of the California General Corporation Law.
27
32
ANNEX C
HERITAGE COMMERCE CORP
AND SUBSIDIARY BANKS
BOARD OF DIRECTORS
AUDIT COMMITTEE CHARTER
APPROVED MARCH 22, 2001
TABLE OF CONTENTS
1. Purpose and Mission Statement
2. Objectives
3. Audit Committee Charter
4. Internal Audit and Risk Management
5. Duties of the Internal Audit Function
6. Certification of All On and Off Balance Sheet Asset
and Liabilities.
7. Internal Audit Outsourcing Arrangements
8. External Audit Program
9. Exhibits
28
33
I. PURPOSE
The Board of Directors of Heritage Commerce Corp (HCC) under its fiduciary
duties has established an Audit Committee. The Committee assists theis to (A) assist Board in
fulfilling its responsibility for oversight of (a) the quality and integrity of Commerce Corp's financial statements, (b) Commerce Corp's compliance with legal and regulatory requirements, (c) the accounting, auditing,independent auditor's qualifications and independence, and (d) the performance of Commerce Corp's internal controlaudit function and financial reporting practicesindependent auditors, and (B) prepare the report that the rules of the company. It may also have such other duties that may, from timeSecurities and Exchange Commission ("SEC" or "Commission") require be included in Commerce Corp's annual proxy statement.
II. RESPONSIBILITIES OF AUDIT COMMITTEE
The Audit Committee has the specific responsibilities and authority necessary to time, be
assignedcomply with Rule 10A-3(b)(2), (3), (4) and (5) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") relating to: (i) registered public accounting firms, (ii) complaints relating to itaccounting, internal accounting controls or auditing matters, (iii) authority to engage advisors, and (iv) funding as determined by the Board.
The primary purpose of this policy is to provide the Audit Committee, all as described in more detail in the provisions of HCCthis Charter.
The Board of Directors recognizes that Commerce Corp's management is responsible for preparing Commerce Corp's financial statements and providing an appropriate system of internal controls, and that independent auditors are responsible for auditing the financial statements and reviewing Commerce Corp's internal controls. In fulfilling these responsibilities, the independent auditors are ultimately accountable to the Audit Committee and management is ultimately accountable to the Audit Committee and the Board of Directors.
Nothing in this Charter should be construed to imply that the Audit Committee is required to provide or does provide any assurance or certification as to Commerce Corp's financial statements or as to its subsidiary banks,compliance with laws, rules or regulations.
In order to fulfill its oversight responsibility, the authority to perform its fiduciary
responsibilitiesAudit Committee must be capable of safeguardingconducting free and open discussions with management, internal and independent auditors, employees and others regarding the assetsquality of the institution, ensure adherence
to Board Policies and ensure quality and reliability of information reporting.
The Audit Committee may engage independent third party services to audit,
investigate and perform operational reviews of activities and financial statements and the system of the company and its subsidiaries.
II. MISSION STATEMENT
internal controls.
The missionspecific duties of the Audit Committee shall be as follows:
Independent Auditors
- Appoint independent auditors, subject, if appropriate, to shareholder ratification, and review and evaluate their performance throughout the year. The evaluation should include the review and evaluation of the lead partner of the independent auditor. In making its evaluation, the audit committee should take into account the opinions of management and Commerce Corp's internal auditors.
- Replace independent auditors where the Committee deems it appropriate.
- Review and approve fee arrangements for independent auditors.
- Ensure the auditor's independence by:
- Annually require the auditors to confirm in writing their understanding of the fact that they are ultimately accountable to the Audit Committee.
- Annually review the auditors' proposed audit plan and approach, as well as staffing and timing of the audit and related matters.
- Review, at least annually, the auditor's report on its internal
control system, a highly effective audit program,quality controls and any material issues and the steps taken and toprovide sufficient resourcesbe taken to deal with issues raised by the independent auditor's internal quality review, peer review, or inquiry by governmental or professional organizations, at any time within the past five years. - Obtain from management, review and approve, a description of issues and responses whenever a second opinion is proposed by management to be sought from another outside accountant.
- Require the auditors to rotate every five years the lead or coordinating audit partner in
a cost effective manner,charge of Commerce Corp's audit and the audit partner responsible for reviewing the audit. - Periodically consider the advisability of rotating the independent audit firm to
adequately and independently testbe selected as Commerce Corp's independent auditors. The audit committee should present its conclusions with respect to thereliability of administrativeindependent auditors to the full Board. - Review major issues regarding accounting principles and financial
reportingstatement presentations, including: - Require Commerce Corp's auditors to
fill the vacancy. - Fifty percent of the voting members at any given meeting shall constitute and qualify as a quorum. A quorum of voting members must exist to conduct the meeting. - The Audit Committee shall meet quarterly or as called by the Chairperson. - The Committee shalltimely report to thefull Board at its regularly scheduled meetingsCommittee: - Reviewing all off-balance sheet transactions for compliance with
written minutes of its meetings. Audit Committee Responsibilities Audit Committee responsibilities will include, but are not limited to, the following: - The Committee shall maintain freeapplicable accounting rules andopen communicationlegal disclosure rules. - Conduct with the independent auditors a post-audit, pre-issuance review of Commerce Corp's annual financial statements, the auditors' opinion thereon, and any problems, difficulties or disagreements with management encountered by the auditors during the course of the audit, and management's response, including reviewing with the auditors:
- Discuss the quarterly and annual financial statements with the appropriate officers and/or employees of Commerce Corp and with the independent auditors, including Commerce Corp's disclosures under "Management's Discussion and
company management. 2934 - In discharging its oversight role,Analysis of Financial Condition and Results of Operations." - Discuss with the auditors the matters required to be discussed by relevant auditing standards, including the quality, and not just the acceptability, of the accounting principles and underlying estimates used in the statements.
- If the Committee
is empoweredfinds the annual financial statements acceptable, toinvestigate any matter relatingrecommend to theCompany's accounting, auditing, internal control or financial reporting practices brought to its attention, with full access to all Company books, records, facilities and personnel. - The Committee may engage highly competent, certified public accounting firms to audit the consolidated financial statementBoard ofthe holding company and its subsidiary banks and to provide other attestation services requiring independence. - The Committee will ensureDirectors thatqualified personnel with diversified banking and internal audit expertise and experience perform the internal audit and loan review functions. - Review and approve the scope and coverage of any audit engagement, regulatory examinations, and loans and operations review. - Review audit plans, risk assessment, management letter, responses and follow-up to audit and examination findings. - Review audited financial statements and discusses them with management and independent auditors (Statement of Auditing Standards No 61.) Review periodic reports from the Compliance and Bank Secrecy Act Officers. - Issue annually,they be included in Commerce Corp's annual report on Form 10-K. - Prepare a report to
be includedthe shareholders of Commerce Corp inthe Company'seach proxy statement, as required by the rules of theSecuritiesSEC. - Review and
Exchange Commission. - Ensure thatdiscuss with Commerce Corp's financial managementreplies in writingand the independent auditors the quarterly earnings releases (paying particular attention tothe recommendations contained in each audit report within 30 daysany use of "pro forma," orsuch"adjusted" or otherreasonable time necessarynon-GAAP, information), as well as financial information and earnings guidance provided toprovide adequate response. -analysts and rating agencies. - Review the
Audit Follow-up Logschedule ofall audit reports issued. The Log should be updated at least quarterly and summarize management responses and corrective action plans. - The Committee shall direct a follow up audit, where necessary,unrecorded adjustments toadequately address significant areas of concern. The follow up shall be performed within six months of the audit. - The Committee may meet in a closed session with auditors without the presence of senior management. - The Committee shall review and formally accept annually, the audited consolidated financial statements of HCC and its subsidiary banks prepared by certified public accountants in accordance with generally accepted accounting principles. - Discuss with management and/or the Company's general counsel, any legal matters (including the status of pending litigation) that may have a material impact on the Company'sCommerce Corp's financial statements and the reasons underlying Commerce Corp's assessment of the immateriality of such adjustments. - Review prior to publication or filing and approve such other Company financial information, including appropriate regulatory filings and releases that include financial information, as the Committee deems desirable.
- Review the adequacy of Commerce Corp's system of internal accounting and financial control.
- Annually review the quality of internal accounting and financial control, the auditors' report or opinion thereon and any
material reportsrecommendations the auditors may have for improving orinquiries from regulatorychanging Commerce Corp's internal controls, as well as management's letter in response thereto and any other matters required to be discussed under Statement of Auditing Standards No. 61 (as it may be modified orgovernmental agencies. IV. INTERNAL AUDITsupplemented). - Discuss policies with respect to Commerce Corp's risk assessment and risk management, and review Commerce Corp's major financial risk exposures and the steps management has taken and proposes to take to monitor and control such exposures. Oversee Commerce Corp's Risk Management Steering Committee.
- Appoint and evaluate Commerce Corp's Vice President, Audit Liaison Officer.
- Review and approve the budgets and staffing for the Internal Audit Department.
- Annually review the results of the Internal Audit Department's reviews and audits.
- Review for approval all related party transactions for potential conflict of interest situations. The term "related party transaction" shall refer to transactions required to be disclosed pursuant to SEC Regulation S-K, Item 404.
- Review proposed future internal audit
policy statement provides guidelinesplans. - Regularly report its activities, concerns, conclusions and
sound practices forrecommendations to theAudit DepartmentBoard of Directors, reviewing with the Board any issues that arise with respect tofollow in order to effectively managethe quality or integrity of Commerce Corp's financial statements, Commerce Corp's compliance with legal or regulatory requirements, the performance and independence of Commerce Corp's independent auditors, or the performance of the internal audit function. - The Audit
Liaison Officer will overseeCommittee and each of its members may communicate directly and/or privately with Commerce Corp's directors, officers, employees, consultants, agents, internal auditors, independent auditors, attorneys-in-fact, counsel and advisors, and any and all third parties, and require theinternalfull cooperation of all such persons, in the performance of the Committee's functions. - The Committee may cause an investigation to be made into any matter within the scope of its responsibilities under this Charter as the Committee deems necessary, or as otherwise authorized, requested or directed by the Board of Directors. The Committee may require Company personnel to assist in any such investigation, and may engage independent resources to assist in such investigations as it deems necessary.
- The Chair of the Audit Committee is authorized and empowered to expend corporate funds to retain and secure independent auditors for Commerce Corp and such consultants, advisors, attorneys, investigatory services or other expert advice and assistance, and to fund ordinary administrative expenses of the Audit Committee, as are necessary or appropriate to carry out its duties under these resolutions and this Charter, including the authority and power to sign, execute and deliver any and all such checks, drafts, vouchers, receipts, notes, documents, contracts and any other instruments whatsoever as he or she shall deem appropriate, in the name and on behalf of Commerce Corp.
- The membership of the Audit Committee shall consist of three or more directors, each of whom shall:
- No member of the Audit Committee, including the Chair, may simultaneously serve on the audit
functioncommittee of more than two other corporations besides Commerce Corp, unless the Board of Directors determines that such simultaneous service would not impair the director's ability to effectively serve on Commerce Corp's Audit Committee andreport directlysuch determination is disclosed in Commerce Corp's proxy statements relating to its annual meetings of shareholders. - The Board of Directors reserves all authority permitted under the
Board's Audit Committee. Responsibilities includerules of the Commission and the relevant listing authority in connection with any matter referred to in this Charter, including butarenot limited to thefollowing: - Assist Board'sdetermination of independence of Audit Committeeand Senior Management in effective discharge of their responsibilities by providing them with independent analysis, appraisal and recommendations regarding the activities of the Holding Company and its subsidiary banks. - Coordinate upcoming audits and regulatory examinations with outside auditors and regulatory agencies. - Ensure implementation of risk-focused internal control system and effective certification program to promote operational efficiency and adherence to internal policies. - Conduct operations audit, loan review and special investigations when appropriate, to detect the presence, absence and/or extent of fraud, embezzlement, or willful manipulation of funds and records. 3035 - Maintain the independent nature of the audit function by ensuring that neither the auditor nor his staff initiates or approves accounting transactions of any nature, or administers or supervises any bank operational function. - Assess the competency, independence, and objectivity of the outside service provider as it relates to assignments to be performed. - Strictly guard the confidentiality of audit reports, audit files and findings, audit schedules, HCC records, Subsidiary Bank's/Client relationships, and HCC data in general. V. CERTIFICATION OF ON AND OFF BALANCE SHEET ITEMS Certification is a process of reconciling, verifying and confirming accounting records and administrative processes to ensure protection of assets, dual control, segregation of duties and other internal control systems are in place.members. - The Audit Committee shall meet as often as necessary to fulfill its functions as determined by the Committee, but no less than four times annually.
- At least quarterly, the Committee shall hold separate, private meetings without other members of
the Heritagemanagement present, with each of CommerceCorp and its subsidiary banks establishes this policy as a necessary tool of an effective internal control structure. - All general ledger accounts or group of similar accounts are to be periodically certified in accordance with established certification procedures. - Non general ledger accounts including certain administrative procedures are to be certified according to established procedures. - Certification of general ledger accounts shall be evidenced by reconciliation to the general ledger with appropriate supporting documentation and certified correct by a reviewer. - Certification of On and Off Balance Sheet items are to be performed on any day of the month; however, the date shall vary within 5 working days of the previous month to maintain an element of surprise. - All stale items (90 days and over) are to be properly researched and referred to theCorp's Chief Financial Officer, counsel, Controller,for charge-off, unless the said items are in process of collection. - Each Department Manager is responsible for completing the certification of his/her area or bank. -Vice President, Audit Liaison Officer,is to oversee the company-wide certification process. - Respective Department Managers are to forward one copy of the certification schedule to the Audit LiaisonCompliance Officer, and Commerce Corp's independent auditor; and, eachmonth. VI. DUTIES OF THE INDEPENDENT INTERNAL AUDIT FIRMS - Designsuch person shall have free andimplement a risk assessment program to effectively assess risk exposures of the areas audited. - Perform a risk-focused audit of the institutions' operations and activities. - Verify and determine compliance with adopted policies, plans, procedures, and applicable banking laws and regulation, including generally accepted accounting principles. - Review internal control systems in place to safeguard assets and other intangibles and verify existence and value of assets and liabilities. - Review operational efficiency of the HCC and its banks, to ensure that the resources are employed efficiently and in a cost-effective manner. Identify and analyze operating weaknesses and recommend corrective action measures. - Review loans, credit administration and analysis of loan and lease losses reserve. - Communicate the results of the internal audits, both positive and negative, in writing including management response to the appropriate levels of management and the Audit Committee. - Participate on a consultative basis in the planning stages of new policies, procedures, and control systems for new product offerings and for new laws and regulation. 3136 VII. INTERNAL AUDIT OUTSOURCING ARRANGEMENTS All outsourcing arrangements shall be evidenced by a written contract, i.e., engagement letter. Minimum requirements of engagement letter are as follows: - The engagement shall set the scope and frequency of work to be performed by the vendor. - It shall set manner and frequency of reporting to Audit Committee about the status of the engagement. - Establish the requisite protocol for changing the terms of the service engagement, i.e. expansion of coverage if material issues are found. - Specify that the internal audit reports are the property of the institution, that the institution will be provided with any copies of the related work papers it deems necessary, and that the Audit Liaison Officer will have reasonable and timelydirect access to thework papers prepared byCommittee and any of its members. - Prior to the
vendor. - Specifybeginning of each fiscal year, thelocationsChair shall draft a proposed schedule of theinternal audit reportsCommittee's activities for the coming year, and therelated work papers. - The regulatory examiners will be granted access totimes at which such activities shall occur, including preliminary agendas for each proposed meeting of theinternal audit reports and related work papers prepared by the vendor if needed, through the Audit Liaison Officer. - Prescribe the method for determining who bears the cost of consequential damages arising from errors, omissions and negligence. - That the vendorsCommittee, which shallnot perform management functions, make management decisions, or act or appear to act, in a capacity equivalent to that of an employee of HCC and its subsidiaries. Nothing in this section prohibits value-added audit. INTERNAL AUDIT SCHEDULE The audit period shall generally be from January 1st to December 31, the Company's fiscal year end. The audit plan and schedule shall be rotating, although an element of surprise should be maintained. The schedule will be driven by risk assessment results, internal and external audit findings and conclusions, as well as regulatory examinations. Audit Cycle shall be as follows:1. High Risk/or Less than Satisfactory Rating.......... 12 months Maximum 2. Moderate Risk/ Satisfactory:........................ 18 months Maximum 3. Low Risk Areas/ Satisfactory:....................... 24 months Maximum 4. Board Policies, irrespective of the risk rating:.... 12 monthsThe scope of an internal audit will be sufficient to test compliance with adopted policy and procedures; appraise the soundness and adequacy of accounting, operating, and other administrative controls, and to detect irregularities from proof detail or reconcilement. The Internal audit firm will have access to any area or records as deemed necessary. RATINGS The Banks/Department/Function shall be rated after a thorough analysis and review of its functions and activities in accordance with Board policies, adherence to internal accounting and administrative control procedures, as well as applicable laws and regulation. The ratings are defined as follows: 1. Strong: The Banks/Department/Function is in substantial compliance with applicable policies and procedures. 2. Satisfactory: The Banks/Department/Function is in compliance with policies and procedures. Any weaknesses are minor and can be handled in a routine manner. 3237 3. Needs Improvement: The Banks/Department/Function, although generally in compliance with policies and procedures, has certain deficiencies that should be improved. Typically, more than one significant weakness is noted. 4. Unsatisfactory: The Banks/Department/Function is in substantial noncompliance with policies and procedures. Violations of laws and regulations are noted. The problem may range from severe to critical and, as such, will expose the bank to financial losses if left uncorrected. REPORTS The Internal audit firm shall prepare, review and provide written audit reports tobe submitted to theAudit Committee. The internal audit firmCommittee for its review and approval, with such changes as the Committee shallroutinely discuss preliminary findings with the appropriate levels of managementdetermine toascertain correctness of facts, andbe appropriate. - Each Committee member is required to
give management the opportunity to clarify. An exit review will be held with senior management and the Audit Liaison Officer. The written report, including the management response, will be provided to the Audit Committee within a reasonable time frame not to exceed 45 days from dateattend at least 75 percent of thecompletionaggregate ofaudit. VIII. EXTERNAL AUDIT A strong internal auditing function establishes(1) theproper control environment and promotes accuracy and efficiency in the company. An external auditing program complements this function by providing an objective outside viewtotal number ofthe HCC and its subsidiary banks' operations. Heritage Commerce Corp and its banks are committed to maintaining a sound external-auditing program. The Audit Committeemeetings of the Board of Directorswill engageof Commerce Corp (held during theexternal auditors annually. Anperiod for which he or she has been a director) and (2) the total number of meetings held by all committees of the Board on which he or she served (during the periods that he or she served), including but not limited to meetings of the Audit Committee. - All complaints received by the Committee relating to accounting, internal accounting controls or auditing matters shall be retained and reviewed by the Committee. Upon receipt of a complaint, the Chair of the Committee shall assign the complaint to any one or more members of the Committee (including the Chair) for preliminary review, and may authorize the use or engagement
letter willof such counsel, accountants, investigators or other assistance as the Chair, in the exercise of his or her discretion, shall determine to beacceptedappropriate under the circumstances. - Management shall retain the original of all such complaints until further notice by the Committee.
- At least annually, management shall ensure that each employee of Commerce Corp is advised in writing (including by any form of electronic transmission which provides the employee the ability to reproduce a written copy of such transmission) that he or she may submit, on a confidential and
it must be sufficientanonymous basis, complaints regarding accounting, internal accounting controls, or auditing matters and concerns regarding questionable accounting or auditing matters. The advice shall include the name and business address of the Chair of the Committee and shall inform employees that they should direct their complaints to the Chair, inscope to renderwriting, at such address. - The Committee shall conduct an
opinionannual self-evaluation of its performance focusing on theconsolidatedquality of the Committee's review of: - The Board of Directors has determined that Mr. Jack W. Conner has: (i) an understanding of generally accepted accounting principles and financial statements; (ii) the
holding company will be submittedability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant's financial statements, or experience actively supervising one or more persons engaged in such activities; (iv) an understanding of internal control over financial reporting; and (v) an understanding of audit committee functions. - Annually review this Audit Committee Charter, and any provisions of Commerce Corp's by-laws which refer to the Audit Committee, and propose to the Board of Directors necessary or appropriate
regulatory agency on behalf of the affiliated banks to satisfy this requirement. 3338revisions.
(i) requiring that the auditors annually submit to the Audit Committee a formal written statement delineating all relationships between the auditors and Commerce Corp;
(ii) actively engaging in a dialogue with the auditors with respect to any disclosed relationships or services that may impact their objectivity and independence, including the matters required by Independence Standards Board Standard No. 1 Independence Discussions with Audit Committees (as it may be modified or supplemented);
(iii) reviewing any relationships between the auditors and Commerce Corp, or any other relationship, that may adversely affect the auditors' independence;
(iv) reviewing and approving any management consulting engagements or any other non-audit services proposed to be undertaken by such auditors on behalf of Commerce Corp; and
(v) setting clear policies defining the circumstances under which Commerce Corp is permitted to providehire former employees of the most effective
risk-focusedindependent auditors.
Financial Statements
(i) any significant changes in Commerce Corp's selection or application of HCC and its Subsidiary banks.
III. AUDIT COMMITTEE CHARTER
The Boards of Heritage Commerce Corp and its subsidiary banks have adopted
this Audit Committee Charter. The Committee shall annually review and reassess
this charter and recommendaccounting principles;
(ii) any proposed changesmajor issues as to the Board for approval.
Membership
- The Committee shall consist entirelyadequacy of outside directors who areCommerce Corp's internal controls and any special audit steps adopted in light of material control deficiencies;
(iii) analyses prepared by management and/or the independent of management.
- The Committee shall not be less than threeauditors setting forth significant financial reporting issues and more than six members.
- Each committee member shall meetjudgments made in connection with the independence and financial literacy
requirements for serving on audit committees, and at least one member
shall have accounting or related financial management expertise, all as
set forth in the applicable rulespreparation of the state and federal banking laws
and NASDAQ/ American Stock Exchange.
- Non-voting advisory members shall consistfinancial statements, including analyses of the Chairpersoneffects of subsidiary bank Audit Committees, Chief Executive Officers, Chief
Financial Officeralternative GAAP methods on the financial statements;
(iv) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the Audit Liaison Officer. Bank officers,
independent public accountants, operationsfinancial statements of Commerce Corp; and loan
(v) the type and presentation of information to be included in earnings press releases (paying particular attention to any use of "pro forma," or "adjusted" non-GAAP, information), as well as review representativesany financial information and regulatory examiners will attend as deemed necessary
by the Chairperson.
- The Board of Directors shall appoint the Chairperson, Vice Chairpersonearnings guidance provided to analysts and each member of the Committee.
- All Committee members shall serve a term of one year unless re-appointed
by the Board of Directors. In the event of a vacancy, an outside director
will be appointedrating agencies.
(i) all critical accounting policies and providepractices to be used;
(ii) all alternative treatments of financial information within generally accepted accounting principles that have been discussed with management officials of the Boardissuer, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the registered public accounting firm; and
(iii) other material written communications between the registered public accounting firm and the management of the issuer, such as any management letter or schedule of unadjusted differences.
(i) any restrictions on the scope of the independent auditors' activities or on access to requested information;
(ii) any accounting adjustments that were noted or proposed by the auditors but were "passed" (as immaterial or otherwise);
(iii) any communications between the audit team and the audit firm's national office respecting auditing or accounting issues presented by the engagement;
(iv) any "management" or "internal control" letter issued, or proposed to be issued, by the auditors to Commerce Corp; and
(v) the responsibilities, budget and staffing of Commerce Corp's internal audit function.
Internal Accounting and Control Functions
III. REPORTING RESPONSIBILITIES
IV. AUTHORITY OF COMMITTEE
V. COMMITTEE MEMBERSHIP
(i) have been appointed by the Board of Directors; and
(ii) have been determined by the Board of Directors to fulfill the requirements for membership on the Committee as provided in the federal securities laws, the rules of the SEC thereunder and the rules of NASDAQ, as such provisions may be amended from time to time.
VI. MEETINGS
VII. COMPLAINTS
VIII. ANNUAL PERFORMANCE EVALUATION OF THE COMMITTEE
(i) major issues regarding accounting principles and financial statement presentations, including any significant changes in Commerce Corp's selection or application of accounting principles, and major issues as to the adequacy of Commerce Corp's internal controls and any special audit steps adopted in light of material control deficiencies;
(ii) analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the Heritage Commerce Corp and its subsidiaries.
OUTLOOK
In view of Heritage Commerce Corp's continued expansion, the holding
company and its banks may be subject to Section 36financial statements, including analyses of the Federal Deposit
Insurance Act,effects of alternative GAAP methods on the financial statements;
(iii) the effect of regulatory and accounting initiatives, as implemented by 12 CFR, Part 363. This law requires each
depository institution with $500 million or more in total assets atwell as off-balance sheet structures, on the
beginning of its fiscal year to file with the appropriate federal banking agency
the following documents:
(a) An audited financial statement
(b) A management report and,
(c) Independent public accountant's attestation concerning both the
effectiveness of the institution's internal controls for financial
reporting and its compliance with designated safety and soundness laws.
A copy of the audited consolidated financial statements of Commerce Corp; and
(iv) earnings press releases (paying particular attention to any use of "pro forma," or "adjusted" non-GAAP, information), as well as financial information and earnings guidance provided to analysts and rating agencies.
IX.AUDIT COMMITTEE FINANCIAL EXPERT
X.GENERAL
REVOCABLE PROXY - HERITAGE COMMERCE CORP
SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS
The undersigned shareholder of Heritage Commerce Corp ("Commerce Corp") hereby nominates, constitutes and appoints Brad L. Smith, Richard L. Conniff and William J. Del Biaggio, Jr., and each of them, the attorney, agent and proxy of the undersigned, with full power of substitution, to vote at the Annual Meeting of Shareholders of the Company to be held at the Company's offices, 150 Almaden Boulevard, San Jose, California, on May 24, 200126, 2005 at 3:00 p.m.9:30 a.m. and any adjournment thereof, as fully and with the same force and effect as the undersigned might or could do if present, as follows:
1. To elect as directors the nominees set forth below:
[ ] FOR all nominees listed (except as marked to the contrary below).
[ ] WITHHOLD AUTHORITY to vote for all nominees listed below.
Instruction: To withhold authority to vote for any individual nominee, strike a
line through the nominee's name below:
Hugh P. Barton
Frank G. Bisceglia
James R. Blair
Richard L. Conniff
William J. Del Biaggio, Jr.
Anneke Dury
Kurt G. Hammerstrom
John W. Larsen
Roy E. Lave
Louis O. ("Lon") Normandin
Jack L. Peckham
Robert W. Peters
Humphrey P. Polanen
Brad L. Smith
Howard J. Weiland
2. To amend Commerce Corp's Articles of Incorporation to eliminate the
availability of cumulative voting in the election of Commerce Corp's
directors.
[ ] FOR approval of an amendment to Commerce Corp's Articles of Incorporation to
eliminate the availability of cumulative voting in the election of Commerce
Corp's directors.
[ ] AGAINST approval of an amendment to Commerce Corp's Articles of
Incorporation to eliminate the availability of cumulative voting in the election
of Commerce Corp's directors.
[ ] ABSTAIN
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3. To amend Commerce Corp's Bylaws to provide for classification of the Board
of Directors into three classes for purposes of the election of directors.
[ ] FOR approval of an amendment to Commerce Corp's Bylaws to provide for
classification of the Board of Directors into three classes for purposes of the
election of directors.
[ ] AGAINST approval of an amendment to Commerce Corp's Bylaws to provide for
classification of the Board of Directors into three classes for purposes of the
election of directors.
[ ] ABSTAIN
4. To amend Commerce Corp's 1994 Tandem Stock Option Plan to increase the
number of shares available for grants of stock options.
[ ] FOR approval of an amendment to Commerce Corp's 1994 Tandem Stock Option
Plan to increase the number of shares available for grants of stock options.
[ ] AGAINST approval of an amendment to Commerce Corp's 1994 Tandem Stock Option
Plan to increase the number of shares available for grants of stock options.
[ ] ABSTAIN
5. To ratify the Board of Directors' selection of Deloitte & Touche LLP,
independent certified public accountants, to serve as the Company's auditors for
the fiscal year ending December 31, 2001.
[ ] FOR ratification of Deloitte & Touche LLP as Commerce Corp's auditors.
[ ] AGAINST ratification of Deloitte & Touche LLP as Commerce Corp's auditors.
[ ] ABSTAIN.
6. To consider and transact such other business as may properly be brought
before the meeting.
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This Proxy will be voted as directed by the Shareholder or, if no instructions
are given by the Shareholder, the Proxy Holders will vote "FOR" each of the
foregoing proposals.
If any other business is presented at said meeting, this Proxy shall be
voted in accordance with the recommendations of the Board of Directors.
When signing as attorney, executor, officer, administrator, trustee or
guardian, please give full title. If more than one trustee, all should sign. All
joint owners must sign.
I / we do [ ] do not [ ] expect to attend this meeting.
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NUMBER OF SHARES
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE LISTED PROPOSALS.
THIS
, DETACH PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE REVOKED
PRIOR TO ITS EXERCISE.
Dated: ________________________________, 2001.
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SIGNATURE OF SHAREHOLDER(S)
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(PRINT NAME)
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SIGNATURE OF SHAREHOLDER(S)
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(PRINT NAME)