|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Beneficial Owner(1)
|
|
Position
|
|
Shares
Beneficially
Owned(2)(3)
|
|
Exercisable
Options
|
|
Percent of
Class(3)
|
|
Michael E. Benito
|
|
Executive Vice President/Banking Division
|
|
|
65,905
|
(4)(18)
|
|
42,065
|
|
|
0.20
|
%
|
Julianne M. Biagini-Komas
|
|
Director
|
|
|
36,249
|
(5)
|
|
|
|
|
0.11
|
%
|
Frank G. Bisceglia
|
|
Director
|
|
|
135,435
|
(6)
|
|
29,430
|
|
|
0.42
|
%
|
Jack W. Conner
|
|
Director and Chairman of the Board
|
|
|
121,886
|
(7)
|
|
27,257
|
|
|
0.38
|
%
|
J. Philip DiNapoli
|
|
Director
|
|
|
816,321
|
|
|
|
|
|
2.54
|
%
|
John M. Eggemeyer
|
|
Director
|
|
|
1,323,064
|
(8)
|
|
12,996
|
|
|
4.12
|
%
|
Steven L. Hallgrimson
|
|
Director
|
|
|
121,164
|
(9)
|
|
3,341
|
|
|
0.38
|
%
|
Walter T. Kaczmarek
|
|
Chief Executive Officer, President and Director
|
|
|
169,882
|
(10)(18)
|
|
53,125
|
|
|
0.53
|
%
|
Lawrence D. McGovern
|
|
Executive Vice President and Chief Financial Officer
|
|
|
92,865
|
(11)(18)
|
|
44,069
|
|
|
0.29
|
%
|
Robert T. Moles
|
|
Director
|
|
|
121,002
|
(12)
|
|
28,930
|
|
|
0.38
|
%
|
David E. Porter
|
|
Executive Vice President and Chief Credit Officer
|
|
|
51,565
|
(18)
|
|
14,065
|
|
|
0.16
|
%
|
Laura Roden
|
|
Director
|
|
|
20,764
|
|
|
8,996
|
|
|
0.06
|
%
|
Ranson W. Webster
|
|
Director
|
|
|
633,776
|
|
|
29,430
|
|
|
1.97
|
%
|
Keith A. Wilton
|
|
Executive Vice President and Chief Operating Officer
|
|
|
75,087
|
(13)(18)
|
|
|
|
|
0.23
|
%
|
W. Kirk Wycoff
|
|
Director
|
|
|
2,609,794
|
(14)(16)
|
|
12,996
|
|
|
8.12
|
%
|
All directors, and executive officers (15 individuals)
|
|
|
|
|
6,394,729
|
|
|
|
|
|
19.72
|
%
|
The Banc Funds Company, LLC
|
|
|
|
|
1,814,232
|
(15)
|
|
|
|
|
5.65
|
%
|
Patriot Financial Partners, L.P.
|
|
|
|
|
2,595,000
|
(16)
|
|
|
|
|
8.08
|
%
|
BlackRock Inc.
|
|
|
|
|
2,277,779
|
(17)
|
|
|
|
|
7.09
|
%
|
-
1.
-
Except
as otherwise noted, the address for all persons is c/o Heritage Commerce Corp, 150 Almaden Boulevard, San Jose, California, 95113.
-
2.
-
Subject
to applicable community property laws and shared voting and investment power with a spouse, the persons listed have sole voting and investment power
with respect to such shares unless otherwise noted. Listed amounts reflect all previous stock splits and stock dividends.
-
3.
-
Includes
shares beneficially owned (including options exercisable within 60 days of February 29, 2016, as shown in the "Exercisable Options"
column).
-
4.
-
Includes
540 shares held by his spouse in her Individual Retirement Account.
-
5.
-
Includes
5,068 shares as co-trustee of a family trust.
6
Table of Contents
-
6.
-
Includes
93,237 shares as one of two trustees of the Bisceglia Family Trust, and 11,000 shares held by Mr. Bisceglia in a personal Individual
Retirement Account.
-
7.
-
Includes
300 shares held in a trust account, and 11,700 shares held by Mr. Conner's spouse.
-
8.
-
Includes
1,310,068 shares of common stock held by Castle Creek Capital Partners IV LLC ("CC Fund IV"). CC Fund IV also owns 12,960 shares of
Series C Preferred Stock which are convertible into 3,456,000 shares of common stock by a holder (other than CC Fund IV and its affiliates) who receives such shares by means of (i) a
widespread public distribution, (ii) a transfer in which no transferee (or group of associated transferees) would receive 2% or more of any class of voting securities of the Company or
(iii) a transfer to a transferee that would control more than 50% of the voting securities of the Company without any transfer from such transferor or its affiliates (a "Widely Dispersed
Offering"). Since CC Fund IV does not have the right to acquire the shares of common stock underlying the Series C Preferred Stock and will not have voting or dispositive power of such shares
of common stock, the shares of common stock underlying the Series C Preferred Stock are not included in the table. Mr. Eggemeyer is a managing principal of Castle Creek Capital
IV LLC which is the sole general partner of CC Fund IV and may be deemed to have voting and/or investment control of the securities held by CC Fund IV. Mr. Eggemeyer disclaims beneficial
ownership of the securities held by CC Fund IV, except to the extent of his pecuniary interest therein. CC Fund IV has applied to the Federal Reserve for approval to exchange its 12,960
shares of Series C Preferred Stock for 3,456,000 shares of Company common stock (the as converted equivalent). The Company has indicated to CC Fund IV that if such approval is
obtained the Company would agree to enter into an exchange agreement to effect the exchange. If the Series C Preferred Stock is exchanged CC Fund IV would own a total of 4,779,064
shares of common stock and beneficial ownership of 12.67% of the outstanding shares of common stock. There is no assurance CC Fund IV will obtain approval from the Federal Reserve.
-
9.
-
Includes
79,123 shares held directly, 3,500 shares held in a SEP IRA account, 2,000 shares held in a personal IRA account and 4,000 shares held in
Mr. Hallgrimson's private foundation. Also includes 3,000 shares held by Mr. Hallgrimson's spouse, 7,000 shares in a limited liability company with his son, 2,900 shares that
Mr. Hallgrimson holds as trustee of various trusts and 16,300 shares held in accounts of others over which Mr. Hallgrimson has voting and investment power.
-
10.
-
Includes
41,000 shares held in a personal Individual Retirement Account.
-
11.
-
Includes
4,980 shares held by Mr. McGovern in a personal Individual Retirement Account.
-
12.
-
Includes
18,295 shares held by Mr. Moles' spouse.
-
13.
-
Includes
55,000 shares of restricted stock that have not vested and of which Mr. Wilton has the right to vote.
-
14.
-
Mr. Wycoff
is one of the general partners of Patriot Financial Partners GP, L.P. ("Patriot GP"). Patriot GP is the
general partner of Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel, L.P. (together, the "Funds"). Patriot Financial Partners GP, LLC
("Patriot LLC") is the general partner of Patriot GP. Mr. Wycoff is a member of Patriot LLC. Accordingly, securities owned by the Funds may be regarded as being
beneficially owned by Mr. Wycoff. Mr. Wycoff disclaims beneficial ownership of the securities owned by the Funds, except to the extent of his pecuniary interest therein.
-
15.
-
Includes
342,634 shares held by Banc Fund VI L.P. ("BF VI"), 485,433 shares held by Banc Fund VII L.P. ("BF VII"), 832,914 shares held by Banc
Fund VIII L.P. ("BF VIII") and 153,251 shares held by Banc Fund IX L.P. ("BF IX"). BF VI, BF VII, BF VIII and BF IX are each Illinois limited partnerships. MidBanc VI L.P. is the
general partner of BF VI. MidBanc VII is the general partner of BF VII. MidBanc VIII is the general partner of BF VIII. MidBanc IX is the general partner of BF IX. Each of the general partners are
Illinois limited partnerships and the general partner for each of these entities is The Banc Funds Company, L.L.C., an Illinois corporation whose principal shareholder is Charles J. Moore.
Mr. Moore as sole shareholder of the Banc Funds Company and as the manager of BF VI, BF VII, BF VIII and BF IX has voting and dispositive power over the shares held by each of these entities.
The address for The Banc Funds Company is 20 North Wacker Drive, Suite 3300,
7
Table of Contents
Chicago,
Illinois 60606. All of the foregoing information has been obtained by Schedule 13G filed with the SEC on February 8, 2016.
-
16.
-
Includes
2,213,000 shares of common stock held by Patriot Financial Partners, L.P. and 382,000 shares of common stock held by Patriot Financial
Partners Parallel, L.P. Patriot Financial Partners GP, L.P. ("Patriot GP") is a general partner of each Patriot Financial Partners, L.P. and Patriot Financial
Partners Parallel, L.P. (together, the "Funds") and Patriot Financial Partners GP, LLC ("Patriot LLC") is a general partner of Patriot GP. In addition, each of W.
Kirk Wycoff, Ira M. Lubert and James J. Lynch are general partners of the Funds and Patriot GP and members of Patriot LLC. Accordingly, securities owned by the Funds may be regarded as
being beneficially owned by Patriot GP, Patriot LLC and each of W. Kirk Wycoff, Ira M. Lubert and James J. Lynch. Mr. Wycoff, Mr. Lubert and Mr. Lynch each disclaim
beneficial ownership of the securities owned by the Funds, except to the extent of their respective pecuniary interest therein. The Funds also own 8,043.75 shares of Series C Preferred Stock
which is convertible into 2,145,000 shares of common stock following transfer to third parties in a Widely Dispersed Offering. Since the Funds do not have the right to acquire these shares of common
stock underlying the Series C Preferred Stock and will not have voting or dispositive power of such shares of common stock, the shares of common stock underlying the Series C Preferred
Stock are not included in the table. The address for Patriot Financial Group is Cira Centre, 2929 Arch Street, 27th Floor, Philadelphia, PA 19104-2868. All of the foregoing information has been
obtained from Schedule 13D filed with the SEC on June 25, 2010. The Funds intend to apply to the Federal Reserve for approval to exchange its 8,043.75 shares of Series C Preferred
Stock for 2,145,000 shares of Company common stock (the as converted equivalent). The Company has indicated to the Funds that if such approval is obtained the Company would agree to enter into an
exchange agreement to effect the exchange. If the Series C Preferred Stock is exchanged the Funds would own a total of 4,754,764 shares of common stock and beneficial ownership of 12.60% of the
outstanding shares of common stock. There is no assurance the Funds will obtain approval from the Federal Reserve.
-
17.
-
BlackRock, Inc.
is an investment management firm and may be deemed to beneficially own 2,277,779 shares of the Company which are held of record by
clients of BlackRock, Inc. The address for BlackRock, Inc. is 55 East 52
nd
Street, New York, NY 10055. All of the foregoing information has been obtained by
Schedule 13G filed with the SEC on January 22, 2016.
-
18.
-
The
Company's Employee Stock Ownership Plan owns 123,707 shares of our common stock, all of which have been allocated. These include shares held for the
account of the following named executive officers and included in the table for: Mr. Kaczmarek 1,830 shares, Mr. McGovern 5,296 shares, Mr. Benito 2,200 shares, and zero shares
for Mr. Porter and Mr. Wilton. Mr. Kaczmarek and Mr. McGovern are two of the three trustees of the Employee Stock Ownership Plan. As trustees, they have the power to vote
any unallocated shares of Employee Stock Ownership Plan (currently no shares are unallocated) and allocated shares for which voting instructions are not otherwise provided.
8
Table of Contents
CORPORATE GOVERNANCE AND BOARD MATTERS
The Board of Directors is committed to good business practices, transparency in financial reporting and the highest level of corporate
governance. To that end, the Board continually reviews its governance policies and practices, as well as the requirements of the Sarbanes-Oxley Act of 2002 and the listing standards of The NASDAQ
Stock Market, to help ensure that such policies and practices are compliant and up to date.
Board of Directors
In 2015 twelve (12) out of thirteen (13) members of the Board of Directors were independent directors, as defined by the
applicable rules and regulations of The NASDAQ Stock Market, as follows:
Julianne
M. Biagini-Komas
Frank G. Bisceglia
Jack W. Conner, Chairman of the Board
J.
Philip DiNapoli
John M. Eggemeyer
Steven L. Hallgrimson
Robert T. Moles
Humphrey P. Polanen
Laura Roden
Charles J. Toeniskoetter
Ranson W. Webster
W. Kirk Wycoff
Julianne
M. Biagini-Komas and J. Philip DiNapoli joined the Board of Directors in August 2015.
Humphrey P.
Polanen will retire from the Board effective April 29, 2016. Charles J. Toeniskoetter will retire from the Board on the date of and prior to the Annual
Meeting.
During the fiscal year ended December 31, 2015, our Board of Directors held a total of 15 meetings. Each incumbent director who
was a director during 2015 attended at least 75% of the aggregate of (a) the total number of such meetings and (b) the total number of meetings held by the standing committees of the
Board on which such director served except for John M. Eggemeyer (attended 67.9%) and W. Kirk Wycoff (attended 74.2%).
The Board believes it is important for all directors to attend the Annual Meeting of Shareholders in order to show their support for
the Company and to provide an opportunity for shareholders to communicate any concerns to them. The Company's policy is to encourage, but not require, attendance by each director at the Company's
Annual Meeting of Shareholders. All of the directors of the Company are encouraged to attend the Annual Meeting of Shareholders at the 2015 Annual Meeting of Shareholders, all of the directors
attended except for two directors who had prior business commitments.
Shareholders may communicate with the Board of Directors, including a committee of the Board or individual directors, by writing to the
Corporate Secretary, Heritage Commerce Corp, 150 Almaden Boulevard, San Jose, California 95113. Each communication from a shareholder should include the
9
Table of Contents
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; and
-
-
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.
The Company has a Corporate Governance and Nominating Committee. The duties of the Corporate Governance and Nominating Committee
include the recommendation of candidates for election to the Company's Board of Directors.
The
Corporate Governance and Nominating Committee's minimum qualifications for a director are persons of high ethical character who have both personal and professional integrity, which
is consistent with the image and values of the Company. The Corporate Governance and Nominating Committee considers some or all of the following criteria in considering candidates to serve as
directors:
-
-
commitment to ethical conduct and personal and professional integrity as evidenced through the person's business associations,
diversity, service as a director or executive officer or other commitment to ethical conduct and personal and professional integrity as evidenced in organizations and/or education;
-
-
objective perspective and mature judgment developed through business experiences and/or educational endeavors;
-
-
the candidate's ability to work with other members of the Board of Directors and management to further our goals and increase
shareholder value;
-
-
the ability and commitment to devote sufficient time to carry out the duties and responsibilities as a director;
-
-
demonstrated experience at policy making levels in various organizations and in areas that are relevant to our activities;
-
-
the skills and experience of the potential nominee in relation to the capabilities already present on the Board of Directors; and
-
-
such other attributes, including independence, relevant in constituting a board that also satisfies the requirements imposed by the
SEC and The NASDAQ Stock Market.
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 the Company'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
10
Table of Contents
the
requirements for nominations in accordance with the Company'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.
Section 5.14
of the Company's Bylaws provide that any shareholder must give advance written notice to the Company of an intention to nominate a director at a shareholder meeting.
Notice of intention to make any nominations must be delivered to the Secretary of the Company at the principal executive offices of the Company not later than the close of business on the ninetieth
(90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year's annual meeting. If the date of the annual meeting is
more than thirty (30) days before or more than sixty (60) days after such anniversary date of the annual meeting, notice by the shareholder must be delivered not earlier than the close
of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the
tenth (10th) day following the day on which public announcement of the date of such meeting is first made by the Company.
To
be in proper written form, a shareholder's notice to the Corporate Secretary must provide as to each person, whom the shareholder proposes to nominate for election as a director (each
referred to as the "Nominee"): (1) all information relating to the Nominee that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to and in accordance with Regulation 14A under the Securities Exchange Act of 1934 (the "Exchange Act"); (2) the Nominee's written consent to
being named in the proxy statement as a nominee and to serving as a director if elected; (3) 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 and the identities and locations of any such institutions; (4) whether the Nominee has ever been convicted of or
pleaded nolo contender to any criminal offensive involving dishonestly or breach of trust, filed a petition in bankruptcy or been adjudged bankrupt; (5) a written statement executed by the
Nominee acknowledging that as a director of the Company, the Nominee will owe a fiduciary duty exclusively to the Company and its shareholders; (6) a representation whether the Nominee
satisfies the requirements of Section 2.2(b) of the Company's Bylaws (see below); (7) whether and the extent to which any hedging or other transaction or series of transactions has been
entered into by or on behalf of the Nominee respect to any securities of the Company, and a description of any other agreement, arrangement or understanding (including any short position or any
borrowing or lending of shares), the effect or intent of which is to mitigate loss to, or to manage the risk or benefit of share price changes for, or to increase or decrease the voting power of the
Nominee; and (8) a description of all arrangements or understandings between the shareholder and the Nominee and any other person or persons (naming such person or persons) pursuant to which
the nomination is to be made by the shareholder.
The
notice must also set forth with respect to the shareholder submitting the nomination: (1) the name and address of the shareholder (and beneficial owner, if applicable), as it
appears on the Company's books, (and of such beneficial owner, if applicable) and any other shareholders and beneficial owners known by such shareholder to be supporting the Nominee(s) for election;
(2) the class or series and number of shares of capital stock of the Company that are, directly or indirectly, owned beneficially and of record by such shareholder (and by such beneficial
owner, if applicable); (3) any derivative positions with respect to shares of capital stock of the Company held or beneficially held by or on behalf of such shareholder (and by or on behalf of
such beneficial owner), the extent to which any hedging or other transaction or series of transactions has been entered into with respect to the shares of capital stock of the Company by or on behalf
of such shareholder (and by or on behalf of such beneficial owner), and the extent to which any other agreement, arrangement or understanding has been made, the effect or intent of which is to
increase or decrease the voting power of such shareholder (and such beneficial owner) with respect to shares of capital stock of the Company; (4) a representation that the shareholder is a
holder of record of stock of the Company entitled to vote at the meeting and intends to appear in person or by proxy
11
Table of Contents
at
the meeting to propose the Nominee; and (5) a representation whether the shareholder (or the beneficial owner, if any), intends or is part of a group that intends to deliver a proxy
statement and/or form of proxy to holders of at least the percentage of the Company's outstanding capital stock required to elect the nominee or otherwise to solicit proxies from shareholders in
support of such nomination (and a copy of such documents must be provided with the notice). The information required of clauses (3) and (4) must be supplemented not later than ten days
following the record date to disclose the information contained in clauses (3) and (4) above as of the record date.
The
Company may require any proposed nominee to furnish such other information as it may reasonably require to determine: (1) the eligibility of the Nominee to serve as a director
of the Company (including the information required to be set forth in the shareholder's notice of nomination of such person as a director as of a date subsequent to the date on which the notice of
such person's nomination was given); and (2) whether the Nominee qualifies as an "independent director" or "audit committee financial expert" under applicable law, securities exchange rule or
regulation, or any publicly-disclosed corporate governance guideline or committee charter of the Company.
Nominees
for the Board of Directors must also meet certain qualifications set forth in Section 2.2(b) of our Bylaws, which prohibit the election as a director of any person 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: (1) any city, town or village in which the Company or any affiliate or subsidiary thereof has offices; or (2) any city, town or village
adjacent to a city, town or village in which the Company or any affiliate or subsidiary thereof has offices.
In
connection with the Company's June 2010 private placement, Patriot Financial Partners, L.P. and Patriot Financial Partners Parallel, L.P. (collectively referred to
herein as "Patriot") and Castle Creek Capital Partners IV, L.P. ("Castle Creek") obtained the right to representation on our Board of Directors (one for Patriot, collectively, and one
for Castle Creek). Patriot and Castle Creek are each entitled to nominate one person to be elected or appointed to our Board (and the Board of Directors of Heritage Bank of Commerce) subject to
receipt of applicable regulatory approvals, satisfaction of all legal and governance requirements regarding service as a director of the Company and Heritage Bank of Commerce and the reasonable
approval of the Governance and Nominating Committee of our Board. So long as each of Patriot and Castle Creek (along with their affiliate funds) holds at least 4.9% of all outstanding shares of our
common stock (counting for such purposes all shares of common stock into which shares of Series C Preferred Stock convertible or exercisable and excluding as shares owned and outstanding shares
of common stock issued by the Company after June 2010), the Company will be required to recommend to its shareholders the election of Patriot's and Castle Creek's Board representative at the Company's
Annual Meeting, subject to satisfaction of all legal and governance requirements regarding service as a director of the Company and to the reasonable approval of the Governance and Nominating
Committee and the Board. Each of the Board representatives may serve on any of the Board committees, except the Audit Committee, so long as the Board representative qualifies to serve on such
committees under applicable rules of The NASDAQ Stock Market, bank regulatory guidelines, and the Company's corporate governance guidelines. For so long as Castle Creek and Patriot are entitled to a
Board representative but do not have a Board representative serving on the Board, these investors will be entitled to designate one Board observer subject to applicable legal requirements. The rights
to a Board representative and Board observer privileges are personal to Patriot and Castle Creek, respectively, and such rights are not transferable. The Patriot Board representative is W. Kirk Wycoff
and the Castle Creek Board representative is John M. Eggemeyer. The Corporate Governance and Nominating Committee have recommended the election of Mr. Wycoff and Mr. Eggemeyer as
directors at the 2016 Annual Meeting.
When
the Company acquired Focus Business Bank in 2015, it agreed to nominate and support the election of Julianne M. Biagini-Komas and J. Philip DiNapoli, former directors of Focus
Business Bank to
12
Table of Contents
the
Company's Board. The Corporate Governance and Nomination Committee has recommended the election of Julianne M. Biagini-Komas and J. Philip DiNapoli as directors at the 2016 Annual Meeting.
In considering diversity of the Board (in all aspects of that term) as a criteria for selecting nominees in accordance with its
charter, the Corporate Governance and
Nominating Committee takes into account various factors and perspectives, including differences of viewpoint, high quality business and professional experience, education, skills and other individual
qualities and attributes that contribute to Board heterogeneity, as well as race, gender and national origin. The Committee does not assign specific weights to particular criteria and no particular
criterion is necessarily applicable to all prospective nominees. The Committee seeks persons with leadership experience in a variety of contexts and industries. The Committee believes that this
expansive conceptualization of diversity is the most effective means to implement Board diversity. The Corporate Governance and Nominating Committee will assess the effectiveness of this approach as
part of its annual review of its charter.
Directors serve for a one-year term or until their successors are elected. The Board does not have term limits, instead preferring to
rely upon the evaluation procedures described herein as the primary methods of ensuring that each director continues to act in a manner consistent with the best interests of the shareholders and the
Company.
The Board may delegate portions of its responsibilities to committees of its members. These standing committees of the Board meet at
regular intervals to attend to their particular areas of responsibility. Our Board has five standing committees: Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee,
Finance and Investment Committee, and Strategic Issues Committee. In addition, Heritage Bank of Commerce maintains a Loan Committee. An independent director, as defined by the applicable rules and
regulations of The NASDAQ Stock Market, chairs the Board and its other standing committees (including the Bank's Loan Committee). The Chair determines the agenda, the frequency and the length of the
meetings and receives input from Board members.
Independent directors meet in executive sessions throughout the year including meeting annually to consider and act upon the
recommendation of the Compensation Committee regarding the compensation and performance of the Chief Executive Officer.
A Board assessment and director self-evaluations are conducted annually in accordance with an established evaluation process and
includes performance of committees. The Corporate Governance and Nominating Committee oversees this process and reviews the assessment and self-evaluation with the full Board.
The Compensation Committee reviews and approves the Chief Executive Officer's evaluation of the top management team on an annual basis.
The Board (largely through the Compensation Committee) evaluates the compensation plans for senior management and other employees to ensure they are appropriate, competitive and properly reflect the
Company's objectives and performance.
13
Table of Contents
The Board has adopted a policy that each member of the Board is expected to hold, at a minimum, 10,000 shares of the Company's common
stock. Any director not meeting the minimum level as of the effective date of their election to the Board has three years to bring his or her holdings up to this minimum level.
Code of Ethics
The Board expects all directors, as well as officers and employees, to display the highest standard of ethics, consistent with the
principles that have guided the Company over the years.
The
Board has adopted an Executive and Principal Financial Officer's Code of Ethics that applies to the Chief Executive Officer, Chief Financial Officer and the senior financial officers
of the Company to help ensure that the financial affairs of the Company are conducted honestly, ethically, accurately, objectively, consistent with generally accepted accounting principles and in
compliance with all applicable governmental law, rules and regulations. We will disclose any amendment to, or a waiver from a provision of our Code of Ethics on our website. The Executive and
Principal Financial Officer's Code of Ethics is available on our website at
www.heritagecommercecorp.com
.
Reporting of Complaints/Concerns Regarding Accounting or Auditing Matters
The Company's Board of Directors has adopted procedures for receiving and responding to complaints or concerns regarding accounting and
auditing matters. These procedures were designed to provide a channel of communication for employees and others who have complaints or concerns regarding accounting or auditing matters involving the
Company.
Employee
concerns may be communicated in a confidential or anonymous manner to the Audit Committee of the Board. The Audit Committee Chairman will make a determination on the level of
inquiry, investigation or disposal of the complaint. All complaints are discussed with the Company's senior management and monitored by the Audit Committee for handling, investigation and final
disposition. The Chairman of the Audit Committee will report the status and disposition of all complaints to the Board of Directors.
14
Table of Contents
INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors
The Board of Directors oversees our business and monitors the performance of management. In accordance with corporate governance
principles, the Board does not involve itself in day-to-day operations. The directors keep themselves informed through, among other things, discussions with the Chief Executive Officer, other key
executives and our principal outside advisors (legal counsel, outside auditors, and other consultants), by reading reports and other materials that we send them and by participating in Board and
committee meetings.
The
Company's Bylaws currently permit the number of Board members to range from 9 to 15, leaving the Board authority to fix the exact number of directors within that range. The Board has
fixed the number of directors at 11 effective on the date of and prior to the Annual Meeting.
Board Leadership Structure
The Board of Directors is committed to maintaining an independent Board, and a majority of the Board has been comprised of independent
directors. It has further for many years been the practice of the Company to separate the roles of Chief Executive Officer and Chairman of the Board in recognition of the differences between the two
roles. The Chief Executive Officer is responsible for setting the strategic direction for the Company and the day-to-day leadership and performance of the Company. The Chairman of the Board provides
guidance to the Chief Executive Officer, sets the agenda for Board meetings, presides over meetings of the full Board (including executive sessions), and facilitates communication among the
independent directors and between the independent directors and the Chief Executive Officer. The Board further believes that the separation of the duties of the Chief Executive Officer and the
Chairman of the Board eliminates any inherent conflict of interest that may arise when the roles are combined, and that an independent director who has not served as an executive of the Company can
best provide the necessary leadership and objectivity required as Chairman of the Board.
Board Authority for Risk Oversight
The Board has active involvement and responsibility for overseeing risk management of the Company arising out of its operations and
business strategy. The Board monitors, reviews and reacts to material enterprise risks identified by management. The Board receives specific oral and written reports from officers with oversight
responsibility for particular risks within the Company. Reports cover executive management on financial, credit, liquidity, interest rate, capital, operational, legal and regulatory compliance and
reputation risks and the Company's degree of exposure to those risks. The Board helps ensure that management is properly focused on risk by, among other things, reviewing and discussing the
performance of senior management and business line leaders.
Board
committees also have responsibility for risk oversight in specific areas. The Audit Committee oversees financial, accounting and internal control risk management policies. The
Company's internal Risk Management Steering Committee reports directly to the Audit Committee. The Audit Committee is responsible for monitoring the Company's overall risk program. The Audit Committee
receives quarterly reports from the Risk Management Steering Committee and the Company's internal audit department. The Audit Committee reports periodically to the Board on the effectiveness of risk
management processes in place, risk trends, and the overall risk assessment of the Company's activities. The Compensation Committee assesses and monitors risks in the Company's compensation program.
The Corporate Governance and Nominating Committee recommends director candidates with appropriate experience and skills who will set the proper tone for the Company's risk profile and provide
competent oversight over our material risks.
15
Table of Contents
The Committees of the Board
The Board may delegate portions of its responsibilities to committees of its members. These standing committees of the Board meet at
regular intervals to attend to their particular areas of responsibility. Our Board has five standing committees: the Audit Committee, Corporate Governance and Nominating Committee, Compensation
Committee, Finance and Investment
Committee, and Strategic Issues Committee. Heritage Bank of Commerce also maintains a Loan Committee.
Audit Committee.
The Company has a separately designated standing Audit Committee established in accordance with Section 3(a)(58)
(A) of the
Securities Exchange Act of 1934, as amended. The Audit Committee charter adopted by the Board sets out the responsibilities, authority and specific duties of the Audit Committee. The Audit Committee
charter is available on the Company's website at
www.heritagecommercecorp.com
.
The
responsibilities of the Audit Committee include the following:
-
-
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, compensation, retention and oversight of our independent auditors, including conducting a review of their
independence, reviewing and approving the planned scope of our annual audit, overseeing the independent auditors' work, and reviewing and pre-approving any audit and non-audit services that may be
performed by them;
-
-
review with management and our independent auditors the effectiveness of our internal controls over financial reporting;
-
-
approve the scope and engagement of external audit services and review significant accounting policies and adjustments recommended by
the independent auditors and address any significant, unresolved disagreements between the independent auditors and management;
-
-
review and discuss the annual audited financial statements with management and the independent auditors prior to publishing the annual
report and filing the Annual Report on Form 10-K with the SEC;
-
-
review and discuss with management and the independent auditors any significant changes, significant deficiencies and material
weaknesses regarding internal controls over financial reporting required by the Sarbanes-Oxley Act of 2002, and oversee the corrective action taken to mitigate any significant deficiencies and
material weaknesses identified;
-
-
review with management and the independent auditors the effect of significant regulatory and accounting initiatives, changes, and
pronouncements as well as significant and unique transactions and financial relationships;
-
-
review with the independent auditors the matters required to be discussed by Auditing Standards No. 16, and receive and discuss
with the independent auditors disclosures regarding the auditors' independence;
-
-
oversee the internal audit function and the audits directed under its auspices;.
-
-
establish policies to ensure all non-audit services provided by the independent auditors are approved prior to work being performed;
and
-
-
oversee and report to the full Board on the effectiveness of the Company's risk management processes and overall risk assessment of
the Company's activities.
Each
member of the Audit Committee meets the independence criteria as defined by applicable rules and regulations of the SEC for audit committee membership and is independent and is
"financially
16
Table of Contents
sophisticated"
as defined by the applicable rules and regulations of The NASDAQ Stock Market. The members of the Audit Committee are Julianne M. Biagini-Komas, Steven L. Hallgrimson, Humphrey P.
Polanen (Committee Chairwill retire on April 29, 2016) and Laura Roden. The Audit Committee met 11 times during 2015.
During
2015, the Board of Directors determined that Mr. Steven L. Hallgrimson has: (i) an understanding of generally accepted accounting principles and financial
statements; (ii) an ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (iii) an 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 our 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,
in 2015 the Board determined that Mr. Hallgrimson meets the definition of "audit committee financial expert" under the applicable rules and regulations of the SEC and
is "financially sophisticated" as defined by the applicable rules and regulations of The NASDAQ Stock Market. 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.
The
Audit Committee Report for 2015 appears on page 56 of this proxy statement.
Compensation Committee.
The Company has a separately designated Compensation Committee, which consists entirely of independent
directors as defined
by the applicable rules and regulations of The NASDAQ Stock Market. The Compensation Committee has adopted a charter, which is available on the Company's website at
www.heritagecommercecorp.com
. The
Compensation Committee has the following responsibilities:
-
-
review and approve our compensation philosophy;
-
-
review industry compensation practices and our relative compensation positioning;
-
-
review the incentive compensation programs by the Company to evaluate and ensure that none of them encourage excessive risk;
-
-
retain compensation consultants to provide independent professional advice;
-
-
approve compensation paid to our Chief Executive Officer and other executive officers;
-
-
review and approve the Compensation Discussion and Analysis appearing in our proxy statement;
-
-
review director compensation programs, plans and awards;
-
-
administer our short-term and long-term executive incentive plans and stock or stock-based plans; and
-
-
review and approve general employee welfare benefit plans and other plans on an as needed basis.
The
members of the Compensation Committee are Julianne M. Biagini-Komas, Frank G. Bisceglia, Robert T. Moles (Committee Chair), Ranson W. Webster, and W. Kirk Wycoff. The Committee met 7
times in 2015.
Corporate Governance and Nominating Committee.
The Company has a separately designated Corporate Governance and Nominating Committee,
which consists
of entirely independent directors as defined by the applicable rules and regulations of The NASDAQ Stock Market. The Corporate
17
Table of Contents
Governance
and Nominating Committee have adopted a charter, which is available on the Company's website at
www.heritagecommercecorp.com
.
The
purposes of the Corporate Governance and Nominating Committee include the following responsibilities:
-
-
identifying individuals qualified to become Board members and making recommendations to the full Board of candidates for election to
the Board;
-
-
recommending to the Board corporate governance guidelines;
-
-
leading the Board in an annual review of its performance; and
-
-
recommending director appointments to Board committees.
The
members of the Corporate Governance and Nominating Committee are J. Philip DiNapoli, Robert T. Moles, Humphrey P. Polanen (will retire on April 29, 2016), Charles J. Toeniskoetter
(will retire at Annual Meeting), and Ranson W. Webster (Committee Chair). The Committee met 6 times in 2015.
Finance and Investment Committee.
The Finance and Investment Committee is responsible for the development of policies and procedures
related to
liquidity, asset-liability management, and supervision of the Company's investments. The Committee also oversees and reviews internal financial reports including annual forecasts and budgets, and
stress test analysis prepared by management. The members of the Finance and Investment Committee are Frank G. Bisceglia, Jack W. Conner (Committee Chair), John M. Eggemeyer, Walter T. Kaczmarek, Laura
Roden, and W. Kirk Wycoff. The Finance and Investment Committee met 9 times during 2015.
Strategic Issues Committee.
The principal duties of the Strategic Issues Committee are to provide oversight and guidance to senior
management
regarding the strategic direction of the Company, including development of an overall strategic business plan. The members of the Strategic Issues Committee are Jack W. Conner, J. Philip DiNapoli,
John M. Eggemeyer, Walter T. Kaczmarek, Laura Roden, Charles J. Toeniskoetter (Committee Chairwill retire at Annual Meeting), and Ranson W. Webster. The Strategic Issues Committee met 4
times during 2015.
Heritage Bank of Commerce Loan Committee.
The Heritage Bank of Commerce Loan Committee is responsible for the approval and supervision
of loans and
the development of the Company's loan policies and procedures. The members of the Loan Committee are Frank G. Bisceglia (Committee
Chair), Steven L. Hallgrimson, Walter T. Kaczmarek, Robert T. Moles, and Charles J. Toeniskoetter (will retire at Annual Meeting). The Loan Committee met 36 times during 2015.
Role of Compensation Consultant
The Compensation Committee of the Board of Directors retained McLagan, an Aon Hewitt Company ("McLagan") as its independent
compensation consultant in the first quarter of 2015.
The
Compensation Committee has the authority to obtain assistance and advice from advisors to assist it with the evaluation of compensation matters without the approval or permission of
management or the Board. The Compensation Committee uses advisors to obtain candid and direct advice independent of management, and takes steps to satisfy this objective. First, in evaluating firms to
potentially provided advisory services to the Compensation Committee, the Compensation Committee considers if the firm provides any other services to the Company. In addition, while members of
management may assist the Compensation Committee in the search for advisors, the Compensation Committee ultimately and in its sole discretion makes the decision to hire or engage a consultant and
provides direction as to the scope of work to be conducted. The Chairman of the Compensation Committee has evaluated the relationship of the compensation consultant with both the Company and the
Compensation Committee, including the
18
Table of Contents
nature
and amount of work performed for the Compensation Committee during the year. The Compensation Committee retained McLagan, to:
-
-
review existing compensation programs for executive officers;
-
-
provide information based on third-party data and analysis of compensation programs at comparable financial institutions for the
design and implementation of our executive compensation programs;
-
-
assist the Compensation Committee in forming a peer group; and
-
-
provide independent information as to the reasonableness and appropriateness of the compensation levels and compensation programs of
the Company as compared to comparable financial services companies.
Executive Officers of the Company
Set forth below is certain information with respect to the executive officers of the Company:
|
|
|
Name
|
|
Position
|
Michael E. Benito
|
|
Executive Vice President/Banking Division
|
Walter T. Kaczmarek
|
|
President and Chief Executive Officer
|
Lawrence D. McGovern
|
|
Executive Vice President and Chief Financial Officer
|
David E. Porter
|
|
Executive Vice President and Chief Credit Officer
|
Keith A. Wilton
|
|
Executive Vice President and Chief Operating Officer
|
Michael
E. Benito, age 55, was promoted to Executive Vice President/Banking Division of Heritage Bank of Commerce in January 2012. Mr. Benito joined Heritage Bank of Commerce in
2003 as Senior Vice President/Director of Sales & Business Development. From 1998 through 2003, Mr. Benito served as a Managing Director for Greater Bay Bank and from December 1986
through 1998, he served as Regional Vice President with Imperial Bancorp. Mr. Benito began his banking career more than 29 years ago at Union Bank.
Biographical
information for Walter T. Kaczmarek is found under "Proposal 1Election of Directors."
Lawrence
D. McGovern, age 61, has served as Executive Vice President and Chief Financial Officer of the Company and Heritage Bank of Commerce since July, 1998.
David
E. Porter, age 66, joined Heritage Bank of Commerce as Executive Vice President and Chief Credit Officer in June 2012. Prior to joining the Bank, Mr. Porter was with Pacific
Capital Bancorp from August 2003 through May 2012, where his last position was Executive Vice President/Regional Credit Manager (following the company's recapitalization in August 2010), after serving
four years as Chief Credit Officer. Prior to joining Pacific Capital Bancorp, Mr. Porter had over 30 years of prior banking experience holding positions of increasing responsibility
primarily with community banks.
Keith
A. Wilton, age 58, joined the Company and Heritage Bank of Commerce as Executive Vice President and Chief Operating Officer in February 2014. Prior to joining the Company and the
Bank, Mr. Wilton was an Executive Vice President with Pacific Capital Bancorp from 2010. Mr. Wilton was a consultant from 2008 to 2010 for several private equity firms assisting with
investment and acquisition opportunities in the financial industry. He was with Greater Bay Bancorp holding positions of Executive Vice President and President of the Specialty Finance Group from 2002
to 2007. Mr. Wilton has over 30 years' experience with bank and finance companies.
19
Table of Contents
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and
persons who own more than ten percent of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock
and other equity securities. They are required by SEC rules and regulations to furnish the Company with copies of all Section 16(a) forms they file.
To
the Company's knowledge, except as disclosed below, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports
were required, all Section 16(a) filing requirements applicable to our executive officers and directors were complied with during the year ended December 31, 2015. Keith A. Wilton
inadvertently failed to file a Form 4 for his automatic reinvestment of Company's dividends. He filed a Form 5 in February, 2016 to report the transactions.
Transactions with Management
Some of the Company's directors and executive officers, as well as other related persons (as defined under "Policies and Procedures for
Approving Related Party Transactions" below), are customers of, and have banking transactions with, the Company's subsidiary, Heritage Bank of Commerce, in the ordinary course of business, and
Heritage Bank of Commerce expects to have such ordinary banking transactions with these persons in the future. In the opinion of the management of the Company and Heritage Bank of Commerce, all loans
and commitments to lend included in such transactions were made in the ordinary course of business, on substantially 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, officers and related persons must comply with Heritage Bank of Commerce's lending policies and statutory lending limits. In addition, prior approval of Heritage Bank of Commerce's Board of
Directors is required for all loans advanced to directors and executive officers. These loans are exempt from the loan prohibitions of the Sarbanes-Oxley Act.
In
2013, Heritage Bank of Commerce entered into an arms-length 5-year lease for office space in Sunnyvale, California with Sunnyvale Village Associates, a California general partnership.
One of the general partners is the father of director Julianne M. Biagini-Komas who joined the Board of Directors in August 2015. Heritage Bank of Commerce paid $146,936 in rent to the partnership in
2015.
Policies and Procedures for Approving Related Party Transactions
The Board of Directors has adopted a written Statement of Policy with Respect to Related Party Transactions. Under this policy, any
"related party transaction" may be consummated or may continue only if the Audit Committee approves or ratifies the transaction in accordance with the guidelines in the policy and if the transaction
is on terms comparable to those that could be obtained in arm's length dealings with an unrelated third party. For purposes of this policy, a "related person" means: (i) any person who is, or
at any time since the beginning of the Company's last fiscal year was, a director or executive officer of the Company or a nominee to become a director of the Company; (ii) any person who is
known to be the beneficial owner of more than 5% of any class of the Company's voting securities; (iii) any immediate family member of any of the foregoing persons, which means any child,
stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5%
beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner; and (iv) any firm,
corporation or other entity in which any of the foregoing persons is employed or is a partner, principal or in a similar position, or in which such person has a 10% or greater beneficial ownership
interest.
20
Table of Contents
A "related party transaction" is a transaction between the Company and any related person (including any transaction requiring disclosure under Item 404 of
Regulation S-K under the Securities Exchange Act of 1934).
The
Board of Directors has determined that the Audit Committee is best suited to review and approve related party transactions. The Committee considers all of the relevant facts and
circumstances available to the Committee, including (if applicable) but not limited to: (i) the benefits to the Company; (ii) the impact on a director's independence in the event the
related person is a director, an immediate family member of a director or an entity in which a director is a partner, shareholder or executive officer; (iii) the availability of other sources
for comparable products or services; (iv) the terms of the transaction; (v) and the terms available to unrelated third parties or to employees generally. No member of the Audit Committee
may participate in any review, consideration or approval of any related person transaction with respect to which such member or any of his or her immediate family members is the
related person. The Committee will approve only those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its shareholders, as the Committee
determines in good faith. The Audit Committee conveys its decision to the Chief Executive Officer, who conveys the decision to the appropriate persons within the Company.
During
2015, the Company did not enter into any related party transactions that require review, approval or ratification under our related party transaction policy.
Compensation Discussion and Analysis
This Compensation Discussion and Analysis identifies the Company's current compensation philosophy and objectives and describes the
various methodologies, policies and practices for establishing and administering the compensation programs for our executives including the named executive officers. The strategies and policies of the
Compensation Committee have been developed so that there is a direct correlation between executive compensation and the Company's overall performance and individual performance. The individuals who
served as the Company's Chief Executive Officer and Chief Financial Officer during 2015, as well as, the other individuals included in the Summary Compensation Table, are referred to as the "named
executive officers."
Overview of Compensation Philosophy
The Compensation Committee believes executive compensation packages provided by the Company to its executives, including the named
executive officers, should include base salary, variable performance based cash awards and equity based compensation in order to achieve three primary goals.
The
Compensation Committee believes that the first goal of our compensation program is that a reasonable percentage of executive compensation program should be linked to the financial
performance of the Company. The Compensation Committee believes that a properly structured compensation program will focus on performance to motivate and support individuals to achieve specific
short-term and long-term objectives while taking into consideration potential risk implications. We achieve this goal by providing our named executive officers the opportunity to significantly
increase their annual cash compensation through our variable performance based cash award incentive program by improving the Company's performance in key financial metrics on an annual basis. We also
expect
that as those improvements are maintained and built upon, the Company's stock price will reflect these improvements.
The
second goal of our compensation program is to align the interests of our executive officers with the interests of our shareholders. We use equity awards (stock options and/or
restricted stock) to reward the long-term efforts of management and to retain management. These equity awards serve to increase the ownership stake of our management in the Company, further aligning
the interests of the executives with those of our shareholders.
21
Table of Contents
The
third goal of our compensation program is to attract and retain highly competent executives. Our executives, and particularly our named executive officers, are talented managers and
they are often presented with opportunities at other institutions, including opportunities at potentially higher compensation levels. We seek to attract and retain our executives by setting base
compensation and incentives at competitive levels and awarding equity based awards. We also consider other forms of executive pay, including our supplemental executive retirement plan and severance
arrangements (including change of control provisions) as a means to attract and retain our executive officers including the named executive officers.
Compensation Program Objectives and Rewards
The components of Company's compensation and benefits programs are driven by our business environment and are designed to enable us to
achieve the goals of our compensation program within a framework that adheres to the Company's mission and values. The programs' objectives are to:
-
-
Reflect our position as a leading community bank in our service areas;
-
-
Attract, engage and retain the workforce that helps ensure our future success;
-
-
Motivate and inspire employee behavior that fosters a high performance culture;
-
-
Support a one company culture;
-
-
Support overall business objectives;
-
-
Provide shareholders with a superior rate of return over the long term; and
-
-
Create shareholder value through the continuous provision of quality service to our customers.
Consequently,
the guiding principles of our programs are to:
-
-
Promote and maintain a high performance banking organization;
-
-
Remain competitive in our marketplace for talent;
-
-
Balance our compensation costs with our desire to provide value to employees and shareholders; and
-
-
Avoid encouraging excessive risk taking.
To
this end, we will measure success of our programs by:
-
-
Overall business performance and employee engagement;
-
-
Ability to attract and retain key talent;
-
-
Costs and business risks that are limited to levels that optimize risk and return; and
-
-
Employee understanding and perceptions that ensure program value equals or exceeds program cost.
All
of our compensation and benefits for our named executive officers described below have as a primary purpose our need to attract, retain and motivate the highly talented individuals
whose performance will enable us to succeed in creating shareholder value in a highly competitive marketplace. Beyond that, different elements have specific purposes designed to reward different
performance and retention goals.
-
-
Base salary and benefits
are designed to:
-
-
Reward core competence in the executive role relative to position, performance, experience and responsibility;
22
Table of Contents
-
-
Provide fixed cash compensation with merit increases competitive with the market place; and
-
-
Control fixed expenses.
-
-
Annual incentive variable cash awards
are designed to:
-
-
Focus employees on annual financial objectives derived from the business plan that lead to long-term success;
-
-
Provide annual variable performance based cash awards to reward and motivate achievement of critical annual performance
metrics selected by the Compensation Committee; and
-
-
Foster a pay for performance culture that aligns our compensation programs with our overall business and strategic
strategy.
-
-
Equity based compensation awards
are designed to:
-
-
Link compensation rewards to the creation of shareholder wealth;
-
-
Promote teamwork by tying compensation significantly to the value of our common stock;
-
-
Attract the next generation of management by providing significant capital accumulation opportunities; and
-
-
Retain executives by providing a long-term-oriented program whose value could only be achieved by remaining with and
performing for the Company.
-
-
Change of control and separation benefits
:
-
-
Individual employment contracts with certain executives provide for change of control and separation benefits;
-
-
Separation benefits provide benefits to ease an employee's transition due to an unexpected employment termination by the
Company due to ongoing changes in the Company's employment needs; and
-
-
Change in control benefits encourage key executives to remain focused on the Company's business in the event of rumored
or actual fundamental corporate changes which will enhance shareholder value.
-
-
Manage excessive risk-taking
through plan design and oversight of incentive
plans:
-
-
Incentive awards are capped;
-
-
Performance objectives are aligned with annual financial plan approval by the Board of Directors;
-
-
Multiple financial metrics are used taking into account performance and risk;
-
-
A "claw-back policy" is applied to performance based cash payments;
-
-
Payouts are modified through the use of risk-based capital ratio metrics;
-
-
Long-term incentive equity awards are deferred through vesting requirements; and
-
-
The Compensation Committee has discretion to reduce cash bonus payments.
The
use of these compensation programs and benefits enables us to reinforce our pay-for-performance philosophy, align our executives' interests with shareholders, and strengthen our
ability to attract, retain and motivate highly qualified executives. We believe that this combination of programs provides an appropriate mix of fixed and variable pay, balances short-term operational
performance with long-term shareholder value, and encourages executive recruitment and retention.
23
Table of Contents
Consideration of Say-On-Pay Vote Results
At our 2015 Annual Shareholders Meeting, pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(the "Dodd-Frank Act") we held a non-binding shareholder advisory vote on executive compensation ("say-on-pay"). At the 2015 Annual Meeting our shareholders approved our 2015 executive compensation
(as they had in each prior year where we had a say-on-pay vote), with approximately 98% of voting shareholders casting their vote in favor of the say-on-pay resolution. The Compensation Committee has
been mindful of the strong support our shareholders expressed for our compensation program when making executive compensation decisions, including base salary adjustments and long-term incentive
awards. In making these executive compensation decisions, which are discussed more fully below, the Compensation Committee's main considerations included our shareholders' support for our executive
compensation program, and the peer and market information provided by the Compensation Committee's compensation consultant. The Compensation Committee will continue to consider our shareholders' views
when making executive compensation decisions in the future. At our 2012 Annual Shareholders Meeting, the shareholders approved a non-binding shareholder advisory proposal to hold say-on-pay proposals
every three years. The Company's Board of Directors agreed that holding say-on-pay proposals every three years was in the best interest of shareholders. Three years provides shareholders with
sufficient time to evaluate the effectiveness of our overall compensation philosophy, policies and practices in the context of our long-term business results for the corresponding period, while
avoiding over emphasis on short term variations in compensation and business results.
Role of Compensation Committee in Determining Compensation
The Compensation Committee of the Board of Directors has strategic and oversight responsibility for the overall compensation and
benefits programs for executives of the Company. These responsibilities include establishing, implementing, and continually monitoring the compensation structure, policies, and programs of the
Company. The Compensation Committee also periodically reviews, assesses and monitors the performance, and regularly reviews the design and function, of the Company's incentive compensation
arrangements to ensure that any risk-taking incentives are consistent with regulatory guidance and the safety and soundness of the organization. The Compensation Committee is responsible for assessing
and approving the total compensation paid to the Chief Executive Officer and all executive officers. The Compensation Committee is responsible for determining whether the compensation paid to each of
these executives is fair, reasonable and competitive, and whether the compensation program serves the interests of the Company's shareholders.
The
Compensation Committee generally targets compensation in relation to the Company's Compensation Peer Group (discussed under "
Market Positioning and Pay
Benchmarking
"). Base salary is targeted at the 60th percentile, total cash (salary and incentive cash awards) is targeted at the 70th percentile, and total direct
compensation (total cash plus the three-year average value of equity awards) is targeted at the 75th percentile. We target above the median because of the competition in our market for talented
executives and our desire to attract and, more importantly, retain and motivate talented individuals we believe are necessary to achieve the goals and objectives of our Board of Directors.
The
Compensation Committee is comprised of four independent directors who satisfy The NASDAQ Stock Market listing requirements and relevant Internal Revenue Service and SEC regulations
on independence. The Compensation Committee's Chair regularly reports to the Board of Directors on the Compensation Committee actions and recommendations. To evaluate and administer the compensation
practices of the Chief Executive Officer and other executive officers, the Compensation Committee meets a minimum of four times a year. The Compensation Committee also holds special meetings and meets
telephonically to discuss extraordinary items, such as the hiring or dismissal of executive officers.
24
Table of Contents
Role of the Chief Executive Officer
The Chief Executive Officer is not a member of the Compensation Committee, but is invited to attend meetings as necessary to provide
input and recommendations on compensation for the other named executive officers. The Chief Executive Officer provides the Compensation Committee with his assessment of the performance of each named
executive officer and his perspective on the factors described above in developing his recommendations for the executive's compensation, including salary adjustments, incentive bonuses, annual equity
grants and equity grants awarded in conjunction with promotions. Because the Chief Executive Officer works closely with and supervises our executive team, the Compensation Committee believes that the
Chief Executive Officer provides valuable insight in evaluating their performance. The Chief Executive Officer also provides the Compensation Committee with additional information regarding the
effect, if any, of market competition and changes in business strategy or priorities. The Compensation Committee discusses the Chief Executive Officer's recommendations and then approves or modifies
the recommendations in collaboration with the Chief Executive Officer.
Role of Compensation Consultants
Generally, at least every two years the Compensation Committee retains the services of an independent executive compensation consultant
to assess the competitiveness of our compensation programs, conduct other research as directed by the Compensation Committee, and support the Compensation Committee in the design and implementation of
executive and Board of Director compensation. In the first quarter of 2015, the Compensation Committee retained McLagan, an Aon Hemitt Company ("McLagan") to: (i) review existing compensation
programs; (ii) provide market benchmark information pertaining to both cash and noncash compensation for executives; (iii) provide recommendations and guidance to the Compensation
Committee to support its oversight over such compensation programs; and (iv) provide other advice and consultation, including guidance relative to evolving compensation-related regulatory
requirements and industry best practices. McLagan reported directly to the Compensation Committee and did not provide services to, or on behalf of, any other part of the Company's business. There are
no known conflicts of interests between McLagan and the Company.
Market Positioning and Pay Benchmarking
The Compensation Committee generally aims to position compensation relative to market for the Chief Executive Officer and the other
named executive officers at the 60th percentile for base salary, 70th percentile for total cash compensation and 75th percentile for total direct compensation. Many factors are
taken into account in determining the actual positioning of each executive officer's compensation, including the executive's experience, responsibilities, management abilities and job performance,
overall performance of the Company, current market conditions and competitive pay for similar positions at comparable companies. In addition, the Compensation Committee reviews the relationship of
various positions between departments, the affordability of desired pay levels and the importance of each position within the Company. These factors are considered by the Compensation Committee in a
subjective manner without any specific formula or weighting.
In
the first quarter of 2015, McLagan provided its report ("2015 Report") and the Compensation Committee undertook a review of the Company's compensation programs for executive officers.
McLagan, in consultation with the Compensation Committee, selected a custom peer group of financial institutions to establish a "Compensation Peer Group" for the 2015 Report. The companies included in
the Compensation Peer Group were selected from publicly traded banks in California, Oregon and Washington based on: (i) compatibility of the bank based on size as measured through total assets
between $900 million and $3.5 billion dollars (median of $1.3 billion); (ii) similarity of their product lines and business focus; and (iii) comparable performance
criteria relating to return on annual assets and nonperforming assets. In addition to the Compensation Peer Group, McLagan's primary data sources also included its proprietary regional and community
banking database and published industry survey data for
25
Table of Contents
national
and California banks. McLagan adjusted national survey data for regional salary differentials, and also to reflect higher costs of salaries in the Company's principal market.
The
Comparative Peer Group and the comparative survey data were used to benchmark executive compensation levels against banks that have executive positions with responsibilities similar
in breadth and scope to ours and that compete with us for executive talent. With such information and recognition that the public company data reflected compensation levels for 2014 and estimated
levels for 2015, the Compensation Committee reviewed and analyzed compensation for the Chief Executive Officer and the other named executive officers.
The
Compensation Peer Group component companies used in the evaluation of the Company's executive compensation programs in the 2015 Report for executive officers were as follows:
|
|
|
Bank of Marin Bancorp
Bridge Capital Holdings*
Farmers & Merchants Bancorp
Heritage Oaks Bancorp
CU Bancorp
Preferred Bank
Pacific Premier Bancorp
Provident Financial Holdings
Sierra Bancorp
TriCo Bancshares
|
|
Bank of Commerce Holdings
HomeStreet Inc.
Pacific Continental Corp.
Heritage Financial Corp.
Central Valley Community Bancorp
First Foundation Inc.
FNB Bancorp
First Northern Community Bancorp
|
-
*
-
Since
acquired by another financial institution.