10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[X]	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2001

Or

[   ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transitional period from _________________ to _________________

Commission File No. 000-23877

HERITAGE COMMERCE CORP

(Exact name of registrant as specified in its charter)

California (State or other jurisdiction of incorporation or organization)	77-0469558 (I.R.S. Employer Identification No.)
150 Almaden Blvd., San Jose, California (Address of principal executive offices)	95113 (Zip Code)

(408) 947-6900

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report.)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    [X] Yes     [   ] No

APPLICABLE ONLY TO CORPORATE ISSUERS:

The Registrant had 11,104,574 shares of Common Stock outstanding on August 9, 2001.

1

TABLE OF CONTENTS

		Condensed Consolidated Statements of Financial Condition
		Condensed Consolidated Income Statements (Unaudited)
		Condensed Consolidated Statements of Cash Flows (Unaudited)
		Notes to Condensed Consolidated Financial Statements
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Part II — Other Information
	Item 1. — Legal Proceedings
	Item 4. — Submissions of Matters to a Vote of Security Holders
	Item 6. — Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 3.1
EXHIBIT 3.2

HERITAGE COMMERCE CORP AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q

Table of Contents

			Page
Part I	—	Financial Information
Item 1.		Financial Statements (Unaudited):
		Condensed Consolidated Statements of Financial Condition		3
		Condensed Consolidated Income Statements		4
		Condensed Consolidated Statements of Cash Flows		5
		Condensed Consolidated Notes to Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		7
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		18
Part II	—	Other Information
Item 1.		Legal Proceedings		18
Item 4.		Submissions of Matters to a Vote of Security Holders		18
Item 6.		Exhibits and Reports on Form 8-K		20
Signatures				20

2

HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition (Unaudited)

ASSETS

					June 30, 2001			December 31, 2000
Cash and due from banks					$	34,624,000		$	38,671,000
Interest bearing deposits in banks						5,414,000			2,098,000
Federal funds sold						67,900,000			19,300,000
				Total cash and cash equivalents		107,938,000			60,069,000
Securities available-for-sale, at fair value						62,072,000			90,894,000
Securities held-to-maturity, at amortized cost (fair value of $19,385,000 at June 30, 2001 and $20,075,000 at December 31, 2000						18,999,000			19,908,000
Loan held for sale, at fair value						40,680,000			35,931,000
Loans, net of deferred costs						605,132,000			610,781,000
Allowance for probable loan losses						(10,347,000	)		(9,651,000	)
				Loans, net		594,785,000			601,130,000
Premises and equipment, net						6,045,000			6,415,000
Accrued interest receivable and other assets						15,416,000			12,920,000
Other investments						21,696,000			18,957,000
				TOTAL	$	867,631,000		$	846,224,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
	Deposits
			Demand, noninterest bearing		$	234,125,000		$	207,885,000
			Demand, interest bearing			66,063,000			68,587,000
			Savings and money market			201,341,000			219,299,000
			Time deposits, under $100,000			82,950,000			70,552,000
			Time deposits, $100,000 and over			158,966,000			162,625,000
			Brokered deposits			26,723,000			9,238,000
	Total deposits					770,168,000			738,186,000
	Federal Home Loan Bank borrowing					—			18,000,000
	Mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust					14,000,000			14,000,000
	Accrued interest payable and other liabilities					12,496,000			10,305,000
				Total liabilities		796,664,000			780,491,000
Commitments and contingencies
Shareholders’ equity:
		Preferred Stock, no par value; 10,000,000 shares authorized; none outstanding				—			—
		Common Stock, no par value; 30,000,000 shares authorized; Shares issued and outstanding: 11,104,574 at June 30, 2001 and 10,939,124 at December 31, 2000				63,491,000			62,469,000
		Accumulated other comprehensive income, net of taxes				656,000			515,000
		Retained Earnings				6,820,000			2,749,000
				Total shareholders’ equity		70,967,000			65,733,000
				TOTAL	$	867,631,000		$	846,224,000

See notes to condensed consolidated financial statements

3

HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Income Statements (Unaudited)

			Three months ended June 30,				Six months ended June 30,
			2001		2000		2001		2000
Interest income:
	Loans, including fees		$	14,818,000	$	13,645,000	$	30,636,000	$	25,027,000
	Securities, taxable			1,130,000		1,457,000		2,546,000		2,652,000
	Securities, non-taxable			146,000		157,000		298,000		303,000
	Interest bearing deposit in banks			47,000		8,000		83,000		11,000
	Federal funds sold			710,000		1,034,000		1,450,000		2,285,000
Total interest income				16,851,000		16,301,000		35,013,000		30,278,000
Interest expense:
	Deposits			5,855,000		5,725,000		12,448,000		10,524,000
	Mandatorily redeemable trust preferred securities			376,000		190,000		752,000		209,000
	Other			—		6,000		113,000		47,000
Total interest expense				6,231,000		5,921,000		13,313,000		10,780,000
Net interest income before provision for loan losses				10,620,000		10,380,000		21,700,000		19,498,000
Provision for loan losses				528,000		534,000		1,055,000		1,214,000
Net interest income after provision for loan losses				10,092,000		9,846,000		20,645,000		18,284,000
Noninterest income:
	Gain on sale of securities available-for-sale			409,000		44,000		551,000		44,000
	Gain on sale of loans			278,000		—		551,000		—
	Other investments			242,000		148,000		510,000		362,000
	Service charges and other fees on deposits accounts			228,000		170,000		436,000		341,000
	Servicing income			118,000		70,000		232,000		70,000
	Other income			372,000		182,000		588,000		533,000
Total noninterest income				1,647,000		614,000		2,868,000		1,350,000
Noninterest expenses:
	Salaries and employee benefits			4,629,000		4,530,000		9,710,000		8,545,000
	Occupancy			681,000		514,000		1,361,000		1,057,000
	Client services			647,000		269,000		939,000		638,000
	Furniture and equipment			425,000		375,000		866,000		706,000
	Loan origination costs			360,000		155,000		659,000		361,000
	Professional fees			265,000		583,000		595,000		889,000
	Advertising and promotion			359,000		222,000		582,000		401,000
	Stationery & supplies			125,000		82,000		258,000		161,000
	Telephone			93,000		84,000		182,000		170,000
	Merger and integration costs			—		95,000		—		95,000
	Other			1,085,000		1,316,000		1,784,000		1,992,000
Total noninterest expenses				8,669,000		8,225,000		16,936,000		15,015,000
Net income before income taxes				3,070,000		2,235,000		6,577,000		4,619,000
Provision for income taxes				1,180,000		746,000		2,506,000		1,613,000
Net income			$	1,890,000	$	1,489,000	$	4,071,000	$	3,006,000
Earnings per share:
		Basic	$	0.17	$	0.14	$	0.37	$	0.29
		Diluted	$	0.17	$	0.13	$	0.36	$	0.27

See notes to condensed consolidated financial statements

4

HERITAGE COMMERCE CORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)

			Six months ended June 30,
			2001			2000
Cash flows from operating activities:
Net income			$	4,071,000		$	3,006,000
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization				803,000			721,000
Provision for probable loan losses				1,055,000			1,214,000
Gain on sale of securities available-for-sale				(551,000	)		(44,000	)
Net amortization of premiums / accretion of discounts				(59,000	)		4,000
Proceeds from sales of loans held for sale				14,611,000			—
Originations of loans held for sale				(19,516,000	)		(5,505,000	)
Maturities of loans held for sale				157,000			128,000
Effect of changes in:
		Accrued interest receivable and other assets		(2,612,000	)		(4,170,000	)
		Accrued interest payable and other liabilities		2,039,000			(4,184,000	)
Net cash used in operating activities				(2,000	)		(8,830,000	)
Cash flows from investing activities:
Net change in loans				5,290,000			(120,357,000	)
Purchases of securities available-for-sale				(38,211,000	)		(39,377,000	)
Maturities\paydowns\calls				12,782,000			1,370,000
Proceeds from sales of securities available-for-sale				55,297,000			10,367,000
Proceeds from maturities or calls of securities held-to-maturity				883,000			1,577,000
Purchases of corporate owned life insurance				(3,074,000	)		(1,655,000	)
Purchases (redemption) of other investments				334,000			(323,000	)
Purchases of property and equipment				(433,000	)		(649,000	)
Net cash provided by (used in) investing activities				32,868,000			(149,047,000	)
Cash flows from financing activities:
Net increase in deposits				31,982,000			135,696,000
Proceeds from issuance of mandatorily redeemable cumulative trust preferred securities of Subsidiary Grantor Trust				—			7,000,000
Proceeds from exercise of stock option				606,000			632,000
Net increase in additional paid-in capital option				415,000			146,000
Net change in FHLB borrowings				(18,000,000	)		(5,000,000	)
Net cash provided by financing activities				15,003,000			138,474,000
Net increase (decrease) in cash and cash equivalents				47,869,000			(19,403,000	)
Cash and cash equivalents, beginning of period				60,069,000			155,224,000
Cash and cash equivalents, end of period			$	107,938,000		$	135,821,000
Supplemental disclosures of cash paid during the period for:
	Interest			13,487,000			9,710,000
	Income taxes			2,890,000			3,277,000

See notes to condensed consolidated financial statements

5

HERITAGE COMMERCE CORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2001
(Unaudited)

1)	Basis of Presentation
	The unaudited condensed consolidated financial statements of Heritage Commerce Corp and its wholly owned subsidiaries: Heritage Bank of Commerce (HBC), Heritage Bank East Bay (HBEB), Heritage Bank South Valley (HBSV), and Bank of Los Altos (BLA), and Heritage Capital Trust I and Heritage Statutory Trust I, which are Delaware Statutory business trusts formed for the exclusive purpose of issuing and selling trust preferred securities, have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and notes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements are not included herein. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K Annual Report for the year ended December 31, 2000, as amended by Form 10-K/A filed on April 6, 2001. The unaudited condensed financial information presented herein has been restated on a historical basis to reflect the merger with Western Holdings Bancorp, which closed in October 2000, as a pooling of interests as if the Companies had been combined for all periods presented.
	HBC, HBEB, HBSV, and BLA are commercial banks, which offer similar products to customers located in Santa Clara, Alameda, and Contra Costa counties of California. No customer accounts for more than 10 percent of revenue for HBC, HBEB, HBSV, BLA or the Company. Management evaluates the Company’s performance as a whole and does not allocate resources based on the performance of different lending or transaction activities. Accordingly, the Company and its subsidiary banks all operate as one business segment.
	In the Company’s opinion, all adjustments necessary for a fair presentation of these condensed consolidated financial statements have been included and are of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to current year presentation.
	The results for the three and six months ended June 30, 2001 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 2001.
2)	Earnings Per Share
	Basic earnings per share is computed by dividing net income by the weighted average common shares outstanding. Diluted earnings per share reflects potential dilution from outstanding stock options, using the treasury stock method. For each of the periods presented, net income is the same for basic and diluted earnings per share. Reconciliation of weighted average shares used in computing basic and diluted earnings per share is as follows:

	Three months ended				Six months ended
	June 30,				June 30,
	2001		2000		2001		2000
Weighted average common shares outstanding — used in computing basic earnings per share		11,096,230		10,472,289		11,053,894		10,429,176
Diluted effect of stock options outstanding, using the treasury stock method		303,808		804,345		316,414		798,600
Shares used in computing diluted earnings per share		11,400,038		11,276,634		11,370,308		11,227,776

6

3)	Comprehensive Income
	Comprehensive Income includes net income and other comprehensive income, which represents the change in its net assets during the period from non-owner sources.
	The Company’s only source of other comprehensive income is derived from unrealized gains and losses on investment securities available-for-sale. Reclassification adjustments resulting from gains or losses on investment securities that were realized and included in net income of the current period that also had been included in other comprehensive income as unrealized holding gains or losses in the period in which they arose are excluded from comprehensive income of the current period. The Company’s total comprehensive income was as follows:

			Three months ended						Six months ended
			June 30,			June 30,			June 30,			June 30,
			2001			2000			2001			2000
Net Income			$	1,890,000		$	1,489,000		$	4,071,000		$	3,006,000
Other comprehensive income, net of tax:
	Net unrealized gain (loss) on securities available-for-sale during the period			(221,000	)		153,000			480,000			(22,000	)
		Less: reclassification adjustment for realized gains on available-for-sale securities included in net income during the period		(252,000	)		(30,000	)		(339,000	)		(30,000	)
Other comprehensive income (loss)				(473,000	)		123,000			141,000			(52,000	)
Comprehensive income			$	1,417,000		$	1,612,000		$	4,212,000		$	2,954,000

4)	New Accounting Pronouncements
	In June 2001, the Financial Accounting Standards Board approved for issuance Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and address the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives will be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will be required to be tested at least annually for impairment. The Company will adopt SFAS No. 142 for its fiscal year beginning January 1, 2002. The Company has not completed its evaluation of the impact that the adoption of SFAS No. 142 will have on its financial position, results of operations and cash flows, however the Company did not have any goodwill or intangible assets at June 30, 2001 or December 31, 2000.
5)	Reclassifications
	Certain amounts in the December 31, 2000 and June 30, 2000 financial statements have been reclassified to conform to the June 30, 2001 financial statement presentation.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Discussions of certain matters in this Report on Form 10-Q may constitute forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may involve risks and uncertainties. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations, are generally identifiable by the use of words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, potential future performance, potential future credit experience, perceived opportunities in the market, and statements regarding the Company’s mission and vision. The Company’s actual results, performance, and achievements may differ materially from the results, performance, and achievements expressed or implied in such forward-looking statements due to a wide range of factors. The factors include, but are not limited to changes in interest rates, general economic conditions, legislative and regulatory changes, monetary and fiscal policies of the US Government, real estate valuations, competition in the financial services industry, and other risks. The Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements.

7

Heritage operates as the bank holding company for the four subsidiary banks: Heritage Bank of Commerce, Heritage Bank East Bay, Heritage Bank South Valley and Bank of Los Altos (collectively the “Banks”). All are California state chartered banks which offer a full range of commercial and personal banking services to residents and the business/professional community in Santa Clara, Contra Costa and Alameda Counties, California. The accounting and reporting policies of Heritage Commerce Corp and its subsidiaries conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. The financial information presented herein has been restated on a historical basis to reflect the merger with Western Holdings Bancorp, which closed in October 2000, as a pooling of interests as if the Companies had been combined for all periods presented.

OVERVIEW

Net income for the three and six months ended June 30, 2001 was $1,890,000 and $4,071,000, up 27% and 35%, from $1,489,000 and $3,006,000 for the same periods in the prior year. Earnings per diluted share for the three and six months ended June 30, 2001 was $0.17 and $0.36, up 31% and 33%, from $0.13 and $0.27 per diluted share for same periods in the prior year. Annualized return on average assets and return on average equity for the six months ended June 30, 2001 were 0.95% and 11.90% compared with returns of 0.84% and 10.38% for the same period in the prior year. Annualized return on average assets and return on average equity for the quarter ended June 30, 2001 were 0.88% and 10.71%, compared with returns of 0.79% and 10.12%, for the same period in the prior year.

For the six months ended June 30, 2001, as compared with the same period in the prior year, net interest income increased from $19,498,000 to $21,700,000, an increase of $2,202,000, or 11%. For the three months ended June 30, 2001, as compared with the same period in the prior year, net interest income increased from $10,380,000 to 10,620,000, an increase of $240,000, or 2%. The increase is attributable to the growth in earning assets, primarily loans, offset by a decline in interest rates earned reflecting the Federal Reserve Board of Governors’ reduction in short term interest rates of 275 basis points during the first six months of 2001 and the timing of the Company's ability to reprice its interest bearing deposits. The Company’s net interest margin was 5.52% for the six months ended June 30, 2001, compared with 5.91% for the six months ended June 30, 2000, reflective of the overall decline in the interest rate environment and the fact that the Company’s assets reprice more quickly than its liabilities.

Total assets as of June 30, 2001 were $867,631,000, an increase of $53,336,000, or 7%, from $814,295,000 at June 30, 2000, and an increase of $21,407,000, or 3%, from total assets of $846,224,000 at December 31, 2000. Total deposits as of June 30, 2001 were $770,168,000, an increase of $33,052,000, or 4%, from $737,116,000 at June 30, 2000, and an increase of $31,982,000, or 4%, from total deposits of $738,186,000 at December 31, 2000.

Total portfolio loans as of June 30, 2001 were $605,132,000, an increase of $83,594,000, or 16%, from $521,538,000 June 30, 2000. Total portfolio loans as of December 31, 2000 were $610,781,000. The Company’s allowance for loan losses was $10,347,000, or 1.71%, of total loans as of June 30, 2001. This compares with an allowance for loan losses of $7,738,000, or 1.48%, and $9,651,000, or 1.58% of total loans at June 30, 2000 and December 31, 2000. The Company’s non-performing assets were $66,000 as of June 30, 2001 compared to $1,092,000 as of June 30, 2000 and none as of December 31, 2000.

The Company’s shareholders’ equity at June 30, 2001 was $70,967,000, up from $60,276,000 as of June 30, 2000 and $65,733,000 as of December 31, 2000. Book value per share was $6.39 as of June 30, 2001, up from $5.71 as of June 30, 2000 and $6.01 as of December 31, 2000. The Company’s leverage capital ratio was 9.78% at June 30, 2001 compared to 9.06% at June 30, 2000 and 9.30% at December 31, 2000.

8

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

The following table presents the Company’s average balance sheet, net interest income and the resultant yields and rates paid for the period presented:

		For the Three Months Ended June 30, 2001							For the Three Months Ended June 30, 2000
				Interest		Average					Interest		Average
		Average		Income/		Yield/			Average		Income/		Yield/
(Dollars in thousands)		Balance		Expense		Rate			Balance		Expense		Rate
Assets:
Loans, gross		$	633,886	$	14,818		9.48	%	$	520,469	$	13,645		10.54	%
Investment securities			88,052		1,276		5.88	%		104,702		1,614		6.20	%
Interest bearing deposits in banks			4,777		47		3.99	%		919		8		3.50	%
Federal funds sold			66,725		710		4.32	%		67,946		1,034		6.12	%
	Total interest earning assets		793,440	$	16,851		8.61	%		694,036	$	16,301		9.45	%
Cash and due from banks			34,813							30,590
Premises and equipment, net			6,144							6,591
Other assets			22,813							21,900
	Total assets	$	857,210						$	753,117
Liabilities and shareholders’ equity:
Deposits:
Noninterest bearing demand deposits		$	65,939	$	288		1.77	%	$	54,586	$	246		1.81	%
Savings and money market			220,553		1,799		3.31	%		217,745		2,203		4.07	%
Time deposits, under $100,000			78,048		1,119		5.81	%		73,312		1,014		5.56	%
Time deposits, $100,000 and over			161,412		2,293		5.76	%		144,585		2,069		5.76	%
Brokered deposits			23,568		356		6.13	%		12,292		193		6.32	%
Other borrowings			14,000		376		10.89	%		8,916		196		8.84	%
	Total interest bearing liabilities		563,520	$	6,231		4.48	%		511,436	$	5,921		4.66	%
Interest bearing demand deposits			209,771							176,418
Other liabilities			13,337							6,390
	Total liabilities		786,628							694,243
Shareholders’ equity			70,582							58,874
	Total liabilities and shareholders’ equity	$	857,210						$	753,117
Net interest income/margin				$	10,620		5.43	%			$	10,380		6.02	%

Note: Yields and amounts earned on loans include loan fees of $1,209,000 and $939,000 for the three month periods ended June 30, 2001 and 2000, respectively. Interest income is reflected on an actual basis, not a fully taxable equivalent basis, and does not include a fair value adjustment. Nonaccrual loans of $66,000 and $1,092,000 for the period ended June 30, 2001 and 2000, respectively, are included in the average balance calculation above.

		For the Six Months Ended June 30, 2001							For the Six Months Ended June 30, 2000
				Interest		Average					Interest		Average
		Average		Income/		Yield/			Average		Income/		Yield/
(Dollars in thousands)		Balance		Expense		Rate			Balance		Expense		Rate
Assets:
Loans, gross		$	630,570	$	30,636		9.80	%	$	486,555	$	25,027		10.34	%
Investment securities			97,214		2,844		5.90	%		98,222		2,955		6.05	%
Interest bearing deposits in banks			3,808		83		4.40	%		562		11		3.94	%
Federal funds sold			61,128		1,450		4.78	%		78,005		2,285		5.89	%
	Total interest earning assets		792,720	$	35,013		8.91	%		663,344	$	30,278		9.18	%
Cash and due from banks			38,103							30,200
Premises and equipment, net			6,214							6,587
Other assets			21,604							17,658
	Total assets	$	858,641						$	717,789
Liabilities and shareholders’ equity:
Deposits:
Demand, interest bearing		$	66,221	$	633		1.93	%	$	53,497	$	494		1.86	%
Savings and money market			222,902		4,011		3.63	%		209,171		4,074		3.92	%
Time deposits, under $100,000			77,745		2,288		5.93	%		70,905		1,912		5.42	%
Time deposits, $100,000 and over			167,166		4,860		5.86	%		133,659		3,694		5.56	%
Brokered deposits			21,497		656		6.15	%		11,347		350		6.20	%
Other borrowings			17,291		865		10.09	%		5,854		256		8.79	%
	Total interest bearing liabilities		572,822	$	13,313		4.69	%		484,433	$	10,780		4.48	%
Interest bearing demand deposits			204,162							167,862
Other liabilities			12,599							7,801
	Total liabilities		789,583							660,096
Shareholders’ equity			69,058							57,693
	Total liabilities and shareholders’ equity	$	858,641						$	717,789
Net interest income/margin				$	21,700		5.52	%			$	19,498		5.91	%

9

Note: Yields and amounts earned on loans include loan fees of $2,353,000 and $1,837,000 for the six month periods ended June 30, 2001 and 2000, respectively. Interest income is reflected on an actual basis, not a fully taxable equivalent basis, and does not include a fair value adjustment. .Nonaccrual loans of $66,000 and $1,092,000 for the period ended June 30, 2001 and 2000, respectively, are included in the average balance calculation above.

The Company’s net interest income for the three and six months ended June 30, 2001 was $10,620,000 and $21,700,000, an increase of $240,000 and $2,202,000, or 2% and 11% over the same periods in the prior year. When compared to the three and six months ended June 30, 2001, average earning assets increased by $99,404,000 and $129,376,000, or 14% and 19%. For the second quarter of 2001, the average yield on earning assets was 8.61%, down 84 basis points from 9.45% for the same period in 2000. Over the same periods, the rates paid on interest bearing liabilities declined 18 basis points to 4.48% from 4.66%. For the six months ended June 30, 2001 the average yield on earning assets was 8.91%, down 27 basis points from 9.18% for the same period in 2000. Over the same periods, the rates paid on interest bearing liabilities increased 21 basis points to 4.69% from 4.48%. Overall, the net interest margin decreased to 5.43% and 5.52% for the three and six months ended June 30, 2001, from to 6.02% and 5.91% for the same periods in the prior year. Even with the above decrease in net interest margin, net interest income increased due to the increases in the level of average loans. The increased level of loans was funded by a decrease in Federal funds sold.

The following table sets forth an analysis of the changes in interest income resulting from increases in the volume of interest earning liabilities and increases in the average rates earned and paid. The total change is shown in the column designated “Net Change” and is allocated in the columns to the left, to the portions respectively attributable to volume changes and rate changes that occurred during the period indicated. Changes due to both volume and rate have been allocated to the change in volume.

		Three Months Ended June 30,
		2001 vs. 2000
		Increase (Decrease) Due to Change In:
(Dollars in thousands)		Average Volume			Average Rate			Net Change
Interest earning assets
	Loans, gross	$	2,651		$	(1,478	)	$	1,173
	Investments securities		(241	)		(97	)		(338	)
	Interest bearing deposits in banks		38			1			39
	Federal funds sold		(13	)		(311	)		(324	)
Total interest earning assets		$	2,435		$	(1,885	)	$	550
Interest bearing liabilities
	Demand, interest bearing	$	50		$	(8	)	$	42
	Money Market and Savings		23			(427	)		(404	)
	Time deposits, under $100,000		68			37			105
	Time deposits, $100,000 and over		224			0			224
	Brokered Deposits		170			(7	)		163
	Other borrowings		137			43			180
Total interest bearing liabilities		$	672		$	(362	)	$	310
Net interest income		$	1,763		$	(1,523	)	$	240

		Six Months Ended June 30,
		2001 vs. 2000
		Increase (Decrease) Due to Change In:
(Dollars in thousands)		Average Volume			Average Rate			Net Change
Interest earning assets
	Loans, gross	$	6,997		$	(1,388	)	$	5,609
	Investments securities		(29	)		(81	)		(111	)
	Interest bearing deposits in banks		71			1			72
	Federal funds sold		(400	)		(436	)		(835	)
Total interest earning assets		$	6,639		$	(1,904	)	$	4,735
Interest bearing liabilities
	Demand, interest bearing	$	122		$	17		$	139
	Money Market and Savings		247			(310	)		(63	)
	Time deposits, under $100,000		201			175			376
	Time deposits, $100,000 and over		974			192			1,166
	Brokered Deposits		310			(4	)		306
	Other borrowings		572			37			609
Total interest bearing liabilities		$	2,426		$	107		$	2,533
Net interest income		$	4,213		$	(2,011	)	$	2,202

10

Provision for Loan Losses

For the three and six months ended June 30, 2001, the provision for loan losses was $528,000 and $1,055,000, down $6,000 and $159,000 from $534,000 and $1,214,000 for the same periods in the prior year. See additional discussion at Allowance for Probable Loan Losses.

Noninterest Income

The following table sets forth the various components of the Company’s noninterest income for the periods indicated:

					Increase (decrease)
	Three months ended June 30,				2001 versus 2000
(Dollars in thousands)	2001		2000		Amount		Percent
Gain on sale of securities available-for-sale	$	409	$	44	$	365		830	%
Gain on sale of loans		278		—		278		—	%
Other investment income		242		148		94		64	%
Service charges and other fees on deposits accounts		228		170		58		34	%
Servicing income		118		70		48		69	%
Other income		372		182		190		104	%
Total	$	1,647	$	614	$	1,033		168	%

					Increase (decrease)
	Six months ended June 30,				2001 versus 2000
(Dollars in thousands)	2001		2000		Amount		Percent
Gain on sale of securities available-for-sale	$	551	$	44	$	507		1,152	%
Gain on sale of loans		551		—		551		—	%
Other investment income		510		362		148		41	%
Service charges and other fees on deposits accounts		436		341		95		28	%
Servicing income		232		70		162		231	%
Other income		588		533		55		10	%
Total	$	2,868	$	1,350	$	1,518		112	%

Noninterest income for the three and six months ended June 30, 2001 was $1,647,000 and $2,868,000, up 168% and 112% from $614,000 and $1,350,000 from the same periods in the prior year. The increase was primarily due to the increases in gains on sale of securities, SBA loans and servicing income recognized for the three and six months ended June 30, 2001 compared to the same period in 2000. The interest rate environment in 2001 has provided the opportunity for the Company to benefit from gains on sales of securities and increase its sales of SBA loans, resulting in gains and increased servicing income.

Noninterest Expense

The following table sets forth the various components of the Company’s noninterest expenses for the periods indicated:

	For The Three Months Ended June 30,
								Percent
					Increase			Increase
(Dollars in thousands)	2001		2000		(Decrease)			(Decrease)
Salaries and benefits	$	4,629	$	4,530	$	99			2	%
Occupancy		681		514		167			32	%
Client services		647		269		378			141	%
Furniture and equipment		425		375		50			13	%
Loan origination costs		360		155		205			132	%
Professional fees		265		583		(318	)		(55	%)
Advertising and promotion		359		222		137			62	%
Stationery & supplies		125		82		43			52	%
Telephone expense		93		84		9			11	%
Merger and integration costs		—		95		(95	)		(100	%)
All other		1,085		1,316		(231	)		(18	%)
Total	$	8,669	$	8,225	$	444			5	%

11

	For The Six Months Ended June 30,
								Percent
					Increase			Increase
(Dollars in thousands)	2001		2000		(Decrease)			(Decrease)
Salaries and benefits	$	9,710	$	8,545	$	1,165			14	%
Occupancy		1,361		1,057		304			29	%
Client services		939		638		301			47	%
Furniture and equipment		866		706		160			23	%
Loan origination costs		659		361		298			83	%
Professional fees		595		889		(294	)		(33	%)
Advertising and promotion		582		401		181			45	%
Stationery & supplies		258		161		97			60	%
Telephone expense		182		170		12			7	%
Merger and integration costs		—		95		(95	)		(100	%)
All other		1,784		1,992		(208	)		(10	%)
Total	$	16,936	$	15,015	$	1,921			13	%

The following table indicates the percentage of noninterest expense in each category:

	For The Three Months Ended June 30,
			% of					% of
(Dollars in thousands)	2001		Total			2000		Total
Salaries and benefits	$	4,629		53	%	$	4,530		55	%
Occupancy		681		8	%		514		6	%
Client services		647		8	%		269		3	%
Furniture and equipment		425		5	%		375		5	%
Loan origination costs		360		4	%		155		2	%
Professional fees		265		3	%		583		7	%
Advertising and promotion		359		4	%		222		3	%
Stationery & supplies		125		1	%		82		1	%
Telephone expense		93		1	%		84		1	%
Merger and integration costs		—		—	%		95		1	%
All other		1,085		13	%		1,316		16	%
Total	$	8,669		100	%	$	8,225		100	%

	For The Six Months Ended June 30,
			% of					% of
(Dollars in thousands)	2001		Total			2000		Total
Salaries and benefits	$	9,710		57	%	$	8,545		57	%
Occupancy		1,361		8	%		1,057		7	%
Client services		939		6	%		638		4	%
Furniture and equipment		866		5	%		706		5	%
Loan origination costs		659		4	%		361		2	%
Professional fees		595		4	%		889		6	%
Advertising and promotion		582		3	%		401		3	%
Stationery & supplies		258		2	%		161		1	%
Telephone expense		182		1	%		170		1	%
Merger and integration costs		—		—			95		1	%
All other		1,784		10	%		1,992		13	%
Total	$	16,936		100	%	$	15,015		100	%

Noninterest expenses for the three and six months ended June 30, 2001 were $8,669,000 and $16,936,000, up $444,000 and $1,921,000, or 5% and 13%, from $8,225,000 and $15,015,000 for the same periods in the prior year. The overall increase in noninterest expenses reflects the growth in infrastructure to support the Company’s loan and deposit growth.

In the second quarter ended June 30, 2001, salaries and benefits increased $99,000 reflecting normal salary and benefit increases and the growth in the level of full time equivalent employees from 215 at June 30, 2000 to 232 at June 30, 2001. Salaries and benefits increased $1,165,000, or 14%, to $9,710,000 in the first six months of 2001, as compared to the same period in the prior year. As a percentage of total noninterest expenses, salaries and benefits were 53% and 55%, respectively, for the three months ended June 30, 2001 and 2000, respectively. Occupancy increased by $167,000, or 32%, as a result of increased rental costs. The increase was $304,000, or 29%, to $1,361,000 in the first six months of 2001, as compared to the same period in the prior year. Furniture and equipment increased by $50,000, or 13%. Stationery and supplies increased by $43,000, or 52%. The increase was $97,000, or 60%, to $258,000 in the first six months of 2001, as compared to the same period in the prior year. This reflects the growth the Company has sustained. Loan origination costs increased by $205,000, or 132%, as a result of the overall growth in the loan portfolio and increased as a percentage of total noninterest expenses from 2% to 4%. The increase was $298,000, or 83%, to $659,000 in the first six months of 2001, as compared to the same period in the prior year. Professional fees decreased by $318,000, or 55%. The decrease was $294,000, or 33%, to $595,000 in the first six months of 2001, as compared to the same period in the prior year. Client services increased $378,000, or 141%, and increased as a percentage of total noninterest expenses from 3% to 8%. The increase was $301,000, or 47%, to $939,000 in the first six months of 2001, as compared to the same period in the prior year. Advertising and promotion increased $181,000, or 45%, to $582,000 in the first six months of 2001, as compared to the same period in the prior year.

12

Income Taxes

The provision for income taxes for the three and six months ended June 30, 2001 was $1,180,000 and $2,505,000, as compared to $746,000 and $1,613,000 for the same periods in the prior year. The difference in the effective tax rate compared to the statutory tax rate is primarily the result of the Company holding certain life insurance contracts and changes in the Company’s level of investments in municipal securities.

FINANCIAL CONDITION

Total assets increased $21,407,000, or 3%, to $867,631,000 at June 30, 2001 from $846,224,000 at December 31, 2000, and increased $53,336,000, or 7%, from $814,295,000 at June 30, 2000. Total portfolio loans decreased $5,649,000 or 1% to $605,132,000 at June 30, 2001 from $610,781,000 at December 31, 2000, but have increased $83,594,000 or 16% from $521,538,000 at June 30, 2000. Total deposits were $770,168,000 at June 30, 2001, an increase of 4% from $738,186,000 at December 31, 2000, and have increased 4% from $737,116,000 at June 30, 2000. The above reflects the continued strong internal growth of the Company, primarily in noninterest bearing demand deposits and brokered deposits, which used with the proceeds from investment securities sales and maturities and loan sales and payments funded the growth in Federal funds sold.

Securities Portfolio

The following table summarizes the composition of the Company’s investment securities and the weighted average yields at June 30, 2001:

				June 30, 2001
				Maturity
									After One Year and					After Five Years and
				Within One Year					Within Five Years					Within Ten Years					After Ten Years					Total
(Dollars in thousands)				Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available-for-sale:
	Agencies			$	1,013		6.69	%	$	30,076		5.83	%	$	—		—	%	$	—		—	%	$	31,089		5.86	%
	U.S. Treasury				1,621		5.74	%		—		—	%		—		—	%		—		—	%		1,621		5.74	%
	Mortgage-backed securities				—		—	%		1,165		6.11	%		4,664		6.52	%		12,524		5.05	%		18,353		5.49	%
	Municipals — nontaxable				2,791		4.64	%		4,329		4.29	%		3,889		4.79	%		—		—	%		11,009		4.56	%
		Total available-for-sale		$	5,425		5.35	%	$	35,570		5.65	%	$	8,553		5.73	%	$	12,524		5.05	%	$	62,072		5.52	%
Securities held-to-maturity:
	CMOs			$	607		5.82	%	$	1,429		6.32	%	$	—		—	%	$	—		—	%	$	2,036		6.17	%
	Mortgage-backed securities				—		—	%		5,077		6.29	%		—		—	%		—		—	%		5,077		6.29	%
	Municipals — taxable				2,378		6.44	%		2,100		6.55	%		—		—	%		—		—	%		4,478		6.49	%
	Municipals — nontaxable				—		—	%		1,959		4.68	%		5,449		4.49	%		—		—	%		7,408		4.54	%
			Total held-to-maturity	$	2,985		6.31	%	$	10,565		6.05	%	$	5,449		4.49	%	$	—		—	%	$	18,999		5.64	%
			Total securities	$	8,410		5.69	%	$	46,135		5.74	%	$	14,002		5.25	%	$	12,524		5.05	%	$	81,071		5.55	%

Note: Yield on non-taxable municipal securities are not presented in a fully tax equivalent basis.

Loans

Total loans (exclusive of loans held for sale) decreased 1% to $605,132,000 at June 30, 2201, as compared to $610,781,000 at December 31, 2000. The decrease in loan balances was a result of loan payments and payoffs exceeding the level of new originations during the first six months of 2001.

13

The following table summarizes the composition of the Company’s loan portfolio at the rates indicated:

(Dollars in thousands)		June 30, 2001			% of Total			December 31, 2000			% of Total
Commercial		$	202,125			33	%	$	200,846			33	%
Real estate — mortgage			231,712			38	%		230,468			38	%
Real estate — land and construction			165,468			28	%		171,325			28	%
Consumer			5,819			1	%		8,172			1	%
	Total loans		605,124			100	%		610,811			100	%
Deferred loan costs (fees)			8						(30	)
Allowance for loan losses			(10,347	)					(9,651	)
Loans, net		$	594,785					$	601,130

The Company’s loan portfolio is based in commercial (primarily to companies engaged in manufacturing, wholesale, and service businesses) and real estate lending, with the balance in consumer loans. Real estate construction loans have been paid off. However, while no specific industry concentration is considered significant, the Company’s lending operations are located in the Company’s market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company’s borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers’ abilities to repay their loans.

The following table sets forth the maturity distribution of the Company’s loans at June 30, 2001:

	Due in		Over One Year
	One Year		But Less Than		Over
(Dollars in thousands)	or Less		Five Years		Five Years		Total
Commercial	$	190,175	$	11,545	$	405	$	202,125
Real estate — mortgage		132,670		82,882		16,160		231,712
Real estate — land and construction		165,377		91		—		165,468
Consumer		5,007		812		—		5,819
Total loans	$	493,229	$	95,330	$	16,565	$	605,124
Loans with variable interest rates	$	476,019	$	58,072	$	490	$	534,581
Loans with fixed interest rates		17,210		37,258		16,075		70,543
Total loans	$	493,229	$	95,330	$	16,565	$	605,124

The table shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates. Floating rates generally fluctuate with changes in the prime rate as reflected in the western edition of The Wall Street Journal. At June 30, 2001, approximately 88% of the Company’s loan portfolio consisted of floating interest rate loans.

Nonperforming assets

Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing, troubled debt restructurings and other real estate owned. The following table shows nonperforming assets at the dates indicated:

		June 30,
								December 31,
(Dollars in thousands)		2001			2000			2000
Nonaccrual loans		$	66		$	1,092		$	—
Loans 90 days past due and still accruing			—			—			—
Restructured loans			—			—			—
	Total nonperforming loans		66			1,092			—
Foreclosed assets			—			—			—
	Total nonperforming assets	$	66		$	1,092		$	—
Nonperforming assets as a percentage of period end loans plus foreclosed assets			0.01	%		0.21	%		—	%

14

Allowance for Loan Losses

Management conducts a critical evaluation of the loan portfolio monthly. This evaluation includes an assessment of the following factors: past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, collateral value, loan volumes and concentrations, recent loss experience in particular segments of the portfolio, bank regulatory examination results, and current economic conditions. Management has established an evaluation process designed to determine the adequacy of the allowance for loan losses. This process attempts to assess the risk of loss inherent in the portfolio by segregating the allowance for loan losses into four components: “watch”, “special mention”, “substandard” and “doubtful”.

It is the policy of management to maintain the allowance for loan losses at a level adequate for known and future risks inherent in the loan portfolio. Based on information currently available to analyze loan loss delinquency and a history of actual charge-offs, management believes that the loan loss provision and allowance are adequate; however, no assurance of the ultimate level of credit losses can be given with any certainty. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely.

The following table summarizes the Company’s loan loss experience as well as transactions in the allowance for loan losses and certain pertinent ratios for the periods indicated:

		Six months ended June 30,						Year ended
								December 31,
(Dollars in thousands)		2001			2000			2000
Balance, beginning of period / year		$	9,651		$	6,511		$	6,511
Net (charge offs) recoveries			(359	)		13			(19	)
Provision for probable loan losses			1,055			1,214			3,159
Balance, end of period / year		$	10,347		$	7,738		$	9,651
Ratios:
	Net charge-offs to average loans outstanding		0.06	%		—	%		—	%
	Allowance for loan losses to average loans		1.67	%		1.62	%		1.80	%
	Allowance for loan losses to total loans		1.71	%		1.48	%		1.58	%
	Allowance for loan losses to non-performing loans		15,661	%		709	%		—	%

The following table summarizes the allocation of the allowance for loan losses (ALL) by loan type and the allocated allowance as a percent of loans outstanding in each loan category at the dates indicated:

	June 30, 2001					June 30, 2000					December 31, 2000
			Percent of ALL by					Percent of ALL by					Percent of ALL by
			category to total					category to total					category to total
(Dollars in thousands)	Amount		loans by category			Amount		loans by category			Amount		loans by category
Commercial	$	3,925		1.94	%	$	3,231		1.81	%	$	4,244		2.11	%
Real estate — mortgage		1,538		0.66	%		1,298		0.66	%		1,509		0.65	%
Real estate — land and construction		2,657		1.61	%		1,669		1.21	%		2,084		1.22	%
Consumer		161		2.77	%		165		2.25	%		158		1.93	%
Unallocated		2,066		—	%		1,375		—	%		1,656		—	%
Total	$	10,347		1.71	%	$	7,738		1.48	%	$	9,651		1.58	%

The increase in the allowance for loan losses reflects the growth in the Company’s commercial and real estate mortgage loan portfolio and the Company’s assessment of the increased inherent credit risk resulting from the current economic environment, particularly in the Company’s primary market area and lending focus, and the potential effects of the continuing California energy situation.

All of the Company’s operations and virtually all of its customers are located in California. The availability of a sufficient supply of electrical power in California has been called into question by recent events, including the bankruptcy of one of the state’s major utilities. While neither the Company nor any of its customers have been materially adversely affected by the electrical power crisis to date, power supply issues could have an affect on future operations of the Company or its customers, including borrowers.

Deposits

Deposits totaled $770,168,000 at June 30, 2001, an increase of 4%, compared to deposits of $738,186,000 at December 31, 2000 and an increase of 4% compared to $737,116,000 at June 30, 2000. The increase in deposits was primarily due to increases in noninterest bearing deposits and brokered deposits. Noninterest bearing deposits increased to $234,125,000 at June 30, 2001, from $207,885,000 at December 31, 2000. Brokered deposits increased to $26,723,000 at June 30, 2001, from $9,238,000 at December 31, 2000.

15

The following table summarizes the distribution of average deposits and the average rates paid for the periods indicated:

		Six months ended					Year ended
		June 30, 20001					December 31, 2000
				Average					Average
		Average		Rate			Average		Rate
(Dollars in thousands)		Balance		Paid			Balance		Paid
Demand, noninterest bearing		$	204,162		—	%	$	183,422		—	%
Demand, interest bearing			66,221		1.93	%		55,616		1.82	%
Saving and money market			222,902		3.63	%		228,336		4.16	%
Time deposits, under $100,000			77,745		5.93	%		73,058		5.85	%
Time deposits, $100,000 and over			167,166		5.86	%		151,275		5.75	%
Brokered deposits			21,497		6.15	%		10,544		6.55	%
	Total average deposits	$	759,693		3.28	%	$	702,251		3.44	%

Deposit Concentration and Deposit Volatility

The following table indicates the maturity schedule of the Company’s time deposits of $100,000 or more as of June 30, 2001.

(Dollars in thousands)		Balance		% of Total
Three months or less		$	72,110		39	%
Over three months through twelve months			96,965		52	%
Over twelve months			16,614		9	%
	Total	$	185,689		100	%

The Company focuses primarily on servicing business accounts that are frequently over $100,000 in average size. Certain types of accounts that the Company makes available are typically in excess of $100,000 in average balance per account, and certain types of business clients whom the Company serves typically carry deposits in excess of $100,000 on average. The account activity for some account types and client types necessitates appropriate liquidity management practices by the Company to ensure its ability to fund deposit withdrawals.

Interest Rate Risk

The planning of asset and liability maturities is an integral part of the management of an institution’s net yield. To the extent maturities of assets and liabilities do not match in a changing interest rate environment, net yields may change over time. Even with perfectly matched repricing of assets and liabilities, risks remain in the form of prepayment of loans or investments or in the form of delays in the adjustment of rates of interest applying to either earning assets with floating rates or to interest bearing liabilities. The Company has generally been able to control its exposure to changing interest rates by maintaining primarily floating interest rate loans and a majority of its time certificates with relatively short maturities.

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The following table sets forth the interest rate sensitivity of the Company’s interest-earning assets and interest-bearing liabilities at June 30, 2001, using the rate sensitivity gap ratio. For purposes of the following table, an asset or liability is considered rate-sensitive within a specified period when it can be repriced or when it is scheduled to mature within the specified time frame:

						Due in Three			Due After
			Within Three			to Twelve			One to Five			Due After			Not Rate-
(Dollars in thousands)			Months			Months			Years			Five Years			Sensitive			Total
Interest earning assets:
	Federal funds sold		$	67,900		$	—		$	—		$	—		$	—		$	67,900
	Interest bearing deposits in banks			5,414			—			—			—			—			5,414
	Securities			2,182			5,165			39,594			34,130			—			81,071
	Total loans			510,649			42,480			75,937			16,746			—			645,812
		Total interest earning assets		586,145			47,645			115,531			50,876			—			800,197
Cash and due from banks				—			—			—			—			34,624			34,624
Other assets				—			—			—			—			32,810			32,810
		Total assets	$	586,145		$	47,645		$	115,531		$	50,876		$	67,434		$	867,631
Interest bearing liabilities:
	Demand, interest bearing		$	66,063		$	—		$	—		$	—		$	—		$	66,063
	Savings and money market			201,341			—			—			—			—			201,341
	Time deposits			96,685			148,700			23,254			—			—			268,639
	Mandatorily redeemable cumulative trust preferred securities			—			—			—			14,000			—			14,000
		Total interest bearing liabilities		364,089			148,700			23,254			14,000			—			550,043
Noninterest demand deposits				88,375			—			—			—			145,750			234,125
Other liabilities				—			—			—			—			12,496			12,496
Shareholders’ equity				—			—			—			—			70,967			70,967
		Total liabilities and shareholders’ equity	$	452,464		$	148,700		$	23,254		$	14,000		$	229,213		$	867,631
Interest rate sensitivity GAP			$	133,681		$	(101,055	)	$	92,277		$	36,876		$	(161,779	)	$	—
Cumulative interest rate sensitivity GAP			$	133,681		$	32,626		$	124,903		$	(161,779	)	$	—		$	—
Cumulative interest rate sensitivity GAP ratio				15.41	%		3.76	%		14.40	%		18.65	%		—	%		—	%

The foregoing table demonstrates that the Company had a positive cumulative one year gap of $32,626,000, or 3.76% of total assets, at June 30, 2001. In theory, this would indicate that $32,626,000 more in assets than liabilities would reprice if there was a change in interest rates over the next year. If interest rates were to increase, the positive gap would tend to result in a higher net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net margin without affecting interest rate sensitivity. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit.

Interest rate changes do not affect all categories of assets and liabilities equally or at the same time. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities, which may have a significant effect on the net interest margin and are not reflected in the interest sensitivity analysis table. Because of these factors, an interest sensitivity gap report may not provide a complete assessment of the exposure to changes in interest rates. To supplement traditional GAP analysis, the Company performs simulation modeling to estimate the potential effects of changing interest rate environments. The process allows the Company to explore the complex relationships within the GAP over time and various interest rate environments.

Liquidity risk represents the potential for loss as a result of limitations on the Company’s ability to adjust for future cash flows, to meet the needs of depositors and borrowers, and to fund operations on a timely and cost-effective basis. The liquidity policy approved by the board requires annual review of the Company’s liquidity by the asset/liability committee, which is composed of senior executives, and the finance and investment committee of the board of directors.

The Company’s internal asset/liability committee and the finance and investment committee of the board each meet monthly to monitor the Company’s investments, liquidity needs and to oversee its asset/liability management. The Company evaluates the rates offered on its deposit products on a weekly basis.

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Liquidity and Liability Management

To meet liquidity needs, the Company maintains a portion of its funds in cash deposits in other banks, in Federal funds sold, and in investment securities. At June 30, 2001, the Company’s primary liquidity ratio was 17.88%, comprised of $38.2 million in investment securities available-for-sale with maturities (or probable calls) of up to five years, less $10.1 million of securities that were pledged to secure public and certain other deposits as required by law and contract; Federal funds sold of $67.9 million, and $40.0 million in cash and due from banks, as a percentage of total unsecured deposits of $748 million.

Capital Resources

The following table summarizes risk-based capital, risk-weighted assets, and risk-based capital ratios of the Company:

			June 30,
									December 31,
(Dollars in thousands)			2001			2000			2000
Capital components:
	Tier 1 Capital		$	83,754		$	67,748		$	78,982
	Tier 2 Capital			9,149			7,738			9,427
		Total risk-based capital	$	92,903		$	75,486		$	88,409
Risk-weighted assets			$	730,759		$	648,339		$	753,947
Average assets			$	856,653		$	753,117		$	850,072
												Minimum
												Regulatory
												Requirements
Capital ratios:
	Total risk-based capital			12.7	%		11.6	%		11.7	%		8.0	%
	Tier 1 risk-based capital			11.5	%		10.4	%		10.5	%		4.0	%
	Leverage ratio(1)			9.8	%		9.0	%		9.3	%		4.0	%

(1) Tier 1 capital divided by average assets (excluding goodwill).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

No material changes have occurred during the quarter to the Company’s market risk profile or information. For further information refer to the Company’s annual report on Form 10-K.

Part II — Other Information

Item 1. — Legal Proceedings

     To the best of the Company’s knowledge, there are no pending legal proceedings to which the Company is a party which may have a materially adverse effect on the Company’s financial condition, results of operations, or cash flows.

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Item 4. — Submissions of Matters to a Vote of Security Holders

The Company held its 2001 Annual Meeting of Shareholders on May 24, 2001 and on June 21, 2001 (the “2000 Annual Meeting”). There were 11,076,965 issued and outstanding shares of Company Common Stock on April 10, 2001, the Record Date for the 2001 Annual Meeting. Each of the shares voting at the meeting was entitled to one vote.

At the 2001 Annual Meeting, the following actions were taken:

Election of Directors

At the 2001 Annual Meeting, fifteen directors of the Company were elected. The following chart indicates the number of shares cast for each elected director:

Name of Director	Votes for		Votes withheld
Hugh Barton		9,704,863		121,748
Frank G. Bisceglia		9,522,873		303,738
James R. Blair		9,711,243		115,368
Richard L. Conniff		9,510,986		315,625
William J. Del Biaggio, Jr.		9,517,923		308,688
Anneke Dury		9,518,033		308,578
Kurt Hammerstrom		9,710,033		116,578
Roy Lave		9,711,133		115,478
John Larsen		9,710,913		115,698
Louis O. Normandin		9,517,923		308,688
Jack L. Peckham		9,517,923		308,688
Robert W. Peters		9,517,922		308,689
Humphrey P. Polanen		9,711,133		115,478
Howard Weiland		9,711,133		115,478
Brad L. Smith		9,282,161		544,450

Heritage Commerce Corp’s Articles of Incorporation

The number of shares cast for and against to amend Commerce Corp’s Articles of Incorporation to eliminate the availability of cumulative voting in the election of Commerce Corp’s directors was as follows:

FOR	5,992,534
AGAINST	2,167,563

Heritage Commerce Corp’s Bylaws

The number shares cast for and against 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 was as followings:

FOR	6,358,048
AGAINST	1,807,842

Increase the number of shares for grants of stock options

The number shares cast for and against to amend Commerce Corp 1994 Tandem Stock Option Plan to increase the number of shares available for grants of stock options was as followings:

FOR	8,370,579
AGAINST	1,227,012

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Ratification of Deloitte & Touche, LLP as the Company’s auditors

The number of shares cast for and against the ratification of the Board of Directors’ selection of Deloitte & Touche, LLP to serve as the Company’s auditors for the fiscal year ending December 31, 2001 was as follows:

FOR	9,389,651
AGAINST	288,138

Item 6. — Exhibits and Reports on Form 8-K

(a) Exhibits included with this filing:

Exhibit Number	Name
3.1	Heritage Commerce Corp Restated Articles of Incorporation as amended effective June 29, 2001
3.2	Heritage Commerce Corp By-laws as amended on May 24, 2001

(b) Reports on Form 8-K

On July 23, 2001, the Company filed its earnings press release for the second quarter ended June 30, 2001 with the SEC on Form 8-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Heritage Commerce Corp (Registrant)
August 14, 2001 Date	/s/ Brad L. Smith Brad L. Smith, Chairman of the Board and CEO
August 14, 2001 Date	/s/ Lawrence D. McGovern Lawrence D. McGovern, Chief Financial Officer

20

EXHIBIT INDEX

Exhibit Number	Name
3.1	Heritage Commerce Corp Articles of incorporation
3.2	Heritage Commerce Corp By-laws

EX-3.1 3 f74672ex3-1.txt EXHIBIT 3.1 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF HERITAGE COMMERCE CORP, AS AMENDED EFFECTIVE JUNE 29, 2001 ARTICLE I The name of this corporation is Heritage Commerce Corp. ARTICLE II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III a. The total number of shares of stock that the corporation shall have authority to issue is 40,000,000 shares, which shall be divided into two classes as follows: (a) 30,000,000 shares of Common Stock, and (b) 10,000,000 shares of Preferred Stock (hereinafter "Preferred Shares"). Upon amendment of this Article III as set forth herein, each outstanding share of Common Stock is divided into one and one-half shares of Common Stock. b. The Preferred Shares may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Shares and to determine the designation of any such series. The Board of Directors is also authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Shares and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. 2 ARTICLE IV Any action required to be taken by shareholders of this corporation must be taken at a duly called annual meeting or a special meeting of shareholders of the corporation and no action may be taken by the written consent of the shareholders. ARTICLE V The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Any repeal or modification of this Article, or the adoption of any provision of the Articles of Incorporation inconsistent with this Article, shall only be prospective and shall not adversely affect the rights under this Article in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability. ARTICLE VI This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) for breach of duty to the corporation and its shareholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the limitations on excess indemnification set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. 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. 2 EX-3.2 4 f74672ex3-2.txt EXHIBIT 3.2 1 EXHIBIT 3.2 BY-LAWS OF HERITAGE COMMERCE CORP (A CALIFORNIA CORPORATION) as amended on May 24, 2001 2 BY-LAWS OF HERITAGE COMMERCE CORP (A CALIFORNIA CORPORATION) as amended on May 24, 2001 SECTION 1. OFFICES 1.1 PRINCIPAL OFFICE. The principal office for the transaction of the business of the corporation shall be located at 150 Almaden Boulevard, City of San Jose, County of Santa Clara, State of California. The Board of Directors is hereby granted full power and authority to change said principal office to another location within or without the State of California. 1.2 OTHER OFFICES. One or more branch or other subordinate offices may at any time be fixed and located by the Board of Directors at such place or places within or without the State of California as it deems appropriate. SECTION 2. DIRECTORS 2.1 EXERCISE OF CORPORATE POWERS. Except as otherwise provided by the Articles of Incorporation of the corporation or by the laws of the State of California now or hereafter in force, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-to-day operation of the business of the corporation as permitted by law, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. 2.2 NUMBER. The number of the corporation's directors shall be not less than eleven nor more than twenty-one, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full Board or by resolution of a majority of the shareholders at any meeting thereof. 2.3 QUALIFICATION OF DIRECTORS. 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. The Board of Directors of the corporation, or a committee thereof, shall determine whether any person who seeks to become a director complies with the 1 3 provisions of this Section 2.3. The directors of the corporation need not be shareholders of the corporation. 2.4 COMPENSATION. Directors shall receive such compensation for their services as directors and such reimbursement for their expenses of attendance at meetings as may be determined from time to time by resolution of the Board. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 2.5 ELECTION AND TERM OF OFFICE. At each annual meeting of shareholders, directors shall be elected to hold office until the next annual meeting, provided that, if for any reason, said annual meeting or an adjournment thereof is not held or the directors are not elected thereat, then the directors may be elected at any special meeting of the shareholders called and held for that purpose. The term of office of the directors shall begin immediately after their election and shall continue until the expiration of the term for which elected and until their respective successors have been elected and qualified. 2.6 ANNUAL REVIEW OF BOARD POLICY STATEMENT AND DIRECTOR NOMINATIONS. The Board Directors shall adopt and maintain a Board Policy Statement which shall establish standards and provide guidance to the Board with respect to legal issues, attendance at Board and Board committee meetings, and related issues of director participation in Board and corporate activities. The Board of Directors shall, at a meeting of the Board during the fourth quarter of each year, consider the following: the Board Policy Statement and the performance of the Board and of individual Board members in light of the requirements of the Board Policy Statement; the structure, function and membership of Board committees; strategies for increasing the effectiveness of the Board; the Board's nominations for the Board of Directors at the following year's annual meeting of the corporation's shareholders; and nominees for positions as officers of the Board. 2.7 ELECTION OF OFFICERS OF THE BOARD. The Board of Directors shall, at its regularly scheduled meeting in December of each year, consider the organization of the Board, the Board's nominations for the Board of Directors at the following year's annual meeting of the corporation's shareholders, the election of officers of the Board, and any other business that results from the Board's annual review of the Board Policy Statement. Officers of the Board shall be elected for one-year terms. The unexpired term of any Board officer who ceases to be a member of the Board of Directors during his or her term as a Board officer may, at the discretion of the remaining Board members, be filled through the election another Board member to fill the unexpired term. 2.8 VACANCIES. A vacancy or vacancies in the Board of Directors shall exist when any authorized position of director is not then filled by a duly elected director, whether caused by death, resignation, removal, change in the authorized number of directors (by the Board or the shareholders) or otherwise. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. Except for a vacancy created by the removal of a director, vacancies on the Board may be filled by approval of the board or, if the number of directors then in office is less than a quorum, by (1) the unanimous written consent of the directors then in office, (2) the affirmative vote of a 2 4 majority of the directors then in office at a meeting held pursuant to notice or waivers of notice, or (3) a sole remaining director. A vacancy created by the removal of a director may be filled only by the approval of the shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. 2.9 NOMINATION, CLASSIFICATION, 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: (1) the name and address of each proposed nominee; (2) the principal occupation of each proposed nominee; (3) the number of shares of capital stock of the Corporation owned by each proposed nominee; (4) the name and residence address of the notifying shareholder, and (5) the number of shares of capital stock of the Corporation owned by the notifying 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. (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. (8) a statement regarding the nominee's compliance with Section 2.3 of these Bylaws. 3 5 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) In the event that the authorized number of directors shall be fixed at nine (9) or more, the Board of Directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist of one-third 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. 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. 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: 4 6 (1) No director may be removed (unless the entire Board is removed) when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast (or, if such 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; and (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 does not remove any director prior to the expiration of such director's term of office. SECTION 3. OFFICERS 3.1 ELECTION AND QUALIFICATIONS. The officers of this corporation shall consist of a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer who shall be chosen by the Board of Directors and such other officers, including a Chairman of the Board, as the Board of Directors shall deem expedient, all of whom shall be chosen in such manner and hold their offices for such terms as the Board of Directors may prescribe. Any two or more of such offices may be held by the same person. Any Vice President, Assistant Treasurer or Assistant Secretary, respectively, may exercise any of the powers of the President, the Chief Financial Officer, or the Secretary, respectively, as directed by the Board of Directors and shall perform such other duties as are imposed upon such officer by the By-Laws or the Board of Directors. 3.2 TERM OF OFFICE AND COMPENSATION. The term of office and salary of each of said officers and the manner and time of the payment of such salaries shall be fixed and determined by the Board of Directors and may be altered by said Board from time to time at its pleasure, subject to the rights, if any, of said officers under any contract of employment. 3.3 REMOVAL AND VACANCIES. Any officer of the corporation may be removed at the pleasure of the Board of Directors at any meeting or by vote of shareholders entitled to exercise the majority of voting power of the corporation at any meeting or at the pleasure of any officer who may be granted such power by a resolution of the Board of Directors. Any officer may resign at any time upon written notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. If any vacancy occurs in any office of the corporation, the Board of Directors may elect a successor to fill such vacancy for the remainder of the unexpired term and until a successor is duly chosen and qualified. SECTION 4. CHAIRMAN OF THE BOARD 4.1 POWERS AND DUTIES. The Chairman of the Board of Directors, if there be one, shall have the power to preside at all meetings of the Board of Directors, and to call meetings of the shareholders and of the Board of Directors to be held within the limitations prescribed by law or by these By-Laws, at such times and at such places as the Chairman of the Board shall deem 5 7 proper. The Chairman of the Board shall have such other powers and shall be subject to such other duties as the Board of Directors may from time to time prescribe. SECTION 5. PRESIDENT 5.1 POWERS AND DUTIES. The powers and duties of the President are: (a) To act as the chief executive officer of the corporation and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the corporation. (b) To preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. (c) To call meetings of the shareholders and also of the Board of Directors to be held, subject to the limitations prescribed by law or by these By-Laws, at such times and at such places as the President shall deem proper. (d) To affix the signature of the corporation to all deeds, conveyances, mortgages, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the President, should be executed on behalf of the corporation, to sign certificates for shares of stock of the corporation and, subject to the direction of the Board of Directors, to have general charge of the property of the corporation and to supervise and control all officers, agents and employees of the corporation. 5.2 PRESIDENT PRO TEM. If neither the Chairman of the Board, the President, nor any Vice President is present at any meeting of the Board of Directors, a President pro tem may be chosen to preside and act at such meeting. If neither the President nor any Vice President is present at any meeting of the shareholders, a President pro tem may be chosen to preside at such meeting. SECTION 6. VICE PRESIDENT 6.1 POWERS AND DUTIES. In case of the absence, disability or death of the President, the Vice President, or one of the Vice Presidents, shall exercise all the powers and perform all the duties of the President. If there is more than one Vice President, the order in which the Vice Presidents shall succeed to the powers and duties of the President shall be as fixed by the Board of Directors. The Vice President or Vice Presidents shall have such other powers and perform such other duties as may be granted or prescribed by the Board of Directors. SECTION 7. SECRETARY 7.1 POWERS AND DUTIES. The powers and duties of the Secretary are: (a) To keep a book of minutes at the principal office of the corporation, or such other place as the Board of Directors may order, of all meetings of its directors and shareholders with the time and place of holding, whether regular or special, and, if special, how authorized, the 6 8 notice thereof given, the names of those present at directors meetings, the number of shares present or represented at shareholders' meetings and the proceedings thereof. (b) To keep the seal of the corporation and to affix the same to all instruments which may require it. (c) To keep or cause to be kept at the principal office of the corporation, or at the office of the transfer agent or agents, a share register, or duplicate share registers, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for shares, and the number and date of cancellation of every certificate surrendered for cancellation. (d) To keep a supply of certificates for shares of the corporation, to fill in all certificates issued, and to make a proper record of each such issuance; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents. (e) To transfer upon the share books of the corporation any and all shares of the corporation; provided, that so long as the corporation shall have one or more duly appointed and acting transfer agents of the shares, or any class or series of shares, of the corporation, such duties with respect to such shares shall be performed by such transfer agent or transfer agents, and the method of transfer of each certificate shall be subject to the reasonable regulations of the transfer agent to which the certificate is presented for transfer, and also, if the corporation then has one or more duly appointed and acting registrars, to the reasonable regulations of the registrar to which the new certificate is presented for registration; and provided, further, that no certificate for shares of stock shall be issued or delivered or, if issued or delivered, shall have any validity whatsoever until and unless it has been signed or authenticated in the manner provided in 12.4 hereof. (f) To make service and publication of all notices that may be necessary or proper, and without command or direction from anyone. In case of the absence, disability, refusal or neglect of the Secretary to make service or publication of any notices, then such notices may be served and/or published by the President or a Vice President, or by any person thereunto authorized by either of them or by the Board of Directors or by the holders of a majority of the outstanding shares of the corporation. (g) Generally to do and perform all such duties as pertain to the office of Secretary and as may be required by the Board of Directors. SECTION 8. CHIEF FINANCIAL OFFICER 8.1 POWERS AND DUTIES. The powers and duties of the Chief Financial Officer are: (a) To supervise and control the keeping and maintaining of adequate and correct accounts of the corporation's properties and business transactions, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. 7 9 (b) To have the custody of all funds, securities, evidence of indebtedness and other valuable documents of the corporation and, at the Chief Financial Officer's discretion, to cause any or all thereof to be deposited for the account of the corporation with such depositary as may be designated from time to time by the Board of Directors. (c) To receive or cause to be received, and to give or cause to be given, receipts and acquittances for moneys paid in for the account of the corporation. (d) To disburse, or cause to be disbursed, all funds of the corporation as may be directed by the Board of Directors, taking proper vouchers for such disbursements. (e) To render to the President and to the Board of Directors, whenever they may require, accounts of all transactions and of the financial condition of the corporation. (f) Generally to do and perform all such duties as pertain to the office of Chief Financial Officer and as may be required by the Board of Directors. SECTION 9. COMMITTEES OF THE BOARD 9.1 APPOINTMENT AND PROCEDURE. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. 9.2 POWERS. Any committee appointed by the Board of Directors, to the extent provided in the resolution of the Board or in these By-Laws, shall have all the authority of the Board except with respect to: (a) the approval of any action which requires the approval or vote of the shareholders; (b) the filling of vacancies on the Board or on any committee; (c) the fixing of compensation of the directors for serving on the Board or on any committee; (d) the amendment or repeal of By-Laws or the adoption of new By-Laws; (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate, in a periodic amount or within a price range set forth in the articles or determined by the Board; and (g) the appointment of other committees of the Board or the members thereof. 8 10 9.3 EXECUTIVE COMMITTEE. In the event that the Board of Directors appoints an Executive Committee, such Executive Committee, in all cases in which specific direction to the contrary shall not have been given by the Board of Directors, shall have and may exercise, during the intervals between the meetings of the Board of Directors, all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation (except as provided in 9.2 hereof) in such manner as the Executive Committee may deem in the best interests of the corporation. SECTION 10. MEETINGS OF SHAREHOLDERS 10.1 PLACE OF MEETINGS. Meetings (whether regular, special or adjourned) of the shareholders of the corporation shall be held at the principal office for the transaction of business as specified in accordance with Section 1.1 hereof, or any place within or without the State which may be designated by written consent of all the shareholders entitled to vote thereat, or which may be designated by the Board of Directors. 10.2 TIME OF ANNUAL MEETINGS. The annual meeting of the shareholders shall be held on the third Thursday in May of each year, if not a legal holiday, and if a legal holiday, then on the next succeeding business day not a legal holiday, or such other time or date as may be set by the Board of Directors. 10.3 SPECIAL MEETINGS. Special meetings of the shareholders may be called by the Board of Directors, the Chairman of the Board, the President or the holders of shares entitled to cast not less than 10 percent of the vote at the meeting. 10.4 NOTICE OF MEETINGS. (a) Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 (or, if sent by third class mail, 30) nor more than 60 days before the day of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted, and that no other business may be transacted, or (2) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders but subject to the provisions of subdivision (b) any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by the Board for election. (b) Any shareholder approval at a meeting, other than unanimous approval by those entitled to vote, on any of the matters listed below, shall be valid only if the general nature of the proposal so approved was stated in the notice of meeting or in any written waiver of notice: (1) a proposal to approve a contract or other transaction between the corporation and one or more of its directors, or between the corporation and any corporation, firm or association in which one or more directors has a material financial interest; (2) proposal to amend the Articles of Incorporation; 9 11 (3) a proposal regarding a reorganization, merger or consolidation involving the corporation; (4) a proposal to wind up and dissolve the corporation; (5) a proposal to adopt a plan of distribution of the shares, obligations or securities of any other corporation, domestic or foreign, or assets other than money which is not in accordance with the liquidation rights of any preferred shares as specified in the Articles of Incorporation. 10.5 DELIVERY OF NOTICE. Notice of a shareholders' meeting or any report shall be given either personally or by first class mail or in the case of a corporation with outstanding shares held of record by 500 or more persons (determined as provided in Section 605 of the California General Corporation Law) on the record date for the shareholders' meeting, notice may be sent third class mail, or other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice; or if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any notice or report in accordance with the provisions of this section, executed by the Secretary, Assistant Secretary or any transfer agent, shall be prima facie evidence of the giving of the notice or report. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. 10.6 ADJOURNED MEETINGS. When a shareholders' meeting is adjourned to another time or place, unless the By-Laws otherwise require and except as provided in this section, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 45 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. 10.7 CONSENT TO SHAREHOLDERS' MEETING. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting 10 12 or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall constitute a waiver of notice of and presence at such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the California General Corporation Law to be included in the notice but not so included in the notice if such objection is expressly made at the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, consent to the holding of the meeting or approval of the minutes thereof, unless otherwise provided in the Articles of Incorporation or By-Laws, except as provided in 10.4(b). 10.8 QUORUM. (a) The presence in person or by proxy of the persons entitled to vote the majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. Except as provided in subdivision (b), the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation or these By-Laws. (b) The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of the number of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. (c) In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented either in person or by proxy, but no other business may be transacted, except as provided in subdivision (b). 10.9 VOTING RIGHTS. Except as provided in 10.11 or in the Articles of Incorporation or in any statute relating to the election of directors or to other particular matters, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of shareholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, other than elections to office, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. 10.10 DETERMINATION OF HOLDERS OF RECORD. (a) In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days prior to the date of such meeting nor more than 60 days prior to any other action. 11 13 (b) In the absence of any record date set by the Board of Directors pursuant to subdivision (a) above, then: (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (2) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. (3) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. (c) A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting, but the Board shall fix a new record date if the meeting is adjourned for more than 45 days from the date set for the original meeting. (d) Shareholders at the close of business on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Articles or by agreement or applicable law. 10.11 ELECTIONS FOR DIRECTORS. (a) Every shareholder complying with subdivision (b) and entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. (b) No shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless such candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given written notice to the chairman of the meeting at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. (c) In any election of directors, the candidates receiving the highest number of affirmative votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected; votes against the director and votes withheld shall have no legal effect. 12 14 (d) Elections for directors need not be by ballot unless a shareholder demands election by ballot at the meeting and before the voting begins or unless the By-Laws so require. 10.12 PROXIES. (a) Every person entitled to vote shares may authorize another person or persons to act by proxy with respect to such shares. Any proxy purporting to be executed in accordance with the provisions of the General Corporation Law of the State of California shall be presumptively valid. (b) No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy continues in full force and effect until revoked by the person executing it prior to the vote pursuant thereto, except as otherwise provided in this section. Such revocation may be effected by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. (c) A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the corporation. 10.13 INSPECTORS OF ELECTION. (a) In advance of any meeting of shareholders the Board may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election (or persons to replace those who so fail or refuse) at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. (b) The inspectors of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies, receive votes, ballots or consents, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes or consents, determine when the polls shall close, determine the result and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. (c) The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. 13 15 SECTION 11. MEETINGS OF DIRECTORS 11.1 PLACE OF MEETINGS. Unless otherwise specified in the notice thereof, meetings (whether regular, special or adjourned) of the Board of Directors of this corporation shall be held at the principal office of the corporation for the transaction of business, as specified in accordance with Section 1 hereof, which is hereby designated as an office for such purpose in accordance with the laws of the State of California, or at any other place within or without the State which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. 11.2 REGULAR MEETINGS. Regular meetings of the Board of Directors, of which no notice need be given except as required by the laws of the State of California, shall be held after the adjournment of each annual meeting of the shareholders (which meeting shall be designated the Regular Annual Meeting) and at such other times as may be designated from time to time by resolution of the Board of Directors. 11.3 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board or the President or by any Vice President or the Secretary or by any two or more of the directors. 11.4 NOTICE OF MEETINGS. Except in the case of regular meetings, notice of which has been dispensed with, the meetings of the Board of Directors shall be held upon four (4) days' notice by mail or forty-eight (48) hours' notice delivered personally or by telephone, telegraph or other electronic or wireless means. If the address of a director is not shown on the records and is not readily ascertainable, notice shall be addressed to the director at the city or place in which the meetings of the directors are regularly held. Except as set forth in 11.6, notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. 11.5 QUORUM. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors except as otherwise provided by law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. 11.6 ADJOURNED MEETINGS. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. 11.7 WAIVER OF NOTICE AND CONSENT. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such 14 16 waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 11.8 ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board may be taken without a meeting, if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. 11.9 CONFERENCE TELEPHONE MEETINGS. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to this section constitutes presence in person at such meeting. 11.10 MEETINGS OF COMMITTEES. The provisions of this Article apply also to committees of the Board and incorporators and action by such committees and incorporators. SECTION 12. SUNDRY PROVISIONS 12.1 INSTRUMENTS IN WRITING. All checks, drafts, demands for money and notes of the corporation, and all written contracts of the corporation, shall be signed by such officer or officers, agent or agents, as the Board of Directors may from time to time by resolution designate. No officer, agent, or employee of the corporation shall have power to bind the corporation by contract or otherwise unless authorized to do so by these By-Laws or by the Board of Directors. 12.2 FISCAL YEAR. The fiscal year of this corporation shall commence on January 1st and end on December 31 of each year. 12.3 SHARES HELD BY THE CORPORATION. Shares in other corporations standing in the name of this corporation may be voted or represented and all rights incident thereto may be exercised on behalf of this corporation by the President or by any other officer of this corporation authorized so to do by resolution of the Board of Directors. 12.4 CERTIFICATES OF STOCK. There shall be issued to each holder of fully paid shares of the capital stock of the corporation a certificate or certificates for such shares. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the Chairman or Vice Chairman of the Board or the President or a Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. 12.5 LOST CERTIFICATES. The corporation may issue a new share certificate or a new certificate for any other security in the place of any certificate theretofore issued by it, alleged to 15 17 have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate or the owner's legal representative to give the corporation a bond (or other adequate security) sufficient to indemnify it against any claim that may be made against it (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. The Board of Directors may adopt such other provisions and restrictions with reference to lost certificates, not inconsistent with applicable law, as it shall in its discretion deem appropriate. 12.6 CERTIFICATION AND INSPECTION OF BY-LAWS. The corporation shall keep at its principal executive office in this state, or if its principal executive office is not in this state at its principal business office in this state, the original or a copy of these By-Laws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, it shall upon the written request of any shareholder furnish to such shareholder a copy of the By-Laws as amended to date. 12.7 NOTICES. Any reference in these By-Laws to the time a notice is given or sent means, unless otherwise expressly provided, the time a written notice by mail is deposited in the United States mails, postage prepaid; or the time any other written notice is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient; or the time any oral notice is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. 12.8 REPORTS TO SHAREHOLDERS. Except as may otherwise be required by law, the rendition of an annual report to the shareholders is waived so long as there are less than 100 holders of record of the shares of the corporation (determined as provided in Section 605 of the California General Corporation Law). At such time or times, if any, that the corporation has 100 or more holders of record of its shares, the Board of Directors shall cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year or within such shorter time period as may be required by applicable law, and such annual report shall contain such information and be accompanied by such other documents as may be required by applicable law. 12.9 INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. (a) The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding, by reason of the fact that such person is or was an agent of the corporation, to the fullest extent permitted by Section 317 of the California General Corporation Law, as amended from time to time. The term "proceeding" and "agent" in the foregoing sentence shall have the meanings given to them in Section 317 of the California General Corporation Law, as amended from time to time. (b) The indemnification provided by this section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official 16 18 capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the articles of the corporation. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in this section shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise. (c) This section does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent as defined in subdivision (a) of the corporation. The corporation shall, and it hereby agrees to, indemnify such trustee, investment manager or other fiduciary to the extent permitted by subdivision (f) of Section 207 of the California General Corporation Law, as amended from time to time. (d) Nothing in this section shall restrict the power of the corporation to indemnify its agents under any provision of the California General Corporation Law, as amended from time to time, or under any other provision of law from time to time applicable to the corporation, nor shall anything in this section authorize the corporation to indemnify its agents in situations prohibited by the California General Corporation Law or other applicable law. SECTION 13. CONSTRUCTION OF BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW 13.1 DEFINITIONS. Unless defined otherwise in these By-Laws or unless the context otherwise requires, terms used herein shall have the same meaning, if any, ascribed thereto in the California General Corporation Law, as amended from time to time. 13.2 BY-LAW PROVISIONS ADDITIONAL AND SUPPLEMENTAL TO PROVISIONS OF LAW. All restrictions, limitations, requirements and other provisions of these By-Laws shall be construed, insofar as possible, as supplemental and additional to all provisions of law applicable to the subject matter thereof and shall be fully complied with in addition to the said provisions of law unless such compliance shall be illegal. 13.3 BY-LAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH PROVISIONS OF LAW. Any article, section, subsection, subdivision, sentence, clause or phrase of these By-Laws which upon being construed in the manner provided in 13.2 hereof, shall be contrary to or inconsistent with any applicable provision of law, shall not apply so long as said provisions of law shall remain in effect, but such result shall not affect the validity or applicability of any other portions of these By-Laws, it being hereby declared that these By-Laws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentence clauses or phrases is or are illegal. 17 19 SECTION 14. ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS 14.1 BY SHAREHOLDERS. By-Laws may be adopted, amended or repealed by the approval of the affirmative vote of a majority of the outstanding shares of the corporation entitled to vote. 14.2 BY THE BOARD OF DIRECTORS. Subject to the right of shareholders to adopt, amend or repeal By-Laws, By-Laws other than a By-Law or amendment thereof changing the authorized number of directors may be adopted, amended or repealed by the Board of Directors. A By-Law adopted by the shareholders may restrict or eliminate the power of the Board of Directors to adopt, amend or repeal any or all By-Laws. 18 20 CERTIFICATE OF SECRETARY KNOW ALL PERSONS BY THESE PRESENTS: That the undersigned does hereby certify that the undersigned is the Secretary of Heritage Commerce Corp, a corporation duly organized and existing under and by virtue of the laws of the State of California; that the above and foregoing By-Laws of said corporation were duly and regularly adopted as such by the Board of Directors of said corporation; and that the above and foregoing By-Laws are now in full force and effect. Dated: ------------------ ----------------------------------- Secretary 19 21 TABLE OF CONTENTS -----------------

Page ---- SECTION 1. OFFICES......................................................................1 1.1 Principal Office.............................................................1 1.2 Other Offices................................................................1 SECTION 2. DIRECTORS....................................................................1 2.1 Exercise of Corporate Powers.................................................1 2.2 Number.......................................................................1 2.3 Qualification of Directors...................................................1 2.4 Compensation.................................................................2 2.5 Election and Term of Office..................................................2 2.6 Annual Review of Board Policy Statement and Director Nominations.............2 2.7 Election of Officers of the Board............................................2 2.8 Vacancies....................................................................2 2.9 Nominations for Election of Directors........................................3 2.10 Removal......................................................................3 SECTION 3. OFFICERS.....................................................................4 3.1 Election and Qualifications..................................................4 3.2 Term of Office and Compensation..............................................4 3.3 Removal and Vacancies........................................................4 SECTION 4. CHAIRMAN OF THE BOARD........................................................4 4.1 Powers and Duties............................................................4 SECTION 5. PRESIDENT....................................................................5 5.1 Powers and Duties............................................................5 5.2 President pro tem............................................................5 SECTION 6. VICE PRESIDENT...............................................................5 6.1 Powers and Duties............................................................5 SECTION 7. SECRETARY....................................................................5 7.1 Powers and Duties............................................................5 SECTION 8. CHIEF FINANCIAL OFFICER......................................................6 8.1 Powers and Duties............................................................6 SECTION 9. COMMITTEES OF THE BOARD......................................................7

i 22 Table of Contents ----------------- (continued)

Page ---- 9.1 Appointment and Procedure....................................................7 9.2 Powers.......................................................................7 9.3 Executive Committee..........................................................7 SECTION 10. MEETINGS OF SHAREHOLDERS.....................................................8 10.1 Place of Meetings............................................................8 10.2 Time of Annual Meetings......................................................8 10.3 Special Meetings.............................................................8 10.4 Notice of Meetings...........................................................8 10.5 Delivery of Notice...........................................................9 10.6 Adjourned Meetings...........................................................9 10.7 Consent to Shareholders' Meeting.............................................9 10.8 Quorum......................................................................10 10.9 Voting Rights...............................................................10 10.10 Determination of Holders of Record..........................................10 10.11 Elections for Directors.....................................................11 10.12 Proxies.....................................................................12 10.13 Inspectors of Election......................................................12 SECTION 11. MEETINGS OF DIRECTORS.......................................................13 11.1 Place of Meetings...........................................................13 11.2 Regular Meetings............................................................13 11.3 Special Meetings............................................................13 11.4 Notice of Meetings..........................................................13 11.5 Quorum......................................................................13 11.6 Adjourned Meetings..........................................................13 11.7 Waiver of Notice and Consent................................................13 11.8 Action Without a Meeting....................................................14 11.9 Conference Telephone Meetings...............................................14 11.10 Meetings of Committees......................................................14 SECTION 12. SUNDRY PROVISIONS...........................................................14 12.1 Instruments in Writing......................................................14

ii 23 Table of Contents ----------------- (continued)

Page ---- 12.2 Fiscal Year.................................................................14 12.3 Shares Held by the Corporation..............................................14 12.4 Certificates of Stock.......................................................14 12.5 Lost Certificates...........................................................14 12.6 Certification and Inspection of By-Laws.....................................15 12.7 Notices.....................................................................15 12.8 Reports to Shareholders.....................................................15 12.9 Indemnification of Directors, Officers and Employees........................15 SECTION 13. CONSTRUCTION OF BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW.................16 13.1 Definitions.................................................................16 13.2 By-Law Provisions Additional and Supplemental to Provisions of Law..........16 13.3 By-Law Provisions Contrary to or Inconsistent with Provisions of Law........16 SECTION 14. ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS....................................17 14.1 By Shareholders.............................................................17 14.2 By the Board of Directors...................................................17

iii -----END PRIVACY-ENHANCED MESSAGE-----

EX-3.1

   1
                                                                    EXHIBIT 3.1



                                    RESTATED

                            ARTICLES OF INCORPORATION

                                       OF

                             HERITAGE COMMERCE CORP,
                       AS AMENDED EFFECTIVE JUNE 29, 2001



                                    ARTICLE I

        The name of this corporation is Heritage Commerce Corp.

                                   ARTICLE II

        The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business,
or the practice of a profession permitted to be incorporated by the California
Corporations Code.

                                   ARTICLE III

        a. The total number of shares of stock that the corporation shall have
authority to issue is 40,000,000 shares, which shall be divided into two classes
as follows: (a) 30,000,000 shares of Common Stock, and (b) 10,000,000 shares of
Preferred Stock (hereinafter "Preferred Shares"). Upon amendment of this Article
III as set forth herein, each outstanding share of Common Stock is divided into
one and one-half shares of Common Stock.

        b. The Preferred Shares may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of any
series of Preferred Shares and to determine the designation of any such series.
The Board of Directors is also authorized to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued series of Preferred Shares and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, to increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any such series subsequent to the issue of shares of that series.


   2

                                   ARTICLE IV

        Any action required to be taken by shareholders of this corporation must
be taken at a duly called annual meeting or a special meeting of shareholders of
the corporation and no action may be taken by the written consent of the
shareholders.


                                    ARTICLE V

        The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. Any
repeal or modification of this Article, or the adoption of any provision of the
Articles of Incorporation inconsistent with this Article, shall only be
prospective and shall not adversely affect the rights under this Article in
effect at the time of the alleged occurrence of any act or omission to act
giving rise to liability.

                                   ARTICLE VI

        This corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) for breach of duty
to the corporation and its shareholders through bylaw provisions or through
agreements with the agents, or both, in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject only to
the limitations on excess indemnification set forth in Section 204 of the
California Corporations Code with respect to actions for breach of duty to the
corporation and its shareholders.


                                   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.










                                        2

EX-3.2

   1
                                                                     EXHIBIT 3.2





                                     BY-LAWS

                                       OF

                             HERITAGE COMMERCE CORP

                           (A CALIFORNIA CORPORATION)

                           as amended on May 24, 2001


   2

                                     BY-LAWS

                                       OF

                             HERITAGE COMMERCE CORP

                           (A CALIFORNIA CORPORATION)

                           as amended on May 24, 2001


SECTION 1. OFFICES

      1.1 PRINCIPAL OFFICE. The principal office for the transaction of the
business of the corporation shall be located at 150 Almaden Boulevard, City of
San Jose, County of Santa Clara, State of California. The Board of Directors is
hereby granted full power and authority to change said principal office to
another location within or without the State of California.

      1.2 OTHER OFFICES. One or more branch or other subordinate offices may at
any time be fixed and located by the Board of Directors at such place or places
within or without the State of California as it deems appropriate.


SECTION 2. DIRECTORS

      2.1 EXERCISE OF CORPORATE POWERS. Except as otherwise provided by the
Articles of Incorporation of the corporation or by the laws of the State of
California now or hereafter in force, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the Board of Directors. The Board may delegate the
management of the day-to-day operation of the business of the corporation as
permitted by law, provided that the business and affairs of the corporation
shall be managed and all corporate powers shall be exercised under the ultimate
direction of the Board.

      2.2 NUMBER. The number of the corporation's directors shall be not less
than eleven nor more than twenty-one, the exact number within such minimum and
maximum limits to be fixed and determined from time to time by resolution of a
majority of the full Board or by resolution of a majority of the shareholders at
any meeting thereof.

      2.3 QUALIFICATION OF DIRECTORS. 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. The Board of Directors of the
corporation, or a committee thereof, shall determine whether any person who
seeks to become a director complies with the


                                       1
   3

provisions of this Section 2.3. The directors of the corporation need not be
shareholders of the corporation.

      2.4 COMPENSATION. Directors shall receive such compensation for their
services as directors and such reimbursement for their expenses of attendance at
meetings as may be determined from time to time by resolution of the Board.
Nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.

      2.5 ELECTION AND TERM OF OFFICE. At each annual meeting of shareholders,
directors shall be elected to hold office until the next annual meeting,
provided that, if for any reason, said annual meeting or an adjournment thereof
is not held or the directors are not elected thereat, then the directors may be
elected at any special meeting of the shareholders called and held for that
purpose. The term of office of the directors shall begin immediately after their
election and shall continue until the expiration of the term for which elected
and until their respective successors have been elected and qualified.

      2.6 ANNUAL REVIEW OF BOARD POLICY STATEMENT AND DIRECTOR NOMINATIONS. The
Board Directors shall adopt and maintain a Board Policy Statement which shall
establish standards and provide guidance to the Board with respect to legal
issues, attendance at Board and Board committee meetings, and related issues of
director participation in Board and corporate activities. The Board of Directors
shall, at a meeting of the Board during the fourth quarter of each year,
consider the following: the Board Policy Statement and the performance of the
Board and of individual Board members in light of the requirements of the Board
Policy Statement; the structure, function and membership of Board committees;
strategies for increasing the effectiveness of the Board; the Board's
nominations for the Board of Directors at the following year's annual meeting of
the corporation's shareholders; and nominees for positions as officers of the
Board.

      2.7 ELECTION OF OFFICERS OF THE BOARD. The Board of Directors shall, at
its regularly scheduled meeting in December of each year, consider the
organization of the Board, the Board's nominations for the Board of Directors at
the following year's annual meeting of the corporation's shareholders, the
election of officers of the Board, and any other business that results from the
Board's annual review of the Board Policy Statement. Officers of the Board shall
be elected for one-year terms. The unexpired term of any Board officer who
ceases to be a member of the Board of Directors during his or her term as a
Board officer may, at the discretion of the remaining Board members, be filled
through the election another Board member to fill the unexpired term.

      2.8 VACANCIES. A vacancy or vacancies in the Board of Directors shall
exist when any authorized position of director is not then filled by a duly
elected director, whether caused by death, resignation, removal, change in the
authorized number of directors (by the Board or the shareholders) or otherwise.
The Board of Directors may declare vacant the office of a director who has been
declared of unsound mind by an order of court or convicted of a felony. Except
for a vacancy created by the removal of a director, vacancies on the Board may
be filled by approval of the board or, if the number of directors then in office
is less than a quorum, by (1) the unanimous written consent of the directors
then in office, (2) the affirmative vote of a


                                       2
   4

majority of the directors then in office at a meeting held pursuant to notice or
waivers of notice, or (3) a sole remaining director. A vacancy created by the
removal of a director may be filled only by the approval of the shareholders.
The shareholders may elect a director at any time to fill any vacancy not filled
by the directors. Any director may resign effective upon giving written notice
to the Chairman of the Board, the President, the Secretary or the Board of
Directors of the corporation, unless the notice specifies a later time for the
effectiveness of such resignation. If the resignation is effective at a future
time, a successor may be elected to take office when the resignation becomes
effective.

      2.9 NOMINATION, CLASSIFICATION, 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:

                      (1) the name and address of each proposed nominee;

                      (2) the principal occupation of each proposed nominee;

                      (3) the number of shares of capital stock of the
                Corporation owned by each proposed nominee;

                      (4) the name and residence address of the notifying
                shareholder, and

                      (5) the number of shares of capital stock of the
                Corporation owned by the notifying 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.

                      (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.

                      (8) a statement regarding the nominee's compliance with
                Section 2.3 of these Bylaws.


                                       3
   5

          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) In the event that the authorized number of directors shall be fixed at
nine (9) or more, the Board of Directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist of
one-third 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.

          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.

      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:


                                       4
   6

            (1) No director may be removed (unless the entire Board is removed)
    when the votes cast against removal, or not consenting in writing to such
    removal, would be sufficient to elect such director if voted cumulatively at
    an election at which the same total number of votes were cast (or, if such
    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; and

            (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 does not remove
any director prior to the expiration of such director's term of office.

SECTION 3. OFFICERS

      3.1 ELECTION AND QUALIFICATIONS. The officers of this corporation shall
consist of a President, one or more Vice Presidents, a Secretary and a Chief
Financial Officer who shall be chosen by the Board of Directors and such other
officers, including a Chairman of the Board, as the Board of Directors shall
deem expedient, all of whom shall be chosen in such manner and hold their
offices for such terms as the Board of Directors may prescribe. Any two or more
of such offices may be held by the same person. Any Vice President, Assistant
Treasurer or Assistant Secretary, respectively, may exercise any of the powers
of the President, the Chief Financial Officer, or the Secretary, respectively,
as directed by the Board of Directors and shall perform such other duties as are
imposed upon such officer by the By-Laws or the Board of Directors.

      3.2 TERM OF OFFICE AND COMPENSATION. The term of office and salary of each
of said officers and the manner and time of the payment of such salaries shall
be fixed and determined by the Board of Directors and may be altered by said
Board from time to time at its pleasure, subject to the rights, if any, of said
officers under any contract of employment.

      3.3 REMOVAL AND VACANCIES. Any officer of the corporation may be removed
at the pleasure of the Board of Directors at any meeting or by vote of
shareholders entitled to exercise the majority of voting power of the
corporation at any meeting or at the pleasure of any officer who may be granted
such power by a resolution of the Board of Directors. Any officer may resign at
any time upon written notice to the corporation without prejudice to the rights,
if any, of the corporation under any contract to which the officer is a party.
If any vacancy occurs in any office of the corporation, the Board of Directors
may elect a successor to fill such vacancy for the remainder of the unexpired
term and until a successor is duly chosen and qualified.

SECTION 4. CHAIRMAN OF THE BOARD

      4.1 POWERS AND DUTIES. The Chairman of the Board of Directors, if there be
one, shall have the power to preside at all meetings of the Board of Directors,
and to call meetings of the shareholders and of the Board of Directors to be
held within the limitations prescribed by law or by these By-Laws, at such times
and at such places as the Chairman of the Board shall deem


                                       5
   7

proper. The Chairman of the Board shall have such other powers and shall be
subject to such other duties as the Board of Directors may from time to time
prescribe.

SECTION 5. PRESIDENT

      5.1 POWERS AND DUTIES. The powers and duties of the President are:

      (a) To act as the chief executive officer of the corporation and, subject
to the control of the Board of Directors, to have general supervision, direction
and control of the business and affairs of the corporation.

      (b) To preside at all meetings of the shareholders and, in the absence of
the Chairman of the Board, or if there be none, at all meetings of the Board of
Directors.

      (c) To call meetings of the shareholders and also of the Board of
Directors to be held, subject to the limitations prescribed by law or by these
By-Laws, at such times and at such places as the President shall deem proper.

      (d) To affix the signature of the corporation to all deeds, conveyances,
mortgages, leases, obligations, bonds, certificates and other papers and
instruments in writing which have been authorized by the Board of Directors or
which, in the judgment of the President, should be executed on behalf of the
corporation, to sign certificates for shares of stock of the corporation and,
subject to the direction of the Board of Directors, to have general charge of
the property of the corporation and to supervise and control all officers,
agents and employees of the corporation.

      5.2 PRESIDENT PRO TEM. If neither the Chairman of the Board, the
President, nor any Vice President is present at any meeting of the Board of
Directors, a President pro tem may be chosen to preside and act at such meeting.
If neither the President nor any Vice President is present at any meeting of the
shareholders, a President pro tem may be chosen to preside at such meeting.

SECTION 6. VICE PRESIDENT

      6.1 POWERS AND DUTIES. In case of the absence, disability or death of the
President, the Vice President, or one of the Vice Presidents, shall exercise all
the powers and perform all the duties of the President. If there is more than
one Vice President, the order in which the Vice Presidents shall succeed to the
powers and duties of the President shall be as fixed by the Board of Directors.
The Vice President or Vice Presidents shall have such other powers and perform
such other duties as may be granted or prescribed by the Board of Directors.

SECTION 7. SECRETARY

      7.1 POWERS AND DUTIES. The powers and duties of the Secretary are:

      (a) To keep a book of minutes at the principal office of the corporation,
or such other place as the Board of Directors may order, of all meetings of its
directors and shareholders with the time and place of holding, whether regular
or special, and, if special, how authorized, the


                                       6
   8

notice thereof given, the names of those present at directors meetings, the
number of shares present or represented at shareholders' meetings and the
proceedings thereof.

      (b) To keep the seal of the corporation and to affix the same to all
instruments which may require it.

      (c) To keep or cause to be kept at the principal office of the
corporation, or at the office of the transfer agent or agents, a share register,
or duplicate share registers, showing the names of the shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for shares, and the number and date of cancellation of every
certificate surrendered for cancellation.

      (d) To keep a supply of certificates for shares of the corporation, to
fill in all certificates issued, and to make a proper record of each such
issuance; provided, that so long as the corporation shall have one or more duly
appointed and acting transfer agents of the shares, or any class or series of
shares, of the corporation, such duties with respect to such shares shall be
performed by such transfer agent or transfer agents.

      (e) To transfer upon the share books of the corporation any and all shares
of the corporation; provided, that so long as the corporation shall have one or
more duly appointed and acting transfer agents of the shares, or any class or
series of shares, of the corporation, such duties with respect to such shares
shall be performed by such transfer agent or transfer agents, and the method of
transfer of each certificate shall be subject to the reasonable regulations of
the transfer agent to which the certificate is presented for transfer, and also,
if the corporation then has one or more duly appointed and acting registrars, to
the reasonable regulations of the registrar to which the new certificate is
presented for registration; and provided, further, that no certificate for
shares of stock shall be issued or delivered or, if issued or delivered, shall
have any validity whatsoever until and unless it has been signed or
authenticated in the manner provided in 12.4 hereof.

      (f) To make service and publication of all notices that may be necessary
or proper, and without command or direction from anyone. In case of the absence,
disability, refusal or neglect of the Secretary to make service or publication
of any notices, then such notices may be served and/or published by the
President or a Vice President, or by any person thereunto authorized by either
of them or by the Board of Directors or by the holders of a majority of the
outstanding shares of the corporation.

      (g) Generally to do and perform all such duties as pertain to the office
of Secretary and as may be required by the Board of Directors.

SECTION 8. CHIEF FINANCIAL OFFICER

      8.1 POWERS AND DUTIES. The powers and duties of the Chief Financial
Officer are:

      (a) To supervise and control the keeping and maintaining of adequate and
correct accounts of the corporation's properties and business transactions,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any director.


                                       7
   9

      (b) To have the custody of all funds, securities, evidence of indebtedness
and other valuable documents of the corporation and, at the Chief Financial
Officer's discretion, to cause any or all thereof to be deposited for the
account of the corporation with such depositary as may be designated from time
to time by the Board of Directors.

      (c) To receive or cause to be received, and to give or cause to be given,
receipts and acquittances for moneys paid in for the account of the corporation.

      (d) To disburse, or cause to be disbursed, all funds of the corporation as
may be directed by the Board of Directors, taking proper vouchers for such
disbursements.

      (e) To render to the President and to the Board of Directors, whenever
they may require, accounts of all transactions and of the financial condition of
the corporation.

      (f) Generally to do and perform all such duties as pertain to the office
of Chief Financial Officer and as may be required by the Board of Directors.

SECTION 9. COMMITTEES OF THE BOARD

      9.1 APPOINTMENT AND PROCEDURE. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two or more directors, to serve at the
pleasure of the Board. The Board may designate one or more directors as
alternate members of any committee, who may replace any absent member at any
meeting of the committee. The appointment of members or alternate members of a
committee requires the vote of a majority of the authorized number of directors.

      9.2 POWERS. Any committee appointed by the Board of Directors, to the
extent provided in the resolution of the Board or in these By-Laws, shall have
all the authority of the Board except with respect to:

      (a) the approval of any action which requires the approval or vote of the
shareholders;

      (b) the filling of vacancies on the Board or on any committee;

      (c) the fixing of compensation of the directors for serving on the Board
or on any committee;

      (d) the amendment or repeal of By-Laws or the adoption of new By-Laws;

      (e) the amendment or repeal of any resolution of the Board which by its
express terms is not so amendable or repealable;

      (f) a distribution to the shareholders of the corporation, except at a
rate, in a periodic amount or within a price range set forth in the articles or
determined by the Board; and

      (g) the appointment of other committees of the Board or the members
thereof.


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   10

      9.3 EXECUTIVE COMMITTEE. In the event that the Board of Directors appoints
an Executive Committee, such Executive Committee, in all cases in which specific
direction to the contrary shall not have been given by the Board of Directors,
shall have and may exercise, during the intervals between the meetings of the
Board of Directors, all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation (except as
provided in 9.2 hereof) in such manner as the Executive Committee may deem in
the best interests of the corporation.

SECTION 10. MEETINGS OF SHAREHOLDERS

      10.1 PLACE OF MEETINGS. Meetings (whether regular, special or adjourned)
of the shareholders of the corporation shall be held at the principal office for
the transaction of business as specified in accordance with Section 1.1 hereof,
or any place within or without the State which may be designated by written
consent of all the shareholders entitled to vote thereat, or which may be
designated by the Board of Directors.

      10.2 TIME OF ANNUAL MEETINGS. The annual meeting of the shareholders shall
be held on the third Thursday in May of each year, if not a legal holiday, and
if a legal holiday, then on the next succeeding business day not a legal
holiday, or such other time or date as may be set by the Board of Directors.

      10.3 SPECIAL MEETINGS. Special meetings of the shareholders may be called
by the Board of Directors, the Chairman of the Board, the President or the
holders of shares entitled to cast not less than 10 percent of the vote at the
meeting.

      10.4 NOTICE OF MEETINGS.

      (a) Whenever shareholders are required or permitted to take any action at
a meeting, a written notice of the meeting shall be given not less than 10 (or,
if sent by third class mail, 30) nor more than 60 days before the day of the
meeting to each shareholder entitled to vote thereat. Such notice shall state
the place, date and hour of the meeting and (1) in the case of a special
meeting, the general nature of the business to be transacted, and that no other
business may be transacted, or (2) in the case of the annual meeting, those
matters which the Board, at the time of the mailing of the notice, intends to
present for action by the shareholders but subject to the provisions of
subdivision (b) any proper matter may be presented at the meeting for such
action. The notice of any meeting at which directors are to be elected shall
include the names of nominees intended at the time of the notice to be presented
by the Board for election.

      (b) Any shareholder approval at a meeting, other than unanimous approval
by those entitled to vote, on any of the matters listed below, shall be valid
only if the general nature of the proposal so approved was stated in the notice
of meeting or in any written waiver of notice:

            (1) a proposal to approve a contract or other transaction between
    the corporation and one or more of its directors, or between the corporation
    and any corporation, firm or association in which one or more directors has
    a material financial interest;

            (2) proposal to amend the Articles of Incorporation;


                                       9
   11

            (3) a proposal regarding a reorganization, merger or consolidation
    involving the corporation;

            (4) a proposal to wind up and dissolve the corporation;

            (5) a proposal to adopt a plan of distribution of the shares,
    obligations or securities of any other corporation, domestic or foreign, or
    assets other than money which is not in accordance with the liquidation
    rights of any preferred shares as specified in the Articles of
    Incorporation.

      10.5 DELIVERY OF NOTICE. Notice of a shareholders' meeting or any report
shall be given either personally or by first class mail or in the case of a
corporation with outstanding shares held of record by 500 or more persons
(determined as provided in Section 605 of the California General Corporation
Law) on the record date for the shareholders' meeting, notice may be sent third
class mail, or other means of written communication, addressed to the
shareholder at the address of such shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice; or if no such address appears or is given, at the place where the
principal executive office of the corporation is located or by publication at
least once in a newspaper of general circulation in the county in which the
principal executive office is located. The notice or report shall be deemed to
have been given at the time when delivered personally or deposited in the mail
or sent by other means of written communication. An affidavit of mailing of any
notice or report in accordance with the provisions of this section, executed by
the Secretary, Assistant Secretary or any transfer agent, shall be prima facie
evidence of the giving of the notice or report.

      If any notice or report addressed to the shareholder at the address of
such shareholder appearing on the books of the corporation is returned to the
corporation by United States Postal Service marked to indicate that the United
States Postal Service is unable to deliver the notice or report to the
shareholder at such address, all future notices or reports shall be deemed to
have been duly given without further mailing if the same shall be available for
the shareholder upon written demand of the shareholder at the principal
executive office of the corporation for a period of one year from the date of
the giving of the notice or report to all other shareholders.

      10.6 ADJOURNED MEETINGS. When a shareholders' meeting is adjourned to
another time or place, unless the By-Laws otherwise require and except as
provided in this section, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than 45 days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at the meeting.

      10.7 CONSENT TO SHAREHOLDERS' MEETING. The transactions of any meeting of
shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting


                                       10
   12

or an approval of the minutes thereof. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting. Attendance of a person at a meeting shall constitute a waiver of notice
of and presence at such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required by
the California General Corporation Law to be included in the notice but not so
included in the notice if such objection is expressly made at the meeting.
Neither the business to be transacted at nor the purpose of any regular or
special meeting of shareholders need be specified in any written waiver of
notice, consent to the holding of the meeting or approval of the minutes
thereof, unless otherwise provided in the Articles of Incorporation or By-Laws,
except as provided in 10.4(b).

      10.8 QUORUM.

      (a) The presence in person or by proxy of the persons entitled to vote the
majority of the voting shares at any meeting shall constitute a quorum for the
transaction of business. Except as provided in subdivision (b), the affirmative
vote of a majority of the shares represented and voting at a duly held meeting
at which a quorum is present (which shares voting affirmatively also constitute
at least a majority of the required quorum) shall be the act of the
shareholders, unless the vote of a greater number or voting by classes is
required by law or the Articles of Incorporation or these By-Laws.

      (b) The shareholders present at a duly called or held meeting at which a
quorum is present may continue to transact business until adjournment
notwithstanding the withdrawal of the number of enough shareholders to leave
less than a quorum, if any action taken (other than adjournment) is approved by
at least a majority of the shares required to constitute a quorum.

      (c) In the absence of a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of the shares represented
either in person or by proxy, but no other business may be transacted, except as
provided in subdivision (b).

      10.9 VOTING RIGHTS. Except as provided in 10.11 or in the Articles of
Incorporation or in any statute relating to the election of directors or to
other particular matters, each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote of shareholders. Any
holder of shares entitled to vote on any matter may vote part of the shares in
favor of the proposal and refrain from voting the remaining shares or vote them
against the proposal, other than elections to office, but, if the shareholder
fails to specify the number of shares such shareholder is voting affirmatively,
it will be conclusively presumed that the shareholder's approving vote is with
respect to all shares such shareholder is entitled to vote.

      10.10 DETERMINATION OF HOLDERS OF RECORD.

      (a) In order that the corporation may determine the shareholders entitled
to notice of any meeting or to vote or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days prior to the date of such meeting nor more than 60 days
prior to any other action.


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   13

      (b) In the absence of any record date set by the Board of Directors
pursuant to subdivision (a) above, then:

            (1) The record date for determining shareholders entitled to notice
    of or to vote at a meeting of shareholders shall be at the close of business
    on the business day next preceding the day on which notice is given or, if
    notice is waived, at the close of business on the business day next
    preceding the day on which the meeting is held.

            (2) The record date for determining shareholders entitled to give
    consent to corporate action in writing without a meeting, when no prior
    action by the Board has been taken, shall be the day on which the first
    written consent is given.

            (3) The record date for determining shareholders for any other
    purpose shall be at the close of business on the day on which the Board
    adopts the resolution relating thereto, or the 60th day prior to the date of
    such other action, whichever is later.

      (c) A determination of shareholders of record entitled to notice of or to
vote at a meeting of shareholders shall apply to any adjournment of the meeting
unless the Board fixes a new record date for the adjourned meeting, but the
Board shall fix a new record date if the meeting is adjourned for more than 45
days from the date set for the original meeting.

      (d) Shareholders at the close of business on the record date are entitled
to notice and to vote or to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided in the Articles or by agreement or applicable law.

      10.11 ELECTIONS FOR DIRECTORS.

      (a) Every shareholder complying with subdivision (b) and entitled to vote
at any election of directors may cumulate such shareholder's votes and give one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which the shareholder's shares are normally
entitled, or distribute the shareholder's votes on the same principle among as
many candidates as the shareholder thinks fit.

      (b) No shareholder shall be entitled to cumulate votes (i.e., cast for any
candidate a number of votes greater than the number of votes which such
shareholder normally is entitled to cast) unless such candidate or candidates'
names have been placed in nomination prior to the voting and the shareholder has
given written notice to the chairman of the meeting at the meeting prior to the
voting of the shareholder's intention to cumulate the shareholder's votes. If
any one shareholder has given such notice, all shareholders may cumulate their
votes for candidates in nomination.

      (c) In any election of directors, the candidates receiving the highest
number of affirmative votes of the shares entitled to be voted for them up to
the number of directors to be elected by such shares are elected; votes against
the director and votes withheld shall have no legal effect.


                                       12
   14

      (d) Elections for directors need not be by ballot unless a shareholder
demands election by ballot at the meeting and before the voting begins or unless
the By-Laws so require.

      10.12 PROXIES.

      (a) Every person entitled to vote shares may authorize another person or
persons to act by proxy with respect to such shares. Any proxy purporting to be
executed in accordance with the provisions of the General Corporation Law of the
State of California shall be presumptively valid.

      (b) No proxy shall be valid after the expiration of 11 months from the
date thereof unless otherwise provided in the proxy. Every proxy continues in
full force and effect until revoked by the person executing it prior to the vote
pursuant thereto, except as otherwise provided in this section. Such revocation
may be effected by a writing delivered to the corporation stating that the proxy
is revoked or by a subsequent proxy executed by the person executing the prior
proxy and presented to the meeting, or as to any meeting by attendance at such
meeting and voting in person by the person executing the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed.

      (c) A proxy is not revoked by the death or incapacity of the maker unless,
before the vote is counted, written notice of such death or incapacity is
received by the corporation.

      10.13 INSPECTORS OF ELECTION.

      (a) In advance of any meeting of shareholders the Board may appoint
inspectors of election to act at the meeting and any adjournment thereof. If
inspectors of election are not so appointed, or if any persons so appointed fail
to appear or refuse to act, the chairman of any meeting of shareholders may, and
on the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election (or persons to replace those who so fail or refuse) at
the meeting. The number of inspectors shall be either one or three. If appointed
at a meeting on the request of one or more shareholders or proxies the majority
of shares represented in person or by proxy shall determine whether one or three
inspectors are to be appointed.

      (b) The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum and the authenticity, validity and effect of proxies,
receive votes, ballots or consents, hear and determine all challenges and
questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders.

      (c) The inspectors of election shall perform their duties impartially, in
good faith, to the best of their ability and as expeditiously as is practical.
If there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima facie
evidence of the facts stated therein.


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   15

SECTION 11. MEETINGS OF DIRECTORS

      11.1 PLACE OF MEETINGS. Unless otherwise specified in the notice thereof,
meetings (whether regular, special or adjourned) of the Board of Directors of
this corporation shall be held at the principal office of the corporation for
the transaction of business, as specified in accordance with Section 1 hereof,
which is hereby designated as an office for such purpose in accordance with the
laws of the State of California, or at any other place within or without the
State which has been designated from time to time by resolution of the Board or
by written consent of all members of the Board.

      11.2 REGULAR MEETINGS. Regular meetings of the Board of Directors, of
which no notice need be given except as required by the laws of the State of
California, shall be held after the adjournment of each annual meeting of the
shareholders (which meeting shall be designated the Regular Annual Meeting) and
at such other times as may be designated from time to time by resolution of the
Board of Directors.

      11.3 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board or the President or by any Vice
President or the Secretary or by any two or more of the directors.

      11.4 NOTICE OF MEETINGS. Except in the case of regular meetings, notice of
which has been dispensed with, the meetings of the Board of Directors shall be
held upon four (4) days' notice by mail or forty-eight (48) hours' notice
delivered personally or by telephone, telegraph or other electronic or wireless
means. If the address of a director is not shown on the records and is not
readily ascertainable, notice shall be addressed to the director at the city or
place in which the meetings of the directors are regularly held. Except as set
forth in 11.6, notice of the time and place of holding an adjourned meeting need
not be given to absent directors if the time and place be fixed at the meeting
adjourned.

      11.5 QUORUM. A majority of the authorized number of directors constitutes
a quorum of the Board for the transaction of business. Every act or decision
done or made by a majority of the directors present at a meeting duly held at
which a quorum is present shall be regarded as the act of the Board of Directors
except as otherwise provided by law. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, if any action taken is approved by at least a majority of the
required quorum for such meeting.

      11.6 ADJOURNED MEETINGS. A majority of the directors present, whether or
not a quorum is present, may adjourn any meeting to another time and place. If
the meeting is adjourned for more than 24 hours, notice of any adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of the adjournment.

      11.7 WAIVER OF NOTICE AND CONSENT. Notice of a meeting need not be given
to any director who signs a waiver of notice or a consent to holding the meeting
or an approval of the minutes thereof, whether before or after the meeting, or
who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director. All such


                                       14
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waivers, consents and approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.

      11.8 ACTION WITHOUT A MEETING. Any action required or permitted to be
taken by the Board may be taken without a meeting, if all members of the Board
shall individually or collectively consent in writing to such action. Such
written consent or consents shall be filed with the minutes of the proceedings
of the Board. Such action by written consent shall have the same force and
effect as a unanimous vote of such directors.

      11.9 CONFERENCE TELEPHONE MEETINGS. Members of the Board may participate
in a meeting through use of conference telephone or similar communications
equipment, so long as all members participating in such meeting can hear one
another. Participation in a meeting pursuant to this section constitutes
presence in person at such meeting.

      11.10 MEETINGS OF COMMITTEES. The provisions of this Article apply also to
committees of the Board and incorporators and action by such committees and
incorporators.

SECTION 12. SUNDRY PROVISIONS

      12.1 INSTRUMENTS IN WRITING. All checks, drafts, demands for money and
notes of the corporation, and all written contracts of the corporation, shall be
signed by such officer or officers, agent or agents, as the Board of Directors
may from time to time by resolution designate. No officer, agent, or employee of
the corporation shall have power to bind the corporation by contract or
otherwise unless authorized to do so by these By-Laws or by the Board of
Directors.

      12.2 FISCAL YEAR. The fiscal year of this corporation shall commence on
January 1st and end on December 31 of each year.

      12.3 SHARES HELD BY THE CORPORATION. Shares in other corporations standing
in the name of this corporation may be voted or represented and all rights
incident thereto may be exercised on behalf of this corporation by the President
or by any other officer of this corporation authorized so to do by resolution of
the Board of Directors.

      12.4 CERTIFICATES OF STOCK. There shall be issued to each holder of fully
paid shares of the capital stock of the corporation a certificate or
certificates for such shares. Every holder of shares in the corporation shall be
entitled to have a certificate signed in the name of the corporation by the
Chairman or Vice Chairman of the Board or the President or a Vice President and
by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any
Assistant Secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate has
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the corporation with the same effect as if such
person were an officer, transfer agent or registrar at the date of issue.

      12.5 LOST CERTIFICATES. The corporation may issue a new share certificate
or a new certificate for any other security in the place of any certificate
theretofore issued by it, alleged to


                                       15
   17

have been lost, stolen or destroyed, and the corporation may require the owner
of the lost, stolen or destroyed certificate or the owner's legal representative
to give the corporation a bond (or other adequate security) sufficient to
indemnify it against any claim that may be made against it (including any
expense or liability) on account of the alleged loss, theft or destruction of
any such certificate or the issuance of such new certificate. The Board of
Directors may adopt such other provisions and restrictions with reference to
lost certificates, not inconsistent with applicable law, as it shall in its
discretion deem appropriate.

      12.6 CERTIFICATION AND INSPECTION OF BY-LAWS. The corporation shall keep
at its principal executive office in this state, or if its principal executive
office is not in this state at its principal business office in this state, the
original or a copy of these By-Laws as amended to date, which shall be open to
inspection by the shareholders at all reasonable times during office hours. If
the principal executive office of the corporation is outside this state and the
corporation has no principal business office in this state, it shall upon the
written request of any shareholder furnish to such shareholder a copy of the
By-Laws as amended to date.

      12.7 NOTICES. Any reference in these By-Laws to the time a notice is given
or sent means, unless otherwise expressly provided, the time a written notice by
mail is deposited in the United States mails, postage prepaid; or the time any
other written notice is personally delivered to the recipient or is delivered to
a common carrier for transmission, or actually transmitted by the person giving
the notice by electronic means, to the recipient; or the time any oral notice is
communicated, in person or by telephone or wireless, to the recipient or to a
person at the office of the recipient who the person giving the notice has
reason to believe will promptly communicate it to the recipient.

      12.8 REPORTS TO SHAREHOLDERS. Except as may otherwise be required by law,
the rendition of an annual report to the shareholders is waived so long as there
are less than 100 holders of record of the shares of the corporation (determined
as provided in Section 605 of the California General Corporation Law). At such
time or times, if any, that the corporation has 100 or more holders of record of
its shares, the Board of Directors shall cause an annual report to be sent to
the shareholders not later than 120 days after the close of the fiscal year or
within such shorter time period as may be required by applicable law, and such
annual report shall contain such information and be accompanied by such other
documents as may be required by applicable law.

      12.9 INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES.

      (a) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any proceeding, by reason of the fact that such
person is or was an agent of the corporation, to the fullest extent permitted by
Section 317 of the California General Corporation Law, as amended from time to
time. The term "proceeding" and "agent" in the foregoing sentence shall have the
meanings given to them in Section 317 of the California General Corporation Law,
as amended from time to time.

      (b) The indemnification provided by this section shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official


                                       16
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capacity and as to action in another capacity while holding such office, to the
extent such additional rights to indemnification are authorized in the articles
of the corporation. The rights to indemnity hereunder shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of the person.
Nothing contained in this section shall affect any right to indemnification to
which persons other than such directors and officers may be entitled by contract
or otherwise.

      (c) This section does not apply to any proceeding against any trustee,
investment manager or other fiduciary of an employee benefit plan in such
person's capacity as such, even though such person may also be an agent as
defined in subdivision (a) of the corporation. The corporation shall, and it
hereby agrees to, indemnify such trustee, investment manager or other fiduciary
to the extent permitted by subdivision (f) of Section 207 of the California
General Corporation Law, as amended from time to time.

      (d) Nothing in this section shall restrict the power of the corporation to
indemnify its agents under any provision of the California General Corporation
Law, as amended from time to time, or under any other provision of law from time
to time applicable to the corporation, nor shall anything in this section
authorize the corporation to indemnify its agents in situations prohibited by
the California General Corporation Law or other applicable law.

SECTION 13. CONSTRUCTION OF BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW

      13.1 DEFINITIONS. Unless defined otherwise in these By-Laws or unless the
context otherwise requires, terms used herein shall have the same meaning, if
any, ascribed thereto in the California General Corporation Law, as amended from
time to time.

      13.2 BY-LAW PROVISIONS ADDITIONAL AND SUPPLEMENTAL TO PROVISIONS OF LAW.
All restrictions, limitations, requirements and other provisions of these
By-Laws shall be construed, insofar as possible, as supplemental and additional
to all provisions of law applicable to the subject matter thereof and shall be
fully complied with in addition to the said provisions of law unless such
compliance shall be illegal.

      13.3 BY-LAW PROVISIONS CONTRARY TO OR INCONSISTENT WITH PROVISIONS OF LAW.
Any article, section, subsection, subdivision, sentence, clause or phrase of
these By-Laws which upon being construed in the manner provided in 13.2 hereof,
shall be contrary to or inconsistent with any applicable provision of law, shall
not apply so long as said provisions of law shall remain in effect, but such
result shall not affect the validity or applicability of any other portions of
these By-Laws, it being hereby declared that these By-Laws would have been
adopted and each article, section, subsection, subdivision, sentence, clause or
phrase thereof, irrespective of the fact that any one or more articles,
sections, subsections, subdivisions, sentence clauses or phrases is or are
illegal.


                                       17
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SECTION 14. ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS

      14.1 BY SHAREHOLDERS. By-Laws may be adopted, amended or repealed by the
approval of the affirmative vote of a majority of the outstanding shares of the
corporation entitled to vote.

      14.2 BY THE BOARD OF DIRECTORS. Subject to the right of shareholders to
adopt, amend or repeal By-Laws, By-Laws other than a By-Law or amendment thereof
changing the authorized number of directors may be adopted, amended or repealed
by the Board of Directors. A By-Law adopted by the shareholders may restrict or
eliminate the power of the Board of Directors to adopt, amend or repeal any or
all By-Laws.

















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                            CERTIFICATE OF SECRETARY

KNOW ALL PERSONS BY THESE PRESENTS:


      That the undersigned does hereby certify that the undersigned is the
Secretary of Heritage Commerce Corp, a corporation duly organized and existing
under and by virtue of the laws of the State of California; that the above and
foregoing By-Laws of said corporation were duly and regularly adopted as such by
the Board of Directors of said corporation; and that the above and foregoing
By-Laws are now in full force and effect.

      Dated:
            ------------------




                                             -----------------------------------
                                                          Secretary



















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                                TABLE OF CONTENTS
                                -----------------



                                                                                       Page
                                                                                       ----
                                                                                 
SECTION 1.  OFFICES......................................................................1

     1.1    Principal Office.............................................................1

     1.2    Other Offices................................................................1

SECTION 2.  DIRECTORS....................................................................1

     2.1    Exercise of Corporate Powers.................................................1

     2.2    Number.......................................................................1

     2.3    Qualification of Directors...................................................1

     2.4    Compensation.................................................................2

     2.5    Election and Term of Office..................................................2

     2.6    Annual Review of Board Policy Statement and Director Nominations.............2

     2.7    Election of Officers of the Board............................................2

     2.8    Vacancies....................................................................2

     2.9    Nominations for Election of Directors........................................3

     2.10   Removal......................................................................3

SECTION 3.  OFFICERS.....................................................................4

     3.1    Election and Qualifications..................................................4

     3.2    Term of Office and Compensation..............................................4

     3.3    Removal and Vacancies........................................................4

SECTION 4.  CHAIRMAN OF THE BOARD........................................................4

     4.1    Powers and Duties............................................................4

SECTION 5.  PRESIDENT....................................................................5

     5.1    Powers and Duties............................................................5

     5.2    President pro tem............................................................5

SECTION 6.  VICE PRESIDENT...............................................................5

     6.1    Powers and Duties............................................................5

SECTION 7.  SECRETARY....................................................................5

     7.1    Powers and Duties............................................................5

SECTION 8.  CHIEF FINANCIAL OFFICER......................................................6

     8.1    Powers and Duties............................................................6

SECTION 9.  COMMITTEES OF THE BOARD......................................................7



                                       i
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                                Table of Contents
                                -----------------
                                   (continued)


                                                                                       Page
                                                                                       ----
                                                                                 
     9.1    Appointment and Procedure....................................................7

     9.2    Powers.......................................................................7

     9.3    Executive Committee..........................................................7

SECTION 10. MEETINGS OF SHAREHOLDERS.....................................................8

     10.1   Place of Meetings............................................................8

     10.2   Time of Annual Meetings......................................................8

     10.3   Special Meetings.............................................................8

     10.4   Notice of Meetings...........................................................8

     10.5   Delivery of Notice...........................................................9

     10.6   Adjourned Meetings...........................................................9

     10.7   Consent to Shareholders' Meeting.............................................9

     10.8   Quorum......................................................................10

     10.9   Voting Rights...............................................................10

     10.10  Determination of Holders of Record..........................................10

     10.11  Elections for Directors.....................................................11

     10.12  Proxies.....................................................................12

     10.13  Inspectors of Election......................................................12

SECTION 11. MEETINGS OF DIRECTORS.......................................................13

     11.1   Place of Meetings...........................................................13

     11.2   Regular Meetings............................................................13

     11.3   Special Meetings............................................................13

     11.4   Notice of Meetings..........................................................13

     11.5   Quorum......................................................................13

     11.6   Adjourned Meetings..........................................................13

     11.7   Waiver of Notice and Consent................................................13

     11.8   Action Without a Meeting....................................................14

     11.9   Conference Telephone Meetings...............................................14

     11.10  Meetings of Committees......................................................14

SECTION 12. SUNDRY PROVISIONS...........................................................14

     12.1   Instruments in Writing......................................................14



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                                Table of Contents
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                                   (continued)


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     12.2   Fiscal Year.................................................................14

     12.3   Shares Held by the Corporation..............................................14

     12.4   Certificates of Stock.......................................................14

     12.5   Lost Certificates...........................................................14

     12.6   Certification and Inspection of By-Laws.....................................15

     12.7   Notices.....................................................................15

     12.8   Reports to Shareholders.....................................................15

     12.9   Indemnification of Directors, Officers and Employees........................15

SECTION 13. CONSTRUCTION OF BY-LAWS WITH REFERENCE TO PROVISIONS OF LAW.................16

     13.1   Definitions.................................................................16

     13.2   By-Law Provisions Additional and Supplemental to Provisions of Law..........16

     13.3   By-Law Provisions Contrary to or Inconsistent with Provisions of Law........16

SECTION 14. ADOPTION, AMENDMENT OR REPEAL OF BY-LAWS....................................17

     14.1   By Shareholders.............................................................17

     14.2   By the Board of Directors...................................................17







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