SecProbe.io

CORRESP
1
filename1.htm

Confidential Treatment has been requested by Heritage
Commerce Corp pursuant to 17 CFR 200.83.  This correspondence omits Confidential
Information included in the unredacted version of this correspondence that was
delivered to the Division of Corporation Finance of the Securities and Exchange
Commission.  Omissions of Confidential
information are denoted by Asterisks.

August 9,
2005

Ms. Chris
Harley

Staff
Accountant, Division of Corporation Finance

U.S.
Securities and Exchange Commission

Mail
Stop 4561

100
F Street, N.E.

Washington,
D.C.  20002

Re:          Heritage Commerce Corp

Item 4.01 Form 8-K

Filed June 2, 2005

File No. 000-23877

Dear
Ms. Harley:

We
have received your letter dated July 25, 2005 regarding our Form 8-K
filed on June 2, 2005.  Enclosed in
our package are formal responses to your inquiries.  In the main memo, we listed each of the SEC’s
questions or comments, and then replied with a detailed answer.  Our responses would reference, if applicable,
an exhibit which provides additional information, schedules, reports and other
documentation.  For your convenience,
there is also a detailed index listing all information provided.

As
requested, we acknowledge that:

•      the company is responsible for the adequacy
and accuracy of the disclosure in the filing;

•      staff comments or changes to disclosure in
response to staff comment do not foreclose the Commission from taking any
action with respect to the filing; and

•      the company may not assert staff comments as
a defense in any proceeding initiated by the Commission or any person under the
federal securities laws of the United States.

As
discussed previously, we are providing this information to you by
August 10, 2005.  Thank you for
extending the five business day time frame.

If
you have any questions, please call me at (408) 494-4562.

Sincerely,

Lawrence
D. McGovern, Executive Vice President and Chief Financial Officer

on
behalf of Heritage Commerce Corp

Heritage Commerce Corp

Heritage Bank of Commerce

Response
to SEC Letter dated July 25, 2005

  Description

  Memo Detailing Responses to SEC’s Comments and
  Questions

  SEC
  Letter Dated July 25, 2005

  HTBK’s
  Form 8-K Filing June 2, 2005

  EXHIBIT A – Sections of December 31, 2004
  Form 10-K

  Item 9A – Controls and
  Procedures

  Consolidated Balance
  Sheets

  Consolidated Income
  Statements

  Consolidated Statement of
  Changes in Shareholders’ Equity

  Consolidated Statement of
  Cash Flows

  Restatement of the pro
  forma amount for stock - based compensation

  Note (2) Restatement

  EXHIBIT B – March 31, 2004
  Form 10-Q & Form 8-K – Filed on May 9, 2005

  Consolidated Balance
  Sheets

  Consolidated Income
  Statements

  Consolidated Statement of
  Cash Flows

  Note (2) Restatement

  Restatement of the pro
  forma amount for stock - based compensation disclosure

  ITEM 4. Controls and
  Procedures

  Form 8-K –
  March 31, 2005 Financial Results – Filed on May 9, 2005

  EXHIBIT C
  – Management’s Corrective Action Plan for Material Weakness Found in Review
  of Internal Controls Memo

2

  Description

  EXHIBIT D – Form 8-K, – Filed
  March 15, 2005

  ITEM 4.02 (a) Non-Reliance
  on Previously Issued Financial Statements or a Related Audit Report or
  Completed Interim Review

  ITEM 9.01
  (a) Financial Statements and Exhibits

  Exhibit 99.1
  Financial Results Press Release March 15, 2005

  EXHIBIT E – 4th Quarter 2004
  Adjustment Entries

  EXHIBIT F
  – Schedule of Written Communications between Management and
  Deloitte & Touche, LLP (“D&T”)

  D&T’s March 30, 2005 Report of
  December 31, 2004 Audit of Financial Statements

  D&T’s March 30, 2005 Report from Audit of
  Management’s Assessment of Internal Control over Financial Reporting

  D&T’s March 30, 2005 Letter involving
  Company’s Internal Control over Financial Reporting detailing Material
  Weaknesses or Significant Deficiencies

  D&T’s March 30, 2005 Report of Company’s
  Internal Control over Financial Reporting

3

SEC Letter Dated July 25, 2005, pages 11-14

Item 4.01 Changes in Registrant’s Certifying
Accountant, beginning on
page 11

1.             Revise the second paragraph
of the disclosure to refer to the consolidated financial statements for the
years ended December 31, 2004 and 2003.

We
will revise the second paragraph of the disclosure to refer to the consolidated
financial statements for the years ended December 31, 2004 and 2003.  (See page 17 for original filing).

2.             Revise to provide the information required by Item
304(a)(1)(v) of Regulation S-K, regarding the reportable event that the
former accountant advised the company of during the two most recent fiscal
years and subsequent interim period through the date of termination.  In detail, supplementally describe the nature
of each reportable event and the amount involved, if any.  Also, tell us in what period the reportable
event occurred and whether or not you restated (or intend to restate) any prior
period for any adjustment resulting from the reportable event; and if not, why
not.  Tell us in detail the steps you
have taken (or plan to take) and procedures you implemented (or plan to
implement) to correct each reportable event.

We
believe the Form 8-K has appropriately included information required by
Item 304(a)(1)(v) of Regulation S-K.
During the Registrant’s two most recent fiscal years and the subsequent
interim period through the date of Deloitte’s dismissal, there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K,
except as follows:  Deloitte’s report on
the Registrant’s internal control over financial reporting dated March 30,
2005 expressed an adverse opinion on the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2004 because
of a material weakness.  The following
material weakness had been identified and included in management’s assessment:

The
Company did not design and implement controls over the selection and
application of accounting policies for complex, non-routine transactions.  As a result, the controls did not prevent or
detect the following matters on a timely basis:

1.     Supplemental Executive Retirement Plan

Event - The pension accounting was not appropriately applied to the
Company’s retirement plan in 2004.

Dollar Amount - The pension accounting was not
appropriately applied to the Company’s retirement plan in 2004 as the Company
did not identify a $1.9 million additional minimum pension liability.  At December 31, 2004, the Company
recorded the $1.9 million in additional minimum pension liability which
increased other liabilities by $1.9 million, increased deferred tax asset by
$.8 million, and decreased other comprehensive income by $1.1 million.  This
adjustment had no effect on net income.

Restatement - Prior period restatement was not necessary since the error occurred
in 2004.

4

Remediation - See Exhibit “C” – Management corrective action plan for
material weakness found in review of internal controls.  (See page 65 for beginning of memo).

2.     Direct Financing Lease

Event - In December 2003, due to an amendment in an agreement, the
Company reclassified an asset from other assets (equipment subject to an
operating lease) to loans (direct financing lease).  The Company subsequently determined that the
minimum rents were not sufficient to qualify the lease as a finance lease.

Dollar Amount - The Company restated its 2003 balance
sheet through a reclassification of approximately $3.9 million from loans to
other assets.  This adjustment had no effect on net income.

Restatement - Because the timing differences related to the accounting for loans
compared to the accounting for assets subject to operating lease, earnings in
the first, second, & third quarters of 2004 will differ from what had
previously been reported in the interim financial statements.  The Company restated its 2003 balance sheet
(See Exhibit “A” – 2004 Form 10-K, balance sheet is page 28) and
described details in the Note 2 Restatement, (See Exhibit “A”
Form 10-K, note is on page 38).  Also, corrected and then referenced is the
March 31, 2005 Form 10-Q 2005 where we restated the March 31,
2004 quarter, (See Exhibit “B” – 1Q05 Form 10-Q, page 43 for the
balance sheet and pages 49-50
for the note explanation & Form 8-K – 1Q05 Press Release, pages 61 & 63,
for referencing to the restatement).  The
effect of the misclassification of the assets on the 2003 statements of income
and cash flow was insignificant and those statements were not restated for this
error.  In addition, we plan to restate
the 2nd and 3rd quarter of 2004 in the future
June 30, 2005 and September 30, 2005 Form 10-Qs.

Remediation - See Exhibit “C” – Management corrective action plan for
material weakness found in review of internal controls.  (See page 65 for beginning of memo).

3.     Low Income Housing Credits

Event - The application of accounting policies for investments in affordable
housing projects did not recognize unconditional, delayed contributions in
2003 & 2004.

Dollar Amount - The Company recorded a $4.3 million
adjustment to increase other assets & other liabilities as of
December 31, 2004.  This adjustment had no effect on net income.

Restatement - The Company restated its 2003 balance sheet (See Exhibit “A” –
2004 Form 10-K, balance sheet is page 28) and described details in the
Note 2 Restatement, (See Exhibit “A” Form 10-K, note is on pages 38-39).

5

Also, corrected and then referenced is the
March 31, 2005 Form 10-Q 2005 where we restated the March 31,
2004 quarter, (See Exhibit “B” – 1Q05 Form 10-Q, page 43 for the
balance sheet and pages 49-50
for the note explanation & Form 8-K – 1Q05 Press Release, pages 61 & 63,
for referencing to the restatement).  In
addition, we plan to restate the 2nd and 3rd quarter of
2004 in the future June 30, 2005 and September 30, 2005
Form 10-Qs.

Remediation - See Exhibit “C” – Management corrective action plan for
material weakness found in review of internal controls.  (See page 65 for beginning of memo).

4.     Straight Line Rent

Event - The application of accounting policies for facilities rental expense
did not appropriately consider free-rent periods and scheduled rent increases
in 2002, 2003, and 2004.

Dollar Amount - The Company recorded a $0.6 million in
deferred lease liability which increased other liabilities $0.6 million and
decreased retained earnings by the same amount as of December 31, 2004.

Restatement - The Company restated its balance sheet in relation to this error for
2003 and restated its income statement for 2002, and 2003 (See
Exhibit “A”- 2004, pages 28-31
for related balance sheets and income statements, and pages 38-39 for
detailed note (2) explanation), and its 2004 quarterly financial
statements (See Exhibit “B” – 1Q05 Form 10-Q, for related balance
sheets and income statements, pages 43-46, and for detailed note explanation, pages 49-50 &
Form 8-K – 1Q05 Press Release, pages 61 & 63, for referencing
to the restatement).  The after tax income statement effect for years ended
December 31, 2003 and 2002 was to reduce income by $6,000 and $23,000,
respectively.  In addition, we
plan to restate the 2nd and 3rd quarter of 2004 in the
future June 30, 2005 and September 30, 2005 Form 10-Qs.

Remediation - See Exhibit “C” – Management corrective action plan for
material weakness found in review of internal controls.  (See page 65 for beginning of memo).

5.     Income Taxes

Event - The application of income tax accounting policies did not
appropriately classify deferred tax assets and liabilities on the balance sheet
as of December 31, 2004.

Dollar Amount - $1.3 million in deferred tax liabilities
which were reclassified from other liabilities to other assets as of
December 31, 2004.  This adjustment had no effect on net income.

6

Restatement - The Company restated its balance sheet in relation to this error for
the fiscal year ended December 31, 2003 (See Exhibit “A”- 2004
Form 10-K, pages 28-29),
and its 2004 quarterly financial statements (See Exhibit “B” – 1Q05
Form 10-Q, pages 43-44 &
Form 8-K – 1Q05 Press Release, references on pages 61 & 63).  In addition, we plan to restate the 2nd
and 3rd quarter of 2004 in the future June 30, 2005 and
September 30, 2005 Form 10-Qs.

Remediation - See Exhibit “C” – Management corrective action plan for
material weakness found in review of internal controls.  (See page 65 for beginning of memo).

6.     Stock-Based Compensation

Event - The application of disclosure policies for stock-based compensation
recognized pro forma compensation expense over the expected life (7 years) of
an option instead of the vesting period (4 years).

Dollar Amount - No
income impact, disclosure only.  The effect was to decrease compensation
expense for amortization of fair value of stock awards, net of taxes $160,000
in 2003 and to increase compensation expense for amortization of fair value of
stock awards, net of taxes $41,000 in 2002.
Pro forma net income per common share increased $.02 per share basic and
$.02 per share diluted in 2003.  Pro
forma net income per common share decreased $.01 per share basic but remained
the same per share diluted in 2002.

Restatement - The Company restated the 2002 & 2003 reported numbers (See
Exhibit “A” – 2004 Form 10-K, pages 36-37) & its 2004
quarterly pro forma amounts (See Exhibit “B” – 1Q05 Form 10-Q, pages 50-51).  In addition, we plan to restate the 2nd
and 3rd quarter of 2004 in the future June 30, 2005 and
September 30, 2005 Form 10-Qs.

Remediation - See Exhibit “C” – Management corrective action plan for
material weakness found in review of internal controls.  (See page 65 for beginning of memo).

3.             Revise to disclose the nature of the accounting errors
and misapplication of accounting principles.
If various in type, clearly disclose the nature of each type of error or
misapplication.  Clarify the effect of
the errors or misapplications on previously issued financial statements.  If no effect on the financial statements,
explain why not in the amendment.  Refer
to Regulation S-K Items 304(a)(1) (iv) and (v).

Information
required has been previously disclosed.
See Exhibit “D” - Form 8-K - Heritage Commerce Corp Restates
Financial Results, a press release dated March 15, 2005, pages 73-82.  See the response to question #2 above, which
details and references each error or misapplication.  Also see Exhibit “A” – 2004
Form 10-K, pages 23-39.  As such, no additional disclosures in the
revised Form 8-K are considered necessary.

7

4.             In detail, supplementally describe the nature of each
material weakness and the amounts involved, as applicable.  Also, tell us:

•      In what period each material
weakness and accounting error or misapplication of GAAP occurred,

•      The amount of each
accounting error and misapplication of GAAP,

•      The reason(s) for each error
or misapplication of accounting,

•      Whether or not you intend to
restate any prior period for any adjustments.  If not, tell us why not, and

•      In detail, all the steps you
have taken (or plan to take) and procedures you have implemented (or plan to
implement) to correct each concern.

The nature of each material weakness &
amounts involved is as follows:

1.     Supplemental Executive Retirement Plan

Period - The pension accounting was not appropriately applied to the
Company’s retirement plan in 2004.

Amount - The pension accounting was not appropriately applied to the
Company’s retirement plan in 2004 as the Company did not identify a $1.9
million additional minimum pension liability.
At December 31, 2004, the Company recorded the $1.9 million in
additional minimum pension liability which increased other liabilities by $1.9
million, increased deferred tax asset by $.8 million, and decreased other
comprehensive income by $1.1 million.