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<CASH> 12,574
<INT-BEARING-DEPOSITS> 0
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<TRADING-ASSETS> 0
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<INVESTMENTS-CARRYING> 15,248
<INVESTMENTS-MARKET> 15,492
<LOANS> 170,800
<ALLOWANCE> 3,847
<TOTAL-ASSETS> 252,195
<DEPOSITS> 196,692
<SHORT-TERM> 24,000
<LIABILITIES-OTHER> 4,845
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<COMMON> 19,627
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<EXPENSE-OTHER> 8,797
<INCOME-PRETAX> 5,419
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</TABLE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the Fiscal Year ended December 31, 1995
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the Transition period from _________________ to _____________________
Commission File Number 0-11771
SJNB Financial Corp.
- --------------------------------------------------------------------------------
(Name of small business issuer in its charter)
California 77-0058227
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (408) 947-7562
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
- --------------------------------------------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the past 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. Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year: $21,944,000
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on a market value of $13.375 per share (the closing price, as
of January 26, 1996) was $31,429,694.
Number of shares of common stock outstanding as of 1/26/96: 2,424,650 shares
Documents incorporated by reference:
Portions of Registrant's definitive proxy statement for Registrant's 1996 Annual
Meeting of Shareholders (to be filed pursuant to Regulation 14A) are
incorporated by reference into Part III of this Report.
Transitional small business disclosure format: Yes No X
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1 - Business 1
Item 2 - Properties 8
Item 3 - Legal Proceedings 8
Item 4 - Submission of Matters to a Vote of Security Holders 9
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6 - Management's Discussion and Analysis or Plan of Operation 11
Item 7 - Financial Statements 31
Item 8 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 50
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 50
Item 10 - Executive Compensation 50
Item 11 - Security Ownership of Certain Beneficial Owners & Management 50
Item 12 - Certain Relationships and Related Transactions 50
Item 13 - Exhibits and Reports on Form 8-K 50
Signatures 53
<PAGE>
PART I
ITEM 1. BUSINESS
General
SJNB Financial Corp. ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the state of California on April 18, 1983. Its principal office is
located at One North Market Street, San Jose, California 95113 and its telephone
number is (408) 947-7562.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose,
California, on June 10, 1982. The Company acquired Business Bancorp ("BB") and
its wholly-owned subsidiary California Business Bank ("CBB") on October 1, 1994.
Operations of the Company and BB were consolidated into a single location at One
North Market Street, San Jose, California 95113. SJNB engages in the general
commercial banking business with special emphasis on the banking needs of the
business and professional communities in San Jose and the surrounding areas.
On January 2, 1996, the Bank acquired Astra Financial Corp. for approximately
$760,000. The purchase price is subject to upward adjustment if certain
contingencies are met. Astra's principal business was factoring. Its business
was merged into the Bank's Financial Services Division, by adding approximately
$1.9 million of factored receivables. Astra Financial Corp. was liquidated on
January 5, 1996 and its assets were transferred to the Bank. The Bank's
Financial Services Division is located at 95 South Market Street, San Jose,
California 95113.
SJNB accepts checking and savings deposits, offers money market deposit accounts
and certificates of deposit, makes secured and unsecured commercial and other
installment and term loans, and offers other customary banking services. SJNB
offers banking services generally, but it places primary emphasis on lending for
real estate purposes and specialized lending to businesses and professionals.
Loans for real estate purposes include term financing for commercial facilities
and real estate construction loans mainly for residential and commercial
properties. Loans to businesses and professionals include accounts receivable
financing, equipment financing, commercial loans, SBA loans, and letters of
credit. In addition, the Bank offers factoring services through its Financial
Services Division. Although the Bank has neither a trust nor an international
banking department, it has arranged to provide these services, when requested,
through its correspondent banks.
The Company provides commercial banking services principally through its
subsidiary Bank and the Bank's Financial Services Division. As a bank holding
company, the Company is authorized to engage in the activities permitted under
the Bank Holding Company Act and regulations thereunder.
Service Area
The principal service area of SJNB includes San Jose and the surrounding areas,
including most of Santa Clara County.
Competition
The banking business in California, generally and specifically in the market
areas served by the Bank, is highly competitive with respect to both loans and
deposits. It is dominated by a relatively small number of major banks which have
offices operating throughout California. Among the advantages such major banks
have over the Bank are their ability to finance wide-ranging advertising
campaigns and to allocate their investment assets to regions of highest yield
and demand. In addition, many of the major banks operating in the Bank's service
area offer certain specialized services, such as trust and international banking
services, which SJNB does not offer directly. By virtue of their greater
capitalization, the major banks also have substantially higher lending limits
than the Bank. SJNB competes for loans and deposits with these major banks, as
well as with savings and loan associations, credit unions, brokerage companies,
mortgage companies, insurance companies, and other lending sources which have
provided significant competition for banks with respect to deposits. Other
entities, both governmental and private, seeking to raise capital through the
issuance and sale of debt or equity securities, also provide competition for the
Bank in the acquisition of deposits.
At present there are approximately 139 banking offices in the geographic area
served by SJNB, including offices of major chain banks and of smaller
independent banks. There are also approximately 219 offices of savings and loan
associations, credit unions and other financial institutions in the service area
of SJNB.
The Bank also directly competes with other independent banks in their respective
market areas. Presently, there are approximately eight other independent banks
in the City of San Jose, and seven in the surrounding areas served by SJNB.
Three of the independent banks--Heritage Bank of Commerce, Cupertino National
Bank, and Silicon Valley Bank--emphasize commercial banking services and,
therefore, create direct competition for the services that SJNB offers to the
business and professional communities in its market area.
The Financial Services Division also competes with many of the major banks and
the independent banks within in its marketing area. It also competes with
companies solely in the factoring business. Such companies may offer products
and services which traditionally are not offered by banking institutions.
The trend of federal and state legislation has significantly increased
competition between banks and other financial institutions for both loans and
deposits and is expected to continue to do so in the future.
Employees
At December 31, 1995, SJNB had 63 full-time officers and employees and 18
part-time employees for a total of 72.33 full time equivalents. Certain of the
Bank's officers are also officers of the Company. None of the Bank's employees
are represented by a union. Employee relations are believed to be good.
Supervision and Regulation
The Company
The Company is a bank holding company registered under the Bank Holding Company
Act of 1956 and is subject to the supervision of the Board of Governors of the
Federal Reserve System ("Board"). As a bank holding company, the Company must
obtain the approval of the Board before it may acquire all or substantially all
of the assets of any bank, or ownership or control of the voting shares of any
bank if, after giving effect to such acquisition of shares, the Company would
own or control more than 5% of the voting shares of such bank. With certain
limited exceptions, the Company is prohibited from engaging in or acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any company engaged in non-banking activities, unless the Federal Reserve Board
determines that such activities are so closely related to banking as to be a
proper incident thereof.
The Company and any subsidiary which it may acquire or organize in the future
are deemed to be affiliates of the Bank within the meaning set forth in the
Federal Reserve Act. This means, for example, that there are limitations on
loans by the Bank to affiliates, on investments by the Bank in any affiliate's
stock and on the Bank's taking any affiliate's stock as collateral for loans to
any borrower. All affiliate transactions must satisfy certain limitations and
otherwise be on terms and conditions that are consistent with safe and sound
banking practices. In this regard, the Bank generally may not purchase from any
affiliate a low-quality asset (as that term is defined in the Federal Reserve
Act). Also, transactions by the Bank with an affiliate must be on substantially
the same terms as would be available for non-affiliates.
The Company and its subsidiary are also subject to certain restrictions with
respect to engaging in the underwriting, public sale and distribution of
securities.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with the extension of credit. For example, the Bank
generally may not extend credit on the condition that the customer obtain some
additional service from the Bank or the Company, or refrain from obtaining such
service from a competitor.
The Bank
As a national banking association, the Bank is subject to the National Bank Act
and to supervision, regulation and regular examination by the Comptroller of the
Currency ("Comptroller"). It is also a member of the Federal Reserve System and,
as such, is subject to applicable provisions of the Federal Reserve Act and
regulations issued pursuant thereto. The deposits of the Bank are insured up to
the maximum legal limits by the Bank Insurance Fund, which is managed by the
Federal Deposit Insurance Corporation ("FDIC"), and the Bank is therefore
subject to applicable provisions of the Federal Deposit Insurance Act and
regulations of the FDIC. The statutes and regulations administered by these
agencies govern most aspects of the Bank's business, including required reserves
against deposits, loans, investments, dividends, and the establishment of new
branches and other banking facilities.
(a) Supervision and Examinations.
Federal law mandates frequent examinations of all banks (usually annually for
the Bank), with the costs of examinations to be assessed against the bank being
examined. In the case of the Bank, its primary regulator is the Comptroller
The FDIC has "back up" enforcement power over the Bank under Federal law. The
FDIC may recommend and, in the absence of response by an institution's primary
regulator, undertake enforcement action against any insured financial
institution. Such "back up" enforcement action is permissible if ordered by the
Board of Directors of the FDIC only upon a showing that an insured financial
institution's conduct poses a risk to its insurance fund.
The federal banking regulatory agencies have substantial enforcement powers over
the depository institutions that they regulate. Civil and criminal penalties may
be imposed on such institutions and persons associated with those institutions
for violations of any law or regulation. The penalties can be up to $5,000 per
day that a violation continues when the violation is unintentional, or up to $1
million per day that a violation continues when the violation is willful. The
amount of the penalty also depends on whether the violation is part of a pattern
or causes a loss to the financial institution.
(b) Brokered Deposits.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
places limits on brokered deposits and extends the limits to any bank that is
not "well capitalized" or is notified that it is in "troubled condition."
Previously, the limitations applied only to troubled banks. A well capitalized
institution (which generally includes an institution that is considered well
capitalized for purposes of the prompt corrective action regulations discussed
below) may still accept brokered deposits without restriction, unless it has
been informed by its appropriate federal regulatory agency that it is in
"troubled condition." All other insured depository institutions are prohibited
from accepting brokered deposits unless a waiver is obtained from the FDIC. If a
waiver is obtained, the interest paid on such deposits may not exceed the rate
paid for deposits in its normal market area, or the national rate as determined
in the FDIC's regulation.
If a depository institution solicits deposits by offering interest rates
significantly higher than rates being offered in its market area, it is deemed
under FDICIA to be a deposit broker. Therefore, depending on its capital
category, it may be prohibited from such practice, or need a prior waiver from
the FDIC in order to offer such rates. The FDIC's regulations specify that an
institution that is not well capitalized may offer rates that exceed the
prevailing effective rates offered in the normal market area only if the
institution obtains a waiver, but the institution may not offer rates more than
75 basis points above such prevailing rates.
The Bank is at this time considered well capitalized and not in a "troubled
condition," and it is not, therefore, subject to the brokered deposit
limitations. If the Bank's status changes in the future, these regulations could
restrict the ability to attract such deposits.
(c) Risk-Based Deposit Insurance Assessments.
In addition, FDICIA required the FDIC to develop and implement a system to
account for risks attributable to different categories and concentrations of
assets and liabilities in assessing deposit insurance premiums. The FDIC adopted
a risk-assessment system effective January 1, 1994. Under this system, each
bank's deposit insurance premium assessment is calculated based on the level of
risk that the Bank Insurance Fund will incur a loss if that bank fails and the
amount of the loss if such failure occurs. This requirement, along with the
increased emphasis on exceeding capital measures, may cause banks such as SJNB
to adjust their asset mix in order to affect their deposit insurance premium and
their ability to engage in activities.
Capital Regulations and Dividends
The Company and the Bank are subject to regulations and guidelines which provide
minimum capital adequacy requirements and leverage requirements for bank holding
companies and banks. The specific regulatory requirements are described in Item
6, "Management's Discussion and Analysis or Plan of Operation-Capital." Under
FDICIA, there are five categories of capital compliance, ranging from "well
capitalized," which means the bank has total risk-based capital of 10% or more,
Tier 1 risk-based capital of 6% or more, and a leverage ratio of 5% or more, to
"critically undercapitalized," which means that the bank has a leverage ratio of
less than 2%. The Bank is in the "well capitalized" category at this time.
FDICIA requires the banking agencies to take corrective action against certain
financial institutions, based upon the financial institution's compliance with
the capital measurements. A financial institution is subject to corrective
action if its total risk-based capital is less than 8%, or its Tier 1 risk-based
capital ratio or leverage ratio is less than 4%. In addition, an institution
having a total risk-based capital to assets ratio of less than 10%, a Tier 1
risk based ratio of less than 6%, or a leverage ratio of less than 5% may be
subject to corrective action if it receives a less-than-satisfactory rating for
assets, management, earnings or liquidity in an examination or if such ratios
fall significantly below such standards. These corrective actions become
increasingly more severe as institutions become more and more undercapitalized.
Ultimately, the federal regulator is required to seize an institution within 90
days of its becoming "critically undercapitalized," unless the regulator can
document that another course of action will better achieve the purposes of this
section. The Bank has capital ratios in excess in all of such capital
measurements and it is not subject to any corrective actions.
As required by FDICIA, the federal banking agencies now take credit risk
concentrations and an individual institution's ability to manage such
concentrations into account when they assess a bank's capital adequacy.
Non-traditional investments and activities, such as the use of derivatives, are
also taken into account in assessing capital requirements. The agencies can
adjust the standards for risk-based capital on a case by case basis to take such
risks into account, but there is no formula that a bank can use prior to
evaluation by the agency to determine how credit concentration or nontraditional
activities will affect its capital requirements.
The banking agencies adopted amendments to the risk-based capital rules in 1995
to take interest rate risk into account. Now, when the agencies assess the
capital adequacy of a bank, they must take into account the effect on that
bank's capital that would occur if interest rates moved up or down. The purpose
of the amendment is to ensure that banks with high levels of interest rate risk
have enough capital to cover the loss exposure.
The amendments to the capital rules do not specify how interest rate risks will
be measured. The agencies proposed a measurement framework in 1995 to measure
the interest rate risk to a particular bank. However, the agencies later
announced in December of 1995 that they need more time to analyze the risk
measurement proposal. It is not known whether the final measurement framework
will affect the Bank's capital requirements.
The Company and the Bank are also subject to regulatory restrictions and
guidelines with respect to the payment ofdividends. See Item 5, "Market for
Registrant's Common Equity and Related Stockholder Matters."
Impact of Monetary Policies
Banking is a business in which profitability depends on rate differentials. In
general, the difference between the interest rate received by the Bank on loans
extended to its customers and securities held in the Bank's investment portfolio
and the interest rate paid by the Bank on its deposits and its other borrowings
comprise the major portion of the Bank's earnings. To the extent that the Bank
is not able to compensate for increases in the cost of deposits and other
borrowings with greater income from loans, securities and fees, the net earnings
of the Bank will be reduced. The interest rates paid and received by the Bank
are highly sensitive to many factors which are beyond the control of the Bank,
including the influence of domestic and foreign economic conditions.
The earnings and growth of the Bank are also affected by the monetary and fiscal
policy of the United States government and its agencies, particularly the Board.
These agencies can and do implement national monetary policy, which is used in
part to curb inflation and combat recession. Among the instruments of monetary
policy used by these agencies are open market transactions in United States
Government securities, changes in the discount rates of member bank borrowings
and changes in reserve requirements. The actions of the Board have had a
significant effect on lending by banks, investments and deposits, and such
actions are expected to continue to have a substantial effect in the future.
However, the nature and timing of any further changes in such polices and their
impact on the Bank cannot be predicted.
Environmental Regulation
Federal, state and local regulations regarding the discharge of materials into
the environment may have an impact on the Company and the Bank. Under federal
law, liability for environmental damage and the cost of cleanup may be imposed
upon any person or entity who is an owner or operator of contaminated property.
State law provisions, which were modeled after federal law, impose substantially
similar requirements. A resulting risk to the Company and the Bank is the
possibility that property securing a loan made by the Bank may be
environmentally impaired and not provide adequate security for the Bank. In
addition, these statutes subject the Bank to a risk that it might be considered
to be an owner or operator of such property and therefore liable for the costs
associated with cleaning up the environmental damage.
California law provides some protection against the first risk, by establishing
certain additional, alternative remedies for a lender in the situation where the
property securing a loan is later found to be environmentally impaired.
Primarily, the law permits the lender in such a case to pursue remedies against
the borrower other than foreclosure under the deed of trust. Additional
legislation is now pending in California to protect lenders against the second
risk, but there can be no assurance that such legislation will be adopted.
The Environmental Protection Agency had adopted a rule that limited the
environmental clean-up liability of a lender with limited interest in and
control over contaminated property. In 1994, however, that rule was struck down
by the federal courts, on the ground that the rule was not authorized by the
statutory law. In spite of this, the EPA has continued to follow the rule's
provisions in its enforcement policy. Although legislation to give lenders
similar protection is pending in Congress, there can be no assurance that it
will pass or that it will provide similar protection to lenders if it is
enacted.
New and Pending Legislation
(a) Interstate Banking and Branching.
The Caldera, Weggeland and Killea California Interstate Banking and Branching
Act of 1995 ("Interstate Banking Act") became effective October 2, 1995. The
Interstate Banking Act implements in California a limited form of interstate
branching. A bank from outside of California may now acquire a whole bank in
California and merge the California bank into the out-of-state bank. The effect
of such merger is that the out-of-state bank will have full branch offices in
California. Federal law authorizing these mergers was passed in 1994 and became
effective September 30, 1995.
Out of state banks may not establish branch offices in California by opening a
new branch or acquiring one or more (but less than all) of the branches of a
California bank. They may only acquire a whole bank that has been in existence
for at least five years. As a result of the Interstate Banking Act, California
banks may now be permitted to branch into other states that have also adopted
early opt-in legislation.
There may be a gradual increase in the number of offices of foreign banks in
California, and a possible decrease in banks headquartered in California, as
such banks are acquired by out-of-state entities. It is too early to predict the
specific effect of the Interstate Banking Act on the Bank and its particular
market.
The Interstate Banking Act also authorizes California state-chartered banks to
appoint unaffiliated banks in other states to act as an agent of the California
state-chartered bank. The agent can accept deposits and evaluate loan
applications on behalf of the principal bank. National banks may establish
agency relationships only with affiliated banks. This expanded authority for
state-chartered banks may place national banks in California at a disadvantage
if many state-chartered bank use agency relationships with unaffiliated entities
to increase their business.
(b) New Community Reinvestment Act Regulations.
The federal banking agencies amended substantially their Community Reinvestment
Act ("CRA") regulations in 1995. CRA requires banks to help meet the credit
needs of their entire communities, including minorities and low and moderate
income groups. Prior regulations required banks to adopt a CRA statement and
prove to the regulators that the bank has engaged in activities to determine and
meet the credit needs of minority and low and moderate income groups. Those
regulations had been criticized on the ground that regulatory examinations to
determine compliance focused on the processes a bank goes through rather than
the results of the effort or actual performance.
Under the revised CRA regulations, the agencies determine a bank's rating under
the CRA by evaluating its performance on lending, service and investment tests,
with the lending test as the most important. The tests are to be applied in an
"assessment context" that is developed by the agency for the particular
institution. The assessment context takes into account demographic data about
the community, the community's characteristics and needs, the institution's
capacities and constraints, the institution's product offerings and business
strategy, the institution's prior performance, and data on similarly situated
lenders. Since the assessment context is developed by the regulatory agencies,
there is substantial concern that a particular bank will not know until it is
examined whether its CRA programs and efforts have been sufficient.
Larger institutions are required under the revised regulations to compile and
report certain data on their lending activities in order to measure performance.
Some of this data is already required under other laws, such as the Equal Credit
Opportunity Act.
Small institutions (with less than $250 million in assets) will be examined on a
"streamlined assessment method". The streamlined method will focus on the
institution's loan to deposit ratio, degree of local lending, record of lending
to borrowers and neighborhoods of differing income levels, and record of
responding to complaints.
Large and small institutions have the option of being evaluated for CRA purposes
in relation to their own pre-approved strategic plan. Such a strategic plan must
be submitted to the institution's regulator three months before its effective
date and be published for public comment.
The Bank will be considered a small institution until it has assets of greater
than $250 million at the ends of two years in a row. Therefore, the Bank expects
that it may become subject to the full reporting requirements for 1997, and be
subject to the service and investment tests starting in 1997. Therefore, the
initial impact of this amendment on the business of the Bank will be less than
the impact starting in 1997. At that time, the new regulations will increase the
amount of reports the Bank is required to prepare and submit, and it could cause
the Bank to change its asset mix, in order to meet the performance standards.
The new regulations will increase the uncertainty of the Bank's business as the
rating and examination procedures changes.
(c) The Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 was enacted near the end of
1995 to implement procedural protections to discourage frivolous securities
litigation. The Reform Act now requires certain specific pleadings to be made in
connection with litigation involving securities fraud, and limits plaintiffs'
rights of recovery against certain defendants. The Reform Act also provides a
legislative safe harbor against liability for the release of certain
"forward-looking" statements, such as projections.
This legislation should have several indirect effects on all publicly held
companies, including the Company and the Bank. First, such companies should face
less risk of being sued by investors over issues relating to disclosures and/or
stock price. Second, companies may find that it is now easier to obtain the
services of highly qualified persons to serve as officers and directors, as this
legislation should reduce the risks such individuals face of being named in
frivolous litigation. Finally, this should reduce, over time, insurance premiums
for director and liability insurance.
(d) Safety and Soundness Guidelines.
The federal banking agencies issued final safety and soundness guidelines in
1995, as required by FDICIA. The guidelines contain operational and managerial
standards and prohibit certain compensation practices. The effect of the
guidelines is to require on general standards of safe and sound business and
banking practices with respect to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure and compensation. The banking agencies have indicated that the
standards are the same as the agencies previously applied in their examinations
of institutions, so the adoption should not affect individual institutions that
comply with the regulations. If an agency determines that an institution is not
in compliance with the guidelines, the institution must submit a plan to come
into compliance to the regulator within 30 days of notification.
In addition, the agencies re-proposed guidelines for asset quality and earnings.
If adopted, the proposal would set forth similar guidelines for institutions in
the areas of monitoring asset quality and the quality and quantity of earnings
that are similar to the operational and managerial standards.
The effect of these guidelines on the Bank, as adopted and re-proposed, depends
on how they are implemented by the Bank's primary regulator, the Comptroller.
The Bank expects that the guidelines may increase the Bank's cost of doing
business, since it now must document its compliance with all the requirements in
the guidelines.
(e) Truth in Lending Act Amendments.
Amendments to the Truth in Lending Act were enacted in 1995. The amendments
increase the tolerances for errors and reduce the potential liability of lenders
for errors in disclosure. The legislation also places limitations on borrowers'
rights to rescind consumer credit transactions based on the disclosures provided
to the borrower by the lender. The amendments provide relief to banks and other
consumer lenders generally from some of the uncertainty and potential liability
that accompanies consumer lending.
(f) Reduced Deposit Insurance Premiums.
During 1995 the FDIC reduced substantially the deposit insurance premiums paid
by most banks. The Bank's premium was reduced, effective June 1, 1995, from 23
cents per $100 to 4 cents per $100 of insured deposits for most healthy banks.
The premium assessment was further reduced for the first half of 1996 to zero
cents per $100 of insured deposits for most healthy banks. Banks must still pay
the legal minimum annual premium of $2,000. This has reduced and will reduce the
Bank's cost of doing business by the amount of the reductions. The second
reduction to the legal minimum premium has been criticized substantially by
other governmental representatives and quasi-governmental groups, however, and
there can be no assurance that the Bank will continue to pay such a small
deposit insurance premium.
(g) Proposed Legislation and Regulation.
Certain legislative and regulatory proposals that could affect the Company, the
Bank and the banking business in general are pending or may be introduced,
before the United States Congress, the California State Legislature, and federal
and state government agencies. The United States Congress is considering
numerous bills that could reform the banking laws substantially. Bills are also
pending that would reduce the banking industry's regulatory burden, in areas
such as Truth in Lending, Truth in Savings, and Real Estate Settlement
Procedures Act disclosure requirements, and in various reporting requirements.
In addition, various legislative proposals to merge the Bank Insurance Fund
("BIF") with the Savings Association Insurance Fund ("SAIF"), and to address the
current deposit insurance premium discrepancy between banks and savings
associations, are currently under consideration. Banks insured by the BIF fund
now pay substantially lower deposit insurance premiums than institutions insured
by the SAIF fund. Should the funds be merged, the premiums paid by banks such as
the Bank may increase substantially, which would increase the Bank's expenses.
Other proposals to permit banks to engage in related financial services, and to
permit other financial services companies to offer banking-related services are
pending and, if adopted, would increase competition to the Bank.
It is not known to what extent, if any, these proposals will be enacted and what
effect such legislation would have on the structure, regulation and competitive
relationship of financial institutions. It is likely, however, that many of
these proposals would subject the Company and the Bank to increased regulation,
disclosure and reporting requirements and would increase competition to the Bank
and its cost of doing business.
In addition to pending legislative changes, the various banking regulatory
agencies frequently propose rules and regulations to implement and enforce
already existing legislation. It cannot be predicted whether or in what form any
such legislation or regulations will be enacted or the effect that such
legislation may have on the Bank's business.
Statistical Data
Certain consolidated statistical information concerning the business of the
Company appears on pages 11 through 30 under the caption "Management's
Discussion and Analysis of Plan of Operation" and in the Company's Consolidated
Financial Statements on pages 31 through 49. ratios relating to the Company's
Return on Equity and Assets appear on page 11. The "Management's Discussion and
Analysis or Plan of Operation" should be read in conjunction with the
Consolidated Financial Statements. Dollars are in thousands in the text, except
as otherwise noted
ITEM 2: PROPERTIES
The Company shares common quarters with SJNB at One North Market Street, San
Jose, California. Purchased by the Bank in 1985, the building consists of
approximately 24,000 square feet of basement, ground floor and second floor
space.
In addition the Bank assumed CBB's lease for approximately 12,000 square feet
located at 95 South Market Street, San Jose, California. Approximately 5,500
square feet is currently being occupied by a third party under a sublease which
expires at the end of the term of the lease. Another sublease with a third party
has been signed for 3,500 square feet. This sublease will commence as of May 1,
1996 and expire upon termination of the original CBB lease. The remaining space
is being occupied by the Bank's Financial Services Division.
In the opinion of management, adequate insurance is being maintained on these
properties.
The Bank has invested in loans secured by real property collateral. The Bank's
policies with respect to such loans are described under the caption
"Management's Discussion and Analysis or Plan of Operation - Loan Portfolio."
The Bank's policies on real estate secured loans may be changed without a vote
of security holders.
ITEM 3: LEGAL PROCEEDINGS
Other than as set forth below, neither the Company nor the Bank are subject to
any pending material legal proceedings, except legal proceedings arising in the
ordinary course of the Bank's business, none of which are expected to have a
material impact upon the financial position or results of operations.
The Bank has been named as a defendant in a lawsuit filed in the Santa Clara
County Superior Court by Giannotta Properties, Inc. Giannotta Properties had
borrowed money from the Bank and had given the Bank a security interest in
certain real property as security for the loan. Giannotta Properties defaulted
on the loan, the Bank declared a default and the foreclosure trustee conducted a
foreclosure sale of the real property on January 17, 1995. The property was
purchased at the foreclosure sale by a third party. The Bank recovered the full
amount owed to it by the borrower. On January 18, 1995, the borrower filed this
suit against the Bank, the foreclosure trustee, the third party that purchased
the property at the foreclosure sale, and various other parties, by which it is
making various allegations including a claim that the foreclosure sale was
improperly conducted. Giannotta Properties claims $20 million in damages as a
result of the conduct described in the allegations, which amount is
unsubstantiated by the pleadings. The litigation is in the initial pleading
stages and virtually no discovery has been conducted and no responses have been
filed to the pleadings. It is too early to make any determination of the Bank's
exposure for damages, if any. The Bank intends to defend this lawsuit
vigorously.
During the second quarter of 1995, the Bank was served with a complaint by
William Kaffer, Robert N. Greco and Gertrude E. Saynor, who allege that the Bank
participated with Charles A. Herpick, Richard J. Bauer, James Herpick, Century
Loan (Messrs. C. Herpick, Bauer, and J. Herpick and Century Loan are referred to
as the "Century Defendants"), Santa Clara Land Title Company and other banks in
a scheme to defraud the investors of Century Loan. The complaint was filed on
May 18, 1995, in the Superior Court of Santa Clara County. In the complaint, the
plaintiffs allege that the Century Defendants sold fictitious second trust deeds
to the plaintiffs and the plaintiff class, and that the proceeds from such sales
were used to make interest payments on fictitious trust deeds that had
previously been sold to other investors. The plaintiffs alleged that the bank
defendants, including the Bank, knew or should have known that 1) Century Loan
was overleveraged and was commingling investors' funds and 2) that the banks
extended credit to Century Loan in spite of such knowledge, enabling Century
Loan to continue defrauding investors. The complaint also alleges that the bank
defendants were co-conspirators of the Century Defendants, were agents of and
joint ventures with the Century Defendants and aided and abetted the fraudulent
scheme.
The Century Loan complaint asks for compensatory damages, punitive damages and
other damages, interest, costs and fees. The named plaintiffs allege losses on
the investments in trust deeds of approximately $1 million. On December 26,
1995, the Court issued a notice of decision indicating its intent to certify a
class in the lawsuit on behalf of all investors who purchased trust deed
investments from Century Defendants. It is not feasible to estimate losses
suffered by the plaintiff class.
In the Company's answer to the complaint, it has denied all of the allegations
and has asserted numerous defenses to the various allegations. Given the early
stage of this action, it is not possible to make any determination of the Bank's
exposure for damages, if any. The Bank intends to defend this lawsuit
vigorously.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this Report.
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 26, 1996, the Company had 2,424,650 shares of Common Stock
outstanding, held by approximately 1,800 shareholders. The Company's Common
Stock is listed on the NASDAQ National Market System under the symbol "SJNB."
The market makers of the common stock are: Everon Securities, Inc., Sandler
O'Neill & Partners, Hoefer & Arnett, Incorporated, Sutro & Co., Dean Witter
Reynolds, Inc. and Van Kasper & Co., Inc.
Stock Price
The following sets forth the high and low prices for the Company's Common Stock
during the periods indicated, as reported by NASDAQ, and the per share cash
dividends declared on the Common Stock. Prices are without retail mark-up,
mark-down or commissions.
QUARTERLY COMMON STOCK PRICE
- -----------------------------------------------------------------------------
Price
of Common Stock Cash
High Low Dividends
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
1994
- -----------------------------------------------------------------------------
First Quarter 8.38 7.50 -----
Second Quarter 9.00 7.00 $0.08
Third Quarter 9.75 7.50 -----
Fourth Quarter 8.88 6.88 $0.08
- -----------------------------------------------------------------------------
1995
- -----------------------------------------------------------------------------
First Quarter 8.13 7.25 -----
Second Quarter 9.38 7.75 $0.09
Third Quarter 11.75 9.13 -----
Fourth Quarter 14.50 11.00 $0.12
- -----------------------------------------------------------------------------
1996
- -----------------------------------------------------------------------------
First Quarter (through January 26, 1996) 13.50 13.00 -----
The Company's Board of Directors will consider the advisability and amount of
proposed dividends each year. Future dividends will be determined in light of
the Company's earnings, financial condition, future capital funds, regulatory
requirements and such other factors as the Board of Directors may deem relevant.
The Company's primary source of funds for payment of dividends to its
shareholders will be receipt of dividends and management fees from the Bank. The
payment of dividends by banks is subject to various legal and regulatory
restrictions. See "Supervision and Regulation - Capital Regulations and
Dividends."
During 1993, the Company commenced a policy to pay regular dividends to its
shareholders. In the future, it is the intention of the Company to continue
dividend payments on a semi-annual basis in May and December, based upon
financial results.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
<TABLE>
<CAPTION>
The following presents selected financial data and ratios for the five years
ended December 31, 1995:
(dollars in thousands, except per share amounts)
- -------------------------------------------------------------------------------------------------------------------
As of and for the Years Ended December 31,
STATEMENT OF OPERATIONS DATA : 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $14,295 $9,749 $7,163 $5,866 $5,592
Provision for possible loan losses (1,045) (600) (625) (698) (1,575)
Other income 966 744 682 527 695
Other expenses (8,797) (6,676) (5,276) (4,645) (5,056)
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 5,419 3,217 1,944 1,050 (344)
Income taxes (recovery) 2,395 1,354 758 345 (153)
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) $3,024 $1,863 $1,186 $705 $(191)
===================================================================================================================
PER SHARE DATA:
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) per share $1.20 $1.00 $0.70 $0.43 $(0.12)
Dividends per share .21 .16 .14 ---- .27
Shareholders' equity per share 11.02 9.92 9.86 9.28 8.90
Tangible shareholders' equity per share 9.06 7.84 9.86 9.28 8.90
===================================================================================================================
BALANCE SHEET DATA:
- -------------------------------------------------------------------------------------------------------------------
Balance sheet totals-end of year:
Assets $252,195 $205,949 $127,967 $107,357 $94,525
Loans 170,800 149,407 97,958 77,001 74,745
Deposits 196,692 180,287 109,712 91,432 79,419
Shareholders' equity 26,658 23,442 16,064 15,084 14,292
Average balance sheet amounts:
Assets $222,913 $153,717 $117,627 $100,382 $98,228
Loans 152,820 112,818 84,457 72,009 73,512
Earning assets 202,996 140,445 106,999 91,169 87,571
Deposits 183,282 133,897 100,899 84,663 82,286
Shareholders' equity 24,898 18,210 15,551 14,701 14,867
===================================================================================================================
SELECTED RATIOS:
- -------------------------------------------------------------------------------------------------------------------
Return on average equity 12.15% 10.23% 7.63% 4.80% (1.29%)
Return on average assets 1.36 1.21 1.01 .70 (.19)
Dividend payout ratio 16.67 17.18 19.22 ---- ----
Average equity to average assets 11.17 11.85 13.22 14.65 15.13
Leveraged capital ratio 9.00 9.33 12.02 14.94 15.33
Nonperforming loans to total loans .52 3.67 3.75 1.85 5.71
Net chargeoffs to average loans .33 1.11 .14 1.88 1.04
Allowance for loan losses to total loans 2.25 2.22 2.10 2.02 2.95
Allowance for loan losses to
nonperforming loans 430.24 60.45 55.93 108.82 51.70
===================================================================================================================
</TABLE>
The purpose of the following discussion is to address information pertaining to
the financial condition and results of operations of the Company that may not be
apparent from a review of the consolidated financial statements and related
notes. It also incorporates certain statistical information that is required by
Industry Guide 3 promulgated by the Securities and Exchange Commission. The
discussion should be read in conjunction with the aforementioned consolidated
financial statements, as found on pages 31 through 49. Dollars are in thousands
in the text, except as otherwise noted. The interest earned and yields on
nontaxable securities have been adjusted to a fully-taxable equivalent basis for
all financial information presented in "Item 6: Management's Discussion and
Analysis or Plan of Operations."
Merger with Business Bancorp (BB)
On October 1, 1994, the Company completed the purchase of BB and CBB. Because
the acquisition was accounted for as a purchase, BB's results of operations for
the period prior to the acquisition have not been included in the Company's
results of operations. The impact of the changes in the Company are discussed
below. See "Financial Review," "Earning Assets," "Funding," "Asset/Liability
Management" and "Capital and Liquidity."
Financial Review
Earnings Summary
For the year ended December 31, 1995, the Company reported net income of $3.0
million or $1.20 per share as compared to net income of $1.9 million or $1.00
per share in 1994 (a 62% increase). Net income for the year increased
substantially over that of a year ago primarily due to the increase of $4.5
million in net interest income. The increase in net interest income is due
partially to the acquisition of CBB as of the beginning of the last quarter of
1994 and to additional volume growth of $46 million throughout 1995. The
increase in net interest income was offset by an increase in the loss provision
and an increase in expenses which are primarily related to the acquisition and
the increase in volumes.
As of December 31, 1995, consolidated assets were $252 million, net loans $167
million, and deposits $197 million. Total consolidated assets have increased $46
million from $206 million a year ago, or a 22% increase. Loan and deposit growth
was generated by increased marketing and business development efforts of the
Bank and the Bank's use of on-balance-sheet hedging of approximately $24
million.
Net Interest Income
Net interest income is the principal source of the Company's operating earnings.
It represents the interest earned on loans, investments, and money market
investments less the interest paid on deposits and other sources of funds.
Significant factors affecting net interest income are rates, volumes and mix of
the loan and deposit portfolios.
Consolidated net interest income was $14.3 million in 1995, as compared to $9.8
million in 1994, on average earning assets of $203 million and $140 million,
respectively. The $4.5 million increase in net interest income during 1995 was
due primarily to an increase in the volume of earning assets. The acquisition of
CBB added approximately $52 million in average earning assets for 1995, while
the remainder of the growth of approximately $11 million was achieved through
the success of the Bank's marketing efforts. The Bank's net interest margin for
1995 was fairly consistent with that in 1994 (7.07% in 1995 as compared to 6.97%
in 1994). Two factors affected this result. First, the Bank received substantial
interest income on a cash basis in 1995 (approximately $588) for loans that had
been put on nonaccrual status in prior years. This had a significant positive
impact on 1995's net interest margin, which is not expected to be continued in
future periods. Offsetting this increase was the stable-to-declining interest
rate environment in 1995, as well as the impact of the highly competitive market
and the resulting pressure on loan interest rates. The Bank's average prime was
8.83% in 1995 as compared to 7.14% in 1994. The impact of these factors
primarily offset each other.
Consolidated net interest income was $9.8 million in 1994, as compared to $7.2
million in 1993, on average earning assets of $140.4 million and $107.0 million,
respectively. The $2.6 million increase in net interest income during 1994 was
due to an increase in the volume of earning assets and an increase in the net
interest margin. On an average basis for the year, the acquisition added
approximately $13 million in average earning assets for 1994, while the
remainder of the growth was achieved through the success of the Bank's marketing
efforts. The increase in the net interest margin was due primarily to the
increase in interest rates throughout 1994. The Bank's average prime was 7.14%
in 1994 as compared to 6% in 1993. The impact of the rate increases resulted in
increasing the net interest margin from 6.74% to 6.97%
The Company recognizes loan origination and certain commitment fees (net of
origination costs) over the contractual lives of the related loans as an
adjustment to yield. Loan fees contributed 6.2% of loan portfolio interest
during 1995, 8.9% in 1994 and 11.6% in 1993. This decline in the proportion of
loan fees to total loan interest is due mainly to the increase in the
competitive atmosphere relating to loan pricing, the overall level of interest
rates and the higher proportion of SBA loans included in the loan portfolio (SBA
loans have lower origination fees).
Like interest income, interest expense increased significantly during 1995.
Interest expense in 1995 was $6.7 million as compared to $3.2 million in 1994.
This was mainly due to the increase in volumes and the higher interest rate
environment. Interest expense as a percent of interest-bearing deposits
increased from 3.31% in 1994 to 4.45% in 1995. The more rapid increase in
interest costs also represents the impact of nonbank competition for bank
deposits.
As an offset to the increase in interest income of $3.8 million in 1994, the
Bank's interest expense increased by $1.2 million. Deposits are priced
competitively based on local market rates. The average interest rate paid on
interest sensitive deposit accounts increased to 3.31% in 1994 from 3.00% in
1993.
A substantial portion of the Bank's deposits (an average of 24% in 1995, 29% in
1994 and 35% in 1993) are non interest-bearing and therefore do not reprice when
interest rates change. See "Funding." This is somewhat ameliorated by a
significant amount of corporate account balances which are tied to earnings
credits and utilized to offset bank service costs. The decline in the percentage
of the non interest-bearing deposits is due to the acquisition of CBB, the more
competitive market for deposits and the impact of the high interest rate
environment.
Due to the nature of the Company's markets in which loans are generally tied to
the prime rate, an increase in interest rates should positively affect the
Company's future earnings, while a decline in interest rates would have a
negative impact. As noted above, the level-to-declining interest rate
environment during 1995 has had a negative impact on net interest income. Should
the trend of declining interest rates continue, the Bank could experience an
additional increase in its cost of funds relative to the rates earned on its
earning assets and a decrease in its net interest margin. See "Asset/Liability
Management."
The Company's net interest margin for the periods presented is high relative to
its peer group, mainly due to its high proportion of non interest-bearing
deposits, the impact of the Bank's Factoring Division and its SBA lending.
Net interest income also reflects the impact of nonperforming loans. Interest
income on the loans is recorded on the accrual basis. However, the Company
follows the practice of discontinuing the accrual of interest and reversing any
accrued and unpaid interest when, in the opinion of management, there is
significant doubt as to the collectibility of interest or principal or when the
payment of principal or interest is ninety days past due, unless the amount is
well-secured and in the process of collection. For these loans, interest is
recorded when payment is received. See "Asset Quality - Nonperforming Loans."
The effect of nonaccrual of interest income based on loans classified as
nonaccrual (such definition provided by the SEC) at December 31, 1995, 1994 and
1993 is set forth in the following table:
NEGATIVE IMPACT OF NONACCRUAL LOANS
(dollars in thousands) For the Years
Ended December 31,
- ---------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------
Interest revenue which would have been
recorded under original terms $111 $359 $265
Interest revenue actually realized 11 121 126
===============================================================
Negative impact on interest revenue $100 $238 $139
===============================================================
This table does not reflect the cash basis interest received on several
significant loan collections, as such loans were not classified as nonaccrual as
of the end of the year. See the above discussion regarding the collection of
such income. The impact of such loans, which are not included in the above
table, was significant in 1995. Approximately $588 of interest income was
recognized on collection of previously nonaccrual loans, which resulted in a 29
basis point impact on the net interest margin.
<TABLE>
<CAPTION>
The following table shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin for the
three years ended December 31, 1995.
AVERAGE BALANCES, RATES AND YIELDS
(dollars in thousands)
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Assets Balance Interest Yield Balance Interest Yield Balance Interest Yield
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans, net (1) $152,820 $18,016 11.79% $112,818 $11,517 10.21% $84,457 $8,002 9.47%
Securities held to maturity:
Taxable (2) 12,122 757 6.25 7,846 406 5.18 7,874 379 4.81
Nontaxable (3) 2,601 168 6.47 1,894 119 6.28 1,816 113 6.22
Securities available for sale (4) 30,619 1,847 6.03 10,866 520 4.79 6,059 253 4.18
Money market investments (5) 4,834 280 5.79 7,021 303 4.31 6,793 192 2.83
Interest rate hedging instruments ---- (43 ) ---- ---- 77 ---- ---- 240
----
- ------------------------------------------------------------- --------------------- -------------------
Total interest-earning assets 202,996 21,025 10.36 140,445 12,942 9.22 106,999 9,179 8.58
- ------------------------------------------------------------- --------------------- -------------------
Allowance for possible loan losses (3,574) (2,677) (1,911)
Cash and due from banks 11,668 8,367 7,362
Bank premises and equipment, net 3,356 2,614 2,517
Other real estate owned 1,213 1,216 1,197
Accrued interest receivable and
other assets 2,466 1,716 1,463
Core deposit intangibles and goodwill 4,788 2,036 ----
- ---------------------------------------------------- ----------- -----------
Total $222,913 $153,717 $117,627
==================================================== =========== ===========
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $30,915 1,158 3.74 $14,399 334 2.32 $6,623 108 1.63
Money market and savings 51,654 1,751 3.39 39,919 1,202 3.01 29,868 825 2.76
Certificates of deposit:
Less than $100 15,519 826 5.32 13,245 516 3.89 9,403 331 3.52
$100 or more 40,305 2,232 5.54 27,668 1,091 3.94 19,612 700 3.57
- ------------------------------------------------------------- --------------------- -------------------
Total certificates of deposit 55,824 3,058 5.48 40,913 1,607 3.93 29,015 1,031 3.55
- ------------------------------------------------------------- --------------------- -------------------
Other short-term borrowings 11,663 716 5.88 272 16 5.88 171 6 3.45
- ------------------------------------------------------------- --------------------- -------------------
Total interest-bearing liabilities 150,056 6,683 4.45 95,503 3,159 3.31 65,677 1,970 3.00
- ------------------------------------------------------------- --------------------- -------------------
Noninterest-bearing demand 44,889 38,666 35,392
Accrued interest payable and
other liabilities 3,070 1,338 1,007
- ---------------------------------------------------- ----------- -----------
Total liabilities 198,015 135,507 102,076
- ---------------------------------------------------- ----------- -----------
Shareholders' equity 24,898 18,210 15,551
- --------------------------------------------------- ----------- -----------
Total $222,913 $153,717 $117,627
====================================================--------- ===========---------- ===========--------
Net interest income and margin (6) $14,342 7.07% $9,783 6.97% $7,209 6.74%
========================================= =================== ==================== ================
<FN>
(1) Includes amortized loan fees of $1,123 for 1995, $1,028 for 1994 and $931
for 1993. Nonperforming loans have been included in average loan balances.
(2) Includes dividend income of $30 received in 1995, $18 in 1994 and $15 in
1993.
(3) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($47 in 1995, $34 in 1994 and $33 in 1993).
(4) Includes dividend income of $233, $195 and $225 received in 1995, 1994 and
1993, respectively and includes $7 in 1993 for taxable equivalent adjustment.
(5) Includes $6 in 1993 for tax equivalent adjustment.
(6) The net interest margin represents the net interest income as a percentage
of average earning assets.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Interest margin is affected by changes in volume, changes in rates, and a
combination of changes in volume and rates. Volume changes are caused by
differences in the level of earning assets and interest-bearing deposits and
borrowings. Rate changes result in differences of yields earned on assets and
rates paid on liabilities. Changes not solely attributable to volume or rates
have been allocated to volume and rate in proportion to the relationship of the
absolute dollar amounts of changes in each. The following table shows the effect
on the interest differential of volume and rate changes for the years ended
December 31, 1995 and 1994.
VOLUME/RATE ANALYSIS
(dollars in thousands)
1995 vs. 1994 1994 vs. 1993
- -----------------------------------------------------------------------------------------------------------------
Increase (decrease) Increase (decrease)
due to change in due to change in
- -----------------------------------------------------------------------------------------------------------------
Average Average Total Average Average Total
Volume Rate Change Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans (1) $4,524 $1,975 $6,499 $2,857 $658 $3,515
Securities:
Taxable 255 96 351 (2) 29 27
Nontaxable 46 3 49 4 2 6
Available for sale 1,161 166 1,327 225 42 267
Money market investments 219 (242) (23) 6 105 111
- -----------------------------------------------------------------------------------------------------------------
Total interest income 6,205 1,998 8,203 3,090 836 3,926
- -----------------------------------------------------------------------------------------------------------------
Interest expense:
Interest checking 536 288 824 166 60 226
Money market and savings 384 165 549 297 80 377
Certificates of deposits:
Less than $100 99 211 310 146 38 184
$100 or greater 606 535 1,141 311 80 391
Other short-term borrowings 700 ---- 700 5 6 11
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 2,325 1,199 3,524 925 264 1,189
- -----------------------------------------------------------------------------------------------------------------
Interest rate hedging instruments ---- (120) (120) ---- (163) (163)
- -----------------------------------------------------------------------------------------------------------------
Change in net interest income $3,880 $679 $4,559 $2,165 $409 $2,574
=================================================================================================================
<FN>
(1) The effect of the change in loan fees is included as an adjustment to the
average rate.
(2) Include in the average rate column for interest income on loans is $588 of
interest income on a cash basis of which $420 pertains to prior periods.
</FN>
</TABLE>
Provision for Possible Loan Losses
The level of the allowance for possible loan losses (and therefore the related
provision) reflects the Company's judgment as to the inherent risks associated
with the loan, factoring and lease portfolios. Based on management's evaluation
of such risks, additions of $1.0 million and $600 were made to the allowance for
possible loan losses in 1995 and 1994, respectively. Management's determinations
of the provision in 1995 and 1994 were based on the measurement of the
possibility of future loan losses through various objective and subjective
criteria and the impact of net chargeoffs.
Please refer to the section regarding the "Loan Portfolio" for a detailed
discussion of asset quality and the allowance for possible loan losses.
Other Income
The following table sets forth the components of other income and the percentage
distribution of such income for the years ended December 31, 1995 and 1994.
OTHER INCOME
(dollars in thousands)
1995 1994
- --------------------------------------------------------------------------------
Amount Percent Amount Percent
- --------------------------------------------------------------------------------
Depositor service charges $553 57.25% $403 54.16%
Other operating income 456 47.20 281 37.77
Gain on sale of SBA loans ---- ---- 75 10.08
Net loss on securities available for sale (43) (4.45) (15) (2.01)
- --------------------------------------------------------------------------------
Total $966 100.00% $744 100.00%
================================================================================
Other income totaled $966 in 1995, which is an increase of $222 over $744 in
1994. The 1995 increase is primarily attributable to the acquisition of CBB at
the beginning of the fourth quarter of 1994. In addition, other operating income
increased mainly due to merchant credit card income and fees relating to the
servicing of SBA loans.
Gains on sale of SBA loans amounted to 11.4% of income before income taxes in
1993 and 2.3% in 1994. In 1995, there were no gains on sale of SBA loans due to
the Bank's decision to hold such loans and realize their inherent spreads over
the Bank's cost of funds. The Bank's policy is to originate only variable rate
SBA loans. As the yield adjusts for changes in interest rates, the risk of
holding the SBA loans is mitigated.
Management believes that the government's SBA loan program will continue for the
foreseeable future, and that the Bank will continue its program to originate
such loans. Future gains on the sale of SBA loans will be dependent on the
Bank's decision whether to sell such loans or maintain such loans for its own
account.
Other Expense
The components of other expense and the percentage of each component of average
assets are set forth in the following table for the years ended December 31,
1995 and 1994.
OTHER EXPENSE AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands)
- --------------------------------------------------------------------------------
1995 1994
Amount Percent Amount Percent
- --------------------------------------------------------------------------------
Salaries and benefits $4,339 1.95% $3,341 2.17%
Occupancy 740 .33 594 .39
Amortization of core deposit
intangiblesand goodwill 569 .26 166 .11
Legal and professional fees 476 .21 282 .18
Data processing 458 .20 351 .23
Business promotion 314 .14 273 .18
Regulators' assessments 283 .13 361 .23
Client services 247 .11 176 .11
Directors' fees and costs 239 .11 161 .10
Loan and collection 215 .10 235 .15
Advertising 186 .08 81 .05
Stationery and supplies 180 .08 132 .09
Net cost of other real estate owned 45 .02 130 .09
Other 506 .23 393 .26
- --------------------------------------------------------------------------------
Total $8,797 3.95% $6,676 4.34%
================================================================================
Other expenses increased approximately $2.1 million or 32% in 1995 as compared
to 1994. The increase is primarily related to the acquisition of CBB and other
growth in loans and deposits and increases in salaries and benefits which
relates to several staff additions for business development and the provision
for incentive payments for exceeding predefined goals. In addition, other
expense includes approximately $569 of amortization of goodwill and core deposit
intangibles relating to the acquisition of CBB as compared to $166 in 1994.
During 1995, the FDIC reduced its premium on insurable deposits effective June
1995 from 23 cents per $100 of deposits to 4 cents. The impact of this was a
savings to the Bank of approximately $190 which offset a portion of the 1995
increase in other expenses. The FDIC has announced that for the first six months
of 1996 such rate for insured deposits will be $2 annually.
Other expenses increased approximately $1.4 million or 27% in 1994 as compared
to 1993. The increase is primarily related to the acquisition and other growth
in loans and deposits. Other expense includes approximately $166 of amortization
relating to the acquisition of CBB.
The net costs of other real estate owned for the years ended December 31, 1995
and 1994 are summarized below:
NET COST OF OTHER REAL ESTATE OWNED
(dollars in thousands)
- --------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------
Costs relating to foreclosed properties $26 $179
Rental income on foreclosed properties (15) (128)
Loss on dispositions 34 79
- --------------------------------------------------------------------
Net cost of other real estate owned $45 $130
====================================================================
Income Taxes
The Company accounts for income taxes using the asset and liability method in
accordance with Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes" (SFAS No. 109). Under the asset and liability method, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as income in the period that includes the
enactment date.
The effective tax rate was 44% in 1995 and 42% in 1994. The higher tax rate in
1995 was primarily due to the amortization of the nondeductible portion of
intangibles arising in connection with the purchase of CBB.
Quarterly Income
<TABLE>
<CAPTION>
The following table shows the Company's unaudited quarterly income statement
data for the years 1995 and 1994.
UNAUDITED QUARTERLY INCOME STATEMENT DATA
(dollars in thousands)
- -------------------------------------------------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
1995 1994 1995 1994 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $3,322 $1,995 $3,772 $2,196 $3,563 $2,252 $3,638 $3,306
Provision for possible loan losses (210) (150) (500) (150) (180) (100) (155) (200)
Other income 256 205 186 141 278 65 246 333
Other expenses (2,186) (1,427) (2,196) (1,511) (2,225) (1,481) (2,190) (2,257)
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 1,182 623 1,262 676 1,436 736 1,539 1,182
Income taxes (531) (249) (561) (270) (629) (295) (674) (540)
- -------------------------------------------------------------------------------------------------------------
Net income $651 $374 $701 $406 $807 $441 $865 $642
=============================================================================================================
Net income per share $0.27 $0.22 $0.29 $0.24 $0.32 $0.26 $0.34 $0.26
=============================================================================================================
</TABLE>
The Company reported net income of $865 for the quarter ended December 31, 1995
compared with net income of $642 for the 1994 fourth quarter. The results for
the fourth quarter of 1995 as compared to the same quarter a year ago reflect an
increase in volume of earning assets ($224 million in 1995 compared to $179
million in 1994) offset by a decrease in net interest margin (6.51% in 1995
compared to 7.33% in 1994).
The results for the fourth quarter of 1994 and later reflect the acquisition of
CBB.
Earning Assets
Investment Securities
The following table shows the book value composition of the securities portfolio
at December 31, 1995, 1994 and 1993. At December 31, 1995, there were no issuers
of securities for which the book value of specific securities held by the Bank
exceeded 10% of the Company's shareholders' equity.
INVESTMENT SECURITIES COMPOSITION
(dollars in thousands) December 31,
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Investment securities held to maturity:
U. S. Treasury $4,265 $4,260 $4,343
U. S. Government Agencies 4,976 4,963 3,001
State and municipal 3,060 1,797 2,008
Mortgage Backed 2,428 2,377 -----
Other 519 462 245
- --------------------------------------------------------------------------------
Investment securities held to maturity 15,248 13,859 9,597
- --------------------------------------------------------------------------------
Investment securities available for sale:
U. S. Treasury 4,057 9,786 2,001
U. S. Government Agencies 34,578 4,955 -----
Mortgage Backed 9 18 -----
Mutual funds 3,898 3,947 5,154
- --------------------------------------------------------------------------------
Investment securities available for sale 42,542 18,706 7,155
- --------------------------------------------------------------------------------
Total $57,790 $32,565 $16,752
================================================================================
Investment securities held to maturity include those securities which management
has the ability and intent to hold to maturity. The Bank's policy is to acquire
generally "A" rated or better state and municipal securities. The specific
issues are monitored for changes in financial condition. Appropriate action
would be taken if significant deterioration was noted. Management's policy is to
reduce the market valuation risk of the investment portfolio by generally
limiting portfolio maturities to 60 months or less. It is management's intent to
maintain at least 50% of its investment securities portfolio in U. S. Treasury
and U. S. Government Agencies securities.
Investment securities available for sale, which include all mutual funds, are
acquired without the intent to hold until maturity. The Bank's weighted average
maturity of the available for sale investment portfolio is 1.7%. It is estimated
that for each 1% change in interest rates, the value of the Company's securities
held to maturity will change by approximately 1.6%. Any unrealized gain or loss
is reflected in the carrying value of the security and reported net of income
taxes in the equity section of the condensed consolidated balance sheets.
Realized gains and losses are reported in the condensed consolidated statement
of operations. The net unrealized gain on securities available for sale as of
December 31, 1995 was $233.
Mortgage backed securities are considered to have increased risks associated
with them because of the timing of principal repayments. At December 31, 1995,
the Bank had the following securities which were mortgage-backed related
securities:
- -------------------------------------------- -------------- -----------
Historical Market
(dollars in thousands) Cost Value
Federal Home Loan Mortgage Corp.
(U.S.Agency) $2,428 $2,544
Federal National Mortgage Association
(U.S. Agency) 9 9
Federated ARMs Funds * 1,686 1,638
Overland Variable Rate
Government Fund* 1,263 1,184
- -------------------------------------------- -------------- -----------
* The assets of these mutual funds are invested mainly in adjustable rate U.S.
Treasury or Agency securities.
Gross unrealized gains on investment securities held to maturity were $244 as of
December 31, 1995 as compared to an unrealized loss of $467 as of December 31,
1994. The unrealized gains result from the significant decrease in interest
rates in 1995. The decrease in interest rates has an inverse effect on the value
of securities for which the interest rate is fixed. The Bank's weighted average
maturity of the held to maturity investment portfolio was approximately 1.9
years as of December 31, 1995. It is estimated that for each 1% change in
interest rates, the value of the Company's securities held to maturity will
change by approximately 1.6%. This volatility decreases as the average maturity
shortens. It is the intention of management to hold these securities to
maturity. Therefore this increase in value will be realized over the life of the
securities as greater than market interest income is recognized.
The average balance of money market investments, which include federal funds
sold and liquid money market cash mutual funds, was $4.8 million in 1995 and
$7.0 million in 1994. These balances represented 3% and 5% of average deposits
for 1995 and 1994, respectively. They are maintained primarily for the
short-term liquidity needs of the Bank. See "Liquidity."
Loan Portfolio
The following table shows the Company's consolidated loans by type of loan or
borrower.
LOAN PORTFOLIO
(dollars in thousands)
December 31,
- --------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Commercial $48,121 $49,018 $27,361 $20,555 $21,244
Real estate construction 14,488 16,343 15,492 14,907 19,263
Real estate-other 66,949 63,104 38,519 26,964 26,829
Consumer 8,800 9,461 6,857 8,696 3,401
Other 21,302 7,362 8,416 4,802 4,418
Unearned fee income (793) (888) (746) (537) (410)
- --------------------------------------------------------------------------------
Loan portfolio 158,867 144,399 95,899 75,387 74,745
Loans available for sale 11,933 5,008 2,059 1,614 -----
- --------------------------------------------------------------------------------
Total loans $170,800 $149,407 $97,958 $77,001 $74,745
================================================================================
During 1995 certain loans were reclassified, the impact of which was to
reclassify approximately $2.1 million from Commercial to Other.
General
The Company's loan portfolio consists primarily of short-term, floating rate
loans for business and real estate purposes. At December 31, 1995, approximately
31% of the loan portfolio was commercial loans, 43% real estate-other, and 8.5%
in real estate construction. SJNB's legal lending limit for any one borrower was
approximately $3.7 million at December 31, 1995.
The commercial loan portfolio primarily consists of loans to small to
medium-sized businesses with gross revenues up to $25 million, as well as loans
to local professional businesspersons. SJNB's lending services include revolving
credit loans, SBA loans, term loans, accounts receivable financing, factoring,
equipment financing and letters of credit.
Included in commercial loans as of December 31, 1995 are factored accounts
receivable of approximately $2.4 million or 1.4% of total loans. As of December
31, 1994, factored accounts receivable were $2.6 million or 1.7% of total loans.
The Bank purchases accounts receivable from clients and then receives payment
directly from the party obligated for the receivable. To date, there have been
no significant losses relating to the Bank's factoring program.
The real estate-other loans include term loans (up to a ten year maturity) on
income producing commercial properties.
The real estate construction portfolio (8.5% of the loan portfolio) consists of
67% residential, 33% commercial. They are made on the basis of the economic
viability for the specific project, the cash flow resources of the developer,
the developer's equity in the project and the underlying financial strength of
the borrower. Each loan is monitored as to its incurred costs, sales price and
sales cycle.
Consumer loans consist primarily of loans to individuals for personal uses, such
as home equity loans, installment purchases, premier lines (unsecured lines of
credit) and overdraft protection loans, and a variety of other consumer
purposes. Other loans include loans primarily to real estate mortgage brokers
(approximately $1.2 million), loans to real estate developers for short-term
investment purposes (approximately $3.3 million) and leases.
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Although the Company has a diversified loan portfolio, a substantial
portion of its customers' ability to honor contracts is reliant upon the
economic stability of Santa Clara County, which in some degree relies on the
stability of high technology companies in its "Silicon Valley." Loans are
generally made on the basis of a secure repayment source and collateral is
generally a secondary source for loan qualification.
Approximately 59% of the loan portfolio is directly related to real estate or
real estate interests, when real estate construction loans, real estate-other
loans, prime equity loans (included in consumer loans of $4.6 million) and
certain other loans to real estate developers and other investors for short-term
investment purposes (approximately 4.6% of the loan portfolio) are included.
Approximately 31% of the loan portfolio is made up of commercial loans; however,
no particular industry represents a significant portion of such loans.
Inherent in any loan portfolio are risks associated with certain types of loans.
The Company attempts to limit these risks through stringent loan policies and
review procedures that are applied at the time of origination. Included in these
policies are specific maximum loan-to-value (LTV) limitations as to various
categories of real estate related loans. These ratios are as follows:
Maximum LTV
Category of Real Estate Collateral Ratio
- ----------------------------------------------------------
Raw land 50%
Land Development 60%
Construction:
1-4 Single family residence,
Less than $500 75%
Greater than $500 70%
Other 70%
Term loans (construction take-out 70%
and commercial)
Other improved property 70%
Prime equity loans 75%
- -----------------------------------------------------------
Any term loans on income producing properties must have a minimum debt service
coverage of at least 1.2 to 1 for non-owner occupied property and at least 1.1
to 1 for owner occupied.
One of the significant risks associated with real estate lending is the risk
associated with the possible existence of environmental risks or hazards on or
in property affiliated with the loan. The Bank mitigates such risk through the
use of an Environmental Risk Questionnaire for all loans secured by real estate.
A Phase I environmental report is required if indicated by the questionnaire or
if for any other reason it is determined appropriate. Other reasons would
include the industrial use of environmentally sensitive substances or the
proximity to known other environmental problems. A Phase II report is required
in certain cases, depending on the outcome of the Phase I report.
Activity
Total loans were $171 million at December 31, 1995 and averaged $153 million for
the year. At December 31, 1994, loans were $149 million and averaged $113
million during the year. The increase in loans of $22 million during 1995
relates to the overall growth in the Bank's loan portfolio. The most significant
area of growth was the increase in SBA loans (included in commercial loan
category) of $14 million. During 1995 approximately $2.1 million of commercial
loans were reclassified to Other. Real estate-other increased $3.8 million due
to strength of the real estate environment in Santa Clara County. Other loans
also increased due to the growth of loans for other investment purposes.
The economic climate in Northern California has been generally strong in 1995.
However, the competitive environment within the Bank's marketplace has become
more aggressive with competition between lenders for additional loan growth
causing more competitive pricing. To the extent that such competitive pricing
continues during 1996 and the Bank finds it necessary to meet such competition,
the Bank's net interest margins could decline.
Asset Quality
Allowance for Possible Loan Losses
A consequence of lending activities is that losses will be experienced. The
amount of such losses will vary from time to time depending upon the risk
characteristics of the loan portfolio as affected by economic conditions and the
financial experiences of borrowers. The allowance for possible loan losses,
which provides for the risk of losses inherent in the credit extension process,
is increased by the provision for possible loan losses charged to expense and
decreased by the amount of chargeoffs net of recoveries. There is no precise
method of predicting specific losses or amounts that ultimately may be charged
off on particular segments of the loan portfolio. The conclusion that a loan may
become uncollectable (in whole or in part) and should be charged against the
allowance is a matter of judgment. Similarly, the adequacy of the allowance for
possible loan losses and the level of the related provision for possible loan
losses is determined (after full review) on a judgmental basis including
consideration of:
o Economic conditions,
o Borrowers' financial condition,
o Loan impairment,
o Evaluation of industry trends,
o Industry concentrations,
o Loans which are contractually current as to payment terms but demonstrate a
higher degree of risk as identified by management,
o Continuing evaluation of the performing loan portfolio,
o Monthly review and evaluation of problem loans identified as having loss
potential,
o Quarterly review by the Board of Directors, and o Off-balance sheet
risks.
In addition to the continuing internal assessment of the loan portfolio (and
off-balance sheet credit risk, such as letters of credit, etc.), the
consolidated financial statements are examined by independent accountants. The
Company also retains a consultant who performs credit reviews on a quarterly
basis and then provides an assessment of the adequacy of the allowance for
possible loan losses. Examinations of the loan portfolio are also conducted
periodically by the federal banking regulators.
The Company utilizes a method of assigning a minimum and maximum loss ratio for
each grade of loan within each category of loans (commercial, real estate-other,
real estate construction, etc.) Loans are graded on a ranking system based on
management's assessment of the loan's credit quality. The assigned loss ratio is
based upon the Company's prior experience, industry experience, delinquency
trends and the level of nonaccrual loans. In addition, the methodology considers
(and assigns a risk factor for) current economic conditions, off-balance sheet
risk and concentrations of credit. The methodology provides a systematic
approach for the measurement of the possible existence of future loan losses.
Management and the Board of Directors evaluate the allowance and determine its
desired level considering objective and subjective measures, such as knowledge
of the borrowers' business, valuation of collateral, the determination of
impaired loans and exposure to potential losses. Management believes that the
allowance for possible loan losses, determined as described above, to be an
adequate allowance against losses inherent in the loan portfolio.
The allowance for possible loan losses includes the allocation for impaired
loans while the amount remaining is considered a general reserve available
against the total loan portfolio and off-balance sheet credit exposure. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions or other new information. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowance for possible losses on loans. Such agencies may require the Bank to
provide additions to the allowance based on their judgment of information
available to them at the time of their examination. The most recent examination
conducted in October 1995 did not result in any recommended adjustments to the
Bank's established reserves.
There is uncertainty concerning the future economic trends. Accordingly, it is
not possible to predict the effect such uncertainty may have on the level of the
provision for possible loan losses in future periods.
<TABLE>
<CAPTION>
The following table summarizes the activity in the allowance for possible loan
losses for the five years ended December 31, 1995:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands) Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of the year $3,311 $2,057 $1,553 $2,207 $1,396
- -------------------------------------------------------------------------------------------------------------
Chargeoffs by loan category:
Commercial 233 148 389 137 533
Real estate-other 220 637 5 ----- 304
Real estate construction 154 ----- ----- 687 183
Consumer 89 73 90 4 9
Other ----- 824 26 980 ----
- -------------------------------------------------------------------------------------------------------------
Total chargeoffs 696 1,682 510 1,808 1,029
- -------------------------------------------------------------------------------------------------------------
Recoveries by loan category:
Commercial 42 192 21 221 151
Real estate-other 27 10 5 173 42
Real estate construction ----- ----- 200 ----- -----
Consumer 16 7 16 29 72
Other 102 222 147 33 -----
- -------------------------------------------------------------------------------------------------------------
Total recoveries 187 431 389 456 265
- -------------------------------------------------------------------------------------------------------------
Net chargeoffs 509 1,251 121 1,352 764
- -------------------------------------------------------------------------------------------------------------
Provision charged to expense 1,045 600 625 698 1,575
Allowance relating to California Business Bank ----- 1,905 ----- ----- -----
- -------------------------------------------------------------------------------------------------------------
Balance, end of the year $3,847 $3,311 $2,057 $1,553 $2,207
=============================================================================================================
Ratios:
Net chargeoffs to average loans 0.33% 1.11% 0.14% 1.88% 1.04%
Allowance to total loans at the end of the year 2.25 2.22 2.10 2.02 2.95
Allowance to nonperforming loans at end of the year 430.24 60.45 55.93 108.82 51.72
===============================================================================================================
</TABLE>
Net chargeoffs were $509 or .33% of average loans during 1995. During 1994, the
Company experienced net chargeoffs of $1.2 million or 1.11%. The decrease in net
chargeoffs in 1995 as compared to 1994 results primarily from the 1994
charge-off of two unrelated loans. The first involved a chargeoff of $750
relating to a real estate mortgage broker who is believed to have defrauded the
Bank and numerous investors by creating fictitious mortgages and obtaining funds
from either the Bank or the investors to fund such fraudulent mortgages. Also in
1994, the Bank charged-off a fully reserved loan in the amount of $469 which it
had acquired from CBB. Real estate-other loss includes the loan which was
acquired from CBB, and Other includes the real estate mortgage broker loan.
Commercial loan losses in 1995 and 1994 involved loans to several borrowers,
none of which were individually significant.
The allowance for possible loan losses as a percent of loans was 2.25% at
December 31, 1995, and 2.22% at December 31, 1994. The allowance for possible
loan losses as a percent of nonperforming loans was approximately 430% at
December 31, 1995 as compared to 60% at December 31, 1994. Nonperforming loans
at December 31, 1995 were $894 compared to $5.5 million at December 31, 1994.
See "Nonperforming Loans" below.
Based on an evaluation of individual credits, historical credit loss experienced
by loan type and economic conditions, management has allocated the allowance for
possible loan losses as follows for the past five years:
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands)
Amount of Allowance Allocation at December 31,
- --------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Commercial $1,193 $1,192 $459 $499 $711
Real estate construction 176 310 181 374 358
Real estate-other 1,134 1,051 567 359 1,069
Consumer 169 219 99 38 31
Other 337 94 101 22 38
Unallocated 838 445 650 261 -----
- --------------------------------------------------------------------------------
Total $3,847 $3,311 $2,057 $1,553 $2,207
================================================================================
Percent of Loans in Each Category
to Total Loans at December 31,
- --------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
Commercial 30.86% 33.96% 27.85% 26.51% 28.38%
Real estate construction 8.45 10.87 15.69 19.23 25.74
Real estate-other 43.15 43.97 40.98 36.86 35.84
Consumer 5.13 6.29 6.95 11.22 4.54
Other 12.41 4.90 8.53 6.18 5.50
- --------------------------------------------------------------------------------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
================================================================================
The allowance for possible loan losses is maintained without any internal
allocation to the segments of the loan portfolio. The above schedule is being
presented in accordance with the Securities and Exchange Commission's
requirements to provide an allocation of the allowance. The allocation is based
on subjective estimates that take into account historical loss experience and
management's current assessment of the relative risk characteristics of the
portfolio as of the reporting date noted above and as described more fully under
the section "Asset Quality - Allowance for Possible Loan Losses".
Nonperforming Loans
<TABLE>
<CAPTION>
Loans for which the accrual of interest has been suspended and other loans with
principal or interest contractually past due 90 days or more are set forth in
the following table:
NONPERFORMING LOANS
(dollars in thousands)
December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $866 $5,395 $3,678 $1,427 $3,698
Other loans with principal or interest contractually past
due 90 days or more 28 83 ---- ---- 571
- ---------------------------------------------------------------------------------------------------------------------------
Total $894 $5,478 $3,678 $1,427 $4,269
===========================================================================================================================
</TABLE>
Nonperforming loans declined significantly during 1995. The primary reason for
the decline was the collection of a $2.5 million loan placed on nonaccrual
status in 1993. In addition, the Bank has placed significant emphasis on
reducing the nonaccrual loans acquired from CBB. Nonperforming loans at December
31, 1995 include loans to four borrowers, of which two loans totaling $783, are
secured by real estate.
During both 1994 and 1993 the amount of nonperforming loans increased
significantly. The increase in 1994 was due to the acquisition of the CBB loans.
The increase in 1993 was due to placing a single loan, a $2.5 million real
estate-other loan, on nonaccrual in July 1994. The loan was collected in June
1995.
Potential nonperforming loans are identified by management as part of its
ongoing evaluation and review of the loan portfolio. Based on such reviews as of
December 31, 1995, management has identified no loans which management has known
information about that causes doubts regarding the borrowers' ability to comply
with present repayment terms, such that the loan(s) might subsequently be
classified as nonperforming.
Other Real Estate Owned
At December 31, 1995, the Bank had three properties totaling $664 which were
acquired through the foreclosure process. Prior to recording a foreclosure, the
Bank provides for any expected loss in its allowance for possible loan losses. A
summary of the properties at December 31, 1995 and 1994 are as follows:
- ----------------------------------------------------------------------------
(dollars in thousands) Carrying Value
- ----------------------------------------------------------------------------
Description of Property 1995 1994
- ----------------------------------------------------------------------------
Two vacant parcels, currently subject to a
one-year sewer moratorium $304 $304
Single family residence ("SFR"), Piedmont 225 -----
Raw land, 11.7 acres in San Jose, CA 135 -----
Other properties, which were liquidated ----- 1,191
- ----------------------------------------------------------------------------
Total $664 $1,495
============================================================================
At the time of foreclosure, any difference between the loan balance and the net
realizable value of the collateral is charged to the allowance for possible loan
losses. Foreclosed property is recorded at the lower of its revised basis or
fair value, less estimated selling costs. Any subsequent decline in value is
charged directly to the income statement. See "Financial Review - Other Expense"
for the analysis of the net cost of other real estate owned for 1995 and 1994.
Commitments and Lines of Credit
It is the Bank's policy not to issue formal commitments or lines of credit
except to a limited number of well-established and financially responsible local
commercial enterprises. Such commitments can be either secured or unsecured and
are typically in the form of revolving lines of credit for seasonal working
capital needs.
Occasionally, such commitments are in the form of a letter of credit to
facilitate the customer's particular business transaction. Commitments and lines
of credit typically mature within one year. These commitments involve (to
varying degrees) credit risk in excess of the amount recognized as either an
asset or liability in the statement of financial position. The Company controls
credit risk through its credit approval process. The same credit policies are
used when entering into such commitments.
As of December 31, 1995, the Company had undisbursed loan commitments to extend
credit under normal lending arrangements as follows:
- ------------------------------------------------------------
UNDISBURSED LOAN COMMITMENTS
(dollars in thousands)
- ------------------------------------------------------------
Loan Category Amount
- ------------------------------------------------------------
Commercial $27,270
Real estate-other 2,991
Real estate construction 13,267
Consumer 5,633
Other 16,302
- ------------------------------------------------------------
Total $65,463
============================================================
In addition, there was approximately $3.3 million for commitments under unused
letters of credit.
Funding
<TABLE>
<CAPTION>
Deposits represent SJNB's principal source of funds. Most of the Bank's deposits
are obtained from professionals, small to medium-sized businesses and
individuals within the Bank's market area. SJNB's deposit base consists of
non-interest and interest-bearing demand deposits, savings and money market
accounts, and certificates of deposit. The following table summarizes the
composition of deposits as of December 31, 1995, 1994 and 1993.
DEPOSIT CATEGORIES
(dollars in thousands)
December 31, 1995 December 31, 1994 December 31, 1993
- -------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Total of Total Total of Total Total of Total
Amount Deposits Amount Deposits Amount Deposits
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $52,775 26.83% $54,002 29.95% $36,677 33.43%
Interest-bearing demand 34,641 17.61 29,041 16.11 8,208 7.48
Money market and savings 51,201 26.03 47,170 26.16 32,400 29.53
Certificates of deposit:
Less than $100 14,730 7.49 16,038 8.90 10,157 9.26
$100 or more 43,345 22.04 34,036 18.88 22,270 20.30
- -------------------------------------------------------------------------------------------------------------------
Total $196,692 100.00% $180,287 100.00% $109,712 100.00%
===================================================================================================================
</TABLE>
Deposits increased 9% from $180 million at December 31, 1994 to $197 million at
December 31, 1995. The increase is primarily centered in interest-bearing
accounts and is related to the servicing of accounts for homeowners
associations. In addition, other interest-bearing accounts showed increases
mainly due to a combination of factors including the development of customers
with significant cash balances, aggressive pricing of rates and the purchase of
certain wholesale deposits.
The Bank has been able to attract a high proportion of its deposits in the form
of non interest-bearing deposits. The Bank's primary business is commercially
oriented and therefore significant non interest-bearing deposits are maintained
by its commercial customers.
The Bank also raises a substantial amount of funds through certificates of
deposit of greater than $100. These deposits are usually at interest rates
greater than other types of deposits and are more sensitive to interest rate
changes. Historically, the Bank's overall cost of funds has been significantly
less than its peer group. However, as these certificates of deposit are usually
more interest rate sensitive, their repricing in an increasing interest rate
environment could negatively impact the Bank's net interest margin without a
corresponding increase in rates earned on its earning assets. See "Liquidity."
Asset/Liability Management
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off-balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest revenue accrual and interest expense that would result from a change in
interest rates. Mismatches in interest rate repricing among assets and
liabilities arise primarily from the interaction of various customer businesses
(i.e., types of loans versus the types of deposits maintained) and from
management's discretionary investment and funds gathering activities. The
Company attempts to manage its exposure to interest rate sensitivity. However,
due to its size and direct competition from the major banks, the Company must
offer products which are competitive in the market place, even if less than
optimum with respect to its interest rate exposure.
The Company's natural balance sheet position is asset-sensitive, based upon the
significant amount of variable rate loans and the repricing characteristics of
its deposit accounts. This natural position provides a hedge against rising
interest rates, but has a detrimental effect during times of interest rate
decreases. Net interest revenues are negatively impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known repricing dates of certain assets and liabilities and
assumed repricing dates of others. See "Net Interest Income."
<TABLE>
<CAPTION>
The following table quantifies the Company's interest rate exposure at December
31, 1995 based upon the known repricing dates of certain assets and liabilities
and the assumed repricing dates of others. At December 31, 1995, the Company
was, as noted above, asset sensitive in the near term. This table displays a
static view of the Company's interest rate sensitivity position and does not
consider the dynamics of the balance sheet and interest rate movements.
DISTRIBUTION OF REPRICING OPPORTUNITIES
At December 31, 1995
(dollars in thousands)
After three After six After one
Within months but months but year but After
three within six within one within five
months months year five years years Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money market investments $3,200 $3,200
Investment securities-taxable ----- $2,798 $1,509 $7,881 ----- 12,188
Investment securities-non-taxable ----- ----- 1,048 1,105 $907 3,060
Securites available for sale 5,397 2,983 6,047 28,106 9 42,542
Loans 148,528 846 826 10,193 10,407 170,800
- -----------------------------------------------------------------------------------------------------
Total earning assets 157,125 6,627 9,430 47,285 11,323 231,790
- -----------------------------------------------------------------------------------------------------
Interest checking, money market
and savings 85,842 ----- ----- ----- ----- 85,842
Certificates of deposit:
Less than $100 6,569 3,305 2,708 1,751 397 14,730
$100 or more 21,778 15,195 3,529 2,643 200 43,345
Repurchase agreements 22,000 ----- ----- ----- ----- 22,000
Other borrowings 2,000 ----- ----- ----- 634 2,634
- -----------------------------------------------------------------------------------------------------
Total interest-bearing 138,189 18,500 6,237 4,394 1,231 168,551
liabilities
- ------------------------------------------------------------------------------------------------------
Interest rate gap $18,936 ($11,873) $3,193 $42,891 $10,092 $63,239
======================================================================================================
Cumulative interest rate gap $18,936 $7,063 $10,256 $53,147 $63,239
===========================================================================================
Interest rate gap ratio 1.14 0.36 1.51 10.76 9.20
===========================================================================================
Cumulative interest rate gap ratio 1.14 1.05 1.06 1.32 1.38
===========================================================================================
</TABLE>
To counter its natural interest rate position, the Bank entered into an interest
rate "floor" in the amount of $10 million which expires in May 1999. The Bank
has paid a fixed premium of $47 for which it will receive the amount of interest
on $10 million based on the difference of 7% and prime when prime is less than
7%. This protects the Bank against decreases in its net income when the prime
decreases. Settlement is done quarterly and the Bank records the impact of this
hedge on an accrual basis.
During the second and third quarters of 1995, the Bank executed several
transactions which are intended to mitigate its exposure to a decline in general
market interest rates. The transactions involved the purchase of three U.S.
Agency securities for an aggregate cost of $24 million which were financed
through the use of 90 day repurchase agreements. The repurchase agreements are
shown as short-term borrowings on the Company's balance sheet. The securities
are fixed rate with maturities of $7 million in November 1997, $10 million in
May 1998 and $7 million in July 1998. The repurchase agreements' interest rates
range from 5.70% to 5.90% and mature through March 1996. As these repurchase
agreements expire they will be renewed at the prevailing rates.
A large proportion of the Bank's deposits are non interest-bearing demand
deposits and are not included in the above table as they are not interest rate
sensitive. The average balance of these deposits was $45 million in 1995. There
is no benefit to the Bank with respect to these deposits when market interest
rates decline. This reduces the Bank's net interest margin when rates decline.
<TABLE>
<CAPTION>
The maturities and yields of the investment portfolio at December 31, 1995 are
shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1995 (dollars in thousands)
- ------------------------------------------------------------------------------------------------------
Maturity
- ------------------------------------------------------------------------------------------------------
After one year
Carrying Within one year within five After ten years
Value Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Securities held to maturity:
U. S. Treasury $4,265 $3,307 4.43% $958 7.05% ---- ----
U. S. Government Agencies 4,976 1,000 4.12 3,976 6.65 ---- ----
State and municipal 3,060 1,298 6.84 1,762 7.92 ---- ----
Mortgage Backed 2,428 ---- ---- 2,428 7.90 ---- ----
Other 519 ---- ---- ---- ---- $519 6.00%
- --------------------------------------------------- ---------- -----------
Total 15,248 5,605 9,124 519
- --------------------------------------------------- ---------- -----------
Securities available for sale:
U. S. Treasury 4,057 3,041 6.93 1,016 6.69 ---- ----
U. S. Government Agencies 34,578 7,038 5.97 27,540 6.13 ---- ----
Mortgage Backed 9 ---- ---- ---- ---- 9 0.00
Mutual funds 3,898 3,898 5.43 ---- ---- ---- ----
- --------------------------------------------------- ---------- -----------
Total 42,542 13,977 28,556 9
- --------------------------------------------------- ---------- -----------
Total $57,790 $19,582 5.71% $37,680 6.42% $528 5.90%
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table shows the maturity and interest rate sensitivity of
commercial, real estate-other and real estate construction loans at December 31,
1995. Approximately 86% of the commercial and real estate loan portfolio is
priced with floating interest rates which limits the exposure to interest rate
risk on long-term loans.
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY
(dollars in thousands)
Balances maturing Interest Rate Sensitivity
- ------------------------------------------------------------------------------------------------------------
Predeter-
Balances at One mined Floating
December One year year to Over interest interest
31, 1995 or less five years five years rates rates
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $52,958 $34,748 $14,058 $4,152 $1,917 $51,041
============================================================================================================
Real estate-other $74,045 $6,024 $31,657 $36,364 $18,019 $56,026
============================================================================================================
Real estate construction $14,488 $12,928 $1,560 ----- $552 $13,936
============================================================================================================
<FN>
The above table does not take into account the possibility that a loan may be
renewed at the time of maturity. In most circumstances, the Company treats a
renewal request in substantially the same manner in which it considers the
request for an initial extension of credit. The Company does not have a policy
to automatically renew loans.
</FN>
</TABLE>
Capital and Liquidity
Capital
The Company's book value per share was $11.02 and $9.92 as of December 31, 1995
and 1994, respectively. Tangible book value per share was $9.06 and $7.84 at
December 31, 1995 and 1994, respectively, due to the goodwill and core deposit
intangibles generated by the acquisition of CBB. Shareholders' equity was $27
million and $23 million as of December 31, 1995 and 1994, respectively. The
Federal Reserve Board's risk-based capital guidelines require that total capital
be in excess of 8% of total assets on a risk-weighted basis. Under the
guidelines for a bank holding company, capital requirements are based upon the
composition of the consolidated asset base and the risk factors assigned to
those assets. The guidelines characterize an institution's capital as being
"Tier 1" capital (defined to be principally shareholders' equity less certain
intangibles such as goodwill and core deposit intangibles) and "Tier 2" capital
(defined to be principally the allowance for possible loan losses and other
supplemental capital). The guidelines require the Company to maintain a
risk-based capital target ratio of 8%, one-half or more of which should be in
the form of Tier 1 capital.
The Comptroller of the Currency also requires SJNB to maintain adequate capital.
The Comptroller's current regulations require national banks to maintain Tier 1
capital (the leveraged ratio) equal to at least 3% to 5% of total assets,
depending on the Comptroller's evaluation of the bank.
The Comptroller also adopted risk-based capital requirements. Like the Federal
Reserve's guidelines, the amount of capital the Comptroller will require a bank
to maintain will be based upon the composition of its asset base and risk
factors assigned to those assets. The guidelines require the Bank to maintain a
risk-based capital target ratio of 8%, one-half or more of which should be in
the form of Tier 1 capital.
The table below summarizes the various capital ratios of the Bank and the
Company for the years ended December 31, 1995 and 1994.
Risk-based and Leverage Capital Ratios
(dollars in thousands)
Company December 31, December 31,
- ------- 1995 1994
-----------------------------------------
Risk-based Amount Ratio Amount Ratio
- --------- -----------------------------------------
Tier 1 capital $21,589 11.34% $18,530 10.93%
Tier 1 capital minimum requirement 7,617 4.00 6,781 4.00
-----------------------------------------
Excess $13,972 7.34% $11,749 6.93%
=========================================
Total capital $24,046 12.63% $20,724 12.23%
Total capital minimum requirement 15,233 8.00 13,561 8.00
-----------------------------------------
Excess $8,813 4.63% $7,163 4.23%
=========================================
Risk-adjusted assets $190,417 $169,514
============ ===========
Leverage
- --------
Tier 1 capital $21,589 9.00% $18,530 9.33%
Minimum leverage ratio requirement (1) 9,596 4.00 7,942 4.00
-----------------------------------------
Excess $11,993 5.00% $10,588 5.33%
=========================================
Average total assets $239,899 $198,542
============ ===========
Bank
- ----
Risk-based
Tier 1 capital 20,819 10.94% $17,477 10.34%
Tier 1 capital minimum requirement 7,614 4.00 6,759 4.00
-----------------------------------------
Excess $13,205 6.94% $10,718 6.34%
-----------------------------------------
Total capital $23,275 12.23% $19,664 11.64%
Total capital minimum requirement 15,228 8.00 13,518 8.00
-----------------------------------------
Excess $8,047 4.23% $6,146 3.64%
=========================================
Risk-adjusted assets $190,345 $168,976
============ ===========
Leverage
- --------
Tier 1 capital $20,819 8.67% $17,477 8.81%
Minimum leverage ratio requirement (1) 9,607 4.00 7,934 4.00
---------------------------------------
Excess $11,212 4.67% $9,543 4.81%
=======================================
Average total assets $240,163 $198,341
============== ============
(1) The required ratio is determined on an individual bank basis as a result of
factors considered by the Company's and Bank's regulators. To date, however, the
regulators have not established this amount. The Company and the Bank believe
that they may be required to maintain a leverage capital ratio at levels higher
than the minimum required ratio of 4% based on management's analysis.
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan funding and deposit withdrawals. Liquidity requirements
are evaluated by taking into consideration factors such as deposit
concentrations, seasonality and maturities, loan demand, capital expenditures,
and prevailing and anticipated economic conditions. SJNB's business is generated
primarily through customer referrals and employee business development efforts.
The Bank utilizes brokered deposits on a limited basis to satisfy temporary
liquidity needs.
The Bank's source of liquidity consists of its deposits with other banks,
overnight funds sold to correspondent banks and short-term, marketable
investments. On December 31, 1995, consolidated liquid assets totaled $35
million or 14% of consolidated total assets as compared to $31 million or 15% of
consolidated total assets on December 31, 1994. In addition to the liquid asset
portfolio, SJNB also has available $9 million in lines of credit with three
major commercial banks, approximately $4 million of credit available at the
Federal Reserve Discount Window and $12 million in SBA guaranteed loans which
are available for sale and could be sold within a 30 day period. SJNB is
primarily a business and professional bank and, as such, its deposit base is
more susceptible to economic fluctuations. Accordingly, management strives to
maintain a balanced position of liquid assets to volatile and cyclical deposits.
In their normal course of business, commercial clients maintain balances in
large certificates of deposit. The stability of these balances hinges upon,
among other factors, market conditions and each business' seasonality. Large
certificates of deposit amounted to 22% of total deposits on December 31, 1995,
as compared to 19% for 1994.
Liquidity is also affected by portfolio maturities and the effect of interest
rate fluctuations on the marketability of both assets and liabilities. The loan
portfolio consists primarily of floating rate, short-term loans. On December 31,
1995, approximately 34% of total consolidated assets had maturities under one
year and 86% of total consolidated loans had floating rates tied to the prime
rate or similar indexes. The short-term nature of the loan portfolio, and loan
agreements which generally require monthly interest payments, provide the
Company with an additional secondary source of liquidity.
There are no material commitments for capital expenditures in 1996.
Effects of Inflation
The most direct effect of inflation on the Company is higher interest rates.
Because a significant portion of the Bank's deposits are represented by non
interest-bearing demand accounts, changes in interest rates have a direct impact
on the financial results of the Bank. See "Asset/Liability Management." Another
effect of inflation is the upward pressure on the Company's operating expenses.
Inflation did not have a material effect on the Bank's operations in 1995 or
1994.
ITEM 7: FINANCIAL STATEMENTS
The following section includes the Company's Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1995
and 1994
Consolidated Statements of Income for the Years
Ended December 31, 1995 and 1994
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1995 and 1994
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995 and 1994
Notes to Consolidated Financial Statements.
<PAGE>
Independent Auditors' Report
The Board of Directors
SJNB Financial Corp.:
We have audited the accompanying consolidated balance sheets of SJNB Financial
Corp. and subsidiary (the Company) as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SJNB Financial Corp.
and subsidiary as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
San Jose, California
January 10, 1996
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Balance Sheets
December 31, 1995 and 1994
(in thousands)
- ----------------------------------------------------------------------------------------------------
Assets 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $12,574 $14,591
Money market investments 3,200 -----
Investment securities:
Held to maturity (Market value: $15,492 at December 31, 1995
and $13,392 at December 31, 1994) 15,248 13,859
Available for sale 42,542 18,706
- ----------------------------------------------------------------------------------------------------
Total investment securities 57,790 32,565
- ----------------------------------------------------------------------------------------------------
Loans 158,867 144,399
Loans available for sale 11,933 5,008
Allowance for possible loan losses (3,847) (3,311)
- ----------------------------------------------------------------------------------------------------
Loans, net 166,953 146,096
- ----------------------------------------------------------------------------------------------------
Premises and equipment, net 3,494 3,022
Other real estate owned 664 1,495
Accrued interest receivable and other assets 2,764 3,267
Intangibles, net of accumulated amortization of $735
at December 31, 1995 and $166 at December 31, 1994 4,756 4,913
- ---------------------------------------------------------------------------------------------------
Total $252,195 $205,949
====================================================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------
Deposits:
Non-interest-bearing $52,775 $54,002
Interest-bearing 143,917 126,285
- ----------------------------------------------------------------------------------------------------
Total deposits 196,692 180,287
- ----------------------------------------------------------------------------------------------------
Other short-term borrowings 24,000 -----
Accrued interest payable and other liabilities 4,845 2,220
- ----------------------------------------------------------------------------------------------------
Total liabilities 225,537 182,507
- ----------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares;
issued and outstanding, 2,418 shares
in 1995 and 2,363 shares in 1994 19,627 19,421
Retained earnings 6,798 4,278
Net unrealized gain (loss) on securities available for sale 233 (257)
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 26,658 23,442
- ----------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- ----------------------------------------------------------------------------------------------------
Total $252,195 $205,949
====================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Income
For the years ended December 31, 1995 and 1994
- -----------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1995 1994
- -----------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C>
Interest and fees on loans $18,016 $11,517
Interest on money market investments 280 300
Interest on investment securities held to maturity 878 491
Interest and dividends on investment securities available for sale 1,847 521
Other interest and investment income (43) 79
- -----------------------------------------------------------------------------------------------------
Total interest income 20,978 12,908
- -----------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit of $100 or more 2,232 1,091
Other 4,451 2,068
- -----------------------------------------------------------------------------------------------------
Total interest expense 6,683 3,159
- -----------------------------------------------------------------------------------------------------
Net interest income 14,295 9,749
- -----------------------------------------------------------------------------------------------------
Provision for possible loan losses 1,045 600
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 13,250 9,149
- -----------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 553 403
Other operating income 456 356
Net loss on sale of securities available for sale (43) (15)
- -----------------------------------------------------------------------------------------------------
Total other income 966 744
- -----------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 4,339 3,341
Occupancy 740 594
Other 3,718 2,741
- -----------------------------------------------------------------------------------------------------
Total other expenses 8,797 6,676
- -----------------------------------------------------------------------------------------------------
Income before income taxes 5,419 3,217
Income taxes 2,395 1,354
- -----------------------------------------------------------------------------------------------------
Net income $3,024 $1,863
=====================================================================================================
Net income per share $1.20 $1.00
=====================================================================================================
Average common share equivalents outstanding 2,522 1,854
=====================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1995 and 1994
Net Unrealized
Gain (Loss) Total
on Securities Share-
Common Retained Available holders'
(in thousands, except per share amounts) Shares Stock Earnings for Sale Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 1,629 $13,329 $2,735 $16,064
Issuance of common stock for Business Bancorp,
net of $165 registration costs 733 6,090 ---- ---- 6,090
Stock options exercised 1 2 ---- ---- 2
Cash dividends ($.16 per share) ---- ---- (320) ---- (320)
Net income for the year ended
December 31, 1994 ---- ---- 1,863 ---- 1,863
Net unrealized loss on securities available for sale ---- ---- ---- $(257) (257)
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 2,363 19,421 4,278 (257) 23,442
- -------------------------------------------------------------------------------------------------------------------------
Stock options exercised 71 351 ---- ---- 351
Stock buyback (16) (145) ---- ---- (145)
Cash dividends ($.21 per share) ---- ---- (504) ---- (504)
Net income for the year ended
December 31, 1995 ---- ---- 3,024 ---- 3,024
Net unrealized gain on securities available for sale ---- ---- 490 490
- -------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 2,418 $19,627 $6,798 $233 $26,658
=========================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 1995 and 1994
- ---------------------------------------------------------------------------------------------------------
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,024 $1,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 1,045 600
Depreciation and amortization 424 321
Amortization of intangibles 569 166
Deferred tax (benefit) (86) 268
Loss on sale of securities available for sale 43 15
Write down of other real estate owned ----- 40
Net gain on sale of other real estate owned 19 -----
Increase in loans available for sale, net (6,925) (1,283)
Amortization of premium on investment securities, net (129) (18)
Decrease in accrued interest receivable and other assets 6 303
Increase (decrease) in accrued interest payable and other liabilities 2,470 (477)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 460 1,798
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale or maturities of securities available for sale 14,162 6,016
Maturities of securities held to maturity 425 2,520
Purchase of securities available for sale (37,148) (14,310)
Purchase of securities to be held until maturity (1,762) (2,319)
Proceeds from the sale of other real estate owned 1,761 -----
Loans, net (15,926) (4,957)
Capital expenditures (896) (580)
Cash and equivalents acquired in acquisition of BB, net
of purchase payments ----- 5,660
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (39,384) (7,970)
- ---------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Deposits, net 16,405 11,429
Other short-term borrowings 24,000 (1,400)
Cash dividends (504) (320)
Common stock repurchased (145) -----
Proceeds from stock options exercised 351 2
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 40,107 9,711
- ---------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 1,183 3,539
Cash and equivalents at beginning of year 14,591 11,052
- ---------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $15,774 $14,591
=========================================================================================================
Other cash flow information:
Interest paid $6,388 $2,998
Income taxes paid $1,185 $795
=========================================================================================================
Noncash transactions:
Transfer of loans to other real estate owned $950 $1,211
=========================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
NOTE 1 - Summary of Significant Accounting Policies
SJNB Financial Corp. ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California on April 18, 1983. Its principal office is
located at One North Market Street, San Jose, California.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose, California
on June 10, 1982. Its main office is located at One North Market Street, San
Jose, California. SJNB engages in the general commercial banking business with
special emphasis on the banking needs of the business and professional
communities in San Jose and the surrounding areas. The Financial Services
Division is located at 95 South Market, San Jose California, where it engages in
the factoring of accounts receivable.
The accounting policies of SJNB Financial Corp. and San Jose National Bank
(collectively, the "Company") are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry.
a. Consolidation
The consolidated financial statements include the accounts of SJNB Financial
Corp. and its wholly-owned subsidiary, San Jose National Bank (the "Bank"). All
material intercompany accounts and transactions have been eliminated in the
consolidated financial statements.
b. Investment Securities
The Company accounts for its securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS No. 115) as follows:
Held to maturity-Investment securities purchased with the intent and ability to
hold them until maturity are classified as held to maturity. Such securities are
carried at cost, adjusted for accretion of discounts and amortization of
premiums.
Available for sale-Investment securities that are acquired without the intent to
hold until maturity are classified as available for sale. Such securities are
valued at market value. Market value adjustments are reported as a separate
component of shareholders' equity until realized.
Investment securities purchased are recorded as of their trade date. Accretion
of discounts and amortization of premiums arising at acquisition are included in
income using methods approximating the interest method. Gains or losses on sales
of securities, if any, are determined based on the specific identification
method.
c. Loans and Allowance for Possible Loan Losses
Loans generally are stated at the principal amount outstanding. Interest on
loans is credited to income on a simple interest basis. Loan origination fees
and direct origination costs are deferred and amortized to income by a method
approximating the level yield method over the estimated lives of the underlying
loans. The accrual of interest on loans is discontinued and any accrued and
unpaid interest is reversed when, in the opinion of management, there is
significant doubt as to the collectibility of interest or principal or when the
payment of principal or interest is ninety days past due, unless the amount is
well-secured and in the process of collection.
The allowance for possible loan losses is a valuation allowance maintained to
provide for future loan losses through charges to current operating expense. The
allowance is based upon a continuing review of loans by management which
includes consideration of changes in the character of the loan portfolio,
current and anticipated economic conditions, past lending experience and such
other factors which, in management's judgment, deserve recognition in estimating
potential loan losses. In addition, regulatory examiners may require the Company
to recognize additions to the allowance based on their judgments about
information available to them at the time of their examinations.
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" as amended by SFAS No. 118
(collectively referred to as SFAS No. 114) on January 1, 1995. SFAS No. 114
requires entities to measure certain impaired loans based on the present value
of future cash flows discounted at the loan's effective interest rate, or at the
loan's market value or the fair value of collateral if the loan is secured. A
loan is considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement, including scheduled interest
payments. If the measurement of the impaired loan is less than the recorded
investment in the loan, impairment is recognized by creating or adjusting an
existing allocation of the allowance for loan losses.
d. Loans Available for Sale
The unsold guaranteed portion of SBA loans has been designated as being
available for sale, and accordingly, these loans are being accounted for on a
lower of aggregate cost or market basis. Any market value adjustments are
recorded as an adjustment to the Company's income.
e. Sales of Loans
When loans or participating interests in loans are sold without recourse, gains
and losses are recognized at the time of sale. Gains or losses recognized are
equal to the premium less estimated future servicing costs and profits. Any
premiums or discounts related to loan sales are amortized on a basis that
approximates the effective yield over the estimated remaining life of the loan.
f. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense over the
estimated useful lives of the assets on a straight-line basis as follows:
Buildings 30 years
Furniture and equipment 3-10 years
Improvements 7-15 years
g. Other Real Estate Owned
Other real estate owned is comprised of real estate acquired through
foreclosure. Such foreclosures are recorded at the lower of cost or fair value
less estimated selling costs. Subsequent valuation adjustments are made if fair
value less estimated selling costs falls below the carrying amount. Holding
costs are expensed as incurred.
h. Intangibles
Goodwill, representing the excess of the purchase price over the fair value of
net assets acquired, results from the Company's acquisition of Business Bancorp
and its subsidiary California Business Bank on October 1, 1994. Goodwill is
being amortized using the straight-line method over 15 years.
Core deposit intangibles resulting from the acquisition of Business Bancorp and
California Business Bank on October 1, 1994 are amortized using an accelerated
method over ten years.
On a periodic basis, the Company reviews its intangible assets for events or
changes in circumstances that may indicate that the carrying amount of the
assets may not be recoverable. Should such a change indicate that the value of
such intangibles may be impaired, an evaluation of the recoverability would be
performed prior to any writedown of the assets.
i. Interest Rate Instruments
Interest rate instruments are entered into in conjunction with the Bank's
asset/liability management. As these contracts are entered into only after
meeting the accounting criteria for a hedge, and as long as they continue to
meet such criteria, changes in market value are deferred and the net settlements
are accrued as adjustments to interest income. The Bank currently has
outstanding an interest rate floor arrangement which does not meet the
accounting criteria for a hedge and which therefore is accounted for on a mark
to market basis.
j. Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Under the asset and liability method, deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit
carryforwards, and then a valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized.
k. Net Income Per Share
Net income per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year plus shares
issuable assuming exercise of all employee stock options, except where
anti-dilutive.
In October 1995, the Financial Accounting Standard Board (FASB) issued Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." SFAS No. 123 permits a company to choose either a new
fair value based method of accounting for its stock-based compensation (stock
options) or the current Accounting Principles Board Opinion 25 (APB 25)
intrinsic value based method of accounting for its stock-based compensation.
SFAS No. 123 requires pro forma disclosures of net income and earnings per share
computed as if the fair value based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangement under APB 25. The Company has elected to continue to use
current practice under APB 25, but is unable to determine the impact of the
required disclosures as it is still reviewing the requirements of SFAS No. 123.
l. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and money market investments. Cash flow amounts for
the year ended December 31, 1994 are net of the effects of the acquisition of
Business Bancorp.
m. Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent asset and liabilities to prepare these financial statement in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
n. Impairment of Long-Lived Assets
In 1995, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" (SFAS No. 121). SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes indicate that the carrying
amount of an asset may not be recoverable. Upon adoption, the Company identified
no long-lived assets or identifiable intangibles which were impaired.
NOTE 2 - Acquisitions
The Company completed the purchase of Business Bancorp ("BB"), the holding
company for California Business Bank, N.A. ("CBB"), effective as of October 1,
1994. The purchase price was approximately $11.4 million, of which $6.3 million
(55%) was paid in common stock of SJNB Financial Corp. (733,000 shares) and $5.1
million (45%) was paid in cash.
The Company accounted for this acquisition as a purchase and, accordingly, the
results of operations for BB have been included in the Consolidated Financial
Statements from October 1, 1994, the acquisition date. The following unaudited
pro forma combined consolidated financial information gives effect to the
acquisition as if it had been consummated on January 1, 1993.
- ------------------------------------------------------------
Years Ended December 31
(dollars in thousands,
except per share data) 1994 1993
Net interest income $12,690 $10,690
Income before income taxes 2,095 2,399
Net income 1,010 1,229
Net income per share .41 .51
- ------------------------------------------------------------
This unaudited pro forma information may not be indicative of the results that
would actually have occurred in the combination had been in effect on January 1,
1993 or which may be obtained in the future. The unaudited pro forma information
does not include any potential benefit from possible efficiencies obtained by
combining the two bank operations.
In November 1995, the Company entered into an agreement to acquire Astra
Financial Inc. (Astra). Astra is an asset based lending company based in San
Jose, California. Its outstanding factoring receivables were approximately $2.2
million as of December 31, 1995. The estimated purchase price of Astra is
approximately $760 including a covenant not to compete and compensation to the
sole owner of Astra. The purchase price is contingent and may be increased based
upon the first year's performance not to exceed a total of $1.2 million. The
acquisition will be accounted for as a purchase transaction and closed on
January 2, 1996.
NOTE 3 - Cash and Due from Banks
The Federal Reserve requires the Bank to maintain average reserve balances for
certain deposit balances. Such required reserves were approximately $2.0 million
and $1.2 million as of December 31, 1995 and 1994, respectively.
NOTE 4 - Investment Securities
Investment securities as of December 31, 1995 and 1994 are summarized as
follows:
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Market Market
Cost Value Cost Value
- --------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury $4,265 $4,293 $4,260 $4,101
U.S. Government agencies 4,976 5,052 4,963 4,752
State and municipal (nontaxable) 3,060 3,084 1,797 1,762
Mortgage Backed 2,428 2,544 2,377 2,315
- --------------------------------------------------------------------------------
Total held to maturity 14,729 14,973 13,397 12,930
Federal Reserve Bank Stock 519 519 462 462
- --------------------------------------------------------------------------------
Total 15,248 15,492 13,859 13,392
- --------------------------------------------------------------------------------
Available for sale:
U.S. Treasury 3,998 4,057 9,989 9,786
U. S. Government Agencies 34,129 34,578 4,960 4,955
Mortgage Backed 9 9 19 18
Mutual funds 4,018 3,898 4,180 3,947
- --------------------------------------------------------------------------------
Total available for sale 42,154 42,542 19,148 18,706
- --------------------------------------------------------------------------------
Total invest. securities portfolio $57,402 $58,034 $33,007 $32,098
================================================================================
As of December 31, 1995 and 1994 investment securities with carrying values of
approximately $34 million and $5 million, respectively, were pledged as
collateral for deposits of public funds and other purposes. Investment in
Federal Reserve Bank stock is carried at cost, which is approximately equal to
its market value.
<TABLE>
<CAPTION>
The following tables provide the scheduled maturity and weighted average yields
of the Company's investment securities portfolio as of December 31, 1995 and
1994:
Weighted
December 31, 1995 Amortized Unrealized Unrealized Market Average
(dollars in thousands) Cost Gain (Loss) Value Yield
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities held to maturity:
U.S. Treasury Securities:
Maturing within 1 year $3,307 ----- ($11) $3,296 4.43%
Maturing after 1 year but within 5 years 958 $39 ----- 997 7.05
U.S. Government Agencies:
Maturing within 1 year 1,000 ----- (9) 991 4.12
Maturing after 1 year but within 5 years 3,976 101 (16) 4,061 6.65
State and municipal:
Maturing within 1 year 1,298 4 (2) 1,300 4.89
Maturing after 1 year but within 5 years 1,762 22 ----- 1,784 5.60
Mortgaged Backed
Maturing after 1 year but within 5 years 2,428 116 ----- 2,544 7.90
Other securities:
Maturing after ten years 519 ----- ----- 519 6.00
- ---------------------------------------------------------------------------------------------------------------------------
Securities held to maturity 15,248 282 (38) 15,492 5.93
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury Securities:
Maturing within 1 year 2,999 42 ----- 3,041 6.93
Maturing after 1 year but within 5 years 999 17 ----- 1,016 6.69
U.S. Government Agencies:
Maturing within 1 year 7,022 17 (1) 7,038 5.97
Maturing after 1 year but within 5 years 27,107 433 ----- 27,540 6.13
Mortgaged Backed-Maturing in more than 10 years 9 ----- ----- 9
Mutual funds-Overnight availability 4,018 ----- (120) 3,898 5.43
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale 42,154 509 (121) 42,542 6.11
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $57,402 $791 $(159) $58,034 6.06%
===========================================================================================================================
December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U.S. Treasury Securities:
Maturing after 1 year but within 5 years $4,260 ----- $(159) $4,101 5.01%
U.S. Government Agencies:
Maturing after 1 year but within 5 years 4,963 $1 (212) 4,752 6.14
State and municipal:
Maturing within 1 year 427 ----- (2) 425 4.63
Maturing after 1 year but within 5 years 1,370 ----- (32) 1,338 4.74
Mortgaged Backed
Maturing after 1 year but within 5 years 2,377 ----- (63) 2,314 7.90
Other securities:
Maturing after ten years 462 ----- ----- 462 6.00
- ---------------------------------------------------------------------------------------------------------------------------
Securities held to maturity 13,859 1 (468) 13,392 5.91
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury Securities:
Maturing within 1 year 3,992 ----- (57) 3,935 4.96
Maturing after 1 year but within 5 years 5,997 ----- (146) 5,851 5.45
U.S. Government Agencies:
Maturing within 1 year 3,960 ----- (4) 3,956 5.66
Maturing after 1 year but within 5 years 1,000 ----- (1) 999 7.63
Mortgaged Backed-Maturing in more 19 ----- (1) 18
than 10 years
Mutual funds-Overnight availability 4,180 ----- (233) 3,947 5.55
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale 19,148 ----- (442) 18,706 5.52
- ---------------------------------------------------------------------------------------------------------------------------
Total investment securities $33,007 $1 $(910) $32,098 5.68%
===========================================================================================================================
<FN>
The weighted average yields above have not been adjusted for tax benefits
available on tax-exempt state and municipal investments. Mutual funds consist of
several funds invested in U. S. Government securities and government issued
adjustable rate mortgages (ARMS).
</FN>
</TABLE>
Interest income earned on U. S. Treasury, U. S. Government agencies and state
and municipal securities for the years ended December 31, 1995 and 1994 are as
follows:
- -----------------------------------------------------
Interest Income
(dollars in thousands) 1995 1994
- -----------------------------------------------------
Securities held to maturity:
U.S. Treasury $214 $193
U.S. Government Agencies 306 148
State and municipal (nontaxable) 120 85
Mortgage Backed 208 47
Federal Reserve Bank 30 18
Securities available for sale:
U.S. Treasury 417 294
U.S. Government agencies 1,200 31
Mortgage Backed (3) 1
Mutual funds 233 195
- -----------------------------------------------------
Interest income $2,725 $1,012
=====================================================
NOTE 5 - Loans
A summary of loans as of December 31, 1995 and 1994 is as follows:
(dollars in thousands) 1995 1994
- ------------------------------------------------------------
Commercial $48,121 $49,018
Real estate construction 14,488 16,343
Real estate other 66,949 63,104
Consumer 8,800 9,461
Other 21,302 7,362
Unearned fee income (793) (889)
- ------------------------------------------------------------
Loan portfolio 158,867 144,399
Loans available for sale 11,933 5,008
- ------------------------------------------------------------
Total 170,800 149,407
Less allowance for possible loan losses (3,847) (3,311)
- -----------------------------------------------------------
Loans, net $166,953 $146,096
===========================================================
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions. Although
the Company has a diversified loan portfolio, a substantial portion of its
customers' ability to honor contracts is reliant upon the economic stability of
the Santa Clara Valley, which in some degree relies on the stability of high
technology companies in its "Silicon Valley." Loans are generally made on the
basis of a secure repayment source, which is based on a detailed cash flow
analysis; however, collateral is generally a secondary source for loan
qualification.
Approximately 43% of the Company's loan portfolio is made up of real estate
other than construction. This category of real estate loans includes loans on
income-bearing commercial properties. In addition, 8.5% of the loan portfolio is
made up of real estate construction loans. These loans consist of approximately
67% residential and 33% commercial. Included in Consumer loans are prime equity
loans of $4.6 million or approximately 2.7% of the total loan portfolio.
Included in the category "Other" are loans to real estate developers for
short-term investment purposes and loans to nondevelopers for real estate
investment purposes that amount to approximately 4.6% of the total loan
portfolio. This amounts to approximately 59% of the loan portfolio which is
directly related to real estate or real estate interests. Approximately 31% of
the total loan portfolio is commercial loans; however, no particular industry
represents a significant portion of such loans.
Loans available for sale consist of the guaranteed portion of the SBA loans. The
Bank provides servicing of loans sold to permanent investors. The amount of
loans being serviced at December 31, 1995 and 1994 was approximately $12 million
and $27 million, respectively.
The following is an analysis of the allowance for possible loan losses for the
years ended December 31, 1995 and 1994:
(dollars in thousands) 1995 1994
- --------------------------------------------------------------
Balance, beginning of year $3,311 $2,057
Provisions for possible loan losses 1,045 600
Charge-offs (696) (1,682)
Recoveries 187 431
Allowance relating to the acquisition
of California Business Bank ----- 1,905
- --------------------------------------------------------------
Balance, end of year $3,847 $3,311
==============================================================
At December 31, 1995, the recorded investment in loans for which impairment in
accordance with SFAS Nos. 114 and 118 totaled $936 with a corresponding
valuation allowance of $302. For the year ended December 31, 1995, the average
recorded investment in impaired loans was approximately $2.8 million. The
Company recognized $549 of interest on impaired loans (during the portion of the
year they were impaired), of which $543 related to impaired loans for which
interest income is recognized on the cash basis.
The balance of nonaccrual loans as of December 31, 1995 and 1994 was
approximately $894 and $5.5 million, respectively. Nonaccrual loans as of
December 31, 1994 includes a single loan in the amount of approximately $2.5
million, which was collected in June 1995. The effect on interest income had
these loans been performing in accordance with contractual terms was $111 in
1995 and $359 in 1994. Income actually recognized on these loans was $11 in 1995
and $121 in 1994.
The Company has made loans to executive officers, directors and their affiliates
in the ordinary course of business. An analysis of activity with respect to such
loans during the years ended December 31, 1995 and 1994 is as follows:
(dollars in thousands) 1995 1994
- ----------------------------------------------------------
Balance, beginning of year $4,206 $2,673
New loans disbursed 471 3,225
Repayments of loans (2,859) (1,692)
- ----------------------------------------------------------
Balance, end of year $1,818 $4,206
==========================================================
As of December 31, 1995, loans of approximately $8.5 million were pledged as
collateral for the Federal Reserve Discount Window. The Bank did not utilize the
Discount Window for any borrowings during 1995.
NOTE 6 - Premises and Equipment
A summary of premises and equipment as of December 31, 1995 and 1994 is as
follows:
(dollars in thousands) 1995 1994
- -------------------------------------------------------------------
Land $829 $829
Buildings and improvements 3,312 2,704
Furniture and equipment 2,258 2,147
- -------------------------------------------------------------------
Premises and equipment 6,399 5,680
Less accumulated depreciation and amortization (2,905) (2,658)
- -------------------------------------------------------------------
Premises and equipment, net $3,494 $3,022
===================================================================
NOTE 7 - Time Deposits
As of December 31, 1995 and 1994, the Bank had $43 and $34 million,
respectively, in time deposits in denominations of $100 or more. Interest
expense for these deposits was $2.2 million and $1.1 million in 1995 and 1994,
respectively.
NOTE 8 - Other Short-term Borrowings
Other short-term borrowings include federal funds purchased and securities sold
under agreements to repurchase and information relating to these borrowings are
summarized below:
(dollars in thousands)
- -----------------------------------------------------------------------
Federal funds purchased
Balance at December 31 $2,000 -----
Weighted average interest rate at year end 5.25% -----
Maximum amount outstanding at any month end 9,000 $1,200
Average outstanding balance 355 182
Weighted average interest rate paid 6.17% 2.72%
Securities sold under agreements to
repurchase
Balance at December 31, $22,000 -----
Weighted average interest rate at year end 5.77% -----
Maximum amount outstanding at any month end 23,553 -----
Average outstanding balance 10,827 -----
Weighted average interest rate paid 5.95% -----
The Company's bank subsidiary has informal arrangements with various
correspondents providing short-term credit for liquidity requirements; such
informal lines aggregated $9 million at December 31, 1995.
NOTE 9 - Income Taxes
Income tax expense for the years ended December 31, 1995 and 1994 consists of
the following:
(dollars in thousands) 1995 1994
- --------------------------------------------------------------
Current:
Federal $2,108 $520
State 373 156
- --------------------------------------------------------------
Total current 2,481 676
- --------------------------------------------------------------
Deferred:
Federal (81) 631
State (5) 47
- --------------------------------------------------------------
Total deferred (86) 678
- --------------------------------------------------------------
Income taxes $2,395 $1,354
==============================================================
Total income tax expense differed from the amount computed by applying the U. S.
federal income tax rates in years ended December 31, 1995 and 1994 of 34% to
income before income taxes as a result of the following:
(dollars in thousands) 1995 1994
- ---------------------------------------------------------------------------
Computed "expected " tax expense $1,842 $1,094
California franchise tax, net of federal income tax 368 203
Amortization of intangible assets 230 56
Federal tax-exempt investment income (42) (33)
Change in valuation account 7 11
Other (10) 23
- ---------------------------------------------------------------------------
Income taxes $2,395 $1,354
===========================================================================
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994, are presented below:
4
(dollars in thousands) 1995 1994
- -------------------------------------------------------------------
Deferred tax assets:
Provision for possible loan losses $1,353 $236
Deferred loan fees ----- 194
Securities available for sale ----- 171
Purchase accounting adjustments ----- 146
Foreclosure income 48 85
State taxes ----- 53
Deferred compensation 65 50
Other ----- 27
- -------------------------------------------------------------------
Total gross deferred tax assets 1,466 962
- -------------------------------------------------------------------
Less valuation allowance (280) (273)
- -------------------------------------------------------------------
Net deferred tax assets 1,186 689
- -------------------------------------------------------------------
Deferred tax liabilities:
Purchase accounting adjustments 503 -----
Securities available for sale 155 -----
State taxes 143 -----
Depreciation and amortization 195 136
Excess servicing 29 152
- -------------------------------------------------------------------
Total gross deferred tax liabilities 1,025 288
- -------------------------------------------------------------------
Net deferred tax assets $161 $401
===================================================================
Deferred tax assets related to purchase accounting adjustments include the tax
effect of fair market value adjustments of the assets and liabilities acquired
from BB and CBB. The Company believes that the net deferred tax asset is
realizable through sufficient taxable income within the carryback periods and
the current year's taxable income.
NOTE 10 - Detail of Other Expense
Other expense for the years ended December 31, 1995 and 1994 consists of the
following:
(dollars in thousands) 1995 1995
- -------------------------------------------------------------------
Amortization of core deposit intangibles
and goodwill $569 $166
Legal and professional fees 476 282
Data processing 458 351
Business promotion 314 273
Regulator's assessments 283 361
Client services 247 176
Directors' fees and costs 239 161
Loan and collection 215 235
Advertising 186 81
Stationery and supplies 180 132
Net cost of other real estate owned 45 130
Other 506 394
- -------------------------------------------------------------------
Total $3,718 $2,741
===================================================================
NOTE 11 - Stock Option Plan
The Company has two stock option plans under which incentive stock options or
nonqualified stock options may be granted to certain key employees or directors
to purchase authorized, but unissued, common stock of the Company. Shares may be
purchased at a price not less than the fair market value of such stock on the
date of the grant. All stock options become exercisable at least 40% one year
after the date of grant and at least 20% in each of the following three years.
They expire no later than ten years after the date of the grant. The number of
shares granted to the directors is set by a predefined formula based on the
profitability of the Company. A prior plan expired during 1992 and the unused
shares authorized under the prior plan may not be the subject of stock options
granted under the current plans. The prior plan provided that all stock options
expire no later than five years after the date of grant. The number of shares
subject to outstanding options under the prior plan was 144,384 as of December
31, 1995.
Activity under the stock plans is as follows:
Per
Options Number Share
- -----------------------------------------------------------
Balances, December 31, 1993 245,371 $4.25-7.87
Granted 17,100 7.25-8.38
Cancelled (1,640) 4.25-8.13
Exercised (360) 4.25-4.37
- -----------------------------------------------------------
Balances, December 31, 1994 260,471 $4.25-8.38
- -----------------------------------------------------------
Granted 140,125 7.50-14.07
Cancelled (8,300) 4.25-9.31
Exercised (70,987) 4.25-7.38
- -----------------------------------------------------------
Balances, December 31, 1995 321,309 $4.25-13.75
===========================================================
Options available for grant at December 31, 1995 and 1994 were 309,355 and
141,180, respectively. Options to purchase 163,432 shares of stock were
exercisable as of December 31, 1995.
NOTE 12 - Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments, such as
commitments to extend credit, which are not reflected in the consolidated
financial statements. These commitments involve, to varying degrees, credit risk
in excess of the amount recognized as either an asset or liability in the
consolidated balance sheet. The Company controls the credit risk through its
credit approval process. The same credit policies are used when entering into
such commitments. Management does not anticipate any loss from such commitments.
As of December 31, 1995, amounts committed to extend credit under normal lending
agreements aggregated approximately $65 million for undisbursed loan commitments
and approximately $3.0 million for commitments under unused standby letters of
credit and other guarantees.
The Bank utilizes various financial instruments with off-balance sheet risk to
reduce its exposure to fluctuations in interest rates. These financial
instruments involve, to varying degrees, credit and interest rate risk in excess
of the amount recognized as either an asset or liability in the statement of
financial position.
The credit risk is the possibility that a loss may occur because a party to a
transaction failed to perform according to the terms of the contract. Interest
rate risk is the possibility that future changes in market prices will cause a
financial instrument to be less valuable or more onerous. The Bank attempts to
control the credit risk arising from these instruments through its credit
approval process and through the use of risk control limits and monitoring
procedures. Interest rate risk is managed by various asset and liability methods
including the utilization of interest rate hedging vehicles.
Also at December 31, 1995, the Bank had outstanding an interest rate floor in
the amount of $10 million for a period of five years. The Bank has paid a fixed
premium for which it will receive, through May 10, 1999, the amount of interest
on $10 million based on the difference of 7% and prime when prime is less than
7%. This will protect the Bank against decreases in its net income when prime
decreases to less than 7%. The current fair market value of the floor is
approximately $64.
The Company is obligated under its lease agreement for 95 South Market under a
noncancelable operating lease through September 2004. The lease is subject to
periodic adjustment based on changes in the CPI. The following table shows
future minimum payments under the lease as of December 31, 1995:
- -------------------------------------- ---------------------
Year Ending
(in thousands) December 31,
- -------------------------------------- ---------------------
1996 $228
1997 228
1998 228
1999 228
2000 228
Thereafter 855
---------------------
Total minimum lease payments $1,995
- ------------------------------------------------------------
Total minimum lease payments to be received under noncancelable operating
subleases at December 31, 1995 are approximately $1.5 million; these payments
are not reflected in the above table.
There is ordinary routine litigation incidental to the business pending against
the Company but, in the opinion of management, liabilities (if any) arising from
such claims will not have a material effect upon the consolidated financial
statements of the Company.
NOTE 13 - Fair Value of Financial Instruments
In 1995, the Company implemented Statement of Financial Accounting Standards No.
107 (SFAS No. 107), "Disclosures about Fair Value of Financial Instruments,"
which requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates, methods and assumptions, set forth below for
the Company's financial instruments, are made solely to comply with the
requirements of SFAS No. 107 and should be read in conjunction with the
financial statements and notes in this Annual Report.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
management's estimates of the values, and they are often calculated based on
current pricing policy, the economic and competitive environment, the
characteristics of the financial instruments, and other such factors. These
calculations are subjective in nature, involve uncertainties and matters of
significant judgment and do not include tax ramifications; therefore, the
results cannot be determined with precision, substantiated by comparison to
independent markets and may not be realized in an actual sale or immediate
settlement of the instruments. The Company has not included certain material
items in its disclosure, such as the value of the long-term relationships with
the Company's deposit customers, since these intangibles are not financial
instruments. There may be inherent weaknesses in any calculation technique, and
changes in the underlying assumptions used, including discount rates and
estimates of future cash flows, could significantly affect the results. For all
these reasons, the aggregation of the fair value calculations presented herein
do not represent, and should not be construed to represent, the underlying value
of the Company.
The following table presents a summary of the Company's financial instruments,
as defined by SFAS No. 107 as of December 31, 1995:
(dollars in thousands)
- -------------------------------------------------------------------------------
Carrying Fair
Financial assets Value Value
- -------------------------------------------------------------------------------
Cash and due from banks $12,574 $12,574
Money market investments 3,200 3,200
Investment securities 57,790 58,034
Loans, net 166,953 167,207
Accrued interest receivable 1,698 1,698
Financial liabilities
- -------------------------------------------------------------------------------
Deposits 197,189 197,102
Federal funds purchased, securities sold under
repurchase agreements and other borrowings 24,714 24,672
Off-balance sheet
Financial Instruments
- -------------------------------------------------------------------------------
Interest rate floor contract purchased 31 64
Cash and due from banks and money market investments - These are valued at their
carrying amounts included in the consolidated statement of financial condition,
which are reasonable estimates of fair value due to the relatively short period
to maturity of the instruments.
Investment securities - For securities held to maturity and carried at amortized
cost, as well as available for sale securities, current market prices or
quotations were used to determine fair value. Stock held in the Federal Reserve
Bank of San Francisco has no trading market, is required as part of being a
member of the Federal Reserve system, and is redeemable at par; therefore, its
fair value is presented at cost.
Loans - The carrying amount of loans is net of unearned fee income and the
reserve for possible loan losses. The fair valuation calculation process
differentiates loans based on their financial characteristics, such as product
classification, loan category, pricing features and remaining maturity.
Prepayment estimates are evaluated by product and loan rate. Discount rates
presented in the paragraphs below have a wide range due to the Company's mix of
fixed and variable rate products.
The fair value of loans is calculated by discounting contractual cash flows
using discount rates that reflect the Company's current pricing for loans with
similar characteristics and remaining maturity. Most of the discount rates
applied to these loans are between 10.6% and 11.2% at December 31, 1995.
Additionally, the allowance for loan losses was applied against the estimated
fair value of loans to recognize future defaults of contractual cash flows.
Fair value for nonperforming loans is based on discounting estimated cash flows
using a rate commensurate with the risk associated with the estimated cash
flows, or underlying collateral values, where appropriate.
Loans available for sale - Loans available for sale are valued based on quoted
prices for SBA guaranteed loans.
Accrued interest receivable - The carrying amounts of accrued interest
receivable approximate their fair values.
Deposits - SFAS No. 107 states that the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, interest-bearing checking
and money market and savings deposit accounts, is equal to the amount payable on
demand at the measurement date. Although FASB's requirement for these categories
is not consistent with market practice of using prevailing interest rates to
value these amounts, the amount included for these deposits in the previous
table is their carrying value.
The fair value of certificates of deposit and other time deposits is calculated
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for like deposits with similar
remaining maturities.
Other short-term borrowings - A reasonable estimate of the fair value of federal
funds sold is the carrying amount because of the relatively short period of time
between the origination of the instrument and its expected maturity.
The fair value of the Company's securities sold under repurchase agreements is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for such instruments with
similar remaining maturities.
Accrued interest payable - The carrying amounts of accrued interest payable
approximate their fair values.
Commitment to extend credit - The majority of the Company's commitments to
extend credit carry variable and current market interest rates if converted to
loans. Because these commitments are generally unassignable by either the
Company or the borrower, they only have value to the Company and the borrower.
The estimated fair value approximates the recorded deferred fee amounts and is
excluded from the table.
Derivative financial instruments - The fair value of the interest rate floor
generally reflects the estimated amounts the Company would receive based upon
dealer quotes, to terminate such agreements at the reporting date.
Limitations - These fair value disclosures are made solely to comply with the
requirements of SFAS No. 107. The calculations represent management's best
estimates; however, due to the lack of broad markets and the significant items
excluded from this disclosure, the calculations do not represent the underlying
value of the Company. The information presented in this footnote is based on
market quotes and fair value calculations as of December 31, 1995. These amounts
have not been updated since year end; therefore, the valuations may have changed
significantly since that point in time.
NOTE 14 - SJNB Financial Corp.
(Parent Company Only)
The following are the financial statements of SJNB Financial Corp. (parent
company only):
- --------------------------------------------------------------------------------
Balance Sheets
December 31, 1995 and 1994
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Assets
Cash and equivalents $710 $529
Loans, net of allowance for possible loan losses
of $57 in 1994 ----- 455
Investment in the Bank 25,889 22,389
Other assets 74 74
- --------------------------------------------------------------------------------
Total assets $26,673 $23,447
================================================================================
Liabilities and Shareholders' Equity
Total liabilities-Accounts payable $15 $5
- --------------------------------------------------------------------------------
Common stock, no par value; authorized, 20,000 shares
issued and and outstanding, 2,418 shares
in 1995 and 2,363 shares in 1994 19,627 19,421
Retained earnings 6,798 4,278
Net unrealized gain (loss) on securities available for sale 233 (257)
- --------------------------------------------------------------------------------
Total shareholders' equity 26,658 23,442
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $26,673 $23,447
================================================================================
- --------------------------------------------------------------------------------
Statements of Income
For the Years Ended December 31, 1995 and 1994
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Equity in undistributed income of the Bank $3,010 $900
Cash dividend received from Bank ----- 900
Interest income and fees on loans 123 105
Reduction of provision for possible loan losses 57 100
Other income (expense) (156) (98)
- --------------------------------------------------------------------------------
Income before taxes 3,034 1,907
Income tax (10) (44)
- --------------------------------------------------------------------------------
Net income $3,024 $1,863
================================================================================
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Statements of Cash Flows
For the Years Ended December 31, 1995 and 1994
(dollars in thousands) 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,024 $1,863
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Recovery of provision for possible loan losses (57) (100)
Decrease (increase) in other assets ---- 76
Increase (decrease) in liabilities 10 (70)
Equity in undistributed income of the Bank (3,010) (901)
- --------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (33) 868
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in loans, net 512 678
Capital contribution to the Bank ---- (1,000)
Cash dividend (504) (320)
Common stock repurchased (145)
Stock options exercised 351 2
Net cash used in the acquisition of BB ---- (2,089)
- --------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 214 (2,729)
- --------------------------------------------------------------------------------------
Net increase in cash and equivalents 181 (1,861)
Cash and equivalents at beginning of year 529 2,390
- --------------------------------------------------------------------------------------
Cash and equivalents at end of year $710 $529
======================================================================================
Noncash transactions:
Acquisition of BB's assets at fair market value:
Fair value of assets acquired ---- $11,374
Payment for purchase of BB ---- (5,136)
-----------------------
Common stock issued ---- $6,238
=======================================================================================
</TABLE>
NOTE 15- Regulatory Matters
The Company and the Bank are subject to their respective regulator's policies
governing capital adequacy. Such regulators adopted regulations for determining
capital adequacy that involve assigning assets to four broad risk categories and
that establish minimum capital ratios based on these assignments. The
regulations require a ratio of capital to risk-weighted assets of 8.00% and a
minimum Tier 1 ratio (as defined by the regulations) of 4.00%. As of December
31, 1995, the Company and the Bank qualified for the top capital category of
"well capitalized" under the regulations.
The ability of the Company to pay dividends largely depends upon the dividends
paid to it by the Bank. There are legal limitations on the ability of the Bank
to provide funds to the Company in the form of loans, advances or dividends.
Under national banking law, the Bank may not declare dividends in any calendar
year that exceed certain legal limitations without the approval of the Office of
the Comptroller of the Currency. The restricted equity of the Bank as of
December 31, 1995 was approximately $20 million.
<PAGE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
ITEM 10:EXECUTIVE COMPENSATION
ITEM 11:SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12:CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction E(3), the information in Items 9, 10, 11, and 12
of Part III is furnished by way of incorporation by reference from those
sections of the Registrant's 1996 proxy statement containing the information
required by Items 401, 402, 403, 404 and 405 of Regulation S-B. The Registrant
intends to file a definitive copy of its 1996 proxy statement by April 29, 1996.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
(2)a.The Plan of Acquisition and Merger by and between SJNB Financial Corp. and
Business Bancorp (as amended) is hereby incorporated by reference to Annex
A filed with Registration Statement on Form S-4, Amendment No. 2 Commission
File No. 33-79874, filed with the Securities and Exchange Commission on
August 3, 1994.
(2)b.The Stock Acquisition Agreement by and among San Jose National Bank, Astra
Financial Inc. and Thomas D. Griffin, dated November 17, 1995, and related
side letters dated December 14, 1995, and January 5, 1996 and the Estension
Agreement dated January 5, 1996 are filed with this Report.
(3)a.The Certificate of Amendment to Articles of Incorporation filed June 17,
1988 and restated Articles of Incorporation are hereby incorporated by
reference to Exhibit (3) b. of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988.
(3)b.Amendments to the Registrant's bylaws dated January 25, 1995, February 22,
1995, and March 22, 1995 and the Registrant's restated bylaws are hereby
incorporated by reference to Exhibit (3)(ii) of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 1995.
*(10)a. The Registrant's Stock Option Plan is hereby incorporated by reference
from Exhibit 4.1 of the Registrant's Registration Statement on Form S-8, as
filed on October 4, 1989 and amended January 24,1992 under Registration No.
33-31392.
*(10)b. The form of Incentive Stock Option Agreement being utilized under the
Stock Option Plan is hereby incorporated by reference from Exhibit 4.2 of
Amendment No. 1 to the Registrant's Registration Statement on Form S-8, as
filed on January 24, 1992, under Registration No. 33-31392.
*(10)c. The form of Stock Option Agreement being utilized under the Stock Option
Plan is hereby incorporated by reference from Exhibit 4.3 of Amendment No.
1 to the Registrant's Registration Statement on Form S-8, as filed on
January 24, 1992, under Registration No. 33-31392.
*(10)d. Amendment No. 3 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.4 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-8, as filed on January 24, 1992, under
Registration No. 33-31392.
*(10)e. Amendment No. 4 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.5 of Amendment No. 2 to the Registrant's
Registration Statement on Form S-8, as filed on June 22, 1992, under
Registration No. 33-31392.
*(10)f. The Registrant's 1992 Employee Stock Option Plan is hereby incorporated
by reference from Exhibit 4.1 of the Registrant's Registration Statement on
Form S-8, as filed on September 4, 1992, under Registration No. 33-51740.
*(10)g. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 1995.
*(10)h. The form of Incentive Stock Option Agreement being utilized under the
1992 Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740.
*(10)i. The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from Exhibit
4.3 of the Registrant's Registration Statement on Form S-8, as filed on
September 4, 1992, under Registration No. 33-51740.
*(10)j. The Registrant's 1992 Director Stock Option Plan is hereby incorporated
by reference from Exhibit (10) i. of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1992.
*(10)k. Amendment No. 1 to the 1992 Director Stock Option Plan is hereby
incorporated by reference to Exhibit (10) i. of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 1995.
*(10)l. The form of Stock Option Agreement being utilized under the 1992
Director Stock Option Plan is hereby incorporated by reference from Exhibit
(10) j. of the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992.
*(10)m. Agreement between James R. Kenny and SJNB Financial Corp. dated June 18,
1991 and amendment dated January 9, 1992 is hereby incorporated by
reference from Exhibit (10) f. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(10)n. Systems Management Services Agreement by and between Systematics, Inc.
and San Jose National Bank dated March 1, 1990, and amendments dated April
5, 1990, July 10, 1990 and January 27, 1992 are hereby incorporated by
reference from Exhibit (10) g. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(10)o. Agreement for Item Processing Services by and between Datatronix
Financial Services and San Jose National Bank dated April 13, 1992 is
hereby incorporated by reference from Exhibit (10) m. of the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.
(10)p. Sublease dated April 5, 1982, for premises at 95 South Market Street, San
Jose, CA is hereby incorporated by reference to Exhibit (10) n. of the
Registrant's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1994.
(10)q. Sublease by and between McWhorter's Stationary and San Jose National
Bank, dated July 6, 1995, and as amended August 11, 1995 and September 21,
1995, for premises at 95 South Market Street, San Jose CA is hereby
incorporated by reference to Exhibit (10) o. of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended September 30, 1995.
(22) Subsidiary of Registrant.
(23) Consent of KPMG Peat Marwick, LLP.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-K
None
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: January 24, 1996 SJNB Financial Corp.
By: S/James R. Kenny By: S/Eugene E. Blakeslee
James R. Kenny Eugene E. Blakeslee
President and Chief Executive Vice President &
Executive Officer Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<PAGE>
S/James R. Kenny S/F. Jack Gorry
- ---------------------------- ------------------------------
James R. Kenny F. Jack Gorry, Director
President, Chief Executive Officer January 24, 1996
and Director
January 24, 1996 S/Arthur K. Lund
------------------------------
S/Eugene E. Blakeslee Arthur K. Lund, Director
- ---------------------------- January 24, 1996
Eugene E. Blakeslee
Executive Vice President and S/Louis Oneal
Chief Financial Officer and ------------------------------
Chief Accounting Officer Louis Oneal, Director
January 24, 1996 January 24, 1996
S/Ray S. Akamine S/Diane Rubino
- ---------------------------- -----------------------------
Ray S. Akamine, Director Diane Rubino, Director
January 24, 1996 January 24, 1996
S/Robert A. Archer S/Douglas L. Shen
- ---------------------------- ------------------------------
Robert A. Archer Douglas L. Shen, Director
Chairman and Director January 24, 1996
January 24, 1996
S/John W. Weinhardt
S/Albert V. Bruno ------------------------------
- ---------------------------- John W. Weinhardt
Albert V. Bruno, Director Vice Chairman and Director
January 24, 1996 January 24, 1996
S/William H. Curtis S/Gary S. Vandeweghe
- ------------------------------ ------------------------------
William H. Curtis, Director Gary S. Vandeweghe, Director
January 24, 1996 January 24, 1996
S/Rod Diridon
- -----------------------------
Rod Diridon, Director
January 24, 1996
S/Dominic A. Fanelli
- -----------------------------
Dominic A. Fanelli, Director
January 24, 1996
S/Jack G. Fischer
- -----------------------------
Jack G. Fischer, Director
January 24, 1996
<PAGE>
SJNB Financial Corp.
Form 10-KSB
Exhibits
December 31, 1995
<TABLE>
The following exhibits are filed as part of this report:
<S> <C>
(2)a.The Plan of Acquisition and Merger by and between SJNB Financial Corp. and
Business Bancorp (as Page amended) is hereby incorporated by reference to
Annex A filed with Registration Statement on Form S-4, Amendment No. 2
Commission File No. 33-79874, filed with the Securities and Exchange
Commission on August 3, 1994. N/A
(2)b.The Stock Acquisition Agreement by and among San Jose National Bank, Astra
Financial Inc. and Thomas D. Griffin, dated November 17, 1995, and related
side letters dated December 14, 1995, and January 5, 1996 and the Extension
Agreement dated January 5, 1996 are filed with this Report. 57
(3)a.The Certificate of Amendment to Articles of Incorporation filed June 17,
1988 and restated Articles of Incorporation are hereby incorporated by
reference to Exhibit (3) b. of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1988. N/A
(3)b.Amendments to the Registrant's bylaws dated January 25, 1995, February 22,
1995, and March 22, 1995 and the Registrant's restated bylaws are hereby
incorporated by reference to Exhibit (3)(ii) of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended March 31, 1995. N/A
*(10)a. The Registrant's Stock Option Plan is hereby incorporated by reference
from Exhibit 4.1 of the Registrant's Registration Statement on Form S-8, as
filed on October 4, 1989 and amended January 24, 1992 under Registration
No. 33-31392. N/A
*(10)b. The form of Incentive Stock Option Agreement being utilized under the
Stock Option Plan is hereby incorporated by reference from Exhibit 4.2 of
Amendment No. 1 to the Registrant's Registration Statement on Form S-8, as
filed on January 24, 1992, under Registration No. 33-31392. N/A
*(10)c. The form of Stock Option Agreement being utilized under the Stock Option
Plan is hereby incorporated by reference from Exhibit 4.3 of Amendment No.
1 to the Registrant's Registration Statement on Form S-8, as filed on
January 24, 1992, under Registration No. 33-31392. N/A
*(10)d. Amendment No. 3 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.4 of Amendment No. 1 to the Registrant's
Registration Statement on Form S-8, as filed on January 24, 1992, under
Registration No. 33-31392. N/A
*(10)e. Amendment No. 4 to the Stock Option Plan is hereby incorporated by
reference from Exhibit 4.5 of Amendment No. 2 to the Registrant's
Registration Statement on Form S-8, as filed on June 22, 1992, under
Registration No. 33-31392. N/A
*(10)f. The Registrant's 1992 Employee Stock Option Plan is hereby incorporated
by reference from Exhibit 4.1 of the Registrant's Registration Statement on
Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. N/A
*(10)g. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 1995. N/A
*(10)h. The form of Incentive Stock Option Agreement being utilized under the
1992 Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740. N/A
*(10)i. The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740. N/A
*(10)j. The Registrant's 1992 Director Stock Option Plan is hereby incorporated
by reference from Exhibit (10) i. of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1992. N/A
*(10)k. Amendment No. 1 to the 1992 Director Stock Option Plan is hereby
incorporated by reference to Exhibit (10) i. of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 1995. N/A
*(10)l. The form of Stock Option Agreement being utilized under the 1992
Director Stock Option Plan is hereby incorporated by reference from Exhibit
(10) j. of the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992. N/A
*(10)m. Agreement between James R. Kenny and SJNB Financial Corp. dated June 18,
1991 and amendment dated January 9, 1992 is hereby incorporated by
reference from Exhibit (10) f. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991. N/A
(10)n. Systems Management Services Agreement by and between Systematics, Inc.
and San Jose National Bank dated March 1, 1990, and amendments dated
April 5, 1990, July 10, 1990 and January 27, 1992 are hereby incorporated
by reference from Exhibit (10) g. of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1991. N/A
(10)o. Agreement for Item Processing Services by and between Datatronix
Financial Services and San Jose National Bank dated April 13, 1992 is
hereby incorporated by reference from Exhibit (10) m. of the Registrant's
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. N/A
(10)p. Sublease dated April 5, 1982, for premises at 95 South Market Street, San
Jose, CA is hereby incorporated by reference to Exhibit (10) n. of the
Registrant's Annual Report on Form 10-KSB for thefiscal year ended December
31, 1994. N/A
(10)q. Sublease by and between McWhorter's Stationary and San Jose National
Bank, dated July 6, 1995, and as amended August 11, 1995 and September
21, 1995, for premises at 95 South Market Street, San Jose CA is hereby
incorporated by reference to Exhibit (10) o. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended September
30, 1995. N/A
(22) Subsidiary of Registrant. 99
(23) Consent of KPMG Peat Marwick, LLP. 100
(27) Financial Data Schedule. 2
* Indicates management contract or compensation plan or arrangement.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<PAGE>
</TABLE>
STOCK
ACQUISITION AGREEMENT
BY AND AMONG
SAN JOSE NATIONAL BANK,
ASTRA FINANCIAL INC.
And
THOMAS D. GRIFFIN
Dated November 17, 1995
<PAGE>
I N D E X
SECTION 1. ACQUISITION; CLOSING............................................... 1
(a) Acquisition............................................................ . 1
(b) Closing Date......................................................... ... 1
(c) Actions at Closing................................................... ... 2
SECTION 2. PURCHASE PRICE..................................................... 2
(a) Purchase Price........................................................ .. 2
(b) Payment of Cash Purchase Price........................................ .. 2
(c) Contingent Purchase Price............................................ ... 2
(d) Nonperforming Accounts Holdback..................................... .... 3
SECTION 3.
REPRESENTATIONS AND WARRANTIES OF ESSENTIAL FACTS CONCERNING THE COMPANY.......4
(a) Organization and Existence of the Company................................. 4
(b) Organizational Documents, Minutes and Stock Register...................... 4
(c) Capitalization............................................................ 5
(d) Financial Statements and Tax Returns...................................... 5
(e) Accounts Receivables and Reserves......................................... 5
(f) Undisclosed Liabilities................................................... 6
(g) No Accounts Held Back..................................................... 6
(h) No Adverse Changes; Conduct of Business in Normal Course.................. 6
(i) Properties and Assets..................................................... 7
(j) Litigation and Compliance with Laws....................................... 7
(k) Significant Contracts..................................................... 8
(l) Additional Schedules...................................................... 8
(m) No Defaults............................................................... 9
(n) Taxes..................................................................... 9
(o) Employee Benefit Plans................................................... 10
(p) Environmental Liability.................................................. 10
(q) Authorization of Transactions............................................ 10
(r) Disclosure............................................................... 11
SECTION 4.
REPRESENTATIONS AND WARRANTIES OF ESSENTIAL FACTS CONCERNING THE BANK....... 11
(a) Corporate Existence...................................................... 11
(b) Authorization of Transactions............................................ 11
(c) Disclosure............................................................... 12
SECTION 5. AGREEMENTS PENDING THE CLOSING.................................... 12
(a) Conduct of Business...................................................... 12
(b) Confidentiality and Access to Information................................ 13
(c) Regulatory Approvals, Tax Clearance, Cancellation of Lease............... 13
(d) Business Relations and Publicity......................................... 14
(e) Financial Statements..................................................... 14
(f) Best Efforts............................................................. 14
(g) No Conduct Inconsistent with this Agreement.............................. 14
(h) Tax Verification Forms................................................... 15
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BANK................... 15
(a) Representations and Warranties of Essential Facts; Performance of
Agreements............ .......... 15
(b) Closing Certificate...................................................... 15
(c) Regulatory Approvals..................................................... 16
(d) Trial Balance............................................................ 16
(e) No Litigation............................................................ 16
(f) Opinion of Counsel....................................................... 16
(g) No Adverse Changes....................................................... 18
(h) Consents and Permissions................................................. 18
(i) Estoppel Certificate..................................................... 18
(j) Officers and Directors................................................... 18
(k) Other Documents.......................................................... 18
<PAGE>
SECTION 7.
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND SHAREHOLDER........... 19
(a) Representations and Warranties of Essential Facts; Performance of
Agreements............................................................... 19
(b) Closing Certificate.......................................................19
(c) Regulatory Approvals......................................................19
(d) No Litigation.............................................................19
(e) Opinion of Counsel........................................................20
(f) Other Documents...........................................................20
(g) Funds Delivered...........................................................20
SECTION 8. SURVIVAL OF REPRESENTATIONS AND INDEMNITY......................... 21
(a) Survival of Representations...............................................21
(b) Indemnification by the Shareholder........................................21
(c) Indemnification by the Bank...............................................22
(d) Time Period Limitations...................................................22
SECTION 9. OBLIGATIONS AFTER CLOSING......................................... 23
(a) Non-Competition...........................................................23
(b) Employment Agreement......................................................23
(c) Confidentiality...........................................................23
(d) Additional Documents......................................................23
SECTION 10. GENERAL.......................................................... 23
(a) Confidential Information................................................. 23
(b) Nonassignment............................................................ 24
(c) Termination.............................................................. 24
(d) Expenses................................................................. 24
(e) Notices.................................................................. 24
(f) Brokerage and Finders' Fees; Indemnification............................. 25
(g) Breach and Non-Performance of Conditions................................. 25
(h) Counterparts............................................................. 26
(i) Entire Agreement......................................................... 26
(j) Severability............................................................. 26
(k) Amendments............................................................... 26
(l) Extension; Waiver........................................................ 26
(m) Arbitration.............................................................. 27
(n) Governing Law............................................................ 27
<PAGE>
STOCK ACQUISITION AGREEMENT
THIS STOCK ACQUISITION AGREEMENT (this "Agreement") is entered into
this 17 day of November, 1995, by and among SAN JOSE NATIONAL BANK, a national
bank (the "Bank"), ASTRA FINANCIAL INC., a California corporation (the
"Company") and THOMAS D. GRIFFIN, the sole shareholder of the Company (the
"Shareholder").
WHEREAS, this Agreement provides for the acquisition by the Bank of all
of the outstanding common shares of the Company from Shareholder for cash;
WHEREAS, the Shareholder owns of record and beneficially all of the
issued and outstanding shares of capital stock of the Company and desires that
the Acquisition occur; and
WHEREAS, the boards of directors of the Bank and the Company deem the
transactions contemplated by this Agreement desirable and in the best interests
of their respective shareholders.
NOW THEREFORE, the parties hereby covenant and agree as follows:
SECTION 1. ACQUISITION; CLOSING.
(a) Acquisition. The Bank agrees to buy and the Shareholder agrees to
sell all of the outstanding shares of the Company, in accordance with the terms
and provisions of this Agreement.
(b) Closing Date. The consummation of the transactions contemplated by
this Agreement shall take place at a closing (the "Closing") no more than twenty
(20) days after receipt of all approvals, expiration of all waiting periods
after prior notice of the transactions contemplated hereby that may be required
under Federal law and any other applicable law, and receipt of tax clearance for
the Company from the California Franchise Tax Board (the "Closing Date"). In the
event that any motion for rehearing or any appeal from the decision of such
regulatory authority, or any litigation of the type contemplated by Section
6(e), is filed, the Bank may postpone the Closing by written notice until such
approval is obtained or such motion, appeal or litigation is resolved.
(c) Actions at Closing. At the Closing the parties shall exchange the
various documents contemplated hereby and the Bank shall pay the portion of the
Cash Purchase Price (as such term is hereinafter defined) specified in Section
2(b) to the Shareholder as holder of all the common shares of the Company
outstanding immediately prior to the Closing Date. The Closing shall take place
at 10:00 a.m., local time, on the Closing Date at the offices of San Jose
National Bank, at 1 North Market Street, San Jose, California, or at such other
time, date or place, or any of them, as the parties may agree.
SECTION 2. PURCHASE PRICE.
(a) Purchase Price. The aggregate purchase price for all of the shares
of stock of the Company shall be Five Hundred Sixty Thousand Dollars
($560,000.00) (the "Cash Purchase Price"), plus the Contingent Purchase Price,
if any, described in paragraph (c) below.
(b) Payment of Cash Purchase Price. Payment of the Cash Purchase Price
to the Shareholder shall be in the form of readily available funds which shall
be delivered as follows: $50,000 at the Closing, and $510,000 on January 4,
1996, which payments shall be subject to the holdback, if any, described in
paragraph (d) below.
(c) Contingent Purchase Price. In addition to the Cash Purchase Price
specified above, the Bank shall pay to Shareholder a one-time deferred
Contingent Purchase Price within 60 days following the one year anniversary of
the Closing.
(1) The amount of the Contingent Purchase Price will be based
upon the Average Monthly Increase in the Astra Portfolio, as defined in
subparagraph (c)(3) and (c)(4) below, starting either (a) with the calendar
month in which the Closing occurs, if the Closing occurs on or before the 15th
of the month, or (b) with the calendar month following the Closing, in all other
cases, and in either event continuing for eleven more calendar months, assuming
the Employment Agreement between the Bank and Shareholder referred to in Section
9(b) does not terminate early. In the event the Employment Agreement is
terminated prior to the end of the twelve month period referred to in the prior
sentence, the amount of the Contingent Purchase Price will be based on the
Average Monthly Increase, starting with the month of the Closing and ending with
the month in which the Employment Agreement is terminated.
(2) The Contingent Purchase Price will be based on the
following formula: for each $1,000 by which the Average Monthly Increase exceeds
$20,000, Shareholder will receive a Contingent Purchase Price of $3,500, up to a
total Contingent Purchase Price of $280,000; provided however, that if the
Employment Agreement referred in Section 9(b) is terminated prior to the end of
the twelve month period referred to in paragraph 2(c)(1), the Shareholder shall
receive a Contingent Purchase Price equal to the amount determined by the above
formula, times the number of months over which the average was determined and
divided by twelve (12). Schedule 2(c)(2) to this Agreement sets forth examples
of calculation of the Contingent Purchase Price for various amounts of Average
Monthly Increases.
(3) The "Astra Portfolio" for purposes of this paragraph (c)
shall consist of all the Accounts Receivable in the Company's portfolio at the
Closing, plus (a) any new Accounts Receivable generated by Shareholder, and (b)
any new Accounts Receivable from customers located in New Mexico, during the
times specified in paragraph 2(c)(1) above.
(4) The "Average Monthly Increase" for purposes of this
paragraph (c) shall consist of the average monthly increases calculated as set
forth below. For the first month, the monthly increase (hereinafter, the "First
Monthly Increase") is equal to (1) the Accounts Receivable of the Company at the
Closing, less $1,800,000 and those Accounts Receivable that have been written
off prior to the Closing or subject to the holdback under section 2(d) below;
plus (2) any change in the Astra Portfolio since the Closing; less (c) any
Accounts Receivable that had been in (1) or (2) but have been paid off or
written off since the Closing. For all subsequent months, the monthly increase
shall consist of (3) the average daily balance of the Astra Portfolio, as taken
from the daily Client Summary Reports for the month; less (4) either (x) for the
second month, the First Monthly Increase plus $1,800,000, or (y) for every other
month, the average daily balance of the Astra Portfolio for the prior month;
plus (5) any accounts receivable subject to the holdback under section 2(d) that
are paid during the month. All Accounts Receivable generated by Shareholder
shall be subject to existing SJNB Financial Services underwriting criteria.
(d) Nonperforming Accounts Holdback. The Bank shall hold back from the
amount of the cash purchase price required to be delivered to the Shareholder
the total amount, if any, of Astra's outstanding Accounts Receivable (1) that
are over ninety (90) days past due; (2) for which the account debtors have
indicated either an inability or unwillingness to pay the invoice and the
customer has insufficient reserves to cover the potential charge-back; (3) that
are determined to be invalid for any reason; (4) that are determined to have
defective lien priority status; or (5) that have any contingencies in the
invoice payment amount or as to which Astra or Griffin have received information
indicating that the account debtor asserts a counterclaim or offset reduces the
amount owed. The amount of the holdback shall be determined by the parties based
on reviews of the Accounts Receivables as of two (2) business days prior to the
Closing. All Accounts Receivables subject to the holdback will be identified
prior to the Closing, and no Accounts Receivables can be added to the holdback
after the Closing. In the event that the holdback exceeds Seventy-Five Thousand
Dollars ($75,000), either Griffin or the Bank may terminate this Agreement
pursuant to Section 10(c) of the Agreement. When the Bank receives payment of
any account receivable that is subject to this holdback, such funds shall be
paid to the Shareholder, together with interest on such funds from the Closing
until such payment at the rate of interest charged by the Company on such
account prior to the Closing.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF ESSENTIAL FACTS CONCERNING
THE COMPANY. This Agreement is entered into by the Bank upon the understanding,
and the Company and the Shareholder represent and warrant, that the following
statements of Essential Facts are true and correct on the date of this
Agreement:
(a) Organization and Existence of the Company. The Company is a
California corporation duly chartered, organized, validly existing and in good
standing under the laws of the State of California, and is duly authorized and
has full power to own its properties and carry on its business as now being
conducted. The Company does not have any subsidiaries. The Company has never
used any fictitious business names.
(b) Organizational Documents, Minutes and Stock Register. The Company
has furnished the Bank copies of its Articles of Incorporation as filed with the
California Secretary of State and its bylaws, in each case as amended to the
date hereof, and such other documents relating to the Company's authority to
conduct its business as the Bank has requested. All such documents are complete
and correct. The minute books and stock register of the Company are complete and
correct in all material respects and accurately reflect all meetings and
consents of the organizers, incorporators, shareholders, Board of Directors and
committees of the Board of Directors of the Company and all transactions of
record in its capital stock occurring since the Shareholder's acquisition of
control of the Company and, to the best of the Shareholder's knowledge, since
the Company's initial organization, except as set forth in Schedule 3(b).
(c) Capitalization. The authorized capital stock of the Company
consists of one thousand (1000) shares of Common Stock, no par value, of which
one hundred sixty-seven (167) shares are issued and outstanding, have been duly
and validly authorized and issued and are fully paid and nonassessable, and all
such shares are owned by the Shareholder free and clear of any liens, claims,
encumbrances or rights of others. Except for the rights of the Bank under this
Agreement and as set forth in Schedule 3(c), there are no options, agreements,
contracts or other rights in existence for any person (natural or otherwise) to
purchase or acquire from the Company or the Shareholder any shares of capital
stock or other securities or rights of the Company, whether now or hereafter
authorized or issued.
(d) Financial Statements and Tax Returns. (1) The Company has furnished
the Bank true and complete copies of the Balance Sheets of the Company as of
December 31, 1992, 1993 and 1994 and Income Statements for the years ended
December 31, 1992, 1993 and 1994, together with the report on the Financial
Statements for 1993 by Tom L. Hall, C.P.A., independent accountants for the
Company. The Company has also furnished the Bank true and complete copies of its
Balance Sheets and Income Statements for each month ended subsequent to December
31, 1994 through September 30, 1995. The Company's Balance Sheet as of September
30, 1995 is herein referred to as the "Last Balance Sheet." Each of the
foregoing financial statements has been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with that of
preceding periods, and together with the notes thereto, present fairly the
financial condition and results of operations of the Company at the dates and
for the periods shown.
(2)..The Company has furnished the Bank true and complete
copies of its Federal and state tax returns for the years 1992, 1993 and 1994.
(e) Accounts Receivables and Reserves. To the best knowledge of the
Company and the Shareholder, all accounts receivables, factoring commitments, or
other financial accommodations or arrangements or evidences of indebtedness
reflected in the Last Balance Sheet, together with any and all security held as
collateral therefor, are valid, genuine and subsisting and are enforceable in
accordance with their terms, except as limited by antideficiency, bankruptcy or
insolvency laws. The allowances for losses reflected in the Last Balance Sheet
is adequate, to the best knowledge of the Company and the Shareholder as of the
date of this Agreement and as of the Closing, in all material respects to
provide for probable losses on outstanding accounts receivables, net of
recoveries, other than the accounts receivable that are subject to the holdback
pursuant to paragraph 2(d) of this Agreement. There are no accounts receivable
past due more than 60 days or similar credits other than as disclosed in
Schedule 3(e).
(f) Undisclosed Liabilities. The Company does not have any material
liabilities, whether accrued, absolute, contingent or otherwise, existing or
arising out of any existing or prior transactions or state of facts except as
and to the extent (1) disclosed, reflected or reserved against in the Last
Balance Sheet, (2) arising under contracts, commitments, transactions or
circumstances identified in the schedules provided for herein, (3) identified in
Schedule 3(f), and (4) incurred in the ordinary course of banking business after
the date of the Last Balance Sheet.
(g) No Accounts Held Back. The Accounts Receivable of the Company
include all sources of business that have been negotiated, committed to or
agreed upon prior to the date of this Agreement and there have been no accounts
or customer relationships held back for funding after the Closing. There are not
a significant amount of accounts or customer relationships that are being held
back and not committed, finally agreed to or funded by the Company pending the
Closing. Schedule 3(g) shows all customers and potential customers and accounts
with whom the Company is currently negotiating to purchase accounts receivable,
but from whom accounts receivable have not been acquired.
(h) No Adverse Changes; Conduct of Business in Normal Course. Other
than as specifically disclosed in Schedule 3(h), the financial statements and
schedules delivered pursuant to this Agreement, there has not occurred any
material adverse change since the date of the Last Balance Sheet, or any
condition (other than general economic or competitive conditions), event,
circumstance, fact or other occurrence, whether occurring before or since the
date of the Last Balance Sheet, that may reasonably be expected to have or
result in such a material adverse change in the business, income, assets,
liabilities, prospects, operations, properties or financial condition of the
Company. The business of the Company has, since the date of the Last Balance
Sheet, been conducted only in the ordinary and usual course consistent with past
practice.
(i) Properties and Assets. The assets of the Company reflected in the
Last Balance Sheet, identified in this agreement or listed in the schedules
provided for herein include (1) all of the material assets owned by the Company,
except for those subsequently disposed of by the Company for fair value in the
ordinary course of business and (2) all of the material assets used by the
Company in its business. Except as disclosed in Schedule 3(i)(1), all such
assets are owned by the Company free and clear of any liens, claims,
encumbrances or rights of others except for normal and customary rights of
customers of the Company arising in the ordinary course of banking transactions
and except as otherwise disclosed in the schedules provided for in this
agreement. The Company leases all real property used by it in the conduct of its
business under a lease, a true and correct copy of which has been furnished to
the Bank (the "Real Estate Lease"). All certificates, licenses, and permits
required for the lawful use and occupancy of such real property by the Company
have been obtained and are in full force and effect. All material tangible
personal property owned by the Company or used by the Company in its business is
listed in Schedule 3(i)(2). All of such property is insured against loss for
customary risks and in customary amount.
(j) Litigation and Compliance with Laws. Except as disclosed in
Schedule 3(j)(1), to the best knowledge of the Company and the Shareholder, the
Company is in compliance in all material respects with all applicable federal,
state, county and municipal laws and regulations (1) that regulate or are
concerned in any way with the business of accounts receivable financing or
factoring, or (2) that otherwise relate to or affect the business or assets of
the Company or the assets owned, used or occupied by it. Except as disclosed in
the Schedule 3(j)(2), there are no claims, actions, suits, or proceedings
pending, or, to the best knowledge of the Company or the Shareholder, threatened
or contemplated against, or adversely affecting the Company or its directors or
officers (in their capacities as such), at law or in equity, or before any
federal, state, municipal or other governmental authority, or before any
arbitrator or arbitration panel, whether by contract or otherwise, and there is
no decree, judgment or order of any kind in existence against or restraining the
Company, or any of its officers, employees or directors, from taking any actions
of any kind in connection with the business of the Company. Except as disclosed
in Schedule 3(j)(3), the Company has not received from any regulatory authority
any cease and desist order, other order, memorandum of understanding, agreement,
criticism, recommendation or suggestion of a material nature, and has no reason
to believe that any such order, memorandum, agreement, criticism, recommendation
or suggestion is contemplated, concerning the Company's business practices that
have not been resolved to the reasonable satisfaction of such authority.
Significant Contracts. The following schedules completely and
accurately sets forth every contract, commitment or arrangement (whether written
or oral) of a material nature under which the Company is obligated on the date
hereof:
(1). Schedule 3(k)(1): all employment contracts, consulting
arrangements, and contracts for professional and other services;
(2)..Schedule 3(k)(2): all leases of real estate or personal
property;
(3)..Schedule 3(k)(3): all conditional sales contracts and
security agreements for the acquisitionof personal property;
(4)..Schedule 3(k)(4): all pension, retirement, compensation,
profit sharing, insurance or similar plans or arrangements for the benefit of
employees (hereinafter referred to as "Employee Benefit Plans");
(5)..Schedule 3(k)(5): all union and other labor contracts;and
(6)..Schedule 3(k)(6): each other material contract to which
the Company is a party or under which it is obligated, other than contracts
described or listed in other schedules.
(l) Additional Schedules. The following additional schedules are
accurate and complete: (1) Schedule 3(l)(1): an Accounts Receivable Schedule,
describing all accounts receivable, factoring commitments, or other financial
accommodations or arrangements or evidences of indebtedness, whether written or
oral, including modifications or amendments thereof, and including any such
accounts receivables that the Company has written off prior to the date hereof,
extended by the Company to or for the benefit of others (the "Accounts
Receivables"); (2) Schedule 3(l)(2): a Real Estate Schedule, describing all real
estate owned (including other real estate owned ("OREO")) or leased by the
Company as of the date of this Agreement, or which is the subject of pending
foreclosure proceedings by the Company, indicating in each case whether such
real estate is improved and the nature of any material encumbrances or defects
of title; (3) Schedule 3(l)(3): a Securities Schedule of all investment
securities owned by the Company, if any, as of the month end preceding the date
of this Agreement; (4) Schedule 3(l)(4): an Insurance Schedule, describing all
policies of insurance as of the date of this Agreement (other than policies
covering collateral for accounts receivables and other loans by the Company) in
which the Company is named as an insured party, which otherwise relate to or
cover any assets or properties of the Company or which is carried by the
Company; and (5) Schedule 3(l)(5): a Subordinated Note Schedule, providing a
listing of the names and address of all holders of the Company's Subordinated
Notes and the forms of notes and agreements with all such holders. Such
schedules are complete and correct in all material respects.
(m) No Defaults. Other than as set forth in Schedule 3(m), the Company
has fulfilled and taken all action reasonably necessary to date to enable it to
fulfill when due, its obligations under all contracts, commitments and
arrangements to which it is a party, and there have not occurred, to the best
knowledge of the Company and the Shareholder, any material defaults or other
events that, with the lapse of time or election of any other party, will become
material defaults by the Company under any such contracts, commitments or
arrangements.
(n) Taxes. All federal, state, and local income, franchise, excise,
real and personal property, employment and other material tax reports, returns,
declarations and information statements (collectively, the "Returns") required
to be filed on or prior to the date hereof have been filed. The Company has paid
or has accrued or otherwise adequately reserved in the Last Balance Sheet in
accordance with generally accepted accounting principles for the payment of all
taxes and other charges (including interest, additions and penalties), required
to be paid in respect of the periods covered by such Returns. No issues have
been raised (or are currently pending) by the Internal Revenue service or any
other taxing authority in connection with any of the Returns which could
reasonably be expected to have a material adverse effect on the financial
condition of the Company, nor, to the best knowledge of the Company or the
Shareholder, are there any such issues which have not been so raised but if so
raised by the Internal Revenue Service or any other taxing authority in
connection with any of such Returns could reasonably be expected to have such
material adverse effect. All returns covering periods through the fiscal year
ended December 31, 1994 have been filed, and no consent to any extension of the
period of limitations applicable to the assessment or collection of any tax is
in effect.
(o) Employee Benefit Plans. Except as set forth on Schedule 3(o), the
Company has no employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended, and it is not obligated
under nor is it a sponsor of, party or contributor to any profit-sharing,
deferred compensation, bonus, stock option, stock ownership, stock purchase,
pension, retainer, employment, consulting, retirement, welfare, or incentive
plan or agreement, or any plan or agreement providing for "fringe benefits" to
its employees, including, but not limited to, vacation, sick leave, salary
continuation, service awards, severance pay, welfare, medical, hospitalization,
disability, life insurance, other insurance plans, or related benefits.
(p) Environmental Liability. Except as set forth in Schedule 3(p),
there are no actions, suits, proceedings or orders involving the Company or any
of its assets, that are pending, or, to the best knowledge of the Company or the
Shareholder, threatened as the result of any asserted failure of the Company to
comply with any requirement of federal, state, or local law or regulation
relating to hazardous, toxic or polluting substances, or the protection of
health or the environment. None of the property owned (including OREO), managed
or leased by the Company is contaminated with any wastes or hazardous
substances, including but not limited to, petroleum or crude oil or fraction
thereof, friable asbestos or asbestos-containing material, polychlorinated
biphenyls or urea formaldehyde foam insulation. The Company is not an "owner or
operator" of a "vessel" or, to the best knowledge of the Company and the
Shareholder, a "facility" which owns, possesses, transports, generates, or
disposes of a "hazardous substance," as those terms are defined in Section 9601
of the Comprehensive Environmental Response Compensation and Liability Act of
1980 42 U.S.C.A. ss. 9601 et. seq.
(q) Authorization of Transactions. The execution, delivery and
performance of this Agreement and the transactions contemplated hereby have been
duly authorized by the Board of Directors and the Shareholder of the Company.
The Company has full corporate power to execute, deliver and perform this
Agreement and to consummate the transactions herein contemplated, and such
execution, delivery and performance do not violate any provisions of the
Company's articles, bylaws, or any agreements to or by which the Company or the
Shareholder are a party or are otherwise bound. Except for the regulatory
approvals referred to in Section 5(c) hereof, no consent of any regulatory
authority or other person is required to be obtained by the Company or the
Shareholder to permit consummation of the transactions contemplated herein.
(r) Disclosure. When taken in the aggregate, the representations,
warranties, information and other documents made or delivered to the Bank by the
Company and the Shareholder, in connection with this Agreement or prior thereto,
do not and will not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements contained herein not
misleading. The Company and the Shareholder shall advise the Bank in writing
within five (5) business days of any matter arising or discovered after the date
of this Agreement which, if existing or known on the date hereof, would be
required to be disclosed or delivered to the Bank in order to make the
representations, warranties, information and other documents true in all
material respects.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF ESSENTIAL FACTS CONCERNING
THE BANK. This Agreement is entered into by the Company and the Shareholder upon
the understanding, and the Bank represents and warrants, that the following
statements of Essential Facts are true and correct on the date of this
Agreement.
(a) Corporate Existence. The Bank is duly chartered, organized, validly
existing and in good standing under the laws of the United States of America and
is duly authorized and has full power to own its properties and carry on its
business as now being conducted.
(b) Authorization of Transactions. The execution, delivery and
performance of this Agreement and the transactions contemplated hereby have been
duly authorized by the Board of Directors of the Bank. The Bank has full
corporate power to execute, deliver and perform this Agreement and to consummate
or cause to be consummated the transactions herein or therein contemplated, and
such execution, delivery and performance do not violate any provisions of the
articles or bylaws of the Bank, or any agreements to which it is a party or by
which it is otherwise bound. Except for the regulatory approvals referred to in
Section 5(c) hereof, no consent of any regulatory authority or other person is
required to be obtained by the Bank in order to permit consummation of the
transactions contemplated hereby.
(c) Disclosure. When taken in the aggregate, the representations,
warranties, statements, information and other documents made or delivered to the
Company and the Shareholder by the Bank do not and will not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements contained herein not misleading. The Bank shall advise the
Company and the Shareholder in writing within five (5) business days of any
matter arising or discovered after the date of this Agreement which, if existing
or known on the date hereof, would be required to be disclosed or delivered to
the Company or the Shareholder in order to make the representations, warranties,
statements, information and other documents true in all material respects.
SECTION 5. AGREEMENTS PENDING THE CLOSING. Pending the Closing, the
parties hereby agree as follows:
(a) Conduct of Business. The business of the Company shall be conducted
in the usual and ordinary course consistent with past practice. Without limiting
the foregoing, without the consent of the Bank (1) no change shall be made in
the Company's Articles of Incorporation or bylaws or in the number of its issued
and outstanding shares; (2) the compensation paid by the Company to officers or
key employees of the Company shall not be increased, provided, however, that a
bonus may be paid to the Shareholder so long as the Company's shareholder's
equity is not reduced to less than $300,000; (3) the Company shall not
charge-off any of its Accounts Receivables or otherwise decrease its loss
reserve to an amount less than $50,000; (4) no dividends or other distributions
on its shares of its capital stock shall be declared or paid by the Company that
decrease its shareholder's equity to less than $300,000; (5) the Company shall
maintain its present insurance coverage of customary risks and in customary
amounts in respect of its properties and business; (6) no significant changes
shall be made in the general nature of the business conducted by the Company,
including but not limited to the investment or use of its assets, the
liabilities it incurs, or the facilities it operates; (7) no employment,
consulting or other similar agreements shall be entered into by the Company; (8)
the Company shall timely file all required tax returns with all applicable
taxing authorities and shall not make any application for or consent to any
extension of time for filing any tax return or any extension of the period of
limitations applicable thereto; (9) the Company shall not enter into any
transactions, other than in the ordinary course of business, with its directors,
officers, employees or any of their affiliates; (10) the Company shall not incur
any liabilities or obligations, make any commitment, disbursement, contract or
agreement, or engage in any transaction, except in the ordinary course of
business; (11) the Company shall not do or fail to do, anything which will cause
it to breach materially or to default in any contract, agreement, commitment or
obligation to which it is a party or by which it may be bound; (12) the Company
shall not make any acquisition of a business or engage in any new activity
requiring approval under any federal or state banking law or which would
otherwise constitute a change in the nature of the Company's business; and (13)
the Company's expenses incurred with respect to this Agreement, including
attorneys' fees, shall not exceed $25,000.
(b) Confidentiality and Access to Information. The Company shall give
the Bank and its representatives full access from time to time to further
information with respect to the Company for the purpose of conducting a business
and financial review of the Company and for such other purposes as may be
related to this Agreement, and the Bank shall maintain the confidentiality of
any such information. Pending the Closing, representatives of the Bank shall be
given full access to the Company's business activities and afforded the
opportunity to observe its business records, books and activities and consult
with the Company's directors and officers regarding the same on an ongoing
basis. The access referred to in this Section 5(b) shall not be exercised in a
manner unreasonably interfering with the operation of the Company's business.
(c) Regulatory Approvals, Tax Clearance, Cancellation of Lease. At the
Bank's expense, the Bank shall take all appropriate actions necessary (1) to
obtain approval of the transactions contemplated hereby from all regulatory
authorities required under any applicable Federal law and any applicable
California law, and (2) to obtain a tax clearance certificate with respect to
the Company from the California Franchise Tax Board in order for the Bank is
liquidate the Company shortly after the Closing. The Company and the Shareholder
shall cooperate fully in the process of obtaining all such approvals and the tax
clearance, including taking all corporate action necessary to approve a
dissolution of the Company and filing the Election to Dissolve with the
California Secretary of State. The Company shall, when requested by the Bank,
submit any required notice to cancel the Real Property Lease effective as of the
date requested by the Bank.
(d) Business Relations and Publicity. The Company shall use its best
efforts to preserve its reputation and its relationships with suppliers,
customers and employees. No press release or other communication related to this
Agreement (other than communications with appropriate regulatory authorities)
shall be issued or made except as mutually agreed upon, provided that the Bank
may, after consultation with the Company, make such disclosures concerning the
transactions provided for herein as the Bank believes are required to be made by
it pursuant to the Securities Exchange Act of 1934.
(e) Financial Statements. Within fifteen (15) days of the end of each
calendar month, the Company shall furnish the Bank true and correct copies of
its balance sheet, statement of income, expense budget statement of income and
proforma income statement. The foregoing financial statements shall be prepared
in accordance with generally accepted accounting principles applied on a basis
consistent with that of preceding periods, and together with the notes thereto,
will present fairly the financial positions of the Company at the dates shown
and the results of its operations and changes in its financial positions for the
period then ended. All statements furnished pursuant to this paragraph shall
fairly set forth the financial condition and results of operation as of the date
of each statement.
(f) Best Efforts. Each of the parties to this Agreement shall use its
best efforts in good faith to satisfy the various conditions to Closing and to
consummate the transactions contemplated hereby as quickly as possible. No party
shall intentionally take or fail to take or intentionally permit or fail to
permit to be taken any action that would be in breach of the terms or provisions
of this Agreement or that would cause any of the representations contained
herein to be or become untrue.
(g) No Conduct Inconsistent with this Agreement. The Company shall not,
nor shall it permit any of the Company's affiliates to, during the term of this
Agreement, (1) offer, sell, or negotiate with or entertain any proposals from
any other person for any such offer or sale of, any securities issued by the
Company, or (2) negotiate with or entertain any proposals from any other person
for any other transaction wherein the business or substantially all of the
properties of the Company would be acquired, directly or indirectly, by any
party other than the Bank.
(h) Tax Verification Forms. The Company shall provide to the Bank such
documents and sign such forms as are required for the Bank to obtain verifying
copies of the Company's tax returns from the IRS within 3 business days of such
a request by the Bank.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BANK. Unless the
conditions are waived by the Bank, all obligations of the Bank under this
Agreement are subject to the fulfillment, prior to or at the Closing, of each of
the following conditions:
(a) Representations and Warranties of Essential Facts; Performance of
Agreements. The Representations and Warranties of Essential Facts contained in
Section 3 of this Agreement and any representations or warranties of the
Shareholder contained herein or in any documents, certificates, schedules or
exhibits delivered by or on its behalf to the Bank pursuant to this Agreement
shall have been true and correct in all material respects as of their date and
shall be true and correct in all material respects at the Closing as though made
at the Closing Date (except for changes therein contemplated or permitted by
this Agreement), in each case to the reasonable satisfaction of the Bank, and
the Shareholder shall have performed all agreements herein required to be
performed by it on or prior to the Closing, including delivery of the executed
Non-competition Agreement and Employment Agreement referred to in Section 9(a)
and (b) of this Agreement.
(b) Closing Certificate. The Bank shall have received a certificate
signed by the Chairman of the Board of the Company and the Shareholder, dated as
of the Closing Date, certifying in such detail as the Bank may reasonably
request as to the fulfillment of the conditions to the obligations of the Bank
as set forth in this Agreement, including without limitation that the
representations and warranties of the Company and the Shareholder are true and
correct in all material respects, that the Company and the Shareholder have
performed all their obligations under this Agreement, all regulatory approvals
have been obtained, including tax clearance, there is no litigation of the type
referred in Section 6(e), there have been no adverse changes of the type
referred to in Section 6(g) and all other requirements of this Agreement.
(c) Regulatory Approvals. The parties hereto shall have duly obtained
all regulatory approvals of the transactions contemplated by this Agreement as
the Bank may reasonably believe are necessary or appropriate, upon such terms
and conditions, if any, as are satisfactory to the Bank in their reasonable
judgment and the Franchise Tax Board shall have provided a Tax Clearance
Certificate with respect to the Company.
(d) Trial Balance. The Bank shall have received a trial balance of
the Company's assets and liabilities as of the day prior to Closing.
(e) No Litigation. No suit or other action shall have been instituted
or threatened seeking to enjoin consummation of the transactions provided for
herein or to obtain other relief in connection with this Agreement or the
transactions contemplated hereby that the Bank believes, in good faith and with
the advice of counsel, makes it undesirable or inadvisable to consummate the
transactions provided for herein by reason of the probability that the
proceeding will result in the issuance of an order enjoining such transactions,
will result in a determination that the Company has failed to comply with
applicable legal requirements of a material nature in connection with the
consummation of the transactions provided for herein or actions preparatory
thereto or will have a material adverse effect on the future conduct of the
business of the Company.
(f) Opinion of Counsel. The Bank shall have received the opinion of
Binder and Malter, counsel for the Company, dated as of the Closing Date, and in
form satisfactory to the Bank and their counsel to the effect that:
(1)......The Company is a California corporation duly
incorporated, organized, validly existing and in good standing under the laws of
the State of California, and is duly authorized and has full power to own its
properties and carry on its business as now being conducted.
(2)......The authorized capital stock of the Company consists
of one thousand (1000) shares of Common Stock, no par value, of which one
hundred sixty-seven (167) shares are issued and outstanding, have been duly and
validly authorized and issued and are fully paid and nonassessable, and are
owned by the Shareholder free and clear of any liens, claims, encumbrances or
rights of others. Except for the rights of the Bank under this Agreement, there
are no options, agreements, contracts or other rights in existence for any
person (natural or otherwise) to purchase or acquire from the Company or the
Shareholder any shares of capital stock of the Company, whether now or hereafter
authorized or issued.
(3)......The execution, delivery, and performance of this
Agreement and the transactions contemplated herein have been duly authorized by
the Board of Directors of the Company and the Shareholder, these being the only
corporate authorizations required under the Company's articles or bylaws, or any
governing statutes. This Agreement has been duly executed and delivered by the
Company and the Shareholder and constitutes the legal, valid and binding
obligation of the Company and the Shareholder.
(4)......The execution, delivery and performance of this
Agreement and the transactions contemplated herein and therein do not violate
any provisions of the articles or bylaws of the Company or, to the best
knowledge of such counsel, any contract or agreement by which either the Company
or the Shareholder, or both, are bound.
(5)......Except as set forth in Schedules 3(j)(1) and 3(j)(2)
and as disclosed in officers' certificates received by counsel from the Company
and in reliance upon such officers' certificates, counsel knows of no claims,
actions, suits, or proceedings pending, threatened, or contemplated against, or
affecting the Company at law or in equity or before any federal, state or
municipal or other governmental authority, or of any decrees, judgments, or
orders of any kind that are in existence enjoining or restraining the Company or
any of the Company's officers, employees, directors or shareholder from taking
action of any kind in connection with the business of the Company.
(6) Counsel has no knowledge of any actions, suits or
proceedings pending or threatened against the Company or the Shareholder, to
enjoin consummation of the transactions provided for herein or to obtain other
relief in connection with this Agreement or the transactions contemplated
herein.
In rendering their opinion, such counsel may rely as to matters of fact upon
certificates of officers of the Company, the Shareholder, or governmental
officials as counsel deems appropriate, and where matters are limited to the
knowledge of such counsel.
(g) No Adverse Changes. Since the date of this Agreement, none of the
following adverse changes shall have occurred: (1) the total shareholder's
equity of the Company, as calculated pursuant to generally accepted accounting
principles consistently applied, has decreased below $300,000; and (2) the
Company's gross purchased accounts receivables have decreased below $1,800,000;
(3) the Company's Allowance for Loan Losses has decreased below $50,000; or (4)
any material adverse change or any condition, event, circumstance, fact or other
occurrence that may, to the best knowledge of the Company and the Shareholder,
reasonably be expected to result in a material adverse change, in the
operations, business, prospects, properties, assets, liabilities or financial
condition of the Company.
(h) Consents and Permissions. The Company shall have obtained all such
written consents, permissions and approvals as are required under contracts,
commitments and business arrangements with third parties.
(i) Estoppel Certificate. The Company shall deliver to the Bank on or
prior to the Closing Date an estoppel certificate signed by the landlord of the
Real Property Lease, which certificate shall be in form and substance
satisfactory to the Bank and their counsel; provided, however, that in the event
the Company is unable to obtain such estoppel certificate, it shall deliver to
the Bank such other assurances as may be reasonably satisfactory to the Bank and
their counsel.
(j) Officers and Directors. If and to the extent requested by the Bank:
(1) each officer of the Company shall have tendered his resignation from office
effective not later than the Closing Date and the Board of Directors shall have
elected such successor officers of the Company as are designated by the Bank;
(2) each director of the Company shall have tendered his resignation from the
Board effective not later than the Closing Date; and (3) each officer and
director and all employees shall have released in writing, in form and content
satisfactory to the Bank, all claims each may have against the Company excepting
only claims for normal compensation and employee benefits accrued through the
Closing Date.
(k) Other Documents. The Bank shall have received all such other
documents, certificates or instruments as it may have reasonably requested
evidencing compliance by the Company and the Shareholder with the terms
of this Agreement.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND
SHAREHOLDER. Unless the conditions are waived by the Company and the
Shareholder, all of their respective obligations under this Agreement are
subject to the fulfillment, prior to or at the Closing, of each of the following
conditions:
(a) Representations and Warranties of Essential Facts; Performance of
Agreements. The Representations and Warranties of Essential Facts contained in
Section 4 of this Agreement and any representations or warranties of the Bank
contained herein or in any documents, certificates, schedules or exhibits
delivered by it or on its behalf to the Company pursuant to this Agreement shall
have been true and correct in all material respects as of their date and shall
be true and correct in all material respects at the Closing as though made at
the Closing Date, in each case to the reasonable satisfaction of the Company,
and the Bank shall have performed all agreements herein required to be performed
by them on or prior to the closing, including delivery of the executed
Non-competition Agreement and Employment Agreement referred to in Section 9(a)
and (b) of this Agreement.
(b) Closing Certificate. The Company shall have received a certificate
signed by the Chairman or the President of the Bank, dated as of the Closing
Date, certifying in such detail as the Company may request as to the fulfillment
of the conditions to the obligations of the Company and the Shareholder set
forth in this Agreement.
(c) Regulatory Approvals. The parties hereto shall have duly obtained
all regulatory approvals of the transactions contemplated by this Agreement as
the Bank may reasonably believe are necessary or appropriate, upon such terms
and conditions, if any, as are satisfactory to the Bank in their reasonable
judgment.
(d) No Litigation. No suit or other action shall have been instituted
or threatened seeking to enjoin consummation of the transactions provided for
herein or to obtain other relief in connection with this Agreement or the
transactions contemplated hereby that the Company believes, in good faith and
with the advice of counsel, makes it undesirable or inadvisable to consummate
the transactions provided for herein by reason of the probability that the
proceeding will result in the issuance of an order enjoining such transactions
or will result in a determination that the Bank or the Company has failed to
comply with applicable legal requirements of a material nature in connection
with the consummation of the transactions provided for herein or action
preparatory thereto or will have a material adverse effect on the future conduct
of the business of the Bank or the Company.
(e) Opinion of Counsel. The Company shall have received the opinion of
Haines & Lea, counsel for the Bank, dated as of the Closing Date, and in form
satisfactory to the Company and its counsel to the effect that:
(1)......The Bank is a national banking association duly
organized, validly existing and in good standing under the laws of the United
States of America, and is duly authorized and has full power to own its
properties and carry on its business as now being conducted.
(2)......The execution, delivery, and performance of this
Agreement and the transactions contemplated herein have been duly authorized by
the Board of Directors of the Bank and its sole shareholder, these being the
only corporate authorizations required under the Company's articles or bylaws,
or any governing statutes. This Agreement has been duly executed and delivered
by the Bank and constitutes the legal, valid and binding obligation of the Bank.
In rendering their opinion, such counsel may rely as to matters of fact upon
certificates of officers of the Bank, or governmental officials as counsel deems
appropriate, and where matters are limited to the knowledge of such counsel.
(f) Other Documents. The Company shall have received all of
such other documents, certificates or instruments as it may have reasonably
requested evidencing compliance by the Bank with the terms of this Agreement.
(g) Funds Delivered. All funds required to be delivered at th
e Closing to the Shareholder shall be delivered.
SECTION 8. SURVIVAL OF REPRESENTATIONS AND INDEMNITY.
(a) Survival of Representations. All representations, warranties and
agreements made by the parties hereto shall survive the Closing for the
applicable period set forth in Section 8(d) hereof; and any investigation made
by a party to be indemnified on account of any breach of such representations,
warranties or agreements shall not be a defense to a claim for indemnification.
This section does not require that any representation or warranty be made on a
continuing basis after the Closing.
(b) Indemnification by the Shareholder. The Shareholder shall indemnify
the Bank, its parent corporation and all of their officers, directors and agents
against and hold them harmless from any and all (1) losses, liabilities, claims,
demands, damages, deficiencies, causes of action or suits (the "Claims") arising
out of or resulting from (A) the breach or incorrectness of any of the
representations, warranties or covenants of the Company or the Shareholder
contained in this Agreement, which breach or incorrectness, either individually
or together total $15,000 or more, or (B) the assertion against the Bank of any
liability or obligation of the Company or the Shareholder arising, existing or
based upon any acts or omissions occurring prior to the date of Closing
(including, without limitation liabilities for any federal or state taxes,
penalties and interest thereon), other than a liability or obligation disclosed
in this Agreement or the schedules referred to herein, and (2) if the
Shareholder refuses to or delays in defending the Bank, reasonable expenses or
costs incurred by the Bank, including reasonable attorneys' fees, in connection
with investigating, attempting to correct, or defending against any Claims,
liens or charges against the Bank for which the Bank is entitled to indemnity
pursuant to the foregoing provisions. The Bank shall give prompt notice in
writing to the Shareholder of the facts and circumstances giving rise to any
Claims by the Bank for indemnification under this Section. Subject to the
limitations of any contract of insurance and to such conditions as the Bank
shall determine to be reasonably necessary for the protection of the interests
of the Bank, the Bank shall tender to the Shareholder the opportunity to
investigate, correct, manage and control any defense against any such Claims.
The assumption of management and control shall not, of itself, constitute any
admission by the Shareholder of liability to the Bank. The Bank shall cooperate
reasonably with the Shareholder in the conduct of such defense.
(c) Indemnification by the Bank. The Bank shall indemnify the
Shareholder against and hold him harmless from any and all (1) losses,
liabilities, claims, demands, damages, deficiencies, causes of actions or suits
(the "Claims") arising out of or resulting from (A) the breach or incorrectness
of any of the representations, warranties or covenants of the Bank contained in
this Agreement, which breach or incorrectness, either individually or together
total $15,000 or more, or (B) the assertion against the Shareholder of any
liability or obligation of the Bank arising, existing or based upon any acts or
omissions occurring prior to the date of Closing (including, without limitation
liabilities for any federal or state taxes, penalties and interest thereon),
other than a liability or obligation disclosed in this Agreement or the
schedules referred to herein, and (2) if the Bank refuses to or delays in
defending the Shareholder, reasonable expenses or costs incurred by the
Shareholder, including reasonable attorneys' fees, in connection with
investigating, attempting to correct, or defending against any Claims, liens or
charges against the Shareholder for which the Shareholder are entitled to
indemnity pursuant to the foregoing provisions. The Shareholder shall give
prompt notice in writing to the Bank of the facts and circumstances giving rise
to any Claims by the Shareholder for indemnification under this Section. Subject
to the limitations of any contract of insurance and to such conditions as the
Shareholder shall determine to be reasonably necessary for the protection of the
interest of the Shareholder, the Shareholder shall tender to the Bank the
opportunity to investigate, correct, manage and control any defense against any
such Claims. The assumption of management and control shall not, of itself,
constitute any admission by the Bank of liability to the Shareholder. The
Shareholder shall cooperate reasonably with the Bank in the conduct of such
defense.
= (d) Time Period Limitations. No party shall be entitled to assert any right of
indemnification under this Agreement for any Claims suffered by such party or
arising from a breach by another party of any other representation, warranty or
covenant contained in this Agreement after the date which is three (3) years
after the Closing Date. Each party shall continue to have the right to be
indemnified for breaches of the representations, warranties and covenants set
forth in the Sections specified above for a period beyond that specified as long
as a notice of such Claims as to such breaches is provided to the indemnifying
party within the specified time period.
SECTION 9. OBLIGATIONS AFTER CLOSING
(a) Non-Competition. At the Closing, the Shareholder and the Bank shall
each execute and deliver to each other as an integral part of this transaction a
Non-Competition Agreement in substantially the form attached hereto as Exhibit
A.
(b) Employment Agreement. At the Closing, the Shareholder and the Bank
as an integral part of this transaction shall each execute and deliver to each
other an Employment Agreement by which the Bank agrees to employ the Shareholder
in substantially the form attached hereto as Exhibit B.
(c) Confidentiality. After the Closing, the Shareholder shall keep
strictly confidential all documents containing any information concerning the
properties, business and assets of the other parties that may have been obtained
in the course of investigating, negotiating and preparing to consummate the
transactions contemplated by the parties (other than such information as shall
be in the public domain or otherwise ascertainable from public or outside
sources).
(d) Additional Documents. Each party shall at any time and from time to
time after the Closing cooperate in providing each other with any additional
documents or information' and shall cause to be executed and delivered to the
other party such further instruments or documents as such other party may
reasonably require to give effect to the transactions contemplated hereunder.
SECTION 10. GENERAL.
(a) Confidential Information. The parties hereto each covenant that, in
the event the transactions contemplated in this Agreement are not consummated,
each party shall keep strictly confidential, shall not use in any manner and
return all documents containing any information concerning the properties,
business and assets of the other party that may have been obtained in the course
of investigating, negotiating and preparing to consummate the transactions
contemplated by the parties (other than such information as shall be in the
public domain or otherwise ascertainable from public or outside sources).
(b) Nonassignment. This Agreement shall not be assignable by any party
without the written consent of the others. Notwithstanding the foregoing, the
Bank may assign its rights hereunder to its holding company, SJNB Financial
Corp., a California corporation, or to a wholly-owned subsidiary of the Bank,
but no such assignment on the part of the Bank shall relieve the Bank, of any of
its obligations hereunder. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the respective heirs, successors,
assigns and personal representatives of the parties hereto.
(c) Termination. This Agreement may be terminated (1) by written
agreement between the Bank, on the one hand, and the Company, on the other hand
at any time, (2) by written notice from the Bank to the Company upon the
occurrence of any adverse condition set forth in Section 6(g), (3) by the Bank
upon written notice by reason of the failure of fulfillment of any condition set
forth in Section 6 or by reason of the material breach of any obligation set
forth herein by either the Company or the Shareholder, (4) by the Shareholder or
the Company upon written notice by reason of the failure of any condition set
forth in Section 7 or the material breach of any obligation set forth herein by
the Bank, or (5) by either party if the amount of the holdback specified in
paragraph 2(d) exceeds $75,000. This Agreement shall terminate automatically
without further action by either party if the Closing does not occur on or prior
to December 31, 1995. Termination of this Agreement shall not serve to relieve a
party of responsibility or obligation, if any, for any breaches of this
Agreement occurring prior to such termination. In the event the terms of this
Section 10(c) shall be inconsistent with any other terms in this Agreement, the
terms set forth in this Section 10(c) shall govern.
(d) Expenses. The parties hereto shall each bear their respective
costs and expenses incurred in the consummation of this transaction.
(e) Notices. All notices, requests, demands and other communications
provided for in this Agreement shall be in writing addressed as follows:
<PAGE>
(i)......If to the Bank, addressed to:
......... San Jose National Bank
......... One North Market Street
......... San Jose, California 95109
......... Attention: Mr. Gary Hansen
......... with a copy to:
......... Joan L. Grant
......... Haines & Lea
......... 44 Montgomery Street, Suite 3600
......... San Francisco, California 94104
(ii) If to the Company or the Shareholder, addressed to:
......... Mr. Thomas D. Griffin
......... 300 Rennie Avenue
......... San Jose, California 95127
......... with a copy to:
......... Heinz Binder, Esq.
......... Binder & Malter
......... 1700 The Alameda, Suite 300
......... San Jose, California 95126-1724
(f) Brokerage and Finders' Fees; Indemnification. Each of the parties
represents to the other that it has not incurred any liability for brokerage
commissions, finders' fees or like compensation in respect of the transactions
contemplated hereunder. The Shareholder shall indemnify and hold harmless the
Bank in respect of any claim for brokerage or other commissions relative to this
Agreement and the transactions contemplated hereby, based in any way on
agreements, arrangements or understandings claimed to have been made by the
Company or the Shareholder with any third party.
(g) Breach and Non-Performance of Conditions. No party shall be deemed
to be in breach of any of its covenants contained in this Agreement unless the
party entitled to performance thereof shall have given written notice to the
breaching party setting forth the nature of the breach, and such breach shall
not be cured or corrected within 20 days thereafter. No party shall be deemed to
have failed to satisfy a condition contained in this Agreement unless the party
entitled to the fulfillment thereof shall have given written notice to the
parties responsible for such fulfillment, and such condition shall thereafter
not be fulfilled.
(h) Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if the signatures to each counterpart were
upon the same instrument.
(i) Entire Agreement. This Agreement and the Exhibits and Schedules
referred to herein set forth the entire Understanding of the parties' and
supersede all prior agreements, arrangements and communications, whether oral or
written, and this Agreement shall not be modified or amended other than by
written agreement of the parties hereto. Captions appearing in this Agreement
are for convenience only and shall not be deemed to explain, limit or amplify
the provisions hereof.
(j) Severability. In the event that any provision of this Agreement or
any portion thereof shall be finally determined to be unlawful or unenforceable,
such provision or portion thereof shall be deemed to be severed from this
Agreement, and every other provision, and any portion of a provision, that is
not invalidated by such determination shall remain in full force and effect.
(k) Amendments. This Agreement may be amended by the parties hereto at
any time prior to the Closing Date by an instrument in writing signed by the
parties.
(l) Extension; Waiver. At any time prior to the Closing Date, the
parties hereto may (1) extend the time for the performance of any of the
obligations or other acts of the other party hereto, (2) waive any inaccuracies
in the representations and warranties of the other party contained herein or in
any documents delivered pursuant hereto, or (3) waive compliance by the other
party with any of the agreements or conditions contained herein. Any agreement
on the part of a party hereto to any such extension or waiver shall be valid if
set forth in an instrument in writing signed by such party.
(m) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or any breach thereof shall be settled in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award may be entered in any court having jurisdiction thereof.
Any arbitration, suits and actions with respect to this Agreement shall be
brought in the County of Santa Clara, California. The parties consent to the
jurisdiction and venue of the courts referred to herein. In the event of any
dispute, arbitration, action at law or in equity between the parties in relation
to this Agreement, the nonprevailing party, in addition to other sums which such
party may be called upon to pay, shall pay to the other party all costs and
expenses of such action or suit, including reasonable attorney's fees, incurred
with or without suit.
(n) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed this Stock
Acquisition Agreement on the day and year first above written.
SAN JOSE NATIONAL BANK, a.. ASTRA FINANCIAL INC.,
national banking association a California corporation
by S/James R. Kenny........ by S/Thomas D. Griffin
------------------------------- ------------------------
its President & CEO its President
------------------------------- ------------------------
THOMAS D. GRIFFIN
S/Thomas D. Griffin
------------------------
<PAGE>
EXHIBIT A
NON-COMPETITION AGREEMENT
THIS NON-COMPETITION AGREEMENT (this "Agreement") is entered
into this January 5, 1996, between SAN JOSE NATIONAL BANK, a national banking
association (the "Bank") and THOMAS D. GRIFFIN, an individual ("Griffin"), in
relation to the following facts, circumstances and understandings:
R E C I T A L S
A. Griffin is the sole shareholder of Astra Financial Inc., a
California corporation (the "Company"). The Bank, the Company and Griffin, sole
shareholder of the Company, have entered into that certain Stock Acquisition
Agreement dated November 17, 1995 (the "Stock Acquisition Agreement"), pursuant
to which the Bank is purchasing all of the outstanding stock of the Company from
Griffin as of the closing under the Stock Acquisition Agreement (the "Closing").
B. Griffin and the Bank are simultaneously entering into an employment
agreement (the "Employment Agreement") by which he will be employed by the Bank
for a period of one year following the date of this agreement.
C. The execution and delivery of this Agreement and the Employment
Agreement are both a condition precedent to the obligations of the Bank and of
the Company and Griffin under the Stock Acquisition Agreement.
D. The Bank seeks to protect the goodwill and other assets of the
Company being acquired under the Stock Acquisition Agreement and to maintain a
competitive advantage in its business by preventing Griffin from competing with
the Company in the area in which it does business (a) for a period of one year
from the Closing under the Employment Agreement and (b) for an additional four
years from the Closing under the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, the parties hereto, each intending to be
legally bound, agree as follows:
1. Non-Competition. (a) In consideration for the payment made pursuant
to Section 2 of this Agreement, Griffin agrees that, commencing on the earlier
of January 5, 1997 (one year from closing) or termination of the Employment
Agreement and ending on January 5, 2002 (five years from closing) (the
"Noncompetition Period"), he shall not, individually or collectively, directly
or indirectly, own an interest in, operate, join, control, or participate in or
be connected as an officer, employee, agent, independent contractor, partner,
shareholder, creditor or principal of any corporation, partnership,
proprietorship, firm or association or other entity which owns and/or operates a
factoring business or accounts receivable financing business or engages in any
type of business that is carried on at that time by the Bank (except mortgage
lending); provided however, that the record or beneficial ownership by Griffin
as a passive investor of not more than five percent (5%) of the outstanding
publicly traded securities of any class of any such business in which he does
not actively participate shall not be deemed to be in violation of this Section.
For purposes of this Agreement, the geographic area of the business is Santa
Clara County and all contiguous counties (collectively, the "Geographic Area").
Griffin agrees and acknowledges that the duration, scope and Geographic Area of
the restrictive covenants described in this Agreement are fair, reasonable and
necessary in order to protect the goodwill and other legitimate business
interests of the Bank and that adequate consideration has been received by
Griffin in exchange for such covenants.
(b) Griffin further acknowledges agrees that he has had access to and
become acquainted with information concerning the operation of the Company,
including without limitation knowledge of personnel, sales, planning, and
customer information that is owned by the Company and regularly used in the
operation of its business and that, except such information that is in the
public domain, this information constitutes the Company's trade secrets. Griffin
further agrees not to compete with the Company as specified herein by directly
or indirectly disclosing such trade secrets to any other person or use the trade
secrets in any way other than as an employee of the Company and agrees not to
solicit any employees of the Company to become employed or associated with
another business or entity which competes with the Company during the term of
this Agreement.
(c) The parties intend that the covenant contained in subsection (a) of
this Section 1 shall be construed as a series of separate Covenant, one for each
county and city specified. Except for geographic coverage, each such separate
covenant shall be deemed identical in terms of the covenant contained in
subsection (a). If, in any judicial proceeding, a court shall refuse to enforce
any of the separate covenants deemed to be included in this Section 1, then the
unenforceable covenant shall be deemed eliminated from these provision for the
purpose of those proceedings to the extent necessary to permit the remaining
separate covenant to be enforced.
2. Consideration. This agreement is an integral part of the Stock
Acquisition Agreement whereby Griffin has sold all of his shares of stock in the
Company to the Bank which will hereafter operate the business of the Company. In
consideration for the non-competition agreement of Griffin in this Agreement,
the Bank shall deliver $100,000.00 to Griffin on January 5, 1996. The parties
agree that such $100,000.00 relates to the Noncompetition Period and that
$25,000.00 of such sum relates to the time from the beginning of the
Noncompetition Period to January 5, 1998 (two years from the closing) and
$25,000 to each subsequent year of such restriction.
3. Remedies for Breach. (a) In the event that Griffin materially
breaches any of the material provisions of Section 1 of this Agreement, the Bank
shall notify Griffin of its intention to hold Griffin in breach of this
Agreement and the basis of such breach in accordance with the notice provisions
of Section 4 of this Agreement. If such breach is capable of being cured,
Griffin shall have 3 days from the date of such notice to cure the breach. If he
fails to cure such breach within such 3 days, or if the breach cannot be cured,
the parties hereto agree that the Bank will be irreparably damaged, and that the
Bank has no adequate remedy at law for damages and that its injury will be
continuing.
(b) Because of the continuing injury to the Bank that will be
created by a breach of the provisions of Section 1 as well as the nature of such
injury, the parties agree that the Bank shall be entitled to injunctive relief
prohibiting Griffin from engaging in the conduct constituting the breach and
that a court of competent jurisdiction may issue an appropriate injunction.
4. Notices. All notices hereunder, to be effective, shall be in writing
and shall be delivered in accordance with the Stock Acquisition Agreement.
5. Modification. This Agreement constitutes the entire Agreement
between the parties hereto with regard to the subject matter hereof, superseding
all prior understandings and agreements, whether written or oral. This Agreement
may not be amended or revised except by a writing signed by the parties.
6. Resolution of Disputes. Any controversy or claim arising out of or
relating to this Agreement, or any breach thereof shall be settled in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
and judgment upon the award may be entered in any court having jurisdiction
thereof. Any arbitration, suits and actions with respect to this Agreement shall
be brought in the County of Santa Clara, California. The parties consent to the
jurisdiction and venue of the courts referred to herein. In the event of any
dispute, arbitration, action at law or in equity between the parties in relation
to this Agreement, the nonprevailing party, in addition to other sums which such
party may be called upon to pay, shall pay to the other party all costs and
expenses of such action or suit, including reasonable attorney's fees, incurred
with or without suit.
7. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
The Bank may assign this Agreement to the Company or any entity conducting the
business of the Company without the prior consent of Griffin. Griffin may not
assign this Agreement without the prior written consent of the Bank.
8. Captions. Captions herein have been inserted only for convenience
of reference and do not define, limit or describe the scope or substance of any
provision of this Agreement.
9. Severability. In the event that any provision of this Agreement or
any portion thereof shall be finally determined to be unlawful or unenforceable,
such provision or portion thereof shall be deemed to be severed from this
Agreement, and every other provision, and any portion of a provision, that is
not invalidated by such determination shall remain in full force and effect.
10. Governing Law. This Agreement shall be construed under and
governed by the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
SAN JOSE NATIONAL BANK, a THOMAS D. GRIFFIN
national banking association
by S/James R. Kenny S/Thomas D. Griffin
---------------------------- ---------------------------
its President & CEO
---------------------------
by S/Eugene E. Blakeslee
----------------------------
its EVP/CFO
----------------------------
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into
this 5th day of January, 1996, between SAN JOSE NATIONAL BANK, a national
banking association (the "Bank") and THOMAS D. GRIFFIN, an individual
("Griffin"), in relation to the following facts, circumstances and
understandings:
R E C I T A L S
A. Griffin is the sole shareholder of Astra Financial, a California
corporation (the "Company"). The Bank, the Company and Griffin have entered into
that certain Stock Acquisition Agreement dated November 17, 1995 (the "Stock
Acquisition Agreement"), pursuant to which the Bank is purchasing all of the
outstanding stock of the Company from Griffin as of the closing under the Stock
Acquisition Agreement (the "Closing").
B. The execution and delivery of both this Agreement and the Non-
Competition Agreement are conditions precedent to the obligations of the Bank
and of the Company and Griffin under the Stock Acquisition Agreement.
C. The Bank seeks to employ Griffin as a Vice President/Business
Development Officer, to assist in operating, marketing and promoting the
Company's business after the Closing and to maintain a competitive advantage in
the business of the Company and to prevent Griffin from competing with the
Company in the area in which it does business (a) for a period of one year from
the Closing under this Agreement and (b) for an additional four years from the
Closing under the terms and conditions set forth in a Non-Competition Agreement.
NOW, THEREFORE, the parties hereto, each intending to be
legally bound, agree as follows:
1. Employment. The Bank hereby employs Griffin and Griffin hereby
accepts employment upon the terms and conditions set forth in this Agreement.
2. Duties. Griffin shall perform the duties of Vice President/Business
Development Officer for the term of this Agreement. Griffin shall devote
substantially his full time energies and skills to the performance of his duties
under this Agreement and shall not engage in any other business pursuits.
Griffin shall do and perform all services necessary or advisable to fulfill the
duties of his position and such performance shall be at all times subject to the
direction of the President of the Bank.
3. Trade Secrets. The parties acknowledge and agree that during the
term of this Agreement and during the period when he was a shareholder of the
Company, Griffin has had and shall have access to information about of the
Company, including without limitation knowledge of personnel, sales, planning,
customer lists and other customer information that is owned by the Company and
regularly used in the operation of its business and that, except such
information that is in the public domain, this information constitutes the
Company's trade secrets. Griffin further agrees not to disclose such trade
secrets to any other person or use the trade secrets in any way other than as an
employee of the Company and agrees not to solicit any employees of the Company
to become employed or associated with another business or entity which competes
with the Company during the term of this Agreement.
4. Term. The term of employment under Section 1 shall commence on
the date of this Agreement and shall continue for a term of one year, unless it
is terminated earlier as specified herein.
5. Non-Competition. (a) This Agreement is an integral part of the Stock
Acquisition Agreement whereby Griffin has sold all of his shares of stock in the
Company to the Bank which will hereafter operate the business of the Company.
Griffin agrees that during his employment by the Bank (the "Noncompetition
Period"), pursuant to this Agreement, he shall not, individually or
collectively, directly or indirectly, own an interest in, operate, join,
control, or participate in or be connected as an officer, employee, agent,
independent contractor, partner, shareholder, creditor or principal of any
corporation, partnership, proprietorship, firm or association or other entity
which owns and/or operates a factoring business or accounts receivable financing
business or engages in any type of business that is carried on at that time by
the Bank (except mortgage lending); provided however, that the record or
beneficial ownership by Griffin as a passive investor of not more than five
percent (5%) of the outstanding publicly traded securities of any class of any
such business in which he is not active shall not be deemed to be in violation
of this Section. For purposes of this Agreement, the geographic area of the
business is Santa Clara County and all contiguous counties (collectively, the
"Geographic Area"). Griffin agrees and acknowledges that the duration, scope and
Geographic Area of the restrictive covenants described in this Agreement are
fair, reasonable and necessary in order to protect the goodwill and other
legitimate business interests of the Bank and that adequate consideration has
been received by Griffin in exchange for such covenants.
(b) The parties intend that the covenant contained in subsection (a) of
this Section 5 shall be construed as a series of separate Covenant, one for each
county included. Except for geographic coverage, each such separate covenant
shall be deemed identical in terms of the covenant contained in subsection (a).
If, in any judicial proceeding, a court shall refuse to enforce any of the
separate covenants deemed to be included in this Section 5, then the
unenforceable covenant shall be deemed eliminated from these provision for the
purpose of those proceedings to the extent necessary to permit the remaining
separate covenant to be enforced.
(c) In the event that Griffin materially breaches any of the material
provisions of this Section 5, the Bank shall notify Griffin of its intention to
hold Griffin in breach of this Agreement and the basis of such breach in
accordance with the notice provisions of Section 13 of this Agreement. If such
breach is capable of being cured, Griffin shall have 3 days from the date of
such notice to cure the breach. If he fails to cure such breach within such 3
days, or if the breach cannot be cured, the parties hereto agree that the Bank
will be irreparably damages, and that the Bank has no adequate remedy at law for
damages and that its injury will be continuing.
(d) Because of the continuing injury to the Bank that will be created
by a breach of the provisions of Section 5 as well as the nature of such injury,
the parties agree that the Bank shall be entitled to injunctive relief
prohibiting Griffin from engaging in the conduct constituting the breach and
that a court of competent jurisdiction may issue an appropriate injunction.
6. Confidentiality. Griffin shall not divulge, publish or otherwise
reveal either directly or indirectly through another during the term of this
Agreement any knowledge of a confidential nature received by him during the
course of his employment, and such information shall be kept confidential and
shall not in any manner be revealed except as may be necessary in connection
with his duties hereunder.
7. Compensation. (a) As compensation for his services hereunder, the
Bank shall pay to Griffin a base annual salary of $60,000.00, payable in equal
semi-monthly installments on the 15th and last day of each month, prorated for
any partial periods. The Bank shall have the right to withhold from Griffin's
compensation any and all sums required by law, including Federal and state tax
law.
(b) As additional incentive for Griffin to increase the accounts
receivable portfolio and generate new accounts receivable financing business,
the Bank shall pay to Griffin a one-time "Portfolio Growth Bonus" within 60 days
following the one year anniversary of the Closing under the Stock Acquisition
Agreement (the "Closing").
(1) The amount of the Portfolio Growth Bonus will be based
upon the Average Monthly Increase in the Astra Portfolio, as defined in
subparagraphs (b)(3) and (b)(4) below, starting either (a) with the calendar
month in which the Closing occurs, if the Closing occurs on or before the 15th
of the month, or (b) with the calendar month following the Closing, in all other
cases, and in either event continuing for eleven more calendar months, assuming
this Agreement does not terminate early. In the event this Agreement is
terminated prior to the end of the twelve month period referred to in the prior
sentence, the amount of the Portfolio Growth Bonus will be based on the Average
Monthly Increase, starting with the month of the Closing and ending with the
month in which this Agreement is terminated.
(2) The Portfolio Growth Bonus will be based on the following
formula: for each $1,000 by which the Average Monthly Increase exceeds $20,000,
Griffin will receive a Portfolio Growth Bonus of $1,500, up to a total Portfolio
Growth Bonus of $120,000; provided however, that if this Agreement is terminated
prior to the end of the eleventh month after the Closing, Griffin shall receive
a Portfolio Growth Bonus equal to the amount determined by the above formula,
times the number of months over which the average was determined and divided by
twelve (12).
(3) The "Astra Portfolio" for purposes of this paragraph 7(b)
shall consist of all the Accounts Receivable in the Company's portfolio at the
Closing, plus (a) any new Accounts Receivable generated by Griffin, and (b) any
new Accounts Receivable from customers located in New Mexico, during the times
specified in paragraph (b)(1) above.
(4) The "Average Monthly Increase" for purposes of this
paragraph shall consist of the average monthly increases calculated as set forth
below. For the first month, the monthly increase (hereinafter, the "First
Monthly Increase") is equal to (1) the Accounts Receivable of the Company at the
Closing, less $1,800,000 and those accounts receivable that have been written
off prior to the Closing or subject to the holdback under Section 2(d) of the
Stock Acquisition Agreement; plus (2) change in the Astra Portfolio since the
Closing; less (c) any accounts receivable that had been in (1) or (2) but have
been paid off or written off since the Closing. For all subsequent months, the
monthly increase shall consist of (3) the average daily balance of the Astra
Portfolio, as taken from the daily Client Summary Reports for the month; less
(4) either (x) for the second month, the First Monthly Increase plus $1,800,000,
or (y) for every other month, the average daily balance of the Astra Portfolio
for the prior month; plus (5) any Accounts Receivable subject to the holdback
under Section 2(d) of the Stock Acquisition Agreement that are paid off during
the month. All accounts receivable generated by Griffin shall be subject to
existing SJNB Financial Services underwriting criteria.
(c) In recognition and compensation of past and future services
provided and to be provided by Griffin to the Company and the Bank, the Bank
shall pay to Griffin on January 4, 1996, the amount of $140,000.
8. Benefits. The Bank shall pay to Griffin $400 a month as a car
allowance during the term of this Agreement. Griffin shall be entitled to four
(4) weeks of vacation during the term of this Agreement, which may be utilized
after April 5, 1996 (91 days after hire). Griffin shall be entitled to 5.33
hours of sick leave per month, which may accrue if not used, but he shall not be
entitled to any reimbursement for unused sick leave. Medical, dental and vision
insurance shall be provided to Griffin on a pre-tax basis, beginning at the
commencement of this Agreement. Sick-leave pay and long term disability shall be
provided to Griffin starting on April 5, 1996 (91 days after hire).
9. Termination. (a) (1) The Bank reserves the right to terminate this
Agreement if Griffin (1) wilfully breaches or habitually neglects the duties
which he is required to perform under the terms of this Agreement, or (2)
commits acts of dishonesty, fraud, misrepresentation, or other acts of moral
turpitude, that would prevent the effective performance of his duties.
(2) The Bank may at its option terminate this Agreement for
the reasons stated in this section by giving written notice of termination to
Griffin without prejudice to any other remedy to which the Bank may be entitled
either at law, in equity, or under this agreement. The notice of termination
required by this section shall specify the ground for the termination and shall
be supported by a statement of relevant facts.
(b) This Agreement, other than Section 7(c), shall be terminated upon
the death of Griffin.
(c) The Bank reserves the right to terminate this Agreement after
Griffin suffers any physical or mental disability that would prevent the
performance of his duties under this Agreement. Such a termination shall be
effected by giving 10 days' written notice of termination to Griffin.
(d) In the event that this Agreement is terminated prior to the
completion of the term of employment specified herein, Griffin shall be entitled
to the compensation described in Subsection 7(a) and Section 8 relating to the
period prior to the date of termination, computed pro rata up to and including
that date. Griffin shall be entitled to the compensation described in
Subsections 7(b) and (c) in any event, as described and limited in those
sections. Griffin shall be entitled to no further compensation as of the date of
termination.
10. Accounting. On all accountings required hereunder, the
determination of the amount due to Griffin shall be certified to be true and
correct by a senior officer of the Bank. Griffin or his agents shall have access
to and may at his cost, audit independently the books and records of the Bank to
determine the accuracy of the statements delivered to Griffin. If the amount
paid to Griffin by the Bank is found to be in error by more than 10% of the
amount due to Griffin, the Bank shall immediately pay the cost of such audit.
11. Surrender of Records and Property. Upon expiration or termination
of this Agreement, Griffin shall promptly return to the Bank all records,
including client lists or references, and client mailings, correspondence files,
other files, keys, and all other property belonging to or supplied by the Bank.
12. Personnel Policies and Practices. Griffin's employment shall be
subject to all of the Bank's personnel policies and practices and any amendments
to such policies that the Bank may make and that are in effect at the Bank
during the term of this Agreement.
13. Notices. All notices hereunder, to be effective, shall be in
writing and shall be delivered in accordance with the Stock Acquisition
Agreement.
14. Modification. This Agreement constitutes the entire Agreement
between the parties hereto with regard to the subject matter hereof, superseding
all prior understandings and agreements, whether written or oral.This Agreement
may not be amended or revised except by a writing signed by the parties.
15. Resolution of Disputes. Any controversy or claim arising out of or
relating to this Agreement, or any breach thereof shall be settled in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
and judgment upon the award may be entered in any court having jurisdiction
thereof. Any arbitration, suits and actions with respect to this Agreement shall
be brought in the County of Santa Clara, California. The parties consent to the
jurisdiction and venue of the courts referred to herein. In the event of any
dispute, arbitration, action at law or in equity between the parties in relation
to this Agreement, the nonprevailing party, in addition to other sums which such
party may be called upon to pay, shall pay to the other party all costs and
expenses of such action or suit, including reasonable attorney's fees, incurred
with or without suit.
16. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns.
The Bank may assign this Agreement to any entity conducting the business of the
Bank without the prior consent of Griffin. Griffin may not assign this Agreement
without the prior written consent of the Bank. If Griffin dies prior to the
expiration of the term of this Agreement, any sums that may be due him from the
Bank under this Agreement as of the date of death shall be paid to Employee's
executors, administrators, heirs, personal representatives, successors and
assigns.
17. Captions. Captions herein have been inserted only for convenience
of reference and do not define, limit or describe the scope or substance of any
provision of this Agreement.
18. Partial Invalidity. If any provision in this Agreement is held by
a court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way.
19. Governing Law. This Agreement shall be construed under and
governed by the laws of the State of California.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
SAN JOSE NATIONAL BANK, a.. THOMAS D. GRIFFIN
national banking association
by S/James R. Kenny S/Thomas D. Griffin
-------------------------- ----------------------------
its President & CEO......
-------------------------
by S/Eugene E. Blakeslee
--------------------------
its EVP & CFO
<PAGE>
December 14, 1995
Mr. Dennis Griffin
Astra Financial Inc.
4030 Moorpark Ave., Suite 122
San Jose, CA 95117
Re: Stock Acquisition Agreement dated November 17, 195
Dear Mr. Griffin:
This letter is intended to clarify several aspects of the above referenced Stock
acquisition Agreement (the "Agreement"). Terms used in this letter that are
defined in the Agreement shall have the same meaning as in the Agreement. Please
sign below if you agree with the following:
1. For purposes of the Agreement, an account shall be considered as owned by
Astra or the Bank regardless of whether the agreement by which the Account
Receivable was purchased from the client is with recourse or without
recourse.
2. In section 2(c)(3)(b) of the Agreement, the term "customers" shall be
deemed to mean "clients." Section 7(b)(3)(b) of the Employment Agreement to
be entered into at the Closing shall be changed in this manner prior to the
execution of the Employment Agreement.
3. For purposes of calculating both the Contingent Purchase Price provided in
Section 2(c) of the Agreement and the Portfolio Growth Bonus provided at
Section 7(b) of the Employment Agreement, all Accounts Receivables from
clients listed on the attached Exhibit A shall be considered to be
"generated by Shareholder."
4. The Company and Shareholder have applied or will apply by tomorrow to the
California Franchise Tax Board for tax clearance, but do not expect to have
tax clearance prior to the Closing. The Bank agrees to waive the receipt of
tax clearance as a condition to Closing.
Other than as specifically listed above, the Agreement shall remain in full
force and effect.
SAN JOSE NATIONAL BANK
by: S/James R. Kenny
James R. Kenny, President & CEO
ACCEPTED AND AGREED:
December 14, 1995
Astra Financial Inc.
S/Dennis Griffin S/Dennis Griffin
by Dennis Griffin, President Dennis Griffin
<PAGE>
January 5, 1996
Mr. Dennis Griffin
Astra Financial Inc.
4030 Moorpark Ave., Suite 122
San Jose, CA 95117
Re: Stock Acquisition Agreement dated November 17, 1995
Dear Mr. Griffin:
This letter will confirm our discussions this morning concerning the closing of
the above referenced agreement. We agree that there is a hold-back of $10,000
under the terms of Section 2(d) of the Stock Acquisition Agreement. The terms of
the agreement shall govern the treatment of that hold-back.
In addition, we have agreed to a hold-back of $30,000 for income taxes relating
to 1995 net income. As we discussed, accruing an adequate provision for 1995
income taxes would have caused Astra's retained earnings to decline below the
amount required as a condition of closing. Should Astra's 1995 income taxes
require a greater provision than $30,000, you will pay us the difference. On the
other hand, if the 1995 taxes require less provision, we will pay you the amount
that is not needed.
Since the $30,000 hold-back relates to the ending retained earnings of Astra,
the Bank and you have agreed that the amount should be reflected in your
compensation under the Employment Agreement. We have paid you $110,000, instead
of $140,000, as adjusted with the taxes and other amount required to be withheld
under Section 7(c) of the Employment Agreement.
Other than as specifically listed above and as specified in the Extension
Agreement dated January 5, 1996, and our letters to you dated December 14, 1995
and January 5, 1996, the Agreement shall remain in full force and effect.
SAN JOSE NATIONAL BANK
S/Eugene E. Blakeslee
Eugene E. Blakeslee
ACCEPTED AND AGREED:
January 6, 1996
Astra Financial
S/Dennis Griffin S/Dennis Griffin
Dennis Griffin, President Dennis Griffin
<PAGE>
Extension Agreement
SAN JOSE NATIONAL BANK, ASTRA FINANCIAL, INC. and THOMAS D GRIFFIN
hereby agree to amend that certain STOCK ACQUISITION AGREEMENT between them
dated November 17, 1995 as follows:
1. The reference to "twenty (20) days" in the third line of Section 1(b)of
the Agreement is hereby amended to read "twenty-two (22) days."
2. The second sentance of Section 10(c) of the Agreement is hereby amended to
read as follows: "This Agreement shall terminate automatically without further
action by either party of the Closing does not occur on or prior to January 5,
1996.:
3. Other than as set forth in those certain letters from San Jose National Bank
to Thomas D. Griffin dated December 14, 1995 and january 5, 1996 and holdback
letter agreement of 1/5/96, and as sest forth herein, the Agreement has not been
amended or supplemented and remians in full foce and effect.
Dated: January 5, 1996
SAN JOSE NATIONAL BANK ASTRA FINANCIAL, INC
a national banking association a California corporation
by S/Eugene E. Blakeslee by S/Thomas D. Griffin
--------------------------------- ------------------------
its EVP/CFO its President
-------------------------------- -----------------------
THOMAS D. GRIFFIN
S/Thomas D. Griffin
---------------------------
<PAGE>
SJNB FINANCIAL CORP.
Subsidiaries of Registrant
San Jose National Bank is the only subsidiary of and is
100% owned by SJNB Financial Corp.
<PAGE>
Consent of Independent Auditors
The Board of Directors
SJNB Financial Corp.:
We consent to incorporation by reference in the registration statement No.
33-31392 on Form S-8 of SJNB Financial Corp. of our report dated January 10,
1996, relating to the consolidated balance sheets of SJNB Financial Corp. and
subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of income shareholders' equity, and cash flows for the years then
ended, which report appears in the December 31, 1995 annual report on Form
10-KSB of SJNB Financial Corp.
S/KPMG Peat Marwick LLP
San Jose, California
January 29, 1996
