UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 0-11771
SJNB FINANCIAL CORP.
(Exact name of registrant as specified 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)
(408) 947-7562
(Registrant's telephone number, including area code)
Not Applicable
(Former name,former address and former fiscal year,if changed,since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,491,922 shares of common
stock outstanding as of November 6, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
Page
Item 1. - FINANCIAL STATEMENTS
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OF OPERATIONS 8-21
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK Not applicable
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 22
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
Item 3. DEFAULTS UPON SENIOR SECURITIES 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22
Item 5. OTHER INFORMATION 22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 25
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
SJNB FINANCIAL CORP. AND SUBSIDIARY
<CAPTION>
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
September 30, December 31,
Assets 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $22,265 $20,208
Money market investments 2,700 19,800
Investment securities:
Available for sale 48,667 48,044
Held to maturity (Fair value: $14,729 at September 30, 1997
and $15,231 at December 31, 1996) 14,622 15,072
- --------------------------------------------------------------------------------------------------------------------
Total investment securities 63,289 63,116
- --------------------------------------------------------------------------------------------------------------------
Loans 222,724 198,627
Allowance for possible loan losses (4,311) (4,005)
- --------------------------------------------------------------------------------------------------------------------
Loans, net 218,413 194,622
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 4,112 4,001
Other real estate owned ----- 454
Accrued interest receivable and other assets 4,716 2,737
Intangibles, net of accumulated amortization of $1,589 at
September 30, 1997 and $1,234 at December 31, 1996 4,110 4,465
- --------------------------------------------------------------------------------------------------------------------
Total $319,605 $309,403
====================================================================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $70,374 $80,774
Interest-bearing 199,410 163,865
- --------------------------------------------------------------------------------------------------------------------
Total deposits 269,784 244,639
- --------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 12,000 29,688
Accrued interest payable and other liabilities 5,745 3,871
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 287,529 278,198
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares; issued and outstanding,
2,488 shares at September 30, 1997
and 2,571 shares at December 31, 1996 18,513 20,880
Retained earnings 13,479 10,263
Net unrealized gain on securities available for sale 84 62
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 32,076 31,205
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ----- -----
- --------------------------------------------------------------------------------------------------------------------
Total $319,605 $309,403
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SJNB FINANCIAL CORP. AND SUBSIDIARY
<CAPTION>
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Quarter ended Nine months ended
September 30, September 30,
-------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $5,776 $5,220 $16,571 $15,199
Interest on money market investments 82 38 475 125
Interest and dividends on investment securities available for sale 758 765 2,233 2,157
Interest on investment securities held to maturity 232 241 720 704
Other interest and investment income (2) (2) (7) (7)
- --------------------------------------------------------------------------------------------------------------------
Total interest income 6,846 6,262 19,992 18,178
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit $100 or more 759 638 2,231 1,889
Other 1,412 1,396 4,243 4,121
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 2,171 2,034 6,474 6,010
- --------------------------------------------------------------------------------------------------------------------
Net interest income 4,675 4,228 13,518 12,168
- --------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses 215 50 395 100
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 4,460 4,178 13,123 12,068
- --------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 156 149 437 421
Other operating income 91 100 340 340
Net loss on securities available for sale ----- (67) (41) (146)
- --------------------------------------------------------------------------------------------------------------------
Total other income 247 182 736 615
- --------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 1,422 1,388 4,284 4,139
Occupancy and equipment 199 178 537 515
Other 842 857 2,555 2,582
- --------------------------------------------------------------------------------------------------------------------
Total other expenses 2,463 2,423 7,376 7,236
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,244 1,937 6,483 5,447
Income taxes 948 817 2,740 2,324
- --------------------------------------------------------------------------------------------------------------------
Net income $1,296 $1,120 $3,743 $3,123
====================================================================================================================
Net income per share $0.49 $0.42 $1.41 $1.19
====================================================================================================================
Weighted average number of shares outstanding 2,637 2,648 2,662 2,633
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SJNB FINANCIAL CORP. AND SUBSIDIARY
<CAPTION>
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine months ended
September 30,
------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $3,743 $3,123
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 395 100
Depreciation and amortization 394 356
Amortization of intangibles 355 375
Net realized loss on securities available for sale 41 146
Net gain on sale of other real estate owned (37) (46)
Amortization of premium (discount) on investment securities, net (32) 39
Increase in deferred tax benefit (1,535) -----
Increase in accrued interest receivable and other assets (444) (1,253)
Increase (decrease) in accrued interest payable and other liabilities 1,858 (1,718)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,738 1,122
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 10,057 11,658
Maturities of securities held to maturity 1,250 3,900
Purchase of securities available for sale (10,699) (25,795)
Purchase of securities held to maturity (753) (3,919)
Proceeds from the sale of other real estate owned 491 406
Cash and equivalents used to acquire Astra Financial Corp. ----- (650)
Net origination of loans (24,186) (18,516)
Capital expenditures (505) (410)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (24,345) (33,326)
- --------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Net increase in deposits 25,145 33,063
Other short-term borrowings (payments) (17,688) 1,256
Cash dividends (526) (366)
Common stock repurchased (2,496) -----
Proceeds from stock options exercised 129 545
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,564 34,498
- --------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (15,042) 2,294
Cash and equivalents at beginning of year 40,008 15,774
- --------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $24,965 $18,068
====================================================================================================================
Other cash flow information:
Interest paid $6,336 $6,006
==========================================
Income taxes $2,365 $3,241
====================================================================================================================
Noncash transactions:
Unrealized gain (loss) on securities available for sale, net of tax $22 $(289)
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Note A Unaudited Condensed Consolidated Financial Statements
The unaudited consolidated financial statements of SJNB Financial
Corp. (the "Company") and its subsidiary, San Jose National Bank, are
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations
and cash flows for the periods have been included and are normal and
recurring. The results of operations and cash flows are not
necessarily indicative of those expected for the full fiscal year.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report to Shareholders
for the year ended December 31, 1996.
Note B Net Income Per Share of Common Stock
The weighted average number of common stock shares and common stock
equivalent shares used in computing net income per share of common
stock are set forth below for the periods indicated:
Weighted Average Number of Shares Outstanding
--------------------------------------------------------------------
(in thousands)
Quarter ended Nine months ended
September 30, September 30,
----------------------------------
1997 1996 1997 1996
----------------------------------
Weighted average number of shares
outstanding during the period 2,487 2,487 2,513 2,455
Common stock equivalents 150 161 149 178
--------------------------------------------------------------------
Total 2,637 2,648 2,662 2,633
====================================================================
Statement of Financial Accounting Standards No. 128, Earnings per
Share, was issued in February 1997 ("SFAS No. 128") and is effective
for years ending after December 15, 1997. The Statement specifies the
computation, presentation and disclosure requirements for earnings
per share ("EPS"). This Statement's objective is to simplify the
computation of earnings per share and to make the U.S. standard for
computing EPS more compatible with the standards of other countries
and with that of the International Accounting Standards Committee.
Under this approach, EPS is to be calculated and reported as two
separate calculations: Basic EPS, similar to the previous primary
earnings per share excluding common stock equivalents; and Diluted
EPS, similar to the previous fully diluted earnings per share.
Earnings per share as calculated under the provisions of SFAS No. 128
for the three and nine months ended September 30, 1997 and 1996 is as
follows:
<PAGE>
Quarter ended Nine months ended
September 30, 1997 September 30, 1997
-----------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------------
Basic earnings per share $0.52 $0.45 $1.49 $1.27
====================================================================
Diluted earning per share $0.49 $0.42 $1.41 $1.19
====================================================================
Note C Other Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
displaying comprehensive income and its components in the
consolidated financial statement. It does not, however, require a
specific format for the statement, but requires the Company to
display an amount representing total comprehensive income for the
period in that financial statement. The Company is in the process of
determining its preferred format. This Statement is effective for
fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for financial
statements for periods beginning after December 31, 1997. The Company
does not believe it has any separately reportable business segments.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SJNB Financial Corp. (the "Company") is the holding company for San Jose
National Bank ("SJNB" and the "Bank"), San Jose, California. This discussion
focuses primarily on the results of operations of the Company on a consolidated
basis for the three and nine months ended September 30, 1997 and the liquidity
and financial condition of the Company and SJNB as of September 30, 1997 and
December 31, 1996.
All dollar amounts in the text in Item 2 are in thousands, except per share
amounts or as otherwise indicated.
Certain matters discussed in this report are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties include, but are not limited to, the competitive environment
and its impact on the Company's net interest margin, changes in interest rates,
asset quality risks, concentrations of credit and the economic health of Santa
Clara County (particularly the health of the semiconductor industry), volatility
of rate sensitive deposits, asset/liability matching risks, the dilutive impact
which might occur upon the issuance of new shares of common stock, and liquidity
risks. Therefore, the matters set forth below should be carefully considered
when evaluating the Company's business and prospects. For additional information
concerning these risks and uncertainties, please refer to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
<TABLE>
<CAPTION>
The following presents selected financial data and ratios as of and for the
three and nine months ended September 30, 1997 and 1996:
SELECTED FINANCIAL DATA AND RATIOS
- --------------------------------------------------------------------------------------------------------------------
For the quarter For the nine months
ended September 30, ended September 30,
------------------------------------------------------------
SELECTED ANNUALIZED OPERATING RATIOS: 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average equity 16.43% 15.47% 16.28% 15.05%
Return on average tangible equity 20.67 20.67 20.70 20.54
Return on average assets 1.64 1.61 1.61 1.55
Net chargeoffs (recoveries) to average loans (.04) .16 (.06) -----
Average equity to average assets 9.98 10.42 9.91 10.28
Average tangible equity to average tangible assets 8.77 8.82 8.66 8.60
====================================================================================================================
At September 30, At December 31,
PER SHARE DATA: 1997 1996 1996
- -----------------------------------------------------------------------------------------------------
Shareholders' equity per share $12.89 $11.75 $12.14
Tangible equity per share $11.24 $9.85 $10.40
SELECTED FINANCIAL POSITION RATIOS:
- -----------------------------------------------------------------------------------------------------
Leverage capital ratio 8.97% 9.12% 9.28%
Nonperforming loans to total loans 1.07 .32 .27
Nonperforming assets to total assets .74 .32 .32
Allowance for possible loan losses to total loans 1.94 2.09 2.02
Allowance for possible loan losses
to nonperforming loans 181 650 733
Allowance for possible loan losses
to nonperforming assets 181 435 401
=====================================================================================================
</TABLE>
Summary of Financial Results
The Company reported net income of $1,296 or $.49 per share for the quarter
ended September 30, 1997, compared with net income of $1,120 or $.42 per share
for the third quarter of 1996. The improvement in earnings is due primarily to
an increase in net interest income due to growth in volume.
For the nine months ended September 30, 1997, net income was $3,743 or $1.41 per
share compared with net income of $3,123 or $1.19 per share for the first nine
months of 1996. The improvement is due primarily to an increase in net interest
income due to growth in volume.
Net Interest Income
Net interest income for the quarter ended September 30, 1997 increased $447 as
compared to the same quarter a year ago. The Bank's average earning assets for
the same period increased by $33 million, primarily as the result of significant
growth in the Bank's loan portfolio. Net interest income for the nine months
ended September 30, 1997 increased $1,350 as compared to the same period a year
ago. The Bank's average earning assets for the same period increased by $36
million.
Net interest margin for the third quarter of 1997 was 6.52% as compared to 6.68%
for the same quarter in 1996. This decrease was primarily related to a decline
in the yield on interest-earning assets from 9.88% in the third quarter of 1996
to 9.53% in 1997. This was partially offset by a decline in the interest rate
paid on interest-bearing liabilities. The decrease in the interest rates
reflects the general economic trend of interest rates and an increase in the
competitive pressures of the Bank's local market.
Net interest margin for the nine months of 1997 was 6.42% as compared to 6.62%
for the same period in 1996. This decrease was primarily related to the
aforementioned decrease in the interest rates and the competitive environment.
Although economic conditions in Northern California have remained strong in
1997, the competitive environment within the Bank's marketplace continues to be
aggressive and the competition between lenders for additional loan growth has
caused more competitive pricing. This is reflected in 1997's year-to-date
results.
Due to the nature of the Company's target market in which loans are generally
tied to the prime rate, management believes modest increases in interest rates
should positively affect the Bank's net interest margin. Conversely, management
believes stable or declining rates will tend to have an adverse impact on net
interest margin. The Bank utilizes various methods to hedge some of its interest
rate risk. See "Loans" and "Asset/Liability Management."
The following tables shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin, on an
annualized basis, for the three and nine months ended September 30, 1997 and
1996.
<PAGE>
<TABLE>
AVERAGE BALANCES, RATES AND YIELDS
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended September 30,
---------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- --------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, net (2) $216,630 $5,776 10.58% $186,677 $5,220 11.12%
Securities available for sale (3) 48,793 758 6.16 48,384 765 6.29
Securities held to maturity:
Taxable (4) 11,485 194 6.70 12,399 209 6.71
Nontaxable (5) 3,116 63 8.06 2,689 53 7.89
Money market investments 6,040 82 5.39 2,963 38 5.10
Interest rate hedging instruments ---- (2) ---- ---- (2) ----
- ------------------------------------------------------------------ -------------------------
Total interest-earning assets 286,064 6,871 9.53 253,112 6,283 9.88
- ------------------------------------------------------------------ -------------------------
Allowance for possible loan losses (4,135) (4,021)
Cash and due from banks 19,029 15,675
Other assets 8,517 6,919
Core deposit intangibles and
goodwill, net 4,155 4,840
===================================================== =============
Total $313,630 $276,525
===================================================== =============
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $47,509 304 2.54 $41,591 295 2.82
Money market and savings 85,083 745 3.47 63,275 549 3.45
Certificates of deposit:
Less than $100 14,368 203 5.61 14,898 206 5.50
$100 or more 55,300 759 5.45 47,169 638 5.38
- ------------------------------------------------------------------ -------------------------
Total certificates of deposits 69,668 962 5.48 62,067 844 5.41
- ------------------------------------------------------------------ -------------------------
Other borrowings 10,347 160 6.13 23,421 346 5.88
- ------------------------------------------------------------------ -------------------------
Total interest-bearing liabilities 212,607 2,171 4.05 190,354 2,034 4.25
- ------------------------------------------------------------------ -------------------------
Noninterest-bearing demand 63,267 53,981
Accrued interest payable and
other liabilities 6,459 3,378
- ----------------------------------------------------- -------------
Total liabilities 282,333 247,713
- ----------------------------------------------------- -------------
Shareholders' equity 31,297 28,812
===================================================== =============
Total $313,630 $276,525
=====================================================------------- =============------------
Net interest income and margin (6) $4,700 6.52% $4,249 6.68%
========================================= ========================= =========================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $248 for 1997, and $241 for 1996. Nonperforming loans
have been included in average loan balances.
(3) Includes dividend income of $54 received in 1997 and 1996.
(4) Includes dividend income of $8 received in 1997 and 1996.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($25 in 1997 and $21 in 1996).
(6) The net interest margin represents the fully taxable equivalent net interest
income as a percentage of average earning assets.
</FN>
</TABLE>
<PAGE>
<TABLE>
AVERAGE BALANCES, RATES AND YIELDS
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Nine months ended September 30,
---------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- -------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net (2) $208,160 $16,571 10.64% $181,169 $15,199 11.21%
Securities available for sale (3) 48,108 2,233 6.21 47,247 2,157 6.10
Securities held to maturity:
Taxable (4) 12,114 617 6.81 12,350 600 6.49
Nontaxable (5) 2,840 172 8.08 2,934 173 7.89
Money market investments 11,807 475 5.38 3,262 125 5.12
Interest rate hedging instruments ---- (7) ---- ---- (7) ----
- ----------------------------------------------------------------- -------------------------
Total interest-earning assets 283,029 20,061 9.48 246,962 18,247 9.87
- ----------------------------------------------------------------- -------------------------
Allowance for possible loan losses (4,090) (3,984)
Cash and due from banks 18,890 14,708
Other assets 7,998 6,831
Core deposit intangibles and
goodwill, net 4,275 4,968
- ---------------------------------------------------- ------------
Total $310,102 $269,485
==================================================== ============
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $45,051 866 2.57 $40,418 844 2.79
Money market and savings 84,746 2,257 3.56 59,499 1,472 3.30
Certificates of deposit:
Less than $100 15,120 607 5.37 14,429 591 5.47
$100 or more 54,113 2,231 5.51 45,315 1,889 5.57
- ----------------------------------------------------------------- -------------------------
Total certificates of deposits 69,233 2,838 5.48 59,744 2,480 5.54
- ----------------------------------------------------------------- -------------------------
Other borrowings 11,462 514 6.00 27,754 1,214 5.84
- ----------------------------------------------------------------- -------------------------
Total interest-bearing 210,492 6,475 4.11 187,415 6,010 4.28
liabilities
- ----------------------------------------------------------------- -------------------------
Noninterest-bearing demand 63,847 50,572
Accrued interest payable and
other liabilities 5,018 3,786
- ---------------------------------------------------- ------------
Total liabilities 279,357 241,773
- ---------------------------------------------------- ------------
Shareholders' equity 30,745 27,712
- ---------------------------------------------------- ------------
Total $310,102 $269,485
====================================================------------- ============-------------
Net interest income and margin (6) $13,586 6.42% $12,237 6.62%
======================================== ========================== =========================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $740 for 1997 and 1996. Nonperforming loans have been
included in average loan balances.
(3) Includes dividend income of $166 and $160 received in 1997 and 1996.
(4) Includes dividend income of $23 received in 1997 and 1996.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($69 in 1997 and 1996).
(6) The net interest margin represents the fully taxable equivalent net interest
income as a percentage of average earning assets.
</FN>
</TABLE>
<PAGE>
Provision for Possible Loan Losses
The level of the allowance for possible loan losses and the related provision,
if any, reflect management's judgment as to the inherent risk of loss associated
with the loan and lease portfolios as of September 30, 1997 based on information
available to management as of said date. Based on management's evaluation of
such risks, additions of $215 and $395 were made to the allowance for possible
loan losses for the third quarter and the nine months ended September 30, 1997,
respectively, as compared to $50 and $100 for the third quarter and nine months
ended September 30, 1996, respectively. See "Loan Portfolio."
Other Income
<TABLE>
<CAPTION>
The following table sets forth the components of other income and the percentage
distribution of such income for the three and nine months ended September 30,
1997 and 1996:
OTHER INCOME
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended September 30, Nine months ended September 30,
---------------------------------------------------------------------------
1997 1996 1997 1996
Amount Percent Amount Percent Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depositor service charges $156 63.2% $149 81.9% $437 59.4% $421 68.4%
Other operating income 91 36.8 100 54.9 340 46.2 340 55.3
Net loss on securities available for sale ----- ----- (67) (36.8) (41) (5.6) (146) (23.7)
- --------------------------------------------------------------------------------------------------------------------
Total $247 100.0% $182 100.0% $736 100.0% $615 100.0%
====================================================================================================================
</TABLE>
Other Expenses
<TABLE>
<CAPTION>
The following schedule summarizes the major categories of expense as a percentage of average assets on an annualized basis:
OTHER EXPENSES AS A PERCENT OF AVERAGE ASSETS
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended September 30, Nine months ended September 30,
------------------------------------------------------------------------------------
1997 1996 1997 1996
Amount Percent * Amount Percent * Amount Percent * Amount Percent *
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $1,422 1.81% $1,388 2.01% $4,284 1.84% $4,139 2.05%
Amortization of core deposit
intangibles and goodwill 119 .15 125 .18 355 .15 375 .18
Data processing 103 .13 164 .24 313 .14 425 .21
Business promotion 106 .14 76 .11 310 .14 262 .13
Furniture and equipment 104 .13 93 .13 300 .13 272 .13
Occupancy 95 .12 85 .12 237 .10 243 .12
Client services paid by bank 77 .10 68 .10 234 .10 179 .09
Legal and professional fees 90 .11 81 .12 233 .10 300 .15
Directors' fees and costs 59 .08 52 .08 170 .07 165 .08
Stationery and supplies 34 .04 49 .07 130 .06 136 .07
Sundry losses ----- ----- 4 .01 124 .05 14 .01
Advertising 28 .03 65 .09 96 .04 184 .09
Regulators assessments 28 .04 19 .03 81 .03 54 .03
Loan and collection 30 .04 17 .02 72 .03 133 .06
Net cost of foreclosed property 5 .01 (3) ---- (45) (.02) (50) (.02)
Other 163 .21 140 .20 482 .21 405 .20
- --------------------------------------------------------------------------------------------------------------------
Total $2,463 3.14% $2,423 3.51% $7,376 3.17% $7,236 3.58%
====================================================================================================================
<FN>
* The percentages are calculated by annualizing the expenses and comparing that
amount to the average assets for the respective periods ended September 30, 1997
and 1996.
</FN>
</TABLE>
Total other expenses for the third quarter of 1997 increased $40 from the same
period a year ago, primarily as a result of increases in salaries and benefits
(relating to increased volumes and incentives), offset by a decrease in data
processing expenses due to a reduction in contract costs.
Total other expenses for the nine months ended September 30, 1997 increased $140
from the same period a year ago. The major increases included salaries and
benefits (relating to increased volumes and incentives), potential uninsured
check-processing losses and additional costs to provide custom client services.
Offsetting these increases were reductions in data processing expenses
(reduction in contract costs), legal and professional fees, loan and collection
expenses and a reduction in advertising costs.
Income Tax Provision
The effective tax rate of 42% for the nine months ended September 30, 1997 is
affected by several items. The most significant are the amortization of
intangibles, tax exempt income and the California Franchise Tax Enterprise Tax
Zone Credit. The effective tax rate for the year ended December 31, 1996 was
43%. The reduction in the rate is mainly due to the decline in amortization of
intangibles.
Financial Condition and Earning Assets
Consolidated assets increased to $320 million at September 30, 1997 compared to
$309 million at December 31, 1996. The increase consisted primarily of loan
growth and was funded principally by an increase in the Bank's core
interest-bearing money market deposits. See "Funding."
Money Market Investments
Money market investments, which include federal funds sold, were $2.7 million at
September 30, 1997 as compared to $19.8 million at December 31, 1996. This
decrease is related to the increase in the Bank's loans.
Securities
The following table shows the composition of the securities portfolio at
September 30, 1997 and December 31, 1996. There were no issuers of securities
(except U.S. Government Securities) for which the book value of securities
issued by any issuer held by the Bank exceeded 10% of the Company's
shareholders' equity.
<PAGE>
<TABLE>
SECURITIES PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
September 30, 1997 December 31, 1996
-------------------------------------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
- ---------------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $5,000 $25 $5,025 $3,989 $16 $4,005
U. S. Government Agencies 34,067 167 34,234 34,099 186 34,285
Mortgage backed 5,518 65 5,583 5,835 33 5,868
Mutual funds 3,955 (130) 3,825 4,018 (132) 3,886
- ---------------------------------------------------------------------------------------------------------------------
Total available for sale 48,540 127 48,667 47,941 103 48,044
- ---------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Treasury 1,988 18 2,006 1,975 28 2,003
U. S. Government Agencies 6,480 31 6,511 7,463 60 7,523
State and municipal (nontaxable) 3,124 25 3,149 2,635 18 2,653
Mortgage backed 2,512 33 2,545 2,481 53 2,534
- ---------------------------------------------------------------------------------------------------------------------
Total held to maturity 14,104 107 14,211 14,554 159 14,713
Federal Reserve Bank Stock 518 ---- 518 518 ---- 518
- ---------------------------------------------------------------------------------------------------------------------
Total 14,622 107 14,729 15,072 159 15,231
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $63,162 $234 $63,396 $63,013 $262 $63,275
=====================================================================================================================
Unrealized gains generally result from the impact of current market rates being
less than those rates in effect at the time the Bank purchased the securities.
The unrealized gain on securities available for sale as of September 30, 1997
was $127 as compared to an unrealized gain of $103 as of December 31, 1996. The
Bank's weighted average maturity of the available for sale portfolio was
approximately 1.59 years as of September 30, 1997. It is estimated by management
that for each 1% change in interest rates the value of the Company's available
for sale securities will change by 1.22%.
The unrealized gain on securities held to maturity was $107 as of September 30,
1997 as compared to an unrealized gain of $159 as of December 31, 1996. The
Bank's weighted average maturity of the held to maturity investment portfolio
was approximately 2.14 years as of September 30, 1997. It is estimated by
management that for each 1% change in interest rates, the value of the Company's
securities held to maturity will change by approximately 1.58%.
The maturities and yields of the investment portfolio at September 30, 1997 are
shown below:
</TABLE>
<PAGE>
<TABLE>
MATURITY AND YIELDS OF INVESTMENT SECURITIES
- -------------------------------------------------------------------------------------------------------------------
At September 30, 1997
(dollars in thousands) Available for Sale Held to Maturity
------------------------------------------------------------------------------
FTE(1) FTE(1)
Amortized Estimated Average Amortized Estimated Average
Cost Fair Value Yield Cost Fair Value Yield
------------------------------------------------------------------------------
U. S. Treasury:
<S> <C> <C> <C> <C> <C> <C>
Within 1 year ----- ----- ----- $988 $996 7.05%
After 1 year within 5 years $5,000 $5,025 6.06% 1,000 1,009 6.38
------------------------------------------------------------------------------
Totals 5,000 5,025 6.06 1,988 2,006 6.71
------------------------------------------------------------------------------
U.S. Government Agencies:
Within 1 year 25,064 25,139 6.19 1,997 2,006 7.75
After 1 year within 5 years 9,003 9,095 6.42 4,483 4,505 6.05
------------------------------------------------------------------------------
Totals 34,067 34,234 6.25 6,480 6,511 6.57
------------------------------------------------------------------------------
State and municipal:
Within 1 year ----- ----- ----- 200 202 7.01
After 1 year within 5 years ----- ----- ----- 2,401 2,417 7.57
After 10 years ----- ----- ----- 523 530 7.16
------------------------------------------------------------------------------
Totals ----- ----- ----- 3,124 3,149 7.47
------------------------------------------------------------------------------
Mortgage backed
After 1 year within 5 years 4,542 4,593 6.77 ----- ----- -----
After 5 years within 10 years 976 990 6.71 2,512 2,545 7.90
------------------------------------------------------------------------------
Totals 5,518 5,583 6.76 2,512 2,545 7.90
------------------------------------------------------------------------------
Mutual funds:
------------------------------------------------------------------------------
Within 1 year 3,955 3,825 5.43 ----- ----- -----
------------------------------------------------------------------------------
Other
------------------------------------------------------------------------------
After 10 years ----- ----- ----- 518 518 6.00
------------------------------------------------------------------------------
Total investment securities 48,540 $48,667 6.22% $14,622 $14,729 7.00%
-------------=================================================================
Net unrealizable gain on
securities available for sale 127
-------------
Total investment securities,
net carrying value $48,667
=============
<FN>
(1) Fully taxable equivalent.
</FN>
</TABLE>
Loan Portfolio
<TABLE>
<CAPTION>
The following table provides a breakdown of the Company's consolidated loans by
type of loan or borrower:
LOAN PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
September 30, 1997 December 31, 1996
------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Loans Amount Loans
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $87,152 39.1% $77,335 38.9%
Real estate construction 16,882 7.6 15,451 7.8
Real estate-other 89,471 40.2 74,713 37.6
Consumer 8,345 3.7 8,622 4.3
Other 21,508 9.7 23,174 11.7
Unearned fee income (634) (0.3) (668) (0.3)
- --------------------------------------------------------------------------------------------------------------------
Total loans $222,724 100.0% $198,627 100.0%
====================================================================================================================
</TABLE>
<PAGE>
Consolidated loans increased to $223 million at September 30, 1997 from $199
million at December 31, 1996. Management believes the increase in the loan
portfolio can be primarily attributed to the success of the Bank's business
development efforts in regards to commercial and real estate term financing
loans and the economic environment in the Bank's market area which has created
greater demand for loans in general.
Approximately 54% of the loan portfolio is directly related to real estate or
real estate interests, including real estate construction loans, real
estate-other, real estate equity lines (2%, included in the Consumer category),
and loans to real estate developers for short-term investment purposes (1%) and
loans for real estate investments purposes made to non-developers (3%). The
latter three types are included in the Other category. Approximately 39% of the
loan portfolio is made up of commercial loans; however, no particular industry
represents a significant portion of such loans.
The following table shows the maturity and interest rate sensitivity of
commercial, real estate-other and real estate construction loans at September
30, 1997. Approximately 84% of the commercial and real estate loan portfolio is
priced with floating interest rates which generally limits the exposure to
interest rate risk on long-term loans.
<TABLE>
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Balances maturing Interest Rate Sensitivity
-------------------------------------------------------------------------
Predeter-
Balances at One mined Floating
September 30, One year year to Over interest interest
1997 or less five years five years rates rates
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $87,151 $49,261 $31,627 $6,263 $5,107 $82,044
====================================================================================================================
Real estate construction $16,882 $15,841 $70 $971 ----- $16,882
====================================================================================================================
Real estate-other $89,471 $13,479 $27,650 $48,342 $25,171 $64,300
====================================================================================================================
</TABLE>
The Company utilizes a method of assigning a minimum and maximum loss ratio to
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, among other things, the Company's prior experience, industry
experience, delinquency trends and the level of nonaccrual loans. Loans secured
by real estate are evaluated on the basis of their underlying collateral in
addition to using the assigned loss ratios. The methodology also considers (and
assigns a risk factor for) current economic conditions, off-balance sheet risk
(including SBA guarantees and servicing and letters of credit) and
concentrations of credit. In addition, each loan is evaluated on the basis of
whether or not it is impaired. For impaired loans, the expected cash flow is
discounted on the basis of the loan's interest rate. The methodology provides a
systematic approach believed by management to measure the risk of possible
future loan losses. Management and the Board of Directors evaluate the allowance
and determine the desired level of the allowance considering objective and
subjective measures, such as knowledge of the borrowers' business, valuation of
collateral and exposure to potential losses. The allowance for possible loan
losses was approximately $4.3 million at September 30, 1997, or 1.94% of total
loans outstanding. Based on information available as of the date of this report,
management believes the allowance for possible loan losses, determined as
described above, to be adequate for potential losses foreseeable at September
30, 1997.
The allowance for possible loan losses is 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
factors. 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.
<PAGE>
<TABLE>
<CAPTION>
The following schedule provides an analysis of the allowance for possible loan
losses:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended Nine months ended Year ended
September 30, September 30, December 31,
--------------------------------------------------------
1997 1996 1997 1996 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of the period $4,076 $4,021 $4,005 $3,847 $3,847
Charge-offs by loan category:
Commercial ---- 155 115 205 233
Real estate-other ---- ---- 33 21 70
Consumer ---- ---- ---- 22 22
Other ---- ---- ---- 93 93
- ------------------------------------------------------------------------------------------------------
Total charge-offs ---- 155 148 341 418
- ------------------------------------------------------------------------------------------------------
Recoveries by loan category:
Commercial 20 75 55 248 258
Real estate-other ---- 2 4 29 13
Consumer ---- 5 ---- 65 65
- ------------------------------------------------------------------------------------------------------
Total recoveries 20 82 59 342 336
- ------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) (20) 73 89 (1) 82
- ------------------------------------------------------------------------------------------------------
Provision charged to expense 215 50 395 100 190
Allowance relating to Astra Financial Corp. ---- ---- ---- 50 50
- ------------------------------------------------------------------------------------------------------
Balance, end of the period $4,311 $3,998 $4,311 $3,998 $4,005
======================================================================================================
</TABLE>
<TABLE>
Ratios:
<S> <C> <C> <C> <C> <C>
Net charge-offs (recoveries) to average loans, annualized (0.04%) 0.16% 0.06% ---- .04%
Allowance to total loans at the end of the period 1.94 2.09 1.94 2.09 2.02
Allowance to nonperforming loans at end of the period 181 650 181 650 733
====================================================================================================================
</TABLE>
During the three months ended September 30, 1997, there were no charge-offs and
for the nine months ended September 30, 1997 a total of $148 had been
charged-off. This compares to the three and nine months ended September 30, 1996
where the Company charged-off $155 and $341, respectively. During the three and
nine months ended September 30, 1997, the Company recovered $20 and $59,
respectively, in loans which were previously charged-off. In the three and nine
months ended September 30, 1996 the Company recovered $82 and $342,
respectively. Management does not believe that there were any trends indicated
by the detail of the aggregate charge-offs for any of the periods discussed. The
allowance for possible loan losses was 181% of nonperforming loans at September
30, 1997 compared to 733% at December 31, 1996. This decrease relates mainly to
the increase in nonperforming loans.
Nonperforming Loans
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:.
<PAGE>
<TABLE>
NONPERFORMING LOANS
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
September 30, December 31,
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans accounted for on a non-accrual basis $2,311 $457
Loans restructured and in compliance with modified terms 66 89
- -----------------------------------------------------------------------------------------------
Total $2,377 $546
================================================================================================
</TABLE>
As of September 30, 1997, the Company had approximately $2,377 of nonperforming
loans, consisting of 10 loans, of which $1,730 (8 loans) is secured by
commercial or residential real estate and/or SBA guarantees with estimated fair
values or guarantees of $3,238. At December 31, 1996, nonperforming loans
totaled approximately $546. This increase relates primarily to a single real
estate construction loan in the amount of $1.2 million, which Management
believes to be well secured.
Management conducts an ongoing evaluation and review of the loan portfolio in
order to identify potential nonperforming loans. Management considers loans
which are classified for regulatory purposes, loans which are graded as
classified by the Bank's outside loan review consultant and internal personnel,
as to whether they (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Based on such reviews as of September 30, 1997, management has not
identified any borrowers with respect to which known information causes
management to have doubts about the borrowers' abilities to comply with present
repayment terms, such that the loans might subsequently be classified as
nonperforming. Changes in general or local economic conditions or specific
industry segments, rising interest rates, declines in real estate values and
acts of nature could have an adverse effect on the ability of borrowers to repay
outstanding loans and the value of real estate and other collateral securing
such loans.
Funding
<TABLE>
<CAPTION>
The following table provides a breakdown of deposits by category as of the dates
indicated:
DEPOSIT CATEGORIES
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
September 30, 1997 December 31, 1996
------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Deposits Amount Deposits
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $70,374 26.1% $80,774 33.0%
Interest-bearing demand 45,195 16.8 40,113 16.4
Money market and savings 85,376 31.6 60,684 24.8
Certificates of deposit:
Less than $100 14,644 5.4 15,535 6.4
$100 or more 54,195 20.1 47,533 19.4
- --------------------------------------------------------------------------------------------------------------------
Total $269,784 100.0% $244,639 100.0%
====================================================================================================================
</TABLE>
Deposits as of September 30, 1997 were $270 million compared to $245 million at
December 31, 1996. The most significant growth in deposits has occurred in the
area of interest-bearing core deposits which increased approximately $30
million. Management believes this growth in interest-bearing core deposits has
been due to unusual activity by several of the Bank's customers which might not
be sustained and to the business development efforts of the Bank's business
development officers. Because of this high level of unusual activity, the Bank
has maintained significant short-term liquidity. See "Liquidity."
Asset/Liability Management
The Company's balance sheet position is asset-sensitive (based upon the
significant amount of variable rate loans and the repricing characteristics of
its deposit accounts). This balance sheet position generally 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.
To counter its asset sensitive 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 to less than 7%. Settlement is done quarterly and the Bank
records the impact of this hedge on an accrual basis.
Capital and Liquidity
Capital
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 Company's 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 intangible assets)
and "Tier 2" capital (defined to be principally the allowance for loan losses,
limited to one and one-fourth percent of gross risk weighted assets). 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
leverage capital ratio equal to at least 3% to 5% of total assets, depending on
the Comptroller's evaluation of the Bank. The Comptroller also has adopted
risk-based capital requirements. Similar to the Federal Reserve's guidelines,
the amount of capital the Comptroller requires a bank to maintain is 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 capital
ratios of the Bank are similar to the capital ratios of the Company.
The capital of the Company and SJNB exceed the amount required by the various
capital guidelines. The table below summarizes the various capital ratios of the
Company at September 30, 1997 and December 31, 1996.
<PAGE>
<TABLE>
Risk-based and Leverage Capital Ratios
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Company September 30, 1997 December 31, 1996
- -------
----------------------------------------------------------------------------
Risk-based Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 capital $27,752 11.51% $26,533 11.91%
Tier 1 capital minimum requirement 9,648 4.00 8,910 4.00
- --------------------------------------------------------------------------------------------------------------------
Excess $18,104 7.51% $17,623 7.91%
====================================================================================================================
Total capital $30,783 12.76% $29,333 13.17%
Total capital minimum requirement 19,296 8.00 17,820 8.00
- --------------------------------------------------------------------------------------------------------------------
Excess $11,487 4.76% $11,513 5.17%
====================================================================================================================
Risk-adjusted assets $241,196 $222,744
=========================================================== ===================
Leverage
Tier 1 capital $27,752 8.97% $26,533 9.28%
Minimum leverage ratio requirement 12,376 4.00 11,438 4.00
- --------------------------------------------------------------------------------------------------------------------
Excess $15,376 4.97% $15,095 5.28%
====================================================================================================================
Average total assets $309,390 $285,952
=========================================================== ===================
</TABLE>
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan funding and deposit withdrawals in an economically
feasible manner. 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; however the Bank utilizes
purchased deposits to satisfy temporary liquidity needs.
The Bank's source of liquidity consists of its deposits with other banks,
overnight funds sold to correspondent banks, short-term securities held to
maturity, securities available for sale, and the guaranteed portion of the SBA
loan portfolio less short-term borrowings. At September 30, 1997, consolidated
net liquid assets totaled $79 million or 28% of consolidated total assets as
compared to $64 million or 22% of consolidated total assets at December 31,
1996. In addition to the liquid asset portfolio, SJNB also has available $12
million in lines of credit with five major commercial banks, a collateralized
repurchase agreement with a maximum limit of $40 million (of which approximately
$12 million has been utilized at September 30, 1997), and a credit facility with
the Federal Reserve Bank based on loans secured by real estate for approximately
$6 million.
SJNB is primarily a business and professional bank and, as such, its deposit
base may be more susceptible to economic fluctuations than other potential
competitors. Accordingly, management strives to maintain a balanced position of
liquid assets to volatile and cyclical deposits. Commercial clients in their
normal course of business maintain balances in large certificates of deposit,
the stability of which hinge upon, among other factors, market conditions,
interest rates and business' seasonality. Large certificates of deposit amounted
to 20% of total deposits on September 30, 1997 and 19% at December 31, 1996.
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 September
30, 1997, approximately 44% of total consolidated assets had maturities under
one year and 84% 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 a secondary source of liquidity. There are no material commitments
for capital expenditures in 1997.
<PAGE>
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
1996 or the nine months of 1997.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank is a party to any material pending legal
proceedings other than as previously disclosed. Material legal proceedings were
reported in the Form 10KSB for the year ended December 31, 1996.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of 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 February 28, 1996 and the
Registrant's restated bylaws as of February 28, 1996 are hereby
incorporated by reference to Exhibit (3) b. of the Registrant's Quarterly
Report on Form 10-QSB for the quarterly period ended June 30, 1996.
*(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. The Registrant's 1996 Stock Option Plan is incorporated by reference to
exhibit 99.1 of the Registrant's Form S-8 filed July 30, 1996.
*(10)n. Agreement between James R. Kenny and SJNB Financial Corp. and San Jose
National Bank dated March 27, 1996 is hereby incorporated by reference to
Exhibit (10) m. of the Registrant's Quarterly Form 10-QSB for the quarterly
period ended June 30, 1996.
*(10)o. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San
Jose National Bank dated March 27, 1996 is hereby incorporated by reference
to Exhibit (10) n. of the Registrant's Quarterly Form 10-QSB for the
quarterly period ended June 30, 1996.
(10)p. 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)q. 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)r. 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)s. 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.
(10)t. Sublease by and between Greater Unified Management Businesses, Inc.
(d.b.a. as Logistics) and SJNB Financial Corp., dated January 15, 1996, and
as amended March 19, 1996, for premises at 95 South Market Street, San Jose
CA is hereby incorporated by reference to Exhibit (10) s. of the
Registrant's Quarterly Form 10-QSB for the quarterly period ended June 30,
1996.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-k
No reports on Form 8-k were filed during the third quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SJNB FINANCIAL CORP.
(Registrant)
Date: November 5, 1997 S/J. R. Kenny
--------------
James R. Kenny
President and
Chief Executive Officer
Date: November 5, 1997 S/E. E. Blakeslee
------------------
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer
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