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, 1996
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)
Issuer's telephone number (408) 947-7562
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange 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 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. [ ]
Issuer's revenues for its most recent fiscal year: $25,374,000
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on a market value of $20.375 per share (the closing price of
the Common Stock, as of February 5, 1997) was $45,265,294.
Number of shares of common stock outstanding as of February 5, 1997:
2,580,182 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
PART I
Page
Item 1 - Business 1
Item 2 - Properties 11
Item 3 - Legal Proceedings 11
Item 4 - Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder 12
Matters
Item 6 - Management's Discussion and Analysis or Plan of Operation 13
Item 7 - Financial Statements 32
Item 8 - Changes in and Disagreements with Accountants on Accounting and 54
Financial Disclosure
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons; 54
Compliance with Section 16(a) of the Exchange Act
Item 10 - Executive Compensation 54
Item 11 - Security Ownership of Certain Beneficial Owners and Management 54
Item 12 - Certain Relationships and Related Transactions 54
Item 13 - Exhibits and Reports on Form 8-K 54
Signatures 57
<PAGE>
PART I
ITEM 1. BUSINESS
Certain statements in this Annual Report on Form 10-KSB include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statements. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Santa
Clara County and in the semiconductor industry; certain operational risks
involving data processing systems or fraud; volatility of rate sensitive
deposits; asset/liability matching risks and liquidity risks; and changes in the
securities markets. See also the section included herein "Certain Additional
Business Risks" and other risk factors discussed elsewhere in this report.
General
SJNB Financial Corp. ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). 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. 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 BHCA and regulations thereunder.
Service Area
The principal service area of SJNB includes San Jose and the surrounding areas,
including most of Santa Clara County.
Employees
At December 31, 1996, SJNB had 76 full-time officers and employees and 15
part-time employees for a total of 81.1 employees on a full time equivalent
basis. Certain of the Bank's officers are also officers of the Company. None of
the Bank's employees are represented by a union. Management believes that
employee relations are good.
<PAGE>
Supervision and Regulation
The Effect of Government Policy on Banking
The earnings and growth of the Bank are affected not only by local market area
factors and general economic conditions, but also by government monetary and
fiscal policies. For example, the Board of Governors of the Federal Reserve
System ("FRB") influences the supply of money through its open market operations
in U.S. Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions influence the
growth of loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of future changes in such
policies on the business and earnings of the Bank cannot be predicted.
Additionally, state and federal tax policies can impact banking organizations.
Effective January 1, 1997, applicable California bank and corporation tax rates
were reduced by 5% in order to keep California competitive with other western
states.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company is particularly susceptible to
being affected by the enactment of federal and state legislation which may have
the effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company. In response to
various business failures in the savings and loan industry and in the banking
industry, in December 1991, Congress enacted, and the President signed into law,
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
FDICIA substantially revised the bank regulatory framework and deposit insurance
funding provisions of the Federal Deposit Insurance Act and made revisions to
several other federal banking statutes.
Implementation of the various provisions of FDICIA is subject to the adoption of
regulations by the various regulatory agencies, the manner in which the
regulatory agencies implement those regulations and certain phase-in periods.
Regulation and Supervision of Bank Holding Companies
The Company is a bank holding company subject to the BHCA . The Company reports
to, registers with, and may be examined by, the FRB. The FRB also has the
authority to examine the Company's subsidiaries. The costs of any examination by
the FRB are payable by the Company.
The FRB has significant supervisory and regulatory authority over the Company
and its affiliates. The FRB requires the Company to maintain certain levels of
capital. See "Capital Standards." The FRB also has the authority to take
enforcement action against any bank holding company that commits any unsafe or
unsound practice, or violates certain laws, regulations or conditions imposed in
writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of the FRB
before it exercises a controlling influence over a bank, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, the Company is required to obtain the
prior approval of the FRB before it acquires, merges or consolidates with any
bank or bank holding company; any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the approval of
the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. A bank holding company, with the approval of the FRB, may
engage, or acquire the voting shares of companies engaged, in activities that
the FRB has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking and Branching Act"), a bank holding company became
able to acquire banks in states other than its home state beginning September
29, 1995 without regard to the permissibility of such acquisitions under state
law, but subject to any state requirement that the bank has been organized and
operating for a minimum period of time, not to exceed five years, and the
requirement that the bank holding company, prior to or following the proposed
acquisition, controls no more than 10% of the total amount of deposits of
insured depository institutions in the United States and no more than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
<PAGE>
The Interstate Banking and Branching Act also authorizes banks to merge across
states lines, therefore creating interstate branches, beginning June 1, 1997.
Under such legislation, each state has the opportunity to "opt out" of this
provision, thereby prohibiting interstate branching in such states, or to "opt
in" at an earlier time, thereby allowing interstate branching within that state
prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now able to
open new branches in a state in which it does not already have banking
operations, if the laws of such state permit such de novo branching. California
enacted legislation to "opt in" to the Interstate Banking and Branching Act
provisions regarding interstate branching, allowing a state bank chartered in a
state other than California to acquire by merger or purchase, at any time after
effectiveness of the Caldera, Weggeland, and Killea California Interstate
Banking and Branching Act of 1995 ("IBBA"), a California bank or industrial loan
company which is at least five (5) years old and thereby establish one or more
California branch offices. However, the IBBA prohibits a state bank chartered in
a state other than California from entering California by purchasing a
California branch office of a California bank or industrial loan company without
purchasing the entire entity or by establishing a de novo California branch
office. See the section entitled "Recently Enacted Legislation" for additional
information.
Proposals to change the laws and regulations governing the banking industry are
frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies.
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition.
Transactions between the Company and the Bank are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees which are unreasonable in amount or exceed the fair market value of the
services rendered (or, if no market exists, actual costs plus a reasonable
profit). Subject to certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in the securities of,
purchase assets from, or issue a guarantee, acceptance, or letter of credit on
behalf of, an affiliate, provided that the aggregate of such transactions with
affiliates may not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such institution. The Company may
only borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, the Company may not sell a low-quality asset to a depository
institution subsidiary.
Generally, a bank holding company and its subsidiaries are prohibited from
engaging in tie-in arrangements in connection with the extension of credit, sale
or lease of property or furnishing of services unless the FRB permits an
exception to the tying prohibitions pursuant to exemption authority available to
it under applicable law. The FRB, however, has adopted a rule, effective
September 2, 1994, amending the anti-tying provisions to permit a bank or bank
holding company to offer a lower price on a loan, deposit or trust service
(traditional bank product), or on securities brokerage services, on the
condition that the customer obtain a traditional bank product from an affiliate.
Additionally, as of January 23, 1995, a bank holding company, or a nonbank
subsidiary, may offer lower prices on any of its products or services on the
condition that the customer obtain another product or service from such company
or any of its nonbank affiliates, provided that all products offered in the
package arrangement are separately available for purchase.
The Company is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such, the Company and the Bank are subject to
examination by, and may be required to file reports with, the California
Superintendent of Banks (the "Superintendent"). Regulations have not yet been
proposed or adopted, and no other steps have been taken, to implement the
Superintendent's power under this statute.
<PAGE>
Bank Regulation and Supervision
As a national bank, the Bank is regulated, supervised and regularly examined by
the Office of the Comptroller of the Currency ("OCC"). Deposit accounts at the
Bank are insured by the Bank Insurance Fund ("BIF"), as administered by the
Federal Deposit Insurance Corporation ("FDIC"), to the maximum amount permitted
by law. The Bank is also subject to applicable provisions of California law,
insofar as such provisions are not in conflict with or preempted by federal
banking law. The Bank is a member of the Federal Reserve System, and is also
subject to certain regulations of the FRB dealing primarily with check clearing
activities, establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).
By comparison, California state-chartered banks are regulated by the
Superintendent. Pursuant to AB 3351, which was adopted by the California
legislature during 1996, all of the California state regulatory authorities for
state-chartered depository institutions will be consolidated under a new state
agency, the Department of Financial Institutions ("DFI") effective July 1, 1997.
The newly created DFI combines the State Banking Department and the Department
of Savings and Loan while regulatory oversight over industrial loan companies
and credit unions will be shifted from the Department of Corporations to the
DFI. During 1996, the California Interstate Banking and Branching Cleanup Act
was enacted, which revised the Superintendent's assessment methodology for
state-chartered banks in order to provide a better basis of comparison to the
method used by the OCC. Under the new methodology, the average assessment for
state banks will be approximately 39% of the OCC's annual charges for national
bank supervision.
During 1996, the OCC adopted a regulation to revise and streamline its
procedures with respect to corporate activities of national banks, to be
effective December 31, 1996. These revised standards allow the OCC to approve,
on a case-by-case basis, the entry of bank operating subsidiaries into a
business incidental to banking, including activities in which the parent bank is
not permitted to engage. Such a standard allows a national bank to conduct an
activity approved for a bank holding company through a bank operating subsidiary
such as acting as an investment or financial advisor, leasing personal property
and providing financial advice to customers. In general, these new standards
will be available to well-capitalized or adequately capitalized national banks.
Capital Standards
The OCC and other federal banking agencies have risk-based capital adequacy
guidelines intended to provide a measure of capital adequacy that reflects the
degree of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such as
letters of credit and recourse arrangements, which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent amounts of off balance sheet items are multiplied by one of several
risk adjustment percentages, which range from 0% for assets with low credit
risk, such as certain U.S. government securities, to 100% for assets with
relatively higher credit risk, such as business loans.
In determining the capital level the Bank is required to maintain, the OCC does
not, in all respects, follow generally accepted accounting principles ("GAAP")
and has special rules which have the effect of reducing the amount of capital it
will recognize for purposes of determining the capital adequacy of the Bank.
These rules are called Regulatory Accounting Principles ("RAP"). In December
1993, the federal banking agencies issued an interagency policy statement on the
allowance for loan and lease losses which, among other things, establishes
certain benchmark ratios of loan loss reserves to classified assets. Future
changes in OCC regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of the Company to grow and could restrict the amount of profits, if
any, available for the payment of dividends.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. Additionally, as of April 1,
1995, for Tier 1 capital purposes, deferred tax assets that can only be realized
if an institution earns sufficient taxable income in the future will be limited
to the amount that the institution is expected to realize within one year, or
ten percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of
a limited amount of the allowance for possible loan and lease losses, term
preferred stock and other types of preferred stock not qualifying as Tier 1
capital, term subordinated debt and certain other instruments with some
characteristics of equity. The inclusion of elements of Tier 2 capital are
subject to certain other requirements and limitations of the federal banking
agencies. Since December 31, 1992, the federal banking agencies have required a
minimum ratio of qualifying total capital to risk-adjusted assets and off
balance sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted
average risk-adjusted assets and off balance sheet items of 4%.
<PAGE>
In addition to the risked-based guidelines, federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. It is improbable, however, that an institution with a
3% leverage ratio would receive the highest rating by the regulators since a
strong capital position is a significant part of the regulators' rating. For all
banking organizations not rated in the highest category, the minimum leverage
ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the
effective minimum leverage ratio, for all practical purposes, must be at least
4% or 5%. In addition to these uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
The following tables present the capital ratios for the Company and the Bank,
compared to the standards for well-capitalized depository institutions, as of
December 31, 1996:
(amounts in thousands, except percentages)
- --------------------------------------------------------------------------------
Actual Well Minimum
----------------- Capitalized Capital
The Company Capital Ratio Ratio Requirement
- --------------------------------------------------------------------------------
Leverage $26,533 9.28% 5.0% 4.0%
Tier 1 Risk-based 26,533 11.91 6.0 4.0
Total Risk- based 29,333 13.17 10.0 8.0
The Bank
- --------------------------------------------------------------------------------
Leverage $25,389 8.87% 5.0% 4.0%
Tier 1 Risk-based 25,389 11.40 6.0 4.0
Total Risk-based 28,187 12.66 10.0 8.0
Banking agencies have recently adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off balance sheet position) in evaluation
of a bank's capital adequacy. This final rule does not codify a measurement
framework for assessing the level of a bank's interest rate risk exposure. The
information and exposure estimates collected through a new proposed supervisory
measurement process, described in the banking agencies' joint policy statement
on interest rate risk, would be one quantitative factor used to determine the
adequacy of an individual bank's capital for interest rate risk. The focus of
that proposed process is on a bank's economic value exposure. Other quantitative
factors include the bank's historical financial performance and its earnings
exposure to interest rate movements. Examiners also will consider qualitative
factors, including the adequacy of the bank's internal interest rate risk
management. The banking agencies intend for this case-by-case approach for
assessing a bank's capital adequacy for interest rate risk to be a transitional
arrangement.
The second step will consist of a proposed rule that would establish an explicit
minimum capital charge for interest rate risk, based on the level of a bank's
measured interest rate risk exposure. The banking agencies intend to implement
this second step at some future date, after the banking agencies and the banking
industry have gained more experience with the proposed supervisory measurement
and assessment process.
<PAGE>
Prompt Corrective Action and Other Enforcement Mechanisms
FDICIA requires each federal banking agency to take prompt corrective action to
resolve the problems of insured depository institutions, including but not
limited to those that fall below one or more prescribed minimum capital ratios.
The law required each federal banking agency to promulgate regulations defining
the following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
In September 1992, the federal banking agencies issued uniform final regulations
implementing the prompt corrective action provisions of FDICIA. An insured
depository institution generally will be classified in the following categories
based on capital measures indicated below:
"Well capitalized"
Total risk-based capital of 10%;
Tier 1 risk-based capital of 6%; and
Leverage ratio of 5%.
"Adequately capitalized"
Total risk-based capital of 8%;
Tier 1 risk-based capital of 4%; and
Leverage ratio of 4%.
"Undercapitalized"
Total risk-based capital less than 8%;
Tier 1 risk-based capital less than 4%; or
Leverage ratio less than 4%.
"Significantly undercapitalized"
Total risk-based capital less than 6%;
Tier 1 risk-based capital less than 3%; or
Leverage ratio less than 3%.
"Critically undercapitalized"
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as "critically undercapitalized" unless
its capital ratio actually warrants such treatment.
If an insured depository institution is undercapitalized, it will be closely
monitored by the appropriate federal banking agency. Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are required to be imposed on insured depository institutions that are
critically undercapitalized. The most important additional measure is that the
appropriate federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
<PAGE>
In addition to the statutory limitations, FDICIA originally required the federal
banking agencies to prescribe, by regulation, standards for all insured
depository institutions for such things as classified loans and asset growth. In
1994 FDICIA was amended to: (a) authorize the agencies to establish safety and
soundness standards by regulation or by guideline for all insured depository
institutions; (b) give the agencies greater flexibility in prescribing asset
quality and earnings standards; and (c) eliminate the requirement that such
standards apply to depository institution holding companies.
On July 10, 1995, the federal banking agencies published Interagency Guidelines
Establishing Standards for Safety and Soundness. By adopting the standards as
guidelines, the agencies retained the authority to require an institution to
submit to an acceptable compliance plan as well as the flexibility to pursue
other more appropriate or effective courses of action given the specific
circumstances and severity of an institution's noncompliance with one or more
standards.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
Regulators also have authority to prohibit a depository institution from
engaging in business practices which are considered to be unsafe or unsound,
possibly including payment of dividends or other payments under certain
circumstances even if such payments are not expressly prohibited by statute.
The payment of dividends by a national bank is further restricted by additional
provisions of federal law, which prohibit a national bank from declaring a
dividend on its shares of common stock unless its surplus fund exceeds the
amount of its common capital (total outstanding common shares times the par
value per share). Additionally, if losses have at any time been sustained equal
to or exceeding a bank's undivided profits then on hand, no dividend shall be
paid. Moreover, even if a bank's surplus exceeded its common capital and its
undivided profits exceed its losses, the approval of the OCC is required for the
payment of dividends if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits of that year
combined with its retained net profits of the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock. A national bank must consider other business factors in determining the
payment of dividends. The payment of dividends by the Bank is governed by the
Bank's ability to maintain minimum required capital levels and an adequate
allowance for loan losses. Regulators also have authority to prohibit a
depository institution from engaging in business practices which are considered
to be unsafe or unsound, possibly including payment of dividends or other
payments under certain circumstances even if such payments are not expressly
prohibited by statute.
Premiums for Deposit Insurance and Assessments for Examinations
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC
also administers the Savings Association Insurance Fund ("SAIF"), which insures
deposits in thrift institutions. The FDIC is authorized to borrow up to $30
billion from the United States Treasury; up to 90% of the fair market value of
assets of institutions acquired by the FDIC as receiver from the Federal
Financing Bank; and from depository institutions that are members of the BIF.
Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits. FDICIA also provides authority for
special assessments against insured deposits. No assurance can be given at this
time as to what the future level of premiums will be.
As required by FDICIA, the FDIC adopted a transitional risk-based assessment
system for deposit insurance premiums which became effective January 1, 1993. On
November 14, 1995 the Board of Directors of the FDIC adopted a resolution to
reduce to a range of 0 to 27 basis points the assessment rates applicable to
deposits assessable by the BIF for the semiannual assessment period beginning
January 1, 1996. The new assessment schedule would retain the risk based
characteristics of the current system. On November 26, 1996 the FDIC decided to
continue in effect the current BIF assessment rate schedule.
<PAGE>
The FDIC may make limited adjustments to the above rates not to exceed an
increase or decrease of 5 basis points without public notice and comment
rulemaking. The amount of an adjustment adopted by the Board is to be determined
by the following considerations: (a) the amount of assessment revenue necessary
to maintain the reserve ratio at the designated reserve ratio and (b) the
assessment schedule that would generate such amount of assessment revenue
considering the risk profile of BIF members. In determining the relevant amount
of assessment revenue, the Board is to consider BIF's expected operating
expenses, case resolution expenditures and income, the effect of assessments on
BIF members' earnings and capital, and any other factors the Board may deem
appropriate.
In 1996 Congress enacted the Deposit Insurance Funds Act ("Funds Act") in order
to raise the level of SAIF reserves, and to reduce the possibility that bonds
issued by the Financing Corporation ("FICO") would go into default. The FICO was
a special purpose government corporation that issued $8.2 billion in bonds to
recapitalize the Federal Savings and Loan Insurance Corporation. Interest on the
FICO bonds was paid from the proceeds of assessments made on the deposits of
SAIF members. Because of the almost $800 million needed to pay for the annual
interest on the FICO bonds, the payments of SAIF members were not increasing the
SAIF reserve to a sufficient level to allow the FDIC to reduce assessment rates
(as had been done for BIF deposits), and SAIF members were employing certain
strategies to either exit the system or transfer deposits to BIF coverage.
Pursuant to the Funds Act, the FDIC imposed a special one-time assessment on all
institutions that held SAIF assessable deposits as of March 31, 1995 of an
estimated 65.7 cents per $100 of SAIF assessable deposits. Certain discounts and
exemptions from the assessment were available. For example, BIF-member banks
that had acquired SAIF-insured deposits from thrifts were generally entitled to
a 20% discount on the special assessment if the bank satisfied certain statutory
thresholds (the bank's acquired SAIF deposits, as adjusted, must be less than
half of its total domestic deposits). Furthermore, beginning January 1, 1997,
all FDIC-insured institutions will be assessed to cover the interest payments
due on FICO bonds. For calendar years 1997 through 1999, BIF members will pay
one-fifth the rate SAIF members will pay, and beginning in 2000 both types of
institutions will pay the same rate. BIF members will be required to pay a FICO
assessment of approximately 1.3 basis points for the first semiannual FICO
assessment in 1997.
The Funds Act also authorized the FDIC to rebate assessments paid by BIF members
if the BIF has reserves exceeding its designated reserve ratio of 1.23 percent
of total estimated insured deposits. The adjusted BIF balance was approximately
$26 billion on June 30, 1996, a reserve ratio of 1.30 percent. The FDIC has
expressed its view that the long-term needs of the BIF are a factor in setting
the effective average BIF assessment rate, and that the FDIC is uncertain
whether the current favorable conditions represent a long-term trend.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
On March 8, 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment, and evidence of
disparate impact.
In 1996, new compliance and examination guidelines for the CRA were promulgated
by each of the federal banking regulatory agencies, fully replacing the prior
rules and regulatory expectations with new ones ostensibly more performance
based than before to be fully phased in as of July 1, 1997. The guidelines
provide for streamlined examinations of smaller institutions.
<PAGE>
Recently Enacted Legislation
On September 29, 1995 the IBBA became effective. The IBBA implemented the
federal Interstate Banking and Branching Act. The main features of this
legislation are: (a) out-of-state banks that wish to establish a California
branch office to conduct core banking business must first acquire an existing 5
year old California bank or industrial loan company by merger or purchase; (b)
California state-chartered banks will be empowered to conduct various authorized
branch-like activities on an agency basis through affiliated and unaffiliated
insured depository institutions in California and other states; and (c) the
Superintendent will be authorized to approve an interstate acquisition or merger
which would result in a deposit concentration exceeding 30% if the
Superintendent finds that the transaction is consistent with public convenience
and advantage. The legislation also contains extensive provisions governing
intrastate and interstate: (a) intra-industry sales, mergers and conversions
between banks and between industrial loan companies and (b) inter-industry
transactions involving banks, savings associations and industrial loan
companies.
During 1996, new federal legislation amended the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground storage
tank provisions of the Resource Conversation and Recovery Act ("RCRA") to
provide lenders and fiduciaries with greater protections from environmental
liability. The definition of "owner or operator" under CERCLA has been amended
to exclude a lender who: (i) holds indicia of ownership in a property primarily
to protect its security interest, but does not participate in the property's
management or (ii) forecloses on a property, or, after foreclosure, sells,
re-leases (in the case of a lease finance transaction), or liquidates the
property, maintains business activities, winds up operations, undertakes a
response under CERCLA, or takes measures to preserve, protect or prepare
property prior to sale or disposition, so long as the lender did not participate
in the property's management prior to sale. In order to preserve these
protections, a lender who forecloses on property must seek to sell, re-lease, or
otherwise divest itself of the property at the earliest practicable,
commercially reasonable time, and on reasonable terms. "Participation in
management" is defined as actual participation in the management or operational
affairs of the facility, not merely having the capacity to influence or the
unexercised right to control operations. Similar changes have been made in RCRA.
The California legislature adopted a similar bill to provide that, subject to
numerous exceptions, a lender acting in the capacity of a lender shall not be
liable under any state or local statute, regulation or ordinance, other than the
California Hazardous Waste Control Law, to undertake a cleanup, pay damages,
penalties or fines, or forfeit property as a result of the release of hazardous
materials at or from the property. Under this bill a lender which had not
participated in the management of the property prior to foreclosure may take
actions similar to those set forth in the CERCLA and RCRA amendments without
losing its immunity from liability. To preserve that immunity, after
foreclosure, the lender must take commercially reasonable steps to divest itself
of the property in a reasonably expeditious manner.
Pending Legislation
There are a number of pending legislative proposals to reform the Glass-Steagall
Act to allow affiliations between banks and other firms engaged in "financial
activities," including insurance companies and securities firms. Glass-Steagall
reform will likely be affected by a bank insurance powers case decided during
1996 by the U.S. Supreme Court, which gives national banks greater opportunities
to sell traditional insurance products, such as life, automobile, and property
and casualty policies. In a similar recent case, the Court upheld an OCC
determination that national banks may sell annuities.
Certain other pending legislative proposals include bills to free withdrawals
from individual retirement accounts from penalties for first-time home
purchasers and other purposes and eliminate most CRA reporting requirements.
While the effect of such proposed legislation and regulatory reform on the
business of financial institutions cannot be accurately predicted at this time,
it seems likely that a significant amount of consolidation in the banking
industry will continue to occur throughout the remainder of the decade.
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.
<PAGE>
SJNB competes for loans and deposits with these major banks, as well as with
savings and loan associations, thrift and loans, credit unions, brokerage
companies, mortgage companies, insurance companies, and other lending sources
which have provided significant competition for banks with respect to deposits.
Other institutions, such as brokerage houses, mutual fund companies, credit card
companies, and even retail establishments have offered new investment vehicles
which also compete with banks for deposit business. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market, and it is anticipated that this trend will continue. 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 202 banking offices in the geographic area
served by SJNB, including offices of major chain banks and other independent
banks. There are also approximately 173 offices of savings and loan
associations, credit unions and other financial institutions in the service area
of SJNB.
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 Bank's 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 enactment of the Interstate Banking and Branching Act as well as the IBBA
will likely increase competition within California. Regulatory reform, as well
as other changes in federal and California law will also affect competition.
While the impact of these changes, and of other proposed changes, cannot be
predicted with certainty, it is clear that the business of banking in California
will remain highly competitive.
Certain Additional Business Risks
The Company's business, financial condition and operating results can be
impacted by a number of factors, including but not limited to those set forth
below, any one of which could cause the Company's actual results to vary from
the Company's anticipated future results.
Shares of the Company Common Stock eligible for future sale could have a
dilutive effect on the market for Company Common Stock and could adversely
affect the market price. The Articles of Incorporation of the Company authorize
the issuance of 20,000,000 shares of common stock, of which approximately
2,571,000 shares were outstanding at December 31, 1996. Pursuant to its stock
option plans, at December 31, 1996, the Company had outstanding options to
purchase an aggregate of 252,518 shares of Company Common Stock. As of December
31, 1996, 231,540 shares of Company Common Stock remained available for option
grants under the stock option plans. Sales of substantial amounts of Company
Common Stock in the public market could adversely affect the market price of the
Common Stock.
The Company has previously announced its intention to pursue acquisitions of
other financial institutions from time to time where such acquisitions are
believed by the Company to enhance shareholder value or satisfy other strategic
objectives of the Company. Other acquisitions, if any, could be accomplished by
the issuance of additional shares of Company Common Stock or other securities
convertible into or exercisable for such Common Stock.
The loan portfolio of the Company is dependent on real estate. At December 31,
1996, real estate served as the principal source of collateral with respect to
approximately 54% of the Company's loan portfolio. A worsening of current
economic conditions or rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay outstanding loans, the
value of real estate and other collateral securing loans and the value of the
available for sale investment portfolio, as well as the Company's financial
condition and results of operations in general and the market value for Company
Common Stock. Acts of nature, including earthquakes and floods, which may cause
uninsured damage and other loss of value to real estate that secures these
loans, may also negatively impact the Company's financial condition.
<PAGE>
The Bank is subject to certain operational risks, including, but not limited to,
data processing system failures and errors and customer or employee fraud. The
Bank maintains a system of internal controls to mitigate against such
occurrences and maintains insurance coverage for such risks, but should such an
event occur that was not prevented or detected by the Company's internal
controls, or that was uninsured or in excess of the applicable insurance limits,
it could have a significant negative impact on the Company's financial condition
or results of operations.
Statistical Data
Certain consolidated statistical information concerning the business of the
Company appears on pages 13 through 31 under the caption "Management's
Discussion and Analysis or Plan of Operation" and in the Company's Consolidated
Financial Statements on pages 32 through 53. Ratios relating to the Company's
Return on Equity and Assets appear on page 14. The section entitled
"Management's Discussion and Analysis or Plan of Operation" should be read in
conjunction with the Company's Consolidated Financial Statements.
ITEM 2: PROPERTIES
The Company shares common quarters with SJNB's only office 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 and is constructed and equipped to meet prescribed security
requirements.
In addition, the Bank assumed BB's lease for approximately 12,000 square feet
located at 95 South Market Street, San Jose, California. Approximately 9,000
square feet is currently being occupied by two third party tenants under
subleases which expire upon termination of the original BB 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 or the Bank is a party to any
material pending legal proceeding, nor is their property the subject of any
material pending legal proceeding, except ordinary routine legal proceedings
arising in the ordinary course of the Bank's business and incidental to its
business, none of which are expected to have a material adverse impact upon the
Company's business, 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 (which has subsequently been remanded to U. S. Bankruptcy
Court jurisdiction) by Giannotta Properties, Inc. (the "Borrower"). The Borrower
had borrowed money from the Bank and had given the Bank a security interest in
certain real property as security for the loan. The Borrower 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 suit
against the Bank, the foreclosure trustee, the third party property purchaser,
and various other parties, alleging, among other things, a claim that the
foreclosure sale was improperly conducted. On December 20, 1996, the Borrower
filed thier first amended complaint which alleged "about $5.0 million" in
damages as a result of the conduct described in its claims, which amount appears
to be unsubstantiated by the Borrower's pleadings. The litigation is in the
initial pleading stages, virtually no discovery has been conducted and the Bank
has answered the First Amended Complaint on February 10, 1997 denying all causes
of action. Insufficient information exists to make a determination of the Bank's
exposure for damages, if any. The Bank intends to vigorously defend this
lawsuit.
During 1995, the Bank (along with Comerica Bank-California, Santa Clara Land
Title and three principals of Century Loan Corporation) was served with a civil
complaint in a class action lawsuit filed in the Superior Court of Santa Clara
County, California. The lawsuit stemmed from the failure of Century Loan, a real
estate investment company now in bankruptcy, that borrowed approximately
$750,000 from the Bank during 1994. Plaintiffs were persons who invested in
deeds of trust sold by Century Loan. Their complaint alleged that they were
defrauded by Century Loan and its principals and that the Bank and other
defendants aided and abetted a fraudulent Ponzi scheme by the principals of
Century Loan.
<PAGE>
The Court granted class certification to the Plaintiffs in December 1995,
permitting them to proceed on behalf of all Century Loan investors. On November
26, 1996, the Court granted summary judgment in favor of the Bank on all of the
Plaintiff's claims against it. The Court found no evidence that the Bank had
participated in any conspiracy with or aided and abetted Century Loan. On
December 4, 1996, the Court entered judgment in favor of the Bank, dismissing
the Plaintiffs' claims. Plaintiff's motion for a new trial was denied on January
27, 1997.
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.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of February 5, 1997, the Company had 2,580,182 shares of Common Stock
outstanding, held by approximately 1,800 beneficial 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: Sutro & Co., Hoefer & Arnett,
Incorporated, Dean Witter Reynolds, Inc., Sandler O'Neill & Partners, Van Kasper
& Co., Inc., Torrey Pines Securities Inc., Herzog, Heine, Geduld, Inc. and
Wedbush Morgan Securities Inc.
Stock Price
The following sets forth the high and low sales 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
- -----------------------------------------------------------
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 14.38 13.13 -----
Second Quarter 16.88 14.00 0.15
Third Quarter 19.38 17.00 -----
Fourth Quarter 20.88 18.75 0.18
- -----------------------------------------------------------
1997
- -----------------------------------------------------------
First Quarter (through
February 5, 1997) 20.87 18.75 -----
The Company's Board of Directors considers 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 "Business - Supervision and Regulation Restrictions on
Dividends and Other Distributions."
During 1993, the Company commenced a policy to pay semi-annual dividends to its
shareholders. It is the intention of the Company to continue semi-annual
dividend payments in May and December or more frequently as the Board may
determine, subject to financial results and other factors which could limit or
restrict dividends as more fully discussed elsewhere herein.
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain statements in this Annual Report on Form 10-KSB include forward-looking
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the "safe harbor" created by those sections. These
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from those in the forward-looking
statement. Such risks and uncertainties include, but are not limited to, the
following factors: competitive pressure in the banking industry increases
significantly; changes in the interest rate environment reduce margins; general
economic conditions, either nationally or regionally, are less favorable than
expected, resulting in, among other things, a deterioration in credit quality
and an increase in the provision for possible loan losses; changes in the
regulatory environment; changes in business conditions, particularly in Santa
Clara County and in the semiconductor industry; certain operational risks
involving data processing systems or fraud; volatility of rate sensitive
deposits; asset/liability matching risks and liquidity risks; and changes in the
securities markets. See also the section included herein "Business - Certain
Additional Business Risks" and other risk factors discussed elsewhere in this
report.
Dollars are in thousands in the text, except per share amounts or as otherwise
noted.
<PAGE>
<TABLE>
<CAPTION>
The following presents selected financial data and ratios for the five years
ended December 31, 1996:
(dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
As of and for the Years Ended December 31,
STATEMENT OF OPERATIONS DATA : 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $16,468 $14,295 $9,749 $7,163 $5,866
Provision for possible loan losses (190) (1,045) (600) (625) (698)
Other income 846 966 744 682 527
Other expenses (9,635) (8,797) (6,676) (5,276) (4,645)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,489 5,419 3,217 1,944 1,050
Income taxes 3,198 2,395 1,354 758 345
- ---------------------------------------------------------------------------------------------------------------------------
Net income $4,291 $3,024 $1,863 $1,186 $705
============================================================================================================================
PER SHARE DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net income per share $1.63 $1.20 $1.00 $0.70 $0.43
Dividends per share .33 .21 .16 .14 ----
Shareholders' equity per share 12.14 11.02 9.92 9.86 9.28
Tangible shareholders' equity per share 10.40 9.06 7.84 9.86 9.28
============================================================================================================================
BALANCE SHEET DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Balance sheet totals-end of year:
Assets $309,403 $252,195 $205,949 $127,967 $107,357
Loans 198,627 170,800 149,407 97,958 77,001
Deposits 244,639 196,692 180,287 109,712 91,432
Shareholders' equity 31,205 26,658 23,442 16,064 15,084
Average balance sheet amounts:
Assets $274,868 $222,913 $153,717 $117,627 $100,382
Loans 183,367 152,820 112,818 84,457 72,009
Earning assets 251,156 202,996 140,445 106,999 91,169
Deposits 217,716 183,282 133,897 100,899 84,663
Shareholders' equity 28,288 24,898 18,210 15,551 14,701
============================================================================================================================
SELECTED RATIOS:
- ----------------------------------------------------------------------------------------------------------------------------
Return on average equity 15.17% 12.15% 10.23% 7.63% 4.80%
Return on average assets 1.56 1.36 1.21 1.01 .70
Efficiency ratio (non-interest expense
as a percentage of total revenues 55.65 57.64 63.62 67.25 72.66
Dividend payout ratio 19.30 16.67 17.18 19.22 ----
Average equity to average assets 10.29 11.17 11.85 13.22 14.65
Leveraged capital ratio 9.28 9.00 9.33 12.02 14.94
Nonperforming loans to total loans .27 .52 3.67 3.75 1.85
Net chargeoffs to average loans .04 .33 1.11 .14 1.88
Allowance for loan losses to total loans 2.02 2.25 2.22 2.10 2.02
Allowance for loan losses to
nonperforming loans 733 430 60 56 109
============================================================================================================================
</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 32 through 53. 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 this Item 6.
<PAGE>
Merger with Business Bancorp (BB)
On October 1, 1994, the Company completed the purchase of BB. 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," "Financial Condition and Earning Assets," "Funding,"
"Asset/Liability Management" and "Capital and Liquidity."
Financial Review
Earnings Summary
For the year ended December 31, 1996, the Company reported net income of $4.3
million or $1.63 per share as compared to net income of $3.0 million or $1.20
per share in 1995 (a 42% increase). Net income for the year increased
substantially over that of a year ago primarily due to the increase of $2.2
million in net interest income and a decrease in the provision for loan losses
of $855. The increase in net interest income and the reduction in the provision
for loan losses was offset by an increase in expenses which are primarily
related to the increase in volumes.
As of December 31, 1996, consolidated assets were $309 million, net loans were
$195 million, and deposits were $245 million. Total consolidated assets have
increased $57 million from $252 million a year ago, representing a 23% increase.
Loan and deposit growth was generated by increased marketing and business
development efforts of the Bank.
Net Interest Income and Margin
Net interest income is the principal source of the Company's operating earnings.
Significant factors affecting net interest income are rates, volumes and mix of
the loan investment and deposit portfolios.
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, 1996.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, RATES AND YIELDS
(dollars in thousands)
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net (1) $183,367 $20,422 11.14% $152,820 $18,016 11.79% $112,818 $11,517 10.21%
Securities held to maturity:
Taxable (2) 12,356 813 6.58 12,122 757 6.25 7,846 406 5.18
Nontaxable (3) 2,866 227 7.91 2,601 201 7.71 1,894 142 7.48
Securities available for sale (4) 47,666 2,907 6.10 30,619 1,847 6.03 10,866 520 4.79
Money market investments 4,901 258 5.26 4,834 280 5.79 7,021 303 4.31
Interest rate hedging instruments ---- (9) ---- ---- ---- (43) ---- 77 ----
- ----------------------------------------------------------- -------------------- -------------------
Total interest-earning assets 251,156 24,618 9.80 202,996 21,057 10.37 140,445 12,965 9.23
- ----------------------------------------------------------- -------------------- -------------------
Allowance for possible loan losses (3,980) (3,574) (2,677)
Cash and due from banks 15,944 11,668 8,367
Bank premises and equipment, net 3,606 3,356 2,614
Other real estate owned 476 1,213 1,216
Accrued interest receivable and
other assets 2,760 2,466 1,716
Core deposit intangibles and 4,906 4,788 2,036
goodwill
- ------------------------------------------------ ---------- ----------
Total $274,868 $222,913 $153,717
================================================ ========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $41,322 1,155 2.79 $30,915 1,158 3.74 $14,399 334 2.32
Money market and savings 60,833 2,035 3.35 51,654 1,751 3.39 39,919 1,202 3.01
Certificates of deposit:
Less than $100 14,628 802 5.48 15,519 826 5.32 13,245 516 3.89
$100 or more 46,794 2,608 5.57 40,305 2,232 5.54 27,668 1,091 3.94
- ----------------------------------------------------------- -------------------- -------------------
Total certificates of 61,422 3,410 5.55 55,824 3,058 5.48 40,913 1,607 3.93
deposit
- ----------------------------------------------------------- -------------------- -------------------
Other short-term borrowings 24,467 1,459 5.96 11,663 716 5.88 272 16 5.88
- ----------------------------------------------------------- -------------------- -------------------
Total interest-bearing 188,044 8,059 4.29 150,056 6,683 4.45 95,503 3,159 3.31
liabilities
- ----------------------------------------------------------- -------------------- -------------------
Noninterest-bearing demand 54,139 44,889 38,666
Accrued interest payable and
other liabilities 4,397 3,070 1,338
- ------------------------------------------------ ---------- ----------
Total liabilities 246,580 198,015 135,507
- ------------------------------------------------ ---------- ----------
Shareholders' equity 28,288 24,898 18,210
================================================ ========== ==========
Total $274,868 $222,913 $153,717
================================================----------- ==========---------- ==========---------
Net interest income and margin (5) $16,559 6.59% $14,374 7.08% $9,805 6.98%
===================================== =================== =================== ==================
<FN>
(1) Includes amortized loan fees of $1,018 for 1996, $1,123 for 1995 and $1,028
for 1994. Nonperforming loans have been included in average loan balances.
(2) Includes dividend income of $31 received in 1996, $30 in 1995 and $18 in
1994.
(3) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($91 in 1996, $81 in 1995 and $57 in 1994).
(4) Includes dividend income of $217, $233 and $195 received in 1996, 1995 and
1994, respectively.
(5) The net interest margin represents the net interest income as a percentage
of average earning assets.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table shows the effect on the interest differential of volume and
rate changes for the years ended December 31, 1996 and 1995:
VOLUME/RATE ANALYSIS
(dollars in thousands)
1996 vs. 1995 1995 vs. 1994
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) Increase (decrease)
due to change in due to change in
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Net Average Average Net
Volume Rate Change Volume Rate (2) Change
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $3,326 $(920) $2,406 $4,524 $1,975 $6,499
Securities:
Taxable 15 41 56 255 96 351
Nontaxable 21 5 26 46 3 49
Available for sale 1,039 21 1,060 1,161 166 1,327
Money market investments 4 (26) (22) 219 (242) (23)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 4,405 (879) 3,526 6,205 1,998 8,203
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest checking (12) 9 (3) 536 288 824
Money market and savings 307 (23) 284 384 165 549
Certificates of deposits:
Less than $100 (51) 27 (24) 99 211 310
$100 or greater 361 15 376 606 535 1,141
Other short-term borrowings 733 10 743 700 ---- 700
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 1,338 38 1,376 2,325 1,199 3,524
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate hedging instruments ---- 34 34 ---- (120) (120)
- -----------------------------------------------------------------------------------------------------------------------------
Change in net interest income $3,067 $(883) $2,184 $3,880 $679 $4,559
=============================================================================================================================
<FN>
(1) The effect of the change in loan fees is included as an adjustment to the
average rate.
(2) Included 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>
Consolidated net interest income (on a fully taxable equivalent basis) was $16.6
million in 1996, as compared to $14.4 million in 1995. The $2.2 million increase
in net interest income during 1996 was due primarily to an increase in the
volume of earning assets. The Bank's net interest margin for 1996 was 6.59%, as
compared to 7.08% in 1995. The decrease in the net interest margin was primarily
due to: (i) the receipt of substantial interest income on a cash basis in 1995
(approximately $588) for loans that had been on nonaccrual status; (ii) the
impact of the declining interest rate environment in 1996; and (iii) the impact
of the competitive market and the resulting pressure on loan interest rates. The
Bank's average prime was 8.27% in 1996, as compared to 8.83% in 1995. In a
declining rate environment, the Company must generally increase its earning
assets in order to maintain net interest income growth.
Consolidated net interest income was $14.4 million in 1995, as compared to $9.8
million in 1994. The $4.6 million increase in net interest income during 1995
was due primarily to an increase in the volume of earning assets. The
acquisition of BB 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 (7.08% in 1995
as compared to 6.98% 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. Offsetting this
increase was the impact of the competitive market and the resulting pressure on
loan interest rates and related loan fees.
Loan fees contributed 5.0% of loan portfolio interest during 1996, 6.2% in 1995
and 8.9% in 1994. 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).
<PAGE>
Interest expense in 1996 was $8.1 million as compared to $6.7 million in 1995.
This was mainly due to the increase in volumes. Actual interest expense rates
declined from 4.45% in 1995 to 4.29% in 1996 (this compares to a decrease in the
yields on earning assets of 10.37% in 1995 to 9.80% in 1996). The smaller
decline in interest expense compared to yields represents the impact of
increased competition for the source of bank deposits.
A substantial portion of the Bank's deposits (an average of 25% in 1995, 24% in
1996 and 29% in 1994) 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.
Due to the nature of the Company's lending 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. The declining interest rate environment during 1996 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 yields earned on its earning assets and a decrease in its
net interest margin.
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 and the impact of the Bank's Financial Services Division.
Net interest income also reflects the impact of nonperforming loans. The effect
of nonaccrual loans on interest income at December 31, 1996, 1995 and 1994 is
set forth in the following table:
NEGATIVE IMPACT OF NONACCRUAL LOANS
(dollars in thousands) For the Years
Ended December 31,
- -----------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------
Interest revenue which would have
been recorded under original terms $35 $111 $359
Interest revenue actually realized 29 11 121
- -----------------------------------------------------------
Negative impact on interest revenue $6 $100 $238
===========================================================
This table does not reflect the cash basis interest received on several
significant loan collections during 1995, as such loans were not classified as
nonaccrual as of the end of the year. The impact of such loans, which are not
included in the above table, was significant in 1995. Approximately $588 of
interest income was recognized in 1995 on collection of certain loans classified
nonaccrual, which resulted in a 29 basis point impact on the net interest
margin.
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. Since estimates of the adequacy
of the Company's allowance for possible loan losses are based on foreseeable
risks, such judgments are subject to change based on changing circumstances.
Based on management's current evaluation of such risks, as well as, judgments of
the Company's regulators, additions of $190, $1.0 million and $600 were made to
the allowance for possible loan losses in 1996, 1995 and 1994, respectively.
Management's determinations of the provision in 1996, 1995 and 1994 were based
on the measurement of the possibility of future estimated loan losses through
various objective and subjective criteria and the impact of net chargeoffs.
Please refer to the section entitled "Loan Portfolio" for a detailed discussion
of asset quality and the allowance for possible loan losses.
<PAGE>
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, 1996 and 1995.
OTHER INCOME
(dollars in thousands)
1996 1995
- -----------------------------------------------------------
Amount Percent Amount Percent
- -----------------------------------------------------------
Depositor service
charges $551 65.13% $553 57.25%
Other operating
income 437 51.65 456 47.20
Net loss on
securities
available for sale (142) (16.78) (43) (4.45)
- -----------------------------------------------------------
Total $846 100.00% $966 100.00%
===========================================================
Other income totaled $846 in 1996, which is a decrease of $120 over $966 in
1994. This decrease is due to the recognition of $142 of securities losses
during 1996.
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,
1996 and 1995.
OTHER EXPENSE AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands)
1996 1995
- -----------------------------------------------------------
Amount Percent Amount Percent
- -----------------------------------------------------------
Salaries and benefits $5,517 2.01% $4,339 1.95%
Occupancy 702 .26 740 .33
Data processing 554 .20 458 .20
Amortization of core
deposit intangibles
and goodwill 499 .18 569 .26
Legal and
professional fees 369 .13 476 .21
Business promotion 365 .13 314 .14
Client services 247 .09 247 .11
Advertising 236 .09 186 .08
Directors' fees and 219 .08 239 .11
costs
Stationery and 183 .07 180 .08
supplies
Loan and collection 151 .05 215 .10
Regulators' 72 .03 283 .13
assessments
Net cost of other
real estate owned (48) (.02) 45 .02
Other 569 .21 506 .23
- ----------------------------------------------------------
Total $9,635 3.51% $8,797 3.95%
===========================================================
Other expenses increased approximately $838 or 9.5% in 1996 as compared to 1995.
This is primarily related to the increase in salaries and benefits due to the
January 1996 acquisition of Astra Financial Corp., staff growth related to the
increased level of Bank's business activity and an increase in the provision for
incentive payments for exceeding predefined goals. Business promotion and
advertising expenses rose due to increased competitive pressures. In addition,
the Bank made significant investments in technology to support the continued
productivity of its staff. Amortization of core deposit intangibles is based on
a declining balance method, and as such, the amount charged to expense will
decline each year.
The FDIC reduced its premium on insurable deposits effective June 1995 from 23
cents per $100 of deposits to 4 cents. This resulted in savings to the Bank of
$216 for 1996. Currently the premium on insurable deposits is 1.3 cents per $100
of insured deposits. In addition, as the Bank's credit quality continued to
improve in 1996, there were significant reductions in its related cost, such as
legal and professional fees, loan and collection expense and the net costs of
other real estate owned, totaling $264.
Other expenses increased approximately $2.1 million or 32% in 1995 as compared
to 1994. The increase is primarily related to the acquisition of BB 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 BB as compared to $166 in 1994. The
impact of the reduction in FDIC premiums in 1995 resulted in savings to the Bank
of approximately $190.
Income Taxes
The effective tax rate was 43% in 1996 and 44% in 1995. The lower effective tax
rate in 1996 was primarily due to the reduction in the amount and proportion of
the amortization of nondeductible portion of intangibles to pretax income
arising in connection with the purchase of BB and Astra Financial Corp.
<PAGE>
Quarterly Income
The unaudited consolidated income statement data of the Company and the Bank, in
the opinion of management, includes all normal and recurring adjustments
necessary to state fairly the information set forth therein. The results of
operations are not necessarily indicative of results for any future period. The
following table shows the Company's unaudited quarterly income statement data
for the years 1996 and 1995:
<TABLE>
<CAPTION>
UNAUDITED QUARTERLY INCOME STATEMENT DATA
(dollars in thousands, except per share amounts)
First quarter Second quarter Third quarter Fourth quarter
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $3,921 $3,322 $4,019 $3,772 $4,228 $3,563 $4,300 $3,638
Provision for possible loan (20) (210) (30) (500) (50) (180) (90) (155)
losses
Other income 260 256 173 186 182 278 231 246
Other expenses (2,473) (2,186) (2,340) (2,196) (2,423) (2,225) (2,399) (2,190)
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,688 1,182 1,822 1,262 1,937 1,436 2,042 1,539
Income taxes (729) (531) (778) (561) (817) (629) (874) (674)
- -----------------------------------------------------------------------------------------------------------------------
Net income $959 $651 $1,044 $701 $1,120 $807 $1,168 $865
========================================================================================================================
Net income per share $0.37 $0.27 $0.40 $0.29 $0.42 $0.32 $0.44 $0.34
========================================================================================================================
</TABLE>
The Company reported net income of $1,168 for the quarter ended December 31,
1996 compared with net income of $865 for the fourth quarter of 1995. The
results for the fourth quarter of 1996 as compared to the same quarter a year
ago reflect an increase in volume of earning assets ($264 million in 1996
compared to $224 million in 1995).
Financial Condition and Earning Assets
Money Market Investments
Money market investments, which include federal funds sold and other short-term
investments were $19.8 million at December 31, 1996 as compared to $3.2 million
at December 31, 1995. This increase relates to the growth in the Bank's
liquidity relating to the increase in non-interest bearing deposits.
The average balance of money market investments, which include federal funds
sold and liquid money market investments, was $4.9 million in 1996 and $4.8
million in 1995. These balances represented 2% and 3% of average deposits for
1996 and 1995, respectively. They are maintained primarily for the short-term
liquidity needs of the Bank. See "Capital and Liquidity."
Securities
The following table shows the book value composition of the securities portfolio
at December 31, 1996, 1995 and 1994. At December 31, 1996 there were no issuers
of securities for which the aggregate book value of securities of such issuer
held by the Bank exceeded 10% of the Company's shareholders' equity.
<PAGE>
INVESTMENT SECURITIES COMPOSITION
(dollars in thousands) December 31,
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Investment securities available for sale:
U. S. Treasury $4,005 $4,057 $9,786
U. S. Government Agencies 34,285 34,578 4,955
Mortgage Backed 5,868 9 18
Mutual funds 3,886 3,898 3,947
- --------------------------------------------------------------------------------
Investment securities available for sale 48,044 42,542 18,706
- --------------------------------------------------------------------------------
Investment securities held to maturity:
U. S. Treasury 1,975 4,265 4,260
U. S. Government Agencies 7,463 4,976 4,963
State and municipal 2,635 3,060 1,797
Mortgage Backed 2,481 2,428 2,377
Other 518 519 462
- --------------------------------------------------------------------------------
Investment securities held to maturity 15,072 15,248 13,859
- --------------------------------------------------------------------------------
Total $63,116 $57,790 $32,565
================================================================================
Investment securities classified as available for sale, which include all mutual
funds, are acquired without the intent to hold until maturity. At December 31,
1996 the Bank's weighted average maturity of the available for sale investment
portfolio was 1.6 years. 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 1.4%.
Any unrealized gain or loss on investment securities available for sale 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, 1996 was $62.
Investment securities classified as held to maturity include those securities
which the Company has the ability and intent to hold to maturity. The Company'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.
The gross unrealized gain on investment securities held to maturity were $159 as
of December 31, 1996 as compared to $244 as of December 31, 1995. The reduction
in unrealized gains resulted from the significant decrease in interest rates in
1995. 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 2.1
years as of December 31, 1996. 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 1.9%. This volatility decreases as the average maturity
shortens. Since it is the intention of management to hold these securities to
maturity, the unrealized gains will be realized over the life of the securities
as above market interest income is recognized.
Mortgage backed securities ("MBS") are considered to have increased risks
associated with them because of the timing of principal repayments. As interest
rates decrease, the average maturity of mortgages underlying MBS's tend to
decline; as rates increase maturities tend to lengthen. At December 31, 1996,
the Company had the following securities which were mortgage-backed or related
securities:
<PAGE>
Fair
(dollars in thousands) Cost Value
- -------------------------------------- ----- ------
Federal Home Loan Mortgage Corp.
(U.S. Agency) $6,104 $6,153
Federal National Mortgage Association
(U.S. Agency) 2,212 2,249
Federated ARMs Funds * 1,686 1,645
Overland Variable Rate
Government Fund* 1,263 1,173
* The assets of these mutual funds are invested mainly in adjustable rate U.S.
Treasury or U.S. Government Agency securities.
Loan Portfolio
The following table shows the Company's consolidated loans by type of loan or
borrower:
LOAN PORTFOLIO
(dollars in thousands)
December 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Commercial $77,335 $52,958 $51,045 $28,267 $21,265
Real estate construction 15,451 14,488 16,343 15,492 14,907
Real estate-other 74,713 74,045 66,085 39,672 27,868
Consumer 8,622 8,800 9,461 6,857 8,696
Other 23,174 21,302 7,362 8,416 4,802
Unearned fee income (668) (793) (888) (746) (537)
================================================================================
Total loan portfolio $198,627 $170,800 $149,407 $97,958 $77,001
================================================================================
General
The Company's loan portfolio consists primarily of short-term, floating rate
loans for business and real estate purposes. At December 31, 1996, approximately
39% of the loan portfolio was commercial loans, 8% was real estate construction,
and 38% was in real estate other. SJNB's legal lending limit for any one
borrower was approximately $4.4 million at December 31, 1996.
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, 1996 were factored accounts
receivable of approximately $4.4 million or 2.2% of total loans. As of December
31, 1995, factored accounts receivable were $2.4 million or 1.4% of total loans.
The Bank purchases accounts receivable from clients and then receives payment
directly from the party obligated for the receivable. In most cases, the Bank's
Financial Services Division purchases the receivables subject to recourse from
the Bank's factoring client. The factoring business and related purchasing of
accounts receivable is subject to a greater degree of risk than normal lending
due to the involvement of the third party obligee, the lack of control over the
direct receipt of payment, and the potential purchase of fraudulent or inflated
receivables. To date, there have been no significant losses relating to the
Bank's factoring program.
The real estate construction portfolio (7.8% of the loan portfolio) consists of
61% residential and 39% commercial. Such loans 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. The Company's policy is to monitor each loan with
respect to incurred costs, sales price and sales cycle.
The real estate-other loans include term loans (up to a ten year maturity) on
income-producing commercial properties.
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.
<PAGE>
Other loans include loans to real estate mortgage brokers (approximately $921),
loans to real estate developers for short-term investment purposes
(approximately $4.3 million), loans for real estate investment purposes made to
non-developers (approximately $7.2 million), and loans for other investments
(approximately $6.7 million).
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 loan terms 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 as the first priority
and collateral is generally a secondary source for loan qualification.
Approximately 54% 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 in the amount of $4.5
million) and certain other loans to real estate developers and other investors
for short-term investment purposes (approximately 2.2% of the loan portfolio)
are included. Approximately 39% 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 conservative 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
and commercial) 70
Other improved property 70
Prime equity loans 75
The Company's loan policy provides that any term loans on income-producing
properties 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 other known environmental problems. A Phase II report is required
in certain cases, depending on the outcome of the Phase I report.
Activity
Total loans were $199 million at December 31, 1996 and averaged $183 million for
the year. At December 31, 1995, total loans were $171 million and averaged $153
million during the year. The increase in loans of $28 million during 1996
relates to the overall growth in the Bank's loan portfolio. The most significant
areas of growth were the increase in SBA loans (included in the commercial and
real estate-other loan categories) of $8 million and other commercial loans of
$16 million. These increases were mainly due to the Bank's business development
efforts and the strength of the local economy. The increase in loans for 1995
was primarily related to a $14 million increase in SBA loans.
The economic climate in Northern California has been generally strong in 1996
and 1995. However, the competitive environment within the Bank's marketplace for
additional loan growth has become more aggressive between lenders resulting in
increasingly competitive pricing. To the extent that such competitive activity
continues during 1997 and the Bank finds it necessary to meet such competition,
the Bank's net interest margins could decline.
<PAGE>
Asset Quality
Allowance for Possible Loan Losses
A consequence of lending activities is that losses may 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, rising
interest rates 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 charge-offs 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.
Similarly, the adequacy of the allowance for possible loan losses and the level
of the related provision for possible loan losses is determined on a judgmental
basis by management based on consideration of:
o Economic conditions;
o Borrowers' financial condition;
o Loan impairment;
o Evaluation of industry trends;
o Industry and other 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;
o Off balance sheet risks; and
o Assessments by regulators and other third parties.
In addition to the internal assessment of the loan portfolio (and off balance
sheet credit risk, such as letters of credit, etc.), 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 Company's 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. Based on known
information available to it, management believes that the Company's allowance
for possible loan losses, determined as described above, was adequate for
foreseeable losses at December 31, 1996.
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. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. 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.
There is uncertainty concerning future economic trends. Accordingly, it is not
possible to predict the effect future economic trends may have on the level of
the provision for possible loan losses in future periods.
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the activity in the allowance for possible loan losses for the five years ended December 31, 1996:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands) Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of the year $3,847 $3,311 $2,057 $1,553 $2,207
- ------------------------------------------------------------------------------------------------------------------
Chargeoffs by loan category:
Commercial 233 233 148 389 137
Real estate construction ----- 154 ----- ----- 687
Real estate-other 70 220 637 5 -----
Consumer 22 89 73 90 4
Other 93 ----- 824 26 980
- ------------------------------------------------------------------------------------------------------------------
Total chargeoffs 418 696 1,682 510 1,808
- ------------------------------------------------------------------------------------------------------------------
Recoveries by loan category:
Commercial 258 42 192 21 221
Real estate construction ----- ----- ----- 200 -----
Real estate-other 13 27 10 5 173
Consumer 65 16 7 16 29
Other ----- 102 222 147 33
- ------------------------------------------------------------------------------------------------------------------
Total recoveries 336 187 431 389 456
- ----------------------------------------------------------------------------------------------------------------
Net chargeoffs 82 509 1,251 121 1,352
- ------------------------------------------------------------------------------------------------------------------
Provision charged to expense 190 1,045 600 625 698
Allowance relating to Astra Financial Corp. 50 ----- ----- ----- -----
Allowance relating to California Business Bank ----- ----- 1,905 ----- -----
- -----------------------------------------------------------------------------------------------------------------
Balance, end of the year $4,005 $3,847 $3,311 $2,057 $1,553
==================================================================================================================
Ratios:
Net chargeoffs to average loans 0.04% 0.33% 1.11% 0.14% 1.88%
Allowance to total loans at the end of the year 2.02 2.25 2.22 2.10 2.02
Allowance to nonperforming loans at end of the year 733 430 60 56 109
==================================================================================================================
</TABLE>
Net chargeoffs were $82 or .04% of average loans during 1996. During 1995, the
Company experienced net chargeoffs of $509 or .33% of average loans during 1995.
The decrease in net chargeoffs in 1996 as compared to 1995 resulted primarily
from improved credit quality of the overall loan portfolio.
The allowance for possible loan losses as a percentage of total loans was 2.02%
at December 31, 1996, and 2.25% at December 31, 1995. The allowance for possible
loan losses as a percentage of nonperforming loans was approximately 733% at
December 31, 1996 as compared to 430% at December 31, 1995. Nonperforming loans
at December 31, 1996 were $457 compared to $894 at December 31, 1995. 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:
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands) Amount of Allowance Allocation at December 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Commercial $1,335 $1,193 $1,192 $459 $499
Real estate construction 223 176 310 181 374
Real estate-other 1,334 1,134 1,051 567 359
Consumer 126 169 219 99 38
Other 236 337 94 101 22
Unallocated 751 838 445 650 261
- --------------------------------------------------------------------------------
Total $4,005 $3,847 $3,311 $2,057 $1,553
================================================================================
Percent of Loans in Each Category
to Total Loans at December 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Commercial 38.80% 30.86% 33.96% 27.85% 26.51%
Real estate construction 7.75 8.45 10.87 15.69 19.23
Real estate-other 37.49 43.15 43.97 40.98 36.86
Consumer 4.33 5.13 6.29 6.95 11.22
Other 11.63 12.41 4.91 8.53 6.18
- --------------------------------------------------------------------------------
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 and the entire allowance is
available to cover loan losses. 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 herein.
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:
<TABLE>
<CAPTION>
NONPERFORMING LOANS
(dollars in thousands) December 31,
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis $457 $866 $5,395 $3,678 $1,427
Loans restructured and in compliance with modified terms 89 ---- ---- ---- ----
Other loans with principal or interest contractually past
due 90 days or more ---- 28 83 ---- ----
- -----------------------------------------------------------------------------------------------------------------------
Total $546 $894 $5,478 $3,678 $1,427
=======================================================================================================================
</TABLE>
<PAGE>
Potential nonperforming loans are identified by management as part of its
ongoing evaluation and review of the loan portfolio. Based on such reviews and
information known to management at the date of this Report, management has
identified four loans in the amount of $754 about which it has serious doubts
regarding the borrowers' ability to comply with present loan repayment terms,
such that the loans might subsequently be classified as nonperforming. Of the
total, $416 is secured by residential real estate and $230 is subject to a
guarantee of the SBA.
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.
<PAGE>
Other Real Estate Owned
At December 31, 1995, the Bank had two properties totaling $454 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.
Any subsequent decline in value is charged directly to the income statement.
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 attempts
to control credit risk through its credit approval process. The same credit
policies are used when entering into such commitments.
As of December 31, 1996, the Company had undisbursed loan commitments to extend
credit as follows:
UNDISBURSED LOAN COMMITMENTS
(dollars in thousands)
Loan Category Amount
- -----------------------------------------------------------
Commercial $40,884
Real estate construction 15,157
Real estate-other 2,633
Consumer 5,153
Other 13,142
- -----------------------------------------------------------
Total $76,969
===========================================================
In addition, there was approximately $2.9 million available for commitments
under unused letters of credit.
Funding
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, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
DEPOSIT CATEGORIES
(dollars in thousands)
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
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 $80,774 33.02% $52,775 26.83% $54,002 29.95%
Interest-bearing demand 40,113 16.40 34,641 17.61 29,041 16.11
Money market and savings 60,684 24.80 51,201 26.03 47,170 26.16
Certificates of deposit:
Less than $100 15,535 6.35 14,730 7.49 16,038 8.90
$100 or more 47,533 19.43 43,345 22.04 34,036 18.88
- ---------------------------------------------------------------------------------------------------------------------------
Total $244,639 100.00% $196,692 100.00% $180,287 100.00%
===========================================================================================================================
</TABLE>
Deposits increased 25% from $197 million at December 31, 1995 to $245 million at
December 31, 1996. This increase is mainly due to a combination of factors
including the development of customers with significant cash balances,
utilization of sophisticated cash management systems and aggressive pricing of
rates.
<PAGE>
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. In a high interest rate environment, these funds
could be subject to disintermediation (moved for higher interest rate products).
To counter such possibilities, the Bank maintains an array of products which
would be competitive in such an occurrence. In addition, in illiquid economic
times (possibly recessions) these deposits could be subject to withdrawal
pressures. See "Capital and Liquidity - Liquidity" for a discussion of the
Bank's liquidity sources.
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 less than that
of its peer group. However, as these certificates of deposit are usually more
interest rate sensitive, their repricing in an increasing interest rate
environment could increase the Bank's cost of funds and negatively impact the
Bank's net interest margin. See "Capital and Liquidity."
The Bank utilizes short-term borrowings in its hedging practices. The short-term
borrowings (securities sold under agreements to repurchase) are used to fund the
acquisition of fixed rate available for sale securities with an average life of
2.3 years. The average cost of the borrowings during 1996 was 5.96% while the
average yield on the assets was 6.23%. If interest rates were to increase, the
cost of borrowings would increase with no offsetting increase in the yield on
the assets purchased. See "Asset/Liability Management."
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 balance sheet position at December 31, 1996 was asset-sensitive,
based upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts. This 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 "Financial Review - Net Interest Income
and Margin."
The following table quantifies the Company's interest rate exposure at December
31, 1996 based upon the known repricing dates of certain assets and liabilities
and the assumed repricing dates of others. At December 31, 1996, the Company
was asset sensitive in the near term, as noted above.
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF REPRICING OPPORTUNITIES
December 31, 1996 After three After six After one
(dollars in thousands) 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 $19,800 ----- ----- ----- ----- $19,800
Investment securities-taxable 37 $1,040 $1,090 $9,772 497 12,436
Investment securities-non-taxable ----- ----- 250 1,877 $508 2,635
Securities available for sale 7,202 1,094 8,350 28,706 2,693 48,045
Loans 169,002 2,221 3,174 14,358 9,874 198,629
- ----------------------------------------------------------------------------------------------------------------------------
Total earning assets 196,041 4,355 12,864 54,713 13,572 281,545
- ----------------------------------------------------------------------------------------------------------------------------
Interest checking, money market
and savings 100,796 ----- ----- ----- ----- 100,796
Certificates of deposit:
Less than $100 8,269 3,490 2,453 1,266 57 15,535
$100 or more 30,423 7,695 8,009 1,305 100 47,532
Repurchase agreements 29,688 ----- ----- ----- ----- 29,688
Other borrowings ----- ----- ----- ----- 550 550
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 169,176 11,185 10,462 2,571 707 194,101
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate gap $26,865 ($6,830) $2,402 $52,142 $12,865 $87,444
============================================================================================================================
Cumulative interest rate gap $26,865 $20,035 $22,437 $74,579 $87,444
===============================================================================================================
Interest rate gap ratio 1.16 0.39 1.23 21.28 19.20
===============================================================================================================
Cumulative interest rate gap ratio 1.16 1.11 1.12 1.39 1.45
===============================================================================================================
</TABLE>
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Further, certain earning assets have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The Company considers the anticipated effects of these various
factors in implementing its interest rate risk management activities, including
the utilization of certain interest rate hedges.
A large proportion of the Bank's deposits are non interest-bearing demand
deposits and are not included in the above table as they tend not to be interest
rate sensitive. The average balance of these deposits was $54 million in 1996.
In addition, the Bank's total capital of approximately $31 million is not
included as a funding source in the above table.
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 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 provides some protection to the Bank against decreases in its
net income when the prime rate decreases. Settlement is done quarterly and the
Bank records the impact of this hedge on an accrual basis.
The Bank has executed several transactions during 1995 and 1996 which are
intended to mitigate its exposure to a decline in general market interest rates.
The transactions involved the purchase of three U.S. Government Agency and three
mortgage backed securities for an aggregate cost of $30 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, $7 million in July 1998, $1 million in November 2000,
$2 million in June 2001 and $2 million in September 2001. The average yield on
the securities was 6.23%. The outstanding repurchase agreements as of December
31, 1996 had interest rates within a range of 5.45% to 5.73% and averaged 5.56%.
Such repurchase agreements mature through March 1997. As these repurchase
agreements expire they will be renewed at the prevailing rates. These
transactions carry risks in a rising rate environment because of the potential
repricing volatility associated with the short-term repurchase market. If
interest rates were to increase, the cost of borrowings would increase with no
offsetting increase in the yield on the assets purchased. At the same time it is
anticipated that the average yield on variable rate loans would increase and
offset this impact.
<PAGE>
<TABLE>
<CAPTION>
The maturities and yields of the investment portfolio at December 31, 1996 are
shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1996
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Maturity
- ----------------------------------------------------------------------------------------------------------------------------
After one year
Carrying Within one year within five years After ten years
Value Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C> <C>
U. S. Treasury $4,005 $1,003 6.69% $3,002 6.03% ---- ----
U. S. Government Agencies 34,285 11,144 5.77 23,141 6.30 ---- ----
Mortgage Backed 5,868 ---- ---- 5,862 5.65 $6 0.00%
Mutual funds 3,886 3,886 5.52 ---- ---- ---- ----
- ----------------------------------------------------------------- ------------ -----------
Total 48,044 16,033 32,005 6
- ----------------------------------------------------------------- ------------ -----------
Securities held to maturity:
U. S. Treasury 1,975 ---- ---- 1,975 6.71 ---- ----
U. S. Government Agencies 7,463 2,000 7.20 5,463 6.30 ---- ----
State and municipal 2,635 250 7.67 2,385 7.88 ---- ----
Mortgage Backed 2,481 ---- ---- ---- ---- 2,481 7.90
Other 518 ---- ---- ---- ---- 518 6.00
- ----------------------------------------------------------------- ------------ -----------
Total 15,072 2,250 9,823 2,999
- ----------------------------------------------------------------- ------------ -----------
Total $63,116 $18,283 5.95% $41,828 6.30% $3,005 6.72%
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
The following table shows the maturity and interest rate sensitivity of
commercial, real estate construction and real estate-other loans at December 31,
1996. Approximately 83% 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- Floating or
Balances at One year mined Adjustable
December 31, One year through Over interest interest
1996 or less five years five years rates rates
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $69,848 $39,872 $22,791 $7,186 $2,760 $67,088
========================================================================================================================
Real estate construction $15,401 $14,225 $1,176 ----- ----- $15,401
========================================================================================================================
Real estate-other $82,250 $7,174 $33,370 $41,706 $25,821 $56,429
========================================================================================================================
</TABLE>
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.
<PAGE>
Capital and Liquidity
Capital
The Company's book value per share was $12.14 and $11.02 as of December 31, 1996
and 1995, respectively. Tangible book value per share was $10.40 and $9.06 at
December 31, 1996 and 1995, respectively, adjusted for goodwill and core deposit
intangibles. Shareholders' equity was $31 million and $27 million as of December
31, 1996 and 1995, respectively. See Notes to Consolidated Financial Statements
and "Business - Supervision and Regulation" for a discussion of the Company's
capital requirements.
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 sources of liquidity consist of its deposits with other banks,
overnight funds sold to correspondent banks and short-term, marketable
investments. On December 31, 1996, consolidated liquid assets totaled $61
million or 20% of consolidated total assets, as compared to $40 million or 16%
of consolidated total assets on December 31, 1995. In addition to the liquid
asset portfolio, SJNB also has available $12 million in informal lines of credit
with three major commercial banks, approximately $6 million of credit available
at the Federal Reserve Discount Window and $13 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 19% of total deposits on December 31, 1996,
as compared to 22% for 1995.
Liquidity is also affected by investment securities and loan 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, 1996, approximately 38% 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 1997 or beyond.
Parent company liquidity is maintained by cash flows stemming from dividends and
management fees from the Bank and the exercise of stock options issued to the
Bank's employees and directors. The amount of dividends from the Bank is subject
to certain regulatory restrictions as discussed in Note 15 of the Notes to the
Consolidated Financial Statements and elsewhere within this Report. Subject to
said restrictions, at December 31, 1996, up to $8.4 million could have been paid
to the parent Company by the Bank without regulatory approval. The parent
company financial statements are presented in Note 14 of the Notes to
Consolidated Financial Statements. No dividends were paid to the parent company
by the Bank in 1995 or 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 1996 or
1995.
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
The following section includes the Company's Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996
and 1995
Consolidated Statements of Income for the Years
Ended December 31, 1996 and 1995
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1996 and 1995
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1995
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, 1996 and 1995, 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, 1996 and 1995, 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
February 10, 1997
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands)
- --------------------------------------------------------------------------------------------------
Assets 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $20,208 $12,574
Money market investments 19,800 3,200
Investment securities:
Available for sale 48,044 42,542
Held to maturity (Fair value: $15,231 at December 31, 1996
and $15,492 at December 31, 1995) 15,072 15,248
- --------------------------------------------------------------------------------------------------
Total investment securities 15,072 15,248
- --------------------------------------------------------------------------------------------------
Loans 198,627 170,800
Allowance for possible loan losses (4,005) (3,847)
- --------------------------------------------------------------------------------------------------
Loans, net 194,622 166,953
- --------------------------------------------------------------------------------------------------
Premises and equipment, net 4,001 3,494
Other real estate owned 454 664
Accrued interest receivable and other assets 2,737 2,764
Intangibles, net of accumulated amortization of $1,234
at December 31, 1996 and $735 at December 31, 1995 4,465 4,756
- --------------------------------------------------------------------------------------------------
Total $309,403 $252,195
==================================================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------
Deposits:
Non-interest-bearing $80,774 $52,775
Interest-bearing 163,865 143,917
- --------------------------------------------------------------------------------------------------
Total deposits 244,639 196,692
- --------------------------------------------------------------------------------------------------
Other short-term borrowings 29,688 24,000
Accrued interest payable and other liabilities 3,871 4,845
- --------------------------------------------------------------------------------------------------
Total liabilities 278,198 225,537
- --------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares;
issued and outstanding, 2,571 shares
in 1996 and 2,418 shares in 1995 20,880 19,627
Retained earnings 10,263 6,798
Net unrealized gain on securities available for sale 62 233
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 31,205 26,658
- --------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- ------------------------------------------------------------------------------------------------
Total $309,403 $252,195
==================================================================================================
<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, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1996 1995
- ---------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C>
Interest and fees on loans $20,422 $18,016
Interest on money market investments 258 280
Interest and dividends on investment securities available for sale 2,907 1,847
Interest on investment securities held to maturity 949 878
Other interest and investment income (9) (43)
- --------------------------------------------------------------------------------------------------------
Total interest income 24,527 20,978
- --------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit of $100 or more 2,608 2,232
Other 5,451 4,451
- --------------------------------------------------------------------------------------------------------
Total interest expense 8,059 6,683
- --------------------------------------------------------------------------------------------------------
Net interest income 16,468 14,295
- --------------------------------------------------------------------------------------------------------
Provision for possible loan losses 190 1,045
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 16,278 13,250
- --------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 551 553
Other operating income 437 456
Net loss on sale of securities available for sale (142) (43)
- --------------------------------------------------------------------------------------------------------
Total other income 846 966
- --------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 5,517 4,339
Occupancy 702 740
Other 3,416 3,718
- --------------------------------------------------------------------------------------------------------
Total other expenses 9,635 8,797
- --------------------------------------------------------------------------------------------------------
Income before income taxes 7,489 5,419
Income taxes 3,198 2,395
- -------------------------------------------------------------------------------------------------------
Net income $4,291 $3,024
========================================================================================================
Net income per share $1.63 $1.20
========================================================================================================
Average common share equivalents outstanding 2,640 2,522
========================================================================================================
<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, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------
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>
Balances, December 31, 1994 2,363 $19,421 $4,278 $(257) $23,442
Stock options exercised 71 351 ---- ---- 351
Common stock repurchase (16) (145) ---- ---- (145)
Cash dividends ($.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
- ----------------------------------------------------------------------------------------------------------------------------
Stock options exercised 153 810 ---- ---- 810
Tax benefit from stock options exercised ---- 443 ---- ---- 443
Cash dividends ($.33 per share) ---- ---- (826) ---- (826)
Net income for the year ended
December 31, 1996 ---- ---- 4,291 ---- 4,291
Net unrealized loss on securities available for sale ---- ---- ---- (171) (171)
- ----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 2,571 $20,880 $10,263 $62 $31,205
============================================================================================================================
<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, 1996 and 1995
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $4,291 $3,024
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 190 1,045
Depreciation and amortization 483 424
Amortization of intangibles 499 569
Deferred tax (benefit) 121 (86)
Loss on sale of securities available for sale 142 43
Write down of other real estate owned ----- -----
Net (gain) loss on sale of other real estate owned (46) 19
Amortization of premium on investment securities, net 36 (129)
Decrease in intangible assets 200 (412)
Decrease in accrued interest receivable and other assets 120 418
Increase (decrease) in accrued interest payable and other liabilities (1,509) 2,470
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,527 7,385
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale or maturities of securities available for sale 22,751 14,162
Maturities of securities held to maturity 5,345 425
Purchase of securities available for sale (28,784) (37,148)
Purchase of securities to be held until maturity (5,101) (1,762)
Proceeds from the sale of other real estate owned 406 1,761
Loans, net (27,333) (22,851)
Capital expenditures (989) (896)
Cash used to acquire Astra Financial Corp. (650) -----
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (34,355) (46,309)
- -------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Deposits, net 47,947 16,405
Other short-term borrowings 5,688 24,000
Cash dividends (826) (504)
Tax benefit from stock options exercised 443 -----
Common stock repurchased ----- (145)
Proceeds from stock options exercised 810 351
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 54,062 40,107
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 24,234 1,183
Cash and equivalents at beginning of year 15,774 14,591
- -------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $40,008 $15,774
===================================================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
Other cash flow information:
Interest paid $8,012 $6,388
Income taxes paid $4,111 $1,185
================================================================================
Noncash transactions:
Transfer of loans to other real estate owned $150 $950
================================================================================
Purchase of Astra Financial's assets at fair value:
Loans $676 -----
Intangible assets 408 -----
Other assets 93 -----
- --------------------------------------------------------------------------------
Fair value of assets acquired 1,177 -----
Liabilities assumed:
Other liabilities 527 -----
- --------------------------------------------------------------------------------
Total liabilities assumed 527 -----
- --------------------------------------------------------------------------------
Cash used to acquire Astra Financial Corp. $650 -----
================================================================================
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
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 investment securities as follows:
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.
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.
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.
Impaired loans are those in which 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. The Company measures such 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. 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.
<PAGE>
d. 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.
e. 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
f. Other Real Estate Owned
Other real estate owned is comprised of real estate acquired through
foreclosure. Such foreclosures are initially recorded at the lower of cost or
fair value. Subsequent valuation adjustments are made if estimated selling costs
and the fair value falls below the carrying amount. Holding costs are expensed
as incurred.
g. Intangibles
Goodwill is being amortized using the straight-line method over 15 years. Core
deposit intangibles 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.
h. 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.
i. 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.
j. 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.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock option plans.
k. 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.
<PAGE>
l. 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.
m. Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles held and used by an
entity are reviewed for impairment whenever events or changes indicate that the
carrying amount of an asset may not be recoverable. The Company has not
identified any long-lived assets or identifiable intangibles which were
impaired.
n. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in 1996 and is effective for years ending after December 31, 1996. The Statement
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. It
distinguishes transfers of financial assets that are sales from transfers that
are secured borrowings. Under this approach, after a transfer of financial
assets, an entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The Company does not
believe this Statement will have any significant impact on its consolidated
financial statements.
NOTE 2 - Acquisition
On January 2, 1996 the Company acquired Astra Financial Inc. (Astra) which was
accounted for as a purchase transaction. 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 purchase price of Astra
was approximately $760.
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 $4.1 million
and $2.0 million as of December 31, 1996 and 1995, respectively.
<PAGE>
NOTE 4 - Investment Securities
<TABLE>
<CAPTION>
Investment securities as of December 31, 1996 and 1995 are summarized as
follows:
(dollars in thousands) December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized
----------------------------------- Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
<S> <C> <C> <C> <C>
U.S. Treasury $3,989 $19 ($3) $4,005
U. S. Government Agencies 34,099 188 (2) 34,285
Mortgage Backed 5,835 55 (22) 5,868
Mutual funds 4,018 ----- (132) 3,886
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale 47,941 262 (159) 48,044
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury 1,975 28 ----- 2,003
U.S. Government agencies 7,463 78 (18) 7,523
State and municipal (nontaxable) 2,635 20 (2) 2,653
Mortgage Backed 2,481 53 ----- 2,534
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity 14,554 179 (20) 14,713
Federal Reserve Bank Stock 518 ----- ----- 518
- ----------------------------------------------------------------------------------------------------------------------------
Total 15,072 179 (20) 15,231
============================================================================================================================
Total investment securities portfolio $63,013 $441 $(179) $63,275
============================================================================================================================
December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury $3,998 $59 ----- $4,057
U. S. Government Agencies 34,129 450 (1) 34,578
Mortgage Backed 9 ----- ----- 9
Mutual funds 4,018 ----- (120) 3,898
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale 42,154 509 (121) 42,542
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury 4,265 39 (11) 4,293
U.S. Government agencies 4,976 101 (25) 5,052
State and municipal (nontaxable) 3,060 26 (2) 3,084
Mortgage Backed 2,428 116 ----- 2,544
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity 14,729 282 (38) 14,973
Federal Reserve Bank Stock 519 ----- ----- 519
- ----------------------------------------------------------------------------------------------------------------------------
Total 15,248 282 (38) 15,492
============================================================================================================================
Total investment securities portfolio $57,402 $791 $(159) $58,034
============================================================================================================================
</TABLE>
As of December 31, 1996 and 1995 investment securities with carrying values of
approximately $38 million and $49 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.
<PAGE>
<TABLE>
<CAPTION>
The following tables provide the scheduled maturities of the Company's
investment securities portfolio as of December 31, 1996 and 1995:
(dollars in thousands) December 31, 1996 December 31, 1995
----------------------------------------------------------------------
Amortized Fair Amortized Fair
Securities available for sale Cost Value Cost Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $12,125 $12,147 $10,021 $10,079
Due after one year through five years 31,798 32,005 28,106 28,556
Due after ten years 0 6 9 9
----------------------------------------------------------------------
Total 43,923 44,158 38,136 38,644
----------------------------------------------------------------------
Securities held to maturity
Due in one year or less 2,250 2,277 5,605 5,587
Due after one year through five years 9,822 10,420 6,696 6,842
Due after ten years 2,481 2,534 2,428 2,544
----------------------------------------------------------------------
Total 14,553 15,231 14,729 14,973
----------------------------------------------------------------------
Non-maturity investments
Available for sale - Mutual Funds 4,018 3,886 4,018 3,898
Held to maturity - FRB Stock 519 519 519 519
----------------------------------------------------------------------
Total 4,537 4,405 4,537 4,417
----------------------------------------------------------------------
Total Investment securities $63,013 $63,794 $57,402 $58,034
======================================================================
</TABLE>
<PAGE>
Mutual funds consist of several funds invested in U. S. Government securities
and government issued adjustable rate mortgages (ARMS).
Interest income earned on U. S. Treasury, U. S. Government agencies and state
and municipal securities for the years ended December 31, 1996 and 1995 are as
follows:
Interest Income
- ---------------------------------------------------------
(dollars in thousands) 1996 1995
- ---------------------------------------------------------
Securities available for sale:
U.S. Treasury $291 $417
U.S. Government agencies 2,088 1,200
Mortgage Backed 311 (3)
Mutual funds 217 233
Securities held to maturity:
U.S. Treasury 168 214
U.S. Government agencies 408 306
State and municipal 136 120
(nontaxable)
Mortgage Backed 206 208
Federal Reserve Bank 31 30
- ---------------------------------------------------------
Interest income $3,856 $2,725
=========================================================
NOTE 5 - Loans
A summary of loans as of December 31, 1996 and 1995 is as follows:
(dollars in thousands) 1996 1995
- ---------------------------------------------------------
Commercial $77,335 $52,958
Real estate construction 15,451 14,488
Real estate-other 74,713 74,045
Consumer 8,622 8,800
Other 23,174 21,302
Unearned fee income (668) (793)
- ---------------------------------------------------------
Total loan portfolio 198,627 170,800
Less allowance for possible (4,005) (3,847)
loan losses
- ---------------------------------------------------------
Loans, net $194,622 $166,953
=========================================================
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 40% 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, 9.0% of the loan portfolio is
made up of real estate construction loans. These loans consist of approximately
61% residential and 39% commercial. Included in Consumer loans are prime equity
loans of $4.5 million or approximately 2.3% 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 6.3% of the total loan
portfolio. This amounts to approximately 54% of the loan portfolio which is
directly related to real estate or real estate interests. Approximately 38% of
the total loan portfolio is commercial loans; however, no particular industry
represents a significant portion of such loans.
<PAGE>
The following is an analysis of the allowance for possible loan losses for the
years ended December 31, 1996 and 1995:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Balance, beginning of year $3,847 $3,311
Provision for possible loan losses 190 1,045
Charge-offs (418) (696)
Recoveries 336 187
Allowance relating to the
acquisition of
Astra Financial Corp. 50 ----
- ----------------------------------------------------------
Balance, end of year $4,005 $3,847
===========================================================
At December 31, 1996, impaired loans totaled $540 with a corresponding valuation
allowance of $37. For the year ended December 31, 1996, the average recorded
investment in impaired loans was approximately $600. The Company recognized $46
of interest on impaired loans (during the portion of the year they were
impaired), of which $39 related to impaired loans for which interest income is
recognized on the cash basis.
The balance of nonaccrual loans as of December 31, 1996 and 1995 was
approximately $457 and $894, respectively. The effect on interest income had
these loans been performing in accordance with contractual terms was $35 in 1996
and $111 in 1995. Income actually recognized on these loans was $29 in 1996 and
$11 in 1995.
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, 1996 and 1995 is as follows:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Balance, beginning of year $1,466 $3,854
New loans disbursed 634 471
Repayments of loans (448) (2,859)
- -----------------------------------------------------------
Balance, end of year $1,652 $1,466
===========================================================
As of December 31, 1996, loans of approximately $12 million were pledged as
collateral for the Federal Reserve Discount Window. The Bank did not utilize the
Discount Window for any borrowings during 1996.
NOTE 6 - Premises and Equipment
A summary of premises and equipment as of December 31, 1996 and 1995 is as
follows:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Land $829 $829
Buildings and improvements 3,880 3,312
Furniture and equipment 2,639 2,258
- -----------------------------------------------------------
Premises and equipment 7,348 6,399
Less accumulated depreciation and (3,347) (2,905)
amortization
- -----------------------------------------------------------
Premises and equipment, net $4,001 $3,494
===========================================================
NOTE 7 - Time Deposits
As of December 31, 1996 and 1995, the Bank had $48 and $43 million,
respectively, in time deposits in denominations of $100 or more. Interest
expense for these deposits was $2.6 million and $2.2 million in 1996 and 1995,
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) 1996 1995
- -----------------------------------------------------------------
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 $5,000 9,000
Average outstanding balance 813 355
Weighted average interest rate paid 5.70% 6.17%
Securities sold under agreements to repurchase:
Balance at December 31, $29,688 $22,000
Weighted average interest rate at year end 5.56% 5.77%
Maximum amount outstanding at any month end 30,067 23,553
Average outstanding balance 23,161 10,827
Weighted average interest rate paid 5.58% 5.95%
The Company's bank subsidiary has informal arrangements with various
correspondents providing short-term credit for liquidity requirements; such
informal lines aggregated $12 million at December 31, 1996.
<PAGE>
NOTE 9 - Income Taxes
Income tax expense for the years ended December 31, 1996 and 1995 consists of
the following:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Current:
Federal $2,271 $2,108
State 806 373
- -----------------------------------------------------------
Total current 3,077 2,481
- -----------------------------------------------------------
Deferred:
Federal 145 (81)
State (24) (5)
- -----------------------------------------------------------
Total deferred 121 (86)
- -----------------------------------------------------------
Income taxes $3,198 $2,395
===========================================================
Total income tax expense differed from the amount computed by applying the U. S.
federal income tax rates in years ended December 31, 1996 and 1995 of 34% to
income before income taxes as a result of the following:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Computed "expected " tax expense $2,546 $1,842
California franchise tax, net of
federal income tax 516 368
Amortization of intangible assets 167 230
Federal tax-exempt investment income (46) (42)
Other 15 (3)
- ----------------------------------------------------------
Income taxes $3,198 $2,395
===========================================================
<PAGE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995, are presented below:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Deferred tax assets:
Provision for possible loan losses $1,157 $1,175
Purchase accounting adjustments 231 263
Foreclosure income 44 44
State taxes 224 181
Deferred compensation 95 59
General business credit 130 182
Net operating loss ----- 175
Other 95 -----
- -----------------------------------------------------------
Total gross deferred tax assets 1,976 2,079
- -----------------------------------------------------------
Deferred tax liabilities:
Securities available for sale 41 155
Depreciation and amortization 125 69
Other ----- 38
- -----------------------------------------------------------
Total gross deferred tax liabilities 166 262
- -----------------------------------------------------------
Net deferred tax assets $1,810 $1,817
===========================================================
Amounts for the current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts shown on the tax
returns as filed. Accordingly, the variances from the amounts previously
reported for 1995 are primarily as a result of adjustments to conform to tax
returns as filed.
Deferred tax assets related to purchase accounting adjustments include the tax
effect of fair market value adjustments of the assets and liabilities of
businesses acquired. 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, 1996 and 1995 consists of the
following:
(dollars in thousands) 1996 1995
- -----------------------------------------------------------
Data processing $554 $458
Amortization of core deposit
intangibles
and goodwill 499 569
Business promotion 370 314
Legal and professional fees 369 476
Client services 247 247
Advertising 242 186
Directors' fees and costs 219 239
Stationery and supplies 183 180
Loan and collection 151 215
Regulators' assessments 72 283
Net cost of other real estate (48) 45
owned
Other 559 506
- -----------------------------------------------------------
Total $3,417 $3,718
===========================================================
NOTE 11 - Stock Option Plan
During 1996 the shareholders of the Company approved the 1996 Stock Option Plan
(the "Plan"), which replaced the existing two stock option plans. The 1996 Stock
Option Plan is described below. The Company applies APB Opinion No. 25 and
related Interpretations in accounting for the Plan. Accordingly, no compensation
cost has been recognized for its Plan. Had compensation cost for the Plan been
determined consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts for options
granted for the years 1995 and 1996 indicated below:
(dollars in thousands) 1996 1995
- --------------------------- --------------- ---------------
Net income:
As reported $4,291 $3,024
Pro forma 3,845 2,842
- --------------------------- --------------- ---------------
Net income per share:
As reported $1.63 $1.20
Pro forma 1.46 1.13
- --------------------------- --------------- ---------------
The above amounts include the impact on net income and net income per share for
options granted during 1995 and 1996; such amounts would have been substantially
different if options granted prior to 1995 had been included in the computation.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
1.9% and 1.6%; expected volatility of 50% and 55%; average risk-free interest
rates of 6.3% and 6.5%; and expected lives of 8.2 years.
<PAGE>
The 1996 Stock Option Plan provides that either incentive stock options or
nonstatutory 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 Plan
provides that outside directors will automatically receive a nonstatutory option
covering 5,000 shares annually at an exercise price equal to 100% of the market
price of the Common Stock on the date of grant. The 1996 Stock Option Plan
replaced the previous two plans which had similar provisions. Any options
granted under these plans which expire without being exercised, the
corresponding common shares shall become available for awards under the Plan.
The number of shares subject to outstanding options under these plans was
244,815 as of December 31, 1996. A prior plan expired during 1992 and the number
of shares subject to outstanding options under the prior plan was 7,703 as of
December 31, 1996.
Activity under the stock plans is as follows:
Weighted
Number Average
of Exercise
Options Shares Price
- ---------------------------------------------------------
Balances, December 31, 1994 260,471 $5.34
Granted 140,125 9.28
Cancelled (8,300) 8.08
Exercised (70,987) 5.14
- -----------------------------------------------------------
Balances, December 31, 1995 321,309 7.03
- -----------------------------------------------------------
Granted 93,560 16.48
Cancelled (9,640) 11.58
Exercised (152,711) 5.29
- -----------------------------------------------------------
Balances, December 31, 1996 252,518 $11.41
===========================================================
The weighted-average fair value of options granted during 1996 and 1995 was
$6.22 and $4.32, respectively.
The following table summarizes options outstanding and exercisable at December
31, 1996:
- --------------------------------------------------------------------------------
Weighted Average Weighted
Range of ------------------------ Average
Exercise Shares Contractual Exercise Shares Exercise
Price Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$4.25-8.37 43,293 5.63 $6.48 33,433 $6.13
9.12-9.31 117,940 8.56 9.31 43,000 9.31
11.50-14.31 12,825 9.09 13.39 770 11.87
16.37-19.94 78,460 9.49 16.96 ---- ----
---------------------------------------------------------------
$4.25-19.94 252,518 8.37 $11.41 77,203 $7.96
========= =========
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, 1996, amounts committed to extend credit under normal lending
agreements aggregated approximately $77 million for undisbursed loan commitments
and approximately $3.9 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.
<PAGE>
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, 1996, 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 $8.
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, 1996:
- ------------------------------------------------------------
Year Ending
(in thousands) December 31,
- ------------------------------------------------------------
1997-2001 ($228 each year) $1,140
Thereafter 630
- ------------------------------------------------------------
Total minimum lease payments $1,770
============================================================
Total minimum lease payments to be received under noncancelable operating
subleases at December 31, 1996 are approximately $1.4 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
Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures
about Fair Value of Financial Instruments," requires the Company disclosure of
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 fair valuations have not been updated since
year end; therefore, the valuations may have changed significantly since that
point in time.
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.
<PAGE>
<TABLE>
<CAPTION>
The following table presents a summary of the Company's financial instruments,
as defined by SFAS No. 107 as of December 31, 1996:
(dollars in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Financial assets: Value Value Value Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $20,208 20,208 $12,574 12,574
Money market investments 19,800 19,807 3,200 3,200
Investment securities 63,116 63,275 57,790 58,034
Loans, net 194,622 193,438 166,953 167,207
Accrued interest receivable 1,735 1,735 1,698 1,698
- ----------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
- ----------------------------------------------------------------------------------------------------------------------------
Deposits 245,213 245,348 197,189 197,102
Federal funds purchased, securities sold under
repurchase agreements and other borrowings 30,286 30,318 24,714 24,672
- ----------------------------------------------------------------------------------------------------------------------------
Off-balance sheet Financial Instruments
- ----------------------------------------------------------------------------------------------------------------------------
Interest rate floor contract purchased 22 8 31 64
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, not previously discussed above, are described
below:
Financial instruments with fair value approximate to carrying value - The
carrying value of cash and due from banks, money market investments, accrued
interest receivable, noninterest-bearing demand accounts, interest-bearing
checking, money market and savings deposit accounts, accrued interest receivable
and expense approximates fair value due to the short-term nature of these
financial instruments.
Investment securities - The estimated fair values of securities by type are
based on quoted market prices when available.
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, 1996.
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.
Deposits -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.
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.
<PAGE>
NOTE 14 - SJNB Financial Corp.
(Parent Company Only)
<TABLE>
<CAPTION>
The following are the financial statements of SJNB Financial Corp. (parent company only):
- -------------------------------------------------------------------------------------------------
Balance Sheets
December 31, 1996 and 1995
(dollars in thousands)
- -------------------------------------------------------------------------------------------------
Assets 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and equivalents $1,050 $710
Investment in the Bank 30,061 25,889
Other assets 94 74
- ------------------------------------------------------------------------------------------------
Total assets $31,205 $26,673
=================================================================================================
Liabilities and Shareholders' Equity
Total liabilities-Accounts payable ----- $15
- -------------------------------------------------------------------------------------------------
Common stock, no par value; authorized, 20,000 shares
issued and outstanding, 2,571 shares
in 1996 and 2,418 shares in 1995 $20,880 19,627
Retained earnings 10,263 6,798
Net unrealized gain on securities available for sale 62 233
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 31,205 26,658
- -------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $31,205 $26,673
=================================================================================================
- -------------------------------------------------------------------------------------------------
Statements of Income
For the Years Ended December 31, 1996 and 1995
- -------------------------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------------
Equity in undistributed income of the Bank $4,343 $3,010
Interest income and fees on loans 23 123
Reduction of provision for possible loan losses ----- 57
Other expense (110) (156)
- -------------------------------------------------------------------------------------------------
Income before taxes 4,256 3,034
Income (tax) benefit 35 (10)
- -------------------------------------------------------------------------------------------------
Net income $4,291 $3,024
=================================================================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $4,291 $3,024
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Recovery of provision for possible loan losses ---- (57)
Increase in other assets (20) ----
Increase (decrease) in liabilities (15) 10
Equity in undistributed income of the Bank (4,343) (3,010)
- --------------------------------------------------------------------------------
Net cash used in operating activities (87) (33)
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in loans, net ---- 512
Cash dividend (826) (504)
Common stock repurchased ---- (145)
Stock options exercised 810 351
Tax benefit from stock options exercised 443 ----
- --------------------------------------------------------------------------------
Net cash provided by investing activities 427 214
- --------------------------------------------------------------------------------
Net increase in cash and equivalents 340 181
Cash and equivalents at beginning of year 710 529
- --------------------------------------------------------------------------------
Cash and equivalents at end of year $1,050 $710
================================================================================
NOTE 15- Regulatory Matters
The Federal Reserve Board, the Comptroller of the Currency and the FDIC have
issued substantially similar risk-based and leverage capital guidelines
applicable to United States banking organizations. In addition, those regulatory
agencies may from time to time require that a banking organization maintain
capital above the minimum levels, whether because of its financial condition or
actual or anticipated growth.
The Federal Reserve Board risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for possible loan losses up to 1.25% of risk weighted assets. The total of Tier
1 and Tier 2 capital, less investments in unconsolidated subsidiaries,
represents qualifying total capital, at least 50% of which must consist of Tier
1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total
capital by risk-weighted assets. Assets and off-balance sheet exposures are
assigned to one of four categories of risk-weights, based primarily on relative
credit risk. The minimum tier 1 risk-based capital ratio is 4% and the minimum
total risk-based capital ratio is 8%. The leverage capital ratio is determined
by dividing Tier 1 capital by adjusted average total assets. Although the stated
minimum leverage capital ratio is 3%, most banking organizations are required to
maintain leveraged capital ratios of at least 100 to 200 basis points above the
3%.
<PAGE>
<TABLE>
The table below summarizes the Tier 1 and total risk-based capital ratios and
leverage capital ratios of the Company and the Bank as of the dates indicated:
- ----------------------------------------------------------------------------------------------------------------------------
Risk-based and Leverage Capital Ratios
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Company December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------
Risk-based Amount Ratio Amount Ratio
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital $26,533 11.91% $21,589 11.34%
Tier 1 capital minimum requirement 8,910 4.00 7,617 4.00
- ----------------------------------------------------------------------------------------------------------------------------
Excess $17,623 7.91% $13,972 7.34%
============================================================================================================================
Total capital $29,333 13.17% $24,046 12.63%
Total capital minimum requirement 17,820 8.00 15,233 8.00
- ----------------------------------------------------------------------------------------------------------------------------
Excess $11,513 5.17% $8,813 4.63%
============================================================================================================================
Risk-adjusted assets $222,744 $190,417
- --------------------------------------------------------------================ =================
Leverage
Tier 1 capital $26,533 9.28% $21,589 9.00%
Minimum leverage ratio requirement 11,438 4.00 9,596 4.00
- ----------------------------------------------------------------------------------------------------------------------------
Excess $15,095 5.28% $11,993 5.00%
============================================================================================================================
Average total assets $285,952 $239,899
- --------------------------------------------------------------================ =================
Bank
- ----------------------------------------------------------------------------------------------------------------------------
Risk-based
Tier 1 capital $25,389 11.40% $20,819 10.94%
Tier 1 capital minimum requirement 8,907 4.00 7,614 4.00
- ----------------------------------------------------------------------------------------------------------------------------
Excess $16,482 7.40% $13,205 6.94%
- ----------------------------------------------------------------------------------------------------------------------------
Total capital $28,187 12.66% $23,275 12.23%
Total capital minimum requirement 17,813 8.00 15,228 8.00
- ----------------------------------------------------------------------------------------------------------------------------
Excess $10,374 4.66% $8,047 4.23%
============================================================================================================================
Risk-adjusted assets $222,669 $190,345
- --------------------------------------------------------------================ =================
Leverage
Tier 1 capital $25,389 8.87% $20,819 8.67%
Minimum leverage ratio requirement 11,447 4.00 9,607 4.00
- ----------------------------------------------------------------------------------------------------------------------------
Excess $13,942 4.87% $11,212 4.67%
============================================================================================================================
Average total assets $286,164 $240,163
- --------------------------------------------------------------================ =================
</TABLE>
<PAGE>
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA"),
among other things, identifies five capital categories for insured depository
institutions, (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective Federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee the bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of 5% of the bank's assets at the time
it became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors.
The various regulatory agencies have adopted substantially similar regulations
that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, or 3% in some cases. Under these guidelines, the
Company and the Bank were considered well capitalized at December 31, 1996 and
1995.
Banking agencies have recently adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of a bank's capital adequacy. Concurrently, banking agencies have proposed a
methodology for evaluating interest rate risk. After gaining experience with the
proposed measurement process, those banking agencies intend to propose further
regulations to establish an explicit risk-based capital charge for interest rate
risk.
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, without the prior approval of the Comptroller of the
Currency, the Bank may not declare dividends in any calendar year that exceed
the Bank's net profits for that year, as defined by statute, combined with its
net retained profits, as defined, for the preceding two years. As of December
31, 1996, the Bank may initiate dividend payments without prior regulatory
approval of up to $8.4 million.
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
Information concerning directors, executive officers, promoters and control
persons and compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the text under the captions "Election of Directors" and "Executive
Compensation and Transactions with Directors and Officers" in the Registrant's
Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 10: EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference to
the text under the caption "Executive Compensation and Transactions with
Directors and Officers" in the Registrant's Proxy Statement for its 1997 Annual
Meeting of Shareholders.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference to the text under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference to the text under the caption "Executive Compensation
and Transactions with Directors and Officers" of the Registrant's Proxy
Statement for its 1997 Annual Meeting of Shareholders
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, are hereby incorporated by
reference to Exhibit (2) b. of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(3) a. The Registrant's 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. 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 including Amendments No. 1 and 2 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 Report on Form 10-QSB for the
quarterly period ended March 31, 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 Report on Form 10-QSB for
the quarterly period ended March 31, 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 March 31,
1996.
(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: SJNB Financial Corp.
By: By:
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.
S/J.R. Kenny
James R. Kenny
President, Chief Executive Officer
and Director
February 5, 1997
S/E.E. Blakeslee
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer and
Chief Accounting Officer
February 5, 1997
S/R.S. Akamine
Ray S. Akamine, Director
February 5, 1997
A/R.A. Archer
Robert A. Archer
Chairman and Director
February 5, 1997
S/A.V. Bruno
Albert V. Bruno, Director
February 5, 1997
S/R. Diridon
Rod Diridon, Director
February 5, 1997
S/J.G. Fischer
Jack G. Fischer, Director
February 5, 1997
S/F.J. Gorry
F. Jack Gorry, Director
February 5, 1997
S/A.K. Lund
Arthur K. Lund, Director
February 5, 1997
S/L. Oneal
Louis Oneal, Director
February 5, 1997
S/D. Rubino
Diane Rubino, Director
February 5, 1997
S/D.L. Shen
Douglas L. Shen, Director
February 5, 1997
S/G.S. Vandeweghe
Gary S. Vandeweghe, Director
February 5, 1997
S/J.W. Weinhardt
John W. Weinhardt,
Vice Chairman and Director
February 5, 1997
<PAGE>
SJNB Financial Corp.
Form 10-KSB
Exhibits
December 31, 1996
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, are hereby incorporated by
reference to Exhibit (2) b. of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1995.
(3) a. The Registrant's 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. 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 including Amendments No. 1 and 2 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 Report on Form 10-QSB for the
quarterly period ended March 31, 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 Report on Form 10-QSB for
the quarterly period ended March 31, 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 March 31,
1996.
(22) Subsidiary of Registrant.
(23) Consent of KPMG Peat Marwick, LLP.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 20,208
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,044
<INVESTMENTS-CARRYING> 15,072
<INVESTMENTS-MARKET> 15,231
<LOANS> 198,627
<ALLOWANCE> (4,005)
<TOTAL-ASSETS> 309,403
<DEPOSITS> 244,639
<SHORT-TERM> 29,688
<LIABILITIES-OTHER> 3,871
<LONG-TERM> 0
<COMMON> 20,880
0
0
<OTHER-SE> 10,325
<TOTAL-LIABILITIES-AND-EQUITY> 309,403
<INTEREST-LOAN> 20,422
<INTEREST-INVEST> 4,114
<INTEREST-OTHER> (9)
<INTEREST-TOTAL> 24,527
<INTEREST-DEPOSIT> 6,600
<INTEREST-EXPENSE> 8,059
<INTEREST-INCOME-NET> 16,468
<LOAN-LOSSES> 190
<SECURITIES-GAINS> (142)
<EXPENSE-OTHER> 9,635
<INCOME-PRETAX> 7,489
<INCOME-PRE-EXTRAORDINARY> 7,489
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,291
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.63
<YIELD-ACTUAL> 0.066
<LOANS-NON> 457
<LOANS-PAST> 0
<LOANS-TROUBLED> 89
<LOANS-PROBLEM> 754
<ALLOWANCE-OPEN> 3,847
<CHARGE-OFFS> 418
<RECOVERIES> 336
<ALLOWANCE-CLOSE> 4,005
<ALLOWANCE-DOMESTIC> 3,254
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 751
</TABLE>
