U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB-A
(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.
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(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
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(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
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(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>
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
January 14, 1997
<PAGE>
<TABLE>
<CAPTION>
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SJNB Financial Corp. and subsidiary
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands)
- -----------------------------------------------------------------------------------------------
Assets 1996 1995
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<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
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Total investment securities 63,116 57,790
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Loans 198,627 170,800
Allowance for possible loan losses (4,005) (3,847)
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Loans, net 194,622 166,953
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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
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Total $309,403 $252,195
===============================================================================================
Liabilities and Shareholders' Equity
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Deposits:
Non-interest-bearing $80,774 $52,775
Interest-bearing 163,865 143,917
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Total deposits 244,639 196,692
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Other short-term borrowings 29,688 24,000
Accrued interest payable and other liabilities 3,871 4,845
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Total liabilities 278,198 225,537
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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
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Total shareholders' equity 31,205 26,658
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Commitments and contingencies ---- ----
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Total $309,403 $252,195
===============================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
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SJNB Financial Corp. and subsidiary
Consolidated Statements of Income
For the years ended December 31, 1996 and 1995
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(in thousands, except per share amounts) 1996 1995
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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)
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Total interest income 24,527 20,978
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Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit of $100 or more 2,608 2,232
Other 5,451 4,451
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Total interest expense 8,059 6,683
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Net interest income 16,468 14,295
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Provision for possible loan losses 190 1,045
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Net interest income after provision for
possible loan losses 16,278 13,250
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Other income:
Service charges on deposits 551 553
Other operating income 437 456
Net loss on sale of securities available for sale (142) (43)
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Total other income 846 966
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Other expenses:
Salaries and benefits 5,517 4,339
Occupancy 702 740
Other 3,416 3,718
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Total other expenses 9,635 8,797
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Income before income taxes 7,489 5,419
Income taxes 3,198 2,395
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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>
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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>
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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) ----- (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 (1,388) 2,470
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,527 7,385
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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)
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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>
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SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 and 1995
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(dollars in thousands) 1996 1995
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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 -----
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Fair value of assets acquired 1,177 -----
Liabilities assumed:
Other liabilities 527 -----
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Total liabilities assumed 527 -----
- --------------------------------------------------------------------------------
Cash used to acquire Astra Financial Corp. $650 -----
================================================================================
See accompanying Notes to Consolidated Financial Statements.
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.
<PAGE>
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.
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.
<PAGE>
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.
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>
<TABLE>
<CAPTION>
NOTE 4 - Investment Securities
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.
<PAGE>
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 $5,000 9,000
end
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 30,067 23,553
end
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.
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
===========================================================
<PAGE>
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
===========================================================
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 owned (48) 45
Other 559 506
- -----------------------------------------------------------
Total $3,417 $3,718
===========================================================
<PAGE>
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.
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.
<PAGE>
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.
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.
<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>
<PAGE>
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)
The following are the financial statements of SJNB Financial Corp. (parent
company only):
- --------------------------------------------------------------------------------
Balance Sheets
December 31, 1996 and 1995
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------
Assets
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
================================================================================
- --------------------------------------------------------------------------------
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
================================================================================
<PAGE>
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>
<CAPTION>
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.
