UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 0-11771
SJNB FINANCIAL CORP.
(Exact name of small business issuer as specified in its charter)
California 77-0058227
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113
(Address of principal executive offices) (Zip Code)
(408) 947-7562
(Issuer's telephone number, including area code)
Not Applicable
(Former name, address and former fiscal year, if changed, since last report)
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 No X
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 2,484,402 shares of common stock
outstanding as of August 4, 1997.
<PAGE>
PART I - FINANCIAL INFORMATION
Page
Item 1. - FINANCIAL STATEMENTS
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OF OPERATIONS 8-20
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 21
Item 2. CHANGES IN SECURITIES 21
Item 3. DEFAULTS UPON SENIOR SECURITIES 21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
Item 5. OTHER INFORMATION 21
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 25
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(in thousands)
(Unaudited)
<TABLE>
June 30, December 31,
Assets 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $14,949 $20,208
Money market investments 10,075 19,800
Investment securities:
Available for sale 48,715 48,044
Held to maturity (Fair value: $14,781 at June 30, 1997
and $15,231 at December 31, 1996) 14,703 15,072
- --------------------------------------------------------------------------------------------------
Total investment securities 63,418 63,116
- --------------------------------------------------------------------------------------------------
Loans 218,055 198,627
Allowance for possible loan losses (4,076) (4,005)
- --------------------------------------------------------------------------------------------------
Loans, net 213,979 194,622
- --------------------------------------------------------------------------------------------------
Premises and equipment, net 4,087 4,001
Other real estate owned 304 454
Accrued interest receivable and other assets 4,445 2,737
Intangibles, net of accumulated amortization of $1,471 at
June 30, 1997 and $1,234 at December 31, 1996 4,230 4,465
- --------------------------------------------------------------------------------------------------
Total $315,487 $309,403
==================================================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $66,104 $80,774
Interest-bearing 207,880 163,865
- --------------------------------------------------------------------------------------------------
Total deposits 273,984 244,639
- --------------------------------------------------------------------------------------------------
Other short-term borrowings 4,297 29,688
Accrued interest payable and other liabilities 6,361 3,871
- --------------------------------------------------------------------------------------------------
Total liabilities 284,642 278,198
- --------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares;
issued and outstanding, 2,490 shares at June 30, 1997
and 2,571 shares at December 31, 1996 18,644 20,880
Retained earnings 12,183 10,263
Net unrealized gain on securities available for sale 18 62
- --------------------------------------------------------------------------------------------------
Total shareholders' equity 30,845 31,205
- --------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- --------------------------------------------------------------------------------------------------
Total $315,487 $309,403
==================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
Quarter ended Six months ended
June 30, June 30,
-------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $5,721 $5,065 $10,795 $9,979
Interest on money market investments 114 57 393 87
Interest and dividends on investment securities available for sale 738 710 1,475 1,392
Interest on investment securities held to maturity 244 237 488 463
Other interest and investment income (3) (3) (5) (5)
- --------------------------------------------------------------------------------------------------------------------
Total interest income 6,814 6,066 13,146 11,916
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit $100 or more 786 630 1,472 1,251
Other 1,393 1,417 2,831 2,725
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 2,179 2,047 4,303 3,976
- --------------------------------------------------------------------------------------------------------------------
Net interest income 4,635 4,019 8,843 7,940
- --------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses 180 30 180 50
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 4,455 3,989 8,663 7,890
- --------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 147 139 281 272
Other operating income 115 113 249 240
Net loss on securities available for sale (41) (79) (41) (79)
- --------------------------------------------------------------------------------------------------------------------
Total other income 221 173 489 433
- --------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 1,451 1,349 2,862 2,751
Occupancy and equipment 158 166 338 337
Other 917 825 1,713 1,725
- --------------------------------------------------------------------------------------------------------------------
Total other expenses 2,526 2,340 4,913 4,813
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,150 1,822 4,239 3,510
Income taxes 908 778 1,792 1,507
- --------------------------------------------------------------------------------------------------------------------
Net income $1,242 $1,044 $2,447 $2,003
====================================================================================================================
Net income per share $0.47 $0.40 $0.92 $0.77
====================================================================================================================
Weighted average number of shares outstanding 2,618 2,639 2,651 2,607
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
<TABLE>
Six months ended
June 30,
-----------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $2,447 $2,003
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 180 50
Depreciation and amortization 258 237
Amortization of intangibles 235 250
Net loss on securities available for sale 41 79
Net gain on sale of other real estate owned (41) (44)
Amortization of premium on investment securities, net (17) 25
Increase in deferred tax benefit (1,535) ----
(Increase) decrease in accrued interest receivable and other assets (172) (1,063)
Increase (decrease) in accrued interest payable and other liabilities 2,519 (1,511)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,915 26
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 9,897 6,142
Maturities of securities held to maturity 1,000 2,800
Purchase of securities available for sale (10,699) (12,538)
Purchase of securities held to maturity (598) (2,969)
Proceeds from the sale of other real estate owned 191 179
Cash and equivalents used to acquire Astra Financial Corp. ---- (650)
Loans, net (19,538) (15,665)
Capital expenditures (344) (240)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (20,091) (22,941)
- --------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Deposits, net 29,345 16,484
Other short-term borrowings (25,391) 7,767
Cash dividends (526) (366)
Common stock repurchased (2,319) ----
Proceeds from stock options exercised 83 271
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,192 24,156
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (14,984) 1,241
Cash and equivalents at beginning of year 40,008 15,774
- --------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $25,024 $17,015
====================================================================================================================
Other cash flow information:
Interest paid $4,214 $3,873
===================================
Income taxes paid $375 $2,566
====================================================================================================================
Noncash transactions:
Transfer of loans to other real estate owned ---- ----
Unrealized gain (loss) on securities available for sale, net of tax $44 $(458)
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Note A Unaudited Condensed Consolidated Financial Statements
The unaudited consolidated financial statements of SJNB Financial
Corp. (the "Company") and its subsidiary, San Jose National Bank, are
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q. In the opinion of management, all adjustments necessary for a
fair presentation of the financial position, results of operations
and cash flows for the periods have been included and are normal and
recurring. The results of operations and cash flows are not
necessarily indicative of those expected for the full fiscal year.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report to Shareholders
for the year ended December 31, 1996.
Note B Net Income Per Share of Common Stock
<TABLE>
<CAPTION>
The weighted average number of common stock shares and common stock
equivalent shares used in computing net income per share of common
stock are set forth below for the periods indicated:
Weighted Average Number of Shares Outstanding
--------------------------------------------------------------------------------------------------------
(in thousands)
Quarter ended Six months ended
June 30, June 30,
------------------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------------------------------------------------
Weighted average number of shares
<S> <C> <C> <C> <C>
outstanding during the period 2,494 2,452 2,527 2,439
Common stock equivalents 124 187 124 168
--------------------------------------------------------------------------------------------------------
Total 2,618 2,639 2,651 2,607
========================================================================================================
</TABLE>
<PAGE>
Statement of Financial Accounting Standards No. 128, Earnings per
Share, was issued in February 1997 ("SFAS No. 128") and is effective
for years ending after December 15, 1997. The Statement specifies the
computation, presentation and disclosure requirements for earnings
per share ("EPS"). This Statement's objective is to simplify the
computation of earnings per share and to make the U.S. standard for
computing EPS more compatible with the standards of other countries
and with that of the International Accounting Standards Committee.
Under this approach, EPS is to be calculated and reported as two
separate calculations: Basic EPS, similar to the previous primary
earnings per share excluding common stock equivalents; and, Diluted
EPS, similar to the previous fully diluted earnings per share.
Earnings per share as calculated under the provisions of SFAS No. 128
for the three and six months ended June 30, 1997 and 1996 is as
follows:
Quarter ended Six months ended
June 30, June 30,
----------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------------
Basic earnings per share $0.50 $0.43 $0.97 $0.82
--------------------------------------------------------------------
Diluted earning per share $0.47 $0.40 $0.92 $0.77
====================================================================
Note c Other Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
displaying comprehensive income and its components in the
consolidated financial statement. It does not, however, require a
specific format for the statement, but requires the Company to
display an amount representing total comprehensive income for the
period in that financial statement. The Company is in the process of
determining its preferred format. This Statement is effective for
fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement
establishes standards for the way the public business enterprises are
to report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for financial
statements for periods beginning after December 31, 1997. The Company
does not believe it has any separately reportable business segments.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SJNB Financial Corp. (the "Company") is the holding company for
San Jose National Bank ("SJNB" and the "Bank"), San Jose, California. This
discussion focuses primarily on the results of operations of the Company on a
consolidated basis for the three and six months ended June 30, 1997 and the
liquidity and financial condition of the Company and SJNB as of June 30, 1997
and December 31, 1996.
All dollar amounts in the text in Item 2 are in thousands, except per share
amounts or as otherwise indicated.
Certain matters discussed in this report are forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties include, but are not limited to, the competitive environment
and its impact on the Company's net interest margin, changes in interest rates,
asset quality risks, concentrations of credit and the economic health of Santa
Clara County (particularly the health of the semiconductor industry), volatility
of rate sensitive deposits, asset/liability matching risks, the dilutive impact
which might occur upon the issuance of new shares of common stock, and liquidity
risks. Therefore, the matters set forth below should be carefully considered
when evaluating the Company's business and prospects. For additional information
concerning these risks and uncertainties, please refer to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.
<TABLE>
<CAPTION>
The following presents selected financial data and ratios as of and for the
three and six months ended June 30, 1997 and 1996:
SELECTED FINANCIAL DATA AND RATIOS
- --------------------------------------------------------------------------------------------------------------------
For the quarters For the six months
ended June 30, ended June 30,
---------------------------------------------------------
SELECTED ANNUALIZED OPERATING RATIOS: 1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average equity 16.54% 15.23% 16.19% 14.83%
Return on average tangible equity 21.10 20.80 20.71 20.47
Return on average assets 1.60 1.53 1.60 1.51
Net chargeoffs (recoveries) to average loans .23 (.29) .11 (.08)
Average equity to average assets 9.66 10.06 9.89 10.21
Average tangible equity to average tangible assets 8.41 8.40 8.60 8.48
====================================================================================================================
At June 30, At June 30, At December 31,
PER SHARE DATA: 1997 1996 1996
- -----------------------------------------------------------------------------------------------------
Shareholders' equity per share $12.39 $11.37 $12.14
Tangible equity per share $10.69 $9.38 $10.40
SELECTED FINANCIAL POSITION RATIOS:
- -----------------------------------------------------------------------------------------------------
Leverage capital ratio 8.62% 8.65% 9.28%
Nonperforming loans to total loans .70 .24 .27
Nonperforming assets to total assets .58 .35 .32
Allowance for possible loan losses to total loans 1.87 2.14 2.02
Allowance for possible loan losses
to nonperforming loans 266.00 904.00 733.00
Allowance for possible loan losses
to nonperforming assets 222.00 413.00 401.00
=====================================================================================================
</TABLE>
<PAGE>
Summary of Financial Results
The Company reported net income of $1,242 or $.47 per share for the quarter
ended June 30, 1997, compared with net income of $1,044 or $.40 per share for
the second quarter of 1996. The improvement in earnings is due primarily to an
increase in the net interest income due to the growth in volume.
For the six months ended June 30, 1997, the net income was $2,447 or $.92 per
share compared with net income of $2,003 or $.77 per share in 1996. The
improvement is due primarily to an increase in the net interest income due to
the growth in volume.
Net Interest Income
Net interest income for the quarter ended June 30, 1997 increased $616 as
compared to the same quarter a year ago. The Bank's average earning assets for
the same period increased by $34 million, primarily as the result of the
significant growth in the Bank's loan portfolio. Net interest income for the six
months ended June 30, 1997 increased $903 as compared to the same period a year
ago. The Bank's average earning assets for the same period increased by $38
million.
Net interest margin for the second quarter of 1997 was 6.56% as compared to
6.48% for the same quarter in 1996. This increase was primarily related to a
decline in the cost of interest-bearing liabilities from 4.25% in the second
quarter of 1996 to 4.07% in 1997. This was partially offset by a decline in
interest income earned on earning assets due to the decrease in the yield on
factoring accounts receivable.
Net interest margin for the first six months of 1997 was 6.37% as compared to
6.59% for the same period in 1996. This decrease was primarily related to a
decline in interest income earned on earning assets due to the aforementioned
decrease in the yield on factoring accounts receivable, offset by the decline in
the cost of interest-bearing deposits.
Although economic conditions in Northern California have remained strong in
1997, the competitive environment within the Bank's marketplace continues to be
aggressive and the competition between lenders for additional loan growth has
caused more competitive pricing. This is reflected in 1997's second quarter
results.
Due to the nature of the Company's target market in which loans are generally
tied to the prime rate, management believes modest increases in interest rates
should positively affect the Bank's net interest margin. Conversely, management
believes stable or declining rates will tend to have an adverse impact on net
interest margin. The Bank utilizes various methods to hedge some of its interest
rate risk. See "Loans" and "Asset/Liability Management."
<PAGE>
<TABLE>
<CAPTION>
The following tables shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin, on an
annualized basis, for the three and six months ended June 30, 1997 and 1996.
AVERAGE BALANCES, RATES AND YIELDS
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended June 30,
---------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- -------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, net (2) $213,050 $5,721 10.77% $183,276 $5,065 11.12%
Securities available for sale (3) 47,669 738 6.21 47,866 710 5.97
Securities held to maturity:
Taxable (4) 12,422 211 6.81 12,452 201 6.49
Nontaxable (5) 2,765 55 7.98 3,056 60 7.90
Money market investments 8,857 114 5.16 4,455 57 5.15
Interest rate hedging instruments ---- (3) ----- ---- (3) -----
- ----------------------------------------------------------------- -------------------------
Total interest-earning assets 284,763 6,836 9.63 251,105 6,090 9.75
- ----------------------------------------------------------------- -------------------------
Allowance for possible loan losses (4,123) (3,966)
Cash and due from banks 18,292 14,681
Other assets 8,527 7,014
Core deposit intangibles and
goodwill, net 4,274 4,965
- ---------------------------------------------------- -------------
Total $311,733 $273,799
==================================================== =============
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $44,650 274 2.46 $42,321 289 2.75
Money market and savings 89,822 807 3.60 62,123 516 3.34
Certificates of deposit:
Less than $100 15,504 199 5.15 14,112 190 5.42
$100 or more 57,497 786 5.48 45,343 630 5.59
- ----------------------------------------------------------------- -------------------------
Total certificates of deposits 73,001 985 5.41 59,455 820 5.55
- ----------------------------------------------------------------- -------------------------
Other borrowings 7,414 113 6.11 29,952 422 5.67
- ----------------------------------------------------------------- -------------------------
Total interest-bearing liabilities 214,887 2,179 4.07 193,851 2,047 4.25
- ----------------------------------------------------------------- -------------------------
Noninterest-bearing demand 61,173 49,229
Accrued interest payable and
other liabilities 5,555 3,165
- ---------------------------------------------------- -------------
Total liabilities 281,615 246,245
- ---------------------------------------------------- -------------
Shareholders' equity 30,118 27,554
- ---------------------------------------------------- -------------
Total $311,733 $273,799
====================================================------------- =============------------
Net interest income and margin (6) $4,657 6.56% $4,043 6.48%
=========================================== ======================== ========================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $244 for 1997, and $259 for 1996. Nonperforming loans have been included
in average loan balances.
(3) Includes dividend income of $54 and $52 received in 1997 and 1996.
(4) Includes dividend income of $8 received in 1997and 1996.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($22 in 1997 and $24 in 1996).
(6) The net interest margin represents the fully taxable equivalent net interest
income as a percentage of average earning assets.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, RATES AND YIELDS
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Six months ended June 30,
----------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- --------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net (2) $203,855 $10,795 10.68% $178,385 $9,979 11.25%
Securities available for sale (3) 47,760 1,475 6.23 46,673 1,392 6.00
Securities held to maturity:
Taxable (4) 12,434 423 6.86 12,324 391 6.38
Nontaxable (5) 2,699 108 8.09 3,057 120 7.89
Money market investments 14,738 393 5.38 3,414 87 5.12
Interest rate hedging instruments ---- (5) ---- ---- (5) ----
- --------------------------------------------------------------------- ----------------------
Total interest-earning assets 281,486 13,189 9.45 243,853 11,964 9.87
- --------------------------------------------------------------------- ----------------------
Allowance for possible loan losses (4,067) (3,965)
Cash and due from banks 18,692 14,220
Other assets 7,736 6,787
Core deposit intangibles and
goodwill, net 4,336 5,032
- --------------------------------------------------------- -----------
Total $308,183 $265,927
========================================================= ===========
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $43,801 561 2.58 $39,826 550 2.78
Money market and savings 84,447 1,512 3.61 57,590 922 3.22
Certificates of deposit:
Less than $100 15,502 404 5.26 14,192 386 5.47
$100 or more 53,511 1,472 5.55 44,378 1,251 5.67
- --------------------------------------------------------------------- ----------------------
Total certificates of deposits 69,013 1,876 5.48 58,570 1,637 5.62
- --------------------------------------------------------------------- ----------------------
Other borrowings 12,029 354 5.93 30,232 867 5.77
- --------------------------------------------------------------------- ----------------------
Total interest-bearing liabilities 209,290 4,303 4.15 186,218 3,976 4.29
- --------------------------------------------------------------------- ----------------------
Noninterest-bearing demand 64,143 48,848
Accrued interest payable and
other liabilities 4,285 3,705
- --------------------------------------------------------- -----------
Total liabilities 277,718 238,771
- --------------------------------------------------------- -----------
Shareholders' equity 30,465 27,156
- --------------------------------------------------------- -----------
Total $308,183 $265,927
=========================================================------------ ===========-----------
Net interest income and margin (6) $8,886 6.37% $7,988 6.59%
=========================================== ====================== =======================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $492 for 1997, and $499 for 1996. Nonperforming loans have been included
in average loan balances.
(3) Includes dividend income of $112 and $106 received in 1997 and 1996.
(4) Includes dividend income of $16 received in 1997and 1996.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($43 in 1997and $48 in 1996).
(6) The net interest margin represents the fully taxable equivalent net interest income as a percentage
of average earning assets.
</FN>
</TABLE>
<PAGE>
Provision for Possible Loan Losses
The level of the allowance for possible loan losses and the related provision,
if any, reflect management's judgment as to the inherent risk of loss associated
with the loan and lease portfolios as of June 30, 1997. Based on management's
evaluation of such risks, an addition of $180 was made to the allowance for
possible loan losses for the second quarter and the six months ended June 30,
1997, respectively, as compared to $30 and $50 for the second quarter and six
months ended June 30, 1996, respectively. See "Loan Portfolio"
Other Income
<TABLE>
<CAPTION>
The following table sets forth the components of other income and the percentage
distribution of such income for the three and six months ended June 30, 1997 and
1996:
OTHER INCOME
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended June 30, Six months ended June 30,
----------------------------------------------------------------------------
1997 1996 1997 1996
Amount Percent Amount Percent Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Depositor service charges $147 66.5% $139 80.4% $281 57.5% $272 62.8%
Other operating income 115 52.0 113 65.3 249 50.9 240 55.4
Net loss on securities available for (41) (18.5) (79) (45.7) (41) (8.4) (79) (18.2)
sale
- ---------------------------------------------------------------------------------------------------------------------
Total $221 100.0% $173 100.0% $489 100.0% $433 100.0%
=====================================================================================================================
</TABLE>
Other Expenses
<TABLE>
<CAPTION>
The following schedule summarizes the major categories of expense as a
percentage of average assets on an annualized basis:
OTHER EXPENSES AS A PERCENT OF AVERAGE ASSETS
- -------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended June 30, Six months ended June 30,
---------------------------------------------------------------------------------
1997 1996 1997 1996
Amount Percent * Amount Percent * Amount Percent * Amount Percent *
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $1,451 1.86% $1,349 1.97% $2,862 1.86% $2,751 2.07%
Amortization of core deposit
intangibles and goodwill 118 .15 125 .18 236 .15 250 .19
Data processing 106 .14 134 .20 210 .14 261 .20
Business promotion 113 .15 88 .13 204 .13 186 .14
Furniture and equipment 99 .13 90 .13 196 .13 179 .13
Client services paid by bank 78 .10 62 .09 157 .10 111 .08
Legal and professional fees 148 .19 100 .15 143 .09 219 .16
Occupancy 59 .08 76 .11 142 .09 158 .12
Sundry losses 58 .07 7 .01 124 .08 10 .01
Directors' fees and costs 54 .07 55 .08 111 .07 113 .08
Stationery and supplies 48 .06 40 .06 96 .06 87 .07
Advertising 25 .03 59 .09 68 .04 119 .09
Regulators assessments 27 .03 17 .03 53 .03 35 .03
Loan and collection 30 .04 57 .08 42 .03 116 .09
Net cost of foreclosed property (45) (.06) (52) (.08) (50) (.03) (47) (.04)
Other 157 .20 133 .19 319 .21 265 .20
- -------------------------------------------------------------------------------------------------------------------
Total $2,526 3.24% $2,340 3.42% $4,913 3.19% $4,813 3.62%
===================================================================================================================
<FN>
* The percentages are calculated by annualizing the quarterly expenses and
comparing that amount to average assets for the respective periods ended
June 30, 1997 and 1996.
</FN>
</TABLE>
<PAGE>
Total other expenses for the second quarter of 1997 increased $186 from the same
period a year ago, primarily as a result of increases in salaries and benefits
(relating to increased volumes and incentives), potential uninsured
check-processing losses and an increase in legal and professional expenses.
Total other expenses for the six months ended June 30, 1997 increased $100 from
the same period a year ago. The major increases included salaries and benefits
(relating to increased volumes and incentives), potential uninsured
check-processing losses and additional costs to provide custom client services.
Offsetting these increases were reductions in data processing expense (reduction
in contract costs), legal and professional fees (inactive litigation matters)
and loan and collection expenses (collection of costs advanced in the collection
process).
Income Tax Provision
The effective tax rate of 42% for the six months ended June 30, 1997 is affected
by several items. The most significant are the amortization of the intangibles,
tax exempt income and the California Franchise Tax Enterprise Tax Zone Credit.
The effective tax rate for the year ended December 31, 1996 was 43%. The
reduction in the rate is mainly due to the decline in amortization of
intangibles.
Financial Condition and Earning Assets
Consolidated assets increased to $315 million at June 30, 1997 compared to $309
million at December 31, 1996. The increase consisted primarily of loan growth
and was funded principally by an increase in the Bank's core interest-bearing
money market deposits. See "Funding."
Money Market Investments
Money market investments, which include federal funds sold, were $10.1 million
at June 30, 1997 as compared to $19.8 million at December 31, 1996. This
decrease is related to the significant increase in the Bank's loans.
Securities
The following table shows the composition of the securities portfolio at June
30, 1997 and December 31, 1996. There were no issuers of securities (except U.S.
Government Securities) for which the book value of specific securities held by
the Bank exceeded 10% of the Company's shareholders' equity.
<PAGE>
<TABLE>
SECURITIES PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
June 30, 1997 December 31, 1996
------------------------------------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
- --------------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $4,999 $(17) $4,982 $3,989 $16 $4,005
U. S. Government Agencies 34,068 135 34,203 34,099 186 34,285
Mortgage backed 5,677 30 5,707 5,835 33 5,868
Mutual funds 3,955 (132) 3,823 4,018 (132) 3,886
- --------------------------------------------------------------------------------------------------------------------
Total available for sale 48,699 16 48,715 47,941 103 48,044
- --------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Treasury 1,984 17 2,001 1,975 28 2,003
U. S. Government Agencies 6,474 24 6,498 7,463 60 7,523
State and municipal (nontaxable) 3,225 11 3,236 2,635 18 2,653
Mortgage backed 2,502 26 2,528 2,481 53 2,534
- --------------------------------------------------------------------------------------------------------------------
Total held to maturity 14,185 78 14,263 14,554 159 14,713
Federal Reserve Bank Stock 518 ---- 518 518 ---- 518
- --------------------------------------------------------------------------------------------------------------------
Total 14,703 78 14,781 15,072 159 15,231
- --------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $63,402 $94 $63,496 $63,013 $262 $63,275
====================================================================================================================
</TABLE>
Unrealized gains result from the impact of current market rates being less than
those rates in effect at the time the Bank purchased the securities. The
unrealized gain on securities available for sale as of June 30, 1997 was $16 as
compared to an unrealized gain of $103 as of December 31, 1996. The change in
the unrealized gain from December 31, 1996 is the result of a decrease in
interest rates during the six months ended June 30, 1997. The Bank's weighted
average maturity of the available for sale portfolio was approximately 1.66
years as of June 30, 1997. It is estimated by management that for each 1% change
in interest rates the value of the Company's available for sale securities will
change by 1.48%.
The unrealized gain on securities held to maturity was $78 as of June 30, 1997
as compared to an unrealized gain of $159 as of December 31, 1996. The Bank's
weighted average maturity of the held to maturity investment portfolio was
approximately 2.04 years as of June 30, 1997. It is estimated by management that
for each 1% change in interest rates, the value of the Company's securities held
to maturity will change by approximately 1.63%.
The maturities and yields of the investment portfolio at June 30, 1997 are shown
below:
<PAGE>
<TABLE>
<CAPTION>
MATURITY AND YIELDS OF INVESTMENT SECURITIES
- --------------------------------------------------------------------------------------------------------------------
At June 30, 1997
(dollars in thousands)
Available for Sale Held to Maturity
- --------------------------------------------------------------------------------------------------------------------
FTE(1) FTE(1)
Amortized Estimated Average Amortized Estimated Average
Cost Fair Value Yield Cost Fair Value Yield
- --------------------------------------------------------------------------------------------------------------------
U. S. Treasury:
<S> <C> <C> <C> <C> <C> <C>
Within 1 year ----- ----- ----- $984 $994 7.05%
After 1 year within 5 years $4,999 $4,982 6.06% 1,000 1,006 6.38
- --------------------------------------------------------------------------------------------------------------------
Totals 4,999 4,982 6.06 1,984 2,001 6.71
- --------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies:
Within 1 year 17,073 17,139 6.20 1,993 2,013 7.75
After 1 year within 5 years 16,995 17,064 6.30 4,481 4,485 6.05
- --------------------------------------------------------------------------------------------------------------------
Totals 34,068 34,203 6.25 6,474 6,498 6.57
- --------------------------------------------------------------------------------------------------------------------
State and municipal:
Within 1 year ----- ----- ----- 451 453 7.43
After 1 year within 5 years ----- ----- ----- 2,406 2,417 7.57
After 10 years ----- ----- ----- 368 367 7.16
- --------------------------------------------------------------------------------------------------------------------
Totals ----- ----- ----- 3,225 3,236 7.50
- --------------------------------------------------------------------------------------------------------------------
Mortgage backed:
After 1 year within 5 years 4,701 4,730 6.77 ----- ----- -----
After 5 years within 10 years 976 977 6.71 2,502 2,528 7.90
- --------------------------------------------------------------------------------------------------------------------
Totals 5,677 5,707 6.76 2,502 2,528 7.90
- --------------------------------------------------------------------------------------------------------------------
Mutual funds:
Within 1 year 3,955 3,823 5.68 ----- ----- -----
- --------------------------------------------------------------------------------------------------------------------
Other:
After 10 years ----- ----- ----- 518 518 6.00
- --------------------------------------------------------------------------------------------------------------------
Total investment securities 48,698 $48,715 5.63% $14,703 $14,781 7.00%
=============================================================
Net unrealizable gain on
securities available for sale 16
--------------
Total investment securities,
net carrying value $48,715
==============
<FN>
(1) Fully taxable equivalent.
</FN>
</TABLE>
<PAGE>
Loan Portfolio
The following table provides a breakdown of the Company's consolidated loans by
type of loan or borrower:
LOAN PORTFOLIO
- --------------------------------------------------------------------------------
(dollars in thousands)
June 30, 1997 December 31, 1996
------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Loans Amount Loans
- --------------------------------------------------------------------------------
Commercial $85,196 39.1% $77,335 38.9%
Real estate construction 14,727 6.8 15,451 7.8
Real estate-other 89,467 41.0 74,713 37.6
Consumer 8,730 4.0 8,622 4.3
Other 20,545 9.4 23,174 11.7
Unearned fee income (610) (0.3) (668) (0.3)
- --------------------------------------------------------------------------------
Total loans $218,055 100.0% $198,627 100.0%
================================================================================
Consolidated loans increased to $218 million at June 30, 1997 from $199 million
at December 31, 1996. Management believes the increase in the loan portfolio can
be primarily attributed to the success of the Bank's business development
efforts in regards to commercial loans and the improvement in the economic
environment in the Bank's market area which has created greater demand for loans
in general.
Approximately 54% of the loan portfolio is directly related to real estate or
real estate interests, including real estate construction loans, real
estate-other, real estate equity lines (1.9%) (included in the Consumer
category), mortgage warehouse line (.56%) and loans to real estate developers
for short-term investment purposes (.63%) and loans for real estate investments
purposes made to non-developers (3.2%). The latter three types are included in
the Other category. Approximately 39% of the loan portfolio is made up of
commercial loans; however, no particular industry represents a significant
portion of such loans.
<TABLE>
<CAPTION>
The following table shows the maturity and interest rate sensitivity of
commercial, real estate-other and real estate construction loans at June 30,
1997. Approximately 85% of the commercial and real estate loan portfolio is
priced with floating interest rates which limits the exposure to interest rate
risk on long-term loans.
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Balances Maturing Interest Rate Sensitivity
---------------------------------------------------------------------
Predeter-
Balances at One mined Floating
June 30, One year year to Over interest interest
1997 or less five years five years rates rates
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $85,196 $46,592 $32,172 $6,432 $4,205 $80,991
========================================================================================================================
Real estate construction $14,727 $12,206 $2,401 $120 ----- $14,727
========================================================================================================================
Real estate-other $89,467 $10,973 $30,751 $47,743 $24,054 $65,413
========================================================================================================================
</TABLE>
The Company utilizes a method of assigning a minimum and maximum loss ratio to
each grade of loan within each category of loans (commercial, real estate-other,
real estate construction, etc.). Loans are graded on a ranking system based on
management's assessment of the loan's credit quality. The assigned loss ratio is
based upon the Company's prior experience, industry experience, delinquency
trends and the level of nonaccrual loans. Loans secured by real estate are
evaluated on the basis of their underlying collateral in addition to using the
assigned loss ratios. The methodology also considers (and assigns a risk factor
for) current economic conditions, off-balance sheet risk (including SBA
guarantees and servicing and letters of credit) and concentrations of credit. In
addition, each loan is evaluated on the basis of whether it is impaired. For
impaired loans, the expected cash flow is discounted on the basis of the loan's
interest rate. The methodology provides a systematic approach for the
measurement of the possible existence of future loan losses. Management and the
Board of Directors evaluate the allowance and determine the desired level of the
allowance considering objective, in addition to subjective measures, such as
knowledge of the borrowers' business, valuation of collateral and exposure to
potential losses. The allowance for possible loan losses was approximately $4.1
million at June 30, 1997, or 1.87% of total loans outstanding. Based on
information available as of the date of this Report management believes that the
allowance for possible loan losses, determined as described above, was adequate
for foreseeable losses at June 30, 1997.
<PAGE>
The allowance for possible loan losses is a general reserve available against
the total loan portfolio and off-balance sheet credit exposure. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions or other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible
losses on loans. Such agencies may require the Bank to provide additions to the
allowance based on their judgment of information available to them at the time
of their examination.
<TABLE>
<CAPTION>
The following schedule provides an analysis of the allowance for possible loan
losses:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Quarter ended Six months ended Year ended
June 30, June 30, December 31,
------------------------------------------------------------
1997 1996 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of the period $4,015 $3,859 $4,005 $3,847 $3,847
Charge-offs by loan category:
Commercial 115 --- 115 50 233
Real estate-other 33 --- 33 21 70
Consumer ---- 9 ---- 22 22
Other ---- --- ---- 93 93
- --------------------------------------------------------------------------------------------------------------------
Total charge-offs 148 9 148 186 418
- --------------------------------------------------------------------------------------------------------------------
Recoveries by loan category:
Commercial 29 88 35 173 258
Real estate-other ---- 23 4 27 13
Consumer ---- 30 ---- 60 65
- --------------------------------------------------------------------------------------------------------------------
Total recoveries 29 141 39 260 336
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 119 (132) 109 (74) 82
- --------------------------------------------------------------------------------------------------------------------
Provision charged to expense 180 30 180 50 190
Allowance relating to Astra Financial Corp. ---- --- ---- 50 50
- --------------------------------------------------------------------------------------------------------------------
Balance, end of the period $4,076 $4,021 $4,076 $4,021 $4,005
====================================================================================================================
Ratios:
Net charge-offs to average loans, annualized .23% (.29)% .11% (.08)% .04%
Allowance to total loans at the end of the period 1.87 2.14 1.87 2.14 2.02
Allowance to nonperforming loans at end of the period 266.00 904.00 266.00 904.00 733.00
====================================================================================================================
</TABLE>
<PAGE>
During the three months ended June 30, 1997, the Company charged-off $148 loans
(there were no charges-off in the first quarter of 1997); while in the three and
six months ended June 30, 1996 the Company charged-off $9 and $186,
respectively. During the three and six months ended June 30, 1997, the Company
recovered $29 and $39, respectively, in loans which were previously charged-off.
In the three and six months ended June 30, 1996 the Company recovered $141 and
$260, respectively. Management does not believe there were any trends indicated
by the detail of the aggregate charge-offs for any of the periods discussed. The
allowance for possible loan losses was 266% of nonperforming loans at June 30,
1997 compared to 733% at December 31, 1996. This decrease relates mainly to the
increase in nonperforming loans.
Nonperforming Loans
Loans for which the accrual of interest has been suspended and other loans with
principal or interest contractually past due 90 days or more are set forth in
the following table.
NONPERFORMING LOANS
- --------------------------------------------------------------------------------
(dollars in thousands)
June 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
Loans accounted for on a non-accrual basis $1,271 $457
Loans restructured and in compliance with modified terms 175 $89
Other loans with principal or interest contractually past
due 90 days or more 87 ----
- --------------------------------------------------------------------------------
Total $1,533 $546
================================================================================
As of June 30, 1997, the Company had approximately $1,533 of nonperforming
loans, consisting of 13 loans, of which, $1,085 is secured by commercial or
residential real estate and/or SBA guarantees with estimated fair values or
guarantees of $2,593. At December 31, 1996, nonperforming loans totaled
approximately $546.
Management conducts an ongoing evaluation and review of the loan portfolio in
order to identify potential nonperforming loans. Management considers loans
which are classified for regulatory purposes, loans which are graded as
classified by the Bank's outside loan review consultant and internal personnel,
as to whether they (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Based on such reviews as of June 30, 1997, management has identified one
borrower with an aggregate loan balance of $1.1 million (which is subject to
collateral with an estimated value in the range of approximately $1.2 million
to $1.8 million) with respect to which known information causes management to
have doubts about the borrowers' abilities to comply with present repayment
terms, such that the loans might subsequently be classified as nonperforming.
Changes in general or local economic conditions or specific industry segments,
rising interest rates, declines in real estate values and acts of nature could
have an adverse effect on the ability of borrowers to repay outstanding loans
and the value of real estate and other collateral securing such loans.
<PAGE>
Funding
The following table provides a breakdown of deposits by category as of the dates
indicated:
DEPOSIT CATEGORIES
- --------------------------------------------------------------------------------
(dollars in thousands)
June 30, 1997 December 31, 1996
--------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Deposits Amount Deposits
- --------------------------------------------------------------------------------
Noninterest-bearing demand $66,104 24.1% $80,774 33.0%
Interest-bearing demand 42,452 15.5 40,113 16.4
Money market and savings 94,757 34.6 60,684 24.8
Certificates of deposit:
Less than $100 14,794 5.4 15,535 6.4
$100 or more 55,877 20.4 47,533 19.4
- --------------------------------------------------------------------------------
Total $273,984 100.0% $244,639 100.0%
================================================================================
Deposits as of June 30, 1997, were $274 million compared to $245 million at
December 31, 1996. The most significant growth in deposits has occurred in the
area of interest-bearing core deposits which increased approximately $36
million. Management believes this growth in interest-bearing core deposits has
been due to unusual activity by several of the Bank's customers which might not
be sustained and to the business development efforts of the Bank's business
development officers. Because of this high level of unusual activity, the Bank
has maintained significant short-term liquidity. See "Liquidity."
Asset/Liability Management
The Company's balance sheet position is asset-sensitive (based upon the
significant amount of variable rate loans and the repricing characteristics of
its deposit accounts). This balance sheet position generally provides a hedge
against rising interest rates, but has a detrimental effect during times of
interest rate decreases. Net interest revenues are negatively impacted by a
decline in interest rates.
To counter its asset sensitive interest rate position, the Bank entered into an
interest rate "floor" in the amount of $10 million which expires in May 1999.
The Bank has paid a fixed premium of $47 for which it will receive the amount of
interest on $10 million based on the difference of 7% and prime when prime is
less than 7%. This protects the Bank against decreases in its net income when
the prime decreases to less than 7%. Settlement is done quarterly and the Bank
records the impact of this hedge on an accrual basis.
Capital and Liquidity
Capital
The Federal Reserve Board's risk-based capital guidelines require that total
capital be in excess of 8% of total assets on a risk-weighted basis. Under the
guidelines for a bank holding company, capital requirements are based upon the
composition of the Company's asset base and the risk factors assigned to those
assets. The guidelines characterize an institution's capital as being "Tier 1"
capital (defined to be principally shareholders' equity less intangible assets)
and "Tier 2" capital (defined to be principally the allowance for loan losses,
limited to one and one-fourth percent of gross risk weighted assets). The
guidelines require the Company to maintain a risk-based capital target ratio of
8%, one-half or more of which should be in the form of Tier 1 capital.
The Comptroller of the Currency also requires SJNB to maintain adequate capital.
The Comptroller's current regulations require national banks to maintain Tier 1
leverage capital ratio equal to at least 3% to 5% of total assets, depending on
the Comptroller's evaluation of the Bank. The Comptroller also has adopted
risk-based capital requirements. Similar to the Federal Reserve's guidelines,
the amount of capital the Comptroller requires a bank to maintain is based upon
the composition of its asset base and risk factors assigned to those assets. The
guidelines require the Bank to maintain a risk-based capital target ratio of 8%,
one-half or more of which should be in the form of Tier 1 capital. The capital
ratios of the Bank are similar to the capital ratios of the Company.
<PAGE>
<TABLE>
<CAPTION>
The capital of the Company and SJNB exceed the amount required by the various
capital guidelines. The table below summarizes the various capital ratios of the
Company at June 30, 1997 and December 31, 1996.
Risk-based and Leverage Capital Ratios
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Company June 30, 1997 December 31, 1996
-----------------------------------------------------
Risk-based Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 capital $26,506 10.61% $26,533 11.91%
Tier 1 capital minimum requirement 9,990 4.00 8,910 4.00
- --------------------------------------------------------------------------------------------------------------------
Excess $16,515 6.61% $17,623 7.91%
====================================================================================================================
Total capital $29,639 11.87% $29,333 13.17%
Total capital minimum requirement 19,981 8.00 17,819 8.00
- ---------------------------------------------------------------=====================================================
Excess $9,659 3.87% $11,513 5.17%
====================================================================================================================
Risk-adjusted assets $249,757 $222,744
================================================================================ =================
Leverage
Tier 1 capital $26,506 8.62% $26,533 9.28%
Minimum leverage ratio requirement 12,296 4.00 11,438 4.00
- -------------------------------------------------------------------------------------------------------------------
Excess $14,209 4.62% $15,095 5.28%
===================================================================================================================
Average total assets $307,411 $285,952
================================================================================ =================
</TABLE>
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan funding and deposit withdrawals in an economically
feasible manner. Liquidity requirements are evaluated by taking into
consideration factors such as deposit concentrations, seasonality and
maturities, loan demand, capital expenditures, and prevailing and anticipated
economic conditions. SJNB's business is generated primarily through customer
referrals and employee business development efforts; however the Bank utilizes
purchased deposits to satisfy temporary liquidity needs.
The Bank's source of liquidity consists of its deposits with other banks,
overnight funds sold to correspondent banks, short-term securities held to
maturity, securities available for sale less short-term borrowings and the
guaranteed portion of the SBA loan portfolio. At June 30, 1997, consolidated net
liquid assets totaled $87 million or 29% of consolidated total assets as
compared to $64 million or 22% of consolidated total assets at December 31,
1996. In addition to the liquid asset portfolio, SJNB also has available $12
million in lines of credit with five major commercial banks, a collateralized
repurchase agreement with a maximum limit of $40 million (of which approximately
$5 million has been utilized at June 30, 1997), and a credit facility with the
Federal Reserve Bank based on loans secured by real estate for approximately $7
million.
SJNB is primarily a business and professional bank and, as such, its deposit
base may be more susceptible to economic fluctuations than other potential
competitors. Accordingly, management strives to maintain a balanced position of
liquid assets to volatile and cyclical deposits. Commercial clients in their
normal course of business maintain balances in large certificates of deposit,
the stability of which hinge upon, among other factors, market conditions,
interest rates and business' seasonality. Large certificates of deposit amounted
to 20% of total deposits on June 30, 1997 and 19% at December 31, 1996.
<PAGE>
Liquidity is also affected by portfolio maturities and the effect of interest
rate fluctuations on the marketability of both assets and liabilities. The loan
portfolio consists primarily of floating rate, short-term loans. On June 30,
1997, approximately 35% of total consolidated assets had maturities under one
year and 82% 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, except for the acquisition of a
new data processing system for the Bank at a cost of approximately $600 which
will be amortized over a period of five years.
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 the discussion regarding
asset/liability management. Another effect of inflation is the upward pressure
on the Company's operating expenses. Inflation did not have a material effect on
the Bank's operations in 1996 or the second quarter of 1997.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank is a party to any material pending legal
proceedings other than as previously disclosed. Material legal proceedings were
reported in the Form 10KSB for the year ended December 31, 1996.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders of the Company on May 28, 1997, 1,943,797
shares were represented. In the election of directors, the shareholders of the
Company voted as follows:
Number of Number of
Votes Cast Votes
Name For Nominee Withheld
Akamine, Ray S. 1,937,420 6,377
Archer, Robert A. 1,937,997 5,800
Bruno, Albert V. 1,937,420 6,377
Diridon, Rod 1,891,467 52,330
Fischer, Jack G. 1,937,584 6,213
Gorry, F. Jack 1,892,866 50,931
Kenny, James R. 1,937,997 5,800
Lund, Arthur K. 1,934,189 9,608
Oneal, Louis 1,929,565 14,232
Rubino, Diane 1,932,147 11,650
Shen, Douglas L. 1,937,920 5,877
Vandeweghe, Gary S. 1,937,221 6,576
Weinhardt, John W. 1,933,715 10,082
In addition, the shareholders ratified the selection of KPMG Peat Marwick LLP as
the Company's independent public accountants for the year ending December 31,
1997, with 1,924,204 shares being voted for the ratification, 12,209 shares
being voted against, and 7,384 abstained.
Item 5. Other Information
Not applicable
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
(3) a. The Certificate of Amendment to Articles of
Incorporation filed June 17, 1988 and restated
Articles of Incorporation are hereby incorporated
by reference to Exhibit (3) b. of the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
(3) b. Amendments to the Registrant's bylaws dated
February 28, 1996 and the Registrant's restated
bylaws as of February 28, 1996 are hereby
incorporated by reference to Exhibit (3) b. of the
Registrant's Quarterly Report on Form 10-QSB for
the quarterly period ended June 30, 1996.
*(10) a. The Registrant's Stock Option Plan is hereby
incorporated by reference from Exhibit 4.1 of the
Registrant's Registration Statement on Form S-8, as
filed on October 4, 1989 and amended January
24,1992 under Registration No. 33-31392.
*(10) b. The form of Incentive Stock Option Agreement
being utilized under the Stock Option Plan is
hereby incorporated by reference from Exhibit 4.2
of Amendment No. 1 to the Registrant's Registration
Statement on Form S-8, as filed on January 24,
1992, under Registration No. 33-31392.
*(10) c. The form of Stock Option Agreement being
utilized under the Stock Option Plan is hereby
incorporated by reference from Exhibit 4.3 of
Amendment No. 1 to the Registrant's Registration
Statement on Form S-8, as filed on January 24,
1992, under Registration No. 33-31392.
*(10) d. Amendment No. 3 to the Stock Option Plan is hereby
incorporated by reference from Exhibit 4.4 of
Amendment No. 1 to the Registrant's Registration
Statement on Form S-8, as filed on January 24,1992,
under Registration No. 33-31392.
*(10) e. Amendment No. 4 to the Stock Option Plan is hereby
incorporated by reference from Exhibit 4.5 of
Amendment No. 2 to the Registrant's Registration
Statement on Form S-8, as filed on June 22, 1992,
under Registration No. 33-31392.
*(10)f. The Registrant's 1992 Employee Stock Option Plan
is hereby incorporated by reference from Exhibit
4.1 of the Registrant's Registration Statement on
Form S-8, as filed on September 4, 1992, under
Registration No. 33-51740.
*(10) g. Amendment No.1 to the 1992 Employee Stock Option
Plan is hereby incorporated by reference to Exhibit
(10)f.of the Registrant's Quarterly Report on For
10-QSB forthe quarterly period ended June 30, 1995.
*(10) h. The form of Incentive Stock Option Agreement
being utilized under the 1992 Employee Stock Option
Plan is hereby incorporated by reference from
Exhibit 4.2 of the Registrant's Registration
Statement on Form S-8, as filed on September 4,
1992, under Registration No. 33-51740.
*(10) i. The form of Stock Option Agreement being
utilized under the 1992 Employee Stock Option Plan
is hereby incorporated by reference from Exhibit
4.3 of the Registrant's Registration Statement on
Form S-8, as filed on September 4, 1992, under
Registration No. 33-51740.
*(10) j. The Registrant's 1992 Director Stock Option Plan
is hereby incorporated by reference from Exhibit
(10) i. of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1992.
*(10) k. Amendment No. 1 to the 1992 Director Stock Option
Plan is hereby incorporated by reference to Exhibit
(10)i. of the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended June 30, 1995
*(10) l. The form of Stock Option Agreement being
utilized under the 1992 Director Stock Option Plan
is hereby incorporated by reference from Exhibit
(10) j. of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1992.
*(10) m. The Registrant's 1996 Stock Option Plan is
incorporated by reference to exhibit 99.1 of the
Registrant's Form S-8 filed July 30, 1996.
*(10) n. Agreement between James R. Kenny and SJNB Financial
Corp. and San Jose National Bank dated March 27,
1996 is hereby incorporated by reference to
Exhibit (10) m. of the Registrant's Quarterly Form
10-QSB for the quarterly period ended June 30, 1996
*(10) o. Agreement betwee Eugene E. Blakeslee and SJNB
Financial Corp. and San Jose National Bank dated
March 27, 1996 is hereby incorporated by reference
to Exhibit (10) n. of the Registrant's Quarterly
Form 10-QSB for the quarterly period ended June 30,
1996.
(10) p. Systems Management Services Agreemen by and
between Systematics, Inc. and San Jose National
Bank dated March 1, 1990, and amendments dated
April 5, 1990, July 10, 1990 and January 27, 1992
are hereby incorporated by reference from Exhibit
(10) g. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
(10) q. Agreement for Item Processing Services by and
between Datatronix Financial Services and San Jose
National Bank dated April 13, 1992 is hereby
incorporated by reference from Exhibit (10) m. of
the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1992.
(10) r. Sublease dated April 5, 1982, for premises at 95
South Market Street, San Jose, CA is hereby
incorporated by reference to Exhibit (10) n. of the
Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994.
(10) s. Sublease by and between McWhorter's Stationary
and San Jose National Bank, dated July 6, 1995, and
as amended August 11, 1995 and September 21, 1995,
for premises at 95 South Market Street, San Jose CA
is hereby incorporated by reference to Exhibit (10)
o. of the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended September 30,
1995.
(10) t. Sublease by and between Greater Unified
Management Businesses, Inc. (d.b.a. as Logistics)
and SJNB Financial Corp., dated January 15, 1996,
and as amended March 19, 1996, for premises at 95
South Market Street, San Jose CA is hereby
incorporated by reference to Exhibit (10) s. of the
Registrant's Quarterly Form 10-QSB for the
quarterly period ended June 30, 1996.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-k
No reports on Form 8-k were filed during the second quarter.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SJNB FINANCIAL CORP.
(Registrant)
Date: August 5, 1997 S/J. R. Kenny
James R. Kenny
President and
Chief Executive Officer
Date: August 5, 1997 S/E. E. Blakeslee
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer
<PAGE>
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