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 March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
Commission File Number: 0-11771
SJNB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California 77-0058227
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113
(Address of principal executive offices) (Zip Code)
(408) 947-7562
(Registrant's telephone number, including area code)
Not Applicable
(Former name, address and former fiscal year, if changed, since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,508,097 shares of common
stock outstanding as of May 13, 1998.
<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 Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 25
- ------
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 25
- ------
Item 3. DEFAULTS UPON SENIOR SECURITIES 25
- ------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
- ------
Item 5. OTHER INFORMATION 25
- ------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 25
- ------
SIGNATURES 28
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(dollars in thousands)
(Unaudited)
March 31, December 31,
Assets 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $18,917 $22,825
Money market investments 16,100 2,700
Investment securities:
Available for sale 49,022 48,305
Held to maturity (Fair value: $13,506 at March 31, 1998
and $13,843 at December 31, 1997) 13,422 13,737
- --------------------------------------------------------------------------------------------------------------------
Total investment securities 62,444 62,042
- --------------------------------------------------------------------------------------------------------------------
Loans 225,192 228,972
Allowance for possible loan losses (4,543) (4,493)
- --------------------------------------------------------------------------------------------------------------------
Loans, net 220,649 224,479
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,820 3,916
Accrued interest receivable and other assets 5,983 5,202
Intangibles, net of accumulated amortization of $1,814 at
March 31, 1998 and $1,707 at December 31, 1997 3,648 3,755
- --------------------------------------------------------------------------------------------------------------------
Total $331,561 $324,919
====================================================================================================================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $73,519 $78,437
Interest-bearing 211,906 191,908
- --------------------------------------------------------------------------------------------------------------------
Total deposits 285,425 270,345
- --------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 5,000 16,000
Accrued interest payable and other liabilities 6,464 5,415
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 296,889 291,760
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares; issued and outstanding,
2,519 shares at March 31, 1998
and 2,493 shares at December 31, 1997 19,208 18,800
Retained earnings 15,342 14,254
Accumulated Other Comprehensive Income:
Net unrealized gain on securities available for sale 122 105
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 34,672 33,159
- --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- --------------------------------------------------------------------------------------------------------------------
Total $331,561 $324,919
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Quarter ended
March 31,
--------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C>
Interest and fees on loans $6,115 $5,074
Interest on money market investments 120 279
Interest and dividends on investment securities available for sale 757 737
Interest on investment securities held to maturity 190 244
Other interest and investment income (2) (2)
- --------------------------------------------------------------------------------------------------------------------
Total interest income 7,180 6,332
- --------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit over $100 679 686
Other 1,536 1,438
- --------------------------------------------------------------------------------------------------------------------
Total interest expense 2,215 2,124
- --------------------------------------------------------------------------------------------------------------------
Net interest income 4,965 4,208
- --------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses ---- ----
- --------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 4,965 4,208
- --------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 161 134
Other operating income 123 134
Net loss on securities available for sale (8) ----
- --------------------------------------------------------------------------------------------------------------------
Total other income 276 268
- --------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 1,620 1,411
Occupancy 167 180
Other 992 796
- --------------------------------------------------------------------------------------------------------------------
Total other expenses 2,779 2,387
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,462 2,089
Income taxes 1,027 884
- --------------------------------------------------------------------------------------------------------------------
Net income $1,435 $1,205
====================================================================================================================
Net income per share - basic $0.57 $0.47
====================================================================================================================
Net income per share - diluted $0.54 $0.45
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Shareholders' Equity
(dollars in thousands)
(Unaudited)
Net
Unrealized
Gain (Loss) Total
on Securities Share-
Common Retained Available holders'
Quarter ended March 31, 1997 Shares Stock Earnings for Sale Equity
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996 2,571 $20,880 $10,263 $62 $31,205
-----------
Net income 1,205 1,205
Other comprehensive income - Unrealized loss
on securities held for sale, net (224) (224)
-----------
Comprehensive income 981
-----------
Common stock repurchased (76) (1,882) (1,882)
Stock options exercised 12 66 66
Cash dividends (527) (527)
- --------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1998 2,507 $19,064 $10,941 ($162) $29,843
====================================================================================================================
Quarter ended March 31, 1998
- --------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 2,493 $18,800 $14,254 $105 $33,159
-----------
Net income 1,435 1,435
Other comprehensive income - Unrealized gains
on securities held for sale, net 17 17
-----------
Comprehensive income 1,452
-----------
Stock options exercised 26 408 408
Cash dividends (347) (347)
- --------------------------------------------------------------------------------------------------------------------
Balances, March 31, 1998 2,519 $19,208 $15,342 $122 $34,672
====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Quarter ended March 31,
--------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $1,435 $1,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 133 128
Amortization on intangibles 107 117
Net loss on securities available for sale 7 ----
Amortization of premium on investment securities, net (12) (5)
Increase in deferred tax benefit ---- (1,535)
Increase in accrued interest receivable and other assets (781) (412)
Increase in accrued interest payable and other liabilities 1,038 2,081
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,927 1,579
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 1,322 3,182
Maturities of securities held to maturity 1,000 ----
Purchase of securities available for sale (2,009) (2,981)
Purchase of securities held to maturity (683) ----
Loans, net 3,830 (5,527)
Capital expenditures (37) (106)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 3,423 (5,432)
- --------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Deposits, net 15,080 33,758
Other short-term borrowings (11,000) (23,108)
Cash dividends (347) (526)
Stock buyback ---- (1,882)
Proceeds from stock options exercised 409 66
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,142 8,308
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 9,492 4,455
Cash and equivalents at beginning of year 25,525 40,008
- --------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $35,017 $44,463
====================================================================================================================
Other cash flow information:
Interest paid $2,465 $2,144
============================================
Income taxes paid $25 ----
====================================================================================================================
Noncash transactions:
Unrealized gain (loss) on securities available for sale, net of tax $17 $(234)
====================================================================================================================
<FN>
See accompanying Notes to Unaudited 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 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, 1997.
Note B Net Income Per Share of Common Stock
<TABLE>
<CAPTION>
The reconciliation of the numerators and denominators of the basic
and diluted earnings per share (EPS) computations are as follows:
Quarter ended Quarter ended
March 31, 1998 March 31, 1997
--------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share
Income Shares Amounts Income Shares Amounts
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income and basic EPS $1,435 2,506 $0.57 $1,205 2,559 $0.47
============ ============
Effect of stock option dilutive shares 145 109
--------------------- ----------------
Diluted earnings per share $1,435 2,651 $0.54 $1,205 2,668 $0.45
==================================================================
</TABLE>
Note C Other Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Statement
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for financial
statements for periods beginning after December 31, 1997. The Company
does not believe it has any separately reportable business segments.
In February 1998, the FASB issued No.132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132
changes disclosure only on applicable defined benefit pension or
postretirement plans, of which the Company has none. The Company does
not believe SFAS No. 132 will have a material impact on its
consolidated financial statements.
<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 months ended March 31, 1998 and the liquidity and financial
condition of the Company and SJNB as of March 31, 1998 and December 31, 1997.
All dollar amounts in the text in Item 2 are in thousands, except per share
amounts or as otherwise indicated.
This Quarterly Report on Form 10-Q includes forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These forward-looking statements
(which do not involve the historical or financial statement information herein)
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward-looking statements. Such risks and
uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry; changes in the interest rate
environment; general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a deterioration
in credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions,
particularly in Santa Clara County and in the semiconductor industry; certain
operational risks involving data processing systems or fraud; volatility of rate
sensitive deposits; asset/liability matching risks and liquidity risks; risks
associated with the Year 2000; and changes in the securities markets. For
additional information concerning risks and uncertainties related to the Company
and its operations please refer to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Current Developments
On April 13, 1998 SJNB agreed to acquire all of the stock of a non-public
company, Epic Funding Corporation, pursuant to a definitive agreement dated
April 13, 1998. In connection with the acquisition, SJNB will issue 12,223
shares of its common stock and pay Epic's shareholder $110,000 in exchange for
all of Epic's outstanding stock. Epic, headquartered in Lafayette, California,
provides direct and vendor lease programs and accounts receivable financing to
manufacturers and equipment users throughout California and across parts of the
Unites States. Subject to regulatory approval and satisfaction of conditions in
the definitive agreement, Epic will become a wholly-owned subsidiary of the Bank
and will expand SJNB's line of lending products. Epic's office will remain in
Lafayette through June, 1998 and will then relocate to a new location in
Danville, California. The Bank will also open a small de novo branch at the
Danville facility. Management believes the acquisition of Epic and the new
branch will not have a significant impact on the financial results of SJNB for
the year ending December 31, 1998.
On April 22, 1998, the Company announced that the Board of Directors approved
the repurchase of up to $3.5 million of Company's common stock. On April 27,
1998, the Company announced it had declared a $0.14 per share cash dividend
payable on June 1, 1998 to shareholders of record as of May 11, 1998.
Year 2000
The Company is conducting a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan designed to resolve the issue. The Company
plans to utilize both internal and external resources to attempt to identify,
correct or replace, and test its systems for the Year 2000 compliance. It is
anticipated by management that all corrective action and testing of key systems
should be completed by December 31, 1998.
The Bank presently believes that, with modifications to existing software and/or
the conversion to new software which is Year 2000 compliant, the Year 2000
problem should not pose significant operational risks for the Company's computer
systems as so modified and converted. The Company is expensing all period costs
associated with the Year 2000 problem. To date, the amount of such expense has
not been significant. It is estimated by management that the Bank will incur
approximately $100,000 for the identification, correction and reprogramming, and
testing of systems for Year 2000 compliance during 1998 and 1999.
Other significant risks relating to the Year 2000 problem are that of the
unknown impact of this problem on the operations of the Bank's customers and
actions which banking or securities regulators may take. The Bank is making
efforts to ensure that its customer base is aware of the Year 2000 problem. In
addition to seminars for and mailings to its customer base, the Bank recently
amended its Credit Policy and credit authorization documentation to include
consideration regarding the Year 2000 problem. It is not possible to predict the
effect of this problem on the economic viability of its customers and the
related adverse impact it may have on SJNB's financial position and results of
operations including the level of the Bank's provision for possible loan losses
in future periods.
<PAGE>
<TABLE>
<CAPTION>
The following presents selected financial data and ratios as of and for the three months ended March 31, 1998 and
1997:
SELECTED FINANCIAL DATA AND RATIOS
- --------------------------------------------------------------------------------------------------------------------
For the quarters
ended March 31,
--------------------------------------------
SELECTED ANNUALIZED OPERATING RATIOS: 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Return on average equity 17.28% 15.86%
Return on average tangible equity 20.85 20.32
Return on average assets 1.80 1.61
Net recoveries to average loans (.09) (.02)
Average equity to average assets 10.39 10.12
Average tangible equity to average tangible assets 9.36 8.80
====================================================================================================================
At March 31, At December 31,
PER SHARE DATA: 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity per share $13.76 $13.30
Tangible equity per share 12.32 11.80
Dividends per share .14 (1) .21
SELECTED FINANCIAL POSITION RATIOS:
- --------------------------------------------------------------------------------------------------------------------
Leverage capital ratio 9.61% 9.07%
Total risk-based capital ratio 12.89 11.33
Nonperforming loans to total loans .26 .60
Nonperforming assets to total assets .17 .52
Allowance for possible loan losses to total loans 2.02 1.97
Allowance for possible loan losses
to nonperforming loans 786.00 327.00
Allowance for possible loan losses
to nonperforming assets 786.00 239.00
====================================================================================================================
<FN>
(1) Effective with the first quarter of 1998, the Company commenced a policy to
pay quarterly cash dividends to its shareholders, previously semi-annual
dividends were paid.
</FN>
</TABLE>
Summary of Financial Results
The Company reported net income of $1,435 or $.54 per share - diluted for the
quarter ended March 31, 1998, compared with net income of $1,205 or $.45 per
share - diluted for the first quarter of 1997. The improvement in earnings is
due primarily to an increase in net interest income due to growth in volume.
Net Interest Income
Net interest income for the quarter ended March 31, 1998 increased $757 as
compared to the same quarter a year ago. The Bank's average earning assets for
the same period increased by $22 million, primarily as the result of significant
growth in the Bank's loan portfolio.
Net interest margin for the first quarter of 1998 was 6.76% as compared to 6.17%
for the same quarter in 1997. This increase was primarily related to an increase
in the average loan to deposit ratio from 77% in 1997 to 83%in 1998; an increase
in the Bank's reference rate that took effect March 25, 1997; and collection of
a $107 prepayment fee in March 1998 relating to a fixed rate loan which paid off
prior to its contractual maturity.
Although economic conditions in Northern California have remained strong in
early 1998, 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.
Due to the nature of the Company's target market in which loans are generally
tied to the prime rate, management believes modest increases in interest rates
should positively affect the Bank's net interest margin. Conversely, management
believes stable or declining rates will tend to have an adverse impact on net
interest margin. The Bank utilizes various methods to hedge some of its interest
rate risk. See "Loans" and "Asset/Liability Management."
The following tables shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin, on an
annualized basis, for the three months ended March 31, 1998 and 1997.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, RATES AND YIELDS
Fully Taxable Equivalent
(dollars in thousands)
Quarter ended March 31,
-----------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
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) $228,411 $6,115 10.86% $194,558 $5,074 10.58%
Securities available for sale (3) 49,213 757 6.24 47,851 737 6.25
Securities held to maturity:
Taxable (4) 9,672 148 6.21 12,447 212 6.91
Nontaxable (5) 3,459 70 8.21 2,633 53 8.21
Money market investments 9,002 120 5.41 20,685 279 5.47
Interest rate hedging instruments ---- (2) ---- ---- (2) ----
- ---------------------------------------------------------------------- ------------------------
Total interest-earning assets 299,757 7,208 9.75 278,174 6,353 9.26
- ---------------------------------------------------------------------- ------------------------
Allowance for possible loan losses (4,528) (4,011)
Cash and due from banks 15,892 19,097
Other assets 9,346 6,733
Core deposit intangibles and
goodwill, net 3,688 4,399
- ---------------------------------------------------------- -------------
Total $324,155 $304,392
========================================================== =============
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $47,296 295 2.53 $42,943 287 2.71
Money market and savings 96,201 899 3.79 79,013 705 3.62
Certificates of deposit:
Less than $100 14,348 184 5.20 15,501 205 5.36
$100 or more 49,792 679 5.53 49,479 686 5.62
- ---------------------------------------------------------------------- ------------------------
Total certificates of deposits 64,140 863 5.46 64,980 891 5.56
- ---------------------------------------------------------------------- ------------------------
Other borrowings 10,640 158 6.02 16,696 241 5.85
- ---------------------------------------------------------------------- ------------------------
Total interest-bearing liabilities 218,277 2,215 4.12 203,632 2,124 4.23
- ---------------------------------------------------------------------- ------------------------
Noninterest-bearing demand 67,012 67,145
Accrued interest payable and
other liabilities 5,192 2,809
- ---------------------------------------------------------- -------------
Total liabilities 290,481 273,586
- ---------------------------------------------------------- -------------
Shareholders' equity 33,674 30,806
- ---------------------------------------------------------- -------------
Total $324,155 $304,392
==========================================================------------ =============-----------
Net interest income and margin (6) $4,993 6.76% $4,229 6.17%
============================================== ======================= =======================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $271 for 1998, and $248 for 1997. Nonperforming loans
have been included in average loan balances.
(3) Includes dividend income of $44 and $58 received in 1998 and 1997.
(4) Includes dividend income of $8 received in 1998 and 1997.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($28 in 1998 and $21 in 1997).
(6) The net interest margin represents the fully taxable equivalent net
interest income as a percentage of average earning assets.
</FN>
</TABLE>
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 March 31, 1998 and March 31, 1997 based
on information available to management as of said date. Based on management's
evaluation of such risks, no additions were made to the allowance for possible
loan losses for the first quarters ended March 31, 1998 and 1997. See "Loan
Portfolio."
<PAGE>
Other Income
<TABLE>
<CAPTION>
The following table sets forth the components of other income and the percentage
distribution of such income for the three months ended March 31, 1998 and 1997:
OTHER INCOME
(dollars in thousands)
Quarter ended March 31,
-----------------------------------------------------------------------
1998 1997
Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Depositor service charges $161 58.33% $134 50.00%
Other operating income 123 44.57 134 50.00
Net loss on securities available for sale (8) (2.90) ---- ----
- --------------------------------------------------------------------------------------------------------------------
Total $276 100.00% $268 100.00%
====================================================================================================================
</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 March 31,
----------------------------------------------------------------------
1998 1997
Amount Percent * Amount Percent *
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries and benefits $1,620 2.00% $1,429 1.87%
Data processing 189 .23 103 .14
Amortization of core deposit
intangibles and goodwill 107 .13 118 .16
Client services paid by bank 93 .11 81 .11
Furniture and equipment 89 .11 88 .12
Business promotion 84 .10 69 .09
Legal and professional fees 79 .10 (23) (.03)
Occupancy 78 .10 84 .11
Directors' & shareholders' 64 .08 84 .11
Advertising & marketing 46 .06 39 .05
Loan and collection 46 .06 14 .02
Stationery and supplies 40 .05 47 .06
Regulators assessments 28 .03 26 .03
Net cost of foreclosed property 1 .0 (5) (.01)
Sundry losses 0 .0 66 .09
Other 215 .27 167 .22
- -------------------------------------------------------------------------------------------------------------------
Total $2,779 3.43% $2,388 3.14%
===================================================================================================================
<FN>
* The percentages are calculated by annualizing the expenses and comparing that
amount to the average assets for the respective periods ended March 31, 1998 and
1997.
</FN>
</TABLE>
Total other expenses for the first quarter of 1998 increased $392 from the same
period a year ago, primarily as a result of increases in salaries and benefits
(relating to increased salaries, incentives and employment fees and costs), an
increase in data processing expenses (relating to a November 1997 conversion to
a new data processing system, greater technology costs and attention to the year
2000 problem) and an increase in legal costs due to a recovery in 1997.
Income Tax Provision
The effective tax rate of 42% for the three months ended March 31, 1998 is
affected by several items. The most significant are the amortization of
intangibles, tax exempt income and the California Franchise Tax Enterprise Tax
Zone Credit. The effective tax rate for the year ended December 31, 1997 was
42%.
<PAGE>
Financial Condition and Earning Assets
Consolidated assets increased to $332 million at March 31, 1998 compared to $325
million at December 31, 1997. The increase consisted primarily of an increase
in money market investments 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 $16.1 million
at March 31, 1998 as compared to $2.7 million at December 31, 1997. This
increase is related to the increase in the Bank's core interest-bearing money
market deposits.
Securities
<TABLE>
<CAPTION>
The following table shows the composition of the securities portfolio at March
31, 1998 and December 31, 1997. There were no issuers of securities (except U.S.
Government Securities) for which the book value of securities issued by any
issuer held by the Bank exceeded 10% of the Company's shareholders' equity.
SECURITIES PORTFOLIO
(dollars in thousands)
March 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
- -------------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury $5,002 $42 $5,044 $5,001 $40 $5,041
U. S. Government Agencies 36,165 186 36,351 34,148 179 34,327
Mortgage backed 4,897 89 4,986 5,097 74 5,171
Mutual funds 2,767 (126) 2,641 3,898 (132) 3,766
- -------------------------------------------------------------------------------------------------------------------
Total available for sale 48,831 191 49,022 48,144 161 48,305
- -------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Treasury 1,996 12 2,008 1,992 16 2,008
U. S. Government Agencies 4,489 32 4,521 5,485 27 5,512
State and municipal (nontaxable) 3,901 7 3,908 3,224 34 3,258
Mortgage backed 2,518 33 2,551 2,518 29 2,547
- -------------------------------------------------------------------------------------------------------------------
Total held to maturity 12,904 84 12,988 13,219 106 13,325
Federal Reserve Bank Stock 518 --- 518 518 --- 518
- -------------------------------------------------------------------------------------------------------------------
Total 13,422 84 13,506 13,737 106 13,843
- -------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $62,253 $275 $62,528 $61,881 $267 $62,148
===================================================================================================================
Unrealized gains generally result from the impact of current market rates being
less than those rates in effect at the time the Bank purchased the securities.
The unrealized gain on securities available for sale as of March 31, 1998 was
$191 as compared to an unrealized gain of $161 as of December 31, 1997. The
Bank's weighted average maturity of the available for sale portfolio was
approximately 1.68 years as of March 31, 1998. 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 1.3%.
</TABLE>
<PAGE>
The unrealized gain on securities held to maturity was $84 as of March 31, 1998
as compared to an unrealized gain of $106 as of December 31, 1997. The Bank's
weighted average maturity of the held to maturity investment portfolio was
approximately 2.64 years as of March 31, 1998. 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 2.1%.
<TABLE>
<CAPTION>
The maturities and yields of the investment portfolio at March 31, 1998 are
shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
- ---------------------------------------------------------------------------------------------------------------------
At March 31, 1998
(dollars in thousands)
Available for Sale Held to Maturity
-------------------------------------------------------------------------------------
FTE FTE
Amortized Estimated Average Amortized Estimated Average
Cost Fair Value Yield (1) Cost Fair Value Yield (1)
-------------------------------------------------------------------------------------
U. S. Treasury:
<S> <C> <C> <C> <C> <C> <C>
Within 1 year $1,997 $2,000 5.84% $996 $999 7.05%
After 1 year within 5 years 3,005 3,044 6.21 1,000 1,008 6.38
-------------------------------------------------------------------------------------
Totals 5,002 5,044 6.06 1,996 2,008 6.71
-------------------------------------------------------------------------------------
U.S. Government Agencies:
Within 1 year 18,996 19,030 6.28 1,993 1,996 5.59
After 1 year within 5 years 17,169 17,321 6.17 2,496 2,525 6.41
-------------------------------------------------------------------------------------
Totals 36,165 36,351 6.22 4,489 4,521 6.05
-------------------------------------------------------------------------------------
State and municipal:
Within 1 year ----- ----- ----- 731 733 7.69
After 1 year within 5 years ----- ----- ----- 1,859 1,867 7.55
After 10 years ----- ----- ----- 1,311 1,308 7.01
------------------------------------------
Totals ----- ----- ----- 3,901 3,908 7.39
------------------------------------------
Mortgage backed
After 1 year within 5 years 3,919 3,977 6.78 ----- ----- -----
After 5 years within 10 years 978 1,009 6.71 2,518 2,551 7.90
-------------------------------------------------------------------------------------
Totals 4,897 4,986 6.76 2,518 2,551 7.90
-------------------------------------------------------------------------------------
Mutual funds:
-------------------------------------------
Within 1 year 2,767 2,641 5.51 ----- ----- -----
-------------------------------------------
Other
------------------------------------------
After 10 years ----- ----- ----- 518 518 6.00
-------------------------------------------------------------------------------------
Total investment securities 48,831 $49,022 6.22% $13,422 $13,506 6.88%
=======================================================================
Net unrealized gain on
securities available for sale 191
--------------
Total investment securities,
net carrying value $49,022
==============
(1) Fully taxable equivalent.
</TABLE>
<PAGE>
Loan Portfolio
<TABLE>
<CAPTION>
The following table provides a breakdown of the Company's consolidated loans by
type of loan or borrower:
LOAN PORTFOLIO
(dollars in thousands)
March 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Loans Amount Loans
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $89,567 39.8% $92,693 40.5%
Real estate construction 20,443 9.1 17,818 7.8
Real estate-other 91,032 40.4 90,495 39.5
Consumer 8,940 4.0 9,042 3.9
Other 15,870 7.0 19,568 8.6
Unearned fee income (660) (.3) (644) (.3)
- --------------------------------------------------------------------------------------------------------------------
Total loans $225,192 100.0% $228,972 100.0%
====================================================================================================================
</TABLE>
Consolidated loans decreased to $225 million at March 31, 1998 from $229 million
at December 31, 1997. Management believes the decrease in the loan portfolio can
be primarily attributed to a number of payoffs of various types of loans. The
decline in commercial loans related to the sale of several of the Bank's
commercial business customers and the competitive market place. The Bank has
elected not to aggressively seek or renew loans where the underwriting criteria
is being sacrificed; this has caused a slow down in production and a an increase
in payoffs when the Bank does not meet competitive pressures. The decline in
other loans related to several borrowers who paid off their borrowings.
Approximately 40% of the loan portfolio is directly related to real estate or
real estate interests, including real estate construction loans, real
estate-other, real estate equity lines (2%, included in the Consumer category),
and loans to real estate developers for short-term investment purposes (1%) and
loans for real estate investments purposes made to non-developers (3%). The
latter three types are included in the Other category. Approximately 40% of the
loan portfolio is made up of commercial loans; however, no particular industry
represents a significant portion of such loans.
The following table shows the maturity and interest rate sensitivity of
commercial, real estate-other and real estate construction loans at March 31,
1998. Approximately 87% of the commercial and real estate loan portfolio is
priced with floating interest rates which generally limits the exposure to
interest rate risk on long-term loans.
<TABLE>
<CAPTION>
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY
(dollars in thousands) Balances maturing Interest Rate Sensitivity
- -----------------------------------------------------------------------------------------------------------
Predeter-
Balances mined Floating
at March 31, One year or One year to Over five interest interest
1998 less five years years rates rates
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $89,567 $53,759 $29,506 $6,302 $2,829 $86,738
===========================================================================================================
Real estate construction $20,443 $15,345 $2,512 $2,586 ---- $20,443
===========================================================================================================
Real estate-other $91,032 $17,261 $23,980 $49,791 $24,071 $66,961
===========================================================================================================
</TABLE>
The Company utilizes a method of assigning a minimum and maximum loss ratio to
each grade of loan within each category of loans (commercial, real estate-other,
real estate construction, etc.). Loans are graded on a ranking system based on
management's assessment of the loan's credit quality. The assigned loss ratio is
based upon, among other things, the Company's prior experience, industry
experience, delinquency trends and the level of nonaccrual loans. Loans secured
by real estate are evaluated on the basis of their underlying collateral in
addition to using the assigned loss ratios. The methodology also considers (and
assigns a risk factor for) current economic conditions, off-balance sheet risk
(including SBA guarantees and servicing and letters of credit) and
concentrations of credit. In addition, each loan is evaluated on the basis of
whether or not it is impaired. For impaired loans, the expected cash flow is
discounted on the basis of the loan's interest rate. The methodology provides a
systematic approach believed by management to measure the risk of possible
future loan losses. Management and the Board of Directors evaluate the allowance
and determine the desired level of the allowance considering objective and
subjective measures, such as knowledge of the borrowers' business, valuation of
collateral and exposure to potential losses. The allowance for possible loan
losses was approximately $4.5 million at March 31, 1998, or 2.02% of total loans
outstanding. Based on information available as of the date of this report,
management believes the allowance for possible loan losses, determined as
described above, is adequate for potential losses foreseeable at March 31, 1998.
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 Year ended
March 31, December 31,
-----------------------------------------------------
1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of the period $4,493 $4,005 $4,005
Charge-offs by loan category:
Commercial ---- ---- 242
Real estate-other ---- ---- 33
Consumer ---- ---- 13
- --------------------------------------------------------------------------------------------------------------------
Total charge-offs ---- ---- 288
- --------------------------------------------------------------------------------------------------------------------
Recoveries by loan category:
Commercial 17 6 67
Real estate-other 33 4 4
- --------------------------------------------------------------------------------------------------------------------
Total recoveries 50 10 71
- --------------------------------------------------------------------------------------------------------------------
Net (recoveries) charge-offs (50) (10) 217
- --------------------------------------------------------------------------------------------------------------------
Provision charged to expense ---- ---- 705
- --------------------------------------------------------------------------------------------------------------------
Balance, end of the period $4,543 $4,015 $4,493
====================================================================================================================
</TABLE>
<TABLE>
Ratios:
<S> <C> <C> <C>
Net (recoveries) charge-offs to average loans, annualized (.09)% (.02)% .10%
Allowance to total loans at the end of the period 2.02 1.97 1.96
Allowance to nonperforming loans at end of the period 786.00 327.00 1060.00
====================================================================================================================
</TABLE>
During the three months ended March 31, 1998 and 1997, there were no
charge-offs. The allowance for possible loan losses was 786% of nonperforming
loans at March 31, 1998 compared to 1060% at December 31, 1997. This decrease
relates mainly to the modest increase in nonperforming loans described below.
Nonperforming Loans
<TABLE>
<CAPTION>
Loans for which the accrual of interest has been suspended and other loans with
principal or interest contractually past due 90 days or more are set forth in
the following table:
NONPERFORMING LOANS
(dollars in thousands)
March 31, December 31,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans on a non-accrual basis $472 $360
Loans restructured and in compliance with modified terms 54 63
Other loans with principal or interest contractually past
due 90 days or more 52 1
- --------------------------------------------------------------------------------------------------------------------
Total $578 $424
====================================================================================================================
<PAGE>
</TABLE>
As of March 31, 1998, nonperforming loans consisted of seven loans.
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 March 31, 1998, management has not identified
any loans not included within the Nonperforming Loan table above with respect to
which known information causes management to have doubts about the borrowers'
abilities to comply with present repayment terms, such that the loans might
subsequently be classified as nonperforming. Changes in general or local
economic conditions or specific industry segments, rising interest rates,
declines in real estate values and acts of nature could have an adverse effect
on the ability of borrowers to repay outstanding loans and the value of real
estate and other collateral securing such loans.
Funding
<TABLE>
<CAPTION>
The following table provides a breakdown of deposits by category as of the dates
indicated:
DEPOSIT CATEGORIES
(dollars in thousands)
March 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Deposits Amount Deposits
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $73,519 25.8% $78,437 29.0%
Interest-bearing demand 45,634 16.0 45,655 16.9
Money market and savings 96,492 33.8 82,619 30.6
Certificates of deposit:
Less than $100 15,272 5.3 15,207 5.6
$100 or more 54,508 19.1 48,427 17.9
- --------------------------------------------------------------------------------------------------------------------
Total $285,425 100.0% $270,345 100.0%
====================================================================================================================
</TABLE>
Deposits as of March 31, 1998 were $285 million compared to $270 million at
December 31, 1997. The most significant growth in deposits has occurred in the
area of interest-bearing core deposits which increased approximately $14
million. Management believes this growth in interest-bearing core deposits has
been due to unusual activity by several of the Bank's customers 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. The growth in the certificates of deposit
greater than $100 was due to activity of several significant customers. 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.
On April 22, 1998, the Board of Directors approved the repurchase from
time-to-time of up to $3.5 million of its common stock through open market or
privately negotiated transactions. If this action had been accomplished as of
March 31, 1998, SJNB's total capital ratio would have declined from 12.89% to
11.56%, which would still exceed the amount required by the guidelines. Assuming
the full $3.5 million is utilized to purchase common shares at the closing price
on May 4, 1998 of $39.50, outstanding shares would be reduced by approximately
88,600 shares.
<TABLE>
<CAPTION>
The table below summarizes the various capital ratios of the Company at March
31, 1998 and December 31, 1997.
Risk-based and Leverage Capital Ratios
(dollars in thousands)
Company March 31, 1998 December 31, 1997
- -------
-----------------------------------------------------------------------
Risk-based Amount Ratio Amount Ratio
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital $30,776 11.64% $29,167 11.28%
Tier 1 capital minimum requirement 10,578 4.00 10,344 4.00
-----------------------------------------------------------------------
Excess $20,198 7.64% $18,823 7.28%
=======================================================================
Total capital $34,097 12.89% $32,415 12.53%
Total capital minimum requirement 21,157 8.00 20,689 8.00
-----------------------------------------------------------------------
Excess $12,941 4.89% $11,726 4.53%
=======================================================================
Risk-adjusted assets $264,459 $258,608
================== =================
Leverage
Tier 1 capital $30,776 9.61% $29,167 9.07%
Minimum leverage ratio requirement 12,815 4.00 12,870 4.00
-----------------------------------------------------------------------
Excess $17,961 5.61% $16,297 5.07%
=======================================================================
Average total assets $320,381 $321,747
================== =================
Bank
Risk-based
Tier 1 capital $30,028 11.36% $28,879 11.17%
Tier 1 capital minimum requirement 10,575 4.00 10,341 4.00
-----------------------------------------------------------------------
Excess $19,452 7.36% $18,538 7.17%
-----------------------------------------------------------------------
Total capital $33,348 12.61% $32,126 12.43%
Total capital minimum requirement 21,151 8.00 20,683 8.00
-----------------------------------------------------------------------
Excess $12,197 4.61% $11,443 4.43%
=======================================================================
Risk-adjusted assets $264,384 $258,533
================== =================
Leverage
Tier 1 capital $30,028 9.37% $28,879 8.97%
Minimum leverage ratio requirement 12,822 4.00 12,881 4.00
-----------------------------------------------------------------------
Excess $17,205 5.37% $15,998 4.97%
=======================================================================
Average total assets $320,562 $322,014
================== =================
</TABLE>
<PAGE>
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, and securities available for sale less short-term borrowings. At March
31, 1998, consolidated net liquid assets totaled $92 million or 29% of
consolidated total assets as compared to $62 million or 19% of consolidated
total assets at December 31, 1997. The increase in the liquid assets is due to
the growth of the deposits. See "Funding." 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
March 31, 1998), the guaranteed portion of the SBA loan portfolio of
approximately $16 million, and a credit facility with the Federal Reserve Bank
based on loans secured by real estate for approximately $5 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 19% of total deposits on March 31, 1998 and 18% at December 31, 1997.
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 March 31,
1998, approximately 39% of total consolidated assets had maturities under one
year and 84% of total consolidated loans had floating rates tied to the prime
rate or similar indexes. The short-term nature of the loan portfolio, and loan
agreements which generally require monthly interest payments, provide the
Company with a secondary source of liquidity. There are no material commitments
for capital expenditures in 1997.
Effects of Inflation
The most direct effect of inflation on the Company is higher interest rates.
Because a significant portion of the Bank's deposits are represented by
non-interest-bearing demand accounts, changes in interest rates have a direct
impact on the financial results of the Bank. See "Asset/Liability Management."
Another effect of inflation is the upward pressure on the Company's operating
expenses. Inflation did not have a material effect on the Bank's operations in
1997 or the three months of 1998.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest income and interest expense that would result from a change in interest
rates. Mismatches in interest rate repricing among assets and liabilities arise
primarily from the interaction of various customer businesses (i.e., types of
loans versus the types of deposits maintained) and from management's
discretionary investment and funds gathering activities. The Company attempts to
manage its exposure to interest rate sensitivity. However, due to its size and
direct competition from the major banks, the Company must offer products which
are competitive in the market place, even if less than optimum with respect to
its interest rate exposure.
The Company's balance sheet position at March 31, 1998 was asset-sensitive,
based upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts. This position provides a hedge against
rising interest rates, but has a detrimental effect during times of interest
rate decreases. Net interest revenues are negatively impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known repricing dates of certain assets and liabilities and
assumed repricing dates of others. Management believes there has been no
significant change in the Bank's market risk exposures disclosed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. See
"Summary of Financial Results - Net Interest Income."
<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 Company's Form 10-K for the year ended December 31, 1997; and,
as of the date of this report, there have been no material changes in said
proceedings.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
(3)a. The Certificate of Amendment to Articles of Incorporation filed
June 17, 1988 and restated Articles of Incorporation are hereby
incorporated by reference to Exhibit (3) b. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,1988.
(3)b. Amendments to the Registrant's bylaws dated February 28, 1996 and
the Registrant's restated bylaws as of February 28, 1996 are hereby
incorporated by reference to Exhibit (3) b. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 1996.
(3)c. Amendment to the Registrant's bylaws dated January 27, 1998.
*(10)a. 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)b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30,1995.
*(10)c. 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)d. 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)e. 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)f. 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)g. 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)h. 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)i. 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)j. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and
San Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) n. of the Registrant's Quarterly Form
10-QSB for the quarterly period ended June 30,1996.
(10)k. 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)l. 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)m. 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 first quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SJNB FINANCIAL CORP.
(Registrant)
Date: May 14, 1998 S/J. R. Kenny
-----------------------------
James R. Kenny
President and
Chief Executive Officer
Date: May 14, 1998 S/E. E. Blakeslee
----------------------------
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer (Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000721161
<NAME> SJNB Financial Corp.
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1998
<PERIOD-END> Mar-31-1998
<CASH> 18,917
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 49,022
<INVESTMENTS-CARRYING> 13,422
<INVESTMENTS-MARKET> 13,506
<LOANS> 225,192
<ALLOWANCE> 4,543
<TOTAL-ASSETS> 331,561
<DEPOSITS> 285,425
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 6,464
<LONG-TERM> 0
0
0
<COMMON> 19,208
<OTHER-SE> 15,464
<TOTAL-LIABILITIES-AND-EQUITY> 331,561
<INTEREST-LOAN> 6,115
<INTEREST-INVEST> 1,067
<INTEREST-OTHER> (2)
<INTEREST-TOTAL> 7,180
<INTEREST-DEPOSIT> 2,057
<INTEREST-EXPENSE> 2,215
<INTEREST-INCOME-NET> 4,965
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 2,779
<INCOME-PRETAX> 2,462
<INCOME-PRE-EXTRAORDINARY> 2,462
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,435
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.54
<YIELD-ACTUAL> 0.066
<LOANS-NON> 472
<LOANS-PAST> 52
<LOANS-TROUBLED> 54
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,493
<CHARGE-OFFS> 0
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 4,543
<ALLOWANCE-DOMESTIC> 4,543
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 627
</TABLE>
The authorized number of directors shall be not less than nine (9) nor more than
seventeen (17) until changed by an amendment to the Bylaw adopted by the vote or
written consent of holders of a majority of the outstanding shares entitled to
vote. The exact number of directors shall be eleven (11) until changed, within
the limits specified above, by a bylaw amending this Section 2, duly adopted by
the Board of Directors or by the shareholders.
