SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-11771
SJNB FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
California 77-0058227
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113
(Address of principal executive offices) (Zip Code)
(408) 947-7562
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed,
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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: 2,352,519 shares of common
stock outstanding as of October 19, 1999.
<PAGE>
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statement 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 26
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 27
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 27
Item 3. DEFAULTS UPON SENIOR SECURITIES 27
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
Item 5. OTHER INFORMATION 27
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURES 30
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. -Financial Statements
<TABLE>
<CAPTION>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(in thousands)
September 30,
1999 December 31,
Assets (Unaudited) 1998
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $14,937 $11,239
Money market investments and Fed Funds sold 9,745 22,285
Investment securities:
Available for sale 52,890 35,216
Held to maturity (Fair value: $9,865 at September 30, 1999
and $11,369 at December 31, 1998) 10,165 11,173
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities 63,055 46,389
- -----------------------------------------------------------------------------------------------------------------------
Loans and leases 310,641 261,380
Allowance for possible loan and lease losses (5,152) (4,778)
- -----------------------------------------------------------------------------------------------------------------------
Loans and leases, net 305,489 256,602
- -----------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,608 3,770
Accrued interest receivable and other assets 6,946 5,622
Intangibles, net of accumulated amortization of $2,506 at
September 30, 1999 and $2,164 at December 31, 1998 3,731 4,027
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $407,511 $349,934
=======================================================================================================================
Liabilities and Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $64,935 $70,962
Interest-bearing 272,283 231,480
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 337,218 302,442
- -----------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 29,057 5,000
Accrued interest payable and other liabilities 6,126 7,010
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 372,401 314,452
- -----------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares;
issued and outstanding, 2,353 shares at September 30, 1999
and 2,450 shares at December 31, 1998 13,917 16,777
Retained earnings 21,609 18,405
Accumulated other comprehensive (loss) income (416) 300
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 35,110 35,482
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- -----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $407,511 $349,934
=======================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts)
(Unaudited)
Quarter ended Nine months ended
September 30, September 30,
---------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans and leases $7,629 $6,249 $20,950 $18,404
Interest on money market investments 123 428 507 823
Interest and dividends on investment securities available for 879 658 1,983 2,172
sale
Interest on investment securities held to maturity 128 171 412 551
Other interest and investment income (14) (2) (34) (7)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 8,745 7,504 23,818 21,943
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit over $100 1,264 863 3,514 2,364
Other 1,752 1,522 4,355 4,475
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,016 2,385 7,869 6,839
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 5,729 5,119 15,949 15,104
- -----------------------------------------------------------------------------------------------------------------------------
Provision for possible loan and lease losses 150 150 250 150
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan and lease losses 5,579 4,969 15,699 14,954
- -----------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 251 149 603 461
Other operating income 99 101 510 324
Net loss on securities available for sale (51) ----- (51) (8)
- -----------------------------------------------------------------------------------------------------------------------------
Total other income 299 250 1,062 777
- -----------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 2,040 1,679 5,749 5,009
Occupancy 243 215 683 564
Other 1,064 1,040 3,146 2,871
- -----------------------------------------------------------------------------------------------------------------------------
Total other expenses 3,347 2,934 9,578 8,444
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,531 2,285 7,183 7,287
Income taxes 1,033 960 2,979 3,046
- -----------------------------------------------------------------------------------------------------------------------------
Net income $1,498 $1,325 $4,204 $4,241
=============================================================================================================================
Net income per share - basic $0.64 $0.54 $1.77 $1.70
=============================================================================================================================
Net income per share - diluted $0.60 $0.51 $1.68 $1.61
=============================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
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'
Nine months ended September 30, 1998 Shares Stock Earnings for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1997 2,493 $18,800 $14,254 $105 $33,159
-----------
Net income 4,241 4,241
Other comprehensive income - Unrealized gains
on securities held for sale, net 309 309
-----------
Comprehensive income 4,550
-----------
Common stock repurchased (77) (3,119) (3,119)
Issuance of common stock for purchase of Epic Funding Corp. 12 501
Stock options exercised 32 506 506
Cash dividends (1,045) (1,045)
- -----------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1998 2,460 $16,688 $17,450 $414 $34,051
=============================================================================================================================
Nine months ended September 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 2,450 $16,777 $18,405 $300 $35,482
-----------
Net income 4,204 4,204
Other comprehensive income - Unrealized losses
on securities held for sale, net (716) (716)
-----------
Comprehensive income 3,488
-----------
Common stock repurchased (112) (3,048) (3,048)
Stock options exercised 15 188 188
Cash dividends (1,000) (1,000)
- -----------------------------------------------------------------------------------------------------------------------------
Balances, September 30, 1999 2,353 $13,917 $21,609 $(416) $35,110
=============================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Nine months ended
September 30,
---------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $4,204 $4,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan and lease losses 250 150
Depreciation and amortization 458 417
Amortization on intangibles 342 337
Net loss on securities available for sale 51 8
Amortization of discount (premium) on investment securities, net 44 (49)
Increase in intangibles assets (45) (91)
Increase in accrued interest receivable and other assets (1,325) (947)
(Decrease) increase in accrued interest payable and other liabilities (407) 386
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,572 4,452
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale/maturity of securities available for sale 13,996 21,009
Maturities of securities held to maturity 4,595 3,991
Purchase of securities available for sale (32,838) (19,008)
Purchase of securities held to maturity (3,593) (1,749)
Loans and leases, net (49,251) (17,473)
Capital expenditures (296) (354)
Acquisition of Epic Funding Corp. - cash portion ---- (206)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (67,387) (13,790)
- ------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Deposits, net 34,776 31,819
Other short-term borrowings 24,057 (16,000)
Cash dividends (1,000) (1,045)
Stock repurchase (3,048) (3,119)
Proceeds from stock options exercised 188 506
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 54,973 12,161
- ------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (8,842) 2,823
Cash and equivalents at beginning of year 33,524 25,525
- ------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $24,682 $28,348
==================================================================================================================
Other cash flow information:
Interest paid $7,588 $7,058
===========================
Income taxes paid 3,480 2,625
==================================================================================================================
Noncash transactions:
Unrealized (loss) gain on securities available for sale, net of tax $(716) $309
==================================================================================================================
Purchase of Epic Funding Corp.:
Leases ---- $149
Other assets ---- 789
- ------------------------------------------------------------------------------------------------------------------
Total assets acquired ---- 938
Cash paid and expenses incurred ---- (206)
Liabilities assumed:
Other liabilities ---- 231
- ------------------------------------------------------------------------------------------------------------------
Total liabilities assumed ---- 231
- ------------------------------------------------------------------------------------------------------------------
Common stock issued, net of registration costs ---- $501
==================================================================================================================
<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 condensed consolidated financial statements of SJNB
Financial Corp. (the "Company") and its subsidiary, San Jose National
Bank, and its subsidiary, Epic Funding Corp., 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, 1998.
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 (in
thousands, except per share amounts):
Quarter ended Quarter ended
September 30, 1999 September 30, 1998
-------------------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share
Income Shares Amounts Income Shares Amounts
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income and basic EPS $1,498 2,350 $0.64 $1,325 2,466 $0.54
============= =============
Effect of stock option dilutive shares 168 139
=========================== ==========================
Diluted earnings per share $1,498 2,518 $0.60 $1,325 2,605 $0.51
===============================================================================
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
------------------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share
Income Shares Amounts Income Shares Amounts
------------------------------------------------------------------------------------------------------------------
Net income and basic EPS $4,204 2,371 $1.77 $4,241 2,492 $1.70
============= =============
Effect of stock option dilutive shares 128 146
=========================== ==========================
Diluted earnings per share $4,204 2,499 $1.68 $4,241 2,638 $1.61
===============================================================================
</TABLE>
Note C Segment Reporting
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as of December 31, 1998; however,
since management views the Company as operating in only one segment,
separate reporting of financial information under SFAS No. 131 is not
considered necessary.
Note D Other Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In
July 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of
SFAS No. 133, which delays the effective date of SFAS No. 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. The
Company expects to adopt this statement on January 1, 2001. The
Company will begin evaluating the impact of its adoption on the
Company's consolidated financial statements. Currently, management
believes this statement would not have a significant effect on the
Company's consolidated financial position or its consolidated
statement of operations.
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"), and the Bank's subsidiary, Epic Funding
Corp. ("Epic"), San Jose, California. This discussion focuses primarily on the
results of operations of the Company on a consolidated basis for the three and
nine months ended September 30, 1999 and 1998 and the liquidity and financial
condition of the Company, SJNB and Epic as of September 30, 1999 and December
31, 1998.
All dollar amounts in the text in Item 2 are in thousands, except per share
amounts or as otherwise indicated.
Forward-looking Information
This Quarterly Report on Form 10-Q includes forward-looking information which is
subject to the "safe harbor" created by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements (which involve the Company's plans,
beliefs and goals, refer to estimates or use similar terms) 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; a potential
declining health of the economy, either nationally or regionally; the
deterioration of credit quality, which could cause an increase in the provision
for possible loan and lease losses; changes in the regulatory environment;
changes in business conditions, particularly in Santa Clara County real estate
and technology industries; 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 which
could cause disruptions in the Company's operations; and changes in the
securities markets. The Company undertakes no obligation to revise or publicly
release the results of any revision to these forward-looking statements. 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, 1998. See also the section below entitled "Year 2000
Issue" and other risk factors discussed elsewhere in this Report.
Current Developments
On August 27, 1999, the Company and Saratoga Bancorp ("Saratoga") jointly
announced the signing of a definitive Agreement and Plan of Merger pursuant to
which the Company will acquire the outstanding shares of common stock of
Saratoga pursuant to an exchange of common stock of the Company for all common
stock of Saratoga. Saratoga, the parent company of Saratoga National Bank,
headquartered in Saratoga, California, has reported approximately $152 million
in assets and $112 million in deposits as of September 30, 1999, and currently
operates three offices in Saratoga, Los Gatos and San Jose, California. The
merger between the Company and Saratoga will result in the formation of a
financial institution with approximately $559 million in assets, $449 million in
deposits and $50 million in shareholders' equity based on each company's
financial position as of September 30, 1999. The combined shareholder base is
estimated to number approximately 2,000.
Consummation of the merger is subject to approval by the shareholders of both
Saratoga and the Company, clearance by regulatory authorities, including the
Federal Reserve Board, and other terms and conditions customary for a
transaction of this type. Upon consummation of the merger Saratoga shareholders
will receive 0.70 shares of Company Common Stock for each outstanding share of
Saratoga common stock. The merger will be accounted for as a pooling of
interests and is intended to qualify as a tax-free reorganization.
Year 2000 Issue
The "Year 2000 issue" relates to the fact that many computer programs and other
technology utilizing microprocessors use only two digits to represent a year,
such as "99" to represent "1999." In the year 2000 ("Y2K"), such
programs/processors could incorrectly treat the year 2000 as the year 1900. This
issue has grown in importance as the use of computers and microprocessors has
become more pervasive throughout the economy, and interdependencies between
systems has multiplied. The issue must be recognized as a business problem,
rather than simply a computer problem, because of the way its effects could
ripple through the economy. The Company could be affected either directly or
indirectly by the Year 2000 issue. This could happen if any of its critical
computer systems or equipment containing embedded logic fail, if the local
infrastructure (electric power, communications, or water system) fails, if its
significant vendors are adversely impacted, or if its borrowers or depositors
are significantly impacted by their internal systems or those of their customers
or suppliers. The Company's business is heavily dependent on technology and data
processing. To address these issues, the Company has created a Year 2000 team
whose members are familiar with the Company's business and operations.
The Company does not rely on its own data processing software for its
mission-critical needs. Rather, it uses outside vendors to license software
and/or data processing services for its critical applications such as data and
item processing and customer statements. The Company is also dependent on an IBM
AS/400 computer and OS/400 operating system, as well as personal computers
connected on a local area network. The foregoing systems are classified by the
Company as mission-critical information technology ("IT") systems.
The Company's business also involves non-IT products and services, some of which
have embedded technology which might not be Year 2000 compliant. Some non-IT
products and services involve various infrastructure issues such as power,
communications and water, as well as elevators, ventilation and air conditioning
equipment. The Company classifies power and communications as non-IT
mission-critical systems.
The Company's application software, data processing vendors, computer operating
systems, local area network and the power and communication infrastructure
provide critical support to substantially all of its business and operations.
Failure to successfully complete renovation, validation and implementation of
its mission-critical IT systems could have a material adverse effect on the
operations and financial performance of the Company. Moreover, Year 2000 issues
experienced by significant vendors or customers of the Company or power or
communications systems could negatively impact the business and operations of
the Company even if its own critical IT systems are capable of functioning
satisfactorily. Due to the numerous issues and problems which might arise and
the lack of guarantees concerning Year 2000 readiness from non-IT service
providers such as power and communication systems vendors, the Company cannot
quantify the potential cost of problems if the Company's renovation and
implementation efforts or the efforts of significant vendors or customers are
not successful.
State of Readiness
The Company believes it has substantially completed its Year 2000 preparations.
During the latter half of 1997 and the first half of 1998, the Company conducted
a comprehensive review of its IT systems to identify systems that present Year
2000 issues. The Company has developed a plan which it believes should
satisfactorily resolve Year 2000 issues related to its mission-critical IT
systems. The Company's Y2K team has also utilized external resources provided by
its outside vendors and a consultant hired to assist the Company. At the date of
this Report, management of the Company had not identified any serious problems
with any of its mission-critical systems.
The Company converted to a new core processing system (which handles accounting
for loans, deposit accounts and general ledger) in November 1997. The conversion
to this system was not based on Year 2000 issues; however, the vendor of this
system represented to the Company that the system was Y2K compliant. The Company
ran tests on its core processing system at a remote disaster recovery site
during October 1998 with technical assistance from the vendor and an outside
consultant. Actual data from a prior period was used to conduct future date
tests.
Vendors of the Company's other critical IT systems and services have also
informed the Company that their products/systems are Y2K compliant. Based on
information provided by outside service providers and its testing process, the
Company believes that its mission-critical IT systems are substantially Y2K
compliant.
By March 31, 1999, testing of both critical and non-critical local area network
applications was substantially complete. The Company has established a policy
limiting changes to ensure the Year 2000 readiness of various systems is not
compromised during the remainder of 1999. The Company cannot test for Y2K
readiness of its power and telecommunication vendors, although the Company is
monitoring their readiness.
During the second quarter of 1999, the Company replaced its voice mail and
e-mail systems, which were determined not to be Year 2000 compliant, with Year
2000 compliant systems.
Costs
The Company is expensing all period costs associated with the Year 2000 issue.
Through September 30, 1999 the amount of such expenses since inception of the
project totaled approximately $194. It is anticipated that additional Year 2000
Project expenses for the remainder of 1999 will be less than $5. Expenses
include costs for consultants, running tests and technical assistance from
vendors, as well as development of contingency plans and costs of communicating
with customers concerning Year 2000 issues. Also included are capital
expenditures of approximately $50 which have been incurred during 1999 to
replace equipment or systems which were nearing the end of their life cycle and
found to be non-Year 2000 compliant. These cost estimates exclude the expense of
the Company's internal staff time and systems or products which were replaced
for other business reasons. The diversion of resources to Year 2000 issues has
resulted in some delays in implementation of other information systems projects.
The Company does not believe that these delays have had a material effect on its
growth in revenues or expense. There can be no assurance that these expenses
will not increase if the Company is adversely impacted by Year 2000
complications.
Risks
It is inherently difficult to predict the future outcome of most events. The Y2K
issue is no exception due to the complexity of technology, the numerous
variables and the inability to assess the impact of the Year 2000 issue on the
local, national and international economy. Management has identified a
long-range, most reasonably likely, worst-case scenario. This scenario suggests
that the Y2K issue might negatively impact some significant customers and non-IT
vendors/products through the failure of the customer and/or vendor to be
prepared or the impact on them of the failure of their own vendors and
customers. Management believes that this scenario could occur in conjunction
with an economic recession arising from the Y2K issue. The Bank's asset quality
and earnings could be adversely impacted in that event. It is not possible to
predict the effect of this Y2K scenario on the economic viability of the Bank's
customers and the related adverse impact it may have on the Company's financial
position and results of operations, including the level of the Bank's provision
for possible loan losses in future periods. Further, there can be no assurance
that other possible adverse scenarios will not occur.
The Company presently believes that, based upon its Year 2000 testing program
and assuming representations of Year 2000 readiness from significant vendors and
customers are accurate, the Year 2000 issue should not pose significant
operational risks for the Company's IT systems. However, other significant risks
relating to the Year 2000 issue are that of the unknown impact of this problem
on the operations of the Bank's customers and vendors, the impact of
infrastructure failures such as power, communications and water on the Company's
IT systems, the economy and future actions which banking or securities
regulators may take.
The Company is making efforts to ensure that its customer base is aware of the
Year 2000 issue. In addition to seminars for and mailings to its customer base,
the Bank has amended its credit policy and credit authorization documentation to
include consideration regarding the Year 2000 issue. Significant customer
relationships have been identified, and such customers have been contacted by
the Bank's account officers to determine whether they are aware of Year 2000
risks and whether they are taking preparatory actions. An initial assessment of
these customers was substantially completed in late 1998. The Company has
continued to monitor the Year 2000 preparedness of its material customers during
1999.
The Company has also contacted major vendors and suppliers of non-software
products and services (including those where products utilize embedded
technology) to determine the Year 2000 readiness of such organizations and/or
the products and services which the Company purchases from such organizations.
The Company is monitoring reports provided by such vendors regarding their
preparations for Year 2000. This is an ongoing process, and the Company intends
to continue to monitor information provided by such vendors through the century
date change.
Federal banking regulators have responsibility for supervision and examination
of banks to determine whether they have an effective plan for identifying,
renovating, testing and implementing solutions for Year 2000 processing and
coordinating Year 2000 processing capabilities with their customers, vendors and
payment system partners. Examiners are also required to assess the soundness of
an institution's internal controls and to identify whether further corrective
action may be necessary to ensure an appropriate level of attention to Year 2000
processing capabilities. Management believes it is currently in compliance with
the federal bank regulatory guidelines and timetables.
Contingency Plans
The Company maintains a Disaster Contingency and Business Resumption Plan which
contains policies and procedures to follow in the event of a significant
business disruption due to events such as fire, earthquake, flood, etc. The
Company has developed contingency plans to address potential business
disruptions which might result from Year 2000 issues. Management engaged an
independent party to review these plans during June, 1999. The Company further
refined these plans during the third quarter of 1999. The plans will utilize a
combination of alternative procedures and manual intervention to compensate for
the potential loss of certain computer systems, power or telecommunications
service should they fail as a result of Year 2000 complications. There can be no
assurance, however, that such contingency plans will be successful in the event
of an extended loss of such systems or widespread loss of power and
telecommunications services.
<PAGE>
Selected Financial Data
<TABLE>
<CAPTION>
The following presents selected financial data and ratios as of and for the three and nine months ended September 30,
1999 and 1998:
SELECTED FINANCIAL DATA AND RATIOS
- ----------------------------------------------------------------------------------------------------------------------------
For the quarters For the nine months
ended September 30, ended September 30,
--------------------------------------------------------------------
SELECTED ANNUALIZED OPERATING RATIOS: 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on average equity 17.35% 15.56% 16.44% 16.72%
Return on average tangible equity 20.99 19.39 20.05 20.41
Return on average assets 1.47 1.51 1.49 1.69
Net recoveries to average loans and leases (0.08) (0.02) (0.06) (0.03)
Average equity to average assets 8.49 9.71 9.06 10.12
Average tangible equity to average tangible assets 7.63 8.60 8.12 9.05
PER SHARE DATA:
Net income per share - basic $0.64 $0.54 $1.77 $1.70
Net income per share - diluted 0.60 0.51 1.68 1.61
Net income per share - (core) - diluted (1) 0.64 0.55 1.82 1.74
Dividends per share 0.14 0.14 0.42 0.42
============================================================================================================================
At September 30, At December 31, At September 30,
SHAREHOLDERS' EQUITY 1999 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity per share $14.92 $14.48 $14.04
Tangible equity per share 13.34 12.84 12.34
SELECTED FINANCIAL POSITION RATIOS:
- -----------------------------------------------------------------------------------------------------------------------------
Leverage capital ratio 7.90% 9.10% 8.80%
Total risk based capital ratio 10.37% 11.82% 11.84%
Nonperforming loans and leases to total loans and leases 0.40% 0.09% 0.18%
Nonperforming assets to total assets 0.30% 0.07% 0.13%
Allowance for possible loan and lease losses to total loans 1.66% 1.83% 1.91%
Allowance for possible loan and lease losses
to nonperforming loans and leases 417% 1,983% 1,081%
Allowance for possible loan and lease losses
to nonperforming assets 417% 1,983% 1,081%
=============================================================================================================================
<FN>
(1) Excludes after-tax effect of goodwill and core deposit intangible amortization.
</FN>
</TABLE>
Summary of Financial Results
The Company reported net income of $1,498 or $0.60 per share - diluted for the
quarter ended September 30, 1999, compared with net income of $1,325 or $0.51
per share - diluted for the third quarter of 1998. The increase in net income
compared to the quarter ended September 30, 1998 was primarily the result of the
increase in net interest income, an increase in other income, offset primarily
by an increase in incentive accruals and staff additions due to the increase in
the Bank's growth.
For the nine months ended September 30, 1999, net income was $4,204 or $1.68 per
share - diluted compared with net income of $4,241 or $1.61 per share - diluted
for the same period in 1998. The decrease in net income is primarily related to
the increase in costs associated with the acquisition of Epic and the start-up
of the new de novo branch office in Danville. Diluted earnings per share
compared to the nine months ended September 30, 1998 increased seven cents as
net income declined, due to the impact of the Company's stock repurchase program
which was suspended effective April 1, 1999.
Net Interest Income
Net interest income for the quarter ended September 30, 1999, increased $610 as
compared to the same quarter a year ago. The Bank's average earning assets for
the same period increased by $54 million, as the result of growth in the Bank's
loan and lease portfolio of $65 million.
Net interest margin for the third quarter of 1999 was 6.05% as compared to 6.28%
for the same quarter in 1998. This decrease was primarily related to the
increase in the Bank's cost of funds during the third quarter of 1999. Cost of
funds increased as the Bank had to source funds with a higher cost to fund the
Bank's growth during the period and to replace certain deposits which were less
expensive.
The net interest margin for the first nine months of 1999 was 6.08% as compared
to 6.51% for the same period in 1998. This decrease was primarily related to the
decrease in the yield on earning assets; in particular the yield on loans and
leases, which accounted for approximately 81% of earning assets, declined from
10.64% to 9.80%. During the same period, the actual cost of funds for the Bank
also decreased from 4.00% in 1998 to 3.95% in 1999. This decrease was due
generally to the lower interest rate environment during the first two quarters
of 1999 offset by the change in the mix of the Bank's deposit base and because
rates on deposits resist declines because of their lower base and the increased
cost of sourcing new deposits.
Economic conditions in Northern California have remained relatively strong in
the first nine months of 1999, although there are indications that this economic
strength could be threatened by the tightening of the skilled labor force in
Santa Clara County and the potential for the real estate market to slow down.
According to information regarding real estate activity, there has been an
increase in the County's vacancy rate and a counter effect of declining lease
and rental rates, the impact of which could be a slow-down in real estate
construction activity. During the last several months the vacancy rate has
leveled off and lease and rental rates are beginning to increase slightly. In
addition, the competitive environment within the Bank's marketplace continues to
be aggressive and the competition among banks for additional loans, leases and
deposits has caused more competitive pricing.
The following tables shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin, on an
annualized basis, for the three and nine months ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
AVERAGE BALANCES, RATES AND YIELDS
Fully Taxable Equivalent
(dollars in thousands)
Quarter ended September 30,
----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans and leases, net (2) $303,567 $7,629 9.97% $238,197 $6,249 10.41%
Securities available for sale (3) 55,580 879 6.27 44,265 658 5.90
Securities held to maturity:
Taxable (4) 3,164 53 6.65 8,348 127 6.04
Nontaxable (5) 7,156 125 6.93 3,946 73 7.34
Money market investments 9,611 123 5.08 30,305 428 5.60
Interest rate hedging instruments ---- (14) ---- ---- (2) ----
- --------------------------------------------------------------------------- --------------------------
Total interest-earning assets 379,078 8,795 9.20 325,061 7,533 9.19
- --------------------------------------------------------------------------- --------------------------
Allowance for possible loan and lease losses (5,022) (4,545)
Cash and due from banks 15,734 13,692
Other assets 9,935 9,525
Core deposit intangibles and goodwill, net 3,772 4,231
- -------------------------------------------------------------- -------------
Total Assets $403,497 $347,964
============================================================== =============
Liabilities and Shareholders' equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $52,653 331 2.49 $54,787 369 2.67
Money market and savings 100,902 919 3.61 107,645 966 3.56
Certificates of deposit:
Less than $100 20,542 263 5.08 12,986 166 5.07
$100 or more 101,723 1,264 4.93 63,184 862 5.41
- --------------------------------------------------------------------------- --------------------------
Total certificates of deposits 122,265 1,527 4.95 76,170 1,028 5.35
- --------------------------------------------------------------------------- --------------------------
Other borrowings 16,123 239 5.88 981 22 8.90
- --------------------------------------------------------------------------- --------------------------
Total interest-bearing liabilities 291,943 3,016 4.10 239,583 2,385 3.95
- --------------------------------------------------------------------------- --------------------------
Noninterest-bearing demand 71,351 68,973
Accrued interest payable and other liabilities 5,946 5,633
- -------------------------------------------------------------- -------------
Total liabilities 369,240 314,189
- -------------------------------------------------------------- -------------
Shareholders' equity 34,257 33,775
- -------------------------------------------------------------- -------------
Total Liabilities and Shareholders' equity $403,497 $347,964
==============================================================------------- =============-------------
Net interest income and margin (6) $5,779 6.05% $5,148 6.28%
================================================= ========================= =========================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $322 for 1999, and $301 for 1998. Nonperforming loans
and leases have been included in average loan and lease balances.
(3) Includes dividend income of $29 and $34 received in 1999 and 1998,
respectively.
(4) Includes dividend income of $8 received in each of 1999 and 1998.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($50 in 1999 and $29 in 1998).
(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
Fully Taxable Equivalent
(dollars in thousands) Nine months ended September 30,
----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases, net (2) $285,863 $20,950 9.80% $231,296 $18,404 10.64%
Securities available for sale (3) 43,328 1,983 6.12 47,779 2,172 6.08
Securities held to maturity:
Taxable (4) 4,670 224 6.41 9,169 423 6.17
Nontaxable (5) 5,826 313 7.19 3,728 213 7.64
Money market investments 13,508 507 5.02 19,777 823 5.56
Interest rate hedging instruments ---- (34) ---- ---- (7) ----
- --------------------------------------------------------------------------- --------------------------
Total interest-earning assets 353,195 23,943 9.06 311,749 22,028 9.45
- --------------------------------------------------------------------------- --------------------------
Allowance for possible loan and lease losses (4,942) (4,565)
Cash and due from banks 15,614 14,602
Other assets 9,560 9,411
Core deposit intangibles and goodwill, net 3,874 3,931
- -------------------------------------------------------------- -------------
Total Assets $377,301 $335,128
============================================================== =============
Liabilities and Shareholders' equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $52,381 986 2.52 $50,941 997 2.62
Money market and savings 94,682 2,384 3.37 100,640 2,706 3.59
Certificates of deposit:
Less than $100 16,704 619 4.95 13,713 527 5.14
$100 or more 94,424 3,514 4.98 57,989 2,364 5.45
- --------------------------------------------------------------------------- --------------------------
Total certificates of deposits 111,128 4,133 4.97 71,702 2,891 5.39
- --------------------------------------------------------------------------- --------------------------
Other borrowings 8,399 366 5.83 5,218 245 6.28
- --------------------------------------------------------------------------- --------------------------
Total interest-bearing liabilities 266,590 7,869 3.95 228,501 6,839 4.00
- --------------------------------------------------------------------------- --------------------------
Noninterest-bearing demand 70,702 67,365
Accrued interest payable and other liabilities 5,820 5,347
- -------------------------------------------------------------- -------------
Total liabilities 343,112 301,213
- -------------------------------------------------------------- -------------
Shareholders' equity 34,189 33,915
- -------------------------------------------------------------- -------------
Total Liabilities and Shareholders' equity $377,301 $335,128
==============================================================------------- =============-------------
Net interest income and margin (6) $16,074 6.08% $15,189 6.51%
================================================= ========================= =========================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $1,002 for 1999, and $928 for 1998. Nonperforming
loans and leases have been included in average loan and lease balances.
(3) Includes dividend income of $92 and $113 received in 1999 and 1998,
respectively.
(4) Includes dividend income of $24 received in 1999 and $23 received in 1998.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($125 in 1999 and $85 in 1998).
(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 and Lease Losses
The level of the allowance for possible loan and lease losses and the related
provision reflect management's judgment as to the inherent risk of loss
associated with the loan and lease portfolios as of September 30, 1999 and 1998
based on information available to management as of said dates. Based on
management's evaluation of such risks, an addition of $150 was made to the
allowance for possible loan and lease losses in the three months ended September
30, 1999 and an addition of $250 was made for the nine months ended September
30, 1999 as compared to an addition of $150 for the third quarter of 1998 and
for the nine months ended September 30, 1998. See "Loan and Lease Portfolio."
Other Income
The following table sets forth the components of other income and the percentage
distribution of such income for the three and nine month periods ended September
30, 1999 and 1998:
<TABLE>
<CAPTION>
OTHER INCOME
(dollars in thousands)
Quarter ended September 30, Nine months ended September 30,
--------------------------------------------------------------------------------
1999 1998 1999 1998
Amount Percent Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service charges on deposits $251 83.95% $149 59.60% $603 56.78% $461 59.33%
Other operating income 99 33.11 101 40.40 520 48.96 324 41.70
Net loss on securities available for sale (51) (17.06) ----- ----- (61) (5.74) (8) (1.03)
- -------------------------------------------------------------------------------------------------------------------------
Total $299 100.00% $250 100.00% $1,062 100.00% $777 100.00%
=========================================================================================================================
</TABLE>
The increase in the service charges on deposits of $102 and $142 for the three
and nine months ended September 30, 1999, respectively, as compared to the same
periods in 1998 is due mainly to a change in the method of assessing certain
service charges on deposit accounts. The increase in other operating income of
$196 for the nine months of 1999 compared to the nine months of 1998 is mainly
due to the reversal during the first quarter of 1999 of a specific reserve
established on the date it was purchased for an acquired SBA loan which was paid
in full.
Other Expenses
The following schedule summarizes the major categories of expense as a
percentage of average assets on an annualized basis:
<TABLE>
<CAPTION>
OTHER EXPENSES AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands)
Quarter ended September 30, Nine months ended September 30,
---------------------------------------------------------------------------------------------
1999 1998 1999 1998
Amount Percent (1) Amount Percent (1) Amount Percent (1) Amount Percent (1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits $2,085 2.07% $1,679 1.93% $5,794 2.05% $5,009 1.99%
Data processing 153 0.15 172 0.20 460 0.16 497 0.20
Client services paid by Bank 102 0.10 129 0.15 341 0.12 315 0.13
Legal and professional fees 118 0.12 80 0.09 347 0.12 224 0.09
Amortization of core deposit
intangibles and goodwill 114 0.11 119 0.14 342 0.12 337 0.13
Furniture and equipment 129 0.13 113 0.13 352 0.12 301 0.12
Occupancy 114 0.11 102 0.12 331 0.12 263 0.10
Business promotion 96 0.10 79 0.09 278 0.10 248 0.10
Directors' & shareholders' 80 0.08 70 0.08 251 0.09 193 0.08
Other 356 0.35 391 0.45 1,082 0.38 1,057 0.42
- ------------------------------------------------------------------------------------------------------------------------------
Total $3,347 3.32% $2,934 3.37% $9,578 3.38% $8,444 3.36%
==============================================================================================================================
<FN>
(1) The percentages are calculated by annualizing the expenses and comparing
that amount to the average assets for the respective three and nine month
periods ended September 30, 1999 and 1998.
</FN>
</TABLE>
Total other expenses for the third quarter of 1999 increased $413 from the same
period a year ago, primarily as a result of increased incentive accruals, staff
additions relating to increased volumes, and salary increases necessitated by
the competitive environment for personnel.
Total other expenses for the nine months ended September 30, 1999 increased
$1,134 from the same period a year ago, primarily as a result of the increased
incentive accruals, additions to staff and the competitive environment for
personnel, in addition to the acquisition of Epic and the opening of the East
Bay Regional Office, both occurring in July 1998. Increases in occupancy also
related to the acquisition of Epic and the opening of the East Bay Regional
Office. Director and shareholder expense increased due to increased director
fees and increased transfer agent costs. Legal and professional costs increased
mainly due to increased costs associated with the preparation of proxy materials
and the annual report and contract negotiations.
Income Tax Provision
The effective tax rate for the nine months ended September 30, 1999 and 1998 was
41%. The rate is impacted by several items, the most significant of which were
the amortization of intangibles, tax exempt income, the California Franchise
tax, the California Franchise Tax Enterprise Tax Zone Credit and the impact of
the Bank's investment in a Low Income Housing Tax Credit fund.
Financial Condition and Earning Assets
Consolidated assets increased to $407 million at September 30, 1999 compared to
$350 million at December 31, 1998. The increase related primarily to an increase
in investment securities and loans and leases and was funded principally by an
increase in money market and savings accounts of $7 million; growth in
certificates of deposit of less than $100 of $9 million which were raised
through an internet listing service; and growth in certificates of deposit of
greater than $100 of approximately $25 million, which resulted from the
placement of three separate wholesale deposit arrangements. See "Funding."
Money Market Investments
Money market investments, which include federal funds sold, were $9.7 million at
September 30, 1999 as compared to $22.3 million at December 31, 1998. This
decrease resulted primarily from the increase in investment securities and loans
and leases. See "Securities" and "Loan and Lease Portfolio."
Securities
The following table shows the composition of the securities portfolio at
September 30, 1999 and December 31, 1998. There were no issuers of securities
(except U.S. Government Securities) for which the book value of securities of
any issuer held by the Bank exceeded 10% of the Company's shareholders' equity.
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO
(dollars in thousands)
September 30, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
U. S. Treasury $2,005 $16 $2,021 $3,005 $72 $3,077
U. S. Government Agencies 21,217 (10) 21,207 25,220 466 25,686
Mortgage-backed 18,676 (140) 18,536 3,865 101 3,966
Asset-backed 2,000 (4) 1,996 ---- ---- ----
Trust preferred 7,064 (299) 6,765 ---- ---- ----
Mutual funds 2,518 (153) 2,365 2,638 (151) 2,487
- -----------------------------------------------------------------------------------------------------------------------------
Total available for sale 53,480 (590) 52,890 34,728 488 35,216
- -----------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Treasury ---- ---- ---- 1,000 7 1,007
U. S. Government Agencies 1,499 7 1,506 3,496 38 3,534
State and municipal (nontaxable) 7,165 (326) 6,839 4,213 116 4,329
Mortgage-backed 964 19 983 1,927 35 1,962
- -----------------------------------------------------------------------------------------------------------------------------
Total held to maturity 9,628 (300) 9,328 10,636 196 10,832
Federal Reserve Bank Stock 537 ---- 537 537 ---- 537
- -----------------------------------------------------------------------------------------------------------------------------
Total 10,165 (300) 9,865 11,173 196 11,369
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $63,645 $(890) $62,755 $45,901 $684 $46,585
=============================================================================================================================
</TABLE>
Unrealized loss generally results from the impact of current market rates being
greater than those rates in effect at the time the Bank purchased the
securities. The unrealized loss on securities available for sale as of September
30, 1999 was $590 as compared to an unrealized gain of $488 as of December 31,
1998. The significant change in the unrealized gain or loss position is due to
the increase in interest rates during the second and third quarters of 1999 and
the extension of the weighted average maturity of the portfolio. The Bank's
weighted average maturity of the available for sale portfolio was approximately
3.36 years as of September 30, 1999, while at December 31, 1998 it was 2.0
years. The increase in the weighted average maturity during this period is
primarily due to the addition to the portfolio of mortgage- and asset-backed
securities and trust preferred securities. 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 approximately 3.36%.
The unrealized loss on securities held to maturity was $300 as of September 30,
1999, as compared to an unrealized gain of $196 as of December 31, 1998. The
reasons for the changes in the unrealized gain or loss position are as noted in
the above paragraph. The Bank's weighted average maturity of the held to
maturity investment portfolio was approximately 8.78 years as of September 30,
1999, while at December 31, 1998 it was 3.9 years. The increase in the maturity
of the securities held to maturity during this period is due to the addition of
only municipal securities with average lives of over ten years. 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 5.20%.
The maturities and yields of the investment portfolio at September 30, 1999 are
shown below:
<TABLE>
<CAPTION>
MATURITY AND YIELDS OF INVESTMENT SECURITIES
- -----------------------------------------------------------------------------------------------------------------------
At September 30, 1999
(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)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury:
Within 1 year $1,000 $1,004 5.99% ----- ----- -----
After 1 year within 5 years 1,005 1,017 6.23 ----- ----- -----
-------------------------------------------
Totals 2,005 2,021 6.11 ----- ----- -----
-------------------------------------------
U.S. Government Agencies:
Within 1 year 3,998 4,012 6.11 $1,000 $1,000 6.23%
After 1 year within 5 years 17,219 17,195 6.03 499 505 6.78
--------------------------------------------------------------------------------------
Totals 21,217 21,207 6.05 1,499 1,506 6.41
--------------------------------------------------------------------------------------
State and municipal:
Within 1 year ----- ----- ----- 412 414 6.89
After 1 year within 5 years ----- ----- ----- 782 787 6.72
After 5 years within 10 years 369 368 8.08
After 10 years ----- ----- ----- 5,602 5,271 7.42
-------------------------------------------
Totals ----- ----- ----- 7,165 6,839 7.35
-------------------------------------------
Mortgage-backed
After 1 year within 5 years 2,997 3,003 6.73 964 983 7.90
After 5 years within 10 years 7,673 7,565 6.26 ----- ----- -----
After 10 years 8,006 7,968 6.83 ----- ----- -----
--------------------------------------------------------------------------------------
Totals 18,676 18,536 6.58 964 983 7.90
--------------------------------------------------------------------------------------
Asset-backed
After 1 year within 5 years 1,000 1,004 6.60 ----- ----- -----
After 5 years within 10 years 1,000 992 6.15 ----- ----- -----
-------------------------------------------
Totals 2,000 1,996 6.38 ----- ----- -----
-------------------------------------------
Trust preferred
After 10 years 7,064 6,765 7.91 ----- ----- -----
-------------------------------------------
Totals 7,064 6,765 7.91 ----- ----- -----
-------------------------------------------
Mutual funds:
-------------------------------------------
Within 1 year 2,518 2,365 4.71 ----- ----- -----
-------------------------------------------
Other
-------------------------------------------
After 10 years ----- ----- ----- 537 537 6.00
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities 53,480 $52,890 6.43% $10,165 $9,865 6.44%
========================================================================
Net unrealized loss on
securities available for sale (590)
--------------
Total investment securities,
net carrying value $52,890
==============
<FN>
(1) Fully taxable equivalent.
</FN>
</TABLE>
Loan and Lease Portfolio
The following table provides a breakdown of the Company's consolidated loans and
leases by type of borrower:
<TABLE>
<CAPTION>
LOAN AND LEASE PORTFOLIO
(dollars in thousands)
September 30, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $94,926 30.5% $90,304 34.5%
Leasing 13,291 4.3 3,768 1.4
Factoring/Asset based lending 11,601 3.7 7,393 2.8
Real estate construction 45,742 14.7 32,340 12.4
Real estate-other 115,112 37.1 101,559 38.9
Consumer 11,077 3.6 9,647 3.7
Other 19,660 6.3 17,031 6.5
Unearned fee income (768) (0.2) (662) (0.2)
- ------------------------------------------------------------------------------------------------------------
Total loans and leases $310,641 100.0% $261,380 100.0%
============================================================================================================
</TABLE>
Consolidated loans and leases increased to $311 million at September 30, 1999,
from $261 million at December 31, 1998. The growth in leasing and
factoring/asset-based lending in this period is due to the acquisition of Epic.
Real estate-other is comprised of real estate term loans and, due to the low
interest rate environment and the increased appetite for refinancing, the demand
for such loans was substantial during late 1998 and early 1999. Similarly, real
estate construction loans have increased due to the significant pickup in
activity in commercial and residential development. The Bank has elected not to
aggressively seek or renew fixed rate loans (other than leasing) or loans where,
in management's opinion, the Bank's underwriting criteria is not satisfied; this
has caused a slow down in real estate - other loan production and an increase in
payoffs when the Bank has not met competitive pressures.
Approximately 56% of the loan and lease portfolio is directly related to real
estate or real estate interests, including real estate construction loans, real
estate-other, mortgage warehouse lines (0.4%, included in the Other category),
real estate equity lines (1.8%, included in the Consumer category), and loans to
real estate developers for short-term investment purposes (1%) and loans for
real estate investment purposes made to non-developers (1%). The latter two
types of loans are included in the Other category. Approximately 31% of the loan
and lease portfolio is made up of commercial loans; however, in management's
view, no particular industry represents a significant portion of such loans.
The following table shows the maturity and interest rate sensitivity of
commercial, real estate construction and real estate-other loans at September
30, 1999. Approximately 80% of the commercial and real estate loan portfolio
have floating interest rates which, in management's opinion, generally limits
the exposure to interest rate risk on long-term loans and leases but can have a
negative impact when rates decline.
<TABLE>
<CAPTION>
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSISTIVITY
(dollars in thousands)
Balances maturing Interest Rate Sensitivity
----------------------------------------------------------------------------
Balances at One year Predetermined Floating
September 30, One year through five Over five interest interest
1999 or less years years rates rates
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Commercial $94,926 $55,741 $29,479 $9,706 $2,480 $92,446
===========================================================================================================================
Real estate construction $45,742 $42,175 $2,702 $865 $460 $45,282
===========================================================================================================================
Real estate-other $115,113 $14,619 $27,175 $73,319 $47,237 $67,876
===========================================================================================================================
</TABLE>
The Company utilizes a method of assigning a minimum and maximum loss ratio to
each grade of loan or lease within each category of borrower (commercial, real
estate-other, real estate construction, factoring/asset-based lending, consumer,
etc.) and leases. Loans and leases 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 and leases.
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 and lease is
evaluated on the basis of whether or not it is impaired. For impaired loans and
leases, 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 and lease 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 and lease losses was approximately $5.2
million at September 30, 1999, or 1.66% of total loans and leases outstanding on
such date. Based on information available as of the date of this Report,
management believes the allowance for possible loan and lease losses, determined
as described above, is adequate for potential losses foreseeable at September
30, 1999.
The allowance for possible loan and lease losses is a general reserve available
against the total loan and lease portfolio and off-balance sheet credit
exposure. While management uses available information to recognize losses on
loans and leases, 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 loan and lease losses. Such agencies may
require the Bank to provide additions to the allowance based on their judgment
of information available to them at the time of their examination.
The following schedule provides an analysis of the allowance for possible loan
and lease losses:
<TABLE>
<CAPTION>
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
(dollars in thousands)
Quarter ended Nine months ended Year ended
September 30, September 30, December 31,
---------------------------------------------------------
1999 1998 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, beginning of the period $4,938 $4,540 $4,778 $4,493 $4,493
Charge-offs by loan or lease category:
Commercial ---- ---- 6 125 234
Consumer 1 ---- 21 ---- ----
- ---------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 1 ---- 27 125 234
- ---------------------------------------------------------------------------------------------------------------------------------
Recoveries by loan or lease category:
Commercial 63 12 133 84 118
Real estate-construction 1 ---- 2 ---- ----
Real estate-other ---- ---- ---- 33 33
Consumer 1 ---- 16 67 68
- ---------------------------------------------------------------------------------------------------------------------------------
Total recoveries 65 12 151 184 219
- ---------------------------------------------------------------------------------------------------------------------------------
Net (recoveries) charge-offs (64) (12) (124) (59) 15
- ---------------------------------------------------------------------------------------------------------------------------------
Provision charged to expense 150 150 250 150 300
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of the period $5,152 $4,702 $5,152 $4,702 $4,778
=================================================================================================================================
Ratios:
Net (recoveries) charge-offs to average loans and leases, annualized (.08%) (.02%) (.06%) (.03%) .01%
Allowance to total loans and leases at the end of the period 1.66% 1.91% 1.66% 1.91% 1.83%
Allowance to nonperforming loans and leases at end of the period 417% 1,081% 417% 1,081% 1,983%
=================================================================================================================================
</TABLE>
During the three months ended September 30, 1999 and 1998, there were no
significant charge-offs and for the nine months ended September 30, 1999 and
1998, charge-offs amounted to $27 and $125, 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
and lease losses was 417% of nonperforming loans and leases at September 30,
1999 compared to 1,983% at December 31, 1998. The decrease in the percentage of
nonperforming loans and leases to the allowance for loan and lease losses was
due to the addition of two loans which were over ninety days past due and still
accruing interest. See "Nonperforming Loans and Leases."
Nonperforming Loans and Leases
Nonperforming loans and leases consist of loans and leases for which the accrual
of interest has been suspended, restructured loans and leases and other loans
and leases with principal or interest contractually past due 90 days or more and
still accruing. The following table provides information about such loans and
leases:
<TABLE>
<CAPTION>
NONPERFORMING LOANS AND LEASES
(dollars in thousands)
September 30,1999 December 31,1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans and leases accounted for on a non-accrual basis $294 $197
Loans and leases restructured and in compliance with modified terms ----- 44
Other loans with principal or interest contractually pastdue 90 days or more 942 -----
- ----------------------------------------------------------------------------------------------------------------------
Total $1,236 $241
======================================================================================================================
</TABLE>
As of September 30, 1999, nonperforming loans and leases consisted of six loans.
Three loans constitute $1,125 of the total, all of which are secured by real
estate and one of which has an SBA guarantee. One of the above loans is also
current as to its payments, but past maturity and currently awaiting Bankruptcy
Court approval to renew. Loss exposure on these loans is not considered
significant.
Management conducts an ongoing evaluation and review of the loan and lease
portfolio in order to identify potential nonperforming loans and leases.
Management considers loans and leases which are classified for regulatory
purposes, and loans and leases 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 credit information about which management
is aware which causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms. Based on such reviews as
of September 30, 1999, management has not identified any significant loans or
leases not included within the Nonperforming Loans and Leases table above with
respect to which known information causes management to have serious doubts
about the borrowers' abilities to comply with present repayment terms, such that
the loans and leases might subsequently be classified as nonperforming. Changes
in world, national or local economic conditions or specific industry segments
(including declining exports), rising interest rates, declines in real estate
values, Year 2000 issues, declines in securities markets and acts of nature
could have an adverse effect on the ability of borrowers to repay outstanding
loans and leases and the value of real estate and other collateral securing such
loans and leases.
Funding
The following table provides a breakdown of deposits by category as of the dates
indicated:
<TABLE>
<CAPTION>
DEPOSIT CATEGORIES
(dollars in thousands)
September 30, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Deposits Amount Deposits
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $64,935 19.2% $70,962 23.5%
Interest-bearing demand 51,057 15.1 49,468 16.4
Money market and savings 96,969 28.8 91,320 30.2
Certificates of deposit:
Less than $100 21,140 6.3 12,492 4.1
$100 or more 103,117 30.6 78,200 25.8
- ----------------------------------------------------------------------------------------------------------
Total $337,218 100.0% $302,442 100.0%
==========================================================================================================
</TABLE>
Deposits as of September 30, 1999 were $337 million compared to $302 million at
December 31, 1998. The source of deposit growth for the first nine months of
1999 was due to several factors: 1) the growth in money market and savings
deposits of approximately $6 million due to increased business activity; 2) the
growth of certificates of deposit of less than $100, which was due to the
addition of approximately $9 million raised through the use of an internet
listing service; and 3) the growth of certificates of deposit of greater than
$100 of approximately $25 million which was mainly due to the placement of three
large wholesale certificates. Non-interest bearing deposits decreased $6 million
due to the Bank's decision not to accept title company escrow deposits under the
current competitive pricing structure for such deposits. Although money market
and savings deposits increased approximately $6 million since the beginning of
the year, during this period a large customer with money market deposit accounts
commenced consolidation of its accounts in the Midwest and approximately $18
million of such deposits were transferred out of the Bank. After adjusting for
the loss of this single customer, money market and savings accounts increased
approximately $24 million during the nine months ended September 30, 1999,
mainly due to the Bank's business development efforts.
Management believes that these non-interest bearing deposits could decrease as a
percent of the total, in part, due to competitive pressures and changes in the
deposit products being utilized by some of the Bank's customers, which has
caused a shift to interest-bearing products. See "Capital and
Liquidity-Liquidity."
Other short-term borrowings include $19 million in overnight federal funds
purchases and a 5.9% one year $10 million repurchase agreement due June 9, 2000.
The funds relating to the one year repurchase agreement were used to purchase
certain investment instruments during the second quarter of 1999.
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 income is negatively impacted in the short
term by a decline in interest rates. Conversely, an increase in interest rates
should have a short-term positive impact on net interest income.
To counter its asset-sensitive interest rate position, the Bank has entered into
an interest rate "floor" as follows:
INTEREST RATE FLOOR
- -------------------------------------------------------------------------------
At September 30, 1999 (in thousands)
- -------------------------------------------------------------------------------
Notional amount $10,000
- -------------------------------------------------------------------------------
Floor rate 8.50%
- -------------------------------------------------------------------------------
Remaining life (months) 5
- -------------------------------------------------------------------------------
Carrying amount $19
- -------------------------------------------------------------------------------
Fair market value $7
- -------------------------------------------------------------------------------
Expiration date December 11, 1999
- -------------------------------------------------------------------------------
The Bank has paid a fixed premium for which it will receive the amount of
interest based on the notional amount and the difference between the floor rate
and the current prime rate when the prime rate is less than the floor rate. This
will protect the Bank against decreases in its net income when the prime rate
decreases. Settlement is done quarterly, and the Bank records the impact of this
hedge on an accrual basis.
Capital and Liquidity
Capital
The Federal Reserve Board's risk-based capital guidelines require that total
capital be in excess of 8% of total assets on a risk-weighted basis. Under the
guidelines for a bank holding company, capital requirements are based upon the
composition of the Company's asset base and the risk factors assigned to those
assets. The guidelines characterize an institution's capital as being "Tier 1"
capital (defined to be principally shareholders' equity less intangible assets)
and "Tier 2" capital (defined to be principally the allowance for loan losses,
limited to one and one-fourth percent of gross risk weighted assets). The
guidelines require the Company to maintain a risk-based capital target ratio of
8%, one-half or more of which should be in the form of Tier 1 capital.
The Comptroller of the Currency also requires SJNB to maintain adequate capital.
The Comptroller's current regulations require national banks to maintain Tier 1
leverage capital ratio equal to at least 3% to 5% of total assets, depending on
the Comptroller's evaluation of the Bank. The Comptroller also has adopted
risk-based capital requirements. Similar to the Federal Reserve's guidelines,
the amount of capital the Comptroller requires a bank to maintain is based upon
the composition of its asset base and risk factors assigned to those assets. The
guidelines require the Bank to maintain a risk-based capital target ratio of 8%,
one-half or more of which should be in the form of Tier 1 capital. The capital
ratios of the Bank are similar to the capital ratios of the Company.
The table below summarizes the various capital ratios of the Company and the
Bank at September 30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
Risk-based and Leverage Capital Ratios
(dollars in thousands)
September 30, 1999 December 31, 1998
------------------------------------------------------
Company-Risk-based Amount Ratio Amount Ratio
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tier 1 capital $31,579 9.12% $30,810 10.57%
Tier 1 capital minimum requirement 13,850 4.00 11,664 4.00
------------------------------------------------------
Excess $17,729 5.12% $19,146 6.57%
======================================================
Total capital $35,917 10.37% $34,469 11.82%
Total capital minimum requirement 27,699 8.00 23,328 8.00
------------------------------------------------------
Excess $8,218 2.37% $11,141 3.82%
======================================================
Risk-adjusted assets $346,243 $291,602
=============== ===============
Company-Leverage
Tier 1 capital $31,579 7.90% $30,810 9.10%
Minimum leverage ratio requirement 15,984 4.00 13,542 4.00
------------------------------------------------------
Excess $15,595 3.90% $17,268 5.10%
======================================================
Average total assets $399,612 $338,544
=============== ===============
Bank-Risk-based
Tier 1 capital $31,170 9.01% $30,125 10.33%
Tier 1 capital minimum requirement 13,844 4.00 11,661 4.00
------------------------------------------------------
Excess $17,326 5.01% $18,464 6.33%
======================================================
Total capital $35,507 10.26% $33,783 11.59%
Total capital minimum requirement 27,689 8.00 23,322 8.00
------------------------------------------------------
Excess $7,818 2.26% $10,461 3.59%
======================================================
Risk-adjusted assets $346,109 $291,524
=============== ===============
Bank-Leverage
Tier 1 capital $31,170 7.80% $30,125 8.88%
Minimum leverage ratio requirement 15,987 4.00 13,567 4.00
------------------------------------------------------
Excess $15,183 3.80% $16,558 4.88%
======================================================
Average total assets $399,675 $339,166
=============== ===============
</TABLE>
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan and lease 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 and lease 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
could utilize 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 and other short-term investments,
short-term securities held to maturity, and securities available for sale less
short-term borrowings. At September 30, 1999, consolidated net liquid assets
totaled $51 million or 21% of consolidated total assets as compared to $87
million or 25% of consolidated total assets at December 31, 1998. The decrease
in the liquid assets is due to the growth of the loan and lease portfolio. See
"Loan and Lease Portfolio." In addition to the liquid asset portfolio, SJNB also
has available $17 million in lines of credit with three major commercial banks,
a collateralized repurchase agreement with a maximum limit of $30 million (of
which $16 million has been utilized at September 30, 1999), the guaranteed
portion of the SBA loan portfolio of approximately $20 million, 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 29% of total deposits on September 30, 1999 and 26% of total deposits at
December 31, 1998. The increase relates to the placement of the $25 million in
wholesale certificate of deposits. See "Funding."
Liquidity is also affected by portfolio maturities and the effect of interest
rate fluctuations on the marketability of both assets and liabilities. The loan
and lease portfolio consists primarily of floating rate, short-term loans. On
September 30, 1999, approximately 36% of total consolidated assets had
maturities under one year and 82% of total consolidated loans and leases had
floating rates tied to the prime rate or similar indexes. The short-term nature
of the loan and lease portfolio, and loan and lease 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
1999.
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
1998 or the first nine months of 1999.
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 and leases 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 September 30, 1999 was asset-sensitive
on a short-term basis, 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, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Summary of Financial Results - Net Interest
Income."
On October 5, 1999, the Federal Open Market Committee ("FOMC") changed its bias
to one of tightening from that of asymmetrical, but did not change the current
inter-bank borrowing rate from 5%. However, the effect of a possible increase in
the future is not precisely determinable due to the many factors influencing the
Bank's net interest margin, including the repricing of deposits, a change in mix
of the loan, lease and deposit portfolios, changes in relative volume, the speed
in which fixed rate loans and leases are repriced, discretionary investment
activities and other factors, although the Bank's margin will likely have a
short-term positive impact.
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis must be considered. For example, although
certain assets and liabilities may have similar maturities or periods to
reprice, they may react in different degrees to changes in market interest
rates. Additionally, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market interest rates.
Further, certain earning assets have features which restrict changes in interest
rates on a short-term basis and over the life of the asset. The Company
considers the anticipated effects of these various factors when implementing its
interest rate risk management activities, including the utilization of certain
interest rate hedges.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank is a party to any material pending legal
proceeding, nor is their property the subject of any material pending legal
proceeding, except ordinary routine legal proceedings arising in the ordinary
course of the Bank's business and incidental to its business, none of which are
expected to have a material adverse impact upon the Company's or the Bank's
business, financial position or results of operations. The status of certain
legal proceedings was reported in the Company's Form 10-Q for the six months
ended June 30, 1999; subsequent thereto, there have been no material changes in
the status of such legal proceedings.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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:
(2) a. Agreement and Plan of Merger by and among the Registrant,
Saratoga Bancorp and Saratoga National Bank, dated as of
August 27, 1999, is hereby incorporated by reference to
Exhibit 2.1 of the Registrant's Registration Statement on
Form S-4 as filed on October 14, 1999, under Registration
No. 333-89013.
(3)(i). The Registrant's restated Articles of Incorporation are
hereby incorporated by reference from Exhibit (3) (i) of the
Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1999.
(3)(ii). The Registrant's restated Bylaws as of June 8, 1999 are
hereby incorporated by reference from Exhibit (3) (ii) of
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999.
*(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) b. of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
*(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 Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit 99.1 of the
Registrant's Form S-8 filed June 15, 1999 under Registration
No. 333-80683.
*(10)f. The form of Nonstatutory Stock Option Agreement for outside
Directors being utilized under the Amended 1996 Stock Option
Plan is hereby incorporated by reference to Exhibit (10) f.
of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
*(10)g. The form of Nonstatutory Stock Option Agreement for
Employees being utilized under the Amended 1996 Stock Option
Plan is hereby incorporated by reference to Exhibit (10) g.
of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
*(10)h. The form of Incentive Stock Option Agreement being utilized
under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) h. of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
*(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 Report on Form 10-QSB for the
quarterly period ended March 31, 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 Report on Form 10-QSB for the
quarterly period ended March 31, 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.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or
arrangement.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Commission on September 1, 1999,
pertaining to the proposed acquisition of Saratoga Bancorp. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Current Developments."
<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: October 20, 1999 /s/ James R. Kenny
-------------------------------
James R. Kenny
President and
Chief Executive Officer
Date: October 20, 1999 /s/ Eugene E. Blakeslee
-------------------------------
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer (Chief
Accounting Officer)
<PAGE>
SJNB Financial Corp.
Form 10-Q
Exhibits
September 30, 1999
The following exhibits are filed as part of this report:
(2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga
Bancorp and Saratoga National Bank, dated as of August 27, 1999, is
hereby incorporated by reference to Exhibit 2.1 of the Registrant's
Registration Statement on Form S-4 as filed on October 14, 1999, under
Registration No. 333-89013.
(3)(i). The Registrant's restated Articles of Incorporation are hereby
incorporated by reference from Exhibit (3) (i) of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1999.
(3)(ii). The Registrant's restated Bylaws as of June 8, 1999 are hereby
incorporated by reference from Exhibit (3) (ii) of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1999.
*(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) b. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(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 Amended 1996 Stock Option Plan is hereby incorporated
by reference to Exhibit 99.1 of the Registrant's Form S-8 filed June
15, 1999, under Registration No. 333-80683
*(10)f. The form of Nonstatutory Stock Option Agreement for outside Directors
being utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)g. The form of Nonstatutory Stock Option Agreement for Employees being
utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) g. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)h. The form of Incentive Stock Option Agreement being utilized under the
Amended 1996 Stock Option Plan is hereby incorporated by reference to
Exhibit (10) h. of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
*(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 Report on Form 10-QSB
for the quarterly period ended March 31, 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 Report on
Form 10-QSB for the quarterly period ended March 31, 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.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
</LEGEND>
<CIK> 0000721161
<NAME> SJNB FINANCIAL CORP.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUN-30-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1,000
<CASH> 14,937
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,745
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,890
<INVESTMENTS-CARRYING> 10,165
<INVESTMENTS-MARKET> 9,865
<LOANS> 310,641
<ALLOWANCE> 5,152
<TOTAL-ASSETS> 407,511
<DEPOSITS> 337,218
<SHORT-TERM> 29,057
<LIABILITIES-OTHER> 6,126
<LONG-TERM> 0
0
0
<COMMON> 13,917
<OTHER-SE> 21,193
<TOTAL-LIABILITIES-AND-EQUITY> 407,511
<INTEREST-LOAN> 7,629
<INTEREST-INVEST> 1,130
<INTEREST-OTHER> (14)
<INTEREST-TOTAL> 8,745
<INTEREST-DEPOSIT> 2,777
<INTEREST-EXPENSE> 3,016
<INTEREST-INCOME-NET> 5,729
<LOAN-LOSSES> 150
<SECURITIES-GAINS> (51)
<EXPENSE-OTHER> 3,347
<INCOME-PRETAX> 2,531
<INCOME-PRE-EXTRAORDINARY> 2,531
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,498
<EPS-BASIC> 0.64
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> .060
<LOANS-NON> 294
<LOANS-PAST> 942
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 4,778
<CHARGE-OFFS> 27
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<ALLOWANCE-CLOSE> 5,152
<ALLOWANCE-DOMESTIC> 5,152
<ALLOWANCE-FOREIGN> 0
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</TABLE>
