-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MBRuppEGNxd8z3398o1DK93snsFTSaqlNiVJMLTEfMldM77dzfhcPOg7Hs3ppY+H 28ZoxZcf4ihgKTAW7XzC0Q== 0000721161-98-000011.txt : 19981120 0000721161-98-000011.hdr.sgml : 19981120 ACCESSION NUMBER: 0000721161-98-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SJNB FINANCIAL CORP CENTRAL INDEX KEY: 0000721161 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 770058227 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11771 FILM NUMBER: 98747604 BUSINESS ADDRESS: STREET 1: ONE N MARKET ST CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089477562 MAIL ADDRESS: STREET 1: ONE NORTH MARKET STREET CITY: SAN JOSE STATE: CA ZIP: 95113 10-Q 1 3RD QUARTER 10Q 1998 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT ---- OF 1934 For the quarterly period ended September 30, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ---- EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File Number: 0-11771 SJNB FINANCIAL CORP. (Exact name of registrant as specified in its charter) California 77-0058227 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113 (Address of principal executive offices) (Zip Code) (408) 947-7562 (Registrant's telephone number, including area code) Not Applicable (Former name, 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 Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 2,460,771 shares of common stock outstanding as of November 3, 1998. PART I - FINANCIAL INFORMATION - - ------------------------------ Page Item 1. - FINANCIAL STATEMENTS - - ------ SJNB FINANCIAL CORP. AND SUBSIDIARY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Shareholders' Equity 5 Condensed Consolidated Statements of Cash Flows 6 Notes to Unaudited Condensed Consolidated Financial Statements 8 Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL - - ------ CONDITION AND RESULTS OF OPERATIONS 9 Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT - - ------ MARKET RISK 27 PART II - OTHER INFORMATION - - --------------------------- Item 1. LEGAL PROCEEDINGS - - ------ 29 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29 - - ------ Item 3. DEFAULTS UPON SENIOR SECURITIES 29 - - ------ Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29 - - ------ Item 5. OTHER INFORMATION 29 - - ------ Item 6. EXHIBITS AND REPORTS ON FORM 8-K 29 - - ------ SIGNATURES 32 PART I - FINANCIAL INFORMATION Item 1. Financial Statements SJNB FINANCIAL CORP. AND SUBSIDIARY Condensed Consolidated Balance Sheets (in thousands) (Unaudited) September 30, December 31, Assets 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Cash and due from banks $19,552 $22,825 Money market investments 8,796 2,700 Investment securities: Available for sale 46,863 48,305 Held to maturity (Fair value: $11,687 at September 30, 1998 and $13,843 at December 31, 1997) 11,492 13,737 - - ---------------------------------------------------------------------------------------------------------------------------- Total investment securities 58,355 62,042 - - ---------------------------------------------------------------------------------------------------------------------------- Loans 246,653 228,972 Allowance for possible loan losses (4,702) (4,493) - - ---------------------------------------------------------------------------------------------------------------------------- Loans, net 241,951 224,479 - - ---------------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 3,864 3,916 Accrued interest receivable and other assets 6,247 5,202 Intangibles, net of accumulated amortization of $2,044 at September 30, 1998 and $1,707 at December 31, 1997 4,188 3,755 - - ---------------------------------------------------------------------------------------------------------------------------- Total $342,953 $324,919 ============================================================================================================================ Liabilities and Shareholders' Equity - - ---------------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing $78,042 $78,437 Interest-bearing 224,121 191,908 - - ---------------------------------------------------------------------------------------------------------------------------- Total deposits 302,163 270,345 - - ---------------------------------------------------------------------------------------------------------------------------- Other short-term borrowings ---- 16,000 Accrued interest payable and other liabilities 6,238 5,415 - - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 308,401 291,760 - - ---------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock, no par value; authorized, 20,000 shares; issued and outstanding, 2,460 shares at September 30, 1998 and 2,493 shares at December 31, 1997 16,688 18,800 Retained earnings 17,450 14,254 Accumulated other comprehensive income 414 105 - - ---------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 34,552 33,159 - - ---------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies ---- ---- - - ---------------------------------------------------------------------------------------------------------------------------- Total $342,953 $324,919 ============================================================================================================================ See accompanying Notes to Unaudited Consolidated Financial Statements.
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, ---------------------------------------------------------- 1998 1997 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans $6,249 $5,776 $18,404 $16,571 Interest on money market investments 428 82 823 475 Interest and dividends on investment securities available for 658 758 2,172 2,233 sale Interest on investment securities held to maturity 171 232 551 720 Other interest and investment income (2) (2) (7) (7) - - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 7,504 6,846 21,943 19,992 - - ---------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest expense on interest-bearing deposits: Certificates of deposit over $100 863 759 2,364 2,231 Other 1,522 1,412 4,475 4,243 - - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 2,385 2,171 6,839 6,474 - - ---------------------------------------------------------------------------------------------------------------------------- Net interest income 5,119 4,675 15,104 13,518 - - ---------------------------------------------------------------------------------------------------------------------------- Provision for possible loan losses 150 215 150 395 - - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 4,969 4,460 14,954 13,123 - - ---------------------------------------------------------------------------------------------------------------------------- Other income: Service charges on deposits 149 156 461 437 Other operating income 101 91 324 340 Net loss on securities available for sale ---- ---- (8) (41) - - ---------------------------------------------------------------------------------------------------------------------------- Total other income 250 247 777 736 - - ---------------------------------------------------------------------------------------------------------------------------- Other expenses: Salaries and benefits 1,679 1,438 5,009 4,337 Occupancy 215 194 564 519 Other 1,040 831 2,871 2,520 - - ---------------------------------------------------------------------------------------------------------------------------- Total other expenses 2,934 2,463 8,444 7,376 - - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 2,285 2,244 7,287 6,483 Income taxes 960 948 3,046 2,740 - - ---------------------------------------------------------------------------------------------------------------------------- Net income $1,325 $1,296 $4,241 $3,743 ============================================================================================================================ Net income per share - basic $0.54 $0.52 $1.70 $1.49 ============================================================================================================================ Net income per share - diluted $0.51 $0.50 $1.61 $1.42 ============================================================================================================================ See accompanying Notes to Unaudited Consolidated Financial Statements.
SJNB FINANCIAL CORP. AND SUBSIDIARY Condensed Consolidated Statements of Shareholders' Equity (in thousands) (Unaudited) Net Unrealized Gain (Loss) on Total Securities Share- Common Retained Available holders' Nine months ended September 30, 1997 Shares Stock Earnings for Sale Equity - - ---------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1996 2,571 $20,880 $10,263 $62 $31,205 -------------- Net income 3,743 3,743 Other comprehensive income - Unrealized loss on securities held for sale, net 22 22 -------------- Comprehensive income 3,765 -------------- Common stock repurchased (102) (2,496) (2,496) Stock options exercised 19 129 129 Cash dividends (527) (527) - - ---------------------------------------------------------------------------------------------------------------------------- Balances, September 30, 1997 2,488 $18,513 $13,479 $84 $32,076 ============================================================================================================================ Nine months ended September 30, 1998 - - ---------------------------------------------------------------------------------------------------------------------------- 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 ============================================================================================================================ See accompanying Notes to Unaudited Consolidated Financial Statements.
SJNB FINANCIAL CORP. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (dollars in thousands) (Unaudited) Nine months ended September 30, ------------------------------------------- 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $4,241 $3,743 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 150 395 Depreciation and amortization 417 394 Amortization on intangibles 337 355 Net loss on securities available for sale 8 41 Net gain on sale of other real estate owned ---- (37) Amortization of premium on investment securities, net (49) (32) Increase in deferred tax benefit ---- (1,535) Increase in intangibles assets (91) ---- Increase in accrued interest receivable and other assets (947) (444) Increase in accrued interest payable and other liabilities 386 1,858 - - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,452 4,738 - - ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sale of securities available for sale 21,009 10,057 Maturities of securities held to maturity 3,991 1,250 Purchase of securities available for sale (19,008) (10,699) Purchase of securities held to maturity (1,749) (753) Proceeds from the sale of other real estae owned ---- 491 Loans, net (17,473) (24,186) Capital expenditures (354) (505) Cash used to acquire Epic Funding, Corp. (206) ---- - - ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (13,790) (24,345) - - ---------------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Deposits, net 31,819 25,145 Other short-term borrowings (16,000) (17,688) Cash dividends (1,045) (526) Stock buyback (3,119) (2,496) Proceeds from stock options exercised 506 129 - - ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 12,161 4,564 - - ---------------------------------------------------------------------------------------------------------------------------- Net increase in cash and equivalents 2,823 (15,043) Cash and equivalents at beginning of year 25,525 40,008 - - ---------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $28,348 $24,965 ============================================================================================================================ Other cash flow information: Interest paid $7,058 $6,336 =========================================== Income taxes paid $2,625 $2,365 ============================================================================================================================ Noncash transactions: Unrealized gain (loss) on securities available for sale, net of tax $309 $22 ============================================================================================================================ 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 ---- ============================================================================================================================ See accompanying Notes to Unaudited Consolidated Financial Statements.
SJNB FINANCIAL CORP. AND SUBSIDIARY Notes to Unaudited Condensed Consolidated Financial Statements Note A Unaudited Condensed Consolidated Financial Statements The unaudited consolidated financial statements of SJNB Financial Corp. (the "Company") and its subsidiary, San Jose National Bank and its subsidiary Epic Funding Corp.(which was acquired on May 22, 1998), are prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods have been included and are normal and recurring. The results of operations and cash flows are not necessarily indicative of those expected for the full fiscal year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Shareholders for the year ended December 31, 1997. Note B Net Income Per Share of Common Stock 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, 1998 September 30, 1997 ------------------------------------------------------------------------------------------------------------------- Net Per Share Net Per Share Income Shares Amounts Income Shares Amounts ---------------------------------------------------------------------------------------------------------------- Net income and basic EPS $1,325 2,466 $0.54 $1,296 2,487 $0.52 ============ =========== Effect of stock option dilutive shares 139 129 ------------------------- ------------------------- Diluted earnings per share $1,325 2,605 $0.51 $1,296 2,616 $0.50 ========================================================================= Nine months ended Nine months ended September 30, 1998 September 30, 1997 ---------------------------------------------------------------------------------------------------------------- Net Per Share Net Per Share Income Shares Amounts Income Shares Amounts ---------------------------------------------------------------------------------------------------------------- Net income and basic EPS $4,241 2,492 $1.70 $3,743 2,513 $1.49 ============ =========== Effect of stock option dilutive shares 147 118 ------------------------- ------------------------ Diluted earnings per share $4,241 2,639 $1.61 $3,743 2,631 $1.42 =========================================================================
Note C Other Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement establishes standards for the way public business enterprises are to report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to shareholders. The Statement is effective for fiscal years ending after December 31, 1998; the Company is still evaluating the Statement's impact upon adoption. In February 1998, the FASB issued SFAS No.132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 changes disclosure only on applicable defined benefit pension or postretirement plans, of which the Company has none. The Company does not believe SFAS No. 132 will have any impact on its consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Statement is effective for fiscal quarters of fiscal years beginning after June 15, 1999. The Company expects to adopt this Statement on January 1, 2000. The Company will begin evaluating the impact of its adoption on the Company's consolidated financial statements. Currently, management believes the 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 and subsidiary ("SJNB" and the "Bank"), San Jose, California. This discussion focuses primarily on the results of operations of the Company on a consolidated basis for the three and nine months ended September 30, 1998 and 1997 and the liquidity and financial condition of the Company and SJNB as of September 30, 1998 and December 31, 1997. All dollar amounts in the text in Item 2 are in thousands, except per share amounts or as otherwise indicated. Forward-looking Information This Quarterly Report on Form 10-Q includes forward-looking information which is subject to the "safe harbor" created by the Securities Act of 1933 and Securities Exchange Act of 1934. 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; the health of the economy declines, either nationally or regionally; credit quality deteriorates, which could cause an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions, particularly in Santa Clara County and high tech 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, 1997. Current Developments During the second quarter of 1998, the Company announced that the Board of Directors approved the repurchase of up to $3.5 million of the Company's common stock. Through September 30, 1998, the Company had repurchased 77,300 shares for a total of $3.1 million. Year 2000 Project The Company's business is dependent on technology and data processing. As a result, it has created a Year 2000 team whose members are familiar with the Company's business and operations. The "Year 2000 issue" relates to the fact that many computer programs and other technology utilizing microprocessors only use two digits to represent a year, such as "98" to represent "1998," which means that in the year 2000 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 their customers or suppliers. The Company does not rely on its own data processing software for its mission-critical applications 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 also is 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 ready. 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 problems experienced by significant vendors or customers of the Company could negatively impact the business and operations of the Company even if its own critical IT systems function satisfactorily. Due to the numerous issues and problems which might arise and the lack of information on 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 has 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 problems related to its mission-critical IT systems. The Company's Y2K team is also using external resources provided by its outside vendors and a consultant hired to assist the Company. Management anticipates that initial renovation and validation (testing) of its critical IT systems should be completed by December 31, 1998. 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. Vendors of the Company's other critical IT systems have also informed the Company that their products/systems are Y2K compliant. If initial testing for critical IT systems are not satisfactory the Company plans to take corrective action and complete secondary testing by June 30, 1999. 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. The Company had not completed an assessment of the test results as of the date of this Report. The Company is also monitoring the Y2K readiness of its outside item processing and operating system vendors. At the date of this report the Company believes it remains on schedule to complete initial testing of all mission-critical IT applications systems by December 31, 1998. By September 30, 1998 the Company had also tested 57% of its critical network applications and 36% of its non-critical network applications. The Company's target for completion of non-critical IT application testing is March 31, 1999. The Company cannot test for Y2K readiness of its power and telecommunication vendors, although the Company is monitoring their readiness. Additionally, at the date of this report the Company had not identified any serious problems with any of its systems. Costs The Company is expensing all period costs associated with the Year 2000 problem. Through September 30, 1998, the amount of such expense has been approximately $73. Management estimates that the Bank will incur approximately an additional $130 in Year 2000 related expenses for the identification, correction and reprogramming, and testing of systems for Year 2000 compliance during the last three months of 1998 and in fiscal 1999. There can be no assurance that these expenses will not increase as further testing and assessment of vendor and customer readiness for the Year 2000 continues. The above cost estimates include costs for consultants, running tests and technical assistance from vendors. These costs exclude the cost of the Company's internal staff time and systems or products which were not replaced due to the Y2K problem. Risks It is inherently difficult to predict the future outcome of most events and 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 problem 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 problem might negatively impact some significant customers and non-IT vendors/products through the failure of the customer/vendor to be prepared or the impact on them of their own vendors and customers. Management believes that this scenario could occur in conjunction with an economic recession, arising from the Y2K problem and, if it did, its asset quality and earnings could be adversely impacted. It is not possible to predict the effect of this scenario on the economic viability of its customers and the related adverse impact it may have on SJNB's financial position and results of operations, including the level of the Bank's provision for possible loan losses in future periods. The Company presently believes that, with modifications to existing software which is Year 2000 compliant 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 as so modified. However, other significant risks relating to the Year 2000 problem are that of the unknown impact of this problem on the operations of the Bank's customers and vendors, the impact of catastrophic infrastructure issues such as power, communications and water on 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 problem. 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 problem. Significant customer relationships have been identified, and such customers are being 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 complete as of September 30, 1998. The Bank intends to take follow-up action based on the results of this assessment. The Company has also attempted to contact 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 the progress of such vendors through the century date change. Federal banking regulators have responsibility for supervision and examination of banks to determine whether each institution has an effective plan for identifying, renovating, testing and implementing solutions for Year 2000 processing and coordinating Year 2000 processing capabilities with its 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 assure 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 has developed contingency plans for its software systems, should they not successfully pass the Company's Year 2000 testing. Generally this involves the identification of an alternate vendor or expected actions the Company could take, as well as the establishment of a trigger date to implement the contingency plan. The Company intends to develop, in accordance with regulatory guidelines, further contingency plans to address potential business disruptions resulting from Year 2000 issues, however, this process is not expected to be completed until December 31, 1998. Selected Financial Data The following presents selected financial data and ratios as of and for the three and nine months ended September 30, 1998 and 1997:
SELECTED FINANCIAL DATA AND RATIOS - - ---------------------------------------------------------------------------------------------------------------------------- For the quarters For the nine months ended September 30, ended September 30, --------------------------------------------------------------------- SELECTED ANNUALIZED OPERATING RATIOS: 1998 1997 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Return on average equity 15.56% 16.43% 16.72% 16.28% Return on average tangible equity 19.39 20.67 20.41 20.70 Return on average assets 1.51 1.64 1.69 1.61 Net chargeoffs (recoveries) to average loans (.02) (.04) (.03) .06 Average equity to average assets 9.71 9.98 10.12 9.91 Average tangible equity to average tangible assets 8.60 8.77 9.05 8.66 PER SHARE DATA: Net income per share - basic $.54 $.52 $1.70 $1.49 Net income per share - diluted .51 .50 1.61 1.42 Net income per share - (core) - diluted (1) .55 .54 1.74 1.56 Dividends per share (2) .14 ---- .42 .21 ============================================================================================================================ At September 30, At September 30, At December 31, SHAREHOLDERS' EQUITY 1998 1997 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Shareholders' equity per share $14.04 $12.89 $13.30 Tangible equity per share 12.34 11.24 11.80 SELECTED FINANCIAL POSITION RATIOS: - - ---------------------------------------------------------------------------------------------------------------------------- Leverage capital ratio 8.80% 8.97% 9.06% Nonperforming loans to total loans .18 1.07 .19 Nonperforming assets to total assets .13 .74 .13 Allowance for possible loan losses to total loans 1.91 1.94 1.96 Allowance for possible loan losses to nonperforming loans 1,081.00 181.00 1,060.00 Allowance for possible loan losses to nonperforming assets 1,081.00 181.00 1,060.00 ============================================================================================================================ (1) Excludes after-tax effect of goodwill and core deposit intangible amortization. (2) Effective with the first quarter of 1998, the Company commenced a policy of paying quarterly cash dividends to its shareholders; previously semi-annual dividends were paid.
Summary of Financial Results The Company reported net income of $1,325 or $.51 per share - diluted for the quarter ended September 30, 1998, compared with net income of $1,296 or $.50 per share - diluted for the third quarter of 1997. The improvement in earnings is due primarily to an increase in net interest income due to growth in volume. For the nine months ended September 30, 1998, net income was $4,241 or $1.61 per share - diluted compared with net income of $3,743 or $1.42 per share - diluted in 1997. The improvement is due primarily to an increase in net interest income due to the growth in volume offset by an increase in third quarter 1998 expenses which were primarily related to the new employees of Epic Funding and the start-up of the East Bay Regional Office. Net Interest Income Net interest income for the quarter ended September 30, 1998 increased $448 as compared to the same quarter a year ago. The Bank's average earning assets for the same period increased by $39 million, primarily as the result of growth in the Bank's loan portfolio and other short-term investments. Net interest margin for the third quarter of 1998 was 6.28% as compared to 6.52% for the same quarter in 1997. This decrease was primarily related to the decrease in the yield on earning assets; in particular the yield on loans, which account for 73% of earning assets, declined from 10.58% to 10.41%. In contrast, the net interest margin for the nine months of 1998 was 6.51% as compared to 6.42% for the same period in 1997. This increase was primarily related to a decline in the cost of funds from 4.11% in 1997 to 4.0% in 1998 and collection of a $107 prepayment fee in March 1998 relating to a fixed rate loan which was repaid prior to its contractual maturity. Economic conditions in Northern California have remained relatively strong in the first nine months of 1998, although, there are indications that this economic strength could be threatened by the problems in Asia and Latin America, slow-down in demand for semi-conductors and other technology products, the tightening of a skilled labor force and the potential for the real estate market to slowdown. In addition, the competitive environment within the Bank's marketplace continues to be aggressive and the competition between banks for additional loans and deposits has caused more competitive pricing. Due to the nature of the Company's target market in which loans are generally tied to the prime rate, management believes modest increases in interest rates should positively affect the Bank's net interest margin. Conversely, management believes stable or declining rates will tend to have an adverse impact on net interest margin. The Bank utilizes various methods to hedge some of its interest rate risk. See "Loans" and "Asset/Liability Management." On September 30, 1998, the Federal Open Market Committee decreased its target rate for interbank borrowings to 5 1/4%. As a result, most domestic banks decreased their prime lending rate to 8 1/4%, which was matched by SJNB. In management's view, the future effect of this rate decrease is not precisely determinable due to the many factors influencing the Bank's net interest margin, although the Bank's margin will likely be negatively impacted. 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, 1998 and 1997. AVERAGE BALANCES, RATES AND YIELDS Fully Taxable Equivalent (dollars in thousands)
Quarter ended September 30, ------------------------------------------------------------------------------------ 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Assets Balance Interest Yield (1) Balance Interest Yield (1) - - ---------------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans, net (2) $238,197 $6,249 10.41% $216,630 $5,776 10.58% Securities available for sale (3) 44,265 658 5.90 48,793 758 6.16 Securities held to maturity: Taxable (4) 8,348 127 6.04 11,485 194 6.70 Nontaxable (5) 3,946 73 7.37 3,116 63 8.02 Money market investments 30,305 428 5.60 6,040 82 5.39 Interest rate hedging instruments ---- (2) ---- ---- (2) ---- - - -------------------------------------------------------------------- ---------------------------- Total interest-earning assets 325,061 7,533 9.19 286,064 6,871 9.53 - - -------------------------------------------------------------------- ---------------------------- Allowance for possible loan losses (4,545) (4,135) Cash and due from banks 13,691 19,029 Other assets 9,526 8,517 Core deposit intangibles and goodwill, net 4,231 4,155 - - ------------------------------------------------------ -------------- Total $347,964 $313,630 ====================================================== ============== Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $54,787 369 2.67 $47,509 304 2.54 Money market and savings 107,645 966 3.56 85,083 745 3.47 Certificates of deposit: Less than $100 12,986 166 5.07 14,368 203 5.61 $100 or more 63,184 862 5.41 55,300 759 5.45 - - -------------------------------------------------------------------- ---------------------------- Total certificates of deposits 76,170 1,028 5.35 69,668 962 5.48 - - -------------------------------------------------------------------- ---------------------------- Other borrowings 981 22 8.90 10,347 160 6.13 - - -------------------------------------------------------------------- ---------------------------- Total interest-bearing 239,583 2,385 3.95 212,607 2,171 4.05 liabilities - - -------------------------------------------------------------------- ---------------------------- Noninterest-bearing demand 68,973 63,267 Accrued interest payable and other liabilities 5,633 6,459 - - ------------------------------------------------------ -------------- Total liabilities 314,189 282,333 - - ------------------------------------------------------ -------------- Shareholders' equity 33,775 31,297 - - ------------------------------------------------------ -------------- Total $347,964 $313,630 ======================================================-------------- ==============-------------- Net interest income and margin (6) $5,148 6.28% $4,700 6.52% ======================================== ============================ ============================ (1) Rates are presented on an annualized basis. (2) Includes loan fees of $301 for 1998, and $248 for 1997. Nonperforming loans have been included in average loan balances. (3) Includes dividend income of $34 and $54 received in 1998 and 1997. (4) Includes dividend income of $8 received in 1998and 1997. (5) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($29 in 1998 and $25 in 1997). (6) The net interest margin represents the fully taxable equivalent net interest income as a percentage
AVERAGE BALANCES, RATES AND YIELDS Fully Taxable Equivalent (dollars in thousands)
Nine months ended September 30, ------------------------------------------------------------------------------------ 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Assets Balance Interest Yield (1) Balance Interest Yield (1) - - ---------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans, net (2) $231,296 $18,404 10.64% $208,160 $16,571 10.64% Securities available for sale (3) 47,779 2,172 6.08 48,108 2,233 6.21 Securities held to maturity: Taxable (4) 9,169 423 6.17 12,114 617 6.81 Nontaxable (5) 3,728 213 7.65 2,840 172 8.10 Money market investments 19,777 823 5.56 11,807 475 5.38 Interest rate hedging instruments ---- (7) ---- ---- (7) ---- - - -------------------------------------------------------------------- ---------------------------- Total interest-earning assets 311,749 22,028 9.45 283,029 20,061 9.48 - - -------------------------------------------------------------------- ---------------------------- Allowance for possible loan losses (4,565) (4,090) Cash and due from banks 14,602 18,890 Other assets 9,411 7,998 Core deposit intangibles and goodwill, net 3,931 4,275 - - ------------------------------------------------------ -------------- Total $335,128 $310,102 ====================================================== ============== Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $50,941 997 2.62 $45,051 866 2.57 Money market and savings 100,640 2,706 3.59 84,746 2,257 3.56 Certificates of deposit: Less than $100 13,713 527 5.14 15,120 607 5.37 $100 or more 57,989 2,364 5.45 54,113 2,231 5.51 - - -------------------------------------------------------------------- ---------------------------- Total certificates of deposits 71,702 2,891 5.39 69,233 2,838 5.48 - - -------------------------------------------------------------------- ---------------------------- Other borrowings 5,218 245 6.28 11,462 514 6.00 - - -------------------------------------------------------------------- ---------------------------- Total interest-bearing liabilities 228,501 6,839 4.00 210,492 6,475 4.11 - - -------------------------------------------------------------------- ---------------------------- Noninterest-bearing demand 67,365 63,847 Accrued interest payable and other liabilities 5,347 5,018 - - ------------------------------------------------------ -------------- Total liabilities 301,213 279,357 - - ------------------------------------------------------ -------------- Shareholders' equity 33,915 30,745 - - ------------------------------------------------------ -------------- Total $335,128 $310,102 ======================================================-------------- ==============-------------- Net interest income and margin (6) $15,189 6.51% $13,586 6.42% ======================================== ============================ ============================ (1) Rates are presented on an annualized basis. (2) Includes loan fees of $928 for 1998, and $740 for 1997. Nonperforming loans have been included in average loan balances. (3) Includes dividend income of $113 and $166 received in 1998 and 1997. (4) Includes dividend income of $23 received in 1998and 1997. (5) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($85 in 1998 and $69 in 1997). (6) The net interest margin represents the fully taxable equivalent net interest income as a percentage of average earning assets.
Provision for Possible Loan Losses The level of the allowance for possible loan losses and the related provision, if any, reflect management's judgment as to the inherent risk of loss associated with the loan and lease portfolios as of September 30, 1998 and 1997 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 losses for the three and nine months ended September 30, 1998 and additions of $215 and $395 were made in the three and nine months ended September 30, 1997, respectively. See "Loan 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, 1998 and 1997: OTHER INCOME (dollars in thousands)
Quarter ended September 30, Nine months ended September 30, ------------------------------------------------------------------------------------ 1998 1997 1998 1997 Amount Percent Amount Percent Amount Percent Amount Percent - - ---------------------------------------------------------------------------------------------------------------------------- Depositor service charges $149 59.60% $156 63.16% $461 59.33% $437 59.38% Other operating income 101 40.40 91 36.84 324 41.70 340 46.19 Net loss on securities available for sale ----- ----- ----- ----- (8) (1.03) (41) (5.57) - - ---------------------------------------------------------------------------------------------------------------------------- Total $250 100.00% $247 100.00% $777 100.00% $736 100.00% ============================================================================================================================
Other Expenses The following schedule summarizes the major categories of expense as a percentage of average assets on an annualized basis: OTHER EXPENSES AS A PERCENT OF AVERAGE ASSETS (dollars in thousands)
Quarter ended September 30, Nine months ended September 30, -------------------------------------------------------------------------------------------- 1998 1997 1998 1997 Amount Percent * Amount Percent * Amount Percent * Amount Percent * - - ---------------------------------------------------------------------------------------------------------------------------- Salaries and benefits $1,679 1.93% $1,438 1.83% $5,009 1.99% $4,337 1.86% Data processing 172 .20 102 .13 497 .20 310 .13 Amortization of core deposit intangibles and goodwill 119 .14 118 .15 337 .13 355 .15 Client services paid by bank 129 .15 80 .10 315 .13 243 .10 Furniture and equipment 113 .13 97 .12 301 .12 277 .12 Occupancy 102 .12 97 .12 263 .10 242 .10 Business promotion 79 .09 86 .11 248 .10 250 .11 Legal and professional fees 80 .09 90 .11 224 .09 190 .08 Directors' & shareholders' 70 .08 80 .10 193 .08 255 .11 Stationery and supplies 58 .07 31 .04 149 .06 124 .05 Advertising & marketing 47 .05 24 .03 138 .05 84 .04 Loan and collection 44 .05 31 .04 96 .04 77 .03 Regulators assessments 30 .03 28 .04 86 .03 81 .03 Net cost of foreclosed property 2 ----- 4 ----- 3 .01 (45) (.02) Sundry losses ----- ----- ----- ----- (29) (.01) 124 .05 Other 210 .24 157 .20 614 .24 472 .20 - - ---------------------------------------------------------------------------------------------------------------------------- Total $2,934 3.37% $2,463 3.14% $8,444 3.36% $7,376 3.17% ============================================================================================================================ (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, 1998 and 1997. (2) Certain amounts have been reclassified in 1997 to conform to the 1998 classifications.
Total other expenses for the third quarter of 1998 increased $471 from the same period a year ago, primarily as a result of increases in salaries and benefits (relating to the acquisition of Epic Funding Corp. during the second quarter and the opening of the East Bay Regional Office in July 1998), an increase in data processing expenses (relating to greater technology costs, impact of a conversion of the Bank's core data processing system in November 1997 and attention to the year 2000 issue), an increase in furniture and equipment, occupancy, advertising and promotion and stationery and supplies also due to the addition of Epic and the new East Bay Regional Office, an increase in client services paid by the Bank representing an increase in costs associated with several significant customers and an increase in other expense due to employment fees. Total other expenses for the nine months ended September 30, 1998 increased $1,068 from the same period a year ago, primarily as a result of the same items discussed above for the third quarter. Income Tax Provision The effective tax rate of 42% for the three months ended September 30, 1998 is affected by several items. The most significant are the amortization of intangibles, tax exempt income and the California Franchise Tax Enterprise Tax Zone Credit. The effective tax rate for the year ended December 31, 1997 was 42%. Financial Condition and Earning Assets Consolidated assets increased to $343 million at September 30, 1998 compared to $325 million at December 31, 1997. The increase related primarily to an increase in loans and money market investments and was funded principally by an increase in the Bank's core interest-bearing money market deposits and a growth in certificates of deposits of greater than $100. See "Funding." Money Market Investments Money market investments, which include federal funds sold, were $8.8 million at September 30, 1998 as compared to $2.7 million at December 31, 1997. This increase is related to the increase in the Bank's core interest-bearing money market deposits and a growth in certificates of deposits of greater than $100. Securities The following table shows the composition of the securities portfolio at September 30, 1998 and December 31, 1997. 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. SECURITIES PORTFOLIO (dollars in thousands)
September 30, 1998 December 31, 1997 - - -------------------------------------------------------------------------------------------------------------------------- Amortized Unrealized Market Amortized Unrealized Market Cost Gain (Loss) Value Cost Gain (Loss) Value - - ---------------------------------------------------------------------------------------------------------------------------- Securities available for sale: U. S. Treasury $5,005 $93 $5,098 $5,001 $40 $5,041 U. S. Government Agencies 34,201 624 34,825 34,148 179 34,327 Mortgage backed 4,212 102 4,314 5,097 74 5,171 Mutual funds 2,767 (141) 2,626 3,898 (132) 3,766 - - ---------------------------------------------------------------------------------------------------------------------------- Total available for sale 46,185 678 46,863 48,144 161 48,305 - - ---------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: U. S. Treasury 1,000 11 1,011 1,992 16 2,008 U. S. Government Agencies 3,494 53 3,547 5,485 27 5,512 State and municipal (nontaxable) 4,221 97 4,318 3,224 34 3,258 Mortgage backed 2,259 34 2,293 2,518 29 2,547 - - ---------------------------------------------------------------------------------------------------------------------------- Total held to maturity 10,974 195 11,169 13,219 106 13,325 Federal Reserve Bank Stock 518 ---- 518 518 ---- 518 - - ---------------------------------------------------------------------------------------------------------------------------- Total 11,492 195 11,687 13,737 106 13,843 - - ---------------------------------------------------------------------------------------------------------------------------- Total investment securities portfolio 57,677 873 58,550 61,881 267 62,148 ============================================================================================================================ Unrealized gains generally result from the impact of current market rates being less than those rates in effect at the time the Bank purchased the securities. The unrealized gain on securities available for sale as of September 30, 1998 was $678 as compared to an unrealized gain of $161 as of December 31, 1997. The Bank's weighted average maturity of the available for sale portfolio was approximately 1.71 years as of September 30, 1998. It is estimated by management that for each 1% change in interest rates the value of the Company's available for sale securities will change by 1.37%.
The unrealized gain on securities held to maturity was $195 as of September 30, 1998 as compared to an unrealized gain of $106 as of December 31, 1997. The Bank's weighted average maturity of the held to maturity investment portfolio was approximately 4.03 years as of September 30, 1998. It is estimated by management that for each 1% change in interest rates, the value of the Company's securities held to maturity will change by approximately 2.54%. The increase in the maturity and duration are due to a 1997 change in Company policy relating to the purchase and treatment of several securities. Since that time, management has classified all new purchases of securities as "available for sale" except for the state and municipal securities, which are classified as "held to maturity." The maturities and yields of the investment portfolio at September 30, 1998 are shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES - - ----------------------------------------------------------------------------------------------------------------------------- At September 30, 1998 (dollars in thousands) Available for Sale Held to Maturity --------------------------------------------------------------------------------------------- FTE FTE Amortized Estimated Average Amortized Estimated Average Cost Fair Value Yield Cost Fair Value Yield ---------------------------------------------------------------------------------------------- U. S. Treasury: Within 1 year $2,999 $3,015 6.03% $1,000 $1,011 6.38% After 1 year within 5 years 2,006 2,083 6.11 ----- ----- ----- ---------------------------------------------------------------------------------------------- Totals 5,005 5,098 6.06 1,000 1,011 6.38 ---------------------------------------------------------------------------------------------- U.S. Government Agencies: Within 1 year 14,982 15,056 5.76 1,995 2,011 6.42 After 1 year within 5 years 19,219 19,769 6.01 1,499 1,536 6.41 ---------------------------------------------------------------------------------------------- Totals 34,201 34,825 5.90 3,494 3,547 6.42 ---------------------------------------------------------------------------------------------- State and municipal: Within 1 year ----- ----- ----- 645 648 6.90 After 1 year within 5 years ----- ----- ----- 1,199 1,220 6.11 After 10 years ----- ----- ----- 2,377 2,450 6.84 ----------------------------------------------- Totals ----- ----- ----- 4,221 4,318 6.64 ----------------------------------------------- Mortgage backed After 1 year within 5 years 3,233 3,304 6.77 ----- ----- ----- After 5 years within 10 years 979 1,010 6.71 2,259 2,293 7.90 ---------------------------------------------------------------------------------------------- Totals 4,212 4,314 6.76 2,259 2,293 7.90 ---------------------------------------------------------------------------------------------- Mutual funds: ----------------------------------------------- Within 1 year 2,767 2,626 5.05 ----- ----- ----- ----------------------------------------------- Other ----------------------------------------------- After 10 years ----- ----- ----- 518 518 6.00 ---------------------------------------------------------------------------------------------- Total investment securities 46,185 $46,863 5.95% $11,492 $11,687 6.77% ============================================================================== Net unrealized gain on securities available for sale 678 ---------------- Total investment securities, net carrying value $46,863 ================ (1) Fully taxable equivalent.
Loan Portfolio The following table provides a breakdown of the Company's consolidated loans by type of loan or borrower: LOAN PORTFOLIO (dollars in thousands)
September 30, 1998 December 31, 1997 - - -------------------------------------------------------------------------------------------------------------------------- Percentage Percentage Total of Total Total of Total Amount Loans Amount Loans - - -------------------------------------------------------------------------------------------------------------------------- Commercial $90,331 36.6% $92,693 40.5% Real estate construction 32,683 13.2 17,818 7.8 Real estate-other 97,148 39.4 90,495 39.5 Consumer 9,338 3.8 9,042 3.9 Other 17,919 7.3 19,568 8.6 Unearned fee income (766) (0.3) (644) (0.3) - - -------------------------------------------------------------------------------------------------------------------------- Total loans $246,653 100.0% $228,972 100.0% ==========================================================================================================================
Consolidated loans increased to $247 million at September 30, 1998 from $229 million at December 31, 1997. The decline in commercial loans related to the sale of several of the Bank's commercial business customers and the competitive market place. The growth in real estate construction loans is due to the impact of the strong current demand in the local real estate market. The increase is primarily related to growth in construction of single family residences. Additionally the Bank has elected not to aggressively seek or renew loans where in management's opinion the Bank's underwriting criteria is not satisfied; this has caused a slow down in loan production and an increase in payoffs when the Bank has not met competitive pressures. Approximately 58% of the loan portfolio is directly related to real estate or real estate interests, including real estate construction loans, real estate-other, mortgage warehouse lines (1%, included in the Commercial category), real estate equity lines (2%, included in the Consumer category), and loans to real estate developers for short-term investment purposes (1%) and loans for real estate investment purposes made to non-developers (1%). The latter two types are included in the Other category. Approximately 38% of the loan 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-other and real estate construction loans at September 30, 1998. Approximately 82% 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 but can have a negative impact when rates decline. COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSISTIVITY
(dollars in thousands) Balances maturing Interest Rate Sensitivity ---------------------------------------------------------------------------------- Predeter- Balances at One year mined Floating September 30, One year to five Over five interest interest 1998 or less years years rates rates - - ---------------------------------------------------------------------------------------------------------------------------- Commercial $90,331 $58,077 $27,268 $4,986 $2,974 $87,357 ============================================================================================================================ Real estate construction $32,683 $31,251 $1,432 ----- $2,261 $30,422 ============================================================================================================================ Real estate-other $97,148 $13,769 $25,716 $57,663 $33,770 $63,378 ============================================================================================================================
The Company utilizes a method of assigning a minimum and maximum loss ratio to each grade of loan within each category of loans (commercial, real estate-other, real estate construction, etc.). Loans are graded on a ranking system based on management's assessment of the loan's credit quality. The assigned loss ratio is based upon, among other things, the Company's prior experience, industry experience, delinquency trends and the level of nonaccrual loans. Loans secured by real estate are evaluated on the basis of their underlying collateral in addition to using the assigned loss ratios. The methodology also considers (and assigns a risk factor for) current economic conditions, off-balance sheet risk (including SBA guarantees and servicing and letters of credit) and concentrations of credit. In addition, each loan is evaluated on the basis of whether or not it is impaired. For impaired loans, the expected cash flow is discounted on the basis of the loan's interest rate. The methodology provides a systematic approach believed by management to measure the risk of possible future loan losses. Management and the Board of Directors evaluate the allowance and determine the desired level of the allowance considering objective and subjective measures, such as knowledge of the borrowers' business, valuation of collateral and exposure to potential losses. The allowance for possible loan losses was approximately $4.7 million at September 30, 1998, or 1.91% of total loans outstanding. Based on information available as of the date of this report, management believes the allowance for possible loan losses, determined as described above, is adequate for potential losses foreseeable at September 30, 1998. The allowance for possible loan losses is a general reserve available against the total loan portfolio and off-balance sheet credit exposure. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions or other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for possible loan losses. Such agencies may require the Bank to provide additions to the allowance based on their judgment of information available to them at the time of their examination. The following schedule provides an analysis of the allowance for possible loan losses: ALLOWANCE FOR POSSIBLE LOAN LOSSES (dollars in thousands)
Quarter ended Nine months ended Year ended September 30, September 30, December 31, ------------------------------------------------------------------- 1998 1997 1998 1997 1997 - - ------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of the period $4,540 $4,076 $4,493 $4,005 $4,005 Charge-offs by loan category: Commercial ---- ---- 125 115 242 Real estate-construction ---- ---- ---- 33 ---- Real estate-other ---- ---- ---- ---- 33 Consumer ---- ---- ---- ---- 13 - - ------------------------------------------------------------------------------------------------------------------------------ Total charge-offs ---- ---- 125 148 288 - - ------------------------------------------------------------------------------------------------------------------------------ Recoveries by loan category: Commercial 12 20 84 55 67 Real estate-other ---- ---- 33 4 4 Consumer ---- ---- 67 ---- ---- - - ------------------------------------------------------------------------------------------------------------------------------ Total recoveries 12 20 184 59 71 - - ------------------------------------------------------------------------------------------------------------------------------ Net charge-offs (recoveries) (12 ) (20 ) (59) 89 217 - - ------------------------------------------------------------------------------------------------------------------------------ Provision charged to expense 150 215 150 395 705 - - ------------------------------------------------------------------------------------------------------------------------------ Balance, end of the period $4,702 $4,311 $4,702 $4,311 $4,493 ============================================================================================================================== Ratios: Net charge-offs (recoveries) to average loans, annualized (.02%) (.04%) (.03%) .06% .10% Allowance to total loans at the end of the period 1.91 1.94 1.91 1.94 1.96 Allowance to nonperforming loans at end of the period 1,081.00 181.00 1,081.00 181.00 1,060.00 ============================================================================================================================== During the three months ended September 30, 1998 and 1997, there were no charge-offs. During the nine months ended September 30, 1998 and 1997, there were charge-offs of $125 and $148. Management does not believe there were any trends indicated by the detail of the aggregate charge-offs for any of the periods discussed. The allowance for possible loan losses was 1,081% of nonperforming loans at September 30, 1998 compared to 1,060% at December 31, 1997. Nonperforming Loans Nonperforming loans consist of loans for which the accrual of interest has been suspended, restructured loans and other loans with principal or interest contractually past due 90 days or more and still accruing. The following table provides information about such loans: NONPERFORMING LOANS (dollars in thousands) September 30, December 31, 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Loans accounted for on a non-accrual basis $388 $360 Loans restructured and in compliance with modified terms 47 $63 Other loans with principal or interest contractually past due 90 days or more 1 - - ---------------------------------------------------------------------------------------------------------------------------- Total $435 $424 ============================================================================================================================
As of September 30, 1998, nonperforming loans consisted of six loans, none of which were individually significant. Management conducts an ongoing evaluation and review of the loan portfolio in order to identify potential nonperforming loans. Management considers loans which are classified for regulatory purposes, loans which are graded as classified by the Bank's outside loan review consultant and internal personnel, as to whether they (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Based on such reviews as of September 30, 1998, management has not identified any loans not included within the Nonperforming Loan table above with respect to which known information causes management to have serious doubts about the borrowers' abilities to comply with present repayment terms, such that the loans 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 problems, declines in securities markets and acts of nature could have an adverse effect on the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing such loans. Funding The following table provides a breakdown of deposits by category as of the dates indicated: DEPOSIT CATEGORIES (dollars in thousands)
September 30, 1998 December 31, 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Percentage Percentage Total of Total Total of Total Amount Deposits Amount Deposits - - ---------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing demand $78,041 25.8% $78,437 29.0% Interest-bearing demand 49,543 16.4 45,655 16.9 Money market and savings 100,970 33.5 82,619 30.6 Certificates of deposit: Less than $100 12,442 4.1 15,207 5.6 $100 or more 61,167 20.2 48,427 17.9 - - ---------------------------------------------------------------------------------------------------------------------------- Total $302,163 100.0% $270,345 100.0% ============================================================================================================================
Deposits as of September 30, 1998 were $302 million compared to $270 million at December 31, 1997. The most significant growth in deposits has occurred in the area of interest-bearing core deposits which increased approximately $22 million. Management believes this growth in interest-bearing core deposits has been due to unusual activity by several of the Bank's customers and to the business development efforts of the Bank's business development officers. Because of this high level of unusual activity, the Bank has maintained significant short-term liquidity. The growth in the certificates of deposit greater than $100 was due to activity of several significant customers. While the amount of noninterest-bearing demand deposits was essentially unchanged the percentage of such deposits declined 3.2%. Management believes this trend could continue due, in part, 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. In addition, the Bank has been notified that a large customer with money market deposit accounts is consolidating accounts in the Midwest and approximately $18 million of such deposits will be transferred out of the Bank over the next six to nine months, commencing in the fourth quarter of 1998. See "Liquidity." Asset/Liability Management The Company's balance sheet position is asset-sensitive (based upon the significant amount of variable rate loans and the repricing characteristics of its deposit accounts). This balance sheet position generally provides a hedge against rising interest rates, but has a detrimental effect during times of interest rate decreases. Net interest revenues are negatively impacted by a decline in interest rates. The recent cuts, and any further cuts, in interest rates by the Federal Reserve System could negatively impact the Company's net interest revenues in future periods. Management notes, however, that these cuts and any further interest rate cuts might stimulate demand for loans in the future which could offset some of the decline in the Company's interest income. To counter a portion of its asset sensitive interest rate position, the Bank entered into an interest rate "floor" in the amount of $10 million which expires in May 1999. The Bank paid a fixed premium of $47 for which it will receive the amount of interest on $10 million based on the difference of 7% and prime when prime is less than 7%. This protects the Bank against decreases in its net income when the prime decreases to less than 7%. Settlement, if any, 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 at September 30, 1998 and December 31, 1997. Risk-based and Leverage Capital Ratios (dollars in thousands) Company September 30, 1998 December 31, 1997 - - ------- ---------------------------------------------------------------------- Risk-based - - ---------- Amount Ratio Amount Ratio ---------------------------------------------------------------------- Tier 1 capital $29,809 10.58% $29,167 11.28% Tier 1 capital minimum requirement 11,267 4.00 10,344 4.00 ---------------------------------------------------------------------- Excess $18,542 6.58% $18,823 7.28% ====================================================================== Total capital $33,344 11.84% $32,415 12.53% Total capital minimum requirement 22,534 8.00 20,689 8.00 ---------------------------------------------------------------------- Excess $10,810 3.84% $11,726 4.53% ====================================================================== Risk-adjusted assets $281,677 $258,608 ================== ================== Leverage - - -------- Tier 1 capital $29,809 8.80% $29,167 9.07% Minimum leverage ratio requirement 13,545 4.00 12,870 4.00 ---------------------------------------------------------------------- Excess $16,264 4.80% $16,297 5.07% ====================================================================== Average total assets $338,623 $321,747 ================== ================== Bank - - ---- Risk-based - - ---------- Tier 1 capital $29,237 10.38% $28,879 11.17% Tier 1 capital minimum requirement 11,264 4.00 10,341 4.00 ---------------------------------------------------------------------- Excess $17,973 6.38% $18,538 7.17% ---------------------------------------------------------------------- Total capital $32,771 11.64% $32,126 12.43% Total capital minimum requirement 22,528 8.00 20,683 8.00 ---------------------------------------------------------------------- Excess $10,243 3.64% $11,443 4.43% ====================================================================== Risk-adjusted assets $281,602 $258,533 ================== ================== Leverage - - -------- Tier 1 capital $29,237 8.50% $28,879 8.97% Minimum leverage ratio requirement 13,757 4.00 12,881 4.00 ---------------------------------------------------------------------- Excess $15,480 4.50% $15,998 4.97% ====================================================================== Average total assets $343,914 $322,014 ================== ==================
To allow for the effective management of capital, the Board of Directors has approved the repurchase from time-to-time of up to $3.5 million of its common stock through open market or privately negotiated transactions. Through September 30, 1998, the Company had repurchased 77,300 shares for a total price of $3.1 million. Liquidity Management strives to maintain a level of liquidity sufficient to meet customer requirements for loan funding and deposit withdrawals in an economically feasible manner. Liquidity requirements are evaluated by taking into consideration factors such as deposit concentrations, seasonality and maturities, loan demand, capital expenditures, and prevailing and anticipated economic conditions. SJNB's business is generated primarily through customer referrals and employee business development efforts; however the Bank 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, short-term securities held to maturity, and securities available for sale less short-term borrowings. At September 30, 1998, consolidated net liquid assets totaled $87 million or 25% of consolidated total assets as compared to $62 million or 19% of consolidated total assets at December 31, 1997. The increase in the liquid assets is due to the growth of the deposits. See "Funding." In addition to the liquid asset portfolio, SJNB also has available $17 million in lines of credit with five major commercial banks, a collateralized repurchase agreement with a maximum limit of $30 million (of which none has been utilized at September 30, 1998), the guaranteed portion of the SBA loan portfolio of approximately $16 million, and a credit facility with the Federal Reserve Bank based on loans secured by real estate for approximately $4 million. SJNB is primarily a business and professional bank and, as such, its deposit base may be more susceptible to economic fluctuations than other potential competitors. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. Commercial clients in their normal course of business maintain balances in large certificates of deposit, the stability of which hinge upon, among other factors, market conditions, interest rates and business' seasonality. Large certificates of deposit amounted to 20% of total deposits on September 30, 1998 and 18% at December 31, 1997. Recently one of the Bank's significant depositors was acquired by a large multi-national corporation. In this connection the parent of the Bank's customer consolidated domestic operations in the Midwest. The impact of this move will be the withdrawal of approximately $18 million included in money market savings accounts over a six to nine month period commencing during the fourth quarter of 1998. Management believes it has adequate liquidity and additional sources of funds to replenish the loss of these accounts. Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The loan portfolio consists primarily of floating rate, short-term loans. On September 30, 1998, approximately 41% of total consolidated assets had maturities under one year and 82% of total consolidated loans had floating rates tied to the prime rate or similar indexes. The short-term nature of the loan portfolio, and loan agreements which generally require monthly interest payments, provide the Company with a secondary source of liquidity. There are no material commitments for capital expenditures in 1998. Effects of Inflation The most direct effect of inflation on the Company is higher interest rates. Because a significant portion of the Bank's deposits are represented by non-interest-bearing demand accounts, changes in interest rates have a direct impact on the financial results of the Bank. See "Asset/Liability Management." Another effect of inflation is the upward pressure on the Company's operating expenses. Inflation did not have a material effect on the Bank's operations in 1997 or the first nine months of 1998. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company defines interest rate sensitivity as the measurement of the mismatch in repricing characteristics of assets, liabilities and off balance sheet instruments at a specified point in time. This mismatch (known as interest rate sensitivity gap) represents the potential mismatch in the change in the rate of interest income and interest expense that would result from a change in interest rates. Mismatches in interest rate repricing among assets and liabilities arise primarily from the interaction of various customer businesses (i.e., types of loans versus the types of deposits maintained) and from management's discretionary investment and funds gathering activities. The Company attempts to manage its exposure to interest rate sensitivity. However, due to its size and direct competition from the major banks, the Company must offer products which are competitive in the market place, even if less than optimum with respect to its interest rate exposure. The Company's balance sheet position at September 30, 1998 was asset-sensitive, based upon the significant amount of variable rate loans and the repricing characteristics of its deposit accounts. This position provides a hedge against rising interest rates, but has a detrimental effect during times of interest rate decreases. Net interest revenues are negatively impacted by a decline in interest rates. The interest rate gap is a measure of interest rate exposure and is based upon the known repricing dates of certain assets and liabilities and assumed repricing dates of others. Management believes there has been no significant change in the Bank's market risk exposures disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. See "Summary of Financial Results - Net Interest Income." On September 30, 1998, the Federal Open Market Committee ("FOMC") decreased its target rate for interbank borrowings to 5 1/4%. As a result, most domestic banks decreased their prime lending rate to 8 1/4%, which was matched by SJNB. Additionally, on October 21, 1998 the FOMC decreased its target rate for interbank borrowings to 5% and reduced its discount rate to 4 3/4%. In management's view, the future effect of there rate decreases 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 and deposit portfolios, changes in relative volume, the speed in which fixed rate loans are repriced, discretionary investment activities and other factors, although the Bank's margin will likely be negatively impacted. 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. Considering the above it is estimated that the annual impact of the 25 basis point decrease in the Bank's prime rate on a pre-tax basis would be a decrease in income of approximately $270 or $162 after tax. PART II - OTHER INFORMATION Item 1. Legal Proceedings - - -------------------------- Neither the Company nor the Bank is a party to any material pending legal proceedings other than as previously disclosed. Material legal proceedings and changes were reported in the Company's Form 10-K for the year ended December 31, 1997 and the Company's Form 10-Q for the six months ended June 30, 1998; and, subsequent thereto, there have been no material changes in said proceedings. Item 2. Changes in Securities - - ------------------------------ Not applicable. Item 3. Defaults Upon Senior Securities - - ---------------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders - - ------------------------------------------------------------ Not applicable. Item 5. Other Information - - -------------------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K - - ----------------------------------------- (a) Exhibits The following exhibits are filed as part of this report: (3) a. The Registrant's restated Articles of Incorporation. (3) b. The Registrant's restated bylaws as of July 23, 1998. *(10) a. The Registrant's 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.1 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10) b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby incorporated by reference to Exhibit (10)f. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30,1995. *(10) c. The form of Incentive Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10) d. The form of Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10) e. The Registrant's 1992 Director Stock Option Plan is hereby incorporated by reference from Exhibit (10) i. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. *(10) f. Amendment No. 1 to the 1992 Director Stock Option Plan is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30,1995. *(10) g. The form of Stock Option Agreement being utilized under the 1992 Director Stock Option Plan is hereby incorporated by reference from Exhibit (10) j. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. *(10) h. The Registrant's Amended 1996 Stock Option Plan is incorporated by reference to exhibit 99.1 of the Registrant's Form S-8 filed July 1, 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 Form 10-QSB for the quarterly period ended June 30, 1996. *(10) j. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San Jose National Bank dated March 27, 1996 is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Quarterly Form 10-QSB for the quarterly period ended June 30, 1996. (10) k. Sublease dated April 5, 1982, for premises at 95 South Market Street, San Jose, CA is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994. (10) l. Sublease by and between McWhorter's Stationary and San Jose National Bank, dated July 6, 1995, and as amended August 11, 1995 and September 21, 1995, for premises at 95 South Market Street, San Jose CA is hereby incorporated by reference to Exhibit (10) o. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1995. (10) m. Sublease by and between Greater Unified Management Businesses, Inc. (d.b.a. as Logistics) and SJNB Financial Corp., dated January 15, 1996, and as amended March 19, 1996, for premises at 95 South Market Street, San Jose CA is hereby incorporated by reference to Exhibit (10) s. of the Registrant's Quarterly Form 10-QSB for the quarterly period ended June 30, 1996. (27) Financial Data Schedule. * Indicates management contract or compensation plan or arrangement. (b) Reports on Form 8-K No reports on Form 8-K were filed during the first quarter. 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: November 10, 1998 /S/ J. Kenny ------------------------------- James R. Kenny President and Chief Executive Officer Date: November 10, 1998 /S/ E. Blakeslee ------------------------------- Eugene E. Blakeslee Executive Vice President and Chief Financial Officer (Chief Accounting Officer) EX-3 2 RESTATED ARTICLES OF INCORPORATION RESTATED ARTICLES OF INCORPORATION OF SJNB FINANCIAL CORP. The undersigned certify that: 1. They are the President and the Secretary, respectively of SJNB Financial Corp., a California corporation. 2. The Articles of Incorporation, as amended, of this Corporation are restated to read in full as set forth in Exhibit A attached hereto and incorporated herein by this reference. 3. The foregoing restatement of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing restatement of Articles of Incorporation may be adopted with the approval of the Board of Directors alone, without the approval of the outstanding shares, pursuant to Section 910 of the California Corporations Code since it does not itself alter or amend the articles in any respect. 5. Article Six of the foregoing restatement of Articles of Incorporation was subject to Section 710 of the California Corporations Code when it was adopted and filed in 1989 and has not been renewed since its initial adoption. This restatement of Articles of Incorporation does not constitute a re-adoption of Article Six because this restatement has not been approved by the shareholders of this Corporation. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated: November 5, 1998 /S/ J. Kenny --------------------------- James R. Kenny, President /S/ M. Castro --------------------------- Madaline Castro, Assistant Corporate Secretary EXHIBIT (3) a RESTATED ARTICLES OF INCORPORATION OF SJNB FINANCIAL CORP. ONE: NAME ---- The name of this corporation is: SJNB Financial Corp. TWO: PURPOSES -------- The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. THREE: TOTAL NUMBER OF SHARES AUTHORIZED --------------------------------- This corporation is authorized to issue one class of stock designated "Common Stock." The number of shares of Common Stock is twenty million (20,000,000). FOUR: LIMITATION ON LIABILITY OF DIRECTORS ------------------------------------ The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. FIVE: INDEMNIFICATION OF AGENTS ------------------------- The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject only to the applicable limits on such excess indemnification set forth in Section 204 of the Corporations Code with respect to breach of duty to the corporation and its shareholders. SIX: REQUIREMENT OF SHAREHOLDERS' VOTE ON REORGANIZATIONS ---------------------------------------------------- In all cases in which Section 1201 of the California General Corporation Law requires the approval by the outstanding shares of this corporation of the principal terms of a reorganization, such approval shall require the affirmative vote or written consent of the holders of two-thirds (2/3) of the outstanding shares entitled to vote, if such reorganization is not approved 80% or more of the authorized number of directors. If such reorganization is approved by 80% or more of the authorized number of directors, such approval shall require the affirmative vote or written consent of the holders of a majority of the outstanding shares entitled to vote. SEVEN: a. No holder of any class of stock of the corporation shall be entitled to cumulate votes in connection with any election of directors of the corporation. b. Any action required to be taken at any annual or special meeting of shareholders of this corporation, or any action which may be taken at any annual or special meeting of shareholders, may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, provided that the board of directors of this corporation, by resolution, shall have previously approved any such action. EX-3 3 RESTATED BY-LAWS EXHIBIT (3) b BYLAWS OF SJNB FINANCIAL CORP. -------------------- (Amended 7-23-98) ARTICLE I Offices Section 1. Principal Office. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside this State, and the corporation has one or more business offices in this State, the Board of Directors shall fix and designate a principal business office in the State of California. Section 2. Other Offices. Branch or other subordinate offices may at any time be established by the Board at such other places as it deems appropriate. ARTICLE II Meetings of Shareholders Section 1. Place of Meetings. Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. Annual Meeting. The annual meeting of shareholders shall be held on the 4th Wednesday of May of each year at 10:00am., or such other date or such other time as may be fixed by the Board of Directors. However, if this day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At this meeting, directors shall be elected, and any other proper business within the power of the shareholders may be transacted. Section 3. Special Meetings. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or by registered mail to the Chairman of the Board, the President, any Vice President or the Secretary of the corporation. The officer receiving the request. shall cause notice to be promptly given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than 35 nor more than 60 days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing in this paragraph shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held. Section 4. Notice of Meetings. Written notice, in accordance with Section 5 of this Article II, of each annual or special meeting of shareholders shall be given not less than 10 nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date, and hour of the meeting and (a) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (b) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. If action is proposed to be taken at any meeting for approval of (a) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (b) an amendment of the Articles of Incorporation, pursuant to Section 902 of that Code, (c) a reorganization of the corporation, pursuant to Section 1201 of that Code, (d) a voluntary dissolution of the corporation, pursuant to Section 1900 of that Code, or (e) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal. Section 5. Manner of Giving Notice. Notice of a shareholders' meeting shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal office or if published at least once in a newspaper of general circulation in the county of which that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of mailing or other means of giving any notice in accordance with the above provisions, executed by the Secretary, Assistant Secretary or other transfer agent shall be prima facie evidence of the giving of the notice or report. Section 6. Quorum. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. Adjourned Meeting and Notice Thereof. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 6 of this Article) no other business may be transacted at such meeting. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, when any shareholders' meeting is adjourned for more than 45 days from the date set for the original meeting, or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. At any adjourned meeting the corporation may transact any business which may have been transacted at the original meeting. Section 8. Voting. The shareholders entitled to notice of any meeting or to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the corporation on the record date determined in accordance with Section 9 of this Article. Voting shall in all cases be subject to the provisions of Section 702 through 704, inclusive, of the California General Corporation Law (relating to voting shares held by a fiduciary, in the name of a corporation, or in joint ownership). The shareholders' vote may be by voice or ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal (other than the election of directors), but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the California General Corporation Law or by the Articles of Incorporation. No shareholder shall be entitled to cumulate votes for any candidate or candidates. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected, shall be elected. Section 9. Nominations for Directors. Nominations for election to the Board of Directors may be made by the Board or by any shareholder entitled to vote in the election of directors. Nominations, other than those made by or on behalf of the existing management of the corporation, shall be made in writing and shall be mailed or delivered to the President of the corporation not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President of the corporation not later than the close of business on the seventh day following the date on which the notice of meeting was mailed. Such written nomination shall include the following information to the extent known to the nominating shareholder: (a) the name and address of each proposed nominee; (b) the principal occupation of each proposed nominee; (c) the total number of voting shares that will be voted for each proposed nominee; (d) the name and residence address of the nominating shareholder; and (e) the number of shares of voting stock of the corporation owned by the nominating shareholder. Nominations not made in accordance herewith may, in his discretion, be disregarded by the Chairman of the meeting, and upon his instructions, the inspectors of election may disregard all votes cast for each such nominee. Section 10. Record Date. The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall be not more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than 45 days. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the date on which the meeting is held. The record date for determining shareholders for any purpose other than set forth in this Section 10 or Section 12 of this Article shall be at the close of business of the day on which the Board adopts the resolution relating there-to, or the sixtieth day prior to the date of such other action, whichever is later. Section 11. Consent of Absentees. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a waiver of notice, or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal. Section 12. Action by Written Consent Without a Meeting. Subject to the Corporation's Articles of Incorporation and Section 603 of the California General Corporation Law, any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, is signed by the holders of the outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted, or their proxies; provided, however, that the board of directors of this corporation, by resolution, shall have previously approved any such action. All such consents shall be filed with the Secretary of the corporation and shall be maintained in the corporate records. Provided, however, that (1) unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous written consent shall be given, as provided by Section 603(b) of the California Corporations Code, and (2) in the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that subject to applicable law, a director may be elected at any time to fill a vacancy on the Board of Directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. Any written consent may be revoked by a writing received by the Secretary of the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Unless a record date for voting purposes be fixed as provided in Section 10 of the Article, the record date for determining shareholders entitled to give consent pursuant to this Section 12, when no prior action by the Board has been taken, shall be the day on which the first written consent is given. Section 13. Proxies. Every person entitled to vote shares or execute written consents has the right to do so either in person or by one or more persons authorized by a written proxy executed and dated by such shareholder and filed with the Secretary of the corporation prior to the convening of any meeting of the shareholders at which any such proxy is to be used or prior to the use of such written consent. A validly executed proxy which does not state that it is irrevocable continues in full force and effect unless (1) revoked by the person executing it, before the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or by attendance at the meeting and voting in person by, the person executing the proxy; or (2) written notice of the death or incapacity of the maker of the proxy is received by the corporation before the vote pursuant thereto is counted; provided, however, that no proxy shall be valid after the expiration of 11 months from the date of its execution unless otherwise provided in the proxy. Section 14. Inspectors of Election. In advance of any meeting of shareholders, the Board may appoint any persons other than nominees for office as inspectors of election to act at such meeting and any adjournment thereof. If no inspectors of election are so appointed, or if any persons so appointed fail to appear or fail or refuse to act, the Chairman of any such meeting may, and on the request of any shareholder or shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present shall determine whether one (1) or three (3) inspectors are to be appointed. The duties of such inspectors shall be as prescribed by Section 707(b) of the California General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any arising in connection with the right to vote; counting and tabulating all votes or consents, determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act, or certificate of a majority is effective in all respects as the decision, act, or certificate of all. ARTICLE III Directors Section 1. Powers. Subject to the provisions of the California General Corporation Law and any limitations in the Articles of Incorporation and these Bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. The Board may delegate the management of the day-today operation of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in these Bylaws: (a) To select and remove all the other officers, agents, and employees of the corporation, prescribe any powers and duties for them that are consistent with law, or with the Articles or these Bylaws, fix their compensation, and require from them security for faithful service. (b) To conduct, manage, and control the affairs and business of the corporation and to make such rules and regulations therefor not inconsistent with law, or with the Articles or these Bylaws, as they may deem best. (c) To adopt, make, and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time as in their judgment they may deem best. (d) To authorize the issuance of shares of stock of the corporation from time to time, upon such terms and for such consideration as may be lawful. (e) To borrow money and incur indebtedness for the purposes of the corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory and capital notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor and any agreements pertaining thereto. (f) To prescribe the manner in which and the person or persons by whom any or all of the checks, drafts, notes, contracts and other corporate instruments shall be executed. (g) To appoint and designate, by resolution adopted by a majority of the authorized number of directors, one or more committees, each consisting of two or more directors, including the appointment of alternate members of any committee who may replace any absent member at any meeting of the committee. Section 2. Number and Qualification of Directors. The authorized number of directors shall be not less than nine (9) nor more than seventeen (17) until changed by an amendment to this Bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote. The exact number of directors shall be eleven (11), until changed, within the limits specified above, by a bylaw amending this Section 2, duly adopted by the Board of Directors or by the shareholders. No person (except, in respect to the limitation in clause (a) below, of this Section 2.3, or any person who shall be a member of the Board of Directors of this Corporation on the date these Bylaws shall be adopted) shall be a member of the Board of Directors of this Corporation (a) who has not been a resident, for a period of at least one (1) year immediately prior to his election, of a state in which the Corporation or any of its subsidiaries maintains an office, or (b) who owns, together with his family residing with him, directly or indirectly, more than one percent (1%) of the outstanding shares of any banking corporation, affiliate or subsidiary thereof, or bank holding company engaged in business in California, other than the Corporation or any of its subsidiaries or affiliates, or (c) who is a director, officer, employee, agent, nominee, or attorney of any banking corporation, affiliate or subsidiary thereof, or bank holding company engaged in business in California, other than the Corporation or any of its subsidiaries or affiliates, or (d) who has or is the nominee of anyone who has a contract, arrangement or understanding with any banking corporation, or affiliate or subsidiary thereof, or bank holding company, other than the Corporation or any of its subsidiaries or affiliates, or with any officer, director, employee, agent, nominee, attorney or other representative thereof that he will reveal or in any way utilize information obtained as a director or that he will, directly or indirectly, attempt to effect or encourage any action of the Corporation. Section 3. Election and Term of Office. The directors shall be elected at each annual meeting of shareholders but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director shall hold office until the next annual meeting and until a successor has been elected and qualified. Section 4. Vacancies. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary, or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Vacancies in the Board may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified. Provided, however, that a vacancy in the Board existing as the result of a removal of a director may not be filled by the directors, unless the Articles or a bylaw adopted by the shareholders so provides. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent, other than to fill a vacancy created by removal, requires the consent of a majority of the outstanding shares entitled to vote. Any such election by written consent to fill a vacancy created by removal requires the unanimous consent of the outstanding shares entitled to vote. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. Section 5. Place of Meeting. Regular meetings of the Board shall be held at any place within the State of California which has been designated in the notice of meeting or if there is no notice, at the principal office of the corporation, or at a place designated by resolution of the Board or by the written consent of the Board. Any regular or special meeting is valid wherever held if held upon written consent of all members of the Board given either before or after the meeting and filed with the Secretary of the corporation. Section 6. Regular Meetings. Immediately following each annual meeting of shareholders and at the same place, the Board shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Other regular meetings of the Board shall be held without notice either on the 3rd Wednesday of January, April, July and October of each year, at the hour of 5:00 p.m., or at such different date and time as the Board may from time to time fix by resolution; provided, however, should said day fall upon a legal holiday observed by the corporation at its principal office, the said meeting shall be held at the same time and place on the next succeeding full business day. Call and notice of all regular meetings of the Board are hereby dispensed with. Section 7. Special Meetings. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President, or the Secretary or by any two directors. Special meetings of the Board shall be held upon four days written notice by mail or 24 hours notice delivered personally or by telephone or telegraph. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the corporation or as may have been given to the corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. Such notice may, but need not, specify the purpose of the meeting, nor the place if the meeting is to be held at the principal office of the corporation. Notice of any meeting of the Board need not be given to any director who attends the meeting without protesting either prior thereto or at its commencement, the lack of notice to such director. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mail, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated, in person or by telephone or wireless, to the recipient or to a person at the office of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. Section 8. Quorum. A majority of the authorized number of directors constitutes a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by the Articles and subject to the provisions of Section 310 of the California General Corporation Law (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest) , Section 311 (as to appointment of committees), and Section 317(e) (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. Participation in Meetings by Conference Telephone. Members of the Board may participate in a meeting through use of a conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting pursuant to Section 9 constitutes "presence" in person at such meeting. Section 10. Waiver of Notice. The transactions of any meeting of the Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting Section 11. Adjournment. A majority of the directors present, whether or not a quorum is. present, may adjourn any directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 7 of this Article III, to the directors who were not present at the time of the adjournment. Section 12. Action Without Meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same effect as a unanimous vote of the Board. Such consent or consents shall be filed with the minutes of the proceedings of the Board. Section 13. Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board. This Section shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. Section 14. Rights of Inspection. Every director of the corporation shall have the absolute right at any reasonable time to inspect and copy all books, records, and documents of every kind and to inspect the physical properties of the corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. ARTICLE IV Officers Section 1. Officers. The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board, a chairman of the board, a vice chairman of the board, one or more vice presidents, one or more assistant vice presidents, one or more assistant treasurers, one or more assistant secretaries and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article. one person may hold two or more offices, except those of president and chief financial officer. Section 2. Election. The officers of the corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen by, and shall serve at the pleasure of, the Board, and shall hold their respective offices until their resignation, removal, or other disqualification from service, or until their respective successors shall be elected, subject to the rights, if any, of an officer under any contract of employment. Section 3. Subordinate Officers. The Board may elect, and may empower the President to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board may from time to time determine. Section 4. Removal and Resignation. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board at any time, or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the corporation, but without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office. Section 6. Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board and of the shareholders, and exercise and perform such other powers and duties as may be from time to time assigned by the Board. Section 7. Vice Chairman. The Vice Chairman of the Board, if there shall be such an officer, shall, in the absence of the Chairman of the Board of Directors, preside at all meetings of the Board and of the shareholders, and exercise and perform such other powers and duties as may be from time to time assigned by the Board. Section 8. President. Subject to such powers, if any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the President is the General Manager and Chief Executive Officer of the corporation and has, subject to the control of the Board, general supervision, direction, and control of the business and officers of the corporation. In the absence of both the Chairman of the Board and the Vice Chairman, or if there be none, the President shall preside at all meetings of the shareholders and at all meetings of the Board. The President has the general powers and duties of management usually vested in the office of President and General Manager of a corporation and such other powers and duties as may be prescribed by the Board. Section 9. Vice Presidents. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board or the Bylaws, and the President, or the Chairman of the Board. Section 10. Secretary. The Secretary shall keep or cause to be kept, at the principal office and such other place as the Board may order, a book of minutes of all the meetings of shareholders, the Board, and its committees, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the corporation at the principal office or business office in accordance with Section 213 of the California General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders, of the Board and of any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 11. Assistant Secretary. The Assistant Secretary or the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 12. Chief Financial officer. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares, and shall send or cause to be sent to the shareholders of the corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all times be open to inspection by any director of the corporation. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board. The Chief Financial officer shall disburse the funds of the corporation as may be ordered by the Board, shall render to the President and directors, whenever they request it, an account of all transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 13. Assistant Treasurer. The Assistant Treasurer or the Assistant Treasurers, in the order of their seniority, shall, in the absence or disability of the Chief Financial Officer, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such additional powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 14. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that such officer is also a director of the corporation. Section 15. Officers Holding More Than One Office. Any two or more offices, except those of President and Chief Financial Officer, may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Section 16. Inability to Act. In the case of absence or inability to act of any officer of the corporation and of any person herein authorized to act in his place, the Board may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select. ARTICLE V Other Provisions Section 1. Inspection of Corporate Records. The corporation shall keep at its principal executive office a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may: (a) Inspect and copy the record of shareholders; names and addresses and shareholdings during usual business hours upon five business days prior notice demand upon the corporation; or (b) Obtain from the transfer agent, if any, for the corporation, upon five business days prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings, as of the most recent record date for which it has been compiled or as of the date specified by the shareholder subsequent to the date of demand. Section 2. Inspection of Bylaws. The corporation shall keep at its principal office the original or a copy of these Bylaws as amended to date which shall be open to inspection by shareholders at all reasonable times during business hours. Section 3. Endorsement of Documents; Contracts. Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance, or other instrument in writing and any assignment or endorsements thereof executed or entered into between this corporation and any other person, when signed by the President or any Vice President and the Treasurer or any Assistant Treasurer of this corporation shall be valid and binding upon this corporation in the absence of actual knowledge on the part of the other person that the signing officers had not the authority to execute the same. Any such instruments may be signed by any other person or persons and in such manner as from time to time shall be determined by the Board, and, unless so authorized by the Board, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or arrangement or to pledge its credit or to render it liable for any purpose or amount. Section 4. Certificates of Stock. Every holder of shares of the corporation shall be entitled to have a certificate signed in the name of the corporation by the President or Vice President and by the Chief Financial Officer or Assistant Financial Officer or by the Secretary or Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificates may be facsimile. If any officer, transfer agent, or registrar who has signed a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent, or registrar at the date of issue. Except as provided in this Section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and canceled at the same time. The Board may, however, in case any certificate for shares is alleged to have been lost, stolen, or destroyed, authorize the issuance of a new certificate in lieu thereof, and the corporation may require that the corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft, or destruction of such certificate or the issuance of such new certificate. Prior to the due presentment for registration of transfer in the stock transfer book of the corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California. Section 5. Representation of Shares of Other Corporations. The President or any other officer or officers authorized by the Board or the President are each authorized to vote, represent, and exercise on behalf of the corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the corporation. The authority herein granted may be exercised by any such officer in person or by any other person authorized to do so by proxy or power of attorney duly executed by said officer. Section 6. Annual Report to Shareholders. Except when this corporation has 100 or more holders of record of its shares (determined as provided in Section 605 of the Corporations Code), the annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly waived, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to shareholders. Section 7. Seal. The corporate seal of the corporation shall consist of two concentric circles, between which shall be the name of the corporation, and in the center shall be inscribed the word "Incorporated" and the date of its incorporation. Section 8. Fiscal Year. The fiscal year of this corporation shall begin on the first day of January and end on the 31st day of December of each year. Section 9. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction, and definitions contained in the California General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. Section 10. Bylaw Provisions Contrary to or Inconsistent with Provisions of Law. Any article, section, subsection, subdivision, sentence, clause or phrase of these Bylaws which, upon being construed in the manner provided in Section 9 of this Article, shall be contrary to or inconsistent with any applicable provision of the California General Corporation Law or other applicable law of the State of California or of the United States shall not apply so long as said provisions of law shall remain in effect, but such result shall not affect the validity of applicability of any other portions of these Bylaws, it being hereby declared that these Bylaws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. ARTICLE VI Indemnification Section 1. Definitions. For the purposes of this Article, "agent" includes any person who is or was a director, officer, employee, or other agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; "proceeding" includes any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative or investigative and "expenses" includes without limitation attorneys' fees and any expenses of establishing a right to indemnification pursuant to law. Section 2. Extent of Indemnification. The corporation shall, to the maximum extent permitted by the California General Corporation Law, advance expenses to and indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact any such person is or was an agent of the corporation. Section 3. Insurance. The corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against such liability under the provisions of this Article. ARTICLE VII Amendments Section 1. Amendment By Shareholders. New Bylaws may be adopted or these Bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the Articles of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the Articles. Section 2. Amendment By Directors. Subject to the rights of the shareholders as provided in Section 1 of this Article VII, Bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors, may be adopted, amended, or repealed by the Board of Directors. EX-27 4 FDS --
9 0000721161 SJNB Financial Corp. 1,000 US Dollars 9-mos Dec-31-1998 Jan-01-1998 Sep-30-1998 1.000 19,552 0 8,796 0 46,863 11,492 11,687 246,653 4,702 342,953 302,163 0 6,238 0 0 0 16,688 17,684 342,953 18,404 3,546 (7) 21,943 6,594 6,839 15,104 150 (8) 8,444 7,287 7,287 0 0 4,241 1.70 1.61 0.065 388 0 47 0 4,493 125 184 4,702 4,702 0 125
-----END PRIVACY-ENHANCED MESSAGE-----