-----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, Bh4hJAs2J/a5vxs1O7V7UvRnarRG0irU5hX9JdxjuFxYCOpJ5J5haHJ01yZQyt9H iTfxxbPbzADNAebhAIO6Zg== 0000721161-01-000003.txt : 20010307 0000721161-01-000003.hdr.sgml : 20010307 ACCESSION NUMBER: 0000721161-01-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SJNB FINANCIAL CORP CENTRAL INDEX KEY: 0000721161 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 770058227 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11771 FILM NUMBER: 1561535 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-K 1 0001.txt 2000 10K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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) Registrant's telephone number, including area code (408) 947-7562 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE ------------- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting common equity held by non-affiliates of the registrant, based on a market value of $38.56 per share (the closing price of the Common Stock, as of February 28, 2001) was $120,605,000 Number of shares of common stock outstanding as of February 28, 2001: 3,791,951 shares Documents incorporated by reference: Portions of the registrant's definitive proxy statement for the registrant's 2001 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A) are incorporated by reference into Part III of this Report. TABLE OF CONTENTS PART I PAGE Item 1 - Business 4 Item 2 - Properties 11 Item 3 - Legal Proceedings 12 Item 4 - Submission of Matters to a Vote of Security Holders 12 PART II Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters 12 Item 6 - Selected Financial Data 14 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation 14 Item 7A- Quantitative and Qualitative Disclosures about Market Risk 34 Item 8 - Financial Statements and Supplementary Data 36 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 61 PART III Item 10 -Directors and Executive Officers of the Registrant 61 Item 11 -Executive Compensation 61 Item 12 -Security Ownership of Certain Beneficial Owners and Management 61 Item 13 -Certain Relationships and Related Transactions 61 PART IV Item 14 -Exhibits, Financial Statement Schedules and Reports on 62 Form 8-K SIGNATURES 65 PART I ITEM 1. BUSINESS Forward-Looking Information This Annual Report on Form 10-K includes forward-looking information which is subject to the "safe harbor" created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements (which involve the Company's plans, beliefs and goals, refer to estimates or use similar terms) involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry; changes in the interest rate environment; the declining health of the economy, either nationally or regionally; the deterioration of credit quality, which could cause an increase in the provision for loan and lease losses; changes in the regulatory environment; changes in business conditions, particularly in Santa Clara County real estate and high-tech industries; the impact of the California energy crisis; certain operational risks involving data processing systems or fraud; volatility of rate sensitive deposits; asset/liability matching risks; and liquidity risks. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. See also the section included herein entitled "Certain Additional Business Risks" and other risk factors discussed elsewhere in this Report. GENERAL SJNB Financial Corp. (the "Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company was incorporated under the laws of the State of California on April 18, 1983. Its principal office is located at One North Market Street, San Jose, California 95113, and its telephone number is (408) 947-7562. The Company owns 100% of the issued and outstanding common shares of San Jose National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was incorporated on November 23, 1981 and commenced business in San Jose, California, on June 10, 1982. SJNB engages in the general commercial banking business with special emphasis on the banking needs of the business and professional communities in Santa Clara County and the surrounding areas. The Bank has branches located in San Jose, Saratoga, Los Gatos and Danville. On May 22, 1998, SJNB acquired all of the stock of a private company, Epic Funding Corporation ("Epic"), pursuant to a definitive agreement dated April 13, 1998. In connection with the acquisition, which was structured as a tax-free reorganization, the Company issued 12,223 shares of its common stock and paid $110,000 to Epic's sole shareholder in exchange for all of Epic's outstanding stock. The total purchase price for Epic was $611,000, while Epic's fair value of net assets was $28,000. Goodwill amounted to $759,000, including certain expenses of the transaction. Epic provides direct and vendor lease programs to manufacturers and equipment users throughout California and across parts of the United States. Epic is now a wholly-owned subsidiary of the Bank. Epic's office is located in Danville, California, together with a small de novo branch of the Bank at the same facility, which opened July 1, 1998. On January 5, 2000, Saratoga Bancorp ("Saratoga"), the parent company of Saratoga National Bank, was merged with and into the Company, pursuant to an exchange of the Company's common stock for all common stock of Saratoga Bancorp. Saratoga National Bank, headquartered in Saratoga, California, operated three branches and as of the acquisition date had approximately $142 million in assets, $103 million in deposits and $15 million in shareholders' equity. Saratoga National Bank was merged with and into SJNB on January 5, 2000. Saratoga's San Jose office, which was located near SJNB's San Jose office, was consolidated into SJNB's San Jose office as of January 28, 2000. The shareholders of Saratoga received 0.70 shares of the Company's common stock for each outstanding share of Saratoga common stock. Based on the closing price of the Company's stock on January 5, 2000 of $29.125, the transaction was valued at approximately $34.2 million, excluding the value of any unexercised options, and each Saratoga shareholder received the equivalent of 0.70 of the Company's common stock valued at $20.39 per share for each share of Saratoga common stock. The merger has been accounted for as a pooling of interests. SJNB accepts checking and savings deposits, offers money market deposit accounts and certificates of deposit, makes secured and unsecured commercial and other installment and term loans and offers other customary banking services. SJNB offers banking services generally, but it places primary emphasis on lending for real estate purposes and specialized lending to businesses and professionals. Loans for real estate purposes include term financing for commercial facilities and real estate construction loans mainly for residential and commercial properties. Loans to businesses and professionals include accounts receivable financing, equipment financing, commercial loans, SBA loans and letters of credit. The Company provides commercial banking, factoring and leasing services principally through the Bank, the Bank's Financial Services Division and Epic. Although the Bank has neither a trust nor an international banking department, it has arranged to provide these services through its correspondent banks. As a bank holding company, the Company is authorized to engage in the activities permitted under the BHCA and regulations thereunder. SERVICE AREA The principal service area of SJNB includes the County of Santa Clara and its contiguous counties, including San Mateo, Alameda, Contra Costa, Santa Cruz and San Benito. EMPLOYEES At December 31, 2000, SJNB had 127 full-time officers and employees and 24 part-time employees for a total of 115.7 employees on a full-time equivalent. Certain of the Bank's officers are also officers of the Company. None of the Bank's employees are represented by a union. Management believes that employee relations are good. SUPERVISION AND REGULATION THE EFFECT OF GOVERNMENT POLICY ON BANKING The earnings and growth of the Company are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. For example, the Board of Governors of the Federal Reserve System (the "FRB") influences the supply of money through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Company cannot be predicted. Additionally, state and federal tax policies can impact banking organizations. As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Company. REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES The Company is a bank holding company subject to the BHCA. The Company reports to, registers with, and may be examined by, the FRB. The FRB also has the authority to examine the Company's subsidiaries. The costs of any examination by the FRB are payable by the Company. On March 11, 2000, the Gramm-Leach-Bliley Act, or the Financial Services Act of 1999 (the "FSA"), became effective. This Act amended certain portions of the BHCA, subject to conditions. See "Recently Enacted Legislation" below for more information. The Company is a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and the Bank are subject to examination by, and may be required to file reports with, the California Commissioner of Financial Institutions (the "Commissioner"). The FRB has significant supervisory and regulatory authority over the Company and its affiliates. The FRB requires the Company to maintain certain levels of capital. See "Capital Standards." The FRB also has the authority to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations or conditions imposed in writing by the FRB. See "Prompt Corrective Action and Other Enforcement Mechanisms." Under the BHCA, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over a bank, or acquires directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company. Thus, the Company is required to obtain the prior approval of the FRB before it acquires, merges or consolidates with any bank or bank holding company. Any company seeking to acquire, merge or consolidate with the Company also would be required to obtain the prior approval of the FRB. The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company. However, a bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity. A bank holding company may acquire banks in states other than its home state without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and no more than 30% of such deposits in that state (or such lesser or greater amount set by state law). Banks may also merge across states lines, thereby creating interstate branches. Furthermore, a bank is now able to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such de novo branching. Under California law, (i) out-of-state banks that wish to establish a California branch office to conduct core banking business must first acquire an existing five year old California bank or industrial bank by merger or purchase, (ii) California state-chartered banks are empowered to conduct various authorized branch-like activities on an agency basis through affiliated and unaffiliated insured depository institutions in California and other states and (iii) the Commissioner is authorized to approve an interstate acquisition or merger which would result in a deposit concentration exceeding 30% if the Commissioner finds that the transaction is consistent with public convenience and advantage. However, a state bank chartered in a state other than California may not enter California by purchasing a California branch office of a California bank or industrial bank without purchasing the entire entity or by establishing a de novo California bank. The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company's financial position. The FRB's policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. See the section entitled "Restrictions on Dividends and Other Distributions" for additional restrictions on the ability of the Company and the Bank to pay dividends. Transactions between the Company and the Bank are subject to a number of other restrictions. FRB policies forbid the payment by bank subsidiaries of management fees, which are unreasonable in amount or exceed the fair market value of the services rendered (or, if no market exists, actual costs plus a reasonable profit). Subject to certain limitations, depository institution subsidiaries of bank holding companies may extend credit to, invest in the securities of, purchase assets from, or issue a guarantee, acceptance, or letter of credit on behalf of, an affiliate, provided that the aggregate of such transactions with affiliates may not exceed 10% of the capital stock and surplus of the institution, and the aggregate of such transactions with all affiliates may not exceed 20% of the capital stock and surplus of such institution. The Company may only borrow from depository institution subsidiaries if the loan is secured by marketable obligations with a value of a designated amount in excess of the loan. Further, the Company may not sell a low-quality asset to a depository institution subsidiary. Comprehensive amendments to Regulation Y became effective in 1997, and are intended to improve the competitiveness of bank holding companies by, among other things: (i) expanding the list of permissible nonbanking activities in which well-run bank holding companies may engage without prior FRB approval, (ii) streamlining the procedures for well-run bank holding companies to obtain approval to engage in other nonbanking activities and (iii) eliminating most of the anti-tying restrictions imposed upon bank holding companies and their nonbank subsidiaries. Amended Regulation Y also provides for a streamlined and expedited review process for bank acquisition proposals submitted by well-run bank holding companies and eliminates certain duplicative reporting requirements when there has been a further change in bank control or in bank directors or officers after an earlier approved change. These changes to Regulation Y are subject to numerous qualifications, limitations and restrictions. In order for a bank holding company to qualify as "well-run," both it and the insured depository institutions that it controls must meet the "well-capitalized" and "well-managed" criteria set forth in Regulation Y. To qualify as "well-capitalized," the bank holding company must, on a consolidated basis: (i) maintain a total risk-based capital ratio of 10% or greater, (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater, and (iii) not be subject to any order by the FRB to meet a specified capital level. Its lead insured depository institution must be well-capitalized as that term is defined in the capital adequacy regulations of the applicable bank regulator, 80% of the total risk-weighted assets held by its insured depository institutions must be held by institutions that are well-capitalized, and none of its insured depository institutions may be undercapitalized. To qualify as "well-managed:" (i) each of the bank holding company, its lead depository institution and its depository institutions holding 80% of the total risk-weighted assets of all its depository institutions at their most recent examination or review must have received a composite rating, rating for management and rating for compliance which were at least satisfactory, (ii) none of the bank holding company's depository institutions may have received one of the two lowest composite ratings, and (iii) neither the bank holding company nor any of its depository institutions during the previous 12 months may have been subject to a formal enforcement order or action. Bank Regulation and Supervision As a national bank, the Bank is regulated, supervised and regularly examined by the Office of the Comptroller of the Currency (the "OCC"). Deposit accounts at the Bank are insured by the Bank Insurance Fund (the "BIF"), as administered by the Federal Deposit Insurance Corporation (the "FDIC"), to the maximum amount permitted by law. The Bank is also subject to applicable provisions of California law, insofar as such provisions are not in conflict with or preempted by federal banking law. The Bank is a member of the Federal Reserve System, and is also subject to certain regulations of the FRB dealing primarily with check clearing activities, establishment of banking reserves, Truth-in-Lending (Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B). The OCC may approve, on a case-by-case basis, the entry of bank operating subsidiaries into a business incidental to banking, including activities in which the parent bank is not permitted to engage. A national bank is permitted to engage in activities approved for a bank holding company through a bank operating subsidiary, such as acting as an investment or financial advisor, leasing personal property and providing financial advice to customers. In general, these activities are permitted only for well-capitalized or adequately capitalized national banks. Capital Standards The federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. government securities, to 100% for assets with relatively higher credit risk, such as certain loans. In determining the capital level the Bank is required to maintain, the federal banking agencies do not, in all respects, follow generally accepted accounting principles ("GAAP") and have special rules which have the effect of reducing the amount of capital they will recognize for purposes of determining the capital adequacy of the Bank. A banking organization's risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off balance sheet items. The regulators measure risk-adjusted assets and off balance sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock, other types of qualifying preferred stock and minority interests in certain subsidiaries, less most other intangible assets and other adjustments. Net unrealized losses on available-for-sale equity securities with readily determinable fair value must be deducted in determining Tier 1 capital. For Tier 1 capital purposes, deferred tax assets that can only be realized if an institution earns sufficient taxable income in the future are limited to the amount that the institution is expected to realize within one year, or ten percent of Tier 1 capital, whichever is less. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses, term preferred stock and other types of preferred stock not qualifying as Tier 1 capital, term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital are subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets and off balance sheet items of 8%, and a minimum ratio of Tier 1 capital to adjusted average risk-adjusted assets and off balance sheet items of 4%. On October 1, 1998, the FDIC adopted two rules governing minimum capital levels that FDIC-supervised banks must maintain against the risks to which they are exposed. The first rule makes risk-based capital standards consistent for two types of credit enhancements (i.e., recourse arrangements and direct credit substitutes) and requires different amounts of capital for different risk positions in asset securitization transactions. The second rule permits limited amounts of unrealized gains on debt and equity securities to be recognized for risk-based capital purposes as of September 1, 1998. The FDIC rules also provide that a qualifying institution that sells small business loans and leases with recourse must hold capital only against the amount of recourse retained. In general, a qualifying institution is one that is well-capitalized under the FDIC's prompt corrective action rules. The amount of recourse that can receive the preferential capital treatment cannot exceed 15% of the institution's total risk-based capital. In addition to the risk-based guidelines, the federal banking agencies require banking organizations to maintain a minimum amount of Tier 1 capital to adjusted average total assets, referred to as the leverage capital ratio. For a banking organization rated in the highest of the five categories used to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets must be 3%. It is improbable, however, that an institution with a 3% leverage ratio would receive the highest rating since a strong capital position is a significant part of the regulators' rating. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 100 to 200 basis points above the 3% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, must be at least 4% or 5%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The following tables present the capital ratios for the Company and the Bank, compared to the standards for well-capitalized depository institutions, as of December 31, 2000. - -------------------------------------------------------- ----------------------- (amounts in thousands, except percentages) WELL MINIMUM ACTUAL CAPITALIZED CAPITAL ---------------------- THE COMPANY CAPITAL RATIO RATIO REQUIREMENT - ------------------------------------------- ---------------------- ------------ Leverage $60,115 8.94% 5.0% 4.0% Tier 1 Risk-based 60,115 11.04 6.0 4.0 Total Risk-based 66,928 12.29 10.0 8.0 THE BANK - -------------------------------------------------------------------------------- Leverage $58,217 8.66% 5.0% 4.0% Tier 1 Risk-based 58,217 10.75 6.0 4.0 Total Risk-based 64,995 12.00 10.0 8.0 The federal banking agencies must take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as a part of the institution's regular safety and soundness examination. The federal banking agencies must also consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off balance sheet position) in evaluation of a bank's capital adequacy. PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified in the following categories based on the capital measures indicated below: WELL CAPITALIZED ADEQUATELY CAPITALIZED Total risk-based capital of 10%; Total risk-based capital of 8%; Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and Leverage ratio of 5%. Leverage ratio of 4%. UNDERCAPITALIZED SIGNIFICANTLY UNDERCAPITALIZED Total risk-based capital less Total risk-based capital less than 6% than 8%; Tier 1 risk-based capital less Tier 1 risk-based capital less than 3%; or than 4%; or Leverage ratio less than 3%. Leverage ratio less than 4%. CRITICALLY UNDERCAPITALIZED Tangible equity to total assets less than 2%. An institution that, based upon its capital levels, is classified as "well capitalized," "adequately capitalized" or "undercapitalized" may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Additionally, a holding company's inability to serve as a source of strength to its subsidiary banking organizations could serve as an additional basis for a regulatory action against the holding company. SAFETY AND SOUNDNESS STANDARDS FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution's noncompliance with one or more standards. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and cash needs of the institution, as well as general business conditions. FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized. The federal banking agencies also have the authority to prohibit a depository institution from engaging in business practices which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute. The payment of dividends by a national bank is further restricted by additional provisions of federal law, which prohibit a national bank from declaring a dividend on its shares of common stock unless its surplus fund exceeds the amount of its common capital (total outstanding common shares times the par value per share). Additionally, if losses have at any time been sustained equal to or exceeding a bank's undivided profits then on hand, no dividend shall be paid. Moreover, even if a bank's surplus exceeded its common capital and its undivided profits exceed its losses, the approval of the OCC is required for the payment of dividends if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits of that year combined with its retained net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. A national bank must consider other business factors in determining the payment of dividends. The payment of dividends by the Bank is governed by the Bank's ability to maintain minimum required capital levels and an adequate allowance for loan losses. PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS FDICIA established several mechanisms to increase funds to protect deposits insured by the BIF administered by the FDIC. The FDIC is authorized to borrow up to $30 billion from the United States Treasury; up to 90% of the fair market value of assets of institutions acquired by the FDIC as receiver from the Federal Financing Bank; and from depository institutions that are members of the BIF. Any borrowings not repaid by asset sales are to be repaid through insurance premiums assessed to member institutions. Such premiums must be sufficient to repay any borrowed funds within 15 years and provide insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. No assurance can be given at this time as to what the future level of insurance premiums will be. COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. RECENTLY ENACTED LEGISLATION On March 11, 2000, the Financial Services Act of 1999 (the "FSA") became effective. The FSA repealed provisions of the Glass-Steagall Act, which had prohibited commercial banks and securities firms from affiliating with each other and engaging in each other's businesses. Thus, many of the barriers prohibiting affiliations between commercial banks and securities firms have been eliminated. The BHCA was also amended by the FSA to allow new "financial holding companies" ("FHC") to offer banking, insurance, securities and other financial products to consumers. Specifically, the FSA amended section 4 of the BHCA in order to provide for a framework for the engagement in new financial activities. Bank holding companies ("BHC") may elect to become a FHC if all its subsidiary depository institutions are well-capitalized and well-managed. If these requirements are met, a BHC may file a certification to that effect with the FRB and declare that it elects to become a FHC. After the certification and declaration is filed, the FHC may engage either de novo or though an acquisition in any activity that has been determined by the FRB to be financial in nature or incidental to such financial activity. BHCs may engage in financial activities without prior notice to the FRB if those activities qualify under the new list of permissible activities in section 4(k) of the BHCA. However, notice must be given to the FRB within 30 days after a FHC has commenced one or more of the financial activities. The Company has not elected to become a FHC. Under the FSA, national banks (as well as FDIC-insured state banks, subject to various requirements) are permitted to engage through "financial subsidiaries" in certain financial activities permissible for affiliates of FHCs. However, to be able to engage in such activities the national bank must also be well-capitalized and well-managed and have received at least a "satisfactory" rating in its most recent CRA examination. The aggregate consolidated total assets of all financial subsidiaries of a national bank may not exceed the lesser of 45% of the consolidated total assets of the parent bank or $50 billion. In addition, if the national bank ranks as one of the top 50 largest insured banks in the United States, it must have an issue of outstanding long-term debt rated in one of the three highest rating categories by an independent rating agency. If the national bank falls within the next group of 50, it must either meet the debt-rating test described above or satisfy a comparable test jointly agreed to by the FRB and the Treasury Department. No debt rating is required for any national bank, such as the Bank, not within the top 100 largest insured banks in the United States. We do not have any such debt outstanding. The Company cannot be certain of the effect of the foregoing recently enacted legislation on its business, although there is likely to be consolidation among financial services institutions and increased competition for the Company. PENDING LEGISLATION AND REGULATIONS Certain pending legislative proposals include bills to permit banks to pay interest on business checking accounts, to cap consumer liability for stolen debit cards, to enact privacy rules designed to regulate the ability of financial institutions to use or share customer information, to end certain predatory lending practices, to allow the payment of interest on reserves that financial institutions must keep with FRB and to give judges the authority to force high-income borrowers to repay their debts rather than cancel them through bankruptcy. A proposal to merge the FDIC's two funds, the BIF and the Savings Association Insurance Fund, is also being discussed. The Company also expects that during 2001, the Financial Accounting Standards Board will issue guidance as to whether to retain the pooling-of-interests method of accounting for business combinations and related issues, including whether to adopt an impairment-only approach to amortization of goodwill. COMPETITION In the past, an independent bank's principal competitors for deposits and loans have been other banks (particularly major banks), savings and loan associations and credit unions. To a lesser extent, competition was also provided by thrift and loans, mortgage brokerage companies and insurance companies. Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and even retail establishments, have offered new investment vehicles which also compete with banks for deposit business. The direction of federal legislation in recent years seems to favor competition between different types of financial institutions and to foster new entrants into the financial services market, and it is anticipated that this trend will continue. The enactment of the Interstate Banking and Branching Act in 1994 and the California Interstate Banking and Branching Act of 1995 have increased competition within California. Recent legislation has also made it easier for out-of-state credit unions to conduct business in California and allows industrial banks to offer consumers more lending products. Regulatory reform, as well as other changes in federal and California law will also affect competition. The availability of banking services over the internet or "e-banking" has continued to expand. While the impact of these changes, and of other proposed changes, cannot be predicted with certainty, it is clear that the business of banking in California will remain highly competitive. As of June 30, 2000, there were approximately 388 banking offices in the geographic area served by SJNB, including offices of major chain banks and other independent banks. There were also approximately 144 offices of savings banks as of such date. Of these there were 230 offices of commercial banks (and 88 offices of savings banks) in Santa Clara County, which is the principal market area for the Bank's San Jose office. In addition, there were 158 offices of commercial banks (and 56 offices of savings banks) in the Danville office's primary market area. Total deposits of the combined area were approximately $54.5 billion as of June 30, 2000, of which the Bank has approximately a 1% share. In the San Jose office's market area, the Bank's market share is approximately 1.5% of the deposits in that market. Presently, there are at least 9 other independent banks in Santa Clara County. Five of the independent banks - Heritage Bank of Commerce and Bank of Los Altos (subsidiaries of Heritage Commerce Corp), Cupertino National Bank & Trust and Mid-Peninsula Bank (subsidiaries of Greater Bay Bancorp) and Silicon Valley Bank - - emphasize commercial banking services and, therefore, create direct competition for the services that SJNB offers to the business and professional communities in its market area. The Bank's Financial Services Division and Epic also compete with many of the major and independent banks within their respective marketing areas. The Bank's Financial Services Division and Epic also compete with companies solely in the factoring or leasing business. Such companies may offer products and services which traditionally are not offered by banking institutions. CERTAIN ADDITIONAL BUSINESS RISKS The Company's business, financial condition, operating results and prospects can be impacted by a number of factors, including, but not limited to, those set forth in the paragraphs below. Any one of these stated risks could cause the Company's actual results in the future to vary from the Company's anticipated future results. Shares of Company Common Stock eligible for future sale could have a dilutive effect on the market for Company Common Stock and could adversely affect the market price of the Common Stock. The Articles of Incorporation of the Company authorize the issuance of 20,000,000 shares of Common and 5,000,000 shares of Preferred Stock, of which approximately 3,791,951 common shares and no preferred shares were outstanding at February 28, 2001. Pursuant to its stock option plans, the Company had outstanding options to purchase an aggregate of 601,181 shares of Company Common Stock at February 28, 2001. As of the same date, 178,645 shares of Company Common Stock remained available for option grants under the Company's stock option plans, including stock option plans of Saratoga. The Company has previously announced its intention to pursue acquisitions of other financial services companies from time to time when such acquisitions are believed by the Company to enhance shareholder value or satisfy other strategic objectives of the Company. Other acquisitions, if any, could be accomplished by the issuance of additional shares of Company Common Stock or other securities convertible into or exercisable for such Common Stock. Sales of substantial amounts of Company Common Stock or convertible securities in the public market or due to acquisitions could adversely affect the market price of the Common Stock. The loan and lease portfolio of the Company is dependent on real estate. At December 31, 2000, real estate served as the principal source of collateral with respect to approximately 55% of the Company's loan and lease portfolio. A worsening of current economic conditions or rising interest rates could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans and the value of the available for sale investment portfolio, as well as the Company's financial condition and results of operations in general and the market value of the Company's Common Stock. Acts of nature, including earthquakes and floods, which may cause uninsured damage and other loss of value to real estate that secures these loans, may also negatively impact the Company's financial condition. In late 2000 and continuing into 2001, the State of California has been subject to a deterioration in the ability of major utilities to provide energy for the State's needs. In Northern California, the crisis has resulted in "rolling blackouts" where certain areas are not provided with any electricity for periods of up to two hours. To date the most immediate impact has been the significant increase in power rates for most users, including the Company. In addition the major utility providers are purchasing power on a "spot" basis. The cost of such purchases has exceeded their ability to fully collect the increases from their customers. The long-term impact is unknown but could result in an economic slow-down as companies located in California relocate or shift production to areas outside the State. This could have an adverse effect on the demand for new loans, the ability of borrowers to repay outstanding loans, the value of real estate and other collateral securing loans, and the Company's financial condition and results of operations in general and, as a result, on the market value of the Company's Common Stock. The Bank is subject to certain operational risks including, but not limited to, data processing system failures and errors and customer or employee fraud. The Bank maintains a system of internal controls, which it believes will mitigate such occurrences, and maintains insurance coverage for such risks. Should such an event occur that was not prevented or detected by the Bank's internal controls or that was uninsured or in excess of the applicable insurance limits, it could have a significant negative impact on the Company's financial condition or results of operations. STATISTICAL DATA Certain consolidated statistical information concerning the business of the Company appears on page 15, under the caption "Selected Financial Data;" on pages 16 through 36, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operation;" on page 36, under the caption "Quantitative and Qualitative Disclosures about Market Risk;" and on pages 38 through 63, in the Company's Consolidated Financial Statements. Ratios relating to the Company's Return on Equity and Assets appear on page 15. The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operation" should be read in conjunction with the information in Item 1 herein and the Company's Consolidated Financial Statements. ITEM 2: PROPERTIES The Company shares office space with the Bank's main branch at One North Market Street, San Jose, California, 95113. The building was purchased by the Bank in 1985 and consists of approximately 24,000 square feet of basement, ground floor and second floor space. It is constructed and equipped to meet prescribed security requirements. SJNB's Saratoga Branch office is located at 12000 Saratoga-Sunnyvale Road, Saratoga, California, 95070, comprises 5,500 square feet and is owned by the Bank. The Bank's Los Gatos Branch office is located at 15405 Los Gatos Blvd., Suite 103, Los Gatos, California, 95032. The facility has 3,082 square feet and is leased under a noncancelable-operating lease which expires in 2003. Current lease payments are $6,387 per month. In addition, the Bank leases approximately 12,000 square feet located at 95 South Market Street, San Jose, California, 95113. Approximately 9,000 square feet of space at this location is currently being occupied by two third-party tenants under subleases which expire at the termination of the lease in September 2004. The Bank's Financial Services Division is occupying the remaining space at this location. Gross rental expense is currently approximately $20,000 per month, of which $14,899 is received from the third- party tenants. The Bank and its subsidiary, Epic, share 3,000 square feet of leased facilities in Danville, California. The monthly lease expense is $6,300 and the lease expires July 2001. The Bank notified the landlord in January 2001 of its intent to exercise its renewal option for the period ending July 2004, on the same terms and conditions as the original term. In the opinion of management, adequate insurance is being maintained on these properties. ITEM 3: LEGAL PROCEEDINGS Neither the Company nor the Bank is a party to any material pending legal proceeding, nor is any of their property the subject of any material pending legal proceeding, except ordinary routine litigation arising in the ordinary course of the Bank's business and incidental to its business, none of which are expected to have a material adverse impact upon the Company's or the Bank's business, financial condition or results of operations. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of February 28, 2001, the Company had 3,791,951 shares of Common Stock outstanding, held by approximately 2,700 beneficial shareholders. The Company's Common Stock is listed on the NASDAQ National Market System under the symbol "SJNB." Significant market participants of the Company's Common Stock and those firms which provide research relating to the Company include: Hoefer & Arnett, Inc., Wedbush Morgan Securities, Inc., Knight Securities L.P., Spear, Leeds & Kellogg, Sandler O'Neill & Partners, Keefe Bruyette & Woods, Inc., and Dain Rauscher Wessels. STOCK PRICE The following sets forth the high and low sales prices for the Company's Common Stock during the periods indicated, as reported by NASDAQ, and the per share cash dividends declared on the Common Stock during such periods. QUARTERLY COMMON STOCK PRICE - -------------------------------------------------------------------------------- PRICE OF COMMON STOCK CASH HIGH LOW DIVIDENDS - -------------------------------------------------------------------------------- 1999 - -------------------------------------------------------------------------------- First Quarter $28.50 $26.00 $.14 Second Quarter 30.25 26.50 .14 Third Quarter 34.50 31.00 .14 Fourth Quarter 37.00 30.00 .14 - -------------------------------------------------------------------------------- ANNUAL CASH DIVIDEND PER SHARE .56 - -------------------------------------------------------------------------------- 2000 - -------------------------------------------------------------------------------- First Quarter 30.63 26.50 .16 Second Quarter 29.75 25.88 .16 Third Quarter 36.88 27.38 .16 Fourth Quarter 37.25 33.75 .16 - -------------------------------------------------------------------------------- ANNUAL CASH DIVIDEND PER SHARE .64 - -------------------------------------------------------------------------------- 2001 - -------------------------------------------------------------------------------- FIRST QUARTER (THROUGH FEBRUARY 28, 2001) 39.75 36.50 .20* [FN] *Declared by the Board of Directors on January 24, 2001 and to be paid on March 5, 2001 to shareholders of record on February 6, 2001. The Company's Board of Directors considers the advisability and amount of proposed dividends each year. Future dividends will be determined after consideration of the Company's earnings, financial condition, future capital funds, regulatory requirements and such other factors as the Board of Directors may deem relevant. The Company's primary source of funds for payment of dividends to its shareholders will be receipt of dividends and management fees from the Bank. The payment of dividends by a bank is subject to various legal and regulatory restrictions. See "Business - Supervision and Regulation - Restrictions on Dividends and Other Distributions." It is the intention of the Company to continue the payment of quarterly dividends, subject to financial results and other factors, which could limit or restrict dividends as more fully discussed elsewhere herein. ITEM 6: SELECTED FINANCIAL DATA The following presents selected financial data and ratios for the five years ended December 31, 2000:
(dollars in thousands, except per share amounts) - ---------------------------------------------------------------------------------------------------------------------------------- As of and for the Years Ended December 31, STATEMENT OF OPERATIONS DATA : 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Net interest income $33,626 $27,565 $25,603 $23,562 $20,495 Provision for loan or lease losses (725) (862) (436) (705) (40) Other income 1,606 1,866 1,824 1,490 1,199 Merger related costs, nonrecurring (3,424) (487) ---- ---- ---- Other expenses (16,932) (16,064) (14,462) (12,888) (12,505) - ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 14,151 12,018 12,529 11,459 9,149 Income taxes (5,527) (4,901) (5,040) (4,749) (3,757) - ---------------------------------------------------------------------------------------------------------------------------------- Net income $8,624 $7,117 $7,489 $6,710 $5,392 ================================================================================================================================== PER SHARE DATA: - ---------------------------------------------------------------------------------------------------------------------------------- Net income per share - basic $2.35 $2.04 $2.06 $1.86 $1.51 Net income per share - diluted 2.24 1.91 1.92 1.74 1.41 EXCLUDING MERGER RELATED COSTS, NET OF TAX: Net income per share - basic (1) 2.94 2.13 ---- ---- ---- Net income per share - diluted (1) 2.80 2.00 ---- ---- ---- Cash dividends per share 0.64 0.56 0.56 0.45 0.33 Shareholders' equity per share 16.97 14.81 14.13 12.85 11.80 Tangible shareholders' equity per share 16.18 13.81 13.01 11.82 10.58 ================================================================================================================================== BALANCE SHEET DATA: - ---------------------------------------------------------------------------------------------------------------------------------- Balance sheet totals-end of year: Assets $687,777 $568,081 $494,736 $455,963 $431,187 Loans and leases 463,314 403,318 335,943 292,737 251,288 Deposits 585,343 473,733 405,857 361,391 334,083 Shareholders' equity 63,583 53,219 50,739 46,764 43,157 Average balance sheet amounts: Assets $634,042 $536,721 $469,317 $439,187 $379,529 Loans and leases 420,943 366,175 301,910 267,332 224,680 Earning assets 583,325 496,958 436,481 402,390 347,639 Deposits 536,844 444,547 385,887 354,604 296,834 Shareholders' equity 56,255 51,956 48,511 43,661 39,619 ================================================================================================================================== SELECTED RATIOS: - ---------------------------------------------------------------------------------------------------------------------------------- Return on average equity 15.33% 13.70% 15.44% 15.37% 13.61% Return on average assets 1.36 1.33 1.60 1.53 1.42 Return on average equity (1) 19.15 14.29 15.44 15.37 13.61 Return on average assets (1) 1.70 1.38 1.60 1.53 1.42 Efficiency ratio (non-interest expense as a percentage of total revenues) (1) 48.06 54.58 52.73 51.45 57.64 Efficiency ratio excluding the amortization of intangibles and goodwill (1) 46.81 53.03 51.06 49.56 55.34 Dividend payout ratio 27.20 27.47 27.18 24.19 21.85 Average equity to average assets 8.87 9.68 10.34 9.94 10.44 Leverage capital ratio 8.94 8.88 9.78 9.58 11.42 Nonperforming loans and leases to total loans and leases 0.10 0.54 0.07 0.27 0.22 Net (recoveries) chargeoffs to average loans and leases (0.06) (0.02) 0.00 0.10 0.04 Allowance for loan or lease losses to total loans and leases 1.60 1.59 1.64 1.74 1.84 Allowance for loan or lease losses to nonperforming loans and leases 1,621 296 2,280 647 849 ================================================================================================================================== (1) Excludes $3.4 million of merger related costs and $1.3 million of related tax benefits for the year ended December 31, 2000 and $487 of merger related costs and $178 of related tax benefits for the year ended December 31, 1999.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION This Annual Report on Form 10-K includes forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the "safe harbor" created by those sections. 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 declining health of the economy, either nationally or regionally; the deterioration of credit quality, which could cause an increase in the provision for loan and lease losses; changes in the regulatory environment; changes in business conditions, particularly in Santa Clara County real estate and high tech industries; the impact of the California energy crisis; certain operational risks involving data processing systems or fraud; volatility of rate sensitive deposits; asset/liability matching risks; and liquidity risks. The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking statements. See also the section included herein entitled "Business - Certain Additional Business Risks" and other risk factors discussed elsewhere in this Report. The purpose of the following discussion is to provide information pertaining to the financial condition and results of operations of the Company that may not be apparent from a review of the consolidated financial statements and related notes. It also incorporates certain statistical information that is required by Industry Guide 3 promulgated by the Securities and Exchange Commission. The discussion should be read in conjunction with the aforementioned consolidated financial statements, as found on pages 38 through 63. The interest earned and yields on nontaxable securities have been adjusted to a fully-taxable equivalent basis for all financial information presented in this Item 7. Dollars and share amounts are in thousands in the text for Item 7, except per share amounts or as otherwise noted. FINANCIAL REVIEW Earnings Summary For the year ended December 31, 2000, the Company reported net income of $8.6 million or $2.24 per diluted share. After excluding merger related costs, net of tax, operating net income was $10.8 million or $2.80 per diluted share as compared to net income, excluding merger related costs, net of tax, of $7.4 million or $2.00 per diluted share for the year ended December 31, 1999 (a 46% increase). Net income, excluding merger related costs, net of tax, for the year increased over that of the previous year primarily due to an increase of $6.1 million in net interest income offset by a decrease in other income of $260 and an increase in other expense of $868. See the specific sections below for details regarding these changes. As of December 31, 2000, consolidated assets were $688 million, gross loans and leases were $463 million, and deposits were $585 million. Total consolidated assets increased $120 million, a 21% increase from $568 million at December 31, 1999. Loans and leases increased $60 million, a 15% increase from $403 million at December 31, 1999. Deposits grew $111 million from $474 million the previous year, representing a 23% increase. Loan and lease and deposit growth was generated mainly by marketing and business development efforts of the Bank and its subsidiary, Epic. For the year ended December 31, 1999, the Company reported net income of $7.1 million or $1.91 per diluted share. After excluding merger related costs, net of tax, operating net income was $7.4 million or $2.00 per diluted share as compared to net income of $7.5 million or $1.92 per diluted share for the year ended December 31, 1998. Net income, excluding merger related costs, net of tax, for the year decreased over that of the previous year primarily due to an increase in the provision for loan and lease losses of $426 and to an increase in other expense of $1.6 million offset by an increase of $2.0 million in net interest income. See the specific sections below for details regarding these changes. As of December 31, 1999, consolidated assets were $568 million, gross loans and leases were $403 million, and deposits were $474 million. Total consolidated assets increased $73 million, a 15% increase from $495 million at December 31, 1998. Loans and leases increased $67 million, a 20% increase from $336 million at December 31, 1998. Deposits grew $68 million from $406 million the previous year, representing a 17% increase. Loan and lease and deposit growth was generated mainly by marketing and business development efforts of the Bank and its subsidiary, Epic. Net Interest Income and Margin Net interest income is the principal source of the Company's operating earnings. Significant factors affecting net interest income are rates, volumes and mix of the loan, investment and deposit portfolios. The following table shows the composition of average earning assets and average funding sources, average yields and rates and the net interest margin for the three years ended December 31, 2000.
AVERAGE BALANCES, RATES AND YIELDS FULLY TAXABLE EQUIVALENT (dollars in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Average Avg yield/ Average Avg yield Average Avg yield/ ASSETS Balance Interest Rate paid Balance Interest Rate paid Balance Interest Rate paid - --------------------------------------------------------------------------------------------------------------------------------- C> Interest earning assets: Loans and leases, net (1) $420,943 $44,942 0.68% $366,175 $35,826 9.78% $301,910 $31,252 10.35% Securities available for sale: Taxable (2) 103,392 6,791 6.57 76,057 4,638 6.10 79,262 4,753 6.00 Nontaxable (3) 531 48 9.10 ---- ---- ---- ---- ---- --- Securities held to maturity: Taxable (4) 2,911 224 7.69 6,450 443 6.87 8,653 648 7.49 Nontaxable (5) 17,464 1,415 8.10 16,199 1,262 7.79 11,588 861 7.43 Money market investments 36,717 2,358 6.42 30,204 1,536 5.08 32,138 1,750 5.44 Interest bearing due from banks 1,367 73 5.34 1,873 107 5.71 2,929 169 5.77 Interest rate hedging instruments ---- 10 --- ---- (50) ---- ---- (9) --- - --------------------------------------------------------------- -------------------- --------------------- TOTAL INTEREST EARNING ASSETS 583,325 55,861 9.58 496,958 43,762 8.81 436,480 39,424 9.03 - --------------------------------------------------------------- -------------------- --------------------- Allowance for loan or lease losses (6,733) (5,799) (5,289) Cash and non-interest bearing due from banks 24,545 22,717 20,078 Other assets 29,536 19,024 14,073 Core deposit intangibles and goodwill, net 3,369 3,820 3,975 - ------------------------------------------------------ ----------- ----------- Total Assets $634,042 $536,721 $469,317 ====================================================== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Deposits: Interest-bearing demand $79,747 2,244 2.81 $81,522 2,189 2.69 $75,152 2,158 2.87 Money market and savings 154,287 6,481 4.20 116,579 3,938 3.38 115,245 3,931 3.41 Certificates of deposit: Less than $100 55,738 3,237 5.81 49,154 2,627 5.34 29,563 1,604 5.42 $100 or more 130,838 7,490 5.72 100,669 4,992 4.96 75,005 4,073 5.43 - --------------------------------------------------------------- -------------------- --------------------- Total certificates of deposit 186,576 10,727 5.75 149,823 7,619 5.09 104,568 5,677 5.43 - --------------------------------------------------------------- -------------------- --------------------- Other borrowings 33,032 2,198 6.65 32,554 1,946 5.98 27,832 1,711 6.15 - --------------------------------------------------------------- -------------------- --------------------- TOTAL INTEREST-BEARING LIABILITIES 453,642 21,650 4.77 380,478 15,692 4.12 322,798 13,477 4.18 - --------------------------------------------------------------- -------------------- --------------------- Noninterest-bearing demand deposits 116,234 96,623 90,921 Accrued interest payable and other liabilities 7,911 7,664 7,087 - ------------------------------------------------------ ----------- ----------- Total liabilities 577,787 484,765 420,806 - ------------------------------------------------------ ----------- ----------- Shareholders' equity 56,255 51,956 48,511 - ------------------------------------------------------ ----------- ----------- Total Liabilities and Shareholders' equity $634,042 $536,721 $469,317 ======================================================-------- ==========--------- ==========---------- NET INTEREST INCOME AND MARGIN (6) $34,211 5.86% $28,070 5.65% $25,947 5.94% ============================================ ==================== =================== ================== (1) Includes amortized loan fees of $2.1 million for 2000 and for 1999 and $1.6 million for 1998. Nonperforming loans and leases have been included in average loan and lease balances. (2) Includes dividend income of $152, $305 and $451 received in 2000, 1999 and 1998, respectively. (3) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($19 in 2000). (4) Includes dividend income of $164, $160 and $31 received in 2000, 1999 and 1998, respectively. (5) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($566 in 2000, $505 in 1999 and $344 in 1998). (6) The net interest margin represents the net interest income as a percentage of average earning assets.
The following table shows the effect on the interest differential of volume and rate changes for the years ended December 31, 2000 and 1999:
VOLUME/RATE ANALYSIS (dollars in thousands) 2000 vs. 1999 1999 vs. 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Increase (decrease) Increase (decrease) due to change in due to change in - ------------------------------------------------------------------------------------------------------------------------------------ Average Average Total Average Average Total Volume Rate Change Volume Rate Change - ------------------------------------------------------------------------------------------------------------------------------------ Interest income: Loans and leases (1) $5,572 $3,544 $9,116 $5,921 $(1,347) $4,574 Securities: Taxable available for sale 1,795 358 2,153 (195) (34) (229) Nontaxable available for sale 48 ---- 48 ---- ---- ---- Taxable held to maturity (272) 53 (219) (151) 60 (91) Nontaxable held to maturity 103 50 153 359 42 401 Money market investments 418 404 822 (99) (115) (214) Interest bearing due from banks (27) (7) (34) (60) (2) (62) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 7,637 4,402 12,039 5,775 (1,396) 4,379 - ------------------------------------------------------------------------------------------------------------------------------------ Interest expense: Interest-bearing demand (50) 105 55 171 (140) 31 Money market and savings 1,584 959 2,543 45 (39) 7 Certificates of deposits: Less than $100 382 228 610 1,047 (24) 1,023 $100 or greater 1,727 771 2,498 1,273 (354) 919 Other borrowings 32 220 252 282 (47) 235 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 3,675 2,283 5,958 2,818 (603) 2,215 - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate hedging instruments ---- 60 60 ---- (41) (41) - ------------------------------------------------------------------------------------------------------------------------------------ Change in net interest income $3,962 $2,179 $6,141 $2,957 $(894) $2,123 ==================================================================================================================================== (1) The effect of the change in loan fees is included as an adjustment to the average rate.
Consolidated net interest income (on a fully taxable equivalent basis) was $34.2 million in 2000, as compared to $28.1 million in 1999. The increase of $6.1 million in net interest income during 2000 was primarily a result of an increase in the average volume of $86.4 million in earning assets, which amounted to approximately $4.0 million of net interest income. In addition to the increase in the average volume of earning assets, the net interest margin (the difference in the yields on earning assets less the cost of the deposits divided by the amount of earning assets) increased to 5.86% in 2000 from 5.65% in 1999, which amounted to approximately $2.1 million of net interest income. The Bank's asset/liability position is slightly asset-sensitive (See "Asset/Liability Management"). Therefore, in times of an increasing interest rate environment, the Bank's net interest margin should be positively impacted, as was the case in 2000. The Bank's average prime was 9.24% in 2000, as compared to 8.00% in 1999. The increase in the cost of interest-bearing liabilities was due the increase in interest rates and to a change in the mix to higher cost funds. Interest expense in 2000 was $21.7 million, as compared to $15.7 million in 1999. The difference attributable to volume increases was $3.7 million and the difference attributable to rate increases was $2.3 million. Actual interest expense rates increased from 4.12% to 4.77%. Consolidated net interest income (on a fully taxable equivalent basis) was $28.1 million in 1999, as compared to $26.0 million in 1998. The increase of $2.1 million in net interest income during 1999 was primarily a result of an increase in volume of $60.5 million in earning assets which amounted to approximately $3.0 million of net interest income. The increase in net interest income in 1999 relating to the increase in volume and fees was offset by an overall decrease in the net interest margin (the difference in the yields on earning assets and the cost of funds). A substantial portion of the Bank's deposits (an average of 22.2% in 2000 and 20.0% in 1999) are non interest-bearing and therefore do not reprice when interest rates change. See "Funding." This is somewhat ameliorated by a significant amount of customer corporate account balances which are tied to earnings credits and utilized to offset bank service costs. Due to the nature of the Company's lending markets, in which loans are generally tied to the Prime Rate, it is believed an increase in interest rates should positively affect the Company's future earnings, while a decline in interest rates would have a negative impact. Should interest rates decline in the future, management believes that net interest income could be negatively impacted and it is not feasible to provide an accurate measure of such a change because of the many factors (many of which are uncontrollable) influencing the result. The Company's net interest margin for the periods presented is high relative to its peer group, mainly due to its high proportion of non interest-bearing deposits and the impact of its generally higher yielding loans, specifically leasing, factoring and asset-based lending. Net interest income also reflects the impact of nonperforming loans and leases. The effect on interest income for the years ended December 31, 2000 through 1996 for the loans and leases that were on nonaccrual as of December 31, 2000 through 1996 was as follows:
NEGATIVE IMPACT OF NONACCRUAL LOANS AND LEASES (dollars in thousands) - ------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Interest revenue which would have been recorded under original terms $62 $132 $22 $61 $35 Interest revenue actually realized 16 112 21 32 29 - ---------------------------------------------------------------------------------------------------------------- NEGATIVE IMPACT ON INTEREST REVENUE $46 $20 $1 $29 $6 ==================================================================================================================
Provision for Loan and Lease Losses The level of the allowance for loan and lease losses (and therefore the related provision) reflects the Company's judgment as to the inherent risks associated with the loan, lease and factoring portfolios. Since estimates of the adequacy of the Company's allowance for loan and lease losses are based on foreseeable risks, such judgments are subject to change based on changing circumstances. Based on management's current evaluation of such risks, as well as judgments of the Company's regulators, additions of $725, $862, and $436 were made to the allowance for loan and lease losses in 2000, 1999 and 1998, respectively. Management's determinations of the provision in 2000, 1999 and 1998 were based on the measurement of the possibility of future loan and lease losses inherent in the portfolio through various objective and subjective criteria and the impact of net chargeoffs. See "Loan and Lease Portfolio" for a detailed discussion of asset quality and the allowance for loan and lease losses. Other Income The following table sets forth the components of other income and the percentage distribution of such income for the years ended December 31, 2000, 1999 and 1998.
OTHER INCOME (dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------------------ Depositor service charges $1,067 66.4% $1,044 55.9% $950 52.1% Other operating income 599 37.3 737 39.5 724 39.7 Increase in cash surrender value of life insurance 542 33.8 218 11.7 --- --- Net (loss) gain on sale of securities available for sale (602) (37.5) (133) (7.1) 150 8.2 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $1,606 100.0% $1,866 100.0% $1,824 100.0% ====================================================================================================================================
Other income totaled $1.6 million in 2000, $1.9 million in 1999 and $1.8 million in 1998. The decrease in other income during 2000 resulted primarily from the realization of securities losses of $602 in 2000. Other Expense The components of other expense are set forth in the following table for the years ended December 31, 2000, 1999 and 1998.
OTHER EXPENSE AS A PERCENT OF AVERAGE ASSETS (dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 Amount Percent Amount Percent Amount Percent - ---------------------------------------------------------------------------------------------------------------------- Salaries and benefits $9,642 1.52% $9,180 1.71% $8,048 1.71% Occupancy 810 0.13 818 0.15 764 0.16 Data processing 747 0.12 676 0.12 741 0.16 Furniture and equipment 694 0.11 636 0.12 546 0.11 Directors' & shareholders' 660 0.10 673 0.13 469 0.10 Legal and professional fees 641 0.10 701 0.13 520 0.11 Client services paid by Bank 613 0.10 585 0.11 495 0.11 Amortization of core deposit intangibles and goodwill 439 0.07 455 0.08 457 0.10 Merger costs 3,424 0.54 487 0.09 ---- ---- Other 2,686 0.42 2,340 0.44 2,422 0.52 - --------------------------------------------------------------------------------------------------------------------- TOTAL $20,356 3.21% $16,551 3.08% $14,462 3.08% ======================================================================================================================
Total other expenses increased approximately $3.8 million in 2000 as compared to 1999. This is mainly attributable to the inclusion of the one-time merger related costs, incurred in connection with the acquisition of Saratoga on January 5, 2000. After deducting these costs in each year, continuing operating expenses were $16.9 million in 2000, $16.1 million in 1999 and $14.5 million in 1998. The most significant increase in 2000 related to increased incentive accruals and salary increases necessitated by the competitive environment for personnel and the supplemental retirement programs for outside directors and key executives instituted by Saratoga National Bank in 1999 and by SJNB in 2000. Total other expenses increased approximately $1.6 million (excluding the impact of the merger related costs) in 1999 as compared to 1998. This increase is partially related to the operations of Epic (which accounted for approximately $400 of the increase) and the opening of the East Bay Regional Office (which accounted for approximately $300 of the increase), both occurring in July 1998. In addition, salaries and benefits increased as a result of the increased incentive accruals, additions to staff and the competitive environment for personnel. Increases in occupancy also related to Epic and the East Bay Regional Office. Income Taxes The effective tax rate was 39% in 2000, 41% in 1999 and 40% in 1998. The lower effective tax rate in 2000 was primarily due to the greater amount of nontaxable income generated by the investment in California nontaxable securities (municipals and other political subdivisions). Quarterly Income The unaudited consolidated income statement data of the Company and the Bank, in the opinion of management, includes all normal and recurring adjustments necessary to state fairly the information set forth therein. The results of operations are not necessarily indicative of results for any future period. The following table shows the Company's unaudited quarterly income statement data for the years 2000 and 1999:
UNAUDITED QUARTERLY INCOME STATEMENT DATA (dollars in thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------------------------------------ First quarter Second quarter Third quarter Fourth quarter 2000 1999 2000 1999 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $7,796 $6,402 $8,543 $6,644 $8,519 $7,162 $8,768 $7,357 Provision for loan or lease losses (250) (140) (125) (27) (150) (150) (200) (545) Other income 507 651 (90) 438 583 468 606 308 Other expenses (7,450) (3,847) (4,116) (3,964) (4,423) (4,196) (4,367) (4,543) - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 603 3,066 4,212 3,091 4,529 3,284 4,807 2,577 Income taxes (288) (1,268) (1,635) (1,235) (1,760) (1,300) (1,844) (1,098) - ------------------------------------------------------------------------------------------------------------------------------------ Net income $315 $1,798 $2,577 $1,856 $2,769 $1,984 $2,963 $1,479 ==================================================================================================================================== Net income per share - basic $0.09 $0.51 $0.70 $0.54 $0.75 $0.57 $0.80 $0.42 Net income per share - diluted $0.08 $0.48 $0.67 $0.50 $0.72 $0.53 $0.75 $0.40 EXCLUDING MERGER RELATED COSTS, NET OF TAX: Net income per share - basic (1) $0.69 $0.51 $0.70 $0.54 $0.75 $0.57 $0.80 $0.42 Net income per share - diluted (1) $0.64 $0.48 $0.67 $0.50 $0.72 $0.53 $0.75 $0.40 ==================================================================================================================================== (1) Excludes $3.4 million of merger related costs and $1.3 million of related tax benefits for the quarter ended March 31, 2000 and $487 of merger related costs and $178 of related tax benefits for the quarter ended December 31, 1999.
The Company reported net income of $3.0 million for the quarter ended December 31, 2000, compared with net income of $1.5 million for the fourth quarter of 1999. The results for the fourth quarter of 2000 as compared to the same quarter a year ago reflect an increase in volume of earning assets ($612 million in 2000 compared to $527 million in 1999). The loan and lease loss provision decreased from $545 in 1999 to $200 in 2000, mainly due to a provision in 1999 by Saratoga for a specific non-performing loan. Other expenses decreased $176 in 2000, primarily as a result of merger related costs of $487 relating to the acquisition of Saratoga incurred in the fourth quarter of 1999 as offset by increased salary and benefit costs in 2000. FINANCIAL CONDITION AND EARNING ASSETS Federal Funds Sold and Money Market Investments Federal funds sold and money market investments were $45.7 million at December 31, 2000 as compared to $12.7 million at December 31, 1999. This increase is mainly due to an increase in short-term deposits, which were invested in short-term money market securities. The average balance of money market investments, which include federal funds sold and liquid money market investments, was $36.7 million in 2000 and $30.2 million in 1999. These balances represented 6.8% of average deposits for 2000 and 1999. They are maintained primarily for the short-term liquidity needs of the Bank. See "Capital and Liquidity." Securities The following table shows the book value composition of the securities portfolio at December 31, 2000, 1999 and 1998. At December 31, 2000, there were no issuers of securities for which the aggregate book value of securities of such issuer held by the Bank exceeded 10% of the Company's shareholders' equity, except for investment securities with the fair value of $21.4 million ($21.2 million cost basis) issued by the Federal Home Loan Bank and $8.5 million ($8.5 million cost basis) issued by the Federal National Mortgage Association.
INVESTMENT SECURITIES COMPOSITION (dollars in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------- Investment securities available for sale: U. S. Treasury $1,527 $2,499 $3,077 U. S. Government Agencies 33,649 36,613 25,687 Mortgage Backed 57,567 37,996 3,965 State and municipal 5,313 ----- ----- Trust Preferred 8,475 6,583 ----- Asset Backed 3,629 1,978 ----- Mutual funds ----- 5,209 2,487 - ----------------------------------------------------------------------------------------------- INVESTMENT SECURITIES AVAILABLE FOR SALE 110,160 90,878 35,216 - ----------------------------------------------------------------------------------------------- Investment securities held to maturity: U. S. Treasury ----- ----- 1,000 U. S. Government Agencies 500 499 3,496 State and municipal 16,395 17,828 4,213 Mortgage Backed ----- 657 1,927 Other 1,732 3,212 537 - ----------------------------------------------------------------------------------------------- INVESTMENT SECURITIES HELD TO MATURITY 18,627 22,196 11,173 - ----------------------------------------------------------------------------------------------- TOTAL $128,787 $113,074 $46,389 ===============================================================================================
Investment securities classified as available for sale are acquired without the intent to hold until maturity. At December 31, 2000, the Bank's weighted average maturity of the available for sale investment portfolio was 3.98 years. It is estimated that for each 1.0% change in interest rates, the value of the Company's securities available for sale will change by approximately 2.9%. Any unrealized gain or loss on investment securities available for sale is reflected in the carrying value of the security and reported net of income taxes in the equity section of the consolidated balance sheets. Realized gains and losses are reported in the consolidated statement of income. The pre-tax unrealized gain on securities available for sale as of December 31, 2000 was $1.2 million. This compares to a pre-tax unrealized loss of $2.2 million as of December 31, 1999. The change in the pre-tax unrealized gain or loss is directly attributable to the decrease in interest rates during late 2000. Changes in interest rates have an inverse effect on the value of securities for which the interest rate is fixed. Investment securities classified as held to maturity include those securities which the Company has the ability and intent to hold to maturity. The Company's policy is to generally acquire "A" rated or better U.S., state and municipal securities. The specific issues are monitored for changes in financial condition. Appropriate action would be taken if significant deterioration was noted. The pre-tax unrealized gain on investment securities held to maturity was $19 as of December 31, 2000 as compared to a $1.5 million pre-tax unrealized loss as of December 31, 1999. The change in the pre-tax unrealized gain or loss resulted from the decrease in interest rates in late 2000. The Bank's weighted average maturity of the held to maturity investment portfolio as of December 31, 2000 was approximately 11.6 years. It is estimated that for each 1.0% change in interest rates, the value of the Company's securities held to maturity will change by approximately 5.9%. This volatility decreases as the average maturity shortens. Since it is the intention of management to hold these securities to maturity, the unrealized losses will be realized over the life of the securities as above-market interest income is recognized. Mortgage-backed securities ("MBS") are considered to have increased risks associated with them because of the timing of principal repayments. As interest rates decrease, the average maturity of mortgages underlying MBS tend to decline; as rates increase, maturities tend to lengthen. At December 31, 2000, the Company had the following securities which were mortgage-backed or related securities: MORTGAGE BACKED AND RELATED SECURITIES December 31, 2000 PAGE> FAIR (dollars in thousands) COST VALUE - ------------------------------------------------------------------------------- Federal Home Loan Mortgage Corp. (U.S. Agency) $2,975 $3,624 Federal National Mortgage Association (U.S. Agency) 18,915 19,004 Government National Mortgage Association (U.S. Agency) 705 710 Collateralized mortgage obligations 33,525 34,229 ---------------------- ---------------------- Total $56,120 $57,567 ====================== LOAN AND LEASE PORTFOLIO The following table shows the Company's consolidated loans and leases by type of loan or borrower and their percentage distribution for the five years ended December 31:
LOAN AND LEASE PORTFOLIO (dollars in thousands) 2000 1999 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Commercial and other $140,108 $123,873 $110,604 $115,311 $96,533 SBA 53,371 49,949 37,019 39,409 32,968 Leasing 37,450 20,837 5,618 3,215 2,160 Factoring and asset-based 13,476 9,901 7,393 4,915 4,397 Real estate construction 54,667 48,410 51,963 26,763 24,700 Real estate term 147,110 139,103 113,461 93,503 81,040 Consumer 18,262 12,448 10,839 10,590 10,483 Unearned fee income (1,130) (1,203) (954) (969) (992) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LOAN AND LEASE PORTFOLIO $463,314 $403,318 $335,943 $292,737 $251,289 ============================================================================================================================= Commercial and other 30.2% 30.7% 32.9% 39.4% 38.4% SBA 11.5 12.4 11.0 13.5 13.1 Leasing 8.1 5.2 1.7 1.1 0.9 Factoring and asset-based 2.9 2.4 2.2 1.8 1.8 Real estate construction 11.8 12.0 15.5 9.1 9.8 Real estate term 31.8 34.5 33.8 31.9 32.2 Consumer 3.9 3.1 3.2 3.6 4.2 Unearned fee income (0.2) (0.3) (0.3) (0.3) (0.4) - ----------------------------------------------------------------------------------------------------------------------------- Total loan and lease portfolio 100.0% 100.0% 100.0% 100.0% 100.0% =============================================================================================================================
GENERAL The Company's loan and lease portfolio consists primarily of short-term, floating rate loans for business and real estate purposes. SJNB's lending services include revolving credit loans, SBA loans, term loans, accounts receivable financing, factoring, equipment financing and letters of credit. The commercial loan portfolio (approximately 30% of the loan portfolio) primarily consists of loans to small- to medium-sized businesses with gross revenues up to $50 million, as well as loans to local professional businesspersons. Commercial and other loans include loans to real estate developers for short-term investment purposes (totaling approximately $16.6 million), loans for real estate investment purposes made to non-developers (totaling approximately $2.7 million) and mortgage warehouse loans (totaling approximately $1.8 million). No particular industry represents a significant portion of such loans, other then the above noted real estate related loans. The Bank as a Preferred Lender originates SBA loans and participates in the SBA 7A and 504 SBA lending programs. Under the 7A program, a loan is made for commercial or real estate purposes. The SBA guarantees these loans and the guarantee may range from 70% to 90% of the total loan. In addition, the loan could be collateralized by a deed of trust on real estate. Because of the nature of the loan and the SBA guarantee, the Bank does not consider this exposure as real estate. It is the Bank's policy to retain ownership of both the guaranteed and unguaranteed portions of these loans in its outstanding loans rather then to sell the guaranteed portion. Under the 504 program, the Bank lends directly to the borrower and takes a first deed of trust to the subject property. In addition the SBA through a Community Development Corporation makes an additional loan to the borrower and takes a deed of trust subject to the Bank's position. The Bank's position in relation to the real estate "piggy back" loans can range from 50% to 70% loan to value. SBA loans can be summarized as follows as of December 31, 2000: SBA 7A program (with SBA guarantee): Commercial purposes (no real estate) $22,065 Real estate related 24,652 SBA 504 program, real estate piggyback loans 6,654 -------- Total SBA loans $53,371 ======== The leasing portfolio consists of financing type leases made to small- and medium-sized businesses. The average lease is approximately $237. Approximately 56% of the leasing portfolio is located in the State of California, 10% is located in Nevada and 7% is located in Texas; no other state has greater than 7% of the leasing portfolio. Computer equipment (including computer hardware, software, network, servers and storage systems) represents approximately 32% of the leasing portfolio, office furniture and equipment (including phone systems) account for approximately 13%, printing and graphic arts equipment account for 11%, and industrial equipment represents approximately 9%. No other sector represents more than 5% of the leasing portfolio. Factoring and asset-based lending represents purchased accounts receivable (factoring) and a structured accounts receivable lending program where the Bank receives specific payment for client invoices. Under the factoring program, the Bank purchases accounts receivable invoices from clients and then receives payment directly from the party obligated for the receivable. In most cases, the Bank's Financial Services Division purchases the receivables subject to recourse from the Bank's factoring client. The asset-based lending program requires a security interest in all of a client's accounts receivable. Specific verifications are performed on some or all of the receivables and the account debtor. Normally payments made by mail are directed to a Bank controlled lock box. This business and related purchasing of accounts receivable is subject to a greater degree of risk than normal lending due to the involvement of the third party obligee, the lack of control over the direct receipt of payment, and the potential purchase of fraudulent or inflated receivables. To date, there have been no significant losses relating to the Bank's factoring or asset-based lending programs. The real estate construction portfolio consists of 30% residential and 70% commercial loans. The most significant types of commercial construction include: industrial and warehouse space, hotels/motels, and golf courses. Approximately 86% of the commercial construction will be either occupied or managed by the owner. Such loans are made on the basis of the economic viability for the specific project, the cash flow resources of the developer, the developer's equity in the project and the underlying financial strength of the borrower. The Company's policy is to monitor each loan with respect to incurred costs, sales price and sales cycle. The weighted average loan to value of all real estate construction loans is estimated to be 57% based on the latest appraisal data available to the Bank. The real estate term loans include term loans (up to a twenty-five year maturity) on income-producing or owner occupied commercial properties totaling $139.7 million and land development loans totaling $7.4 million. Approximately 41% of these properties are owner occupied. The most significant types of commercial properties include: industrial and warehouse space, office buildings, retail and retail strip centers, and hotels/motels. The average loan to value of all real estate term loans and land development loans is estimated to be 60% based on the latest appraisal data available to the Bank. Consumer loans consist primarily of loans to individuals for personal uses, such as home equity loans, installment purchases, premier lines (unsecured lines of credit) and overdraft protection loans and a variety of other consumer purposes. Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified loan and lease portfolio, a substantial portion of its customers' ability to honor loan and lease terms is reliant upon the economic stability of Santa Clara County, which in some degree relies on the stability of high technology companies in its "Silicon Valley." Loans are made on the basis of a secure repayment source as the first priority. Collateral is generally a secondary source for loan qualification. Approximately 55% of the loan and lease portfolio is directly related to real estate or real estate interests. This amount includes real estate construction loans, real estate term loans, real estate related loans included in the commercial loan portfolio, SBA real estate piggyback loans, and prime equity loans (included in consumer loans in the amount of $8.1 million). Inherent in any loan and lease portfolio are risks associated with certain types of loans and leases. The Company attempts to limit these risks through conservative loan and lease policies and review procedures that are applied at the time of origination. Included in these policies are specific maximum loan-to-value ("LTV") limitations as to various categories of real estate related loans. These ratios are as follows: MAXIMUM LOAN TO VALUE RATIOS - ---------------------------------------------------------------------- MAXIMUM LTV CATEGORY OF REAL ESTATE COLLATERAL RATIO - ----------------------------------------------------- ---------------- Raw land 50% Land Development 60 Construction: 1-4 Single family residence, Owner occupied 80 Speculative development 80 Other 80 Term loans (construction take-out and commercial) 75 Other improved property 75 Prime equity loans 80 The Company's loan and lease policy provides that any term loans on income-producing properties must have a minimum debt service coverage of at least 1.25 to 1 for non-owner occupied property and at least 1.15 to 1 for owner occupied. During 2000 the Bank increased the maximum loan to value ratio for speculative construction loans from 75% to 80%. This was done to allow the Bank to be more competitive in its marketplace. In addition, the Bank generally requires that the developer have 10% to 25% of the total project costs paid by them in cash. Over 90% of all construction loans to date have required at least 20% of the total project costs paid in cash. Since this change of policy, no loan has been made with a loan to value in excess of 75%. One of the significant risks associated with real estate lending is the risk associated with the possible existence of environmental risks or hazards on or in property affiliated with the loan. The Bank attempts to mitigate such risk through the use of an Environmental Risk Questionnaire for all loans secured by real estate. A Phase I environmental report is required if so indicated by response to the questionnaire or if (for any other reason) it is determined to be appropriate. Other reasons would include the industrial use of environmentally sensitive substances or the proximity to other known environmental problems. A Phase II report is required in certain cases, depending on the outcome of the Phase I report. ACTIVITY Total loans and leases were $463 million and averaged $421 million as of and for the year ended December 31, 2000. Total loans and leases were $403 million and averaged $366 million as of and for the year ended December 31, 1999. The increase in total loans and leases of $60 million during 2000 represented growth from all sectors of the Bank's portfolio. The largest growth was centered in the Commercial and other category, which grew $16 million or 13%. The growth was not centered in any specific industry or sector and the Bank continues to enjoy a diversified commercial loan portfolio. The leasing portfolio has continued to expand since the acquisition of Epic in 1998, growing $17 million in 2000 as marketing efforts and diversification expanded. Real estate construction loans grew $6.3 million or approximately 13% in 2000. The major source of the growth relating to construction was in the commercial area. The demand for construction in the Bank's market area continued to be strong in 2000. Demand in the housing and commercial markets was fueled by the growth in the high technology sector throughout much of 2000. Real estate term loans increased by $8 million in 2000 mainly as a result of the Bank providing term funding for several of its completed construction projects, as well as the continued development of new business. In addition, the Bank experienced growth in SBA loans ($4 million) and factoring/asset-based lending ($3 million) in 2000. Growth in these areas was also mainly due to business development efforts. Late in 2000, the expansion of the Bank's market area, specifically Silicon Valley and the high technology sector, was impacted by the negative reaction of the financial markets to the Internet industry and the slow-down of earnings growth of the large technology companies. There has also been a slow-down in venture capital fundings; the future of such fundings is unclear at this time. If venture capital fundings are significantly curtailed during 2001, the Bay Area and the Silicon Valley could be negatively impacted. In addition, the State of California is in the midst of an energy crisis, where the ability of the major utilities to provide and deliver adequate resources to their users has been threatened. These changes could result in layoffs and restructurings. It is not clear at this time what impact this will have on the overall economy and specifically the growth and quality of the Bank's loan portfolio in the future. Total loans and leases were $336 million and averaged $302 million as of and for the year ended December 31, 1998. The increase in total loans and leases of $67 million during 1999 represented growth from all sectors of the Bank's portfolio, except real estate construction. Real estate term loans increased by $26 million as a result of the lower interest rate environment during the first and second quarters of 1999, which fueled the demand for refinancing. The Bank continued to provide term funding for several of its completed construction projects, as well as the continued development of new business. In addition the Bank experienced growth in commercial ($13 million), SBA ($13 million), leasing ($15 million), and factoring/asset-based lending ($3 million) in 1999. Growth in all these areas was mainly due to the generally positive economic conditions of Silicon Valley and rapid expansion of the technology sector in 1999. Real estate construction loans declined by $3.6 million in 1999. The decrease in real estate construction was due to a change in the mix of business done by Saratoga National Bank prior to the merger with SJNB on January 5, 2000. During 1999 Saratoga National Bank began to focus on larger real estate projects where they sold off (participated) a majority of the loan balance. Although activity increased, the amount outstanding actually declined by approximately $12 million. The net remaining increase of $8 million related to SJNB's focus on its market area's expanding real estate environment during 1999. Asset Quality ALLOWANCE FOR LOAN AND LEASE LOSSES A consequence of lending activities is the potential for loss. The amount of such losses will vary from time to time depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions, rising interest rates and the financial experience of borrowers. The allowance for loan and lease losses, which provides for the risk of losses inherent in the credit extension process, is increased by the provision for loan and lease losses charged to expense and decreased by the amount of charge-offs net of recoveries. There is no precise method of predicting specific losses or amounts that ultimately may be charged off on particular segments of the loan and lease portfolio. Similarly, the adequacy of the allowance for loan and lease losses and the level of the related provision for loan and lease losses is determined on a judgmental basis by management based on consideration of: o Economic conditions, o Borrowers' financial condition, o Loan and lease impairment, o Evaluation of industry trends, o Historic losses, migrations and delinquency trends, o Industry and other concentrations, o Loans which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management, o Continuing evaluation of the performing loan portfolio, o Monthly review and evaluation of problem loans and leases identified as having loss potential, o Quarterly review by the Board of Directors, o Off balance sheet risks, and o Assessments by regulators and other third parties. In addition to the internal assessment of the loan and lease portfolio (and off balance sheet credit risk, such as letters of credit, etc.), the Company also retains a consultant who performs credit reviews on a quarterly basis and then provides an assessment of the adequacy of the allowance for loan and lease losses. The federal banking regulators also conduct examinations of the loan and lease portfolio periodically. The Company utilizes a method of assigning a minimum and maximum loss ratio for each grade of loan or lease within each category of loans (commercial, real estate term, real estate construction, etc.). Loans and leases are graded on a ranking system based on management's assessment of the loan's or lease's credit quality. The assigned loss ratio is based upon many factors, including prevailing economic conditions, historical loss experience as well as other factors. In addition, the Company's methodology considers (and assigns a risk factor for) current economic conditions, off balance sheet risk and concentrations of credit. The methodology provides a systematic approach for the measurement of the possible existence of future loan and lease losses. Management and the Board of Directors evaluate the allowance and determine its appropriate level considering objective and subjective measures, such as knowledge of the borrowers' business, valuation of collateral, the determination of impaired loans and leases and exposure to potential losses. Based on known information available to it at the date of this Report, management believes that the Company's allowance for loan and lease losses, determined as described above, was adequate at December 31, 2000 for foreseeable losses. The allowance for loan and lease losses is a general reserve available against the total loan and lease portfolio and off balance sheet credit exposure. While management uses available information to recognize losses on loans or leases, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan and lease losses. Such agencies may require the Bank to provide additions to the allowance based on their judgment of information available to them at the time of their examination. Finally, there is uncertainty concerning future economic trends. As noted elsewhere in this Report, the events occurring at the end of 2000 and the beginning of 2001, such as the national equity market correction, disappointing earnings announcements, negative economic fundamentals, the California energy crisis, and the corrective action taken by the FOMC by reducing interest rates by 100 basis points, has caused greater uncertainty. Accordingly, it is not possible to predict the effect future economic trends may have on the level of the provision for loan and lease losses in future periods. See "Item 7A: Quantitative and Qualitative Disclosures About Market Risk" herein, for additional information regarding changes in interest rates. The following table summarizes the activity in the allowance for loan and lease losses for the five years ended December 31, 2000:
ALLOWANCE FOR LOAN AND LEASE LOSSES (dollars in thousands) 2000 1999 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of the year $6,412 $5,494 $5,071 $4,633 $4,623 - ---------------------------------------------------------------------------------------------------------------------------------- Chargeoffs by category: Commercial and other ----- 108 234 271 243 SBA 18 18 ----- 37 22 Factoring and asset-based ----- ----- ----- 1 83 Real estate construction 376 ----- ----- ----- ----- Real estate term ----- 4 ----- 32 69 Consumer 17 35 65 62 60 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL CHARGEOFFS 411 165 299 403 477 - ---------------------------------------------------------------------------------------------------------------------------------- Recoveries by category: Commercial and other 135 150 159 123 216 SBA 13 5 58 5 39 Factoring and asset-based ----- ----- ----- 6 35 Real estate construction 379 4 ----- ----- ----- Real estate term ----- 4 ----- ----- 1 Consumer 140 59 69 2 106 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL RECOVERIES 667 222 286 136 397 - ---------------------------------------------------------------------------------------------------------------------------------- NET (RECOVERIES) CHARGEOFFS (256) (57) 13 267 80 - ---------------------------------------------------------------------------------------------------------------------------------- PROVISION CHARGED TO EXPENSE 725 861 436 705 40 Allowance relating to acquired businesses ----- ----- ----- ----- 50 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF THE YEAR $7,393 $6,412 $5,494 $5,071 $4,633 ================================================================================================================================== RATIOS: Net (recoveries) chargeoffs to average loans and leases (.06%) (.02%) .00% .10% .04% Allowance to total loans and leases at the end of the year 1.60 1.59 1.64 1.74 1.84 Allowance to nonperforming loans and leases at end of the year 1,621 296 2,280 647 849 ====================================================================================================================================
During 2000, the Bank wrote off $411 in loans and had recoveries of $667 for a total of $256 in net recoveries. Net recoveries were $57 during 1999 and net chargeoffs were $13 in 1998. The allowance for loan and lease losses as a percentage of total loans and leases was 1.60%, 1.59%, and 1.64% at December 31, 2000, 1999 and 1998, respectively. The allowance for loan and lease losses as a percentage of nonperforming loans was approximately 1,621%, 296% and 2,280% at December 31, 2000, 1999 and 1998, respectively. Nonperforming loans and leases were $456, $2.2 million and $241 at December 31, 2000, 1999 and 1998, respectively. See "Nonperforming Loans and Leases" below. Based on an evaluation of individual credits, historical credit loss experienced by loan or lease type and economic conditions, management has allocated the allowance for loan and lease losses as follows for the past five years ended December 31:
ALLOCATION OF THE ALLOWANCE FOR LOAN OR LEASE LOSSES (dollars in thousands) Amount of allowance allocation - -------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Commercial and other $2,549 $2,209 $2,066 $1,519 $1,401 SBA 1,258 1,051 1,064 1,079 840 Leasing 820 455 90 ---- ---- Factoring and asset-based 457 320 197 206 159 Real estate construction 556 970 570 297 293 Real estate term 1,433 1,044 933 1,042 1,050 Consumer 320 245 239 167 139 Unallocated ---- 118 335 761 751 - -------------------------------------------------------------------------------------------------------------------- TOTAL $7,393 $6,412 $5,494 $5,071 $4,633 ==================================================================================================================== Percent of loans and leases in each category to total loans and leases - -------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------- Commercial and other 30.0% 30.4% 32.6% 39.1% 38.0% SBA 11.5 12.4 11.0 13.5 13.1 Leasing 8.1 5.2 1.7 1.1 0.9 Factoring and asset-based 2.9 2.4 2.2 1.7 1.8 Real estate construction 11.8 12.0 15.5 9.1 9.8 Real estate term 31.8 34.5 33.8 31.9 32.2 Consumer 3.9 3.1 3.2 3.6 4.2 - -------------------------------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% ====================================================================================================================
The allowance for loan and lease losses is maintained without any internal allocation to the segments of the loan and lease portfolio and the entire allowance is available to cover any loan and lease losses. The allocation above is based on subjective estimates that take into account historical loss experience and management's current assessment of the relative risk characteristics of the portfolio as of the reporting date noted above and as described more fully herein. NONPERFORMING LOANS AND LEASES 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 are set forth in the following table as of December 31 of each year:
NONPERFORMING LOANS AND LEASES (dollars in thousands) 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Loans and leases accounted for on a non-accrual basis $421 $1,395 $197 $720 $457 Loans and leases restructured and in compliance with modified terms ---- ---- 44 63 89 Other loans and leases with principal or interest contractually past due 90 days or more 35 769 ---- 1 ---- - -------------------------------------------------------------------------------------------------------------------------------- TOTAL $456 $2,164 $241 $784 $546 ====================================================================================================================================
Total nonperforming loans of $456 in 2000 consisted of four individual loans, none of which were considered significant. Total nonperforming loans of $2.2 million in 1999 included a single customer with aggregate borrowings of $1.1 million with the remaining loans not considered significant. Management identifies potential nonperforming loans and leases as part of its ongoing evaluation and review of the loan and lease portfolio. On February 16, 2001, a commercial loan and related leases in the aggregate amount of $1.7 million secured by accounts receivable, operating equipment and other assets were classified as nonperforming and were put on non-accrual status. Based on such reviews and information known to management at the date of this Report, management has not identified any further SJNB loans or leases (other than those in the above table and mentioned above) about which it has serious doubts regarding the borrowers' ability to comply with present loan repayment terms, such that the loans or leases might subsequently be classified as nonperforming. The accrual of interest on loans is discontinued and any accrued and unpaid interest is reversed when, in the opinion of management, there is significant doubt as to the collectibility of interest or principal or when the payment of principal or interest is ninety days past due, unless the amount is well-secured and in the process of collection. OTHER REAL ESTATE OWNED At December 31, 2000 and 1999 there were no properties owned by the Bank acquired through the foreclosure process. COMMITMENTS AND LINES OF CREDIT It is the Bank's policy not to issue formal commitments or lines of credit except to well-established and financially responsible commercial enterprises. Such commitments can be either secured or unsecured and are typically in the form of revolving lines of credit for seasonal working capital needs. Occasionally, such commitments are in the form of a letter of credit to facilitate the customer's particular business transaction. Commitments and lines of credit typically mature within one year. These commitments involve (to varying degrees) credit risk in excess of the amount recognized as either an asset or liability in the statement of financial position. The Company attempts to control this credit risk through its credit approval process. The same credit policies are used when entering into such commitments. As of December 31, 2000, the Company had undisbursed loan commitments to extend credit as follows: UNDISBURSED LOAN COMMITMENTS (dollars in thousands) Loan Category Amount - -------------------------------------------------------------------------------- Commercial and other $138,196 SBA 1,462 Real estate construction 47,133 Real estate term 1,111 Consumer 13,348 - -------------------------------------------------------------------------------- Total $201,250 ================================================================================ In addition, there was approximately $13 million available for commitments under unused letters of credit as of December 31, 2000. FUNDING Deposits represent SJNB's principal source of funds. Most of the Bank's deposits are obtained from professionals, small- to medium-sized businesses and individuals within the Bank's market area. SJNB's deposit base consists of non interest and interest-bearing demand deposits, savings and money market accounts and certificates of deposit. The following table summarizes the composition of deposits as of December 31, 2000, 1999 and 1998:
DEPOSIT CATEGORIES (dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Percentage Percentage Percentage Total of Total Total of Total Total of Total Amount Deposits Amount Deposits Amount Deposits - ------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing demand $130,130 22.23% $94,687 19.99% $98,422 24.25% Interest-bearing demand 78,539 13.42 78,523 16.58 73,834 18.19 Money market and savings 187,794 32.08 140,871 29.73 105,009 25.87 Certificates of deposit: Less than $100 54,175 9.26 54,172 11.43 45,272 11.16 $100 or more 134,705 23.01 105,480 22.27 83,320 20.53 - ------------------------------------------------------------------------------------------------------------------------------ Total $585,343 100.00% $473,733 100.00% $405,857 100.00% ==============================================================================================================================
Deposits increased 24% to $585 million at December 31, 2000 from $474 million at December 31, 1999. Deposits increased 17% at December 31, 1999 from $406 million at December 31, 1998. Several specific customers' unusually large short-term deposits amounting to approximately $37 million impacted the increase in deposits from 1999 to 2000. Excluding this unusual flow of funds, the growth in deposits from 1999 to 2000 would have been 16%. These increases are due to a combination of factors, including the development of customers with significant cash balances, utilization of sophisticated cash management systems and aggressive pricing of interest rates. The Bank has been able to attract a significant proportion of its deposits in the form of noninterest-bearing deposits. The Bank's primary business is commercially oriented with significant noninterest-bearing deposits maintained by commercial customers. In the current economic environment, these funds could be subject to disintermediation (moved for higher interest rate products). To counter such possibilities, the Bank maintains an array of products which it believes would be competitive if such were to occur. In addition, in illiquid economic times (possibly recessions) these deposits could be subject to withdrawal pressures. See "Capital and Liquidity - Liquidity" for a discussion of the Bank's liquidity sources. The Bank also raises a substantial amount of funds through certificates of deposit of $100 or greater, which were approximately 23% of total deposits at December 31, 2000. These deposits are usually at interest rates greater than other types of deposits and are more sensitive to interest rate changes. Historically, the Bank's overall cost of funds has been less than that of its peer group. However, as these certificates of deposit are usually more interest rate sensitive, their repricing in an increasing interest rate environment could increase the Bank's cost of funds and negatively impact the Bank's net interest margin. See "Capital and Liquidity." On December 4, 1998 the Bank obtained $10 million through the placement of a ten-year synthetic floating rate certificate of deposit. The instrument consists of two linked transactions, a callable interest rate swap and callable fixed rate certificate of deposit. Under the swap agreement, the Bank pays LIBOR plus five basis points and receives 6% for a period of ten years. The swap is currently callable by a major U.S. domestic bank. Simultaneously, the Bank issued a callable 6% fixed rate certificate of deposit. The certificate of deposit does not have any early redemption clauses, other than by death of the holder. Effectively, the Bank's rate of interest on the combined transaction is LIBOR plus five basis points. The Bank utilizes short-term borrowings in its balance sheet management. The short-term borrowings (securities sold under agreements to repurchase) are used for short-term liquidity needs. During 2000, the average cost of the borrowings was 6.65%, the average amount outstanding was $7.4 million and the maximum at any month end was $15.6 million. ASSET/LIABILITY MANAGEMENT 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 revenue accrual and interest expense that would result from a change in interest rates. Mismatches in interest rate repricing among assets and liabilities arise primarily from the interaction of various customer businesses (i.e., types of loans and leases versus the types of deposits maintained) and from management's discretionary investment and funds gathering activities. The Company attempts to manage its exposure to interest rate sensitivity. However, due to its size and direct competition from the major banks, the Company must offer products which are competitive in the market place, even if less than optimum with respect to its interest rate exposure. The Company's balance sheet position at December 31, 2000 was slightly asset-sensitive, based upon the significant amount of variable rate loans and the repricing characteristics of its deposit accounts (although the table below reflects liability sensitivity, see commentary beneath the table). 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 and positively impacted by an increase 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. See "Financial Review - Net Interest Income and Margin." The following table quantifies the Company's interest rate exposure at December 31, 2000 based upon the known repricing dates of certain assets and liabilities and the assumed repricing dates of others.
DISTRIBUTION OF REPRICING OPPORTUNITIES (dollars in thousands) After three After six After one Within months but months but year but After three within six within one within five months months year five years years Total - --------------------------------------------------------------------- -------------------------------------------------------------- Federal funds sold and money market investments $45,715 ---- ---- ---- ---- $45,715 Investment securities-held to maturity-taxable ---- $500 ---- ---- $1,732 2,232 Investment securities-held to maturity-non-taxable ---- ---- $415 $1,542 14,438 16,395 Securities available for sale-taxable 4,609 2,670 7,759 71,174 23,276 109,488 Securities available for sale-non-taxable ---- ---- ----- ----- 672 672 Loans 324,167 15,573 30,445 71,411 21,718 463,314 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL EARNING ASSETS 374,491 18,743 38,619 144,127 61,836 637,816 - ------------------------------------------------------------------------------------------------------------------------------------ Interest checking, money market and savings 266,334 ---- ---- ---- ---- 266,334 Certificates of deposit: Less than $100 18,870 8,751 9,568 16,566 419 54,174 $100 or more 80,704 28,871 16,338 8,247 545 134,705 Repurchase agreements ---- ---- 9,645 ---- ---- 9,645 Other borrowings 4,116 26 7,667 4,863 5,722 22,394 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST-BEARING LIABILITIES 370,024 37,648 43,218 29,676 6,686 487,252 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST RATE GAP $4,467 $(18,905) $(4,599) $114,451 $55,150 $150,564 ==================================================================================================================================== CUMULATIVE INTEREST RATE GAP $4,467 $(14,438) $(19,037) $95,414 $150,564 ========================================================================================================================= Interest rate gap ratio 1.01 0.50 0.89 4.86 9.25 ========================================================================================================================= CUMULATIVE INTEREST RATE GAP RATIO 1.01 0.96 0.96 1.20 1.31 =========================================================================================================================
In evaluating the Company's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table 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. In considering such shortcomings, the above table would reflect a slightly asset-sensitive position. 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. A large proportion of the Bank's deposits are non interest-bearing demand deposits and are not included in the above table as they tend not to be interest rate sensitive. The average balance of these deposits was $116 million in 2000. In addition, the Bank's total tangible capital of approximately $61 million in 2000 is not included as a funding source in the above table. Lastly, the table includes the repricing of the Bank's non-maturity deposits (interest-bearing demand, money market and savings accounts) as repricing immediately. These accounts are not subject to any specific interest rate adjustment formulas and are adjusted by management based upon the competitive environment and the Bank's liquidity and asset/liability positions. Taking these factors into consideration could alter the above ratios significantly. The maturities and yields of the investment portfolio at December 31, 2000 are shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES (dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Maturity ----------------------------------------------------------------------------------------- After one year After five years Within one year within five years within ten years After ten years Carrying --------------------------------------------------------------------------------------- Value Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------------------------ Securities available for sale: U. S. Treasury $1,527 ---- ---- $1,527 6.25% ---- ---- ---- ---- U. S. Government Agencies 33,649 ---- ---- 30,687 6.36 $2,962 6.13% ---- ---- Mortgage backed (1) 57,567 $7,877 6.71% 29,214 6.35 9,502 6.56 $10,974 6.85% State and municipal (2) 5,313 ---- ---- 4,116 6.99 ---- ---- 1,197 7.34 Trust preferred 8,475 2,029 7.00 ---- ---- ---- ---- 6,446 7.91 Asset-backed 3,629 2,377 6.38 1,252 7.43 ---- ---- ---- ---- - ------------------------------------------------------- ------------- ------------- ------------ TOTAL 110,160 12,283 66,796 12,464 18,617 - ------------------------------------------------------- ------------- ------------- ------------ Securities held to maturity: U. S. Government Agencies 500 500 6.78 ---- ---- ---- ---- ---- ---- State and municipal (2) 16,395 415 7.96 2,067 7.52 1,483 7.70 12,430 7.92 Other 1,732 ---- ---- ---- ---- ---- ---- 1,732 6.00 - ------------------------------------------------------- ------------- ------------- ------------ TOTAL 18,627 915 2,067 1,483 14,162 - ------------------------------------------------------- ------------- ------------- ------------ TOTAL $128,787 $13,198 6.73% $68,863 6.45% $13,947 6.59% $32,779 7.44% ==================================================================================================================================== (1) Maturities of mortgage backed securities are based upon dealer prepayment projections. (2) State and municipal securities are adjusted to a fully taxable equivalent basis using the federal statutory rate.
The following table shows the maturity and interest rate sensitivity of commercial, SBA, real estate construction and real estate term loans at December 31, 2000. Approximately 77% of the commercial and real estate loan portfolio is priced with floating interest rates, which limit the exposure to interest rate risk on long-term loans.
COMMERCIAL AND REAL ESTATE LOAN MATURITIES AND INTEREST RATE SENSITIVITY Balances maturing Interest Rate Sensitivity - ----------------------------------------------------------------------------------------------------------------------- Predeter- Balances at One mined Floating December 31, One year year to Over interest interest 2000 or less five years five years rates rates - ----------------------------------------------------------------------------------------------------------------------- Commercial and other $140,108 $94,865 $36,425 $8,818 $27,210 $112,899 SBA 53,371 2,786 10,343 40,242 2,090 51,281 Real estate construction 54,667 49,467 227 4,972 8,093 46,574 Real estate-other 147,110 14,907 44,951 87,252 55,401 91,709
The above table does not take into account the possibility that a loan may be renewed at the time of maturity. In most circumstances, the Company treats a renewal request in substantially the same manner in which it considers the request for an initial extension of credit. The Company does not have a policy to automatically renew loans. CAPITAL AND LIQUIDITY Capital The Company's book value per share was $16.97, $14.81 and $14.13 as of December 31, 2000, 1999 and 1998, respectively. Tangible book value per share, adjusted for goodwill and core deposit intangibles was $16.18, $13.81 and $13.01 at December 31, 2000, 1999 and 1998, respectively. Shareholders' equity was $64 million, $53 million and $51 million as of December 31, 2000, 1999 and 1998, respectively. Tangible shareholders' equity was $61 million, $50 million and $47 million as of December 31, 2000, 1999 and 1998, respectively. During 2000 the Company did not repurchase any shares of its Common Stock. During 1999 and 1998 the Company repurchased 151 shares of its Common Stock for $3.9 million and 103 shares of its Common Stock for $3.7 million, respectively. See Notes to Consolidated Financial Statements and "Business - Supervision and Regulation" for a discussion of the Company's capital requirements. Liquidity Management strives to maintain a level of liquidity sufficient to meet customer requirements for loan and lease funding and deposit withdrawals. Liquidity requirements are evaluated by taking into consideration factors such as deposit concentrations, seasonality and maturities, loan and lease demand, capital expenditures and prevailing and anticipated economic conditions. SJNB's business is generated primarily through customer referrals and employee business development efforts. The Bank utilizes brokered deposits on a limited basis to satisfy temporary liquidity needs. The Bank's sources of liquidity consist of its deposits with other banks, overnight funds sold to correspondent banks and short-term, marketable investments net of short-term borrowings. On December 31, 2000, consolidated liquid assets totaled $110 million or 16% of consolidated total assets, as compared to $86 million or 15% of consolidated total assets on December 31, 1999. In addition to the liquid asset portfolio, as of December 31, 2000 SJNB also had $22 million in informal lines of credit available with three major commercial banks, approximately $7.0 million of credit available at the Federal Reserve Discount Window, a repurchase agreement for up to $24 million in additional borrowings and $26 million in SBA guaranteed loans which are available for sale and could likely be sold within a 30-day period. SJNB is primarily a business and professional bank and, as such, its deposit base is more susceptible to economic fluctuations. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. In their normal course of business, commercial clients maintain balances in large certificates of deposit. The stability of these balances hinges upon, among other factors, market conditions and each business' seasonality. Large certificates of deposit ($100 or more) amounted to 23% of total deposits on December 31, 2000 and 22% on December 31, 1999. Liquidity is also affected by investment securities and loan and lease maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The loan and lease portfolio consists primarily of floating rate, short-term loans. On December 31, 2000, approximately 26% of total consolidated assets had maturities less than one year and 70% of total consolidated loans and leases had floating rates tied to the prime rate or similar indexes. The short-term nature of the loan and lease portfolio, and loan agreements which generally require monthly interest payments, provide the Company with an additional secondary source of liquidity. The Company's liquidity is maintained by cash flows stemming from dividends and management fees from the Bank and the exercise of stock options issued to the Bank's employees and directors. The amount of dividends from the Bank is subject to certain regulatory restrictions as discussed in Note 17 of the Notes to the Consolidated Financial Statements and elsewhere within this Report. Subject to said restrictions, at December 31, 2000, up to $16 million could have been paid to the Company by the Bank without regulatory approval. The Company's parent-only financial statements are presented in Note 16 of the Notes to Consolidated Financial Statements. Dividends of $500 and $5.0 million were paid to the Company by the Bank during 2000 and 1999, respectively. There are no material commitments for capital expenditures in 2001 or beyond. 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 noninterest-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 2000, 1999 or 1998. ITEM 7A: 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 revenue accrual and interest expense that would result from a change in interest rates. Mismatches in interest rate repricing among assets and liabilities arise primarily from the interaction of various customer businesses (i.e., types of loans and leases versus the types of deposits maintained) and from management's discretionary investment and funds gathering activities. The Company attempts to manage its exposure to interest rate sensitivity. However, due to its size and direct competition from the major banks, the Company must offer products which are competitive in the market place, even if less than optimum with respect to its interest rate exposure. The Company's balance sheet position at December 31, 2000 was slightly 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. See "Financial Review - Net Interest Income and Margin." Commencing in the third quarter of 1999, the Federal Open Market Committee ("FOMC") began a process of increasing interest rates to offset the possible increase in inflation and to slow down consumer spending. Through July 2000, the FOMC had increased interest rates 175 basis points. For the year ended December 31, 2000, 1999 and 1998, net interest margins on a fully taxable equivalent basis were 5.86%, 5.65% and 5.94%, respectively. The effect of possible interest rate changes is not precisely determinable due to the many factors influencing the Bank's net interest margin, including repricing of deposits, a change in mix of the loan, lease and deposit portfolios and other borrowings, changes in relative volumes, the speed in which fixed rate loans and leases are repriced, discretionary investment activities and other factors. On January 3, 2001 and on January 31, 2001, the Federal Open Market Committee lowered its target for the interbank borrowing rate (the rate banks borrow and lend to each other) by 50 basis points on each date to 5.5%. This action caused a decrease in SJNB's prime rate from 9.5% to 8.5%. SJNB's balance sheet position at December 31, 2000, as discussed above, was slightly asset-sensitive on a short-term basis, based on the significant amount of variable rate loans at that date, most of which will have immediate reductions in their interest rates. Rates paid on deposits generally will not be readjusted downward as quickly. This position has a short-term detrimental effect during times of interest rate decreases as net interest revenues are negatively impacted by a decline in interest rates. Future rate reductions will likely have a similar impact. The Federal Reserve's rate reductions were made based on a slowing economy and an attempt to forestall an economic recession. Management believes, however, that the Bank should be able to achieve loan and deposit growth in 2001 similar to its historical rates of growth. As a result of the recent rate reductions, management anticipates the Company's net interest margin in the first quarter of 2001 will be in a range of 5.55% to 5.65% and for the year within a range of approximately 5.59% to 5.69%. Based upon the Company's currently projected growth rates and the anticipated range of the net interest margins for the year, management currently expects the Company's full-year 2001 diluted earnings per share to be between $2.95 and $3.00. As of the date of the Report, current analyst expectations have the Company's diluted earnings per share in the range of $3.04 to $3.05 for the full year. In evaluating the Company's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the following table 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. See Note 15 to the Consolidated Financial Statements on page 58 of this Report for a discussion of the methodology and assumptions used in the following table.
INTEREST RATE RISK ANALYSIS (dollars in thousands) - ------------------------------------------------------------------------------------------------------------------------December 31, Average Expected Maturity/Principal Repayment December 31, 1999 Interest Total Fair Fair Rate 2001 2002 2003 2004 2005 Thereafter Balance Value Value - ------------------------------------------------------------------------------------------------------------------------------------ Interest-Sensitive Assets: Fed funds sold and money market investments 6.36% $45,715 ---- ---- ---- ---- ---- $45,715 $45,730 $12,655 Investments: Fixed maturity 6.24 1,998 $15,395 $18,289 $6,977 $931 $26,110 69,700 69,507 69,708 Mortgage Backed 6.90 12,722 14,284 11,318 6,752 4,380 6,664 56,120 57,567 38,666 Federal Reserve Bank and Federal Home Loan Bank stock 6.00 ---- ---- ---- ---- ---- 1,732 1,732 1,732 3,212 Loans and leases: Fixed rate 8.38 26,693 5,612 6,091 6,517 2,811 48,201 95,926 95,724 93,985 Variable rate 11.11 151,095 21,317 13,258 13,165 23,440 94,186 316,461 325,231 273,151 Leasing 9.77 13,120 7,841 9,270 5,977 1,242 ---- 37,451 36,799 20,379 Factoring accounts receivable and asset based lending 16.94 13,476 ---- ---- ---- ---- ---- 13,476 13,522 9,961 Interest-Sensitive Liabilities: Deposits: Interest-bearing demand 3.11 39,270 11,781 11,781 15,707 ---- ---- 78,539 76,597 75,247 Money market 4.55 107,211 35,737 35,739 ---- ---- ---- 178,687 177,790 130,885 Savings 3.00 10 2,729 2,729 1,819 1,820 ---- 9,107 8,628 7,905 Certificates of deposit 5.89 163,102 7,287 5,890 11,637 864 100 188,880 189,519 159,761 Fed funds purchased and repurchase agreements 7.01 9,645 ---- ---- ---- ---- ---- 9,645 8,753 10,516 Federal Home Loan Bank advances 6.50 11,723 1,494 1,773 1,596 48 3,692 20,326 21,310 23,592 Other borrowings 9.74 ---- ---- ---- ---- ---- 2,068 2,068 2,156 525 Interest-Sensitive Off balance sheet items: Unused lines of credit and undisbursed loan commitments 11.09 ---- ---- ---- ---- ---- ---- 201,250 ---- ----
TEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following section includes the Company's Consolidated Financial Statements: Independent Auditors' Report Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements INDEPENDENT AUDITORS' REPORT The Board of Directors SJNB Financial Corp.: We have audited the accompanying consolidated balance sheets of SJNB Financial Corp. and subsidiary (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SJNB Financial Corp. and subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP San Francisco, California January 17, 2001
- --------------------------------------------------------------------------------------------------------------------- SJNB FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (in thousands) - --------------------------------------------------------------------------------------------------------------------- ASSETS 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Cash and due from banks $20,831 $18,938 Interest-bearing deposits in other banks 599 2,042 Federal funds sold 7,240 7,000 Money market investments 38,475 5,651 Investment securities: Available for sale (includes securities subject to repurchase agreements Fair value: $10,024 at December 31, 2000 and $13,147 at December 31, 1999) 110,160 90,878 Held to maturity (Fair value: $18,646 at December 31, 2000 and $20,708 at December 31,1999) 18,627 22,196 - --------------------------------------------------------------------------------------------------------------------- Total investment securities 128,787 113,074 - --------------------------------------------------------------------------------------------------------------------- Loans and leases 463,314 403,318 Allowance for loan and lease losses (7,393) (6,412) - --------------------------------------------------------------------------------------------------------------------- Loans and leases, net 455,921 396,906 - --------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 5,444 5,564 Accrued interest receivable 3,968 3,202 Intangibles, net of accumulated amortization of $3,059 at December 31, 2000 and $2,620 at December 31, 1999. 2,952 3,617 Other assets 23,560 12,087 - --------------------------------------------------------------------------------------------------------------------- Total $687,777 $568,081 ===================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - --------------------------------------------------------------------------------------------------------------------- Deposits: Non interest-bearing $130,130 $94,687 Interest-bearing 455,213 379,046 - --------------------------------------------------------------------------------------------------------------------- Total deposits 585,343 473,733 - --------------------------------------------------------------------------------------------------------------------- Federal Home Loan Bank advances 20,326 22,503 Other borrowings 11,713 11,022 Accrued interest payable 2,412 1,720 Other liabilities 4,400 5,884 - --------------------------------------------------------------------------------------------------------------------- Total liabilities 624,194 514,862 - --------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Preferred stock, no par value, 5,000 shares authorized; none issued or outstanding in 2000 or 1999. ---- ---- Common stock, no par value; 20,000 shares authorized ; 3,747 and 3,593 shares issued and outstanding in 2000 and 1999 respectively. 22,845 20,769 Retained earnings 40,221 33,942 Accumulated other comprehensive income (losses) 517 (1,492) - --------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 63,583 53,219 - --------------------------------------------------------------------------------------------------------------------- Commitments and contingencies ---- ---- - --------------------------------------------------------------------------------------------------------------------- Total $687,777 $568,081 ===================================================================================================================== See accompanying Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------------------------------------ SJNB FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands, except per share amounts) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME: Interest and fees on loans and leases $44,942 $35,826 $31,252 Interest on money market investments 2,358 1,536 1,750 Interest on time deposits 73 107 169 Interest and dividends on investment securities available for sale 6,820 4,638 4,753 Interest and dividends on investment securities held to maturity 1,073 1,200 1,165 Other interest and investment income (expense) 10 (50) (9) - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST INCOME 55,276 43,257 39,080 - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Deposits: Interest-bearing demand 2,244 2,189 2,158 Money market and savings 6,481 3,938 3,931 Certificates of deposit of $100 or more 7,490 4,992 4,073 Certificates of deposit of less than $100 3,237 2,627 1,604 Federal Home Loan Bank advances 1,331 1,361 1,398 Other borrowings 867 585 313 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL INTEREST EXPENSE 21,650 15,692 13,477 - ------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 33,626 27,565 25,603 - ------------------------------------------------------------------------------------------------------------------------------ Provision for loan and lease losses 725 862 436 - ------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 32,901 26,703 25,167 - ------------------------------------------------------------------------------------------------------------------------------ OTHER INCOME: Service charges on deposits 1,067 1,044 950 Other operating income 599 737 724 Increase in cash surrender value of life insurance 542 218 ---- Net (loss) gain on sale of securities available for sale (602) (133) 150 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL OTHER INCOME 1,606 1,866 1,824 - ------------------------------------------------------------------------------------------------------------------------------ OTHER EXPENSES: Salaries and benefits 9,642 9,180 8,048 Occupancy 1,504 1,454 1,310 Merger related costs, nonrecurring 3,424 487 ---- Other 5,786 5,430 5,104 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL OTHER EXPENSES 20,356 16,551 14,462 - ------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 14,151 12,018 12,529 Income taxes 5,527 4,901 5,040 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME $8,624 $7,117 $7,489 ============================================================================================================================== BASIC EARNINGS PER SHARE $2.35 $2.04 $2.06 ============================================================================================================================== DILUTED EARNINGS PER SHARE $2.24 $1.91 $1.92 ============================================================================================================================== Average common shares outstanding 3,665 3,491 3,635 ============================================================================================================================== Average common share equivalents outstanding 3,854 3,722 3,902 ============================================================================================================================== See accompanying Notes to Consolidated Financial Statements.
- ------------------------------------------------------------------------------------------------------------------------------------ SJNB FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Total Other Share- Common Retained Comprehensive holders' (in thousands, except per share amounts) Shares Stock Earnings Income (Losses) Equity - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, DECEMBER 31, 1997 3,640 $23,505 $23,353 $(94) $46,764 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year ---- ---- 7,489 ---- 7,489 Change in net unrealized gain/loss on securities: Unrealized gains arising during the year, net of taxes ---- ---- ---- 329 329 Reclassification adjustment for losses included in income, net of taxes ---- ---- ---- 47 47 --------------- Comprehensive income 7,865 --------------- Stock options exercised 41 572 ---- ---- 572 Common stock repurchase (103) (3,562) (180) ---- (3,742) Issuance of common stock for Epic Funding Corp. 12 501 ---- ---- 501 Tax benefit from stock options exercised ---- 445 ---- ---- 445 Cash dividends ($0.56 per share) ---- ---- (1,666) ---- (1,666) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, DECEMBER 31, 1998 3,590 21,461 28,996 282 50,739 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year ---- ---- 7,117 ---- 7,117 Other comprehensive income-Unrealized loss on securities held for sale, net ---- ---- ---- (1,774) (1,774) --------------- Comprehensive income 5,343 --------------- Common stock issued 60 1,800 ---- ---- 1,800 Stock options exercised 93 849 ---- ---- 849 Common stock repurchase (150) (3,389) (522) ---- (3,911) Tax benefit from stock options exercised ---- 48 ---- ---- 48 Cash dividends ($0.56 per share) ---- ---- (1,649) ---- (1,649) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, DECEMBER 31, 1999 3,593 20,769 33,942 (1,492) 53,219 - ------------------------------------------------------------------------------------------------------------------------------------ Net income for the year ---- ---- 8,624 ---- 8,624 Other comprehensive income-Unrealized gain on securities held for sale, net ---- ---- ---- 2,009 2,009 --------------- Comprehensive income 10,633 --------------- Stock options exercised 154 1,557 ---- ---- 1,557 Tax benefit from stock options exercised ---- 519 ---- ---- 519 Cash dividends ($0.64 per share) ---- ---- (2,345) ---- (2,345) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCES, DECEMBER 31, 2000 3,747 $22,845 $40,221 $517 $63,583 ==================================================================================================================================== See accompanying Notes to Consolidated Financial Statements.
- ---------------------------------------------------------------------------------------------------------------------------------- SJNB FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 - ---------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $8,624 $7,117 $7,489 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 725 862 436 Depreciation and amortization 844 1,279 790 Amortization of intangibles 439 456 457 Deferred tax benefit 1,199 361 57 Loss (gain) on sale of securities available for sale 602 133 (150) Net gain (loss) on sale of leased assets ----- 35 (12) Amortization of (discount) premium on investment securities, net (185) 10 (49) Decrease (increase) in intangible assets 226 (45) (50) Increase in accrued interest receivable and other assets (5,304) (3,561) (393) (Decrease) increase in accrued interest payable and other liabilities (618) (24) 1,702 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,552 6,623 10,277 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sale or maturities of securities available for sale 38,636 23,423 58,974 Maturities of securities held to maturity 3,757 6,725 11,355 Purchase of securities available for sale (54,926) (53,991) (40,071) Purchase of securities to be held to maturity (150) (5,868) (6,703) Net increase in loans and leases (59,898) (64,996) (43,070) Capital expenditures (723) (3,381) (908) Purchase of life insurance policies (9,070) ----- (3,953) Cash used to acquire Epic Funding Corp. ----- ----- (206) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (82,374) (98,088) (24,582) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flow from financing activities: Net increase in deposits 111,610 67,867 44,466 Decrease in Federal Home Loan Bank borrowings (2,177) (169) (287) Increase (decrease) in other borrowings 691 3,997 (11,000) Cash dividends (2,345) (1,649) (1,666) Common stock repurchased ----- (3,911) (3,742) Common stock issued ----- 1,800 ----- Proceeds from stock options exercised 1,557 849 572 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 109,336 68,784 28,343 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and equivalents 33,514 (22,681) 14,038 Cash and equivalents at beginning of year 33,631 56,312 42,274 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and equivalents at end of year $67,145 $33,631 $56,312 ================================================================================================================================== Other cash flow information: Interest paid $20,958 $15,268 $13,450 Income taxes paid 5,832 5,544 4,016 ================================================================================================================================== Noncash transactions: 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 Consolidated Financial Statements.
Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SJNB Financial Corp. ("Company") is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California on April 18, 1983. Its principal office is located at One North Market Street, San Jose, California, 95113. The Company owns 100% of the issued and outstanding common shares of San Jose National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was incorporated on November 23, 1981 and commenced business in San Jose, California on June 10, 1982. Its main office is located at One North Market Street, San Jose, California, 95113. SJNB engages in the general commercial banking business with special emphasis on the banking needs of the business and professional communities in San Jose and the surrounding areas. The Financial Services Division is located at 95 South Market, San Jose, California, 95113, where it engages in the factoring of accounts receivable. The Bank's wholly-owned subsidiary, Epic Funding Corp. is located in Danville, California where it shares an office with the Bank's Danville branch. Epic Funding Corp. is primarily in the business of originating equipment lease financing throughout the United States, but primarily in the State of California. Dollars and share amounts are in thousands in these footnotes, except per share amounts or as otherwise noted. The accounting policies of SJNB Financial Corp. and San Jose National Bank (collectively, the "Company") are in accordance with generally accepted accounting principles and conform to general practices within the banking industry. a. Consolidation The consolidated financial statements include the accounts of SJNB. All material intercompany accounts and transactions have been eliminated in the consolidated financial statements. b. Investment Securities The Company accounts for its investment securities as follows: AVAILABLE FOR SALE-Investment securities that are acquired without the intent to hold until maturity are classified as available for sale. Such securities are carried at market value. Market value adjustments are reported as a separate component of other comprehensive income included in shareholders' equity until realized. HELD TO MATURITY-Investment securities purchased with the intent and ability to hold them until maturity are classified as held to maturity. Such securities are carried at cost, adjusted for accretion of discounts and amortization of premiums. Investment securities purchased are recorded as of their trade date. Accretion of discounts and amortization of premiums arising at acquisition are included in income using methods approximating the interest method. Gains or losses on sales of securities, if any, are determined based on the specific identification method. The carrying values of individual investment securities are reduced, if necessary, through write-downs to reflect other than temporary impairments in value. In connection with the Company's adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as described in note 1(f) below the Company elected to reclassify all of its "Held to maturity" investments to "available for sale" as of January 1, 2001. The impact of this will be to account for the unrealized gain or loss in the held to maturity securities as an additional component of other comprehensive income included in shareholders' equity until realized. The amount of the net unrealized gain in the held to maturity classification was $19 as of December 31, 2000. c. Loans and Leases and Allowance for Loan and Lease Losses Loans and leases generally are stated at the principal amount outstanding. Interest on loans is credited to income on a simple interest basis. Unearned revenue on direct financing leases is accreted over the lives of the leases in decreasing amounts to provide a constant rate of return on the net investment in the leases. Loan origination fees and direct origination costs, including initial direct cost of lease origination are deferred and amortized to income by a method approximating the level yield method over the estimated lives of the underlying loans. The accrual of interest on loans and leases is discontinued and any accrued and unpaid interest is reversed when, in the opinion of management, there is significant doubt as to the collectibility of interest or principal or when the payment of principal or interest is ninety days past due, unless the loan is well-secured and in the process of collection. The allowance for loan and lease losses is a valuation allowance maintained to provide for future loan losses through charges to current operating expense. The allowance is based upon a continuing review of loans and leases by management which includes consideration of changes in the character of the loan and lease portfolio, current and anticipated economic conditions, past lending experience and such other factors which, in management's judgment, deserve recognition in estimating potential loan losses. In addition, regulatory examiners may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examinations. Impaired loans are those in which, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan or lease agreement, including scheduled interest payments. The Company measures such loans and leases based on the present value of future cash flows discounted at the loan's or lease's effective interest rate, or at the loan's or lease's market value or the fair value of the collateral if the loan is secured. If the measurement of the impaired loan or lease is less than the recorded investment, impairment is recognized by creating or adjusting an existing allocation of the allowance for loan and lease losses. d. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are charged to expense over the estimated useful lives of the assets on a straight-line basis as follows: Buildings 30 years Furniture and equipment 3-10 years Improvements 7-15 years e. Intangibles Goodwill is amortized using the straight-line method over 15 years. Core deposit intangibles are amortized using an accelerated method over ten years. On a periodic basis, the Company reviews its intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets may not be recoverable. Should such a change indicate that the value of such intangibles may be impaired, an evaluation of the recoverability would be performed, using undiscounted cash flows, prior to any writedown of the assets. f. Derivative Instruments and Hedging Activities Interest rate instruments are entered into in conjunction with the Bank's asset/liability management. As these contracts are entered into only after meeting the accounting criteria for a hedge, and as long as they continue to meet such criteria, changes in market value are deferred and the net settlements are accrued as adjustments to interest income. The Bank currently has outstanding a callable interest rate swap for $10 million it issued simultaneously with a $10 million ten-year callable synthetic floating rate certificate of deposit and a three-year $20 million prime/fixed interest rate swap, which are accounted for as hedges. 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. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of Effective Date". In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", an amendment of SFAS No. 133. SFAS No. 138 addresses a limited number of issues causing implementation difficulties for entities which are required to apply SFAS No. 133. SFAS No. 137 deferred the effective date to the fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133, as amended on January 1, 2001 and there was no effect. As noted above the Bank currently has outstanding $30 million in derivative instruments as defined by SFAS No. 133. These derivative instruments will qualify as cash flow or fair market hedges in accordance with the Statement. g. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Under the asset and liability method, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and then a valuation allowance is established to reduce that deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized. h. Stock-based Compensation The Company continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company only grants stock options at fair market value. SFAS No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. The Company has elected to remain on its current method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 123. i. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year plus shares issuable assuming exercise of all employee stock options, except where anti-dilutive. j. Comprehensive Income Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes new rules for the reporting and display of comprehensive income and its components. Comprehensive income is a part of an enterprises financial performance and, as described in SFAS No. 130, includes net income and other comprehensive income such as revenues, expenses, gains and losses not included in net income. The adoption of this statement had no impact on net income or shareholders' equity. SFAS No. 130 requires the Company's net unrealized gains or losses on available-for-sale securities to be included in other comprehensive income. Comprehensive income is included in the statement of shareholders' equity for the periods presented. k. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, fed funds sold and money market investments. l. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent asset and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. m. Impairment of Long-lived Assets Long-lived assets and certain identifiable intangibles held and used by an entity are reviewed for impairment whenever events or changes indicate that the carrying amount of an asset may not be recoverable. The Company has not identified any long-lived assets or identifiable intangibles which were impaired. n. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under this approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", was issued in September 2000 and replaces the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The Company did not have any significant transactions in which these Statements had any impact on its consolidated financial statements. o. Segments of an Enterprise and Related Information SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", requires certain information about the operating segments of the Company. The objective of requiring disclosures about segments of an enterprise and related information is to provide information about the different types of business activities in which an enterprise engages and the different economic environments in which it operates to help users of financial statements better understand its performance, better assess its prospects for future cash flows and make more informed judgments about the enterprise as a whole. The Company has determined it has three segments: general commercial banking, leases, and factoring/asset based financing. Neither leasing nor factoring/asset based financing meet the required thresholds for disagregation and therefore the disclosures and related information about such segments has not been included in the consolidated financial statements. At such time that these segments meet the required thresholds, such disclosures and other information will be included. p. Reclassification Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentation. NOTE 2 - ACQUISITIONS On January 5, 2000, the Company acquired all of the outstanding shares of common stock of Saratoga Bancorp, the parent company of Saratoga National Bank, pursuant to an exchange of the Company's common stock for all common stock of Saratoga Bancorp. Saratoga National Bank, headquartered in Saratoga, California, operated three branches and as of the acquisition date had $142 million (unaudited) in assets and $103 million (unaudited) in deposits. Saratoga's San Jose office, which was located near SJNB's San Jose office, was consolidated into SJNB's San Jose office in January 2000. The shareholders of Saratoga received 0.70 shares of the Company's common stock for each outstanding share of Saratoga common stock. Based on the closing price of the Company's stock on January 5, 2000 of $29.125, the transaction was valued at approximately $34.2 million, excluding the value of any unexercised options, and each Saratoga shareholder received SJNB common stock valued at $20.39 per share for each share of Saratoga common stock. The merger has been accounted for as a pooling of interests. On May 22, 1998, SJNB acquired all of the stock of a private company, Epic Funding Corporation (Epic), pursuant to a definitive agreement dated April 13, 1998. In connection with the acquisition, which was structured as a tax-free reorganization and accounted for as a purchase transaction for accounting purposes, SJNB issued 12.2 shares of its common stock and paid $110 to Epic's sole shareholder in exchange for all of Epic's outstanding stock. The total purchase price was $611, while Epic's fair value of net assets was $28; goodwill amounted to $759 including certain expenses of the transaction. Epic provides direct and vendor lease programs to manufacturers and equipment users throughout California and across parts of the United States. Epic is a wholly owned subsidiary of the Bank. Epic's office is located in Danville, California, together with a small de novo branch of the Bank at the same facility which opened July 1, 1998. NOTE 3 - CASH AND DUE FROM BANKS The Federal Reserve requires the Bank to maintain average reserve balances for certain deposit balances. Required reserves at December 31, 2000 were $746 and there were no required reserves in 1999. NOTE 4 - INVESTMENT SECURITIES Investment securities as of December 31, 2000 and 1999 are summarized as follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 2000 - ---------------------------------------------------------------------------------------------------- UNREALIZED FAIR -------------------------- COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE: U.S. Treasury $1,496 $31 ----- $1,527 U. S. Government Agencies 33,444 295 $(90) 33,649 Mortgage Backed 56,120 1,567 (120) 57,567 State and municipal 5,208 109 (4) 5,313 Trust preferred 9,050 32 (607) 8,475 Asset-backed 3,607 29 (7) 3,629 - ---------------------------------------------------------------------------------------------------- TOTAL AVAILABLE FOR SALE 108,925 2,063 (828) 110,160 - ---------------------------------------------------------------------------------------------------- HELD TO MATURITY: U.S. Government agencies 500 1 ----- 501 State and municipal (nontaxable) 16,395 159 (141) 16,413 - ---------------------------------------------------------------------------------------------------- TOTAL HELD TO MATURITY 16,895 160 (141) 16,914 - ---------------------------------------------------------------------------------------------------- Federal Reserve Bank/Federal Home Loan Bank Stock 1,732 ----- ----- 1,732 - ---------------------------------------------------------------------------------------------------- TOTAL 18,627 160 (141) 18,646 - ---------------------------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES PORTFOLIO $127,552 $2,223 $(969) $128,806 ==================================================================================================== DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------ UNREALIZED FAIR -------------------------- COST GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE: U.S. Treasury $2,496 $3 ----- $2,499 U. S. Government Agencies 37,337 8 $(732) 36,613 Mortgage Backed 38,560 ----- (564) 37,996 Asset-backed 2,000 ----- (22) 1,978 Trust Preferred 7,062 ----- (479) 6,583 Mutual funds 5,646 ----- (437) 5,209 - ---------------------------------------------------------------------------------------------------- TOTAL AVAILABLE FOR SALE 93,101 11 (2,234) 90,878 - ---------------------------------------------------------------------------------------------------- HELD TO MATURITY: U.S. Government agencies 499 3 ----- 502 State and municipal (nontaxable) 17,828 8 (1,512) 16,324 Mortgage Backed 657 13 ----- 670 - ---------------------------------------------------------------------------------------------------- TOTAL HELD TO MATURITY 18,984 24 (1,512) 17,496 - ---------------------------------------------------------------------------------------------------- Federal Reserve Bank/Federal Home Loan Bank Stock 3,212 ----- ----- 3,212 - ---------------------------------------------------------------------------------------------------- TOTAL 22,196 24 (1,512) 20,708 - ---------------------------------------------------------------------------------------------------- TOTAL INVESTMENT SECURITIES PORTFOLIO $115,297 $35 $(3,746) $111,586 ====================================================================================================
As of December 31, 2000 and 1999 investment securities with carrying values of approximately $54.9 million and $36.9 million, respectively, were pledged as collateral for deposits of public funds and other purposes. Investments in the Federal Reserve Bank and Federal Home Loan Bank stock is carried at cost, which is approximately equal to their market value. Mutual funds consist of several funds invested in U. S. Government securities and government issued adjustable rate mortgages (ARMS). The following tables provide the scheduled maturities of the Company's investment securities portfolio as of December 31, 2000: MATURITY OF INVESTMENT SECURITIES PORTFOLIO (dollars in thousands) AMORTIZED FAIR SECURITIES AVAILABLE FOR SALE COST VALUE ----------------------------- Due in one year or less $1,998 $2,029 Due after one year through five years 42,050 42,928 Due after five years through ten years 18,090 18,204 Due after ten years 46,787 46,999 ----------------------------- TOTAL 108,925 110,160 ----------------------------- SECURITIES HELD TO MATURITY Due in one year or less 915 918 Due after one year through five years 2,067 2,092 Due after five years through ten years 1,483 1,498 Due after ten years 12,430 12,406 ----------------------------- TOTAL 16,895 16,914 ----------------------------- NON-MATURITY INVESTMENTS Held to maturity - FRB/FHLB Stock 1,732 1,732 ----------------------------- TOTAL 1,732 1,732 ----------------------------- TOTAL INVESTMENT SECURITIES $127,553 $128,806 ============================= Interest and dividend income earned on investment securities for the years ended December 31, 2000, 1999 and 1998 are as follows: INTEREST AND DIVIDEND INCOME
INTEREST AND DIVIDEND INCOME (dollars in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Treasury $99 $146 $378 U.S. Government agencies 2,147 2,964 3,736 State and municipal (nontaxable) 29 ---- ---- State and municipal (taxable) 115 ---- ---- Mortgage Backed 3,257 851 301 Asset-backed 376 72 ---- Trust preferred 645 300 ---- Mutual funds 152 305 338 Securities held to maturity: U.S. Treasury ---- 78 97 U.S. Government agencies 34 116 260 State and municipal (nontaxable) 849 757 518 Mortgage Backed 26 89 146 Federal Reserve Bank/Federal Home Loan Bank Stock 164 160 144 - --------------------------------------------------------------------------------------------------------------------------------- INTEREST AND DIVIDEND INCOME $7,893 $5,838 $5,918 =================================================================================================================================
NOTE 5 - LOANS A summary of loans as of December 31, 2000, 1999 and 1998 is as follows:
(dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Commercial and other $140,108 $123,873 $110,604 SBA 53,371 49,949 37,019 Leasing 37,450 20,837 5,618 Factoring and asset-based 13,476 9,901 7,393 Real estate construction 54,667 48,410 51,963 Real estate term 147,110 139,103 113,461 Consumer 18,262 12,448 10,839 Unearned fee income (1,130) (1,203) (954) - -------------------------------------------------------------------------------------------------------------------------------- Total loan and lease portfolio 463,314 403,318 335,943 Less allowance for loan or lease losses (7,393) (6,412) (5,494) - -------------------------------------------------------------------------------------------------------------------------------- LOANS AND LEASES, NET $455,921 $396,906 $330,449 ====================================================================================================================================
Concentrations of credit risk arise when a number of customers are engaged in similar business activities, or activities in the same geographic region, or have similar features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic conditions. Although the Company has a diversified loan and lease portfolio, a substantial portion of its customers' ability to honor contracts is reliant upon the economic stability of the Santa Clara Valley, which in some degree relies on the stability of high technology companies in its "Silicon Valley." Loans and leases are generally made on the basis of a secure repayment source, which is based on a detailed cash flow analysis; however, collateral is generally a secondary source for loan qualification. Approximately 32% of the Company's loan and lease portfolio is made up of real estate term loans. This category of real estate loans includes loans on income-bearing or owner-occupied commercial properties and land loans. In addition, approximately 12% of the loan and lease portfolio is made up of real estate construction loans. These loans consist of approximately 30% residential and 70% commercial. Included in consumer loans are prime equity loans of $8.1 million or representing approximately 1.7% of the total loan portfolio. Included in the commercial category are mortgage warehouse loans, loans to real estate developers for short-term investment purposes and loans to nondevelopers for real estate investment purposes that amount to approximately 9% of the total loan portfolio. Included in the SBA category are real estate piggy back loans that amount to approximately 2% of the total loan portfolio. In the aggregate, approximately 55% of the loan portfolio is directly related to real estate or real estate interests. Approximately 30% of the total loan portfolio is commercial loans; however, no particular industry represents a significant portion of such loans. The following is an analysis of the allowance for loan and lease losses for the years ended December 31, 2000, 1999 and 1998:
(dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $6,412 $5,494 $5,071 Provision for loan or lease losses 725 861 436 Charge-offs (411) (165) (299) Recoveries 667 222 286 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF YEAR $7,393 $6,412 $5,494 ================================================================================================================================
At December 31, 2000 and 1999, impaired loans totaled $421 and $1.4 million with a corresponding valuation allowance of $284 and $224, respectively. For the years ended December 31, 2000 and 1999, the average recorded investment in impaired loans was approximately $828 and $475, respectively. The Company recognized $72, $41 and $60 of interest on impaired loans (during the portion of the year they were impaired), of which $72, $40 and $8 related to impaired loans for which interest income is recognized on the cash basis, for the years ended December 31, 2000, 1999 and 1998, respectively. The balance of nonaccrual loans as of December 31, 2000 and 1999 was approximately $421 and $1.4 million, respectively. The effect on interest income had these loans been performing in accordance with contractual terms was $62 in 2000, $132 in 1999, and $22 in 1998. Income actually recognized on these loans was $16 in 2000, $112 in 1999 and $21 in 1998. The Company has made loans to executive officers, directors and their affiliates in the ordinary course of business. An analysis of activity with respect to such loans during the years ended December 31, 2000, 1999 and 1998 is as follows:
(dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $2,741 $1,749 $1,223 New loans disbursed 21 2,717 1,340 Repayments of loans (2,189) (1,725) (814) - ---------------------------------------------------------------------------------------------------------------------- BALANCE, END OF YEAR $573 $2,741 $1,749 ======================================================================================================================
As of December 31, 2000, loans of approximately $12 million were pledged as collateral for the Federal Reserve Discount Window. NOTE 6 - PREMISES AND EQUIPMENT A summary of premises and equipment as of December 31, 2000 and 1999 is as follows: (dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Land $1,777 $1,777 Buildings and improvements 4,138 4,351 Furniture and equipment 2,623 3,447 - -------------------------------------------------------------------------------- Premises and equipment 8,538 9,575 Less accumulated depreciation and amortization (3,094) (4,011) - -------------------------------------------------------------------------------- PREMISES AND EQUIPMENT, NET $5,444 $5,564 ================================================================================ NOTE 7 - TIME DEPOSITS As of December 31, 2000 and 1999, the Bank had $135 million and $105 million, respectively, in time deposits in denominations of $100 or more. Interest expense for these deposits was $7.5 million and $5.0 million in 2000 and 1999, respectively. Time deposits in denominations of $100 or more which mature in greater than one year were $8.8 million as of December 31, 2000. On December 4, 1998 the Bank raised $10 million through the placement of a ten-year synthetic floating rate certificate of deposit. The instrument consists of two linked transactions, a callable interest rate swap and callable fixed rate certificate of deposit. Under the swap agreement the Bank pays LIBOR plus five basis points and receives 6% for a period of ten years. The swap is callable after one year by the issuer. Simultaneously, the Bank issued a callable 6% fixed rate 10-year certificate of deposit. The certificate of deposit does not have any early redemption clauses, other then by death of the holder. Effectively, the Bank's rate of interest on the combined transaction is LIBOR plus five basis points. NOTE 8 - BORROWINGS Federal funds purchased and securities sold under agreements to repurchase and information relating to these borrowings are summarized below as of and for the years ended December 31:
(dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ FEDERAL FUNDS PURCHASED Balance at December 31, ----- $500 $5,000 Weighted average interest rate at year end ----- 5.50% 5.50% Maximum amount outstanding at any month end $9,000 $22,000 $5,000 Average outstanding balance $577 $1,801 $380 Weighted average interest rate paid 7.00% 5.54% 6.40% SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Balance at December 31, $9,645 $10,497 ----- Weighted average interest rate at year end 7.01% 5.80% ----- Maximum amount outstanding at any month end $10,497 $15,559 $12,000 Average outstanding balance $10,017 $7,421 $3,762 Weighted average interest rate paid 6.65% 5.61% 5.59%
Any securities used under securities sold under agreements to repurchase are under the control of the Bank. Securities subject to the agreement to repurchase represent securities held by the Bank in its securities available for sale portfolio with a total amortized cost of $9.9 million and a market value of $10.0 million as of December 31, 2000. The Company's bank subsidiary has informal arrangements with various correspondents providing short-term credit for liquidity requirements; such informal lines aggregated $22 million at December 31, 2000. The Company had borrowings from the Federal Home Loan Bank bearing interest ranging from 5.67% to 7.59% as of December 31, 2000 and 5.82% to 6.74% as of December 31, 1999. The borrowings are secured by U. S. Government Agency securities and are due as follows as of December 31, 2000 and 1999: Year 2000 1999 - ------------------ --------------------- --------------------- - ------------------ --------------------- --------------------- 2001 $9,076 $9,096 2002 723 735 2003 2,616 2,639 2005 6,892 6,933 2010 246 274 2011 773 826 - ------------------ --------------------- --------------------- - ------------------ --------------------- --------------------- Total $20,326 $20,503 ================== ===================== ===================== NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is as follows for the years ended December 31, 2000, 1999, and 1998: 2000 1999 1998 - --------------------------------------------------------------------------------- ----------------- ----------------- Realized (losses) gains on securities available for sale, net $(602) $(133) $150 Unrealized appreciation (loss) of securities held for sale, net 2,611 (1,641) 226 - --------------------------------------------------------------------------------- ----------------- ----------------- OTHER COMPREHENSIVE INCOME (LOSS) $2,009 $(1,774) $376 ================================================================================= ================= =================
NOTE 10 - EARNINGS PER SHARE The reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations are as follows:
(in thousands, Net PER SHARE except per share amounts) Income Shares AMOUNTS - ---------------------------------------------------------------------------------------------------------------------------------- For the year ended December 31, 2000 Net income and basic EPS $8,624 3,665 $2.35 ======================= Effect of stock option dilutive shares 189 - ------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS PER SHARE $8,624 3,854 $2.24 ================================================================================================================================== For the year ended December 31, 1999 Net income and basic EPS $7,117 3,491 $2.04 ======================= Effect of stock option dilutive shares 231 - ------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS PER SHARE $7,117 3,722 $1.91 ================================================================================================================================== For the year ended December 31, 1998 Net income and basic EPS $7,489 3,635 $2.06 ======================= Effect of stock option dilutive shares 267 - ------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS PER SHARE $7,489 3,902 $1.92 ==================================================================================================================================
NOTE 11 - INCOME TAXES
Income tax expense for the years ended December 31, 2000, 1999 and 1998 consists of the following: (dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Current: Federal $5,065 $3,980 $3,899 State 1,661 1,282 1,198 - -------------------------------------------------------------------------------------------------------------------- Total current 6,726 5,262 5,097 - -------------------------------------------------------------------------------------------------------------------- Deferred: Federal (910) (266) (48) State (289) (95) (9) - -------------------------------------------------------------------------------------------------------------------- Total deferred (1,199) (361) (57) - -------------------------------------------------------------------------------------------------------------------- Income taxes $5,527 $4,901 $5,040 ====================================================================================================================
Total income tax expense differed from the amount computed by applying the U.S. federal income tax rate of 34% in the years ended December 31, 2000, 1999 and 1998 to income before income taxes as a result of the following:
(dollars in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Computed "expected " tax expense $4,811 $4,085 $4,259 California franchise tax, net of federal income tax 905 783 785 Amortization of intangible assets 130 136 136 Federal tax-exempt investment income (266) (239) (151) Other (53) 136 11 - --------------------------------------------------------------------------------------------------------------------- Income taxes $5,527 $4,901 $5,040 =====================================================================================================================
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999, are presented below: (dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Deferred tax assets: Provision for loan or lease losses $2,414 $2,193 Purchase accounting adjustments 65 95 Foreclosure income 43 43 State taxes 527 426 Deferred compensation 1,275 353 Securities available for sale ---- 936 - -------------------------------------------------------------------------------- Total gross deferred tax assets 4,324 4,046 - -------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation and amortization 32 43 Leases 2 2 Securities available for sale 345 ---- Other 152 126 - -------------------------------------------------------------------------------- TOTAL GROSS DEFERRED TAX LIABILITIES 531 171 - -------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $3,793 $3,875 ================================================================================ Amounts for the current year are based upon estimates and assumptions as of the date of this report and could vary significantly from amounts shown on the tax returns as filed. Accordingly, the variances from the amounts previously reported for 1999 are primarily as a result of adjustments to conform to tax returns as filed. Deferred tax assets related to purchase accounting adjustments include the tax effect of fair market value adjustments of the assets and liabilities of businesses acquired. The Company believes that the net deferred tax asset is realizable through sufficient taxable income within the carryback periods and the current year's taxable income. NOTE 12 - DETAIL OF OTHER EXPENSE Other expense for the years ended December 31, 2000, 1999 and 1998 consists of the following:
(dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- Data processing $747 $676 $741 Directors and shareholders 660 673 469 Legal and professional fees 641 701 520 Client services 613 585 495 Amortization of core deposit intangibles and goodwill 439 455 457 Net cost of other real estate owned ---- (47) 7 Other 2,686 2,387 2,415 - ---------------------------------------------------------------------------------------------------------- TOTAL $5,786 $5,430 $5,104 ==========================================================================================================
NOTE 13 - STOCK OPTION PLAN During 1996, the shareholders of the Company approved the 1996 Stock Option Plan (the "Plan"), which replaced two then existing stock option plans. The 1996 Stock Option Plan is described below. In accordance with APB 15, no compensation cost has been recognized for the Plan. Had compensation cost for the Plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been adjusted to the pro forma amounts for options granted for the years 2000, 1999 and 1998 indicated below:
(dollars in thousands, except per share amounts) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME: As reported $8,624 $7,117 $7,489 Pro forma 7,841 6,261 6,432 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER SHARE: Basic, as reported $2.35 $2.04 $2.06 Basic, pro forma 2.14 1.79 1.77 - -------------------------------------------------------------------------------------------------------------------------------- Diluted, as reported $2.24 $1.91 $1.92 Diluted, pro forma 2.03 1.68 1.65
The above amounts include the impact on net income and net income per share for options granted during the years 1995 through 2000; such amounts would have been substantially different if options granted prior to 1995 had been included in the computation. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the following years:
ASSUMPTIONS: 2000 1999 1998 - ---------------------------------------------------------------------------- ---------------------- ---------------------- Dividend yield 2.2% 2.0% 1.8% Volatility 31.2% 46.7% 50.0% Risk free interest rate 6.2% 5.4% 5.0% Expected lives (years) 4.9 7.2 6.4
The 1996 Stock Option Plan provides that either incentive stock options or nonstatutory stock options may be granted to certain key employees or directors to purchase authorized, but unissued, Common Stock of the Company. Shares may be purchased at a price not less than the fair market value of such stock on the date of the grant. Generally, stock options become exercisable 40% one year after the date of grant and 20% in each of the following three years. They expire no later than ten years after the date of the grant. The Plan provides that outside directors will automatically receive a nonstatutory option covering five thousand shares annually at an exercise price equal to 100% of the market price of the Common Stock on the date of grant. The 1996 Stock Option Plan replaced the previous two plans which had similar provisions. If options granted under the prior plans expire without being exercised, the corresponding common shares shall become available for awards under the Plan. During 2000, no shares became available under this provision. The number of shares available for future grants of options under the 1996 Stock Option Plan was 169 as of December 31, 2000. Activity under the stock plans is as follows: WEIGHTED NUMBER AVERAGE OF EXERCISE OPTIONS SHARES PRICE - -------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1997 527,157 $12.03 Granted 428,950 30.09 Cancelled (198,230) 35.25 Exercised (41,233) 13.87 - -------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1998 716,644 16.31 Granted 158,170 27.93 Cancelled (32,632) 25.51 Exercised (90,965) 9.34 - -------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 1999 751,217 19.21 - -------------------------------------------------------------------------------- Granted 93,186 30.17 Cancelled (26,258) 26.25 Exercised (155,978) 10.12 - -------------------------------------------------------------------------------- BALANCES, DECEMBER 31, 2000 662,167 $22.62 ================================================================================ The weighted-average fair value of options granted during 2000, 1999 and 1998 was $9.05, $12.34 and $12.30, respectively. The following table summarizes options outstanding and exercisable at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------------------------------------------- NUMBER WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AVERAGE EXERCISABLE AVERAGE EXERCISE AS OF REMAINING EXERCISE AS OF EXERCISE PRICES DECEMBER 31, 2000 LIFE PRICE DECEMBER 31, 2000 PRICE - ------------------------------------------------------------------------------------------------------------------------------------ $5.38-$6.43 66,650 3.14 $5.94 66,650 $5.94 6.90- 9.31 8,810 3.86 7.68 8,810 7.68 11.50-14.31 49,010 4.63 9.56 49,010 9.56 16.38-19.94 59,920 5.51 16.98 59,120 16.94 22.69-24.88 36,542 7.28 22.95 34,408 22.91 25.00-26.56 66,250 6.64 25.38 46,500 25.22 26.69-26.69 156,360 7.81 26.69 91,648 26.69 27.19-27.50 49,452 8.26 27.33 19,420 27.33 27.63-27.63 55,400 8.19 27.63 22,160 27.63 27.79-36.06 113,773 9.36 30.32 9,668 30.56 - ------------------------------------------------------------------------------------------------------------------------------------ $5.38-$36.06 662,167 7.03 $22.62 407,394 $19.10 ====================================================================================================================================
Options exercisable as of December 31, 1999 were 354,851 and had a weighted average exercise price of $11.70. Options exercisable as of December 31, 1998 were 370,025 and had a weighted average exercise price of $9.38. NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding commitments, such as commitments to extend credit, which are not reflected in the consolidated financial statements. These commitments involve, to varying degrees, credit risk in excess of the amount recognized as either an asset or liability in the consolidated balance sheet. The Company controls the credit risk through its credit approval process. The same credit policies are used when entering into such commitments. Management does not anticipate any loss from such commitments. Amounts committed to extend credit under normal lending agreements aggregated approximately $201 million and $164 million for undisbursed variable loan commitments and approximately $13 million and $5.6 million for commitments under unused standby letters of credit and other guarantees at December 31, 2000 and 1999, respectively. The Bank utilizes various financial instruments with off balance sheet risk to reduce its exposure to fluctuations in interest rates. These financial instruments involve, to varying degrees, credit and interest rate risk in excess of the amount recognized as either an asset or liability in the statement of financial position. The credit risk is the possibility that a loss may occur because a party to a transaction fails to perform according to the terms of the contract. Interest rate risk is the possibility that future changes in market prices will cause a financial instrument to be less valuable or more onerous. The Bank attempts to control the credit risk arising from these instruments through its credit approval process and through the use of risk control limits and monitoring procedures. Interest rate risk is managed by various asset and liability methods including the utilization of interest rate hedging vehicles. During 2000 the Company executed supplemental compensation agreements providing nonqualified defined benefit retirement income for the directors and certain executive officers of the Company. In connection with establishing these agreements, the Company also purchased single premium life insurance policies for each participant. Generally, the defined benefit for retirement was 50% vested at the date of the agreements and 10% for each year thereafter. For those directors for which mandatory retirement (age 70) was within five years, vesting was in equal periods until retirement. The agreements provide that each director will receive $22.5 annually (adjusted annually by 2%) over their lifetime commencing on the third anniversary subsequent to their retirement. The range of defined lifetime benefit for the participating executives is $72.5 to $182 (adjusted annually by 2%); retirement is at age 65. If an executive shall voluntarily resign prior to being 100% vested, the executive shall forfeit all rights and benefits under the agreement. At the participant's death, 80% of the difference between the insurance life benefit and the then cash surrender value, will be paid to the participant's heirs. The total amount accrued for these agreements was $215 during 2000. The Company also assumed a nonqualified defined contribution retirement plan for the benefit of the directors and certain executive officers of Saratoga. In connection with this plan, Saratoga purchased single premium life insurance policies for each participant. At the time of the acquisition of Saratoga the estimated net present value of the lifetime benefit of each participant was accrued by the Company in the amount of $1.4 million. During 1999, the total amount expensed for this plan was $231. The cash surrender value of life insurance purchased under these plans totaled approximately $15 million as of December 31, 2000. Of this amount, $9.3 million related to the Company's plan and $5.7 million related to the Saratoga plan. The Company is obligated under its lease agreements for 95 South Market Street, San Jose, 50 Oak Court, Danville and 15405 Los Gatos Boulevard, Los Gatos under noncancelable operating leases through September 2004, June 2004, and March 2003, respectively. The leases are subject to periodic adjustments based on changes in the CPI. The following table shows future minimum payments under the leases as of December 31, 2000: YEARS ENDING DECEMBER 31, - ------------------------------------------------- --------------------- (in thousands) 2001 $405 2002 409 2003 342 2004 220 - ------------------------------------------------- --------------------- TOTAL MINIMUM LEASE PAYMENTS $1,376 ================================================= ===================== Total minimum lease payments to be received under noncancelable operating subleases at December 31, 2001 were approximately $712; these payments are not reflected in the above table. Total rent expense was $434, $583, and $520 for the years ended December 31, 2000, 1999 and 1998, respectively. There is ordinary routine litigation incidental to the business pending against the Company but, in the opinion of management, liabilities (if any) arising from such claims will not have a material effect upon the consolidated financial statements of the Company. NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of estimated fair values for the Company's financial instruments. Fair value estimates, methods and assumptions, set forth below for the Company's financial instruments, are made solely to comply with the requirements of SFAS No. 107 and should be read in conjunction with the consolidated financial statements and notes thereto in this Annual Report. Fair values are based on estimates or calculations at the transaction level using present value techniques in instances where quoted market prices are not available. Because broadly traded markets do not exist for most of the Company's financial instruments, the fair value calculations attempt to incorporate the effect of current market conditions at a specific time. Fair valuations are management's estimates of the values, and they are often calculated based on current pricing policy, the economic and competitive environment, the characteristics of the financial instruments, and other such factors. These calculations are subjective in nature, involve uncertainties and matters of significant judgment and do not include tax ramifications; therefore, the results cannot be determined with precision, substantiated by comparison to independent markets and may not be realized in an actual sale or immediate settlement of the instruments. The fair valuations have not been updated since year end; therefore, the valuations may have changed significantly since that point in time. The Company has not included certain material items in its disclosure, such as the value of the long-term relationships with the Company's deposit customers, since these intangibles are not financial instruments. There may be inherent weaknesses in any calculation technique, and changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results. For all these reasons, the aggregation of the fair value calculations presented herein do not represent, and should not be construed to represent, the underlying value of the Company. The following table presents a summary of the Company's financial instruments, as defined by SFAS No. 107 as of December 31, 2000 and 1999:
FAIR VALUE OF FINANCIAL INSTRUMENTS (dollars in thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair FINANCIAL ASSETS Value Value Value Value - ------------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks (including federal funds sold) $28,670 $28,674 $27,980 $27,980 Money market investments 38,475 38,486 5,651 5,655 Investment securities 128,787 128,806 113,074 111,586 Loans and leases, net 455,921 463,883 396,906 397,476 Accrued interest receivable 3,968 3,968 3,202 3,202 FINANCIAL LIABILITIES - ------------------------------------------------------------------------------------------------------------------------------------ Deposits 585,343 585,982 473,733 474,250 Federal funds purchased, securities sold under repurchase agreements, FHLB advances and other borrowings 32,039 33,219 33,525 34,633 OFF BALANCE SHEET FINANCIAL INSTRUMENTS - ------------------------------------------------------------------------------------------------------------------------------------ Interest rate swap contract purchased ---- 501 ----
The methodology and assumptions utilized to estimate the fair value of the Company's financial instruments, not previously discussed above, are described below: Financial instruments with fair value approximate to carrying value - The carrying value of cash and due from banks, money market investments, accrued interest receivable, non-interest-bearing demand accounts, interest-bearing demand, money market and savings deposit accounts, accrued interest receivable and expense approximates fair value due to the short-term nature of these financial instruments. Investment securities - The estimated fair values of securities by type are based on quoted market prices when available. Loans and leases - The carrying amount of loans and leases is net of unearned fee income and the reserve for loan and lease losses. The fair valuation calculation process differentiates loans and leases based on their financial characteristics, such as product classification, loan category, pricing features and remaining maturity. Prepayment estimates are evaluated by product and respective interest rate. Discount rates presented in the paragraphs below have a wide range due to the Company's mix of fixed and variable rate products. The fair value of loans and leases is calculated by discounting contractual cash flows using discount rates that reflect the Company's current pricing for loans and leases with similar characteristics and remaining maturity. Most of the discount rates applied to these loans were between 8.2% and 10.6% at December 31, 2000. Additionally, the allowance for loan and lease losses was applied against the estimated fair value of loans and leases to recognize future defaults of contractual cash flows. Fair value for nonperforming loans and leases is based on discounting estimated cash flows using a rate commensurate with the risk associated with the estimated cash flows, or underlying collateral values, where appropriate. Deposits - The fair value of certificates of deposit and other time deposits is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for like deposits with similar remaining maturities. Other short-term borrowings - A reasonable estimate of the fair value of federal funds sold is the carrying amount because of the relatively short period of time between the origination of the instrument and its expected maturity. The fair value of the Company's securities sold under repurchase agreements is calculated based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for such instruments with similar remaining maturities. Commitment to extend credit - The majority of the Company's commitments to extend credit carry variable and current market interest rates if converted to loans or leases. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table. Derivative financial instruments - The fair value of the derivative financial instruments generally reflects the estimated amounts the Company would receive based upon dealer quotes, to terminate such agreements at the reporting date. NOTE 16 - SJNB FINANCIAL CORP. (PARENT COMPANY ONLY) The following are the financial statements of SJNB Financial Corp. (parent company only):
- -------------------------------------------------------------------------------------------------------------- BALANCE SHEETS December 31, 2000 and 1999 (dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and equivalents $1,085 $1,847 Real estate loans ---- 123 Investment in the Bank 61,686 50,898 Other assets 812 351 - -------------------------------------------------------------------------------------------------------------- Total assets $63,583 $53,219 ============================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Total liabilities-Accounts payable ---- ---- - -------------------------------------------------------------------------------------------------------------- Common stock $22,845 $20,769 Retained earnings 40,221 33,942 Accumulated other comprehensive income (losses) 517 (1,492) - -------------------------------------------------------------------------------------------------------------- Total shareholders' equity 63,583 53,219 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $63,583 $53,219 ==============================================================================================================
- -------------------------------------------------------------------------------------------------------------- STATEMENTS OF INCOME Years Ended December 31, 2000, 1999 and 1998 (dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------- Cash dividend received from Bank $500 $4,979 $4,470 Interest income and fees on loans 60 30 79 Other expense (314) (280) (222) - -------------------------------------------------------------------------------------------------------------- Income before taxes 246 4,729 4,327 Income tax benefit 101 97 58 - -------------------------------------------------------------------------------------------------------------- Income before undistributed income of the Bank 347 4,826 4,385 Equity in undistributed income of the Bank 8,277 2,291 3,104 - -------------------------------------------------------------------------------------------------------------- Net income $8,624 $7,117 $7,489 ==============================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF CASH FLOWS Years Ended December 31, 2000, 1999 and 1998 (dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: NET INCOME $8,624 $7,117 $7,489 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Increase in other assets (444) (439) (609) (Decrease) increase in other liabilities ---- ( 98) 631 Equity in undistributed income of the Bank (8,277) (2,291) (3,104) - ------------------------------------------------------------------------------------------------------------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ( 97) 4,289 4,407 - ------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Decrease in loans, net 123 413 124 Cash dividend (2,345) (1,649) (1,666) Common stock repurchased ---- (3,911) (3,742) Stock options exercised 1,557 2,649 572 - ------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (665) (2,498) (4,712) - ------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and equivalents (762) 1,791 (305) Cash and equivalents at beginning of year 1,847 56 361 - ------------------------------------------------------------------------------------------------------------------------- CASH AND EQUIVALENTS AT END OF YEAR $1,085 $1,847 $56 ========================================================================================================================= Noncash transaction: Contribution of stock used in the acquisition of Epic Funding Corp. ---- ---- $501 =====================================================
NOTE 17 - REGULATORY MATTERS The Federal Reserve Board, the Comptroller of the Currency and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a two-tier capital framework. Tier 1 capital consists of common and qualifying preferred shareholders' equity, less certain intangibles and other adjustments. Tier 2 capital consists of subordinated and other qualifying debt, and the allowance for loan and lease losses up to 1.25% of risk weighted assets. The total of Tier 1 and Tier 2 capital, less investments in unconsolidated subsidiaries, represents qualifying total capital, at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off balance sheet exposures are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. The leverage capital ratio is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum leverage capital ratio is 3%, most banking organizations are required to maintain leverage capital ratios of at least 100 to 200 basis points above the 3%. The table below summarizes the Tier 1 and total risk-based capital ratios and leverage capital ratios of the Company and the Bank as of December 31:
RISK-BASED AND LEVERAGE CAPITAL RATIOS (DOLLARS IN THOUSANDS) 2000 1999 ---------------------------------------------------------------------------- COMPANY-RISK-BASED Amount Ratio Amount Ratio - ------------------ ---------------------------------------------------------------------------- TIER 1 CAPITAL $60,115 11.04% $50,371 11.08% Tier 1 capital minimum requirement 21,779 4.00 18,177 4.00 ---------------------------------------------------------------------------- EXCESS $38,336 7.04% $32,194 7.08% ============================================================================ TOTAL CAPITAL $66,928 12.29% $56,060 12.34% Total capital minimum requirement 43,559 8.00 36,354 8.00 ---------------------------------------------------------------------------- EXCESS $23,369 4.29% $19,706 4.34% ============================================================================ Risk-adjusted assets $544,485 $454,429 ====================== =================== COMPANY-LEVERAGE TIER 1 CAPITAL $60,115 8.94% $50,371 8.88% Minimum leverage ratio requirement 26,902 4.00 22,685 4.00 ---------------------------------------------------------------------------- EXCESS $33,213 4.94% $27,686 4.88% ============================================================================ Average total assets $672,555 $567,130 ====================== =================== BANK-RISK-BASED TIER 1 CAPITAL $58,217 10.75% $48,050 10.57% Tier 1 capital minimum requirement 21,667 4.00 18,180 4.00 ---------------------------------------------------------------------------- EXCESS $36,550 6.75% $29,870 6.57% ============================================================================ TOTAL CAPITAL $64,995 12.00% $53,740 11.82% Total capital minimum requirement 43,334 8.00 36,360 8.00 ---------------------------------------------------------------------------- EXCESS $21,661 4.00% $17,380 3.82% ============================================================================ Risk-adjusted assets $541,671 $454,503 ====================== =================== BANK-LEVERAGE TIER 1 CAPITAL $58,217 8.66% $48,050 8.47% Minimum leverage ratio requirement 26,879 4.00 22,679 4.00 ---------------------------------------------------------------------------- EXCESS $31,338 4.66% $25,371 4.47% ============================================================================ Average total assets $671,976 $566,978 ====================== ===================
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective Federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An "undercapitalized" bank must develop a capital restoration plan and its parent holding company must guarantee the bank's compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank's assets at the time it became "undercapitalized" or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent's general unsecured creditors. The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 capital ratio of at least 4%, or 3% in some cases. Under these guidelines, the Company and the Bank were considered well capitalized at December 31, 2000 and 1999. Banking agencies consider concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation is made as part of the institution's regular safety and soundness examination. Banking agencies also consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off balance sheet position) in evaluating a bank's capital adequacy. Banking agencies have adopted a methodology for evaluating interest rate risk. After gaining experience with this measurement process, such banking agencies may propose further regulations to establish an explicit risk-based capital charge for interest rate risk. The ability of the Company to pay dividends largely depends upon the dividends paid to it by the Bank. There are legal limitations on the ability of the Bank to provide funds to the Company in the form of loans, advances or dividends. Under national banking law, without the prior approval of the Comptroller of the Currency, the Bank may not declare dividends in any calendar year that exceed the Bank's net profits for that year, as defined by statute, combined with its net retained profits, as defined, for the preceding two years. As of December 31, 2000, the Bank may initiate dividend payments without prior regulatory approval of up to $16 million. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors, executive officers, promoters and control persons and compliance with Section 16(a) of the Exchange Act is incorporated by reference to the text under the captions "Election of Directors," "Executive Compensation and Transactions with Directors and Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders. ITEM 11: EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference to the text under the caption "Executive Compensation and Transactions with Directors and Officers" in the Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference to the text under the captions "Security Ownership of Directors and Management" and "Security Ownership of Certain Beneficial Owners" in the Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by reference to the text under the caption "Executive Compensation and Transactions with Directors and Officers" in the Registrant's Proxy Statement for its 2001 Annual Meeting of Shareholders. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. All Financial Statements See Index to Financial Statements on page 38 hereof. (a) 2. Financial statement schedules required. None. (Information included in Financial Statements). (a) 3. Exhibits The following exhibits are filed as part of this report: EXHIBIT NUMBER (2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga Bancorp and Saratoga National Bank, dated as of August 27, 1999, is hereby incorporated by reference to Exhibit 2.1 of the Registrant's Registration Statement on Form S-4 as filed on October 14, 1999, under Registration No. 333-89013. (3)(i). The Registrant's restated Articles of Incorporation are hereby incorporated by reference from Exhibit (3)(i) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30,1999. (3)(ii). The Registrant's Restated Bylaws as of February 23, 2000 are hereby incorporated by reference to Exhibit 3(ii)of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,1999. *(10)a. The Registrant's 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.1 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby incorporated by reference to Exhibit(10)b of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)c. The form of Incentive Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)d. The form of Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)e. The Registrant's Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit 99.1 of the Registrant's Form S-8 filed June 15, 1999, under Registration No.333-80683. *(10)f. The form of Nonstatutory Stock Option Agreement for outside Directors being utilized under the Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit (10) f. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)g. The form of Nonstatutory Stock Option Agreement for Employees being utilized under the Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit (10) g. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)h. The form of Incentive Stock Option Agreement being utilized under the Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit (10) h. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)i. The Saratoga Bancorp 1982 Stock Option Plan is hereby incorporated by reference to Exhibit (10)i.of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)j. The Saratoga Bancorp 1994 Stock Option Plan (Amended) is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)k. Forms of Incentive Stock Option Agreement, Non-Statutory Stock Option Agreement and Non-Statutory Stock Option Agreement for Outside Directors is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)l. Agreement between James R. Kenny and SJNB Financial Corp. and San Jose National Bank dated March 27,1996 is hereby incorporated by reference to Exhibit (10) m. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1996. *(10)m. Amendment No. 1 to Employment Agreement between James R. Kenny and SJNB Financial Corp. and San Jose National Bank dated October 6, 2000 is hereby incorporated by reference to Exhibit(10)n. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2000. *(10)n. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San Jose National Bank dated March 27, 1996 is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1996. *(10)o. Amendment No. 1 To Employment Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San Jose National Bank dated October 6, 2000 is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2000. (10)p. 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)q. 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 Form10-QSB for the quarterly period ended September 30, 1995. (10)r. Agreement of Purchase and Sale dated July 27, 1988 for 12000 Saratoga- Sunnyvale Road, Saratoga, CA is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)s. Form of Director Supplemental Compensation Agreement dated September 24, 1998 between Saratoga National Bank and Robert G. Egan, John F. Lynch III and V. Ronald Mancuso, respectively, is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)t. Form of Director Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 between Saratoga National Bank and Robert G. Egan, John F. Lynch III and V. Ronald Mancuso, respectively, is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)u. Form of Director Surrogate Supplemental Compensation Agreement dated September 24, 1998 between Saratoga National Bank and Victor E. Aboukhater and William D. Kron, respectively, is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,1999. *(10)v. Form of Director Surrogate Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 between Saratoga National Bank and Victor E. Aboukhater and William D. Kron, respectively, is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)w. Form of Officer Supplemental Compensation Agreement dated September 24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe Franklin, respectively, is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)x. Form of Officer Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe Franklin, respectively, is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)y. Richard L. Mount Executive Supplemental Compensation Agreement dated September 24, 1998 is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)z. Richard L. Mount Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)aa. Richard L. Mount Executive Benefits Agreement dated June 18, 1999 is hereby incorporated by reference to Exhibit (10)i.of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)ab. Form of Executive Supplemental Compensation Agreement dated June 1, 2000 between San Jose National Bank and James R. Kenny, Eugene E. Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith Doering Nielsen, respectively, is hereby incorporated by reference to Exhibit (10) z. of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *(10)ac. Form of Endorsement Method Split Dollar Plan Agreement dated August 1, 2000 between San Jose National Bank and James R. Kenny, Eugene E. Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith Doering Nielsen, respectively, is hereby incorporated by reference to Exhibit (10) aa. of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *(10)ad. Form of Endorsement Method Split Dollar Plan Agreement dated August 1, 2000 between San Jose National Bank and each of Ray S. Akamine, Robert A. Archer, Albert V. Bruno, Rod Diridon, Sr., F. Jack Gorry, Arthur K. Lund, Richard L. Mount, Louis Oneal, Diane Rubino, Douglas L. Shen, D.D.S . and Gary S. Vandeweghe is hereby incorporated by reference to Exhibit (10) ab. of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *(10)ae. Form of Director Supplemental Compensation Agreement dated June 1, 2000 between San Jose National Bank and Ray S. Akamine, Robert A. Archer, Albert V. Bruno, Rod Diridon, Sr., Robert G. Egan, F. Jack Gorry, Arthur K. Lund, V. Ronald Mancuso, D.D.S., Richard L. Mount, Louis Oneal, Diane Rubino, Douglas L. Shen, D.D.S. and Gary S. Vandeweghe respectively, is hereby incorporated by reference to Exhibit(10) ae. of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 22 Subsidiary of the Registrant 23 Consent of KPMG LLP * Indicates management contract or compensation plan or arrangement. (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: February 28, 2001 SJNB Financial Corp. By: S/J.R. KENNY By: S/E.E. BLAKESLEE ----------------------------- ------------------------------ James R. Kenny Eugene E. Blakeslee President and Executive Vice President and Chief Executive Officer Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. S/J.R. KENNY - ------------------------------------------ James R. Kenny President, Chief Executive Officer and Director (Principal Executive Officer) February 28, 2001 S/E.E. BLAKESLEE - ------------------------------------------ Eugene E. Blakeslee Executive Vice President and Chief Financial Officer and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer February 28, 2001 S/V. E. ABOUKHATER - ------------------------------------------ Victor E. Aboukhater, Director February 28, 2001 S/R.S. AKAMINE - ------------------------------------------ Ray S. Akamine, Director February 28, 2001 S/R.A. ARCHER - ------------------------------------------ Robert A. Archer Chairman and Director February 28, 2001 S/A.V. BRUNO - ------------------------------------------ Albert V. Bruno, Director February 28, 2001 S/R. DIRIDON, SR. - ------------------------------------------ Rod Diridon, Sr., Director February 28, 2001 S/R. G. EGAN - ------------------------------------------ Robert G. Egan, Director February 28, 2001 S/F.J. GORRY - ------------------------------------------ F. Jack Gorry, Director February 28, 2001 S/W. D. KRON - ------------------------------------------ William D. Kron, Director February 28, 2001 S/A.K. LUND - ------------------------------------------ Arthur K. Lund, Director February 28, 2001 S/V. R. MANCUSO, D.D.S. - ------------------------------------------ V. Ronald Mancuso, D.D.S., Director February 28, 2001 S/R. L. MOUNT - ------------------------------------------ Richard L. Mount, Director February 28, 2001 S/L. ONEAL - ------------------------------------------ Louis Oneal, Director February 28, 2001 S/D. RUBINO - ------------------------------------------ Diane Rubino, Director February 28, 2001 S/D.L. SHEN - ------------------------------------------ Douglas L. Shen, Director February 28, 2001 S/G.S. VANDEWEGHE - ------------------------------------------ Gary S. Vandeweghe, Director February 28, 2001 SJNB Financial Corp. Form 10-K Exhibits December 31, 2000 The following exhibits are filed as part of this report: EXHIBIT NUMBER (2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga Bancorp and Saratoga National Bank, dated as of August 27, 1999, is hereby incorporated by reference to Exhibit 2.1 of the Registrant's Registration Statement on Form S-4 as filed on October 14, 1999, under Registration No. 333-89013. (3)(i). The Registrant's restated Articles of Incorporation are hereby incorporated by reference from Exhibit (3)(i) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30,1999. (3)(ii). The Registrant's Restated Bylaws as of February 23, 2000 are hereby incorporated by reference to Exhibit 3(ii)of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,1999. *(10)a. The Registrant's 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.1 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby incorporated by reference to Exhibit(10)b of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)c. The form of Incentive Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)d. The form of Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)e. The Registrant's Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit 99.1 of the Registrant's Form S-8 filed June 15, 1999, under Registration No.333-80683. *(10)f. The form of Nonstatutory Stock Option Agreement for outside Directors being utilized under the Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit (10) f. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)g. The form of Nonstatutory Stock Option Agreement for Employees being utilized under the Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit (10) g. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)h. The form of Incentive Stock Option Agreement being utilized under the Amended 1996 Stock Option Plan is hereby incorporated by reference to Exhibit (10) h. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. *(10)i. The Saratoga Bancorp 1982 Stock Option Plan is hereby incorporated by reference to Exhibit (10)i.of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)j. The Saratoga Bancorp 1994 Stock Option Plan (Amended) is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)k. Forms of Incentive Stock Option Agreement, Non-Statutory Stock Option Agreement and Non-Statutory Stock Option Agreement for Outside Directors is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)l. Agreement between James R. Kenny and SJNB Financial Corp. and San Jose National Bank dated March 27,1996 is hereby incorporated by reference to Exhibit (10) m. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1996. *(10)m. Amendment No. 1 to Employment Agreement between James R. Kenny and SJNB Financial Corp. and San Jose National Bank dated October 6, 2000 is hereby incorporated by reference to Exhibit(10)n. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2000. *(10)n. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San Jose National Bank dated March 27, 1996 is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 1996. *(10)o. Amendment No. 1 To Employment Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San Jose National Bank dated October 6, 2000 is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2000. (10)p. 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)q. 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 Form10-QSB for the quarterly period ended September 30, 1995. (10)r. Agreement of Purchase and Sale dated July 27, 1988 for 12000 Saratoga- Sunnyvale Road, Saratoga, CA is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)s. Form of Director Supplemental Compensation Agreement dated September 24, 1998 between Saratoga National Bank and Robert G. Egan, John F. Lynch III and V. Ronald Mancuso, respectively, is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)t. Form of Director Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 between Saratoga National Bank and Robert G. Egan, John F. Lynch III and V. Ronald Mancuso, respectively, is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)u. Form of Director Surrogate Supplemental Compensation Agreement dated September 24, 1998 between Saratoga National Bank and Victor E. Aboukhater and William D. Kron, respectively, is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)v. Form of Director Surrogate Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 between Saratoga National Bank and Victor E. Aboukhater and William D. Kron, respectively, is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)w. Form of Officer Supplemental Compensation Agreement dated September 24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe Franklin, respectively, is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)x. Form of Officer Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe Franklin, respectively, is hereby incorporated by reference to Exhibit (10)i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)y. Richard L. Mount Executive Supplemental Compensation Agreement dated September 24, 1998 is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)z. Richard L. Mount Life Insurance Endorsement Method Split Dollar Plan Agreement dated September 24, 1998 is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)aa. Richard L. Mount Executive Benefits Agreement dated June 18, 1999 is hereby incorporated by reference to Exhibit (10)i.of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. *(10)ab. Form of Executive Supplemental Compensation Agreement dated June 1, 2000 between San Jose National Bank and James R. Kenny, Eugene E. Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith Doering Nielsen, respectively, is hereby incorporated by reference to Exhibit (10) z. of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *(10)ac. Form of Endorsement Method Split Dollar Plan Agreement dated August 1, 2000 between San Jose National Bank and James R. Kenny, Eugene E. Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith Doering Nielsen, respectively, is hereby incorporated by reference to Exhibit (10) aa. of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *(10)ad. Form of Endorsement Method Split Dollar Plan Agreement dated August 1, 2000 between San Jose National Bank and each of Ray S Akamine, Robert A. Archer, Albert V. Bruno, Rod Diridon, Sr., F. Jac Gorry, Arthur K. Lund, Richard L. Mount, Louis Oneal, Diane Rubino Douglas L. Shen, D.D.S. and Gary S. Vandeweghe is hereb incorporated by reference to Exhibit (10) ab. of the Registrant' Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. *(10)ae. Form of Director Supplemental Compensation Agreement dated June 1 2000 between San Jose National Bank and Ray S. Akamine, Robert A Archer, Albert V. Bruno, Rod Diridon, Sr., Robert G. Egan, F. Jac Gorry, Arthur K. Lund, V. Ronald Mancuso, D.D.S., Richard L. Mount Louis Oneal, Diane Rubino, Douglas L. Shen D.D.S. and Gary S Vandeweghe respectively, is hereby incorporated by reference t Exhibit (10) ae. of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 22 Subsidiary of the Registrant 23 Consent of KPMG LLP * Indicates management contract or compensation plan or arrangement. EX-22 2 0002.txt EXHIBIT 22 SJNB FINANCIAL CORP Subsidiaries of Registrant as of December 31, 2000 San Jose National Bank 100% owned by SJNB Financial Corp. Epic Funding Corp. 100% owned by San Jose National Bank EX-23 3 0003.txt KPMG CONSENT Consent of Independent Auditors The Board of Directors SJNB Financial Corp. We consent to the incorporation by reference in the registration statements on Form S-8 (Nos. 33-31392 and 333-89013) of SJNB Financial Corp. of our report dated January 17, 2001, relating to the consolidated balance sheets of SJNB Financial Corp. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000, annual report on Form 10-K of SJNB Financial Corp. /s/ KPMG LLP San Francisco, California February 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----