-----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, Vs2ge4n9okExkzPtCvPb73Z7i9M3NUbyvJO2JZEHn3zR0+5xPHHvgz/wMwDD12/l C2iEGdlgyNnimWSv5+1vBw== 0000721161-96-000020.txt : 19961115 0000721161-96-000020.hdr.sgml : 19961115 ACCESSION NUMBER: 0000721161-96-000020 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-11771 FILM NUMBER: 96662534 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 10QSB 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF - --- 1934 For the quarterly period ended September 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the transition period from to Commission File Number: 0-11771 SJNB FINANCIAL CORP. (Exact name of small business issuer as specified in its charter) California 77-0058227 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113 (Address of principal executive off (Zip Code) (408) 947-7562 (Issuer's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed, since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 2,567,480 shares of common stock outstanding as of November 10, 1996 Transitional Small Business Disclosure Format; Yes No X PART I - FINANCIAL INFORMATION Page Item 1. - FINANCIAL STATEMENTS SJNB FINANCIAL CORP. AND SUBSIDIARY CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 7-28 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS 29 Item 2. CHANGES IN SECURITIES 29 Item 3. DEFAULTS UPON SENIOR SECURITIES 29 - ------ Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29 - ------ Item 5. OTHER INFORMATION 29 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 29-31 SIGNATURES 32
PART I - FINANCIAL INFORMATION Item 1. Financial Statements SJNB FINANCIAL CORP. AND SUBSIDIARY Condensed Consolidated Balance Sheets (dollars in thousands) (Unaudited) September 30, December 31, Assets 1996 1995 - -------------------------------------------------------------------------------------------- Cash and due from banks $16,568 $12,574 Money market investments 1,500 3,200 Investment securities: Held to maturity (Fair value: $15,408 at September 30, 1996 and $15,492 at December 31, 1995) 15,316 15,248 Available for sale 55,964 42,542 - -------------------------------------------------------------------------------------------- Total investment securities 71,280 57,790 - -------------------------------------------------------------------------------------------- Loans 178,664 158,867 Loans available for sale 12,420 11,933 Allowance for possible loan losses (3,998) (3,847) - -------------------------------------------------------------------------------------------- Loans, net 187,086 166,953 - -------------------------------------------------------------------------------------------- Premises and equipment, net 3,548 3,494 Other real estate owned 304 664 Accrued interest receivable and other assets 3,106 2,764 Intangibles, net of accumulated amortization of $1,110 at September 30, 1996 and $735 at December 31, 1995 4,790 4,756 - -------------------------------------------------------------------------------------------- Total $288,182 $252,195 ============================================================================================ Liabilities and Shareholders' Equity - -------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing $55,739 $52,775 Interest-bearing 174,016 143,917 - -------------------------------------------------------------------------------------------- Total deposits 229,755 196,692 - -------------------------------------------------------------------------------------------- Other short-term borrowings 25,256 24,000 Accrued interest payable and other liabilities 3,500 4,845 - -------------------------------------------------------------------------------------------- Total liabilities 258,511 225,537 - -------------------------------------------------------------------------------------------- Shareholders' equity: Common stock, no par value; authorized, 20,000 shares; issued and outstanding, 2,525 shares at September 30, 1996 and 2,418 shares at December 31, 1995 20,170 19,627 Retained earnings 9,557 6,798 Net unrealized gain (loss) on securities available for sale (56) 233 - -------------------------------------------------------------------------------------------- Total shareholders' equity 29,671 26,658 - -------------------------------------------------------------------------------------------- Commitments and contingencies ---- ---- - ------------------------------------------------------------------------------------------- Total $288,182 $252,195 ============================================================================================ See accompanying Notes to Unaudited Consolidated Financial Statements.
SJNB FINANCIAL CORP. AND SUBSIDIARY Condensed Consolidated Statement of Operations (in thousands, except per share amounts) (Unaudited) Quarter ended Nine months ended September 30, September 30, ----------------------------------------------- 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Interest income: Interest and fees on loans $5,220 $4,525 $15,199 $13,364 Interest on investment securities held to maturity 241 228 704 653 Interest and dividends on investment securities available for 765 608 2,157 1,200 sale Interest on money market investments 38 112 125 213 Other interest and investment income (2) (2) (7) (41) - ------------------------------------------------------------------------------------------------------------------- Total interest income 6,262 5,471 18,178 15,389 - ------------------------------------------------------------------------------------------------------------------- Interest expense: Interest expense on interest-bearing deposits: Certificates of deposit over $100 638 643 1,889 1,577 Other 1,396 1,265 4,121 3,155 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 2,034 1,908 6,010 4,732 - ------------------------------------------------------------------------------------------------------------------- Net interest income 4,228 3,563 12,168 10,657 - ------------------------------------------------------------------------------------------------------------------- Provision for possible loan losses 50 180 100 890 - ------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 4,178 3,383 12,068 9,767 - ------------------------------------------------------------------------------------------------------------------- Other income: Service charges on deposits 149 140 421 426 Other operating income 100 138 340 337 Net loss on securities available for sale (67) ---- (146) (43) - ------------------------------------------------------------------------------------------------------------------- Total other income 182 278 615 720 - ------------------------------------------------------------------------------------------------------------------- Other expenses: Salaries and benefits 1,388 1,091 4,139 3,212 Occupancy 178 177 515 560 Other 857 957 2,582 2,835 - ------------------------------------------------------------------------------------------------------------------- Total other expenses 2,423 2,225 7,236 6,607 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 1,937 1,436 5,447 3,880 Income taxes 817 629 2,324 1,721 - ------------------------------------------------------------------------------------------------------------------ Net income $1,120 $807 $3,123 $2,159 =================================================================================================================== Net income per share $0.42 $0.32 $1.19 $0.87 =================================================================================================================== Weighted average number of shares outstanding 2,648 2,508 2,633 2,493 =================================================================================================================== See accompanying Notes to Unaudited Consolidated Financial Statements.
SJNB FINANCIAL CORP. AND SUBSIDIARY Consolidated Statements of Cash Flows (dollars in thousands) (Unaudited) Nine months ended September 30, --------------------- 1996 1995 - ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $3,123 $2,159 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 100 890 Depreciation and amortization 356 315 Amortization on intangibles 375 420 Net loss on securities available for sale 146 43 Net (gain) loss on sale of other real estate owned (46) 22 Increase in loans available for sale, net (486) (6,385) Amortization of premium (discount) on investment securities, net 39 (114) Increase in accrued interest receivable and other assets (1,253) (146) Increase (decrease) in accrued interest payable and other liabilities (1,718) 1,880 - ------------------------------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 636 (916) - ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sale or maturities of securities available for sale 11,658 13,162 Maturities of securities held to maturity 3,900 425 Purchase of securities available for sale (25,795) (36,144) Purchase of securities held to maturity (3,919) (1,388) Proceeds from the sale of other real estate owned 406 1,377 Cash and equivalents used to acquire Astra Financial, Inc. (650) ---- Loans, net (18,030) (9,920) Capital expenditures (410) (689) - ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (32,840) (33,177) - ------------------------------------------------------------------------------------------------------ Cash flow from financing activities: Deposits, net 33,063 14,687 Other short-term borrowings 1,256 20,295 Cash dividends (366) (215) Common stock repurchased ---- (145) Proceeds from stock options exercised 545 206 - ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 34,498 34,828 - ------------------------------------------------------------------------------------------------------ Net increase in cash and equivalents 2,294 735 Cash and equivalents at beginning of year 15,774 14,591 - ----------------------------------------------------------------------------------------------------- Cash and equivalents at end of period $18,068 $15,326 ====================================================================================================== Other cash flow information: Interest paid $6,006 $4,398 ======================= Income taxes paid $3,241 $965 ====================================================================================================== Noncash transactions: Transfer of loans to other real estate owned ---- $950 ======================= Unrealized gain (loss) on securities available for sale, net of tax $(289) $247 ====================================================================================================== See accompanying Notes to Unaudited Consolidated Financial Statements.
SJNB FINANCIAL CORP. AND SUBSIDIARY Notes to Unaudited Condensed Consolidated Financial Statements Note A Unaudited Condensed Consolidated Financial Statements The unaudited consolidated financial statements of SJNB Financial Corp. (the "Company") and its subsidiary, San Jose National Bank, are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods have been included and are normal and recurring. The results of operations and cash flows are not necessarily indicative of those expected for the full fiscal year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report to Shareholders for the year ended December 31, 1995. Note B Net Deferred Tax Asset As of September 30, 1996 the net deferred tax asset was approximately $1,240 and $1,186 at December 31, 1995 which is included in the category "Accrued interest receivable and other assets" on the Company's condensed consolidated balance sheet. 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 C Net Income Per Share of Common Stock The weighted average number of common stock shares and common stock equivalent shares used in computing net income per share of common stock are set forth below for the periods indicated: Weighted Average Number of Shares Outstanding Quarter ended Nine months ended September 30, September 30, ---------------------------------- 1996 1995 1996 1995 ---------------------------------- Weighted average number of shares outstanding during the period 2,487 2,383 2,455 2,375 Common stock equivalents 161 125 178 118 ---------------------------------- Total 2,648 2,508 2,633 2,493 ================================== Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION SJNB Financial Corp. (the "Company") is the holding company for San Jose National Bank ("SJNB" and the "Bank"), San Jose, California. This discussion focuses primarily on the results of operations of the Company on a consolidated basis for the three and nine months ended September 30, 1996 and the liquidity and financial condition of the Company and SJNB as of September 30, 1996 and December 31, 1995. All dollar amounts in the text in this Item 2 are in thousands, except per share amounts or as otherwise indicated. Certain matters discussed in this report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the competitive environment and its impact on the Company's net interest margin, changes in interest rates, asset quality risks, concentrations of credit and the economic health of Santa Clara County (particularly the health of the semiconductor industry), volatility of rate sensitive deposits, asset/liability matching risks and liquidity risks. Therefore, the matters set forth below should be carefully considered when evaluating the Company's business and prospects. In November 1995, the Company entered into an agreement to acquire Astra Financial Inc. (Astra). Astra is an asset based lending company located in San Jose, California. Its outstanding factoring receivables were approximately $2.2 million as of December 31, 1995. The acquisition was accounted for as a purchase transaction and closed on January 2, 1996.
The following presents selected financial data and ratios as of and for the three and nine months ended September 30, 1996 and 1995: SELECTED FINANCIAL DATA AND RATIOS - ------------------------------------------------------------------------------------------------------- For the quarters For the nine months ended September 30, ended September 30, ------------------------------------------------ SELECTED ANNUALIZED OPERATING RATIOS: 1996 1995 1996 1995 - ------------------------------------------------------------------------------------------------------- Return on average equity 15.47% 12.70% 15.05% 11.75% Return on average tangible equity 20.67 18.33 20.54 17.42 Return on average assets 1.61 1.35 1.55 1.34 Net chargeoffs (recoveries) to average loans .16 .25 ---- .46 Average equity to average assets 10.42 10.61 10.28 11.39 Average tangible equity to average tangible assets 8.82 8.80 8.60 9.39 ======================================================================================================= September 30, December 31, PER SHARE DATA: 1996 1995 1995 - ----------------------------------------------------------------------------------------------- Shareholders' equity per share $11.75 $10.77 $11.02 Tangible equity per share $9.85 $8.72 $9.06 SELECTED FINANCIAL POSITION RATIOS: - ----------------------------------------------------------------------------------------------- Leverage capital ratio 9.12% 8.91% 9.00% Nonperforming loans to total loans .32 .56 .52 Nonperforming assets to total assets .32 .80 .62 Allowance for possible loan losses to total loans 2.09 2.24 2.25 Allowance for possible loan losses to nonperforming loans 650 400 430 Allowance for possible loan losses to nonperforming assets 435 188 247 ===============================================================================================
Summary of Financial Results The Company reported net income of $1,120 or $.42 per share for the quarter ended September 30, 1996, compared with net income of $807 or $.32 per share for the third quarter of 1995. The improvement in earnings is due primarily to an increase in the net interest income due to the growth in volume and a reduction in the loan loss provision which is offset by an increase in non-interest expense and taxes. For the nine months ended September 30, 1996, the net income was $3,123 or $1.19 per share compared with net income of $2,159 or $.87 per share in 1995. The improvement was due primarily to the reasons discussed above regarding the comparison of the third quarter results. Net Interest Income Net interest income for the quarter ended September 30, 1996 increased $665 as compared to the same quarter a year ago. Net interest income is dependent upon volume and net interest margin. The Bank's average earning assets for the same period increased by $35 million, primarily as the result of the significant growth in the Bank's loan portfolio. See the discussion in the sections "Loan Portfolio" and "Asset/Liability Management" below. Net interest income for the nine months ended September 30, 1996 increased $1,511 over that of the same period a year ago. The increase was primarily due to the increase in average earning assets ($51 million), offset by a decline in the year-to-date net interest margin (7.31% for the nine months ended September 30, 1995 as compared to 6.62% for 1996). This decrease is mainly due to the collection of nonaccrual loans and the recovery of interest income of approximately $540 in 1995 as compared to an insignificant amount in 1996. Net interest margin without this recovery for the nine months ended September 30, 1995 would have been 6.94%. Net interest margin for the third quarter of 1996 was 6.68% as compared to 6.53% for 1995. This increase was primarily related to a decline in the cost of the Bank's interest-bearing funds. Such funds had an average cost of 4.25% for the third quarter of 1996 as compared to 4.62% for the same period in 1995. This was mainly due to the repricing of the Bank's interest checking demand accounts and a reduction in its short-term borrowing costs. Offsetting this decline in interest expense was a reduction in income earned on earning assets which was due to a decline in the yield on interest-bearing assets from 10.01% in the third quarter of 1995 to 9.88%. This was mainly attributable to the decline of yields on loans from 11.54% for the third quarter of 1995 to 11.12% in 1996. Net interest margin for the nine months ended September 30, 1996 was 6.62% as compared to 7.31% for the nine months ended September 30, 1995. During the nine months ended September 30, 1995, the Bank recognized approximately $492 of income received on loans which had previously not been recognized as income as they were on nonaccrual status. Adjusting for this would reduce the net interest margin to 6.94% for the nine months ended September 30, 1995. The Bank's average prime rate declined from 8.87% to 8.28% during such periods, but during the same period the average cost of the Bank's funds did not decline. Although economic conditions in Northern California have rebounded to date in 1996, the competitive environment within the Bank's marketplace has become more aggressive and the competition between lenders for additional loan growth has caused more competitive pricing. Even though the Bank's net interest margin improved for the third quarter of 1996 over that of a year ago, on a year to-date basis, it has declined as compared to the same period a year ago. To the extent that such competitive pricing continues throughout 1996 and 1997 and the Bank finds it necessary to meet such competition or the prime rate declines, the Bank's net interest margins could be negatively impacted. See "Loans and "Funding". In addition to the positive impact of the interest income recovery in 1995, net interest income in 1996 was reduced due to the decrease in the prime interest rate which the Bank utilizes to price approximately 85% of its loan portfolio without a corresponding decrease in its cost of funds. Cost of funds for the nine month periods remained stable at 3.37% for 1996 and 3.36% for 1995. A substantial portion (24% for the three and nine months ended September 30, 1996 and 24 % and 25% for the three and nine months ended September 30, 1995, respectively) of the Bank's average deposits are non-interest-bearing and therefore do not reprice when interest rates change. See "Funding." Due to the nature of the Company's market in which loans are generally tied to the prime rate, management believes an increase in interest rates should positively affect the Company's net interest margin. Conversely, Management believes stable or declining rates will tend to have an adverse impact on net interest margin. The Bank utilizes various vehicles to hedge its interest rate position. See "Asset/Liability Management." Net interest income also reflects the impact of nonperforming loans. Interest income on the loan portfolio is recorded on the accrual basis. However, the Company follows the practice of discontinuing the accrual of interest and reversing any accrued and unpaid interest when, in the opinion of management, there is significant doubt as to the collectability 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. For these loans, interest is recorded when payment is received. The effect of nonaccrual of interest income based on loans classified as nonaccrual at September 30, 1996 and 1995 was not significant for the periods. See "Nonperforming Loans." The following table shows the composition of average earning assets and average funding sources, average yields and rates and the net interest margin, on an annualized basis, for the three and nine months ended September 30, 1996 and 1995.
AVERAGE BALANCES, RATES AND YIELDS (dollars in thousands) Quarter ended September 30, ------------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Average Average Average Average Assets Balance Interest Yield (1) Balance Interest Yield (1) - --------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans, net (2) $186,677 $5,220 11.12% $155,488 $4,524 11.54% Securities held to maturity: Taxable (3) 12,399 209 6.71 12,155 195 6.36 Nontaxable (4) 2,689 53 7.89 2,733 55 7.98 Securities available for sale (5) 48,384 765 6.29 39,521 608 6.10 Money market investments 2,963 38 5.10 7,857 113 5.71 Interest rate hedging instruments ---- (2) ---- ---- (2) ---- - ------------------------------------------------------------------- --------------------------- Total interest-earning assets 253,112 6,283 9.88 217,754 5,493 10.01 - ------------------------------------------------------------------- --------------------------- Allowance for possible loan losses (4,021) (3,610) Cash and due from banks 15,675 11,608 Bank premises and equipment, net 3,533 3,321 Other real estate owned 314 1,556 Accrued interest receivable and other assets 3,072 2,157 Core deposit intangibles and goodwill, net 4,840 4,713 - -------------------------------------------------------- ------------- Total $276,525 $237,499 ======================================================== ============= Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $41,591 295 2.82 $31,055 305 3.90 Money market and savings 63,275 549 3.45 53,111 446 3.33 Certificates of deposit: Less than $100 14,898 206 5.50 15,447 215 5.52 $100 or more 47,169 638 5.38 44,820 643 5.69 - ------------------------------------------------------------------- --------------------------- Total certificates of deposits 62,067 844 5.41 60,267 858 5.65 - ------------------------------------------------------------------- --------------------------- Other borrowings 23,421 346 5.88 19,599 299 6.05 - ------------------------------------------------------------------- --------------------------- Total interest-bearing liabilities 190,354 2,034 4.25 164,032 1,908 4.61 - ------------------------------------------------------------------- --------------------------- Noninterest-bearing demand 53,981 44,894 Accrued interest payable and other liabilities 3,378 3,377 - -------------------------------------------------------- ------------- Total liabilities 247,713 212,303 - -------------------------------------------------------- ------------- Shareholders' equity 28,812 25,196 ======================================================== ============= Total $276,525 $237,499 ========================================================----------- =============-------------- Net interest income and margin (6) $4,249 6.68% $3,585 6.53% ============================================ ====================== ========================== (1) Rates are presented on an annualized basis. (2) Includes loan fees of $241 for 1996, and $251 for 1995. Nonperforming loans have been included in average loan balances. (3) Includes dividend income of $8 received in 1996 and $8 in 1995. (4) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($21 in 1996 and $22 in 1995). (5) Includes dividend income of $54 and $58 received in 1996 and 1995. (6) The net interest margin represents the fully taxable equivalent net interest income as a percentage of average earning assets.
AVERAGE BALANCES, RATES AND YIELDS (dollars in thousands) Nine months ended September 30, ------------------------------------------------------------------------- 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Average Average Average Average Assets Balance Interest Yield (1) Balance Interest Yield (1) - --------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans, net (2) $181,169 $15,199 11.21% $149,743 $13,364 11.93% Securities held to maturity: Taxable (3) 12,350 600 6.49 12,105 566 6.25 Nontaxable (4) 2,934 173 7.89 2,547 145 7.61 Securities available for sale (5) 47,247 2,157 6.10 26,739 1,201 6.01 Money market investments 3,262 125 5.12 4,830 212 5.87 Interest rate hedging instruments ---- (7) ---- ---- (41) ---- - ------------------------------------------------------------------- --------------------------- Total interest-earning assets 246,962 18,247 9.87 195,964 15,447 10.54 - ------------------------------------------------------------------- --------------------------- Allowance for possible loan losses (3,984) (3,512) Cash and due from banks 14,708 11,279 Bank premises and equipment, net 3,537 3,321 Other real estate owned 513 1,355 Accrued interest receivable and other assets 2,781 2,468 Core deposit intangibles and goodwill, net 4,968 4,778 - -------------------------------------------------------- ------------- Total $269,485 $215,653 ======================================================== ============= Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $40,418 844 2.79 $29,797 829 3.72 Money market and savings 59,499 1,472 3.30 50,587 1,288 3.40 Certificates of deposit: Less than $100 14,429 591 5.47 15,502 595 5.13 $100 or more 45,315 1,889 5.57 38,762 1,577 5.44 - ------------------------------------------------------------------- --------------------------- Total certificates of deposits 59,744 2,480 5.54 54,264 2,172 5.35 - ------------------------------------------------------------------- --------------------------- Other borrowings 27,754 1,214 5.84 9,631 443 6.15 - ------------------------------------------------------------------- --------------------------- Total interest-bearing liabilities 187,415 6,010 4.28 144,279 4,732 4.38 - ------------------------------------------------------------------- --------------------------- Noninterest-bearing demand 50,572 43,930 Accrued interest payable and other liabilities 3,786 2,875 - -------------------------------------------------------- ------------- Total liabilities 241,773 191,084 - -------------------------------------------------------- ------------- Shareholders' equity 27,712 24,569 ======================================================== ============= Total $269,485 $215,653 ========================================================----------- =============-------------- Net interest income and margin (6) $12,237 6.62% $10,715 7.31% ============================================ ====================== ========================== (1) Rates are presented on an annualized basis. (2) Includes loan fees of $740 for 1996, and $827 for 1995. Nonperforming loans have been included in average loan balances. (3) Includes dividend income of $23 received in 1996 and $22 in 1995. (4) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($69 in 1996 and $58 in 1995). (5) Includes dividend income of $160 and $177 received in 1996 and 1995. (6) The net interest margin represents the fully taxable equivalent net interest income as a percentage of average earning assets
Interest margin is affected by changes in volume, changes in rates, and a combination of changes in volume and rates. Volume changes are caused by differences in the level of earning assets, deposits and borrowings. Rate changes result in differences in yields earned on assets and rates paid on liabilities. Changes not solely attributable to volume or rates are allocated to volume and rate in proportion to the relationship to the absolute dollar amounts of changes in each. The following table shows the effect on the interest differential of volume and rate changes for the quarters and nine months ended September 30, 1996 and 1995.
VOLUME/RATE ANALYSIS (dollars in thousands) Quarter ended Sept. 30, 1996 vs. Nine months ended Sept. 30, 1996 vs. Quarter ended Sept. 30, 1995 Nine months ended Sept. 30, 1995 ----------------------------------------------------------------------------- Increase (decrease) due to change in - ----------------------------------------------------------------------------------------------------------------- Average Average Total Average Average Total Volume Rate Change Volume Rate Change - ----------------------------------------------------------------------------------------------------------------- Interest income: Loans (1) $887 $(191) $696 $2,822 $(987) $1,835 Securities: Taxable 4 10 14 12 22 34 Nontaxable (1) (1) (2) 22 6 28 Available for sale 134 23 157 925 31 956 Money market investments (70) (5) (75) (69) (18) (87) - ----------------------------------------------------------------------------------------------------------------- Total interest income 954 (164) 790 3,712 (946) 2,766 - ----------------------------------------------------------------------------------------------------------------- Interest expense: Interest checking 109 (119) (10) 313 (298) 15 Money market and savings 84 19 103 226 (42) 184 Certificates of deposits: Less than $100 (8) (1) (9) (38) 34 (4) $100 or greater 55 (60) (5) 268 44 312 Other short-term borrowings 57 (10) 47 835 (64) 771 - ----------------------------------------------------------------------------------------------------------------- Total interest expense 297 (171) 126 1,604 (326) 1,278 - ----------------------------------------------------------------------------------------------------------------- Interest rate hedging instruments ---- ---- ---- ---- 34 34 - ----------------------------------------------------------------------------------------------------------------- Change in net interest income $657 $7 $664 $2,108 $(586) $1,522 ================================================================================================================= (1) The effect of the change in loan fees is included as an adjustment to the average rate.
Provision for Possible Loan Losses The allowance for possible loan losses and therefore the related provision reflect the Company's judgment as to the inherent risks associated with the loan and lease portfolios. Based on management's evaluation of such risks, additions of $50 and $100 were made to the allowance for possible loan losses for the third quarter and nine months ended September 30, 1996, respectively, as compared to $180 and $890 for the third quarter and nine months ended September 30, 1995 respectively. Management's determinations of the provision in 1996 and 1995 were based on an analysis of the possibility of future loan losses through various objective and subjective criteria and the impact of net charge-offs. The causes for the decrease in 1996 were due to the improved credit quality of the Bank's loan portfolio, the reduction in the amount of the net charge-offs and other criteria deemed relevant by management. Please refer to the section regarding the "Loan Portfolio" for a detailed discussion of loan quality and the allowance for possible loan losses. Other Income
The following table sets forth the components of other income and the percentage distribution of such income for the quarters and nine months ended September 30, 1996 and 1995. OTHER INCOME (dollars in thousands) Quarter ended September 30, Nine months ended September 30, --------------------------------------------------------------------------------------- 1996 1995 1996 1995 Amount Percent Amount Percent Amount Percent Amount Percent - --------------------------------------------------------------------------------------------------------------------- Depositor service charges $149 81.87% $140 50.36% $421 68.46% $426 59.17% Other operating income 100 54.94 138 49.64 340 55.28 337 46.81 Net loss on securities available for sale (67) (36.81) ----- ----- (146) (23.74) (43) (5.98) - --------------------------------------------------------------------------------------------------------------------- Total $182 100.00% $278 100.00% $615 100.00% $720 100.00% =====================================================================================================================
Other income decreased from $278 for the quarter ended September 30, 1995 to $182 for the comparable quarter in 1996. The primary reason for the decrease is related to the realized loss on the sale of securities available for sale of $67 for the third quarter of 1996 and a decrease in wire transfer and SBA loan servicing fees. Other income decreased from $720 for the nine months ended September 30, 1995 to $615 for the comparable period in 1996. The major factors were the difference in the net realized loss on securities available for sale, a write off of unused assets of $62 in 1995 and a reduction in wire transfer and SBA loan servicing fees. Other Expenses The following schedule summarizes the major categories of expense as a percentage of average assets on an annualized basis:
OTHER EXPENSES AS A PERCENT OF AVERAGE ASSETS (dollars in thousands) Quarter ended September 30, Nine months ended September 30, 1996 1995 1996 1995 Amount Percent* Amount Percent* Amount Percent* Amount Percent* - ---------------------------------------------------------------------------------------------------------------------- Salaries and benefits $1,388 2.03% $1,091 1.84% $4,139 2.05% $3,212 1.99% Data processing 164 .24 119 .20 425 .21 343 .21 Amortization of core deposit intangibles and goodwill 125 .19 140 .24 375 .19 420 .26 Legal and professional fees 81 .12 126 .21 300 .15 359 .22 Furniture and equipment 93 .14 76 .13 272 .13 253 .15 Business promotion 76 .11 70 .12 262 .13 236 .15 Occupancy 85 .12 101 .17 243 .12 307 .19 Advertising 65 .09 46 .08 184 .09 138 .09 Client services paid by bank 68 .10 61 .10 179 .09 186 .11 Directors' fees and costs 52 .08 60 .10 165 .08 182 .11 Stationery and supplies 49 .07 49 .08 136 .07 130 .08 Loan and collection 17 .02 91 .15 133 .07 163 .10 Regulators assessments 19 .03 4 .01 54 .03 248 .15 Net cost of foreclosed property (3) --- 56 .09 (50) (.02) 43 .03 Other 144 .21 135 .23 419 .21 387 .24 - --------------------------------------------------------------------------------------------------------------------- Total $2,423 3.54% $2,225 3.75% $7,236 3.58% $6,607 4.08% ===================================================================================================================== * The percentages are calculated by annualizing the quarterly or year to date expenses, and comparing that amount to average assets for the respective periods ended September 30, 1996 and 1995.
Total other expenses for the third quarter of 1996 increased $198 from the same period a year ago. The increase relates primarily to an increase in the salaries and benefits relating to the acquisition of a factoring company as of January 2, 1996, plus an increase due to volume increases and profitability related incentive payments to employees. In addition data processing expenses increased $45 mainly due to the Bank's increased volume and increased investment in technology. These increases were offset by decreases in legal and professional fees, occupancy, amortization of intangibles and loan and collection costs. Total other expenses for the nine months ended September 30, 1996 increased $629 from the same period a year ago. The increase relates primarily to increases in salaries and benefits relating to factoring and volume and incentive payments discussed above; plus volume related increases in advertising and business promotion and data processing. These increases were offset by decreases in occupancy (due to the impact of subletting certain bank facilities), a decrease in FDIC premiums on insured deposits, a decrease in the amortization of intangibles, and an increase in the recoveries on other real estate owned. Income Tax Provision 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 attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year 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 during the period which includes the enactment date. The effective tax rate of 42% and 43% for the three and nine months ended September 30, 1996, respectively, is affected by several items, the most significant of which are the amortization of the intangibles, tax exempt income and the California Franchise Tax Enterprise Tax Zone Credit. The effective tax rate for the year ended December 31, 1995 was 44%. The reduction in the rate is mainly due to the decline in amortization of the intangibles. Financial Condition and Earning Assets Consolidated assets increased to $288 million at September 30, 1996 compared to $252 million at December 31, 1995. The increase consisted primarily of securities available for sale and loans and was funded by an increase in the Bank's core interest-bearing deposits and an increase in certificates of deposit greater than $100. See "Funding." Money Market Investments Money market investments, which include federal funds sold were $1.5 million at September 30, 1996 as compared to $3.2 million at December 31, 1995. Securities The following table shows the composition of the securities portfolio at September 30, 1996 and December 31, 1995. There were no issuers of securities for which the book value of specific securities held by the Bank exceeded 10% of the Company's shareholders' equity, except U.S. Government Securities.
SECURITIES PORTFOLIO (dollars in thousands) September 30, 1996 December 31, 1995 - -------------------------------------------------------------------------------------------------------------- Amortized Unrealized Fair Amortized Unrealized Fair Cost Gain (Loss) Value Cost Gain (Loss) Value - -------------------------------------------------------------------------------------------------------------- Securities held to maturity: U. S. Treasury $1,971 $19 $1,990 $4,265 $28 $4,293 U. S. Government Agencies 7,454 25 7,479 4,976 76 5,052 State and municipal (nontaxable) 2,903 8 2,911 3,060 24 3,084 Mortgage backed 2,469 40 2,509 2,428 116 2,544 Federal Reserve Bank Stock 519 ---- 519 519 ---- 519 - --------------------------------------------------------------------------------------------------------------- Securities held to maturity 15,316 92 15,408 15,248 244 15,492 - --------------------------------------------------------------------------------------------------------------- Securities available for sale: U. S. Treasury 3,998 21 4,019 3,998 59 4,057 U. S. Government Agencies 42,107 60 42,167 34,129 449 34,578 Mortgage backed 5,932 (28) 5,904 9 ---- 9 Mutual funds 4,032 (158) 3,874 4,018 (120) 3,898 - --------------------------------------------------------------------------------------------------------------- Securities available for sale 56,069 (105) 55,964 42,154 388 42,542 - --------------------------------------------------------------------------------------------------------------- Total $71,385 $(13) $71,372 $57,402 $632 $58,034 =============================================================================================================== Securities held to maturity include those securities as to which the Company has the ability and intent to hold to maturity. This decision is dependent upon the liquidity and asset/liability needs of the Bank and does not involve any specific type of securities except that as a matter of policy all state and municipal securities will be included in the "held to maturity" category and all mutual funds are classified as "available for sale." The Bank's policy is to generally acquire "A" rated or better state and municipal securities. Management's policy is to reduce the market valuation risk of the investment portfolio by generally limiting portfolio maturities to 60 months or less. It is management's present intent to maintain at least 50% of its total investment securities portfolio in U.S. Treasury and U.S. Government Agencies securities. Unrealized gains on securities held to maturity were $92 as of September 30, 1996 as compared to an unrealized gain of $244 as of December 31, 1995. Unrealized gains result from the impact of current market rates being less than those rates at the time in which the Bank purchased the securities. The decline in the unrealized gains from December 31, 1995 is a result of an increase in interest rates during the nine months ended September 30, 1996. The Bank's weighted average maturity of the held to maturity investment portfolio was approximately 2.05 years as of September 30, 1996. It is estimated by management that for each 1% change in interest rates, the value of the Company's securities held to maturity will change by approximately 1.88%. This volatility decreases as the average maturity shortens. It is the intention of management to hold these securities to maturity, and therefore, any increase in value will be recognized over the life of the securities as the interest income is recognized. Securities available for sale, which include all mutual funds, are acquired without the intent to hold until maturity. Any unrealized gain or loss is reflected in the carrying value of the security and reported, net of income taxes, in the equity section of the condensed consolidated balance sheets. Realized gains and losses are reported in the condensed consolidated statement of operations. The unrealized loss on securities available for sale as of September 30, 1996 was $105 as compared to an unrealized gain of $388 as of December 31, 1995. The Bank's weighted average maturity of the available for sale portfolio was approximately 1.43 years as of September 30, 1996. It is estimated by management that for each 1% change in interest rates the value of the Company's available for sale securities will change by 1.26%. A substantial portion of the large increase in the available for sale securities consists of $6 million of mortgage backed securities purchased as part of a hedge transaction. The mortgage backed securities have fixed rates with fixed maturities of no later than September 2001, and the purchases were financed by $30 million in short term repurchase agreements maturing through December 1996. See "Asset and Liability Management." Mortgage backed securities are considered to have increased risks associated with them because of the timing of principal repayments. At September 30, 1996, the Bank had the following securities which were mortgage-backed related securities: Historical Fair (dollars in thousands) Cost Value ----------------------------------------- ------------ ----------- Federal Home Loan Mortgage Corp. (U.S. Agency) $6,178 $6,175 Federal National Mortgage Association (U.S. Agency) 2,221 2,231 Federated ARMs Funds * 1,686 1,637 Overland Variable Rate Government Fund* 1,263 1,174 ----------------------------------------- ------------ ----------- * The assets of these mutual funds are invested mainly in adjustable rate U. S. Treasury or Agency securities. Interest income earned on the securities portfolio for the quarters and nine months ended September 30, 1996 and 1995 are as follows: INTEREST AND DIVIDEND INCOME ON INVESTMENT SECURITIES (dollars in thousands) Quarter ended Nine months ended September 30, September 30, --------------------------------------------- 1996 1995 1996 1995 - -------------------------------------------------------------------------------- Securities held to maturity: U.S. Treasury $35 $54 $135 $160 U.S. Government agencies 115 77 287 229 State and municipal (nontaxable) 32 33 104 87 Mortgage backed 51 56 155 155 Federal Reserve Bank Stock 8 8 23 22 Securities available for sale: U.S. Treasury 70 69 208 348 U. S. Government Agencies 534 481 1,565 678 Mortgage backed 108 (1) 224 (2) Mutual funds 53 58 160 176 - -------------------------------------------------------------------------------- Interest and dividend income $1,006 $835 $2,861 $1,853 ================================================================================ Loan Portfolio The following table provides a breakdown of the Company's consolidated loans by type of loan or borrower: LOAN PORTFOLIO (dollars in thousands) September 30, 1996 December 31, 1995 - -------------------------------------------------------------------------------- Percentage Percentage Total of Total Total of Total Amount Loans Amount Loans - -------------------------------------------------------------------------------- Commercial $62,907 32.92% $48,121 28.17% Real estate construction 16,199 8.48 14,488 8.48 Real estate-other 68,415 35.80 66,949 39.20 Consumer 9,186 4.81 8,800 5.15 Other 22,689 11.87 21,302 12.47 Unearned fee income (732) (.38) (793) (.46) - -------------------------------------------------------------------------------- Loan portfolio 178,664 93.50% 158,867 93.01% Loans available for sale 12,420 6.50 11,933 6.99 - -------------------------------------------------------------------------------- Total loans $191,084 100.00% $170,800 100.00% ================================================================================ Consolidated loans increased to $191 million at September 30, 1996 from $171 million at December 31, 1995. Management believes the increase in the loan portfolio can be primarily attributed to the success of the Bank's business development efforts in regards to commercial loans and improvement in the economic environment in the Bank's market area which has created greater demand for loans in general. 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 portfolio, a substantial portion of its customers' ability to honor contracts 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." Although there has been no sign of an employment slow down, the semiconductor industry statistics measuring orders versus sales (book-to-bill ratio) showed some weakness in the first and second quarters of 1996; recently there has been some improvement in this ratio. This could suggest a possible slow down in the semiconductor industry, which could negatively impact the economy Santa Clara County as a whole. The Bank's loans are generally made on the basis of a secure repayment source and collateral is generally a tertiary source for loan qualification. Approximately 57% of the loan portfolio is directly related to real estate or real estate interests, including real estate construction loans, real estate-other, real estate equity lines (2%) (included in the Consumer category), mortgage warehouse line (.9%) and loans to real estate developers for short-term investment purposes (3%) and loans for real estate investments purposes made to non-developers (4%). The latter three types are included in the Other category. Approximately 36% of the loan portfolio is made up of commercial loans; however, no particular industry represents a significant portion of such loans. Inherent in any loan portfolio are risks associated with certain types of loans. The Company attempts to limit these risks through stringent loan policies and review procedures. 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: Category of Real Estate Collateral Maximum LTV Ratio Raw land 50% Land Development 60% Construction: 1-4 Single family residence, Less than $500,000 75% Greater than $500,000 70% Other 70% Term loans (construction take-out and commercial) 70% Other improved property 70% Prime equity loans 75% Any term loans on income producing properties must have a maximum debt service coverage of at least 1.2 to 1 for non-owner occupied property and at least 1.1 to 1 for owner occupied. One of the significant risks associated with real estate lending is 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 indicated by the questionnaire or if for any other reason management determines it to be appropriate. Other reasons would include the industry 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. Quality of Loans A consequence of lending activities is that losses will be experienced and that the amount of such losses will vary from time to time depending upon the risk characteristics of the loan portfolio as affected by economic conditions, rising interest rates and the financial experiences of borrowers. The allowance for possible loan losses, which provides for the risk of losses inherent in the credit extension process, is increased by the provision for possible loan 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 portfolio. Similarly, the adequacy of the allowance for possible loan losses and the level of the related provision for possible loan losses is determined on a judgmental basis by management based on consideration of: o Economic conditions; o Borrowers' financial condition; o Loan impairment; o Evaluation of industry 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 identified as having loss potential; o Quarterly review by the Board of Directors; and, o Off-balance sheet risks. o Assessments by regulators and other third parties In addition to the continuing internal assessment of the loan portfolio (and off-balance sheet credit risk, such as letters of credit, etc.), the consolidated fiscal year-end financial statements are examined by independent accountants. Additionally, the Company retains a consultant who performs credit reviews on a quarterly basis. Also, examinations of the loan portfolio are conducted periodically by the Federal banking regulators. The Company utilizes a method of assigning a minimum and maximum loss ratio for each grade of loan within each category of loans (commercial, real estate-other, real estate construction, etc.). Loans are graded on a ranking system based on management's assessment of the loan's credit quality. The assigned loss ratio is based upon the Company's prior experience, industry experience, delinquency trends and the level of nonaccrual loans. Loans secured by real estate are evaluated on the basis of their underlying collateral in addition to using the assigned loss ratios. The methodology also considers (and assigns a risk factor for) current economic conditions, off-balance sheet risk (including SBA guarantees and servicing and letters of credit) and concentrations of credit. In addition, each loan is evaluated on the basis of whether it is impaired and for such loans, the expected cash flow is discounted on the basis of the loan's interest rate. The methodology provides a systematic approach for the measurement of the possible existence of future loan losses. Management and the Board of Directors evaluate the allowance and determine the desired level of the allowance considering objective, in addition to subjective measures, such as knowledge of the borrowers' business, valuation of collateral and exposure to potential losses. The allowance for possible loan losses was approximately $4.0 million at September 30, 1996, or 2.09% of total loans outstanding. Management believes that the allowance for possible loan losses, determined as described above, was adequate for foreseeable losses at September 30, 1996. The allowance for possible loan losses is a general reserve available against the total loan portfolio and off-balance sheet credit exposure. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for possible losses on loans. Such agencies may require the Bank to provide additions to the allowance based on their judgment of information available to them at the time of their examination. There is uncertainty concerning future economic trends. Accordingly, it is not possible to predict the effect future economic trends may have on the level of the provision for possible loan losses in future periods. The following schedule provides an analysis of the allowance for possible loan losses: ALLOWANCE FOR POSSIBLE LOAN LOSSES (dollars in thousands) Quarter ended Nine months ended Year ended September 30, September 30, December 31, ------------------------------------------------------ 1996 1995 1996 1995 1995 - ------------------------------------------------------------------------------------------------------------------ Balance, beginning of the period $4,021 $3,604 $3,847 $3,311 $3,311 Charge-offs by loan category: Commercial 155 ---- 205 230 233 Real estate-construction ---- ---- ---- 150 154 Real estate-other ---- 117 21 220 220 Consumer ---- 8 22 83 89 Other ---- ---- 93 ---- ---- - ------------------------------------------------------------------------------------------------------------------ Total charge-offs 155 125 341 683 696 - ------------------------------------------------------------------------------------------------------------------ Recoveries by loan category: Commercial 75 2 248 36 42 Real estate-other 2 25 29 25 27 Consumer 5 ---- 65 6 16 Other ---- ---- ---- 101 102 - ------------------------------------------------------------------------------------------------------------------ Total recoveries 82 27 342 168 187 - ------------------------------------------------------------------------------------------------------------------ Net charge-offs (recoveries) 73 98 (1) 515 509 - ------------------------------------------------------------------------------------------------------------------ Provision charged to expense 50 180 100 890 1,045 Allowance relating to Astra Financial Corp. ---- ---- 50 ---- ---- - ------------------------------------------------------------------------------------------------------------------ Balance, end of the period $3,998 $3,686 $3,998 $3,686 $3,847 ================================================================================================================== Ratios: Net charge-offs to average loans, annualized .16% .25% ---- .46% .33% Allowance to total loans at the end of the period 2.09 2.24 2.09 2.24 2.25 Allowance to nonperforming loans at end of the period 650 400 650 400 430 ==================================================================================================================
During the three and nine months ended September 30, 1996, the Company charged off $155 and $341 and recovered $83 and $342 on loans previously charged off, respectively. This compares to $125 and $683 and $27 and $168, for the three and nine months ended September 30, 1995, respectively. Management does not believe there were any trends indicated by the detail of the aggregate charge-offs for any of the periods discussed. The allowance for possible loan losses was 650% of nonperforming loans at September 30, 1996 compared to 430% at December 31, 1995. This increase relates mainly to the reduction of nonperforming loans through collection efforts and foreclosure. Based on an evaluation of individual credits, historical credit loss experienced by loan type and economic conditions, management has allocated the allowance for possible loan losses as follows as of September 30, 1996 and December 31, 1995: ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (dollars in thousands) September 30, 1996 December 31, 1995 - -------------------------------------------------------------------------------- Percentage Percentage Amount of of loans to Amount of of loans to Allowance total loans Allowance total loans - ------------------------------------------------------------------------------- Commercial $1,537 36.16% $1,193 30.86% Real estate construction 221 8.48 176 8.45 Real estate-other 1,334 39.06 1,134 43.15 Consumer 150 4.81 169 5.13 Other 229 11.49 337 12.41 Unallocated 527 --- 838 --- - -------------------------------------------------------------------------------- Total $3,998 100.00% $3,847 100.00% ================================================================================ The allowance for possible loan losses is maintained without any internal allocation to the segments of the loan portfolio. The above schedule is being presented in accordance with the Securities and Exchange Commission's requirements to provide an allocation of the allowance. The allocation 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 dates noted above. Nonperforming Loans
Loans for which the accrual of interest has been suspended and other loans with principal or interest contractually past due 90 days or more are set forth in the following table. NONPERFORMING LOANS (dollars in thousands) September 30, 1996 December 31, 1995 - ----------------------------------------------------------------------------------------------------------- Loans accounted for on a non-accrual basis $615 $866 Loans restructured and in compliance with modified terms 89 ---- Other loans with principal or interest contractually past due 90 days or more ---- 28 - ----------------------------------------------------------------------------------------------------------- Total $704 $894 ===========================================================================================================
The Company follows the practice of discontinuing the accrual of interest and reversing any accrued and unpaid interest when, in the opinion of management, there is significant doubt as to the collectability 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. As of September 30, 1996, the Company had approximately $704 of nonperforming loans, consisting of seven loans, of which, $550 is secured by commercial or residential real estate. At December 31, 1995, nonperforming loans totaled approximately $894 consisting of four loans; of which two were secured by commercial or residential real estate in the amount of $783. Management conducts an ongoing evaluation and review of the loan portfolio in order to identify potential nonperforming loans. Management considers loans which are classified for regulatory purposes, loans which are graded as classified by the Bank's outside loan review consultant and internal personnel, as to whether they (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Based on such reviews as of September 30, 1996, management has identified two borrowers with an aggregate loan balance of $536 (which is subject to collateral with a value of approximately $457) with respect to which known information causes management to have doubts about the borrower's abilities to comply with present repayment terms, such that the loans might subsequently be classified as nonperforming. Changes in general or local economic conditions or specific industry segments, rising interest rates, declines in real estate values and acts of nature could have an adverse effect on the ability of borrowers to repay outstanding loans and the value of real estate and other collateral securing such loans. Other Real Estate Owned At September 30, 1996 and December 31, 1995, the Bank had the following properties which were acquired through the foreclosure process:
OTHER REAL ESTATE OWNED (dollars in thousands) Carrying Value Description of Property September 30, 1996 December 31, 1995 - ----------------------- ------------------ ----------------- Two vacant parcels, currently subject to a sewer moratorium $304 $304 SFR in Piedmont, CA ---- 225 Raw land, 11.7 acres in San Jose, CA ---- 135 --------------------------------------------- Total $304 $664 =============================================
At the time of foreclosure, any difference between the loan balance and the net realizable value of the collateral is charged to the allowance for possible loan losses. Foreclosed property is recorded at the lower of its revised basis or fair value, less estimated selling costs. Any subsequent decline in value is charged directly to the income statement. During the third quarter of 1996, the 11.7 acres of raw land was sold for a gain of $44. As of July 5, 1996, the SFR in Piedmont was sold, which resulted in an insignificant gain. The Bank has entered into a contract to sell the above vacant parcels for an insignificant loss. The transaction is expected to close in December 1996. Commitments and Lines of Credit It is the Bank's policy not to issue formal commitments or lines of credit except to a limited number of well-established and financially responsible local 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, to varying degrees, involve credit risk in excess of the amount recognized as either an asset or liability in the statement of financial position. The Company controls credit risk through its credit approval process. The same credit policies are used when entering into such commitments and lines of credit. As of September 30, 1996 and December 31, 1995, the Company had undisbursed loan commitments to extend credit as follows: UNDISBURSED LOAN COMMITMENTS (dollars in thousands) Loan Category September 30, 1996 December 31,1995 - -------------------------------------------------------------------------------- Commercial $34,319 $27,270 Real estate construction 14,296 13,267 Real estate-other 2,491 2,991 Consumer 5,372 5,633 Other 13,457 16,302 - -------------------------------------------------------------------------------- Total $69,935 $65,463 ================================================================================ In addition there was approximately $3.2 million for commitments under unused letters of credit at September 30, 1996. Funding The following table provides a breakdown of deposits by category as of the dates indicated: DEPOSIT CATEGORIES (dollars in thousands) September 30, 1996 December 31, 1995 - -------------------------------------------------------------------------------- Percentage Percentage Total of Total Total of Total Amount Deposits Amount Deposits - -------------------------------------------------------------------------------- Noninterest-bearing demand $55,739 24.26% $52,775 26.83% Interest-bearing demand 44,790 19.49 34,641 17.61 Money market and savings 60,882 26.50 51,201 26.03 Certificates of deposit: Less than $100 14,957 6.51 14,730 7.49 $100 or more 53,387 23.24 43,345 22.04 - -------------------------------------------------------------------------------- Total $229,755 100.00% $196,692 100.00% ================================================================================ Deposits as of September 30, 1996, were $230 million compared to $197 million at December 31, 1995. The increase in deposits relates to the growth in all areas of the Bank's deposit products. The most significant growth occurred in the area of interest-bearing core deposits which increased approximately $20 million. Management believes this growth in interest-bearing core deposits has been due to business development efforts of the Bank's business development officers and higher interest rates. In addition certificates of deposit of greater than $100 increased approximately $10 million. These funds were generated in the Bank's market area and are primarily associated with the Bank's core depositors. The Bank raises a substantial amount of funds through certificates of deposits of greater than $100. 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 cost of funds has been significantly less than its peer group. However, these certificates of deposits are usually more interest rate sensitive, and therefore at maturity their repricing could negatively impact the Bank's net interest margin without a corresponding increase in rates earned on its earning assets. See "Liquidity." 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, or interest rate sensitivity gap, represents the potential mismatch in the change in the rate of accrual of interest revenue and interest expense that would result from a change in interest rates. Mismatches in interest rate repricing among assets and liabilities arise primarily from the interaction of various customer businesses (i.e., types of loans versus the types of deposits maintained) and from management's discretionary investment and funds gathering activities. The Company attempts to manage its exposure to interest rate sensitivity; however due to its size and direct competition from major banks, mutual funds, community banks and other financial intermediaries it must offer products which are competitive in the market place even if such products are not optimum with respect to its interest rate exposure. The Company's balance sheet position is asset-sensitive (based upon the significant amount of variable rate loans and the repricing characteristics of its deposit accounts). This balance sheet position generally provides a hedge against rising interest rates, but has a detrimental effect during times of interest rate decreases. Net interest revenues are negatively impacted by a decline in interest rates. To counter its asset sensitive interest rate position, the Bank entered into an interest rate "floor" in the amount of $10 million which expires in May 1999. The Bank has paid a fixed premium of $47 for which it will receive the amount of interest on $10 million based on the difference of 7% and prime when prime is less than 7%. This will protect the Bank against decreases in its net income when the prime decreases to less than 7%. Settlement is done quarterly and the Bank records the impact of this hedge on an accrual basis. During 1995 and 1996, the Bank executed several transactions which are intended to mitigate its exposure to a decline in general market interest rates. The transactions involved the purchase of six U.S. Agency and mortgage backed securities for an aggregate cost of $30 million which were financed through the use of repurchase agreements. The repurchase agreements are shown as short-term borrowings on the Company's balance sheet. The securities are fixed rate and $7.1 million matures in November 1997, $10 million matures in May 1998, $7 million matures in July 1998, $1.4 million in November 2000, $2.3 million in June 2001 and $2.2 million in September 2001. The repurchase agreements interest rates range from 5.38% to 5.53% and mature through December 1996. The following table quantifies the Company's interest rate exposure at September 30, 1996 based upon the known repricing dates of certain assets and liabilities and the assumed repricing dates of others. Mortgage backed securities are included in the repricing schedule based upon their market determined prepayment speeds. At September 30, 1996, the Company was, as noted above, asset sensitive in the near term. This table displays a static view of the Company's interest rate sensitivity position and does not consider the dynamics of the balance sheet and interest rate movements.
DISTRIBUTION OF REPRICING OPPORTUNITIES September 30, 1996 (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 - ------------------------------------------------------------------------------------------------------------------- Money market investments $1,500 $1,500 Investment securities-taxable 1,034 $38 $1,084 $9,760 $497 12,413 Investment securities-non-taxable 445 0 250 1,602 606 2,903 Securities available for sale 14,963 3,069 2,200 31,852 3,880 55,964 Loans 164,371 1,904 3,145 13,614 8,049 191,083 - ------------------------------------------------------------------------------------------------------------------- Total earning assets 182,313 5,011 6,679 56,828 13,032 263,863 - ------------------------------------------------------------------------------------------------------------------- Interest checking, money market and savings 105,673 ----- ----- ----- ----- 105,673 Certificates of deposit: Less than $100 8,015 2,416 3,351 1,112 62 14,956 $100 or more 33,896 8,880 9,429 1,182 0 53,387 Repurchase agreements 22,756 0 0 0 0 22,756 Other borrowings 2,500 0 0 0 570 3,070 - ------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 172,840 11,296 12,780 2,294 632 199,842 - ------------------------------------------------------------------------------------------------------------------- Interest rate gap $9,473 ($6,285) ($6,101) $54,534 $12,400 $64,021 =================================================================================================================== Cumulative interest rate gap $9,473 $3,188 ($2,913) $51,621 $64,021 ======================================================================================================= Interest rate gap ratio 1.05 0.44 0.52 24.77 20.62 ======================================================================================================= Cumulative interest rate gap ratio 1.05 1.02 0.99 1.26 1.32 =======================================================================================================
The maturities and yields of the investment portfolio at September 30, 1996 are shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES At September 30, 1996 (dollars in thousands) Maturity ------------------------------------------------------------------------- After one year Carrying Within one year within five years After ten years Value Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------------ Securities held to maturity: U. S. Treasury $1,971 ---- ---- $1,971 6.71% ---- ---- U. S. Government Agencies 7,454 $2,000 5.25% 5,454 6.63 ---- ---- State and municipal 2,903 695 7.64 2,208 7.72 ---- ---- Mortgage backed 2,469 ---- ---- 2,469 7.90 ---- ---- Other 519 ---- ---- ---- ---- $519 6.00% - ------------------------------------------------------- ------------ ------------ Total 15,316 2,695 12,102 519 - ------------------------------------------------------- ------------ ------------ Securities available for sale: U. S. Treasury 4,019 3,015 7.18 1,004 6.42 ---- ---- U.S. Government Agencies 42,167 13,034 5.36 29,133 6.21 ---- ---- Mortgage backed 5,904 ---- ---- 5,896 6.55 8 0.00% Mutual funds 3,874 3,874 5.38 ---- ---- ---- ---- - ------------------------------------------------------- ------------ ------------ Total 55,964 19,923 36,033 8 - ------------------------------------------------------- ------------ ------------ Total $71,280 $22,618 5.67% $48,135 6.48% $527 6.00% ========================================================================================================================
The following table shows the maturity and interest rate sensitivity of commercial, real estate-other and real estate construction loans at September 30, 1996. Approximately 82% of the commercial and real estate loan portfolio is priced with floating interest rates which limits the exposure to interest rate risk on long-term loans. COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY (dollars in thousands) Balances maturing Interest Rate Sensitivity -------------------------------------------------------------- Predeter- Balances at One mined Floating September 30, One year year to Over interest interest 1996 or less five years five years rates rates - -------------------------------------------------------------------------------------------------------------- Commercial $69,104 $42,148 $18,884 $8,072 $2,005 $67,099 ============================================================================================================== Real estate construction $16,199 $14,730 $1,469 ---- $4,320 $11,879 ============================================================================================================== Real estate-other $74,638 $8,885 $30,183 $35,570 $22,327 $52,311 ==============================================================================================================
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 $11.75 and $11.02 on September 30, 1996 and December 31, 1995, respectively. The increase reflects net income per share of $1.19 less cash dividends per share of $.15, the impact of the change in the unrealized gain (loss) of assets held for sale and exercise of stock options. Shareholders' equity was $29.7 million and $26.7 million as of September 30, 1996 and December 31, 1995, respectively. The Federal Reserve Board's risk-based capital guidelines require that total capital be in excess of 8% of total assets on a risk-weighted basis. Under the guidelines for a bank holding company capital requirements are based upon the composition of the Company's asset base and the risk factors assigned to those assets. The guidelines characterize an institution's capital as being "Tier 1" capital (defined to be principally shareholders' equity) and "Tier 2" capital (defined to be principally the allowance for loan losses, limited to one and one-fourth percent of loans, and other supplemental capital). The guidelines require the Company to maintain a risk-based capital target ratio of 8%, one-half or more of which should be in the form of Tier 1 capital. The Comptroller of the Currency also requires SJNB to maintain adequate capital. The Comptroller's current regulations require national banks to maintain Tier 1 leverage capital ratio equal to at least 3% to 5% of total assets, depending on the Comptroller's evaluation of the Bank. The Comptroller also has adopted risk-based capital requirements. Similar to the Federal Reserve's guidelines, the amount of capital the Comptroller requires a bank to maintain is based upon the composition of its asset base and risk factors assigned to those assets. The guidelines require the Bank to maintain a risk-based capital target ratio of 8%, one-half or more of which should be in the form of Tier 1 capital. The capital of the Company and SJNB exceed the amount required by the various capital guidelines. The table below summarizes the various capital ratios of the Company and the Bank at September 30, 1996 and December 31, 1995.
Risk-based and Leverage Capital Ratios (dollars in thousands) Company September 30, 1996 December 31, 1995 - ------- ------------------------------------------------- Risk-based Amount Ratio Amount Ratio -------------------------------------------------- Tier 1 capital $24,779 11.51% $21,589 11.34% Tier 1 capital minimum requirement 8,608 4.00 7,617 4.00 -------------------------------------------------- Excess $16,172 7.51% $13,972 7.34% ================================================== Total capital $27,486 12.77% $24,046 12.63% Total capital minimum requirement 17,215 8.00 15,233 8.00 ================================================== Excess $10,270 4.77% $8,813 4.63% ================================================== Risk-adjusted assets $215,194 $190,417 ============= ============= Leverage Tier 1 capital $24,779 9.12% $21,589 9.00% Minimum leverage ratio requirement (1) 10,869 4.00 9,596 4.00 -------------------------------------------------- Excess $13,910 5.12% $11,993 5.00% ================================================== Average total assets $271,736 $239,899 ============= ============= Bank Risk-based Tier 1 capital $23,880 11.10% $20,819 10.94% Tier 1 capital minimum requirement 8,605 4.00 7,614 4.00 -------------------------------------------------- Excess $15,275 7.10% $13,205 6.94% -------------------------------------------------- Total capital $26,585 12.36% $23,275 12.23% Total capital minimum requirement 17,209 8.00 15,228 8.00 --------------------------------------------------- Excess $9,376 4.36% $8,047 4.23% ================================================== Risk-adjusted assets $215,117 $190,345 ============= ============= Leverage Tier 1 capital $23,880 8.80% $20,819 8.67% Minimum leverage ratio requirement (1) 10,858 4.00 9,607 4.00 -------------------------------------------------- Excess $13,023 4.80% $11,212 4.67% ================================================== Average total assets $271,439 $240,163 ============= ============= (1) The required ratio is determined on an individual bank basis as a result of factors considered by the Company's and Bank's regulators. Amounts shown as the minimum requirements relate to the standards imposed by the FDIC in their determination of an "adequately capitalized" bank for their insurance premium determination.
Liquidity Management strives to maintain a level of liquidity sufficient to meet customer requirements for loan funding and deposit withdrawals in an economically feasible manner. Liquidity requirements are evaluated by taking into consideration factors such as deposit concentrations, seasonality and maturities, loan demand, capital expenditures, and prevailing and anticipated economic conditions. SJNB's business is generated primarily through customer referrals and employee business development efforts; however the Bank utilizes purchased deposits to satisfy temporary liquidity needs. The Bank's source of liquidity consists of its deposits with other banks, overnight funds sold to correspondent banks, short-term securities held to maturity and securities available for sale and loans held for sale, less short-term borrowings. At September 30, 1996, consolidated net liquid assets totaled $64 million or 22% of consolidated total assets as compared to $52 million or 21% of consolidated total assets on December 31, 1995. In addition to the liquid asset portfolio, SJNB also has available $12 million in lines of credit with five major commercial banks, a collateralized repurchase agreement with a maximum limit of $40 million (of which approximately $25 million has been utilized), a credit facility with the Federal Reserve Bank based on loans secured by real estate for approximately $6 million. SJNB is primarily a business and professional bank and, as such, its deposit base may be more susceptible to economic fluctuations than other potential competitors. Accordingly, management strives to maintain a balanced position of liquid assets to volatile and cyclical deposits. Commercial clients in their normal course of business maintain balances in large certificates of deposit, the stability of which hinge upon, among other factors, market conditions, interest rates and business' seasonality. Large certificates of deposit amounted to 23% of total deposits on September 30, 1996 and 22% at December 31, 1995. Liquidity is also affected by portfolio maturities and the effect of interest rate fluctuations on the marketability of both assets and liabilities. The loan portfolio consists primarily of floating rate, short-term loans. On September 30, 1996, approximately 35% of total consolidated assets had maturities under one year and 85% of total consolidated loans had floating rates tied to the prime rate or similar indexes. The short-term nature of the loan portfolio, and loan agreements which generally require monthly interest payments, provide the Company with an additional secondary source of liquidity. There are no material commitments for capital expenditures in 1996, except for the renovation of the lower level of the Bank's primary facility at a cost of approximately $400 (of which $92 has been expended to date. Effects of Inflation The most direct effect of inflation on the Company is higher interest rates. Because a significant portion of the Bank's deposits are represented by non-interest-bearing demand accounts, changes in interest rates have a direct impact on the financial results of the Bank. See the discussion regarding asset/liability management. Another effect of inflation is the upward pressure on the Company's operating expenses. Inflation did not have a material effect on the Bank's operations in 1995 or the first nine months of 1996. PART II - OTHER INFORMATION Item 1. Legal Proceedings Neither the Company nor the Bank is a party to any material pending legal proceedings other than as previously disclosed. Material legal proceedings were reported in the Form 10KSB for the year ended December 31, 1995, and Form 10QSB for the three months ended March 31, 1996 and June 30, 1996. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as part of this report: (2) a. The Plan of Acquisition and Merger by and between SJNB Financial Corp. and Business Bancorp (as amended) is hereby incorporated by reference to Annex A filed with Registration Statement on Form S-4, Amendment No. 2 Commission File No. 33-79874, filed with the Securities and Exchange Commission on August 3, 1994. (2) b. The Stock Acquisition Agreement by and among San Jose National Bank, Astra Financial Inc. and Thomas D. Griffin, dated November 17, 1995, and related side letters dated December 14, are hereby incorporated by reference to Exhibit (2) b. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995. (3) a. The Certificate of Amendment to Articles of Incorporation filed June 17, 1988 and restated Articles of Incorporation are hereby incorporated by reference to Exhibit (3) b. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (3) b. Amendments to the Registrant's bylaws dated February 28, 1996 and the Registrant's restated bylaws as of February 28, 1996 are hereby incorporated by reference to Exhibit (3) b. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1996. *(10)a. The Registrant's Stock Option Plan is hereby incorporated by reference from Exhibit 4.1 of the Registrant's Registration Statement on Form S-8, as filed on October 4, 1989 and amended January 24,1992 under Registration No. 33-31392. *(10)b. The form of Incentive Stock Option Agreement being utilized under the Stock Option Plan is hereby incorporated by reference from Exhibit 4.2 of Amendment No. 1 to the Registrant's Registration Statement on Form S-8, as filed on January 24, 1992, under Registration No. 33-31392. *(10)c. The form of Stock Option Agreement being utilized under the Stock Option Plan is hereby incorporated by reference from Exhibit 4.3 of Amendment No. 1 to the Registrant's Registration Statement on Form S-8, as filed on January 24, 1992, under Registration No. 33-31392. *(10)d. Amendment No. 3 to the Stock Option Plan is hereby incorporated by reference from Exhibit 4.4 of Amendment No. 1 to the Registrant's Registration Statement on Form S-8, as filed on January 24, 1992, under Registration No. 33-31392. *(10)e. Amendment No. 4 to the Stock Option Plan is hereby incorporated by reference from Exhibit 4.5 of Amendment No. 2 to the Registrant's Registration Statement on Form S-8, as filed on June 22, 1992, under Registration No. 33-31392. *(10)f. The Registrant's 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.1 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)g. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby incorporated by reference to Exhibit (10) f. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1995. *(10)h. The form of Incentive Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.2 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)i. The form of Stock Option Agreement being utilized under the 1992 Employee Stock Option Plan is hereby incorporated by reference from Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as filed on September 4, 1992, under Registration No. 33-51740. *(10)j. The Registrant's 1992 Director Stock Option Plan is hereby incorporated by reference from Exhibit (10) i. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. *(10)k. Amendment No. 1 to the 1992 Director Stock Option Plan is hereby incorporated by reference to Exhibit (10) i. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1995. *(10)l. The form of Stock Option Agreement being utilized under the 1992 Director Stock Option Plan is hereby incorporated by reference from Exhibit (10) j. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. *(10)m. The Registrant's 1996 Stock Option Plan is incorporated by reference to exhibit 99.1 of the Registrant's Form S-8 filed July 30, 1996. *(10)n. Agreement between James R. Kenny and SJNB Financial Corp. and San Jose National Bank dated March 27, 1996 is hereby incorporated by reference to Exhibit (10) m. of the Registrant's Quarterly Form 10-QSB for the quarterly period ended March 31, 1996. *(10)o. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San Jose National Bank dated March 27, 1996 is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Quarterly Form 10-QSB for the quarterly period ended March 31, 1996. (10) p. Systems Management Services Agreement by and between Systematics, Inc. and San Jose National Bank dated March 1, 1990, and amendments dated April 5, 1990, July 10, 1990 and January 27, 1992 are hereby incorporated by reference from Exhibit (10) g. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (10) q. Agreement for Item Processing Services by and between Datatronix Financial Services and San Jose National Bank dated April 13, 1992 is hereby incorporated by reference from Exhibit (10) m. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992. (10) r. Sublease dated April 5, 1982, for premises at 95 South Market Street, San Jose, CA is hereby incorporated by reference to Exhibit (10) n. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994. (10) s. Sublease by and between McWhorter's Stationary and San Jose National Bank, dated July 6, 1995, and as amended August 11, 1995 and September 21, 1995, for premises at 95 South Market Street, San Jose CA is hereby incorporated by reference to Exhibit (10) o. of the Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1995. (10) t. Sublease by and between Greater Unified Management Businesses, Inc. (d.b.a. as Logistics) and SJNB Financial Corp., dated January 15, 1996, and as amended March 19, 1996, for premises at 95 South Market Street, San Jose CA is hereby incorporated by reference to Exhibit (10) s. of the Registrant's Quarterly Form 10-QSB for the quarterly period ended March 31, 1996. (27) Financial Data Schedule. * Indicates management contract or compensation plan or arrangement. SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SJNB FINANCIAL CORP. (Registrant) Date: November 12, 1996 S/J. Kenny James R. Kenny President and Chief Executive Officer Date: November 12, 1996 S/E. Blakeslee Eugene E. Blakeslee Executive Vice President and Chief Financial Officer EX-27 2 FDS --
9 0000721161 SJNB FINANCIAL CORP. 1 US DOLLARS 3-mos Dec-31-1996 Jul-01-1996 Sep-30-1996 1 16,568 0 1,500 0 55,964 15,316 15,408 191,084 3,998 288,182 229,755 25,256 3,500 0 20,170 0 0 9,501 288,182 5,220 1,044 (2) 6,262 1,688 2,034 4,228 50 (67) 2,423 1,937 1,937 0 0 1,120 .42 .42 .066 615 0 89 536 4,021 155 82 3,998 3,471 0 527
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