-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, S50WYS2yduUjvtc7VjYakfv6oKs3iC/W0yYheSEGb8fV+N4/LfnXzsWIkcO/PWky zqMuA5ULYaQc9mE70Kb0kw== 0000940401-95-000013.txt : 19950814 0000940401-95-000013.hdr.sgml : 19950814 ACCESSION NUMBER: 0000940401-95-000013 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: NONE 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: 95560928 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 FORM 10-QSB 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 June 30, 1995 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 offices) (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. 2,384,181 shares of common stock outstanding as of July 17, 1995 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 30 Item 5. OTHER INFORMATION 30 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 30 SIGNATURES 33 PART I - FINANCIAL INFORMATION Item 1. Financial Statements
SJNB FINANCIAL CORP. AND SUBSIDIARY Condensed Consolidated Balance Sheets (dollars in thousands) (Unaudited) June 30, December 31, Assets 1995 1994 Cash and due from banks $12,484 $14,591 Money market investments 8,310 ----- Investment securities: Held to maturity (Market value: $15,123 at June 30, 1995 and $13,392 at December 31, 1994) 15,034 13,859 Available for sale 34,232 18,706 Loans 145,688 144,399 Loans available for sale 9,320 5,008 Allowance for possible loan losses (3,604) (3,311) Loans, net 151,404 146,096 Premises and equipment, net 3,295 3,022 Other real estate owned 1,152 1,495 Accrued interest receivable and other assets 2,297 3,267 Intangibles, net of accumulated amortization of $446 and $166 4,777 4,913 Total $232,985 $205,949 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing $ 45,986 $ 54,003 Interest-bearing 141,968 126,285 Total deposits 187,954 180,287 Other short-term borrowings 16,758 ----- Accrued interest payable and other liabilities 3,355 2,220 Total liabilities 208,067 182,507 Shareholders' equity: Common stock, no par value; authorized, 20,000,000 shares; issued and outstanding, 2,384,181 shares at June 30, 1995 and 2,362,550 shares at December 31, 1994 19,498 19,421 Retained earnings 5,416 4,278 Net unrealized gain (loss) on securities available for sale 4 (257) Total shareholders' equity 24,918 23,442 Commitments and contingencies ---- ---- Total $232,985 $205,949
See accompanying Notes to Unaudited Consolidated Financial Statements.
Condensed Consolidated Statement of Operations (dollars in thousands, except share and per share amounts) (Unaudited) Quarter ended Six months ended June 30, June 30, 1995 1994 1995 1994 Interest income: Interest and fees on loans $4,678 $2,539 $8,839 $4,814 Interest on investment securities held to maturity 188 93 412 190 Interest and dividends on investment securities available for sale 362 117 592 190 Interest on money market investments 69 64 100 100 Other interest and investment income (7) 21 (25) 83 Total interest income 5,290 2,834 9,918 5,377 Interest expense: Interest expense on interest-bearing deposits: Certificates of deposit over $100 519 228 934 437 Other 999 410 1,890 749 Total interest expense 1,518 638 2,824 1,186 Net interest income 3,772 2,196 7,094 4,191 Provision for possible loan losses 500 150 710 300 Net interest income after provision for possible loan losses 3,272 2,046 6,384 3,891 Other income: Service charges on deposits 155 82 286 165 Other operating income 68 61 199 106 Net gain (loss) on securities available for sale (37) (2) (43) 0 Gain on sale of SBA loans ---- ---- ---- 75 Total other income 186 141 442 346 Other expenses: Salaries and benefits 1,046 778 2,121 1,535 Occupancy 176 124 383 248 Other 974 609 1,878 1,155 Total other expenses 2,196 1,511 4,382 2,938 Income before income taxes 1,262 676 2,443 1,299 Income taxes 561 270 1,092 519 Net income $ 701 $ 406 $1,351 $ 780 Net income per share $0.29 $0.24 $0.55 $0.46 Weighted average number of shares outstanding 2,454,822 1,701,970 2,444,154 1,704,874
See accompanying Notes to Unaudited Consolidated Financial Statements.
SJNB FINANCIAL CORP. AND SUBSIDIARY Consolidated Statements of Cash Flows (dollars in thousands) (Unaudited) Six months ended June 30, 1995 1994 Cash flows from operating activities: Net income $ 1,352 $ 780 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan losses 710 300 Depreciation and amortization 216 143 Amortization on intangibles 280 ---- Net loss (gain) on securities available for sale 43 (2) Net gain on sale of other real estate owned (12) - ---- Increase in loans available for sale, net (4,311) (987) Amortization of (discount) premium on investment securities, net (91) 24 (Increase) decrease in accrued interest receivable and other assets 653 (592) Increase in accrued interest payable and other liabilities 1,135 58 Net cash used in operating activities (25) (276) Cash flows from investing activities: Proceeds from sale of securities available for sale 12,162 2,076 Maturities of securities held to maturity 145 2,240 Purchase of securities available for sale (27,222) (6,283) Purchase of securities held to maturity (1,303) (1,319) Proceeds from the sale of other real estate owned 611 - ---- Loans, net (1,962) (3,667) Capital expenditures (490) (139) Net cash used in investing activities (18,059) (7,092) Cash flow from financing activities: Deposits, net 7,666 11,328 Other short-term borrowings 16,758 (1,400) Cash dividends (215) (130) Common stock repuchased (119) - ---- Proceeds from stock options exercised 197 - ---- Net cash provided by financing activities 24,287 9,798 Net increase in cash and equivalents 6,203 2,430 Cash and equivalents at beginning of year 14,591 11,052 Cash and equivalents at end of period $20,794 $13,482 Other cash flow information: Interest paid $ 2,591 $ 1,162 Income taxes paid $ 695 $ 730 Noncash transactions: Transfer of loans to other real estate owned $ 256 $1,033 Unrealized gain (loss) on securities available for sale, net of tax 261 (137) 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, 1994. Note B Net Deferred Tax Asset As of June 30, 1995 the net deferred tax asset was approximately $492,000 which is included in the category "Accrued interest receivable and other assets" of 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:
Quarter ended Six months ended June 30, June 30, 1995 1994 1995 1994 Weighted average number of shares outstanding during the period 2,375,966 1,629,962 2,370,287 1,629,962 Common stock equivalents 78,856 72,008 73,867 74,912 Total 2,454,822 1,701,970 2,444,154 1,704,874
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 six months ended June 30, 1995 and the liquidity and financial condition of the Company and SJNB as of June 30, 1995 and December 31, 1994. All dollar amounts in the text in this Item 2 are in thousands, except per share amounts. The following presents selected financial data and ratios as of and for the three and six months ended June 30, 1995 and 1994:
SELECTED FINANCIAL DATA AND RATIOS For the quarters For the six months ended June 30, ended June 30, SELECTED ANNUALIZED OPERATING RATIOS: 1995 1994 1995 1994 Return on average equity 11.43% 9.84% 11.24% 9.61% Return on average tangible equity 14.17 9.84 14.01 9.61 Return on average assets 1.34 1.21 1.33 1.19 Net chargeoffs (recoveries) to average loans .82 (.04) .57 .21 Average equity to average assets 11.74 12.27 11.85 12.43 Average tangible equity to average assets 9.69 12.27 9.73 12.43
At June 30, At December 31, PER SHARE DATA: 1995 1994 1994 Shareholders' equity per share $10.45 $10.17 $9.92 Tangible equity per share $ 8.45 $10.17 $7.84 SELECTED FINANCIAL POSITION RATIOS: Leverage capital ratio 9.78% 12.30% 9.33% Nonperforming loans to total loans 1.40 3.18 3.67 Nonperforming assets to total assets 1.42 3.30 3.32 Allowance for possible loan losses to total loans 2.33 2.22 2.22 Allowance for possible loan losses to nonperforming loans 166.20 69.77 60.45 Allowance for possible loan losses to nonperforming assets 108.54 49.34 47.49
Summary of Financial Results The Company reported net income of $701 or $.29 per share for the quarter ended June 30, 1995, compared with net income of $406 or $.24 per share for the second quarter of 1994. The improvement in earnings is due primarily to the acquisition of Business Bancorp and California Business Bank as of the beginning of the last quarter of 1994 and to additional volume growth. In addition, the Company collected $2.5 million in loans that had been on nonaccrual, and recognized approximately $389 in interest income relating to prior periods. During the time a loan is on nonaccrual, no interest is recorded. When the loan is then paid, interest income is recorded for the time that the loan was on nonaccrual to the extent it is recovered. The income then recorded relates to the prior periods, but is recognized in the current period. The increase in net interest income was offset by an increase in the provision for possible loan losses and expenses related to both the acquisition and the increase in volume. For the six months ended June 30, 1995, the net income was $1,352 or $.55 per share compared with net income of $780 or $.46 per share in 1994. The improvement was due mainly to the reasons discussed above regarding the comparison of the second quarter results. Net Interest Income Net interest income for the quarter ended June 30, 1995 increased $1.6 million 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 $73 million, primarily the result of the acquisition of CBB. The Bank's net interest margin increased from 7.11% in the second quarter of 1994 to 7.97% in the second quarter of 1995. This increase is due to the recognition of interest from loans that had been on nonaccrual, as described above. If prior period income is adjusted out of the interest income, the net interest margin would have been 7.15% for the second quarter of 1995. Net interest income for the six months ended June 30, 1995 increased $2.9 million over that of the same period a year ago. The increase was primarily the result of the increase in volumes and recognition of interest on previously nonaccruing loans. The Bank's net interest margin increased from 6.99% for the six months ended June 30, 1994 to 7.75% for the six months ended June 30, 1995. Adjusting for the interest income on previously nonaccruing loans (which amounted to approximately $431 for the six months ended June 30, 1995), as noted above, the net interest margin would have been 7.28% in 1995. The increase in the net interest margin as adjusted was due to higher rate environment during 1995 as compared to 1994. A substantial portion (24% for the six months ended June 30, 1995 and 33% for the six month period ended June 30, 1994) of the Bank's 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, an increase in interest rates should positively affect the Company's noninterest income. Increases in the prime rate during 1994 had a significant positive impact on the net interest income. Conversely stable or declining rates will have an adverse impact on net interest income. 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 collectibility of interest or principal or when the payment of principal or interest is ninety days past due, unless the amount is well-secured and in the process of collection. For these loans, interest is recorded when payment is received. See "Nonperforming Loans." The effect of nonaccrual of interest income based on loans classified as nonaccrual at June 30, 1995 and 1994, is set forth in the following table:
IMPACT OF NONACCRUAL LOANS (dollars in thousands) Quarter ended Six months ended June 30, June 30, 1995 1994 1995 1994 Interest revenue which would have been recorded under original terms $71 $73 $127 $138 Interest revenue actually realized (2) (4) (5) (21) Negative impact on interest revenue $69 $69 $122 $117
This table does not reflect the cash basis interest received on several significant loan collections, as such loans were not classified as nonaccrual as of June 30, 1995 and 1994. See the above discussion regarding the collection of such income and its impact on net interest income. 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 six months ended June 30, 1995 and 1994.
AVERAGE BALANCES, RATES AND YIELDS (dollars in thousands, except for footnotes) Quarter ended June 30, 1995 1994 Average Average Average Average Assets Balance Interest Yield(1) Balance Interest Yield (1) Interest earning assets: Loans, net (2) $148,148 $4,679 12.67% $99,115 $2,540 10.28% Securities held to maturity: Taxable (3) 12,089 165 5.49 6,597 77 4.68 Nontaxable (4) 2,763 41 5.99 1,817 28 6.18 Securities available for sale (5) 23,318 362 6.23 10,175 117 4.61 Money market investments 4,189 68 6.56 6,659 64 3.85 Interest rate hedging instruments ---- (14) ---- ---- 18 ---- Total interest-earning assets 190,507 5,301 11.16 124,363 2,844 9.17 Allowance for possible loan losses (3,519) (2,177) Cash and due from banks 11,368 7,002 Bank premises and equipment, net 3,479 2,498 Other real estate owned 1,197 1,207 Accrued interest receivable and other assets 1,960 1,832 Core deposit intangibles and goodwill, net 4,749 ---- Total $209,741 $134,725 Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $ 29,610 284 3.85 $ 9,464 32 1.34 Money market and savings 49,766 427 3.44 35,007 254 2.91 Certificates of deposit: Less than $100,000 15,286 196 5.14 13,230 124 3.76 $100,000 or more 38,140 520 5.47 25,346 229 3.62 Total certificates of deposits 53,426 716 5.37 38,576 353 3.67 Other short-term borrowings 5,973 91 6.10 Total interest-bearing liabilities 138,775 1,518 4.39 83,047 639 3.08 Noninterest-bearing demand 43,680 34,386 Accrued interest payable and other liabilities 2,673 757 Total liabilities 185,128 118,190 Shareholders' equity 24,613 16,535 Total $209,741 $134,725 Net interest income and margin (6) $ 3,783 7.97% $2,205 7.11% (1) Rates are presented on an annualized basis. (2) Includes loan fees of $292,000 for 1995, and $282,000 for 1994. Nonperforming loans have been included in average loan balances. (3) Includes dividend income of $7,000 received in 1995 and $3,000 in 1994. (4) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($11,000 in 1995 and $9,000 in 1994). (5) Includes dividend income of $59,000 and $47,000 received in 1995 and 1994. (6) The net interest margin represents the net interest income as a percentage of average earning assets.
AVERAGE BALANCES, RATES AND YIELDS (dollars in thousands, except for footnotes) Six months ended June 30, 1995 1994 Average Average Average Average Assets Balance Interest Yield (1) Balance Interest Yield (1) Interest earning assets: Loans, net (2) $146,888 $8,839 12.14% $98,745 $4,814 9.83% Securities held to maturity: Taxable (3) 12,079 371 6.20 6,724 157 4.70 Nontaxable (4) 2,454 76 6.23 1,788 58 6.54 Securities available for sale (5) 20,385 593 5.86 8,559 190 4.48 Money market investments 3,324 100 6.04 5,613 100 3.58 Interest rate hedging instruments ---- (39) ---- ---- 76 ---- Total interest-earning assets 185,130 9,940 10.83 121,429 5,395 8.96 Allowance for possible loan losses (3,463) (2,125) Cash and due from banks 11,115 7,008 Bank premises and equipment, net 3,321 2,499 Other real estate owned 1,254 1,099 Accrued interest receivable and other assets 2,533 1,740 Core deposit intangibles and goodwill, net 4,810 ---- Total $204,700 $131,650 Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $ 29,172 524 3.62 $ 8,958 60 1.34 Money market and savings 49,331 841 3.44 32,741 451 2.78 Certificates of deposit: Less than $100,000 15,529 380 4.93 12,900 234 3.66 $100,000 or more 35,750 934 5.27 24,590 437 3.59 Total certificates of deposits 51,279 1,314 5.17 37,490 671 7.18 Other short-term borrowings 4,674 145 6.25 279 4 3.18 Total interest-bearing liabilities 134,456 2,824 4.24 79,468 1,186 3.01 Noninterest-bearing demand 43,394 35,033 Accrued interest payable and other liabilities 2,593 787 Total liabilities 180,443 115,288 Shareholders' equity 24,257 16,362 Total $204,700 $131,650 Net interest income and margin (6) $7,116 7.75% $4,209 6.99% (1) Rates are presented on an annualized basis. (2) Includes loan fees of $576,000 for 1995, and $523,000 for 1994. Nonperforming loans have been included in average loan balances. (3) Includes dividend income of $14,000 received in 1995 and $7,000 in 1994. (4) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($22,000 in 1995 and $18,000 in 1994). (5) Includes dividend income of $118,000 and $89,000 received in 1995 and 1994. (6) The net interest margin represents the 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 six months ended June 30, 1995 and 1994.
VOLUME/RATE ANALYSIS (dollars in thousands) Quarter ended June 30, 1995 vs. Six months ended June30, 1995 vs. Quarter ended June 30, 1994 Six months ended June30, 1994 Increase (decrease) Increase (decrease) due to change in due to change in Average Average Total Average Average Total Volume Rate Change Volume Rate Change Interest income: Loans (1) $1,257 $882 $2,139 $2,346 $1,679 $4,025 Securities: Taxable 64 24 88 125 89 214 Nontaxable 15 (2) 13 22 (4) 18 Available for sale 151 94 245 263 140 403 Money market investments (24) 28 4 (165) 165 ---- Total interest income 1,463 1,026 2,489 2,591 2,069 4,660 Interest expense: Interest checking 67 185 252 134 329 464 Money market and savings 107 66 173 229 161 390 Certificates of deposits: Less than $100,000 19 53 72 48 98 146 $100,000 or greater 116 175 291 199 299 497 Other short-term borrowings 91 ---- 91 70 71 141 Total interest expense 400 479 879 679 958 1,638 Interest rate hedging instruments ---- (32) (32) ---- (115) (115) Change in net interest income $1,063 $515 $1,578 $1,912 $996 $2,907 (1) The effect of the change in loan fees is included as adjustment to the average rate.
Provision for Possible Loan Losses The level of 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 $500 and $150 were made to the allowance for possible loan losses for the quarters ended June 30, 1995 and 1994, respectively and $710 and $300 for the six months ended June 30, 1995 and 1994, respectively. Management's determinations of the provision in 1995 and 1994 were based on the measurement of the possibility of future loan losses through various objective and subjective criteria and the impact of net charge-offs. The primary cause for the increase in the second quarter of 1995 was due to several factors, including a significant increase in loan volume, greater exposure on SBA loan guarantees and Management's evaluation of the impact of the local economy on its loan portfolio. 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 six months ended June 30, 1995 and 1994.
OTHER INCOME (dollars in thousands) Quarter ended June 30, Six months ended June 30, 1995 1994 1995 1994 Amount Percent Amount Percent Amount Percent Amount Percent Depositor service charges $155 82.95% $82 58.03% $286 64.73% $165 47.69% Other operating income 68 36.72 59 41.97 199 44.98 106 30.64 Gain on sale of SBA loans ---- ---- ---- ---- ---- ---- 75 21.67 Net loss on securities available for sale (37) (19.67) ---- ---- (43) (9.71) ---- ---- Total $186 100.00% $141 100.00% $442 100.00% $346 100.00%
Other income increased from $141 for the quarter ended June 30, 1994 to $186 for the comparable quarter in 1995. This increase was due mainly to the impact of the CBB acquisition offset in part by the realization of $37 in losses on securities available for sale. For the six month ended June 30, 1995, other income was $442, as compared to $346 for the same period in 1994. The increase was due to the CBB acquisition. In addition, the Bank recognized $75 in gains on the sale of SBA guaranteed loans during 1994 and none in 1995. 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 June 30, Six months ended June 30, 1995 1994 1995 1994 Amount Percent* Amount Percent* Amount Percent* Amount Percent* Salaries and benefits $1,046 2.00% $778 2.31% $2,121 2.07% $1,535 2.33% Amortization of core deposit intangibles and goodwill 140 .26 ----- ----- 280 .27 ----- ----- Regulators assessments 117 .22 81 .24 244 .24 163 .25 Legal and professional fees 170 .32 69 .20 233 .23 123 .19 Data processing 115 .22 85 .25 224 .22 157 .24 Occupancy 88 .17 124 .37 206 .20 248 .38 Furniture and equipment 88 .17 60 .18 178 .17 115 .17 Business promotion 79 .15 77 .23 166 .16 133 .20 Client services paid by bank 62 .12 54 .16 125 .12 92 .14 Directors' fees and costs 61 .12 21 .06 122 .12 54 .08 Advertising 45 .09 15 .04 91 .09 31 .05 Stationery and supplies 41 .08 33 .10 80 .08 62 .09 Loan and collection 29 .04 46 .14 72 .07 103 .16 Net cost of foreclosed property (2) ----- 34 .10 (14) (.01) 67 .10 Other 117 .22 34 .10 253 .25 55 .08 Total $2,1964 .18% $1,5114 .48% $4,382 4.28% $2,9384 .46% * The percentages are calculated by annualizing the quarter or year to date expense, and comparing that amount to average assets for the respective periods ended June 30, 1995 and 1994.
Total other expenses for the second quarter and first six months of 1995 increased $685 and $1,444 respectively, from the same periods a year ago. The increases relate primarily to the increased costs associated with the acquisition of CBB including the amortization of core deposit premium and goodwill. Most costs showed increases in absolute amounts while declining as a percent of average assets, with the exception of legal and professional fees, directors' fees and costs and advertising. Legal and professional fees increased due to the cost of litigation relating to several suits. Directors' fees have increased due to a greater number of directors and an increase in fees paid. Costs of advertising have increased due to greater promotion of the Bank. The net cost of other real estate owned decreased substantially mainly due to the reduction in the amount of foreclosed property. See "Other Real Estate Owned." The costs are summarized below:
Quarter ended Six months ended June 30, June 30, 1995 1994 1995 1994 Costs relating to foreclosed properties $71 $10 $129 Loss on dispositions $(2 ) ---- (12) ---- Income collected on foreclosed property ---- (37) (11) (62) Net cost of other real estate owned $(2) $34 $(14) $67
Income Tax Provision The Company accounts for income taxes using the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). Under the asset and liability 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 45% for the six months ended June 30, 1995 is affected by several items, the most significant of which are the amortization of the intangibles; estimates for tax exempt income and the California Franchise Tax Enterprise Tax Zone Credit. The effective tax rate for the year ended December 31, 1994 was 42%. Financial Condition and Earning Assets Consolidated assets increased to $233 million at June 30, 1995 compared to $206 million at December 31, 1994. The increase consisted primarily of money market investments, securities available for sale and loans and was funded by an increase in the Bank's core interest-bearing deposit accounts and certificates of deposits. See "Funding." In addition, there was an increase in other short-term borrowings of $17 million relating to the Bank's hedging activities. See "Asset/Liability Management." Money Market Investments Money market investments, which include federal funds sold, increased to $8 million at June 30, 1995 from none at December 31, 1994. This increase was related to the growth in deposits. Securities The following table shows the composition of the securities portfolio, at book value, at June 30, 1995 and December 31, 1994. 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) June 30, 1995 December 31, 1994 Amortized Unrealized Market Amortized Unrealized Market Cost Gain (Loss) Value Cost Gain (Loss) Value Securities held to maturity: U. S. Treasury $4,262 $(10) $4,252 $4,260 $(159) $4,101 U. S. Government Agencies 4,969 24 4,993 4,963 (211) 4,752 State and municipal (nontaxable) 2,889 10 2,899 1,797 (34) 1,763 Mortgage backed 2,395 65 2,460 2,377 (63) 2,314 Federal Reserve Bank Stock 519 ---- 519 462 ---- 462 Securities held to maturity 15,034 89 15,123 13,859 (467) 13,392 Securities available for sale: U. S. Treasury 3,996 58 4,054 9,989 (203) 9,786 U. S. Government Agencies 26,197 83 26,280 4,960 (5) 4,955 Mortgage backed 14 5 19 19 (1) 18 Mutual funds 4,032 (153) 3,879 4,180 (233) 3,947 Securities available for sale 34,239 (7) 34,232 19,148 (442) 18,706 Total $49,273 $82 $49,355 $33,007 $(909) $32,098
Securities held to maturity include those securities which management 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 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 acquire generally "A" rated or better state and municipal securities. The specific issues are monitored for changes in financial condition and appropriate action would be taken if significant deterioration was noted. 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 intent to maintain at least 50% of its total investment securities portfolio in U.S. Treasury and U.S. Government Agencies securities. Gross unrealized gains on securities held to maturity were $89 as of June 30, 1995 as compared to an unrealized loss of $467 as of December 31, 1994. The unrealized gain results from the significant decrease in interest rates over the last six months. The decrease in interest rates has an inverse effect on the value of securities for which the interest rate is fixed. The Bank's weighted average maturity of the held to maturity investment portfolio was approximately 2.3 years as of June 30, 1995. It is estimated that for each 1% change in interest rates, the value of the Company's securities held to maturity will change by approximately 2%. This volatility decreases as the average maturity shortens. It is the intention of management to hold these securities to maturity and therefore this 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 June 30, 1995 was $7. The Bank's weighted average maturity of the available for sale portfolio was approximately 2.0 years as of June 30, 1995. It is estimated that for each 1% change in interest rates the value of the Company's available for sale securities will change by 1.8%. Mortgage backed securities are considered to have increased risks associated with them because of the timing of principal repayments. At June 30, 1995, the Bank had the following securities which were mortgage-backed related securities:
Historical Market (dollars in thousands) Cost Value Federal Home Loan Mortgage Corp. (U.S. Agency) $2,396 $2,461 Federal National Mortgage Association (U.S. Agency) 14 18 Federated ARMs Funds * 1,686 1,631 Overland Variable Rate Government Fund* 1,263 1,180 * 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 six months ended June 30, 1995 and 1994 are as follows:
INTEREST AND DIVIDEND INCOME ON INVESTMENT SECURITIES (dollars in thousands) Quarter ended Six months ended June 30, June 30, 1995 1994 1995 1994 Securities held to maturity: U.S. Treasury $54 $51 $107 $102 U.S. Government agencies 57 22 152 48 State and municipal (nontaxable) 30 19 54 40 Mortgage backed 47 ----- 99 ----- Federal Reserve Bank Stock 7 4 14 7 Securities available for sale: U.S. Treasury 145 70 279 101 U. S. Government Agencies 159 ----- 196 ----- Mortgage backed (1) ----- (2) ----- Mutual funds 59 47 119 89 Interest and dividend income $557 $213 $1,018 $387
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) June 30, 1995 December 31, 1994 Percentage Percentage Total of Total Total of Total Amount Loans Amount Loans Commercial $47,895 30.90% $49,018 32.81% Real estate construction 11,303 7.29 16,343 10.94 Real estate-other 66,093 42.64 63,104 42.23 Consumer 11,600 7.48 9,461 6.34 Other 9,621 6.21 7,362 4.93 Unearned fee income (824) (.53) (889) (.60) Loan portfolio 145,688 93.99% 144,399 96.65% Loans available for sale 9,320 6.01 5,008 3.35 Total loans $155,008 100.00% $149,407 100.00%
Consolidated loans increased to $155 million at June 30, 1995 from $149 million at December 31, 1994. The increase in the loan portfolio can be attributed to the success of the Bank's SBA and other business development efforts offset by a decrease in real estate construction loans reflecting the recent slowdown in market demand for residential construction. Economic conditions in Northern California have begun to level off during 1995. At the same time, 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. To the extent that such competitive pricing continues throughout 1995 and the Bank finds it necessary to meet such competition, the Bank's net interest margins could decline. 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." Loans are generally made on the basis of a secure repayment source and collateral is generally a secondary source for loan qualification. Approximately 55% 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 (included in the Consumer category) (3%), mortgage warehouse line (1%) and loans to real estate developers for short-term investment purposes (1%). The latter two types are included in the Other category. Approximately 31% 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 mitigates 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 it is determined appropriate. Other reasons would include the industry use of environmentally sensitive substances or the proximity to known other 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 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, especially in light of the current economic environment. The conclusion that a loan may become uncollectable (in whole or in part) and be charged off against the allowance is a matter of judgment. 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, after full review, including consideration of: * Economic conditions; * Borrowers' financial condition; * Loan impairment * Evaluation of industry trends; * Industry concentrations * Loans which are contractually current as to payment terms but demonstrate a higher degree of risk as identified by management; * Continuing evaluation of the performing loan portfolio; * Monthly review and evaluation of problem loans identified as having loss potential; and, * Quarterly review by the Board of Directors; * Off-balance sheet risks 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 financial statements are examined by independent accountants and the Company retains a consultant who performs credit reviews on a quarterly basis and who provides an assessment of the adequacy of the allowance for possible loan losses. 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 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 the objective in addition to subjective measures, such as knowledge of the borrowers' business, valuation of collateral and exposure to potential losses. Management believes that the allowance for possible loan losses was determined as described above and therefore believes it to be an adequate allowance against losses inherent in the loan portfolio. 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 the future economic trends. Accordingly, it is not possible to predict the effect such uncertainty may have on the level of the provision for possible loan losses in future periods. The allowance for possible loan losses was approximately $4 million at June 30, 1995, or 2.33% of loans outstanding. The following schedule provides an analysis of the allowance for possible loan losses:
ALLOWANCE FOR POSSIBLE LOAN LOSSES (dollars in thousands) Quarter ended Six months ended Year ended June 30, June 30, December 31, 1995 1994 1995 1994 1994 Balance, beginning of the period $3,407 $2,091 $3,311 $2,057 $2,057 Charge-offs by loan category: Commercial ---- ---- 230 85 148 Real estate-construction 150 ---- 150 ---- ---- Real estate-other 96 26 104 126 637 Consumer 75 33 75 33 73 Other ---- 24 ---- 24 824 Total charge-offs 321 83 559 268 1,682 Recoveries by loan category: Commercial 15 39 33 54 192 Real estate-other 1 ---- 1 ---- 10 Consumer ---- 6 6 7 7 Other 2 49 101 102 222 Total recoveries 18 94 141 163 431 Net charge-offs 303 (11) 418 105 1,251 Provision charged to expense 500 150 710 300 600 Allowance relating to California Business Bank ---- ---- ---- ---- 1,905 Balance, end of the period $3,604 $2,252 $3,604 $2,252 $3,311 Ratios: Net charge-offs to average loans, annualized .82% ( .04%) .57% .21% 1.11% Allowance to total loans at the end of the period 2.33 2.22 2.32 2.22 2.22 Allowance to nonperforming loans at end of the period 166.20 69.78 166.20 69.78 60.45
During the three months ended June 30, 1995, the Company charged off $321 and recovered $18 on loans previously charged off. This compares to $83 and $94, respectively, for the three months ended June 30, 1994. During the six months ended June 30, 1995, the Company charged off $559 and recovered $141. This compares to $268 and $163, respectively for the six months ended June 30, 1994. The most significant charge-offs during 1995 represented partial write offs of a commercial loan in the amount of $198 and a real estate development loan of $150. Both loans were the result of the acquisition of CBB. There were no trends indicated by the detail of the aggregate charge-offs for any of the periods discussed. The allowance for possible loan losses was 166% of nonperforming loans at June 30, 1995 compared to 60% at December 31, 1994. 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 June 30, 1995 and December 31, 1994:
ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES (dollars in thousands) June 30, 1995 December 31, 1994 Percentage Percentage Amount of of loans to Amount of of loans to Allowance total loans Allowance total loans Commercial $856 33.29% $1,192 33.96% Real estate construction 257 7.29 310 10.87 Real estate-other 954 46.26 1,051 43.97 Consumer 172 7.48 219 6.29 Other 110 5.68 94 4.91 Unallocated 1,255 --- 445 --- Total $3,604 100.00% $3,311 100.00%
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 and as described more fully under the section "Asset Quality - Allowance for Possible Loan Losses". The increase in the unallocated portion is due to several factors including the write-off of loans which had been previously identified, an increased allocation relating to the off-balance sheet risk of SBA guaranteed loans and management's assessment of the overall risk relating to local economic conditions. 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) June 30, December 31, 1995 1994 Loans accounted for on a non-accrual basis $2,163 $5,395 Other loans with principal or interest contractually past due 90 days or more 6 83 Total $2,169 $5,478
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 collectibility of interest or principal or when the payment of principal or interest is ninety days past due, unless the amount is well-secured and in the process of collection. As of June 30, 1995, the Company had approximately $2 million of nonperforming loans, consisting of eight loans, of which the most significant are summarized below.
SUMMARY OF SIGNIFICANT NONPERFORMING LOANS (dollars in thousands) Purpose Amount Description of Collateral Date of Appraisal Land development $594 2nd deed of trust on five rural August 1993 lots and a 1st deed of trust on another lot, San Jose, CA Real estate development 534 1st deed of trust of SFR and two September 1994 lots in San Jose, CA Business loan 393 1st deed of trust on SFR, January 1994 Petaluma, CA Business loan 222 2nd deed of trust on commercial August 1991 building in Campbell, CA Land development 184 1st deed of trust of 11.7 acres, August 1993 San Jose, CA Real estate development 106 2nd deed of trust on SFR in May 1993 Piedmont, CA
At December 31, 1994, there were 14 loans which were included as nonperforming loans. Of these loans, 11 were secured by commercial or residential real estate (approximately 89%) and three were secured by general business assets (approximately 11%). 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 June 30, 1995, management has identified approximately $53 of loans relating to two borrowers 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. Other Real Estate Owned At June 30 1995, the Bank had three properties which were acquired through the foreclosure process in the amount of $1.2 million. A summary of the properties at June 30, 1995 and December 31, 1994 follows:
Carrying Value Description of Property June 30, 1995 December 31, 1994 72 berth marina, property sold January 1995, see note below $800 $800 Two vacant parcels, currently subject to a one-year sewer moratorium 304 304 Commercial office converted from a SFR, participated with SBA 48 48 Other properties ----- 343 Total $1,152 $1,495
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. See "Financial Review - Other Expense" for the analysis of the net cost of other real estate owned for the quarters and six months ended June 30, 1995 and 1994. On December 31, 1994 the Bank entered into an agreement to sell the marina property which was acquired through the foreclosure process in early 1994 for $800. The Bank received a down payment of $100 and took back a note for the remainder. The property is subject to a cease and desist order from the Army Corps of Engineers specifying that there is to be no further encroachment of the protected wetlands area which is located on the marina property. In addition, the Army Corps of Engineers has suggested that certain cleanup of the wetlands be undertaken. The purchaser has agreed to expend $200 relating to this restoration and cleanup. If the Army Corps of Engineers does not accept the cleanup effort after the expenditure of the agreed $200 and prior to September 20, 1995, the purchaser has the right to return the property to the Bank and receive the amount of his down payment and the return of the $200 expended on the cleanup effort. If the property is returned, the Bank would be subject to any potential costs of any further environmental remediation. Due to the percentage of the down payment to total consideration and the contingency relating to the return of the property, the Bank has not recorded the sale and continues to classify the property as other real estate owned. The Bank will record the sale when the contingency expires and other conditions are met. 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 June 30, 1995 and December 31, 1994, the Company had undisbursed loan commitments to extend credit under normal lending arrangements as follows:
UNDISBURSED LOAN COMMITMENTS (dollars in thousands) June 30, December 31, Loan Category 1995 1994 Commercial $29,097 $22,837 Real estate-other 2,991 3,658 Real estate construction 11,050 9,314 Consumer 6,182 6,955 Other 11,487 11,832 Total $60,807 $54,596
In addition there was approximately $3 million for commitments under unused letters of credit at June 30, 1995. Funding The following table provides a breakdown of deposits by category as of the dates indicated:
DEPOSIT CATEGORIES (dollars in thousands) June 30, 1995 December 31, 1994 Percentage Percentage Total of Total Total of Total Amount Deposits Amount Deposits Noninterest-bearing demand $45,985 24.47% $54,002 29.95% Interest-bearing demand 30,282 16.11 29,041 16.11 Money market and savings 53,849 28.65 47,170 26.16 Certificates of deposit: Less than $100,000 14,918 7.94 16,038 8.90 $100,000 or more 42,920 22.83 34,036 18.88 Total $187,954 100.00% $180,287 100.00%
Consolidated deposits as of June 30, 1995, were $188 million compared to $180 million at December 31, 1994. The increase in deposits relates to the growth of interest-bearing deposits of all types. Noninterest-bearing deposits have declined from $54 million as of December 31, 1994 to $46 million as of June 30, 1995. The decline in these deposits is due to the decrease in title company escrow deposits of $3 million and the impact of customers who have converted such deposits to interest-bearing deposits. Title company escrow deposits were $3 million at June 30, 1995 as compared to $6 million at December 31, 1994. Such deposits are cyclical in nature and are dependent upon the real estate activity in Santa Clara County. This activity has declined sharply with the advent of increased interest rates. See "Liquidity." The growth in interest-bearing deposits has been due to the successful business development efforts of the Bank's business development officers and higher interest rates on certificates of deposits. 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 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 the major banks, 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 provides a hedge against rising interest rates, but has a detrimental effect during times of interest rate decreases. Net interest revenues are negatively impacted by a decline in interest rates. The interest rate gap is a measure of interest rate exposure and is based upon the known repricing dates of certain assets and liabilities and assumed repricing dates of others. To counter its natural 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. Settlement is done quarterly and the Bank records the impact of these hedges on an accrual basis. During the second quarter of 1995, the Bank executed two transactions which are intended to mitigate its exposure to a decline in general market interest rates. The transactions involved the purchase of two U.S. Agency securities for an aggregate cost of $17 million which were financed through the use of two 90 day repurchase agreements. The securities are fixed rate and $10 million matures in May 1998 and $7 million matures in November 1997. The repurchase agreement interest rates are 6.05% (adjusts on August 16, 1995) and 5.85% (adjusts on September 25, 1995), respectively. The following table quantifies the Company's interest rate exposure at June 30, 1995 based upon the known repricing dates of certain assets and liabilities and the assumed repricing dates of others. At June 30, 1995, 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 At June 30, 1995 (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 Investment securities-taxable ----- ----- $2,796 $8,831 $519 $12,146 Investment securities-non-taxable $530 ----- ----- 2,238 120 2,888 Securites available for sale 4,868 1,985 4,070 23,291 18 34,232 Loans 139,119 526 376 11,300 3,687 155,008 Total earning assets 144,517 2,511 7,242 45,660 4,344 204,274 Interest checking, money market and savings 84,130 ----- ----- ----- ----- 84,130 Certificates of deposit: Less than $100,000 5,244 4,046 3,546 2,082 ----- 14,918 $100,000 or more 21,133 8,692 11,669 1,426 ----- 42,920 Other short-term borrowings 16,758 ----- ----- ----- ----- 16,758 Total interest-bearing liabilities 127,265 12,738 15,215 3,508 ----- 158,726 Interest rate gap $17,252 ($10,227) ($7,973) $42,152 $4,344 $45,548 Cumulative interest rate gap $17,252 $7,025 ($948) $41,204 $45,548 Interest rate gap ratio 1.14 0.20 0.48 13.02 ----- Cumulative interest rate gap ratio 1.14 1.05 0.99 1.26 1.29
The maturities and yields of the investment portfolio at June 30, 1995 are shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES At June 30, 1995 (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 $4,262 $2,796 4.44% $1,466 6.11% ---- ---- U. S. Government Agencies 4,969 ---- ---- 4,969 6.14 ---- ---- State and municipal 2,889 530 7.25 2,359 6.36 ---- ---- Mortgage backed 2,395 ---- ---- 2,395 7.90 ---- ---- Other 519 ---- ---- ---- ---- $519 6.00% Total 15,034 3,326 11,189 519 Securities available for sale: U. S. Treasury 4,054 1,000 5.94 3,054 7.18 ---- ---- U.S. Government Agencies 26,280 2,989 6.73 23,291 6.07 ---- ---- Mortgage backed 19 ---- ---- ---- ---- 19 ---- Mutual funds 3,879 3,879 6.08 ---- ---- ---- ---- Total 34,232 7,868 26,345 19 Total $49,266 $11,194 5.89% $37,534 6.31% $538 5.79%
The following table shows the maturity and interest rate sensitivity of commercial, real estate-other and real estate construction loans at June 30, 1995. Approximately 89% 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 June 30, One year year to Over interest interest 1995 or less five years five years rates rates Commercial $51,603 $33,345 $15,150 $3,108 $1,979 $49,624 Real estate-other $71,705 $9,682 $29,792 $32,231 $13,341 $58,363 Real estate construction $11,303 $10,771 $532 ----- ----- $11,303
The above table does not take into account the possibility that a loan maybe 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 $10.45 and $9.92 on June 30, 1995 and December 31, 1994, respectively. Shareholders' equity was $25 million and $23 million as of June 30, 1995 and December 31, 1994, 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 has also adopted risk-based capital requirements. Similar to the Federal Reserve's guidelines, the amount of capital the Comptroller will require a bank to maintain will be 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 June 30, 1995 and December 31, 1994.
Risk-based and Leverage Capital Ratios (dollars in thousands) Company June 30, 1995 December 31, 1994 Risk-based Amount Ratio Amount Ratio Tier 1 capital $20,046 11.38% $18,530 10.93% Tier 1 capital minimum requirement 7,047 4.00 6,781 4.00 Excess $12,999 7.38% $11,749 6.93% Total capital $22,325 12.67% $20,724 12.23% Total capital minimum requirement 14,094 8.00 13,561 8.00 Excess $8,231 4.67% $7,163 4.23% Risk-adjusted assets $176,169 $169,514 Leverage Tier 1 capital $20,046 9.78% $18,530 9.33% Minimum leverage ratio requirement (1) 8,195 4.00 7,942 4.00 Excess $11,851 5.78% $10,588 5.33% Average total assets $204,873 $198,542 Bank Risk-based Tier 1 capital $19,114 10.86% $17,477 10.34% Tier 1 capital minimum requirement 7,040 4.00 6,759 4.00 Excess $12,075 6.86% $10,718 6.34% Total capital $21,390 12.15% $19,664 11.64% Total capital minimum requirement 14,079 8.00 13,518 8.00 Excess $7,311 4.15% $6,146 3.64% Risk-adjusted assets $175,992 $168,976 Leverage Tier 1 capital $19,114 9.35% $17,477 8.81% Minimum leverage ratio requirement (1) 8,178 4.00 7,934 4.00 Excess $10,936 5.35% $9,543 4.81% Average total assets $204,460 $198,341 (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. To date, however, the regulators have not established this amount. 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 the most 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, and short-term marketable investments. At June 30, 1995, consolidated liquid assets totaled $32 million or 14% of consolidated total assets as compared to $31 million or 15% of consolidated total assets on December 31, 1994 In addition to the liquid asset portfolio, SJNB also has available $9 million in lines of credit with five major commercial banks, a repurchase line with a maximum limit of $40 million (of which approximately $17 has been utilized) and a credit facility with the Federal Reserve Bank based on loans secured by real estate for approximately $4 million. SJNB is primarily a business and professional bank and, as such, its deposit base is more susceptible to economic fluctuations. 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 and each business' seasonality. Large certificates of deposit amounted to 23% of total deposits on June 30, 1995 as compared to 19% on December 31, 1994. This increase is principally due to the impact of several customers which have transferred balances from other deposit accounts and the placement by several new customers of new funds into the Bank. Additionally, SJNB is a depository of title company funds which are cyclical and dependent mainly upon the residential real estate market. There were $3 million of such title company deposits on June 30, 1995, compared to $6 million at December 31, 1994. 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 June 30, 1995, approximately 31% of total consolidated assets had maturities under one year and 89% 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. In addition, the Bank currently has available $9 million of SBA loans available for sale. These loans could be sold within a 30 day period. There are no material commitments for capital expenditures in 1995. 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 1994. PART II - OTHER INFORMATION Item 1. Legal Proceedings Neither the Company nor the Bank is a party to any material pending legal proceedings other then as previously disclosed and as set forth below. The Bank is party to routine litigation incidental to its business. During the second quarter of 1995, the Bank was served with a complaint by William Kaffer, Robert N. Greco and Gertrude E. Saynor, who allege that the Bank participated with Charles A. Herpick, Richard J. Bauer, James Herpick, Century Loan (Messrs. C. Herpick, Bauer, and J. Herpick and Century Loan are referred to as the "Century Defendants"), Santa Clara Land Title Company and other banks in a scheme to defraud the investors of Century Loan. The complaint was filed on May 18, 1995, in the Superior Court in Santa Clara County. In the complaint, the plaintiffs allege that the Century Defendants sold fictitious second trust deeds to the plaintiffs and the plaintiff class, and that the proceeds from such sales were used to make interest payments on fictitious trust deeds that had previously been sold to other investors. The plaintiffs alleged that the bank defendants, including the Bank, knew or should have known that Century Loan was overleveraged and was commingling investors' funds, and that the banks extended credit to Century Loan in spite of such knowledge, enabling Century Mortgage to continue defrauding investors. The complaint also alleges that the bank defendants were co-conspirators of the Century Defendants, were agents of and joint venturers with the Century Defendants and aided and abetted the fraudulent scheme. The complaint asks for compensatory damages, punitive damages and other damages, interest, costs and fees. The named defendants allege losses on the investments in trust deeds of approximately $1 million. The plaintiffs have asked the court to certify the plaintiffs as a class, in which case the lawsuit will be on behalf of all investors who purchased trust deed investments from the Century Defendants. If a class is certified, the losses suffered by the plaintiff class will be much higher. The Bank has filed a demurrer to the complaint, on the grounds that it does not state a cause of action against the Bank. If the demurrer is not granted, the Bank intends to vigorously defend the action. 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 At the annual meeting of shareholders of the Company on May 24, 1995, 1,986,551 shares were represented. In the election of directors, the shareholders of the Company voted as follows:
Number of Number of Votes Cast Votes Name For Nominee Withheld Akamine, Ray S. 1,931,888 54,663 Archer, Robert A. 1,929,285 57,266 Bruno, Albert V. 1,935,170 51,381 Curtis, William H. 1,929,285 57,266 Diridon, Rod 1,926,324 60,227 Fanelli, Sr., Dominic A. 1,929,149 57,402 Fischer, Jack G. 1,929,285 57,266 Gorry, F. Jack 1,918,147 68,404 Kenny, James R. 1,933,469 53,082 Lund, Arthur K. 1,928,200 58,351 Oneal, Louis 1,928,511 58,040 Rubino, Diane 1,929,285 57,266 Shen, Douglas L. 1,930,665 55,886 Vandeweghe, Gary S. 1,929,011 57,540 Weinhardt, John W. 1,930,285 56,266
The shareholders approved the Amendment increasing the shares available for options in the 1992 Employee Stock Option Plan with 1,449,285 shares being voted for the approval, 208,156 shares being voted against and 29,169 withhelds and non-voting broker votes of 299,941. The shareholders also approved the Amendment increasing the shares available for options in the 1992 Director Stock Option Plan with 1,384,043 shares being voted for the approval, 254,866 shares being voted against and 47,957 withhelds and non-voting broker votes of 299,685. In addition, the shareholders ratified the selection of KPMG Peat Marwick as the Company's independent public accountants for the year ending December 31, 1995, with 1,956,457 shares being voted for the ratification, 26,721 shares being voted against, and 3,373 withhelds. 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) 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. (3) a. The Registrant's Articles of Incorporation and Bylaws are hereby incorporated by reference from Exhibit 3 of Registrant's Registration Statement on Form S-4, as filed on July 5, 1985 under Registration No. 2-98846. (3) b. The Certificate of Amendment to Articles of Incorporation filed June 17, 1988 is hereby incorporated by reference from Exhibit (3) b. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. (3) c. Secretary's certificate dated February 2, 1995, regarding amendment to SJNB Financial Corp.'s bylaws to increase number of directors. *(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. Amendment No. 1 to the 1992 Employee Stock Option Plan is filed with this report. *(10) g. 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) h. 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) i. 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. Amendment No. 1 to the 1992 Director Stock Option Plan is filed with this report. *(10) j. 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) k. Agreement between James R. Kenny and SJNB Financial Corp. dated June 18, 1991 and amendment dated January 9, 1992 is hereby incorporated by reference from Exhibit (10) f. of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991. (10) l. 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) m. 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) n. Sublease dated April 5, 1982, for premises at 95 South Market Street, San Jose, CA is hereby incorporated by reference from Exhibit (10) n. of the Registrant's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994. (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) Dated: August 3, 1995 /s/ James R. Kenny President and Chief Executive Officer /s/ Eugene E. Blakeslee Executive Vice President and Chief Financial Officer EX-27 2
9 This schedule contains summary financial information extracted from the Balance Sheet, and Statement of Income, and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1995 JUN-30-1995 12,484 0 8,310 0 34,232 15,034 15,123 155,008 3,604 232,985 187,954 16,758 3,355 0 19,498 0 0 5,420 232,985 8,839 1,104 (25) 9,918 2,679 2,824 7,094 710 (43) 4,382 2,443 2,443 0 0 1,351 .55 .55 7.73 2,163 6 0 53 3,311 559 141 3,604 2,349 0 1,255
EX-10 3 EXHIBIT 10(F) Exhibit No. 10 (f) to SJNB Financial Corp. Form 10-QSB for the quarterly period ended June 30, 1995 AMENDMENT NO. 1 TO SJNB FINANCIAL CORP. 1992 EMPLOYEE STOCK OPTION PLAN This Amendment No. 1 to the SJNB Financial Corp. 1992 Employee Stock Option Plan ("Plan") is adopted by the Board of Directors of SJNB Financial Corp. ("Corporation") with reference to the following: RECITALS: A. The Board of Directors of the Corporation desires to amend the Plan to increase the number of shares for which options may be granted, subject to the approval of the shareholders of the Corporation, THEREFORE, the Plan is hereby amended as follows: 1. Section 2 of the Plan is amended to read in its entirety as follows: "2. STOCK SUBJECT TO OPTION "Subject to adjustment as provided in Section 6(g) hereof, options under the Plan may be granted to participants by the Corporation from time to time to purchase an aggregate of up to two hundred, thirty-five thousand (235,000) shares. For purposes of calculating the aggregate number of shares of Common Stock which may be issued under the Plan: "(a) Shares of Common Stock applicable to the unexercised portions of options which have terminated or expired may again be made subject to options under the Plan, if at such time options may still be granted under the Plan; and "(b) All the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted upon exercise of an option, even if shares of Common Stock are delivered to the Corporation as payment for the exercise." 2. The amendment effected by Section 1 of the Amendment No. 1 shall be subject to being approved by the shareholders of the Corporation. 3. Except as amended herein, the Plan shall remain in full force and effect. EX-10 4 EXHIBIT 10(I) Exhibit No. (10) i to SJNB Financial Corp. Form 10-QSB for the quarterly period ended June 30, 1995 AMENDMENT NO. 1 TO SJNB FINANCIAL CORP. 1992 DIRECTOR OPTION PLAN This Amendment No. 1 to the SJNB Financial Corp. 1992 Director Stock Option Plan ("Plan") is adopted by the Board of Directors of SJNB Financial Corp. ("Corporation") with reference to the following: RECITALS: A. The Board of Directors of the Corporation desires to amend the Plan to increase the number of shares for which options may be granted, subject to the approval of the shareholders of the Corporation, THEREFORE, the Plan is hereby amended as follows: 1. Section 2 of the Plan is amended to read in its entirety as follows: "2. STOCK SUBJECT TO OPTION "Subject to adjustment as provided in Section 6(g) hereof, options under the Plan may be granted to participants by the Corporation from time to time to purchase an aggregate of up to two hundred, fifty-five thousand (255,000) shares. For purposes of calculating the aggregate number of shares of Common Stock which may be issued under the Plan: "(a) Shares of Common Stock applicable to the unexercised portions of options which have terminated or expired may again be made subject to options under the Plan, if at such time options may still be granted under the Plan; and "(b) All the shares issued (including the shares, if any, withheld for tax withholding requirements) shall be counted upon exercise of an option, even if shares of Common Stock are delivered to the Corporation as payment for the exercise." 2. The amendment effected by Section 1 of the Amendment No. 1 shall be subject to being approved by the shareholders of the Corporation. 3. Except as amended herein, the Plan shall remain in full force and effect. -----END PRIVACY-ENHANCED MESSAGE-----