United States
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-11771
SJNB Financial Corp.
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(Exact name of registrant as specified in its charter)
California 77-0058227
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 947-7562
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ]No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant, based on a market value of $29.00 per share (the closing price
of the Common Stock, as of February 29, 2000) was $85,774,000
Number of shares of common stock outstanding as of February 29, 2000: 3,617,408
shares
Documents incorporated by reference:
Portions of the registrant's definitive proxy statement for the registrant's
2000 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A) are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PART I
Page
Item 1 - Business 3
Item 2 - Properties 12
Item 3 - Legal Proceedings 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters 13
Item 6 - Selected Financial Data 14
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation 16
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 34
Item 8 - Financial Statements and Supplementary Data 35
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 63
PART III
Item 10- Directors and Executive Officers of the Registrant 63
Item 11- Executive Compensation 63
Item 12- Security Ownership of Certain Beneficial Owners and Management 63
Item 13- Certain Relationships and Related Transactions 63
PART IV
Item 14- Exhibits, Financial Statement Schedules and Reports on
Form 8-K 63
SIGNATURES 66
PART I
ITEM 1. BUSINESS
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Forward-Looking Information
This Annual Report on Form 10-K includes forward-looking information which is
subject to the "safe harbor" created by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements (which involve the Company's plans,
beliefs and goals, refer to estimates or use similar terms) involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Such risks and uncertainties
include, but are not limited to, the following factors: competitive pressure in
the banking industry; changes in the interest rate environment; the declining
health of the economy, either nationally or regionally; the deterioration of
credit quality, which could cause an increase in the provision for loan and
lease losses; changes in the regulatory environment; changes in business
conditions, particularly in Santa Clara County real estate and high tech
industries; certain operational risks involving data processing systems or
fraud; volatility of rate sensitive deposits; asset/liability matching risks and
liquidity risks. The Company undertakes no obligation to revise or publicly
release the results of any revision to these forward-looking statements. See
also the section included herein entitled "Certain Additional Business Risks"
and other risk factors discussed elsewhere in this Report.
General
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SJNB Financial Corp. (the "Company") is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company was
incorporated under the laws of the State of California on April 18, 1983. Its
principal office is located at One North Market Street, San Jose, California
95113, and its telephone number is (408) 947-7562.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose,
California, on June 10, 1982. SJNB engages in the general commercial banking
business with special emphasis on the banking needs of the business and
professional communities in San Jose and the surrounding areas.
On January 2, 1996, the Bank acquired Astra Financial Corp. for approximately
$760,000. Its business was merged into the Bank's Financial Services Division,
by adding approximately $1.9 million of factored receivables. Astra Financial
Corp. was liquidated on January 5, 1996, and its assets were transferred to the
Bank. The Bank's Financial Services Division is located at 95 South Market
Street, San Jose, California 95113.
On May 22, 1998, SJNB acquired all of the stock of a private company, Epic
Funding Corporation ("Epic"), pursuant to a definitive agreement dated April 13,
1998. In connection with the acquisition, which was structured as a tax-free
reorganization, the Company issued 12,223 shares of its common stock and paid
$110,000 to Epic's sole shareholder in exchange for all of Epic's outstanding
stock. The total purchase price for Epic was $611,000, while Epic's net equity
was $28,000. Goodwill amounted to $759,000, including certain expenses of the
transaction. Epic provides direct and vendor lease programs and accounts
receivable financing to manufacturers and equipment users throughout California
and across parts of the United States. Epic is now a wholly-owned subsidiary of
the Bank. Epic's office is located in Danville, California, together with a
small de novo branch of the Bank at the same facility, which opened July 1,
1998.
On January 5, 2000, Saratoga Bancorp, the parent company of Saratoga National
Bank, was merged with and into the Company, pursuant to an exchange of the
Company's common stock for all common stock of Saratoga Bancorp. Saratoga
National Bank, headquartered in Saratoga, California, operated three branches
and as of the acquisition date had approximately $142 million in assets, $103
million in deposits and $15 million in shareholders' equity. Saratoga National
Bank was merged with and into SJNB on January 5, 2000. Saratoga's San Jose
office, which was located near SJNB's San Jose office was consolidated into
SJNB's San Jose office as of January 28, 2000. The shareholders of Saratoga
received 0.70 shares of the Company's common stock for each outstanding share of
Saratoga common stock. Based on the closing price of the Company's stock on
January 5, 2000 of $29.125, the transaction is valued at approximately $34.2
million, excluding the value of any unexercised options, and each Saratoga
shareholder received the equivalent of .70 of the Company's common stock valued
at $20.39 per share. The merger has been accounted for as a pooling of
interests. See unaudited pro forma combined condensed financial information as
if the transaction had taken place as of December 31, 1999 on page 62 of this
Report.
SJNB accepts checking and savings deposits, offers money market deposit accounts
and certificates of deposit, makes secured and unsecured commercial and other
installment and term loans and offers other customary banking services. SJNB
offers banking services generally, but it places primary emphasis on lending for
real estate purposes and specialized lending to businesses and professionals.
Loans for real estate purposes include term financing for commercial facilities
and real estate construction loans mainly for residential and commercial
properties. Loans to businesses and professionals include accounts receivable
financing, equipment financing, commercial loans, SBA loans and letters of
credit. The Company provides commercial banking, factoring and leasing services
principally through the Bank, the Bank's Financial Services Division and Epic.
Although the Bank has neither a trust nor an international banking department,
it has arranged to provide these services through its correspondent banks. As a
bank holding company, the Company is authorized to engage in the activities
permitted under the BHCA and regulations thereunder.
Service Area
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The principal service area of SJNB includes the County of Santa Clara and its
contiguous counties, including San Mateo, Alameda, Contra Costa, Santa Cruz and
San Benito.
Employees
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At December 31, 1999, SJNB had 110 full-time officers and employees and 25
part-time employees for a total of 99.08 employees on a full-time equivalent
basis (125, 28, and 112.85, respectively, subsequent to the acquisition of
Saratoga). Certain of the Bank's officers are also officers of the Company. None
of the Bank's employees are represented by a union. Management believes that
employee relations are good.
Supervision and Regulation
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The Effect of Government Policy on Banking
The earnings and growth of the Company are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Board of Governors of the Federal Reserve
System ("FRB") influences the supply of money through its open market operations
in U.S. Government securities and adjustments to the discount rates applicable
to borrowings by depository institutions and others. Such actions influence the
growth of loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits. The nature and impact of future changes in such
policies on the business and earnings of the Company cannot be predicted.
Additionally, state and federal tax policies can impact banking organizations.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company is particularly susceptible to
being affected by the enactment of federal and state legislation which may have
the effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company.
Regulation and Supervision of Bank Holding Companies
The Company is a bank holding company subject to the Bank Holding Company Act of
1956, as amended ("BHCA"). The Company reports to, registers with, and may be
examined by, the FRB. The FRB also has the authority to examine the Company's
subsidiaries. The costs of any examination by the FRB are payable by the
Company.
On November 12, 1999 President Clinton signed into law the Gramm-Leach-Bliley
Act, or the Financial Services Act of 1999 (the "FSA"), which becomes effective
on March 11, 2000. The FSA amends certain portions of the BHCA, subject to
conditions. See "Recently Enacted Legislation" below for more information.
The Company is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such, the Company and the Bank are subject to
examination by, and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner").
The FRB has significant supervisory and regulatory authority over the Company
and its affiliates. The FRB requires the Company to maintain certain levels of
capital. See "Capital Standards." The FRB also has the authority to take
enforcement action against any bank holding company that commits any unsafe or
unsound practice, or violates certain laws, regulations or conditions imposed in
writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of the FRB
before it exercises a controlling influence over a bank, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, the Company is required to obtain the
prior approval of the FRB before it acquires, merges or consolidates with any
bank or bank holding company. Any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the prior approval
of the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. However, a bank holding company, with the approval of the FRB,
may engage, or acquire the voting shares of companies engaged, in activities
that the FRB has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
A bank holding company may acquire banks in states other than its home state
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been organized and operating
for a minimum period of time, not to exceed five years, and the requirement that
the bank holding company, prior to or following the proposed acquisition,
controls no more than 10% of the total amount of deposits of insured depository
institutions in the United States and no more than 30% of such deposits in that
state (or such lesser or greater amount set by state law). Banks may also merge
across states lines, therefore creating interstate branches. Furthermore, a bank
is now able to open new branches in a state in which it does not already have
banking operations, if the laws of such state permit such de novo branching.
Under California law, (a) out-of-state banks that wish to establish a California
branch office to conduct core banking business must first acquire an existing
five year old California bank or industrial loan company by merger or purchase,
(b) California state-chartered banks are empowered to conduct various authorized
branch-like activities on an agency basis through affiliated and unaffiliated
insured depository institutions in California and other states and (c) the
Commissioner is authorized to approve an interstate acquisition or merger which
would result in a deposit concentration exceeding 30% if the Commissioner finds
that the transaction is consistent with public convenience and advantage.
However, a state bank chartered in a state other than California may not enter
California by purchasing a California branch office of a California bank or
industrial loan company without purchasing the entire entity or by establishing
a de novo California bank.
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. See the
section entitled "Restrictions on Dividends and Other Distributions" for
additional restrictions on the ability on the Company and the Bank to pay
dividends.
Transactions between the Company and the Bank are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees which are unreasonable in amount or exceed the fair market value of the
services rendered (or, if no market exists, actual costs plus a reasonable
profit). Subject to certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in the securities of,
purchase assets from, or issue a guarantee, acceptance, or letter of credit on
behalf of, an affiliate, provided that the aggregate of such transactions with
affiliates may not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such institution. The Company may
only borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, the Company may not sell a low-quality asset to a depository
institution subsidiary.
Comprehensive amendments to Regulation Y became effective in 1997, and are
intended to improve the competitiveness of bank holding companies by, among
other things: (i) expanding the list of permissible nonbanking activities in
which well-run bank holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding companies to obtain
approval to engage in other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides for a streamlined and
expedited review process for bank acquisition proposals submitted by well-run
bank holding companies and eliminates certain duplicative reporting requirements
when there has been a further change in bank control or in bank directors or
officers after an earlier approved change. These changes to Regulation Y are
subject to numerous qualifications, limitations and restrictions. In order for a
bank holding company to qualify as "well-run," both it and the insured
depository institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or
greater; (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater; and
(iii) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed": (i) each of the bank holding company, its lead
depository institution and its depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at their most recent
examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory; (ii) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings; and (iii) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
Bank Regulation and Supervision
As a national bank, the Bank is regulated, supervised and regularly examined by
the Office of the Comptroller of the Currency ("OCC"). Deposit accounts at the
Bank are insured by Bank Insurance Fund ("BIF"), as administered by the Federal
Deposit Insurance Corporation ("FDIC"), to the maximum amount permitted by law.
The Bank is also subject to applicable provisions of California law, insofar as
such provisions are not in conflict with or preempted by federal banking law.
The Bank is a member of the Federal Reserve System, and is also subject to
certain regulations of the FRB dealing primarily with check clearing activities,
establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).
The OCC may approve, on a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking, including activities in
which the parent bank is not permitted to engage. A national bank is permitted
to engage in activities approved for a bank holding company through a bank
operating subsidiary, such as acting as an investment or financial advisor,
leasing personal property and providing financial advice to customers. In
general, these activities are permitted only for well-capitalized or adequately
capitalized national banks.
Capital Standards
The federal banking agencies have risk-based capital adequacy guidelines
intended to provide a measure of capital adequacy that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. government securities, to 100% for assets with relatively
higher credit risk, such as certain loans.
In determining the capital level the Bank is required to maintain, the federal
banking agencies do not, in all respects, follow generally accepted accounting
principles ("GAAP") and has special rules which have the effect of reducing the
amount of capital it will recognize for purposes of determining the capital
adequacy of the Bank.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. For Tier 1 capital purposes,
deferred tax assets that can only be realized if an institution earns sufficient
taxable income in the future are limited to the amount that the institution is
expected to realize within one year, or ten percent of Tier 1 capital, whichever
is less. Tier 2 capital may consist of a limited amount of the allowance for
loan and lease losses, term preferred stock and other types of preferred stock
not qualifying as Tier 1 capital, term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements of
Tier 2 capital are subject to certain other requirements and limitations of the
federal banking agencies. The federal banking agencies require a minimum ratio
of qualifying total capital to risk-adjusted assets and off balance sheet items
of 8%, and a minimum ratio of Tier 1 capital to adjusted average risk-adjusted
assets and off balance sheet items of 4%.
On October 1, 1998, the FDIC adopted two rules governing minimum capital levels
that FDIC-supervised banks must maintain against the risks to which they are
exposed. The first rule makes risk-based capital standards consistent for two
types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on debt and equity securities to be recognized for
risk-based capital purposes as of September 1, 1998. The FDIC rules also provide
that a qualifying institution that sells small business loans and leases with
recourse must hold capital only against the amount of recourse retained. In
general, a qualifying institution is one that is well-capitalized under the
FDIC's prompt corrective action rules. The amount of recourse that can receive
the preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
In addition to the risked-based guidelines, the federal banking agencies require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital ratio. For a banking
organization rated in the highest of the five categories used to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating since a strong capital position is a
significant part of the regulators' rating. For all banking organizations not
rated in the highest category, the minimum leverage ratio must be at least 100
to 200 basis points above the 3% minimum. Thus, the effective minimum leverage
ratio, for all practical purposes, must be at least 4% or 5%. In addition to
these uniform risk-based capital guidelines and leverage ratios that apply
across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The following tables present the capital ratios for the Company and the Bank,
compared to the standards for well-capitalized depository institutions, as of
December 31, 1999.
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(amounts in thousands, except percentages) Well Minimum
Actual Capitalized Capital
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The Company Capital Ratio Ratio Requirement
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Leverage $34,971 8.36% 5.0% 4.0%
Tier 1 Risk-based 34,971 9.80 6.0 4.0
Total Risk-based 39,442 11.05 10.0 8.0
The Bank
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Leverage $33,421 7.99% 5.0% 4.0%
Tier 1 Risk-based 33,421 9.46 6.0 4.0
Total Risk-based 37,848 10.71 10.0 8.0
The federal banking agencies must take into consideration concentrations of
credit risk and risks from non-traditional activities, as well as an
institution's ability to manage those risks, when determining the adequacy of an
institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. The federal banking
agencies must also consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off-balance-sheet position) in evaluation of a bank's capital
adequacy.
Prompt Corrective Action and Other Enforcement Mechanisms
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
Under the prompt corrective action provisions of FDICIA, an insured depository
institution generally will be classified in the following categories based on
the capital measures indicated below:
Well capitalized Adequately capitalized
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Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
Undercapitalized Significantly undercapitalized
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Total risk-based capital Total risk-based capital less than 6%;
less than 8%;
Tier 1 risk-based capital Tier 1 risk-based capital less than 3%;or
less than 4%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
Critically undercapitalized
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Tangible equity to total
assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
Safety and Soundness Standards
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts.
The federal banking agencies may require an institution to submit to an
acceptable compliance plan as well as the flexibility to pursue other more
appropriate or effective courses of action given the specific circumstances and
severity of an institution's noncompliance with one or more standards.
Restrictions on Dividends and Other Distributions
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The Federal Banking agencies also have the authority to prohibit a depository
institution from engaging in business practices which are considered to be
unsafe or unsound, possibly including payment of dividends or other payments
under certain circumstances even if such payments are not expressly prohibited
by statute.
The payment of dividends by a national bank is further restricted by additional
provisions of federal law, which prohibit a national bank from declaring a
dividend on its shares of common stock unless its surplus fund exceeds the
amount of its common capital (total outstanding common shares times the par
value per share). Additionally, if losses have at any time been sustained equal
to or exceeding a bank's undivided profits then on hand, no dividend shall be
paid. Moreover, even if a bank's surplus exceeded its common capital and its
undivided profits exceed its losses, the approval of the OCC is required for the
payment of dividends if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits of that year
combined with its retained net profits of the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock. A national bank must consider other business factors in determining the
payment of dividends. The payment of dividends by the Bank is governed by the
Bank's ability to maintain minimum required capital levels and an adequate
allowance for loan losses. Regulators also have authority to prohibit a
depository institution from engaging in business practices which are considered
to be unsafe or unsound, possibly including payment of dividends or other
payments under certain circumstances even if such payment are not expressly
prohibited by statute.
Premiums for Deposit Insurance and Assessments for Examinations
FDICIA established several mechanisms to increase funds to protect deposits
insured by the Bank Insurance Fund ("BIF") administered by the FDIC. The FDIC is
authorized to borrow up to $30 billion from the United States Treasury; up to
90% of the fair market value of assets of institutions acquired by the FDIC as
receiver from the Federal Financing Bank; and from depository institutions that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits. FDICIA also
provides authority for special assessments against insured deposits. No
assurance can be given at this time as to what the future level of premiums will
be.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
Recently Enacted Legislation
On November 12, 1999 President Clinton signed into law the Financial Services
Act of 1999 ("FSA"), which becomes effective on March 11, 2000. The FSA repeals
provisions of the Glass-Steagall Act, which had prohibited commercial banks and
securities firms from affiliating with each other and engaging in each other's
businesses. Thus, many of the barriers prohibiting affiliations between
commercial banks and securities firms have been eliminated.
The BHCA is also amended by the FSA to allow new "financial holding companies"
("FHC") to offer banking, insurance, securities and other financial products to
consumers. Specifically, the FSA amends section 4 of the BHCA in order to
provide for a framework for the engagement in new financial activities. Bank
holding companies ("BHC") may elect to become a financial holding company if all
its subsidiary depository institutions are well-capitalized and well-managed. If
these requirements are met, a BHC may file a certification to that effect with
the FRB and declare that it elects to become a FHC. After the certification and
declaration is filed, the FHC may engage either de novo or though an acquisition
in any activity that has been determined by the FRB to be financial in nature or
incidental to such financial activity. BHCs may engage in financial activities
without prior notice to the FRB if those activities qualify under the new list
in section 4(k) of the BHCA. However, notice must be given to the FRB within 30
days after a FHC has commenced one or more of the financial activities.
Under the FSA, national banks (as well as FDIC-insured state banks, subject to
various requirements) are permitted to engage through "financial subsidiaries"
in certain financial activities permissible for affiliates of FHCs. However, to
be able to engage in such activities the national bank must also be
well-capitalized and well-managed and receive at least a "satisfactory" rating
in its most recent Community Reinvestment Act examination. In addition, if the
national bank ranks as one of the top 50 largest insured banks in the United
States, it must have an issue of outstanding long-term debt rated in one of the
50 highest rating categories by an independent rating agency. If the national
bank falls within the next group of 50, it must either meet the debt rating test
described above or satisfy a comparable test jointly agreed to by the FRB and
the Treasury Department. No debt rating is required for any national bank, such
as the Bank, not within the top 100 largest insured banks in the United States.
We do not have any such debt outstanding.
The Company cannot be certain of the effect of the foregoing recently enacted
legislation on its business, although there is likely to be consolidation among
financial services institutions and increased competition for the Company.
Pending Legislation and Regulations
Certain pending legislative proposals include bills to let banks pay interest on
business checking accounts, to cap consumer liability for stolen debit cards,
and to give judges the authority to force high-income borrowers to repay their
debts rather than cancel them through bankruptcy.
Competition
In the past, an independent bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, mutual fund companies, credit card
companies, and even retail establishments have offered new investment vehicles
which also compete with banks for deposit business. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market, and it is anticipated that this trend will continue.
The enactment of the Interstate Banking and Branching Act in 1994 and the
California Interstate Banking and Branching Act of 1995 have increased
competition within California. Regulatory reform, as well as other changes in
federal and California law will also affect competition. While the impact of
these changes, and of other proposed changes, cannot be predicted with
certainty, it is clear that the business of banking in California will remain
highly competitive.
At present there are approximately 382 banking offices in the geographic area
served by SJNB, including offices of major chain banks and other independent
banks. There are also approximately 140 offices of savings banks. Of these there
are 231 offices of commercial banks (and 86 offices of savings banks) in Santa
Clara County, which is the principal market area for the San Jose office. In
addition, there are 151 offices of commercial banks (and 54 offices of savings
banks) in the Danville office's primary market area. Total deposits of the
combined area are approximately $48 billion as of June 30, 1999, of which the
Bank has approximately a 0.7% share. In the San Jose's office market area, the
Bank's market share is approximately 1.07% of the deposits in that market.
Presently, there are at least seven other independent banks in Santa Clara
County. Three of the independent banks - Heritage Bank of Commerce, Cupertino
National Bank (a subsidiary of Greater Bay Bancorp), and Silicon Valley Bank -
emphasize commercial banking services and, therefore, create direct competition
for the services that SJNB offers to the business and professional communities
in its market area.
The Bank's Financial Services Division and Epic also compete with many of the
major and independent banks within their respective marketing areas. The Bank's
Financial Services Division and Epic also compete with companies solely in the
factoring or leasing business. Such companies may offer products and services
which traditionally are not offered by banking institutions.
Certain Additional Business Risks
- ---------------------------------
The Company's business, financial condition, operating results and prospects can
be impacted by a number of factors, including, but not limited to, those set
forth in the paragraphs below. Any one of these stated risks could cause the
Company's actual results in the future to vary from the Company's anticipated
future results.
Shares of Company Common Stock eligible for future sale could have a dilutive
effect on the market for Company Common Stock and could adversely affect the
market price of the Common Stock. The Articles of Incorporation of the Company
authorize the issuance of 20,000,000 shares of Common and 5,000,000 shares of
Preferred Stock, of which approximately 3,617,408 common shares and no preferred
shares were outstanding at February 29, 2000 (subsequent to the acquisition of
Saratoga Bancorp). Pursuant to its stock option plans, the Company had
outstanding options to purchase an aggregate of 726,000 shares of Company Common
Stock at February 29, 2000 (adjusting for the Saratoga Bancorp's stock option
plans). As of the same date, 236,000 shares of Company Common Stock remained
available for option grants under the Company's stock option plans, including
stock option plans of Saratoga Bancorp.
The Company has previously announced its intention to pursue acquisitions of
other financial services companies from time to time when such acquisitions are
believed by the Company to enhance shareholder value or satisfy other strategic
objectives of the Company. Other acquisitions, if any, could be accomplished by
the issuance of additional shares of Company Common Stock or other securities
convertible into or exercisable for such Common Stock. Sales of substantial
amounts of Company Common Stock or convertible securities in the public market
or due to acquisitions could adversely affect the market price of the Common
Stock.
The loan and lease portfolio of the Company is dependent on real estate. At
December 31, 1999, real estate served as the principal source of collateral with
respect to approximately 47% of the Company's loan and lease portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available for sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value of the Company's Common Stock. Acts of nature, including
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
The Bank is subject to certain operational risks including, but not limited to,
data processing system failures and errors and customer or employee fraud. The
Bank maintains a system of internal controls which it believes will mitigate
such occurrences and maintains insurance coverage for such risks. Should such an
event occur that was not prevented or detected by the Bank's internal controls
or that was uninsured or in excess of the applicable insurance limits, it could
have a significant negative impact on the Company's financial condition or
results of operations.
Statistical Data
- ----------------
Certain consolidated statistical information concerning the business of the
Company appears on page 14, under the caption "Selected Financial Data;" on
pages 16 through 34, under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operation;" on page 34, under the caption
"Quantitative and Qualitative Disclosures about Market Risk;" and on pages 35
through 61, in the Company's Consolidated Financial Statements. Ratios relating
to the Company's Return on Equity and Assets appear on page 14. The section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operation" should be read in conjunction with the information in Item
1 herein and the Company's Consolidated Financial Statements.
ITEM 2: PROPERTIES
- -------------------
The Company shares common quarters with SJNB's main branch at One North Market
Street, San Jose, California, 95113. The building was purchased by the Bank in
1985 and consists of approximately 24,000 square feet of basement, ground floor
and second floor space. It is constructed and equipped to meet prescribed
security requirements.
In addition, the Bank leases approximately 12,000 square feet located at 95
South Market Street, San Jose, California. Approximately 9,000 square feet of
space at this location is currently being occupied by two third-party tenants
under subleases which expire at the termination of the lease in September 2004.
The Bank's Financial Services Division is occupying the remaining space at this
location.
The Bank and its subsidiary, Epic, share 3,000 square feet of leased facilities
in Danville, California. The monthly lease expense is $6,300 with annual
increase in July 2000. The lease expires July 2001.
In connection with the acquisition of Saratoga Bancorp, three banking facilities
were obtained. Saratoga's main office and principal executive office, located at
12000 Saratoga-Sunnyvale Road, Saratoga, California comprises 5,500 square feet
and was owned by Saratoga National Bank. This office is now being used as a
branch of SJNB. The second office is located at 15405 Los Gatos Blvd., Suite
103, Los Gatos, California. The facility has 3,082 square feet and is leased
under a noncancelable-operating lease which expires in 2003. Current lease
payments are $6,387 per month. This office is being maintained as a branch of
SJNB. The third facility was located at 160 West Santa Clara Street, San Jose,
California. The lease expired on this facility as of December 31, 1999 and was
leased for the month of January 2000 at a cost of approximately $17,000. This
office was closed as of January 28, 2000 and the accounts were consolidated into
the SJNB office located at One North Market Street.
In the opinion of management, adequate insurance is being maintained on these
properties.
ITEM 3: LEGAL PROCEEDINGS
- --------------------------
Neither the Company nor the Bank is a party to any material pending legal
proceeding, nor is their property the subject of any material pending legal
proceeding, except ordinary routine legal proceedings arising in the ordinary
course of the Bank's business and incidental to its business, none of which are
expected to have a material adverse impact upon the Company's or the Bank's
business, financial position or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At a Special Meeting of Shareholders of the Company on December 13, 1999,
1,453,026 shares were represented in person or by proxy. The shareholders
approved the merger between Saratoga Bancorp and SJNB Financial Corp. with
1,439,645 shares being voted for the approval, 5,903 shares being voted against
and 7,478 shares abstained.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
As of February 29, 2000, the Company had 3,617,408 shares of Common Stock
outstanding, held by approximately 2,200 beneficial shareholders. The Company's
Common Stock is listed on the NASDAQ National Market System under the symbol
"SJNB." Market makers of the Company's Common Stock include: Hoefer & Arnett,
Inc., Sandler O'Neill & Partners, Wedbush Morgan Securities, Inc., Knight
Securities L.P., Keefe Bruyette & Woods, Inc., and Spear, Leeds & Kellogg.
Stock Price
- -----------
The following sets forth the high and low sales prices for the Company's Common
Stock during the periods indicated, as reported by NASDAQ, and the per share
cash dividends declared on the Common Stock during such periods.
QUARTERLY COMMON STOCK PRICE
- -----------------------------------------------------------------------------------------------------------
Price
of Common Stock Cash
High Low Dividends
- -----------------------------------------------------------------------------------------------------------
1998
- -----------------------------------------------------------------------------------------------------------
First Quarter $37.00 $33.50 $.14
Second Quarter 43.25 35.00 .14
Third Quarter 43.25 26.00 .14
Fourth Quarter 29.00 26.00 .14
- -----------------------------------------------------------------------------------------------------------
Annual cash dividend per share .56
- -----------------------------------------------------------------------------------------------------------
1999
- -----------------------------------------------------------------------------------------------------------
First Quarter 28.50 26.00 .14
Second Quarter 30.25 26.50 .14
Third Quarter 34.50 31.00 .14
Fourth Quarter 37.00 30.00 .14
- -----------------------------------------------------------------------------------------------------------
Annual cash dividend per share .56
- -----------------------------------------------------------------------------------------------------------
2000
- -----------------------------------------------------------------------------------------------------------
First quarter (through February 29, 2000) 30.63 27.75 .16*
<FN>
*Declared by the Board of Directors on January 26, 2000 and to be paid on March
6, 2000 to shareholders of record on February 7, 2000.
</FN>
The Company's Board of Directors considers the advisability and amount of
proposed dividends each year. Future dividends will be determined after
consideration of the Company's earnings, financial condition, future capital
funds, regulatory requirements and such other factors as the Board of Directors
may deem relevant. The Company's primary source of funds for payment of
dividends to its shareholders will be receipt of dividends and management fees
from the Bank. The payment of dividends by a bank is subject to various legal
and regulatory restrictions. See "Business - Supervision and Regulation -
Restrictions on Dividends and Other Distributions." It is the intention of the
Company to continue the payment of quarterly dividends, subject to financial
results and other factors which could limit or restrict dividends as more fully
discussed elsewhere herein.
ITEM 6: SELECTED FINANCIAL DATA
The following presents selected financial data and ratios for the five years ended December 31, 1999:
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts) As of and for the Years Ended December 31,
STATEMENT OF OPERATIONS DATA : 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $21,852 $20,254 $18,489 $16,468 $14,295
Provision for loan and lease losses (495) (300) (705) (190) (1,045)
Other income 1,426 1,059 1,013 846 966
Other expenses (12,991) (11,497) (9,910) (9,635) (8,797)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 9,792 9,516 8,887 7,489 5,419
Income taxes (3,984) (3,975) (3,773) (3,198) (2,395)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $5,808 $5,541 $5,114 $4,291 $3,024
============================================================================================================================
PER SHARE DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $2.45 $2.23 $2.04 $1.73 $1.27
Net income per share - diluted 2.31 2.11 1.94 1.64 1.22
Cash dividends per share 0.56 0.56 0.45 0.33 0.21
Shareholders' equity per share 15.65 14.48 13.30 12.14 11.02
Tangible shareholders' equity per share 14.15 12.84 11.80 10.40 9.06
============================================================================================================================
BALANCE SHEET DATA:
- ----------------------------------------------------------------------------------------------------------------------------
Balance sheet totals-end of year:
Assets $425,947 $349,934 $324,919 $309,403 $252,195
Loans and leases 326,961 261,380 228,972 198,627 170,800
Deposits 370,742 302,442 270,345 244,639 196,692
Shareholders' equity 37,829 35,482 33,159 31,205 26,658
Average balance sheet amounts:
Assets $387,604 $337,185 $314,460 $274,868 $222,913
Loans and leases 292,692 236,971 212,795 183,367 152,820
Earning assets 362,926 313,605 286,585 251,156 202,996
Deposits 337,035 292,502 265,340 217,716 183,282
Shareholders' equity 34,715 34,097 31,091 28,288 24,898
============================================================================================================================
SELECTED RATIOS:
- ----------------------------------------------------------------------------------------------------------------------------
Return on average equity 16.73% 16.25% 16.45% 15.17% 12.15%
Return on average assets 1.50 1.64 1.63 1.56 1.36
Efficiency ratio (non-interest expense
as a percentage of total revenues) 55.81 53.94 50.82 55.65 57.64
Efficiency ratio excluding the amortization of
intangibles and goodwill 53.85 51.80 48.39 52.77 53.92
Dividend payout ratio 22.90 25.08 21.95 19.30 16.67
Average equity to average assets 8.96 10.11 9.89 10.29 11.17
Leverage capital ratio 8.36 9.10 9.06 9.28 9.00
Nonperforming loans and leases to total loans 0.43 0.09 0.19 0.27 0.52
and leases
Net chargeoffs to average loans and leases ---- 0.01 0.10 0.04 0.33
Allowance for loan or lease losses to total 1.62 1.83 1.96 2.02 2.25
loans and leases
Allowance for loan or lease losses to
nonperforming loans and leases 375.00 1,983.00 1,060.00 733.00 430.00
============================================================================================================================
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This Annual Report on Form 10-K includes forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and are subject to the
"safe harbor" created by those sections. These forward-looking statements (which
involve the Company's plans, beliefs and goals, refer to estimates or use
similar terms) involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry; changes in the interest rate
environment; the declining health of the economy, either nationally or
regionally; the deterioration of credit quality, which could cause an increase
in the provision for loan and lease losses; changes in the regulatory
environment; changes in business conditions, particularly in Santa Clara County
real estate and high tech industries; certain operational risks involving data
processing systems or fraud; volatility of rate sensitive deposits;
asset/liability matching risks and liquidity risks. The Company undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. See also the section included herein entitled
"Business - Certain Additional Business Risks" and other risk factors discussed
elsewhere in this Report.
The purpose of the following discussion is to provide information pertaining to
the financial condition and results of operations of the Company that may not be
apparent from a review of the consolidated financial statements and related
notes. It also incorporates certain statistical information that is required by
Industry Guide 3 promulgated by the Securities and Exchange Commission. The
discussion should be read in conjunction with the aforementioned consolidated
financial statements, as found on pages 35 through 61. The interest earned and
yields on nontaxable securities have been adjusted to a fully-taxable equivalent
basis for all financial information presented in this Item 7.
Dollars and share amounts are in thousands in the text for Item 7, except per
share amounts or as otherwise noted.
Financial Review
- ----------------
Earnings Summary
For the year ended December 31, 1999, the Company reported net income of $5.8
million or $2.31 per diluted share as compared to net income of $5.5 million or
$2.11 per diluted share in December 31, 1998 (a 9% increase). Net income for the
year increased over that of the previous year primarily due to an increase of
$1.6 million in net interest income and an increase in other income of $367 of
which $253 related to the reversal of a specific reserve for an acquired SBA
loan which was paid in full and a change in the method of calculating certain
deposit service charges. These increases were partially offset by an increase in
the loan and lease loss provision of $195 (due to the growth in the loan
portfolio) and by an increase in non-interest expense of $1.5 million relating
to the acquisition of Epic Funding and increased costs due to growth.
For the year ended December 31, 1998, the Company reported net income of $5.5
million or $2.11 per diluted share as compared to net income of $5.1 million or
$1.94 per diluted share in December 31, 1997 (an 8% increase). Net income for
the year increased over that of the previous year primarily due to an increase
of $1.8 million in net interest income and a decrease in the loan and lease loss
provision, partially offset by an increase in non-interest expense mainly due to
the aforementioned acquisition of Epic Funding.
As of December 31, 1999, consolidated assets were $426 million, gross loans and
leases were $327 million, and deposits were $371 million. Total consolidated
assets increased $76 million from $350 million at December 31, 1998, and
deposits grew $69 million from $302 million the previous year, representing a
22% and 23% increase, respectively. Loan and lease and deposit growth was
generated mainly by marketing and business development efforts of the Bank and
its subsidiary, Epic Funding. In addition the Bank generated additional deposits
of $29 million in various wholesale markets.
As of December 31, 1998, consolidated assets were $350 million, gross loans and
leases were $261 million, and deposits were $302 million. Total consolidated
assets increased $25 million from $325 million, and deposits grew $32 million
from $270 million the previous year, representing an 8% and 12% increase,
respectively. Loan and lease and deposit growth was generated by marketing and
business development efforts of the Bank, in addition to a $10 million, ten year
callable, floating rate (30 day LIBOR plus 5 basis points) certificate of
deposit in December 1998.
Net Interest Income and Margin
Net interest income is the principal source of the Company's operating earnings.
Significant factors affecting net interest income are rates, volumes and mix of
the loan, investment and deposit portfolios.
The following table shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin for the
three years ended December 31, 1999.
AVERAGE BALANCES, RATES AND YIELDS
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Average Avg yield/ Average Avg yield/ Average Avg yield/
Assets Balance Interest Rate paid Balance Interest Rate paid Balance Interest Rate paid
- ----------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans and leases, net (1) $292,692 $28,915 9.88% $236,971 $24,858 10.49% $212,795 $22,732 10.68%
Securities available for sale (2) 46,374 2,889 6.23 45,599 2,749 6.03 48,178 2,982 6.19
Securities held to maturity:
Taxable (3) 3,981 261 6.56 8,653 535 6.17 11,929 806 6.76
Nontaxable (4) 6,168 457 7.40 3,852 291 7.56 2,916 235 8.06
Money market investments 13,711 701 5.11 18,530 1,024 5.53 10,767 586 5.44
Interest rate hedging instruments ---- (50) ---- ---- (9) ---- ---- (9) ----
- -------------------------------------------------------- -------------------- --------------------
Total interest-earning assets 362,926 33,173 9.14 313,605 29,448 9.39 286,585 27,332 9.54
- -------------------------------------------------------- -------------------- --------------------
Allowance for loan or lease losses (5,006) (4,604) (4,162)
Cash and due from banks 16,144 14,805 20,008
Other assets 9,720 9,404 7,835
Core deposit intangibles and 3,820 3,975 4,194
goodwill, net
- ---------------------------------------------- ---------- ----------
Total $387,604 $337,185 $314,460
============================================== ========== ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $52,263 1,316 2.51 $50,970 1,325 2.59 $46,126 1,178 2.55
Money market and savings 98,174 3,450 3.51 100,327 3,504 3.49 85,696 3,061 3.57
Certificates of deposit:
Less than $100 36,470 1,917 5.25 13,387 680 5.07 14,987 792 5.28
$100 or more 78,861 3,871 4.90 60,293 3,256 5.40 53,662 2,964 5.52
- -------------------------------------------------------- -------------------- --------------------
Total certificates of deposit 115,331 5,788 5.01 73,680 3,936 5.34 68,649 3,756 5.47
- -------------------------------------------------------- -------------------- --------------------
Other short-term borrowings 9,921 584 5.88 4,976 312 6.26 12,610 754 5.98
- -------------------------------------------------------- -------------------- --------------------
Total interest-bearing 275,689 11,138 4.04 229,954 9,077 3.95 213,081 8,749 4.11
liabilities
- -------------------------------------------------------- -------------------- --------------------
Noninterest-bearing demand 71,267 67,524 64,869
Accrued interest payable and
other liabilities 5,933 5,610 5,419
- ---------------------------------------------- ---------- ----------
Total liabilities 352,889 303,088 283,369
- ---------------------------------------------- ---------- ----------
Shareholders' equity 34,715 34,097 31,091
- ---------------------------------------------- ---------- ----------
Total $387,604 $337,185 $314,460
=============================================----------- =========----------- =========-----------
Net interest income and margin (5) $22,035 6.07% $20,371 6.50% $18,583 6.48%
===================================== ===================== ===================== =====================
<FN>
(1) Includes amortized loan fees of $1,380 for 1999, $1,309 for 1998 and $1,014
for 1997. Nonperforming loans and leases have been included in average loan and
lease balances.
(2) Includes dividend income of $122, $147 and $219 received in 1999, 1998 and
1997, respectively.
(3) Includes dividend income of $32 received in 1999 and $31 received in 1998
and 1997.
(4) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($183 in 1999, $116 in 1998 and $94 in 1997).
(5) The net interest margin represents the net interest income as a percentage
of average earning assets.
</FN>
The following table shows the effect on the interest differential of volume and
rate changes for the years ended December 31, 1999 and 1998:
VOLUME/RATE ANALYSIS
(dollars in thousands) 1999 vs. 1998 1998 vs. 1997
- -----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) Increase (decrease)
due to change in due to change in
- -----------------------------------------------------------------------------------------------------------------------------
Average Average Total Average Average Total
Volume Rate Change Volume Rate Change
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases (1) $4,546 $(490) $4,056 $2,527 $(401) $2,126
Securities:
Available for sale 47 93 140 (157) (76) (233)
Taxable (309) 36 (273) (207) (65) (272)
Nontaxable 176 (10) 166 70 (13) 56
Money market investments (266) (57) (323) 429 9 438
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 4,194 (428) 3,766 2,662 (546) 2,116
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest -bearing demand 34 (43) (9) 126 22 147
Money market and savings (75) 21 (54) 514 (71) 443
Certificates of deposits:
Less than $100 1,172 65 1,237 (82) (31) (112)
$100 or greater 1,003 (388) 615 359 (67) 292
Other short-term borrowings 309 (37) 272 (479) 37 (442)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,442 (381) 2,061 438 (110) 328
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate hedging instruments (41) (41) ---- ----
- -----------------------------------------------------------------------------------------------------------------------------
Change in net interest income $1,752 $(88) $1,664 $2,224 $(436) $1,788
=============================================================================================================================
<FN>
(1) The effect of the change in loan fees is included as an adjustment to the
average rate and is described in greater detail below.
</FN>
Consolidated net interest income (on a fully taxable equivalent basis) was $22.0
million in 1999, as compared to $20.4 million in 1998. The increase of $1.6
million in net interest income during 1999 was primarily a result of an increase
in volume of $49.3 million in earning assets which amounted to approximately
$1.8 million of net interest income. The increase in net interest income in
1999 relating to the increase in volume and fees was offset by an overall
decrease in the net interest margin (the difference in the yields on earning
assets and the cost of funds).
The Bank's asset/liability position is slightly asset-sensitive (See
"Asset/Liability Management"). Therefore in times of a declining interest rate
environment, the Bank's net interest margin should be negatively impacted, as
was the case in 1999. The Bank's average prime was 8.00% in 1999, as compared to
8.38% in 1998. At the same time the Bank's net interest margin declined from
6.50% in 1998 to 6.07% in 1999. This was primarily caused by a decline in the
interest earned on earning assets which decline from 9.39% to 9.14%, while the
overall cost of interest-bearing liabilities increased from 3.95% to 4.04%. The
increase in the cost of interest-bearing liabilities was mainly due to a change
in the mix to high cost funds.
Commencing in the third quarter of 1999 and continuing in early 2000, the FOMC
has increased interest rates by 100 basis points. This has caused the Bank's
prime rate to increase from 7 3/4% to 8 3/4%. Due to the competitive nature of
the Bank's market, a decline in the Bank's interest rate sensitivity and an
overall increase in its cost of funds (due to a changing mix of deposit products
and borrowings) the Bank's net interest margin (on a fully taxable equivalent
basis) remained stable in the fourth quarter versus the immediately preceding
quarter at 6.05%. Even though the Bank is asset-sensitive, further increases in
interest rates may not have a significant, if any, positive impact on its net
interest margin.
Consolidated net interest income (on a fully taxable equivalent basis) was $20.4
million in 1998, as compared to $18.6 million in 1997. The increase of $1.8
million in net interest income during 1998 was primarily a result of an increase
in volume of $27 million in earning assets which amounted to approximately $2.2
million of net interest income and an increase of approximately $295 in loan
fees. Late in 1998, the Federal Open Market Committee ("FOMC") decreased the
interbank borrowing rate by 75 basis points and the Discount Rate by 50 basis
points which resulted in a decrease in the Bank's prime rate from 8 1/2% to 7
3/4%. The Bank's average prime was 8.38% in 1998, as compared to 8.44% in 1997.
In a declining rate environment, the Company must generally increase its earning
assets in order to maintain net interest income growth.
Interest expense in 1999 was $11.1 million as compared to $9.1 million in 1998.
The difference was due primarily to the increase in volume (approximately $45.7
million) in addition to an overall increase in interest rates paid. Actual
interest expense rates increased from 3.95% to 4.04%. This occurred while the
average prime rate deceased 38 basis points. In addition the level of
non-interest-bearing deposits declined from an average of 22.7% of average
deposits in 1998 to 20.5% in 1999.
Interest expense in 1998 was $9.1 million as compared to $8.7 million in 1997.
The difference was due primarily to the increase in volume offset by the
decrease in overall interest rate paid. Actual interest expense rates declined
from 4.11% to 3.95%. This compares to a decrease in the yields on earning assets
from 9.54% in 1997 to 9.39% in 1998.
A substantial portion of the Bank's deposits (an average of 21% in 1999 and 23%
in 1998) are non interest-bearing and therefore do not reprice when interest
rates change. See "Funding." This is somewhat ameliorated by a significant
amount of customer corporate account balances which are tied to earnings credits
and utilized to offset bank service costs.
Due to the nature of the Company's lending markets, in which loans are generally
tied to the Prime Rate, it is believed an increase in interest rates should
positively affect the Company's future earnings, while a decline in interest
rates would have a negative impact. Should interest rates decline in the future,
management believes that net interest income could be negatively impacted and it
is not feasible to provide an accurate measure of such a change because of the
many factors (many of which are uncontrollable) influencing the result.
The Company's net interest margin for the periods presented is high relative to
its peer group, mainly due to its high proportion of non interest-bearing
deposits and the impact of its generally higher yielding loans, but specifically
leasing, factoring and asset-based lending.
Net interest income also reflects the impact of nonperforming loans and leases.
The effect of nonaccrual loans and leases on interest income for the years ended
December 31, 1999 through 1995 was as follows:
NEGATIVE IMPACT OF NONACCRUAL LOANS AND LEASES
(dollars in thousands) For the Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Interest revenue which would have been
recorded under original terms $132 $22 $61 $35 $111
Interest revenue actually realized 112 21 32 29 11
- ------------------------------------------------------------------------------------------------------------------------------
Negative impact on interest revenue $20 $1 $29 $6 $100
==============================================================================================================================
Provision for Loan and Lease Losses
The level of the allowance for loan and lease losses (and therefore the related
provision) reflects the Company's judgment as to the inherent risks associated
with the loan, lease and factoring portfolios. Since estimates of the adequacy
of the Company's allowance for loan and lease losses are based on foreseeable
risks, such judgments are subject to change based on changing circumstances.
Based on management's current evaluation of such risks, as well as judgments of
the Company's regulators, additions of $495, $300, and $705 were made to the
allowance for loan and lease losses in 1999, 1998 and 1997, respectively.
Management's determinations of the provision in 1999, 1998 and 1997 were based
on the measurement of the possibility of future estimated loan and lease losses
through various objective and subjective criteria and the impact of net
chargeoffs. See "Loan and Lease Portfolio" for a detailed discussion of asset
quality and the allowance for loan and lease losses.
Other Income
The following table sets forth the components of other income and the percentage
distribution of such income for the years ended December 31, 1999, 1998 and
1997.
OTHER INCOME
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
Depositor service charges $839 58.8% $659 62.3% $607 59.9%
Other operating income 638 44.7 404 38.1 453 44.7
Net loss on securities available for sale (51) (3.6) (4) (.4) (47) (4.6)
- -----------------------------------------------------------------------------------------------------------------------------
Total $1,426 100.0% $1,059 100.0% $1,013 100.0%
=============================================================================================================================
Other income totaled $1.4 million in 1999, $1.1 million in 1998 and $1.0 million
in 1997. The increase in other income during 1999 resulted from the reversal of
a specific reserve established on the date it was purchased for an acquired SBA
loan which was paid in full and to a change in the method of assessing certain
service charges on deposit accounts.
Other Expense
The components of other expense are set forth in the following table for the
years ended December 31, 1999, 1998 and 1997.
OTHER EXPENSE AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------------
Salaries and benefits $7,840 2.02% $6,787 2.01% $5,725 1.82%
Occupancy 915 0.24 775 0.23 725 0.23
Data processing 604 0.15 663 0.20 441 0.14
Legal and professional fees 506 0.13 315 0.09 331 0.11
Amortization of core deposit intangibles
and goodwill 456 0.12 457 0.14 473 0.15
Client services 437 0.11 443 0.13 345 0.11
Business promotion 389 0.10 332 0.10 369 0.12
Directors and shareholders 339 0.09 282 0.08 332 0.11
Other 1,505 0.39 1,442 0.43 1,169 0.36
- ----------------------------------------------------------------------------------------------------------------------------
Total $12,991 3.35% $11,497 3.41% $9,910 3.15%
============================================================================================================================
Total other expenses increased approximately $1.5 million or 13% in 1999 as
compared to 1998. The increase is partially related to the acquisition of Epic
Funding Corporation (which accounted for approximately $400 of the increase) and
the opening of the of the East Bay Regional Office (which accounted for
approximately $300 of the increase), both occurring in July 1998. In addition
salaries and benefits increased as a result of the increased incentive accruals,
additions to staff and the competitive environment for personnel. Increases in
occupancy also related to Epic and the East Bay Regional Office. Business
promotion expenses have increased mainly due to the increased efforts of the
Bank to penetrate new markets and to continue to develop existing market share.
Legal and professional fees have increased due to costs associated with the
preparation of proxy materials and the annual report, increased audit fees,
legal contract negotiations, general consulting and other matters. The increase
in other relates to increased director and shareholder costs (increased director
fees, transfer agent fees and increased costs of Annual Report) and other
general cost increases.
Total other expenses increased approximately $1.6 million or 16.0% in 1998 as
compared to 1997. The increase is primarily related to the acquisition of Epic
Funding Corporation (which accounted for approximately $421 of the increase),
salary increases of $328 during the first quarter of 1998, necessary to adjust
officers' salaries based on competitive conditions and increased data processing
expenses of $213 relating to the acquisition and implementation of a new
processing system in November 1997. In addition, the Bank increased the number
of business development and lending personnel and incurred overall salary
increases for the Bank's operating staff. Advertising and marketing costs
increased due to effects of greater amounts expended on charitable donations,
community support events and client entertainment. Client services paid by the
Bank also increased due to the significant increase in services provided for
client purposes.
Income Taxes
The effective tax rate was 41% in 1999, 42% in 1998 and 1997. The lower
effective tax rate in 1999 was primarily due to the greater amount of nontaxable
income generated by the investment in California nontaxable securities
(municipals and other political subdivisions).
Quarterly Income
The unaudited consolidated income statement data of the Company and the Bank, in
the opinion of management, includes all normal and recurring adjustments
necessary to state fairly the information set forth therein. The results of
operations are not necessarily indicative of results for any future period. The
following table shows the Company's unaudited quarterly income statement data
for the years 1999 and 1998:
UNAUDITED QUARTERLY INCOME STATEMENT DATA
(dollars in thousands, except per
share amounts) First quarter Second quarter Third quarter Fourth quarter
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income $4,983 $4,965 $5,237 $5,020 $5,712 $5,119 $5,920 $5,150
Provision for loan or lease losses (100) ----- ----- ----- (150) (150) (245) (150)
Other income 498 276 265 251 316 250 347 282
Other expenses (3,060) (2,779) (3,171) (2,731) (3,347) (2,934) (3,413) (3,053)
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,321 2,462 2,331 2,540 2,531 2,285 2,609 2,229
Income taxes (992) (1,027) (954) (1,059) (1,033) (960) (1,005) (929)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $1,329 $1,435 $1,377 $1,481 $1,498 $1,325 $1,604 $1,300
============================================================================================================================
Net income per share - basic $0.55 $0.57 $0.59 $0.59 $0.64 $0.54 $0.67 $0.53
============================================================================================================================
Net income per share - diluted $0.53 $0.54 $0.56 $0.56 $0.60 $0.51 $0.63 $0.51
============================================================================================================================
The Company reported net income of $1.6 million for the quarter ended December
31, 1999, compared with net income of $1.3 million for the fourth quarter of
1998. The results for the fourth quarter of 1999 as compared to the same quarter
a year ago reflect an increase in volume of earning assets ($392 million in 1999
compared to $319 million in 1998). The loan and lease loss provision increased
from $150 in 1998 to $245 in 1999. Other expenses increased $360, primarily as a
result of an increase in incentive accruals and increased costs associated with
the 1999 audit examinations.
Financial Condition and Earning Assets
Money Market Investments
Money market investments, which include federal funds sold and other short-term
investments, were $5.6 million at December 31, 1999 as compared to $22.3 million
at December 31, 1998. This decrease is mainly due to the increase in investment
securities and loans of $92 million as compared to the growth in deposits of $68
million.
The average balance of money market investments, which include federal funds
sold and liquid money market investments, was $13.7 million in 1999 and $18.5
million in 1998. These balances represented 4.1% and 6.3% of average deposits
for 1999 and 1998, respectively. They are maintained primarily for the
short-term liquidity needs of the Bank. The decrease in money market investments
relates primarily to the growth in investments securities and loans. See
"Capital and Liquidity."
Securities
The following table shows the book value composition of the securities portfolio
at December 31, 1999, 1998 and 1997. At December 31, 1999, there were no issuers
of securities for which the aggregate book value of securities of such issuer
held by the Bank exceeded 10% of the Company's shareholders' equity.
INVESTMENT SECURITIES COMPOSITION
(dollars in thousands) December 31,
- -----------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Investment securities available for sale:
U. S. Treasury $2,007 $3,077 $5,041
U. S. Government Agencies 20,025 25,686 34,327
Mortgage-backed 30,517 3,966 5,171
Asset-backed 1,978 ---- ----
Trust preferred 6,583 ---- ----
Mutual funds 2,364 2,487 3,766
- -----------------------------------------------------------------------------------------------
Investment securities available for sale 63,474 35,216 48,305
- -----------------------------------------------------------------------------------------------
Investment securities held to maturity:
U. S. Treasury ---- $1,000 $1,992
U. S. Government Agencies $499 3,496 5,485
State and municipal 7,327 4,213 3,224
Mortgage-backed 657 1,927 2,518
Other 559 537 518
- -----------------------------------------------------------------------------------------------
Investment securities held to maturity 9,042 11,173 13,737
- -----------------------------------------------------------------------------------------------
Total $72,516 $46,389 $62,042
===============================================================================================
Investment securities classified as available for sale (which include all mutual
funds), are acquired without the intent to hold until maturity. At December 31,
1999, the Bank's weighted average maturity of the available for sale investment
portfolio was 5.1 years. It is estimated that for each 1.0% change in interest
rates, the value of the Company's securities available for sale will change by
approximately 3.3%.
Any unrealized gain or loss on investment securities available for sale is
reflected in the carrying value of the security and reported net of income taxes
in the equity section of the consolidated balance sheets. Realized gains and
losses are reported in the consolidated statement of income. The net unrealized
loss, net of tax, on securities available for sale as of December 31, 1999 was
$850. This compares to the net unrealized gain, net of tax, of $300 as of
December 31, 1998. The change in the unrealized gain or loss is directly
attributable to the increase in interest rates during late 1999. Changes in
interest rates have an inverse effect on the value of securities for which the
interest rate is fixed.
Investment securities classified as held to maturity include those securities
which the Company has the ability and intent to hold to maturity. The Company's
policy is to generally acquire "A" rated or better U.S., state and municipal
securities. The specific issues are monitored for changes in financial
condition. Appropriate action would be taken if significant deterioration was
noted.
The pre-tax unrealized loss on investment securities held to maturity was $800
as of December 31, 1999 as compared to a $196 pre-tax unrealized gain as of
December 31, 1998. The change in the net unrealized gain or loss resulted from
the increase in interest rates in late 1999. The Bank's weighted average
maturity of the held to maturity investment portfolio as of December 31, 1999
was approximately 10.4 years. It is estimated that for each 1.0% change in
interest rates, the value of the Company's securities held to maturity will
change by approximately 5.8%. This volatility decreases as the average maturity
shortens. Since it is the intention of management to hold these securities to
maturity, the unrealized losses will be realized over the life of the securities
as above- market interest income is recognized.
Mortgage-backed securities ("MBS") are considered to have increased risks
associated with them because of the timing of principal repayments. As interest
rates decrease, the average maturity of mortgages underlying MBS tend to
decline; as rates increase, maturities tend to lengthen. At December 31, 1999,
the Company had the following securities which were mortgage-backed or related
securities:
Mortgage-backed and Related Securities
December 31, 1999
Fair
(dollars in thousands) Cost Value
---------------------------------------------------- --------- ----------------
Federal Home Loan Mortgage Corp. (U.S. Agency) $3,604 $3,551
Federal National Mortgage Association (U.S. Agency) 16,284 16,035
Collateralized mortgage obligations 11,657 11,599
Federated ARMs Funds * 1,686 1,618
Overland Variable Rate Government Fund 832 746
* The assets of these mutual funds are invested mainly in adjustable rate U.S.
Treasury or U.S. Government Agency securities.
Loan and Lease Portfolio
The following table shows the Company's consolidated loans and leases by type of
loan or borrower and their percentage distribution:
LOAN AND LEASE PORTFOLIO
(dollars in thousands) December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Commercial and other $107,415 $91,866 $94,029 $78,291 $62,245
SBA 46,031 37,019 39,409 32,968 25,128
Leasing 16,633 3,768 ----- ----- -----
Factoring and asset-based 9,901 7,393 4,915 4,397 2,366
Real estate construction 40,620 32,340 17,818 15,451 14,488
Real estate term 96,434 80,009 64,403 59,567 58,567
Consumer 10,764 9,647 9,042 8,622 8,800
Unearned fee income (837) (662) (644) (668) (793)
- -----------------------------------------------------------------------------------------------------------------------------
Total loan and lease portfolio $326,961 $261,380 $228,972 $198,627 $170,800
=============================================================================================================================
December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
Commercial and other 32.9% 35.1% 41.1% 39.4% 36.4%
SBA 14.1 14.2 17.2 16.6 14.7
Leasing 5.1 1.4 ----- ----- -----
Factoring and asset-based 3.0 2.8 2.1 2.2 1.4
Real estate construction 12.4 12.4 7.8 7.8 8.5%
Real estate term 29.5 30.6 28.1 30.0 34.3
Consumer 3.3 3.7 3.9 4.3 5.2
Unearned fee income (0.3) (0.3) (0.3) (0.3) (0.5)
- -----------------------------------------------------------------------------------------------------------------------------
Total loan and lease portfolio 100.0% 100.0% 100.0% 100.0% 100.0%
=============================================================================================================================
General
The Company's loan and lease portfolio consists primarily of short-term,
floating rate loans for business and real estate purposes. Effective as of the
merger date (January 5, 2000) with Saratoga National Bank the legal lending
limit of SJNB increased to approximately $7 million.
The commercial loan portfolio primarily consists of loans to small- to
medium-sized businesses with gross revenues up to $50 million, as well as loans
to local professional businesspersons. SJNB's lending services include revolving
credit loans, SBA loans, term loans, accounts receivable financing, factoring,
equipment financing and letters of credit. Commercial loans include loans to
real estate developers for short-term investment purposes (approximately $7.9
million), loans for real estate investment purposes made to non-developers
(approximately $3.0 million) and loans for other investments (approximately $1.2
million).
SBA loans are made for commercial and real estate purposes. The Bank originates
its SBA loans and has a policy of carrying both the guaranteed and unguaranteed
portions of these loans in its outstanding loans rather then selling the
guaranteed portion. These loans carry a 70% to 80% guarantee by the SBA.
The leasing portfolio consists of financing type leases made to small-and
medium-sized businesses. The average lease is approximately $150 and there is no
concentration of the type of equipment for which Epic Funding provides
financing. The increase during 1999 as compared to 1998 was due to the full year
of operations for Epic Funding.
Factoring and asset based represents purchased account receivable (factoring)
and a structured accounts receivable lending program where the Bank receives
specific payment for client invoices. Under the Factoring program the Bank
purchases accounts receivable from clients and then receives payment directly
from the party obligated for the receivable. In most cases, the Bank's Financial
Services Division purchases the receivables subject to recourse from the Bank's
factoring client. The factoring business and related purchasing of accounts
receivable is subject to a greater degree of risk than normal lending due to the
involvement of the third party obligee, the lack of control over the direct
receipt of payment, and the potential purchase of fraudulent or inflated
receivables. To date, there have been no significant losses relating to the
Bank's factoring program.
The real estate construction portfolio consists of 37% residential and 63%
commercial. Such loans are made on the basis of the economic viability for the
specific project, the cash flow resources of the developer, the developer's
equity in the project and the underlying financial strength of the borrower. The
Company's policy is to monitor each loan with respect to incurred costs, sales
price and sales cycle.
The real estate term loans include term loans (up to a twenty-five year
maturity) on income-producing commercial properties.
Consumer loans consist primarily of loans to individuals for personal uses, such
as home equity loans, installment purchases, premier lines (unsecured lines of
credit) and overdraft protection loans and a variety of other consumer purposes.
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Although the Company has a diversified loan and lease portfolio, a
substantial portion of its customers' ability to honor loan and lease terms is
reliant upon the economic stability of Santa Clara County, which in some degree
relies on the stability of high technology companies in its "Silicon Valley."
Loans are made on the basis of a secure repayment source as the first priority.
Collateral is generally a secondary source for loan qualification.
Approximately 47% of the loan and lease portfolio is directly related to real
estate or real estate interests, when real estate construction loans, real
estate term loans, Prime equity loans (included in consumer loans in the amount
of $5.3 million) and certain other loans to real estate developers and other
investors for short-term investment purposes are included. Approximately 33% of
the loan and lease portfolio is made up of commercial loans; however, no
particular industry represents a significant portion of such loans.
Inherent in any loan and lease portfolio are risks associated with certain types
of loans and leases. The Company attempts to limit these risks through
conservative loan and lease policies and review procedures that are applied at
the time of origination. Included in these policies are specific maximum
loan-to-value ("LTV") limitations as to various categories of real estate
related loans. These ratios are as follows:
Maximum Loan to Value Ratios
- ------------------------------------------------------------
Maximum LTV
Category of Real Estate Collateral Ratio
- --------------------------------------------- --------------
Raw land 50%
Land Development 60
Construction:
1-4 Single family residence,
Owner occupied 80
Speculative development 75
Other 75
Term loans (construction take-out
and commercial) 75
Other improved property 70
Prime equity loans 80
The Company's loan and lease policy provides that any term loans on
income-producing properties must have a minimum debt service coverage of at
least 1.2 to 1 for non-owner occupied property and at least 1.1 to 1 for owner
occupied.
During 1999 the Bank lowered the maximum loan to value ratio for most real
estate projects. In prior years the 1-4 Single family residence requirement was
based on the dollar amount of the commitment. This was changed to reflect the
differences in the risks associated with owner occupied construction as compared
to development done on a speculative basis. In the latter case and in the case
of all other construction projects the loan to value ratio was decreased to 75%.
One of the significant risks associated with real estate lending is the risk
associated with the possible existence of environmental risks or hazards on or
in property affiliated with the loan. The Bank attempts to mitigate such risk
through the use of an Environmental Risk Questionnaire for all loans secured by
real estate. A Phase I environmental report is required if so indicated by
response to the questionnaire or if (for any other reason) it is determined to
be appropriate. Other reasons would include the industrial use of
environmentally sensitive substances or the proximity to other known
environmental problems. A Phase II report is required in certain cases,
depending on the outcome of the Phase I report.
Activity
Total loans and leases were $327 million and averaged $293 million as of and for
the year ended December 31, 1999. Total loans and leases were $261 million and
averaged $237 million as of and for the year ended December 31, 1998. The
increase in total loans and leases of $66 million during 1999 represented growth
from all sectors of the Bank's portfolio. Real estate construction loans grew
$8.3 million or an approximate growth of 26% for 1999. The major source of the
growth related primarily to construction was in the commercial area. The demand
for construction in the Bank's market area continued to be strong. Generally,
the growth in construction loans was mainly due to the rapid expansion of the
Bank's market area. Demand in the housing and commercial markets was fueled by
the growth in the high technology sector and the related increase in wealth of
employees of Silicon Valley technology firms. Major projects the Bank assisted
in developing were several hospitality and mini-storage projects. Real estate
term loans increased by $16 million as a result of the lower interest rate
environment during the first and second quarters of 1999, which fueled the
demand for refinancing. Also, the Bank continued to provide term funding for
several of its completed construction projects, as well as the continued
development of new business.
In addition the Bank experienced growth in commercial ($15 million), SBA ($9
million), leasing ($13 million), and factoring/asset-based lending ($3 million).
Growth in all these areas was mainly due to the economic conditions of Silicon
Valley and rapid expansion of the technology sector. The Bank was able to
successfully penetrate the market through its business development efforts.
Total loans and leases were $261 million and averaged $237 million as of and for
the year ended December 31, 1998. Total loans and leases were $229 million and
averaged $213 million as of and for the year ended December 31, 1997. The
increase in total loans and leases of $32 million during 1998 relates primarily
to the growth in the Bank's real estate portfolio. Both construction lending and
real estate term lending showed significant growth during 1998. The growth in
the construction portfolio was mainly due to the rapid expansion of housing in
the Bank's market area. Demand in the housing market was fueled by low
unemployment (less than 4% over the last two years) and increased wealth of
employees of Silicon Valley technology firms.
The economic climate in Northern California has been generally strong in 1999
and 1998. The competitive environment within the Bank's marketplace for
additional loan and lease growth has become more aggressive between lenders,
resulting in increasingly competitive pricing. To the extent that such
competitive activity continues during 2000 and the Bank finds it necessary to
meet such competition, the Bank's net interest margins could decline.
Asset Quality
Allowance for Loan and Lease Losses
A consequence of lending activities is the potential for loss. The amount of
such losses will vary from time to time depending upon the risk characteristics
of the loan and lease portfolio as affected by economic conditions, rising
interest rates and the financial experience of borrowers. The allowance for loan
and lease losses, which provides for the risk of losses inherent in the credit
extension process, is increased by the provision for loan and lease losses
charged to expense and decreased by the amount of charge-offs net of recoveries.
There is no precise method of predicting specific losses or amounts that
ultimately may be charged off on particular segments of the loan and lease
portfolio. Similarly, the adequacy of the allowance for loan and lease losses
and the level of the related provision for loan and lease losses is determined
on a judgmental basis by management based on consideration of:
- Economic conditions,
- Borrowers' financial condition,
- Loan and lease impairment,
- Evaluation of industry trends,
- Industry and other 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 and leases identified as
having loss potential,
- Quarterly review by the Board of Directors,
- Off-balance sheet risks, and
- Assessments by regulators and other third parties.
In addition to the internal assessment of the loan and lease portfolio (and
off-balance sheet credit risk, such as letters of credit, etc.), the Company
also retains a consultant who performs credit reviews on a quarterly basis and
then provides an assessment of the adequacy of the allowance for loan and lease
losses. The federal banking regulators also conduct examinations of the loan and
lease portfolio periodically.
The Company utilizes a method of assigning a minimum and maximum loss ratio for
each grade of loan or lease within each category of loans (commercial, real
estate term, real estate construction, etc.) Loans and leases are graded on a
ranking system based on management's assessment of the loan or lease'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 and
leases. In addition, the Company's methodology considers (and assigns a risk
factor for) current economic conditions, off-balance sheet risk and
concentrations of credit. The methodology provides a systematic approach for the
measurement of the possible existence of future loan and lease losses.
Management and the Board of Directors evaluate the allowance and determine its
desired level considering objective and subjective measures, such as knowledge
of the borrowers' business, valuation of collateral, the determination of
impaired loans and leases and exposure to potential losses. Based on known
information available to it at the date of this Report, management believes that
the Company's allowance for loan and lease losses, determined as described
above, was adequate at December 31, 1999 for foreseeable losses.
The allowance for loan and lease losses is a general reserve available against
the total loan and lease portfolio and off-balance sheet credit exposure. While
management uses available information to recognize losses on loans or leases,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan and
lease losses. Such agencies may require the Bank to provide additions to the
allowance based on their judgment of information available to them at the time
of their examination.
Finally, there is uncertainty concerning future economic trends. Accordingly, it
is not possible to predict the effect future economic trends may have on the
level of the provision for loan and lease losses in future periods.
The following table summarizes the activity in the allowance for loan and lease
losses for the five years ended December 31, 1999:
ALLOWANCE FOR LOAN AND LEASE LOSSES
(dollars in thousands) Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Balance, beginning of the year $4,778 $4,493 $4,005 $3,847 $3,311
- ----------------------------------------------------------------------------------------------------------------------------
Chargeoffs by category:
Commercial and other 108 234 205 243 217
SBA 19 ----- 37 22 112
Factoring and asset-based ----- ----- 1 83 -----
Real estate construction ----- ----- ----- ----- 154
Real estate term 4 ----- 32 69 125
Consumer 21 ----- 13 21 88
- ----------------------------------------------------------------------------------------------------------------------------
Total chargeoffs 152 234 288 438 696
- ----------------------------------------------------------------------------------------------------------------------------
Recoveries by category:
Commercial and other 135 93 58 216 134
SBA 5 58 5 39 11
Factoring and asset-based ----- ----- 6 35 -----
Real estate construction 3 ----- ----- ----- -----
Real estate term 4 ----- ----- 1 26
Consumer 16 68 2 65 16
- ----------------------------------------------------------------------------------------------------------------------------
Total recoveries 163 219 71 356 187
- ----------------------------------------------------------------------------------------------------------------------------
Net (recoveries) chargeoffs (11 ) 15 217 82 509
- ----------------------------------------------------------------------------------------------------------------------------
Provision charged to expense 495 300 705 190 1,045
Allowance relating to acquired businesses ----- ----- ----- 50 -----
- ----------------------------------------------------------------------------------------------------------------------------
Balance, end of the year $5,284 $4,778 $4,493 $4,005 $3,847
============================================================================================================================
Ratios:
Net chargeoffs to average loans and leases ----- 0.01% 0.10% 0.04% 0.33%
Allowance to total loans and leases at the end of the year 1.62% 1.83 1.96 2.02 2.25
Allowance to nonperforming loans and leases at end of the year 375.00 1,983.00 1,060.00 733.00 430.00
============================================================================================================================
During 1999 the Bank wrote off $152 in loans and had recoveries of $163 for a
total of $11 in net recoveries. Net chargeoffs were $15 or 0.01% of average
loans and leases during 1998. Net chargeoffs were $217 or 0.10% of average loans
during 1997.
The allowance for loan and lease losses as a percentage of total loans and
leases was 1.62%, 1.83%, and 1.96% at December 31, 1999, 1998 and 1997,
respectively. The allowance for loan and lease losses as a percentage of
nonperforming loans was approximately 375%, 1,983% and 1,060% at December 31,
1999, 1998 and 1997, respectively. Nonperforming loans were $1,411, $241 and
$424 at December 31, 1999, 1998 and 1997, respectively. See "Nonperforming Loans
and Leases" below.
Based on an evaluation of individual credits, historical credit loss experienced
by loan or lease type and economic conditions, management has allocated the
allowance for loan and lease losses as follows for the past five years:
ALLOCATION OF THE ALLOWANCE FOR LOAN OR LEASE LOSSES
(dollars in thousands) Amount of allowance allocation at December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Commercial and other $1,984 $1,842 $1,265 $1,070 $1,316
SBA 1,051 1,064 1,079 840 1,075
Leasing 455 90 ----- ----- -----
Factoring and asset-based 320 197 206 159 83
Real estate construction 329 291 236 223 225
Real estate term 832 764 788 835 710
Consumer 195 195 158 127 227
Unallocated 118 335 761 751 211
- ----------------------------------------------------------------------------------------------------------------------------
Total $5,284 $4,778 $4,493 $4,005 $3,847
============================================================================================================================
Percent of loans and leases in each category
to total loans and leases at December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Commercial and other 32.6% 34.9% 40.8% 39.1% 36.0%
SBA 14.1 14.2 17.2 16.6 14.7
Leasing 5.1 1.4 ----- ----- -----
Factoring and asset-based 3.0 2.8 2.1 2.2 1.4
Real estate construction 12.4 12.4 7.8 7.8 8.5
Real estate term 29.5 30.6 28.1 30.0 34.3
Consumer 3.3 3.7 3.9 4.3 5.2
- ----------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============================================================================================================================
The allowance for loan and lease losses is maintained without any internal
allocation to the segments of the loan and lease portfolio and the entire
allowance is available to cover any loan and lease losses. The allocation above
is based on subjective estimates that take into account historical loss
experience and management's current assessment of the relative risk
characteristics of the portfolio as of the reporting date noted above and as
described more fully herein.
Nonperforming Loans and Leases
Loans for which the accrual of interest has been suspended, restructured loans
and other loans with principal or interest contractually past due 90 days or
more are set forth in the following table:
NONPERFORMING LOANS AND LEASES
(dollars in thousands) December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual basis $1,395 $197 $360 $457 $866
Loans and leases restructured and in compliance with modified terms ----- 44 63 89 -----
Other loans and leases with principal or interest contractually past
due 90 days or more 16 ----- 1 ----- 28
- ----------------------------------------------------------------------------------------------------------------------------
Total $1,411 $241 $424 $546 $894
============================================================================================================================
The increase in the total on nonperforming loans during 1999 was due mainly to a
single customer with aggregate borrowings of $1.1 million. The Bank believes it
has adequate collateral and it is not anticipated that there is any loss
exposure due to this nonperforming loan. At the date of the merger of Saratoga
Bancorp, January 5, 2000, nonperforming loans increased by approximately $375.
Potential nonperforming loans and leases are identified by management as part of
its ongoing evaluation and review of the loan and lease portfolio. Based on such
reviews and information known to management at the date of this Report,
management has not identified any loans or leases (other than those in the above
table) about which it has serious doubts regarding the borrowers' ability to
comply with present loan repayment terms, such that the loans or leases might
subsequently be classified as nonperforming. Management has identified one
Saratoga National Bank loan in the amount of $377 about which it has serious
doubts regarding the borrower's ability to comply with present loan repayment
terms, such that the loan will be classified as nonperforming in future combined
financial data.
The accrual of interest on loans is discontinued and any accrued and unpaid
interest is reversed when, in the opinion of management, there is significant
doubt as to the collectibility of interest or principal or when the payment of
principal or interest is ninety days past due, unless the amount is well-secured
and in the process of collection.
Other Real Estate Owned
At December 31, 1999 and 1998 there were no properties owned by the Bank
acquired through the foreclosure process.
Commitments and Lines of Credit
It is the Bank's policy not to issue formal commitments or lines of credit
except to well-established and financially responsible commercial enterprises.
Such commitments can be either secured or unsecured and are typically in the
form of revolving lines of credit for seasonal working capital needs.
Occasionally, such commitments are in the form of a letter of credit to
facilitate the customer's particular business transaction. Commitments and lines
of credit typically mature within one year. These commitments involve (to
varying degrees) credit risk in excess of the amount recognized as either an
asset or liability in the statement of financial position. The Company attempts
to control this credit risk through its credit approval process. The same credit
policies are used when entering into such commitments.
As of December 31, 1999, the Company had undisbursed loan commitments to extend
credit as follows:
UNDISBURSED LOAN COMMITMENTS
(dollars in thousands) Amount
- --------------------------------------------------------------------
Commercial and other $115,006
SBA $1,110
Real estate construction 35,027
Real estate term 1,919
Consumer 10,501
- --------------------------------------------------------------------
Total $163,564
====================================================================
In addition, there was approximately $5.6 million available for commitments
under unused letters of credit.
Funding
- -------
Deposits represent SJNB's principal source of funds. Most of the Bank's deposits
are obtained from professionals, small- to medium-sized businesses and
individuals within the Bank's market area. SJNB's deposit base consists of
non-interest and interest-bearing demand deposits, savings and money market
accounts and certificates of deposit. The following table summarizes the
composition of deposits as of December 31, 1999, 1998 and 1997:
DEPOSIT CATEGORIES
(dollars in thousands) December 31, 1999 December 31, 1998 December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Total of Total Total of Total Total of Total
Amount Deposits Amount Deposits Amount Deposits
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $73,201 19.74% $70,962 23.46% $78,437 29.01%
Interest-bearing demand 48,205 13.00 49,468 16.36 45,655 16.89
Money market and savings 120,330 32.46 91,320 30.19 82,619 30.56
Certificates of deposit:
Less than $100 44,201 11.92 22,492 7.44 15,207 5.63
$100 or more 84,805 22.88 68,200 22.55 48,427 17.91
- -----------------------------------------------------------------------------------------------------------------------------
Total $370,742 100.00% $302,442 100.00% $270,345 100.00%
=============================================================================================================================
Deposits increased 23% to $371 million at December 31, 1999 from $302 million at
December 31, 1998. Deposits increased 12% to $302 million at December 31, 1998
from $270 million at December 31, 1997. These increases are due to a combination
of factors including the development of customers with significant cash
balances, utilization of sophisticated cash management systems and aggressive
pricing of interest rates.
The Bank has been able to attract a significant proportion of its deposits in
the form of noninterest-bearing deposits. The Bank's primary business is
commercially oriented with significant noninterest-bearing deposits maintained
by commercial customers. In a high interest rate environment, these funds could
be subject to disintermediation (moved for higher interest rate products). To
counter such possibilities, the Bank maintains an array of products which it
believes would be competitive if such were to occur. In addition, in illiquid
economic times (possibly recessions) these deposits could be subject to
withdrawal pressures. See "Capital and Liquidity - Liquidity" for a discussion
of the Bank's liquidity sources.
The Bank also raises a substantial amount of funds through certificates of
deposit of $100 or greater, which were approximately 23% of total deposits at
December 31, 1999. These deposits are usually at interest rates greater than
other types of deposits and are more sensitive to interest rate changes.
Historically, the Bank's overall cost of funds has been less than that of its
peer group. However, as these certificates of deposit are usually more interest
rate sensitive, their repricing in an increasing interest rate environment could
increase the Bank's cost of funds and negatively impact the Bank's net interest
margin. See "Capital and Liquidity."
On December 4, 1998 the Bank obtained $10 million through the placement of a
ten-year synthetic floating rate certificate of deposit. The instrument consists
of two linked transactions, a callable interest rate swap and callable fixed
rate certificate of deposit. Under the swap agreement, the Bank pays LIBOR plus
five basis points and receives 6% for a period of ten years. The swap is
callable after one year by a major U.S. domestic bank. Simultaneously, the Bank
issued a callable 6% fixed rate certificate of deposit. The certificate of
deposit does not have any early redemption clauses, other than by death of the
holder. Effectively, the Bank's rate of interest on the combined transaction is
LIBOR plus five basis points.
The Bank utilizes short-term borrowings in its balance sheet management. The
short-term borrowings (securities sold under agreements to repurchase) are used
for short-term liquidity needs. The average cost of the borrowings during 1999
was 5.61%, the average amount outstanding was $7.4 million and the maximum at
any month end was $15.6 million.
Asset/Liability Management
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off-balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest revenue accrual and interest expense that would result from a change in
interest rates. Mismatches in interest rate repricing among assets and
liabilities arise primarily from the interaction of various customer businesses
(i.e., types of loans and leases versus the types of deposits maintained) and
from management's discretionary investment and funds gathering activities. The
Company attempts to manage its exposure to interest rate sensitivity. However,
due to its size and direct competition from the major banks, the Company must
offer products which are competitive in the market place, even if less than
optimum with respect to its interest rate exposure.
The Company's balance sheet position at December 31, 1999 was slightly
asset-sensitive, based upon the significant amount of variable rate loans and
the repricing characteristics of its deposit accounts. This position provides a
hedge against rising interest rates, but has a detrimental effect during times
of interest rate decreases. Net interest revenues are negatively impacted by a
decline in interest rates and positively impacted by an increase in interest
rates. The interest rate gap is a measure of interest rate exposure and is based
upon the known repricing dates of certain assets and liabilities and assumed
repricing dates of others. See "Financial Review - Net Interest Income and
Margin."
The following table quantifies the Company's interest rate exposure at December
31, 1999 based upon the known repricing dates of certain assets and liabilities
and the assumed repricing dates of others. At December 31, 1999, the Company was
asset-sensitive in the near term, as noted above. It is expected by management
that with the addition of Saratoga Bancorp the Bank will continue to be
asset-sensitive.
DISTRIBUTION OF REPRICING OPPORTUNITIES
December 31, 1999
(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 $5,650 $5,650
Investment securities-taxable 605 $45 $80 $796 $189 1,715
Investment securities-non-taxable 371 374 491 1,120 4,971 7,327
Securities available for sale 3,938 1,779 9,026 23,113 25,618 63,474
Loans and leases 228,306 6,666 13,674 46,315 32,000 326,961
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 238,870 8,864 23,271 71,344 62,778 405,127
- -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing demand, money
market and savings 168,535 ----- ----- ----- ----- 168,535
Certificates of deposit:
Less than $100 16,735 3,582 2,774 6,809 14,301 44,201
$100 or more 57,483 10,054 15,204 1,334 730 84,805
Repurchase agreements ----- ----- 10,497 ----- ----- 10,497
Other borrowings 910 ----- ----- ----- 230 1,140
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 243,663 13,636 28,475 8,143 15,261 309,178
- -----------------------------------------------------------------------------------------------------------------------------
Interest rate gap ($4,793) ($4,772) ($5,204) $63,201 $47,517 $95,949
=============================================================================================================================
Cumulative interest rate gap ($4,793) ($9,565) ($14,769) $48,432 $95,949
==============================================================================================================
Interest rate gap ratio 0.98 0.65 0.82 8.76 4.11
==============================================================================================================
Cumulative interest rate gap ratio 0.98 0.96 0.95 1.16 1.31
==============================================================================================================
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Further, certain earning assets have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In considering such shortcomings the above table would reflect a
slightly asset sensitive position. The Company considers the anticipated effects
of these various factors in implementing its interest rate risk management
activities, including the utilization of certain interest rate hedges.
A large proportion of the Bank's deposits are non interest-bearing demand
deposits and are not included in the above table as they tend not to be interest
rate sensitive. The average balance of these deposits was $71 million in 1999.
In addition, the Bank's total tangible capital of approximately $34 million is
not included as a funding source in the above table. Lastly, the table includes
the repricing of the Bank's non-maturity deposits (interest-bearing demand,
money market and savings accounts) as repricing immediately. These accounts are
not subject to any specific interest rate adjustment formulas and are adjusted
by management based upon the competitive environment and the Bank's liquidity
and asset/liability positions. Taking these factors into consideration could
alter the above ratios significantly.
The maturities and yields of the investment portfolio at December 31, 1999 are
shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1999
(dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Maturity
- ----------------------------------------------------------------------------------------------------------------------------
After one year After five years
Carrying Within one year within five years within ten years After ten years
Value Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U. S. Treasury $2,007 $1,001 5.99% $1,006 6.23% ----- ----- ----- -----
U. S. Government Agencies 20,025 9,169 6.08 10,856 6.11 ----- ----- ----- -----
Mortgage-backed (1) 30,517 949 6.71 10,836 6.72 $7,308 6.54% $11,424 6.88%
Asset-backed 1,978 177 6.60 1,801 6.15 ----- ----- ----- -----
Trust preferred 6,583 ----- ----- ----- ----- ----- ----- 6,583 7.91
Mutual funds 2,364 2,364 4.78 ----- ----- ----- ----- ----- -----
- ------------------------------------------------------- ---------- ----------- ----------
Total 63,474 13,660 24,499 7,308 18,007
- ------------------------------------------------------- ---------- ----------- ----------
Securities held to maturity:
U. S. Government Agencies 499 ----- ----- 499 6.78 ----- ----- ----- -----
State and municipal (2) 7,327 798 7.09 180 7.63 369 8.46 5,980 7.86
Mortgage-backed (1) 657 657 7.90 ----- ----- ----- ----- ----- -----
Other 559 ----- ----- ----- ----- ----- ----- 559 6.00
- ------------------------------------------------------- ---------- ----------- ----------
Total 9,042 1,455 679 369 6,539
- ------------------------------------------------------- ---------- ----------- ----------
Total $72,516 $15,115 6.05% $25,178 6.40% $7,677 6.64% $24,546 7.38%
=============================================================================================================================
<FN>
(1) Maturities of mortgaged-backed securities are based upon dealer prepayment
projections.
(2) State and municipal securities are adjusted to a fully taxable equivalent
basis using the federal statutory rate.
</FN>
The following table shows the maturity and interest rate sensitivity of
commercial, SBA, real estate construction and real estate term loans at December
31, 1999. Approximately 77% of the commercial and real estate loan portfolio is
priced with floating interest rates, which limit the exposure to interest rate
risk on long-term loans.
Balances maturing Interest Rate Sensitivity
- -----------------------------------------------------------------------------------------------------------------------------
Predeter-
Balances at One mined Floating
December 31, One year year to Over interest interest
1999 or less five years five years rates rates
- -----------------------------------------------------------------------------------------------------------------------------
Commercial $107,415 $73,824 $26,263 $7,328 $20,386 $87,029
=============================================================================================================================
SBA $46,031 $2,881 $10,423 $32,726 $3,219 $42,812
=============================================================================================================================
Real estate construction $40,620 $36,468 $2,605 $1,547 $460 $40,161
=============================================================================================================================
Real estate term $96,434 $12,156 $25,985 $58,293 $43,088 $53,346
=============================================================================================================================
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 $15.65, $14.48 and $13.30 as of December
31, 1999, 1998 and 1997, respectively. Tangible book value per share was $14.15,
$12.84 and $11.80 at December 31, 1999, 1998 and 1997, respectively, adjusted
for goodwill and core deposit intangibles. Shareholders' equity was $38 million,
$35 million and $33 million as of December 31, 1999, 1998 and 1997,
respectively. Tangible shareholders' equity was $34 million, $31 million and $30
million as of December 31, 1999, 1998 and 1997, respectively. During 1999 and
1998 the Company repurchased 115 shares for $3.1 million and 102 shares for $2.5
million, respectively. See Notes to Consolidated Financial Statements and
"Business - Supervision and Regulation" for a discussion of the Company's
capital requirements.
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan and lease funding and deposit withdrawals. Liquidity
requirements are evaluated by taking into consideration factors such as deposit
concentrations, seasonality and maturities, loan and lease demand, capital
expenditures and prevailing and anticipated economic conditions. SJNB's business
is generated primarily through customer referrals and employee business
development efforts. The Bank utilizes brokered deposits on a limited basis to
satisfy temporary liquidity needs.
The Bank's sources of liquidity consist of its deposits with other banks,
overnight funds sold to correspondent banks and short-term, marketable
investments net of short-term borrowings. On December 31, 1999, consolidated
liquid assets totaled $60 million or 14% of consolidated total assets, as
compared to $70 million or 20% of consolidated total assets on December 31,
1998. In addition to the liquid asset portfolio, SJNB also has $22 million in
informal lines of credit available with three major commercial banks,
approximately $6.7 million of credit available at the Federal Reserve Discount
Window, a repurchase agreement for up to $34 million in additional borrowings
and $22 million in SBA guaranteed loans which are available for sale and could
likely be sold within a 30-day period.
SJNB is primarily a business and professional bank and, as such, its deposit
base is more susceptible to economic fluctuations. Accordingly, management
strives to maintain a balanced position of liquid assets to volatile and
cyclical deposits. In their normal course of business, commercial clients
maintain balances in large certificates of deposit. The stability of these
balances hinges upon, among other factors, market conditions and each business'
seasonality. Large certificates of deposit amounted to 23% of total deposits on
December 31, 1999 and 1998.
Liquidity is also affected by investment securities and loan and lease
maturities and the effect of interest rate fluctuations on the marketability of
both assets and liabilities. The loan and lease portfolio consists primarily of
floating rate, short-term loans. On December 31, 1999, approximately 36% of
total consolidated assets had maturities under one year and 74% of total
consolidated loans and leases had floating rates tied to the prime rate or
similar indexes. The short-term nature of the loan and lease portfolio, and loan
agreements which generally require monthly interest payments, provide the
Company with an additional secondary source of liquidity.
The Company's liquidity is maintained by cash flows stemming from dividends and
management fees from the Bank and the exercise of stock options issued to the
Bank's employees and directors. The amount of dividends from the Bank is subject
to certain regulatory restrictions as discussed in Note 17 of the Notes to the
Consolidated Financial Statements and elsewhere within this Report. Subject to
said restrictions, at December 31, 1999, up to $8.9 million could have been paid
to the parent Company by the Bank without regulatory approval. The Company's
parent-only financial statements are presented in Note 16 of the Notes to
Consolidated Financial Statements. Dividends of $3.8 million and $4.5 million
were paid to the parent company during 1999 and 1998, respectively.
There are no material commitments for capital expenditures in 2000 or beyond.
Effects of Inflation
- --------------------
The most direct effect of inflation on the Company is higher interest rates.
Because a significant portion of the Bank's deposits is represented by non
interest-bearing demand accounts, changes in interest rates have a direct impact
on the financial results of the Bank. See "Asset/Liability Management." Another
effect of inflation is the upward pressure on the Company's operating expenses.
Inflation did not have a material effect on the Bank's operations in 1999, 1998
or 1997.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off-balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest income and interest expense that would result from a change in interest
rates. Mismatches in interest rate repricing among assets and liabilities arise
primarily from the interaction of various customer businesses (i.e., types of
loans and leases versus the types of deposits maintained) and from management's
discretionary investment and funds gathering activities. The Company attempts to
manage its exposure to interest rate sensitivity. However, due to its size and
direct competition from the major banks, the Company must offer products which
are competitive in the market place, even if less than optimum with respect to
its interest rate exposure.
The Company's balance sheet position at December 31, 1999 was asset-sensitive,
based upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts. This position provides a hedge against
rising interest rates, but has a detrimental effect during times of interest
rate decreases. Net interest revenues are negatively impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known repricing dates of certain assets and liabilities and
assumed repricing dates of others. See "Financial Review - Net Interest Income
and Margin."
Commencing in the third quarter of 1999, the Federal Open Market Committee
("FOMC") began a process of increasing interest rates to offset the possible
increase in inflation and to slow down consumer spending. Through February 29,
2000, the FOMC had increased interest rates 100 basis points. During this period
the Bank experienced very little change in its net interest margin. For the
three quarters ended June 30, 1999, September 30, 1999 and December 31, 1999,
net interest margins on a fully taxable equivalent basis were 5.97%, 6.05% and
6.05%, respectively. The effect of possible interest rate changes is not
precisely determinable due to the many factors influencing the Bank's net
interest margin, including repricing of deposits, a change in mix of the loan,
lease and deposit portfolios and other borrowings, changes in relative volumes,
the speed in which fixed rate loans and leases are repriced, discretionary
investment activities and other factors. Although, there was not an appreciable
change in the Bank's net interest margin, during this period the Bank
experienced significant growth in its higher cost funding sources, such as money
market savings and certificates of deposits. The growth in these deposits had
the impact of offsetting any increase in the net interest margin.
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the following table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Further, certain earning assets have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The Company considers the anticipated effects of these various
factors when implementing its interest rate risk management activities,
including the utilization of certain interest rate hedges.
See footnote 15 of the Consolidated Financial Statements on page 56 of this
Report for a discussion of the methodology and assumptions used in the following
table.
Interest Rate Risk Analysis
December 31, 1999 December 31,
(dollars in thousands) Average 1998
Interest Expected Maturity/Principal Repayment December 31, Total Fair Fair
Rate 2000 2001 2002 2003 2004 Thereafter Balance Value Value
- ------------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Assets:
Fed funds sold and other
short-term investments 6.30% $5,650 ----- ----- ----- ----- ----- $5,650 $5,653 $22,298
Investments:
Fixed maturity 6.15 11,928 $3,433 $7,989 $1,822 $2,575 $10,673 38,420 37,606 37,610
Mortgage Backed 6.90 4,554 5,398 5,770 3,969 2,464 9,019 31,174 31,187 5,930
Mutual Funds 4.91 2,364 ----- ----- ----- ----- ----- 2,364 2,364 2,487
Federal Reserve Bank Stock 6.00 ----- ----- ----- ----- ----- 559 559 559 537
Loans and leases:
Fixed rate 9.46 9,396 7,219 3,485 4,700 5,757 36,555 67,112 66,689 54,572
Variable rate 10.08 128,462 15,717 9,599 10,219 8,386 61,196 233,579 234,924 199,730
Leasing 10.24 3,463 4,275 4,695 3,935 ----- ----- 16,368 16,008 4,283
Factoring accounts receivable
and asset-based lending 21.98 9,901 ----- ----- ----- ----- ----- 9,901 9,961 7,672
Interest rate floor 82
Interest-Sensitive Liabilities:
Deposits:
Interest-bearing demand 2.50 24,997 6,963 6,963 9,282 ----- ----- 48,205 46,194 48,270
Money market 4.14 71,377 23,520 23,522 ----- ----- ----- 118,419 116,768 88,376
Savings 2.10 ----- 573 573 382 382 ----- 1,910 1,856 2,037
Certificates of deposit 5.18 105,832 5,348 2,266 529 11,876 3,155 129,006 129,094 91,094
Fed funds purchased and
repurchase agreements 5.79 10,997 ----- ----- ----- ----- ----- 10,997 11,016 5,003
Interest-Sensitive
Off-balance sheet items:
Unused lines of credit and
undisbursed loan commitments 10.66 ----- ----- ----- ----- ----- ----- 163,564 ----- -----
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The following section includes the Company's Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
The Board of Directors
SJNB Financial Corp.:
We have audited the accompanying consolidated balance sheets of SJNB Financial
Corp. and subsidiary (the Company) as of December 31, 1999 and 1998, and the
related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SJNB Financial Corp.
and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Mountain View, California
January 13, 2000
- -----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Assets 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $11,180 $11,239
Federal funds sold ----- 2,200
Money market investments 5,650 20,085
Investment securities:
Available for sale 63,474 35,216
Held to maturity (Fair value: $8,242 at December 31, 1999
and $11,369 at December 31,1998) 9,042 11,173
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 72,516 46,389
- -----------------------------------------------------------------------------------------------------------------------------
Loans and leases 326,961 261,380
Allowance for loan or lease losses (5,284) (4,778)
- -----------------------------------------------------------------------------------------------------------------------------
Loans and leases, net 321,677 256,602
- -----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,812 3,770
Accrued interest receivable 2,209 1,600
Intangibles, net of accumulated amortization of $2,620 at December 31,1999
and $2,164 at December 31, 1998. 3,617 4,027
Other assets 5,286 4,022
- -----------------------------------------------------------------------------------------------------------------------------
Total $425,947 $349,934
=============================================================================================================================
Liabilities and Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------
Deposits:
Non interest-bearing $73,201 $70,962
Interest-bearing 297,541 231,480
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 370,742 302,442
- -----------------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 10,997 5,000
Accrued interest payable 1,321 822
Other liabilities 5,058 6,188
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 388,118 314,452
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized;
none issued or outstanding in 1999 or 1998 ----- -----
Common stock, no par value; 20,000 shares authorized;
2,417 and 2,449 shares issued and outstanding
in 1999 and 1998 respectively. 15,796 16,777
Retained earnings 22,883 18,405
Accumulated other comprehensive (loss) income, net (850) 300
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 37,829 35,482
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- -----------------------------------------------------------------------------------------------------------------------------
Total $425,947 $349,934
=============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
- ----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans and leases $28,915 $24,858 $22,732
Interest on money market investments 701 1,024 586
Interest and dividends on investment securities available for sale 2,889 2,749 2,982
Interest on investment securities held to maturity 535 709 947
Other interest and investment income (50) (9) (9)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 32,990 29,331 27,238
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits:
Interest-bearing demand 1,316 1,325 1,178
Money market and savings 3,450 3,504 3,061
Certificates of deposit of $100 or more 3,871 3,256 2,964
Certificates of deposit of less than $100 1,917 680 792
Other short-term borrowings 584 312 754
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 11,138 9,077 8,749
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income 21,852 20,254 18,489
- ----------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 495 300 705
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan and lease losses 21,357 19,954 17,784
- ----------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 839 659 607
Other operating income 638 404 453
Net loss on sale of securities available for sale (51) (4) (47)
- ----------------------------------------------------------------------------------------------------------------------------
Total other income 1,426 1,059 1,013
- ----------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 7,840 6,787 5,725
Occupancy 915 775 725
Other 4,236 3,935 3,460
- ----------------------------------------------------------------------------------------------------------------------------
Total other expenses 12,991 11,497 9,910
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 9,792 9,516 8,887
Income taxes 3,984 3,975 3,773
- ----------------------------------------------------------------------------------------------------------------------------
Net income $5,808 $5,541 $5,114
============================================================================================================================
Basic earnings per share $2.45 $2.23 $2.04
============================================================================================================================
Diluted earnings per share $2.31 $2.11 $1.94
============================================================================================================================
Average common shares outstanding 2,375 2,484 2,508
============================================================================================================================
Average common and common share equivalents outstanding 2,510 2,627 2,640
============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
- ---------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
- ---------------------------------------------------------------------------------------------------------------------
Net Unrealized
Gain (Loss) Total
on Securities Share-
Common Retained Available holders'
(in thousands, except per share amounts) Shares Stock Earnings for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 2,571 $20,880 $10,263 $62 $31,205
Net income for the year ---- ---- 5,114 ---- 5,114
Other comprehensive income-Unrealized gain
on securities available for sale, net ---- ---- ---- 43 43
---------------
Comprehensive income ---- ---- ---- ---- 5,157
---------------
Stock options exercised 24 206 ---- ---- 206
Common stock repurchase (102) (2,495) ---- ---- (2,495)
Tax benefit from stock options exercised ---- 209 ---- ---- 209
Cash dividends ($0.45 per share) ---- ---- (1,123) ---- (1,123)
- -----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 2,493 18,800 14,254 105 33,159
- -----------------------------------------------------------------------------------------------------------------------------
Net income for the year ---- ---- 5,541 ---- 5,541
Other comprehensive income-Unrealized gain
on securities available for sale, net ---- ---- ---- 195 195
---------------
Comprehensive income ---- ---- ---- ---- 5,736
---------------
Stock options exercised 35 529 ---- ---- 529
Common stock repurchase (91) (3,498) ---- ---- (3,498)
Issuance of common stock for Epic Funding Corp. 12 501 ---- ---- 501
Tax benefit from stock options exercised ---- 445 ---- ---- 445
Cash dividends ($0.56 per share) ---- ---- (1,390) ---- (1,390)
- -----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 2,449 16,777 18,405 300 35,482
- -----------------------------------------------------------------------------------------------------------------------------
Net income for the year ---- ---- 5,808 ---- 5,808
Other comprehensive income-Unrealized loss
on securities available for sale, net ---- ---- ---- (1,150) (1,150)
---------------
Comprehensive income ---- ---- ---- ---- 4,658
---------------
Common stock issued 60 1,800 1,800
Stock options exercised 23 275 ---- ---- 275
Common stock repurchase (115) (3,104) ---- ---- (3,104)
Tax benefit from stock options exercised ---- 48 ---- ---- 48
Cash dividends ($0.56 per share) ---- ---- (1,330) ---- (1,330)
- -----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 2,417 $15,796 $22,883 $(850) $37,829
=============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
- ----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $5,808 $5,541 $5,114
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 495 300 705
Depreciation and amortization 626 546 529
Amortization of intangibles 456 457 473
Deferred tax benefit (230) (56) (356)
Loss on sale of securities available for sale 51 4 47
Net gain on sale of other real estate owned ----- ----- (65)
Amortization of premium (discount) on investment securities, net 10 (49) (48)
(Increase) decrease in intangible assets (45) (50) 237
Increase in accrued interest receivable and other assets (1,673) (253) (2,107)
Increase in accrued interest payable and other liabilities 184 1,678 1,716
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,712 8,118 6,245
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale or maturities of securities available for sale 16,761 32,476 18,610
Maturities of securities held to maturity 6,125 4,323 2,250
Purchase of securities available for sale (46,783) (19,008) (18,850)
Purchase of securities to be held to maturity (3,993) (1,768) (857)
Proceeds from the sale of other real estate owned ----- ----- 519
Net increase in loans and leases (65,785) (32,274) (30,562)
Capital expenditures (669) (400) (444)
Cash used to acquire Epic Funding Corp. ----- (206) -----
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (94,344) (16,857) (29,334)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Net increase in deposits 68,300 32,097 25,706
Increase (decrease) in other short-term borrowings 5,997 (11,000) (13,688)
Cash dividends (1,330) (1,390) (1,123)
Common stock repurchased (3,104) (3,498) (2,495)
Common stock issued 1,800 ----- -----
Proceeds from stock options exercised 275 529 206
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 71,938 16,738 8,606
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (16,694) 7,999 (14,483)
Cash and equivalents at beginning of year 33,524 25,525 40,008
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $16,830 $33,524 $25,525
============================================================================================================================
Other cash flow information:
Interest paid $10,639 $9,118 $8,511
Income taxes paid 4,750 2,626 3,445
============================================================================================================================
Purchase of Epic Funding Corp.:
Leases ----- $149 -----
Other assets ----- 789 -----
- ----------------------------------------------------------------------------------------------------------------------------
Total assets acquired ----- 938 -----
Cash paid and expenses incurred (206)
Liabilities assumed:
Other liabilities ----- 231 -----
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities assumed ----- 231 -----
- ----------------------------------------------------------------------------------------------------------------------------
Common stock issued, net of registration costs ----- $501 -----
============================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
NOTE 1 - Summary of Significant Accounting Policies
SJNB Financial Corp. ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California on April 18, 1983. Its principal office is
located at One North Market Street, San Jose, California, 95113.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose, California
on June 10, 1982. Its main office is located at One North Market Street, San
Jose, California. SJNB engages in the general commercial banking business with
special emphasis on the banking needs of the business and professional
communities in San Jose and the surrounding areas. The Financial Services
Division is located at 95 South Market, San Jose, California, where it engages
in the factoring of accounts receivable.
The accounting policies of SJNB Financial Corp. and San Jose National Bank
(collectively, the "Company") are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry.
a. Consolidation
The consolidated financial statements include the accounts of SJNB. All material
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
b. Investment Securities
The Company accounts for its investment securities as follows:
Available for sale-Investment securities that are acquired without the intent to
hold until maturity are classified as available for sale. Such securities are
carried at market value. Market value adjustments are reported as a separate
component of shareholders' equity until realized.
Held to maturity-Investment securities purchased with the intent and ability to
hold them until maturity are classified as held to maturity. Such securities are
carried at cost, adjusted for accretion of discounts and amortization of
premiums.
Investment securities purchased are recorded as of their trade date. Accretion
of discounts and amortization of premiums arising at acquisition are included in
income using methods approximating the interest method. Gains or losses on sales
of securities, if any, are determined based on the specific identification
method. The carrying values of individual investment securities are reduced, if
necessary, through write-downs to reflect other than temporary impairments in
value.
c. Loans and Leases and Allowance for loan and Lease Losses
Loans and leases generally are stated at the principal amount outstanding.
Interest on loans is credited to income on a simple interest basis. Unearned
revenue on direct financing leases is accreted over the lives of the leases in
decreasing amounts to provide a constant rate of return on the net investment in
the leases. Loan origination fees and direct origination costs, including
initial direct cost of lease origination are deferred and amortized to income by
a method approximating the level yield method over the estimated lives of the
underlying loans. The accrual of interest on loans and leases is discontinued
and any accrued and unpaid interest is reversed when, in the opinion of
management, there is significant doubt as to the collectibility of interest or
principal or when the payment of principal or interest is ninety days past due,
unless the amount is well-secured and in the process of collection.
The allowance for loan and leases losses is a valuation allowance maintained to
provide for future loan losses through charges to current operating expense. The
allowance is based upon a continuing review of loans and leases by management
which includes consideration of changes in the character of the loan and lease
portfolio, current and anticipated economic conditions, past lending experience
and such other factors which, in management's judgment, deserve recognition in
estimating potential loan losses. In addition, regulatory examiners may require
the Company to recognize additions to the allowance based on their judgments
about information available to them at the time of their examinations.
Impaired loans are those in which, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan or lease agreement, including scheduled
interest payments. The Company measures such loans and leases based on the
present value of future cash flows discounted at the loan's or lease's effective
interest rate, or at the loan's or lease's market value or the fair value of the
collateral if the loan is secured. If the measurement of the impaired loan or
lease is less than the recorded investment, impairment is recognized by creating
or adjusting an existing allocation of the allowance for loan and leases losses.
Recognition of interest income on impaired loans or leases is as stated in the
first paragraph above of this footnote 1(c).
d. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense over the
estimated useful lives of the assets on a straight-line basis as follows:
Buildings 30 years
Furniture and equipment 3-10 years
Improvements 7-15 years
e. Intangibles
Goodwill is amortized using the straight-line method over 15 years. Core deposit
intangibles are amortized using an accelerated method over ten years.
On a periodic basis, the Company reviews its intangible assets for events or
changes in circumstances that may indicate that the carrying amount of the
assets may not be recoverable. Should such a change indicate that the value of
such intangibles may be impaired, an evaluation of the recoverability would be
performed, using undiscounted cash flows, prior to any writedown of the assets.
f. Interest Rate Instruments
Interest rate instruments are entered into in conjunction with the Bank's
asset/liability management. As these contracts are entered into only after
meeting the accounting criteria for a hedge, and as long as they continue to
meet such criteria, changes in market value are deferred and the net settlements
are accrued as adjustments to interest income. The Bank currently has
outstanding an interest rate swap for $10 million in connection with the $10
million ten year synthetic floating rate certificate of deposit and a one year
$10 million treasury lock, both of which are accounted for as hedges
g. Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Under the asset and liability method, deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit
carryforwards, and then a valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized.
h. Stock-based Compensation
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company only grants stock
options at fair market value. Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation," established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. The Company has elected
to remain on its current method of accounting as described above, and has
adopted the disclosure requirements of SFAS No. 123.
i. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year plus shares
issuable assuming exercise of all employee stock options, except where
anti-dilutive.
j. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income, which establishes new rules for the reporting and display
of comprehensive income and its components. The adoption of this statement had
no impact on net income or shareholders' equity. SFAS No. 130 requires the
Company's net unrealized gains or losses on available-for-sale securities to be
included in other comprehensive income. Comprehensive income is included in the
statement of shareholders' equity for the periods presented.
k. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, fed funds sold and money market investments.
l. Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent asset and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
m. Impairment of Long-lived Assets
Long-lived assets and certain identifiable intangibles held and used by an
entity are reviewed for impairment whenever events or changes indicate that the
carrying amount of an asset may not be recoverable. The Company has not
identified any long-lived assets or identifiable intangibles which were
impaired.
n. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under this approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. The Company did not
have any significant transactions in which this Statement had any impact on its
consolidated financial statements.
o. Segments of an Enterprise and Related Information
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires certain information about the operating segments of the
Company. The objective of requiring disclosures about segments of an enterprise
and related information is to provide information about the different types of
business activities in which an enterprise engages and the different economic
environments in which it operates to help users of financial statements better
understand its performance; better assess its prospects for future cash flows
and make more informed judgments about the enterprise as a whole. The Company
has determined it has three segments, general commercial banking, leases, and
factoring/asset based financing. Neither leasing nor factoring and asset based
financing meet the required thresholds for disagregation and therefore the
disclosures and related information about such segments has not been included in
the consolidated financial statements. At such time these segments meet the
required thresholds, such disclosures and other information will be included. It
is expected they will meet the thresholds in 2000.
p. Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In June 1999,
the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date. This Statement deferred the effective
date to the fiscal quarters of fiscal years beginning after June 15, 2000. The
Company expects to adopt this Statement on January 1, 2001. Management believes
the Statement would not have a significant effect on the Company's consolidated
financial position or its consolidated statement of operations.
q. Reclassification
Certain 1998 and 1997 amounts have been reclassified to conform with the 1999
presentation.
NOTE 2 - Acquisitions
On May 22, 1998 SJNB acquired all of the stock of a private company, Epic
Funding Corporation (Epic), pursuant to a definitive agreement dated April 13,
1998. In connection with the acquisition, which was structured as a tax-free
reorganization and accounted for as a purchase transaction for accounting
purposes, SJNB issued 12.2 shares of its common stock and paid $110 to Epic's
shareholder in exchange for all of Epic's outstanding stock. Total purchase
price was $611, while Epic's fair value of net assets was $28; goodwill amounted
to $759 including certain expenses of the transaction. Epic provides direct and
vendor lease programs and accounts receivable financing to manufacturers and
equipment users throughout California and across parts of the United States.
Epic is a wholly-owned subsidiary of the Bank. Epic's office is located in
Danville, California; together with a small de novo branch at the same facility
which was opened on July 1, 1998.
NOTE 3 - Cash and Due from Banks
The Federal Reserve requires the Bank to maintain average reserve balances for
certain deposit balances. There were no required reserves at December 31, 1999
or 1998.
NOTE 4 - Investment Securities
Investment securities as of December 31, 1999 and 1998 are summarized as
follows:
(dollars in thousands) December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized Fair
------------------------------------
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury $2,004 $3 ----- $2,007
U. S. Government Agencies 20,215 ----- ($190) 20,025
Mortgage Backed 30,888 ----- (371) 30,517
Asset-backed 2,000 ----- (22) 1,978
Trust preferred 7,062 ----- (479) 6,583
Mutual funds 2,518 ----- (154) 2,364
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale 64,687 3 (1,216) 63,474
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Government agencies 499 3 ----- 502
State and municipal (nontaxable) 7,327 ----- (816) 6,511
Mortgage Backed 657 13 ----- 670
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity 8,483 16 (816) 7,683
Federal Reserve Bank Stock 559 ----- ----- 559
- ----------------------------------------------------------------------------------------------------------------------------
Total 9,042 16 (816) 8,242
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $73,729 $19 ($2,032) $71,716
============================================================================================================================
December 31, 1998
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized Fair
--------------------------------------
Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury $3,005 $72 ----- $3,077
U. S. Government Agencies 25,220 466 ----- 25,686
Mortgage Backed 3,865 101 ----- 3,966
Mutual funds 2,638 ----- ($151) 2,487
- ----------------------------------------------------------------------------------------------------------------------------
Total available for sale 34,728 639 (151) 35,216
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S. Treasury 1,000 7 ----- 1,007
U.S. Government agencies 3,496 38 ----- 3,534
State and municipal (nontaxable) 4,213 116 ----- 4,329
Mortgage Backed 1,927 35 ----- 1,962
- ----------------------------------------------------------------------------------------------------------------------------
Total held to maturity 10,636 196 ----- 10,832
Federal Reserve Bank Stock 537 ----- ----- 537
- ----------------------------------------------------------------------------------------------------------------------------
Total 11,173 196 ----- 11,369
- ----------------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $45,901 $835 ($151) $46,585
============================================================================================================================
As of December 31, 1999 and 1998 investment securities with carrying values of
approximately $36.9 million and $18.6 million, respectively, were pledged as
collateral for deposits of public funds and other purposes. Investment in
Federal Reserve Bank stock is carried at cost, which is approximately equal to
its market value.
The following tables provide the scheduled maturities of the Company's
investment securities portfolio as of December 31, 1999:
Maturity of investment securities portfolio
(dollars in thousands) December 31, 1999
------------------------------------
Amortized Fair
Securities available for sale Cost Value
------------------------------------
Due in one year or less $11,315 $11,296
Due after one year through five years 24,760 24,499
Due after five years through ten years 7,448 7,308
Due after ten years 18,646 18,007
------------------------------------
Total 62,169 61,110
------------------------------------
Securities held to maturity
Due in one year or less 1,455 1,463
Due after one year through five years 679 680
Due after five years through ten years 369 344
Due after ten years 5,980 5196
------------------------------------
Total 8,483 7,683
------------------------------------
Non-maturity investments
Available for sale - Mutual Funds 2,518 2,364
Held to maturity - FRB Stock 559 559
------------------------------------
Total 3,077 2,923
------------------------------------
Total Investment securities $73,729 $71,716
====================================
Mutual funds consist of several funds invested in U. S. Government securities
and government issued adjustable rate mortgages (ARMS).
Interest income earned on U. S. Treasury, U. S. Government agencies and state
and municipal securities for the years ended December 31, 1999, 1998 and 1997
are as follows:
Interest income
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury $147 $293 $280
U.S. Government agencies 1,396 2,008 2,110
Mortgage-backed 851 301 373
Asset-backed 72 ----- -----
Trust preferred 301 ----- -----
Mutual funds 122 147 219
Securities held to maturity:
U.S. Treasury 24 97 132
U.S. Government agencies 115 260 453
State and municipal (nontaxable) 274 175 141
Mortgage-backed 90 146 190
Federal Reserve Bank 32 31 31
- -----------------------------------------------------------------------------------------------------------
Interest income $3,424 $3,458 $3,929
===========================================================================================================
NOTE 5 - Loans
A summary of loans as of December 31, 1999, 1998 and 1997 is as follows:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Commercial and other $107,415 $91,866 $94,029
SBA 46,031 37,019 39,409
Leasing 16,633 3,768 -----
Factoring and asset-based 9,901 7,393 4,915
Real estate construction 40,620 32,340 17,818
Real estate term 96,434 80,009 64,403
Consumer 10,764 9,647 9,042
Unearned fee income (837) (662) (644)
- -----------------------------------------------------------------------------------------------------------
Total loan and lease portfolio 326,961 261,380 228,972
Less allowance for loan or lease losses (5,284) (4,778) (4,493)
- -----------------------------------------------------------------------------------------------------------
Loans and leases, net $321,677 $256,602 $224,479
===========================================================================================================
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions. Although
the Company has a diversified loan and lease portfolio, a substantial portion of
its customers' ability to honor contracts is reliant upon the economic stability
of the Santa Clara Valley, which in some degree relies on the stability of high
technology companies in its "Silicon Valley." Loans and leases are generally
made on the basis of a secure repayment source, which is based on a detailed
cash flow analysis; however, collateral is generally a secondary source for loan
qualification.
Approximately 29% of the Company's loan and lease portfolio is made up of real
estate term loans. This category of real estate loans includes loans on
income-bearing commercial properties. In addition, 12% of the loan and lease
portfolio is made up of real estate construction loans. These loans consist of
approximately 37% residential and 63% commercial. Included in Consumer loans are
Prime equity loans of $5.3 million or approximately 2% of the total loan
portfolio. Included in the commercial category are mortgage warehouse loans,
loans to real estate developers for short-term investment purposes and loans to
nondevelopers for real estate investment purposes that amount to approximately
4% of the total loan portfolio. This amounts to approximately 47% of the loan
portfolio directly related to real estate or real estate interests.
Approximately 33% of the total loan portfolio is commercial loans; however, no
particular industry represents a significant portion of such loans.
The following is an analysis of the allowance for loan losses for the years
ended December 31, 1999, 1998 and 1997:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Balance, beginning of year $4,778 $4,493 $4,005
Provision for loan or lease losses 495 300 705
Charge-offs (152) (234) (288)
Recoveries 163 219 71
- -----------------------------------------------------------------------------------------------------------
Balance, end of year $5,284 $4,778 $4,493
===========================================================================================================
At December 31, 1999 and 1998, impaired loans totaled $1.4 million and $403 with
a corresponding valuation allowance of $224 and $27, respectively. For the years
ended December 31, 1999 and 1998, the average recorded investment in impaired
loans was approximately $475 and $733, respectively. The Company recognized $41,
$60 and $46 of interest on impaired loans (during the portion of the year they
were impaired), of which $40, $8 and $39 related to impaired loans for which
interest income is recognized on the cash basis for the years ended December 31,
1999, 1998 and 1997, respectively.
The balance of nonaccrual loans as of December 31, 1999 and 1998 was
approximately $1.4 million and $197, respectively. The effect on interest income
had these loans been performing in accordance with contractual terms was $132 in
1999, $22 in 1998, and $61 in 1997. Income actually recognized on these loans
was $112 in 1999, $21 in 1998 and $32 in 1997.
The Company has made loans to executive officers, directors and their affiliates
in the ordinary course of business. An analysis of activity with respect to such
loans during the years ended December 31, 1999, 1998 and 1997 is as follows:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Balance, beginning of year $1,749 $1,223 $1,652
New loans disbursed 2,717 1,340 495
Repayments of loans (1,725) (814) (924)
- -----------------------------------------------------------------------------------------------------------
Balance, end of year $2,741 $1,749 $1,223
===========================================================================================================
As of December 31, 1999, loans of approximately $11 million were pledged as
collateral for the Federal Reserve Discount Window.
NOTE 6 - Premises and Equipment
A summary of premises and equipment as of December 31, 1999 and 1998 is as
follows:
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Land $829 $829
Buildings and improvements 3,153 3,109
Furniture and equipment 2,371 1,748
- --------------------------------------------------------------------------------
Premises and equipment 6,353 5,686
Less accumulated depreciation and amortization 2,541) (1,916)
- --------------------------------------------------------------------------------
Premises and equipment, net $3,812 $3,770
===========================================================++++=================
NOTE 7 - Time Deposits
As of December 31, 1999 and 1998, the Bank had $85 million and $68 million,
respectively, in time deposits in denominations of $100 or more. Interest
expense for these deposits was $3.9 million and $3.3 million in 1999 and 1998,
respectively. Time deposits in denominations of $100 or more which mature in
greater than one year was $54.6 million as of December 31, 1999.
On December 4, 1998 the Bank raised $10 million through the placement of a ten
year synthetic floating rate certificate of deposit. The instrument consists of
two linked transactions, a callable interest rate swap and callable fixed rate
certificate of deposit. Under the swap agreement the Bank pays LIBOR plus five
basis points and receives 6% for a period of ten years. The swap is callable
after one year by the issuer. Simultaneously, the Bank issued a callable 6%
fixed rate 10 year certificate of deposit. The certificate of deposit does not
have any early redemption clauses, other then by death of the holder.
Effectively, the Bank's rate of interest on the combined transaction is LIBOR
plus five basis points.
NOTE 8 - Other Short-term Borrowings
Other short-term borrowings include federal funds purchased and securities sold
under agreements to repurchase and information relating to these borrowings are
summarized below:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Federal funds purchased
Balance at December 31, $500 $5,000 -----
Weighted average interest rate at year end 5.50% 5.50% -----
Maximum amount outstanding at any month end 22,000 5,000 $6,000
Average outstanding balance 1,801 380 834
Weighted average interest rate paid 5.54% 6.40% 5.93%
Securities sold under agreements to repurchase
Balance at December 31, $10,497 ----- $16,000
Weighted average interest rate at year end 5.80% ----- 5.72%
Maximum amount outstanding at any month end 15,559 $12,000 16,000
Average outstanding balance 7,421 3,762 11,236
Weighted average interest rate paid 5.61% 5.59% 5.77%
Any securities used under securities sold under agreements to repurchase are
under the control of the Bank. Securities subject to the agreement to repurchase
represent securities held by the Bank in its securities available for sale
portfolio with a total amortized cost of $13.3 million and a market value of
$13.1 million as of December 31, 1999.
The Company's bank subsidiary has informal arrangements with various
correspondents providing short-term credit for liquidity requirements; such
informal lines aggregated $22 million at December 31, 1999.
NOTE 9 - Accumulated other Comprehensive Income
Accumulated other comprehensive income is as follows for the years ended
December 31, 1999, 1998, and 1997:
- --------------------------------------------------------------- -------------- --------------- --------------
1999 1998 1997
- --------------------------------------------------------------- -------------- --------------- --------------
Realized losses on securities available for sale, net $(51) $(4) $(47)
Unrealized (loss)appreciation of securities held for sale, (1,099) 199 90
net
- --------------------------------------------------------------- -------------- --------------- --------------
Other comprehensive (loss) income ($1,150) $195 $43
=============================================================== ============== =============== ==============
NOTE 10 - Earnings per Share
The reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations are as follows:
For the year ended December 31, 1999
- -------------------------------------------------------------------------------------------------------------
Per share
Net income Shares amount
- -------------------------------------------------------------------------------------------------------------
Net income and basic EPS $5,808 2,375 $2.45
================
Effect of stock option dilutive shares 135
- --------------------------------------------------------------------------------------------
Diluted EPS 2,510 $2.31
=============================================================================================================
For the year ended December 31, 1998
- -------------------------------------------------------------------------------------------------------------
Net income and basic EPS $5,541 2,484 $2.23
================
Effect of stock option dilutive shares 143
- --------------------------------------------------------------------------------------------
Diluted EPS $5,541 2,627 $2.11
=============================================================================================================
For the year ended December 31, 1997
-----------------------------------------------------
Net income and basic EPS $5,114 2,508 $2.04
================
Effect of stock option dilutive shares 132
- --------------------------------------------------------------------------------------------
Diluted EPS $5,114 2,640 $1.94
=============================================================================================================
NOTE 11 - Income Taxes
Income tax expense for the years ended December 31, 1999, 1998 and 1997 consists
of the following:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Current:
Federal $3,218 $3,120 $3,208
State 996 911 921
- -----------------------------------------------------------------------------------------------------------
Total current 4,214 4,031 4,129
- -----------------------------------------------------------------------------------------------------------
Deferred:
Federal (183) (45) (281)
State (47) (11) (75)
- -----------------------------------------------------------------------------------------------------------
Total deferred (230) (56) (356)
- -----------------------------------------------------------------------------------------------------------
Income taxes $3,984 $3,975 $3,773
===========================================================================================================
Total income tax expense differed from the amount computed by applying the U. S.
federal income tax rates of 34% in years ended December 31, 1999, 1998 and 1997
to income before income taxes as a result of the following:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Computed "expected " tax expense $3,329 $3,235 $3,021
California franchise tax, net of federal income tax 627 610 558
Amortization of intangible assets 136 136 142
Federal tax-exempt investment income (97) (52) (42)
Other (11) 46 94
- -----------------------------------------------------------------------------------------------------------
Income taxes $3,984 $3,975 $3,773
===========================================================================================================
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998, are presented below:
(dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan and lease losses $1,850 $1,592
Purchase accounting adjustments 95 137
Foreclosure income 43 43
State taxes 337 286
Deferred compensation 105 114
Securities available for sale 567 ----
Other 72 100
- ------------------------------------------------------------------------------------------
Total gross deferred tax assets 3,069 2,272
- ------------------------------------------------------------------------------------------
Deferred tax liabilities:
Securities available for sale ---- 200
Depreciation and amortization 81 81
- ------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 81 281
- ------------------------------------------------------------------------------------------
Net deferred tax assets $2,988 $1,991
==========================================================================================
Amounts for the current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts shown on the tax
returns as filed. Accordingly, the variances from the amounts previously
reported for 1998 are primarily as a result of adjustments to conform to tax
returns as filed.
Deferred tax assets related to purchase accounting adjustments include the tax
effect of fair market value adjustments of the assets and liabilities of
businesses acquired. The Company believes that the net deferred tax asset is
realizable through sufficient taxable income within the carryback periods and
the current year's taxable income.
NOTE 12 - Detail of Other Expense
Other expense for the years ended December 31, 1999, 1998 and 1997 consists of
the following:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Data processing $604 $663 $441
Amortization of core deposit intangibles and goodwill 456 457 473
Legal and professional fees 506 315 331
Client services 437 443 345
Business promotion 389 332 369
Directors and shareholders 339 282 332
Net cost of other real estate owned ----- 3 (72)
Other 1,505 1,440 1,241
- -----------------------------------------------------------------------------------------------------------
Total $4,236 $3,935 $3,460
===========================================================================================================
NOTE 13 - Stock Option Plan
During 1996 the shareholders of the Company approved the 1996 Stock Option Plan
(the "Plan"), which replaced the then existing two stock option plans. The 1996
Stock Option Plan is described below. In accordance with APB 15, no compensation
cost has been recognized for the Plan. Had compensation cost for the Plan been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been adjusted to the pro forma amounts for options granted
for the years 1998, 1998 and 1997 indicated below:
(dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Net income:
As reported $5,808 $5,541 $5,114
Pro forma 4,663 4,854 4,850
- -----------------------------------------------------------------------------------------------------------
Net income per share:
Basic, as reported $2.45 $2.23 $2.04
Basic, pro forma 1.96 1.95 1.93
- -----------------------------------------------------------------------------------------------------------
Diluted, as reported $2.31 $2.11 $1.94
Diluted, pro forma 1.86 1.85 1.84
The above amounts include the impact on net income and net income per share for
options granted during the years 1995 through 1999; such amounts would have been
substantially different if options granted prior to 1995 had been included in
the computation.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the following years:
Assumptions: 1999 1998 1997
- --------------------------------------------------------- ---------------- ----------------- ----------------
Dividend yield 2.0% 1.8% 1.3%
Volatility 46.7% 50.0% 53.0%
Risk free interest rates 5.4% 5.0% 6.4%
Expected lives (years) 7.2 6.4 6.5
The 1996 Stock Option Plan provides that either incentive stock options or
nonstatutory stock options may be granted to certain key employees or directors
to purchase authorized, but unissued, Common Stock of the Company. Shares may be
purchased at a price not less than the fair market value of such stock on the
date of the grant. Generally, stock options become exercisable 40% one year
after the date of grant and 20% in each of the following three years. They
expire no later than ten years after the date of the grant. The Plan provides
that outside directors will automatically receive a nonstatutory option covering
5,000 shares annually at an exercise price equal to 100% of the market price of
the Common Stock on the date of grant. The 1996 Stock Option Plan replaced the
previous two plans which had similar provisions. If options granted under the
prior plans expire without being exercised, the corresponding common shares
shall become available for awards under the Plan. During 1999, 1,080 shares
became available under this provision. The number of shares available for future
grants of options under the 1996 Stock Option Plan was 153,487 as of December
31, 1999.
Activity under the stock plans is as follows:
Weighted
Number Average
of Exercise
Options Shares Price
- --------------------------------------------------------------------------------
Balances, December 31, 1996 252,518 $11.40
Granted 100,070 25.60
Cancelled (15,075) 15.70
Exercised (23,553) 8.76
- --------------------------------------------------------------------------------
Balances, December 31, 1997 313,960 15.92
Granted 371,200 31.26
Cancelled (198,230) 35.25
Exercised (35,080) 15.08
- --------------------------------------------------------------------------------
Balances, December 31, 1998 451,850 20.09
- --------------------------------------------------------------------------------
Granted 158,170 27.93
Cancelled (30,182) 25.74
Exercised (19,798) 13.90
- --------------------------------------------------------------------------------
Balances, December 31, 1999 560,040 $22.22
================================================================================
The weighted-average fair value of options granted during 1999, 1998 and 1997
was $12.34, $14.38 and $13.28 respectively.
The following table summarizes options outstanding and exercisable at December
31, 1999:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------------
Number Number Weighted
Range of Outstanding Weighted Average Exercisable Average
Exercise as of Remaining Exercise as of Exercise
Prices December 31, 1999 Life Price December 31, 1999 Price
- -----------------------------------------------------------------------------------------------------------------------------
$5.38 - $9.31 15,400 3.38 $6.46 15,400 $6.46
11.50 - 11.50 92,500 5.57 9.34 92,500 9.34
13.38 - 16.75 56,930 6.41 16.22 43,870 16.29
17.31 - 25.00 68,460 7.13 23.99 43,220 23.78
25.38 - 26.56 16,450 9.05 26.55 120 25.38
26.69 - 26.69 171,360 8.81 26.69 67,512 26.69
27.19 - 34.25 138,940 9.28 28.11 ----- -----
- -----------------------------------------------------------------------------------------------------------------------------
$5.38 - $34.25 560,040 7.80 $22.22 262,622 $17.18
=============================================================================================================================
<FN>
Options exercisable as of December 31, 1998 and 1997 were 163,674 and 126,679
and had weighted average exercise prices of $13.24 and $11.54 respectively.
</FN>
NOTE 14 - Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments, such as
commitments to extend credit, which are not reflected in the consolidated
financial statements. These commitments involve, to varying degrees, credit risk
in excess of the amount recognized as either an asset or liability in the
consolidated balance sheet. The Company controls the credit risk through its
credit approval process. The same credit policies are used when entering into
such commitments. Management does not anticipate any loss from such commitments.
Amounts committed to extend credit under normal lending agreements aggregated
approximately $164 million and $139 million for undisbursed variable loan
commitments and approximately $5.6 million and $6.3 million for commitments
under unused standby letters of credit and other guarantees at December 31, 1999
and 1998, respectively.
The Bank utilizes various financial instruments with off-balance sheet risk to
reduce its exposure to fluctuations in interest rates. These financial
instruments involve, to varying degrees, credit and interest rate risk in excess
of the amount recognized as either an asset or liability in the statement of
financial position.
The credit risk is the possibility that a loss may occur because a party to a
transaction fails to perform according to the terms of the contract. Interest
rate risk is the possibility that future changes in market prices will cause a
financial instrument to be less valuable or more onerous. The Bank attempts to
control the credit risk arising from these instruments through its credit
approval process and through the use of risk control limits and monitoring
procedures. Interest rate risk is managed by various asset and liability methods
including the utilization of interest rate hedging vehicles.
The Company is obligated under its lease agreements for 95 South Market Street,
San Jose and 50 Oak Court, Danville under a noncancelable operating leases
through September 2004 and July 2001, respectively. The leases are subject to
periodic adjustments based on changes in the CPI. The following table shows
future minimum payments under the leases as of December 31, 1999:
- -------------------------------------------------------------
Years Ending December 31,
(in thousands)
2000 $314
2001 269
2002 236
2003 236
2004 177
Total minimum lease payments
=============================================================
Total minimum lease payments to be received under noncancelable operating
subleases at December 31, 1999 were approximately $890; these payments are not
reflected in the above table. Total rent expense was $330, $281, and $90 for the
years ended December 31, 1999, 1998 and 1997, respectively.
There is ordinary routine litigation incidental to the business pending against
the Company but, in the opinion of management, liabilities (if any) arising from
such claims will not have a material effect upon the consolidated financial
statements of the Company.
NOTE 15 - Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of estimated fair values for the Company's financial instruments.
Fair value estimates, methods and assumptions, set forth below for the Company's
financial instruments, are made solely to comply with the requirements of SFAS
No. 107 and should be read in conjunction with the consolidated financial
statements and notes thereto in this Annual Report.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
management's estimates of the values, and they are often calculated based on
current pricing policy, the economic and competitive environment, the
characteristics of the financial instruments, and other such factors. These
calculations are subjective in nature, involve uncertainties and matters of
significant judgment and do not include tax ramifications; therefore, the
results cannot be determined with precision, substantiated by comparison to
independent markets and may not be realized in an actual sale or immediate
settlement of the instruments. The fair valuations have not been updated since
year end; therefore, the valuations may have changed significantly since that
point in time.
The Company has not included certain material items in its disclosure, such as
the value of the long-term relationships with the Company's deposit customers,
since these intangibles are not financial instruments. There may be inherent
weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash flows,
could significantly affect the results. For all these reasons, the aggregation
of the fair value calculations presented herein do not represent, and should not
be construed to represent, the underlying value of the Company.
The following table presents a summary of the Company's financial instruments,
as defined by SFAS No. 107 as of December 31, 1999 and 1998:
Fair Value of Financial Instruments
(dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Financial assets Value Value Value Value
- --------------------------------------------------------------------------------------------------------
Cash and due from banks $11,180 $11,180 $11,239 $11,239
Money market investments 5,650 5,653 22,285 22,298
Investment securities 72,516 71,716 46,389 46,563
Loans and leases, net 321,677 322,298 256,602 261,479
Accrued interest receivable 2,209 2,209 1,600 1,600
Financial liabilities
- --------------------------------------------------------------------------------------------------------
Deposits 370,742 368,919 302,442 289,147
Federal funds purchased, securities sold under
repurchase agreements and other borrowings 11,637 11,656 5,743 5,748
Off-balance sheet
Financial Instruments
- --------------------------------------------------------------------------------------------------------
Interest rate floor contract purchased ----- ----- 100 82
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, not previously discussed above, are described
below:
Financial instruments with fair value approximate to carrying value - The
carrying value of cash and due from banks, money market investments, accrued
interest receivable, noninterest-bearing demand accounts, interest-bearing
demand, money market and savings deposit accounts, accrued interest receivable
and expense approximates fair value due to the short-term nature of these
financial instruments.
Investment securities - The estimated fair values of securities by type are
based on quoted market prices when available.
Loans and leases - The carrying amount of loans and leases is net of unearned
fee income and the reserve for loan and lease losses. The fair valuation
calculation process differentiates loans and leases based on their financial
characteristics, such as product classification, loan category, pricing features
and remaining maturity. Prepayment estimates are evaluated by product and
respective interest rate. Discount rates presented in the paragraphs below have
a wide range due to the Company's mix of fixed and variable rate products.
The fair value of loans and leases is calculated by discounting contractual cash
flows using discount rates that reflect the Company's current pricing for loans
and leases with similar characteristics and remaining maturity. Most of the
discount rates applied to these loans were between 8.2% and 10.6% at December
31, 1999.
Additionally, the allowance for loan and lease losses was applied against the
estimated fair value of loans and leases to recognize future defaults of
contractual cash flows.
Fair value for nonperforming loans and leases is based on discounting estimated
cash flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Deposits - The fair value of certificates of deposit and other time deposits is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for like deposits with
similar remaining maturities.
Other short-term borrowings - A reasonable estimate of the fair value of federal
funds sold is the carrying amount because of the relatively short period of time
between the origination of the instrument and its expected maturity.
The fair value of the Company's securities sold under repurchase agreements is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for such instruments with
similar remaining maturities.
Commitment to extend credit - The majority of the Company's commitments to
extend credit carry variable and current market interest rates if converted to
loans or leases. Because these commitments are generally unassignable by either
the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts and is excluded from the table.
Derivative financial instruments - The fair value of the interest rate floor
generally reflects the estimated amounts the Company would receive based upon
dealer quotes, to terminate such agreements at the reporting date.
NOTE 16 - SJNB Financial Corp.
(Parent Company Only)
The following are the financial statements of SJNB Financial Corp. (parent
company only):
- ----------------------------------------------------------------------------------------------------------------------------
Balance Sheets
December 31, 1999 and 1998
(dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Cash and equivalents $1,141 $50
Investment in the Bank 36,341 34,603
Other assets 347 829
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $37,829 $35,482
============================================================================================================================
Liabilities and Shareholders' Equity
Total liabilities-Accounts payable ----- -----
- ----------------------------------------------------------------------------------------------------------------------------
Common stock $15,796 $16,776
Retained earnings 22,883 18,406
Net unrealized (loss) gain on securities available for sale (850) 300
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 37,829 35,482
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $37,829 $35,482
============================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Cash dividend received from Bank $3,779 $4,470 $2,600
Interest income and fees on loans 11 8 13
Other expense (202) (118) (84)
- ----------------------------------------------------------------------------------------------------------------------------
Income before taxes 3,588 4,360 2,529
Income tax benefit 75 45 28
- ----------------------------------------------------------------------------------------------------------------------------
Income before undistributed income of the Bank 3,663 4,405 2,557
Equity in undistributed income of the Bank 2,145 1,136 2,557
- ----------------------------------------------------------------------------------------------------------------------------
Net income $5,808 $5,541 $5,114
============================================================================================================================
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $5,808 $5,541 $5,114
Adjustments to reconcile net income to net cash
used in operating activities:
Increase in other assets (213) (172) (19)
Equity in undistributed income of the Bank (2,145) (1,136) (2,557)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,450 4,233 2,538
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash dividend (1,330) (1,390) (1,123)
Common stock repurchased (3,104) (3,498) (2,495)
Stock options exercised 2,075 529 206
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,359) (4,359) (3,412)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 1,091 (126) (874)
Cash and equivalents at beginning of year 50 176 1,050
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $1,141 $50 $176
============================================================================================================================
Noncash transaction:
Contribution of stock used in the acquisition of Epic Funding Corp. ----- $501 -----
============================================================================================================================
NOTE 17 - Regulatory Matters
The Federal Reserve Board, the Comptroller of the Currency and the FDIC have
issued substantially similar risk-based and leverage capital guidelines
applicable to United States banking organizations. In addition, those regulatory
agencies may from time to time require that a banking organization maintain
capital above the minimum levels, whether because of its financial condition or
actual or anticipated growth.
The Federal Reserve Board risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for loan and lease losses up to 1.25% of risk weighted assets. The total of Tier
1 and Tier 2 capital, less investments in unconsolidated subsidiaries,
represents qualifying total capital, at least 50% of which must consist of Tier
1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total
capital by risk-weighted assets. Assets and off-balance sheet exposures are
assigned to one of four categories of risk-weights, based primarily on relative
credit risk. The minimum tier 1 risk-based capital ratio is 4% and the minimum
total risk-based capital ratio is 8%. The leverage capital ratio is determined
by dividing Tier 1 capital by adjusted average total assets. Although the stated
minimum leverage capital ratio is 3%, most banking organizations are required to
maintain leveraged capital ratios of at least 100 to 200 basis points above the
3%.
The table below summarizes the Tier 1 and total risk-based capital ratios and
leverage capital ratios of the Company and the Bank as of the dates indicated:
Risk-based and Leverage Capital Ratios
(dollars in thousands)
December 31, 1999 December 31, 1998
----------------------------------------------------------------------
Company-Risk-based Amount Ratio Amount Ratio
----------------------------------------------------------------------
Tier 1 capital $34,971 9.80% $30,798 10.56%
Tier 1 capital minimum requirement 14,274 4.00 11,664 4.00
----------------------------------------------------------------------
Excess $20,697 5.80% $19,134 6.56%
======================================================================
Total capital $39,442 11.05% $34,457 11.82%
Total capital minimum requirement 28,549 8.00 23,328 8.00
----------------------------------------------------------------------
Excess $10,893 3.05% $11,129 3.82%
======================================================================
Risk-adjusted assets $356,861 $291,602
================= =================
Company-Leverage
Tier 1 capital $34,971 8.36% $30,798 9.10%
Minimum leverage ratio requirement 16,727 4.00 13,542 4.00
----------------------------------------------------------------------
Excess $18,244 4.36% $17,256 5.10%
======================================================================
Average total assets $418,177 $338,544
================= =================
Bank-Risk-based
Tier 1 capital $33,421 9.46% $30,125 10.33%
Tier 1 capital minimum requirement 14,132 4.00 11,661 4.00
----------------------------------------------------------------------
Excess $19,288 5.46% $18,464 6.33%
----------------------------------------------------------------------
Total capital $37,848 10.71% $33,783 11.59%
Total capital minimum requirement 28,265 8.00 23,322 8.00
----------------------------------------------------------------------
Excess $9,583 2.71% $10,461 3.59%
======================================================================
Risk-adjusted assets $353,307 $291,524
================= =================
Bank-Leverage
Tier 1 capital $33,421 7.99% $30,125 8.88%
Minimum leverage ratio requirement 16,729 4.00 13,567 4.00
----------------------------------------------------------------------
Excess $16,692 3.99% $16,558 4.88%
======================================================================
Average total assets $418,230 $339,166
================= =================
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions, (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective Federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee the bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of 5% of the bank's assets at the time
it became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors.
The various regulatory agencies have adopted substantially similar regulations
that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, or 3% in some cases. Under these guidelines, the
Company and the Bank were considered well capitalized at December 31, 1999 and
1998.
Banking agencies have recently adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in evaluation
of a bank's capital adequacy. Concurrently, banking agencies have proposed a
methodology for evaluating interest rate risk. After gaining experience with the
proposed measurement process, those banking agencies intend to propose further
regulations to establish an explicit risk-based capital charge for interest rate
risk.
The ability of the Company to pay dividends largely depends upon the dividends
paid to it by the Bank. There are legal limitations on the ability of the Bank
to provide funds to the Company in the form of loans, advances or dividends.
Under national banking law, without the prior approval of the Comptroller of the
Currency, the Bank may not declare dividends in any calendar year that exceed
the Bank's net profits for that year, as defined by statute, combined with its
net retained profits, as defined, for the preceding two years. As of December
31, 1999, the Bank may initiate dividend payments without prior regulatory
approval of up to $7.1 million.
Note 18 - Subsequent Event - Acquisition of Saratoga Bancorp
On January 5, 2000, the Company acquired all of the outstanding shares of common
stock of Saratoga Bancorp, the parent company of Saratoga National Bank,
pursuant to an exchange of the Company's common stock for all common stock of
Saratoga Bancorp. Saratoga National Bank, headquartered in Saratoga, California,
operated three branches and as of the acquisition date had $142 million in
assets and $103 million in deposits. Saratoga's San Jose office, which was
located near SJNB's San Jose office was consolidated into SJNB's San Jose office
in January 2000. The shareholders of Saratoga received 0.70 shares of the
Company's common stock for each outstanding share of Saratoga common stock.
Based on the closing price of the Company's stock on January 5, 2000 of $29.125
the transaction is valued at approximately $34.2 million, excluding the value of
any unexercised options, and each Saratoga shareholder received SJNB common
stock valued at $20.39 per share. The merger has been accounted for as a pooling
of interests.
The following unaudited pro forma combined financial information, based on the
historical financial statements of the parties, summarizes the combined results
of operations of the Company and Saratoga Bancorp on a pooling of interests
basis, as if the combination had been consummated on January 1 of each of the
periods presented. These pro forma financials are simply arithmetical
combinations of the Company's and Saratoga Bancorp's separate financial results,
which do not reflect any direct costs or potential savings which are expected to
result from the consolidation of the operations and are not indicative of the
results of future operations. Excluded from the 1999 results of operations is
approximately $330, net of taxes, of costs directly related to the merger. No
assurances can be given with respect to the ultimate level of expense savings.
Earnings per share were calculated using the exchange ratio of .70 as described
above.
(in thousands, except per share data)
- -----------------------------------------------------------------------------------------------------------
Unaudited As of or for the year ended December 31,
- -----------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
Total assets $568,202 $494,736 $455,963
Loans and leases 400,780 335,943 292,737
Deposits 473,734 405,857 361,391
Shareholders' equity 53,291 50,739 46,764
===========================================================================================================
Net interest income $27,471 $25,603 $23,562
Provision for loan and lease losses (861) (436) (705)
Other income 2,737 1,824 1,490
Other expense (16,691) (14,462) (12,888)
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 12,656 12,529 11,459
Income taxes (4,949) (5,040) (4,749)
- -----------------------------------------------------------------------------------------------------------
Net income $7,707 $7,489 $6,710
===========================================================================================================
Net income per share - basic $2.21 $2.06 $1.86
Net income per share - diluted 2.07 1.92 1.74
===========================================================================================================
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- --------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information concerning directors, executive officers, promoters and control
persons and compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the text under the captions "Election of Directors," "Executive
Compensation and Transactions with Directors and Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement
for its 1999 Annual Meeting of Shareholders.
ITEM 11: EXECUTIVE COMPENSATION
- --------------------------------
Information concerning executive compensation is incorporated by reference to
the text under the caption "Executive Compensation and Transactions with
Directors and Officers" in the Registrant's Proxy Statement for its 2000 Annual
Meeting of Shareholders.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference to the text under the captions "Security
Ownership of Directors and Management" and "Security Ownership of Certain
Beneficial Owners" in the Registrant's Proxy Statement for its 2000 Annual
Meeting of Shareholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated by reference to the text under the caption "Executive Compensation
and Transactions with Directors and Officers" of the Registrant's Proxy
Statement for its 2000 Annual Meeting of Shareholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) 1. All Financial Statements
See Index to Financial Statements on page 35 hereof.
(a) 2. Financial statements schedules required. None. (Information included in
Financial Statements).
(a) 3. Exhibits
The following exhibits are filed as part of this report:
Exhibit Number
(2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga
Bancorp and Saratoga National Bank, dates as of August 27, 1999, is
hereby incorporated by reference to Exhibit 2.1 of the Registrant's
Registration Statement on Form S-4 as filed on October 14, 1999, under
Registration No. 333-89013.
(3)(i). The Registrant's Restated Articles of Incorporation, as amended are
hereby incorporated by reference to Exhibit (3) a. of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1999.
(3)(ii). The Registrant's restated Bylaws, as amended as of January 26, 2000
and February 23, 2000.
*(10)a. The Registrant's 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit 4.1 of the Registrant's on Form
S-8, as filed on September 4, 1992, under Registration No. 33-51740.
*(10)b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit (10) b. of the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)c. The form of Incentive Stock Option Agreement being utilized under the
1992 Employee Stock Option Plan is hereby incorporated by reference
from Exhibit 4.2 of the Registrant's Registration Statement on Form
S-8, as filed on September 4, 1992, under Registration No. 33-51740.
*(10)d. The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740.
*(10)e. The Registrant's Amended 1996 Stock Option Plan is incorporated by
reference to Exhibit 99.1 of the Registrant's Form S-8 filed June 15,
1999, under Registration No. 333-80683.
*(10)f. The form of Nonstatutory Stock Option Agreement for outside Directors
being utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)g. The form of Nonstatutory Stock Option Agreement for Employees being
utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) g. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)h. The form of Incentive Stock Option Agreement being utilized under the
Amended 1996 Stock Option Plan is hereby incorporated by reference to
Exhibit (10) h. of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
*(10)i. The Saratoga Bancorp 1982 Stock Option Plan.
*(10)j. The Saratoga Bancorp 1994 Stock Option Plan (Amended).
*(10)k. Forms of Incentive Stock Option Agreement, Non-Statutory Stock Option
Agreement and Non-Statutory Stock Option Agreement for Outside
Directors.
*(10)l. Agreement between James R. Kenny and SJNB Financial Corp. and San Jose
National Bank dated March 27, 1996 is hereby incorporated by reference
to Exhibit (10) m. of the Registrant's Quarterly Report on Form 10-QSB
for the quarterly period ended March 31, 1996.
*(10)m. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San
Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) n. of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1996.
(10)n. 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)o. 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)p. Agreement of Purchase and Sale dated July 27, 1988 for 12000
Saratoga-Sunnyvale Road, Saratoga, CA.
(10)q. Form of Director Supplemental Compensation Agreement dated September
24, 1998 between Saratoga National Bank and Robert G. Egan, John F.
Lynch III and V. Ronald Mancuso, respectively.
(10)r. Form of Director Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998 between Saratoga National Bank and
Robert G. Egan, John F. Lynch III and V. Ronald Mancuso, respectively.
(10)s. Form of Director Surrogate Supplemental Compensation Agreement dated
September 24, 1998 between Saratoga National Bank and Victor E.
Aboukhater and William D. Kron, respectively.
(10)t. Form of Director Surrogate Life Insurance Endorsement Method Split
Dollar Plan Agreement dated September 24, 1998 between Saratoga
National Bank and Victor E. Aboukhater and William D. Kron,
respectively.
(10)u. Form of Officer Supplemental Compensation Agreement dated September
24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke,
Sandra Swenson, Barbara Resop and Cathe Franklin, respectively.
(10)v. Form of Officer Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998 between Saratoga National Bank and
Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe
Franklin, respectively.
(10)w. Richard L. Mount Executive Supplemental Compensation Agreement dated
September 24, 1998.
(10)x. Richard L. Mount Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998.
(10)y. Richard L. Mount Executive Benefits Agreement dated June 18, 1999.
(22) Subsidiary of Registrant.
(23) Consent of KPMG LLP.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-K
Registrant: Current Report of Form 8-K filed on December 16, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: February 29, 2000 SJNB Financial Corp.
By: /s/J.R. Kenny By: /s/E.E. Blakeslee
--------------------------------- -----------------------------
James R. Kenny Eugene E. Blakeslee
President and Chief Executive Vice President &
Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ J.R. Kenny /s/ F.J. Gorry
- --------------------------------- ---------------------------------
James R. Kenny F. Jack Gorry, Director
President, Chief Executive Officer February 29, 2000
and Director
(Principal Executive Officer)
February 29, 2000
/s/ E.E. Blakeslee /s/ A.K. Lund
- --------------------------------- ---------------------------------
Eugene E. Blakeslee Arthur K. Lund, Director
Executive Vice President and February 29, 2000
Chief Financial Officer and
Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer
February 29, 2000
/s/ R.S. Akamine /s/ L. Oneal
- --------------------------------- ---------------------------------
Ray S. Akamine, Director Louis Oneal, Director
February 29, 2000 February 29, 2000
/s/ R.A. Archer /s/ D. Rubino
- --------------------------------- ---------------------------------
Robert A. Archer Diane Rubino, Director
Chairman and Director February 29, 2000
February 29, 2000
/s/ A.B. Bruno /s/ D.L. Shen
- --------------------------------- ---------------------------------
Albert V. Bruno, Director Douglas L. Shen, Director
February 29, 2000 February 29, 2000
/s/ R. Diridon /s/ G.S. Vandeweghe
- --------------------------------- ---------------------------------
Rod Diridon,Sr., Director Gary S. Vandeweghe
February 29, 2000 February 29, 2000
SJNB Financial Corp.
Form 10-K
Exhibits
December 31, 1999
The following exhibits are filed as part of this report:
(2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga
Bancorp and Saratoga National Bank, dates as of August 27, 1999, is
hereby incorporated by reference to Exhibit 2.1 of the Registrant's
Registration Statement on Form S-4 as filed on October 14, 1999, under
Registration No. 333-89013.
(3)(i). The Registrant's Restated Articles of Incorporation, as amended are
hereby incorporated by reference to Exhibit (3) a. of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1999.
(3)(ii). The Registrant's restated Bylaws, as amended as of January 26, 2000
and February 23, 2000.
*(10)a. The Registrant's 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit 4.1 of the Registrant's
Registration Statement on Form S-8, as filed on September 4, 1992,
under Registration No. 33-51740.
*(10)b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit (10) b. of the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)c. The form of Incentive Stock Option Agreement being utilized under the
1992 Employee Stock Option Plan is hereby incorporated by reference
from Exhibit 4.2 of the Registrant's Registration Statement on Form
S-8, as filed on September 4, 1992, under Registration No. 33-51740.
*(10)d The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740.
*(10)e. The Registrant's Amended 1996 Stock Option Plan is incorporated by
reference to exhibit 99.1 of the Registrant's Form S-8 filed June 15,
1999, under Registration No. 333-80683.
*(10)f. The form of Nonstatutory Stock Option Agreement for outside Directors
being utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) f. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998
*(10)g. The form of Nonstatutory Stock Option Agreement for Employees being
utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) g. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)h. The form of Incentive Stock Option Agreement being utilized under the
Amended 1996 Stock Option Plan is hereby incorporated by reference to
Exhibit (10) h. of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
*(10)i. The Saratoga Bancorp 1982 Stock Option Plan.
*(10)j. The Saratoga Bancorp 1994 Stock Option Plan (Amended).
*(10)k. Forms of Incentive Stock Option Agreement, Non-Statutory Stock Option
Agreement and Non-Statutory Stock Option Agreement for Outside
Directors.
*(10)l. Agreement between James R. Kenny and SJNB Financial Corp.and San Jose
National Bank dated March 27, 1996 is hereby incorporated by reference
to Exhibit (10) m. of the Registrant's Quarterly Report on Form 10-QSB
for the quarterly period ended March 31, 1996.
*(10)m. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and San
Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) n. of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1996.
(10)n. 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)o. 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)p. Agreement of Purchase and Sale dated July 27, 1988 for 12000
Saratoga-Sunnyvale Road, Saratoga, CA.
(10)q. Form of Director Supplemental Compensation Agreement dated September
24, 1998 between Saratoga National Bank and Robert G. Egan, John F.
Lynch III and V. Ronald Mancuso, respectively.
(10)r. Form of Director Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998 between Saratoga National Bank and
Robert G. Egan, John F. Lynch III and V. Ronald Mancuso, respectively.
(10)s. Form of Director Surrogate Supplemental Compensation Agreement dated
September 24, 1998 between Saratoga National Bank and Victor E.
Aboukhater and William D. Kron, respectively.
(10)t. Form of Director Surrogate Life Insurance Endorsement Method Split
Dollar Plan Agreement dated September 24, 1998 between Saratoga
National Bank and Victor E. Aboukhater and William D. Kron,
respectively.
(10)u. Form of Officer Supplemental Compensation A greement dated September
24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke,
Sandra Swenson, Barbara Resop and Cathe Franklin, respectively.
(10)v. Form of Officer Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998 between Saratoga National Bank and
Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe
Franklin, respectively.
(10)w. Richard L. Mount Executive Supplemental Compensation Agreement dated
September 24, 1998.
(10)x. Richard L. Mount Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998.
(10)y. Richard L. Mount Executive Benefits Agreement dated June 18, 1999.
(22) Subsidiary of Registrant.
(23) Consent of KPMG LLP.
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.