UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________to _________________
Commission File Number 0-11771
SJNB FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0058227
- ---------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE NORTH MARKET STREET, SAN JOSE, CALIFORNIA 95113
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 947-7562
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
-------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant, based on a market value of $38.56 per share (the closing price
of the Common Stock, as of February 28, 2001) was $120,605,000
Number of shares of common stock outstanding as of February 28, 2001: 3,791,951
shares
Documents incorporated by reference:
Portions of the registrant's definitive proxy statement for the registrant's
2001 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A) are
incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
PART I
PAGE
Item 1 - Business 4
Item 2 - Properties 11
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
PART II
Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters 12
Item 6 - Selected Financial Data 14
Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation 14
Item 7A- Quantitative and Qualitative Disclosures about Market Risk 34
Item 8 - Financial Statements and Supplementary Data 36
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 61
PART III
Item 10 -Directors and Executive Officers of the Registrant 61
Item 11 -Executive Compensation 61
Item 12 -Security Ownership of Certain Beneficial Owners and Management 61
Item 13 -Certain Relationships and Related Transactions 61
PART IV
Item 14 -Exhibits, Financial Statement Schedules and Reports on 62
Form 8-K
SIGNATURES 65
PART I
ITEM 1. BUSINESS
Forward-Looking Information
This Annual Report on Form 10-K includes forward-looking information which is
subject to the "safe harbor" created by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements (which involve the Company's plans,
beliefs and goals, refer to estimates or use similar terms) involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Such risks and uncertainties
include, but are not limited to, the following factors: competitive pressure in
the banking industry; changes in the interest rate environment; the declining
health of the economy, either nationally or regionally; the deterioration of
credit quality, which could cause an increase in the provision for loan and
lease losses; changes in the regulatory environment; changes in business
conditions, particularly in Santa Clara County real estate and high-tech
industries; the impact of the California energy crisis; certain operational
risks involving data processing systems or fraud; volatility of rate sensitive
deposits; asset/liability matching risks; and liquidity risks. The Company
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements. See also the section included
herein entitled "Certain Additional Business Risks" and other risk factors
discussed elsewhere in this Report.
GENERAL
SJNB Financial Corp. (the "Company") is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company was
incorporated under the laws of the State of California on April 18, 1983. Its
principal office is located at One North Market Street, San Jose, California
95113, and its telephone number is (408) 947-7562.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose,
California, on June 10, 1982. SJNB engages in the general commercial banking
business with special emphasis on the banking needs of the business and
professional communities in Santa Clara County and the surrounding areas. The
Bank has branches located in San Jose, Saratoga, Los Gatos and Danville.
On May 22, 1998, SJNB acquired all of the stock of a private company, Epic
Funding Corporation ("Epic"), pursuant to a definitive agreement dated April 13,
1998. In connection with the acquisition, which was structured as a tax-free
reorganization, the Company issued 12,223 shares of its common stock and paid
$110,000 to Epic's sole shareholder in exchange for all of Epic's outstanding
stock. The total purchase price for Epic was $611,000, while Epic's fair value
of net assets was $28,000. Goodwill amounted to $759,000, including certain
expenses of the transaction. Epic provides direct and vendor lease programs to
manufacturers and equipment users throughout California and across parts of the
United States. Epic is now a wholly-owned subsidiary of the Bank. Epic's office
is located in Danville, California, together with a small de novo branch of the
Bank at the same facility, which opened July 1, 1998.
On January 5, 2000, Saratoga Bancorp ("Saratoga"), the parent company of
Saratoga National Bank, was merged with and into the Company, pursuant to an
exchange of the Company's common stock for all common stock of Saratoga Bancorp.
Saratoga National Bank, headquartered in Saratoga, California, operated three
branches and as of the acquisition date had approximately $142 million in
assets, $103 million in deposits and $15 million in shareholders' equity.
Saratoga National Bank was merged with and into SJNB on January 5, 2000.
Saratoga's San Jose office, which was located near SJNB's San Jose office, was
consolidated into SJNB's San Jose office as of January 28, 2000. The
shareholders of Saratoga received 0.70 shares of the Company's common stock for
each outstanding share of Saratoga common stock. Based on the closing price of
the Company's stock on January 5, 2000 of $29.125, the transaction was valued at
approximately $34.2 million, excluding the value of any unexercised options, and
each Saratoga shareholder received the equivalent of 0.70 of the Company's
common stock valued at $20.39 per share for each share of Saratoga common stock.
The merger has been accounted for as a pooling of interests.
SJNB accepts checking and savings deposits, offers money market deposit accounts
and certificates of deposit, makes secured and unsecured commercial and other
installment and term loans and offers other customary banking services. SJNB
offers banking services generally, but it places primary emphasis on lending for
real estate purposes and specialized lending to businesses and professionals.
Loans for real estate purposes include term financing for commercial facilities
and real estate construction loans mainly for residential and commercial
properties. Loans to businesses and professionals include accounts receivable
financing, equipment financing, commercial loans, SBA loans and letters of
credit. The Company provides commercial banking, factoring and leasing services
principally through the Bank, the Bank's Financial Services Division and Epic.
Although the Bank has neither a trust nor an international banking department,
it has arranged to provide these services through its correspondent banks. As a
bank holding company, the Company is authorized to engage in the activities
permitted under the BHCA and regulations thereunder.
SERVICE AREA
The principal service area of SJNB includes the County of Santa Clara and its
contiguous counties, including San Mateo, Alameda, Contra Costa, Santa Cruz and
San Benito.
EMPLOYEES
At December 31, 2000, SJNB had 127 full-time officers and employees and 24
part-time employees for a total of 115.7 employees on a full-time equivalent.
Certain of the Bank's officers are also officers of the Company. None of the
Bank's employees are represented by a union. Management believes that employee
relations are good.
SUPERVISION AND REGULATION
THE EFFECT OF GOVERNMENT POLICY ON BANKING
The earnings and growth of the Company are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Board of Governors of the Federal Reserve
System (the "FRB") influences the supply of money through its open market
operations in U.S. Government securities and adjustments to the discount rates
applicable to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in such policies on the business and earnings of the Company cannot be
predicted. Additionally, state and federal tax policies can impact banking
organizations.
As a consequence of the extensive regulation of commercial banking activities in
the United States, the business of the Company is particularly susceptible to
being affected by the enactment of federal and state legislation which may have
the effect of increasing or decreasing the cost of doing business, modifying
permissible activities or enhancing the competitive position of other financial
institutions. Any change in applicable laws or regulations may have a material
adverse effect on the business and prospects of the Company.
REGULATION AND SUPERVISION OF BANK HOLDING COMPANIES
The Company is a bank holding company subject to the BHCA. The Company reports
to, registers with, and may be examined by, the FRB. The FRB also has the
authority to examine the Company's subsidiaries. The costs of any examination by
the FRB are payable by the Company.
On March 11, 2000, the Gramm-Leach-Bliley Act, or the Financial Services Act of
1999 (the "FSA"), became effective. This Act amended certain portions of the
BHCA, subject to conditions. See "Recently Enacted Legislation" below for more
information.
The Company is a bank holding company within the meaning of Section 3700 of the
California Financial Code. As such, the Company and the Bank are subject to
examination by, and may be required to file reports with, the California
Commissioner of Financial Institutions (the "Commissioner").
The FRB has significant supervisory and regulatory authority over the Company
and its affiliates. The FRB requires the Company to maintain certain levels of
capital. See "Capital Standards." The FRB also has the authority to take
enforcement action against any bank holding company that commits any unsafe or
unsound practice, or violates certain laws, regulations or conditions imposed in
writing by the FRB. See "Prompt Corrective Action and Other Enforcement
Mechanisms."
Under the BHCA, a company generally must obtain the prior approval of the FRB
before it exercises a controlling influence over a bank, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, the Company is required to obtain the
prior approval of the FRB before it acquires, merges or consolidates with any
bank or bank holding company. Any company seeking to acquire, merge or
consolidate with the Company also would be required to obtain the prior approval
of the FRB.
The Company is generally prohibited under the BHCA from acquiring ownership or
control of more than 5% of the voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than banking, managing banks, or providing services to affiliates of the
holding company. However, a bank holding company, with the approval of the FRB,
may engage, or acquire the voting shares of companies engaged, in activities
that the FRB has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. A bank holding company
must demonstrate that the benefits to the public of the proposed activity will
outweigh the possible adverse effects associated with such activity.
A bank holding company may acquire banks in states other than its home state
without regard to the permissibility of such acquisitions under state law, but
subject to any state requirement that the bank has been organized and operating
for a minimum period of time, not to exceed five years, and the requirement that
the bank holding company, prior to or following the proposed acquisition,
controls no more than 10% of the total amount of deposits of insured depository
institutions in the United States and no more than 30% of such deposits in that
state (or such lesser or greater amount set by state law). Banks may also merge
across states lines, thereby creating interstate branches. Furthermore, a bank
is now able to open new branches in a state in which it does not already have
banking operations, if the laws of such state permit such de novo branching.
Under California law, (i) out-of-state banks that wish to establish a California
branch office to conduct core banking business must first acquire an existing
five year old California bank or industrial bank by merger or purchase, (ii)
California state-chartered banks are empowered to conduct various authorized
branch-like activities on an agency basis through affiliated and unaffiliated
insured depository institutions in California and other states and (iii) the
Commissioner is authorized to approve an interstate acquisition or merger which
would result in a deposit concentration exceeding 30% if the Commissioner finds
that the transaction is consistent with public convenience and advantage.
However, a state bank chartered in a state other than California may not enter
California by purchasing a California branch office of a California bank or
industrial bank without purchasing the entire entity or by establishing a de
novo California bank.
The FRB generally prohibits a bank holding company from declaring or paying a
cash dividend which would impose undue pressure on the capital of subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial position. The FRB's policy
is that a bank holding company should not continue its existing rate of cash
dividends on its common stock unless its net income is sufficient to fully fund
each dividend and its prospective rate of earnings retention appears consistent
with its capital needs, asset quality and overall financial condition. See the
section entitled "Restrictions on Dividends and Other Distributions" for
additional restrictions on the ability of the Company and the Bank to pay
dividends.
Transactions between the Company and the Bank are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees, which are unreasonable in amount or exceed the fair market value of the
services rendered (or, if no market exists, actual costs plus a reasonable
profit). Subject to certain limitations, depository institution subsidiaries of
bank holding companies may extend credit to, invest in the securities of,
purchase assets from, or issue a guarantee, acceptance, or letter of credit on
behalf of, an affiliate, provided that the aggregate of such transactions with
affiliates may not exceed 10% of the capital stock and surplus of the
institution, and the aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such institution. The Company may
only borrow from depository institution subsidiaries if the loan is secured by
marketable obligations with a value of a designated amount in excess of the
loan. Further, the Company may not sell a low-quality asset to a depository
institution subsidiary.
Comprehensive amendments to Regulation Y became effective in 1997, and are
intended to improve the competitiveness of bank holding companies by, among
other things: (i) expanding the list of permissible nonbanking activities in
which well-run bank holding companies may engage without prior FRB approval,
(ii) streamlining the procedures for well-run bank holding companies to obtain
approval to engage in other nonbanking activities and (iii) eliminating most of
the anti-tying restrictions imposed upon bank holding companies and their
nonbank subsidiaries. Amended Regulation Y also provides for a streamlined and
expedited review process for bank acquisition proposals submitted by well-run
bank holding companies and eliminates certain duplicative reporting requirements
when there has been a further change in bank control or in bank directors or
officers after an earlier approved change. These changes to Regulation Y are
subject to numerous qualifications, limitations and restrictions. In order for a
bank holding company to qualify as "well-run," both it and the insured
depository institutions that it controls must meet the "well-capitalized" and
"well-managed" criteria set forth in Regulation Y.
To qualify as "well-capitalized," the bank holding company must, on a
consolidated basis: (i) maintain a total risk-based capital ratio of 10% or
greater, (ii) maintain a Tier 1 risk-based capital ratio of 6% or greater, and
(iii) not be subject to any order by the FRB to meet a specified capital level.
Its lead insured depository institution must be well-capitalized as that term is
defined in the capital adequacy regulations of the applicable bank regulator,
80% of the total risk-weighted assets held by its insured depository
institutions must be held by institutions that are well-capitalized, and none of
its insured depository institutions may be undercapitalized.
To qualify as "well-managed:" (i) each of the bank holding company, its lead
depository institution and its depository institutions holding 80% of the total
risk-weighted assets of all its depository institutions at their most recent
examination or review must have received a composite rating, rating for
management and rating for compliance which were at least satisfactory, (ii) none
of the bank holding company's depository institutions may have received one of
the two lowest composite ratings, and (iii) neither the bank holding company nor
any of its depository institutions during the previous 12 months may have been
subject to a formal enforcement order or action.
Bank Regulation and Supervision
As a national bank, the Bank is regulated, supervised and regularly examined by
the Office of the Comptroller of the Currency (the "OCC"). Deposit accounts at
the Bank are insured by the Bank Insurance Fund (the "BIF"), as administered by
the Federal Deposit Insurance Corporation (the "FDIC"), to the maximum amount
permitted by law. The Bank is also subject to applicable provisions of
California law, insofar as such provisions are not in conflict with or preempted
by federal banking law. The Bank is a member of the Federal Reserve System, and
is also subject to certain regulations of the FRB dealing primarily with check
clearing activities, establishment of banking reserves, Truth-in-Lending
(Regulation Z), Truth-in-Savings (Regulation DD), and Equal Credit Opportunity
(Regulation B).
The OCC may approve, on a case-by-case basis, the entry of bank operating
subsidiaries into a business incidental to banking, including activities in
which the parent bank is not permitted to engage. A national bank is permitted
to engage in activities approved for a bank holding company through a bank
operating subsidiary, such as acting as an investment or financial advisor,
leasing personal property and providing financial advice to customers. In
general, these activities are permitted only for well-capitalized or adequately
capitalized national banks.
Capital Standards
The federal banking agencies have risk-based capital adequacy guidelines
intended to provide a measure of capital adequacy that reflects the degree of
risk associated with a banking organization's operations for both transactions
reported on the balance sheet as assets and transactions, such as letters of
credit and recourse arrangements, which are recorded as off balance sheet items.
Under these guidelines, nominal dollar amounts of assets and credit equivalent
amounts of off balance sheet items are multiplied by one of several risk
adjustment percentages, which range from 0% for assets with low credit risk,
such as certain U.S. government securities, to 100% for assets with relatively
higher credit risk, such as certain loans.
In determining the capital level the Bank is required to maintain, the federal
banking agencies do not, in all respects, follow generally accepted accounting
principles ("GAAP") and have special rules which have the effect of reducing the
amount of capital they will recognize for purposes of determining the capital
adequacy of the Bank.
A banking organization's risk-based capital ratios are obtained by dividing its
qualifying capital by its total risk-adjusted assets and off balance sheet
items. The regulators measure risk-adjusted assets and off balance sheet items
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings, noncumulative perpetual preferred stock, other types
of qualifying preferred stock and minority interests in certain subsidiaries,
less most other intangible assets and other adjustments. Net unrealized losses
on available-for-sale equity securities with readily determinable fair value
must be deducted in determining Tier 1 capital. For Tier 1 capital purposes,
deferred tax assets that can only be realized if an institution earns sufficient
taxable income in the future are limited to the amount that the institution is
expected to realize within one year, or ten percent of Tier 1 capital, whichever
is less. Tier 2 capital may consist of a limited amount of the allowance for
loan and lease losses, term preferred stock and other types of preferred stock
not qualifying as Tier 1 capital, term subordinated debt and certain other
instruments with some characteristics of equity. The inclusion of elements of
Tier 2 capital are subject to certain other requirements and limitations of the
federal banking agencies. The federal banking agencies require a minimum ratio
of qualifying total capital to risk-adjusted assets and off balance sheet items
of 8%, and a minimum ratio of Tier 1 capital to adjusted average risk-adjusted
assets and off balance sheet items of 4%.
On October 1, 1998, the FDIC adopted two rules governing minimum capital levels
that FDIC-supervised banks must maintain against the risks to which they are
exposed. The first rule makes risk-based capital standards consistent for two
types of credit enhancements (i.e., recourse arrangements and direct credit
substitutes) and requires different amounts of capital for different risk
positions in asset securitization transactions. The second rule permits limited
amounts of unrealized gains on debt and equity securities to be recognized for
risk-based capital purposes as of September 1, 1998. The FDIC rules also provide
that a qualifying institution that sells small business loans and leases with
recourse must hold capital only against the amount of recourse retained. In
general, a qualifying institution is one that is well-capitalized under the
FDIC's prompt corrective action rules. The amount of recourse that can receive
the preferential capital treatment cannot exceed 15% of the institution's total
risk-based capital.
In addition to the risk-based guidelines, the federal banking agencies require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets, referred to as the leverage capital ratio. For a banking
organization rated in the highest of the five categories used to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be 3%. It is improbable, however, that an institution with a 3% leverage ratio
would receive the highest rating since a strong capital position is a
significant part of the regulators' rating. For all banking organizations not
rated in the highest category, the minimum leverage ratio must be at least 100
to 200 basis points above the 3% minimum. Thus, the effective minimum leverage
ratio, for all practical purposes, must be at least 4% or 5%. In addition to
these uniform risk-based capital guidelines and leverage ratios that apply
across the industry, the regulators have the discretion to set individual
minimum capital requirements for specific institutions at rates significantly
above the minimum guidelines and ratios.
The following tables present the capital ratios for the Company and the Bank,
compared to the standards for well-capitalized depository institutions, as of
December 31, 2000.
- -------------------------------------------------------- -----------------------
(amounts in thousands, except percentages) WELL MINIMUM
ACTUAL CAPITALIZED CAPITAL
----------------------
THE COMPANY CAPITAL RATIO RATIO REQUIREMENT
- ------------------------------------------- ---------------------- ------------
Leverage $60,115 8.94% 5.0% 4.0%
Tier 1 Risk-based 60,115 11.04 6.0 4.0
Total Risk-based 66,928 12.29 10.0 8.0
THE BANK
- --------------------------------------------------------------------------------
Leverage $58,217 8.66% 5.0% 4.0%
Tier 1 Risk-based 58,217 10.75 6.0 4.0
Total Risk-based 64,995 12.00 10.0 8.0
The federal banking agencies must take into consideration concentrations of
credit risk and risks from non-traditional activities, as well as an
institution's ability to manage those risks, when determining the adequacy of an
institution's capital. This evaluation will be made as a part of the
institution's regular safety and soundness examination. The federal banking
agencies must also consider interest rate risk (when the interest rate
sensitivity of an institution's assets does not match the sensitivity of its
liabilities or its off balance sheet position) in evaluation of a bank's capital
adequacy.
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
required each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized.
Under the prompt corrective action provisions of FDICIA, an insured depository
institution generally will be classified in the following categories based on
the capital measures indicated below:
WELL CAPITALIZED ADEQUATELY CAPITALIZED
Total risk-based capital of 10%; Total risk-based capital of 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
UNDERCAPITALIZED SIGNIFICANTLY UNDERCAPITALIZED
Total risk-based capital less Total risk-based capital less than 6%
than 8%; Tier 1 risk-based capital less
Tier 1 risk-based capital less than 3%; or
than 4%; or Leverage ratio less than 3%.
Leverage ratio less than 4%.
CRITICALLY UNDERCAPITALIZED
Tangible equity to total assets less than 2%.
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal banking agencies for unsafe or unsound practices in conducting
their businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease-and-desist order that can be judicially enforced, the
termination of insurance of deposits (in the case of a depository institution),
the imposition of civil money penalties, the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and prohibition orders against institution-affiliated parties and the
enforcement of such actions through injunctions or restraining orders based upon
a judicial determination that the agency would be harmed if such equitable
relief was not granted. Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking organizations could serve as an
additional basis for a regulatory action against the holding company.
SAFETY AND SOUNDNESS STANDARDS
FDICIA also implemented certain specific restrictions on transactions and
required federal banking regulators to adopt overall safety and soundness
standards for depository institutions related to internal control, loan
underwriting and documentation and asset growth. Among other things, FDICIA
limits the interest rates paid on deposits by undercapitalized institutions,
restricts the use of brokered deposits, limits the aggregate extensions of
credit by a depository institution to an executive officer, director, principal
shareholder or related interest, and reduces deposit insurance coverage for
deposits offered by undercapitalized institutions for deposits by certain
employee benefits accounts. The federal banking agencies may require an
institution to submit to an acceptable compliance plan as well as the
flexibility to pursue other more appropriate or effective courses of action
given the specific circumstances and severity of an institution's noncompliance
with one or more standards.
RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS
The power of the board of directors of an insured depository institution to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory restrictions which limit the amount available for
such distribution depending upon the earnings, financial condition and cash
needs of the institution, as well as general business conditions. FDICIA
prohibits insured depository institutions from paying management fees to any
controlling persons or, with certain limited exceptions, making capital
distributions, including dividends, if, after such transaction, the institution
would be undercapitalized.
The federal banking agencies also have the authority to prohibit a depository
institution from engaging in business practices which are considered to be
unsafe or unsound, possibly including payment of dividends or other payments
under certain circumstances even if such payments are not expressly prohibited
by statute.
The payment of dividends by a national bank is further restricted by additional
provisions of federal law, which prohibit a national bank from declaring a
dividend on its shares of common stock unless its surplus fund exceeds the
amount of its common capital (total outstanding common shares times the par
value per share). Additionally, if losses have at any time been sustained equal
to or exceeding a bank's undivided profits then on hand, no dividend shall be
paid. Moreover, even if a bank's surplus exceeded its common capital and its
undivided profits exceed its losses, the approval of the OCC is required for the
payment of dividends if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits of that year
combined with its retained net profits of the two preceding years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock. A national bank must consider other business factors in determining the
payment of dividends. The payment of dividends by the Bank is governed by the
Bank's ability to maintain minimum required capital levels and an adequate
allowance for loan losses.
PREMIUMS FOR DEPOSIT INSURANCE AND ASSESSMENTS FOR EXAMINATIONS
FDICIA established several mechanisms to increase funds to protect deposits
insured by the BIF administered by the FDIC. The FDIC is authorized to borrow up
to $30 billion from the United States Treasury; up to 90% of the fair market
value of assets of institutions acquired by the FDIC as receiver from the
Federal Financing Bank; and from depository institutions that are members of the
BIF. Any borrowings not repaid by asset sales are to be repaid through insurance
premiums assessed to member institutions. Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide insurance fund reserves of
$1.25 for each $100 of insured deposits. FDICIA also provides authority for
special assessments against insured deposits. No assurance can be given at this
time as to what the future level of insurance premiums will be.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Bank is subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of their local communities, including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
RECENTLY ENACTED LEGISLATION
On March 11, 2000, the Financial Services Act of 1999 (the "FSA") became
effective. The FSA repealed provisions of the Glass-Steagall Act, which had
prohibited commercial banks and securities firms from affiliating with each
other and engaging in each other's businesses. Thus, many of the barriers
prohibiting affiliations between commercial banks and securities firms have been
eliminated.
The BHCA was also amended by the FSA to allow new "financial holding companies"
("FHC") to offer banking, insurance, securities and other financial products to
consumers. Specifically, the FSA amended section 4 of the BHCA in order to
provide for a framework for the engagement in new financial activities. Bank
holding companies ("BHC") may elect to become a FHC if all its subsidiary
depository institutions are well-capitalized and well-managed. If these
requirements are met, a BHC may file a certification to that effect with the FRB
and declare that it elects to become a FHC. After the certification and
declaration is filed, the FHC may engage either de novo or though an acquisition
in any activity that has been determined by the FRB to be financial in nature or
incidental to such financial activity. BHCs may engage in financial activities
without prior notice to the FRB if those activities qualify under the new list
of permissible activities in section 4(k) of the BHCA. However, notice must be
given to the FRB within 30 days after a FHC has commenced one or more of the
financial activities. The Company has not elected to become a FHC.
Under the FSA, national banks (as well as FDIC-insured state banks, subject to
various requirements) are permitted to engage through "financial subsidiaries"
in certain financial activities permissible for affiliates of FHCs. However, to
be able to engage in such activities the national bank must also be
well-capitalized and well-managed and have received at least a "satisfactory"
rating in its most recent CRA examination. The aggregate consolidated total
assets of all financial subsidiaries of a national bank may not exceed the
lesser of 45% of the consolidated total assets of the parent bank or $50
billion. In addition, if the national bank ranks as one of the top 50 largest
insured banks in the United States, it must have an issue of outstanding
long-term debt rated in one of the three highest rating categories by an
independent rating agency. If the national bank falls within the next group of
50, it must either meet the debt-rating test described above or satisfy a
comparable test jointly agreed to by the FRB and the Treasury Department. No
debt rating is required for any national bank, such as the Bank, not within the
top 100 largest insured banks in the United States. We do not have any such debt
outstanding.
The Company cannot be certain of the effect of the foregoing recently enacted
legislation on its business, although there is likely to be consolidation among
financial services institutions and increased competition for the Company.
PENDING LEGISLATION AND REGULATIONS
Certain pending legislative proposals include bills to permit banks to pay
interest on business checking accounts, to cap consumer liability for stolen
debit cards, to enact privacy rules designed to regulate the ability of
financial institutions to use or share customer information, to end certain
predatory lending practices, to allow the payment of interest on reserves that
financial institutions must keep with FRB and to give judges the authority to
force high-income borrowers to repay their debts rather than cancel them through
bankruptcy. A proposal to merge the FDIC's two funds, the BIF and the Savings
Association Insurance Fund, is also being discussed. The Company also expects
that during 2001, the Financial Accounting Standards Board will issue guidance
as to whether to retain the pooling-of-interests method of accounting for
business combinations and related issues, including whether to adopt an
impairment-only approach to amortization of goodwill.
COMPETITION
In the past, an independent bank's principal competitors for deposits and loans
have been other banks (particularly major banks), savings and loan associations
and credit unions. To a lesser extent, competition was also provided by thrift
and loans, mortgage brokerage companies and insurance companies. Other
institutions, such as brokerage houses, mutual fund companies, credit card
companies, and even retail establishments, have offered new investment vehicles
which also compete with banks for deposit business. The direction of federal
legislation in recent years seems to favor competition between different types
of financial institutions and to foster new entrants into the financial services
market, and it is anticipated that this trend will continue.
The enactment of the Interstate Banking and Branching Act in 1994 and the
California Interstate Banking and Branching Act of 1995 have increased
competition within California. Recent legislation has also made it easier for
out-of-state credit unions to conduct business in California and allows
industrial banks to offer consumers more lending products. Regulatory reform, as
well as other changes in federal and California law will also affect
competition. The availability of banking services over the internet or
"e-banking" has continued to expand. While the impact of these changes, and of
other proposed changes, cannot be predicted with certainty, it is clear that the
business of banking in California will remain highly competitive.
As of June 30, 2000, there were approximately 388 banking offices in the
geographic area served by SJNB, including offices of major chain banks and other
independent banks. There were also approximately 144 offices of savings banks as
of such date. Of these there were 230 offices of commercial banks (and 88
offices of savings banks) in Santa Clara County, which is the principal market
area for the Bank's San Jose office. In addition, there were 158 offices of
commercial banks (and 56 offices of savings banks) in the Danville office's
primary market area. Total deposits of the combined area were approximately
$54.5 billion as of June 30, 2000, of which the Bank has approximately a 1%
share. In the San Jose office's market area, the Bank's market share is
approximately 1.5% of the deposits in that market.
Presently, there are at least 9 other independent banks in Santa Clara County.
Five of the independent banks - Heritage Bank of Commerce and Bank of Los Altos
(subsidiaries of Heritage Commerce Corp), Cupertino National Bank & Trust and
Mid-Peninsula Bank (subsidiaries of Greater Bay Bancorp) and Silicon Valley Bank
- - emphasize commercial banking services and, therefore, create direct
competition for the services that SJNB offers to the business and professional
communities in its market area. The Bank's Financial Services Division and Epic
also compete with many of the major and independent banks within their
respective marketing areas.
The Bank's Financial Services Division and Epic also compete with companies
solely in the factoring or leasing business. Such companies may offer products
and services which traditionally are not offered by banking institutions.
CERTAIN ADDITIONAL BUSINESS RISKS
The Company's business, financial condition, operating results and prospects can
be impacted by a number of factors, including, but not limited to, those set
forth in the paragraphs below. Any one of these stated risks could cause the
Company's actual results in the future to vary from the Company's anticipated
future results.
Shares of Company Common Stock eligible for future sale could have a dilutive
effect on the market for Company Common Stock and could adversely affect the
market price of the Common Stock. The Articles of Incorporation of the Company
authorize the issuance of 20,000,000 shares of Common and 5,000,000 shares of
Preferred Stock, of which approximately 3,791,951 common shares and no preferred
shares were outstanding at February 28, 2001. Pursuant to its stock option
plans, the Company had outstanding options to purchase an aggregate of 601,181
shares of Company Common Stock at February 28, 2001. As of the same date,
178,645 shares of Company Common Stock remained available for option grants
under the Company's stock option plans, including stock option plans of
Saratoga.
The Company has previously announced its intention to pursue acquisitions of
other financial services companies from time to time when such acquisitions are
believed by the Company to enhance shareholder value or satisfy other strategic
objectives of the Company. Other acquisitions, if any, could be accomplished by
the issuance of additional shares of Company Common Stock or other securities
convertible into or exercisable for such Common Stock. Sales of substantial
amounts of Company Common Stock or convertible securities in the public market
or due to acquisitions could adversely affect the market price of the Common
Stock.
The loan and lease portfolio of the Company is dependent on real estate. At
December 31, 2000, real estate served as the principal source of collateral with
respect to approximately 55% of the Company's loan and lease portfolio. A
worsening of current economic conditions or rising interest rates could have an
adverse effect on the demand for new loans, the ability of borrowers to repay
outstanding loans, the value of real estate and other collateral securing loans
and the value of the available for sale investment portfolio, as well as the
Company's financial condition and results of operations in general and the
market value of the Company's Common Stock. Acts of nature, including
earthquakes and floods, which may cause uninsured damage and other loss of value
to real estate that secures these loans, may also negatively impact the
Company's financial condition.
In late 2000 and continuing into 2001, the State of California has been subject
to a deterioration in the ability of major utilities to provide energy for the
State's needs. In Northern California, the crisis has resulted in "rolling
blackouts" where certain areas are not provided with any electricity for periods
of up to two hours. To date the most immediate impact has been the significant
increase in power rates for most users, including the Company. In addition the
major utility providers are purchasing power on a "spot" basis. The cost of such
purchases has exceeded their ability to fully collect the increases from their
customers. The long-term impact is unknown but could result in an economic
slow-down as companies located in California relocate or shift production to
areas outside the State. This could have an adverse effect on the demand for new
loans, the ability of borrowers to repay outstanding loans, the value of real
estate and other collateral securing loans, and the Company's financial
condition and results of operations in general and, as a result, on the market
value of the Company's Common Stock.
The Bank is subject to certain operational risks including, but not limited to,
data processing system failures and errors and customer or employee fraud. The
Bank maintains a system of internal controls, which it believes will mitigate
such occurrences, and maintains insurance coverage for such risks. Should such
an event occur that was not prevented or detected by the Bank's internal
controls or that was uninsured or in excess of the applicable insurance limits,
it could have a significant negative impact on the Company's financial condition
or results of operations.
STATISTICAL DATA
Certain consolidated statistical information concerning the business of the
Company appears on page 15, under the caption "Selected Financial Data;" on
pages 16 through 36, under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operation;" on page 36, under the caption
"Quantitative and Qualitative Disclosures about Market Risk;" and on pages 38
through 63, in the Company's Consolidated Financial Statements. Ratios relating
to the Company's Return on Equity and Assets appear on page 15. The section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operation" should be read in conjunction with the information in Item
1 herein and the Company's Consolidated Financial Statements.
ITEM 2: PROPERTIES
The Company shares office space with the Bank's main branch at One North Market
Street, San Jose, California, 95113. The building was purchased by the Bank in
1985 and consists of approximately 24,000 square feet of basement, ground floor
and second floor space. It is constructed and equipped to meet prescribed
security requirements.
SJNB's Saratoga Branch office is located at 12000 Saratoga-Sunnyvale Road,
Saratoga, California, 95070, comprises 5,500 square feet and is owned by the
Bank. The Bank's Los Gatos Branch office is located at 15405 Los Gatos Blvd.,
Suite 103, Los Gatos, California, 95032. The facility has 3,082 square feet and
is leased under a noncancelable-operating lease which expires in 2003. Current
lease payments are $6,387 per month.
In addition, the Bank leases approximately 12,000 square feet located at 95
South Market Street, San Jose, California, 95113. Approximately 9,000 square
feet of space at this location is currently being occupied by two third-party
tenants under subleases which expire at the termination of the lease in
September 2004. The Bank's Financial Services Division is occupying the
remaining space at this location. Gross rental expense is currently
approximately $20,000 per month, of which $14,899 is received from the third-
party tenants.
The Bank and its subsidiary, Epic, share 3,000 square feet of leased facilities
in Danville, California. The monthly lease expense is $6,300 and the lease
expires July 2001. The Bank notified the landlord in January 2001 of its intent
to exercise its renewal option for the period ending July 2004, on the same
terms and conditions as the original term.
In the opinion of management, adequate insurance is being maintained on these
properties.
ITEM 3: LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material pending legal
proceeding, nor is any of their property the subject of any material pending
legal proceeding, except ordinary routine litigation arising in the ordinary
course of the Bank's business and incidental to its business, none of which are
expected to have a material adverse impact upon the Company's or the Bank's
business, financial condition or results of operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of February 28, 2001, the Company had 3,791,951 shares of Common Stock
outstanding, held by approximately 2,700 beneficial shareholders. The Company's
Common Stock is listed on the NASDAQ National Market System under the symbol
"SJNB." Significant market participants of the Company's Common Stock and those
firms which provide research relating to the Company include: Hoefer & Arnett,
Inc., Wedbush Morgan Securities, Inc., Knight Securities L.P., Spear, Leeds &
Kellogg, Sandler O'Neill & Partners, Keefe Bruyette & Woods, Inc., and Dain
Rauscher Wessels.
STOCK PRICE
The following sets forth the high and low sales prices for the Company's Common
Stock during the periods indicated, as reported by NASDAQ, and the per share
cash dividends declared on the Common Stock during such periods.
QUARTERLY COMMON STOCK PRICE
- --------------------------------------------------------------------------------
PRICE
OF COMMON STOCK CASH
HIGH LOW DIVIDENDS
- --------------------------------------------------------------------------------
1999
- --------------------------------------------------------------------------------
First Quarter $28.50 $26.00 $.14
Second Quarter 30.25 26.50 .14
Third Quarter 34.50 31.00 .14
Fourth Quarter 37.00 30.00 .14
- --------------------------------------------------------------------------------
ANNUAL CASH DIVIDEND PER SHARE .56
- --------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------
First Quarter 30.63 26.50 .16
Second Quarter 29.75 25.88 .16
Third Quarter 36.88 27.38 .16
Fourth Quarter 37.25 33.75 .16
- --------------------------------------------------------------------------------
ANNUAL CASH DIVIDEND PER SHARE .64
- --------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------
FIRST QUARTER (THROUGH FEBRUARY 28, 2001) 39.75 36.50 .20*
[FN]
*Declared by the Board of Directors on January 24, 2001 and to be paid on March
5, 2001 to shareholders of record on February 6, 2001.
</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, 2000:
(dollars in thousands, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
As of and for the Years Ended December 31,
STATEMENT OF OPERATIONS DATA : 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income $33,626 $27,565 $25,603 $23,562 $20,495
Provision for loan or lease losses (725) (862) (436) (705) (40)
Other income 1,606 1,866 1,824 1,490 1,199
Merger related costs, nonrecurring (3,424) (487) ---- ---- ----
Other expenses (16,932) (16,064) (14,462) (12,888) (12,505)
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 14,151 12,018 12,529 11,459 9,149
Income taxes (5,527) (4,901) (5,040) (4,749) (3,757)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $8,624 $7,117 $7,489 $6,710 $5,392
==================================================================================================================================
PER SHARE DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $2.35 $2.04 $2.06 $1.86 $1.51
Net income per share - diluted 2.24 1.91 1.92 1.74 1.41
EXCLUDING MERGER RELATED COSTS, NET OF TAX:
Net income per share - basic (1) 2.94 2.13 ---- ---- ----
Net income per share - diluted (1) 2.80 2.00 ---- ---- ----
Cash dividends per share 0.64 0.56 0.56 0.45 0.33
Shareholders' equity per share 16.97 14.81 14.13 12.85 11.80
Tangible shareholders' equity per share 16.18 13.81 13.01 11.82 10.58
==================================================================================================================================
BALANCE SHEET DATA:
- ----------------------------------------------------------------------------------------------------------------------------------
Balance sheet totals-end of year:
Assets $687,777 $568,081 $494,736 $455,963 $431,187
Loans and leases 463,314 403,318 335,943 292,737 251,288
Deposits 585,343 473,733 405,857 361,391 334,083
Shareholders' equity 63,583 53,219 50,739 46,764 43,157
Average balance sheet amounts:
Assets $634,042 $536,721 $469,317 $439,187 $379,529
Loans and leases 420,943 366,175 301,910 267,332 224,680
Earning assets 583,325 496,958 436,481 402,390 347,639
Deposits 536,844 444,547 385,887 354,604 296,834
Shareholders' equity 56,255 51,956 48,511 43,661 39,619
==================================================================================================================================
SELECTED RATIOS:
- ----------------------------------------------------------------------------------------------------------------------------------
Return on average equity 15.33% 13.70% 15.44% 15.37% 13.61%
Return on average assets 1.36 1.33 1.60 1.53 1.42
Return on average equity (1) 19.15 14.29 15.44 15.37 13.61
Return on average assets (1) 1.70 1.38 1.60 1.53 1.42
Efficiency ratio (non-interest expense
as a percentage of total revenues) (1) 48.06 54.58 52.73 51.45 57.64
Efficiency ratio excluding the amortization of
intangibles and goodwill (1) 46.81 53.03 51.06 49.56 55.34
Dividend payout ratio 27.20 27.47 27.18 24.19 21.85
Average equity to average assets 8.87 9.68 10.34 9.94 10.44
Leverage capital ratio 8.94 8.88 9.78 9.58 11.42
Nonperforming loans and leases to total loans and leases 0.10 0.54 0.07 0.27 0.22
Net (recoveries) chargeoffs to average loans and leases (0.06) (0.02) 0.00 0.10 0.04
Allowance for loan or lease losses to total loans and leases 1.60 1.59 1.64 1.74 1.84
Allowance for loan or lease losses to
nonperforming loans and leases 1,621 296 2,280 647 849
==================================================================================================================================
<FN>
(1) Excludes $3.4 million of merger related costs and $1.3 million of related
tax benefits for the year ended December 31, 2000 and $487 of merger related
costs and $178 of related tax benefits for the year ended December 31, 1999.
</FN>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This Annual Report on Form 10-K includes forward-looking information within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and is subject to the
"safe harbor" created by those sections. These forward-looking statements (which
involve the Company's plans, beliefs and goals, refer to estimates or use
similar terms) involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward-looking statements. Such
risks and uncertainties include, but are not limited to, the following factors:
competitive pressure in the banking industry; changes in the interest rate
environment; the declining health of the economy, either nationally or
regionally; the deterioration of credit quality, which could cause an increase
in the provision for loan and lease losses; changes in the regulatory
environment; changes in business conditions, particularly in Santa Clara County
real estate and high tech industries; the impact of the California energy
crisis; certain operational risks involving data processing systems or fraud;
volatility of rate sensitive deposits; asset/liability matching risks; and
liquidity risks. The Company undertakes no obligation to revise or publicly
release the results of any revision to these forward-looking statements. See
also the section included herein entitled "Business - Certain Additional
Business Risks" and other risk factors discussed elsewhere in this Report.
The purpose of the following discussion is to provide information pertaining to
the financial condition and results of operations of the Company that may not be
apparent from a review of the consolidated financial statements and related
notes. It also incorporates certain statistical information that is required by
Industry Guide 3 promulgated by the Securities and Exchange Commission. The
discussion should be read in conjunction with the aforementioned consolidated
financial statements, as found on pages 38 through 63. The interest earned and
yields on nontaxable securities have been adjusted to a fully-taxable equivalent
basis for all financial information presented in this Item 7.
Dollars and share amounts are in thousands in the text for Item 7, except per
share amounts or as otherwise noted.
FINANCIAL REVIEW
Earnings Summary
For the year ended December 31, 2000, the Company reported net income of $8.6
million or $2.24 per diluted share. After excluding merger related costs, net of
tax, operating net income was $10.8 million or $2.80 per diluted share as
compared to net income, excluding merger related costs, net of tax, of $7.4
million or $2.00 per diluted share for the year ended December 31, 1999 (a 46%
increase). Net income, excluding merger related costs, net of tax, for the year
increased over that of the previous year primarily due to an increase of $6.1
million in net interest income offset by a decrease in other income of $260 and
an increase in other expense of $868. See the specific sections below for
details regarding these changes.
As of December 31, 2000, consolidated assets were $688 million, gross loans and
leases were $463 million, and deposits were $585 million. Total consolidated
assets increased $120 million, a 21% increase from $568 million at December 31,
1999. Loans and leases increased $60 million, a 15% increase from $403 million
at December 31, 1999. Deposits grew $111 million from $474 million the previous
year, representing a 23% increase. Loan and lease and deposit growth was
generated mainly by marketing and business development efforts of the Bank and
its subsidiary, Epic.
For the year ended December 31, 1999, the Company reported net income of $7.1
million or $1.91 per diluted share. After excluding merger related costs, net of
tax, operating net income was $7.4 million or $2.00 per diluted share as
compared to net income of $7.5 million or $1.92 per diluted share for the year
ended December 31, 1998. Net income, excluding merger related costs, net of tax,
for the year decreased over that of the previous year primarily due to an
increase in the provision for loan and lease losses of $426 and to an increase
in other expense of $1.6 million offset by an increase of $2.0 million in net
interest income. See the specific sections below for details regarding these
changes.
As of December 31, 1999, consolidated assets were $568 million, gross loans and
leases were $403 million, and deposits were $474 million. Total consolidated
assets increased $73 million, a 15% increase from $495 million at December 31,
1998. Loans and leases increased $67 million, a 20% increase from $336 million
at December 31, 1998. Deposits grew $68 million from $406 million the previous
year, representing a 17% increase. Loan and lease and deposit growth was
generated mainly by marketing and business development efforts of the Bank and
its subsidiary, Epic.
Net Interest Income and Margin
Net interest income is the principal source of the Company's operating earnings.
Significant factors affecting net interest income are rates, volumes and mix of
the loan, investment and deposit portfolios.
The following table shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin for the
three years ended December 31, 2000.
AVERAGE BALANCES, RATES AND YIELDS
FULLY TAXABLE EQUIVALENT
(dollars in thousands)
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Average Avg yield/ Average Avg yield Average Avg yield/
ASSETS Balance Interest Rate paid Balance Interest Rate paid Balance Interest Rate paid
- ---------------------------------------------------------------------------------------------------------------------------------
C>
Interest earning assets:
Loans and leases, net (1) $420,943 $44,942 0.68% $366,175 $35,826 9.78% $301,910 $31,252 10.35%
Securities available for sale:
Taxable (2) 103,392 6,791 6.57 76,057 4,638 6.10 79,262 4,753 6.00
Nontaxable (3) 531 48 9.10 ---- ---- ---- ---- ---- ---
Securities held to maturity:
Taxable (4) 2,911 224 7.69 6,450 443 6.87 8,653 648 7.49
Nontaxable (5) 17,464 1,415 8.10 16,199 1,262 7.79 11,588 861 7.43
Money market investments 36,717 2,358 6.42 30,204 1,536 5.08 32,138 1,750 5.44
Interest bearing due from banks 1,367 73 5.34 1,873 107 5.71 2,929 169 5.77
Interest rate hedging instruments ---- 10 --- ---- (50) ---- ---- (9) ---
- --------------------------------------------------------------- -------------------- ---------------------
TOTAL INTEREST EARNING ASSETS 583,325 55,861 9.58 496,958 43,762 8.81 436,480 39,424 9.03
- --------------------------------------------------------------- -------------------- ---------------------
Allowance for loan or lease losses (6,733) (5,799) (5,289)
Cash and non-interest bearing due from banks 24,545 22,717 20,078
Other assets 29,536 19,024 14,073
Core deposit intangibles and goodwill, net 3,369 3,820 3,975
- ------------------------------------------------------ ----------- -----------
Total Assets $634,042 $536,721 $469,317
====================================================== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $79,747 2,244 2.81 $81,522 2,189 2.69 $75,152 2,158 2.87
Money market and savings 154,287 6,481 4.20 116,579 3,938 3.38 115,245 3,931 3.41
Certificates of deposit:
Less than $100 55,738 3,237 5.81 49,154 2,627 5.34 29,563 1,604 5.42
$100 or more 130,838 7,490 5.72 100,669 4,992 4.96 75,005 4,073 5.43
- --------------------------------------------------------------- -------------------- ---------------------
Total certificates of deposit 186,576 10,727 5.75 149,823 7,619 5.09 104,568 5,677 5.43
- --------------------------------------------------------------- -------------------- ---------------------
Other borrowings 33,032 2,198 6.65 32,554 1,946 5.98 27,832 1,711 6.15
- --------------------------------------------------------------- -------------------- ---------------------
TOTAL INTEREST-BEARING LIABILITIES 453,642 21,650 4.77 380,478 15,692 4.12 322,798 13,477 4.18
- --------------------------------------------------------------- -------------------- ---------------------
Noninterest-bearing demand deposits 116,234 96,623 90,921
Accrued interest payable and
other liabilities 7,911 7,664 7,087
- ------------------------------------------------------ ----------- -----------
Total liabilities 577,787 484,765 420,806
- ------------------------------------------------------ ----------- -----------
Shareholders' equity 56,255 51,956 48,511
- ------------------------------------------------------ ----------- -----------
Total Liabilities and Shareholders'
equity $634,042 $536,721 $469,317
======================================================-------- ==========--------- ==========----------
NET INTEREST INCOME AND MARGIN (6) $34,211 5.86% $28,070 5.65% $25,947 5.94%
============================================ ==================== =================== ==================
<FN>
(1) Includes amortized loan fees of $2.1 million for 2000 and for 1999 and $1.6
million for 1998. Nonperforming loans and leases have been included in
average loan and lease balances.
(2) Includes dividend income of $152, $305 and $451 received in 2000, 1999 and
1998, respectively.
(3) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($19 in 2000).
(4) Includes dividend income of $164, $160 and $31 received in 2000, 1999 and
1998, respectively.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($566 in 2000, $505 in 1999 and $344 in 1998).
(6) The net interest margin represents the net interest income as a
percentage of average earning assets.
</FN>
The following table shows the effect on the interest differential of volume and
rate changes for the years ended December 31, 2000 and 1999:
VOLUME/RATE ANALYSIS
(dollars in thousands)
2000 vs. 1999 1999 vs. 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) Increase (decrease)
due to change in due to change in
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Total Average Average Total
Volume Rate Change Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases (1) $5,572 $3,544 $9,116 $5,921 $(1,347) $4,574
Securities:
Taxable available for sale 1,795 358 2,153 (195) (34) (229)
Nontaxable available for sale 48 ---- 48 ---- ---- ----
Taxable held to maturity (272) 53 (219) (151) 60 (91)
Nontaxable held to maturity 103 50 153 359 42 401
Money market investments 418 404 822 (99) (115) (214)
Interest bearing due from banks (27) (7) (34) (60) (2) (62)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 7,637 4,402 12,039 5,775 (1,396) 4,379
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand (50) 105 55 171 (140) 31
Money market and savings 1,584 959 2,543 45 (39) 7
Certificates of deposits:
Less than $100 382 228 610 1,047 (24) 1,023
$100 or greater 1,727 771 2,498 1,273 (354) 919
Other borrowings 32 220 252 282 (47) 235
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 3,675 2,283 5,958 2,818 (603) 2,215
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate hedging instruments ---- 60 60 ---- (41) (41)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $3,962 $2,179 $6,141 $2,957 $(894) $2,123
====================================================================================================================================
<FN>
(1) The effect of the change in loan fees is included as an adjustment to the
average rate.
</FN>
Consolidated net interest income (on a fully taxable equivalent basis) was $34.2
million in 2000, as compared to $28.1 million in 1999. The increase of $6.1
million in net interest income during 2000 was primarily a result of an increase
in the average volume of $86.4 million in earning assets, which amounted to
approximately $4.0 million of net interest income. In addition to the increase
in the average volume of earning assets, the net interest margin (the difference
in the yields on earning assets less the cost of the deposits divided by the
amount of earning assets) increased to 5.86% in 2000 from 5.65% in 1999, which
amounted to approximately $2.1 million of net interest income.
The Bank's asset/liability position is slightly asset-sensitive (See
"Asset/Liability Management"). Therefore, in times of an increasing interest
rate environment, the Bank's net interest margin should be positively impacted,
as was the case in 2000. The Bank's average prime was 9.24% in 2000, as compared
to 8.00% in 1999. The increase in the cost of interest-bearing liabilities was
due the increase in interest rates and to a change in the mix to higher cost
funds. Interest expense in 2000 was $21.7 million, as compared to $15.7 million
in 1999. The difference attributable to volume increases was $3.7 million and
the difference attributable to rate increases was $2.3 million. Actual interest
expense rates increased from 4.12% to 4.77%.
Consolidated net interest income (on a fully taxable equivalent basis) was $28.1
million in 1999, as compared to $26.0 million in 1998. The increase of $2.1
million in net interest income during 1999 was primarily a result of an increase
in volume of $60.5 million in earning assets which amounted to approximately
$3.0 million of net interest income. The increase in net interest income in 1999
relating to the increase in volume and fees was offset by an overall decrease in
the net interest margin (the difference in the yields on earning assets and the
cost of funds).
A substantial portion of the Bank's deposits (an average of 22.2% in 2000 and
20.0% in 1999) are non interest-bearing and therefore do not reprice when
interest rates change. See "Funding." This is somewhat ameliorated by a
significant amount of customer corporate account balances which are tied to
earnings credits and utilized to offset bank service costs.
Due to the nature of the Company's lending markets, in which loans are generally
tied to the Prime Rate, it is believed an increase in interest rates should
positively affect the Company's future earnings, while a decline in interest
rates would have a negative impact. Should interest rates decline in the future,
management believes that net interest income could be negatively impacted and it
is not feasible to provide an accurate measure of such a change because of the
many factors (many of which are uncontrollable) influencing the result.
The Company's net interest margin for the periods presented is high relative to
its peer group, mainly due to its high proportion of non interest-bearing
deposits and the impact of its generally higher yielding loans, specifically
leasing, factoring and asset-based lending.
Net interest income also reflects the impact of nonperforming loans and leases.
The effect on interest income for the years ended December 31, 2000 through 1996
for the loans and leases that were on nonaccrual as of December 31, 2000 through
1996 was as follows:
NEGATIVE IMPACT OF NONACCRUAL LOANS AND LEASES
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Interest revenue which would have been
recorded under original terms $62 $132 $22 $61 $35
Interest revenue actually realized 16 112 21 32 29
- ----------------------------------------------------------------------------------------------------------------
NEGATIVE IMPACT ON INTEREST REVENUE $46 $20 $1 $29 $6
==================================================================================================================
Provision for Loan and Lease Losses
The level of the allowance for loan and lease losses (and therefore the related
provision) reflects the Company's judgment as to the inherent risks associated
with the loan, lease and factoring portfolios. Since estimates of the adequacy
of the Company's allowance for loan and lease losses are based on foreseeable
risks, such judgments are subject to change based on changing circumstances.
Based on management's current evaluation of such risks, as well as judgments of
the Company's regulators, additions of $725, $862, and $436 were made to the
allowance for loan and lease losses in 2000, 1999 and 1998, respectively.
Management's determinations of the provision in 2000, 1999 and 1998 were based
on the measurement of the possibility of future loan and lease losses inherent
in the portfolio through various objective and subjective criteria and the
impact of net chargeoffs. See "Loan and Lease Portfolio" for a detailed
discussion of asset quality and the allowance for loan and lease losses.
Other Income
The following table sets forth the components of other income and the percentage
distribution of such income for the years ended December 31, 2000, 1999 and
1998.
OTHER INCOME
(dollars in thousands)
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
Depositor service charges $1,067 66.4% $1,044 55.9% $950 52.1%
Other operating income 599 37.3 737 39.5 724 39.7
Increase in cash surrender value of life insurance 542 33.8 218 11.7 --- ---
Net (loss) gain on sale of securities available for sale (602) (37.5) (133) (7.1) 150 8.2
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $1,606 100.0% $1,866 100.0% $1,824 100.0%
====================================================================================================================================
Other income totaled $1.6 million in 2000, $1.9 million in 1999 and $1.8 million
in 1998. The decrease in other income during 2000 resulted primarily from the
realization of securities losses of $602 in 2000.
Other Expense
The components of other expense are set forth in the following table for the
years ended December 31, 2000, 1999 and 1998.
OTHER EXPENSE AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
Amount Percent Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------------------------
Salaries and benefits $9,642 1.52% $9,180 1.71% $8,048 1.71%
Occupancy 810 0.13 818 0.15 764 0.16
Data processing 747 0.12 676 0.12 741 0.16
Furniture and equipment 694 0.11 636 0.12 546 0.11
Directors' & shareholders' 660 0.10 673 0.13 469 0.10
Legal and professional fees 641 0.10 701 0.13 520 0.11
Client services paid by Bank 613 0.10 585 0.11 495 0.11
Amortization of core deposit
intangibles and goodwill 439 0.07 455 0.08 457 0.10
Merger costs 3,424 0.54 487 0.09 ---- ----
Other 2,686 0.42 2,340 0.44 2,422 0.52
- ---------------------------------------------------------------------------------------------------------------------
TOTAL $20,356 3.21% $16,551 3.08% $14,462 3.08%
======================================================================================================================
Total other expenses increased approximately $3.8 million in 2000 as compared to
1999. This is mainly attributable to the inclusion of the one-time merger
related costs, incurred in connection with the acquisition of Saratoga on
January 5, 2000. After deducting these costs in each year, continuing operating
expenses were $16.9 million in 2000, $16.1 million in 1999 and $14.5 million in
1998. The most significant increase in 2000 related to increased incentive
accruals and salary increases necessitated by the competitive environment for
personnel and the supplemental retirement programs for outside directors and key
executives instituted by Saratoga National Bank in 1999 and by SJNB in 2000.
Total other expenses increased approximately $1.6 million (excluding the impact
of the merger related costs) in 1999 as compared to 1998. This increase is
partially related to the operations of Epic (which accounted for approximately
$400 of the increase) and the opening of the East Bay Regional Office (which
accounted for approximately $300 of the increase), both occurring in July 1998.
In addition, salaries and benefits increased as a result of the increased
incentive accruals, additions to staff and the competitive environment for
personnel. Increases in occupancy also related to Epic and the East Bay Regional
Office.
Income Taxes
The effective tax rate was 39% in 2000, 41% in 1999 and 40% in 1998. The lower
effective tax rate in 2000 was primarily due to the greater amount of nontaxable
income generated by the investment in California nontaxable securities
(municipals and other political subdivisions).
Quarterly Income
The unaudited consolidated income statement data of the Company and the Bank, in
the opinion of management, includes all normal and recurring adjustments
necessary to state fairly the information set forth therein. The results of
operations are not necessarily indicative of results for any future period. The
following table shows the Company's unaudited quarterly income statement data
for the years 2000 and 1999:
UNAUDITED QUARTERLY INCOME STATEMENT DATA
(dollars in thousands, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
First quarter Second quarter Third quarter Fourth quarter
2000 1999 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income $7,796 $6,402 $8,543 $6,644 $8,519 $7,162 $8,768 $7,357
Provision for loan or lease losses (250) (140) (125) (27) (150) (150) (200) (545)
Other income 507 651 (90) 438 583 468 606 308
Other expenses (7,450) (3,847) (4,116) (3,964) (4,423) (4,196) (4,367) (4,543)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 603 3,066 4,212 3,091 4,529 3,284 4,807 2,577
Income taxes (288) (1,268) (1,635) (1,235) (1,760) (1,300) (1,844) (1,098)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $315 $1,798 $2,577 $1,856 $2,769 $1,984 $2,963 $1,479
====================================================================================================================================
Net income per share - basic $0.09 $0.51 $0.70 $0.54 $0.75 $0.57 $0.80 $0.42
Net income per share - diluted $0.08 $0.48 $0.67 $0.50 $0.72 $0.53 $0.75 $0.40
EXCLUDING MERGER RELATED COSTS, NET OF TAX:
Net income per share - basic (1) $0.69 $0.51 $0.70 $0.54 $0.75 $0.57 $0.80 $0.42
Net income per share - diluted (1) $0.64 $0.48 $0.67 $0.50 $0.72 $0.53 $0.75 $0.40
====================================================================================================================================
<FN>
(1) Excludes $3.4 million of merger related costs and $1.3 million of related
tax benefits for the quarter ended March 31, 2000 and $487 of merger related
costs and $178 of related tax benefits for the quarter ended December 31, 1999.
</FN>
The Company reported net income of $3.0 million for the quarter ended December
31, 2000, compared with net income of $1.5 million for the fourth quarter of
1999. The results for the fourth quarter of 2000 as compared to the same quarter
a year ago reflect an increase in volume of earning assets ($612 million in 2000
compared to $527 million in 1999). The loan and lease loss provision decreased
from $545 in 1999 to $200 in 2000, mainly due to a provision in 1999 by Saratoga
for a specific non-performing loan. Other expenses decreased $176 in 2000,
primarily as a result of merger related costs of $487 relating to the
acquisition of Saratoga incurred in the fourth quarter of 1999 as offset by
increased salary and benefit costs in 2000.
FINANCIAL CONDITION AND EARNING ASSETS
Federal Funds Sold and Money Market Investments
Federal funds sold and money market investments were $45.7 million at December
31, 2000 as compared to $12.7 million at December 31, 1999. This increase is
mainly due to an increase in short-term deposits, which were invested in
short-term money market securities.
The average balance of money market investments, which include federal funds
sold and liquid money market investments, was $36.7 million in 2000 and $30.2
million in 1999. These balances represented 6.8% of average deposits for 2000
and 1999. They are maintained primarily for the short-term liquidity needs of
the Bank. See "Capital and Liquidity."
Securities
The following table shows the book value composition of the securities portfolio
at December 31, 2000, 1999 and 1998. At December 31, 2000, there were no issuers
of securities for which the aggregate book value of securities of such issuer
held by the Bank exceeded 10% of the Company's shareholders' equity, except for
investment securities with the fair value of $21.4 million ($21.2 million cost
basis) issued by the Federal Home Loan Bank and $8.5 million ($8.5 million cost
basis) issued by the Federal National Mortgage Association.
INVESTMENT SECURITIES COMPOSITION
(dollars in thousands)
2000 1999 1998
- -----------------------------------------------------------------------------------------------
Investment securities available for sale:
U. S. Treasury $1,527 $2,499 $3,077
U. S. Government Agencies 33,649 36,613 25,687
Mortgage Backed 57,567 37,996 3,965
State and municipal 5,313 ----- -----
Trust Preferred 8,475 6,583 -----
Asset Backed 3,629 1,978 -----
Mutual funds ----- 5,209 2,487
- -----------------------------------------------------------------------------------------------
INVESTMENT SECURITIES AVAILABLE FOR SALE 110,160 90,878 35,216
- -----------------------------------------------------------------------------------------------
Investment securities held to maturity:
U. S. Treasury ----- ----- 1,000
U. S. Government Agencies 500 499 3,496
State and municipal 16,395 17,828 4,213
Mortgage Backed ----- 657 1,927
Other 1,732 3,212 537
- -----------------------------------------------------------------------------------------------
INVESTMENT SECURITIES HELD TO MATURITY 18,627 22,196 11,173
- -----------------------------------------------------------------------------------------------
TOTAL $128,787 $113,074 $46,389
===============================================================================================
Investment securities classified as available for sale are acquired without the
intent to hold until maturity. At December 31, 2000, the Bank's weighted average
maturity of the available for sale investment portfolio was 3.98 years. It is
estimated that for each 1.0% change in interest rates, the value of the
Company's securities available for sale will change by approximately 2.9%.
Any unrealized gain or loss on investment securities available for sale is
reflected in the carrying value of the security and reported net of income taxes
in the equity section of the consolidated balance sheets. Realized gains and
losses are reported in the consolidated statement of income. The pre-tax
unrealized gain on securities available for sale as of December 31, 2000 was
$1.2 million. This compares to a pre-tax unrealized loss of $2.2 million as of
December 31, 1999. The change in the pre-tax unrealized gain or loss is directly
attributable to the decrease in interest rates during late 2000. Changes in
interest rates have an inverse effect on the value of securities for which the
interest rate is fixed.
Investment securities classified as held to maturity include those securities
which the Company has the ability and intent to hold to maturity. The Company's
policy is to generally acquire "A" rated or better U.S., state and municipal
securities. The specific issues are monitored for changes in financial
condition. Appropriate action would be taken if significant deterioration was
noted.
The pre-tax unrealized gain on investment securities held to maturity was $19 as
of December 31, 2000 as compared to a $1.5 million pre-tax unrealized loss as of
December 31, 1999. The change in the pre-tax unrealized gain or loss resulted
from the decrease in interest rates in late 2000. The Bank's weighted average
maturity of the held to maturity investment portfolio as of December 31, 2000
was approximately 11.6 years. It is estimated that for each 1.0% change in
interest rates, the value of the Company's securities held to maturity will
change by approximately 5.9%. This volatility decreases as the average maturity
shortens. Since it is the intention of management to hold these securities to
maturity, the unrealized losses will be realized over the life of the securities
as above-market interest income is recognized.
Mortgage-backed securities ("MBS") are considered to have increased risks
associated with them because of the timing of principal repayments. As interest
rates decrease, the average maturity of mortgages underlying MBS tend to
decline; as rates increase, maturities tend to lengthen. At December 31, 2000,
the Company had the following securities which were mortgage-backed or related
securities:
MORTGAGE BACKED AND RELATED SECURITIES
December 31, 2000
PAGE>
FAIR
(dollars in thousands) COST VALUE
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp. (U.S. Agency) $2,975 $3,624
Federal National Mortgage Association (U.S. Agency) 18,915 19,004
Government National Mortgage Association (U.S. Agency) 705 710
Collateralized mortgage obligations 33,525 34,229
----------------------
----------------------
Total $56,120 $57,567
======================
LOAN AND LEASE PORTFOLIO
The following table shows the Company's consolidated loans and leases by type of
loan or borrower and their percentage distribution for the five years ended
December 31:
LOAN AND LEASE PORTFOLIO
(dollars in thousands)
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Commercial and other $140,108 $123,873 $110,604 $115,311 $96,533
SBA 53,371 49,949 37,019 39,409 32,968
Leasing 37,450 20,837 5,618 3,215 2,160
Factoring and asset-based 13,476 9,901 7,393 4,915 4,397
Real estate construction 54,667 48,410 51,963 26,763 24,700
Real estate term 147,110 139,103 113,461 93,503 81,040
Consumer 18,262 12,448 10,839 10,590 10,483
Unearned fee income (1,130) (1,203) (954) (969) (992)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LOAN AND LEASE PORTFOLIO $463,314 $403,318 $335,943 $292,737 $251,289
=============================================================================================================================
Commercial and other 30.2% 30.7% 32.9% 39.4% 38.4%
SBA 11.5 12.4 11.0 13.5 13.1
Leasing 8.1 5.2 1.7 1.1 0.9
Factoring and asset-based 2.9 2.4 2.2 1.8 1.8
Real estate construction 11.8 12.0 15.5 9.1 9.8
Real estate term 31.8 34.5 33.8 31.9 32.2
Consumer 3.9 3.1 3.2 3.6 4.2
Unearned fee income (0.2) (0.3) (0.3) (0.3) (0.4)
- -----------------------------------------------------------------------------------------------------------------------------
Total loan and lease portfolio 100.0% 100.0% 100.0% 100.0% 100.0%
=============================================================================================================================
GENERAL
The Company's loan and lease portfolio consists primarily of short-term,
floating rate loans for business and real estate purposes. SJNB's lending
services include revolving credit loans, SBA loans, term loans, accounts
receivable financing, factoring, equipment financing and letters of credit.
The commercial loan portfolio (approximately 30% of the loan portfolio)
primarily consists of loans to small- to medium-sized businesses with gross
revenues up to $50 million, as well as loans to local professional
businesspersons. Commercial and other loans include loans to real estate
developers for short-term investment purposes (totaling approximately $16.6
million), loans for real estate investment purposes made to non-developers
(totaling approximately $2.7 million) and mortgage warehouse loans (totaling
approximately $1.8 million). No particular industry represents a significant
portion of such loans, other then the above noted real estate related loans.
The Bank as a Preferred Lender originates SBA loans and participates in the SBA
7A and 504 SBA lending programs. Under the 7A program, a loan is made for
commercial or real estate purposes. The SBA guarantees these loans and the
guarantee may range from 70% to 90% of the total loan. In addition, the loan
could be collateralized by a deed of trust on real estate. Because of the nature
of the loan and the SBA guarantee, the Bank does not consider this exposure as
real estate. It is the Bank's policy to retain ownership of both the guaranteed
and unguaranteed portions of these loans in its outstanding loans rather then to
sell the guaranteed portion.
Under the 504 program, the Bank lends directly to the borrower and takes a first
deed of trust to the subject property. In addition the SBA through a Community
Development Corporation makes an additional loan to the borrower and takes a
deed of trust subject to the Bank's position. The Bank's position in relation to
the real estate "piggy back" loans can range from 50% to 70% loan to value.
SBA loans can be summarized as follows as of December 31, 2000:
SBA 7A program (with SBA guarantee):
Commercial purposes (no real estate) $22,065
Real estate related 24,652
SBA 504 program, real estate piggyback loans 6,654
--------
Total SBA loans $53,371
========
The leasing portfolio consists of financing type leases made to small- and
medium-sized businesses. The average lease is approximately $237. Approximately
56% of the leasing portfolio is located in the State of California, 10% is
located in Nevada and 7% is located in Texas; no other state has greater than 7%
of the leasing portfolio. Computer equipment (including computer hardware,
software, network, servers and storage systems) represents approximately 32% of
the leasing portfolio, office furniture and equipment (including phone systems)
account for approximately 13%, printing and graphic arts equipment account for
11%, and industrial equipment represents approximately 9%. No other sector
represents more than 5% of the leasing portfolio.
Factoring and asset-based lending represents purchased accounts receivable
(factoring) and a structured accounts receivable lending program where the Bank
receives specific payment for client invoices. Under the factoring program, the
Bank purchases accounts receivable invoices from clients and then receives
payment directly from the party obligated for the receivable. In most cases, the
Bank's Financial Services Division purchases the receivables subject to recourse
from the Bank's factoring client. The asset-based lending program requires a
security interest in all of a client's accounts receivable. Specific
verifications are performed on some or all of the receivables and the account
debtor. Normally payments made by mail are directed to a Bank controlled lock
box. This business and related purchasing of accounts receivable is subject to a
greater degree of risk than normal lending due to the involvement of the third
party obligee, the lack of control over the direct receipt of payment, and the
potential purchase of fraudulent or inflated receivables. To date, there have
been no significant losses relating to the Bank's factoring or asset-based
lending programs.
The real estate construction portfolio consists of 30% residential and 70%
commercial loans. The most significant types of commercial construction include:
industrial and warehouse space, hotels/motels, and golf courses. Approximately
86% of the commercial construction will be either occupied or managed by the
owner. Such loans are made on the basis of the economic viability for the
specific project, the cash flow resources of the developer, the developer's
equity in the project and the underlying financial strength of the borrower. The
Company's policy is to monitor each loan with respect to incurred costs, sales
price and sales cycle. The weighted average loan to value of all real estate
construction loans is estimated to be 57% based on the latest appraisal data
available to the Bank.
The real estate term loans include term loans (up to a twenty-five year
maturity) on income-producing or owner occupied commercial properties totaling
$139.7 million and land development loans totaling $7.4 million. Approximately
41% of these properties are owner occupied. The most significant types of
commercial properties include: industrial and warehouse space, office buildings,
retail and retail strip centers, and hotels/motels. The average loan to value of
all real estate term loans and land development loans is estimated to be 60%
based on the latest appraisal data available to the Bank.
Consumer loans consist primarily of loans to individuals for personal uses, such
as home equity loans, installment purchases, premier lines (unsecured lines of
credit) and overdraft protection loans and a variety of other consumer purposes.
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar economic features that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic
conditions. Although the Company has a diversified loan and lease portfolio, a
substantial portion of its customers' ability to honor loan and lease terms is
reliant upon the economic stability of Santa Clara County, which in some degree
relies on the stability of high technology companies in its "Silicon Valley."
Loans are made on the basis of a secure repayment source as the first priority.
Collateral is generally a secondary source for loan qualification.
Approximately 55% of the loan and lease portfolio is directly related to real
estate or real estate interests. This amount includes real estate construction
loans, real estate term loans, real estate related loans included in the
commercial loan portfolio, SBA real estate piggyback loans, and prime equity
loans (included in consumer loans in the amount of $8.1 million).
Inherent in any loan and lease portfolio are risks associated with certain types
of loans and leases. The Company attempts to limit these risks through
conservative loan and lease policies and review procedures that are applied at
the time of origination. Included in these policies are specific maximum
loan-to-value ("LTV") limitations as to various categories of real estate
related loans. These ratios are as follows:
MAXIMUM LOAN TO VALUE RATIOS
- ----------------------------------------------------------------------
MAXIMUM LTV
CATEGORY OF REAL ESTATE COLLATERAL RATIO
- ----------------------------------------------------- ----------------
Raw land 50%
Land Development 60
Construction:
1-4 Single family residence,
Owner occupied 80
Speculative development 80
Other 80
Term loans (construction take-out and
commercial) 75
Other improved property 75
Prime equity loans 80
The Company's loan and lease policy provides that any term loans on
income-producing properties must have a minimum debt service coverage of at
least 1.25 to 1 for non-owner occupied property and at least 1.15 to 1 for owner
occupied.
During 2000 the Bank increased the maximum loan to value ratio for speculative
construction loans from 75% to 80%. This was done to allow the Bank to be more
competitive in its marketplace. In addition, the Bank generally requires that
the developer have 10% to 25% of the total project costs paid by them in cash.
Over 90% of all construction loans to date have required at least 20% of the
total project costs paid in cash. Since this change of policy, no loan has been
made with a loan to value in excess of 75%.
One of the significant risks associated with real estate lending is the risk
associated with the possible existence of environmental risks or hazards on or
in property affiliated with the loan. The Bank attempts to mitigate such risk
through the use of an Environmental Risk Questionnaire for all loans secured by
real estate. A Phase I environmental report is required if so indicated by
response to the questionnaire or if (for any other reason) it is determined to
be appropriate. Other reasons would include the industrial use of
environmentally sensitive substances or the proximity to other known
environmental problems. A Phase II report is required in certain cases,
depending on the outcome of the Phase I report.
ACTIVITY
Total loans and leases were $463 million and averaged $421 million as of and for
the year ended December 31, 2000. Total loans and leases were $403 million and
averaged $366 million as of and for the year ended December 31, 1999. The
increase in total loans and leases of $60 million during 2000 represented growth
from all sectors of the Bank's portfolio. The largest growth was centered in the
Commercial and other category, which grew $16 million or 13%. The growth was not
centered in any specific industry or sector and the Bank continues to enjoy a
diversified commercial loan portfolio. The leasing portfolio has continued to
expand since the acquisition of Epic in 1998, growing $17 million in 2000 as
marketing efforts and diversification expanded. Real estate construction loans
grew $6.3 million or approximately 13% in 2000. The major source of the growth
relating to construction was in the commercial area. The demand for construction
in the Bank's market area continued to be strong in 2000. Demand in the housing
and commercial markets was fueled by the growth in the high technology sector
throughout much of 2000. Real estate term loans increased by $8 million in 2000
mainly as a result of the Bank providing term funding for several of its
completed construction projects, as well as the continued development of new
business.
In addition, the Bank experienced growth in SBA loans ($4 million) and
factoring/asset-based lending ($3 million) in 2000. Growth in these areas was
also mainly due to business development efforts.
Late in 2000, the expansion of the Bank's market area, specifically Silicon
Valley and the high technology sector, was impacted by the negative reaction of
the financial markets to the Internet industry and the slow-down of earnings
growth of the large technology companies. There has also been a slow-down in
venture capital fundings; the future of such fundings is unclear at this time.
If venture capital fundings are significantly curtailed during 2001, the Bay
Area and the Silicon Valley could be negatively impacted. In addition, the State
of California is in the midst of an energy crisis, where the ability of the
major utilities to provide and deliver adequate resources to their users has
been threatened. These changes could result in layoffs and restructurings. It is
not clear at this time what impact this will have on the overall economy and
specifically the growth and quality of the Bank's loan portfolio in the future.
Total loans and leases were $336 million and averaged $302 million as of and for
the year ended December 31, 1998. The increase in total loans and leases of $67
million during 1999 represented growth from all sectors of the Bank's portfolio,
except real estate construction. Real estate term loans increased by $26 million
as a result of the lower interest rate environment during the first and second
quarters of 1999, which fueled the demand for refinancing. The Bank continued to
provide term funding for several of its completed construction projects, as well
as the continued development of new business. In addition the Bank experienced
growth in commercial ($13 million), SBA ($13 million), leasing ($15 million),
and factoring/asset-based lending ($3 million) in 1999. Growth in all these
areas was mainly due to the generally positive economic conditions of Silicon
Valley and rapid expansion of the technology sector in 1999. Real estate
construction loans declined by $3.6 million in 1999. The decrease in real estate
construction was due to a change in the mix of business done by Saratoga
National Bank prior to the merger with SJNB on January 5, 2000. During 1999
Saratoga National Bank began to focus on larger real estate projects where they
sold off (participated) a majority of the loan balance. Although activity
increased, the amount outstanding actually declined by approximately $12
million. The net remaining increase of $8 million related to SJNB's focus on its
market area's expanding real estate environment during 1999.
Asset Quality
ALLOWANCE FOR LOAN AND LEASE LOSSES
A consequence of lending activities is the potential for loss. The amount of
such losses will vary from time to time depending upon the risk characteristics
of the loan and lease portfolio as affected by economic conditions, rising
interest rates and the financial experience of borrowers. The allowance for loan
and lease losses, which provides for the risk of losses inherent in the credit
extension process, is increased by the provision for loan and lease losses
charged to expense and decreased by the amount of charge-offs net of recoveries.
There is no precise method of predicting specific losses or amounts that
ultimately may be charged off on particular segments of the loan and lease
portfolio. Similarly, the adequacy of the allowance for loan and lease losses
and the level of the related provision for loan and lease losses is determined
on a judgmental basis by management based on consideration of:
o Economic conditions,
o Borrowers' financial condition,
o Loan and lease impairment,
o Evaluation of industry trends,
o Historic losses, migrations and delinquency trends,
o Industry and other concentrations,
o Loans which are contractually current as to payment terms but demonstrate a
higher degree of risk as identified by management,
o Continuing evaluation of the performing loan portfolio,
o Monthly review and evaluation of problem loans and leases identified as
having loss potential,
o Quarterly review by the Board of Directors,
o Off balance sheet risks, and
o Assessments by regulators and other third parties.
In addition to the internal assessment of the loan and lease portfolio (and off
balance sheet credit risk, such as letters of credit, etc.), the Company also
retains a consultant who performs credit reviews on a quarterly basis and then
provides an assessment of the adequacy of the allowance for loan and lease
losses. The federal banking regulators also conduct examinations of the loan and
lease portfolio periodically.
The Company utilizes a method of assigning a minimum and maximum loss ratio for
each grade of loan or lease within each category of loans (commercial, real
estate term, real estate construction, etc.). Loans and leases are graded on a
ranking system based on management's assessment of the loan's or lease's credit
quality. The assigned loss ratio is based upon many factors, including
prevailing economic conditions, historical loss experience as well as other
factors. In addition, the Company's methodology considers (and assigns a risk
factor for) current economic conditions, off balance sheet risk and
concentrations of credit. The methodology provides a systematic approach for the
measurement of the possible existence of future loan and lease losses.
Management and the Board of Directors evaluate the allowance and determine its
appropriate level considering objective and subjective measures, such as
knowledge of the borrowers' business, valuation of collateral, the determination
of impaired loans and leases and exposure to potential losses. Based on known
information available to it at the date of this Report, management believes that
the Company's allowance for loan and lease losses, determined as described
above, was adequate at December 31, 2000 for foreseeable losses.
The allowance for loan and lease losses is a general reserve available against
the total loan and lease portfolio and off balance sheet credit exposure. While
management uses available information to recognize losses on loans or leases,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan and
lease losses. Such agencies may require the Bank to provide additions to the
allowance based on their judgment of information available to them at the time
of their examination.
Finally, there is uncertainty concerning future economic trends. As noted
elsewhere in this Report, the events occurring at the end of 2000 and the
beginning of 2001, such as the national equity market correction, disappointing
earnings announcements, negative economic fundamentals, the California energy
crisis, and the corrective action taken by the FOMC by reducing interest rates
by 100 basis points, has caused greater uncertainty. Accordingly, it is not
possible to predict the effect future economic trends may have on the level of
the provision for loan and lease losses in future periods. See "Item 7A:
Quantitative and Qualitative Disclosures About Market Risk" herein, for
additional information regarding changes in interest rates.
The following table summarizes the activity in the allowance for loan and lease
losses for the five years ended December 31, 2000:
ALLOWANCE FOR LOAN AND LEASE LOSSES
(dollars in thousands)
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of the year $6,412 $5,494 $5,071 $4,633 $4,623
- ----------------------------------------------------------------------------------------------------------------------------------
Chargeoffs by category:
Commercial and other ----- 108 234 271 243
SBA 18 18 ----- 37 22
Factoring and asset-based ----- ----- ----- 1 83
Real estate construction 376 ----- ----- ----- -----
Real estate term ----- 4 ----- 32 69
Consumer 17 35 65 62 60
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CHARGEOFFS 411 165 299 403 477
- ----------------------------------------------------------------------------------------------------------------------------------
Recoveries by category:
Commercial and other 135 150 159 123 216
SBA 13 5 58 5 39
Factoring and asset-based ----- ----- ----- 6 35
Real estate construction 379 4 ----- ----- -----
Real estate term ----- 4 ----- ----- 1
Consumer 140 59 69 2 106
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 667 222 286 136 397
- ----------------------------------------------------------------------------------------------------------------------------------
NET (RECOVERIES) CHARGEOFFS (256) (57) 13 267 80
- ----------------------------------------------------------------------------------------------------------------------------------
PROVISION CHARGED TO EXPENSE 725 861 436 705 40
Allowance relating to acquired businesses ----- ----- ----- ----- 50
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF THE YEAR $7,393 $6,412 $5,494 $5,071 $4,633
==================================================================================================================================
RATIOS:
Net (recoveries) chargeoffs to average loans and leases (.06%) (.02%) .00% .10% .04%
Allowance to total loans and leases at the end of the year 1.60 1.59 1.64 1.74 1.84
Allowance to nonperforming loans and leases at end of the year 1,621 296 2,280 647 849
====================================================================================================================================
During 2000, the Bank wrote off $411 in loans and had recoveries of $667 for a
total of $256 in net recoveries. Net recoveries were $57 during 1999 and net
chargeoffs were $13 in 1998.
The allowance for loan and lease losses as a percentage of total loans and
leases was 1.60%, 1.59%, and 1.64% at December 31, 2000, 1999 and 1998,
respectively. The allowance for loan and lease losses as a percentage of
nonperforming loans was approximately 1,621%, 296% and 2,280% at December 31,
2000, 1999 and 1998, respectively. Nonperforming loans and leases were $456,
$2.2 million and $241 at December 31, 2000, 1999 and 1998, respectively. See
"Nonperforming Loans and Leases" below.
Based on an evaluation of individual credits, historical credit loss experienced
by loan or lease type and economic conditions, management has allocated the
allowance for loan and lease losses as follows for the past five years ended
December 31:
ALLOCATION OF THE ALLOWANCE FOR LOAN OR LEASE LOSSES
(dollars in thousands)
Amount of allowance allocation
- --------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Commercial and other $2,549 $2,209 $2,066 $1,519 $1,401
SBA 1,258 1,051 1,064 1,079 840
Leasing 820 455 90 ---- ----
Factoring and asset-based 457 320 197 206 159
Real estate construction 556 970 570 297 293
Real estate term 1,433 1,044 933 1,042 1,050
Consumer 320 245 239 167 139
Unallocated ---- 118 335 761 751
- --------------------------------------------------------------------------------------------------------------------
TOTAL $7,393 $6,412 $5,494 $5,071 $4,633
====================================================================================================================
Percent of loans and leases in each category
to total loans and leases
- --------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Commercial and other 30.0% 30.4% 32.6% 39.1% 38.0%
SBA 11.5 12.4 11.0 13.5 13.1
Leasing 8.1 5.2 1.7 1.1 0.9
Factoring and asset-based 2.9 2.4 2.2 1.7 1.8
Real estate construction 11.8 12.0 15.5 9.1 9.8
Real estate term 31.8 34.5 33.8 31.9 32.2
Consumer 3.9 3.1 3.2 3.6 4.2
- --------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
====================================================================================================================
The allowance for loan and lease losses is maintained without any internal
allocation to the segments of the loan and lease portfolio and the entire
allowance is available to cover any loan and lease losses. The allocation above
is based on subjective estimates that take into account historical loss
experience and management's current assessment of the relative risk
characteristics of the portfolio as of the reporting date noted above and as
described more fully herein.
NONPERFORMING LOANS AND LEASES
Loans for which the accrual of interest has been suspended, restructured loans
and other loans with principal or interest contractually past due 90 days or
more are set forth in the following table as of December 31 of each year:
NONPERFORMING LOANS AND LEASES
(dollars in thousands)
2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual basis $421 $1,395 $197 $720 $457
Loans and leases restructured and in compliance with modified terms ---- ---- 44 63 89
Other loans and leases with principal or interest contractually past
due 90 days or more 35 769 ---- 1 ----
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL $456 $2,164 $241 $784 $546
====================================================================================================================================
Total nonperforming loans of $456 in 2000 consisted of four individual loans,
none of which were considered significant. Total nonperforming loans of $2.2
million in 1999 included a single customer with aggregate borrowings of $1.1
million with the remaining loans not considered significant.
Management identifies potential nonperforming loans and leases as part of its
ongoing evaluation and review of the loan and lease portfolio. On February 16,
2001, a commercial loan and related leases in the aggregate amount of $1.7
million secured by accounts receivable, operating equipment and other assets
were classified as nonperforming and were put on non-accrual status. Based on
such reviews and information known to management at the date of this Report,
management has not identified any further SJNB loans or leases (other than those
in the above table and mentioned above) about which it has serious doubts
regarding the borrowers' ability to comply with present loan repayment terms,
such that the loans or leases might subsequently be classified as nonperforming.
The accrual of interest on loans is discontinued and any accrued and unpaid
interest is reversed when, in the opinion of management, there is significant
doubt as to the collectibility of interest or principal or when the payment of
principal or interest is ninety days past due, unless the amount is well-secured
and in the process of collection.
OTHER REAL ESTATE OWNED
At December 31, 2000 and 1999 there were no properties owned by the Bank
acquired through the foreclosure process.
COMMITMENTS AND LINES OF CREDIT
It is the Bank's policy not to issue formal commitments or lines of credit
except to well-established and financially responsible commercial enterprises.
Such commitments can be either secured or unsecured and are typically in the
form of revolving lines of credit for seasonal working capital needs.
Occasionally, such commitments are in the form of a letter of credit to
facilitate the customer's particular business transaction. Commitments and lines
of credit typically mature within one year. These commitments involve (to
varying degrees) credit risk in excess of the amount recognized as either an
asset or liability in the statement of financial position. The Company attempts
to control this credit risk through its credit approval process. The same credit
policies are used when entering into such commitments.
As of December 31, 2000, the Company had undisbursed loan commitments to extend
credit as follows:
UNDISBURSED LOAN COMMITMENTS
(dollars in thousands)
Loan Category Amount
- --------------------------------------------------------------------------------
Commercial and other $138,196
SBA 1,462
Real estate construction 47,133
Real estate term 1,111
Consumer 13,348
- --------------------------------------------------------------------------------
Total $201,250
================================================================================
In addition, there was approximately $13 million available for commitments under
unused letters of credit as of December 31, 2000.
FUNDING
Deposits represent SJNB's principal source of funds. Most of the Bank's deposits
are obtained from professionals, small- to medium-sized businesses and
individuals within the Bank's market area. SJNB's deposit base consists of non
interest and interest-bearing demand deposits, savings and money market accounts
and certificates of deposit. The following table summarizes the composition of
deposits as of December 31, 2000, 1999 and 1998:
DEPOSIT CATEGORIES
(dollars in thousands)
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Total of Total Total of Total Total of Total
Amount Deposits Amount Deposits Amount Deposits
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $130,130 22.23% $94,687 19.99% $98,422 24.25%
Interest-bearing demand 78,539 13.42 78,523 16.58 73,834 18.19
Money market and savings 187,794 32.08 140,871 29.73 105,009 25.87
Certificates of deposit:
Less than $100 54,175 9.26 54,172 11.43 45,272 11.16
$100 or more 134,705 23.01 105,480 22.27 83,320 20.53
- ------------------------------------------------------------------------------------------------------------------------------
Total $585,343 100.00% $473,733 100.00% $405,857 100.00%
==============================================================================================================================
Deposits increased 24% to $585 million at December 31, 2000 from $474 million at
December 31, 1999. Deposits increased 17% at December 31, 1999 from $406 million
at December 31, 1998. Several specific customers' unusually large short-term
deposits amounting to approximately $37 million impacted the increase in
deposits from 1999 to 2000. Excluding this unusual flow of funds, the growth in
deposits from 1999 to 2000 would have been 16%. These increases are due to a
combination of factors, including the development of customers with significant
cash balances, utilization of sophisticated cash management systems and
aggressive pricing of interest rates.
The Bank has been able to attract a significant proportion of its deposits in
the form of noninterest-bearing deposits. The Bank's primary business is
commercially oriented with significant noninterest-bearing deposits maintained
by commercial customers. In the current economic environment, these funds could
be subject to disintermediation (moved for higher interest rate products). To
counter such possibilities, the Bank maintains an array of products which it
believes would be competitive if such were to occur. In addition, in illiquid
economic times (possibly recessions) these deposits could be subject to
withdrawal pressures. See "Capital and Liquidity - Liquidity" for a discussion
of the Bank's liquidity sources.
The Bank also raises a substantial amount of funds through certificates of
deposit of $100 or greater, which were approximately 23% of total deposits at
December 31, 2000. These deposits are usually at interest rates greater than
other types of deposits and are more sensitive to interest rate changes.
Historically, the Bank's overall cost of funds has been less than that of its
peer group. However, as these certificates of deposit are usually more interest
rate sensitive, their repricing in an increasing interest rate environment could
increase the Bank's cost of funds and negatively impact the Bank's net interest
margin. See "Capital and Liquidity."
On December 4, 1998 the Bank obtained $10 million through the placement of a
ten-year synthetic floating rate certificate of deposit. The instrument consists
of two linked transactions, a callable interest rate swap and callable fixed
rate certificate of deposit. Under the swap agreement, the Bank pays LIBOR plus
five basis points and receives 6% for a period of ten years. The swap is
currently callable by a major U.S. domestic bank. Simultaneously, the Bank
issued a callable 6% fixed rate certificate of deposit. The certificate of
deposit does not have any early redemption clauses, other than by death of the
holder. Effectively, the Bank's rate of interest on the combined transaction is
LIBOR plus five basis points.
The Bank utilizes short-term borrowings in its balance sheet management. The
short-term borrowings (securities sold under agreements to repurchase) are used
for short-term liquidity needs. During 2000, the average cost of the borrowings
was 6.65%, the average amount outstanding was $7.4 million and the maximum at
any month end was $15.6 million.
ASSET/LIABILITY MANAGEMENT
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest revenue accrual and interest expense that would result from a change in
interest rates. Mismatches in interest rate repricing among assets and
liabilities arise primarily from the interaction of various customer businesses
(i.e., types of loans and leases versus the types of deposits maintained) and
from management's discretionary investment and funds gathering activities. The
Company attempts to manage its exposure to interest rate sensitivity. However,
due to its size and direct competition from the major banks, the Company must
offer products which are competitive in the market place, even if less than
optimum with respect to its interest rate exposure.
The Company's balance sheet position at December 31, 2000 was slightly
asset-sensitive, based upon the significant amount of variable rate loans and
the repricing characteristics of its deposit accounts (although the table below
reflects liability sensitivity, see commentary beneath the table). This position
provides a hedge against rising interest rates, but has a detrimental effect
during times of interest rate decreases. Net interest revenues are negatively
impacted by a decline in interest rates and positively impacted by an increase
in interest rates. The interest rate gap is a measure of interest rate exposure
and is based upon the known repricing dates of certain assets and liabilities
and assumed repricing dates of others. See "Financial Review - Net Interest
Income and Margin."
The following table quantifies the Company's interest rate exposure at December
31, 2000 based upon the known repricing dates of certain assets and liabilities
and the assumed repricing dates of others.
DISTRIBUTION OF REPRICING OPPORTUNITIES
(dollars in thousands)
After three After six After one
Within months but months but year but After
three within six within one within five
months months year five years years Total
- --------------------------------------------------------------------- --------------------------------------------------------------
Federal funds sold and money market investments $45,715 ---- ---- ---- ---- $45,715
Investment securities-held to maturity-taxable ---- $500 ---- ---- $1,732 2,232
Investment securities-held to maturity-non-taxable ---- ---- $415 $1,542 14,438 16,395
Securities available for sale-taxable 4,609 2,670 7,759 71,174 23,276 109,488
Securities available for sale-non-taxable ---- ---- ----- ----- 672 672
Loans 324,167 15,573 30,445 71,411 21,718 463,314
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 374,491 18,743 38,619 144,127 61,836 637,816
- ------------------------------------------------------------------------------------------------------------------------------------
Interest checking, money market
and savings 266,334 ---- ---- ---- ---- 266,334
Certificates of deposit:
Less than $100 18,870 8,751 9,568 16,566 419 54,174
$100 or more 80,704 28,871 16,338 8,247 545 134,705
Repurchase agreements ---- ---- 9,645 ---- ---- 9,645
Other borrowings 4,116 26 7,667 4,863 5,722 22,394
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 370,024 37,648 43,218 29,676 6,686 487,252
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE GAP $4,467 $(18,905) $(4,599) $114,451 $55,150 $150,564
====================================================================================================================================
CUMULATIVE INTEREST RATE GAP $4,467 $(14,438) $(19,037) $95,414 $150,564
=========================================================================================================================
Interest rate gap ratio 1.01 0.50 0.89 4.86 9.25
=========================================================================================================================
CUMULATIVE INTEREST RATE GAP RATIO 1.01 0.96 0.96 1.20 1.31
=========================================================================================================================
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Further, certain earning assets have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. In considering such shortcomings, the above table would reflect a
slightly asset-sensitive position. The Company considers the anticipated effects
of these various factors when implementing its interest rate risk management
activities, including the utilization of certain interest rate hedges.
A large proportion of the Bank's deposits are non interest-bearing demand
deposits and are not included in the above table as they tend not to be interest
rate sensitive. The average balance of these deposits was $116 million in 2000.
In addition, the Bank's total tangible capital of approximately $61 million in
2000 is not included as a funding source in the above table. Lastly, the table
includes the repricing of the Bank's non-maturity deposits (interest-bearing
demand, money market and savings accounts) as repricing immediately. These
accounts are not subject to any specific interest rate adjustment formulas and
are adjusted by management based upon the competitive environment and the Bank's
liquidity and asset/liability positions. Taking these factors into consideration
could alter the above ratios significantly.
The maturities and yields of the investment portfolio at December 31, 2000 are
shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Maturity
-----------------------------------------------------------------------------------------
After one year After five years
Within one year within five years within ten years After ten years
Carrying ---------------------------------------------------------------------------------------
Value Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U. S. Treasury $1,527 ---- ---- $1,527 6.25% ---- ---- ---- ----
U. S. Government Agencies 33,649 ---- ---- 30,687 6.36 $2,962 6.13% ---- ----
Mortgage backed (1) 57,567 $7,877 6.71% 29,214 6.35 9,502 6.56 $10,974 6.85%
State and municipal (2) 5,313 ---- ---- 4,116 6.99 ---- ---- 1,197 7.34
Trust preferred 8,475 2,029 7.00 ---- ---- ---- ---- 6,446 7.91
Asset-backed 3,629 2,377 6.38 1,252 7.43 ---- ---- ---- ----
- ------------------------------------------------------- ------------- ------------- ------------
TOTAL 110,160 12,283 66,796 12,464 18,617
- ------------------------------------------------------- ------------- ------------- ------------
Securities held to maturity:
U. S. Government Agencies 500 500 6.78 ---- ---- ---- ---- ---- ----
State and municipal (2) 16,395 415 7.96 2,067 7.52 1,483 7.70 12,430 7.92
Other 1,732 ---- ---- ---- ---- ---- ---- 1,732 6.00
- ------------------------------------------------------- ------------- ------------- ------------
TOTAL 18,627 915 2,067 1,483 14,162
- ------------------------------------------------------- ------------- ------------- ------------
TOTAL $128,787 $13,198 6.73% $68,863 6.45% $13,947 6.59% $32,779 7.44%
====================================================================================================================================
<FN>
(1) Maturities of mortgage backed securities are based upon dealer prepayment
projections.
(2) State and municipal securities are adjusted to a fully taxable equivalent
basis using the federal statutory rate.
</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, 2000. Approximately 77% of the commercial and real estate loan portfolio is
priced with floating interest rates, which limit the exposure to interest rate
risk on long-term loans.
COMMERCIAL AND REAL ESTATE LOAN MATURITIES AND INTEREST RATE SENSITIVITY
Balances maturing Interest Rate Sensitivity
- -----------------------------------------------------------------------------------------------------------------------
Predeter-
Balances at One mined Floating
December 31, One year year to Over interest interest
2000 or less five years five years rates rates
- -----------------------------------------------------------------------------------------------------------------------
Commercial and other $140,108 $94,865 $36,425 $8,818 $27,210 $112,899
SBA 53,371 2,786 10,343 40,242 2,090 51,281
Real estate construction 54,667 49,467 227 4,972 8,093 46,574
Real estate-other 147,110 14,907 44,951 87,252 55,401 91,709
The above table does not take into account the possibility that a loan may be
renewed at the time of maturity. In most circumstances, the Company treats a
renewal request in substantially the same manner in which it considers the
request for an initial extension of credit. The Company does not have a policy
to automatically renew loans.
CAPITAL AND LIQUIDITY
Capital
The Company's book value per share was $16.97, $14.81 and $14.13 as of December
31, 2000, 1999 and 1998, respectively. Tangible book value per share, adjusted
for goodwill and core deposit intangibles was $16.18, $13.81 and $13.01 at
December 31, 2000, 1999 and 1998, respectively. Shareholders' equity was $64
million, $53 million and $51 million as of December 31, 2000, 1999 and 1998,
respectively. Tangible shareholders' equity was $61 million, $50 million and $47
million as of December 31, 2000, 1999 and 1998, respectively. During 2000 the
Company did not repurchase any shares of its Common Stock. During 1999 and 1998
the Company repurchased 151 shares of its Common Stock for $3.9 million and 103
shares of its Common Stock for $3.7 million, respectively. See Notes to
Consolidated Financial Statements and "Business - Supervision and Regulation"
for a discussion of the Company's capital requirements.
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan and lease funding and deposit withdrawals. Liquidity
requirements are evaluated by taking into consideration factors such as deposit
concentrations, seasonality and maturities, loan and lease demand, capital
expenditures and prevailing and anticipated economic conditions. SJNB's business
is generated primarily through customer referrals and employee business
development efforts. The Bank utilizes brokered deposits on a limited basis to
satisfy temporary liquidity needs.
The Bank's sources of liquidity consist of its deposits with other banks,
overnight funds sold to correspondent banks and short-term, marketable
investments net of short-term borrowings. On December 31, 2000, consolidated
liquid assets totaled $110 million or 16% of consolidated total assets, as
compared to $86 million or 15% of consolidated total assets on December 31,
1999. In addition to the liquid asset portfolio, as of December 31, 2000 SJNB
also had $22 million in informal lines of credit available with three major
commercial banks, approximately $7.0 million of credit available at the Federal
Reserve Discount Window, a repurchase agreement for up to $24 million in
additional borrowings and $26 million in SBA guaranteed loans which are
available for sale and could likely be sold within a 30-day period.
SJNB is primarily a business and professional bank and, as such, its deposit
base is more susceptible to economic fluctuations. Accordingly, management
strives to maintain a balanced position of liquid assets to volatile and
cyclical deposits. In their normal course of business, commercial clients
maintain balances in large certificates of deposit. The stability of these
balances hinges upon, among other factors, market conditions and each business'
seasonality. Large certificates of deposit ($100 or more) amounted to 23% of
total deposits on December 31, 2000 and 22% on December 31, 1999.
Liquidity is also affected by investment securities and loan and lease
maturities and the effect of interest rate fluctuations on the marketability of
both assets and liabilities. The loan and lease portfolio consists primarily of
floating rate, short-term loans. On December 31, 2000, approximately 26% of
total consolidated assets had maturities less than one year and 70% of total
consolidated loans and leases had floating rates tied to the prime rate or
similar indexes. The short-term nature of the loan and lease portfolio, and loan
agreements which generally require monthly interest payments, provide the
Company with an additional secondary source of liquidity.
The Company's liquidity is maintained by cash flows stemming from dividends and
management fees from the Bank and the exercise of stock options issued to the
Bank's employees and directors. The amount of dividends from the Bank is subject
to certain regulatory restrictions as discussed in Note 17 of the Notes to the
Consolidated Financial Statements and elsewhere within this Report. Subject to
said restrictions, at December 31, 2000, up to $16 million could have been paid
to the Company by the Bank without regulatory approval. The Company's
parent-only financial statements are presented in Note 16 of the Notes to
Consolidated Financial Statements. Dividends of $500 and $5.0 million were paid
to the Company by the Bank during 2000 and 1999, respectively.
There are no material commitments for capital expenditures in 2001 or beyond.
EFFECTS OF INFLATION
The most direct effect of inflation on the Company is higher interest rates.
Because a significant portion of the Bank's deposits are represented by
noninterest-bearing demand accounts, changes in interest rates have a direct
impact on the financial results of the Bank. See "Asset/Liability Management."
Another effect of inflation is the upward pressure on the Company's operating
expenses. Inflation did not have a material effect on the Bank's operations in
2000, 1999 or 1998.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest revenue accrual and interest expense that would result from a change in
interest rates. Mismatches in interest rate repricing among assets and
liabilities arise primarily from the interaction of various customer businesses
(i.e., types of loans and leases versus the types of deposits maintained) and
from management's discretionary investment and funds gathering activities. The
Company attempts to manage its exposure to interest rate sensitivity. However,
due to its size and direct competition from the major banks, the Company must
offer products which are competitive in the market place, even if less than
optimum with respect to its interest rate exposure.
The Company's balance sheet position at December 31, 2000 was slightly
asset-sensitive, based upon the significant amount of variable rate loans and
the repricing characteristics of its deposit accounts. This position provides a
hedge against rising interest rates, but has a detrimental effect during times
of interest rate decreases. Net interest revenues are negatively impacted by a
decline in interest rates. The interest rate gap is a measure of interest rate
exposure and is based upon the known repricing dates of certain assets and
liabilities and assumed repricing dates of others. See "Financial Review - Net
Interest Income and Margin."
Commencing in the third quarter of 1999, the Federal Open Market Committee
("FOMC") began a process of increasing interest rates to offset the possible
increase in inflation and to slow down consumer spending. Through July 2000, the
FOMC had increased interest rates 175 basis points. For the year ended December
31, 2000, 1999 and 1998, net interest margins on a fully taxable equivalent
basis were 5.86%, 5.65% and 5.94%, respectively. The effect of possible interest
rate changes is not precisely determinable due to the many factors influencing
the Bank's net interest margin, including repricing of deposits, a change in mix
of the loan, lease and deposit portfolios and other borrowings, changes in
relative volumes, the speed in which fixed rate loans and leases are repriced,
discretionary investment activities and other factors.
On January 3, 2001 and on January 31, 2001, the Federal Open Market Committee
lowered its target for the interbank borrowing rate (the rate banks borrow and
lend to each other) by 50 basis points on each date to 5.5%. This action caused
a decrease in SJNB's prime rate from 9.5% to 8.5%. SJNB's balance sheet
position at December 31, 2000, as discussed above, was slightly asset-sensitive
on a short-term basis, based on the significant amount of variable rate loans at
that date, most of which will have immediate reductions in their interest rates.
Rates paid on deposits generally will not be readjusted downward as quickly.
This position has a short-term detrimental effect during times of interest rate
decreases as net interest revenues are negatively impacted by a decline in
interest rates. Future rate reductions will likely have a similar impact.
The Federal Reserve's rate reductions were made based on a slowing economy and
an attempt to forestall an economic recession. Management believes, however,
that the Bank should be able to achieve loan and deposit growth in 2001 similar
to its historical rates of growth. As a result of the recent rate reductions,
management anticipates the Company's net interest margin in the first quarter of
2001 will be in a range of 5.55% to 5.65% and for the year within a range of
approximately 5.59% to 5.69%. Based upon the Company's currently projected
growth rates and the anticipated range of the net interest margins for the year,
management currently expects the Company's full-year 2001 diluted earnings per
share to be between $2.95 and $3.00. As of the date of the Report, current
analyst expectations have the Company's diluted earnings per share in the range
of $3.04 to $3.05 for the full year.
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the following table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market interest rates. Additionally, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market interest rates. Further, certain earning assets have features, which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The Company considers the anticipated effects of these various
factors when implementing its interest rate risk management activities,
including the utilization of certain interest rate hedges.
See Note 15 to the Consolidated Financial Statements on page 58 of this Report
for a discussion of the methodology and assumptions used in the following table.
INTEREST RATE RISK ANALYSIS
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------December 31,
Average Expected Maturity/Principal Repayment December 31, 1999
Interest Total Fair Fair
Rate 2001 2002 2003 2004 2005 Thereafter Balance Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-Sensitive Assets:
Fed funds sold and money market
investments 6.36% $45,715 ---- ---- ---- ---- ---- $45,715 $45,730 $12,655
Investments:
Fixed maturity 6.24 1,998 $15,395 $18,289 $6,977 $931 $26,110 69,700 69,507 69,708
Mortgage Backed 6.90 12,722 14,284 11,318 6,752 4,380 6,664 56,120 57,567 38,666
Federal Reserve Bank and
Federal Home Loan Bank stock 6.00 ---- ---- ---- ---- ---- 1,732 1,732 1,732 3,212
Loans and leases:
Fixed rate 8.38 26,693 5,612 6,091 6,517 2,811 48,201 95,926 95,724 93,985
Variable rate 11.11 151,095 21,317 13,258 13,165 23,440 94,186 316,461 325,231 273,151
Leasing 9.77 13,120 7,841 9,270 5,977 1,242 ---- 37,451 36,799 20,379
Factoring accounts receivable and
asset based lending 16.94 13,476 ---- ---- ---- ---- ---- 13,476 13,522 9,961
Interest-Sensitive Liabilities:
Deposits:
Interest-bearing demand 3.11 39,270 11,781 11,781 15,707 ---- ---- 78,539 76,597 75,247
Money market 4.55 107,211 35,737 35,739 ---- ---- ---- 178,687 177,790 130,885
Savings 3.00 10 2,729 2,729 1,819 1,820 ---- 9,107 8,628 7,905
Certificates of deposit 5.89 163,102 7,287 5,890 11,637 864 100 188,880 189,519 159,761
Fed funds purchased and
repurchase agreements 7.01 9,645 ---- ---- ---- ---- ---- 9,645 8,753 10,516
Federal Home Loan Bank advances 6.50 11,723 1,494 1,773 1,596 48 3,692 20,326 21,310 23,592
Other borrowings 9.74 ---- ---- ---- ---- ---- 2,068 2,068 2,156 525
Interest-Sensitive Off balance
sheet
items:
Unused lines of credit and
undisbursed loan commitments 11.09 ---- ---- ---- ---- ---- ---- 201,250 ---- ----
TEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following section includes the Company's Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income for the Years Ended December 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SJNB Financial Corp.:
We have audited the accompanying consolidated balance sheets of SJNB Financial
Corp. and subsidiary (the Company) as of December 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SJNB Financial Corp.
and subsidiary as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
San Francisco, California
January 17, 2001
- ---------------------------------------------------------------------------------------------------------------------
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
ASSETS 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Cash and due from banks $20,831 $18,938
Interest-bearing deposits in other banks 599 2,042
Federal funds sold 7,240 7,000
Money market investments 38,475 5,651
Investment securities:
Available for sale (includes securities subject to repurchase agreements
Fair value: $10,024 at December 31, 2000 and $13,147 at December 31, 1999) 110,160 90,878
Held to maturity (Fair value: $18,646 at December 31, 2000
and $20,708 at December 31,1999) 18,627 22,196
- ---------------------------------------------------------------------------------------------------------------------
Total investment securities 128,787 113,074
- ---------------------------------------------------------------------------------------------------------------------
Loans and leases 463,314 403,318
Allowance for loan and lease losses (7,393) (6,412)
- ---------------------------------------------------------------------------------------------------------------------
Loans and leases, net 455,921 396,906
- ---------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 5,444 5,564
Accrued interest receivable 3,968 3,202
Intangibles, net of accumulated amortization of $3,059 at December 31, 2000
and $2,620 at December 31, 1999. 2,952 3,617
Other assets 23,560 12,087
- ---------------------------------------------------------------------------------------------------------------------
Total $687,777 $568,081
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Deposits:
Non interest-bearing $130,130 $94,687
Interest-bearing 455,213 379,046
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 585,343 473,733
- ---------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances 20,326 22,503
Other borrowings 11,713 11,022
Accrued interest payable 2,412 1,720
Other liabilities 4,400 5,884
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 624,194 514,862
- ---------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock, no par value, 5,000 shares authorized;
none issued or outstanding in 2000 or 1999. ---- ----
Common stock, no par value; 20,000 shares authorized ;
3,747 and 3,593 shares issued and outstanding
in 2000 and 1999 respectively. 22,845 20,769
Retained earnings 40,221 33,942
Accumulated other comprehensive income (losses) 517 (1,492)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 63,583 53,219
- ---------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- ---------------------------------------------------------------------------------------------------------------------
Total $687,777 $568,081
=====================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
- ------------------------------------------------------------------------------------------------------------------------------
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans and leases $44,942 $35,826 $31,252
Interest on money market investments 2,358 1,536 1,750
Interest on time deposits 73 107 169
Interest and dividends on investment securities available for sale 6,820 4,638 4,753
Interest and dividends on investment securities held to maturity 1,073 1,200 1,165
Other interest and investment income (expense) 10 (50) (9)
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 55,276 43,257 39,080
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits:
Interest-bearing demand 2,244 2,189 2,158
Money market and savings 6,481 3,938 3,931
Certificates of deposit of $100 or more 7,490 4,992 4,073
Certificates of deposit of less than $100 3,237 2,627 1,604
Federal Home Loan Bank advances 1,331 1,361 1,398
Other borrowings 867 585 313
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 21,650 15,692 13,477
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 33,626 27,565 25,603
- ------------------------------------------------------------------------------------------------------------------------------
Provision for loan and lease losses 725 862 436
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES 32,901 26,703 25,167
- ------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposits 1,067 1,044 950
Other operating income 599 737 724
Increase in cash surrender value of life insurance 542 218 ----
Net (loss) gain on sale of securities available for sale (602) (133) 150
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 1,606 1,866 1,824
- ------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and benefits 9,642 9,180 8,048
Occupancy 1,504 1,454 1,310
Merger related costs, nonrecurring 3,424 487 ----
Other 5,786 5,430 5,104
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSES 20,356 16,551 14,462
- ------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 14,151 12,018 12,529
Income taxes 5,527 4,901 5,040
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $8,624 $7,117 $7,489
==============================================================================================================================
BASIC EARNINGS PER SHARE $2.35 $2.04 $2.06
==============================================================================================================================
DILUTED EARNINGS PER SHARE $2.24 $1.91 $1.92
==============================================================================================================================
Average common shares outstanding 3,665 3,491 3,635
==============================================================================================================================
Average common share equivalents outstanding 3,854 3,722 3,902
==============================================================================================================================
<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, 2000, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Other Share-
Common Retained Comprehensive holders'
(in thousands, except per share amounts) Shares Stock Earnings Income (Losses) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 3,640 $23,505 $23,353 $(94) $46,764
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year ---- ---- 7,489 ---- 7,489
Change in net unrealized gain/loss on securities:
Unrealized gains arising during the year, net of taxes ---- ---- ---- 329 329
Reclassification adjustment for losses included in
income, net of taxes ---- ---- ---- 47 47
---------------
Comprehensive income 7,865
---------------
Stock options exercised 41 572 ---- ---- 572
Common stock repurchase (103) (3,562) (180) ---- (3,742)
Issuance of common stock for Epic Funding Corp. 12 501 ---- ---- 501
Tax benefit from stock options exercised ---- 445 ---- ---- 445
Cash dividends ($0.56 per share) ---- ---- (1,666) ---- (1,666)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 3,590 21,461 28,996 282 50,739
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year ---- ---- 7,117 ---- 7,117
Other comprehensive income-Unrealized loss
on securities held for sale, net ---- ---- ---- (1,774) (1,774)
---------------
Comprehensive income 5,343
---------------
Common stock issued 60 1,800 ---- ---- 1,800
Stock options exercised 93 849 ---- ---- 849
Common stock repurchase (150) (3,389) (522) ---- (3,911)
Tax benefit from stock options exercised ---- 48 ---- ---- 48
Cash dividends ($0.56 per share) ---- ---- (1,649) ---- (1,649)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1999 3,593 20,769 33,942 (1,492) 53,219
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for the year ---- ---- 8,624 ---- 8,624
Other comprehensive income-Unrealized gain
on securities held for sale, net ---- ---- ---- 2,009 2,009
---------------
Comprehensive income 10,633
---------------
Stock options exercised 154 1,557 ---- ---- 1,557
Tax benefit from stock options exercised ---- 519 ---- ---- 519
Cash dividends ($0.64 per share) ---- ---- (2,345) ---- (2,345)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2000 3,747 $22,845 $40,221 $517 $63,583
====================================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
- ----------------------------------------------------------------------------------------------------------------------------------
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $8,624 $7,117 $7,489
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 725 862 436
Depreciation and amortization 844 1,279 790
Amortization of intangibles 439 456 457
Deferred tax benefit 1,199 361 57
Loss (gain) on sale of securities available for sale 602 133 (150)
Net gain (loss) on sale of leased assets ----- 35 (12)
Amortization of (discount) premium on investment securities, net (185) 10 (49)
Decrease (increase) in intangible assets 226 (45) (50)
Increase in accrued interest receivable and other assets (5,304) (3,561) (393)
(Decrease) increase in accrued interest payable and other liabilities (618) (24) 1,702
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 6,552 6,623 10,277
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale or maturities of securities available for sale 38,636 23,423 58,974
Maturities of securities held to maturity 3,757 6,725 11,355
Purchase of securities available for sale (54,926) (53,991) (40,071)
Purchase of securities to be held to maturity (150) (5,868) (6,703)
Net increase in loans and leases (59,898) (64,996) (43,070)
Capital expenditures (723) (3,381) (908)
Purchase of life insurance policies (9,070) ----- (3,953)
Cash used to acquire Epic Funding Corp. ----- ----- (206)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (82,374) (98,088) (24,582)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Net increase in deposits 111,610 67,867 44,466
Decrease in Federal Home Loan Bank borrowings (2,177) (169) (287)
Increase (decrease) in other borrowings 691 3,997 (11,000)
Cash dividends (2,345) (1,649) (1,666)
Common stock repurchased ----- (3,911) (3,742)
Common stock issued ----- 1,800 -----
Proceeds from stock options exercised 1,557 849 572
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 109,336 68,784 28,343
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 33,514 (22,681) 14,038
Cash and equivalents at beginning of year 33,631 56,312 42,274
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $67,145 $33,631 $56,312
==================================================================================================================================
Other cash flow information:
Interest paid $20,958 $15,268 $13,450
Income taxes paid 5,832 5,544 4,016
==================================================================================================================================
Noncash transactions:
Purchase of Epic Funding Corp.:
Leases ----- ----- $149
Other assets ----- ----- 789
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets acquired ----- ----- 938
Cash paid and expenses incurred ----- ----- (206)
Liabilities assumed:
Other liabilities ----- ----- 231
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities assumed ----- ----- 231
- ----------------------------------------------------------------------------------------------------------------------------------
Common stock issued, net of registration costs ----- ----- $501
==================================================================================================================================
<FN>
See accompanying Notes to Consolidated Financial Statements.
</FN>
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SJNB Financial Corp. ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California on April 18, 1983. Its principal office is
located at One North Market Street, San Jose, California, 95113.
The Company owns 100% of the issued and outstanding common shares of San Jose
National Bank (referred to herein as "SJNB" or "the Bank"). The Bank was
incorporated on November 23, 1981 and commenced business in San Jose, California
on June 10, 1982. Its main office is located at One North Market Street, San
Jose, California, 95113. SJNB engages in the general commercial banking business
with special emphasis on the banking needs of the business and professional
communities in San Jose and the surrounding areas. The Financial Services
Division is located at 95 South Market, San Jose, California, 95113, where it
engages in the factoring of accounts receivable. The Bank's wholly-owned
subsidiary, Epic Funding Corp. is located in Danville, California where it
shares an office with the Bank's Danville branch. Epic Funding Corp. is
primarily in the business of originating equipment lease financing throughout
the United States, but primarily in the State of California.
Dollars and share amounts are in thousands in these footnotes, except per share
amounts or as otherwise noted.
The accounting policies of SJNB Financial Corp. and San Jose National Bank
(collectively, the "Company") are in accordance with generally accepted
accounting principles and conform to general practices within the banking
industry.
a. Consolidation
The consolidated financial statements include the accounts of SJNB. All material
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
b. Investment Securities
The Company accounts for its investment securities as follows:
AVAILABLE FOR SALE-Investment securities that are acquired without the intent to
hold until maturity are classified as available for sale. Such securities are
carried at market value. Market value adjustments are reported as a separate
component of other comprehensive income included in shareholders' equity until
realized.
HELD TO MATURITY-Investment securities purchased with the intent and ability to
hold them until maturity are classified as held to maturity. Such securities are
carried at cost, adjusted for accretion of discounts and amortization of
premiums.
Investment securities purchased are recorded as of their trade date. Accretion
of discounts and amortization of premiums arising at acquisition are included in
income using methods approximating the interest method. Gains or losses on sales
of securities, if any, are determined based on the specific identification
method. The carrying values of individual investment securities are reduced, if
necessary, through write-downs to reflect other than temporary impairments in
value.
In connection with the Company's adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as described in note 1(f) below
the Company elected to reclassify all of its "Held to maturity" investments to
"available for sale" as of January 1, 2001. The impact of this will be to
account for the unrealized gain or loss in the held to maturity securities as an
additional component of other comprehensive income included in shareholders'
equity until realized. The amount of the net unrealized gain in the held to
maturity classification was $19 as of December 31, 2000.
c. Loans and Leases and Allowance for Loan and Lease Losses
Loans and leases generally are stated at the principal amount outstanding.
Interest on loans is credited to income on a simple interest basis. Unearned
revenue on direct financing leases is accreted over the lives of the leases in
decreasing amounts to provide a constant rate of return on the net investment in
the leases. Loan origination fees and direct origination costs, including
initial direct cost of lease origination are deferred and amortized to income by
a method approximating the level yield method over the estimated lives of the
underlying loans. The accrual of interest on loans and leases is discontinued
and any accrued and unpaid interest is reversed when, in the opinion of
management, there is significant doubt as to the collectibility of interest or
principal or when the payment of principal or interest is ninety days past due,
unless the loan is well-secured and in the process of collection.
The allowance for loan and lease losses is a valuation allowance maintained to
provide for future loan losses through charges to current operating expense. The
allowance is based upon a continuing review of loans and leases by management
which includes consideration of changes in the character of the loan and lease
portfolio, current and anticipated economic conditions, past lending experience
and such other factors which, in management's judgment, deserve recognition in
estimating potential loan losses. In addition, regulatory examiners may require
the Company to recognize additions to the allowance based on their judgments
about information available to them at the time of their examinations.
Impaired loans are those in which, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan or lease agreement, including scheduled
interest payments. The Company measures such loans and leases based on the
present value of future cash flows discounted at the loan's or lease's effective
interest rate, or at the loan's or lease's market value or the fair value of the
collateral if the loan is secured. If the measurement of the impaired loan or
lease is less than the recorded investment, impairment is recognized by creating
or adjusting an existing allocation of the allowance for loan and lease losses.
d. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are charged to expense over the
estimated useful lives of the assets on a straight-line basis as follows:
Buildings 30 years
Furniture and equipment 3-10 years
Improvements 7-15 years
e. Intangibles
Goodwill is amortized using the straight-line method over 15 years. Core deposit
intangibles are amortized using an accelerated method over ten years.
On a periodic basis, the Company reviews its intangible assets for events or
changes in circumstances that may indicate that the carrying amount of the
assets may not be recoverable. Should such a change indicate that the value of
such intangibles may be impaired, an evaluation of the recoverability would be
performed, using undiscounted cash flows, prior to any writedown of the assets.
f. Derivative Instruments and Hedging Activities
Interest rate instruments are entered into in conjunction with the Bank's
asset/liability management. As these contracts are entered into only after
meeting the accounting criteria for a hedge, and as long as they continue to
meet such criteria, changes in market value are deferred and the net settlements
are accrued as adjustments to interest income. The Bank currently has
outstanding a callable interest rate swap for $10 million it issued
simultaneously with a $10 million ten-year callable synthetic floating rate
certificate of deposit and a three-year $20 million prime/fixed interest rate
swap, which are accounted for as hedges.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of Effective Date". In June 2000, the FASB issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", an amendment of SFAS No. 133. SFAS No. 138 addresses a limited
number of issues causing implementation difficulties for entities which are
required to apply SFAS No. 133. SFAS No. 137 deferred the effective date to the
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
adopted SFAS No. 133, as amended on January 1, 2001 and there was no effect. As
noted above the Bank currently has outstanding $30 million in derivative
instruments as defined by SFAS No. 133. These derivative instruments will
qualify as cash flow or fair market hedges in accordance with the Statement.
g. Income Taxes
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences of differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Under the asset and liability method, deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit
carryforwards, and then a valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized.
h. Stock-based Compensation
The Company continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company only grants stock
options at fair market value. SFAS No. 123, "Accounting for Stock-Based
Compensation," established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. The Company has elected to remain on its current method of accounting as
described above, and has adopted the disclosure requirements of SFAS No. 123.
i. Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the year plus shares
issuable assuming exercise of all employee stock options, except where
anti-dilutive.
j. Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes new rules for the reporting and display
of comprehensive income and its components. Comprehensive income is a part of an
enterprises financial performance and, as described in SFAS No. 130, includes
net income and other comprehensive income such as revenues, expenses, gains and
losses not included in net income. The adoption of this statement had no impact
on net income or shareholders' equity. SFAS No. 130 requires the Company's net
unrealized gains or losses on available-for-sale securities to be included in
other comprehensive income. Comprehensive income is included in the statement of
shareholders' equity for the periods presented.
k. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, fed funds sold and money market investments.
l. Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent asset and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
m. Impairment of Long-lived Assets
Long-lived assets and certain identifiable intangibles held and used by an
entity are reviewed for impairment whenever events or changes indicate that the
carrying amount of an asset may not be recoverable. The Company has not
identified any long-lived assets or identifiable intangibles which were
impaired.
n. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under this approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it no
longer controls and liabilities that have been extinguished. SFAS No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", was issued in September 2000 and replaces the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. The Company did not have any
significant transactions in which these Statements had any impact on its
consolidated financial statements.
o. Segments of an Enterprise and Related Information
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information", requires certain information about the operating segments of the
Company. The objective of requiring disclosures about segments of an enterprise
and related information is to provide information about the different types of
business activities in which an enterprise engages and the different economic
environments in which it operates to help users of financial statements better
understand its performance, better assess its prospects for future cash flows
and make more informed judgments about the enterprise as a whole. The Company
has determined it has three segments: general commercial banking, leases, and
factoring/asset based financing. Neither leasing nor factoring/asset based
financing meet the required thresholds for disagregation and therefore the
disclosures and related information about such segments has not been included in
the consolidated financial statements. At such time that these segments meet the
required thresholds, such disclosures and other information will be included.
p. Reclassification
Certain 1999 and 1998 amounts have been reclassified to conform to the 2000
presentation.
NOTE 2 - ACQUISITIONS
On January 5, 2000, the Company acquired all of the outstanding shares of common
stock of Saratoga Bancorp, the parent company of Saratoga National Bank,
pursuant to an exchange of the Company's common stock for all common stock of
Saratoga Bancorp. Saratoga National Bank, headquartered in Saratoga, California,
operated three branches and as of the acquisition date had $142 million
(unaudited) in assets and $103 million (unaudited) in deposits. Saratoga's San
Jose office, which was located near SJNB's San Jose office, was consolidated
into SJNB's San Jose office in January 2000. The shareholders of Saratoga
received 0.70 shares of the Company's common stock for each outstanding share of
Saratoga common stock. Based on the closing price of the Company's stock on
January 5, 2000 of $29.125, the transaction was valued at approximately $34.2
million, excluding the value of any unexercised options, and each Saratoga
shareholder received SJNB common stock valued at $20.39 per share for each share
of Saratoga common stock. The merger has been accounted for as a pooling of
interests.
On May 22, 1998, SJNB acquired all of the stock of a private company, Epic
Funding Corporation (Epic), pursuant to a definitive agreement dated April 13,
1998. In connection with the acquisition, which was structured as a tax-free
reorganization and accounted for as a purchase transaction for accounting
purposes, SJNB issued 12.2 shares of its common stock and paid $110 to Epic's
sole shareholder in exchange for all of Epic's outstanding stock. The total
purchase price was $611, while Epic's fair value of net assets was $28; goodwill
amounted to $759 including certain expenses of the transaction. Epic provides
direct and vendor lease programs to manufacturers and equipment users throughout
California and across parts of the United States. Epic is a wholly owned
subsidiary of the Bank. Epic's office is located in Danville, California,
together with a small de novo branch of the Bank at the same facility which
opened July 1, 1998.
NOTE 3 - CASH AND DUE FROM BANKS
The Federal Reserve requires the Bank to maintain average reserve balances for
certain deposit balances. Required reserves at December 31, 2000 were $746 and
there were no required reserves in 1999.
NOTE 4 - INVESTMENT SECURITIES
Investment securities as of December 31, 2000 and 1999 are summarized as
follows:
(DOLLARS IN THOUSANDS) DECEMBER 31, 2000
- ----------------------------------------------------------------------------------------------------
UNREALIZED FAIR
--------------------------
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
U.S. Treasury $1,496 $31 ----- $1,527
U. S. Government Agencies 33,444 295 $(90) 33,649
Mortgage Backed 56,120 1,567 (120) 57,567
State and municipal 5,208 109 (4) 5,313
Trust preferred 9,050 32 (607) 8,475
Asset-backed 3,607 29 (7) 3,629
- ----------------------------------------------------------------------------------------------------
TOTAL AVAILABLE FOR SALE 108,925 2,063 (828) 110,160
- ----------------------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Government agencies 500 1 ----- 501
State and municipal (nontaxable) 16,395 159 (141) 16,413
- ----------------------------------------------------------------------------------------------------
TOTAL HELD TO MATURITY 16,895 160 (141) 16,914
- ----------------------------------------------------------------------------------------------------
Federal Reserve Bank/Federal Home Loan Bank Stock 1,732 ----- ----- 1,732
- ----------------------------------------------------------------------------------------------------
TOTAL 18,627 160 (141) 18,646
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES PORTFOLIO $127,552 $2,223 $(969) $128,806
====================================================================================================
DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------
UNREALIZED FAIR
--------------------------
COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
AVAILABLE FOR SALE:
U.S. Treasury $2,496 $3 ----- $2,499
U. S. Government Agencies 37,337 8 $(732) 36,613
Mortgage Backed 38,560 ----- (564) 37,996
Asset-backed 2,000 ----- (22) 1,978
Trust Preferred 7,062 ----- (479) 6,583
Mutual funds 5,646 ----- (437) 5,209
- ----------------------------------------------------------------------------------------------------
TOTAL AVAILABLE FOR SALE 93,101 11 (2,234) 90,878
- ----------------------------------------------------------------------------------------------------
HELD TO MATURITY:
U.S. Government agencies 499 3 ----- 502
State and municipal (nontaxable) 17,828 8 (1,512) 16,324
Mortgage Backed 657 13 ----- 670
- ----------------------------------------------------------------------------------------------------
TOTAL HELD TO MATURITY 18,984 24 (1,512) 17,496
- ----------------------------------------------------------------------------------------------------
Federal Reserve Bank/Federal Home Loan Bank Stock 3,212 ----- ----- 3,212
- ----------------------------------------------------------------------------------------------------
TOTAL 22,196 24 (1,512) 20,708
- ----------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES PORTFOLIO $115,297 $35 $(3,746) $111,586
====================================================================================================
As of December 31, 2000 and 1999 investment securities with carrying values of
approximately $54.9 million and $36.9 million, respectively, were pledged as
collateral for deposits of public funds and other purposes. Investments in the
Federal Reserve Bank and Federal Home Loan Bank stock is carried at cost, which
is approximately equal to their market value.
Mutual funds consist of several funds invested in U. S. Government
securities and government issued adjustable rate mortgages (ARMS).
The following tables provide the scheduled maturities of the Company's
investment securities portfolio as of December 31, 2000:
MATURITY OF INVESTMENT SECURITIES PORTFOLIO
(dollars in thousands)
AMORTIZED FAIR
SECURITIES AVAILABLE FOR SALE COST VALUE
-----------------------------
Due in one year or less $1,998 $2,029
Due after one year through five years 42,050 42,928
Due after five years through ten years 18,090 18,204
Due after ten years 46,787 46,999
-----------------------------
TOTAL 108,925 110,160
-----------------------------
SECURITIES HELD TO MATURITY
Due in one year or less 915 918
Due after one year through five years 2,067 2,092
Due after five years through ten years 1,483 1,498
Due after ten years 12,430 12,406
-----------------------------
TOTAL 16,895 16,914
-----------------------------
NON-MATURITY INVESTMENTS
Held to maturity - FRB/FHLB Stock 1,732 1,732
-----------------------------
TOTAL 1,732 1,732
-----------------------------
TOTAL INVESTMENT SECURITIES $127,553 $128,806
=============================
Interest and dividend income earned on investment securities for the years ended
December 31, 2000, 1999 and 1998 are as follows:
INTEREST AND DIVIDEND INCOME
INTEREST AND DIVIDEND INCOME
(dollars in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury $99 $146 $378
U.S. Government agencies 2,147 2,964 3,736
State and municipal (nontaxable) 29 ---- ----
State and municipal (taxable) 115 ---- ----
Mortgage Backed 3,257 851 301
Asset-backed 376 72 ----
Trust preferred 645 300 ----
Mutual funds 152 305 338
Securities held to maturity:
U.S. Treasury ---- 78 97
U.S. Government agencies 34 116 260
State and municipal (nontaxable) 849 757 518
Mortgage Backed 26 89 146
Federal Reserve Bank/Federal Home Loan Bank Stock 164 160 144
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME $7,893 $5,838 $5,918
=================================================================================================================================
NOTE 5 - LOANS
A summary of loans as of December 31, 2000, 1999 and 1998 is as follows:
(dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial and other $140,108 $123,873 $110,604
SBA 53,371 49,949 37,019
Leasing 37,450 20,837 5,618
Factoring and asset-based 13,476 9,901 7,393
Real estate construction 54,667 48,410 51,963
Real estate term 147,110 139,103 113,461
Consumer 18,262 12,448 10,839
Unearned fee income (1,130) (1,203) (954)
- --------------------------------------------------------------------------------------------------------------------------------
Total loan and lease portfolio 463,314 403,318 335,943
Less allowance for loan or lease losses (7,393) (6,412) (5,494)
- --------------------------------------------------------------------------------------------------------------------------------
LOANS AND LEASES, NET $455,921 $396,906 $330,449
====================================================================================================================================
Concentrations of credit risk arise when a number of customers are engaged in
similar business activities, or activities in the same geographic region, or
have similar features that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic conditions. Although
the Company has a diversified loan and lease portfolio, a substantial portion of
its customers' ability to honor contracts is reliant upon the economic stability
of the Santa Clara Valley, which in some degree relies on the stability of high
technology companies in its "Silicon Valley." Loans and leases are generally
made on the basis of a secure repayment source, which is based on a detailed
cash flow analysis; however, collateral is generally a secondary source for loan
qualification.
Approximately 32% of the Company's loan and lease portfolio is made up of real
estate term loans. This category of real estate loans includes loans on
income-bearing or owner-occupied commercial properties and land loans. In
addition, approximately 12% of the loan and lease portfolio is made up of real
estate construction loans. These loans consist of approximately 30% residential
and 70% commercial. Included in consumer loans are prime equity loans of $8.1
million or representing approximately 1.7% of the total loan portfolio. Included
in the commercial category are mortgage warehouse loans, loans to real estate
developers for short-term investment purposes and loans to nondevelopers for
real estate investment purposes that amount to approximately 9% of the total
loan portfolio. Included in the SBA category are real estate piggy back loans
that amount to approximately 2% of the total loan portfolio. In the aggregate,
approximately 55% of the loan portfolio is directly related to real estate or
real estate interests. Approximately 30% of the total loan portfolio is
commercial loans; however, no particular industry represents a significant
portion of such loans.
The following is an analysis of the allowance for loan and lease losses for the
years ended December 31, 2000, 1999 and 1998:
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $6,412 $5,494 $5,071
Provision for loan or lease losses 725 861 436
Charge-offs (411) (165) (299)
Recoveries 667 222 286
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $7,393 $6,412 $5,494
================================================================================================================================
At December 31, 2000 and 1999, impaired loans totaled $421 and $1.4 million with
a corresponding valuation allowance of $284 and $224, respectively. For the
years ended December 31, 2000 and 1999, the average recorded investment in
impaired loans was approximately $828 and $475, respectively. The Company
recognized $72, $41 and $60 of interest on impaired loans (during the portion of
the year they were impaired), of which $72, $40 and $8 related to impaired loans
for which interest income is recognized on the cash basis, for the years ended
December 31, 2000, 1999 and 1998, respectively.
The balance of nonaccrual loans as of December 31, 2000 and 1999 was
approximately $421 and $1.4 million, respectively. The effect on interest income
had these loans been performing in accordance with contractual terms was $62 in
2000, $132 in 1999, and $22 in 1998. Income actually recognized on these loans
was $16 in 2000, $112 in 1999 and $21 in 1998.
The Company has made loans to executive officers, directors and their affiliates
in the ordinary course of business. An analysis of activity with respect to such
loans during the years ended December 31, 2000, 1999 and 1998 is as follows:
(dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $2,741 $1,749 $1,223
New loans disbursed 21 2,717 1,340
Repayments of loans (2,189) (1,725) (814)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $573 $2,741 $1,749
======================================================================================================================
As of December 31, 2000, loans of approximately $12 million were pledged as
collateral for the Federal Reserve Discount Window.
NOTE 6 - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 2000 and 1999 is as
follows:
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Land $1,777 $1,777
Buildings and improvements 4,138 4,351
Furniture and equipment 2,623 3,447
- --------------------------------------------------------------------------------
Premises and equipment 8,538 9,575
Less accumulated depreciation and amortization (3,094) (4,011)
- --------------------------------------------------------------------------------
PREMISES AND EQUIPMENT, NET $5,444 $5,564
================================================================================
NOTE 7 - TIME DEPOSITS
As of December 31, 2000 and 1999, the Bank had $135 million and $105 million,
respectively, in time deposits in denominations of $100 or more. Interest
expense for these deposits was $7.5 million and $5.0 million in 2000 and 1999,
respectively. Time deposits in denominations of $100 or more which mature in
greater than one year were $8.8 million as of December 31, 2000.
On December 4, 1998 the Bank raised $10 million through the placement of a
ten-year synthetic floating rate certificate of deposit. The instrument consists
of two linked transactions, a callable interest rate swap and callable fixed
rate certificate of deposit. Under the swap agreement the Bank pays LIBOR plus
five basis points and receives 6% for a period of ten years. The swap is
callable after one year by the issuer. Simultaneously, the Bank issued a
callable 6% fixed rate 10-year certificate of deposit. The certificate of
deposit does not have any early redemption clauses, other then by death of the
holder. Effectively, the Bank's rate of interest on the combined transaction is
LIBOR plus five basis points.
NOTE 8 - BORROWINGS
Federal funds purchased and securities sold under agreements to repurchase and
information relating to these borrowings are summarized below as of and for the
years ended December 31:
(dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
FEDERAL FUNDS PURCHASED
Balance at December 31, ----- $500 $5,000
Weighted average interest rate at year end ----- 5.50% 5.50%
Maximum amount outstanding at any month end $9,000 $22,000 $5,000
Average outstanding balance $577 $1,801 $380
Weighted average interest rate paid 7.00% 5.54% 6.40%
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Balance at December 31, $9,645 $10,497 -----
Weighted average interest rate at year end 7.01% 5.80% -----
Maximum amount outstanding at any month end $10,497 $15,559 $12,000
Average outstanding balance $10,017 $7,421 $3,762
Weighted average interest rate paid 6.65% 5.61% 5.59%
Any securities used under securities sold under agreements to repurchase are
under the control of the Bank. Securities subject to the agreement to repurchase
represent securities held by the Bank in its securities available for sale
portfolio with a total amortized cost of $9.9 million and a market value of
$10.0 million as of December 31, 2000.
The Company's bank subsidiary has informal arrangements with various
correspondents providing short-term credit for liquidity requirements; such
informal lines aggregated $22 million at December 31, 2000.
The Company had borrowings from the Federal Home Loan Bank bearing interest
ranging from 5.67% to 7.59% as of December 31, 2000 and 5.82% to 6.74% as of
December 31, 1999. The borrowings are secured by U. S. Government Agency
securities and are due as follows as of December 31, 2000 and 1999:
Year 2000 1999
- ------------------ --------------------- ---------------------
- ------------------ --------------------- ---------------------
2001 $9,076 $9,096
2002 723 735
2003 2,616 2,639
2005 6,892 6,933
2010 246 274
2011 773 826
- ------------------ --------------------- ---------------------
- ------------------ --------------------- ---------------------
Total $20,326 $20,503
================== ===================== =====================
NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is as follows for the years ended
December 31, 2000, 1999, and 1998:
2000 1999 1998
- --------------------------------------------------------------------------------- ----------------- -----------------
Realized (losses) gains on securities available for sale, net $(602) $(133) $150
Unrealized appreciation (loss) of securities held for sale, net 2,611 (1,641) 226
- --------------------------------------------------------------------------------- ----------------- -----------------
OTHER COMPREHENSIVE INCOME (LOSS) $2,009 $(1,774) $376
================================================================================= ================= =================
NOTE 10 - EARNINGS PER SHARE
The reconciliation of the numerators and denominators of the basic and diluted
earnings per share (EPS) computations are as follows:
(in thousands, Net PER SHARE
except per share amounts) Income Shares AMOUNTS
- ----------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000
Net income and basic EPS $8,624 3,665 $2.35
=======================
Effect of stock option dilutive shares 189
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $8,624 3,854 $2.24
==================================================================================================================================
For the year ended December 31, 1999
Net income and basic EPS $7,117 3,491 $2.04
=======================
Effect of stock option dilutive shares 231
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $7,117 3,722 $1.91
==================================================================================================================================
For the year ended December 31, 1998
Net income and basic EPS $7,489 3,635 $2.06
=======================
Effect of stock option dilutive shares 267
- ------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $7,489 3,902 $1.92
==================================================================================================================================
NOTE 11 - INCOME TAXES
Income tax expense for the years ended December 31, 2000, 1999 and 1998 consists
of the following:
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Current:
Federal $5,065 $3,980 $3,899
State 1,661 1,282 1,198
- --------------------------------------------------------------------------------------------------------------------
Total current 6,726 5,262 5,097
- --------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (910) (266) (48)
State (289) (95) (9)
- --------------------------------------------------------------------------------------------------------------------
Total deferred (1,199) (361) (57)
- --------------------------------------------------------------------------------------------------------------------
Income taxes $5,527 $4,901 $5,040
====================================================================================================================
Total income tax expense differed from the amount computed by applying the U.S.
federal income tax rate of 34% in the years ended December 31, 2000, 1999 and
1998 to income before income taxes as a result of the following:
(dollars in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Computed "expected " tax expense $4,811 $4,085 $4,259
California franchise tax, net of federal income tax 905 783 785
Amortization of intangible assets 130 136 136
Federal tax-exempt investment income (266) (239) (151)
Other (53) 136 11
- ---------------------------------------------------------------------------------------------------------------------
Income taxes $5,527 $4,901 $5,040
=====================================================================================================================
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999, are presented below:
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets:
Provision for loan or lease losses $2,414 $2,193
Purchase accounting adjustments 65 95
Foreclosure income 43 43
State taxes 527 426
Deferred compensation 1,275 353
Securities available for sale ---- 936
- --------------------------------------------------------------------------------
Total gross deferred tax assets 4,324 4,046
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization 32 43
Leases 2 2
Securities available for sale 345 ----
Other 152 126
- --------------------------------------------------------------------------------
TOTAL GROSS DEFERRED TAX LIABILITIES 531 171
- --------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $3,793 $3,875
================================================================================
Amounts for the current year are based upon estimates and assumptions as of the
date of this report and could vary significantly from amounts shown on the tax
returns as filed. Accordingly, the variances from the amounts previously
reported for 1999 are primarily as a result of adjustments to conform to tax
returns as filed.
Deferred tax assets related to purchase accounting adjustments include the tax
effect of fair market value adjustments of the assets and liabilities of
businesses acquired. The Company believes that the net deferred tax asset is
realizable through sufficient taxable income within the carryback periods and
the current year's taxable income.
NOTE 12 - DETAIL OF OTHER EXPENSE
Other expense for the years ended December 31, 2000, 1999 and 1998 consists of
the following:
(dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------
Data processing $747 $676 $741
Directors and shareholders 660 673 469
Legal and professional fees 641 701 520
Client services 613 585 495
Amortization of core deposit intangibles and goodwill 439 455 457
Net cost of other real estate owned ---- (47) 7
Other 2,686 2,387 2,415
- ----------------------------------------------------------------------------------------------------------
TOTAL $5,786 $5,430 $5,104
==========================================================================================================
NOTE 13 - STOCK OPTION PLAN
During 1996, the shareholders of the Company approved the 1996 Stock Option Plan
(the "Plan"), which replaced two then existing stock option plans. The 1996
Stock Option Plan is described below. In accordance with APB 15, no compensation
cost has been recognized for the Plan. Had compensation cost for the Plan been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been adjusted to the pro forma amounts for options granted
for the years 2000, 1999 and 1998 indicated below:
(dollars in thousands, except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME:
As reported $8,624 $7,117 $7,489
Pro forma 7,841 6,261 6,432
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
Basic, as reported $2.35 $2.04 $2.06
Basic, pro forma 2.14 1.79 1.77
- --------------------------------------------------------------------------------------------------------------------------------
Diluted, as reported $2.24 $1.91 $1.92
Diluted, pro forma 2.03 1.68 1.65
The above amounts include the impact on net income and net income per share for
options granted during the years 1995 through 2000; such amounts would have been
substantially different if options granted prior to 1995 had been included in
the computation.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the following years:
ASSUMPTIONS: 2000 1999 1998
- ---------------------------------------------------------------------------- ---------------------- ----------------------
Dividend yield 2.2% 2.0% 1.8%
Volatility 31.2% 46.7% 50.0%
Risk free interest rate 6.2% 5.4% 5.0%
Expected lives (years) 4.9 7.2 6.4
The 1996 Stock Option Plan provides that either incentive stock options or
nonstatutory stock options may be granted to certain key employees or directors
to purchase authorized, but unissued, Common Stock of the Company. Shares may be
purchased at a price not less than the fair market value of such stock on the
date of the grant. Generally, stock options become exercisable 40% one year
after the date of grant and 20% in each of the following three years. They
expire no later than ten years after the date of the grant. The Plan provides
that outside directors will automatically receive a nonstatutory option covering
five thousand shares annually at an exercise price equal to 100% of the market
price of the Common Stock on the date of grant. The 1996 Stock Option Plan
replaced the previous two plans which had similar provisions. If options granted
under the prior plans expire without being exercised, the corresponding common
shares shall become available for awards under the Plan. During 2000, no shares
became available under this provision. The number of shares available for future
grants of options under the 1996 Stock Option Plan was 169 as of December 31,
2000.
Activity under the stock plans is as follows:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
OPTIONS SHARES PRICE
- --------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 527,157 $12.03
Granted 428,950 30.09
Cancelled (198,230) 35.25
Exercised (41,233) 13.87
- --------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 716,644 16.31
Granted 158,170 27.93
Cancelled (32,632) 25.51
Exercised (90,965) 9.34
- --------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1999 751,217 19.21
- --------------------------------------------------------------------------------
Granted 93,186 30.17
Cancelled (26,258) 26.25
Exercised (155,978) 10.12
- --------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 2000 662,167 $22.62
================================================================================
The weighted-average fair value of options granted during 2000, 1999 and 1998
was $9.05, $12.34 and $12.30, respectively.
The following table summarizes options outstanding and exercisable at December
31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF REMAINING EXERCISE AS OF EXERCISE
PRICES DECEMBER 31, 2000 LIFE PRICE DECEMBER 31, 2000 PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
$5.38-$6.43 66,650 3.14 $5.94 66,650 $5.94
6.90- 9.31 8,810 3.86 7.68 8,810 7.68
11.50-14.31 49,010 4.63 9.56 49,010 9.56
16.38-19.94 59,920 5.51 16.98 59,120 16.94
22.69-24.88 36,542 7.28 22.95 34,408 22.91
25.00-26.56 66,250 6.64 25.38 46,500 25.22
26.69-26.69 156,360 7.81 26.69 91,648 26.69
27.19-27.50 49,452 8.26 27.33 19,420 27.33
27.63-27.63 55,400 8.19 27.63 22,160 27.63
27.79-36.06 113,773 9.36 30.32 9,668 30.56
- ------------------------------------------------------------------------------------------------------------------------------------
$5.38-$36.06 662,167 7.03 $22.62 407,394 $19.10
====================================================================================================================================
Options exercisable as of December 31, 1999 were 354,851 and had a weighted
average exercise price of $11.70. Options exercisable as of December 31, 1998
were 370,025 and had a weighted average exercise price of $9.38.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding commitments, such as
commitments to extend credit, which are not reflected in the consolidated
financial statements. These commitments involve, to varying degrees, credit risk
in excess of the amount recognized as either an asset or liability in the
consolidated balance sheet. The Company controls the credit risk through its
credit approval process. The same credit policies are used when entering into
such commitments. Management does not anticipate any loss from such commitments.
Amounts committed to extend credit under normal lending agreements aggregated
approximately $201 million and $164 million for undisbursed variable loan
commitments and approximately $13 million and $5.6 million for commitments under
unused standby letters of credit and other guarantees at December 31, 2000 and
1999, respectively.
The Bank utilizes various financial instruments with off balance sheet risk to
reduce its exposure to fluctuations in interest rates. These financial
instruments involve, to varying degrees, credit and interest rate risk in excess
of the amount recognized as either an asset or liability in the statement of
financial position.
The credit risk is the possibility that a loss may occur because a party to a
transaction fails to perform according to the terms of the contract. Interest
rate risk is the possibility that future changes in market prices will cause a
financial instrument to be less valuable or more onerous. The Bank attempts to
control the credit risk arising from these instruments through its credit
approval process and through the use of risk control limits and monitoring
procedures. Interest rate risk is managed by various asset and liability methods
including the utilization of interest rate hedging vehicles.
During 2000 the Company executed supplemental compensation agreements providing
nonqualified defined benefit retirement income for the directors and certain
executive officers of the Company. In connection with establishing these
agreements, the Company also purchased single premium life insurance policies
for each participant. Generally, the defined benefit for retirement was 50%
vested at the date of the agreements and 10% for each year thereafter. For those
directors for which mandatory retirement (age 70) was within five years, vesting
was in equal periods until retirement. The agreements provide that each director
will receive $22.5 annually (adjusted annually by 2%) over their lifetime
commencing on the third anniversary subsequent to their retirement. The range of
defined lifetime benefit for the participating executives is $72.5 to $182
(adjusted annually by 2%); retirement is at age 65. If an executive shall
voluntarily resign prior to being 100% vested, the executive shall forfeit all
rights and benefits under the agreement. At the participant's death, 80% of the
difference between the insurance life benefit and the then cash surrender value,
will be paid to the participant's heirs. The total amount accrued for these
agreements was $215 during 2000.
The Company also assumed a nonqualified defined contribution retirement plan for
the benefit of the directors and certain executive officers of Saratoga. In
connection with this plan, Saratoga purchased single premium life insurance
policies for each participant. At the time of the acquisition of Saratoga the
estimated net present value of the lifetime benefit of each participant was
accrued by the Company in the amount of $1.4 million. During 1999, the total
amount expensed for this plan was $231.
The cash surrender value of life insurance purchased under these plans totaled
approximately $15 million as of December 31, 2000. Of this amount, $9.3 million
related to the Company's plan and $5.7 million related to the Saratoga plan.
The Company is obligated under its lease agreements for 95 South Market Street,
San Jose, 50 Oak Court, Danville and 15405 Los Gatos Boulevard, Los Gatos under
noncancelable operating leases through September 2004, June 2004, and March
2003, respectively. The leases are subject to periodic adjustments based on
changes in the CPI. The following table shows future minimum payments under the
leases as of December 31, 2000:
YEARS ENDING DECEMBER 31,
- ------------------------------------------------- ---------------------
(in thousands)
2001 $405
2002 409
2003 342
2004 220
- ------------------------------------------------- ---------------------
TOTAL MINIMUM LEASE PAYMENTS $1,376
================================================= =====================
Total minimum lease payments to be received under noncancelable operating
subleases at December 31, 2001 were approximately $712; these payments are not
reflected in the above table. Total rent expense was $434, $583, and $520 for
the years ended December 31, 2000, 1999 and 1998, respectively.
There is ordinary routine litigation incidental to the business pending against
the Company but, in the opinion of management, liabilities (if any) arising from
such claims will not have a material effect upon the consolidated financial
statements of the Company.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires
disclosure of estimated fair values for the Company's financial instruments.
Fair value estimates, methods and assumptions, set forth below for the Company's
financial instruments, are made solely to comply with the requirements of SFAS
No. 107 and should be read in conjunction with the consolidated financial
statements and notes thereto in this Annual Report.
Fair values are based on estimates or calculations at the transaction level
using present value techniques in instances where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial instruments, the fair value calculations attempt to incorporate the
effect of current market conditions at a specific time. Fair valuations are
management's estimates of the values, and they are often calculated based on
current pricing policy, the economic and competitive environment, the
characteristics of the financial instruments, and other such factors. These
calculations are subjective in nature, involve uncertainties and matters of
significant judgment and do not include tax ramifications; therefore, the
results cannot be determined with precision, substantiated by comparison to
independent markets and may not be realized in an actual sale or immediate
settlement of the instruments. The fair valuations have not been updated since
year end; therefore, the valuations may have changed significantly since that
point in time.
The Company has not included certain material items in its disclosure, such as
the value of the long-term relationships with the Company's deposit customers,
since these intangibles are not financial instruments. There may be inherent
weaknesses in any calculation technique, and changes in the underlying
assumptions used, including discount rates and estimates of future cash flows,
could significantly affect the results. For all these reasons, the aggregation
of the fair value calculations presented herein do not represent, and should not
be construed to represent, the underlying value of the Company.
The following table presents a summary of the Company's financial instruments,
as defined by SFAS No. 107 as of December 31, 2000 and 1999:
FAIR VALUE OF FINANCIAL INSTRUMENTS
(dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
FINANCIAL ASSETS Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks (including federal funds sold) $28,670 $28,674 $27,980 $27,980
Money market investments 38,475 38,486 5,651 5,655
Investment securities 128,787 128,806 113,074 111,586
Loans and leases, net 455,921 463,883 396,906 397,476
Accrued interest receivable 3,968 3,968 3,202 3,202
FINANCIAL LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------------------
Deposits 585,343 585,982 473,733 474,250
Federal funds purchased, securities sold under
repurchase agreements, FHLB advances and other borrowings 32,039 33,219 33,525 34,633
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------------------------------------------------------------------------
Interest rate swap contract purchased ---- 501 ----
The methodology and assumptions utilized to estimate the fair value of the
Company's financial instruments, not previously discussed above, are described
below:
Financial instruments with fair value approximate to carrying value - The
carrying value of cash and due from banks, money market investments, accrued
interest receivable, non-interest-bearing demand accounts, interest-bearing
demand, money market and savings deposit accounts, accrued interest receivable
and expense approximates fair value due to the short-term nature of these
financial instruments.
Investment securities - The estimated fair values of securities by type are
based on quoted market prices when available.
Loans and leases - The carrying amount of loans and leases is net of unearned
fee income and the reserve for loan and lease losses. The fair valuation
calculation process differentiates loans and leases based on their financial
characteristics, such as product classification, loan category, pricing features
and remaining maturity. Prepayment estimates are evaluated by product and
respective interest rate. Discount rates presented in the paragraphs below have
a wide range due to the Company's mix of fixed and variable rate products.
The fair value of loans and leases is calculated by discounting contractual cash
flows using discount rates that reflect the Company's current pricing for loans
and leases with similar characteristics and remaining maturity. Most of the
discount rates applied to these loans were between 8.2% and 10.6% at December
31, 2000.
Additionally, the allowance for loan and lease losses was applied against the
estimated fair value of loans and leases to recognize future defaults of
contractual cash flows.
Fair value for nonperforming loans and leases is based on discounting estimated
cash flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Deposits - The fair value of certificates of deposit and other time deposits is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for like deposits with
similar remaining maturities.
Other short-term borrowings - A reasonable estimate of the fair value of federal
funds sold is the carrying amount because of the relatively short period of time
between the origination of the instrument and its expected maturity.
The fair value of the Company's securities sold under repurchase agreements is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently offered for such instruments with
similar remaining maturities.
Commitment to extend credit - The majority of the Company's commitments to
extend credit carry variable and current market interest rates if converted to
loans or leases. Because these commitments are generally unassignable by either
the Company or the borrower, they only have value to the Company and the
borrower. The estimated fair value approximates the recorded deferred fee
amounts and is excluded from the table.
Derivative financial instruments - The fair value of the derivative financial
instruments generally reflects the estimated amounts the Company would receive
based upon dealer quotes, to terminate such agreements at the reporting date.
NOTE 16 - SJNB FINANCIAL CORP.
(PARENT COMPANY ONLY)
The following are the financial statements of SJNB Financial Corp. (parent
company only):
- --------------------------------------------------------------------------------------------------------------
BALANCE SHEETS
December 31, 2000 and 1999
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and equivalents $1,085 $1,847
Real estate loans ---- 123
Investment in the Bank 61,686 50,898
Other assets 812 351
- --------------------------------------------------------------------------------------------------------------
Total assets $63,583 $53,219
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities-Accounts payable ---- ----
- --------------------------------------------------------------------------------------------------------------
Common stock $22,845 $20,769
Retained earnings 40,221 33,942
Accumulated other comprehensive income (losses) 517 (1,492)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 63,583 53,219
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $63,583 $53,219
==============================================================================================================
- --------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
(dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Cash dividend received from Bank $500 $4,979 $4,470
Interest income and fees on loans 60 30 79
Other expense (314) (280) (222)
- --------------------------------------------------------------------------------------------------------------
Income before taxes 246 4,729 4,327
Income tax benefit 101 97 58
- --------------------------------------------------------------------------------------------------------------
Income before undistributed income of the Bank 347 4,826 4,385
Equity in undistributed income of the Bank 8,277 2,291 3,104
- --------------------------------------------------------------------------------------------------------------
Net income $8,624 $7,117 $7,489
==============================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
NET INCOME $8,624 $7,117 $7,489
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Increase in other assets (444) (439) (609)
(Decrease) increase in other liabilities ---- ( 98) 631
Equity in undistributed income of the Bank (8,277) (2,291) (3,104)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ( 97) 4,289 4,407
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in loans, net 123 413 124
Cash dividend (2,345) (1,649) (1,666)
Common stock repurchased ---- (3,911) (3,742)
Stock options exercised 1,557 2,649 572
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (665) (2,498) (4,712)
- -------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (762) 1,791 (305)
Cash and equivalents at beginning of year 1,847 56 361
- -------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $1,085 $1,847 $56
=========================================================================================================================
Noncash transaction:
Contribution of stock used in the acquisition of
Epic Funding Corp. ---- ---- $501
=====================================================
NOTE 17 - REGULATORY MATTERS
The Federal Reserve Board, the Comptroller of the Currency and the FDIC have
issued substantially similar risk-based and leverage capital guidelines
applicable to United States banking organizations. In addition, those regulatory
agencies may from time to time require that a banking organization maintain
capital above the minimum levels, whether because of its financial condition or
actual or anticipated growth.
The Federal Reserve Board risk-based guidelines define a two-tier capital
framework. Tier 1 capital consists of common and qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. Tier 2
capital consists of subordinated and other qualifying debt, and the allowance
for loan and lease losses up to 1.25% of risk weighted assets. The total of Tier
1 and Tier 2 capital, less investments in unconsolidated subsidiaries,
represents qualifying total capital, at least 50% of which must consist of Tier
1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total
capital by risk-weighted assets. Assets and off balance sheet exposures are
assigned to one of four categories of risk-weights, based primarily on relative
credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum
total risk-based capital ratio is 8%. The leverage capital ratio is determined
by dividing Tier 1 capital by adjusted average total assets. Although the stated
minimum leverage capital ratio is 3%, most banking organizations are required to
maintain leverage capital ratios of at least 100 to 200 basis points above the
3%.
The table below summarizes the Tier 1 and total risk-based capital ratios and
leverage capital ratios of the Company and the Bank as of December 31:
RISK-BASED AND LEVERAGE CAPITAL RATIOS
(DOLLARS IN THOUSANDS)
2000 1999
----------------------------------------------------------------------------
COMPANY-RISK-BASED Amount Ratio Amount Ratio
- ------------------
----------------------------------------------------------------------------
TIER 1 CAPITAL $60,115 11.04% $50,371 11.08%
Tier 1 capital minimum requirement 21,779 4.00 18,177 4.00
----------------------------------------------------------------------------
EXCESS $38,336 7.04% $32,194 7.08%
============================================================================
TOTAL CAPITAL $66,928 12.29% $56,060 12.34%
Total capital minimum requirement 43,559 8.00 36,354 8.00
----------------------------------------------------------------------------
EXCESS $23,369 4.29% $19,706 4.34%
============================================================================
Risk-adjusted assets $544,485 $454,429
====================== ===================
COMPANY-LEVERAGE
TIER 1 CAPITAL $60,115 8.94% $50,371 8.88%
Minimum leverage ratio requirement 26,902 4.00 22,685 4.00
----------------------------------------------------------------------------
EXCESS $33,213 4.94% $27,686 4.88%
============================================================================
Average total assets $672,555 $567,130
====================== ===================
BANK-RISK-BASED
TIER 1 CAPITAL $58,217 10.75% $48,050 10.57%
Tier 1 capital minimum requirement 21,667 4.00 18,180 4.00
----------------------------------------------------------------------------
EXCESS $36,550 6.75% $29,870 6.57%
============================================================================
TOTAL CAPITAL $64,995 12.00% $53,740 11.82%
Total capital minimum requirement 43,334 8.00 36,360 8.00
----------------------------------------------------------------------------
EXCESS $21,661 4.00% $17,380 3.82%
============================================================================
Risk-adjusted assets $541,671 $454,503
====================== ===================
BANK-LEVERAGE
TIER 1 CAPITAL $58,217 8.66% $48,050 8.47%
Minimum leverage ratio requirement 26,879 4.00 22,679 4.00
----------------------------------------------------------------------------
EXCESS $31,338 4.66% $25,371 4.47%
============================================================================
Average total assets $671,976 $566,978
====================== ===================
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
among other things, identifies five capital categories for insured depository
institutions (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective Federal regulatory agencies to implement systems for "prompt
corrective action" for insured depository institutions that do not meet minimum
capital requirements within such categories. FDICIA imposes progressively more
restrictive constraints on operations, management and capital distributions,
depending on the category in which an institution is classified. Failure to meet
the capital guidelines could also subject a banking institution to capital
raising requirements. An "undercapitalized" bank must develop a capital
restoration plan and its parent holding company must guarantee the bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of 5% of the bank's assets at the time
it became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors.
The various regulatory agencies have adopted substantially similar regulations
that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the
relevant capital measures. Such regulations establish various degrees of
corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least
10% and a leverage ratio of at least 5% and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least 4%, or 3% in some cases. Under these guidelines, the
Company and the Bank were considered well capitalized at December 31, 2000 and
1999.
Banking agencies consider concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation is made as part of the institution's regular safety and soundness
examination. Banking agencies also consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off balance sheet position) in evaluating
a bank's capital adequacy. Banking agencies have adopted a methodology for
evaluating interest rate risk. After gaining experience with this measurement
process, such banking agencies may propose further regulations to establish an
explicit risk-based capital charge for interest rate risk.
The ability of the Company to pay dividends largely depends upon the dividends
paid to it by the Bank. There are legal limitations on the ability of the Bank
to provide funds to the Company in the form of loans, advances or dividends.
Under national banking law, without the prior approval of the Comptroller of the
Currency, the Bank may not declare dividends in any calendar year that exceed
the Bank's net profits for that year, as defined by statute, combined with its
net retained profits, as defined, for the preceding two years. As of December
31, 2000, the Bank may initiate dividend payments without prior regulatory
approval of up to $16 million.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors, executive officers, promoters and control
persons and compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the text under the captions "Election of Directors," "Executive
Compensation and Transactions with Directors and Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Registrant's Proxy Statement
for its 2001 Annual Meeting of Shareholders.
ITEM 11: EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference to
the text under the caption "Executive Compensation and Transactions with
Directors and Officers" in the Registrant's Proxy Statement for its 2001 Annual
Meeting of Shareholders.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated by reference to the text under the captions "Security
Ownership of Directors and Management" and "Security Ownership of Certain
Beneficial Owners" in the Registrant's Proxy Statement for its 2001 Annual
Meeting of Shareholders.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
incorporated by reference to the text under the caption "Executive Compensation
and Transactions with Directors and Officers" in the Registrant's Proxy
Statement for its 2001 Annual Meeting of Shareholders.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. All Financial Statements
See Index to Financial Statements on page 38 hereof.
(a) 2. Financial statement schedules required. None. (Information included
in Financial Statements).
(a) 3. Exhibits
The following exhibits are filed as part of this report:
EXHIBIT NUMBER
(2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga
Bancorp and Saratoga National Bank, dated as of August 27, 1999, is
hereby incorporated by reference to Exhibit 2.1 of the Registrant's
Registration Statement on Form S-4 as filed on October 14, 1999,
under Registration No. 333-89013.
(3)(i). The Registrant's restated Articles of Incorporation are hereby
incorporated by reference from Exhibit (3)(i) of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
30,1999. (3)(ii). The Registrant's Restated Bylaws as of February 23,
2000 are hereby incorporated by reference to Exhibit 3(ii)of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31,1999.
*(10)a. The Registrant's 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit 4.1 of the Registrant's
Registration Statement on Form S-8, as filed on September 4, 1992,
under Registration No. 33-51740.
*(10)b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference to Exhibit(10)b of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)c. The form of Incentive Stock Option Agreement being utilized under
the 1992 Employee Stock Option Plan is hereby incorporated by
reference from Exhibit 4.2 of the Registrant's Registration Statement
on Form S-8, as filed on September 4, 1992, under Registration No.
33-51740.
*(10)d. The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740.
*(10)e. The Registrant's Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit 99.1 of the Registrant's Form S-8
filed June 15, 1999, under Registration No.333-80683.
*(10)f. The form of Nonstatutory Stock Option Agreement for outside
Directors being utilized under the Amended 1996 Stock Option Plan is
hereby incorporated by reference to Exhibit (10) f. of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
*(10)g. The form of Nonstatutory Stock Option Agreement for Employees being
utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) g. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)h. The form of Incentive Stock Option Agreement being utilized under
the Amended 1996 Stock Option Plan is hereby incorporated by reference
to Exhibit (10) h. of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
*(10)i. The Saratoga Bancorp 1982 Stock Option Plan is hereby incorporated
by reference to Exhibit (10)i.of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
*(10)j. The Saratoga Bancorp 1994 Stock Option Plan (Amended) is hereby
incorporated by reference to Exhibit (10)i. of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
*(10)k. Forms of Incentive Stock Option Agreement, Non-Statutory Stock
Option Agreement and Non-Statutory Stock Option Agreement for Outside
Directors is hereby incorporated by reference to Exhibit (10) i. of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
*(10)l. Agreement between James R. Kenny and SJNB Financial Corp. and San
Jose National Bank dated March 27,1996 is hereby incorporated by
reference to Exhibit (10) m. of the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended March 31, 1996.
*(10)m. Amendment No. 1 to Employment Agreement between James R. Kenny and
SJNB Financial Corp. and San Jose National Bank dated October 6, 2000
is hereby incorporated by reference to Exhibit(10)n. of the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 2000.
*(10)n. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and
San Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) n. of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1996.
*(10)o. Amendment No. 1 To Employment Agreement between Eugene E. Blakeslee
and SJNB Financial Corp. and San Jose National Bank dated October 6,
2000 is hereby incorporated by reference to Exhibit (10) n. of the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 2000.
(10)p. Sublease dated April 5, 1982, for premises at 95 South Market
Street, San Jose, CA is hereby incorporated by reference to Exhibit
(10)n. of the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
(10)q. Sublease by and between McWhorter's Stationary and San Jose National
Bank, dated July 6, 1995, and as amended August 11, 1995, and
September 21, 1995, for premises at 95 South Market Street, San Jose,
CA is hereby incorporated by reference to Exhibit (10) o. of the
Registrant's Quarterly Report on Form10-QSB for the quarterly period
ended September 30, 1995.
(10)r. Agreement of Purchase and Sale dated July 27, 1988 for 12000
Saratoga- Sunnyvale Road, Saratoga, CA is hereby incorporated by
reference to Exhibit (10) i. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
*(10)s. Form of Director Supplemental Compensation Agreement dated
September 24, 1998 between Saratoga National Bank and Robert G. Egan,
John F. Lynch III and V. Ronald Mancuso, respectively, is hereby
incorporated by reference to Exhibit (10) i. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
*(10)t. Form of Director Life Insurance Endorsement Method Split Dollar
Plan Agreement dated September 24, 1998 between Saratoga National Bank
and Robert G. Egan, John F. Lynch III and V. Ronald Mancuso,
respectively, is hereby incorporated by reference to Exhibit (10) i.
of the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
*(10)u. Form of Director Surrogate Supplemental Compensation Agreement
dated September 24, 1998 between Saratoga National Bank and Victor E.
Aboukhater and William D. Kron, respectively, is hereby incorporated
by reference to Exhibit (10) i. of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31,1999.
*(10)v. Form of Director Surrogate Life Insurance Endorsement Method Split
Dollar Plan Agreement dated September 24, 1998 between Saratoga
National Bank and Victor E. Aboukhater and William D. Kron,
respectively, is hereby incorporated by reference to Exhibit (10)i. of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
*(10)w. Form of Officer Supplemental Compensation Agreement dated September
24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke,
Sandra Swenson, Barbara Resop and Cathe Franklin, respectively, is
hereby incorporated by reference to Exhibit (10)i. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
*(10)x. Form of Officer Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998 between Saratoga National Bank and
Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe
Franklin, respectively, is hereby incorporated by reference to Exhibit
(10)i. of the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
*(10)y. Richard L. Mount Executive Supplemental Compensation Agreement
dated September 24, 1998 is hereby incorporated by reference to
Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
*(10)z. Richard L. Mount Life Insurance Endorsement Method Split Dollar
Plan Agreement dated September 24, 1998 is hereby incorporated by
reference to Exhibit (10) i. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
*(10)aa. Richard L. Mount Executive Benefits Agreement dated June 18, 1999
is hereby incorporated by reference to Exhibit (10)i.of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
*(10)ab. Form of Executive Supplemental Compensation Agreement dated June
1, 2000 between San Jose National Bank and James R. Kenny, Eugene E.
Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith Doering
Nielsen, respectively, is hereby incorporated by reference to Exhibit
(10) z. of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
*(10)ac. Form of Endorsement Method Split Dollar Plan Agreement dated
August 1, 2000 between San Jose National Bank and James R. Kenny,
Eugene E. Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith
Doering Nielsen, respectively, is hereby incorporated by reference to
Exhibit (10) aa. of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.
*(10)ad. Form of Endorsement Method Split Dollar Plan Agreement dated
August 1, 2000 between San Jose National Bank and each of Ray S.
Akamine, Robert A. Archer, Albert V. Bruno, Rod Diridon, Sr., F. Jack
Gorry, Arthur K. Lund, Richard L. Mount, Louis Oneal, Diane Rubino,
Douglas L. Shen, D.D.S . and Gary S. Vandeweghe is hereby
incorporated by reference to Exhibit (10) ab. of the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
*(10)ae. Form of Director Supplemental Compensation Agreement dated June 1,
2000 between San Jose National Bank and Ray S. Akamine, Robert A.
Archer, Albert V. Bruno, Rod Diridon, Sr., Robert G. Egan, F. Jack
Gorry, Arthur K. Lund, V. Ronald Mancuso, D.D.S., Richard L. Mount,
Louis Oneal, Diane Rubino, Douglas L. Shen, D.D.S. and Gary S.
Vandeweghe respectively, is hereby incorporated by reference to
Exhibit(10) ae. of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.
22 Subsidiary of the Registrant
23 Consent of KPMG LLP
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2001 SJNB Financial Corp.
By: S/J.R. KENNY By: S/E.E. BLAKESLEE
----------------------------- ------------------------------
James R. Kenny Eugene E. Blakeslee
President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
S/J.R. KENNY
- ------------------------------------------
James R. Kenny
President, Chief Executive Officer
and Director
(Principal Executive Officer)
February 28, 2001
S/E.E. BLAKESLEE
- ------------------------------------------
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer and
Chief Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer
February 28, 2001
S/V. E. ABOUKHATER
- ------------------------------------------
Victor E. Aboukhater, Director
February 28, 2001
S/R.S. AKAMINE
- ------------------------------------------
Ray S. Akamine, Director
February 28, 2001
S/R.A. ARCHER
- ------------------------------------------
Robert A. Archer
Chairman and Director
February 28, 2001
S/A.V. BRUNO
- ------------------------------------------
Albert V. Bruno, Director
February 28, 2001
S/R. DIRIDON, SR.
- ------------------------------------------
Rod Diridon, Sr., Director
February 28, 2001
S/R. G. EGAN
- ------------------------------------------
Robert G. Egan, Director
February 28, 2001
S/F.J. GORRY
- ------------------------------------------
F. Jack Gorry, Director
February 28, 2001
S/W. D. KRON
- ------------------------------------------
William D. Kron, Director
February 28, 2001
S/A.K. LUND
- ------------------------------------------
Arthur K. Lund, Director
February 28, 2001
S/V. R. MANCUSO, D.D.S.
- ------------------------------------------
V. Ronald Mancuso, D.D.S., Director
February 28, 2001
S/R. L. MOUNT
- ------------------------------------------
Richard L. Mount, Director
February 28, 2001
S/L. ONEAL
- ------------------------------------------
Louis Oneal, Director
February 28, 2001
S/D. RUBINO
- ------------------------------------------
Diane Rubino, Director
February 28, 2001
S/D.L. SHEN
- ------------------------------------------
Douglas L. Shen, Director
February 28, 2001
S/G.S. VANDEWEGHE
- ------------------------------------------
Gary S. Vandeweghe, Director
February 28, 2001
SJNB Financial Corp.
Form 10-K
Exhibits
December 31, 2000
The following exhibits are filed as part of this report:
EXHIBIT NUMBER
(2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga
Bancorp and Saratoga National Bank, dated as of August 27, 1999, is
hereby incorporated by reference to Exhibit 2.1 of the Registrant's
Registration Statement on Form S-4 as filed on October 14, 1999,
under Registration No. 333-89013.
(3)(i). The Registrant's restated Articles of Incorporation are hereby
incorporated by reference from Exhibit (3)(i) of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
30,1999. (3)(ii). The Registrant's Restated Bylaws as of February 23,
2000 are hereby incorporated by reference to Exhibit 3(ii)of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31,1999.
*(10)a. The Registrant's 1992 Employee Stock Option Plan is hereby
incorporated by reference from Exhibit 4.1 of the Registrant's
Registration Statement on Form S-8, as filed on September 4, 1992,
under Registration No. 33-51740.
*(10)b. Amendment No. 1 to the 1992 Employee Stock Option Plan is hereby
incorporated by reference to Exhibit(10)b of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)c. The form of Incentive Stock Option Agreement being utilized under
the 1992 Employee Stock Option Plan is hereby incorporated by
reference from Exhibit 4.2 of the Registrant's Registration Statement
on Form S-8, as filed on September 4, 1992, under Registration No.
33-51740.
*(10)d. The form of Stock Option Agreement being utilized under the 1992
Employee Stock Option Plan is hereby incorporated by reference from
Exhibit 4.3 of the Registrant's Registration Statement on Form S-8, as
filed on September 4, 1992, under Registration No. 33-51740.
*(10)e. The Registrant's Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit 99.1 of the Registrant's Form S-8
filed June 15, 1999, under Registration No.333-80683.
*(10)f. The form of Nonstatutory Stock Option Agreement for outside
Directors being utilized under the Amended 1996 Stock Option Plan is
hereby incorporated by reference to Exhibit (10) f. of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
*(10)g. The form of Nonstatutory Stock Option Agreement for Employees being
utilized under the Amended 1996 Stock Option Plan is hereby
incorporated by reference to Exhibit (10) g. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
*(10)h. The form of Incentive Stock Option Agreement being utilized under
the Amended 1996 Stock Option Plan is hereby incorporated by reference
to Exhibit (10) h. of the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
*(10)i. The Saratoga Bancorp 1982 Stock Option Plan is hereby incorporated
by reference to Exhibit (10)i.of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
*(10)j. The Saratoga Bancorp 1994 Stock Option Plan (Amended) is hereby
incorporated by reference to Exhibit (10)i. of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999.
*(10)k. Forms of Incentive Stock Option Agreement, Non-Statutory Stock
Option Agreement and Non-Statutory Stock Option Agreement for Outside
Directors is hereby incorporated by reference to Exhibit (10) i. of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
*(10)l. Agreement between James R. Kenny and SJNB Financial Corp. and San
Jose National Bank dated March 27,1996 is hereby incorporated by
reference to Exhibit (10) m. of the Registrant's Quarterly Report
on Form 10-QSB for the quarterly period ended March 31, 1996.
*(10)m. Amendment No. 1 to Employment Agreement between James R. Kenny and
SJNB Financial Corp. and San Jose National Bank dated October 6, 2000
is hereby incorporated by reference to Exhibit(10)n. of the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 2000.
*(10)n. Agreement between Eugene E. Blakeslee and SJNB Financial Corp. and
San Jose National Bank dated March 27, 1996 is hereby incorporated by
reference to Exhibit (10) n. of the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended March 31, 1996.
*(10)o. Amendment No. 1 To Employment Agreement between Eugene E. Blakeslee
and SJNB Financial Corp. and San Jose National Bank dated October 6,
2000 is hereby incorporated by reference to Exhibit (10) n. of the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 2000.
(10)p. Sublease dated April 5, 1982, for premises at 95 South Market
Street, San Jose, CA is hereby incorporated by reference to Exhibit
(10)n. of the Registrant's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
(10)q. Sublease by and between McWhorter's Stationary and San Jose National
Bank, dated July 6, 1995, and as amended August 11, 1995, and
September 21, 1995, for premises at 95 South Market Street, San Jose,
CA is hereby incorporated by reference to Exhibit (10) o. of the
Registrant's Quarterly Report on Form10-QSB for the quarterly period
ended September 30, 1995.
(10)r. Agreement of Purchase and Sale dated July 27, 1988 for 12000
Saratoga- Sunnyvale Road, Saratoga, CA is hereby incorporated by
reference to Exhibit (10) i. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
*(10)s. Form of Director Supplemental Compensation Agreement dated
September 24, 1998 between Saratoga National Bank and Robert G. Egan,
John F. Lynch III and V. Ronald Mancuso, respectively, is hereby
incorporated by reference to Exhibit (10) i. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
*(10)t. Form of Director Life Insurance Endorsement Method Split Dollar
Plan Agreement dated September 24, 1998 between Saratoga National Bank
and Robert G. Egan, John F. Lynch III and V. Ronald Mancuso,
respectively, is hereby incorporated by reference to Exhibit (10) i.
of the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
*(10)u. Form of Director Surrogate Supplemental Compensation Agreement
dated September 24, 1998 between Saratoga National Bank and Victor E.
Aboukhater and William D. Kron, respectively, is hereby incorporated
by reference to Exhibit (10) i. of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999.
*(10)v. Form of Director Surrogate Life Insurance Endorsement Method Split
Dollar Plan Agreement dated September 24, 1998 between Saratoga
National Bank and Victor E. Aboukhater and William D. Kron,
respectively, is hereby incorporated by reference to Exhibit (10)i. of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
*(10)w. Form of Officer Supplemental Compensation Agreement dated September
24, 1998 between Saratoga National Bank and Earl Lanna, Mary Rourke,
Sandra Swenson, Barbara Resop and Cathe Franklin, respectively, is
hereby incorporated by reference to Exhibit (10)i. of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
*(10)x. Form of Officer Life Insurance Endorsement Method Split Dollar Plan
Agreement dated September 24, 1998 between Saratoga National Bank and
Earl Lanna, Mary Rourke, Sandra Swenson, Barbara Resop and Cathe
Franklin, respectively, is hereby incorporated by reference to Exhibit
(10)i. of the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
*(10)y. Richard L. Mount Executive Supplemental Compensation Agreement
dated September 24, 1998 is hereby incorporated by reference to
Exhibit (10) i. of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
*(10)z. Richard L. Mount Life Insurance Endorsement Method Split Dollar
Plan Agreement dated September 24, 1998 is hereby incorporated by
reference to Exhibit (10) i. of the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
*(10)aa. Richard L. Mount Executive Benefits Agreement dated June 18, 1999
is hereby incorporated by reference to Exhibit (10)i.of the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
*(10)ab. Form of Executive Supplemental Compensation Agreement dated June
1, 2000 between San Jose National Bank and James R. Kenny, Eugene E.
Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith Doering
Nielsen, respectively, is hereby incorporated by reference to Exhibit
(10) z. of the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
*(10)ac. Form of Endorsement Method Split Dollar Plan Agreement dated
August 1, 2000 between San Jose National Bank and James R. Kenny,
Eugene E. Blakeslee, Frederic A. Charpiot, Margo Culcasi and Judith
Doering Nielsen, respectively, is hereby incorporated by reference to
Exhibit (10) aa. of the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.
*(10)ad. Form of Endorsement Method Split Dollar Plan Agreement dated
August 1, 2000 between San Jose National Bank and each of Ray S
Akamine, Robert A. Archer, Albert V. Bruno, Rod Diridon, Sr., F. Jac
Gorry, Arthur K. Lund, Richard L. Mount, Louis Oneal, Diane Rubino
Douglas L. Shen, D.D.S. and Gary S. Vandeweghe is hereb
incorporated by reference to Exhibit (10) ab. of the Registrant'
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
*(10)ae. Form of Director Supplemental Compensation Agreement dated June 1
2000 between San Jose National Bank and Ray S. Akamine, Robert A
Archer, Albert V. Bruno, Rod Diridon, Sr., Robert G. Egan, F. Jac
Gorry, Arthur K. Lund, V. Ronald Mancuso, D.D.S., Richard L. Mount
Louis Oneal, Diane Rubino, Douglas L. Shen D.D.S. and Gary S
Vandeweghe respectively, is hereby incorporated by reference t
Exhibit (10) ae. of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000.
22 Subsidiary of the Registrant
23 Consent of KPMG LLP
* Indicates management contract or compensation plan or arrangement.