SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1998
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)
(408) 947-7562
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed, since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,464,261 shares of common
stock outstanding as of August 10, 1998.
PART I - FINANCIAL INFORMATION
Page
Item 1.- FINANCIAL STATEMENTS
- - ------
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 9
- - ------ RESULTS OF OPERATIONS
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
- - ------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 27
- - ------
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 27
- - ------
Item 3. DEFAULTS UPON SENIOR SECURITIES 27
- - ------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
- - ------
Item 5. OTHER INFORMATION 28
- - ------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 28
- - ------
SIGNATURES 30
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(dollars and shares in thousands)
(Unaudited)
June 30, December 31,
Assets 1998 1997
- - --------------------------------------------------------------------------------------------------------------------
Cash and due from banks $21,029 $22,825
Money market investments 18,243 2,700
Investment securities:
Available for sale 45,503 48,305
Held to maturity (Fair value: $12,426 at June 30, 1998
and $13,843 at December 31, 1997) 12,338 13,737
- - --------------------------------------------------------------------------------------------------------------------
Total investment securities 57,841 62,042
- - --------------------------------------------------------------------------------------------------------------------
Loans 236,282 228,972
Allowance for possible loan losses (4,540) (4,493)
- - --------------------------------------------------------------------------------------------------------------------
Loans, net 231,742 224,479
- - --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,824 3,916
Accrued interest receivable and other assets 5,634 5,202
Intangibles, net of accumulated amortization of $1,925 at
June 30, 1998 and $1,707 at December 31, 1997 4,296 3,755
- - --------------------------------------------------------------------------------------------------------------------
Total $342,609 $324,919
====================================================================================================================
Liabilities and Shareholders' Equity
- - --------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $75,269 $78,437
Interest-bearing 222,909 191,908
- - --------------------------------------------------------------------------------------------------------------------
Total deposits 298,178 270,345
- - --------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 5,000 16,000
Accrued interest payable and other liabilities 5,683 5,415
- - --------------------------------------------------------------------------------------------------------------------
Total liabilities 308,861 291,760
- - --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares; issued and outstanding,
2,471 shares at June 30, 1998
and 2,493 shares at December 31, 1997 17,174 18,800
Retained earnings 16,470 14,254
Accumulated other comprehensive income 104 105
- - --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 33,748 33,159
- - --------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- - --------------------------------------------------------------------------------------------------------------------
Total $342,609 $324,919
====================================================================================================================
<FN>
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statement of Operations
(in thousands, except per share amounts)
(Unaudited)
Quarter ended Six months ended
June 30, June 30,
----------------------------------------------------
1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $6,040 $5,721 $12,155 $10,795
Interest on money market investments 275 114 395 393
Interest and dividends on investment securities available for sale 757 738 1,514 1,475
Interest on investment securities held to maturity 190 244 380 488
Other, net (3) (3) (5) (5)
- - -------------------------------------------------------------------------------------------------------------------
Total interest income 7,259 6,814 14,439 13,146
- - -------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit over $100 822 786 1,501 1,472
Other 1,417 1,393 2,953 2,831
- - -------------------------------------------------------------------------------------------------------------------
Total interest expense 2,239 2,179 4,454 4,303
- - -------------------------------------------------------------------------------------------------------------------
Net interest income 5,020 4,635 9,985 8,843
- - -------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses ---- 180 ---- 180
- - -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 5,020 4,455 9,985 8,663
- - -------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 151 147 312 281
Other operating income 100 115 223 249
Net loss on securities available for sale ---- (41) (8) (41)
- - --------------------------------------------------------------------------------------------------------------------
Total other income 251 221 527 489
- - -------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 1,710 1,451 3,330 2,862
Occupancy and equipment 182 158 349 338
Other 839 917 1,831 1,713
- - -------------------------------------------------------------------------------------------------------------------
Total other expenses 2,731 2,526 5,510 4,913
- - -------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,540 2,150 5,002 4,239
Income taxes 1,059 908 2,086 1,792
- - -------------------------------------------------------------------------------------------------------------------
Net income $1,481 $1,242 $2,916 $2,447
===================================================================================================================
Net income per share - basic $0.59 $0.50 $1.16 $0.97
===================================================================================================================
Net income per share - diluted $0.56 $0.48 $1.10 $0.93
===================================================================================================================
<FN>
See accompanying Notes to Unaudited Consolidated Financial Statements.
</FN>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Shareholders' Equity
(dollars in thousands)
(Unaudited)
Net Unrealized
Gain (Loss) Total
on Securities Share-
Common Retained Available holders'
Six months ended June 30, 1997 Shares Stock Earnings for Sale Equity
- - ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 2,571 $20,880 $10,263 $62 $31,205
---------
Net income 2,447 2,447
Other comprehensive income - Unrealized loss
on securities held for sale, net (44) (44)
---------
Comprehensive income 2,403
---------
Common stock repurchased (95) (2,319) (2,319)
Stock options exercised 14 83 83
Cash dividends (527) (527)
- - ---------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1997 2,490 $18,644 $12,183 $18 $30,845
=====================================================================================================================
Six months ended June 30, 1998
- - ---------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 2,493 $18,800 $14,254 $105 $33,159
-----------
Net income 2,916 2,916
Other comprehensive income - Unrealized gains
on securities held for sale, net (1) (1)
-----------
Comprehensive income 2,915
-----------
Common stock repurchased (64) (2,614) (2,614)
Issuance of common stock for purchase of Epic Funding, Corp. 12 501
Stock options exercised 30 487 487
Cash dividends (700) (700)
- - ---------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1998 2,471 $17,174 $16,470 $104 $33,247
=====================================================================================================================
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six months ended
June 30,
----------------------------
1998 1997
- - ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $2,916 $2,447
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses ---- 180
Depreciation and amortization 270 258
Amortization on intangibles 218 235
Net loss on securities available for sale 7 41
Net gain on sale of other real estate owned ---- (41)
Amortization of premium on investment securities, net (19) (17)
Increase in deferred tax benefit ---- (1,535)
Increase in intangibles assets (80) ----
Increase in accrued interest receivable and other assets (333) (172)
Increase in accrued interest payable and other liabilities 37 2,519
- - ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,016 3,915
- - ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 11,820 9,897
Maturities of securities held to maturity 2,200 1,000
Purchase of securities available for sale (9,011) (10,699)
Purchase of securities held to maturity (798) (598)
Proceeds from the sale of other real estate owned ---- 191
Loans, net (7,115) (19,538)
Capital expenditures (165) (344)
Acquisition of Epic Funding, Corp. - cash portion (206) ----
- - ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,275) (20,091)
- - ----------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Deposits, net 27,833 29,345
Other short-term borrowings (11,000) (25,391)
Cash dividends (700) (526)
Stock buyback (2,614) (2,319)
Proceeds from stock options exercised 487 83
- - ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,006 1,192
- - ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 13,747 (14,984)
Cash and equivalents at beginning of year 25,525 40,008
- - ----------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $39,272 $25,024
======================================================================================================================
Other cash flow information:
Interest paid $4,573 $4,214
============================
Income taxes paid 2,025 375
======================================================================================================================
Noncash transactions:
Unrealized gain (loss) on securities available for sale, net of tax $(1) $44
======================================================================================================================
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 Unaudited Consolidated Financial Statements.
</FN>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Notes to Unaudited Condensed Consolidated Financial Statements
Note A Unaudited Condensed Consolidated Financial Statements
The unaudited consolidated financial statements of SJNB Financial
Corp. (the "Company") and its subsidiary, San Jose National Bank and
its subsidiary Epic Funding Corp. (which was acquired on May 22,
1998), are prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to
Form 10-Q. In the opinion of management, all adjustments necessary
for a fair presentation of the financial position, results of
operations and cash flows for the periods have been included and are
normal and recurring. The results of operations and cash flows are
not necessarily indicative of those expected for the full fiscal
year.
Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report to Shareholders
for the year ended December 31, 1997.
Note B Net Income Per Share of Common Stock
The reconciliation of the numerators and denominators of the basic
and diluted earnings per share (EPS) computations are as follows (in
thousands, except per share amounts):
Quarter ended Quarter ended
June 30, 1998 June 30, 1997
- - ---------------------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share
Income Shares Amounts Income Shares Amounts
- - --------------------------------------------------------------------------------------------------------------------
Net income and basic EPS $1,481 2,504 $0.59 $1,242 2,494 $0.50
============= ==============
Effect of stock option dilutive shares 158 116
-------------------------- -----------------------
Diluted earnings per share $1,481 2,662 $0.56 $1,242 2,610 $0.48
============================================================================
Six months ended Six months ended
June 30, 1998 June 30, 1997
- - --------------------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share
Income Shares Amounts Income Shares Amounts
- - --------------------------------------------------------------------------------------------------------------------
Net income and basic EPS $2,916 2,505 $1.16 $2,447 2,527 $0.97
============ =============
Effect of stock option dilutive shares 150 112
---------------------------- -----------------------
Diluted earnings per share $2,916 2,655 $1.10 $2,447 2,639 $0.93
============================================================================
Note C Other Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The Statement establishes standards for the way
public business enterprises are to report information about operating
segments in annual financial statements and requires those
enterprises to report selected information about operating segments
in interim financial reports issued to shareholders.
In February 1998, the FASB issued SFAS No.132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." SFAS
No. 132 changes disclosure only on applicable defined benefit pension
or postretirement plans, of which the Company has none. The Company
does not believe SFAS No. 132 will have any impact on its
consolidated financial statements.
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. The Statement is effective for fiscal quarters of fiscal
years beginning after June 15, 1999. The Company expects to adopt
this Statement on January 1, 2000. The Company will begin evaluating
the impact of its adoption on the Company's consolidated financial
statements. Currently, the Statement would not have a significant
effect on the consolidated financial position or its consolidated
statement of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SJNB Financial Corp. (the "Company") is the holding company for San Jose
National Bank and subsidiary ("SJNB" and the "Bank"), San Jose, California. This
discussion focuses primarily on the results of operations of the Company on a
consolidated basis for the three and six months ended June 30, 1998 and 1997 and
the liquidity and financial condition of the Company and SJNB as of June 30,
1998 and December 31, 1997.
All dollar amounts in the text in Item 2 are in thousands, except per share
amounts or as otherwise indicated.
This Quarterly Report on Form 10-Q includes forward-looking information within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject
to the "safe harbor" created by those sections. These forward-looking statements
(which do not involve the historical or financial statement information herein)
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; general economic conditions, either nationally or regionally, are
less favorable than expected, resulting in, among other things, a deterioration
in credit quality and an increase in the provision for possible loan losses;
changes in the regulatory environment; changes in business conditions,
particularly in Santa Clara County and in the semiconductor or other high tech
type industries; certain operational risks involving data processing systems or
fraud; volatility of rate sensitive deposits; asset/liability matching risks and
liquidity risks; risks associated with the Year 2000; and changes in the
securities markets. The Company undertakes no obligation to revise or publicly
release the results of any revision to these forward looking statements. For
additional information concerning risks and uncertainties related to the Company
and its operations please refer to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
Current Developments
On May 22, 1998 SJNB acquired all of the stock of a private company, Epic
Funding Corporation, pursuant to a definitive agreement dated as of April 13,
1998. In connection with the acquisition, which was structured as a tax-free
reorganization, SJNB issued 12,223 shares of its common stock and paid $110,000
to Epic's shareholder in exchange for all of Epic's outstanding stock. Total
purchase price was $611, while Epic's net equity was $28; goodwill amounted to
$759 including certain expenses of the transaction. Epic, provides direct and
vendor lease programs and accounts receivable financing to manufacturers and
equipment users throughout California and across parts of the United States.
Epic is a wholly-owned subsidiary of the Bank. Epic's office is located in
Danville, California; together with a small de novo branch at the same facility
which was opened on July 1, 1998. Management believes the acquisition of Epic
and the new branch will not have a significant impact on the results of
operations of SJNB for the year ending December 31, 1998.
On April 22, 1998, the Company announced that the Board of Directors approved
the repurchase of up to $3.5 million of Company's common stock. To date the
Company has repurchased 72,300 shares for a total of $2.9 million.
Year 2000
The "Year 2000 issue" relates to the fact that many computer programs use only
two digits to represent a year, such as "98" to represent "1998," which means
that in the year 2000 such programs could incorrectly treat the year 2000 as the
year 1900. This issue has grown in importance as the use of computers and
microchips has become more pervasive throughout the economy, and
interdependencies between systems have multiplied. The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its effects could ripple through the economy. The Company could be affected
either directly or indirectly by the Year 2000 issue. This could happen if any
of its critical computer systems or equipment containing embedded logic fail, if
the local infrastructure (electric power, phone system, or water system) fails,
if its significant vendors are adversely impacted, or if its borrowers or
depositors are significantly impacted by their internal systems or their
customers or suppliers.
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan designed to resolve the issue. The Company is
using both internal and external resources to attempt to identify, correct or
replace, and test its systems for the Year 2000 compliance. Management
anticipates that initial testing of critical systems should be completed by
December 31, 1998. If some or the Bank's systems fail initial tests, the Bank
intends to take corrective action and complete secondary testing by June 30,
1999. The Company converted to its existing core processing system (a critical
system handling the accounting for its loans, deposit accounts and general
ledger) in November, 1997. The vendor of this system has represented to the
Company that the system is Year 2000 compliant.
The Company has developed contingency plans for its software systems, should
they not successfully pass the Company's Year 2000 testing. Generally this
involves the identification of an alternate vendor or expected actions the
Company could take, as well as the establishment of a trigger date to implement
the contingency plan. The Company intends to develop, in accordance with
regulatory guidelines, further contingency plans to address potential business
disruptions resulting from Year 2000 issues, however, this process is not
expected to be completed until December 31, 1998.
The Company presently believes that, with modifications to existing software
and/or the conversion to new software which is Year 2000 compliant and in
reliance upon representations of Year 2000 readiness from significant vendors
and customers, the Year 2000 issue should not pose significant operational risks
for the Company's computer systems as so modified and converted. However, other
significant risks relating to the Year 2000 problem are that of the unknown
impact of this problem on the operations of the Bank's customers and significant
vendors, the impact of catastrophic infrastructure issues such as power, heat
and light on the economy and future actions which banking or securities
regulators may take.
The Bank is making efforts to ensure that its customer base is aware of the Year
2000 problem. In addition to seminars for and mailings to its customer base, the
Bank amended its Credit Policy and credit authorization documentation to include
consideration regarding the Year 2000 problem. Significant customer
relationships have been identified, and such customers are being contacted by
the Bank's account officers to determine whether they are aware of Year 2000
risks and whether they are taking preparatory actions. An initial assessment of
these customers is expected to be completed by September 30, 1998. The Bank
intends to take follow-up action based on the results of this assessment. It is
not possible to predict the effect of this problem on the economic viability of
its customers and the related adverse impact it may have on SJNB's financial
position and results of operations, including the level of the Bank's provision
for possible loan losses in future periods.
The Company has also attempted to contact major vendors and suppliers of
non-software products and services including those products utilizing embedded
technology, to determine the Year 2000 readiness of such organizations and/or
the products and services which the Company purchases from such organizations.
The company is monitoring reports provided by such vendors regarding their
preparations for Year 2000. This is an ongoing process, and the company intends
to focus more attention on such suppliers in the latter half of 1998.
The Company is expensing all period costs associated with the Year 2000 problem.
To date, the amount of such expense has been $53,000. Management estimates that
the Bank will incur approximately an additional $150,000 in Year 2000 related
expenses for the identification, correction and reprogramming, and testing of
systems for Year 2000 compliance during the last six months of 1998 and 1999.
There can be no assurance that these expenses will not increase as further
testing and assessment of vendor and customer readiness for the Year 2000
continues.
Federal banking regulators have responsibility for supervision and examination
of banks to determine whether each institution has an effective plan for
identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing and coordinating Year 2000
processing capabilities with its customers, vendors and payment system partners.
Examiners are also required to assess the soundness of an institution's internal
controls and to identify whether further corrective action may be necessary to
assure an appropriate level of attention to Year 2000 processing capabilities.
Management believes it is currently in compliance with the federal bank
regulatory guidelines and timetables.
Selected Financial Data
The following presents selected financial data and ratios as of and for the
three and six months ended June 30, 1998 and 1997:
SELECTED FINANCIAL DATA AND RATIOS
- - ---------------------------------------------------------------------------------------------------------------------
For the quarters For the six months
ended June 30, ended June 30,
-----------------------------------------------------
SELECTED ANNUALIZED OPERATING RATIOS: 1998 1997 1998 1997
- - --------------------------------------------------------------------------------------------------------------------
Return on average equity 17.33% 16.54% 17.30% 16.19%
Return on average tangible equity 20.99 21.10 20.92 20.71
Return on average assets 1.79 1.60 1.79 1.60
Net chargeoffs (recoveries) to average loans .01 .23 (.04) .11
Average equity to average assets 10.31 9.66 10.35 9.89
Average tangible equity to average tangible assets 9.26 8.41 9.31 8.60
PER SHARE DATA:
Net income per share - basic $0.59 $0.50 $1.16 $0.97
Net income per share - diluted .56 .48 1.10 .93
Net income per share - (core) - diluted (1) .60 .52 1.18 1.02
Dividends per share (2) .14 ---- .28 .21
====================================================================================================================
At June 30, At June 30, At December 31,
SHAREHOLDERS' EQUITY 1998 1997 1997
- - -------------------------------------------------------------------------------------------------------------
Shareholders' equity per share $13.66 $12.39 $13.30
Tangible equity per share 11.92 10.69 11.80
SELECTED FINANCIAL POSITION RATIOS:
- - -------------------------------------------------------------------------------------------------------------
Leverage capital ratio 8.90% 8.62% 9.07%
Total risk based capital ratio 12.07 11.87 12.53
Nonperforming loans to total loans .28 .70 .19
Nonperforming assets to total assets .19 .58 .13
Allowance for possible loan losses to total loans 1.92 1.87 1.96
Allowance for possible loan losses
to nonperforming loans 681 266 1,060
Allowance for possible loan losses
to nonperforming assets 681 222 1,060
=============================================================================================================
<FN>
(1) Excludes after-tax effect of goodwill and core deposit intangible
amortization.
(2) Effective with the first quarter of 1998, the Company commenced a policy of
paying quarterly cash dividends to its shareholders; previously semi-annual
dividends were paid.
</FN>
Summary of Financial Results
The Company reported net income of $1,481 or $.56 per share - diluted for the
quarter ended June 30, 1998, compared with net income of $1,242 or $.48 per
share - diluted for the second quarter of 1997. The improvement in earnings is
due primarily to an increase in net interest income due to growth in volume.
For the six months ended June 30, 1998, net income was $2,916 or $1.10 per share
- - - diluted compared with net income of $2,447 or $.93 per share - diluted in
1997. The improvement is due primarily to an increase in net interest income due
to the growth in volume.
Net Interest Income
Net interest income for the quarter ended June 30, 1998 increased $385 as
compared to the same quarter a year ago. The Bank's average earning assets for
the same period increased by $25 million, primarily as the result of significant
growth in the Bank's loan portfolio and other short-term investments.
Net interest margin for the second quarter of 1998 was 6.53% as compared to
6.56% for the same quarter in 1997. This slight decrease was primarily related
to the decrease in the cost of funds and the loan to deposit ratio.
Net interest margin for the first six months of 1998 was 6.64% as compared to
6.37% for the same period in 1997. This increase was primarily related to a
decline in the cost of funds and an increase in the average loan to deposit
ratio from 78% in 1997 to 81% for the six months in 1998; and collection of a
$107 prepayment fee in March 1998 relating to a fixed rate loan which was repaid
prior to its contractual maturity.
Economic conditions in Northern California have remained strong in the first
half of 1998, although, there are indications that this economic strength could
be threatened by the problems in Asia, slow-down in demand for semi-conductors
and other technology products, the tightening of a skilled labor force and the
potential for the real estate market to slowdown. In addition, the competitive
environment within the Bank's marketplace continues to be aggressive and the
competition between lenders for additional loan growth has caused more
competitive pricing.
Due to the nature of the Company's target market in which loans are generally
tied to the prime rate, management believes modest increases in interest rates
should positively affect the Bank's net interest margin. Conversely, management
believes stable or declining rates will tend to have an adverse impact on net
interest margin. The Bank utilizes various methods to hedge some of its interest
rate risk. See "Loans" and "Asset/Liability Management."
The following tables shows the composition of average earning assets and average
funding sources, average yields and rates and the net interest margin, on an
annualized basis, for the three and six months ended June 30, 1998 and 1997.
AVERAGE BALANCES, RATES AND YIELDS
Fully Taxable Equivalent
(dollars in thousands)
Quarter ended June 30,
-----------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- - --------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans, net (2) $227,171 $6,040 10.66% $213,050 $5,721 10.77%
Securities available for sale (3) 49,914 757 6.08 47,669 738 6.21
Securities held to maturity:
Taxable (4) 9,502 148 6.25 12,422 211 6.81
Nontaxable (5) 3,773 70 7.44 2,765 55 7.98
Money market investments 19,791 275 5.57 8,857 114 5.16
Interest rate hedging instruments ---- (3) ---- ---- (3) ----
- - --------------------------------------------------------------------------- ---------------------
Total interest-earning assets 310,151 7,287 9.42 284,763 6,836 9.63
- - --------------------------------------------------------------------------- ---------------------
Allowance for possible loan losses (4,622) (4,123)
Cash and due from banks 13,790 18,292
Other assets 9,360 8,527
Core deposit intangibles and
goodwill, net 3,867 4,274
- - ----------------------------------------------------------------- -----------
Total $332,546 $311,733
================================================================= ===========
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $50,657 332 2.63 $44,650 274 2.46
Money market and savings 97,520 842 3.46 89,822 807 3.60
Certificates of deposit:
Less than $100 13,821 178 5.17 15,504 199 5.15
$100 or more 60,843 822 5.42 57,497 786 5.48
- - --------------------------------------------------------------------------- ---------------------
Total certificates of deposits 74,664 1,000 5.37 73,001 985 5.41
- - --------------------------------------------------------------------------- ---------------------
Other borrowings 4,022 65 6.48 7,414 113 6.11
- - --------------------------------------------------------------------------- ---------------------
Total interest-bearing liabilities 226,863 2,239 3.96 214,887 2,179 4.07
- - --------------------------------------------------------------------------- ---------------------
Noninterest-bearing demand 66,063 61,173
Accrued interest payable and
other liabilities 5,326 5,555
- - ----------------------------------------------------------------- -----------
Total liabilities 298,252 281,615
- - ----------------------------------------------------------------- -----------
Shareholders' equity 34,294 30,118
- - ----------------------------------------------------------------- -----------
Total $332,546 $311,733
=================================================================---------- ===========----------
Net interest income and margin (6) $5,048 6.53% $4,657 6.56%
=================================================== ==================== ====================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $356 for 1998, and $244 for 1997. Nonperforming
loans have been included in average loan balances.
(3) Includes dividend income of $35 and $54 received in 1998 and 1997. (4)
Includes dividend income of $8 received in 1998and 1997.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($28 in 1998 and $22 in 1997). (6) The net interest margin represents
the fully taxable equivalent net interest income as a percentage of
average earning assets.
</FN>
AVERAGE BALANCES, RATES AND YIELDS
Fully Taxable Equivalent
(dollars in thousands) Six months ended June 30,
------------------------------------------------------------------
1998 1997
- - --------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- - --------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans, net (2) $227,789 $12,155 10.76% $203,855 $10,795 10.68%
Securities available for sale (3) 49,565 1,514 6.16 47,760 1,475 6.23
Securities held to maturity:
Taxable (4) 9,587 296 6.23 12,434 423 6.86
Nontaxable (5) 3,617 140 7.81 2,699 108 8.07
Money market investments 14,426 395 5.52 14,738 393 5.38
Interest rate hedging instruments ---- (5) ---- ---- (5) ----
- - -------------------------------------------------------------------------- ----------------------
Total interest-earning assets 304,984 14,495 9.58 281,486 13,189 9.45
- - -------------------------------------------------------------------------- ----------------------
Allowance for possible loan losses (4,575) (4,067)
Cash and due from banks 14,881 18,692
Other assets 9,352 7,736
Core deposit intangibles and
goodwill, net 3,778 4,336
- - ---------------------------------------------------------------- ------------ ============
Total $328,420 $308,183
================================================================ ============
Liabilities and Shareholders' equity Interest-bearing liabilities:
Deposits:
Interest-bearing demand $48,986 628 2.59 $43,801 561 2.58
Money market and savings 96,908 1,740 3.62 84,447 1,512 3.61
Certificates of deposit:
Less than $100 14,083 361 5.17 15,502 404 5.26
$100 or more 55,348 1,501 5.47 53,511 1,472 5.55
- - -------------------------------------------------------------------------- ----------------------
Total certificates of deposits 69,431 1,862 5.41 69,013 1,876 5.48
- - -------------------------------------------------------------------------- ----------------------
Other borrowings 7,334 224 6.16 12,029 354 5.93
- - -------------------------------------------------------------------------- ----------------------
Total interest-bearing liabilities 222,659 4,454 4.03 209,290 4,303 4.15
- - -------------------------------------------------------------------------- ----------------------
Noninterest-bearing demand 66,537 64,143
Accrued interest payable and
other liabilities 5,238 4,285
- - ---------------------------------------------------------------- ------------
Total liabilities 294,434 277,718
- - ---------------------------------------------------------------- ------------
Shareholders' equity 33,986 30,465
- - ---------------------------------------------------------------- ------------
Total $328,420 $308,183
================================================================---------- ============----------
Net interest income and margin (6) $10,041 6.64% $8,886 6.37%
================================================== ==================== ====================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $627 for 1998, and $492 for 1997. Nonperforming loans
have been included in average loan balances.
(3) Includes dividend income of $79 and $112 received in 1998 and 1997.
(4) Includes dividend income of $16 received in 1998 and 1997.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($56 in 1998 and $43 in 1997). (6) The net interest margin represents
the fully taxable equivalent net interest income as a percentage of average
earning assets.
</FN>
Provision for Possible Loan Losses
The level of the allowance for possible loan losses and the related provision,
if any, reflect management's judgment as to the inherent risk of loss associated
with the loan and lease portfolios as of June 30, 1998 and 1997 based on
information available to management as of said dates. Based on management's
evaluation of such risks, no additions were made to the allowance for possible
loan losses for the six months ended June 30, 1998. An addition of $180 was made
in the second quarter of 1997. See "Loan Portfolio."
Other Income
The following table sets forth the components of other income and the percentage
distribution of such income for the three and six month periods ended June 30,
1998 and 1997:
OTHER INCOME
(dollars in thousands)
Quarter ended June 30, Six months ended June 30,
---------------------------------------------------------------------------
1998 1997 1998 1997
Amount Percent Amount Percent Amount Percent Amount Percent
- - --------------------------------------------------------------------------------------------------------------------
Depositor service charges $151 60.16% $147 66.52% $312 59.20% $281 57.46%
Other operating income 100 39.84 115 52.04 223 42.31 249 50.92
Net loss on securities available for sale ----- ----- (41) (18.55) (8) (1.52) (41) (8.38)
====================================================================================================================
Total $251 100.00% $221 100.00% $527 100.00% $489 100.00%
====================================================================================================================
Other Expenses
The following schedule summarizes the major categories of expense as a
percentage of average assets on an annualized basis:
OTHER EXPENSES AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands)
Quarter ended June 30, Six months ended June 30,
------------------------------------------------------------------------------------
1998 1997 1998 1997
Amount Percent(1) Amount(2) Percent(1) Amount Percent(1) Amount(2) Percent(1)
- - ---------------------------------------------------------------------------------------------------------------------
Salaries and benefits $1,710 2.06% $1,470 1.88% $3,330 2.03% $2,898 1.88%
Data processing 136 .16 105 .13 325 .20 208 .13
Amortization of core deposit
intangibles and goodwill 111 .13 118 .15 218 .13 236 .15
Furniture and equipment 99 .12 92 .12 188 .11 180 .12
Client services paid by bank 93 .11 82 .11 186 .11 163 .11
Business promotion 85 .10 95 .12 169 .10 164 .11
Occupancy 83 .10 61 .08 161 .10 145 .09
Legal and professional fees 65 .08 124 .16 144 .09 100 .06
Directors' & shareholders' 59 .07 91 .12 123 .07 175 .11
Advertising & marketing 45 .05 21 .03 91 .06 59 .04
Stationery and supplies 51 .06 46 .06 91 .06 93 .06
Regulators assessments 28 .03 27 .03 56 .03 53 .03
Loan and collection 6 .01 32 .04 52 .03 46 .03
Net cost of foreclosed property ----- ----- (44) (.06) 1 .00 (50) (.03)
Sundry losses (29) (.03) 58 .07 (29) (.02) 124 .08
Other 189 .23 148 .19 404 .25 319 .21
- - ---------------------------------------------------------------------------------------------------------------------
Total $2,731 3.29% $2,526 3.24% $5,510 3.36% $4,913 3.19%
=====================================================================================================================
<FN>
(1) The percentages are calculated by annualizing the expenses and comparing
that amount to the average assets for the respective three and six month
periods ended June 30, 1998 and 1997.
(2) Certain amounts have been reclassified in 1997 to conform to the 1998
classifications.
</FN>
Total other expenses for the second quarter of 1998 increased $205 from the same
period a year ago, primarily as a result of increases in salaries and benefits
(relating to increased salaries, incentives and costs), an increase in data
processing expenses (relating to a November 1997 conversion to a new data
processing system, greater technology costs and attention to the year 2000
issue), an increase in other expense due to employment fees and a significant
recovery received in 1997 related to the cost of foreclosed property. These
increases were offset by a decline in legal and professional and a reduction in
sundry losses.
Total other expenses for the six months ended June 30, 1998 increased $597 from
the same period a year ago, primarily as a result of the same items discussed
above for the second quarter.
Income Tax Provision
The effective tax rate of 42% for the three months ended June 30, 1998 is
affected by several items. The most significant are the amortization of
intangibles, tax exempt income and the California Franchise Tax Enterprise Tax
Zone Credit. The effective tax rate for the year ended December 31, 1997 was
42%.
Financial Condition and Earning Assets
Consolidated assets increased to $343 million at June 30, 1998 compared to $325
million at December 31, 1997. The increase related primarily to an increase in
loans and money market investments and was funded principally by an increase in
the Bank's core interest-bearing money market deposits and a growth in
certificates of deposits of greater than $100. See "Funding."
Money Market Investments
Money market investments, which include federal funds sold, were $18.2 million
at June 30, 1998 as compared to $2.7 million at December 31, 1997. This increase
is related to the increase in the Bank's core interest-bearing money market
deposits and a growth in certificates of deposits of greater than $100.
Securities
The following table shows the composition of the securities portfolio at June
30, 1998 and December 31, 1997. There were no issuers of securities (except U.S.
Government Securities) for which the book value of securities of any issuer held
by the Bank exceeded 10% of the Company's shareholders' equity.
SECURITIES PORTFOLIO
(dollars in thousands)
June 30, 1998 December 31, 1997
- - -----------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
- - --------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U. S. Treasury $5,003 $44 $5,047 $5,001 $40 $5,041
U. S. Government Agencies 33,171 168 33,339 34,148 179 34,327
Mortgage backed 4,401 81 4,482 5,097 74 5,171
Mutual funds 2,767 (132) 2,635 3,898 (132) 3,766
- - --------------------------------------------------------------------------------------------------------------------
Total available for sale 45,342 161 45,503 48,144 161 48,305
- - --------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Treasury 1,000 7 1,007 1,992 16 2,008
U. S. Government Agencies 4,491 31 4,522 5,485 27 5,512
State and municipal (nontaxable) 3,810 15 3,825 3,224 34 3,258
Mortgage backed 2,519 34 2,553 2,518 29 2,547
- - --------------------------------------------------------------------------------------------------------------------
Total held to maturity 11,820 87 11,908 13,219 106 13,325
Federal Reserve Bank Stock 518 ---- 518 518 ---- 518
- - --------------------------------------------------------------------------------------------------------------------
Total 12,338 87 12,426 13,737 106 13,843
- - --------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $57,680 $248 $57,928 $61,881 $267 $62,148
====================================================================================================================
<FN>
Unrealized gains generally result from the impact of current market rates being
less than those rates in effect at the time the Bank purchased the securities.
The unrealized gain on securities available for sale as of June 30, 1998 was
$161 as compared to an unrealized gain of $161 as of December 31, 1997. The
Bank's weighted average maturity of the available for sale portfolio was
approximately 1.73 years as of June 30, 1998. It is estimated by management that
for each 1% change in interest rates the value of the Company's available for
sale securities will change by 1.49%.
</FN>
The unrealized gain on securities held to maturity was $87 as of June 30, 1998
as compared to an unrealized gain of $106 as of December 31, 1997. The Bank's
weighted average maturity of the held to maturity investment portfolio was
approximately 2.79 years as of June 30, 1998. It is estimated by management that
for each 1% change in interest rates, the value of the Company's securities held
to maturity will change by approximately 1.87%.
The maturities and yields of the investment portfolio at June 30, 1998 are shown
below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
- - -------------------------------------------------------------------------------------------------------------------------------
At June 30, 1998
(dollars in thousands)
Available for Sale Held to Maturity
---------------------------------------------------------------------------------
FTE FTE
Amortized Estimated Average Amortized Estimated Average
Cost Fair Value Yield Cost Fair Value Yield
-------------------------------------------------------------------------------
U. S. Treasury:
Within 1 year $2,998 $3,008 6.03% $1,000 $1,007 6.38%
After 1 year within 5 years 2,006 2,038 6.11 ----- ----- -----
-------------------------------------------------------------------------------
Totals 5,003 5,046 6.06 1,000 1,008 6.38
-------------------------------------------------------------------------------
U.S. Government Agencies:
Within 1 year 16,000 16,030 6.02 2,992 3,002 5.87
After 1 year within 5 years 17,171 17,309 6.02 1,499 1,520 6.41
-------------------------------------------------------------------------------
Totals 33,171 33,339 6.02 4,491 4,522 6.05
-------------------------------------------------------------------------------
State and municipal:
Within 1 year ----- ----- ----- 749 751 7.41
After 1 year within 5 years ----- ----- ----- 1,634 1,641 7.74
After 10 years ----- ----- ----- 1,426 1,433 6.97
----------------------------------------
Totals ----- ----- ----- 3,809 3,825 7.39
----------------------------------------
Mortgage backed
After 1 year within 5 years 3,422 3,481 6.77 ----- ----- -----
After 5 years within 10 years 978 1,001 6.71 2,519 2,553 7.90
-------------------------------------------------------------------------------
Totals 4,400 4,482 6.76 2,519 2,553 7.90
-------------------------------------------------------------------------------
Mutual funds:
---------------------------------------
Within 1 year 2,767 2,635 4.92 ----- ----- -----
---------------------------------------
Other
After 10 years ----- ----- ----- 519 518 6.00
-------------------------------------------------------------------------------
Total investment securities 45,342 $45,503 6.03% $12,338 $12,426 6.86%
=============================================================
Net unrealized gain on
securities available for sale 161
----------------
Total investment securities,
net carrying value $45,503
================
(1) Fully taxable equivalent.
Loan Portfolio
The following table provides a breakdown of the Company's consolidated loans by
type of loan or borrower:
LOAN PORTFOLIO
(dollars in thousands)
June 30, 1998 December 31, 1997
- - ----------------------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Loans Amount Loans
- - --------------------------------------------------------------------------------------------------------------------
Commercial $89,376 37.8% $92,693 40.5%
Real estate construction 26,706 11.3 17,818 7.8
Real estate-other 90,750 38.4 90,495 39.5
Consumer 9,661 4.1 9,042 3.9
Other 20,536 8.7 19,568 8.6
Unearned fee income (747) (.3) (644) (.3)
- - --------------------------------------------------------------------------------------------------------------------
Total loans $236,282 100.0% $228,972 100.0%
====================================================================================================================
Consolidated loans increased to $236 million at June 30, 1998 from $229 million
at December 31, 1997. The decline in commercial loans related to the sale of
several of the Bank's commercial business customers and the competitive market
place. The growth in real estate construction loans is due to the impact of the
strong local economic conditions. The increase is primarily related to growth in
construction of single family residences. Additionally the Bank has elected not
to aggressively seek or renew loans where in management's opinion the Bank's the
underwriting criteria is not satisfied; this has caused a slow down in loan
production and an increase in payoffs when the Bank has not met competitive
pressures.
Approximately 56% of the loan portfolio is directly related to real estate or
real estate interests, including real estate construction loans, real
estate-other, mortgage warehouse lines (1%, included in the Commercial
category), real estate equity lines (2%, included in the Consumer category), and
loans to real estate developers for short-term investment purposes (2%) and
loans for real estate investments purposes made to non-developers (2%). The
latter two types are included in the Other category. Approximately 38% of the
loan portfolio is made up of commercial loans; however, no particular industry
represents a significant portion of such loans.
The following table shows the maturity and interest rate sensitivity of
commercial, real estate-other and real estate construction loans at June 30,
1998. Approximately 85% of the commercial and real estate loan portfolio have
floating interest rates which in management's opinion generally limits the
exposure to interest rate risk on long-term loans.
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY
(dollars in thousands) Balances maturing Interest Rate Sensitivity
- - -------------------------------------------------------------------------------------------------------------------
Predeter-
Balances at One year mined Floating
June 30, One year to five Over five interest interest
1998 or less years years rates rates
- - --------------------------------------------------------------------------------------------------------------------
Commercial $89,376 $56,330 $25,632 $7,414 $3,503 $85,873
====================================================================================================================
Real estate construction $26,706 $25,267 $908 $530 $1,108 $25,597
====================================================================================================================
Real estate-other $90,750 $13,471 $24,453 $52,825 $26,779 $63,970
====================================================================================================================
The Company utilizes a method of assigning a minimum and maximum loss ratio to
each grade of loan within each category of loans (commercial, real estate-other,
real estate construction, etc.). Loans are graded on a ranking system based on
management's assessment of the loan's credit quality. The assigned loss ratio is
based upon, among other things, the Company's prior experience, industry
experience, delinquency trends and the level of nonaccrual loans. Loans secured
by real estate are evaluated on the basis of their underlying collateral in
addition to using the assigned loss ratios. The methodology also considers (and
assigns a risk factor for) current economic conditions, off-balance sheet risk
(including SBA guarantees and servicing and letters of credit) and
concentrations of credit. In addition, each loan is evaluated on the basis of
whether or not it is impaired. For impaired loans, the expected cash flow is
discounted on the basis of the loan's interest rate. The methodology provides a
systematic approach believed by management to measure the risk of possible
future loan losses. Management and the Board of Directors evaluate the allowance
and determine the desired level of the allowance considering objective and
subjective measures, such as knowledge of the borrowers' business, valuation of
collateral and exposure to potential losses. The allowance for possible loan
losses was approximately $4.5 million at June 30, 1998, or 1.92% of total loans
outstanding. Based on information available as of the date of this report,
management believes the allowance for possible loan losses, determined as
described above, is adequate for potential losses foreseeable at June 30, 1998.
The allowance for possible loan losses is a general reserve available against
the total loan portfolio and off-balance sheet credit exposure. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions or other
factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible loan
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.
The following schedule provides an analysis of the allowance for possible loan
losses:
ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands)
Quarter ended Six months ended Year ended
June 30, June 30, December 31,
------------------------------------------------------------
1998 1997 1998 1997 1997
- - --------------------------------------------------------------------------------------------------------------------
Balance, beginning of the period $4,543 $4,015 $4,493 $4,005 $4,005
Charge-offs by loan category:
Commercial 125 115 125 115 242
Real estate-construction ---- 33 ---- 33 ----
Real estate-other ---- ---- ---- ---- 33
Consumer ---- ---- ---- ---- 13
- - --------------------------------------------------------------------------------------------------------------------
Total charge-offs 125 148 125 148 288
- - --------------------------------------------------------------------------------------------------------------------
Recoveries by loan category:
Commercial 54 29 72 35 67
Real estate-other ---- ---- 32 4 4
Consumer 68 ---- 68 ---- ----
- - --------------------------------------------------------------------------------------------------------------------
Total recoveries 122 29 172 39 71
- - --------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 3 119 (47) 109 217
- - --------------------------------------------------------------------------------------------------------------------
Provision charged to expense ---- 180 ---- 180 705
- - --------------------------------------------------------------------------------------------------------------------
Balance, end of the period $4,540 $4,076 $4,540 $4,076 $4,493
====================================================================================================================
Ratios:
Net charge-offs to average loans, annualized .01% .23% (.04)% .10% .10%
Allowance to total loans at the end of the period 1.92 1.87 1.92 1.87 1.96
Allowance to nonperforming loans at end of the period 681 266 681 266 1,060
====================================================================================================================
During the three and six months ended June 30, 1998 and 1997, there were $125
and $148 in charge-offs, respectively. Management does not believe there were
any trends indicated by the detail of the aggregate charge-offs for any of the
periods discussed. The allowance for possible loan losses was 681% of
nonperforming loans at June 30, 1998 compared to 1,060% at December 31, 1997.
This decrease relates mainly to the modest increase in nonperforming loans
described below.
Nonperforming Loans
Nonperforming loans consist of loans for which the accrual of interest has been
suspended and other loans with principal or interest contractually past due 90
days or more are set forth in the following table:
NONPERFORMING LOANS
(dollars in thousands)
June 30, December 31,
1998 1997
- - ------------------------------------------------------------------------------------------------------------------
Loans accounted for on a non-accrual basis $470 $360
Loans restructured and in compliance with modified terms 48 63
Other loans with principal or interest contractually past
due 90 days or more 149 1
- - -------------------------------------------------------------------------------------------------------------
Total $667 $424
=============================================================================================================
As of June 30, 1998, nonperforming loans consisted of ten loans.
Management conducts an ongoing evaluation and review of the loan portfolio in
order to identify potential nonperforming loans. Management considers loans
which are classified for regulatory purposes, loans which are graded as
classified by the Bank's outside loan review consultant and internal personnel,
as to whether they (i) represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources, or (ii) represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms. Based on such reviews as of June 30, 1998, management has not identified
any loans not included within the Nonperforming Loan table above with respect to
which known information causes management to have serious doubts about the
borrowers' abilities to comply with present repayment terms, such that the loans
might subsequently be classified as nonperforming. Changes in general or local
economic conditions or specific industry segments, rising interest rates,
declines in real estate values, year 2000 processing problems and acts of nature
could have an adverse effect on the ability of borrowers to repay outstanding
loans and the value of real estate and other collateral securing such loans.
Funding
The following table provides a breakdown of deposits by category as of the dates
indicated:
DEPOSIT CATEGORIES
(dollars in thousands)
June 30, 1998 December 31, 1997
- - --------------------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Deposits Amount Deposits
- - --------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $75,269 25.2% $78,437 29.0%
Interest-bearing demand 55,869 18.7 45,655 16.9
Money market and savings 93,854 31.5 82,619 30.6
Certificates of deposit:
Less than $100 12,729 4.3 15,207 5.6
$100 or more 60,457 20.3 48,427 17.9
- - --------------------------------------------------------------------------------------------------------------------
Total $298,178 100.0% $270,345 100.0%
====================================================================================================================
Deposits as of June 30, 1998 were $298 million compared to $270 million at
December 31, 1997. The most significant growth in deposits has occurred in the
area of interest-bearing core deposits which increased approximately $21
million. Management believes this growth in interest-bearing core deposits has
been due to unusual activity by several of the Bank's customers and to the
business development efforts of the Bank's business development officers.
Because of this high level of unusual activity, the Bank has maintained
significant short-term liquidity. The growth in the certificates of deposit
greater than $100 was due to activity of several significant customers. See
"Liquidity."
Asset/Liability Management
The Company's balance sheet position is asset-sensitive (based upon the
significant amount of variable rate loans and the repricing characteristics of
its deposit accounts). This balance sheet position generally provides a hedge
against rising interest rates, but has a detrimental effect during times of
interest rate decreases. Net interest revenues are negatively impacted by a
decline in interest rates.
To counter a portion of its asset sensitive interest rate position, the Bank
entered into an interest rate "floor" in the amount of $10 million which expires
in May 1999. The Bank has paid a fixed premium of $47 for which it will receive
the amount of interest on $10 million based on the difference of 7% and prime
when prime is less than 7%. This protects the Bank against decreases in its net
income when the prime decreases to less than 7%. Settlement is done quarterly
and the Bank records the impact of this hedge on an accrual basis.
Capital and Liquidity
Capital
The Federal Reserve Board's risk-based capital guidelines require that total
capital be in excess of 8% of total assets on a risk-weighted basis. Under the
guidelines for a bank holding company, capital requirements are based upon the
composition of the Company's asset base and the risk factors assigned to those
assets. The guidelines characterize an institution's capital as being "Tier 1"
capital (defined to be principally shareholders' equity less intangible assets)
and "Tier 2" capital (defined to be principally the allowance for loan losses,
limited to one and one-fourth percent of gross risk weighted assets). The
guidelines require the Company to maintain a risk-based capital target ratio of
8%, one-half or more of which should be in the form of Tier 1 capital.
The Comptroller of the Currency also requires SJNB to maintain adequate capital.
The Comptroller's current regulations require national banks to maintain Tier 1
leverage capital ratio equal to at least 3% to 5% of total assets, depending on
the Comptroller's evaluation of the Bank. The Comptroller also has adopted
risk-based capital requirements. Similar to the Federal Reserve's guidelines,
the amount of capital the Comptroller requires a bank to maintain is based upon
the composition of its asset base and risk factors assigned to those assets. The
guidelines require the Bank to maintain a risk-based capital target ratio of 8%,
one-half or more of which should be in the form of Tier 1 capital. The capital
ratios of the Bank are similar to the capital ratios of the Company.
The table below summarizes the various capital ratios of the Company at June 30,
1998 and December 31, 1997.
Risk-based and Leverage Capital Ratios
(dollars in thousands)
Company June 30, 1998 December 31, 1997
- - -------
---------------------------------------------------------------
Risk-based Amount Ratio Amount Ratio
---------------------------------------------------------------
Tier 1 capital $29,216 10.82% $29,167 11.28%
Tier 1 capital minimum requirement 10,802 4.00 10,344 4.00
---------------------------------------------------------------
Excess $18,414 6.82% $18,823 7.28%
===============================================================
Total capital $32,606 12.07% $32,415 12.53%
Total capital minimum requirement 21,604 8.00 20,689 8.00
------------------------------------------------------------
Excess $11,002 4.07% $11,726 4.53%
============================================================
Risk-adjusted assets $270,050 $258,608
================== ==================
Leverage
Tier 1 capital $29,216 8.90% $29,167 9.07%
Minimum leverage ratio requirement 13,125 4.00 12,870 4.00
------------------------------------------------------------
Excess $16,091 4.90% $16,297 5.07%
============================================================
Average total assets $328,118 $321,747
================== ==================
Bank
Risk-based
Tier 1 capital $28,707 10.63% $28,879 11.17%
Tier 1 capital minimum requirement 10,799 4.00 10,341 4.00
------------------------------------------------------------
Excess $17,908 6.63% $18,538 7.17%
------------------------------------------------------------
Total capital $32,096 11.89% $32,126 12.43%
Total capital minimum requirement 21,598 8.00 20,683 8.00
------------------------------------------------------------
Excess $10,498 3.89% $11,443 4.43%
============================================================
Risk-adjusted assets $269,976 $258,533
================== ==================
Leverage
Tier 1 capital $28,707 8.74% $28,879 8.97%
Minimum leverage ratio requirement 13,134 4.00 12,881 4.00
-------------------------------------------------------------
Excess $15,573 4.74% $15,998 4.97%
============================================================
Average total assets $328,351 $322,014
================== ==================
On April 22, 1998, the Board of Directors approved the repurchase from
time-to-time of up to $3.5 million of its common stock through open market or
privately negotiated transactions. To date the Company has repurchased 72,300
shares for a total price of $2.9 million.
Liquidity
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan funding and deposit withdrawals in an economically
feasible manner. Liquidity requirements are evaluated by taking into
consideration factors such as deposit concentrations, seasonality and
maturities, loan demand, capital expenditures, and prevailing and anticipated
economic conditions. SJNB's business is generated primarily through customer
referrals and employee business development efforts; however the Bank utilizes
purchased deposits to satisfy temporary liquidity needs.
The Bank's source of liquidity consists of its deposits with other banks,
overnight funds sold to correspondent banks, short-term securities held to
maturity, and securities available for sale less short-term borrowings. At June
30, 1998, consolidated net liquid assets totaled $92 million or 28% of
consolidated total assets as compared to $62 million or 19% of consolidated
total assets at December 31, 1997. The increase in the liquid assets is due to
the growth of the deposits. See "Funding." In addition to the liquid asset
portfolio, SJNB also has available $17 million in lines of credit with five
major commercial banks, a collateralized repurchase agreement with a maximum
limit of $30 million (of which approximately $5 million has been utilized at
June 30, 1998), the guaranteed portion of the SBA loan portfolio of
approximately $16 million, and a credit facility with the Federal Reserve Bank
based on loans secured by real estate for approximately $4 million.
SJNB is primarily a business and professional bank and, as such, its deposit
base may be more susceptible to economic fluctuations than other potential
competitors. Accordingly, management strives to maintain a balanced position of
liquid assets to volatile and cyclical deposits. Commercial clients in their
normal course of business maintain balances in large certificates of deposit,
the stability of which hinge upon, among other factors, market conditions,
interest rates and business' seasonality. Large certificates of deposit amounted
to 20% of total deposits on June 30, 1998 and 18% at December 31, 1997.
Liquidity is also affected by portfolio maturities and the effect of interest
rate fluctuations on the marketability of both assets and liabilities. The loan
portfolio consists primarily of floating rate, short-term loans. On June 30,
1998, approximately 42% of total consolidated assets had maturities under one
year and 82% of total consolidated loans had floating rates tied to the prime
rate or similar indexes. The short-term nature of the loan portfolio, and loan
agreements which generally require monthly interest payments, provide the
Company with a secondary source of liquidity. There are no material commitments
for capital expenditures in 1998.
Effects of Inflation
The most direct effect of inflation on the Company is higher interest rates.
Because a significant portion of the Bank's deposits are represented by
non-interest-bearing demand accounts, changes in interest rates have a direct
impact on the financial results of the Bank. See "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
1997 or the six months of 1998.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company defines interest rate sensitivity as the measurement of the mismatch
in repricing characteristics of assets, liabilities and off balance sheet
instruments at a specified point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential mismatch in the change in the rate of
interest income and interest expense that would result from a change in interest
rates. Mismatches in interest rate repricing among assets and liabilities arise
primarily from the interaction of various customer businesses (i.e., types of
loans 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 June 30, 1998 was asset-sensitive, based
upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts. This position provides a hedge against
rising interest rates, but has a detrimental effect during times of interest
rate decreases. Net interest revenues are negatively impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known repricing dates of certain assets and liabilities and
assumed repricing dates of others. Management believes there has been no
significant change in the Bank's market risk exposures disclosed in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. See
"Summary of Financial Results - Net Interest Income."
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor the Bank is a party to any material pending legal
proceedings other than as previously disclosed. Material legal proceedings were
reported in the Company's Form 10-K for the year ended December 31, 1997; and,
as of the date of this report, there have been no material changes in said
proceedings other than as noted below.
On June 30, 1998, the U. S. Bankruptcy Court dismissed San Jose National Bank
from the Giannotta Properties, Inc. adversary proceedings upon the approval of
Order Approving Compromise of Controversy. Such compromise released the Bank
without any significant liability or contingencies.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders of the Company on May 27, 1998 which
meeting was adjourned and reconvened on June 27, 1998, 2,107,184 shares were
represented. In the election of directors, the shareholders of the Company voted
as follows:
Number of Number of
Votes Cast Votes
Name For Nominee Withheld
--------------- ------------- ----------
Akamine, Ray S. 2,056,467 50,717
Archer, Robert A. 2,037,703 49,481
Bruno, Albert V. 2,057,626 49,558
Diridon, Rod 2,035,881 71,303
Gorry, F. Jack 2,057,428 49,756
Kenny, James R. 2,057,703 49,481
Lund, Arthur K. 2,045,150 62,034
Oneal, Louis 2,057,013 50,171
Rubino, Diane 2,057,703 49,481
Shen, Douglas L. 2,056,329 50,855
Vandeweghe, Gary S. 2,057,389 49,795
The shareholders approved the amendment of the 1996 Stock Option Plan to
increase the authorized shares of common stock subject to the plan from 310,000
shares to 460,000 shares with 1,361,151 shares being voted for the approval,
374,895 shares being voted against, 35,064 shares abstained and broker non-votes
of 337,984.
The shareholders approved the amendment of the Articles of Incorporation
concerning the elimination of cumulative voting with 1,404,703 shares being
voted for the approval, 273,871 shares being voted against,90,626 shares
abstained and broker non-votes of 337,984.
The shareholders approved the amendment of the Articles on Incorporation
restricting shareholder action by written consent with 1,420,384 shares being
voted for the approval, 261,288 shares being voted against, 87,528 shares
abstained and broker non-votes of 337,984.
In addition, the shareholders ratified the selection of KPMG Peat Marwick LLP as
the Company's independent public accountants for the year ending December 31,
1998, with 2,087,216 shares being voted for the ratification, 12,173 shares
being voted against and 7,795 shares abstained.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
(3)a. The Certificate of Amendment to Articles
of Incorporation filed June 17, 1988 and restated
Articles of Incorporation are hereby incorporated
by reference to Exhibit (3) b. of the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1988.
(3)b. Amendments to the Registrant's bylaws dated
February 28, 1996 and the Registrant's restated
bylaws as of February 28, 1996 are hereby
incorporated by reference to Exhibit (3) b. of the
Registrant's Quarterly Report on Form 10-QSB for
the quarterly period ended June 30, 1996.
(3)c. Amendment to the Registrant's bylaws dated
January 27, 1998 are hereby incorporated by
reference to Exhibit (3) c. of the Registrant's
Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998.
*(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)f. of the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended June 30,1995.
*(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
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 1992 Director Stock Option Plan
is hereby incorporated by reference from Exhibit
(10) i. of the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1992.
*(10)f. Amendment No.1 to the 1992 Director Stock Option
Plan is hereby incorporated by reference to Exhibit
(10)i. of the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended June 30,1995.
*(10)g. The form of Stock Option Agreement being utilized
under the 1992 Director Stock Option Plan is hereby
incorporated by reference from Exhibit (10)j. of
the Registrant's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1992.
*(10)h. The Registrant's Amended 1996 Stock Option Plan
is incorporated by reference to exhibit 99.1 of the
Registrant's Form S-8 filed July 1, 1998.
*(10)i. Agreement between James R. Kenny and SJNB Financial
Corp. and San Jose National Bank dated March 27,
1996 is hereby incorporated by reference to Exhibit
(10)m. of the Registrant's Quarterly Form 10-QSB
for the quarterly period ended June 30, 1996.
*(10)j. Agreement between Eugene E. Blakeslee and SJNB
Financial Corp. and San Jose National Bank dated
March 27, 1996 is hereby incorporated by reference
to Exhibit (10)n. of the Registrant's Quarterly
Form 10-QSB for the quarterly period ended June, 30
1996.
(10)k. 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)l. Sublease by and between McWhorter's Stationary
and San Jose National Bank, dated July 6, 1995, and
as amended August 11, 1995 and September 21, 1995,
for premises at 95 South Market Street, San Jose CA
is hereby incorporated by reference to Exhibit (10)
o. of the Registrant's Quarterly Report on Form
10-QSB for the quarterly period ended September 30,
1995.
(10)m. Sublease by and between Greater Unified Management
Businesses, Inc. (d.b.a. as Logistics) and SJNB
Financial Corp., dated January 15, 1996, and as
amended March 19, 1996, for premises at 95 South
Market Street, San Jose CA is hereby incorporated
by reference to Exhibit (10) s. of the Registrant's
Quarterly Form 10-QSB for the quarterly period
ended June 30, 1996.
*(10)n. The Registrant's 1996 Stock Option Plan, as
amended, is hereby incorporated by reference from
Exhibit 99.1 of the Registrant's Registration
Statement on Form S-8, as filed on July 2, 1998
(27) Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter.
SIGNATURES
Pursuant to the requirements 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.
SJNB FINANCIAL CORP.
(Registrant)
Date: August 12, 1998 S/J. Kenny
James R. Kenny
President and Chief Executive Officer
Date: August 12, 1998 S/E. Blakeslee
Eugene E. Blakeslee
Executive Vice President and Chief Financial
Officer (Chief Accounting Officer)