SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File Number: 0-11771
SJNB FINANCIAL CORP.
(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)
(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 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 2,349,741 shares of common
stock outstanding as of August 12, 1999.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. - FINANCIAL STATEMENTS
- ------
SJNB FINANCIAL CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statements of Shareholders' Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------ CONDITION AND RESULTS OF OPERATIONS 8
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 28
- ------
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
- ------
Item 5. OTHER INFORMATION 29
- ------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 29
- ------
SIGNATURES 31
PART I - FINANCIAL INFORMATION
Item 1. -Financial Statements
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(in thousands)
June 30,
1999 December 31,
Assets (Unaudited) 1998
- -----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks $18,425 $11,239
Money market investments and Fed Funds sold 12,572 22,285
Investment securities:
Available for sale 56,187 35,216
Held to maturity (Fair value: $10,133 at June 30, 1999
and $11,369 at December 31, 1998) 10,279 11,173
- -----------------------------------------------------------------------------------------------------------------------------
Total investment securities 66,466 46,389
- -----------------------------------------------------------------------------------------------------------------------------
Loans and leases 296,969 261,380
Allowance for possible loan and lease losses (4,938) (4,778)
- -----------------------------------------------------------------------------------------------------------------------------
Loans and leases, net 292,031 256,602
- -----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,706 3,770
Accrued interest receivable and other assets 6,595 5,622
Intangibles, net of accumulated amortization of $2,393 at
June 30, 1999 and $2,164 at December 31, 1998 3,845 4,027
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $403,640 $349,934
=============================================================================================================================
Liabilities and Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing $76,464 $70,962
Interest-bearing 254,661 231,480
- -----------------------------------------------------------------------------------------------------------------------------
Total deposits 331,125 302,442
- -----------------------------------------------------------------------------------------------------------------------------
Other short-term borrowings 32,497 5,000
Accrued interest payable and other liabilities 5,923 7,010
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 369,545 314,452
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, no par value; authorized, 20,000 shares;
issued and outstanding, 2,349 shares at June 30, 1999
and 2,450 shares at December 31, 1998 13,840 16,777
Retained earnings 20,440 18,405
Accumulated other comprehensive (loss) income (185) 300
- -----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 34,095 35,482
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies ---- ----
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholder's Equity $403,640 $349,934
=============================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed 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,
----------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans and leases $6,891 $6,040 $13,321 $12,155
Interest on money market investments 244 275 384 395
Interest and dividends on investment securities available for sale 586 757 1,104 1,514
Interest on investment securities held to maturity 130 190 284 380
Other interest and investment income (6) (3) (20) (5)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 7,845 7,259 15,073 14,439
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest expense on interest-bearing deposits:
Certificates of deposit over $100 1,198 822 2,250 1,501
Other 1,410 1,417 2,603 2,953
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,608 2,239 4,853 4,454
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 5,237 5,020 10,220 9,985
- -----------------------------------------------------------------------------------------------------------------------------
Provision for possible loan and lease losses ----- ----- 100 -----
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan and lease losses 5,237 5,020 10,120 9,985
- -----------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges on deposits 196 151 352 312
Other operating income 69 100 411 223
Net loss on securities available for sale ----- ----- ----- (8)
- -----------------------------------------------------------------------------------------------------------------------------
Total other income 265 251 763 527
- -----------------------------------------------------------------------------------------------------------------------------
Other expenses:
Salaries and benefits 1,905 1,710 3,709 3,330
Occupancy 224 182 440 349
Other 1,042 839 2,082 1,831
- -----------------------------------------------------------------------------------------------------------------------------
Total other expenses 3,171 2,731 6,231 5,510
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,331 2,540 4,652 5,002
Income taxes 954 1,059 1,946 2,086
- -----------------------------------------------------------------------------------------------------------------------------
Net income $1,377 $1,481 $2,706 $2,916
=============================================================================================================================
Net income per share - basic $0.59 $0.59 $1.14 $1.16
=============================================================================================================================
Net income per share - diluted $0.56 $0.56 $1.08 $1.10
=============================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed 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, 1998 Shares Stock Earnings for Sale Equity
- -----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 2,493 $18,800 $14,254 $105 $33,159
----------
Net income 2,916 2,916
Other comprehensive income - Unrealized losses
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
=============================================================================================================================
Six months ended June 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998 2,450 $16,777 $18,405 $300 $35,482
----------
Net income 2,706 2,706
Other comprehensive income - Unrealized losses
on securities held for sale, net (485) (485)
----------
Comprehensive income 2,221
----------
Common stock repurchased (114) (3,105) (3,105)
Stock options exercised 13 168 168
Cash dividends (671) (671)
- -----------------------------------------------------------------------------------------------------------------------------
Balances, June 30, 1999 2,349 $13,840 $20,440 ($185) $34,095
=============================================================================================================================
<FN>
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
</FN>
SJNB FINANCIAL CORP. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six months ended
June 30,
-------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $2,706 $2,916
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan and lease losses 100 ----
Depreciation and amortization 292 270
Amortization on intangibles 228 218
Net loss on securities available for sale ---- 7
Amortization of discount (premium) on investment securities, net 30 (19)
Increase in intangibles assets (45) (80)
Increase in accrued interest receivable and other assets (974) (333)
(Decrease) increase in accrued interest payable and other liabilities (764) 37
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,573 3,016
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale/maturity of securities available for sale 7,914 11,820
Maturities of securities held to maturity 3,861 2,200
Purchase of securities available for sale (29,710) (9,011)
Purchase of securities held to maturity (2,980) (798)
Loans and leases, net (35,529) (7,115)
Capital expenditures (228) (165)
Acquisition of Epic Funding Corp. - cash portion ---- (206)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (56,672) (3,275)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
Deposits, net 28,683 27,833
Other short-term borrowings 27,497 (11,000)
Cash dividends (671) (700)
Stock repurchase (3,105) (2,614)
Proceeds from stock options exercised 168 487
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 52,572 14,006
- -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and equivalents (2,527) 13,747
Cash and equivalents at beginning of year 33,524 25,525
- -----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $30,997 $39,272
=============================================================================================================================
Other cash flow information:
Interest paid $4,736 $4,573
=====================================
Income taxes paid 2,300 2,025
=============================================================================================================================
Noncash transactions:
Unrealized loss on securities available for sale, net of tax $(485) $(1)
=============================================================================================================================
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 Condensed 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 condensed consolidated financial statements of SJNB
Financial Corp. (the "Company") and its subsidiary, San Jose National
Bank, and its subsidiary Epic Funding Corp., 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, 1998.
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, 1999 June 30, 1998
---------------------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share
Income Shares Amounts Income Shares Amounts
--------------------------------------------------------------------------------------------------------------------
Net income and basic EPS $1,377 2,344 $0.59 $1,481 2,504 $0.59
============== ==============
Effect of stock option dilutive
shares 122 158
---------------------------- ---------------------------
Diluted earnings per share $1,377 2,466 $0.56 $1,481 2,662 $0.56
===================================================================================
Six months ended Six months ended
June 30, 1999 June 30, 1998
--------------------------------------------------------------------------------------------------------------------
Net Per Share Net Per Share
Income Shares Amounts Income Shares Amounts
--------------------------------------------------------------------------------------------------------------------
Net income and basic EPS $2,706 2,382 $1.14 $2,916 2,505 $1.16
============== ==============
Effect of stock option dilutive
shares 120 150
---------------------------- ---------------------------
Diluted earnings per share $2,706 2,501 $1.08 $2,916 2,655 $1.10
===================================================================================
Note C Segment Reporting
-----------------
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as of December 31, 1998; however,
since management views the Company as operating in only one segment,
separate reporting of financial information under SFAS No. 131 is not
considered necessary.
Note D Other Recent Accounting Pronouncements
--------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement requires that an entity recognizes all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In
July 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of
SFAS No. 133, which delays the effective date of SFAS No. 133 to all
fiscal quarters of fiscal years beginning after June 15, 2000. The
Company expects to adopt this statement on January 1, 2001. The
Company will begin evaluating the impact of its adoption on the
Company's consolidated financial statements. Currently, management
believes the Statement would not have a significant effect on the
Company's 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 ("SJNB" and the "Bank"), and the Bank's subsidiary, Epic Funding
Corp. ("Epic"), 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, 1999 and 1998 and the liquidity and financial
condition of the Company, SJNB and Epic as of June 30, 1999 and December 31,
1998.
All dollar amounts in the text in Item 2 are in thousands, except per share
amounts or as otherwise indicated.
Forward-looking Information
- ---------------------------
This Quarterly Report on Form 10-Q 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; a potential
declining health of the economy, either nationally or regionally; the
deterioration of credit quality, which could cause an increase in the provision
for possible loan and lease losses; changes in the regulatory environment;
changes in business conditions, particularly in Santa Clara County real estate
and technology 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 which
could cause disruptions in the Company's operations; 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, 1998. See also the section below entitled "Year 2000
Issue" and other risk factors discussed elsewhere in this Report.
Current Developments
- --------------------
During the first quarter of 1999, the Company announced that the Board of
Directors had approved the repurchase of up to $3.5 million of the Company's
common stock. Through June 30, 1999, the Company had repurchased 114,500 shares
of the Company's common stock for a total price of $3.1 million. The Company's
stock repurchase program was suspended effective April 1, 1999.
Year 2000 Issue
- ---------------
The "Year 2000 issue" relates to the fact that many computer programs and other
technology utilizing microprocessors use only two digits to represent a year,
such as "99" to represent "1999." In the year 2000 ("Y2K"), such
programs/processors could incorrectly treat the year 2000 as the year 1900. This
issue has grown in importance as the use of computers and microprocessors has
become more pervasive throughout the economy, and interdependencies between
systems has 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, communications, 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 those of their customers
or suppliers. The Company's business is heavily dependent on technology and data
processing. To address these issues, the Company has created a Year 2000 team
whose members are familiar with the Company's business and operations.
The Company does not rely on its own data processing software for its
mission-critical needs. Rather, it uses outside vendors to license software
and/or data processing services for its critical applications such as data and
item processing and customer statements. The Company is also dependent on an IBM
AS/400 computer and OS/400 operating system, as well as personal computers
connected on a local area network. The foregoing systems are classified by the
Company as mission-critical information technology ("IT") systems.
The Company's business also involves non-IT products and services, some of which
have embedded technology which might not be Year 2000 compliant. Some non-IT
products and services involve various infrastructure issues such as power,
communications and water, as well as elevators, ventilation and air conditioning
equipment. The Company classifies power and communications as non-IT
mission-critical systems.
The Company's application software, data processing vendors, computer operating
systems, local area network and the power and communication infrastructure
provide critical support to substantially all of its business and operations.
Failure to successfully complete renovation, validation and implementation of
its mission-critical IT systems could have a material adverse effect on the
operations and financial performance of the Company. Moreover, Year 2000 issues
experienced by significant vendors or customers of the Company or power or
communications systems could negatively impact the business and operations of
the Company even if its own critical IT systems are capable of functioning
satisfactorily. Due to the numerous issues and problems which might arise and
the lack of guarantees concerning Year 2000 readiness from non-IT service
providers such as power and communication systems vendors, the Company cannot
quantify the potential cost of problems if the Company's renovation and
implementation efforts or the efforts of significant vendors or customers are
not successful.
State of Readiness
The Company believes it has substantially completed its Year 2000 preparations.
During the latter half of 1997 and the first half of 1998, the Company conducted
a comprehensive review of its IT systems to identify systems that present Year
2000 issues. The Company has developed a plan which it believes should
satisfactorily resolve Year 2000 issues related to its mission-critical IT
systems. The Company's Y2K team has also utilized external resources provided by
its outside vendors and a consultant hired to assist the Company. At the date of
this Report, management of the Company had not identified any serious problems
with any of its mission-critical systems.
The Company converted to a new core processing system (which handles accounting
for loans, deposit accounts and general ledger) in November 1997. The conversion
to this system was not based on Year 2000 issues; however, the vendor of this
system represented to the Company that the system was Y2K compliant. The Company
ran tests on its core processing system at a remote disaster recovery site
during October 1998 with technical assistance from the vendor and an outside
consultant. Actual data from a prior period was used to conduct future date
tests.
Vendors of the Company's other critical IT systems and services have also
informed the Company that their products/systems are Y2K compliant. Based on
information provided by outside service providers and its testing process the
Company believes that its mission-critical IT systems are substantially Y2K
compliant.
By March 31, 1999, testing of both critical and non-critical local area network
applications was substantially complete. The Company has established a policy
limiting changes to ensure the Year 2000 readiness of various systems is not
compromised during the remainder of 1999. The Company cannot test for Y2K
readiness of its power and telecommunication vendors, although the Company is
monitoring their readiness.
During the second quarter of 1999, the Company replaced its voice mail and
e-mail systems which were determined not to be Year 2000 compliant, with Year
2000 compliant systems.
Costs
The Company is expensing all period costs associated with the Year 2000 issue.
Through June 30, 1999 the amount of such expenses since inception of the project
totaled approximately $193. It is anticipated that additional Year 2000 Project
expenses for the remainder of 1999 will be less than $10. Expenses include costs
for consultants, running tests and technical assistance from vendors, as well as
development of contingency plans and costs of communicating with customers
concerning Year 2000 issues. Also included are capital expenditures of
approximately $50 which have been incurred during 1999 to replace equipment or
systems which were nearing the end of their life cycle and found to be non-Year
2000 compliant. These cost estimates exclude the expense of the Company's
internal staff time and systems or products which were replaced for other
business reasons. The diversion of resources to Year 2000 issues has resulted in
some delays in implementation of other information systems projects. The Company
does not believe that these delays have had a material effect on its growth in
revenues or expense. There can be no assurance that these expenses will not
increase as further assessment of vendor and customer readiness and contingency
planning for the Year 2000 continues.
Risks
It is inherently difficult to predict the future outcome of most events. The Y2K
issue is no exception due to the complexity of technology, the numerous
variables and the inability to assess the impact of the Year 2000 issue on the
local, national and international economy. Management has identified a
long-range, most reasonably likely, worst-case scenario. This scenario suggests
that the Y2K issue might negatively impact some significant customers and non-IT
vendors/products through the failure of the customer and/or vendor to be
prepared or the impact on them of the failure of their own vendors and
customers. Management believes that this scenario could occur in conjunction
with an economic recession arising from the Y2K issue. The Bank's asset quality
and earnings could be adversely impacted in that event. It is not possible to
predict the effect of this Y2K scenario on the economic viability of the Bank's
customers and the related adverse impact it may have on the Company's financial
position and results of operations, including the level of the Bank's provision
for possible loan losses in future periods. Further, there can be no assurance
that other possible adverse scenarios will not occur.
The Company presently believes that, based upon its Year 2000 testing program
and assuming representations of Year 2000 readiness from significant vendors and
customers are accurate, the Year 2000 issue should not pose significant
operational risks for the Company's IT systems. However, other significant risks
relating to the Year 2000 issue are that of the unknown impact of this problem
on the operations of the Bank's customers and vendors, the impact of
infrastructure failures such as power, communications and water on the Company's
IT systems, the economy and future actions which banking or securities
regulators may take.
The Company is making efforts to ensure that its customer base is aware of the
Year 2000 issue. In addition to seminars for and mailings to its customer base,
the Bank has amended its credit policy and credit authorization documentation to
include consideration regarding the Year 2000 issue. Significant customer
relationships have been identified, and such customers have been 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 was substantially completed in late 1998. The Company is taking
follow-up action in 1999 based on the results of this assessment.
The Company has also attempted to contact major vendors and suppliers of
non-software products and services (including those where products utilize
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 continue to monitor information provided by such vendors
through the century date change.
Federal banking regulators have responsibility for supervision and examination
of banks to determine whether they have an effective plan for identifying,
renovating, testing and implementing solutions for Year 2000 processing and
coordinating Year 2000 processing capabilities with their 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 ensure 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.
Contingency Plans
The Company maintains a Disaster Contingency and Business Resumption Plan which
contains policies and procedures to follow in the event of a significant
business disruption due to events such as fire, earthquake, flood, etc. The
Company has recently developed contingency plans to address potential business
disruptions which might result from Year 2000 issues. Management engaged an
independent party to review these plans during June, 1999. While the plans are
considered to be substantially complete, the Company will continue to refine
these plans during the third quarter of 1999.
Selected Financial Data
The following presents selected financial data and ratios as of and for the three and six months ended June 30, 1999 and 1998:
SELECTED FINANCIAL DATA AND RATIOS
- -----------------------------------------------------------------------------------------------------------------------------
For the quarters For the six months
ended June 30, ended June 30,
-------------------------------------------------------------
SELECTED ANNUALIZED OPERATING RATIOS: 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
Return on average equity 16.51% 17.33% 15.98% 17.30%
Return on average tangible equity 20.22 20.99 19.57 20.92
Return on average assets 1.46 1.79 1.50 1.79
Net (recoveries) losses to average loans and leases (0.05) 0.01 (0.04) (0.04)
Average equity to average assets 8.84 10.31 9.38 10.35
Average tangible equity to average tangible assets 7.90 8.40 8.40 9.31
PER SHARE DATA:
Net income per share - basic $0.59 $0.59 $1.14 $1.16
Net income per share - diluted 0.56 0.56 1.08 1.10
Net income per share - (core) - diluted (1) 0.60 0.60 1.17 1.18
Dividends per share 0.14 0.14 0.28 0.28
=============================================================================================================================
SHAREHOLDERS' EQUITY At June 30, At December At June 30,
1999 31, 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity per share $14.52 $14.48 $13.66
Tangible equity per share 12.88 12.84 11.92
SELECTED FINANCIAL POSITION RATIOS:
- -----------------------------------------------------------------------------------------------------------------------------
Leverage capital ratio 8.09% 9.10% 8.90%
Total risk based capital ratio 10.31 11.82 12.07
Nonperforming loans and leases to total loans and leases 0.14 0.09 0.28
Nonperforming assets to total assets 0.10 0.07 0.19
Allowance for possible loan and lease losses to total loans 1.66 1.83 1.92
Allowance for possible loan and lease losses
to nonperforming loans and leases 1,201% 1,983% 681%
Allowance for possible loan and lease losses
to nonperforming assets 1,201% 1,983% 681%
=============================================================================================================================
<FN>
(1) Excludes after-tax effect of goodwill and core deposit intangible
amortization.
</FN>
Summary of Financial Results
- ----------------------------
The Company reported net income of $1,377 or $0.56 per share - diluted for the
quarter ended June 30, 1999, compared with net income of $1,481 or $0.56 per
share - diluted for the second quarter of 1998. The decrease in net income
compared to the quarter ended June 30, 1998 was primarily the result of the net
interest margin declining 63 basis points due to the prime rate decreases in
late 1998 and an increase in the cost of funds, an increase in expenses
associated with the Bank's new leasing subsidiary, Epic, and the establishment
of a de novo branch in Danville, CA, an increase in legal costs associated with
the year end proxy and other matters and an increase in directors and
shareholder costs.
For the six months ended June 30, 1999, net income was $2,706 or $1.08 per share
- - diluted compared with net income of $2,916 or $1.10 per share - diluted for
the same period in 1998. The decrease in net income and diluted earnings per
share compared to the six months ended June 30, 1998 resulted from the factors
noted above in the explanation for the second quarters of 1999 and 1998.
Net Interest Income
- -------------------
Net interest income for the quarter ended June 30, 1999, increased $217 as
compared to the same quarter a year ago. The Bank's average earning assets for
the same period increased by $46 million, as the result of growth in the Bank's
loan and lease portfolio of $45 million.
Net interest margin for the second quarter of 1999 was 5.97% as compared to
6.53% for the same quarter in 1998. This decrease was primarily related to the
decrease in the yield on earning assets; in particular the yield on loans and
leases, which accounted for approximately 80% of earning assets, declined from
10.66% to 9.67% and the cost of funds (as compared to the decline in loan
yields) decreased from 3.96% to 3.93%. This decrease in interest rates was due
to the lower interest rate environment during the fourth quarter of 1998 and the
first quarter of 1999. The stable cost of funds was due to the change in the mix
of the Bank's deposit base which had the impact of offsetting any decrease in
the cost of funds relative to decrease in yields on earning assets.
The net interest margin for the six months of 1999 was 6.11% as compared to
6.64% for the same period in 1998. This decrease was primarily related to the
decrease in the yield on earning assets; in particular the yield on loans and
leases, which accounted for approximately 81% of earning assets, declined from
10.76% to 9.70% which decline was offset by a decrease in the cost of funds from
4.03% to 3.86%. This decrease in interest rates was due to the lower interest
rate environment during the fourth quarter of 1998 and the first quarter of
1999. The cost of funds decrease did not decline in proportion with the decrease
in the yield on earning assets because of the change in the mix of the Bank's
deposit base and because rates on deposits resist declines because of their
lower base.
Economic conditions in Northern California have remained relatively strong in
the first six months of 1999, although there are indications that this economic
strength could be threatened by the tightening of the skilled labor force in
Santa Clara County and the potential for the real estate market to slow down.
According to information regarding real estate activity, there has been an
increase in the County's vacancy rate and a counter effect of declining lease
and rental rates, the impact of which could be a slow-down in real estate
construction activity. In addition, the competitive environment within the
Bank's marketplace continues to be aggressive and the competition among banks
for additional loans, leases and deposits 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 "Loan and Lease Portfolio" 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, 1999 and 1998.
AVERAGE BALANCES, RATES AND YIELDS
Fully Taxable Equivalent
(dollars in thousands)
Quarter ended June 30,
---------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- ----------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
Loans and leases, net (2) $285,892 $6,891 9.67% $227,171 $6,040 10.66%
Securities available for sale (3) 39,041 586 6.02 49,914 757 6.08
Securities held to maturity:
Taxable (4) 4,297 67 6.25 9,502 148 6.25
Nontaxable (5) 5,677 105 7.42 3,773 70 7.44
Money market investments 19,994 244 4.89 19,791 275 5.57
Interest rate hedging instruments ---- (6) ---- ---- (3) ----
- -------------------------------------------------------------------------- -------------------------
Total interest-earning assets 354,901 7,887 8.91 310,151 7,287 9.42
- -------------------------------------------------------------------------- -------------------------
Allowance for possible loan and lease losses (4,951) (4,622)
Cash and due from banks 15,070 13,790
Other assets 9,489 9,360
Core deposit intangibles and
goodwill, net 3,888 3,867
- -------------------------------------------------------------- -------------
Total Assets $378,397 $332,546
============================================================== =============
Liabilities and Shareholders' equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $52,652 343 2.61 $50,657 332 2.63
Money market and savings 94,335 781 3.32 97,520 842 3.46
Certificates of deposit:
Less than $100 17,074 211 4.96 13,821 178 5.17
$100 or more 96,991 1,198 4.95 60,843 822 5.42
- -------------------------------------------------------------------------- -------------------------
Total certificates of deposits 114,065 1,409 4.95 74,664 1,000 5.37
- -------------------------------------------------------------------------- -------------------------
Other borrowings 5,011 75 6.00 4,022 65 6.48
- -------------------------------------------------------------------------- -------------------------
Total interest-bearing liabilities 266,063 2,608 3.93 226,863 2,239 3.96
- -------------------------------------------------------------------------- -------------------------
Noninterest-bearing demand 73,347 66,063
Accrued interest payable and
other liabilities 5,520 5,326
- -------------------------------------------------------------- -------------
Total liabilities 344,930 298,252
- -------------------------------------------------------------- -------------
Shareholders' equity 33,467 34,294
- -------------------------------------------------------------- -------------
Total Liabilities and Shareholders' equity $378,397 $332,546
==============================================================------------ =============------------
Net interest income and margin (6) $5,279 5.97% $5,048 6.53%
================================================= ========================= ========================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $331 for 1999, and $356 for 1998. Nonperforming loans
and leases have been included in average loan and lease balances.
(3) Includes dividend income of $31 and $35 received in 1999 and 1998,
respectively.
(4) Includes dividend income of $8 received in 1999 and 1998.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($42 in 1999 and $28 in 1998).
(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,
---------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Assets Balance Interest Yield (1) Balance Interest Yield (1)
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans and leases, net (2) $276,864 $13,321 9.70% $227,789 $12,155 10.76%
Securities available for sale (3) 37,100 1,104 6.00 49,565 1,514 6.16
Securities held to maturity:
Taxable (4) 5,436 170 6.31 9,587 296 6.23
Nontaxable (5) 5,150 190 7.44 3,617 140 7.81
Money market investments 15,489 384 5.00 14,426 395 5.52
Interest rate hedging instruments ---- (20) ---- ---- (5) ----
- -------------------------------------------------------------------------- -------------------------
Total interest-earning assets 340,039 15,149 8.98 304,984 14,495 9.58
- -------------------------------------------------------------------------- -------------------------
Allowance for possible loan and lease losses (4,900) (4,575)
Cash and due from banks 15,553 14,881
Other assets 9,368 9,352
Core deposit intangibles and
goodwill, net 3,926 3,778
- -------------------------------------------------------------- -------------
Total Assets $363,986 $328,420
============================================================== =============
Liabilities and Shareholders' equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand $52,243 655 2.53 $48,986 628 2.59
Money market and savings 91,521 1,466 3.23 96,908 1,740 3.62
Certificates of deposit:
Less than $100 14,753 355 4.85 14,083 361 5.17
$100 or more 90,715 2,250 5.00 55,348 1,501 5.47
- -------------------------------------------------------------------------- -------------------------
Total certificates of deposits 105,468 2,605 4.98 69,431 1,862 5.41
- -------------------------------------------------------------------------- -------------------------
Other borrowings 4,472 127 5.73 7,334 224 6.16
- -------------------------------------------------------------------------- -------------------------
Total interest-bearing liabilities 253,704 4,853 3.86 222,659 4,454 4.03
- -------------------------------------------------------------------------- -------------------------
Noninterest-bearing demand 70,372 66,537
Accrued interest payable and
other liabilities 5,756 5,238
- -------------------------------------------------------------- -------------
Total liabilities 329,832 294,434
- -------------------------------------------------------------- -------------
Shareholders' equity 34,154 33,986
- -------------------------------------------------------------- -------------
Total Liabilities and Shareholders' equity $363,986 $328,420
==============================================================------------ =============------------
Net interest income and margin (6) $10,296 6.11% $10,041 6.64%
================================================= ========================= ========================
<FN>
(1) Rates are presented on an annualized basis.
(2) Includes loan fees of $680 for 1999, and $627 for 1998. Nonperforming loans
and leases have been included in average loan and lease balances.
(3) Includes dividend income of $62 and $79 received in 1999 and 1998,
respectively.
(4) Includes dividend income of $16 received in 1999 and 1998.
(5) Adjusted to a fully taxable equivalent basis using the federal statutory
rate ($76 in 1999 and $56 in 1998).
(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 and Lease Losses
The level of the allowance for possible loan and lease 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, 1999 and 1998 based
on information available to management as of said dates. Based on management's
evaluation of such risks, no addition was made to the allowance for possible
loan and lease losses in the three months ended June 30, 1999 and an addition of
$100 was made for the six months ended June 30, 1999, and no addition was made
in the three and six months ended June 30, 1998. See "Loan and Lease 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,
1999 and 1998:
OTHER INCOME
(dollars in thousands)
Quarter ended June 30, Six months ended June 30,
-------------------------------------------------------------------------------------
1999 1998 1999 1998
Amount Percent Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------
Service charges on deposits $196 73.96% $151 60.16% $352 46.13% $312 59.20%
Other operating income 69 26.04 100 39.84 411 53.87 223 42.31
Net loss on securities available for sale ----- ----- ----- ----- ----- ----- (8) (1.52)
- ------------------------------------------------------------------------------------------------------------------------------
Total $265 100.00% $251 100.00% $763 100.00% $527 100.00%
==============================================================================================================================
The increase in the service charges on deposits of $45 for the second quarter
ended June 30, 1999 as compared to the second quarter of 1998 is due mainly to a
change in the method of calculating certain service charges. The increase in
other operating income of $188 for the six months of 1999 compared to the six
months of 1998 is mainly due to the reversal of a specific reserve established
on the date it was purchased for an acquired SBA loan which was paid in full.
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,
----------------------------------------------------------------------------------------------
1999 1998 1999 1998
Amount Percent (1) Amount Percent (1) Amount Percent (1) Amount Percent (1)
- -------------------------------------------------------------------------------------------------------------------------------
Salaries and benefits $1,905 2.01% $1,710 2.06% $3,709 2.04% $3,330 2.03%
Data processing 142 0.15 136 0.16 307 0.17 325 0.20
Client services paid by Bank 121 0.13 93 0.11 239 0.13 186 0.11
Legal and professional fees 118 0.12 65 0.08 229 0.13 144 0.09
Amortization of core deposit
intangibles and goodwill 115 0.12 111 0.13 228 0.13 218 0.13
Furniture and equipment 114 0.12 99 0.12 223 0.12 188 0.11
Occupancy 110 0.12 83 0.10 217 0.12 161 0.10
Business promotion 93 0.10 85 0.10 182 0.10 169 0.10
Directors' & shareholders' 88 0.09 59 0.07 171 0.09 123 0.07
Other 365 0.39 290 0.35 726 0.40 666 0.41
- -------------------------------------------------------------------------------------------------------------------------------
Total $3,171 3.35% $2,731 3.28% $6,231 3.42% $5,510 3.36%
===============================================================================================================================
<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, 1999 and 1998.
</FN>
Total other expenses for the second quarter of 1999 increased $440 from the same
period a year ago, primarily as a result of increases in salaries and benefits
(relating to the acquisition of Epic and the opening of the East Bay Regional
Office, both occurring in July 1998), an increase in occupancy, furniture and
equipment, and stationery and supplies (also due to the addition of Epic and the
new East Bay Regional Office), an increase in client services paid by the Bank
resulting from an increase in costs associated with several significant
customers, and an increase in legal and professional fees.
Total other expenses for the six months ended June 30, 1999 increased $721 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 for the six months ended June 30, 1999 and 1998 was 42%.
The rate is impacted by several items, the most significant of which were the
amortization of intangibles, tax exempt income, the California Franchise tax,
the California Franchise Tax Enterprise Tax Zone Credit and the impact of the
Bank's investment in a Low Income Housing Tax Credit fund.
Financial Condition and Earning Assets
- --------------------------------------
Consolidated assets increased to $404 million at June 30, 1999 compared to $350
million at December 31, 1998. The increase related primarily to an increase in
investment securities and loans and leases and was funded principally by an
increase in noninterest-bearing demand accounts, growth in certificates of
deposits of greater than $100 of approximately $17 million, $10 million of which
resulted from the placement of a five year, fixed rate certificate of deposit,
and an increase in certificates of deposits of less then $100 of approximately
$8 million, which were raised through an internet listing service. See
"Funding."
Money Market Investments
- ------------------------
Money market investments, which include federal funds sold, were $12.6 million
at June 30, 1999 as compared to $22.3 million at December 31, 1998. This
decrease resulted primarily from the increase in the Bank's cash, investment
securities and loans and leases. See "Securities" and "Loan and Lease
Portfolio."
Securities
- ----------
The following table shows the composition of the securities portfolio at June
30, 1999 and December 31, 1998. 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, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
- ------------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U. S. Treasury $2,005 $16 $2,021 $3,005 $72 $3,077
U. S. Government Agencies 24,237 26 24,263 25,220 466 25,686
Mortgage-backed 18,681 (112) 18,569 3,865 101 3,966
Asset-backed 2,000 (9) 1,991 ---- ---- ----
Trust-preferred 7,066 (86) 6,980 ---- ---- ----
Mutual funds 2,518 (155) 2,363 2,638 (151) 2,487
- ------------------------------------------------------------------------------------------------------------------------------
Total available for sale 56,507 (320) 56,187 34,728 488 35,216
- ------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Treasury ---- ---- ---- 1,000 7 1,007
U. S. Government Agencies 1,499 10 1,509 3,496 38 3,534
State and municipal (nontaxable) 6,966 (184) 6,782 4,213 116 4,329
Mortgage-backed 1,277 28 1,305 1,927 35 1,962
- ------------------------------------------------------------------------------------------------------------------------------
Total held to maturity 9,742 (146) 9,596 10,636 196 10,832
Federal Reserve Bank Stock 537 ---- 537 537 ---- 537
- ------------------------------------------------------------------------------------------------------------------------------
Total 10,279 (146) 10,133 11,173 196 11,369
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities portfolio $66,786 ($466) $66,320 $45,901 $684 $46,585
==============================================================================================================================
Unrealized loss generally results from the impact of current market rates being
greater than those rates in effect at the time the Bank purchased the
securities. The unrealized loss on securities available for sale as of June 30,
1999 was $320 as compared to an unrealized gain of $488 as of December 31, 1998.
The significant change in the unrealized gain or loss position is due to the
increase in interest rates during the second quarter of 1999 and the extension
of the weighted average maturity of the portfolio. The Bank's weighted average
maturity of the available for sale portfolio was approximately 4.68 years as of
June 30, 1999, while at December 31, 1998 it was 2.0 years. The increase in the
weighted average maturity is primarily due to the addition to the portfolio of
mortgage and asset backed securities and the trust preferred securities. 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 3.73%.
The unrealized loss on securities held to maturity was $146 as of June 30, 1999,
as compared to an unrealized gain of $196 as of December 31, 1998. The reasons
for the changes in the unrealized gain or loss position are as noted in the
above paragraph. The Bank's weighted average maturity of the held to maturity
investment portfolio was approximately 6.44 years as of June 30, 1999, while at
December 31, 1998 it was 3.9 years. 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 6.44%. The increase in the maturity of the
securities held to maturity is due to the addition of only municipal securities
with average lives of over ten years.
The maturities and yields of the investment portfolio at June 30, 1999 are shown below:
MATURITY AND YIELDS OF INVESTMENT SECURITIES
At June 30, 1999
(dollars in thousands)
Available for Sale Held to Maturity
----------------------------------------------------------------------------------------------
FTE FTE
Amortized Estimated Average Amortized Estimated Average
Cost Fair Value Yield (1) Cost Fair Value Yield (1)
----------------------------------------------------------------------------------------------
U. S. Treasury:
Within 1 year $999 $1,004 5.99% ----- ----- -----
After 1 year within 5 years 1,006 1,017 6.23 ----- ----- -----
-----------------------------------------------
Totals 2,005 2,021 6.11 ----- ----- -----
-----------------------------------------------
U.S. Government Agencies:
Within 1 year 7,019 7,036 5.72 $1,000 $1,003 6.23%
After 1 year within 5 years 17,218 17,227 6.03 499 506 6.78
----------------------------------------------------------------------------------------------
Totals 24,237 24,263 5.94 1,499 1,509 6.41
----------------------------------------------------------------------------------------------
State and municipal:
Within 1 year ----- ----- ----- 629 634 7.56
After 1 year within 5 years ----- ----- ----- 979 986 6.81
After 5 years within 10 years 369 366 8.08
After 10 years ----- ----- ----- 4,989 4,796 7.36
-----------------------------------------------
Totals ----- ----- ----- 6,966 6,782 7.34
-----------------------------------------------
Mortgage-backed:
After 1 year within 5 years 3,226 3,242 6.74 1,277 1,305 7.90
After 5 years within 10 years 7,875 7,813 6.26 ----- ----- -----
After 10 years 7,579 7,514 6.58 ----- ----- -----
----------------------------------------------------------------------------------------------
Totals 18,681 18,569 6.47 1,277 1,305 7.90
----------------------------------------------------------------------------------------------
Asset-backed:
After 5 years within 10 years 2,000 1,991 6.38 ----- ----- -----
-----------------------------------------------
Totals 2,000 1,991 6.38 ----- ----- -----
-----------------------------------------------
Trust-preferred:
After 10 years 7,066 6,980 7.91 ----- ----- -----
-----------------------------------------------
Totals 7,066 6,980 7.91 ----- ----- -----
-----------------------------------------------
Mutual funds:
-----------------------------------------------
Within 1 year 2,518 2,363 4.68 ----- ----- -----
-----------------------------------------------
Other:
-----------------------------------------------
After 10 years ----- ----- ----- 537 537 6.00
----------------------------------------------------------------------------------------------
Total investment securities 56,507 $56,187 6.33% $10,279 $10,133 6.22%
==============================================================================
Net unrealized gain on
securities available for sale (320)
----------------
Total investment securities,
net carrying value $56,187
================
<FN>
(1) Fully taxable equivalent.
</FN>
Loan and Lease Portfolio
The following table provides a breakdown of the Company's consolidated loans and leases by type of borrower:
LOAN AND LEASE PORTFOLIO
(dollars in thousands)
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Loans Amount Loans
- -----------------------------------------------------------------------------------------------------------------------------
Commercial $94,739 31.9% $90,304 34.5%
Leasing 10,025 3.4 3,768 1.4
Factoring/Asset based lending 11,837 4.0 7,393 2.8
Real estate construction 42,968 14.5 32,340 12.4
Real estate-other 106,632 35.9 101,559 38.9
Consumer 11,422 3.8 9,647 3.7
Other 20,026 6.7 17,031 6.5
Unearned fee income (680) (0.2) (662) (0.2)
- -----------------------------------------------------------------------------------------------------------------------------
Total loans and leases $296,969 100.0% $261,380 100.0%
=============================================================================================================================
Consolidated loans and leases increased to $297 million at June 30, 1999, from
$261 million at December 31, 1998. The growth in leasing and
factoring/asset-based lending is due to the acquisition of Epic. Real
estate-other is comprised of real estate term loans and, due to the low interest
rate environment and the increased appetite for refinancing, the demand for such
loans was substantial during late 1998 and early 1999. Similarly, real estate
construction loans have increased due to the significant pickup in activity in
commercial and residential development. It is expected that during the third and
fourth quarters, significant paydowns will reduce the balance outstanding of
real estate construction as a percent of the total loan portfolio. Additionally,
the Bank has elected not to aggressively seek or renew loans where, in
management's opinion, the Bank's 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 55% of the loan and lease 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 Other
category), real estate equity lines (2%, included in the Consumer category), and
loans to real estate developers for short-term investment purposes (1%) and
loans for real estate investment purposes made to non-developers (1%). The
latter two types of loans are included in the Other category. Approximately 32%
of the loan and lease portfolio is made up of commercial loans; however, in
management's view, no particular industry represents a significant portion of
such loans.
The following table shows the maturity and interest rate sensitivity of
commercial, real estate construction and real estate-other loans at June 30,
1999. Approximately 80% 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 and leases but can have a
negative impact when rates decline.
COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE
SENSITIVITY
(dollars in thousands) Balances Maturing Interest Rate Sensitivity
-----------------------------------------------------------------------------------
One year Predetermined Floating
Balances at One year to five Over five years interest interest
June 30, 1999 or less years rates rates
- -----------------------------------------------------------------------------------------------------------------------------
Commercial $94,739 $55,157 $29,388 $10,194 $3,322 $91,417
=============================================================================================================================
Real estate construction $42,968 $42,235 $733 ---- $460 $42,508
=============================================================================================================================
Real estate-other $106,633 $11,806 $24,346 $70,481 $43,990 $62,643
=============================================================================================================================
The Company utilizes a method of assigning a minimum and maximum loss ratio to
each grade of loan or lease within each category of borrower (commercial, real
estate-other, real estate construction, factoring/asset-based lending, consumer,
etc.) and leases. Loans and leases 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 and leases.
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 and lease is
evaluated on the basis of whether or not it is impaired. For impaired loans and
leases, 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 and lease 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 and lease losses was approximately $4.9
million at June 30, 1999, or 1.66% of total loans and leases outstanding. Based
on information available as of the date of this Report, management believes the
allowance for possible loan and lease losses, determined as described above, is
adequate for potential losses foreseeable at June 30, 1999.
The allowance for possible 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 and leases, 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 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.
The following schedule provides an analysis of the allowance for possible loan
and lease losses:
ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES
(dollars in thousands)
Quarter ended Six months ended Year ended
June 30, June 30, December 31,
---------------------------------------------------------------------
1999 1998 1999 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of the period $4,903 $4,543 $4,778 $4,493 $4,493
Charge-offs by loan or lease category:
Commercial 6 125 6 125 234
Consumer ---- ---- 20 ---- ----
- ------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 6 125 26 125 234
- ------------------------------------------------------------------------------------------------------------------------------
Recoveries by loan or lease category:
Commercial 37 54 69 72 118
Real estate-construction 1 ---- 2 ---- ----
Real estate-other ---- ---- ---- 32 33
Consumer 3 68 15 68 68
- ------------------------------------------------------------------------------------------------------------------------------
Total recoveries 41 122 86 172 219
- ------------------------------------------------------------------------------------------------------------------------------
Net (recoveries) charge-offs (35) 3 (60) (47) 15
- ------------------------------------------------------------------------------------------------------------------------------
Provision charged to expense ---- ---- 100 ---- 300
- -----------------------------------------------------------------------------------------------------------------------------
Balance, end of the period $4,938 $4,540 $4,938 $4,540 $4,778
==============================================================================================================================
Ratios:
Net (recoveries) charge-offs to average loans and (.05%) .01% (.04%) (.04%) .01%
leases, annualized
Allowance to total loans and leases at the end of the 1.66 1.92 1.66 1.92 1.83
period
Allowance to nonperforming loans and leases at end of 1,201% 681% 1,201% 681% 1,983%
the period
==============================================================================================================================
During the three months ended June 30, 1999 and 1998, charge-offs amounted to $6
and $125, respectively, and for the six months ended June 30, 1999 and 1998,
charge-offs amounted to $26 and $125, 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 and lease losses
was 1,201% of nonperforming loans and leases at June 30, 1999 compared to 1,983%
at December 31, 1998.
Nonperforming Loans and Leases
- ------------------------------
Nonperforming loans and leases consist of loans and leases for which the accrual
of interest has been suspended, restructured loans and leases and other loans
and leases with principal or interest contractually past due 90 days or more and
still accruing. The following table provides information about such loans and
leases:
NONPERFORMING LOANS AND LEASES
(dollars in thousands)
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Loans and leases accounted for on a non-accrual basis $411 $197
Loans and leases restructured and in compliance with modified terms ----- 44
- -----------------------------------------------------------------------------------------------------------------------------
Total $411 $241
=============================================================================================================================
As of June 30, 1999, nonperforming loans and leases consisted of four loans, one
of which was approximately $201 and the remainder of which were individually not
significant.
Management conducts an ongoing evaluation and review of the loan and lease
portfolio in order to identify potential nonperforming loans and leases.
Management considers loans and leases which are classified for regulatory
purposes, and loans and leases 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 information about which management
is aware 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, 1999, management has not identified any loans or leases not included
within the Nonperforming Loan and Lease 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 and leases
might subsequently be classified as nonperforming. Changes in world, national or
local economic conditions or specific industry segments (including declining
exports), rising interest rates, declines in real estate values, Year 2000
issues, declines in securities markets and acts of nature could have an adverse
effect on the ability of borrowers to repay outstanding loans and leases and the
value of real estate and other collateral securing such loans and leases.
Funding
- -------
The following table provides a breakdown of deposits by category as of the dates
indicated:
DEPOSIT CATEGORIES
(dollars in thousands)
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Percentage Percentage
Total of Total Total of Total
Amount Deposits Amount Deposits
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $76,464 23.1% $70,962 23.5%
Interest-bearing demand 49,314 14.9 49,468 16.4
Money market and savings 89,507 27.0 91,320 30.2
Certificates of deposit:
Less than $100 20,577 6.2 12,492 4.1
$100 or more 95,263 28.8 78,200 25.8
- -----------------------------------------------------------------------------------------------------------------------------
Total $331,125 100.0% $302,442 100.0%
=============================================================================================================================
Deposits as of June 30, 1999, were $331 million compared to $302 million at
December 31, 1998. The source of deposit growth for the first six months was due
to several factors: 1) the increase of $5.5 million in noninterest-bearing
deposits, primarily due to the increased business activity of the Bank; 2) the
growth of certificate of deposits of less than $100, which was due to the
addition of approximately $8 million raised through the use of an internet
listing service; and 3) the growth of certificate of deposits of greater than
$100 which was mainly due to the placement of a five year, fixed rate
certificate of deposit of $10 million. Although money market and savings
decreased $2 million since the beginning of the year, during this period a large
customer with money market deposit accounts commenced consolidation of its
accounts in the Midwest and approximately $18 million of such deposits were
transferred out of the Bank. After adjusting for the loss of this single
customer, money market and savings accounts increased approximately $16 million
during the six months ended June 30, 1999, mainly due to the Bank's business
development efforts. Because of this high level of unusual activity, the Bank
considers it prudent to maintain significant short-term liquidity. While the
amount of noninterest-bearing demand deposits increased 7.8%, the percentage of
such deposits remained relatively constant. Management believes these deposits
could decrease as a percent of the total, in part, due to competitive pressures
and changes in the deposit products being utilized by some of the Bank's
customers, which has caused a shift to interest-bearing products. See
"Liquidity."
Other short-term borrowings include $22 million in overnight federal funds
purchases and a 5.9% one year $10 million repurchase agreement due June 9, 2000.
The funds relating to the one year repurchase agreement were used to purchase
certain investment instruments during the second quarter of 1999.
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 income is negatively impacted by a decline
in interest rates. Conversely, an increase in interest rates should have a
positive impact on net interest income. As of June 30, 1999, the Federal Open
Market Committee increased the interbank target borrowing rate from 4.75% to 5%.
To counter its asset-sensitive interest rate position, the Bank has entered into
an interest rate "floor" as follows:
INTEREST RATE FLOOR
At June 30, 1999 (in thousands)
- -------------------------------------------------------------------------------
Notional amount $10,000
Floor rate 8.50%
Remaining life (months) 5
Carrying amount $35
Fair market value $20
Expiration date December 11, 1999
The Bank has paid a fixed premium for which it will receive the amount of
interest based on the notional amount and the difference between the floor rate
and the current prime rate when the prime rate is less than the floor rate. This
will protect the Bank against decreases in its net income when the prime rate
decreases. 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 and the
Bank at June 30, 1999 and December 31, 1998.
Risk-based and Leverage Capital Ratios
(dollars in thousands)
June 30, 1999 December 31, 1998
----------------------------------------------------------------------
Company-Risk-based Amount Ratio Amount Ratio
----------------------------------------------------------------------
Tier 1 capital $30,237 9.23% $30,810 10.57%
Tier 1 capital minimum requirement 13,099 4.00 11,664 4.00
----------------------------------------------------------------------
Excess $17,138 5.23% $19,146 6.57%
======================================================================
Total capital $34,341 10.49% $34,469 11.82%
Total capital minimum requirement 26,199 8.00 23,328 8.00
----------------------------------------------------------------------
Excess $8,142 2.49% $11,141 3.82%
======================================================================
Risk-adjusted assets $327,487 $291,602
================= =================
Company-Leverage
Tier 1 capital $30,237 7.98% $30,810 9.10%
Minimum leverage ratio requirement 15,160 4.00 13,542 4.00
----------------------------------------------------------------------
Excess $15,077 3.98% $17,268 5.10%
======================================================================
Average total assets $379,000 $338,544
================= =================
Bank-Risk-based
Tier 1 capital $28,993 8.86% $30,125 10.33%
Tier 1 capital minimum requirement 13,094 4.00 11,661 4.00
----------------------------------------------------------------------
Excess $15,899 4.86% $18,464 6.33%
======================================================================
Total capital $33,095 10.11% $33,783 11.59%
Total capital minimum requirement 26,188 8.00 23,322 8.00
----------------------------------------------------------------------
Excess $6,907 2.11% $10,461 3.59%
======================================================================
Risk-adjusted assets $327,350 $291,524
================= =================
Bank-Leverage
Tier 1 capital $28,993 7.73% $30,125 8.88%
Minimum leverage ratio requirement 15,012 4.00 13,567 4.00
----------------------------------------------------------------------
Excess $13,981 3.73% $16,558 4.88%
======================================================================
Average total assets $375,297 $339,166
================= =================
To allow for the effective management of capital, the Board of Directors has
approved the repurchase from time-to-time of up to $3.5 million of its common
stock through open market or privately negotiated transactions. Through June 30,
1999, the Company had repurchased 114,500 shares of Company common stock for a
total price of $3.1 million.
Liquidity
- ---------
Management strives to maintain a level of liquidity sufficient to meet customer
requirements for loan and lease 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 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; however the Bank
could utilize purchased deposits to satisfy temporary liquidity needs.
The Bank's source of liquidity consists of its deposits with other banks,
overnight funds sold to correspondent banks and other short-term investments,
short-term securities held to maturity, and securities available for sale less
short-term borrowings. At June 30, 1999, consolidated net liquid assets totaled
$55 million or 22% of consolidated total assets as compared to $87 million or
25% of consolidated total assets at December 31, 1998. The decrease in the
liquid assets is due to the growth of the loan and lease portfolio. See "Loan
and Lease Portfolio." In addition to the liquid asset portfolio, SJNB also has
available $17 million in lines of credit with three major commercial banks, a
collateralized repurchase agreement with a maximum limit of $30 million (of
which $10 million has been utilized at June 30, 1999), the guaranteed portion of
the SBA loan portfolio of approximately $21 million, and a credit facility with
the Federal Reserve Bank based on loans secured by real estate for approximately
$7 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 29% of total deposits on June 30, 1999 and 26% of total deposits at December
31, 1998. The increase relates to the placement of the $10 million fixed rate
certificate of deposit. See "Funding."
Liquidity is also affected by portfolio 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
June 30, 1999, approximately 38% of total consolidated assets had maturities
under one year and 82% 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 and lease 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 1999.
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
1998 or the first six months of 1999.
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 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 June 30, 1999 was asset-sensitive, based
upon the significant amount of variable rate loans and the repricing
characteristics of its deposit accounts. This position provides a hedge against
rising interest rates, but has a detrimental effect during times of interest
rate decreases. Net interest revenues are negatively impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known repricing dates of certain assets and liabilities and
assumed repricing dates of others. 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, 1998. See
"Summary of Financial Results - Net Interest Income."
On June 30, 1999, the Federal Open Market Committee ("FOMC") increased its
target rate for interbank borrowings to 4 3/4% from the previous 4 1/2%. As a
result, most domestic banks increased their prime lending rate to 8% which was
matched by SJNB. The effect of this change has not impacted the second quarter
of 1999 results, however, the effect of such increase in the future is not
precisely determinable due to the many factors influencing the Bank's net
interest margin, including the repricing of deposits, a change in mix of the
loan, lease and deposit portfolios, changes in relative volume, the speed in
which fixed rate loans and leases are repriced, discretionary investment
activities and other factors, although the Bank's margin will likely have a
positive impact.
In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ------
Neither the Company nor the Bank is a party to any material pending legal
proceeding, nor is their property the subject of any material pending legal
proceeding, except ordinary routine legal proceedings arising in the ordinary
course of the Bank's business and incidental to its business, none of which are
expected to have a material adverse impact upon the Company's or the Bank's
business, financial position or results of operations. In addition, as reported
in the Company's Form 10-K for the year ended December 31, 1998, during 1995,
the Bank (along with Comerica Bank-California, Santa Clara Land Title and three
principals of Century Loan Corporation) was served with a civil complaint in a
class action lawsuit filed in the Superior Court of Santa Clara County,
California. The lawsuit stemmed from the failure of Century Loan, a real estate
investment company. Plaintiffs were persons who invested in deeds of trust sold
by Century Loan. Their complaint alleged that they were defrauded by Century
Loan and its principals and that the Bank and other defendants aided and abetted
a fraudulent Ponzi scheme by the principals of Century Loan. The Court granted
class certification to the Plaintiffs in December 1995. On November 26, 1996,
the Court granted summary judgment in favor of the Bank on all of the
Plaintiff's claims against it. On December 4, 1996, the Court entered judgment
in favor of the Bank, dismissing the Plaintiffs' claims. Plaintiff's motion for
a new trial was denied on January 27, 1997 and was subsequently appealed. On
July 1, 1999, the Bank was notified by the Court of Appeals that the Court had
affirmed the lower court's decision dismissing the Plaintiffs claims. Plaintiffs
have petitioned the California Supreme Court to review the decision of the Court
of Appeals.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- ------
On May 26, 1999, at the Company's Annual Meeting of Shareholders, the
shareholders of the Company approved an amendment to the Company's Restated
Articles of Incorporation and Bylaws providing for the Board of Directors to be
divided into three classes of directors, each consisting of a number of
directors equal as nearly as practicable to one-third the total number of
directors, for so long as the Board consists of at least nine authorized
directors and, in the event that the total number of authorized directors on the
Board is at least six but less than nine, for classification of the Board of
Directors into two classes, each consisting of a number of directors equal as
nearly as practicable to one-half the total number of directors. Pursuant to
California law, members of the Board of Directors may be removed by the Board of
Directors for cause (defined to be a felony conviction or court declaration of
unsound mind), by the shareholders without cause or by court order for
fraudulent or dishonest acts or gross abuse of authority or discretion. In the
case of a Board of Directors that is not classified, no director may be removed
by the shareholders if the votes cast against such removal (or, if done by
written consent, the votes eligible to be cast by the non-consenting
shareholders) would have been sufficient to elect such director if voted
cumulatively at an election at which the same total number of votes were cast
(or, if the action is taken by written consent, all shares entitled to vote were
voted) and the entire number of directors authorized at the time of the
director's most recent election were then being elected (the "Relevant Number of
Directors"). In the case of classified boards, the Relevant Number of Directors
is (i) the number of directors elected at the most recent Annual Meeting of
shareholders or, if greater, (ii) the number of directors sought to be removed.
The classification of the Board of Directors will have the effect of making it
more difficult to replace incumbent directors. As a result of this amendment to
the Company's Articles of Incorporation, a shareholder or group of shareholders
seeking to replace a majority of the directors on the Board will generally need
to influence the voting of at least a majority of the outstanding shares at two
consecutive annual meetings. So long as the Board is classified into three
classes, a minimum of three annual meetings of shareholders would generally be
required to replace the entire Board, absent intervening vacancies.
At the Company's Annual Meeting of Shareholders, the shareholders of the Company
also approved an amendment to the Company's Restated Articles of Incorporation
to authorize the issuance of up to 5,000,000 shares of Preferred Stock, which
may be issued in one or more series and which shall have such rights,
preferences, privileges and restrictions as determined by the Board of
Directors. As a result of the adoption of this amendment to the Company's
Articles by the shareholders, the Board of Directors may authorize the issuance
of Preferred Stock or series of Preferred Stock that have certain dividend
and/or liquidation preferences over the Company's Common Stock, as well as those
other rights, preferences, privileges and restrictions determined by the Board
of Directors. The Company does not at the present time have any plan or
intention to issue shares of such Preferred Stock. The authorization of such
shares of Preferred Stock will have no dilutive effect upon the proportionate
voting power of the present shareholders of the Company. However, to the extent
that preferred shares which are convertible into the Company's Common Stock are
subsequently issued in connection with any corporate action to persons other
than the present shareholders, such issuance could have a dilutive effect on the
earnings per share and voting power of present shareholders. Under California
law, under certain circumstances, holders of preferred shares, even if those
shares are not granted voting rights, will have the right to vote in connection
with certain fundamental corporate transactions such as a reorganization; under
those circumstances, unless the requisite vote is obtained from holders of that
class, the preferred shareholders may effectively be able to block transactions
which are otherwise supported by the common shareholders. The Company is not
aware of any proposed or contemplated transaction of this type.
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 26, 1999, 2,181,388
shares were represented. Each of the persons named in the Proxy Statement as a
nominee for director was elected. 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. 2,137,864 43,524
Archer, Robert A. 2,139,100 42,288
Bruno, Albert V. 2,138,948 42,440
Diridon, Rod 2,087,574 93,814
Gorry, F. Jack 2,097,353 84,035
Kenny, James R. 2,139,100 42,288
Lund, Arthur K. 2,126,962 54,426
Oneal, Louis 2,138,748 42,640
Rubino, Diane 2,139,100 42,288
Shen, Douglas L. 2,137,864 43,524
Vandeweghe, Gary S. 2,138,962 42,426
The shareholders approved the amendment to the Corporation's Restated Articles
of Incorporation and Bylaws to provide for the classification of the Board of
Directors into three classes with 1,394,475 shares being voted for the approval,
213,340 shares being voted against, 39,049 shares abstained and broker non-votes
of 534,524.
The shareholders approved the amendment to the Corporation's Restated Articles
of Incorporation to authorize the issuance of Preferred Stock with 1,333,909
shares being voted for the approval, 259,725 shares being voted against, 53,230
shares abstained and broker non-votes of 534,524.
The shareholders approved the amendment of the Company's 1996 Stock Option Plan
to increase the authorized shares of common stock subject to the plan from
460,000 shares to 610,000 shares with 1,142,656 shares being voted for the
approval, 468,915 shares being voted against, 35,293 shares abstained and broker
non-votes of 534,524.
In addition, the shareholders ratified the appointment of KPMG LLP as the
Company's independent public accountants for the year ending December 31, 1999,
with 2,158,040 shares being voted for the ratification, 10,918 shares being
voted against and 12,430 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)(i). The Registrant's restated Articles of Incorporation.
(3)(ii). The Registrant's restated Bylaws as of June 8, 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. 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)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 Report on Form 10-QSB for the
quarterly period ended March 31, 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.
(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 second 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, 1999 /S/ J. Kenny
------------------------------
James R. Kenny
President and
Chief Executive Officer
Date: August 12, 1999 /S/ E. Blakeslee
------------------------------
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer (Chief
Accounting Officer)
SJNB Financial Corp.
Form 10-Q
Exhibits
June 30, 1999
The following exhibits are filed as part of this report:
(3)(i). The Registrant's restated Articles of Incorporation.
(3)(ii). The Registrant's restated Bylaws as of June 8, 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. 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)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 Report on
Form 10-QSB for the quarterly period ended March 31, 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.
(27) Financial Data Schedule.
*Indicates management contract or compensation plan or arrangement.