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 September 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: 2,352,519 shares of common stock outstanding as of October 19, 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 27 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27 Item 5. OTHER INFORMATION 27 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 27 SIGNATURES 30 PART I - FINANCIAL INFORMATION Item 1. -Financial Statements SJNB FINANCIAL CORP. AND SUBSIDIARY Condensed Consolidated Balance Sheets (in thousands) September 30, 1999 December 31, Assets (Unaudited) 1998 - ----------------------------------------------------------------------------------------------------------------------- Cash and due from banks $14,937 $11,239 Money market investments and Fed Funds sold 9,745 22,285 Investment securities: Available for sale 52,890 35,216 Held to maturity (Fair value: $9,865 at September 30, 1999 and $11,369 at December 31, 1998) 10,165 11,173 - ----------------------------------------------------------------------------------------------------------------------- Total investment securities 63,055 46,389 - ----------------------------------------------------------------------------------------------------------------------- Loans and leases 310,641 261,380 Allowance for possible loan and lease losses (5,152) (4,778) - ----------------------------------------------------------------------------------------------------------------------- Loans and leases, net 305,489 256,602 - ----------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 3,608 3,770 Accrued interest receivable and other assets 6,946 5,622 Intangibles, net of accumulated amortization of $2,506 at September 30, 1999 and $2,164 at December 31, 1998 3,731 4,027 - ----------------------------------------------------------------------------------------------------------------------- Total Assets $407,511 $349,934 ======================================================================================================================= Liabilities and Shareholders' Equity - ----------------------------------------------------------------------------------------------------------------------- Deposits: Noninterest-bearing $64,935 $70,962 Interest-bearing 272,283 231,480 - ----------------------------------------------------------------------------------------------------------------------- Total deposits 337,218 302,442 - ----------------------------------------------------------------------------------------------------------------------- Other short-term borrowings 29,057 5,000 Accrued interest payable and other liabilities 6,126 7,010 - ----------------------------------------------------------------------------------------------------------------------- Total liabilities 372,401 314,452 - ----------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock, no par value; authorized, 20,000 shares; issued and outstanding, 2,353 shares at September 30, 1999 and 2,450 shares at December 31, 1998 13,917 16,777 Retained earnings 21,609 18,405 Accumulated other comprehensive (loss) income (416) 300 - ----------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 35,110 35,482 - ----------------------------------------------------------------------------------------------------------------------- Commitments and contingencies ---- ---- - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities and Shareholder's Equity $407,511 $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 Nine months ended September 30, September 30, --------------------------------------------------------- 1999 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Interest income: Interest and fees on loans and leases $7,629 $6,249 $20,950 $18,404 Interest on money market investments 123 428 507 823 Interest and dividends on investment securities available for 879 658 1,983 2,172 sale Interest on investment securities held to maturity 128 171 412 551 Other interest and investment income (14) (2) (34) (7) - ----------------------------------------------------------------------------------------------------------------------------- Total interest income 8,745 7,504 23,818 21,943 - ----------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest expense on interest-bearing deposits: Certificates of deposit over $100 1,264 863 3,514 2,364 Other 1,752 1,522 4,355 4,475 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 3,016 2,385 7,869 6,839 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income 5,729 5,119 15,949 15,104 - ----------------------------------------------------------------------------------------------------------------------------- Provision for possible loan and lease losses 150 150 250 150 - ----------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan and lease losses 5,579 4,969 15,699 14,954 - ----------------------------------------------------------------------------------------------------------------------------- Other income: Service charges on deposits 251 149 603 461 Other operating income 99 101 510 324 Net loss on securities available for sale (51) ----- (51) (8) - ----------------------------------------------------------------------------------------------------------------------------- Total other income 299 250 1,062 777 - ----------------------------------------------------------------------------------------------------------------------------- Other expenses: Salaries and benefits 2,040 1,679 5,749 5,009 Occupancy 243 215 683 564 Other 1,064 1,040 3,146 2,871 - ----------------------------------------------------------------------------------------------------------------------------- Total other expenses 3,347 2,934 9,578 8,444 - ----------------------------------------------------------------------------------------------------------------------------- Income before income taxes 2,531 2,285 7,183 7,287 Income taxes 1,033 960 2,979 3,046 - ----------------------------------------------------------------------------------------------------------------------------- Net income $1,498 $1,325 $4,204 $4,241 ============================================================================================================================= Net income per share - basic $0.64 $0.54 $1.77 $1.70 ============================================================================================================================= Net income per share - diluted $0.60 $0.51 $1.68 $1.61 ============================================================================================================================= <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' Nine months ended September 30, 1998 Shares Stock Earnings for Sale Equity - ----------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1997 2,493 $18,800 $14,254 $105 $33,159 ----------- Net income 4,241 4,241 Other comprehensive income - Unrealized gains on securities held for sale, net 309 309 ----------- Comprehensive income 4,550 ----------- Common stock repurchased (77) (3,119) (3,119) Issuance of common stock for purchase of Epic Funding Corp. 12 501 Stock options exercised 32 506 506 Cash dividends (1,045) (1,045) - ----------------------------------------------------------------------------------------------------------------------------- Balances, September 30, 1998 2,460 $16,688 $17,450 $414 $34,051 ============================================================================================================================= Nine months ended September 30, 1999 - ----------------------------------------------------------------------------------------------------------------------------- Balances, December 31, 1998 2,450 $16,777 $18,405 $300 $35,482 ----------- Net income 4,204 4,204 Other comprehensive income - Unrealized losses on securities held for sale, net (716) (716) ----------- Comprehensive income 3,488 ----------- Common stock repurchased (112) (3,048) (3,048) Stock options exercised 15 188 188 Cash dividends (1,000) (1,000) - ----------------------------------------------------------------------------------------------------------------------------- Balances, September 30, 1999 2,353 $13,917 $21,609 $(416) $35,110 ============================================================================================================================= <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) Nine months ended September 30, --------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $4,204 $4,241 Adjustments to reconcile net income to net cash provided by operating activities: Provision for possible loan and lease losses 250 150 Depreciation and amortization 458 417 Amortization on intangibles 342 337 Net loss on securities available for sale 51 8 Amortization of discount (premium) on investment securities, net 44 (49) Increase in intangibles assets (45) (91) Increase in accrued interest receivable and other assets (1,325) (947) (Decrease) increase in accrued interest payable and other liabilities (407) 386 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 3,572 4,452 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from sale/maturity of securities available for sale 13,996 21,009 Maturities of securities held to maturity 4,595 3,991 Purchase of securities available for sale (32,838) (19,008) Purchase of securities held to maturity (3,593) (1,749) Loans and leases, net (49,251) (17,473) Capital expenditures (296) (354) Acquisition of Epic Funding Corp. - cash portion ---- (206) - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (67,387) (13,790) - ------------------------------------------------------------------------------------------------------------------ Cash flow from financing activities: Deposits, net 34,776 31,819 Other short-term borrowings 24,057 (16,000) Cash dividends (1,000) (1,045) Stock repurchase (3,048) (3,119) Proceeds from stock options exercised 188 506 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 54,973 12,161 - ------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and equivalents (8,842) 2,823 Cash and equivalents at beginning of year 33,524 25,525 - ------------------------------------------------------------------------------------------------------------------ Cash and equivalents at end of period $24,682 $28,348 ================================================================================================================== Other cash flow information: Interest paid $7,588 $7,058 =========================== Income taxes paid 3,480 2,625 ================================================================================================================== Noncash transactions: Unrealized (loss) gain on securities available for sale, net of tax $(716) $309 ================================================================================================================== 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 September 30, 1999 September 30, 1998 ------------------------------------------------------------------------------------------------------------------- Net Per Share Net Per Share Income Shares Amounts Income Shares Amounts ------------------------------------------------------------------------------------------------------------------ Net income and basic EPS $1,498 2,350 $0.64 $1,325 2,466 $0.54 ============= ============= Effect of stock option dilutive shares 168 139 =========================== ========================== Diluted earnings per share $1,498 2,518 $0.60 $1,325 2,605 $0.51 =============================================================================== Nine months ended Nine months ended September 30, 1999 September 30, 1998 ------------------------------------------------------------------------------------------------------------------ Net Per Share Net Per Share Income Shares Amounts Income Shares Amounts ------------------------------------------------------------------------------------------------------------------ Net income and basic EPS $4,204 2,371 $1.77 $4,241 2,492 $1.70 ============= ============= Effect of stock option dilutive shares 128 146 =========================== ========================== Diluted earnings per share $4,204 2,499 $1.68 $4,241 2,638 $1.61 =============================================================================== 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 this 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 nine months ended September 30, 1999 and 1998 and the liquidity and financial condition of the Company, SJNB and Epic as of September 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 On August 27, 1999, the Company and Saratoga Bancorp ("Saratoga") jointly announced the signing of a definitive Agreement and Plan of Merger pursuant to which the Company will acquire the outstanding shares of common stock of Saratoga pursuant to an exchange of common stock of the Company for all common stock of Saratoga. Saratoga, the parent company of Saratoga National Bank, headquartered in Saratoga, California, has reported approximately $152 million in assets and $112 million in deposits as of September 30, 1999, and currently operates three offices in Saratoga, Los Gatos and San Jose, California. The merger between the Company and Saratoga will result in the formation of a financial institution with approximately $559 million in assets, $449 million in deposits and $50 million in shareholders' equity based on each company's financial position as of September 30, 1999. The combined shareholder base is estimated to number approximately 2,000. Consummation of the merger is subject to approval by the shareholders of both Saratoga and the Company, clearance by regulatory authorities, including the Federal Reserve Board, and other terms and conditions customary for a transaction of this type. Upon consummation of the merger Saratoga shareholders will receive 0.70 shares of Company Common Stock for each outstanding share of Saratoga common stock. The merger will be accounted for as a pooling of interests and is intended to qualify as a tax-free reorganization. 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 September 30, 1999 the amount of such expenses since inception of the project totaled approximately $194. It is anticipated that additional Year 2000 Project expenses for the remainder of 1999 will be less than $5. 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 if the Company is adversely impacted by Year 2000 complications. 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 has continued to monitor the Year 2000 preparedness of its material customers during 1999. The Company has also contacted 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 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. The Company further refined these plans during the third quarter of 1999. The plans will utilize a combination of alternative procedures and manual intervention to compensate for the potential loss of certain computer systems, power or telecommunications service should they fail as a result of Year 2000 complications. There can be no assurance, however, that such contingency plans will be successful in the event of an extended loss of such systems or widespread loss of power and telecommunications services. Selected Financial Data The following presents selected financial data and ratios as of and for the three and nine months ended September 30, 1999 and 1998: SELECTED FINANCIAL DATA AND RATIOS - ---------------------------------------------------------------------------------------------------------------------------- For the quarters For the nine months ended September 30, ended September 30, -------------------------------------------------------------------- SELECTED ANNUALIZED OPERATING RATIOS: 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Return on average equity 17.35% 15.56% 16.44% 16.72% Return on average tangible equity 20.99 19.39 20.05 20.41 Return on average assets 1.47 1.51 1.49 1.69 Net recoveries to average loans and leases (0.08) (0.02) (0.06) (0.03) Average equity to average assets 8.49 9.71 9.06 10.12 Average tangible equity to average tangible assets 7.63 8.60 8.12 9.05 PER SHARE DATA: Net income per share - basic $0.64 $0.54 $1.77 $1.70 Net income per share - diluted 0.60 0.51 1.68 1.61 Net income per share - (core) - diluted (1) 0.64 0.55 1.82 1.74 Dividends per share 0.14 0.14 0.42 0.42 ============================================================================================================================ At September 30, At December 31, At September 30, SHAREHOLDERS' EQUITY 1999 1998 1998 - ----------------------------------------------------------------------------------------------------------------------------- Shareholders' equity per share $14.92 $14.48 $14.04 Tangible equity per share 13.34 12.84 12.34 SELECTED FINANCIAL POSITION RATIOS: - ----------------------------------------------------------------------------------------------------------------------------- Leverage capital ratio 7.90% 9.10% 8.80% Total risk based capital ratio 10.37% 11.82% 11.84% Nonperforming loans and leases to total loans and leases 0.40% 0.09% 0.18% Nonperforming assets to total assets 0.30% 0.07% 0.13% Allowance for possible loan and lease losses to total loans 1.66% 1.83% 1.91% Allowance for possible loan and lease losses to nonperforming loans and leases 417% 1,983% 1,081% Allowance for possible loan and lease losses to nonperforming assets 417% 1,983% 1,081% ============================================================================================================================= <FN> (1) Excludes after-tax effect of goodwill and core deposit intangible amortization. </FN> Summary of Financial Results The Company reported net income of $1,498 or $0.60 per share - diluted for the quarter ended September 30, 1999, compared with net income of $1,325 or $0.51 per share - diluted for the third quarter of 1998. The increase in net income compared to the quarter ended September 30, 1998 was primarily the result of the increase in net interest income, an increase in other income, offset primarily by an increase in incentive accruals and staff additions due to the increase in the Bank's growth. For the nine months ended September 30, 1999, net income was $4,204 or $1.68 per share - diluted compared with net income of $4,241 or $1.61 per share - diluted for the same period in 1998. The decrease in net income is primarily related to the increase in costs associated with the acquisition of Epic and the start-up of the new de novo branch office in Danville. Diluted earnings per share compared to the nine months ended September 30, 1998 increased seven cents as net income declined, due to the impact of the Company's stock repurchase program which was suspended effective April 1, 1999. Net Interest Income Net interest income for the quarter ended September 30, 1999, increased $610 as compared to the same quarter a year ago. The Bank's average earning assets for the same period increased by $54 million, as the result of growth in the Bank's loan and lease portfolio of $65 million. Net interest margin for the third quarter of 1999 was 6.05% as compared to 6.28% for the same quarter in 1998. This decrease was primarily related to the increase in the Bank's cost of funds during the third quarter of 1999. Cost of funds increased as the Bank had to source funds with a higher cost to fund the Bank's growth during the period and to replace certain deposits which were less expensive. The net interest margin for the first nine months of 1999 was 6.08% as compared to 6.51% 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 10.64% to 9.80%. During the same period, the actual cost of funds for the Bank also decreased from 4.00% in 1998 to 3.95% in 1999. This decrease was due generally to the lower interest rate environment during the first two quarters of 1999 offset by the change in the mix of the Bank's deposit base and because rates on deposits resist declines because of their lower base and the increased cost of sourcing new deposits. Economic conditions in Northern California have remained relatively strong in the first nine 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. During the last several months the vacancy rate has leveled off and lease and rental rates are beginning to increase slightly. 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. 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 nine months ended September 30, 1999 and 1998. AVERAGE BALANCES, RATES AND YIELDS Fully Taxable Equivalent (dollars in thousands) Quarter ended September 30, ---------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Assets Balance Interest Yield (1) Balance Interest Yield (1) - ----------------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans and leases, net (2) $303,567 $7,629 9.97% $238,197 $6,249 10.41% Securities available for sale (3) 55,580 879 6.27 44,265 658 5.90 Securities held to maturity: Taxable (4) 3,164 53 6.65 8,348 127 6.04 Nontaxable (5) 7,156 125 6.93 3,946 73 7.34 Money market investments 9,611 123 5.08 30,305 428 5.60 Interest rate hedging instruments ---- (14) ---- ---- (2) ---- - --------------------------------------------------------------------------- -------------------------- Total interest-earning assets 379,078 8,795 9.20 325,061 7,533 9.19 - --------------------------------------------------------------------------- -------------------------- Allowance for possible loan and lease losses (5,022) (4,545) Cash and due from banks 15,734 13,692 Other assets 9,935 9,525 Core deposit intangibles and goodwill, net 3,772 4,231 - -------------------------------------------------------------- ------------- Total Assets $403,497 $347,964 ============================================================== ============= Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $52,653 331 2.49 $54,787 369 2.67 Money market and savings 100,902 919 3.61 107,645 966 3.56 Certificates of deposit: Less than $100 20,542 263 5.08 12,986 166 5.07 $100 or more 101,723 1,264 4.93 63,184 862 5.41 - --------------------------------------------------------------------------- -------------------------- Total certificates of deposits 122,265 1,527 4.95 76,170 1,028 5.35 - --------------------------------------------------------------------------- -------------------------- Other borrowings 16,123 239 5.88 981 22 8.90 - --------------------------------------------------------------------------- -------------------------- Total interest-bearing liabilities 291,943 3,016 4.10 239,583 2,385 3.95 - --------------------------------------------------------------------------- -------------------------- Noninterest-bearing demand 71,351 68,973 Accrued interest payable and other liabilities 5,946 5,633 - -------------------------------------------------------------- ------------- Total liabilities 369,240 314,189 - -------------------------------------------------------------- ------------- Shareholders' equity 34,257 33,775 - -------------------------------------------------------------- ------------- Total Liabilities and Shareholders' equity $403,497 $347,964 ==============================================================------------- =============------------- Net interest income and margin (6) $5,779 6.05% $5,148 6.28% ================================================= ========================= ========================= <FN> (1) Rates are presented on an annualized basis. (2) Includes loan fees of $322 for 1999, and $301 for 1998. Nonperforming loans and leases have been included in average loan and lease balances. (3) Includes dividend income of $29 and $34 received in 1999 and 1998, respectively. (4) Includes dividend income of $8 received in each of 1999 and 1998. (5) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($50 in 1999 and $29 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) Nine months ended September 30, ---------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Assets Balance Interest Yield (1) Balance Interest Yield (1) - ----------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans and leases, net (2) $285,863 $20,950 9.80% $231,296 $18,404 10.64% Securities available for sale (3) 43,328 1,983 6.12 47,779 2,172 6.08 Securities held to maturity: Taxable (4) 4,670 224 6.41 9,169 423 6.17 Nontaxable (5) 5,826 313 7.19 3,728 213 7.64 Money market investments 13,508 507 5.02 19,777 823 5.56 Interest rate hedging instruments ---- (34) ---- ---- (7) ---- - --------------------------------------------------------------------------- -------------------------- Total interest-earning assets 353,195 23,943 9.06 311,749 22,028 9.45 - --------------------------------------------------------------------------- -------------------------- Allowance for possible loan and lease losses (4,942) (4,565) Cash and due from banks 15,614 14,602 Other assets 9,560 9,411 Core deposit intangibles and goodwill, net 3,874 3,931 - -------------------------------------------------------------- ------------- Total Assets $377,301 $335,128 ============================================================== ============= Liabilities and Shareholders' equity Interest-bearing liabilities: Deposits: Interest-bearing demand $52,381 986 2.52 $50,941 997 2.62 Money market and savings 94,682 2,384 3.37 100,640 2,706 3.59 Certificates of deposit: Less than $100 16,704 619 4.95 13,713 527 5.14 $100 or more 94,424 3,514 4.98 57,989 2,364 5.45 - --------------------------------------------------------------------------- -------------------------- Total certificates of deposits 111,128 4,133 4.97 71,702 2,891 5.39 - --------------------------------------------------------------------------- -------------------------- Other borrowings 8,399 366 5.83 5,218 245 6.28 - --------------------------------------------------------------------------- -------------------------- Total interest-bearing liabilities 266,590 7,869 3.95 228,501 6,839 4.00 - --------------------------------------------------------------------------- -------------------------- Noninterest-bearing demand 70,702 67,365 Accrued interest payable and other liabilities 5,820 5,347 - -------------------------------------------------------------- ------------- Total liabilities 343,112 301,213 - -------------------------------------------------------------- ------------- Shareholders' equity 34,189 33,915 - -------------------------------------------------------------- ------------- Total Liabilities and Shareholders' equity $377,301 $335,128 ==============================================================------------- =============------------- Net interest income and margin (6) $16,074 6.08% $15,189 6.51% ================================================= ========================= ========================= <FN> (1) Rates are presented on an annualized basis. (2) Includes loan fees of $1,002 for 1999, and $928 for 1998. Nonperforming loans and leases have been included in average loan and lease balances. (3) Includes dividend income of $92 and $113 received in 1999 and 1998, respectively. (4) Includes dividend income of $24 received in 1999 and $23 received in 1998. (5) Adjusted to a fully taxable equivalent basis using the federal statutory rate ($125 in 1999 and $85 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 reflect management's judgment as to the inherent risk of loss associated with the loan and lease portfolios as of September 30, 1999 and 1998 based on information available to management as of said dates. Based on management's evaluation of such risks, an addition of $150 was made to the allowance for possible loan and lease losses in the three months ended September 30, 1999 and an addition of $250 was made for the nine months ended September 30, 1999 as compared to an addition of $150 for the third quarter of 1998 and for the nine months ended September 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 nine month periods ended September 30, 1999 and 1998: OTHER INCOME (dollars in thousands) Quarter ended September 30, Nine months ended September 30, -------------------------------------------------------------------------------- 1999 1998 1999 1998 Amount Percent Amount Percent Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------- Service charges on deposits $251 83.95% $149 59.60% $603 56.78% $461 59.33% Other operating income 99 33.11 101 40.40 520 48.96 324 41.70 Net loss on securities available for sale (51) (17.06) ----- ----- (61) (5.74) (8) (1.03) - ------------------------------------------------------------------------------------------------------------------------- Total $299 100.00% $250 100.00% $1,062 100.00% $777 100.00% ========================================================================================================================= The increase in the service charges on deposits of $102 and $142 for the three and nine months ended September 30, 1999, respectively, as compared to the same periods in 1998 is due mainly to a change in the method of assessing certain service charges on deposit accounts. The increase in other operating income of $196 for the nine months of 1999 compared to the nine months of 1998 is mainly due to the reversal during the first quarter of 1999 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 September 30, Nine months ended September 30, --------------------------------------------------------------------------------------------- 1999 1998 1999 1998 Amount Percent (1) Amount Percent (1) Amount Percent (1) Amount Percent (1) - ------------------------------------------------------------------------------------------------------------------------------ Salaries and benefits $2,085 2.07% $1,679 1.93% $5,794 2.05% $5,009 1.99% Data processing 153 0.15 172 0.20 460 0.16 497 0.20 Client services paid by Bank 102 0.10 129 0.15 341 0.12 315 0.13 Legal and professional fees 118 0.12 80 0.09 347 0.12 224 0.09 Amortization of core deposit intangibles and goodwill 114 0.11 119 0.14 342 0.12 337 0.13 Furniture and equipment 129 0.13 113 0.13 352 0.12 301 0.12 Occupancy 114 0.11 102 0.12 331 0.12 263 0.10 Business promotion 96 0.10 79 0.09 278 0.10 248 0.10 Directors' & shareholders' 80 0.08 70 0.08 251 0.09 193 0.08 Other 356 0.35 391 0.45 1,082 0.38 1,057 0.42 - ------------------------------------------------------------------------------------------------------------------------------ Total $3,347 3.32% $2,934 3.37% $9,578 3.38% $8,444 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 nine month periods ended September 30, 1999 and 1998. </FN> Total other expenses for the third quarter of 1999 increased $413 from the same period a year ago, primarily as a result of increased incentive accruals, staff additions relating to increased volumes, and salary increases necessitated by the competitive environment for personnel. Total other expenses for the nine months ended September 30, 1999 increased $1,134 from the same period a year ago, primarily as a result of the increased incentive accruals, additions to staff and the competitive environment for personnel, in addition to the acquisition of Epic and the opening of the East Bay Regional Office, both occurring in July 1998. Increases in occupancy also related to the acquisition of Epic and the opening of the East Bay Regional Office. Director and shareholder expense increased due to increased director fees and increased transfer agent costs. Legal and professional costs increased mainly due to increased costs associated with the preparation of proxy materials and the annual report and contract negotiations. Income Tax Provision The effective tax rate for the nine months ended September 30, 1999 and 1998 was 41%. 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 $407 million at September 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 money market and savings accounts of $7 million; growth in certificates of deposit of less than $100 of $9 million which were raised through an internet listing service; and growth in certificates of deposit of greater than $100 of approximately $25 million, which resulted from the placement of three separate wholesale deposit arrangements. See "Funding." Money Market Investments Money market investments, which include federal funds sold, were $9.7 million at September 30, 1999 as compared to $22.3 million at December 31, 1998. This decrease resulted primarily from the increase in 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 September 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) September 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 21,217 (10) 21,207 25,220 466 25,686 Mortgage-backed 18,676 (140) 18,536 3,865 101 3,966 Asset-backed 2,000 (4) 1,996 ---- ---- ---- Trust preferred 7,064 (299) 6,765 ---- ---- ---- Mutual funds 2,518 (153) 2,365 2,638 (151) 2,487 - ----------------------------------------------------------------------------------------------------------------------------- Total available for sale 53,480 (590) 52,890 34,728 488 35,216 - ----------------------------------------------------------------------------------------------------------------------------- Securities held to maturity: U. S. Treasury ---- ---- ---- 1,000 7 1,007 U. S. Government Agencies 1,499 7 1,506 3,496 38 3,534 State and municipal (nontaxable) 7,165 (326) 6,839 4,213 116 4,329 Mortgage-backed 964 19 983 1,927 35 1,962 - ----------------------------------------------------------------------------------------------------------------------------- Total held to maturity 9,628 (300) 9,328 10,636 196 10,832 Federal Reserve Bank Stock 537 ---- 537 537 ---- 537 - ----------------------------------------------------------------------------------------------------------------------------- Total 10,165 (300) 9,865 11,173 196 11,369 - ----------------------------------------------------------------------------------------------------------------------------- Total investment securities portfolio $63,645 $(890) $62,755 $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 September 30, 1999 was $590 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 and third quarters 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 3.36 years as of September 30, 1999, while at December 31, 1998 it was 2.0 years. The increase in the weighted average maturity during this period is primarily due to the addition to the portfolio of mortgage- and asset-backed securities and 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 approximately 3.36%. The unrealized loss on securities held to maturity was $300 as of September 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 8.78 years as of September 30, 1999, while at December 31, 1998 it was 3.9 years. The increase in the maturity of the securities held to maturity during this period is due to the addition of only municipal securities with average lives of over ten 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 5.20%. The maturities and yields of the investment portfolio at September 30, 1999 are shown below: MATURITY AND YIELDS OF INVESTMENT SECURITIES - ----------------------------------------------------------------------------------------------------------------------- At September 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 $1,000 $1,004 5.99% ----- ----- ----- After 1 year within 5 years 1,005 1,017 6.23 ----- ----- ----- ------------------------------------------- Totals 2,005 2,021 6.11 ----- ----- ----- ------------------------------------------- U.S. Government Agencies: Within 1 year 3,998 4,012 6.11 $1,000 $1,000 6.23% After 1 year within 5 years 17,219 17,195 6.03 499 505 6.78 -------------------------------------------------------------------------------------- Totals 21,217 21,207 6.05 1,499 1,506 6.41 -------------------------------------------------------------------------------------- State and municipal: Within 1 year ----- ----- ----- 412 414 6.89 After 1 year within 5 years ----- ----- ----- 782 787 6.72 After 5 years within 10 years 369 368 8.08 After 10 years ----- ----- ----- 5,602 5,271 7.42 ------------------------------------------- Totals ----- ----- ----- 7,165 6,839 7.35 ------------------------------------------- Mortgage-backed After 1 year within 5 years 2,997 3,003 6.73 964 983 7.90 After 5 years within 10 years 7,673 7,565 6.26 ----- ----- ----- After 10 years 8,006 7,968 6.83 ----- ----- ----- -------------------------------------------------------------------------------------- Totals 18,676 18,536 6.58 964 983 7.90 -------------------------------------------------------------------------------------- Asset-backed After 1 year within 5 years 1,000 1,004 6.60 ----- ----- ----- After 5 years within 10 years 1,000 992 6.15 ----- ----- ----- ------------------------------------------- Totals 2,000 1,996 6.38 ----- ----- ----- ------------------------------------------- Trust preferred After 10 years 7,064 6,765 7.91 ----- ----- ----- ------------------------------------------- Totals 7,064 6,765 7.91 ----- ----- ----- ------------------------------------------- Mutual funds: ------------------------------------------- Within 1 year 2,518 2,365 4.71 ----- ----- ----- ------------------------------------------- Other ------------------------------------------- After 10 years ----- ----- ----- 537 537 6.00 - ----------------------------------------------------------------------------------------------------------------------- Total investment securities 53,480 $52,890 6.43% $10,165 $9,865 6.44% ======================================================================== Net unrealized loss on securities available for sale (590) -------------- Total investment securities, net carrying value $52,890 ============== <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) September 30, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------------ Percentage Percentage Total of Total Total of Total Amount Loans Amount Loans - ------------------------------------------------------------------------------------------------------------ Commercial $94,926 30.5% $90,304 34.5% Leasing 13,291 4.3 3,768 1.4 Factoring/Asset based lending 11,601 3.7 7,393 2.8 Real estate construction 45,742 14.7 32,340 12.4 Real estate-other 115,112 37.1 101,559 38.9 Consumer 11,077 3.6 9,647 3.7 Other 19,660 6.3 17,031 6.5 Unearned fee income (768) (0.2) (662) (0.2) - ------------------------------------------------------------------------------------------------------------ Total loans and leases $310,641 100.0% $261,380 100.0% ============================================================================================================ Consolidated loans and leases increased to $311 million at September 30, 1999, from $261 million at December 31, 1998. The growth in leasing and factoring/asset-based lending in this period 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. The Bank has elected not to aggressively seek or renew fixed rate loans (other than leasing) or loans where, in management's opinion, the Bank's underwriting criteria is not satisfied; this has caused a slow down in real estate - other loan production and an increase in payoffs when the Bank has not met competitive pressures. Approximately 56% 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 (0.4%, included in the Other category), real estate equity lines (1.8%, 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 31% 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 September 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 SENSISTIVITY (dollars in thousands) Balances maturing Interest Rate Sensitivity ---------------------------------------------------------------------------- Balances at One year Predetermined Floating September 30, One year through five Over five interest interest 1999 or less years years rates rates =========================================================================================================================== Commercial $94,926 $55,741 $29,479 $9,706 $2,480 $92,446 =========================================================================================================================== Real estate construction $45,742 $42,175 $2,702 $865 $460 $45,282 =========================================================================================================================== Real estate-other $115,113 $14,619 $27,175 $73,319 $47,237 $67,876 =========================================================================================================================== 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 $5.2 million at September 30, 1999, or 1.66% of total loans and leases outstanding on such date. 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 September 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 Nine months ended Year ended September 30, September 30, December 31, --------------------------------------------------------- 1999 1998 1999 1998 1998 - --------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of the period $4,938 $4,540 $4,778 $4,493 $4,493 Charge-offs by loan or lease category: Commercial ---- ---- 6 125 234 Consumer 1 ---- 21 ---- ---- - --------------------------------------------------------------------------------------------------------------------------------- Total charge-offs 1 ---- 27 125 234 - --------------------------------------------------------------------------------------------------------------------------------- Recoveries by loan or lease category: Commercial 63 12 133 84 118 Real estate-construction 1 ---- 2 ---- ---- Real estate-other ---- ---- ---- 33 33 Consumer 1 ---- 16 67 68 - --------------------------------------------------------------------------------------------------------------------------------- Total recoveries 65 12 151 184 219 - --------------------------------------------------------------------------------------------------------------------------------- Net (recoveries) charge-offs (64) (12) (124) (59) 15 - --------------------------------------------------------------------------------------------------------------------------------- Provision charged to expense 150 150 250 150 300 - --------------------------------------------------------------------------------------------------------------------------------- Balance, end of the period $5,152 $4,702 $5,152 $4,702 $4,778 ================================================================================================================================= Ratios: Net (recoveries) charge-offs to average loans and leases, annualized (.08%) (.02%) (.06%) (.03%) .01% Allowance to total loans and leases at the end of the period 1.66% 1.91% 1.66% 1.91% 1.83% Allowance to nonperforming loans and leases at end of the period 417% 1,081% 417% 1,081% 1,983% ================================================================================================================================= During the three months ended September 30, 1999 and 1998, there were no significant charge-offs and for the nine months ended September 30, 1999 and 1998, charge-offs amounted to $27 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 417% of nonperforming loans and leases at September 30, 1999 compared to 1,983% at December 31, 1998. The decrease in the percentage of nonperforming loans and leases to the allowance for loan and lease losses was due to the addition of two loans which were over ninety days past due and still accruing interest. See "Nonperforming Loans and Leases." 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) September 30,1999 December 31,1998 - ---------------------------------------------------------------------------------------------------------------------- Loans and leases accounted for on a non-accrual basis $294 $197 Loans and leases restructured and in compliance with modified terms ----- 44 Other loans with principal or interest contractually pastdue 90 days or more 942 ----- - ---------------------------------------------------------------------------------------------------------------------- Total $1,236 $241 ====================================================================================================================== As of September 30, 1999, nonperforming loans and leases consisted of six loans. Three loans constitute $1,125 of the total, all of which are secured by real estate and one of which has an SBA guarantee. One of the above loans is also current as to its payments, but past maturity and currently awaiting Bankruptcy Court approval to renew. Loss exposure on these loans is not considered 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 credit 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 September 30, 1999, management has not identified any significant loans or leases not included within the Nonperforming Loans and Leases 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) September 30, 1999 December 31, 1998 - ---------------------------------------------------------------------------------------------------------- Percentage Percentage Total of Total Total of Total Amount Deposits Amount Deposits - ---------------------------------------------------------------------------------------------------------- Noninterest-bearing demand $64,935 19.2% $70,962 23.5% Interest-bearing demand 51,057 15.1 49,468 16.4 Money market and savings 96,969 28.8 91,320 30.2 Certificates of deposit: Less than $100 21,140 6.3 12,492 4.1 $100 or more 103,117 30.6 78,200 25.8 - ---------------------------------------------------------------------------------------------------------- Total $337,218 100.0% $302,442 100.0% ========================================================================================================== Deposits as of September 30, 1999 were $337 million compared to $302 million at December 31, 1998. The source of deposit growth for the first nine months of 1999 was due to several factors: 1) the growth in money market and savings deposits of approximately $6 million due to increased business activity; 2) the growth of certificates of deposit of less than $100, which was due to the addition of approximately $9 million raised through the use of an internet listing service; and 3) the growth of certificates of deposit of greater than $100 of approximately $25 million which was mainly due to the placement of three large wholesale certificates. Non-interest bearing deposits decreased $6 million due to the Bank's decision not to accept title company escrow deposits under the current competitive pricing structure for such deposits. Although money market and savings deposits increased approximately $6 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 $24 million during the nine months ended September 30, 1999, mainly due to the Bank's business development efforts. Management believes that these non-interest bearing 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 "Capital and Liquidity-Liquidity." Other short-term borrowings include $19 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 in the short term by a decline in interest rates. Conversely, an increase in interest rates should have a short-term positive impact on net interest income. To counter its asset-sensitive interest rate position, the Bank has entered into an interest rate "floor" as follows: INTEREST RATE FLOOR - ------------------------------------------------------------------------------- At September 30, 1999 (in thousands) - ------------------------------------------------------------------------------- Notional amount $10,000 - ------------------------------------------------------------------------------- Floor rate 8.50% - ------------------------------------------------------------------------------- Remaining life (months) 5 - ------------------------------------------------------------------------------- Carrying amount $19 - ------------------------------------------------------------------------------- Fair market value $7 - ------------------------------------------------------------------------------- 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 September 30, 1999 and December 31, 1998. Risk-based and Leverage Capital Ratios (dollars in thousands) September 30, 1999 December 31, 1998 ------------------------------------------------------ Company-Risk-based Amount Ratio Amount Ratio ------------------------------------------------------ Tier 1 capital $31,579 9.12% $30,810 10.57% Tier 1 capital minimum requirement 13,850 4.00 11,664 4.00 ------------------------------------------------------ Excess $17,729 5.12% $19,146 6.57% ====================================================== Total capital $35,917 10.37% $34,469 11.82% Total capital minimum requirement 27,699 8.00 23,328 8.00 ------------------------------------------------------ Excess $8,218 2.37% $11,141 3.82% ====================================================== Risk-adjusted assets $346,243 $291,602 =============== =============== Company-Leverage Tier 1 capital $31,579 7.90% $30,810 9.10% Minimum leverage ratio requirement 15,984 4.00 13,542 4.00 ------------------------------------------------------ Excess $15,595 3.90% $17,268 5.10% ====================================================== Average total assets $399,612 $338,544 =============== =============== Bank-Risk-based Tier 1 capital $31,170 9.01% $30,125 10.33% Tier 1 capital minimum requirement 13,844 4.00 11,661 4.00 ------------------------------------------------------ Excess $17,326 5.01% $18,464 6.33% ====================================================== Total capital $35,507 10.26% $33,783 11.59% Total capital minimum requirement 27,689 8.00 23,322 8.00 ------------------------------------------------------ Excess $7,818 2.26% $10,461 3.59% ====================================================== Risk-adjusted assets $346,109 $291,524 =============== =============== Bank-Leverage Tier 1 capital $31,170 7.80% $30,125 8.88% Minimum leverage ratio requirement 15,987 4.00 13,567 4.00 ------------------------------------------------------ Excess $15,183 3.80% $16,558 4.88% ====================================================== Average total assets $399,675 $339,166 =============== =============== 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 September 30, 1999, consolidated net liquid assets totaled $51 million or 21% 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 $16 million has been utilized at September 30, 1999), the guaranteed portion of the SBA loan portfolio of approximately $20 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 September 30, 1999 and 26% of total deposits at December 31, 1998. The increase relates to the placement of the $25 million in wholesale certificate of deposits. 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 September 30, 1999, approximately 36% 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 nine 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 September 30, 1999 was asset-sensitive on a short-term basis, 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Summary of Financial Results - Net Interest Income." On October 5, 1999, the Federal Open Market Committee ("FOMC") changed its bias to one of tightening from that of asymmetrical, but did not change the current inter-bank borrowing rate from 5%. However, the effect of a possible 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 short-term 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. The status of certain legal proceedings was reported in the Company's Form 10-Q for the six months ended June 30, 1999; subsequent thereto, there have been no material changes in the status of such legal proceedings. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. Item 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. Item 5. OTHER INFORMATION Not applicable. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: (2) a. Agreement and Plan of Merger by and among the Registrant, Saratoga Bancorp and Saratoga National Bank, dated as of August 27, 1999, is hereby incorporated by reference to Exhibit 2.1 of the Registrant's Registration Statement on Form S-4 as filed on October 14, 1999, under Registration No. 333-89013. (3)(i). The Registrant's restated Articles of Incorporation are hereby incorporated by reference from Exhibit (3) (i) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. (3)(ii). The Registrant's restated Bylaws as of June 8, 1999 are hereby incorporated by reference from Exhibit (3) (ii) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 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 A report on Form 8-K was filed with the Commission on September 1, 1999, pertaining to the proposed acquisition of Saratoga Bancorp. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Current Developments." 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: October 20, 1999 /s/ James R. Kenny ------------------------------- James R. Kenny President and Chief Executive Officer Date: October 20, 1999 /s/ Eugene E. Blakeslee ------------------------------- Eugene E. Blakeslee Executive Vice President and Chief Financial Officer (Chief Accounting Officer) SJNB Financial Corp. Form 10-Q Exhibits September 30, 1999 The following exhibits are filed as part of this report: (2)a. Agreement and Plan of Merger by and among the Registrant, Saratoga Bancorp and Saratoga National Bank, dated as of August 27, 1999, is hereby incorporated by reference to Exhibit 2.1 of the Registrant's Registration Statement on Form S-4 as filed on October 14, 1999, under Registration No. 333-89013. (3)(i). The Registrant's restated Articles of Incorporation are hereby incorporated by reference from Exhibit (3) (i) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1999. (3)(ii). The Registrant's restated Bylaws as of June 8, 1999 are hereby incorporated by reference from Exhibit (3) (ii) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 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.