U. S. SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549

                                   FORM 10-KSB
                   (Mark One)
                 [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
               THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the Fiscal Year ended December 31, 1996

                                       OR

                 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                                [NO FEE REQUIRED]

              For the Transition period from _______________to _______________

                         Commission File Number 0-11771

                              SJNB Financial Corp.
--------------------------------------------------------------------------------
                 (Name of small business issuer 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)

Issuer's telephone number    (408) 947-7562

      Securities registered under Section 12(b) of the Exchange Act:        NONE

Securities registered under Section 12(g) of the Exchange Act:
                                Common Stock, no par value
--------------------------------------------------------------------------------
                                  (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

Issuer's revenues for its most recent fiscal year:   $25,374,000

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  based on a market value of $20.375 per share (the closing  price of
the Common Stock, as of February 5, 1997) was $45,265,294.

Number of shares of common stock outstanding as of February 5, 1997: 
  2,580,182 shares

                      Documents incorporated by reference:
Portions of registrant's definitive proxy statement for Registrant's 1996 Annual
Meeting  of   Shareholders   (to  be  filed  pursuant  to  Regulation  14A)  are
incorporated by reference into Part III of this Report.

Transitional small business disclosure format:  Yes       No  X


<PAGE>



                                TABLE OF CONTENTS

PART I

                                                                            Page
Item 1 - Business                                                              1

Item 2 - Properties                                                           11

Item 3 - Legal Proceedings                                                    11

Item 4 - Submission of Matters to a Vote of Security Holders                  12

PART II

Item 5 - Market for Registrant's Common Equity and Related Stockholder        12
         Matters                 

Item 6 - Management's Discussion and Analysis or Plan of Operation            13

Item 7 - Financial Statements                                                 32

Item 8 - Changes in and Disagreements with Accountants on Accounting and      54
         Financial Disclosure

PART III

 Item 9 - Directors,  Executive  Officers,  Promoters and Control  Persons;   54
          Compliance  with Section 16(a) of the Exchange Act                    

 Item 10 - Executive Compensation                                             54

 Item 11 - Security Ownership of Certain Beneficial Owners and Management     54

 Item 12 - Certain Relationships and Related Transactions                     54

 Item 13 - Exhibits and Reports on Form 8-K                                   54

 Signatures                                                                   57


<PAGE>


                                     PART I


ITEM 1.  BUSINESS

Certain statements in this Annual Report on Form 10-KSB include  forward-looking
information  within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are   subject  to  the  "safe   harbor"   created  by  those   sections.   These
forward-looking  statements  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  increases
significantly;  changes in the interest rate environment reduce margins; general
economic  conditions,  either nationally or regionally,  are less favorable than
expected,  resulting in, among other things,  a deterioration  in credit quality
and an  increase in the  provision  for  possible  loan  losses;  changes in the
regulatory  environment;  changes in business conditions,  particularly in Santa
Clara  County  and in the  semiconductor  industry;  certain  operational  risks
involving  data  processing  systems  or  fraud;  volatility  of rate  sensitive
deposits; asset/liability matching risks and liquidity risks; and changes in the
securities  markets.  See also the section  included herein "Certain  Additional
Business Risks" and other risk factors discussed elsewhere in this report.


General

SJNB Financial Corp.  ("Company") is a bank holding company registered under the
Bank  Holding  Company Act of 1956,  as amended  (the  "BHCA").  The Company was
incorporated  under the laws of the State of California  on April 18, 1983.  Its
principal  office is located at One North Market  Street,  San Jose,  California
95113 and its telephone number is (408) 947-7562.

The Company owns 100% of the issued and  outstanding  common  shares of San Jose
National  Bank  (referred  to  herein as  "SJNB"  or "the  Bank").  The Bank was
incorporated  on  November  23,  1981  and  commenced   business  in  San  Jose,
California,  on June 10, 1982. The Company acquired  Business Bancorp ("BB") and
its wholly-owned subsidiary California Business Bank ("CBB") on October 1, 1994.
Operations of the Company and BB were consolidated into a single location at One
North Market Street,  San Jose,  California  95113.  SJNB engages in the general
commercial  banking  business with special  emphasis on the banking needs of the
business and professional communities in San Jose and the surrounding areas.

On January 2, 1996, the Bank acquired Astra  Financial  Corp. for  approximately
$760,000.  Its business was merged into the Bank's Financial  Services Division,
by adding  approximately $1.9 million of factored  receivables.  Astra Financial
Corp. was  liquidated on January 5, 1996 and its assets were  transferred to the
Bank.  The Bank's  Financial  Services  Division  is located at 95 South  Market
Street, San Jose, California 95113.

SJNB accepts checking and savings deposits, offers money market deposit accounts
and  certificates of deposit,  makes secured and unsecured  commercial and other
installment and term loans, and offers other customary  banking  services.  SJNB
offers banking services generally, but it places primary emphasis on lending for
real estate  purposes and specialized  lending to businesses and  professionals.
Loans for real estate purposes include term financing for commercial  facilities
and real  estate  construction  loans  mainly  for  residential  and  commercial
properties.  Loans to businesses and professionals  include accounts  receivable
financing,  equipment  financing,  commercial  loans,  SBA loans, and letters of
credit.  In addition,  the Bank offers factoring  services through its Financial
Services  Division.  Although the Bank has neither a trust nor an  international
banking department,  it has arranged to provide these services,  when requested,
through its correspondent banks.

The  Company  provides  commercial  banking  services  principally  through  its
subsidiary Bank and the Bank's Financial  Services  Division.  As a bank holding
company,  the Company is authorized to engage in the activities  permitted under
the BHCA and regulations thereunder.


Service Area

The principal service area of SJNB includes San Jose and the surrounding  areas,
including most of Santa Clara County.


Employees

At December  31,  1996,  SJNB had 76 full-time  officers  and  employees  and 15
part-time  employees  for a total of 81.1  employees  on a full time  equivalent
basis. Certain of the Bank's officers are also officers of the Company.  None of
the Bank's  employees  are  represented  by a union.  Management  believes  that
employee relations are good.


<PAGE>

Supervision and Regulation

         The Effect of Government Policy on Banking

The  earnings  and growth of the Bank are affected not only by local market area
factors and general  economic  conditions,  but also by government  monetary and
fiscal  policies.  For example,  the Board of  Governors of the Federal  Reserve
System ("FRB") influences the supply of money through its open market operations
in U.S.  Government  securities and adjustments to the discount rates applicable
to borrowings by depository  institutions and others. Such actions influence the
growth of loans, investments and deposits and also affect interest rates charged
on loans and paid on deposits.  The nature and impact of future  changes in such
policies  on  the  business  and  earnings  of the  Bank  cannot  be  predicted.
Additionally,  state and federal tax policies can impact banking  organizations.
Effective January 1, 1997,  applicable California bank and corporation tax rates
were reduced by 5% in order to keep  California  competitive  with other western
states.

As a consequence of the extensive regulation of commercial banking activities in
the United States,  the business of the Company is  particularly  susceptible to
being affected by the enactment of federal and state  legislation which may have
the effect of  increasing or decreasing  the cost of doing  business,  modifying
permissible  activities or enhancing the competitive position of other financial
institutions.  Any change in applicable  laws or regulations may have a material
adverse  effect on the  business and  prospects  of the Company.  In response to
various  business  failures in the savings and loan  industry and in the banking
industry, in December 1991, Congress enacted, and the President signed into law,
the Federal Deposit  Insurance  Corporation  Improvement Act of 1991 ("FDICIA").
FDICIA substantially revised the bank regulatory framework and deposit insurance
funding  provisions of the Federal  Deposit  Insurance Act and made revisions to
several other federal banking statutes.

Implementation of the various provisions of FDICIA is subject to the adoption of
regulations  by the  various  regulatory  agencies,  the  manner  in  which  the
regulatory agencies implement those regulations and certain phase-in periods.

         Regulation and Supervision of Bank Holding Companies

The Company is a bank holding  company subject to the BHCA . The Company reports
to,  registers  with,  and may be  examined  by,  the FRB.  The FRB also has the
authority to examine the Company's subsidiaries. The costs of any examination by
the FRB are payable by the Company.

The FRB has significant  supervisory  and regulatory  authority over the Company
and its affiliates.  The FRB requires the Company to maintain  certain levels of
capital.  See  "Capital  Standards."  The FRB  also  has the  authority  to take
enforcement  action against any bank holding  company that commits any unsafe or
unsound practice, or violates certain laws, regulations or conditions imposed in
writing  by the  FRB.  See  "Prompt  Corrective  Action  and  Other  Enforcement
Mechanisms."

Under the BHCA, a company  generally  must obtain the prior  approval of the FRB
before it exercises a controlling influence over a bank, or acquires directly or
indirectly, more than 5% of the voting shares or substantially all of the assets
of any bank or bank holding company. Thus, the Company is required to obtain the
prior approval of the FRB before it acquires,  merges or  consolidates  with any
bank or  bank  holding  company;  any  company  seeking  to  acquire,  merge  or
consolidate  with the Company  also would be required to obtain the  approval of
the FRB.

The Company is generally  prohibited under the BHCA from acquiring  ownership or
control of more than 5% of the voting  shares of any company  that is not a bank
or bank holding  company and from engaging  directly or indirectly in activities
other than banking,  managing banks, or providing  services to affiliates of the
holding  company.  A bank  holding  company,  with the  approval of the FRB, may
engage,  or acquire the voting shares of companies  engaged,  in activities that
the FRB has  determined  to be so closely  related to  banking  or  managing  or
controlling  banks as to be a proper  incident  thereto.  A bank holding company
must demonstrate  that the benefits to the public of the proposed  activity will
outweigh the possible adverse effects associated with such activity.

Pursuant to the Riegle-Neal  Interstate Banking and Branching  Efficiency Act of
1994 (the "Interstate Banking and Branching Act"), a bank holding company became
able to acquire  banks in states other than its home state  beginning  September
29, 1995 without regard to the  permissibility of such acquisitions  under state
law, but subject to any state  requirement  that the bank has been organized and
operating  for a minimum  period  of time,  not to exceed  five  years,  and the
requirement  that the bank holding  company,  prior to or following the proposed
acquisition,  controls  no more than 10% of the  total  amount  of  deposits  of
insured  depository  institutions  in the United  States and no more than 30% of
such deposits in that state (or such lesser or greater amount set by state law).
<PAGE>

The Interstate  Banking and Branching Act also authorizes  banks to merge across
states lines,  therefore creating interstate  branches,  beginning June 1, 1997.
Under  such  legislation,  each state has the  opportunity  to "opt out" of this
provision,  thereby prohibiting  interstate branching in such states, or to "opt
in" at an earlier time, thereby allowing interstate  branching within that state
prior to June 1, 1997. Furthermore,  pursuant to such act, a bank is now able to
open  new  branches  in a state  in  which  it does  not  already  have  banking
operations, if the laws of such state permit such de novo branching.  California
enacted  legislation  to "opt in" to the  Interstate  Banking and  Branching Act
provisions regarding interstate branching,  allowing a state bank chartered in a
state other than California to acquire by merger or purchase,  at any time after
effectiveness  of the  Caldera,  Weggeland,  and  Killea  California  Interstate
Banking and Branching Act of 1995 ("IBBA"), a California bank or industrial loan
company  which is at least five (5) years old and thereby  establish one or more
California branch offices. However, the IBBA prohibits a state bank chartered in
a  state  other  than  California  from  entering  California  by  purchasing  a
California branch office of a California bank or industrial loan company without
purchasing  the entire entity or by  establishing  a de novo  California  branch
office. See the section entitled  "Recently Enacted  Legislation" for additional
information.

Proposals to change the laws and regulations  governing the banking industry are
frequently  introduced  in Congress,  in the state  legislatures  and before the
various bank regulatory agencies.

The FRB generally  prohibits a bank holding  company from  declaring or paying a
cash  dividend  which would impose undue  pressure on the capital of  subsidiary
banks or would be funded only through borrowing or other arrangements that might
adversely affect a bank holding company's financial  position.  The FRB's policy
is that a bank holding  company  should not  continue its existing  rate of cash
dividends on its common stock unless its net income is  sufficient to fully fund
each dividend and its prospective rate of earnings  retention appears consistent
with its capital needs, asset quality and overall financial condition.

Transactions  between  the Company and the Bank are subject to a number of other
restrictions. FRB policies forbid the payment by bank subsidiaries of management
fees which are  unreasonable  in amount or exceed the fair  market  value of the
services  rendered  (or, if no market  exists,  actual  costs plus a  reasonable
profit). Subject to certain limitations,  depository institution subsidiaries of
bank  holding  companies  may extend  credit to,  invest in the  securities  of,
purchase assets from, or issue a guarantee,  acceptance,  or letter of credit on
behalf of, an affiliate,  provided that the aggregate of such  transactions with
affiliates  may  not  exceed  10%  of  the  capital  stock  and  surplus  of the
institution,  and the aggregate of such transactions with all affiliates may not
exceed 20% of the capital stock and surplus of such institution. The Company may
only borrow from depository  institution  subsidiaries if the loan is secured by
marketable  obligations  with a value of a  designated  amount  in excess of the
loan.  Further,  the Company may not sell a  low-quality  asset to a  depository
institution subsidiary.

Generally,  a bank holding  company and its  subsidiaries  are  prohibited  from
engaging in tie-in arrangements in connection with the extension of credit, sale
or lease of  property  or  furnishing  of  services  unless  the FRB  permits an
exception to the tying prohibitions pursuant to exemption authority available to
it under  applicable  law.  The FRB,  however,  has  adopted  a rule,  effective
September 2, 1994,  amending the anti-tying  provisions to permit a bank or bank
holding  company  to offer a lower  price on a loan,  deposit  or trust  service
(traditional  bank  product),  or  on  securities  brokerage  services,  on  the
condition that the customer obtain a traditional bank product from an affiliate.
Additionally,  as of January 23,  1995,  a bank  holding  company,  or a nonbank
subsidiary,  may offer  lower  prices on any of its  products or services on the
condition that the customer  obtain another product or service from such company
or any of its nonbank  affiliates,  provided  that all  products  offered in the
package arrangement are separately available for purchase.

The Company is a bank holding  company within the meaning of Section 3700 of the
California  Financial  Code.  As such,  the  Company and the Bank are subject to
examination  by,  and may be  required  to file  reports  with,  the  California
Superintendent  of Banks (the  "Superintendent").  Regulations have not yet been
proposed  or  adopted,  and no other steps have been  taken,  to  implement  the
Superintendent's power under this statute.
<PAGE>
         Bank Regulation and Supervision

As a national bank, the Bank is regulated,  supervised and regularly examined by
the Office of the Comptroller of the Currency  ("OCC").  Deposit accounts at the
Bank are insured by the Bank  Insurance  Fund ("BIF"),  as  administered  by the
Federal Deposit Insurance  Corporation ("FDIC"), to the maximum amount permitted
by law. The Bank is also subject to applicable  provisions  of  California  law,
insofar as such  provisions  are not in conflict  with or  preempted  by federal
banking law.  The Bank is a member of the Federal  Reserve  System,  and is also
subject to certain  regulations of the FRB dealing primarily with check clearing
activities,  establishment of banking reserves, Truth-in-Lending (Regulation Z),
Truth-in-Savings (Regulation DD), and Equal Credit Opportunity (Regulation B).

By   comparison,   California   state-chartered   banks  are  regulated  by  the
Superintendent.  Pursuant  to AB  3351,  which  was  adopted  by the  California
legislature during 1996, all of the California state regulatory  authorities for
state-chartered  depository  institutions will be consolidated under a new state
agency, the Department of Financial Institutions ("DFI") effective July 1, 1997.
The newly created DFI combines the State Banking  Department  and the Department
of Savings and Loan while  regulatory  oversight over  industrial loan companies
and credit  unions will be shifted from the  Department of  Corporations  to the
DFI. During 1996, the California  Interstate  Banking and Branching  Cleanup Act
was enacted,  which  revised the  Superintendent's  assessment  methodology  for
state-chartered  banks in order to provide a better basis of  comparison  to the
method used by the OCC. Under the new  methodology,  the average  assessment for
state banks will be  approximately  39% of the OCC's annual charges for national
bank supervision.

During  1996,  the OCC  adopted  a  regulation  to  revise  and  streamline  its
procedures  with  respect to  corporate  activities  of  national  banks,  to be
effective  December 31, 1996. These revised  standards allow the OCC to approve,
on a  case-by-case  basis,  the  entry  of bank  operating  subsidiaries  into a
business incidental to banking, including activities in which the parent bank is
not  permitted to engage.  Such a standard  allows a national bank to conduct an
activity approved for a bank holding company through a bank operating subsidiary
such as acting as an investment or financial advisor,  leasing personal property
and providing  financial  advice to customers.  In general,  these new standards
will be available to well-capitalized or adequately capitalized national banks.

         Capital Standards

The OCC and other federal  banking  agencies have  risk-based  capital  adequacy
guidelines  intended to provide a measure of capital  adequacy that reflects the
degree of risk  associated  with a banking  organization's  operations  for both
transactions  reported on the balance sheet as assets and transactions,  such as
letters of credit and recourse  arrangements,  which are recorded as off balance
sheet items. Under these guidelines, nominal dollar amounts of assets and credit
equivalent  amounts of off balance sheet items are  multiplied by one of several
risk  adjustment  percentages,  which  range from 0% for assets  with low credit
risk,  such as certain  U.S.  government  securities,  to 100% for  assets  with
relatively higher credit risk, such as business loans.

In determining the capital level the Bank is required to maintain,  the OCC does
not, in all respects,  follow generally accepted accounting  principles ("GAAP")
and has special rules which have the effect of reducing the amount of capital it
will  recognize for purposes of  determining  the capital  adequacy of the Bank.
These rules are called Regulatory  Accounting  Principles  ("RAP").  In December
1993, the federal banking agencies issued an interagency policy statement on the
allowance  for loan and lease  losses  which,  among other  things,  establishes
certain  benchmark  ratios of loan loss  reserves to classified  assets.  Future
changes in OCC  regulations  or  practices  could  further  reduce the amount of
capital recognized for purposes of capital adequacy.  Such a change could affect
the ability of the Company to grow and could restrict the amount of profits,  if
any, available for the payment of dividends.

A banking organization's  risk-based capital ratios are obtained by dividing its
qualifying  capital  by its total  risk-adjusted  assets and off  balance  sheet
items. The regulators measure  risk-adjusted  assets and off balance sheet items
against  both total  qualifying  capital  (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common
stock, retained earnings,  noncumulative  perpetual preferred stock, other types
of qualifying  preferred stock and minority  interests in certain  subsidiaries,
less most other intangible assets and other  adjustments.  Net unrealized losses
on  available-for-sale  equity  securities with readily  determinable fair value
must be deducted in  determining  Tier 1 capital.  Additionally,  as of April 1,
1995, for Tier 1 capital purposes, deferred tax assets that can only be realized
if an institution earns sufficient  taxable income in the future will be limited
to the amount that the  institution  is expected to realize  within one year, or
ten percent of Tier 1 capital,  whichever is less. Tier 2 capital may consist of
a limited  amount of the  allowance  for possible  loan and lease  losses,  term
preferred  stock and other types of  preferred  stock not  qualifying  as Tier 1
capital,  term  subordinated  debt  and  certain  other  instruments  with  some
characteristics  of equity.  The  inclusion  of  elements  of Tier 2 capital are
subject to certain other  requirements  and  limitations of the federal  banking
agencies.  Since December 31, 1992, the federal banking agencies have required a
minimum  ratio of  qualifying  total  capital  to  risk-adjusted  assets and off
balance  sheet  items of 8%, and a minimum  ratio of Tier 1 capital to  adjusted
average risk-adjusted assets and off balance sheet items of 4%.
<PAGE>

In addition to the risked-based  guidelines,  federal banking regulators require
banking organizations to maintain a minimum amount of Tier 1 capital to adjusted
average total assets,  referred to as the leverage  capital ratio. For a banking
organization  rated in the highest of the five  categories used by regulators to
rate  banking  organizations,  the minimum  leverage  ratio of Tier 1 capital to
total assets must be 3%. It is improbable,  however,  that an institution with a
3% leverage  ratio would receive the highest  rating by the  regulators  since a
strong capital position is a significant part of the regulators' rating. For all
banking  organizations not rated in the highest  category,  the minimum leverage
ratio must be at least 100 to 200 basis points above the 3% minimum.  Thus,  the
effective minimum leverage ratio, for all practical  purposes,  must be at least
4% or 5%.  In  addition  to these  uniform  risk-based  capital  guidelines  and
leverage  ratios  that  apply  across  the  industry,  the  regulators  have the
discretion  to  set  individual   minimum  capital   requirements  for  specific
institutions at rates significantly above the minimum guidelines and ratios.

The following  tables  present the capital  ratios for the Company and the Bank,
compared to the standards for well-capitalized  depository  institutions,  as of
December 31, 1996:


(amounts in thousands, except percentages)
--------------------------------------------------------------------------------
                                          Actual          Well       Minimum
                                    -----------------  Capitalized    Capital
                     The Company    Capital   Ratio       Ratio     Requirement
--------------------------------------------------------------------------------
Leverage                            $26,533      9.28%     5.0%         4.0%
Tier 1 Risk-based                    26,533     11.91      6.0          4.0
Total Risk- based                    29,333     13.17     10.0          8.0
                      The Bank
--------------------------------------------------------------------------------
Leverage                            $25,389      8.87%     5.0%         4.0%
Tier 1 Risk-based                    25,389     11.40      6.0          4.0
Total Risk-based                     28,187     12.66     10.0          8.0


Banking  agencies have recently  adopted  final  regulations  which mandate that
regulators take into consideration  concentrations of credit risk and risks from
non-traditional  activities, as well as an institution's ability to manage those
risks,  when  determining  the  adequacy  of  an  institution's   capital.  This
evaluation  will  be  made as a part of the  institution's  regular  safety  and
soundness  examination.  Banking  agencies  also  have  recently  adopted  final
regulations  requiring  regulators  to  consider  interest  rate risk  (when the
interest  rate  sensitivity  of an  institution's  assets  does  not  match  the
sensitivity of its  liabilities or its off balance sheet position) in evaluation
of a bank's  capital  adequacy.  This final  rule does not codify a  measurement
framework for assessing the level of a bank's  interest rate risk exposure.  The
information and exposure estimates collected through a new proposed  supervisory
measurement  process,  described in the banking agencies' joint policy statement
on interest rate risk,  would be one  quantitative  factor used to determine the
adequacy of an individual  bank's  capital for interest rate risk.  The focus of
that proposed process is on a bank's economic value exposure. Other quantitative
factors  include the bank's  historical  financial  performance and its earnings
exposure to interest rate  movements.  Examiners also will consider  qualitative
factors,  including  the  adequacy  of the bank's  internal  interest  rate risk
management.  The banking  agencies  intend for this  case-by-case  approach  for
assessing a bank's capital  adequacy for interest rate risk to be a transitional
arrangement.

The second step will consist of a proposed rule that would establish an explicit
minimum  capital  charge for interest rate risk,  based on the level of a bank's
measured  interest rate risk exposure.  The banking agencies intend to implement
this second step at some future date, after the banking agencies and the banking
industry have gained more experience with the proposed  supervisory  measurement
and assessment process.
<PAGE>
         Prompt Corrective Action and Other Enforcement Mechanisms

FDICIA requires each federal banking agency to take prompt  corrective action to
resolve  the  problems of insured  depository  institutions,  including  but not
limited to those that fall below one or more prescribed  minimum capital ratios.
The law required each federal banking agency to promulgate  regulations defining
the following five categories in which an insured depository institution will be
placed,  based on the level of its capital ratios: well capitalized,  adequately
capitalized,  undercapitalized,  significantly  undercapitalized  and critically
undercapitalized.

In September 1992, the federal banking agencies issued uniform final regulations
implementing  the prompt  corrective  action  provisions  of FDICIA.  An insured
depository  institution generally will be classified in the following categories
based on capital measures indicated below:

          "Well  capitalized"
           Total risk-based capital of 10%;
           Tier 1 risk-based capital of 6%; and
           Leverage ratio of 5%.

          "Adequately  capitalized"
           Total risk-based capital of 8%;
           Tier 1 risk-based capital of 4%; and
           Leverage ratio of 4%.

          "Undercapitalized"
           Total risk-based capital less than 8%;
           Tier 1 risk-based capital less than 4%; or 
           Leverage ratio less than 4%.

          "Significantly  undercapitalized"
           Total risk-based capital less than 6%;
           Tier 1 risk-based  capital  less than 3%; or
           Leverage ratio less than 3%.

          "Critically undercapitalized"
           Tangible equity to total assets less than 2%.

An  institution  that,  based upon its capital  levels,  is  classified as "well
capitalized,"  "adequately  capitalized" or "undercapitalized" may be treated as
though it were in the next lower  capital  category if the  appropriate  federal
banking agency,  after notice and  opportunity  for hearing,  determines that an
unsafe or unsound  condition  or an unsafe or  unsound  practice  warrants  such
treatment.  At each successive  lower capital  category,  an insured  depository
institution  is subject to more  restrictions.  The  federal  banking  agencies,
however,  may not treat an institution as "critically  undercapitalized"  unless
its capital ratio actually warrants such treatment.

If an insured  depository  institution is  undercapitalized,  it will be closely
monitored  by  the  appropriate   federal   banking   agency.   Undercapitalized
institutions must submit an acceptable capital restoration plan with a guarantee
of performance issued by the holding company. Further restrictions and sanctions
are  required  to  be  imposed  on  insured  depository  institutions  that  are
critically  undercapitalized.  The most important additional measure is that the
appropriate  federal banking agency is required to either appoint a receiver for
the institution within 90 days, or obtain the concurrence of the FDIC in another
form of action.

In addition to measures  taken under the prompt  corrective  action  provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal  regulators for unsafe or unsound  practices in conducting  their
businesses  or for  violations  of any law,  rule,  regulation  or any condition
imposed  in  writing by the agency or any  written  agreement  with the  agency.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance  of a  cease-and-desist  order  that can be  judicially  enforced,  the
termination of insurance of deposits (in the case of a depository  institution),
the imposition of civil money penalties,  the issuance of directives to increase
capital, the issuance of formal and informal agreements, the issuance of removal
and   prohibition   orders  against   institution-affiliated   parties  and  the
enforcement of such actions through injunctions or restraining orders based upon
a  judicial  determination  that the  agency  would be harmed if such  equitable
relief was not granted.  Additionally, a holding company's inability to serve as
a source of strength to its subsidiary banking  organizations  could serve as an
additional basis for a regulatory action against the holding company.

         Safety and Soundness Standards

FDICIA also  implemented  certain  specific  restrictions  on  transactions  and
required  federal  banking  regulators  to adopt  overall  safety and  soundness
standards  for  depository   institutions  related  to  internal  control,  loan
underwriting  and  documentation  and asset growth.  Among other things,  FDICIA
limits the  interest  rates paid on deposits by  undercapitalized  institutions,
restricts  the use of brokered  deposits,  limits the  aggregate  extensions  of
credit by a depository institution to an executive officer, director,  principal
shareholder or related  interest,  and reduces  deposit  insurance  coverage for
deposits  offered  by  undercapitalized  institutions  for  deposits  by certain
employee benefits accounts.
<PAGE>

In addition to the statutory limitations, FDICIA originally required the federal
banking  agencies  to  prescribe,  by  regulation,  standards  for  all  insured
depository institutions for such things as classified loans and asset growth. In
1994 FDICIA was amended to: (a) authorize  the agencies to establish  safety and
soundness  standards by regulation  or by guideline  for all insured  depository
institutions;  (b) give the agencies  greater  flexibility in prescribing  asset
quality and earnings  standards;  and (c)  eliminate the  requirement  that such
standards apply to depository institution holding companies.

On July 10, 1995, the federal banking agencies published Interagency  Guidelines
Establishing  Standards for Safety and  Soundness.  By adopting the standards as
guidelines,  the agencies  retained the authority to require an  institution  to
submit to an acceptable  compliance  plan as well as the  flexibility  to pursue
other  more  appropriate  or  effective  courses  of action  given the  specific
circumstances  and severity of an institution's  noncompliance  with one or more
standards.

         Restrictions on Dividends and Other Distributions

The power of the board of  directors  of an insured  depository  institution  to
declare a cash dividend or other distribution with respect to capital is subject
to statutory and regulatory  restrictions  which limit the amount  available for
such  distribution  depending  upon the earnings,  financial  condition and cash
needs  of the  institution,  as  well as  general  business  conditions.  FDICIA
prohibits  insured  depository  institutions  from paying management fees to any
controlling  persons  or,  with  certain  limited  exceptions,   making  capital
distributions,  including dividends, if, after such transaction, the institution
would be undercapitalized.

Regulators  also have  authority  to  prohibit  a  depository  institution  from
engaging in business  practices  which are  considered  to be unsafe or unsound,
possibly  including  payment  of  dividends  or  other  payments  under  certain
circumstances even if such payments are not expressly prohibited by statute.

The payment of dividends by a national bank is further  restricted by additional
provisions  of federal  law,  which  prohibit a national  bank from  declaring a
dividend  on its shares of common  stock  unless its  surplus  fund  exceeds the
amount of its common  capital  (total  outstanding  common  shares times the par
value per share). Additionally,  if losses have at any time been sustained equal
to or exceeding a bank's  undivided  profits then on hand, no dividend  shall be
paid.  Moreover,  even if a bank's  surplus  exceeded its common capital and its
undivided profits exceed its losses, the approval of the OCC is required for the
payment of dividends if the total of all  dividends  declared by a national bank
in any  calendar  year would  exceed  the total of its net  profits of that year
combined  with its retained  net profits of the two  preceding  years,  less any
required  transfers  to surplus or a fund for the  retirement  of any  preferred
stock. A national bank must consider other business  factors in determining  the
payment of  dividends.  The payment of  dividends by the Bank is governed by the
Bank's  ability to  maintain  minimum  required  capital  levels and an adequate
allowance  for loan  losses.  Regulators  also  have  authority  to  prohibit  a
depository  institution from engaging in business practices which are considered
to be unsafe or  unsound,  possibly  including  payment  of  dividends  or other
payments  under  certain  circumstances  even if such payments are not expressly
prohibited by statute.

         Premiums for Deposit Insurance and Assessments for Examinations

FDICIA  established  several  mechanisms to increase  funds to protect  deposits
insured by the Bank  Insurance Fund ("BIF")  administered  by the FDIC. The FDIC
also administers the Savings Association Insurance Fund ("SAIF"),  which insures
deposits  in thrift  institutions.  The FDIC is  authorized  to borrow up to $30
billion from the United States  Treasury;  up to 90% of the fair market value of
assets  of  institutions  acquired  by the FDIC as  receiver  from  the  Federal
Financing  Bank; and from depository  institutions  that are members of the BIF.
Any  borrowings  not repaid by asset  sales are to be repaid  through  insurance
premiums  assessed to member  institutions.  Such premiums must be sufficient to
repay any borrowed funds within 15 years and provide  insurance fund reserves of
$1.25 for each $100 of insured  deposits.  FDICIA also  provides  authority  for
special assessments against insured deposits.  No assurance can be given at this
time as to what the future level of premiums will be.

As required by FDICIA,  the FDIC adopted a  transitional  risk-based  assessment
system for deposit insurance premiums which became effective January 1, 1993. On
November 14, 1995 the Board of  Directors  of the FDIC  adopted a resolution  to
reduce to a range of 0 to 27 basis points the  assessment  rates  applicable  to
deposits  assessable by the BIF for the semiannual  assessment  period beginning
January  1,  1996.  The new  assessment  schedule  would  retain  the risk based
characteristics  of the current system. On November 26, 1996 the FDIC decided to
continue in effect the current BIF assessment rate schedule.
<PAGE>

The FDIC may make  limited  adjustments  to the  above  rates  not to  exceed an
increase  or  decrease  of 5 basis  points  without  public  notice and  comment
rulemaking. The amount of an adjustment adopted by the Board is to be determined
by the following considerations:  (a) the amount of assessment revenue necessary
to  maintain  the  reserve  ratio at the  designated  reserve  ratio and (b) the
assessment  schedule  that would  generate  such  amount of  assessment  revenue
considering the risk profile of BIF members.  In determining the relevant amount
of  assessment  revenue,  the  Board is to  consider  BIF's  expected  operating
expenses,  case resolution expenditures and income, the effect of assessments on
BIF  members'  earnings and  capital,  and any other  factors the Board may deem
appropriate.

In 1996 Congress enacted the Deposit  Insurance Funds Act ("Funds Act") in order
to raise the level of SAIF reserves,  and to reduce the  possibility  that bonds
issued by the Financing Corporation ("FICO") would go into default. The FICO was
a special purpose  government  corporation  that issued $8.2 billion in bonds to
recapitalize the Federal Savings and Loan Insurance Corporation. Interest on the
FICO bonds was paid from the  proceeds of  assessments  made on the  deposits of
SAIF  members.  Because of the almost $800 million  needed to pay for the annual
interest on the FICO bonds, the payments of SAIF members were not increasing the
SAIF reserve to a sufficient level to allow the FDIC to reduce  assessment rates
(as had been done for BIF  deposits),  and SAIF members were  employing  certain
strategies to either exit the system or transfer deposits to BIF coverage.

Pursuant to the Funds Act, the FDIC imposed a special one-time assessment on all
institutions  that  held SAIF  assessable  deposits  as of March 31,  1995 of an
estimated 65.7 cents per $100 of SAIF assessable deposits. Certain discounts and
exemptions  from the assessment were available.  For example,  BIF-member  banks
that had acquired  SAIF-insured deposits from thrifts were generally entitled to
a 20% discount on the special assessment if the bank satisfied certain statutory
thresholds  (the bank's acquired SAIF deposits,  as adjusted,  must be less than
half of its total domestic  deposits).  Furthermore,  beginning January 1, 1997,
all FDIC-insured  institutions  will be assessed to cover the interest  payments
due on FICO bonds.  For calendar  years 1997 through 1999,  BIF members will pay
one-fifth  the rate SAIF members  will pay, and  beginning in 2000 both types of
institutions  will pay the same rate. BIF members will be required to pay a FICO
assessment  of  approximately  1.3 basis  points for the first  semiannual  FICO
assessment in 1997.

The Funds Act also authorized the FDIC to rebate assessments paid by BIF members
if the BIF has reserves  exceeding its designated  reserve ratio of 1.23 percent
of total estimated insured deposits.  The adjusted BIF balance was approximately
$26 billion on June 30,  1996,  a reserve  ratio of 1.30  percent.  The FDIC has
expressed its view that the  long-term  needs of the BIF are a factor in setting
the  effective  average  BIF  assessment  rate,  and that the FDIC is  uncertain
whether the current favorable conditions represent a long-term trend.

         Community Reinvestment Act and Fair Lending Developments

The  Bank  is  subject  to  certain  fair  lending  requirements  and  reporting
obligations   involving   home  mortgage   lending   operations   and  Community
Reinvestment  Act ("CRA")  activities.  The CRA  generally  requires the federal
banking  agencies to evaluate the record of a financial  institution  in meeting
the credit needs of their local  communities,  including low and moderate income
neighborhoods. In addition to substantive penalties and corrective measures that
may be required  for a  violation  of certain  fair  lending  laws,  the federal
banking  agencies may take  compliance  with such laws and CRA into account when
regulating and supervising other activities.

On March 8, 1994,  the federal  Interagency  Task Force on Fair Lending issued a
policy statement on  discrimination in lending.  The policy statement  describes
the three methods that federal agencies will use to prove discrimination:  overt
evidence of  discrimination,  evidence of disparate  treatment,  and evidence of
disparate impact.

In 1996, new compliance and examination  guidelines for the CRA were promulgated
by each of the federal banking  regulatory  agencies,  fully replacing the prior
rules and regulatory  expectations  with new ones  ostensibly  more  performance
based  than  before to be fully  phased in as of July 1,  1997.  The  guidelines
provide for streamlined examinations of smaller institutions.
<PAGE>

         Recently Enacted Legislation

On  September  29,  1995 the IBBA became  effective.  The IBBA  implemented  the
federal  Interstate  Banking  and  Branching  Act.  The  main  features  of this
legislation  are:  (a)  out-of-state  banks that wish to  establish a California
branch office to conduct core banking  business must first acquire an existing 5
year old California bank or industrial  loan company by merger or purchase;  (b)
California state-chartered banks will be empowered to conduct various authorized
branch-like  activities on an agency basis through  affiliated and  unaffiliated
insured  depository  institutions  in California  and other states;  and (c) the
Superintendent will be authorized to approve an interstate acquisition or merger
which  would   result  in  a  deposit   concentration   exceeding   30%  if  the
Superintendent  finds that the transaction is consistent with public convenience
and advantage.  The legislation  also contains  extensive  provisions  governing
intrastate and interstate:  (a)  intra-industry  sales,  mergers and conversions
between  banks and between  industrial  loan  companies  and (b)  inter-industry
transactions   involving  banks,   savings   associations  and  industrial  loan
companies.

During 1996, new federal  legislation  amended the  Comprehensive  Environmental
Response, Compensation, and Liability Act ("CERCLA") and the underground storage
tank  provisions  of the  Resource  Conversation  and  Recovery  Act ("RCRA") to
provide  lenders and fiduciaries  with greater  protections  from  environmental
liability.  The definition of "owner or operator"  under CERCLA has been amended
to exclude a lender who: (i) holds indicia  of ownership in a property primarily
to protect its security  interest,  but does not  participate  in the property's
management or (ii)  forecloses  on a property,  or,  after  foreclosure,  sells,
re-leases  (in the  case of a lease  finance  transaction),  or  liquidates  the
property,  maintains  business  activities,  winds up  operations,  undertakes a
response  under  CERCLA,  or takes  measures  to  preserve,  protect  or prepare
property prior to sale or disposition, so long as the lender did not participate
in the  property's  management  prior  to  sale.  In  order  to  preserve  these
protections, a lender who forecloses on property must seek to sell, re-lease, or
otherwise   divest   itself  of  the  property  at  the  earliest   practicable,
commercially  reasonable  time,  and  on  reasonable  terms.  "Participation  in
management" is defined as actual  participation in the management or operational
affairs of the  facility,  not merely  having the  capacity to  influence or the
unexercised right to control operations. Similar changes have been made in RCRA.

The California  legislature  adopted a similar bill to provide that,  subject to
numerous  exceptions,  a lender  acting in the capacity of a lender shall not be
liable under any state or local statute, regulation or ordinance, other than the
California  Hazardous  Waste  Control Law, to undertake a cleanup,  pay damages,
penalties or fines, or forfeit  property as a result of the release of hazardous
materials  at or from the  property.  Under  this  bill a lender  which  had not
participated  in the management of the property  prior to  foreclosure  may take
actions  similar to those set forth in the CERCLA  and RCRA  amendments  without
losing  its  immunity  from   liability.   To  preserve  that  immunity,   after
foreclosure, the lender must take commercially reasonable steps to divest itself
of the property in a reasonably expeditious manner.

         Pending Legislation

There are a number of pending legislative proposals to reform the Glass-Steagall
Act to allow  affiliations  between  banks and other firms engaged in "financial
activities," including insurance companies and securities firms.  Glass-Steagall
reform will likely be affected by a bank  insurance  powers case decided  during
1996 by the U.S. Supreme Court, which gives national banks greater opportunities
to sell traditional insurance products,  such as life, automobile,  and property
and  casualty  policies.  In a similar  recent  case,  the  Court  upheld an OCC
determination that national banks may sell annuities.

Certain other pending  legislative  proposals  include bills to free withdrawals
from  individual   retirement   accounts  from  penalties  for  first-time  home
purchasers and other purposes and eliminate most CRA reporting requirements.

While the  effect of such  proposed  legislation  and  regulatory  reform on the
business of financial  institutions cannot be accurately predicted at this time,
it seems  likely  that a  significant  amount of  consolidation  in the  banking
industry will continue to occur throughout the remainder of the decade.

         Competition

The banking  business in California,  generally and  specifically  in the market
areas served by the Bank, is highly  competitive  with respect to both loans and
deposits. It is dominated by a relatively small number of major banks which have
offices operating throughout  California.  Among the advantages such major banks
have  over  the Bank are  their  ability  to  finance  wide-ranging  advertising
campaigns and to allocate  their  investment  assets to regions of highest yield
and demand. In addition, many of the major banks operating in the Bank's service
area offer certain specialized services, such as trust and international banking
services,  which  SJNB does not  offer  directly.  By  virtue  of their  greater
capitalization,  the major banks also have  substantially  higher lending limits
than the Bank.
<PAGE>

SJNB  competes  for loans and deposits  with these major banks,  as well as with
savings  and loan  associations,  thrift and  loans,  credit  unions,  brokerage
companies,  mortgage companies,  insurance companies,  and other lending sources
which have provided significant  competition for banks with respect to deposits.
Other institutions, such as brokerage houses, mutual fund companies, credit card
companies,  and even retail  establishments have offered new investment vehicles
which also compete  with banks for deposit  business.  The  direction of federal
legislation in recent years seems to favor  competition  between different types
of financial institutions and to foster new entrants into the financial services
market,  and it is anticipated  that this trend will continue.  Other  entities,
both governmental and private, seeking to raise capital through the issuance and
sale of debt or equity securities,  also provide competition for the Bank in the
acquisition of deposits.

At present there are  approximately  202 banking  offices in the geographic area
served by SJNB,  including  offices of major chain  banks and other  independent
banks.   There  are  also   approximately   173  offices  of  savings  and  loan
associations, credit unions and other financial institutions in the service area
of SJNB.

Presently,  there are approximately eight other independent banks in the City of
San  Jose,  and seven in the  surrounding  areas  served  by SJNB.  Three of the
independent  banks--Heritage  Bank of Commerce,  Cupertino  National  Bank,  and
Silicon  Valley  Bank--emphasize  commercial  banking  services and,  therefore,
create direct  competition for the services that SJNB offers to the business and
professional communities in its market area.

The Bank's  Financial  Services  Division  also  competes with many of the major
banks and the  independent  banks within in its marketing area. It also competes
with  companies  solely in the  factoring  business.  Such  companies  may offer
products  and  services   which   traditionally   are  not  offered  by  banking
institutions.

The  enactment of the  Interstate  Banking and Branching Act as well as the IBBA
will likely increase  competition within California.  Regulatory reform, as well
as other  changes in federal and  California  law will also affect  competition.
While the impact of these  changes,  and of other  proposed  changes,  cannot be
predicted with certainty, it is clear that the business of banking in California
will remain highly competitive.


Certain Additional Business Risks

The  Company's  business,  financial  condition  and  operating  results  can be
impacted  by a number of factors,  including  but not limited to those set forth
below,  any one of which could cause the Company's  actual  results to vary from
the Company's  anticipated  future  results.

Shares of the  Company  Common  Stock  eligible  for  future  sale  could have a
dilutive  effect on the  market for  Company  Common  Stock and could  adversely
affect the market price. The Articles of Incorporation of the Company  authorize
the  issuance  of  20,000,000  shares of common  stock,  of which  approximately
2,571,000  shares were  outstanding at December 31, 1996.  Pursuant to its stock
option  plans,  at December 31,  1996,  the Company had  outstanding  options to
purchase an aggregate of 252,518 shares of Company Common Stock.  As of December
31, 1996,  231,540 shares of Company Common Stock remained  available for option
grants under the stock option  plans.  Sales of  substantial  amounts of Company
Common Stock in the public market could adversely affect the market price of the
Common Stock.

The Company has  previously  announced its intention to pursue  acquisitions  of
other  financial  institutions  from time to time  where such  acquisitions  are
believed by the Company to enhance  shareholder value or satisfy other strategic
objectives of the Company. Other acquisitions,  if any, could be accomplished by
the issuance of additional  shares of Company  Common Stock or other  securities
convertible into or exercisable for such Common Stock.

The loan  portfolio of the Company is dependent on real estate.  At December 31,
1996,  real estate served as the principal  source of collateral with respect to
approximately  54% of the  Company's  loan  portfolio.  A  worsening  of current
economic conditions or rising interest rates could have an adverse effect on the
demand for new loans, the ability of borrowers to repay  outstanding  loans, the
value of real estate and other  collateral  securing  loans and the value of the
available for sale  investment  portfolio,  as well as the  Company's  financial
condition  and results of operations in general and the market value for Company
Common Stock. Acts of nature,  including earthquakes and floods, which may cause
uninsured  damage  and other loss of value to real  estate  that  secures  these
loans, may also negatively impact the Company's financial condition.
<PAGE>

The Bank is subject to certain operational risks, including, but not limited to,
data processing  system failures and errors and customer or employee fraud.  The
Bank  maintains  a  system  of  internal   controls  to  mitigate  against  such
occurrences and maintains  insurance coverage for such risks, but should such an
event  occur  that was not  prevented  or  detected  by the  Company's  internal
controls, or that was uninsured or in excess of the applicable insurance limits,
it could have a significant negative impact on the Company's financial condition
or results of operations.


Statistical Data

Certain  consolidated  statistical  information  concerning  the business of the
Company  appears  on  pages  13  through  31  under  the  caption  "Management's
Discussion and Analysis or Plan of Operation" and in the Company's  Consolidated
Financial  Statements on pages 32 through 53.  Ratios  relating to the Company's
Return  on  Equity  and  Assets   appear  on  page  14.  The  section   entitled
"Management's  Discussion  and Analysis or Plan of Operation"  should be read in
conjunction with the Company's Consolidated Financial Statements.


ITEM 2:  PROPERTIES

The Company  shares common  quarters with SJNB's only office at One North Market
Street,  San  Jose,  California.  Purchased  by the Bank in 1985,  the  building
consists of  approximately  24,000  square feet of  basement,  ground  floor and
second floor space and is constructed and equipped to meet  prescribed  security
requirements.

In addition,  the Bank assumed BB's lease for  approximately  12,000 square feet
located at 95 South Market Street,  San Jose,  California.  Approximately  9,000
square  feet is  currently  being  occupied  by two third  party  tenants  under
subleases which expire upon  termination of the original BB lease. The remaining
space is being occupied by the Bank's Financial Services Division.

In the opinion of management,  adequate  insurance is being  maintained on these
properties.

The Bank has invested in loans secured by real property  collateral.  The Bank's
policies   with  respect  to  such  loans  are   described   under  the  caption
"Management's  Discussion  and Analysis or Plan of Operation - Loan  Portfolio."
The Bank's  policies on real estate secured loans may be changed  without a vote
of security holders.


ITEM 3:  LEGAL PROCEEDINGS

Other than as set forth below, neither the Company or 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 business, financial position or results of operations.

The Bank has been named as a  defendant  in a lawsuit  filed in the Santa  Clara
County Superior Court (which has subsequently  been remanded to U. S. Bankruptcy
Court jurisdiction) by Giannotta Properties, Inc. (the "Borrower"). The Borrower
had borrowed  money from the Bank and had given the Bank a security  interest in
certain real  property as security for the loan.  The Borrower  defaulted on the
loan,  the Bank  declared a default  and the  foreclosure  trustee  conducted  a
foreclosure  sale of the real  property on January 17,  1995.  The  property was
purchased at the foreclosure  sale by a third party. The Bank recovered the full
amount owed to it by the borrower.  On January 18, 1995, the Borrower filed suit
against the Bank, the foreclosure  trustee,  the third party property purchaser,
and  various  other  parties,  alleging,  among other  things,  a claim that the
foreclosure  sale was improperly  conducted.  On December 20, 1996, the Borrower
filed  thier first  amended  complaint  which  alleged  "about $5.0  million" in
damages as a result of the conduct described in its claims, which amount appears
to be  unsubstantiated  by the  Borrower's  pleadings.  The litigation is in the
initial pleading stages,  virtually no discovery has been conducted and the Bank
has answered the First Amended Complaint on February 10, 1997 denying all causes
of action. Insufficient information exists to make a determination of the Bank's
exposure  for  damages,  if any.  The Bank  intends to  vigorously  defend  this
lawsuit.

During 1995,  the Bank (along with  Comerica  Bank-California,  Santa Clara Land
Title and three principals of Century Loan  Corporation) was served with a civil
complaint in a class action  lawsuit filed in the Superior  Court of Santa Clara
County, California. The lawsuit stemmed from the failure of Century Loan, a real
estate  investment  company  now  in  bankruptcy,  that  borrowed  approximately
$750,000  from the Bank during  1994.  Plaintiffs  were  persons who invested in
deeds of trust sold by Century  Loan.  Their  complaint  alleged  that they were
defrauded  by  Century  Loan and its  principals  and  that  the Bank and  other
defendants  aided and abetted a  fraudulent  Ponzi scheme by the  principals  of
Century Loan.
<PAGE>

The Court  granted  class  certification  to the  Plaintiffs  in December  1995,
permitting them to proceed on behalf of all Century Loan investors.  On November
26, 1996, the Court granted summary  judgment in favor of the Bank on all of the
Plaintiff's  claims  against it. The Court  found no evidence  that the Bank had
participated  in any  conspiracy  with or aided and  abetted  Century  Loan.  On
December 4, 1996,  the Court entered  judgment in favor of the Bank,  dismissing
the Plaintiffs' claims. Plaintiff's motion for a new trial was denied on January
27, 1997.


ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security  holders during the fourth quarter
of the fiscal year covered by this Report.

                                     PART II


ITEM 5:  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of  February  5, 1997,  the  Company  had  2,580,182  shares of Common  Stock
outstanding, held by approximately 1,800 beneficial shareholders.  The Company's
Common  Stock is listed on the NASDAQ  National  Market  System under the symbol
"SJNB." The market makers of the common stock are: Sutro & Co., Hoefer & Arnett,
Incorporated, Dean Witter Reynolds, Inc., Sandler O'Neill & Partners, Van Kasper
& Co., Inc.,  Torrey Pines  Securities Inc.,  Herzog,  Heine,  Geduld,  Inc. and
Wedbush Morgan Securities Inc.


Stock Price

The following sets forth the high and low sales prices for the Company's  Common
Stock  during the periods  indicated,  as reported by NASDAQ,  and the per share
cash dividends declared on the Common Stock.  Prices are without retail mark-up,
mark-down or commissions.


QUARTERLY COMMON STOCK PRICE
-----------------------------------------------------------
                                 Price
                            of Common Stock       Cash
                            High       Low      Dividends
-----------------------------------------------------------
          1995
-----------------------------------------------------------
First Quarter               $8.13     $7.25       -----
Second Quarter               9.38      7.75       $0.09
Third Quarter               11.75      9.13       -----
Fourth Quarter              14.50     11.00        0.12
-----------------------------------------------------------
          1996
-----------------------------------------------------------
First Quarter               14.38     13.13       -----
Second Quarter              16.88     14.00        0.15
Third Quarter               19.38     17.00       -----
Fourth Quarter              20.88     18.75        0.18
-----------------------------------------------------------
          1997
-----------------------------------------------------------
First Quarter (through
February 5, 1997)           20.87     18.75       -----

The  Company's  Board of  Directors  considers  the  advisability  and amount of
proposed  dividends each year.  Future  dividends will be determined in light of
the Company's earnings,  financial condition,  future capital funds,  regulatory
requirements and such other factors as the Board of Directors may deem relevant.
The  Company's  primary  source  of  funds  for  payment  of  dividends  to  its
shareholders will be receipt of dividends and management fees from the Bank. The
payment  of  dividends  by banks is  subject  to  various  legal and  regulatory
restrictions.  See  "Business  -  Supervision  and  Regulation  Restrictions  on
Dividends and Other Distributions."

During 1993, the Company commenced a policy to pay semi-annual  dividends to its
shareholders.  It is  the  intention  of the  Company  to  continue  semi-annual
dividend  payments  in May and  December  or more  frequently  as the  Board may
determine,  subject to financial  results and other factors which could limit or
restrict dividends as more fully discussed elsewhere herein.



<PAGE>

ITEM 6:  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Certain statements in this Annual Report on Form 10-KSB include  forward-looking
information  within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are   subject  to  the  "safe   harbor"   created  by  those   sections.   These
forward-looking  statements  involve certain risks and uncertainties  that could
cause  actual  results to differ  materially  from those in the  forward-looking
statement.  Such risks and  uncertainties  include,  but are not limited to, the
following  factors:  competitive  pressure  in the  banking  industry  increases
significantly;  changes in the interest rate environment reduce margins; general
economic  conditions,  either nationally or regionally,  are less favorable than
expected,  resulting in, among other things,  a deterioration  in credit quality
and an  increase in the  provision  for  possible  loan  losses;  changes in the
regulatory  environment;  changes in business conditions,  particularly in Santa
Clara  County  and in the  semiconductor  industry;  certain  operational  risks
involving  data  processing  systems  or  fraud;  volatility  of rate  sensitive
deposits; asset/liability matching risks and liquidity risks; and changes in the
securities  markets.  See also the section  included herein  "Business - Certain
Additional  Business Risks" and other risk factors  discussed  elsewhere in this
report.

Dollars are in thousands in the text,  except per share  amounts or as otherwise
noted.



<PAGE>

<TABLE>
<CAPTION>

The following  presents  selected  financial  data and ratios for the five years
ended December 31, 1996:

(dollars in thousands, except per share amounts)                                           
----------------------------------------------------------------------------------------------------------------------------
                                                               As of and for the Years Ended December 31,
STATEMENT OF OPERATIONS DATA :                     1996            1995            1994            1993           1992
----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>              <C>             <C>            <C>   
Net interest income                               $16,468         $14,295          $9,749          $7,163         $5,866
Provision for possible loan losses                   (190)         (1,045)           (600)           (625)          (698)
Other income                                          846             966             744             682            527
Other expenses                                     (9,635)         (8,797)         (6,676)         (5,276)        (4,645)
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes                          7,489           5,419           3,217           1,944          1,050
Income taxes                                        3,198           2,395           1,354             758            345
---------------------------------------------------------------------------------------------------------------------------
Net income                                         $4,291          $3,024          $1,863          $1,186           $705
============================================================================================================================
PER SHARE DATA:
----------------------------------------------------------------------------------------------------------------------------
Net income per share                                $1.63           $1.20           $1.00           $0.70          $0.43
Dividends per share                                   .33             .21             .16             .14           ----
Shareholders' equity per share                      12.14           11.02            9.92            9.86           9.28
Tangible shareholders' equity per share             10.40            9.06            7.84            9.86           9.28
============================================================================================================================
BALANCE SHEET DATA:
----------------------------------------------------------------------------------------------------------------------------
Balance sheet totals-end of year:
  Assets                                         $309,403        $252,195        $205,949        $127,967       $107,357
  Loans                                           198,627         170,800         149,407          97,958         77,001
  Deposits                                        244,639         196,692         180,287         109,712         91,432
  Shareholders' equity                             31,205          26,658          23,442          16,064         15,084
Average balance sheet amounts:
  Assets                                         $274,868        $222,913        $153,717        $117,627       $100,382
  Loans                                           183,367         152,820         112,818          84,457         72,009
  Earning assets                                  251,156         202,996         140,445         106,999         91,169
  Deposits                                        217,716         183,282         133,897         100,899         84,663
  Shareholders' equity                             28,288          24,898          18,210          15,551         14,701
============================================================================================================================
SELECTED RATIOS:
----------------------------------------------------------------------------------------------------------------------------      
Return on average equity                             15.17%          12.15%          10.23%           7.63%          4.80%
Return on average assets                              1.56            1.36            1.21            1.01            .70
Efficiency ratio (non-interest expense
 as a percentage of total revenues                   55.65           57.64           63.62           67.25          72.66
Dividend payout ratio                                19.30           16.67           17.18           19.22           ----
Average equity to average assets                     10.29           11.17           11.85           13.22          14.65
Leveraged capital ratio                               9.28            9.00            9.33           12.02          14.94
Nonperforming loans to total loans                     .27             .52            3.67            3.75           1.85
Net chargeoffs to average loans                        .04             .33            1.11             .14           1.88
Allowance for loan losses to total loans              2.02            2.25            2.22            2.10           2.02
Allowance for loan losses to
  nonperforming loans                                  733             430              60              56            109
============================================================================================================================

</TABLE>


The purpose of the following discussion is to address information  pertaining to
the financial condition and results of operations of the Company that may not be
apparent  from a review of the  consolidated  financial  statements  and related
notes. It also incorporates certain statistical  information that is required by
Industry  Guide 3 promulgated by the  Securities  and Exchange  Commission.  The
discussion  should be read in conjunction with the  aforementioned  consolidated
financial statements,  as found on pages 32 through 53. Dollars are in thousands
in the text,  except as  otherwise  noted.  The  interest  earned  and yields on
nontaxable securities have been adjusted to a fully-taxable equivalent basis for
all financial information presented in this Item 6.

<PAGE>

Merger with Business Bancorp (BB)

On October 1, 1994,  the  Company  completed  the  purchase  of BB.  Because the
acquisition was accounted for as a purchase,  BB's results of operations for the
period prior to the acquisition have not been included in the Company's  results
of operations. The impact of the changes in the Company are discussed below. See
"Financial  Review,"  "Financial   Condition  and  Earning  Assets,"  "Funding,"
"Asset/Liability Management" and "Capital and Liquidity."


Financial Review

         Earnings Summary

For the year ended  December 31, 1996,  the Company  reported net income of $4.3
million or $1.63 per share as  compared  to net income of $3.0  million or $1.20
per  share  in  1995  (a 42%  increase).  Net  income  for  the  year  increased
substantially  over that of a year ago  primarily  due to the  increase  of $2.2
million in net interest  income and a decrease in the  provision for loan losses
of $855. The increase in net interest  income and the reduction in the provision
for loan  losses was  offset by an  increase  in  expenses  which are  primarily
related to the increase in volumes.

As of December 31, 1996,  consolidated assets were $309 million,  net loans were
$195 million,  and deposits were $245 million.  Total  consolidated  assets have
increased $57 million from $252 million a year ago, representing a 23% increase.
Loan and deposit  growth was  generated  by  increased  marketing  and  business
development efforts of the Bank.

         Net Interest Income and Margin

Net interest income is the principal source of the Company's operating earnings.
Significant factors affecting net interest income are rates,  volumes and mix of
the loan investment and deposit portfolios.

The following  table shows the composition of average earning assets and average
funding  sources,  average yields and rates and the net interest  margin for the
three years ended December 31, 1996.


<PAGE>


<TABLE>
<CAPTION>


AVERAGE BALANCES, RATES AND YIELDS
(dollars in thousands)  
                                                  1996                        1995                         1994
----------------------------------------------------------------------------------------------------------------------------
                                                           Average                      Average                     Average
                                      Average              Yield/   Average             Yield/   Average             Yield/
Assets                                Balance    Interest   Rate    Balance  Interest    Rate    Balance   Interest   Rate
----------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
<S>                                  <C>         <C>        <C>     <C>      <C>        <C>     <C>       <C>       <C>   
  Loans, net (1)                     $183,367    $20,422    11.14%  $152,820 $18,016    11.79%  $112,818  $11,517   10.21%
  Securities held to maturity:
    Taxable (2)                        12,356        813     6.58     12,122     757     6.25      7,846      406    5.18
    Nontaxable (3)                      2,866        227     7.91      2,601     201     7.71      1,894      142    7.48
  Securities available for sale (4)    47,666      2,907     6.10     30,619   1,847     6.03     10,866      520    4.79
  Money market investments              4,901        258     5.26      4,834     280     5.79      7,021      303    4.31
Interest rate hedging instruments        ----         (9)    ----       ----    ----     (43)       ----       77    ----  
-----------------------------------------------------------        --------------------         -------------------
      Total interest-earning assets   251,156     24,618     9.80    202,996  21,057    10.37    140,445   12,965    9.23
-----------------------------------------------------------        --------------------         -------------------
Allowance for possible loan losses     (3,980)                        (3,574)                     (2,677)
Cash and due from banks                15,944                         11,668                       8,367
Bank premises and equipment, net        3,606                          3,356                       2,614
Other real estate owned                   476                          1,213                       1,216
Accrued interest receivable and
  other assets                          2,760                          2,466                       1,716
Core deposit intangibles and            4,906                          4,788                       2,036
goodwill
------------------------------------------------                   ----------                   ----------
      Total                          $274,868                       $222,913                    $153,717
================================================                   ==========                   ==========
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
  Deposits:
    Interest-bearing demand           $41,322      1,155     2.79    $30,915   1,158     3.74    $14,399      334    2.32
    Money market and savings           60,833      2,035     3.35     51,654   1,751     3.39     39,919    1,202    3.01
    Certificates of deposit:
      Less than $100                   14,628        802     5.48     15,519     826     5.32     13,245      516    3.89
      $100 or more                     46,794      2,608     5.57     40,305   2,232     5.54     27,668    1,091    3.94
-----------------------------------------------------------        --------------------         -------------------
        Total certificates of          61,422      3,410     5.55     55,824   3,058     5.48     40,913    1,607    3.93
         deposit
-----------------------------------------------------------        --------------------         -------------------
Other short-term borrowings            24,467      1,459     5.96     11,663     716     5.88        272       16    5.88
-----------------------------------------------------------        --------------------         -------------------
       Total interest-bearing         188,044      8,059     4.29    150,056   6,683     4.45     95,503    3,159    3.31
        liabilities
-----------------------------------------------------------        --------------------         -------------------
Noninterest-bearing demand             54,139                         44,889                      38,666
Accrued interest payable and
  other liabilities                     4,397                          3,070                       1,338
------------------------------------------------                   ----------                   ----------
      Total liabilities               246,580                        198,015                     135,507
------------------------------------------------                   ----------                   ----------
Shareholders' equity                   28,288                         24,898                      18,210
================================================                   ==========                   ==========
       Total                         $274,868                       $222,913                    $153,717
================================================-----------        ==========----------         ==========---------
Net interest income and margin (5)               $16,559     6.59%           $14,374     7.08%             $9,805    6.98%
=====================================           ===================          ===================          ==================
<FN>

 (1) Includes amortized loan fees of $1,018 for 1996, $1,123 for 1995 and $1,028
     for 1994.  Nonperforming loans have been included in average loan balances.
 (2) Includes dividend income of $31 received in 1996, $30 in 1995 and $18 in 
     1994.
 (3) Adjusted to a fully taxable equivalent basis using  the federal statutory 
     rate ($91 in 1996, $81 in 1995 and $57 in 1994).
 (4) Includes dividend income of $217, $233 and $195 received in 1996, 1995 and
     1994, respectively.
 (5) The net interest margin represents the net interest income as a percentage
     of average earning assets.
</FN>
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

The following table shows the effect on the interest  differential of volume and
rate changes for the years ended December 31, 1996 and 1995:


VOLUME/RATE ANALYSIS
(dollars in thousands)
                                                      1996 vs. 1995                             1995 vs. 1994
----------------------------------------------------------------------------------------------------------------------------
                                                   Increase (decrease)                        Increase (decrease)
                                                     due to change in                           due to change in
-----------------------------------------------------------------------------------------------------------------------------
                                         Average        Average          Net          Average         Average        Net
                                          Volume          Rate          Change        Volume         Rate (2)       Change
-----------------------------------------------------------------------------------------------------------------------------
Interest income:
<S>     <C>                               <C>             <C>           <C>            <C>             <C>           <C>   
  Loans (1)                               $3,326          $(920)        $2,406         $4,524          $1,975        $6,499
  Securities:
    Taxable                                   15             41             56            255              96           351
    Nontaxable                                21              5             26             46               3            49
    Available for sale                     1,039             21          1,060          1,161             166         1,327
  Money market investments                     4            (26)           (22)           219            (242)          (23)
-----------------------------------------------------------------------------------------------------------------------------
     Total interest income                 4,405           (879)         3,526          6,205           1,998         8,203
-----------------------------------------------------------------------------------------------------------------------------
Interest expense:
  Interest checking                          (12)             9             (3)           536             288           824
  Money market and savings                   307            (23)           284            384             165           549
  Certificates of deposits:
    Less than $100                           (51)            27            (24)            99             211           310
    $100 or greater                          361             15            376            606             535         1,141
  Other short-term borrowings                733             10            743            700            ----           700
-----------------------------------------------------------------------------------------------------------------------------
      Total interest expense               1,338             38          1,376          2,325           1,199         3,524
-----------------------------------------------------------------------------------------------------------------------------     
Interest rate hedging instruments           ----             34             34           ----            (120)         (120)
-----------------------------------------------------------------------------------------------------------------------------
Change in net interest income             $3,067          $(883)        $2,184         $3,880            $679        $4,559
=============================================================================================================================
<FN>
 
(1) The effect of the change in loan fees is included as an  adjustment  to the
    average rate.
(2) Included in the average rate column for interest  income on loans is $588 of
    interest  income on a cash basis  of which $420 pertains to prior periods.
</FN>
</TABLE>

Consolidated net interest income (on a fully taxable equivalent basis) was $16.6
million in 1996, as compared to $14.4 million in 1995. The $2.2 million increase
in net  interest  income  during  1996 was due  primarily  to an increase in the
volume of earning assets.  The Bank's net interest margin for 1996 was 6.59%, as
compared to 7.08% in 1995. The decrease in the net interest margin was primarily
due to: (i) the receipt of substantial  interest  income on a cash basis in 1995
(approximately  $588) for loans  that had been on  nonaccrual  status;  (ii) the
impact of the declining  interest rate environment in 1996; and (iii) the impact
of the competitive market and the resulting pressure on loan interest rates. The
Bank's  average  prime was 8.27% in 1996,  as  compared  to 8.83% in 1995.  In a
declining  rate  environment,  the Company must  generally  increase its earning
assets in order to maintain net interest income growth.

Consolidated  net interest income was $14.4 million in 1995, as compared to $9.8
million in 1994.  The $4.6 million  increase in net interest  income during 1995
was  due  primarily  to an  increase  in  the  volume  of  earning  assets.  The
acquisition of BB added  approximately $52 million in average earning assets for
1995,  while the  remainder  of the  growth of  approximately  $11  million  was
achieved  through the success of the Bank's  marketing  efforts.  The Bank's net
interest margin for 1995 was fairly  consistent with that in 1994 (7.08% in 1995
as compared to 6.98% in 1994). Two factors affected this result. First, the Bank
received  substantial  interest  income on a cash  basis in 1995  (approximately
$588) for loans that had been put on nonaccrual  status in prior years. This had
a significant  positive  impact on 1995's net interest  margin.  Offsetting this
increase was the impact of the competitive  market and the resulting pressure on
loan interest rates and related loan fees.

Loan fees contributed 5.0% of loan portfolio  interest during 1996, 6.2% in 1995
and 8.9% in 1994.  This  decline  in the  proportion  of loan fees to total loan
interest is due mainly to the increase in the competitive atmosphere relating to
loan pricing,  the overall level of interest rates and the higher  proportion of
SBA loans  included  in the loan  portfolio  (SBA loans  have lower  origination
fees).
<PAGE>

Interest  expense in 1996 was $8.1  million as compared to $6.7 million in 1995.
This was mainly due to the increase in volumes.  Actual  interest  expense rates
declined from 4.45% in 1995 to 4.29% in 1996 (this compares to a decrease in the
yields on  earning  assets of  10.37%  in 1995 to 9.80% in  1996).  The  smaller
decline  in  interest  expense  compared  to  yields  represents  the  impact of
increased competition for the source of bank deposits.

A substantial  portion of the Bank's deposits (an average of 25% in 1995, 24% in
1996 and 29% in 1994) are non interest-bearing and therefore do not reprice when
interest  rates  change.  See  "Funding."  This  is  somewhat  ameliorated  by a
significant  amount of  corporate  account  balances  which are tied to earnings
credits and utilized to offset bank service costs.

Due to the nature of the Company's  lending markets in which loans are generally
tied to the prime rate, an increase in interest rates should  positively  affect
the Company's  future  earnings,  while a decline in interest rates would have a
negative impact.  The declining  interest rate environment during 1996 has had a
negative impact on net interest income.  Should the trend of declining  interest
rates continue,  the Bank could experience an additional increase in its cost of
funds  relative to the yields earned on its earning assets and a decrease in its
net interest margin.

The Company's net interest margin for the periods  presented is high relative to
its peer  group,  mainly  due to its  high  proportion  of non  interest-bearing
deposits and the impact of the Bank's Financial Services Division.

Net interest income also reflects the impact of nonperforming  loans. The effect
of nonaccrual  loans on interest  income at December 31, 1996,  1995 and 1994 is
set forth in the following table:


NEGATIVE IMPACT OF NONACCRUAL LOANS
(dollars in thousands)                   For the Years
                                      Ended December 31,
-----------------------------------------------------------
                                      1996   1995    1994
-----------------------------------------------------------
Interest revenue which would have
been recorded under original terms     $35   $111    $359
Interest revenue actually realized      29     11     121
-----------------------------------------------------------
Negative impact on interest revenue     $6   $100    $238
===========================================================

This  table  does not  reflect  the cash  basis  interest  received  on  several
significant loan  collections  during 1995, as such loans were not classified as
nonaccrual  as of the end of the year.  The impact of such loans,  which are not
included in the above table,  was  significant  in 1995.  Approximately  $588 of
interest income was recognized in 1995 on collection of certain loans classified
nonaccrual,  which  resulted  in a 29 basis  point  impact  on the net  interest
margin.

              Provision for Possible Loan Losses

The level of the allowance  for possible loan losses (and  therefore the related
provision)  reflects the Company's  judgment as to the inherent risks associated
with the loan,  factoring and lease portfolios.  Since estimates of the adequacy
of the Company's  allowance  for possible  loan losses are based on  foreseeable
risks,  such  judgments  are subject to change based on changing  circumstances.
Based on management's current evaluation of such risks, as well as, judgments of
the Company's regulators,  additions of $190, $1.0 million and $600 were made to
the  allowance for possible  loan losses in 1996,  1995 and 1994,  respectively.
Management's  determinations  of the provision in 1996, 1995 and 1994 were based
on the  measurement of the  possibility of future  estimated loan losses through
various  objective  and  subjective  criteria and the impact of net  chargeoffs.
Please refer to the section entitled "Loan Portfolio" for a detailed  discussion
of asset quality and the allowance for possible loan losses.



<PAGE>


Other Income

The following table sets forth the components of other income and the percentage
distribution of such income for the years ended December 31, 1996 and 1995.

OTHER INCOME
(dollars in thousands)
                           1996               1995
-----------------------------------------------------------
                      Amount  Percent   Amount    Percent
-----------------------------------------------------------
Depositor service
  charges              $551      65.13%   $553      57.25%
Other operating
  income                437      51.65     456      47.20
Net loss on
  securities
available   for sale   (142)    (16.78)    (43)     (4.45)
-----------------------------------------------------------
    Total              $846     100.00%   $966     100.00%
===========================================================

Other  income totaled $846 in  1996,  which is  a  decrease of $120 over $966 in
1994.  This  decrease  is  due  to  the recognition of $142 of securities losses
during 1996.

              Other Expense

The  components of other expense and the percentage of each component of average
assets are set forth in the  following  table for the years ended  December  31,
1996 and 1995.

OTHER EXPENSE AS A PERCENT OF AVERAGE ASSETS
(dollars in thousands)
                             1996               1995
-----------------------------------------------------------
                       Amount    Percent   Amount   Percent
-----------------------------------------------------------
Salaries and benefits  $5,517      2.01%   $4,339    1.95%
Occupancy                 702       .26       740     .33
Data processing           554       .20       458     .20
Amortization of core
  deposit intangibles
  and goodwill            499       .18       569     .26
Legal and
professional   fees       369       .13       476     .21
Business promotion        365       .13       314     .14
Client services           247       .09       247     .11
Advertising               236       .09       186     .08
Directors' fees and       219       .08       239     .11
  costs
Stationery and            183       .07       180     .08
supplies
Loan and collection       151       .05       215     .10
Regulators'                72       .03       283     .13
  assessments
Net cost of other
real   estate owned       (48)     (.02)       45     .02
Other                     569       .21       506     .23
----------------------------------------------------------
     Total             $9,635      3.51%   $8,797    3.95%
===========================================================

Other expenses increased approximately $838 or 9.5% in 1996 as compared to 1995.
This is  primarily  related to the  increase in salaries and benefits due to the
January 1996 acquisition of Astra Financial  Corp.,  staff growth related to the
increased level of Bank's business activity and an increase in the provision for
incentive  payments for  exceeding  predefined  goals.  Business  promotion  and
advertising expenses rose due to increased competitive  pressures.  In addition,
the Bank made  significant  investments  in  technology to support the continued
productivity of its staff.  Amortization of core deposit intangibles is based on
a declining  balance  method,  and as such,  the amount  charged to expense will
decline each year.

The FDIC reduced its premium on insurable  deposits  effective June 1995 from 23
cents per $100 of deposits to 4 cents.  This  resulted in savings to the Bank of
$216 for 1996. Currently the premium on insurable deposits is 1.3 cents per $100
of insured  deposits.  In addition,  as the Bank's credit  quality  continued to
improve in 1996, there were significant  reductions in its related cost, such as
legal and  professional  fees, loan and collection  expense and the net costs of
other real estate owned, totaling $264.

Other expenses  increased  approximately $2.1 million or 32% in 1995 as compared
to 1994.  The increase is primarily  related to the  acquisition of BB and other
growth in loans and  deposits  and  increases  in salaries  and  benefits  which
relates to several staff  additions for business  development  and the provision
for  incentive  payments for  exceeding  predefined  goals.  In addition,  other
expense includes approximately $569 of amortization of goodwill and core deposit
intangibles  relating to the  acquisition of BB as compared to $166 in 1994. The
impact of the reduction in FDIC premiums in 1995 resulted in savings to the Bank
of approximately $190.

              Income Taxes

The effective tax rate was 43% in 1996 and 44% in 1995. The lower  effective tax
rate in 1996 was primarily due to the reduction in the amount and  proportion of
the  amortization  of  nondeductible  portion of  intangibles  to pretax  income
arising in connection with the purchase of BB and Astra Financial Corp.



<PAGE>


              Quarterly Income

The unaudited consolidated income statement data of the Company and the Bank, in
the  opinion  of  management,  includes  all normal  and  recurring  adjustments
necessary  to state fairly the  information  set forth  therein.  The results of
operations are not necessarily  indicative of results for any future period. The
following table shows the Company's  unaudited  quarterly  income statement data
for the years 1996 and 1995:

<TABLE>
<CAPTION>

UNAUDITED QUARTERLY INCOME STATEMENT DATA
 (dollars in thousands, except per share amounts)

                                   First quarter        Second quarter          Third quarter        Fourth quarter
------------------------------------------------------------------------------------------------------------------------
                                 1996       1995       1996        1995       1996       1995       1996       1995
------------------------------------------------------------------------------------------------------------------------
<S>                              <C>       <C>        <C>         <C>         <C>       <C>        <C>        <C>   
Net interest income              $3,921    $3,322     $4,019      $3,772      $4,228    $3,563     $4,300     $3,638
Provision for possible loan         (20)     (210)       (30)       (500)        (50)     (180)       (90)      (155)
losses
Other income                        260       256        173         186         182       278        231        246
Other expenses                   (2,473)   (2,186)    (2,340)     (2,196)     (2,423)   (2,225)    (2,399)    (2,190)
------------------------------------------------------------------------------------------------------------------------
Income before income taxes        1,688     1,182      1,822       1,262       1,937     1,436      2,042      1,539
Income taxes                       (729)     (531)      (778)       (561)       (817)     (629)      (874)      (674)
-----------------------------------------------------------------------------------------------------------------------
Net income                         $959      $651     $1,044        $701      $1,120      $807     $1,168       $865
========================================================================================================================
Net income per share              $0.37     $0.27      $0.40       $0.29       $0.42     $0.32      $0.44      $0.34
========================================================================================================================

</TABLE>


The Company  reported  net income of $1,168 for the quarter  ended  December 31,
1996  compared  with net  income of $865 for the  fourth  quarter  of 1995.  The
results for the fourth  quarter of 1996 as  compared to the same  quarter a year
ago  reflect an  increase  in volume of  earning  assets  ($264  million in 1996
compared to $224 million in 1995).


Financial Condition and Earning Assets

              Money Market Investments

Money market investments,  which include federal funds sold and other short-term
investments  were $19.8 million at December 31, 1996 as compared to $3.2 million
at  December  31,  1995.  This  increase  relates  to the  growth in the  Bank's
liquidity relating to the increase in non-interest bearing deposits.

The average  balance of money market  investments,  which include  federal funds
sold and liquid  money  market  investments,  was $4.9  million in 1996 and $4.8
million in 1995.  These balances  represented 2% and 3% of average  deposits for
1996 and 1995,  respectively.  They are maintained  primarily for the short-term
liquidity needs of the Bank. See "Capital and Liquidity."


              Securities

The following table shows the book value composition of the securities portfolio
at December 31, 1996,  1995 and 1994. At December 31, 1996 there were no issuers
of securities  for which the  aggregate  book value of securities of such issuer
held by the Bank exceeded 10% of the Company's shareholders' equity.



<PAGE>



INVESTMENT SECURITIES COMPOSITION                
 (dollars in thousands)                                   December 31,
--------------------------------------------------------------------------------
                                                 1996       1995         1994
--------------------------------------------------------------------------------
Investment securities available for sale:
  U. S. Treasury                                 $4,005     $4,057       $9,786
  U. S. Government Agencies                      34,285     34,578        4,955
  Mortgage Backed                                 5,868          9           18
  Mutual funds                                    3,886      3,898        3,947
--------------------------------------------------------------------------------
    Investment securities available for sale     48,044     42,542       18,706
--------------------------------------------------------------------------------
Investment securities held to maturity:
  U. S. Treasury                                  1,975      4,265        4,260
  U. S. Government Agencies                       7,463      4,976        4,963
  State and municipal                             2,635      3,060        1,797
  Mortgage Backed                                 2,481      2,428        2,377
  Other                                             518        519          462
--------------------------------------------------------------------------------
    Investment securities held to maturity       15,072     15,248       13,859
--------------------------------------------------------------------------------
  Total                                         $63,116    $57,790      $32,565
================================================================================



Investment securities classified as available for sale, which include all mutual
funds, are acquired  without the intent to hold until maturity.  At December 31,
1996 the Bank's weighted  average  maturity of the available for sale investment
portfolio  was 1.6 years.  It is  estimated  that for each 1% change in interest
rates,  the value of the  Company's  securities  held to maturity will change by
approximately 1.4%.

Any  unrealized  gain or loss on  investment  securities  available  for sale is
reflected in the carrying value of the security and reported net of income taxes
in the equity section of the condensed  consolidated  balance  sheets.  Realized
gains and  losses  are  reported  in the  condensed  consolidated  statement  of
operations.  The net  unrealized  gain on  securities  available  for sale as of
December 31, 1996 was $62.

Investment  securities  classified as held to maturity  include those securities
which the Company has the ability and intent to hold to maturity.  The Company's
policy  is to  acquire  generally  "A"  rated  or  better  state  and  municipal
securities.   The  specific  issues  are  monitored  for  changes  in  financial
condition.  Appropriate  action would be taken if significant  deterioration was
noted.  Management's  policy  is to  reduce  the  market  valuation  risk of the
investment  portfolio by generally limiting portfolio maturities to 60 months or
less.  It is  management's  intent to  maintain  at least 50% of its  investment
securities portfolio in U. S. Treasury and U. S. Government Agencies securities.

The gross unrealized gain on investment securities held to maturity were $159 as
of December 31, 1996 as compared to $244 as of December 31, 1995.  The reduction
in unrealized gains resulted from the significant  decrease in interest rates in
1995.  Decrease  in  interest  rates  has an  inverse  effect  on the  value  of
securities  for which the interest rate is fixed.  The Bank's  weighted  average
maturity of the held to maturity  investment  portfolio  was  approximately  2.1
years as of  December  31,  1996.  It is  estimated  that for each 1%  change in
interest  rates,  the value of the  Company's  securities  held to maturity will
change by approximately 1.9%. This volatility  decreases as the average maturity
shortens.  Since it is the intention of  management to hold these  securities to
maturity,  the unrealized gains will be realized over the life of the securities
as above market interest income is recognized.

Mortgage  backed  securities  ("MBS") are  considered  to have  increased  risks
associated with them because of the timing of principal repayments.  As interest
rates  decrease,  the average  maturity of  mortgages  underlying  MBS's tend to
decline;  as rates increase  maturities tend to lengthen.  At December 31, 1996,
the Company had the following  securities which were  mortgage-backed or related
securities:


<PAGE>

                                                    Fair
(dollars in thousands)                    Cost      Value
--------------------------------------    -----     ------
Federal  Home  Loan   Mortgage   Corp.
   (U.S.     Agency)                      $6,104    $6,153
Federal National Mortgage  Association
   (U.S. Agency)                           2,212     2,249
Federated ARMs Funds *                     1,686     1,645
Overland Variable Rate
   Government Fund*                        1,263     1,173

* The assets of these mutual funds are invested  mainly in adjustable  rate U.S.
Treasury or U.S. Government Agency securities.


Loan Portfolio

The following  table shows the Company's  consolidated  loans by type of loan or
borrower:

LOAN PORTFOLIO
(dollars in thousands)
                                               December 31,
--------------------------------------------------------------------------------
                             1996        1995        1994       1993       1992
--------------------------------------------------------------------------------
Commercial                $77,335      $52,958     $51,045    $28,267    $21,265
Real estate construction   15,451       14,488      16,343     15,492     14,907
Real estate-other          74,713       74,045      66,085     39,672     27,868
Consumer                    8,622        8,800       9,461      6,857      8,696
Other                      23,174       21,302       7,362      8,416      4,802
Unearned fee income         (668)        (793)       (888)      (746)      (537)
================================================================================
  Total loan portfolio   $198,627     $170,800    $149,407    $97,958    $77,001
================================================================================


              General

The Company's loan  portfolio  consists  primarily of short-term,  floating rate
loans for business and real estate purposes. At December 31, 1996, approximately
39% of the loan portfolio was commercial loans, 8% was real estate construction,
and 38%  was in real  estate  other.  SJNB's  legal  lending  limit  for any one
borrower was approximately $4.4 million at December 31, 1996.

The  commercial  loan  portfolio   primarily  consists  of  loans  to  small  to
medium-sized  businesses with gross revenues up to $25 million, as well as loans
to local professional businesspersons. SJNB's lending services include revolving
credit loans, SBA loans, term loans, accounts receivable  financing,  factoring,
equipment financing and letters of credit.

Included in  commercial  loans as of December  31, 1996 were  factored  accounts
receivable of approximately  $4.4 million or 2.2% of total loans. As of December
31, 1995, factored accounts receivable were $2.4 million or 1.4% of total loans.
The Bank purchases  accounts  receivable from clients and then receives  payment
directly from the party obligated for the receivable.  In most cases, the Bank's
Financial Services Division purchases  the receivables subject to recourse  from
the Bank's factoring client.  The factoring  business and related  purchasing of
accounts  receivable is subject to a greater  degree of risk than normal lending
due to the involvement of the third party obligee,  the lack of control over the
direct receipt of payment,  and the potential purchase of fraudulent or inflated
receivables.  To date,  there have been no  significant  losses  relating to the
Bank's factoring program.

The real estate construction  portfolio (7.8% of the loan portfolio) consists of
61%  residential  and 39%  commercial.  Such  loans are made on the basis of the
economic  viability  for the specific  project,  the cash flow  resources of the
developer,  the developer's  equity in the project and the underlying  financial
strength of the  borrower.  The  Company's  policy is to monitor  each loan with
respect to incurred costs, sales price and sales cycle.

The real  estate-other  loans include term loans (up to a ten year  maturity) on
income-producing commercial properties.

Consumer loans consist primarily of loans to individuals for personal uses, such
as home equity loans,  installment purchases,  premier lines (unsecured lines of
credit)  and  overdraft  protection  loans,  and a  variety  of  other  consumer
purposes.
<PAGE>

Other loans include loans to real estate mortgage brokers  (approximately $921),
loans  to  real   estate   developers   for   short-term   investment   purposes
(approximately $4.3 million),  loans for real estate investment purposes made to
non-developers  (approximately  $7.2 million),  and loans for other  investments
(approximately $6.7 million).

Concentrations  of credit risk arise when a number of  customers  are engaged in
similar business  activities,  or activities in the same geographic  region,  or
have  similar  economic   features  that  would  cause  their  ability  to  meet
contractual  obligations  to  be  similarly  affected  by  changes  in  economic
conditions. Although the Company has a diversified loan portfolio, a substantial
portion of its  customers'  ability  to honor  loan  terms is  reliant  upon the
economic  stability of Santa Clara  County,  which in some degree  relies on the
stability  of high  technology  companies  in its  "Silicon  Valley."  Loans are
generally made on the basis of a secure  repayment  source as the first priority
and collateral is generally a secondary source for loan qualification.

Approximately  54% of the loan  portfolio is directly  related to real estate or
real estate interests,  when real estate  construction  loans, real estate-other
loans,  prime  equity loans  (included  in consumer  loans in the amount of $4.5
million) and certain other loans to real estate  developers and other  investors
for short-term  investment  purposes  (approximately 2.2% of the loan portfolio)
are included.  Approximately  39% of the loan portfolio is made up of commercial
loans;  however, no particular industry represents a significant portion of such
loans.

Inherent in any loan portfolio are risks associated with certain types of loans.
The Company attempts to limit these risks through conservative loan policies and
review procedures that are applied at the time of origination. Included in these
policies are specific  maximum  loan-to-value  (LTV)  limitations  as to various
categories of real estate related loans. These ratios are as follows:

                                                Maximum LTV
Category of Real Estate Collateral                Ratio
-----------------------------------               -----
Raw land                                           50%
Land Development                                   60
Construction:
  1-4 Single family residence,
    Less than $500                                 75
    Greater than $500                              70
  Other                                            70
Term loans (construction take-out
  and commercial)                                  70
Other improved property                            70
Prime equity loans                                 75


The  Company's  loan  policy  provides  that any term loans on  income-producing
properties  have a  minimum  debt  service  coverage  of at  least  1.2 to 1 for
non-owner occupied property and at least 1.1 to 1 for owner occupied.

One of the  significant  risks  associated  with real estate lending is the risk
associated with the possible  existence of environmental  risks or hazards on or
in property  affiliated  with the loan. The Bank mitigates such risk through the
use of an Environmental Risk Questionnaire for all loans secured by real estate.
A Phase I environmental  report is required if indicated by the questionnaire or
if for any other  reason  it is  determined  appropriate.  Other  reasons  would
include  the  industrial  use of  environmentally  sensitive  substances  or the
proximity to other known environmental  problems.  A Phase II report is required
in certain cases, depending on the outcome of the Phase I report.

              Activity

Total loans were $199 million at December 31, 1996 and averaged $183 million for
the year. At December 31, 1995,  total loans were $171 million and averaged $153
million  during the year.  The  increase  in loans of $28  million  during  1996
relates to the overall growth in the Bank's loan portfolio. The most significant
areas of growth were the increase in SBA loans  (included in the  commercial and
real  estate-other  loan categories) of $8 million and other commercial loans of
$16 million.  These increases were mainly due to the Bank's business development
efforts and the  strength of the local  economy.  The increase in loans for 1995
was primarily related to a $14 million increase in SBA loans.

The economic  climate in Northern  California has been generally  strong in 1996
and 1995. However, the competitive environment within the Bank's marketplace for
additional loan growth has become more aggressive  between lenders  resulting in
increasingly  competitive  pricing. To the extent that such competitive activity
continues during 1997 and the Bank finds it necessary to meet such  competition,
the Bank's net interest margins could decline.
<PAGE>

              Asset Quality

              Allowance for Possible Loan Losses

A  consequence  of lending  activities  is that losses may be  experienced.  The
amount  of such  losses  will vary  from  time to time  depending  upon the risk
characteristics of the loan portfolio as affected by economic conditions, rising
interest  rates and the financial  experiences  of borrowers.  The allowance for
possible  loan losses,  which  provides  for the risk of losses  inherent in the
credit extension process, is increased by the provision for possible loan losses
charged to expense and decreased by the amount of charge-offs net of recoveries.
There is no  precise  method  of  predicting  specific  losses or  amounts  that
ultimately  may be charged off on  particular  segments  of the loan  portfolio.
Similarly,  the adequacy of the allowance for possible loan losses and the level
of the related  provision for possible loan losses is determined on a judgmental
basis by management based on consideration of:

     o Economic conditions;
     o Borrowers' financial condition;
     o Loan impairment;
     o Evaluation of industry trends;
     o Industry and other concentrations;
     o Loans which are contractually current as to payment terms but demonstrate
       a higher degree of risk as identified by management;
     o Continuing evaluation of the performing loan portfolio;
     o Monthly review and evaluation of problem loans  identified as having loss
       potential;
     o Quarterly  review by the Board of  Directors;
     o Off balance sheet risks; and
     o Assessments by regulators and other third parties.

In addition to the internal  assessment of the loan  portfolio  (and off balance
sheet credit risk, such as letters of credit,  etc.), the Company also retains a
consultant who performs credit reviews on a quarterly basis and then provides an
assessment   of  the  adequacy  of  the  allowance  for  possible  loan  losses.
Examinations  of the loan  portfolio  are  also  conducted  periodically  by the
federal banking regulators.

The Company  utilizes a method of assigning a minimum and maximum loss ratio for
each grade of loan within each category of loans (commercial, real estate-other,
real estate  construction,  etc.) Loans are graded on a ranking  system based on
management's assessment of the loan's credit quality. The assigned loss ratio is
based upon the Company's  prior  experience,  industry  experience,  delinquency
trends and the level of nonaccrual loans. In addition, the Company's methodology
considers  (and  assigns a risk factor for)  current  economic  conditions,  off
balance sheet risk and  concentrations  of credit.  The  methodology  provides a
systematic approach for the measurement of the possible existence of future loan
losses.  Management  and the  Board of  Directors  evaluate  the  allowance  and
determine its desired level considering objective and subjective measures,  such
as  knowledge  of  the  borrowers'  business,   valuation  of  collateral,   the
determination of impaired loans and exposure to potential losses. Based on known
information  available to it, management  believes that the Company's  allowance
for  possible  loan losses,  determined  as  described  above,  was adequate for
foreseeable losses at December 31, 1996.

The allowance for possible loan losses is a general  reserve  available  against
the total loan portfolio and off balance sheet credit exposure. While management
uses available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory  agencies,  as an integral part of their examination process,
periodically review the Bank's allowance for possible loan losses. Such agencies
may  require  the Bank to  provide  additions  to the  allowance  based on their
judgment of information available to them at the time of their examination.

There is uncertainty concerning future economic trends.  Accordingly,  it is not
possible to predict the effect future  economic  trends may have on the level of
the provision for possible loan losses in future periods.



<PAGE>

<TABLE>
<CAPTION>

The following  table  summarizes the activity in the allowance for possible loan losses for the five years ended December 31, 1996:

ALLOWANCE FOR POSSIBLE LOAN LOSSES
 (dollars in thousands)                                                       Years Ended December 31,
------------------------------------------------------------------------------------------------------------------
                                                       1996         1995        1994         1993        1992
------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>         <C>         <C>          <C>   
Balance, beginning of the year                        $3,847        $3,311      $2,057      $1,553       $2,207
------------------------------------------------------------------------------------------------------------------
Chargeoffs by loan category:
  Commercial                                             233           233         148         389          137
  Real estate construction                             -----           154       -----       -----          687
  Real estate-other                                       70           220         637           5        -----
  Consumer                                                22            89          73          90            4
  Other                                                   93         -----         824          26          980
------------------------------------------------------------------------------------------------------------------
    Total chargeoffs                                     418           696       1,682         510        1,808
------------------------------------------------------------------------------------------------------------------
Recoveries by loan category:
  Commercial                                             258            42         192          21          221
  Real estate construction                             -----         -----       -----         200        -----
  Real estate-other                                       13            27          10           5          173
  Consumer                                                65            16           7          16           29
  Other                                                -----           102         222         147           33
------------------------------------------------------------------------------------------------------------------
    Total recoveries                                     336           187         431         389          456
----------------------------------------------------------------------------------------------------------------
Net chargeoffs                                            82           509       1,251         121        1,352
------------------------------------------------------------------------------------------------------------------
Provision charged to expense                             190         1,045         600         625          698
Allowance relating to Astra Financial Corp.               50         -----       -----       -----        -----
Allowance relating to California Business Bank         -----         -----       1,905       -----        -----
-----------------------------------------------------------------------------------------------------------------
Balance, end of the year                              $4,005        $3,847      $3,311      $2,057       $1,553
==================================================================================================================

Ratios:
Net chargeoffs to average loans                         0.04%        0.33%       1.11%       0.14%       1.88%
Allowance to total loans at the end of the year         2.02         2.25        2.22        2.10        2.02
Allowance to nonperforming loans at end of the year      733          430          60          56         109
==================================================================================================================
</TABLE>



Net chargeoffs  were $82 or .04% of average loans during 1996.  During 1995, the
Company experienced net chargeoffs of $509 or .33% of average loans during 1995.
The decrease in net  chargeoffs in 1996 as compared to 1995  resulted  primarily
from improved credit quality of the overall loan portfolio.

The  allowance for possible loan losses as a percentage of total loans was 2.02%
at December 31, 1996, and 2.25% at December 31, 1995. The allowance for possible
loan losses as a percentage of  nonperforming  loans was  approximately  733% at
December 31, 1996 as compared to 430% at December 31, 1995.  Nonperforming loans
at December  31,  1996 were $457  compared to $894 at  December  31,  1995.  See
"Nonperforming Loans" below.

Based on an evaluation of individual credits, historical credit loss experienced
by loan type and economic conditions, management has allocated the allowance for
possible loan losses as follows for the past five years:



<PAGE>




ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
(dollars in thousands)          Amount of Allowance Allocation at December 31,
--------------------------------------------------------------------------------
                                1996       1995       1994      1993       1992
--------------------------------------------------------------------------------
  Commercial                  $1,335     $1,193     $1,192      $459       $499
  Real estate construction       223        176        310       181        374
  Real estate-other            1,334      1,134      1,051       567        359
  Consumer                       126        169        219        99         38
  Other                          236        337         94       101         22
  Unallocated                    751        838        445       650        261
--------------------------------------------------------------------------------
    Total                     $4,005     $3,847     $3,311    $2,057     $1,553
================================================================================
                                      Percent of Loans in Each Category
                                        to Total Loans at December 31,
--------------------------------------------------------------------------------
                                1996       1995       1994      1993       1992
--------------------------------------------------------------------------------
  Commercial                   38.80%     30.86%     33.96%    27.85%     26.51%
  Real estate construction      7.75       8.45      10.87     15.69      19.23
  Real estate-other            37.49      43.15      43.97     40.98      36.86
  Consumer                      4.33       5.13       6.29      6.95      11.22
  Other                        11.63      12.41       4.91      8.53       6.18
--------------------------------------------------------------------------------
    Total                     100.00%    100.00%    100.00%   100.00%    100.00%
================================================================================



The  allowance  for  possible  loan losses is  maintained  without any  internal
allocation  to the segments of the loan  portfolio  and the entire  allowance is
available to cover loan losses. The allocation is based on subjective  estimates
that take into account  historical  loss  experience  and  management's  current
assessment  of the  relative  risk  characteristics  of the  portfolio as of the
reporting date noted above and as described more fully herein.

              Nonperforming Loans

Loans for which the accrual of interest has been  suspended and other loans with
principal  or interest  contractually  past due 90 days or more are set forth in
the following table:


<TABLE>
<CAPTION>


NONPERFORMING LOANS
(dollars in thousands)                                                            December 31,
-----------------------------------------------------------------------------------------------------------------------
                                                             1996       1995         1994         1993         1992
-----------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>        <C>       <C>          <C>           <C>   
Loans accounted for on a non-accrual basis                   $457       $866      $5,395       $3,678        $1,427
Loans restructured and in compliance with modified terms       89       ----        ----         ----          ----
Other loans with principal or interest contractually past
  due 90 days or more                                        ----         28          83         ----          ----
-----------------------------------------------------------------------------------------------------------------------
    Total                                                    $546       $894      $5,478       $3,678        $1,427
=======================================================================================================================

</TABLE>


<PAGE>


Potential  nonperforming  loans  are  identified  by  management  as part of its
ongoing  evaluation and review of the loan portfolio.  Based on such reviews and
information  known to  management  at the date of this  Report,  management  has
identified  four loans in the amount of $754 about which it has  serious  doubts
regarding the borrowers'  ability to comply with present loan  repayment  terms,
such that the loans might  subsequently be classified as  nonperforming.  Of the
total,  $416 is  secured  by  residential  real  estate and $230 is subject to a
guarantee of the SBA.

The  accrual of  interest  on loans is  discontinued  and any accrued and unpaid
interest is reversed  when, in the opinion of  management,  there is significant
doubt as to the  collectibility  of interest or principal or when the payment of
principal or interest is ninety days past due, unless the amount is well-secured
and in the process of collection.
<PAGE>

              Other Real Estate Owned

At December  31,  1995,  the Bank had two  properties  totaling  $454 which were
acquired through the foreclosure process. Prior to recording a foreclosure,  the
Bank  provides for any expected  loss in its allowance for possible loan losses.
Any subsequent decline in value is charged directly to the income statement.

Commitments and Lines of Credit

It is the  Bank's  policy  not to issue  formal  commitments  or lines of credit
except to a limited number of well-established and financially responsible local
commercial enterprises.  Such commitments can be either secured or unsecured and
are  typically  in the form of revolving  lines of credit for  seasonal  working
capital needs.

Occasionally,  such  commitments  are in the  form  of a  letter  of  credit  to
facilitate the customer's particular business transaction. Commitments and lines
of credit  typically  mature  within one year.  These  commitments  involve  (to
varying  degrees)  credit risk in excess of the amount  recognized  as either an
asset or liability in the statement of financial position.  The Company attempts
to control  credit risk  through its credit  approval  process.  The same credit
policies are used when entering into such commitments.

As of December 31, 1996, the Company had undisbursed  loan commitments to extend
credit as follows:

UNDISBURSED LOAN COMMITMENTS
(dollars in thousands)
Loan Category                                   Amount
-----------------------------------------------------------
Commercial                                      $40,884
Real estate construction                         15,157
Real estate-other                                 2,633
Consumer                                          5,153
Other                                            13,142
-----------------------------------------------------------
    Total                                       $76,969
===========================================================

In addition,  there was  approximately  $2.9 million  available for  commitments
under unused letters of credit.


Funding

Deposits represent SJNB's principal source of funds. Most of the Bank's deposits
are  obtained  from   professionals,   small  to  medium-sized   businesses  and
individuals  within the Bank's  market area.  SJNB's  deposit  base  consists of
non-interest  and  interest-bearing  demand  deposits,  savings and money market
accounts,  and  certificates  of deposit.  The following  table  summarizes  the
composition of deposits as of December 31, 1996, 1995 and 1994:


<TABLE>
<CAPTION>
DEPOSIT CATEGORIES
 (dollars in thousands)
                                           December 31, 1996            December 31, 1995            December 31, 1994
---------------------------------------------------------------------------------------------------------------------------
                                                     Percentage                    Percentage                 Percentage
                                         Total        of Total        Total         of Total       Total       of Total
                                         Amount       Deposits        Amount        Deposits       Amount      Deposits
---------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>            <C>            <C>           <C>           <C>   
Noninterest-bearing demand                $80,774       33.02%         $52,775        26.83%        $54,002       29.95%
Interest-bearing demand                    40,113       16.40           34,641        17.61          29,041       16.11
Money market and savings                   60,684       24.80           51,201        26.03          47,170       26.16
Certificates of deposit:
  Less than $100                           15,535        6.35           14,730         7.49          16,038        8.90
  $100 or more                             47,533       19.43           43,345        22.04          34,036       18.88
---------------------------------------------------------------------------------------------------------------------------
    Total                                $244,639      100.00%        $196,692       100.00%       $180,287      100.00%
===========================================================================================================================
</TABLE>



Deposits increased 25% from $197 million at December 31, 1995 to $245 million at
December  31,  1996.  This  increase is mainly due to a  combination  of factors
including  the  development  of  customers  with   significant   cash  balances,
utilization of sophisticated  cash management  systems and aggressive pricing of
rates.
<PAGE>

The Bank has been able to attract a high  proportion of its deposits in the form
of  non-interest-bearing  deposits.  The Bank's primary business is commercially
oriented and therefore significant  non-interest-bearing deposits are maintained
by its commercial  customers.  In a high interest rate environment,  these funds
could be subject to disintermediation (moved for higher interest rate products).
To counter such  possibilities,  the Bank  maintains an array of products  which
would be competitive in such an occurrence.  In addition,  in illiquid  economic
times  (possibly  recessions)  these  deposits  could be subject  to  withdrawal
pressures.  See "Capital  and  Liquidity -  Liquidity"  for a discussion  of the
Bank's liquidity sources.

The Bank also  raises a  substantial  amount of funds  through  certificates  of
deposit of greater  than $100.  These  deposits  are usually at  interest  rates
greater  than other types of deposits and are more  sensitive  to interest  rate
changes.  Historically, the Bank's overall cost of funds has been less than that
of its peer group.  However,  as these  certificates of deposit are usually more
interest  rate  sensitive,  their  repricing  in  an  increasing  interest  rate
environment  could increase the Bank's cost of funds and  negatively  impact the
Bank's net interest margin. See "Capital and Liquidity."

The Bank utilizes short-term borrowings in its hedging practices. The short-term
borrowings (securities sold under agreements to repurchase) are used to fund the
acquisition of fixed rate available for sale  securities with an average life of
2.3 years.  The average cost of the  borrowings  during 1996 was 5.96% while the
average yield on the assets was 6.23%.  If interest rates were to increase,  the
cost of borrowings  would  increase with no offsetting  increase in the yield on
the assets purchased. See "Asset/Liability Management."


Asset/Liability Management

The Company defines interest rate sensitivity as the measurement of the mismatch
in  repricing  characteristics  of assets,  liabilities  and off  balance  sheet
instruments at a specified  point in time. This mismatch (known as interest rate
sensitivity gap) represents the potential  mismatch in the change in the rate of
interest revenue accrual and interest expense that would result from a change in
interest  rates.   Mismatches  in  interest  rate  repricing  among  assets  and
liabilities arise primarily from the interaction of various customer  businesses
(i.e.,  types  of  loans  versus  the  types of  deposits  maintained)  and from
management's  discretionary  investment  and  funds  gathering  activities.  The
Company attempts to manage its exposure to interest rate  sensitivity.  However,
due to its size and direct  competition  from the major banks,  the Company must
offer  products  which are  competitive  in the market place,  even if less than
optimum with respect to its interest rate exposure.

The Company's  balance sheet position at December 31, 1996 was  asset-sensitive,
based upon the  significant  amount of  variable  rate  loans and the  repricing
characteristics of its deposit accounts.  This position provides a hedge against
rising  interest  rates,  but has a detrimental  effect during times of interest
rate decreases.  Net interest  revenues are negatively  impacted by a decline in
interest rates. The interest rate gap is a measure of interest rate exposure and
is based upon the known  repricing  dates of certain assets and  liabilities and
assumed  repricing dates of others.  See "Financial Review - Net Interest Income
and Margin."

The following table quantifies the Company's  interest rate exposure at December
31, 1996 based upon the known  repricing dates of certain assets and liabilities
and the assumed  repricing  dates of others.  At December 31, 1996,  the Company
was asset sensitive in the near term, as noted above.


<PAGE>

<TABLE>
<CAPTION>

DISTRIBUTION OF REPRICING OPPORTUNITIES
December 31, 1996                                        After three     After six     After one
(dollars in thousands)                       Within       months but    months but     year but       After
                                             three        within six    within one      within        five
                                             months         months         year       five years      years       Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>            <C>          <C>           <C>        <C>              
Money market investments                     $19,800          -----          -----         -----        -----      $19,800
Investment securities-taxable                     37         $1,040         $1,090        $9,772          497       12,436
Investment securities-non-taxable              -----          -----            250         1,877         $508        2,635
Securities available for sale                  7,202          1,094          8,350        28,706        2,693       48,045
Loans                                        169,002          2,221          3,174        14,358        9,874      198,629
----------------------------------------------------------------------------------------------------------------------------
 Total earning assets                        196,041          4,355         12,864        54,713       13,572      281,545
----------------------------------------------------------------------------------------------------------------------------
Interest checking, money market
  and savings                                100,796          -----          -----         -----        -----      100,796
Certificates of deposit:
 Less than $100                                8,269          3,490          2,453         1,266           57       15,535
  $100 or more                                30,423          7,695          8,009         1,305          100       47,532
Repurchase agreements                         29,688          -----          -----         -----        -----       29,688
Other borrowings                               -----          -----          -----         -----          550          550
----------------------------------------------------------------------------------------------------------------------------
 Total interest-bearing liabilities          169,176         11,185         10,462         2,571          707      194,101
----------------------------------------------------------------------------------------------------------------------------
Interest rate gap                            $26,865        ($6,830)        $2,402       $52,142      $12,865      $87,444
============================================================================================================================
Cumulative interest rate gap                 $26,865        $20,035        $22,437       $74,579      $87,444
===============================================================================================================
Interest rate gap ratio                         1.16           0.39           1.23         21.28        19.20
===============================================================================================================
Cumulative interest rate gap ratio              1.16           1.11           1.12          1.39         1.45
===============================================================================================================

</TABLE>


In evaluating the Company's exposure to interest rate risk, certain shortcomings
inherent  in the method of analysis  presented  in the  foregoing  table must be
considered.  For  example,  although  certain  assets and  liabilities  may have
similar maturities or periods to reprice, they may react in different degrees to
changes in market  interest rates.  Additionally,  the interest rates on certain
types of assets and  liabilities  may  fluctuate in advance of changes in market
interest  rates,  while  interest rates on other types may lag behind changes in
market  interest  rates.  Further,  certain  earning  assets have features which
restrict  changes in interest  rates on a short-term  basis and over the life of
the asset.  The  Company  considers  the  anticipated  effects of these  various
factors in implementing its interest rate risk management activities,  including
the utilization of certain interest rate hedges.

A large  proportion  of the  Bank's  deposits  are non  interest-bearing  demand
deposits and are not included in the above table as they tend not to be interest
rate  sensitive.  The average balance of these deposits was $54 million in 1996.
In  addition,  the Bank's  total  capital of  approximately  $31  million is not
included as a funding source in the above table.

To counter its asset sensitive interest rate position,  the Bank entered into an
interest  rate "floor" in the amount of $10 million  which  expires in May 1999.
The Bank paid a fixed  premium  of $47 for which it will  receive  the amount of
interest on $10 million  based on the  difference  of 7% and prime when prime is
less than 7%. This provides some protection to 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.

The Bank has  executed  several  transactions  during  1995 and 1996  which  are
intended to mitigate its exposure to a decline in general market interest rates.
The transactions involved the purchase of three U.S. Government Agency and three
mortgage  backed  securities  for an  aggregate  cost of $30 million  which were
financed  through  the  use  of 90 day  repurchase  agreements.  The  repurchase
agreements  are shown as short-term  borrowings on the Company's  balance sheet.
The  securities  are fixed rate with  maturities of $7 million in November 1997,
$10 million in May 1998, $7 million in July 1998,  $1 million in November  2000,
$2 million in June 2001 and $2 million in September  2001.  The average yield on
the securities was 6.23%. The outstanding  repurchase  agreements as of December
31, 1996 had interest rates within a range of 5.45% to 5.73% and averaged 5.56%.
Such repurchase  agreements  mature  through  March  1997.  As these  repurchase
agreements  expire  they  will  be  renewed  at  the  prevailing  rates.   These
transactions  carry risks in a rising rate environment  because of the potential
repricing  volatility  associated  with the  short-term  repurchase  market.  If
interest rates were to increase,  the cost of borrowings  would increase with no
offsetting increase in the yield on the assets purchased. At the same time it is
anticipated  that the average  yield on variable  rate loans would  increase and
offset this impact.
<PAGE>
<TABLE>
<CAPTION>

The maturities  and yields of the investment  portfolio at December 31, 1996 are
shown below:

MATURITY AND YIELDS OF INVESTMENT SECURITIES
At December 31, 1996
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------
                                                                                   Maturity
----------------------------------------------------------------------------------------------------------------------------
                                                                                 After one year
                                         Carrying       Within one year         within five years        After ten years
                                          Value        Amount      Yield      Amount        Yield       Amount     Yield
----------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
<S>                                          <C>          <C>       <C>          <C>        <C>                         
  U. S. Treasury                             $4,005       $1,003    6.69%        $3,002     6.03%           ----    ----
  U. S. Government Agencies                  34,285       11,144    5.77         23,141     6.30            ----    ----
  Mortgage Backed                             5,868         ----    ----          5,862     5.65              $6     0.00%
  Mutual funds                                3,886        3,886    5.52           ----      ----           ----    ----
-----------------------------------------------------------------           ------------              -----------
    Total                                    48,044       16,033                 32,005                        6
-----------------------------------------------------------------           ------------              -----------
Securities held to maturity:
  U. S. Treasury                              1,975         ----    ----          1,975     6.71            ----    ----
  U. S. Government Agencies                   7,463        2,000    7.20          5,463     6.30            ----    ----
  State and municipal                         2,635          250    7.67          2,385     7.88            ----    ----
  Mortgage Backed                             2,481         ----    ----           ----      ----          2,481     7.90
  Other                                         518         ----    ----           ----      ----            518     6.00
-----------------------------------------------------------------           ------------              -----------
    Total                                    15,072        2,250                  9,823                    2,999
-----------------------------------------------------------------           ------------              -----------
  Total                                     $63,116      $18,283    5.95%       $41,828     6.30%         $3,005     6.72%
============================================================================================================================

</TABLE>


<TABLE>
<CAPTION>

The  following  table  shows the  maturity  and  interest  rate  sensitivity  of
commercial, real estate construction and real estate-other loans at December 31,
1996.  Approximately  83% of the  commercial  and real estate loan  portfolio is
priced with floating  interest  rates which limits the exposure to interest rate
risk on long-term loans.


COMMERCIAL AND REAL ESTATE LOAN MATURITY AND INTEREST RATE SENSITIVITY
(dollars in thousands)
                                                                       Balances maturing       Interest Rate Sensitivity
--------------------------------------------------------------------------------------------------------------------------
                                                                                                Predeter-     Floating or
                                     Balances at                      One year                    mined       Adjustable
                                     December 31,      One year       through        Over       interest      interest
                                         1996           or less      five years    five years     rates          rates
------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>             <C>           <C>           <C>          <C>            <C>    
Commercial                              $69,848         $39,872       $22,791       $7,186       $2,760         $67,088
========================================================================================================================
Real estate construction                $15,401         $14,225        $1,176        -----        -----         $15,401    
========================================================================================================================
Real estate-other                       $82,250          $7,174       $33,370      $41,706      $25,821         $56,429
========================================================================================================================


</TABLE>

The above table does not take into  account the  possibility  that a loan may be
renewed at the time of maturity.  In most  circumstances,  the Company  treats a
renewal  request in  substantially  the same  manner in which it  considers  the
request for an initial  extension of credit.  The Company does not have a policy
to automatically renew loans.

<PAGE>

Capital and Liquidity

         Capital

The Company's book value per share was $12.14 and $11.02 as of December 31, 1996
and 1995,  respectively.  Tangible  book value per share was $10.40 and $9.06 at
December 31, 1996 and 1995, respectively, adjusted for goodwill and core deposit
intangibles. Shareholders' equity was $31 million and $27 million as of December
31, 1996 and 1995, respectively.  See Notes to Consolidated Financial Statements
and "Business - Supervision  and  Regulation"  for a discussion of the Company's
capital requirements.

         Liquidity

Management strives to maintain a level of liquidity  sufficient to meet customer
requirements for loan funding and deposit  withdrawals.  Liquidity  requirements
are   evaluated   by  taking  into   consideration   factors   such  as  deposit
concentrations,  seasonality and maturities,  loan demand, capital expenditures,
and prevailing and anticipated economic conditions. SJNB's business is generated
primarily through customer referrals and employee business  development efforts.
The Bank  utilizes  brokered  deposits on a limited  basis to satisfy  temporary
liquidity needs.

The  Bank's  sources of  liquidity  consist of its  deposits  with other  banks,
overnight  funds  sold  to  correspondent   banks  and  short-term,   marketable
investments.  On December  31,  1996,  consolidated  liquid  assets  totaled $61
million or 20% of consolidated  total assets,  as compared to $40 million or 16%
of  consolidated  total assets on December  31, 1995.  In addition to the liquid
asset portfolio, SJNB also has available $12 million in informal lines of credit
with three major commercial banks,  approximately $6 million of credit available
at the Federal Reserve  Discount Window and $13 million in SBA guaranteed  loans
which are available for sale and could be sold within a 30-day  period.  SJNB is
primarily a business  and  professional  bank and, as such,  its deposit base is
more susceptible to economic  fluctuations.  Accordingly,  management strives to
maintain a balanced position of liquid assets to volatile and cyclical deposits.
In their normal  course of business,  commercial  clients  maintain  balances in
large  certificates  of deposit.  The stability of these  balances  hinges upon,
among other factors,  market  conditions and each business'  seasonality.  Large
certificates of deposit  amounted to 19% of total deposits on December 31, 1996,
as compared to 22% for 1995.

Liquidity is also affected by investment  securities and loan maturities and the
effect of interest rate  fluctuations  on the  marketability  of both assets and
liabilities.  The loan portfolio consists primarily of floating rate, short-term
loans. On December 31, 1996,  approximately 38% of total consolidated assets had
maturities under one year and 86% of total consolidated loans had floating rates
tied to the prime rate or similar  indexes.  The  short-term  nature of the loan
portfolio,   and  loan  agreements  which  generally  require  monthly  interest
payments, provide the Company with an additional secondary source of liquidity.

There are no material commitments for capital expenditures in 1997 or beyond.

Parent company liquidity is maintained by cash flows stemming from dividends and
management  fees from the Bank and the exercise of stock  options  issued to the
Bank's employees and directors. The amount of dividends from the Bank is subject
to certain  regulatory  restrictions as discussed in Note 15 of the Notes to the
Consolidated  Financial Statements and elsewhere within this Report.  Subject to
said restrictions, at December 31, 1996, up to $8.4 million could have been paid
to the  parent  Company  by the Bank  without  regulatory  approval.  The parent
company  financial  statements  are  presented  in  Note  14  of  the  Notes  to
Consolidated Financial Statements.  No dividends were paid to the parent company
by the Bank in 1995 or 1996.

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 1996 or
1995.



<PAGE>



ITEM 7:  FINANCIAL STATEMENTS

The following section includes the Company's Consolidated Financial Statements:

            Independent Auditors' Report

            Consolidated Balance Sheets - December 31, 1996
                  and 1995

            Consolidated Statements of Income for the Years
                  Ended December 31, 1996 and 1995

            Consolidated Statements of Shareholders' Equity
                  for the Years Ended December 31, 1996 and 1995

            Consolidated Statements of Cash Flows for the
                  Years Ended December 31, 1996 and 1995

            Notes to Consolidated Financial Statements.







<PAGE>




                          Independent Auditors' Report

The Board of Directors
SJNB Financial Corp.:

We have audited the accompanying  consolidated  balance sheets of SJNB Financial
Corp.  and  subsidiary  (the Company) as of December 31, 1996 and 1995,  and the
related consolidated  statements of income,  shareholders' equity and cash flows
for the years  then  ended.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of SJNB Financial Corp.
and  subsidiary  as of  December  31,  1996 and 1995,  and the  results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.


KPMG Peat Marwick LLP

San Jose, California
February 10, 1997


<PAGE>
<TABLE>
<CAPTION>



--------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Balance Sheets
December 31, 1996 and 1995
(in thousands)
--------------------------------------------------------------------------------------------------
Assets                                                                  1996           1995
--------------------------------------------------------------------------------------------------
<S>                                                                     <C>             <C>    
Cash and due from banks                                                 $20,208         $12,574
Money market investments                                                 19,800           3,200
Investment securities:
  Available for sale                                                     48,044          42,542
  Held to maturity (Fair value: $15,231 at December 31, 1996
    and $15,492 at December 31, 1995)                                    15,072          15,248
--------------------------------------------------------------------------------------------------
    Total investment securities                                          15,072          15,248
--------------------------------------------------------------------------------------------------
Loans                                                                   198,627         170,800
Allowance for possible loan losses                                       (4,005)         (3,847)
--------------------------------------------------------------------------------------------------
   Loans, net                                                           194,622         166,953
--------------------------------------------------------------------------------------------------
Premises and equipment, net                                               4,001           3,494
Other real estate owned                                                     454             664
Accrued interest receivable and other assets                              2,737           2,764
Intangibles, net of accumulated amortization of $1,234
  at December 31, 1996 and $735 at December 31, 1995                      4,465           4,756
--------------------------------------------------------------------------------------------------
     Total                                                             $309,403        $252,195
==================================================================================================

Liabilities and Shareholders' Equity
--------------------------------------------------------------------------------------------------
Deposits:
  Non-interest-bearing                                                  $80,774         $52,775
  Interest-bearing                                                      163,865         143,917
--------------------------------------------------------------------------------------------------
     Total deposits                                                     244,639         196,692
--------------------------------------------------------------------------------------------------
Other short-term borrowings                                              29,688          24,000
Accrued interest payable and other liabilities                            3,871           4,845
--------------------------------------------------------------------------------------------------
     Total liabilities                                                  278,198         225,537
--------------------------------------------------------------------------------------------------
Shareholders' equity:
  Common stock, no par value; authorized, 20,000 shares;
     issued and outstanding, 2,571 shares
     in 1996 and 2,418 shares in 1995                                    20,880          19,627
  Retained earnings                                                      10,263           6,798
  Net unrealized gain on securities available for sale                       62             233
--------------------------------------------------------------------------------------------------
     Total shareholders' equity                                          31,205          26,658
--------------------------------------------------------------------------------------------------
Commitments and contingencies                                              ----            ----          
------------------------------------------------------------------------------------------------
     Total                                                             $309,403        $252,195
==================================================================================================
<FN>

See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


---------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Income
For the years ended December 31, 1996 and 1995
---------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)                                        1996            1995
---------------------------------------------------------------------------------------------------------
Interest income:
<S>                                                                           <C>             <C>    
  Interest and fees on loans                                                  $20,422         $18,016
  Interest on money market investments                                            258             280
  Interest and dividends on investment securities available for sale            2,907           1,847
  Interest on investment securities held to maturity                              949             878
  Other interest and investment income                                             (9)            (43)
--------------------------------------------------------------------------------------------------------
    Total interest income                                                      24,527          20,978
--------------------------------------------------------------------------------------------------------
Interest expense:
  Interest expense on interest-bearing deposits:
    Certificates of deposit of $100 or more                                     2,608           2,232
    Other                                                                       5,451           4,451
--------------------------------------------------------------------------------------------------------
    Total interest expense                                                      8,059           6,683
--------------------------------------------------------------------------------------------------------
    Net interest income                                                        16,468          14,295
--------------------------------------------------------------------------------------------------------
  Provision for possible loan losses                                              190           1,045
--------------------------------------------------------------------------------------------------------
    Net interest income after provision for
       possible loan losses                                                    16,278          13,250
--------------------------------------------------------------------------------------------------------
Other income:
  Service charges on deposits                                                     551             553
  Other operating income                                                          437             456
  Net loss on sale of securities available for sale                              (142)            (43)
--------------------------------------------------------------------------------------------------------
     Total other income                                                           846             966
--------------------------------------------------------------------------------------------------------
Other expenses:
  Salaries and benefits                                                         5,517           4,339
  Occupancy                                                                       702             740
  Other                                                                         3,416           3,718
--------------------------------------------------------------------------------------------------------
     Total other expenses                                                       9,635           8,797
--------------------------------------------------------------------------------------------------------
     Income before income taxes                                                 7,489           5,419
Income taxes                                                                    3,198           2,395
-------------------------------------------------------------------------------------------------------
     Net income                                                                $4,291          $3,024
========================================================================================================
Net income per share                                                            $1.63           $1.20
========================================================================================================
Average common share equivalents outstanding                                    2,640           2,522
========================================================================================================
<FN>

See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>



----------------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1996 and 1995
----------------------------------------------------------------------------------------------------------------------------
                                                                                             Net Unrealized
                                                                                              Gain (Loss)        Total
                                                                                             on Securities       Share-
                                                                      Common     Retained      Available        holders'
(in thousands, except per share amounts)                   Shares      Stock     Earnings       for Sale         Equity
----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>       <C>         <C>             <C>           <C>    
Balances, December 31, 1994                                  2,363     $19,421     $4,278          $(257)        $23,442
Stock options exercised                                         71         351       ----           ----             351
Common stock repurchase                                        (16)       (145)      ----           ----            (145)
Cash dividends ($.21 per share)                               ----        ----       (504)          ----            (504)
Net income for the year ended
  December 31, 1995                                           ----        ----      3,024           ----           3,024
Net unrealized gain on securities available for sale          ----        ----       ----            490             490
----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995                                  2,418      19,627      6,798            233          26,658
----------------------------------------------------------------------------------------------------------------------------
Stock options exercised                                        153         810       ----           ----             810
Tax benefit from stock options exercised                      ----         443       ----           ----             443
Cash dividends ($.33 per share)                               ----        ----       (826)          ----            (826)
Net income for the year ended
  December 31, 1996                                           ----        ----      4,291           ----           4,291
Net unrealized loss on securities available for sale          ----        ----       ----           (171)           (171)
----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996                                  2,571     $20,880    $10,263            $62         $31,205
============================================================================================================================
<FN>

See accompanying Notes to Consolidated Financial Statements.
</FN>
</TABLE>


<PAGE>


<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 and 1995
-------------------------------------------------------------------------------------------------------------------
(dollars in thousands)                                                                 1996              1995
-------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:                                                                       
<S>                                                                                   <C>               <C>   
  Net income                                                                          $4,291            $3,024
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Provision for possible loan losses                                                 190             1,045
      Depreciation and amortization                                                      483               424
      Amortization of intangibles                                                        499               569
      Deferred tax (benefit)                                                             121               (86)
      Loss on sale of securities available for sale                                      142                43
      Write down of other real estate owned                                             -----             -----
      Net (gain) loss on sale of other real estate owned                                 (46)               19
      Amortization of  premium on investment securities, net                              36              (129)
      Decrease in intangible assets                                                      200              (412)
     Decrease in accrued interest receivable and other assets                            120               418
      Increase (decrease) in accrued interest payable and other liabilities           (1,509)            2,470
-------------------------------------------------------------------------------------------------------------------
          Net cash provided by operating activities                                    4,527             7,385
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Proceeds from sale or maturities of securities available for sale                   22,751            14,162
  Maturities of securities held to maturity                                            5,345               425
  Purchase of securities available for sale                                          (28,784)          (37,148)
  Purchase of securities to be held until maturity                                    (5,101)           (1,762)
  Proceeds from the sale of other real estate owned                                      406             1,761
  Loans, net                                                                         (27,333)          (22,851)
  Capital expenditures                                                                  (989)             (896)
  Cash used to acquire Astra Financial Corp.                                            (650)             -----
-------------------------------------------------------------------------------------------------------------------
          Net cash used in investing activities                                      (34,355)          (46,309)
-------------------------------------------------------------------------------------------------------------------
Cash flow from financing activities:
  Deposits, net                                                                       47,947            16,405
  Other short-term borrowings                                                          5,688            24,000
  Cash dividends                                                                        (826)             (504)
  Tax benefit from stock options exercised                                               443              -----
  Common stock repurchased                                                              -----             (145)
  Proceeds from stock options exercised                                                  810               351
-------------------------------------------------------------------------------------------------------------------
          Net cash provided by financing activities                                   54,062            40,107
-------------------------------------------------------------------------------------------------------------------
          Net increase in cash and equivalents                                        24,234             1,183
Cash and equivalents at beginning of year                                             15,774            14,591
-------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year                                                  $40,008           $15,774
===================================================================================================================

</TABLE>

<PAGE>


--------------------------------------------------------------------------------
SJNB Financial Corp. and subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 1996 and 1995
--------------------------------------------------------------------------------
(dollars in thousands)                                        1996        1995
--------------------------------------------------------------------------------
Other cash flow information:
  Interest paid                                               $8,012     $6,388
  Income taxes paid                                           $4,111     $1,185
================================================================================
Noncash transactions:
  Transfer of loans to other real estate owned                  $150       $950
================================================================================
  Purchase of Astra Financial's assets at fair value:
    Loans                                                       $676       -----
    Intangible assets                                            408       -----
    Other assets                                                  93       -----
--------------------------------------------------------------------------------
      Fair value of assets acquired                            1,177       -----
  Liabilities assumed:
    Other liabilities                                            527       -----
--------------------------------------------------------------------------------
      Total liabilities assumed                                  527       -----
--------------------------------------------------------------------------------
Cash used to acquire Astra Financial Corp.                      $650       -----
================================================================================

See accompanying Notes to Consolidated Financial Statements.



<PAGE>


Notes to Consolidated Financial Statements
December 31, 1996 and 1995

NOTE 1 - Summary of Significant Accounting Policies

SJNB Financial Corp.  ("Company") is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. The Company was incorporated under
the laws of the State of California on April 18, 1983.  Its principal  office is
located at One North Market Street, San Jose, California.

The Company owns 100% of the issued and  outstanding  common  shares of San Jose
National  Bank  (referred  to  herein as  "SJNB"  or "the  Bank").  The Bank was
incorporated on November 23, 1981 and commenced business in San Jose, California
on June 10,  1982.  Its main office is located at One North Market  Street,  San
Jose,  California.  SJNB engages in the general commercial banking business with
special  emphasis  on  the  banking  needs  of  the  business  and  professional
communities  in San Jose  and the  surrounding  areas.  The  Financial  Services
Division is located at 95 South Market, San Jose California, where it engages in
the factoring of accounts receivable.

The  accounting  policies of SJNB  Financial  Corp.  and San Jose  National Bank
(collectively,   the  "Company")  are  in  accordance  with  generally  accepted
accounting  principles  and  conform to  general  practices  within the  banking
industry.

a.  Consolidation

The  consolidated  financial  statements  include the accounts of SJNB Financial
Corp. and its wholly-owned subsidiary,  San Jose National Bank (the "Bank"). All
material  intercompany  accounts and  transactions  have been  eliminated in the
consolidated financial statements.

b.  Investment Securities

The Company accounts for its investment securities as follows:

Available for sale-Investment securities that are acquired without the intent to
hold until  maturity are classified as available for sale.  Such  securities are
valued at market  value.  Market  value  adjustments  are reported as a separate
component of shareholders' equity until realized.

Held to maturity-Investment  securities purchased with the intent and ability to
hold them until maturity are classified as held to maturity. Such securities are
carried at cost,  adjusted  for  accretion  of  discounts  and  amortization  of
premiums.

Investment  securities  purchased are recorded as of their trade date. Accretion
of discounts and amortization of premiums arising at acquisition are included in
income using methods approximating the interest method. Gains or losses on sales
of  securities,  if any, are  determined  based on the  specific  identification
method.

c.  Loans and Allowance for Possible Loan Losses

Loans  generally are stated at the  principal  amount  outstanding.  Interest on
loans is credited to income on a simple interest basis.  Loan  origination  fees
and direct  origination  costs are deferred and  amortized to income by a method
approximating  the level yield method over the estimated lives of the underlying
loans.  The  accrual of interest  on loans is  discontinued  and any accrued and
unpaid  interest  is  reversed  when,  in the  opinion of  management,  there is
significant doubt as to the  collectibility of interest or principal or when the
payment of principal  or interest is ninety days past due,  unless the amount is
well-secured and in the process of collection.

The allowance for possible  loan losses is a valuation  allowance  maintained to
provide for future loan losses through charges to current operating expense. The
allowance  is based  upon a  continuing  review  of loans  by  management  which
includes  consideration  of  changes  in the  character  of the loan  portfolio,
current and anticipated  economic  conditions,  past lending experience and such
other factors which, in management's judgment, deserve recognition in estimating
potential loan losses. In addition, regulatory examiners may require the Company
to  recognize  additions  to  the  allowance  based  on  their  judgments  about
information available to them at the time of their examinations.

Impaired loans are those in which based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the  contractual  terms  of the loan  agreement,  including  scheduled  interest
payments.  The Company  measures such loans based on the present value of future
cash flows  discounted at the loan's  effective  interest rate, or at the loan's
market  value or the fair value of  collateral  if the loan is  secured.  If the
measurement  of the impaired  loan is less than the recorded  investment  in the
loan,  impairment is recognized by creating or adjusting an existing  allocation
of the allowance for loan losses.
<PAGE>

d.  Sales of Loans

When loans or participating interests in loans are sold without recourse,  gains
and losses are  recognized at the time of sale.  Gains or losses  recognized are
equal to the premium less  estimated  future  servicing  costs and profits.  Any
premiums  or  discounts  related  to loan  sales are  amortized  on a basis that
approximates the effective yield over the estimated remaining life of the loan.

e.  Premises and Equipment

Premises and equipment are stated at cost,  less  accumulated  depreciation  and
amortization.  Depreciation  and  amortization  are charged to expense  over the
estimated useful lives of the assets on a straight-line basis as follows:

     Buildings                         30 years
     Furniture and equipment         3-10 years
     Improvements                    7-15 years

f.  Other Real Estate Owned

Other  real  estate  owned  is  comprised  of  real  estate   acquired   through
foreclosure.  Such  foreclosures are initially  recorded at the lower of cost or
fair value. Subsequent valuation adjustments are made if estimated selling costs
and the fair value falls below the carrying  amount.  Holding costs are expensed
as incurred.

g. Intangibles

Goodwill is being amortized using the  straight-line  method over 15 years. Core
deposit intangibles are amortized using an accelerated method over ten years.

On a periodic  basis,  the Company  reviews its intangible  assets for events or
changes in  circumstances  that may  indicate  that the  carrying  amount of the
assets may not be  recoverable.  Should such a change indicate that the value of
such intangibles may be impaired,  an evaluation of the recoverability  would be
performed prior to any writedown of the assets.

h.  Interest Rate Instruments

Interest  rate  instruments  are  entered  into in  conjunction  with the Bank's
asset/liability  management.  As these  contracts  are  entered  into only after
meeting the  accounting  criteria for a hedge,  and as long as they  continue to
meet such criteria, changes in market value are deferred and the net settlements
are  accrued  as  adjustments  to  interest  income.   The  Bank  currently  has
outstanding  an  interest  rate  floor  arrangement  which  does  not  meet  the
accounting  criteria for a hedge and which  therefore is accounted for on a mark
to market basis.

i.  Income Taxes

The Company  accounts  for income  taxes using the asset and  liability  method.
Under this method,  deferred tax assets and  liabilities  are recognized for the
future tax consequences of differences  between the financial statement carrying
amounts of  existing  assets and  liabilities  and their  respective  tax bases.
Deferred  tax  assets and  liabilities  are  measured  using  enacted  tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets and  liabilities  of a change in tax rates is recognized in income in the
period that includes the enactment date.

Under the asset and liability  method,  deferred tax assets are  recognized  for
deductible   temporary   differences   and   operating   loss  and  tax   credit
carryforwards,  and then a valuation  allowance  is  established  to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized.

j.  Net Income Per Share

Net income per share is computed by dividing net income by the weighted  average
number of  shares  of  common  stock  outstanding  during  the year plus  shares
issuable  assuming  exercise  of  all  employee  stock  options,   except  where
anti-dilutive.

The  Company  applies  APB  Opinion  No.  25 and  related  interpretations  in 
accounting  for  its  stock  option  plans. Accordingly, no compensation cost
has been recognized for its stock option plans.

k.  Statement of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents  include cash on
hand, amounts due from banks and money market investments.
<PAGE>
l.  Use of Estimates

Management  of the  Company  has  made a number  of  estimates  and  assumptions
relating  to the  reporting  of assets and  liabilities  and the  disclosure  of
contingent  asset and  liabilities  to  prepare  these  financial  statement  in
conformity with generally accepted accounting  principles.  Actual results could
differ from those estimates.

m.  Impairment of Long-Lived Assets

Long-lived  assets  and  certain  identifiable  intangibles  held and used by an
entity are reviewed for impairment  whenever events or changes indicate that the
carrying  amount  of an  asset  may  not be  recoverable.  The  Company  has not
identified  any  long-lived  assets  or  identifiable   intangibles  which  were
impaired.

n. Accounting for Transfers and Servicing of Financial Assets and
   Extinguishments of Liabilities

Statement of Financial  Accounting  Standards No. 125,  Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, was issued
in 1996 and is effective for years ending after December 31, 1996. The Statement
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial  assets  and   extinguishments  of  liabilities  based  on  consistent
application  of a  financial-components  approach  that  focuses on control.  It
distinguishes  transfers of financial  assets that are sales from transfers that
are secured  borrowings.  Under this  approach,  after a transfer  of  financial
assets,  an entity recognizes all financial and servicing assets it controls and
liabilities  it has  incurred  and  derecognizes  financial  assets it no longer
controls  and  liabilities  that have been  extinguished.  The Company  does not
believe this  Statement  will have any  significant  impact on its  consolidated
financial statements.

NOTE 2 - Acquisition

On January 2, 1996 the Company  acquired Astra Financial Inc.  (Astra) which was
accounted for as a purchase transaction. Astra is an asset based lending company
based in San  Jose,  California.  Its  outstanding  factoring  receivables  were
approximately  $2.2 million as of December 31, 1995. The purchase price of Astra
was approximately $760.


NOTE 3 - Cash and Due from Banks

The Federal Reserve  requires the Bank to maintain  average reserve balances for
certain deposit balances. Such required reserves were approximately $4.1 million
and $2.0 million as of December 31, 1996 and 1995, respectively.



<PAGE>


NOTE 4 - Investment Securities
<TABLE>
<CAPTION>

Investment  securities  as of  December  31,  1996 and 1995  are  summarized  as
follows:

(dollars in thousands)                                                          December 31, 1996
----------------------------------------------------------------------------------------------------------------------------
                                                                                    Unrealized                   
                                                                        -----------------------------------     Fair
                                                            Cost             Gains            Losses            Value
----------------------------------------------------------------------------------------------------------------------------
Available for sale:
<S>                                                         <C>                  <C>              <C>            <C>   
  U.S. Treasury                                             $3,989               $19              ($3)           $4,005
  U. S. Government Agencies                                 34,099               188               (2)           34,285
  Mortgage Backed                                            5,835                55              (22)            5,868
  Mutual funds                                               4,018             -----             (132)            3,886
----------------------------------------------------------------------------------------------------------------------------
    Total available for sale                                47,941               262             (159)           48,044
----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
  U.S. Treasury                                              1,975                28            -----             2,003
  U.S. Government agencies                                   7,463                78              (18)            7,523
  State and municipal (nontaxable)                           2,635                20               (2)            2,653
  Mortgage Backed                                            2,481                53            -----             2,534
----------------------------------------------------------------------------------------------------------------------------
    Total held to maturity                                  14,554               179              (20)           14,713
Federal Reserve Bank Stock                                     518             -----            -----               518
----------------------------------------------------------------------------------------------------------------------------
    Total                                                   15,072               179              (20)           15,231
============================================================================================================================
      Total investment securities portfolio                $63,013              $441            $(179)          $63,275
============================================================================================================================

                                                                                December 31, 1995
----------------------------------------------------------------------------------------------------------------------------
Available for sale:
  U.S. Treasury                                             $3,998               $59            -----            $4,057
  U. S. Government Agencies                                 34,129               450               (1)           34,578
  Mortgage Backed                                                9             -----            -----                 9
  Mutual funds                                               4,018             -----             (120)            3,898
----------------------------------------------------------------------------------------------------------------------------
    Total available for sale                                42,154               509             (121)           42,542
----------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
  U.S. Treasury                                              4,265                39              (11)            4,293
  U.S. Government agencies                                   4,976               101              (25)            5,052
  State and municipal (nontaxable)                           3,060                26               (2)            3,084
  Mortgage Backed                                            2,428               116            -----             2,544
----------------------------------------------------------------------------------------------------------------------------
    Total held to maturity                                  14,729               282              (38)           14,973
Federal Reserve Bank Stock                                     519             -----            -----               519
----------------------------------------------------------------------------------------------------------------------------
    Total                                                   15,248               282              (38)           15,492
============================================================================================================================
      Total investment securities portfolio                $57,402              $791            $(159)          $58,034
============================================================================================================================
</TABLE>


As of December 31, 1996 and 1995  investment  securities with carrying values of
approximately  $38  million  and $49  million,  respectively,  were  pledged  as
collateral  for  deposits  of public  funds and other  purposes.  Investment  in
Federal Reserve Bank stock is carried at cost, which is  approximately  equal to
its market value.


<PAGE>

<TABLE>
<CAPTION>

The  following  tables  provide  the  scheduled   maturities  of  the  Company's
investment securities portfolio as of December 31, 1996 and 1995:

(dollars in thousands)                                        December 31, 1996                  December 31, 1995
                                                      ----------------------------------------------------------------------
                                                          Amortized           Fair           Amortized           Fair
            Securities available for sale                   Cost             Value             Cost             Value
                                                      ----------------------------------------------------------------------
<S>                                                         <C>               <C>              <C>               <C>    
Due in one year or less                                     $12,125           $12,147          $10,021           $10,079
Due after one year through five years                        31,798            32,005           28,106            28,556
Due after ten years                                               0                 6                9                 9
                                                      ----------------------------------------------------------------------
  Total                                                      43,923            44,158           38,136            38,644
                                                      ----------------------------------------------------------------------
             Securities held to maturity
Due in one year or less                                       2,250             2,277            5,605             5,587
Due after one year through five years                         9,822            10,420            6,696             6,842
Due after ten years                                           2,481             2,534            2,428             2,544
                                                      ----------------------------------------------------------------------
  Total                                                      14,553            15,231           14,729            14,973
                                                      ----------------------------------------------------------------------
              Non-maturity investments
Available for sale - Mutual Funds                             4,018             3,886            4,018             3,898
Held to maturity - FRB Stock                                    519               519              519               519
                                                      ----------------------------------------------------------------------
  Total                                                       4,537             4,405            4,537             4,417
                                                      ----------------------------------------------------------------------
    Total Investment securities                             $63,013           $63,794          $57,402           $58,034
                                                      ======================================================================
</TABLE>


<PAGE>


Mutual funds consist of several funds  invested in U. S.  Government  securities
and government issued adjustable rate mortgages (ARMS).

Interest income earned on U. S. Treasury,  U. S.  Government  agencies and state
and municipal  securities  for the years ended December 31, 1996 and 1995 are as
follows:


                                     Interest Income
---------------------------------------------------------
(dollars in thousands)               1996        1995
---------------------------------------------------------
Securities available for sale:
  U.S. Treasury                       $291        $417
  U.S. Government agencies           2,088       1,200
  Mortgage Backed                      311          (3)
  Mutual funds                         217         233
Securities held to maturity:
  U.S. Treasury                        168         214
  U.S. Government agencies             408         306
  State and municipal                  136         120
(nontaxable)
  Mortgage Backed                      206         208
  Federal Reserve Bank                  31          30
---------------------------------------------------------
     Interest income                $3,856      $2,725
=========================================================


NOTE 5 - Loans

A summary of loans as of December 31, 1996 and 1995 is as follows:

(dollars in thousands)               1996        1995
---------------------------------------------------------
Commercial                          $77,335     $52,958
Real estate construction             15,451      14,488
Real estate-other                    74,713      74,045
Consumer                              8,622       8,800
Other                                23,174      21,302
Unearned fee income                    (668)       (793)
---------------------------------------------------------
  Total loan portfolio              198,627     170,800
Less allowance for possible          (4,005)     (3,847)
loan losses
---------------------------------------------------------
     Loans, net                    $194,622    $166,953
=========================================================

Concentrations  of credit risk arise when a number of  customers  are engaged in
similar business  activities,  or activities in the same geographic  region,  or
have  similar  features  that would  cause  their  ability  to meet  contractual
obligations to be similarly affected by changes in economic conditions. Although
the Company has a  diversified  loan  portfolio,  a  substantial  portion of its
customers'  ability to honor contracts is reliant upon the economic stability of
the Santa Clara  Valley,  which in some degree  relies on the  stability of high
technology  companies in its "Silicon  Valley."  Loans are generally made on the
basis of a secure  repayment  source,  which is based on a  detailed  cash  flow
analysis;   however,  collateral  is  generally  a  secondary  source  for  loan
qualification.

Approximately  40% of the  Company's  loan  portfolio  is made up of real estate
other than  construction.  This category of real estate loans  includes loans on
income-bearing commercial properties. In addition, 9.0% of the loan portfolio is
made up of real estate  construction loans. These loans consist of approximately
61% residential and 39% commercial.  Included in Consumer loans are prime equity
loans  of $4.5  million  or  approximately  2.3% of the  total  loan  portfolio.
Included  in the  category  "Other"  are  loans to real  estate  developers  for
short-term  investment  purposes  and  loans to  nondevelopers  for real  estate
investment  purposes  that  amount  to  approximately  6.3%  of the  total  loan
portfolio.  This amounts to  approximately  54% of the loan  portfolio  which is
directly related to real estate or real estate  interests.  Approximately 38% of
the total loan portfolio is commercial loans;  however,  no particular  industry
represents a significant portion of such loans.
<PAGE>
The  following is an analysis of the  allowance for possible loan losses for the
years ended December 31, 1996 and 1995:

(dollars in thousands)                 1996        1995
-----------------------------------------------------------
Balance, beginning of year             $3,847     $3,311
Provision for possible loan losses        190      1,045
Charge-offs                              (418)      (696)
Recoveries                                336        187
Allowance relating to the
acquisition of
  Astra Financial Corp.                    50       ----
----------------------------------------------------------
 Balance, end of year                  $4,005     $3,847
===========================================================

At December 31, 1996, impaired loans totaled $540 with a corresponding valuation
allowance of $37. For the year ended  December  31, 1996,  the average  recorded
investment in impaired loans was approximately  $600. The Company recognized $46
of  interest  on  impaired  loans  (during  the  portion  of the year  they were
impaired),  of which $39 related to impaired loans for which interest  income is
recognized on the cash basis.

The  balance  of  nonaccrual  loans  as  of  December  31,  1996  and  1995  was
approximately  $457 and $894,  respectively.  The effect on interest  income had
these loans been performing in accordance with contractual terms was $35 in 1996
and $111 in 1995. Income actually  recognized on these loans was $29 in 1996 and
$11 in 1995.

The Company has made loans to executive officers, directors and their affiliates
in the ordinary course of business. An analysis of activity with respect to such
loans during the years ended December 31, 1996 and 1995 is as follows:

(dollars in thousands)                    1996      1995
-----------------------------------------------------------
Balance, beginning of year               $1,466     $3,854
New loans disbursed                         634        471
Repayments of loans                        (448)    (2,859)
-----------------------------------------------------------
Balance, end of year                     $1,652     $1,466
===========================================================

As of December  31,  1996,  loans of  approximately  $12 million were pledged as
collateral for the Federal Reserve Discount Window. The Bank did not utilize the
Discount Window for any borrowings during 1996.

NOTE 6 - Premises and Equipment

A summary of  premises  and  equipment  as of  December  31, 1996 and 1995 is as
follows:

(dollars in thousands)                     1996      1995
-----------------------------------------------------------
Land                                       $829      $829
Buildings and improvements                3,880     3,312
Furniture and equipment                   2,639     2,258
-----------------------------------------------------------
   Premises and equipment                 7,348     6,399
Less accumulated depreciation and        (3,347)   (2,905)
amortization
-----------------------------------------------------------
     Premises and equipment, net         $4,001    $3,494
===========================================================

NOTE 7 - Time Deposits

As  of  December  31,  1996  and  1995,  the  Bank  had  $48  and  $43  million,
respectively,  in time  deposits  in  denominations  of $100 or  more.  Interest
expense for these  deposits  was $2.6 million and $2.2 million in 1996 and 1995,
respectively.

NOTE 8 - Other Short-term Borrowings

Other short-term  borrowings include federal funds purchased and securities sold
under agreements to repurchase and information  relating to these borrowings are
summarized below:


(dollars in thousands)                            1996     1995
-----------------------------------------------------------------
Federal funds purchased:
   Balance at December 31,                        -----   $2,000               
   Weighted average interest rate at year end     -----     5.25%
   Maximum amount outstanding at any month end   $5,000    9,000
   Average outstanding balance                      813      355
   Weighted average interest rate paid             5.70%    6.17%
Securities sold under agreements to repurchase:
   Balance at December 31,                      $29,688  $22,000
   Weighted average interest rate at year end      5.56%    5.77%
   Maximum amount outstanding at any month end   30,067   23,553
   Average outstanding balance                   23,161   10,827
   Weighted average interest rate paid             5.58%   5.95%

The  Company's   bank   subsidiary  has  informal   arrangements   with  various
correspondents  providing  short-term  credit for liquidity  requirements;  such
informal lines aggregated $12 million at December 31, 1996.
<PAGE>
NOTE 9 - Income Taxes

Income tax expense for the years ended  December  31, 1996 and 1995  consists of
the following:

(dollars in thousands)                 1996         1995
-----------------------------------------------------------
Current:
  Federal                            $2,271       $2,108
  State                                 806          373
-----------------------------------------------------------
     Total current                    3,077        2,481
-----------------------------------------------------------
Deferred:
  Federal                               145          (81)
  State                                 (24)          (5)
-----------------------------------------------------------
    Total deferred                      121          (86)
-----------------------------------------------------------
       Income taxes                  $3,198       $2,395
===========================================================

Total income tax expense differed from the amount computed by applying the U. S.
federal  income tax rates in years  ended  December  31, 1996 and 1995 of 34% to
income before income taxes as a result of the following:

(dollars in thousands)                      1996     1995
-----------------------------------------------------------
Computed "expected " tax expense           $2,546  $1,842
California franchise tax, net of
federal     income tax                        516     368
Amortization of intangible assets             167     230
Federal tax-exempt investment income          (46)    (42)
Other                                          15      (3)
----------------------------------------------------------
     Income taxes                          $3,198  $2,395
===========================================================
<PAGE>
The tax effects of temporary  differences that gave rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995, are presented below:

(dollars in thousands)                      1996     1995
-----------------------------------------------------------
Deferred tax assets:
  Provision for possible loan losses       $1,157   $1,175
  Purchase accounting adjustments             231      263
  Foreclosure income                           44       44
  State taxes                                 224      181
  Deferred compensation                        95       59
  General business credit                     130      182
  Net operating loss                        -----      175           
  Other                                        95    -----               
-----------------------------------------------------------
    Total gross deferred tax assets         1,976    2,079
-----------------------------------------------------------
Deferred tax liabilities:
  Securities available for sale                41      155
  Depreciation and amortization               125       69
  Other                                     -----       38
-----------------------------------------------------------
    Total gross deferred tax liabilities      166      262
-----------------------------------------------------------
      Net deferred tax assets              $1,810   $1,817
===========================================================

Amounts for the current year are based upon estimates and  assumptions as of the
date of this report and could vary  significantly  from amounts shown on the tax
returns  as  filed.  Accordingly,  the  variances  from the  amounts  previously
reported  for 1995 are  primarily as a result of  adjustments  to conform to tax
returns as filed.

Deferred tax assets related to purchase  accounting  adjustments include the tax
effect of fair  market  value  adjustments  of the  assets  and  liabilities  of
businesses  acquired.  The Company  believes  that the net deferred tax asset is
realizable  through  sufficient  taxable income within the carryback periods and
the current year's taxable income.

NOTE 10 - Detail of Other Expense

Other  expense for the years ended  December  31, 1996 and 1995  consists of the
following:

(dollars in thousands)                1996          1995
-----------------------------------------------------------
Data processing                       $554          $458
Amortization of core deposit
intangibles
  and goodwill                         499           569
Business promotion                     370           314
Legal and professional fees            369           476
Client services                        247           247
Advertising                            242           186
Directors' fees and costs              219           239
Stationery and supplies                183           180
Loan and collection                    151           215
Regulators' assessments                 72           283
Net cost of other real estate          (48)           45
owned
Other                                  559           506
-----------------------------------------------------------
  Total                             $3,417        $3,718
===========================================================

NOTE 11 - Stock Option Plan

During 1996 the  shareholders of the Company approved the 1996 Stock Option Plan
(the "Plan"), which replaced the existing two stock option plans. The 1996 Stock
Option  Plan is  described  below.  The  Company  applies APB Opinion No. 25 and
related Interpretations in accounting for the Plan. Accordingly, no compensation
cost has been recognized for its Plan. Had  compensation  cost for the Plan been
determined  consistent with FASB Statement No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma  amounts for options
granted for the years 1995 and 1996 indicated below:

(dollars in thousands)            1996           1995
--------------------------- --------------- ---------------
Net income:
    As reported                  $4,291         $3,024
    Pro forma                     3,845          2,842
--------------------------- --------------- ---------------
Net income per share:
    As reported                   $1.63          $1.20
    Pro forma                      1.46           1.13
--------------------------- --------------- ---------------

The above amounts  include the impact on net income and net income per share for
options granted during 1995 and 1996; such amounts would have been substantially
different if options granted prior to 1995 had been included in the computation.

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions  used for grants in 1996 and 1995,  respectively:  dividend yield of
1.9% and 1.6%;  expected  volatility of 50% and 55%; average risk-free  interest
rates of 6.3% and 6.5%; and expected lives of 8.2 years.
<PAGE>

The 1996 Stock  Option Plan  provides  that either  incentive  stock  options or
nonstatutory  stock options may be granted to certain key employees or directors
to purchase authorized, but unissued, common stock of the Company. Shares may be
purchased  at a price not less than the fair  market  value of such stock on the
date of the grant.  All stock options  become  exercisable at least 40% one year
after the date of grant and at least 20% in each of the  following  three years.
They  expire no later  than ten  years  after  the date of the  grant.  The Plan
provides that outside directors will automatically receive a nonstatutory option
covering 5,000 shares  annually at an exercise price equal to 100% of the market
price of the  Common  Stock on the date of grant.  The 1996  Stock  Option  Plan
replaced  the  previous  two plans  which had  similar  provisions.  Any options
granted   under  these  plans  which  expire   without  being   exercised,   the
corresponding  common  shares shall become  available for awards under the Plan.
The number of shares  subject  to  outstanding  options  under  these  plans was
244,815 as of December 31, 1996. A prior plan expired during 1992 and the number
of shares  subject to  outstanding  options under the prior plan was 7,703 as of
December 31, 1996.

Activity under the stock plans is as follows:

                                                 Weighted
                                       Number    Average
                                         of      Exercise
Options                                Shares     Price
---------------------------------------------------------
Balances, December 31,  1994           260,471      $5.34
  Granted                              140,125       9.28
  Cancelled                             (8,300)      8.08
  Exercised                            (70,987)      5.14
-----------------------------------------------------------
Balances, December 31, 1995            321,309       7.03
-----------------------------------------------------------
  Granted                               93,560      16.48
  Cancelled                             (9,640)     11.58
  Exercised                           (152,711)      5.29
-----------------------------------------------------------
Balances, December 31, 1996            252,518     $11.41
===========================================================

The  weighted-average  fair value of options  granted  during  1996 and 1995 was
$6.22 and $4.32, respectively.


The following table summarizes  options  outstanding and exercisable at December
31, 1996:

--------------------------------------------------------------------------------
                                 Weighted Average                       Weighted
   Range of                  ------------------------                   Average
  Exercise         Shares    Contractual     Exercise      Shares       Exercise
    Price       Outstanding      Life         Price       Exercisable    Price
--------------------------------------------------------------------------------
 $4.25-8.37        43,293         5.63         $6.48         33,433       $6.13
  9.12-9.31       117,940         8.56          9.31         43,000        9.31
 11.50-14.31       12,825         9.09         13.39            770       11.87
 16.37-19.94       78,460         9.49         16.96           ----        ----
                 ---------------------------------------------------------------
 $4.25-19.94      252,518         8.37        $11.41         77,203       $7.96
                 =========                                 =========



NOTE 12 - Commitments and Contingent Liabilities

In the normal course of business,  there are  outstanding  commitments,  such as
commitments  to extend  credit,  which  are not  reflected  in the  consolidated
financial statements. These commitments involve, to varying degrees, credit risk
in excess of the  amount  recognized  as  either  an asset or  liability  in the
consolidated  balance  sheet.  The Company  controls the credit risk through its
credit  approval  process.  The same credit policies are used when entering into
such commitments. Management does not anticipate any loss from such commitments.
As of December 31, 1996, amounts committed to extend credit under normal lending
agreements aggregated approximately $77 million for undisbursed loan commitments
and  approximately  $3.9 million for commitments under unused standby letters of
credit and other guarantees.

The Bank utilizes various  financial  instruments with off-balance sheet risk to
reduce  its  exposure  to  fluctuations  in  interest  rates.   These  financial
instruments involve, to varying degrees, credit and interest rate risk in excess
of the amount  recognized  as either an asset or liability  in the  statement of
financial position.
<PAGE>

The credit risk is the  possibility  that a loss may occur  because a party to a
transaction  failed to perform according to the terms of the contract.  Interest
rate risk is the  possibility  that future changes in market prices will cause a
financial  instrument to be less valuable or more onerous.  The Bank attempts to
control  the credit  risk  arising  from these  instruments  through  its credit
approval  process  and  through the use of risk  control  limits and  monitoring
procedures. Interest rate risk is managed by various asset and liability methods
including the utilization of interest rate hedging vehicles.

Also at December 31, 1996,  the Bank had  outstanding  an interest rate floor in
the amount of $10 million for a period of five years.  The Bank has paid a fixed
premium for which it will receive,  through May 10, 1999, the amount of interest
on $10 million  based on the  difference of 7% and prime when prime is less than
7%. This will  protect the Bank  against  decreases in its net income when prime
decreases  to less  than 7%.  The  current  fair  market  value of the  floor is
approximately $8.

The Company is obligated  under its lease  agreement for 95 South Market under a
noncancelable  operating  lease through  September 2004. The lease is subject to
periodic  adjustment  based on changes in the CPI.  The  following  table  shows
future minimum payments under the lease as of December 31, 1996:

------------------------------------------------------------
                                             Year Ending
(in thousands)                              December 31,
------------------------------------------------------------
1997-2001 ($228 each year)                     $1,140
Thereafter                                        630
------------------------------------------------------------
Total minimum lease payments                   $1,770
============================================================

Total  minimum  lease  payments to be  received  under  noncancelable  operating
subleases at December 31, 1996 are  approximately  $1.4 million;  these payments
are not reflected in the above table.

There is ordinary routine litigation  incidental to the business pending against
the Company but, in the opinion of management, liabilities (if any) arising from
such claims  will not have a material  effect  upon the  consolidated  financial
statements of the Company.

NOTE 13 - Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures
about Fair Value of Financial  Instruments,"  requires the Company disclosure of
estimated  fair  values for its  financial  instruments.  Fair value  estimates,
methods  and   assumptions,   set  forth  below  for  the  Company's   financial
instruments, are made solely to comply with the requirements of SFAS No. 107 and
should be read in  conjunction  with the financial  statements and notes in this
Annual Report.

Fair values are based on  estimates or  calculations  at the  transaction  level
using present value  techniques in instances  where quoted market prices are not
available. Because broadly traded markets do not exist for most of the Company's
financial  instruments,  the fair value calculations  attempt to incorporate the
effect of current  market  conditions at a specific  time.  Fair  valuations are
management's  estimates of the values,  and they are often  calculated  based on
current  pricing  policy,   the  economic  and  competitive   environment,   the
characteristics  of the financial  instruments,  and other such  factors.  These
calculations  are  subjective in nature,  involve  uncertainties  and matters of
significant  judgment  and do not  include  tax  ramifications;  therefore,  the
results  cannot be determined  with  precision,  substantiated  by comparison to
independent  markets  and may not be  realized  in an actual  sale or  immediate
settlement of the  instruments.  The fair valuations have not been updated since
year end;  therefore,  the valuations may have changed  significantly since that
point in time.

The Company has not included certain  material items in its disclosure,  such as
the value of the long-term  relationships  with the Company's deposit customers,
since these  intangibles  are not financial  instruments.  There may be inherent
weaknesses  in  any  calculation  technique,   and  changes  in  the  underlying
assumptions used,  including  discount rates and estimates of future cash flows,
could significantly  affect the results.  For all these reasons, the aggregation
of the fair value calculations presented herein do not represent, and should not
be construed to represent, the underlying value of the Company.
<PAGE>
<TABLE>
<CAPTION>

The following table presents a summary of the Company's  financial  instruments,
as defined by SFAS No. 107 as of December 31, 1996:

(dollars in thousands)                                              1996                               1995
------------------------------------------------------------------------------------------------------------------------------
                                                           Carrying           Fair           Carrying            Fair
Financial assets:                                           Value            Value             Value            Value
----------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>             <C>                <C>   
Cash and due from banks                                      $20,208           20,208          $12,574            12,574
Money market investments                                      19,800           19,807            3,200             3,200
Investment securities                                         63,116           63,275           57,790            58,034
Loans, net                                                   194,622          193,438          166,953           167,207
Accrued interest receivable                                    1,735            1,735            1,698             1,698
----------------------------------------------------------------------------------------------------------------------------
Financial liabilities:
----------------------------------------------------------------------------------------------------------------------------
Deposits                                                     245,213          245,348          197,189           197,102
Federal funds purchased, securities sold under
  repurchase agreements and other borrowings                  30,286           30,318           24,714            24,672
----------------------------------------------------------------------------------------------------------------------------
Off-balance sheet Financial Instruments
----------------------------------------------------------------------------------------------------------------------------
Interest rate floor contract purchased                            22                8               31                64
----------------------------------------------------------------------------------------------------------------------------

</TABLE>
The  methodology  and  assumptions  utilized to  estimate  the fair value of the
Company's financial  instruments,  not previously discussed above, are described
below:

Financial  instruments  with fair  value  approximate  to  carrying  value - The
carrying  value of cash and due from banks,  money market  investments,  accrued
interest  receivable,   noninterest-bearing  demand  accounts,  interest-bearing
checking, money market and savings deposit accounts, accrued interest receivable
and  expense  approximates  fair  value  due to the  short-term  nature of these
financial instruments.

Investment  securities - The  estimated  fair values of  securities  by type are
based on quoted market prices when available.

Loans - The  carrying  amount of loans is net of  unearned  fee  income  and the
reserve  for  possible  loan  losses.  The fair  valuation  calculation  process
differentiates loans based on their financial  characteristics,  such as product
classification,   loan  category,   pricing  features  and  remaining  maturity.
Prepayment  estimates  are  evaluated by product and loan rate.  Discount  rates
presented in the paragraphs  below have a wide range due to the Company's mix of
fixed and variable rate products.

The fair value of loans is  calculated  by  discounting  contractual  cash flows
using discount rates that reflect the Company's  current  pricing for loans with
similar  characteristics  and  remaining  maturity.  Most of the discount  rates
applied to these loans are between 10.6% and 11.2% at December 31, 1996.

Additionally,  the allowance  for loan losses was applied  against the estimated
fair value of loans to recognize future defaults of contractual cash flows.

Fair value for nonperforming loans is based on discounting  estimated cash flows
using a rate  commensurate  with the risk  associated  with the  estimated  cash
flows, or underlying collateral values, where appropriate.

Deposits -The fair value of  certificates  of deposit and other time deposits is
calculated based on the discounted value of contractual cash flows. The discount
rate is  estimated  using the rates  currently  offered for like  deposits  with
similar remaining maturities.

Other short-term borrowings - A reasonable estimate of the fair value of federal
funds sold is the carrying amount because of the relatively short period of time
between the origination of the instrument and its expected maturity.

The fair value of the Company's  securities sold under repurchase  agreements is
calculated based on the discounted value of contractual cash flows. The discount
rate is estimated using the rates currently  offered for such  instruments  with
similar remaining maturities.

Commitment  to extend  credit - The  majority of the  Company's  commitments  to
extend credit carry variable and current  market  interest rates if converted to
loans.  Because  these  commitments  are  generally  unassignable  by either the
Company or the  borrower,  they only have value to the Company and the borrower.
The estimated fair value  approximates the recorded  deferred fee amounts and is
excluded from the table.

Derivative  financial  instruments  - The fair value of the interest  rate floor
generally  reflects the  estimated  amounts the Company would receive based upon
dealer quotes, to terminate such agreements at the reporting date.
<PAGE>

NOTE 14 - SJNB Financial Corp.
(Parent Company Only)
<TABLE>
<CAPTION>

The following  are the financial  statements  of SJNB  Financial  Corp.  (parent company only):
-------------------------------------------------------------------------------------------------
Balance Sheets
December 31, 1996 and 1995
(dollars in thousands)                                               
-------------------------------------------------------------------------------------------------
Assets                                                                1996              1995
------------------------------------------------------------------------------------------------
<S>                                                                  <C>                 <C> 
Cash and equivalents                                                 $1,050              $710
Investment in the Bank                                               30,061            25,889
Other assets                                                             94                74
------------------------------------------------------------------------------------------------
     Total assets                                                   $31,205           $26,673
=================================================================================================
Liabilities and Shareholders' Equity
Total liabilities-Accounts payable                                    -----               $15
-------------------------------------------------------------------------------------------------
Common stock, no par value; authorized, 20,000 shares
   issued and outstanding, 2,571 shares
   in 1996 and 2,418 shares in 1995                                 $20,880            19,627
Retained earnings                                                    10,263             6,798
Net unrealized gain on securities available for sale                     62               233
-------------------------------------------------------------------------------------------------
     Total shareholders' equity                                      31,205            26,658
-------------------------------------------------------------------------------------------------
     Total liabilities and shareholders' equity                     $31,205           $26,673
=================================================================================================

-------------------------------------------------------------------------------------------------
Statements of Income
For the Years Ended December 31, 1996 and 1995
-------------------------------------------------------------------------------------------------
(dollars in thousands)                                                1996              1995
-------------------------------------------------------------------------------------------------
Equity in undistributed income of the Bank                           $4,343            $3,010
Interest income and fees on loans                                        23               123
Reduction of provision for possible loan losses                       -----                57
Other expense                                                          (110)             (156)
-------------------------------------------------------------------------------------------------
Income  before taxes                                                  4,256             3,034
Income (tax) benefit                                                     35               (10)
-------------------------------------------------------------------------------------------------
Net income                                                           $4,291            $3,024
=================================================================================================

</TABLE>

<PAGE>



--------------------------------------------------------------------------------
Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
--------------------------------------------------------------------------------
(dollars in thousands)                                       1996         1995
--------------------------------------------------------------------------------
Cash flows from operating activities:
  Net income                                                $4,291       $3,024
    Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
        Recovery of provision for possible loan losses        ----          (57)
        Increase in other assets                               (20)        ----
        Increase (decrease) in liabilities                     (15)          10
        Equity in undistributed income of the Bank          (4,343)      (3,010)
--------------------------------------------------------------------------------
          Net cash used in operating activities                (87)         (33)
--------------------------------------------------------------------------------
  Cash flows from investing activities:
    Decrease in loans, net                                    ----          512
    Cash dividend                                             (826)        (504)
    Common stock repurchased                                  ----         (145)
    Stock options exercised                                    810          351
    Tax benefit from stock options exercised                   443         ----
--------------------------------------------------------------------------------
          Net cash provided by investing activities            427          214
--------------------------------------------------------------------------------
  Net increase in cash and equivalents                         340          181
  Cash and equivalents at beginning of year                    710          529
--------------------------------------------------------------------------------
  Cash and equivalents at end of year                       $1,050         $710
================================================================================


NOTE 15- Regulatory Matters

The Federal  Reserve  Board,  the  Comptroller of the Currency and the FDIC have
issued   substantially   similar  risk-based  and  leverage  capital  guidelines
applicable to United States banking organizations. In addition, those regulatory
agencies  may from time to time  require  that a banking  organization  maintain
capital above the minimum levels,  whether because of its financial condition or
actual or anticipated growth.

The  Federal  Reserve  Board  risk-based  guidelines  define a two-tier  capital
framework.   Tier  1  capital  consists  of  common  and  qualifying   preferred
shareholders'  equity,  less certain  intangibles and other adjustments.  Tier 2
capital  consists of subordinated  and other  qualifying debt, and the allowance
for possible loan losses up to 1.25% of risk weighted assets.  The total of Tier
1  and  Tier  2  capital,  less  investments  in  unconsolidated   subsidiaries,
represents  qualifying total capital, at least 50% of which must consist of Tier
1 capital. Risk-based capital ratios are calculated by dividing Tier 1 and total
capital by  risk-weighted  assets.  Assets and  off-balance  sheet exposures are
assigned to one of four categories of risk-weights,  based primarily on relative
credit risk.  The minimum tier 1 risk-based  capital ratio is 4% and the minimum
total  risk-based  capital ratio is 8%. The leverage capital ratio is determined
by dividing Tier 1 capital by adjusted average total assets. Although the stated
minimum leverage capital ratio is 3%, most banking organizations are required to
maintain  leveraged capital ratios of at least 100 to 200 basis points above the
3%.



<PAGE>

<TABLE>

The table below  summarizes the Tier 1 and total  risk-based  capital ratios and
leverage capital ratios of the Company and the Bank as of the dates indicated:
----------------------------------------------------------------------------------------------------------------------------
Risk-based and Leverage Capital Ratios
(dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------
Company                                                             December 31, 1996              December 31, 1995              
----------------------------------------------------------------------------------------------------------------------------
Risk-based                                                        Amount         Ratio          Amount           Ratio
                                                              --------------------------------------------------------------
<S>                                                               <C>             <C>           <C>              <C>   
Tier 1 capital                                                     $26,533         11.91%        $21,589          11.34%
Tier 1 capital minimum requirement                                   8,910          4.00           7,617           4.00
----------------------------------------------------------------------------------------------------------------------------
  Excess                                                           $17,623          7.91%        $13,972           7.34%
============================================================================================================================
Total capital                                                      $29,333         13.17%        $24,046          12.63%
Total capital minimum requirement                                   17,820          8.00          15,233           8.00
----------------------------------------------------------------------------------------------------------------------------
  Excess                                                           $11,513          5.17%         $8,813           4.63%
============================================================================================================================
Risk-adjusted assets                                              $222,744                      $190,417
--------------------------------------------------------------================             =================

Leverage
Tier 1 capital                                                     $26,533          9.28%        $21,589           9.00%
Minimum leverage ratio requirement                                  11,438          4.00           9,596           4.00
----------------------------------------------------------------------------------------------------------------------------
  Excess                                                           $15,095          5.28%        $11,993           5.00%
============================================================================================================================
Average total assets                                              $285,952                      $239,899
--------------------------------------------------------------================             =================

Bank
----------------------------------------------------------------------------------------------------------------------------
Risk-based
Tier 1 capital                                                     $25,389         11.40%        $20,819          10.94%
Tier 1 capital minimum requirement                                   8,907          4.00           7,614           4.00
----------------------------------------------------------------------------------------------------------------------------
  Excess                                                           $16,482          7.40%        $13,205           6.94%
----------------------------------------------------------------------------------------------------------------------------
Total capital                                                      $28,187         12.66%        $23,275          12.23%
Total capital minimum requirement                                   17,813          8.00          15,228           8.00
----------------------------------------------------------------------------------------------------------------------------
  Excess                                                           $10,374          4.66%         $8,047           4.23%
============================================================================================================================
Risk-adjusted assets                                              $222,669                      $190,345
--------------------------------------------------------------================             =================

Leverage
Tier 1 capital                                                     $25,389          8.87%        $20,819           8.67%
Minimum leverage ratio requirement                                  11,447          4.00           9,607           4.00
----------------------------------------------------------------------------------------------------------------------------
  Excess                                                           $13,942          4.87%        $11,212           4.67%
============================================================================================================================
Average total assets                                              $286,164                      $240,163
--------------------------------------------------------------================             =================
</TABLE>



<PAGE>
The Federal  Deposit  Insurance  Corporation  Improvement Act of 1991 (FDICIA"),
among other things,  identifies five capital  categories for insured  depository
institutions,  (well  capitalized,  adequately  capitalized,   undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the
respective  Federal  regulatory   agencies  to  implement  systems  for  "prompt
corrective action" for insured depository  institutions that do not meet minimum
capital requirements within such categories.  FDICIA imposes  progressively more
restrictive  constraints  on operations,  management and capital  distributions,
depending on the category in which an institution is classified. Failure to meet
the  capital  guidelines  could also  subject a banking  institution  to capital
raising  requirements.   An  "undercapitalized"  bank  must  develop  a  capital
restoration  plan and its  parent  holding  company  must  guarantee  the bank's
compliance  with the plan. The liability of the parent holding company under any
such  guarantee is limited to the lesser of 5% of the bank's  assets at the time
it became  "undercapitalized"  or the  amount  needed  to comply  with the plan.
Furthermore,  in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors.

The various regulatory agencies have adopted  substantially  similar regulations
that define the five capital  categories  identified by FDICIA,  using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the
relevant  capital  measures.  Such  regulations  establish  various  degrees  of
corrective   action   to  be   taken   when   an   institution   is   considered
undercapitalized.  Under the regulations,  a "well capitalized" institution must
have a Tier 1 capital  ratio of at least 6%, a total  capital  ratio of at least
10% and a  leverage  ratio  of at  least  5% and  not be  subject  to a  capital
directive  order.  An "adequately  capitalized"  institution  must have a Tier 1
capital ratio of at least 4%, or 3% in some cases.  Under these guidelines,  the
Company and the Bank were considered  well  capitalized at December 31, 1996 and
1995.

Banking  agencies have recently  adopted  final  regulations  which mandate that
regulators take into consideration  concentrations of credit risk and risks from
non-traditional  activities, as well as an institution's ability to manage those
risks,  when  determining  the  adequacy  of  an  institution's   capital.  This
evaluation  will  be  made  as part  of the  institution's  regular  safety  and
soundness  examination.  Banking  agencies  also  have  recently  adopted  final
regulations  requiring  regulators  to  consider  interest  rate risk  (when the
interest  rate  sensitivity  of an  institution's  assets  does  not  match  the
sensitivity of its liabilities or its off-balance-sheet  position) in evaluation
of a bank's capital  adequacy.  Concurrently,  banking  agencies have proposed a
methodology for evaluating interest rate risk. After gaining experience with the
proposed measurement  process,  those banking agencies intend to propose further
regulations to establish an explicit risk-based capital charge for interest rate
risk.

The ability of the Company to pay dividends  largely  depends upon the dividends
paid to it by the Bank.  There are legal  limitations on the ability of the Bank
to provide  funds to the Company in the form of loans,  advances  or  dividends.
Under national banking law, without the prior approval of the Comptroller of the
Currency,  the Bank may not declare  dividends in any calendar  year that exceed
the Bank's net profits for that year,  as defined by statute,  combined with its
net retained  profits,  as defined,  for the preceding two years. As of December
31, 1996,  the Bank may initiate  dividend  payments  without  prior  regulatory
approval of up to $8.4 million.


ITEM  8:  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

Not applicable.


                                    PART III

ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT

Information  concerning  directors,  executive  officers,  promoters and control
persons and compliance with Section 16(a) of the Exchange Act is incorporated by
reference to the text under the captions  "Election of Directors" and "Executive
Compensation and  Transactions  with Directors and Officers" in the Registrant's
Proxy Statement for its 1997 Annual Meeting of Shareholders.

ITEM 10:  EXECUTIVE COMPENSATION

Information  concerning  executive  compensation is incorporated by reference to
the text  under  the  caption  "Executive  Compensation  and  Transactions  with
Directors and Officers" in the Registrant's  Proxy Statement for its 1997 Annual
Meeting of Shareholders.

ITEM 11:   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information  concerning  security  ownership  of certain  beneficial  owners and
management is incorporated by reference to the text under the caption  "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement for its 1997 Annual Meeting of Shareholders.

ITEM 12:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information   concerning  certain  relationships  and  related  transactions  is
incorporated by reference to the text under the caption "Executive  Compensation
and  Transactions  with  Directors  and  Officers"  of  the  Registrant's  Proxy
Statement for its 1997 Annual Meeting of Shareholders

ITEM 13:  EXHIBITS AND REPORTS ON FORM 8-K

(a)    Exhibits

         The following exhibits are filed as part of this report:

(2)  a. The Plan of Acquisition  and Merger by and between SJNB Financial  Corp.
     and Business  Bancorp (as amended) is hereby  incorporated  by reference to
     Annex A filed with  Registration  Statement  on Form S-4,  Amendment  No. 2
     Commission  File No.  33-79874,  filed  with the  Securities  and  Exchange
     Commission on August 3, 1994.

(2)  b. The Stock  Acquisition  Agreement by and among San Jose  National  Bank,
     Astra  Financial  Inc. and Thomas D. Griffin,  dated November 17, 1995, and
     related  side  letters  dated  December  14,  are  hereby  incorporated  by
     reference  to  Exhibit  (2) b. of the  Registrant's  Annual  Report on Form
     10-KSB for the fiscal year ended December 31, 1995.

(3)  a.  The  Registrant's   restated   Articles  of  Incorporation  are  hereby
     incorporated  by  reference  to Exhibit (3) b. of the  Registrant's  Annual
     Report on Form 10-K for the fiscal year ended December 31, 1988.

(3)  b. The  registrant's  restated  bylaws as of  February  28, 1996 are hereby
     incorporated by reference to Exhibit (3) b. of the  Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended June 30, 1996.

*(10)a. The Registrant's  Stock Option Plan including  Amendments No. 1 and 2 is
     hereby  incorporated  by  reference  from  Exhibit 4.1 of the  Registrant's
     Registration Statement on Form S-8, as filed on October 4, 1989 and amended
     January 24,1992 under Registration No. 33-31392.

*(10)b. The form of Incentive  Stock Option  Agreement  being utilized under the
     Stock Option Plan is hereby  incorporated  by reference from Exhibit 4.2 of
     Amendment No. 1 to the Registrant's  Registration Statement on Form S-8, as
     filed on January 24, 1992, under Registration No. 33-31392.

*(10)c. The form of Stock  Option  Agreement  being  utilized  under  the  Stock
     Option  Plan is  hereby  incorporated  by  reference  from  Exhibit  4.3 of
     Amendment No. 1 to the Registrant's  Registration Statement on Form S-8, as
     filed on January 24, 1992, under Registration No. 33-31392.

*(10)d.  Amendment  No. 3 to the Stock  Option  Plan is hereby  incorporated  by
     reference  from  Exhibit  4.4  of  Amendment  No.  1  to  the  Registrant's
     Registration  Statement  on Form S-8, as filed on January 24,  1992,  under
     Registration No. 33-31392.

*(10)e.  Amendment  No. 4 to the Stock  Option  Plan is hereby  incorporated  by
     reference  from  Exhibit  4.5  of  Amendment  No.  2  to  the  Registrant's
     Registration  Statement  on Form  S-8,  as filed on June  22,  1992,  under
     Registration No. 33-31392.

*(10)f. 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)g.  Amendment  No. 1 to the  1992  Employee  Stock  Option  Plan is  hereby
     incorporated by reference to Exhibit (10) f. of the Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended June 30, 1995.

*(10)h. 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)i.  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)j. The Registrant's 1992 Director Stock Option Plan is hereby  incorporated
     by reference from Exhibit (10) i. of the Registrant's Annual Report on Form
     10-KSB for the fiscal year ended December 31, 1992.

*(10)k.  Amendment  No. 1 to the  1992  Director  Stock  Option  Plan is  hereby
     incorporated by reference to Exhibit (10) i. of the Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended June 30, 1995.

*(10)l.  The  form of Stock  Option  Agreement  being  utilized  under  the 1992
     Director Stock Option Plan is hereby incorporated by reference from Exhibit
     (10) j. of the  Registrant's  Annual  Report on Form  10-KSB for the fiscal
     year ended December 31, 1992.

*(10)m. The Registrant's  1996 Stock Option Plan is incorporated by reference to
     exhibit 99.1 of the Registrant's Form S-8 filed July 30, 1996.

*(10)n. 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)o. 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) p. Systems Management Services Agreement by and between  Systematics,  Inc.
     and San Jose National Bank dated March 1, 1990, and amendments  dated April
     5, 1990,  July 10, 1990 and January  27,  1992 are hereby  incorporated  by
     reference  from Exhibit (10) g. of the  Registrant's  Annual Report on Form
     10-K for the fiscal year ended December 31, 1991.

(10) q.  Agreement  for  Item  Processing  Services  by and  between  Datatronix
     Financial  Services  and San Jose  National  Bank dated  April 13,  1992 is
     hereby  incorporated by reference from Exhibit (10) m. of the  Registrant's
     Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.

(10) r. 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) s.  Sublease by and between  McWhorter's  Stationary  and San Jose National
     Bank,  dated July 6, 1995, and as amended August 11, 1995 and September 21,
     1995,  for  premises  at 95 South  Market  Street,  San  Jose CA is  hereby
     incorporated by reference to Exhibit (10) o. of the Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended September 30, 1995.

(10) t. Sublease by and between  Greater  Unified  Management  Businesses,  Inc.
     (d.b.a. as Logistics) and SJNB Financial Corp., dated January 15, 1996, and
     as amended March 19, 1996, for premises at 95 South Market Street, San Jose
     CA  is  hereby  incorporated  by  reference  to  Exhibit  (10)  s.  of  the
     Registrant's Quarterly Form 10-QSB for the quarterly period ended March 31,
     1996.

(22) Subsidiary of Registrant.

(23) Consent of KPMG Peat Marwick, LLP.

(27) Financial Data Schedule.

*    Indicates management contract or compensation plan or arrangement.

(b)  Reports on Form 8-K

         None

<PAGE>


In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act of  1934,  the
Registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

Date:                                                       SJNB Financial Corp.

By:                                                       By:
     James R. Kenny                                         Eugene E. Blakeslee
     President and Chief                              Executive Vice President &
     Executive Officer                                   Chief Financial Officer

In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  Registrant and in the capacities and on the
dates indicated.


S/J.R. Kenny
James R. Kenny
President, Chief Executive Officer
and Director
February 5, 1997

S/E.E. Blakeslee
Eugene E. Blakeslee
Executive Vice President and
Chief Financial Officer and
Chief Accounting Officer
February 5, 1997

S/R.S. Akamine
Ray S. Akamine, Director
February 5, 1997

A/R.A. Archer
Robert A. Archer
Chairman and Director
February 5, 1997

S/A.V. Bruno
Albert V. Bruno, Director
February 5, 1997

S/R. Diridon
Rod Diridon, Director
February 5, 1997

S/J.G. Fischer
Jack G. Fischer, Director
February 5, 1997

S/F.J. Gorry
F. Jack Gorry, Director
February 5, 1997

S/A.K. Lund
Arthur K. Lund, Director
February 5, 1997

S/L. Oneal
Louis Oneal, Director
February 5, 1997

S/D. Rubino
Diane Rubino, Director
February 5, 1997

S/D.L. Shen
Douglas L. Shen, Director
February 5, 1997

S/G.S. Vandeweghe
Gary S. Vandeweghe, Director
February 5, 1997

S/J.W. Weinhardt
John W. Weinhardt,
Vice Chairman and Director
February 5, 1997



<PAGE>







                              SJNB Financial Corp.

                                   Form 10-KSB

                                    Exhibits

                                December 31, 1996


The following exhibits are filed as part of this report:
                                                                                
(2)  a. The Plan of Acquisition  and Merger by and between SJNB Financial  Corp.
     and Business  Bancorp (as amended) is hereby  incorporated  by reference to
     Annex A filed with  Registration  Statement  on Form S-4,  Amendment  No. 2
     Commission  File No.  33-79874,  filed  with the  Securities  and  Exchange
     Commission on August 3, 1994.

(2)  b. The Stock  Acquisition  Agreement by and among San Jose  National  Bank,
     Astra  Financial  Inc. and Thomas D. Griffin,  dated November 17, 1995, and
     related  side  letters  dated  December  14,  are  hereby  incorporated  by
     reference  to  Exhibit  (2) b. of the  Registrant's  Annual  Report on Form
     10-KSB for the fiscal year ended December 31, 1995.

(3)  a.  The  Registrant's   restated   Articles  of  Incorporation  are  hereby
     incorporated  by  reference  to Exhibit (3) b. of the  Registrant's  Annual
     Report on Form 10-K for the fiscal year ended December 31, 1988.

(3)  b. The  Registrant's  restated  bylaws as of  February  28, 1996 are hereby
     incorporated by reference to Exhibit (3) b. of the  Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended June 30, 1996.

*(10)a. The Registrant's  Stock Option Plan including  Amendments No. 1 and 2 is
     hereby  incorporated  by  reference  from  Exhibit 4.1 of the  Registrant's
     Registration Statement on Form S-8, as filed on October 4, 1989 and amended
     January 24,1992 under Registration No. 33-31392.

*(10)b. The form of Incentive  Stock Option  Agreement  being utilized under the
     Stock Option Plan is hereby  incorporated  by reference from Exhibit 4.2 of
     Amendment No. 1 to the Registrant's  Registration Statement on Form S-8, as
     filed on January 24, 1992, under Registration No. 33-31392.

*(10)c. The form of Stock  Option  Agreement  being  utilized  under  the  Stock
     Option  Plan is  hereby  incorporated  by  reference  from  Exhibit  4.3 of
     Amendment No. 1 to the Registrant's  Registration Statement on Form S-8, as
     filed on January 24, 1992, under Registration No. 33-31392.

*(10)d.  Amendment  No. 3 to the Stock  Option  Plan is hereby  incorporated  by
     reference  from  Exhibit  4.4  of  Amendment  No.  1  to  the  Registrant's
     Registration  Statement  on Form S-8, as filed on January 24,  1992,  under
     Registration No. 33-31392.

*(10)e.  Amendment  No. 4 to the Stock  Option  Plan is hereby  incorporated  by
     reference  from  Exhibit  4.5  of  Amendment  No.  2  to  the  Registrant's
     Registration  Statement  on Form  S-8,  as filed on June  22,  1992,  under
     Registration No. 33-31392.

*(10)f. 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)g.  Amendment  No. 1 to the  1992  Employee  Stock  Option  Plan is  hereby
     incorporated by reference to Exhibit (10) f. of the Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended June 30, 1995.

*(10)h. 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)i.  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)j. The Registrant's 1992 Director Stock Option Plan is hereby  incorporated
     by reference from Exhibit (10) i. of the Registrant's Annual Report on Form
     10-KSB for the fiscal year ended December 31, 1992.

*(10)k.  Amendment  No. 1 to the  1992  Director  Stock  Option  Plan is  hereby
     incorporated by reference to Exhibit (10) i. of the Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended June 30, 1995.

*(10)l.  The  form of Stock  Option  Agreement  being  utilized  under  the 1992
     Director Stock Option Plan is hereby incorporated by reference from Exhibit
     (10) j. of the  Registrant's  Annual  Report on Form  10-KSB for the fiscal
     year ended December 31, 1992.

*(10)m. The Registrant's  1996 Stock Option Plan is incorporated by reference to
     exhibit 99.1 of the Registrant's Form S-8 filed July 30, 1996.

*(10)n. 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)o. 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) p. Systems Management Services Agreement by and between  Systematics,  Inc.
     and San Jose National Bank dated March 1, 1990, and amendments  dated April
     5, 1990,  July 10, 1990 and January  27,  1992 are hereby  incorporated  by
     reference  from Exhibit (10) g. of the  Registrant's  Annual Report on Form
     10-K for the fiscal year ended December 31, 1991.

(10) q.  Agreement  for  Item  Processing  Services  by and  between  Datatronix
     Financial  Services  and San Jose  National  Bank dated  April 13,  1992 is
     hereby  incorporated by reference from Exhibit (10) m. of the  Registrant's
     Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.

(10) r. 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) s.  Sublease by and between  McWhorter's  Stationary  and San Jose National
     Bank,  dated July 6, 1995, and as amended August 11, 1995 and September 21,
     1995,  for  premises  at 95 South  Market  Street,  San  Jose CA is  hereby
     incorporated by reference to Exhibit (10) o. of the Registrant's  Quarterly
     Report on Form 10-QSB for the quarterly period ended September 30, 1995.

(10) t. Sublease by and between  Greater  Unified  Management  Businesses,  Inc.
     (d.b.a. as Logistics) and SJNB Financial Corp., dated January 15, 1996, and
     as amended March 19, 1996, for premises at 95 South Market Street, San Jose
     CA  is  hereby  incorporated  by  reference  to  Exhibit  (10)  s.  of  the
     Registrant's Quarterly Form 10-QSB for the quarterly period ended March 31,
     1996.

(22) Subsidiary of Registrant.

(23) Consent of KPMG Peat Marwick, LLP.

(27) Financial Data Schedule.

*  Indicates management contract or compensation plan or arrangement.
<PAGE>