<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- --- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to .
---------------- ----------------
Commission file number 0-18015
CUPERTINO NATIONAL BANCORP
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0060898
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20230 STEVENS CREEK BOULEVARD, CUPERTINO, CALIFORNIA, 95014
(Address of principal executive offices) (Zip Code)
(408) 996-1144
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X No
--- ---
Outstanding shares of Common Stock, no par value, as of May 1, 1995: 1,589,511.
This report contains a total of 17 pages.
1
<PAGE>
CUPERTINO NATIONAL BANCORP
INDEX
<TABLE>
<CAPTION>
DESCRIPTION PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED BALANCE SHEETS AS OF
March 31, 1995 AND December 31, 1994... 3
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
March 31, 1995 AND 1994................ 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
March 31, 1995 AND 1994................ 5
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.... 7
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........ 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES...................... 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited...Dollars in thousands) March 31, December 31,
1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 18,416 $ 9,326
Federal funds sold -- 10,400
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents 18,416 19,726
Other short-term investments -- --
Investment securities
Held to maturity 59,892 59,573
(Market Value $58,900 at March 31, 1995;
and $57,257 at December 31, 1994)
Other securities 944 933
- -----------------------------------------------------------------------------------------------------
Total investment securities 60,836 60,506
Loans:
Commercial 82,194 81,695
Real estate-construction 21,855 18,117
Real estate-term 15,292 13,133
Consumer and other 23,113 21,059
Deferred loan fees, net (743) (847)
- -----------------------------------------------------------------------------------------------------
Loans 141,711 133,157
Allowance for credit losses (2,359) (2,918)
- -----------------------------------------------------------------------------------------------------
Loans, net 139,352 130,239
Loans held for sale 5,805 5,383
Total loans 145,157 135,622
Premises and equipment, net 1,543 1,434
Accrued interest receivable and other assets 7,309 5,856
- -----------------------------------------------------------------------------------------------------
TOTAL $233,261 $223,144
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, non-interest-bearing $ 52,767 $ 53,880
NOW 7,629 8,331
Money Market Demand Accounts 76,143 73,623
Savings 5,897 5,951
Other time certificates 25,105 19,417
Time certificates, $100 and over 20,959 25,520
- -----------------------------------------------------------------------------------------------------
Total deposits 188,500 186,722
Short-term borrowings 25,220 17,256
Accrued interest payable and other liabilities 1,186 1,129
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 214,906 205,107
Shareholders' equity:
Preferred stock, no par value:
4,000,000 shares authorized; none issued -- --
Common stock, no par value: 6,000,000 shares
authorized; shares outstanding: 1,586,748, at
March 31, 1995 and 1,557,008 at December 31, 1994 15,113 14,901
Retained earnings 3,242 3,136
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 18,355 18,037
- -----------------------------------------------------------------------------------------------------
TOTAL $233,261 $223,144
=====================================================================================================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited...dollars in thousands, except per share data) Three Months Ended
March 31,
------------------------
1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest on loans $ 3,799 $ 2,943
Interest on investment securities:
Taxable 917 335
Non-taxable 18 28
- -----------------------------------------------------------------------------------------------------
Total Investment securities 935 363
Other interest income 29 33
- -----------------------------------------------------------------------------------------------------
Total interest income 4,763 3,339
Interest expense:
Interest on deposits 1,365 726
Other interest expense 367 35
- -----------------------------------------------------------------------------------------------------
Total interest expense 1,732 761
- -----------------------------------------------------------------------------------------------------
Net interest income 3,031 2,578
Provision for loan losses 431 235
- -----------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,600 2,343
Other income:
Gain on sale of mortgage loans 85 425
Other loan fees 20 135
Trust Fees 156 142
Gain on sale of SBA loans 105 111
Depositor service fees 71 69
Other 56 75
- -----------------------------------------------------------------------------------------------------
Total other income 493 957
Operating expenses:
Compensation and benefits 1,635 1,520
Occupancy and equipment 396 319
Professional services 204 141
FDIC insurance and regulatory assessments 125 115
Client services 88 107
Other real estate, net 41 34
Other 438 360
- -----------------------------------------------------------------------------------------------------
Total operating expenses 2,927 2,596
- -----------------------------------------------------------------------------------------------------
Income before income tax expense 166 704
Income tax expense 60 254
- -----------------------------------------------------------------------------------------------------
Net income $ 106 $ 450
=====================================================================================================
Net income per common and
common equivalent share $0.06 $0.28
- -----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited...dollars in thousands)
Three Months Ended
March 31,
-----------------------------
1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS-OPERATING ACTIVITIES:
Net income $ 106 $ 450
Reconciliation of net income to net
cash from operations:
Provision for credit losses 431 235
Depreciation and amortization 70 123
Accrued interest receivable and other assets (659) 653
Accrued interest, expenses and other liabilities 57 (245)
Deferred loan fees (104) 21
Proceeds from sales of loans held for sale 10,061 44,376
Origination of loans held for resale (10,483) (42,619)
Other real estate owned, net 37 25
- -----------------------------------------------------------------------------------------
Operating cash flows, net (484) 3,019
CASH FLOWS - INVESTING ACTIVITIES:
Maturities of investment securities
and other short-term investments 1,676 5,639
Purchase of investment securities
and other short-term investments (2,010) --
Loans, net (9,440) 2,689
Sale of other real estate owned 338 --
Purchase of Life Insurance Policies (1,170) --
Premises and equipment, net (174) (69)
- -----------------------------------------------------------------------------------------
Investing cash flows, net (10,780) 8,259
CASH FLOWS - FINANCING ACTIVITIES:
Non-interest bearing deposits, net (1,113) (2,599)
Interest bearing deposits, net 2,891 (1,826)
Short-term borrowings, net 7,964 7,000
Stock issued to employees 212 233
- -----------------------------------------------------------------------------------------
Financing cash flows, net 9,954 2,808
- -----------------------------------------------------------------------------------------
Net increase/ (decrease) in cash and cash equivalents (1,310) 14,086
Cash and cash equivalents at beginning of period 19,726 14,350
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18,416 $ 28,436
=========================================================================================
CASH FLOWS - SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on deposits and other borrowings $ 1,765 $ 748
Income taxes -- --
- -----------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 1995 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Cupertino National Bancorp ("CUNB") and its subsidiary, Cupertino
National Bank & Trust. These financial statements reflect, in management's
opinion, all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of CUNB's financial position and the results of its
operations and cash flows for the periods presented. Certain amounts for prior
periods have been reclassified to conform to current period presentation. The
results for the three months ended March 31, 1995 are not necessarily
indicative of the results expected for any subsequent quarter or for the entire
year ending December 31, 1995. These financial statements should be read in
conjunction with the financial statements for 1994 included in the Annual
Report to Shareholders for 1994.
2. ADOPTION OF ACCOUNTING PRONOUNCEMENT
The Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a
Loan, on January 1, 1995. Under this new standard, a loan is considered
impaired if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Since most of the Company's loans are
collateral dependent, the calculation of the impaired loans is generally based
on the fair value of the collateral. The adoption of SFAS No. 114 did not
result in any additional provision for credit losses at January 1, 1995.
Income recognition on impaired loans conforms to the method the Company uses
for income recognition on nonaccrual loans.
At March 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS No. 114 totaled $2.7 million, with a
corresponding valuation allowance of $.6 million. For the quarter ended March
31, 1995, the average recorded investment in impaired loans was approximately
$3.1 million. The Company did not recognize interest on impaired loans during
the first quarter of 1995.
3. SHARE AND PER SHARE AMOUNTS
Earnings per common and common equivalent share are calculated based upon the
weighted average number of shares outstanding during the period, plus
equivalent shares representing the effect of dilutive stock options. The
number of shares used to compute earnings per share were 1,661,400 and
1,607,100 for the three months ended March 31, 1995 and 1994, respectively.
Per share amounts have been adjusted for the 5% stock dividend paid in May
1994.
6
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Analysis Of Operations
CUNB reported net income for the first quarter of 1995 of $106,000, or $.06 per
common and common equivalent share, a decrease from the $450,000, or $.28 per
common equivalent share, of net income reported in the first quarter of last
year. Return on average assets annualized for the first quarters of 1995 and
1994 were .19% and .97%, respectively, while return on average common equity
annualized was 2.31% for the first quarter of 1995, compared with 11.37% for the
first quarter of 1994.
The earnings for the first quarter of 1995 were adversely effected by
nonrecurring charges totaling $275,000 net of tax, related to the closing of the
mortgage banking operations ($170,000), the costs of the cancellation of merger
discussions with South Valley National Bank ($70,000), and severance payments to
a former executive officer ($35,000). Excluding these charges, first quarter
1995 earnings would have been $381,000, with a return on average assets and
average shareholder's equity of .68% and 8.32%, respectively.
Non-performing assets (including nonaccrual loans, loans 90 days past due and
OREO) totaled $3.0 million at March 31, 1995, a decline of $2.0 million, or 40%,
from December 31, 1994. The ratio of non-performing assets to loans plus
foreclosed properties was 2.66% at March 31, 1995, down from 3.60% at December
31, 1994 and slightly higher than the 2.33% at March 31, 1994. The Bank's
portfolio of classified assets declined to $12.0 million, or 5.37% of total
assets, at March 31, 1995, from $13.1 million or 5.87% of total assets at
December 31, 1994 and $10.9 million or 5.57% of total assets at March 31, 1994.
The reserve for loan losses was $2.4 million at March 31, 1995, compared with
$2.9 million at December 31, 1994 and $2.0 million at March 31, 1994. The
provision for loan losses was $431,000 for the first quarter of 1995, an
increase of $196,000 over the first quarter of 1994. Net charge-offs were $1.0
million for the first quarter of 1995, compared to $544,000 for the first
quarter of 1994 (primarily related to a $614,000 charge-off on an unsecured
loan). The Bank is aggressively pursuing collection on this debt, however, for
regulatory purposes it must be charged-off and when collected, it will be
accounted for as a recovery. The ratio of the reserve for loan losses to non-
performing assets was 78% at March 31, 1995 compared with 58% at December 1994
and 66% at March 31, 1994.
Shareholders' equity increased $318,000 to $18.4 million, or 7.87% of assets, at
March 31, 1995 from $18.0 million or 8.08% of assets at December 31, 1994. The
decline in the ratio was due to the growth in earning assets in the first
quarter of 1995.
CUNB's Tier 1 and Total Risk-based capital ratios were 10.1% and 11.4% at March
31, 1995, respectively, compared with 10.8% and 12.1% at December 31, 1994,
respectively. The Leverage ratio declined slightly to 8.2% at March 31, 1995
from 8.4% at December 31, 1994, reflecting the increase in average quarterly
assets in combination with the earnings for the first quarter of 1995. CUNB's
Risk-based capital and Leverage ratios, as well as those of the bank, exceed the
ratios for a well-capitalized financial institution as defined in FDICIA under
the prompt corrective action regulations.
CUNB's common stock closed at $9.00 per share on March 31, 1995, representing
78% of the $11.57 book value per common share, compared with $9.25 per share and
80% of the $11.58 book value per common share at December 31, 1994.
7
<PAGE>
NET INTEREST INCOME
The following are the Bank's average balance sheet, net interest income and
interest rates for the periods presented:
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994 March 31, 1994
-----------------------------------------------------------------------------------------
Avg. Avg. Avg.
Avg. Yield/ Avg. Yield/ Avg. Yield/
($ in 000's) Bal. Int. Rate Bal. Int. Rate Bal. Int. Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (2) (4) $146,385 $3,799 10.38% $135,073 $3,513 10.40% $130,528 $2,943 9.02%
Investment securities, short term
investments and cash
equivalents 62,518 964 6.17 65,435 957 5.85 38,079 396 4.16
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets
(3b) 208,903 4,763 9.12 200,508 4,470 8.92 168,607 3,339 7.92
Noninterest-earning assets 14,190 14,381 17,648
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $223,093 $214,889 $186,255
====================================================================================================================================
Interest bearing liabilities:
Deposits:
NOW and MMDA $ 81,598 775 3.80 $ 83,340 708 3.40 $ 66,018 405 2.45
Savings deposits 6,097 48 3.15 7,382 53 2.86 6,050 33 2.20
Time deposits 46,058 543 4.71 41,906 474 4.53 37,021 288 3.11
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 133,753 1,365 4.08 132,628 1,235 3.73 109,089 726 2.66
Borrowings 24,445 367 6.01 17,445 228 5.23 4,120 35 3.40
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 158,198 1,732 4.38 150,073 1,463 3.90 113,209 761 2.69
------ ----- ------ ----- ------ ----
Noninterest-bearing deposits 45,887 45,674 56,058
Other noninterest-bearing liabilities 674 974 425
- -----------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing liabilities 46,561 46,648 56,483
Shareholders' equity 18,334 18,168 16,563
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $223,093 $214,889 $186,255
-------- -------- --------
Net interest income; interest rate
spread (3a) $3,031 4.74% $3,007 5.02% $2,578 5.23%
------ ----- ------ ----- ------ ----
Net margin $ 50,705 5.88% $ 50,435 5.95% $ 55,397 6.20%
====================================================================================================================================
</TABLE>
1) Average balances are computed using an average of the daily balances during
the period.
2) Nonaccrual loans are included in the average balance column; however, only
collected interest on such loans is included in the interest column.
3) The net margin on interest-earning assets during the period equals (3a) the
difference between the interest income on interest-earning assets and
interest expense on interest-bearing liabilities, divided by (3b) average
interest-earning assets for the period.
4) Loan fees totaling $186, $193 and $208 are included in loan interest income
for the periods ended March 31, 1995, December 31, 1994 and March 31, 1994,
respectively.
<TABLE>
<CAPTION>
Three months ended March 31, 1995 Three months ended March 31, 1995
compared with December 31, 1994 compared with March 31, 1994
favorable (unfavorable) favorable (unfavorable)
(Dollars in thousands) Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans $ 293 $ (7) $ 286 $ 412 $ 444 $ 856
Interest on investment
securities, short-term
investments and cash equivalents (45) 51 6 377 191 568
- -------------------------------------------------------------------------------------------------------------------
248 44 292 789 635 1,424
Interest expense on deposits
NOW and MMDA 16 (83) (67) (148) (222) (370)
Savings deposits 10 (5) 5 (1) (14) (15)
Time Deposits (49) (19) (68) (107) (148) (255)
- -------------------------------------------------------------------------------------------------------------------
(23) (107) (130) (256) (384) (640)
Interest expense on borrowings (105) (34) (139) (305) (27) (332)
----- ----- ----- ----- ----- ------
(128) (141) (269) (561) (411) (972)
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $ 120 $ (97) $ 23 $ 228 $ 224 $ 452
----- ----- ----- ----- ----- ------
</TABLE>
(1) In the analysis, the change due to the volume rate variance has been
allocated to volume
8
<PAGE>
CUNB's net interest income for the first quarter of 1995 was $3.0 million, which
was equal to the fourth quarter of 1994, and $453,000 over the first quarter of
1994. When compared to the fourth quarter of 1994, average earning assets
increased by $8.4 million, but the interest rate spread decreased from 5.02% in
the fourth quarter of 1994 to 4.74% in the first quarter of 1995. This was
mainly due to a rising interest rate environment and increased competition for
loans and deposits, which resulted in higher rates being paid on deposit
accounts, and more competitive loan rates offered to our loan clients. The
average yield on loans for the first quarter of 1995 was also affected to some
extent by non-accruing loans, and lower accrued loan fees. It is anticipated
that the pressure on interest margins will continue in 1995.
When compared to the first quarter of 1994, average earning assets at March 31,
1995, increased by $40.3 million or 23.9% in June to August. This was primarily
due to an increase of $32.0 million in the investment securities portfolio
undertaken in 1994, when loan demand was relatively flat. Average loans in the
first quarter of 1995 increased by $15.9 million (12.1%) over the first quarter
of 1994. Average noninterest bearing deposits declined by approximately $10
million from the first quarter of 1994 to the first quarter of 1995. This change
in the asset and liability mix, in addition to the aforementioned increasing
interest rate environment resulted in a reduction in the net interest spread
from 5.23% to 4.74%, and a reduction in the net interest margin from 6.20% to
5.88%. Another factor impacting the net interest spread and margin was the
Company's increased investment in held-to-maturity securities, which improved
net interest income but reduced the net interest spread and margin. The held-
to-maturity securities were purchased in the third and fourth quarter of 1994 to
increase the Bank's earning asset base during a period where loan volume was
relatively flat. The impact of this on the spread and margin will decline as
the loan portfolio increases.
The Company provides client services to several of its non-interest bearing
demand deposit customers. The amount of credit available to clients is based on
a calculation of their average non-interest bearing deposit balance, adjusted
for float and reserves, multiplied by an earnings credit rate, generally the 90-
day T-Bill rate. The credit can be utilized to pay for services including
messenger service, account reconciliation and other similar services. If the
services provided exceed the available credit, the customer is charged for the
difference.
The impact of this on the Company's net interest spread and net yield on
interest earning assets would have been as follows:
<TABLE>
<CAPTION>
March 30, December 31, March 30,
1995 1994 1994
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing demand deposits $45,887 $45,674 $56,058
Client Service expense 88 86 107
Client Service cost annualized .78% .75% .77%
Impact on Net Yield
- -------------------
Net yield on interest earning assets 5.88% 5.95% 6.20%
Impact on client services (.17) (.17) (.34)
------- ------- -------
Adjusted net yield (1) 5.71% 5.78% 5.94%
======= ======= =======
</TABLE>
(1) Non-interest bearing liabilities are included in cost of funds calculation
to determine adjusted spread.
The negative impact on the net yield on interest earning assets is caused by
off-setting net interest income by the cost of client service expenses, which
reduces the yield on interest earning assets. The cost for
9
<PAGE>
client service expense is trending down and reflects the Company's efforts in
the management of client service expense.
The trend of interest rates in the economy continues to move upward through the
first quarter of 1995 and it is anticipated this trend will continue through
1995, as the Federal Reserve attempts to control inflation, while not disrupting
the slow and steady economic growth occurring in most areas of the United States
economy. If the interest rate trends continue upward at a slow and steady pace,
the Bank's net interest margin should remain relatively stable and the credit
risk associated with higher borrowing rates should not significantly impact
CNB's earnings.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is measured as the difference between the volumes of
assets and liabilities in the Bank's current portfolio that are subject to
repricing at various intervals; one day or immediate, two days to six months;
seven to twelve months, one to three years, three to five years, over five years
and on a cumulative basis. Allocations of assets and liabilities including
noninterest bearing sources of funds, to specific periods are based upon
management's assessment of contractual or anticipated repricing characteristics.
The differences between the volumes of assets and liabilities are known as
sensitivity gaps. The following table shows interest sensitivity gaps for
different intervals as of March 31, 1995:
<TABLE>
<CAPTION>
INTEREST SENSITIVITY REPORT
CUPERTINO NATIONAL BANK Repricing Periods
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Total Total
Day Months Months > 1 Year > 3 Years Rate Non-Rate
One 1-6 7-12 to 3 Yrs to 5 Yrs >5 Years Sensitive Sensitive Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash & due from Banks $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 18,416 $ 18,416
Investment securities -- 8,751 5,550 14,966 8,157 22,518 59,892 944 60,836
Loans 124,756 5,025 694 6,908 3,038 4,433 144,854 3,306 148,160
Other assets -- -- -- -- -- -- -- 8,895 8,895
Loan loss & unearned fees -- -- -- -- -- -- -- (3,102) (3,102)
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets 124,756 13,776 6,194 21,874 11,195 26,951 204,746 28,459 233,205
===================================================================================================================================
Liabilities & equity:
Deposits
Demand -- -- -- -- -- -- -- 53,615 53,615
NOW, MMDA, and Savings 89,937 -- -- -- -- -- 89,937 -- 89,937
Time deposits -- 43,045 3,014 203 25 -- 46,287 -- 46,287
Other borrowed funds 25,219 -- -- -- -- -- 25,219 -- 25,219
Other liabilities -- -- -- -- -- -- -- 1,185 1,185
Shareholder's equity -- ----- -- -- -- -- -- 16,962 16,962
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liability & Equity 115,156 43,045 3,014 203 25 -- 161,443 71,762 $233,205
===================================================================================================================================
Total asset GAP
GAP $ 9,600 $(29,269) $ 3,180 $21,672 $11,170 $26,951 $ 43,303 $(43,303)
-------- -------- -------- ------- ------- ------- -------- --------
Cumulative GAP $ 9,600 $(19,669) $(16,489) $ 5,183 $16,353 $43,303 $ 43,303 $ 0
-------- -------- -------- ------- ------- ------- -------- --------
Cumulative GAP/Total
assets 4.11% -8.43% -7.06% 2.22% 7.01% 18.55% 18.55% 0%
</TABLE>
The management of interest rate sensitivity, or interest rate risk management,
is a function of the repricing characteristics of the Bank's portfolio of assets
and liabilities. These repricing characteristics are subject to changes in
interest rates either as replacement, repricing or maturity during the life of
the instruments. Interest rate risk management focuses on the maturity
structure of assets and liabilities and their repricing characteristics during
periods of changes in market interest rates. Effective interest rate risk
management seeks to ensure that both assets and liabilities respond to changes
in interest rates within an acceptable time frame, thereby minimizing the effect
of interest rate movements on net interest income.
10
<PAGE>
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing of
both the asset and its supporting liability can remain the same, thus impacting
net interest income. This characteristic is referred to as a basis risk and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity table above. These prepayments may have significant effects on the
Bank's net interest margin. Because of these factors, the interest sensitivity
gap report may not provide a complete assessment of the Bank's exposure to
changes in interest rates.
The Bank currently has a negative cumulative GAP position for periods up to one
year, and a positive cumulative GAP thereafter. A positive cumulative GAP
position would be expected to provide increased net interest income during
periods of rising interest rates and would decrease net income during periods of
falling rates. While the Company's current negative one year GAP position
would indicate net interest income will decrease during periods of rising
interest rates, the actual impact would be an increase to net interest income.
The primary reason this occurs is the lagging effect between the repricing
characteristics of the Bank's interest earning assets and interest bearing
liabilities. In a simulation analysis on the impact of rising interest rates,
the rates on the Bank's interest bearing liabilities reprice at a slower pace
than its assets, thus providing positive net interest income when interest rates
increase.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
Quarter Ended
- -----------------------------------------------------------------------------------------------------
March 31, December 31, September 30 , June 30, March 31,
(in thousands) 1995 1994 1994 1994 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gain on sale of mortgage loans $ 85 $ 218 $ 222 $ 128 $ 425
Loan fees 20 78 39 25 135
Trust fees 156 146 163 142 142
Gain on sale of SBA loans 105 343 151 79 111
Depositor service fees 71 64 69 65 69
Other 56 59 57 75 75
- -----------------------------------------------------------------------------------------------------
Total other income $ 493 $ 908 $ 701 $ 514 $ 957
- -----------------------------------------------------------------------------------------------------
</TABLE>
Non-interest income was $493,000 for the first quarter of 1995, a decrease of
$415,000 from the fourth quarter of 1994, and a decrease of $464,000 from the
first quarter of 1994.
Gains on the sale of mortgage loans declined throughout 1994 and are one of the
primary reasons for the decline in other income in the first quarter of 1995.
Gains on the sale of loans decreased $171,000 versus the fourth quarter of 1994
and $346,000 versus the first quarter of 1994. Since the decline in gain on
sale of mortgage loans has continued since early 1994, the Bank determined it
was in the best interest of the shareholders to close the mortgage operations
effective March 31, 1995.
Additionally, loan fees have decreased $58,000 versus the fourth quarter of
1995, and $115,000 versus the first quarter of 1994, as loan documentation
income has been reduced due to competitive pressure in the Bank's market area.
11
<PAGE>
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
Quarter Ended
- -------------------------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(in thousands) 1995 1994 1994 1994 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $1,635 $1,270 $1,397 $1,537 $1,520
Occupancy and equipment 396 372 362 349 319
Professionals services
legal settlement 204 557 109 104 141
FDIC insurance and assessments 125 127 127 115 115
Supplies, telephone and postage 128 119 110 120 100
Data processing 33 29 32 30 20
Client services 88 86 86 95 107
Other real estate, net 41 7 9 (1) 34
Other 277 208 276 217 240
- -------------------------------------------------------------------------------------------------------
Total operating expenses $2,927 $2,775 $2,508 $2,566 $2,596
- -------------------------------------------------------------------------------------------------------
</TABLE>
Non-interest expenses were $2.9 million for the first quarter of 1995, an
increase of $0.2 million from the fourth quarter of 1994, and $0.3 million from
the first quarter of 1994.
Compensation and benefits expense increased $365,000 versus the fourth quarter
of 1994, and $115,000 from the comparable quarter of 1994, $32,000 related to
the closing of the mortgage division, as well as $57,000 of severance for one
senior Bank officer. The balance of $276,000 versus the fourth quarter of
1994, and $26,000 versus the first quarter of 1994, is attributable to growth in
staffing, incentive increases, and merit increases.
Professional services expense increased $63,000 compared to the first quarter of
1994 primarily due a one time $120,000 charge related to merger discussions
with South Valley National Bank, partially offset by lower legal expense in the
first quarter of 1995. When compared to the fourth quarter of 1994,
professional services expense decreased $353,000 as legal expenses declined due
to non-recurring legal accruals recorded in the fourth quarter of 1994.
INCOME TAXES
The provision for income taxes for the first quarter of 1995 was $60,000
compared with $254,000 for the same quarter a year ago. CUNB did not require a
valuation allowance related to its deferred tax asset.
12
<PAGE>
FINANCIAL CONDITION
Capitalization
The Company's and the Bank's risk-based capital and leverage ratios were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CAPITALIZATION March 31, December 31, September 30, June 30, March 31,
(in thousands) 1995 1994 1994 1994 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED COMPANY
- --------------------
GAAP EQUITY RATIO:
GAAP equity $ 18,355 $ 18,037 $ 17,872 $ 17,406 $ 16,902
Total assets 223,261 216,318 216,318 212,296 195,587
Equity to assets ratio 7.87% 8.34% 8.26% 8.20% 8.64%
LEVERAGE RATIO:
GAAP equity $ 18,355 $ 18,037 $ 17,872 $ 17,406 $ 16,902
Average quarterly assets 223,093 214,889 206,467 185,988 185,133
Leverage capital ratio 8.23% 8.39% 8.66% 9.36% 9.13%
Minimum requirement 3.00% 3.00% 3.00% 3.00% 3.00%
Well capitalized requirement 5.00% 5.00% 5.00% 5.00% 5.00%
RISK-BASED CAPITAL RATIOS:
Tier I capital $ 18,355 $ 18,037 $ 17,872 $ 17,406 $ 16,902
Tier II capital 2,268 2,082 2,086 1,951 1,967
- -----------------------------------------------------------------------------------------------------------
Total risk-based capital $ 20,623 $ 20,119 $ 19,958 $ 19,357 $ 18,869
===========================================================================================================
Risk-based assets 181,474 166,592 166,889 161,590 157,379
Tier I risk-based capital ratio 10.11% 10.83% 10.71% 10.77% 10.74%
Minimum requirement 4.00% 4.00% 4.00% 4.00% 4.00%
Well capitalized requirement 6.00% 6.00% 6.00% 6.00% 6.00%
===========================================================================================================
Total Risk-based Capital Ratio 11.36% 12.08% 11.96% 11.98% 11.99%
Minimum requirement 8.00% 8.00% 8.00% 8.00% 8.00%
Well capitalized requirement 10.00% 10.00% 10.00% 10.00% 10.00%
BANK ONLY
- ---------
Gaap equity ratio:
GAAP equity $ 16,962 $ 16,851 $ 16,624 $ 16,168 $ 15,921
Total assets 233,205 222,839 216,312 212,276 195,581
Equity to assets ratio 7.27% 7.56% 7.69% 7.62% 8.14%
Leverage ratio:
GAAP equity $ 16,962 $ 16,851 $ 16,624 $ 16,168 $ 15,921
Regulatory Accounting
Adjustment (65) (65) (57) (48) (80)
- -----------------------------------------------------------------------------------------------------------
Regulatory Equity $ 16,897 $ 16,786 $ 16,567 $ 16,120 $ 15,841
- -----------------------------------------------------------------------------------------------------------
Average quarterly assets $222,901 $214,785 $206,367 $185,888 $185,033
Leverage capital ratio 7.58% 7.82% 8.03% 8.67% 8.56%
Minimum requirement 3.00% 3.00% 3.00% 3.00% 3.00%
Well capitalized requirement 5.00% 5.00% 5.00% 5.00% 5.00%
Risk-based Capital Ratios:
Tier I capital $ 16,897 $ 16,786 $ 16,567 $ 16,120 $ 15,841
Tier II capital 2,268 2,079 2,084 1,951 1,967
- -----------------------------------------------------------------------------------------------------------
Total risk-based capital $ 19,165 $ 18,865 $ 18,651 $ 18,071 $ 17,808
===========================================================================================================
Risk-based assets $181,417 $166,288 $166,691 $161,571 $157,374
Tier I risk-based capital ratio 9.31% 10.09% 10.01% 10.02% 10.07%
Minimum requirement 4.00% 4.00% 4.00% 4.00% 4.00%
Well capitalized requirement 6.00% 6.00% 6.00% 6.00% 6.00%
Total Risk-based Capital Ratio 10.56% 11.34% 11.19% 11.18% 11.32%
Minimum requirement 8.00% 8.00% 8.00% 8.00% 8.00%
Well capitalized requirement 10.00% 10.00% 10.00% 10.00% 10.00%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
CUNB's Tier 1 and Total Risk-based capital ratios were 10.10% and 11.35% at
March 31, 1995, respectively, compared with 10.83% and 12.08% at December 31,
1994, and 10.74% and 11.99% respectively at March 31, 1994. The leverage
ratio, a measure of Tier 1 capital to average quarterly assets, was 8.26% at
March 31, 1995 compared to 8.39% at December 31, 1994 and 9.13% at March 31,
1994. To be considered well capitalized as defined under the regulatory
framework for prompt corrective action, an institution must have a risk-based
Tier 1 capital ratio of 6.0% or greater, a risk-based total capital ratio of 10%
or greater and a leverage ratio of 5.0% or greater. CUNB's risk-based capital
and leverage ratios have exceeded the ratios for a well-capitalized financial
institution under FDICIA's prompt corrective action regulations for all periods
presented.
The Bank's Tier 1 and Total Risk-based capital ratios were 9.30% and 10.55% at
March 31, 1995, respectively, compared with 10.09% and 11.34% at December 31,
1994, and 10.07% and 11.32% respectively at March 31, 1994. The leverage
ratio, a measure of Tier 1 capital to average quarterly assets, was 7.61% at
March 31, 1995 compared to 7.82% at December 31, 1994 and 8.56% at March 31,
1994. To be considered well capitalized as defined under the regulatory
framework for prompt corrective action, an institution must have a risk-based
Tier 1 capital ratio of 6.0% or greater, a risk-based total capital ratio of 10%
or greater and a leverage ratio of 5.0% or greater. The Bank's risk-based
capital and leverage ratios have exceeded the ratios for a well-capitalized
financial institution for all periods presented above.
The company and the Bank seek to maintain capital ratios at levels that will
maintain their status as a well-capitalized financial institution.
LIQUIDITY
Liquidity is defined as the ability of a company to convert assets in cash or
cash equivalents without significant loss, and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the Bank's
ability to meet the day-to-day cash flow requirements of the Bank's clients who
either want to withdraw funds or require funds to meet their credit needs.
Through an Asset Liability Management Committee, the Bank actively monitors its
commitments to fund loans, as well as the composition and maturity schedule of
its loan and deposit portfolios. To manage its liquidity, the Bank maintains
$17 million in inter-bank Fed Fund purchase lines, as well as $100 million in
institutional deposit or brokered deposit lines, and $60 million in reverse
repurchase lines.
14
<PAGE>
PROVISION AND RESERVE FOR LOAN LOSSES
The following schedule details the activity in the Bank's reserve for loan
losses and related ratios for the period involved:
<TABLE>
<CAPTION>
Quarter ended
- -----------------------------------------------------------------------------------------------------------
March 31, December 30, September 30, June 30, March 31,
(in millions) 1995 1994 1994 1994 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at
beginning of period $ 2,918 $2,286 $1,951 $1,989 $2,247
Provision charged to operations 431 785 450 150 235
Loans charged off (1,001) (153) (123) (191) (544)
Loan recoveries 11 -- 8 3 51
- -----------------------------------------------------------------------------------------------------------
Reserve for loan losses at
end of period $ 2,359 $2,918 $2,286 $1,951 $1,989
===========================================================================================================
Ratio of:
Reserve for loan losses to loans 1.60% 2.09% 1.66% 1.55% 1.53%
Reserve for loan losses to
Nonperforming assets 78.66% 58.47% 50.67% 49.82% 65.82%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses was $431,000 in the first quarter of 1995, down
substantially from $785,000 in the fourth quarter of 1994, and slightly higher
than the $235,000 in the first quarter of 1994. Net charge-offs were $990,000
for the first quarter of 1995, compared to $153,000 in the fourth quarter of
1994, and $493,000 in the first quarter of 1994. On an annualized basis, net
charge-offs were 2.72% of average loans in the first quarter of 1995, compared
to 0.45% of average loans in the fourth quarter of 1994, and 1.51% of average
loans in the first quarter of 1994.
Management considers changes in the size and character of the loan portfolio,
changes in non-performing and past due loans, historical loan loss experience,
and the existing and prospective economic conditions when determining the
adequacy of the loan loss reserve. The reserve for loan losses was $2.4 million
at March 31, 1995, compared with $2.9 million at December 31, 1994, and $2.0
million at March 31, 1994.
The ratio of the reserve for loan losses to total loans was 1.60% at March 31,
1995, compared with 2.09% at December 31, 1994, and 1.53% at March 31, 1994.
The ratio of the reserve for loan losses to total nonperforming assets,
including foreclosed real estate, was 78.66% at March 31, 1995, compared to
58.47% at December 31, 1994 and 65.82% at March 31, 1994.
NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AND FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(in millions) 1995 1994 1994 1994 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans $2,743 $3,244 $3,162 $3,694 $ 705
Restructured loans -- -- -- -- --
Accruing loans past due 90 days or more 256 1,371 762 10 1,662
- --------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 2,999 4,615 3,924 3,704 2,367
OREO 0 375 587 212 593
------ ------ ------ ------ ------
Total nonperforming assets $2,999 $4,990 $4,511 $3,916 $2,960
====================================================================================================================
Total nonperforming loans to total assets 1.29% 2.24% 2.08% 1.84% 1.51%
====================================================================================================================
</TABLE>
15
<PAGE>
Total nonperforming assets were $3.0 million at March 31, 1995, compared with
$5.0 million at December 31, 1994, and $3.0 million at March 31, 1994.
Nonperforming loans, which includes non-accruing loans, restructured loans, and
accruing loans which are past due 90 days or more, were $3.0 million at March
31, 1995, compared with $4.6 million at December 31, 1994, and $2.4 million at
March 31, 1994.
Accruing loans past due 90 days or more, which are well secured and in the
process of collection, were $0.3 million at March 31, 1995, compared with $1.4
million at December 31, 1994, and $1.7 million at March 31, 1994. It is the
Bank's policy to discontinue the accrual of interest when the ability of a
borrower to repay principal or interest is in doubt, or when a loan is past due
90 days or more, except when, in management's judgment, the loan is well secured
and in the process of collection.
At March 31, 1994 the Bank had no foreclosed properties, compared with $375,000
at December 31, 1994, and $593,000 at March 31, 1994. The decrease in
foreclosed property reflects management's efforts to actively market and dispose
of any properties so acquired.
The Bank has an active credit administration function which includes, in
addition to internal reviews, the regular use of an outside loan review firm to
review the quality of the loan portfolio. Senior management, and an internal
asset review committee actively review problem loans on a regular basis.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on industrial concerns, primarily because its assets and
liabilities consist largely of monetary items. The most direct effect of
inflation on a financial institution is fluctuation in interest rates. However,
net interest income is affected by the spread between interest rates received on
assets and those paid on interest bearing liabilities, rather than the absolute
level of interest rates. Additionally, there may be some upward pressure on the
Company's operating expenses, such as increases in occupancy expenses based on
consumer price indices. In the opinion of management, inflation has not had
material effect on the operating results of the Company.
PART II. OTHER INFORMATION
ITEM 1 - Legal Proceedings
The Company has previously reported on pending litigation brought against the
Bank by Sumitomo Bank ("Sumitomo"), as trustee for the California Dental Guild
Mortgage Fund II. The complaint seeks monetary damages of $2.2 million. While
no trial date is currently scheduled, discovery for this litigation is
substantially complete, and the Bank and Sumitomo have recently been engaged in
active settlement negotiations. There is no assurance that a settlement will be
reached, and no assurance that if the matter goes to trial, what the outcome
will be as litigation is subject to inherent uncertainties, especially in cases
such as this where issues of trustee standards of care may be decided by a lay
jury.
The Bank believes, based on advice of counsel, that it is probable that
insurance coverage for this lawsuit is available to the Bank under both a $2
million director and officer liability policy, as well as a $1 million
professional liability policy. The Bank has recently initiated litigation
against the insurance carriers in pursuit of such coverage, and against the
agent from whom the Bank obtained the policies.
16
<PAGE>
If a settlement were to be reached, the Company cannot presently predict what
the after tax cost of settlement will be, nor whether or to what extent any
amount paid in settlement will be recovered under the insurance policies. The
Company believes, however, based on the advice of its counsel, that an
acceptable settlement can be negotiated which would be within the aggregate
policy limits, and which should be substantially and perhaps completely
recoverable under the insurance policies. The Company therefore believes that
the Bank's litigation reserves, together with the insurance coverage, should be
adequate to cover a settlement without causing a material adverse impact on the
financial condition of the Bank. However, because of the advanced stage of the
Sumitomo litigation relative to the insurance coverage litigation recently
commenced by the Bank, a settlement of the former may be reached before
resolution of the latter; consequently, the impact of any settlement on the
Bank's financial statements may be greater at the outset than it actually will
be once the insurance coverage issues are resolved.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K for the quarter covered by this report - None
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CUPERTINO NATIONAL BANCORP
(REGISTRANT)
s/ STEVEN C. SMITH
- ---------------------------
STEVEN C. SMITH
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER
& ACTING CHIEF OPERATING OFFICER
DATE: MAY 11, 1995
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR PERIOD ENDED 3/31/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 18,416
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 59,892
<INVESTMENTS-MARKET> 58,900
<LOANS> 145,157
<ALLOWANCE> 2,359
<TOTAL-ASSETS> 233,261
<DEPOSITS> 188,500
<SHORT-TERM> 25,220
<LIABILITIES-OTHER> 1,186
<LONG-TERM> 0
<COMMON> 15,113
0
0
<OTHER-SE> 3,242
<TOTAL-LIABILITIES-AND-EQUITY> 233,261
<INTEREST-LOAN> 3,799
<INTEREST-INVEST> 935
<INTEREST-OTHER> 29
<INTEREST-TOTAL> 4,763
<INTEREST-DEPOSIT> 1,365
<INTEREST-EXPENSE> 1,732
<INTEREST-INCOME-NET> 3,031
<LOAN-LOSSES> 431
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,927
<INCOME-PRETAX> 166
<INCOME-PRE-EXTRAORDINARY> 106
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
<YIELD-ACTUAL> .058
<LOANS-NON> 2,743
<LOANS-PAST> 256
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,918
<CHARGE-OFFS> 1,001
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 2,359
<ALLOWANCE-DOMESTIC> 2,359
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
