<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 June 30, 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 July 19, 1995:
1,602,100.
This report contains a total of 18 pages.
1 of 18
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CUPERTINO NATIONAL BANCORP
INDEX
<TABLE>
<CAPTION>
DESCRIPTION PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED BALANCE SHEETS AS OF
June 30, 1995 AND December 31, 1994................ 3
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS AND SIX MONTHS ENDED
June 30, 1995 AND 1994............................. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
June 30, 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.................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................... 18
SIGNATURES......................................... 18
</TABLE>
2 of 18
<PAGE>
PART I. FINANCIAL INFORMATION
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited...Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 12,730 $ 9,326
Federal funds sold 19,500 10,400
--------------------------------------------------------------------------------------
Cash and cash equivalents 32,230 19,726
Other short-term investments -- --
Investment securities
Held to maturity 55,362 59,573
(Market value $55,631 at June 30, 1995;
$57,257 at December 31, 1994)
Available for sale 2,495 --
(Cost 2,491 at June 30, 1995)
Other securities 951 933
--------------------------------------------------------------------------------------
Total investment securities 58,808 60,506
Loans:
Commercial 79,100 81,695
Real estate-construction 21,825 18,117
Real estate-term 18,349 13,133
Consumer and other 26,150 21,059
Deferred loan fees and discounts (600) (847)
--------------------------------------------------------------------------------------
Loans 144,824 133,157
Allowance for credit losses (2,454) (2,918)
--------------------------------------------------------------------------------------
Loans, net 142,370 130,622
Loans held for sale -- 5,383
--------------------------------------------------------------------------------------
Total loans 142,370 135,622
Premises and equipment, net 1,539 1,434
Accrued interest receivable and other assets 8,632 5,856
--------------------------------------------------------------------------------------
TOTAL $243,579 $223,144
======================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 61,086 $ 53,880
NOW 9,230 8,331
Money Market Demand Accounts 84,360 73,623
Savings 4,630 5,951
Other time certificates 36,581 19,417
Time certificates, $100 and over 19,264 25,520
--------------------------------------------------------------------------------------
Total deposits 215,151 186,722
Short-term borrowings 8,654 17,256
Accrued interest payable and other liabilities 2,152 1,129
--------------------------------------------------------------------------------------
TOTAL LIABILITIES 225,957 205,107
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: 1,599,928 at
June 30, 1995 and 1,557,008 at December 31, 1994 15,190 14,901
Retained earnings 2,432 3,136
--------------------------------------------------------------------------------------
Total shareholders' equity 17,622 18,037
--------------------------------------------------------------------------------------
TOTAL $243,579 $223,144
======================================================================================
</TABLE>
See notes to consolidated financial statements
3 of 18
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited...dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1995 1994 1995 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 4,021 $ 2,920 $7,820 $ 5,863
Interest on investment securities:
Taxable 920 399 1,837 734
Non-taxable 18 28 36 56
------------------------------------------------------------------------------------------------------
Total Investment securities 938 427 1,873 790
Other interest income 108 80 137 113
------------------------------------------------------------------------------------------------------
Total interest income 5,067 3,427 9,830 6,766
Interest expense:
Interest on deposits 1,625 840 2,991 1,566
Other interest expense 288 13 655 48
------------------------------------------------------------------------------------------------------
Total interest expense 1,913 853 3,646 1,614
------------------------------------------------------------------------------------------------------
Net interest income 3,154 2,574 6,184 5,152
Provision for loan losses 85 150 516 385
------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 3,069 2,424 5,668 4,767
Other income:
Gain on sale of mortgage loans 51 128 137 553
Other loan fees 29 25 48 160
Trust Fees 135 142 291 284
Gain on sale of SBA loans 45 79 150 190
Depositor service fees 67 65 138 134
Other 80 75 137 150
------------------------------------------------------------------------------------------------------
Total other income 407 514 901 1,471
Operating expenses:
Compensation and benefits 1,600 1,537 3,236 3,057
Occupancy and equipment 392 349 788 668
Legal settlement & costs 1,700 -- 1,700 --
Professional services 230 104 435 245
FDIC insurance and regulatory assessments 135 115 260 231
Client services 91 95 179 202
Other real estate, net (7) (1) 34 33
Other 459 367 896 726
------------------------------------------------------------------------------------------------------
Total operating expenses 4,600 2,566 7,528 5,162
------------------------------------------------------------------------------------------------------
Income before income tax expense (1,124) 372 (959) 1,076
Income tax (benefit) expense (470) 126 (411) 380
------------------------------------------------------------------------------------------------------
Net (loss) income $ (654) $ 246 $ (548) $ 696
------------------------------------------------------------------------------------------------------
Net (loss) income per common and
common equivalent share $(.39) $.15 $(.33) $.43
------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
4 of 18
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited...dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1995 1994
-----------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS-OPERATING ACTIVITIES:
Net income $ (548) $ 696
Reconciliation of net income to net
cash from operations:
Provision for credit losses 516 385
Depreciation and amortization 293 266
Accrued interest receivable and other assets (894) 122
Accrued interest, expenses and other liabilities 1,023 243
Net change in deferred loan fees (247) 63
Proceeds from sales of loans held for sale 16,364 66,339
Origination of loans held for resale (10,981) (61,951)
Other real estate owned, net 17 25
-----------------------------------------------------------------------------------------
Operating cash flows, net 5,543 6,188
CASH FLOWS - INVESTING ACTIVITIES:
Maturities of investment securities
Held-to-maturity 6,237 5,649
Available-for-sale -- --
Purchase of investment securities
Held-to-maturity (2,045) (20,972)
Available-for-sale (2,495) --
Net change in loans (12,400) 2,850
Sale of other real estate owned 358 381
Purchase of life insurance policies (2,257) --
Purchase of premises and equipment (397) (257)
Other net 5 45
-----------------------------------------------------------------------------------------
Investing cash flows, net (12,994) (12,304)
CASH FLOWS - FINANCING ACTIVITIES:
Non-interest bearing deposits, net 7,206 (1,975)
Interest bearing deposits, net 21,223 14,177
Short-term borrowings, net (8,603) 6,090
Stock issued to employees 289 361
Cash dividends (160) (3)
-----------------------------------------------------------------------------------------
Financing cash flows, net 19,955 18,650
-----------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 12,504 12,534
Cash and cash equivalents at beginning of period 19,726 14,350
-----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 32,230 $ 26,884
=========================================================================================
</TABLE>
See notes to consolidated financial statements
5 of 18
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1995
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Cupertino National Bancorp ("CUNB" or the "Company") and its
subsidiary, Cupertino National Bank & Trust (the "Bank"). 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
June 30, 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 June 30, 1995, the recorded
investment in loans for which impairment has been recognized in accordance with
SFAS No. 114 totaled $2.4 million, with a corresponding valuation allowance of
$547,000. For the quarter and six months ended June 30, 1995, the average
recorded investment in impaired loans was approximately $2.5 million and $2.9
million, respectively. The Company did not recognize interest on impaired loans
during the second quarter or the six months ended June 30, 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 1,687,100 and 1,640,000 for the three
months ended June 30, 1995 and 1994, respectively and 1,674,000 and 1,628,600
for the six months ended June 30, 1995 and 1994, respectively.
4. CONTINGENCIES
In July 1995, the Company settled a lawsuit for $1,020,000 (net of tax) brought
against the Bank by the successor trustee of California Dental Guild Mortgage
Fund II. The Company believes that it is highly probable that insurance
coverage for a significant portion of this settlement is available under its
director and officer's liability policy and a professional liability insurance
policy, as well as and the errors and omissions policy of the insurance agent
which sold the Company these policies. The Company's insurance company has
denied the Company's claim for coverage under these policies, and the Company
has initiated litigation against the insurance company as well as the agent from
whom the Company obtained such policies. However, due to the uncertainty
associated with recovery under its claims, the Company has reflected the
$1,020,000 expense (net of tax) of the legal settlement in second quarter 1995
earnings.
6 of 18
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CUNB reported a net loss for the second quarter of 1995 of $(654,000), or $(.39)
per common and common equivalent share, compared to net income of $246,000, or
$.15 per common and common equivalent share, reported in the second quarter of
last year. The net loss in the recent quarter was largely due to the settlement
of litigation that was pending against CUNB, as discussed below. Return on
average assets annualized for the second quarters of 1995 and 1994 were (1.14%)
and .53%, respectively, while return on average common equity annualized was
(14.26%) for the second quarter of 1995, compared with 5.70% for the second
quarter of 1994.
The earnings for the second quarter of 1995 were adversely effected by an
accrual of $1,020,000 (net of tax) for the settlement of trust department
litigation with Sumitomo Bank, which was acting as successor trustee for the
California Dental Guild Mortgage Fund II. The Company believes, based on the
advice of counsel, that it is highly probable that insurance coverage for a
significant portion of the settlement amount is available under its director and
officer insurance policy and its professional liability insurance policy, as
well as the errors and omissions policy of its insurance agent. The Company's
insurance company has denied the Company's claim for coverage under these
policies, and the Company has initiated litigation against the insurance
companies who issued the policies as well as the agent from whom the Company
obtained such policies. For a more complete discussion see Part II Item 1 -
Legal Proceedings. Excluding this charge, second quarter 1995 earnings would
have been $366,000, with a return on average assets and return on average
shareholder's equity of .64% and 7.98%, respectively.
For the six months ended June 30, 1995, the Company posted a net loss of
$(548,000) or $(.33) per common and equivalent share, compared to net income of
$696,000 or $.43 per common and equivalent share for the same period in 1994.
The annualized return on average assets and return on average equity for the
first six months of 1995 were (0.49%) and (5.98%), respectively, compared to
0.75% and 8.28% for the comparable period in 1994. Net income of $106,000 for
the first quarter of 1995 included approximately $275,000 in non-recurring
expenses (net of tax) related to the closing of the Bank's mortgage operations,
the costs incurred related to canceled merger discussions, and severance
payments to a former executive officer. Excluding the legal settlement charge
and related costs, as well as the non-recurring charges from the first quarter,
the net income for the six months ended June 30, 1995 would have been $747,000,
with an adjusted return on average assets and return on average shareholder's
equity of 0.66% and 8.15%, respectively.
Non-performing assets (including nonaccrual loans, loans 90 days past due and
OREO) totaled $3.6 million at June 30, 1995, a decrease of $1.4 million from
December 31, 1994, and a decrease of $0.3 million from June 30, 1994. The ratio
of non-performing assets to loans plus foreclosed properties was 2.48% at June
30, 1995, down from 3.60% at December 31, 1994 and 3.11% at June 30, 1995. The
Bank's portfolio of classified assets declined to $8.7 million, or 3.57% of
total assets, at June 30, 1995, from $13.1 million or 5.86% of total assets at
December 31, 1994 and $10.3 million or 4.88% of total assets at June 30, 1994.
The reserve for loan losses was $2.5 million at June 30, 1995, compared with
$2.9 million at December 31, 1994 and $2.0 million at June 30, 1994. The
provision for loan losses was $85,000 for the second quarter of 1995, a
substantial decrease from the $431,000 recorded in the first quarter of 1995,
and $150,000 recorded in the second quarter of 1994. The reduced provision for
the second quarter was reflective of improved credit quality, as the Company
experienced net recoveries of $10,000 versus net charge-offs of $990,000 in the
first quarter (primarily related to a $614,000 charge-off on an unsecured loan).
For the first six months of 1995, the provision for loan losses was $516,000, an
increase of $131,000 over the first half of 1994. Net charge-offs were $980,000
for the first six months of 1995, compared to $681,000 for the first half of
1994. The ratio of the reserve for loan losses to
7 of 18
<PAGE>
non-performing assets was 68.3% at June 30, 1995 compared with 58.5% at December
31, 1994 and 49.8% at June 30, 1994.
Shareholders' equity decreased $733,000 to $17.6 million, or 7.23% of assets, at
June 30, 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 assets in the fist six months of
1995, coupled with the reduction in equity due primarily to the legal settlement
charge recorded in the second quarter of 1995, and a dividend payment made to
shareholders during the quarter.
CUNB's Tier 1 and Total Risk-based capital ratios were 9.6% and 10.9% at June
30, 1995, respectively, compared with 10.8% and 12.1% at December 31, 1994,
respectively. The Leverage ratio declined to 7.6% at June 30, 1995 from 8.4% at
December 31, 1995. These declines reflect the growth in assets in combination
with the legal settlement charge and dividend payment during the second quarter
of 1995. At June 30, 1995, CUNB's Risk-based capital and Leverage ratios, as
well as those of the Bank, exceeded the ratios for a well-capitalized financial
institution as defined in FDICIA under the prompt corrective action regulations.
The Company will seek to maintain its well capitalized position to ensure
flexibility in its operations.
CUNB's common stock closed at $9.375 per share on June 30, 1995, representing
85% of the $11.02 book value per common share, compared with $9.00 per share and
78% of the $11.57 book value per common share at March 31, 1995.
NET INTEREST INCOME
The following are the Company's average balance sheet, net interest income and
interest rates for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
June 30, 1995 March 31, 1995 June 30, 1994
----------------------------- -------------------------------- -----------------------------
Avg. Avg. Avg.
Avg. Yield/ Avg. Yield/ Avg. Yield/
($ 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) $145,249 $ 4,021 11.07% $141,558 $ 3,799 10.73% $125,566 $2,925 9.32%
Investment securities,
short term investments
and cash equivalents 67,948 1,046 6.16% 63,092 964 6.11% 45,359 502 4.43%
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets (3b) 213,197 5,067 9.51% 204,650 4,763 9.31% 170,926 3,427 8.02%
Noninterest-earning assets 17,068 13,452 16,046 --
------------------------------------------------------------------------------------------------------------------------------------
Total assets $230,265 $218,102 $186,972 3,427
====================================================================================================================================
Interest bearing liabilities:
Deposits:
NOW and MMDA $ 88,998 $ 903 4.06% $ 80,473 $ 775 3.85% $ 73,393 $ 489 2.67%
Savings deposits 4,759 42 3.51% 5,741 48 3.34% 6,074 37 2.45%
Time deposits 49,188 680 5.53% 42,234 543 5.14% 36,807 314 3.41%
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 142,945 1,625 4.55% 128,448 1,366 4.25% 116,274 840 2.89%
Borrowings 18,414 288 6.26% 24,486 367 6.00% 1,155 13 4.36%
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 161,359 1,913 4.74% 152,934 1,733 4.53% 117,429 853 2.91%
------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 49,365 46,060 52,562
Other noninterest-bearing
liabilities 1,202 773 50
------------------------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing
liabilities 50,567 46,833 52,612
Shareholders' equity 18,339 18,335 16,931
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $230,265 $218,102 $186,972
======== ======== ========
Net interest income;
interest rate spread (3a) $ 3,154 4.76% $ 3,031 4.78% $2,574 5.11%
======== ======== ======
Net margin $ 51,838 5.93% $ 51,716 6.01% $ 54,120 6.04%
====================================================================================================================================
</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 $209, $186, and $211 are included in loan interest income
for the periods ended June 30, 1995, March 31, 1995 and June 30, 1994,
respectively.
8 of 18
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<TABLE>
<CAPTION>
Three months ended June 30, 1995 Three months ended June 30, 1995
compared with March 31, 1995 compared with June 30, 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 $ 102 $ 120 $ 222 $ 544 $ 552 $ 1,096
Interest on investment
securities, short-term
investments and cash equivalents 75 7 82 348 196 544
------------------------------------------------------------------------------------------------------------
177 127 304 892 748 1,640
Interest expense on deposits
NOW and MMDA (86) (42) (128) (158) (256) (414)
Savings deposits 8 (2) 6 11 (16) (5)
Time Deposits (96) (42) (138) (171) (195) (366)
------------------------------------------------------------------------------------------------------------
(174) (86) (260) (318) (467) (785)
Interest expense on borrowings 95 (16) (79) (270) (5) (275)
----- ----- ----- ----- ----- -------
(79) (102) (181) (588) (472) (1,060)
------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $ 98 $ 25 $ 123 $ 304 $ 276 $ 580
===== ===== ===== ===== ===== =======
</TABLE>
(1) In the analysis, the change due to the volume rate variance has been
allocated to volume
CUNB's net interest income for the second quarter of 1995 was $3.2 million, a
$123,000 increase over the first quarter of 1995. When compared to the first
quarter of 1995, average earning assets increased by $8.5 million, while the net
yield on earning assets decreased slightly from 6.01% in the first quarter of
1995 to 5.93% in the second 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 second 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 loan
rates may continue in 1995. However, with the temporary decline of interest
rates implemented by the Federal Reserve, the pressure on deposit rates may be
reduced.
Compared to the second quarter of 1994, average earning assets during the second
quarter of 1995 increased by $42.3 million. This was due to an increase in the
investment securities portfolio undertaken in 1994, when loan demand was
relatively flat, coupled with increased loan demand in the latter part of 1994
and the first half of 1995. Average loans in the second quarter of 1995
increased by $19.6 million (15%) over the second quarter of 1994. The Company's
mix of funding sources shifted toward higher cost short term borrowings in the
latter half of 1994 to finance the increased investment in the securities
portfolio. This increased net interest income but reduced the net interest
spread and margin.
9 of 18
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The following are the Company's average balance sheet, net
interest income and interest rates for the periods presented:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1995 June 30, 1994
-------------------------------- ----------------------------
Avg. Avg.
Avg. Yield/ Avg. Yield/
($ in 000's) Bal. Int. Rate Bal. Int. Rate
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (2) (4) $143,414 $7,820 10.91% $128,033 $5,868 9.17%
Investment securities, short term
investments and cash equivalents 65,533 2,010 6.13% 41,739 898 4.30%
----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets (3b) 208,947 9,830 9.41% 169,772 6,766 7.97%
Noninterest-earning assets 15,270 -- 16,796 --
----------------------------------------------------------------------------------------------------------------------
Total assets $224,217 $9,830 $186,568 6,766
======================================================================================================================
Interest bearing liabilities:
Deposits:
NOW and MMDA $ 84,665 $1,678 3.96% $ 69,726 $ 894 2.56%
Savings deposits 5,247 90 3.42% 6,062 70 2.32%
Time deposits 45,731 1,223 5.35% 36,913 602 3.26%
----------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 135,643 2,991 4.41% 112,701 1,566 2.78%
Borrowings 21,433 655 6.11% 2,316 48 4.11%
----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 157,076 3,646 4.64% 115,017 1,614 2.81%
----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 47,722 54,301
Other noninterest-bearing liabilities 1,082 438
----------------------------------------------------------------------------------------------------------------------
Total noninterest-bearing liabilities 48,804 54,739
Shareholders' equity 18,339 16,813
----------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $224,217 $186,568
======== ========
Net interest income; interest rate spread (3a) $6,184 4.77% $5,152 5.16%
====== ======
Net margin $ 51,871 5.97% $ 54,755 6.12%
=====================================================================================================================
</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 $395 and $441 are included in loan interest income for
the periods ended June 30, 1995, and June 30, 1994, respectively.
<TABLE>
<CAPTION>
Six months ended June 30, 1995
compared with June 30, 1994
favorable (unfavorable)
(Dollars in thousands) Volume Rate Net
----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income on loans $ 1,395 $ 557 $ 1,952
Interest on investment
securities, short-term
investments and cash equivalents 921 191 1,112
----------------------------------------------------------------------------
2,316 748 3,064
Interest expense on deposits
NOW and MMDA (540) (244) (784)
Savings deposits 2 (17) (19)
Time Deposits (428) (193) (621)
----------------------------------------------------------------------------
(970) (454) (1,424)
Interest expense on borrowings (595) (12) (607)
------- ----- -------
(1,565) (466) (2,031)
----------------------------------------------------------------------------
Increase (decrease) in net
interest income $ 726 $ 305 $ 1,033
======= ===== =======
</TABLE>
(1) In the analysis, the change due to the volume rate variance has been
allocated to volume
10 of 18
<PAGE>
For the six month period ended June 30, 1995, the company experienced an
increase in net interest income of $1.0 million when compared to the comparable
period of 1994. This increase was mainly due to the increased volume in the
lending and securities portfolios, and higher interest rates received on these
assets, partly offset by higher interest expense rates on increased volumes of
deposits and other short term borrowings. For the six months ended June 30,
1995, the Company's net interest margin of 5.97% reflected a decline from 6.12%
for the same period in 1994. This again was due to the shift in the Company's
asset and liability mix as discussed above, as well as increased competition for
deposits and loans.
The trend of interest rates in the economy has reversed, and it appears that
interest rates will level off or possibly decline slightly for the remainder of
1995, as the Federal Reserve attempts to control inflation, but achieve a "soft
landing." If the interest rates remain relatively flat, the Bank's net interest
margin should remain relatively stable.
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
cost of the services provided exceeds the available credit, the customer is
charged for the difference.
The impact of this expense on the Company's net interest spread and net yield on
interest earning assets was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $49,365 $52,562 $47,722 $54,301
Client Service expense 91 95 161 202
Client Service cost annualized .74% .72% .67% .74%
Impact on Net Yield
-------------------
Net yield on interest earning assets 5.93% 6.04% 5.97% 6.12%
Impact of client services (.17) (.16) (.16) (.24)
---- ------- ------- -------
Adjusted net yield (1) 5.76% 5.88% 5.81% 5.88%
==== ======= ======= =======
</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 client service
expense has been relatively stable, and reflects the Company's efforts in the
management of client service expense.
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 intervals of (1) one day or immediate, (2) two days to six months,
(3) seven to twelve months, (4) one to three years, (5) three to five years, (6)
over five years and (7) 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
11 of 18
<PAGE>
differences between the volumes of assets and liabilities are known as
"sensitivity gaps." The following table shows interest sensitivity gaps for
different intervals at June 30, 1995:
INTEREST SENSITIVITY REPORT
<TABLE>
<CAPTION>
CUPERTINO NATIONAL BANK & TRUST Repricing Periods
=================================================================================================================================
Greater Greater
(Dollars in thousands) than than Greater Total Total
Day Months Months 1 Year 3 Years than 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 $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 12,730 $ 12,730
Short term investments 19,500 -- -- -- -- -- 19,500 -- 19,500
Investment securities -- 10,459 8,446 9,999 6,606 22,343 57,853 951 58,804
Loans 123,800 1,407 2,361 6,046 3,338 4,839 141,791 3,432 145,223
Other assets -- -- -- -- -- -- -- (3,054) (3,054)
Loan loss & unearned fees -- -- -- -- -- -- -- 10,645 10,645
---------------------------------------------------------------------------------------------------------------------------------
Total assets 143,300 11,866 10,807 16,045 9,944 27,182 219,144 24,704 243,848
=================================================================================================================================
Liabilities & equity:
Deposits
Demand -- -- -- -- -- -- -- 61,752 --
NOW, MMDA, and Savings 98,849 -- -- -- -- -- 98,849 -- 98,849
Time deposits 41,411 8,879 5,273 25 123 55,711 -- 55,711
Other borrowed funds 8,654 -- -- -- -- -- 8,654 -- 8,654
Other liabilities -- -- -- -- -- -- -- 2,150 2,150
Shareholder's equity -- -- -- -- -- -- -- 16,732 16,732
---------------------------------------------------------------------------------------------------------------------------------
Total Liability & Equity 107,503 41,411 8,879 5,273 25 123 163,214 80,634 $243,848
=================================================================================================================================
Total asset GAP
GAP $ 35,797 $(29,545) $ 1,928 $10,772 $ 9,919 $27,059 $ 55,930 $(55,930) --
Cumulative GAP $ 35,797 $ 6,252 $ 8,180 $18,952 $28,871 $55,930 $ 55,930 $ 0 --
Cumulative GAP/Total
assets 14.68% 2.56% 3.35% 7.77% 11.84% 22.94% 22.94% 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 reducing the effect
of interest rate movements on net interest income.
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.
12 of 18
<PAGE>
<TABLE>
<CAPTION>
NON-INTEREST INCOME Quarter Ended
--------------------------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(in thousands) 1995 1995 1994 1994 1994
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gain on sale of mortgage loans $ 51 $ 85 $ 218 $ 222 $ 128
Loan fees 22 20 78 39 25
Trust fees 135 156 146 163 142
Gain on sale of SBA loans 45 105 343 151 79
Depositor service fees 67 71 64 69 65
Other 87 56 59 57 75
--------------------------------------------------------------------------------------------------
Total other income $ 407 $ 493 $ 908 $ 701 $ 514
--------------------------------------------------------------------------------------------------
</TABLE>
Non-interest income was $404,000 for the second quarter of 1995, a decrease of
$89,000 from the first quarter of 1995, and a decrease of $110,000 from the
second quarter of 1994. Relative to the first quarter of 1995, most of the
decline was due to $60,000 decrease in gain on sale of SBA loans and a $34,000
decrease in gain on sale of mortgage loans. The decline in the SBA category was
due to the generally cyclical nature of this business, while the decline in
mortgage revenue was due to the closure of the Company's wholesale mortgage
business unit at the end of the first quarter of 1995.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE Quarter Ended
-----------------------------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(in thousands) 1995 1995 1994 1994 1994
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $1,600 $1,635 $1,270 $1,397 $1,537
Occupancy and equipment 392 396 372 362 349
Professionals services 230 204 307 109 104
Legal settlement and costs 1,700 -- 250 -- --
FDIC insurance and assessments 135 125 127 127 115
Supplies, telephone and postage 108 128 119 110 120
Data processing 30 33 29 32 30
Client services 91 70 86 86 95
Other real estate, net (7) 41 7 9 (1)
Other 321 295 208 276 217
-----------------------------------------------------------------------------------------------------
Total operating expenses $4,600 $2,927 $2,775 $2,508 $2,566
====== ====== ====== ====== ======
</TABLE>
Non-interest expenses were $4.6 million for the second quarter of 1995, an
increase of $1.67 million from the first quarter of 1995, and $2.0 million from
the second quarter of 1994. Most of the increase is due to the $1.9 million
legal settlement related to the Sumitomo litigation (see Part II Item 1 - Legal
Proceedings), $1.7 million of which was expensed in the second quarter of 1995.
Compensation and benefits expense decreased $35,000 versus the first quarter of
1995, but increased by $63,000 from the comparable quarter of 1994. The
decrease during the second quarter of 1995 was due to the closure of the
wholesale mortgage business unit. The increase of other expense to $318,000 in
the second quarter from $277,000 in the first quarter was largely due to an
increase in marketing and advertising expense of $34,000.
INCOME TAXES
The provision for income taxes for the second quarter of 1995 was a credit of
$470,000, compared with an expense of $126,000 for the same quarter a year ago.
The difference was primarily due to the operating loss experienced by the
Company in the second quarter of 1995, due to the settlement of litigation with
Sumitomo. CUNB did not require a valuation allowance related to its deferred
tax asset.
13 of 18
<PAGE>
FINANCIAL CONDITION
CAPITAL RATIOS
The Company's and the Bank's risk-based capital and leverage ratios were as
follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
CAPITAL RATIOS June 30, March 31, December 31, September 30, June 30,
(in thousands) 1995 1995 1994 1994 1994
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED COMPANY
--------------------
GAAP EQUITY RATIO:
GAAP equity $ 17,622 $ 18,355 $ 18,037 $ 17,872 $ 17,406
Total assets 243,579 233,261 223,144 216,318 212,296
Equity to assets ratio 7.23% 7.87% 8.08% 8.26% 8.20%
LEVERAGE RATIO:
GAAP equity $ 17,622 $ 18,355 $ 18,037 $ 17,872 $ 17,406
Average quarterly assets 230,265 223,093 214,889 206,467 185,988
Leverage capital ratio 7.65% 8.23% 8.39% 8.66% 9.36%
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 $ 17,622 $ 18,355 $ 18,037 $ 17,872 $ 17,406
Tier II capital allowed 2,288 2,268 2,082 2,086 1,951
-------------------------------------------------------------------------------------------------------
Total risk-based capital $ 19,910 $ 20,623 $ 20,119 $ 19,958 $ 19,357
=======================================================================================================
RISK-BASED ASSETS 183,000 181,474 166,592 166,889 161,590
TIER I RISK-BASED CAPITAL RATIO 9.63% 10.11% 10.83% 10.71% 10.77%
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 10.88% 11.36% 12.08% 11.96% 11.98%
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 $ 16,732 $ 16,962 $ 16,851 $ 16,624 $ 16,168
Total assets 243,579 233,205 222,839 216,312 212,276
Equity to assets ratio 6.87% 7.27% 7.56% 7.69% 7.62%
LEVERAGE RATIO:
GAAP equity $ 16,732 $ 16,962 $ 16,851 $ 16,624 $ 16,168
Regulatory Accounting
Adjustment (30) (65) (65) (57) (48)
-------------------------------------------------------------------------------------------------------
Regulatory Equity $ 16,702 $ 16,897 $ 16,786 $ 16,567 $ 16,120
-------------------------------------------------------------------------------------------------------
Average quarterly assets $230,109 $222,901 $214,785 $206,367 $185,888
Leverage capital ratio 7.26% 7.58% 7.82% 8.03% 8.67%
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 $ 16,732 $ 16,897 $ 16,786 $ 16,567 $ 16,120
Tier II capital 2,285 2,268 2,079 2,084 1,951
-------------------------------------------------------------------------------------------------------
Total risk-based capital $ 19,017 $ 19,165 $ 18,865 $ 18,651 $ 18,071
-------------------------------------------------------------------------------------------------------
RISK-BASED ASSETS $182,837 $181,417 $166,288 $166,691 $161,571
TIER I RISK-BASED CAPITAL RATIO 9.15% 9.31% 10.09% 10.01% 10.02%
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 10.40% 10.56% 11.34% 11.19% 11.18%
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>
14 of 18
<PAGE>
CUNB's Tier 1 and Total Risk-based capital ratios were 9.63% and 10.88% at June
30, 1995, respectively, compared with 10.83% and 12.08%, respectively, at
December 31, 1994, and 10.77% and 11.98%, respectively, at June 30, 1994. The
leverage ratio, a measure of Tier 1 capital to average quarterly assets, was
7.65% at June 30, 1995, compared to 8.39% at December 31, 1994 and 9.36% at June
30, 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 for all periods presented above.
The Bank's Tier 1 and Total Risk-based capital ratios were 9.15% and 10.40%,
respectively, at June 30, 1995, compared with 10.09% and 11.34%, respectively,
at December 31, 1994, and 10.02% and 11.18%, respectively, at June 30, 1994. The
leverage ratio, a measure of Tier 1 capital to average quarterly assets, was
7.26% at June 30, 1995, compared to 7.82% at December 31, 1994 and 8.67% at June
30, 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. During the
second quarter of 1995, the holding company made an additional investment of
$425,000 in common equity of the Bank.
LIQUIDITY
Liquidity is defined as the ability of a company to convert assets into 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
$20 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.
PROVISION AND RESERVE FOR LOAN LOSSES
The following schedule details the activity in the Bank's reserve for loan
losses and related ratios for each of the last five quarters:
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(in millions) 1995 1995 1994 1994 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at
beginning of period $2,359 $ 2,918 $2,286 $1,951 $1,989
Provision charged to operations 85 431 785 450 150
Loans charged off (4) (1,001) (153) (123) (191)
Loan recoveries 14 11 -- 8 3
---------------------------------------------------------------------------------------------------------
Reserve for loan losses at
end of period $2,454 $ 2,359 $2,918 $2,286 $1,951
=========================================================================================================
Ratio of:
Reserve for loan losses to loans 1.70% 1.60% 2.09% 1.66% 1.55%
Reserve for loan losses to
Nonperforming assets 68.33% 78.66% 58.47% 50.67% 49.82%
---------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses was $85,000 in the second quarter of 1995, down
substantially from $431,000 in the first quarter of 1995, and the $150,000 in
the second quarter of 1994. The second quarter of 1995 included net
15 of 18
<PAGE>
recoveries of $10,000, compared to net charge-offs of $990,000 in the first
quarter of 1995, and net charge-offs of $188,000 in the second quarter of 1994.
For the first two quarters of 1995 net charge-offs were $980,000, or 1.36% of
average loans (on an annualized basis), compared to $681,000 (1.06% of average
loans) for the same period in 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 $2.45 million
at June 30, 1995, compared with $2.36 million at March 31, 1995, and $1.95
million at June 30, 1994.
The ratio of the reserve for loan losses to total loans was 1.70% at June 30,
1995, compared with 1.60% at March 31, 1995, and 1.55% at June 30, 1994. The
ratio of the reserve for loan losses to total nonperforming assets, including
foreclosed real estate, was 68.33% at June 30, 1995, compared to 78.66% at March
31, 1995 and 49.82% at June 30, 1994.
NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AND FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(in millions) 1995 1995 1994 1994 1994
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans $2,426 $2,743 $3,244 $3,162 $3,694
Restructured loans -- -- -- -- --
Accruing loans past due 90 days or more 1,166 256 1,371 762 10
-----------------------------------------------------------------------------------------------------------------
Total nonperforming loans 3,592 2,999 4,615 3,924 3,704
OREO -- -- 375 587 212
------ ------ ------ ------ ------
Total nonperforming assets 3,592 $2,999 $4,990 $4,511 $3,916
================================================================================================================
Total nonperforming loans to total assets 1.47% 1.29% 2.24% 2.08% 1.84%
================================================================================================================
</TABLE>
Total nonperforming assets were $3.6 million at June 30, 1995, compared with
$3.0 million at March 31, 1995, and $3.9 million at June 30, 1994.
Nonperforming loans, which includes non-accruing loans, restructured loans, and
accruing loans which are past due 90 days or more, were $3.6 million at June 30,
1995, compared with $3.0 million at March 31, 1995, and $3.7 million at June 30,
1994.
Accruing loans past due 90 days or more, which are well secured and in the
process of collection, were $1.2 million at June 30, 1995, compared with $0.3
million at March 31, 1995, and $0.01 million at June 30, 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 June 30, 1995 the Bank had no foreclosed properties, compared with $375,000,
at December 31, 1994, and $212,000 at June 30, 1994.
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 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
16 of 18
<PAGE>
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, which alleged that the Bank did not perform its fiduciary
duties as a trustee properly. The Bank and Sumitomo have recently agreed upon
the terms of a settlement agreement. Under the settlement agreement, the Bank
made a payment of $1,850,000 to fully settle the litigation on July 21, 1995.
The Company believes, based on the advice of counsel, that it is highly probable
that insurance coverage for a significant portion of this settlement amount is
available under its director and officer liability insurance policy and its
professional liability insurance policy, as well as the errors and omissions
policy of the insurance agent which sold the Company these policies. The
company's insurance company has denied the Company's claim for coverage under
these policies, and the Company has initiated litigation against the insurance
company as well as the agent from whom the Company obtained such policies.
However, due to the uncertainty associated with recovery under its claims, the
Company has reflected the expense of the legal settlement in second quarter 1995
earnings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on May 25, 1995
and 1,237,059 shares were represented at the meeting in person or by
proxy.
(b) The following 13 persons nominated by management were elected as directors
at the meeting:
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
C. Donald Allen 1,216,509 20,550
David K. Chui 1,224,329 12,730
Carl E. Cookson 1,224,329 12,730
Jerry R. Crowley 1,224,329 12,730
Janet M. DeCarli 1,224,329 12,730
John M. Gatto 1,224,329 12,730
William H. Guengerich 1,224,329 12,730
James E. Jackson 1,224,329 12,730
Rex D. Lindsay 1,206,742 30,305
Glen McLaughlin 1,205,754 30,305
Norman Meltzer 1,224,329 12,730
Dick J. Randall 1,206,754 30,305
Dennis Whittaker 1,224,329 12,730
</TABLE>
(c) A proposal to approve the adoption of the Company's 1995 Stock Option Plan
was approved by a vote of 872,994 shares in favor, 71,766 shares opposed
and 86,466 shares abstaining or subject to broker non-votes.
(d) A proposal to approve an amendment to the Company's Employee Stock Purchase
Plan to (i) increase the number of shares of the Company's Common Stock
reserved for issuance thereunder from 40,202 to 65,202 and (ii) permit
otherwise eligible directors administering the plan who are also employees
to participate in the plan was approved by a vote of 908,668 shares in
favor, 38,661 shares opposed and 94,071 shares abstaining.
17 of 18
<PAGE>
(e) A proposal to ratify the appointment of Coopers & Lybrand L.L.P. as the
Company's independent accountants for the current fiscal year was approved
by a vote of 1,208,838 in favor, 9,808 shares opposed and 18,413 shares
abstaining or subject to broker non-votes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Report.
(a) Exhibits--Listed on Index to Exhibits
(b) Reports on Form 8-K for the quarter covered by this report - None
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CUPERTINO NATIONAL BANCORP
(REGISTRANT)
BY:
/s/ STEVEN C. SMITH
----------------------------
STEVEN C. SMITH
EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER
& CHIEF FINANCIAL OFFICER
DATE: AUGUST 9, 1995
18 of 18
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<S> <C>
3.1 Amended Articles of Incorporation of Cupertino National Bankcorp-
filed as Exhibit 4.1 of Registrant's Exhibits to Form S-8
Registration Statement (No. 33-36057), as filed with the
Securities and Exchange Commission (the "Commission") on July 25,
1990 and incorporated herein by reference.
3.2 Bylaws of Cupertino National Bancorp-filed as Exhibit of
Registrant's Exhibits to Form S-8 Registration Statement
(No. 33-36057), as filed with the Commission on July 25, 1990 and
incorporated herein by reference.
4.1 Specimen Stock Certificate filed as Exhibit 4.1 of Registrant's
Exhibits to Form S-2 Registration Statement (No. 33-30297), as
filed with the Commission on August 2, 1989 and incorporated
herein by reference.
27.0* Financial Data Schedule
</TABLE>
--------------
* Previously filed
