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Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended DECEMBER 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
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Commission file number 0-18015
CUPERTINO NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0060898
(State of incorporation) (IRS employer identification number)
20230 STEVENS CREEK BOULEVARD, CUPERTINO, CA 95014
(Address of principal executive offices)
(408) 996-1144
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained herein, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 2,
1995, as reported on the NASDAQ National Market System, was approximately
$11,090,833. Shares of Common Stock held by each officer, director and holder
of 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares of COMMON STOCK, NO PAR VALUE, of registrant outstanding as
of March 2, 1995 was 1,559,187.
_______________
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts I, II,
III, and IV of this Form 10-K Report: (1) Proxy Statement for registrant's
Annual Meeting of Shareholders to be held May 25, 1995 (Part III), and (2)
registrant's Annual Report to Shareholders for the year ended December 31, 1994
(Parts I, II and IV).
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PART I
ITEM 1. BUSINESS
GENERAL
Cupertino National Bancorp (the "Company") is a California corporation
and bank holding company. Cupertino National Bank (the "Bank"), a wholly owned
subsidiary of the Company, is a national bank conducting a commercial banking
business. The Company was organized in August 1984, and the Bank began
operations in May 1985. The Company and the Bank have their principal offices
at 20230 Stevens Creek Boulevard, Cupertino CA 95014. The Company's current
activities are principally acting as the holding company for the Bank and as the
lessee and sublessor to the Bank of the premises on which the Bank is located.
The Bank provides a wide range of commercial banking services to small
and medium-sized businesses, real estate firms, business executives,
professionals and other individuals. Trust services are provided by a separate
department of the Bank to support the trust needs of its clients. The Bank's
strategy emphasizes acquiring and developing relationships with clients in the
Bank's service area. Personal service officers are assigned to each borrowing
client to provide continuity to the relationship.
The Bank provides commercial loans for working capital and business
expansion to small and medium-sized businesses with annual revenues in the range
of $1 million to $25 million. Commercial loans typically include revolving
lines of credit collateralized by inventory, accounts receivable or leasehold
improvements, loans to purchase equipment, and loans for general working capital
purposes, collateralized by equipment. The Bank's commercial customers are
drawn from a wide variety of manufacturing, wholesale and service businesses,
and are not concentrated in any one particular industry. Loans to real estate
construction and development companies are primarily for construction of single-
family residences in the Bank's primary service area. Such loans typically
range between approximately $200,000 and $2,900,000. Loans to professional and
other individual clients, whose income typically equals or exceeds the median
income for the Bank's service area, cover a full range of consumer services,
such as automobile, aircraft, home improvement and home equity loans, and other
secured and unsecured lines of credit, including credit cards.
The Bank has a Small Business Administration ("SBA") department which
makes loans to assist smaller clients and those who are starting new businesses
in obtaining financing. The loans are generally 65% to 80% guaranteed by the
SBA. In 1994, the Bank was named a Preferred Lender by the SBA. Preferred
Lender status is awarded by the SBA to lenders who have demonstrated superior
ability to generate, underwrite and service loans guaranteed by the SBA, and
results in more rapid turn around of loan applications submitted to the SBA for
approval.
In May 1994, the Bank opened its Emerging Growth Industries ("EGI")
Venture Lending Group to serve the needs of companies in their start-up and
development phase. This unit was developed to meet the needs of clients in the
Bank's service area by allowing them to access a banking relationship early in
their development. The loans to this target group of clients are generally
secured by the accounts receivable, inventory and equipment of the companies.
The financial strength of these companies also tends to be bolstered by the
presence of venture capital investors among the shareholders.
The Bank is a member of the Federal Reserve System and the deposits of
the Bank's clients are insured up to $100,000 by the Federal Deposit Insurance
Corporation ("FDIC"). In 1992, the Bank became a member of the Federal Home
Loan Bank of San Francisco ("FHLB")in order to enhance its ability to service
its loan clients. This membership allows the Bank to enhance its funding
sources as the FHLB allows members to borrow funds by pledging mortgage loans as
collateral.
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MARKET AREA AND CLIENT BASE
The Bank concentrates on providing service to clients in Cupertino,
San Jose, Palo Alto and the surrounding communities in Santa Clara County and
San Mateo County. Cupertino is located in the center of the geographical area
which is referred to as "Silicon Valley". The City of Cupertino has a
population of approximately 42,000 and its average annual household income
exceeds $79,000. Among metropolitan areas, Santa Clara County ranks third in
California in median household income.
The commercial base of Santa Clara County is diverse and includes
computer and semiconductor manufacturing, professional services, printing and
publishing, aerospace, defense, real estate construction, and wholesale and
retail trade. The Bank has not concentrated on attracting commercial clients
from any single industry, although it has in the past emphasized lending to the
residential real estate construction industry in its service area.
The Bank's headquarters are in Cupertino. In March 1991, the Bank
opened its first regional office in downtown San Jose. This office was
established to better serve existing clients of the Bank, as well as to gain new
relationships from clients based in the growing financial center in the downtown
San Jose area. In May 1992, the Bank opened a second regional office in Palo
Alto. This office gives the Bank a presence in the financial market in Northern
Santa Clara and Southern San Mateo counties. The opening of these regional
offices has contributed to the continued growth of the Bank through 1994.
Many of the directors of the Company and the Bank, and their
affiliates, maintain deposit and loan relationships with the Bank. See Note 11
of Notes to Consolidated Financial Statements in the Company's 1994 Annual
Report, incorporated herein by reference, for information regarding loans to
affiliates and other significant related party transactions.
SOURCES OF FUNDS
Most of the Bank's deposits are obtained from small and medium-sized
businesses, business executives, professionals and other individuals. At
December 31, 1994, the Bank had a total of 4,633 deposit accounts, representing
2,032 non-interest-bearing deposit (checking) accounts with an average balance
of approximately $26,700 each, 2,146 interest-bearing demand, money market
demand, and savings accounts with an average balance of approximately $41,200
each, and 455 time deposit accounts with an average balance of approximately
$99,000 each. Rates paid on deposits vary among the categories of deposits due
to different terms, the size of the individual deposit, and rates paid by
competitors on similar deposits.
The Bank has one large deposit relationship with a title company, in
which three of the directors of the Bank serve as directors (one Bank director
is also the principal shareholder and Chief Executive Officer of the title
company). Deposits from this client ranged between $3.9 million and $12.6
million during 1994; balances related to this client, in both non-interest-
bearing demand accounts and money market accounts totaled $4.6 million on
December 31, 1994.
LENDING ACTIVITIES
The Bank's loan portfolio is centered in commercial lending to small
and medium-sized businesses in the manufacturing and service industries. The
Bank has also been an active lender in residential real estate construction.
Due to economic declines in the company's business market, the emphasis on
residential real estate construction lending has been reduced.
Approximately 59% of the Bank's portfolio was in commercial loans at
December 31, 1994. Real estate construction loans represented approximately 13%
of total loans at December 31, 1994, primarily for residential projects. In
addition, 9% of the Bank's loans were real estate term loans, which are
primarily secured by commercial properties. The balance of the portfolio
consists of consumer loans and loans held for sale. The Bank's loan clients are
primarily located in Cupertino, San Jose, Palo Alto and the surrounding
communities in Santa Clara County and San Mateo County.
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The majority of loans are collateralized. Generally, real estate loans
are secured by real property, and commercial and other loans are secured by bank
deposits or business and personal assets. Repayment is generally expected from
the sale of the related property for real estate construction loans, and from
the cash flow of the borrower for commercial and other loans.
The interest rates charged for the loans made by the Bank vary with
the degree of risk, size and maturity of the loans. Rates are generally
affected by competition, associated factors stemming from the client's deposit
relationship with the Bank and the Bank's cost of funds. A majority of the
loans in the Bank's portfolio have a floating rate.
In its commercial loan portfolio, the Bank provides personalized
financial services to the diverse commercial and professional businesses in its
market area, but does not concentrate on any particular industry. Commercial
loans consist chiefly of short-term loans (normally with a maturity of under one
year) for working capital. Significant emphasis is placed on the borrower's
earnings history, capitalization, secondary sources of repayment (such as
accounts receivable), and in some instances, third party guaranties or highly
liquid collateral (e.g., time deposits). Commercial loan pricing is generally
at a rate tied to the Prime rate (as quoted in the Wall Street Journal) or the
Bank's reference rate.
While the commercial loan portfolio of the Bank is not concentrated in
any one industry, the Bank's service area has a concentration of technology
companies, and accordingly, the ability of any of the Bank's borrowers to repay
loans may be affected by the performance of this sector of the economy. The
California economy has been particularly hard hit by the national recession.
There has been a significant decline in the California residential real estate
market since late 1990, which has persisted through 1994. This has resulted in
an increase in the level of non-performing assets in 1993 and 1994, and has
resulted in an increase in loans charged-off and the provision for loan losses
in 1993 and 1994. The Bank's portfolio may be adversely affected if economic
conditions do not improve, which could result in an increase in non-performing
loans, charge-offs and the related provision to the allowance for loan losses.
The Bank's residential real estate construction loan activity has
focused on providing short-term (less than one year maturity) loans to local
individuals, partnerships and corporations in the local residential real estate
industry for the construction of single family residences. During 1992 through
1993, the Bank concentrated its construction loan activity in the market for
owner-occupied custom residences. During 1994 real estate values began to
stabilize and the Bank began to cautiously enter the construction loan market
for small townhouse and single family home projects.
Residential real estate construction loans are typically secured by
first deeds of trust and require guaranties of the borrower. The economic
viability of the project and the borrower's credit-worthiness are primary
considerations in the loan underwriting decision. Generally, these loans
provide an attractive yield, but may carry a higher than normal risk of loss or
delinquency, particularly if general real estate values decline or the loan
underwriting process is based upon inaccurate appraisals. The Bank utilizes
independent local appraisers and conservative loan-to-value ratios (e.g. loans
generally not exceeding 65% to 75% of the appraised value of the property). The
Bank monitors projects during the construction phase through regular
construction inspections and a disbursement program tied to the percentage of
completion of each project. In the absence of rapid declines in residential
real estate values, ultimate collectibility of such secured loans is usually
better than the average mix of commercial loans. Construction loans are
generally made on a floating rate basis.
The Bank's consumer loan portfolio is divided between installment
loans for the purchase of such items as automobiles and aircraft, and home
improvement loans and equity lines of credit which are often secured by
residential real estate. Installment loans tend to be fixed rate and longer-
term (one to five year maturity), while the equity line type loans are generally
floating rate, and are reviewed for renewal on an annual basis. The Bank also
has a minimal portfolio of credit card loans, issued as an additional service to
its clients.
LOAN ADMINISTRATION
The loan policy of the Bank is approved each year by its Board of
Directors and is managed through periodic reviews of such policies in relation
to current economic activity and the degree of risk (both credit and interest
rate) in the
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current portfolio. The Directors' Loan Committee supervises the lending
activities of the Bank. This committee consists of four outside directors, the
Chairman/Chief Executive Officer, the President/Chief Operating Officer
(position currently vacant), the Executive Vice President/Senior Credit Officer,
Senior Vice President Commercial Lending and the Vice President/Credit
Administration. The officers in this group make up the Officers' Loan Committee.
Sole lending authority is granted to officers on a limited basis.
Loan requests exceeding individual officer approval limits are submitted to the
Officers' Loan Committee, and those which exceed its limit are submitted to the
Directors' Loan Committee for final approval. Both of these committees meet on
a regular basis in order to provide timely responses to the Bank's clients.
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. The Bank has an internal asset
review committee (IARC) that meets monthly to review delinquencies, non-
performing assets, classified assets and other pertinent information for the
purpose of evaluating credit risk within the Bank's loan portfolio and to
recommend general reserve percentages and specific reserve allocations. The
IARC reports to the Board of Directors on a quarterly basis.
TRUST DEPARTMENT
The Bank's Trust Department commenced operations in July 1988 and
offers a full range of fee-based trust services directly to its clients. The
Trust Department administers all types of retirement plans, including corporate
pension plans, 401(k) plans and individual retirement plans, with an emphasis on
the investment management, custodianship and trusteeship of such plans. In
addition, the Trust Department acts as executor, administrator, guardian and/or
trustee in the administration of the estates of individuals. Investment and
custodial services are provided for corporations, individuals and non-profit
organizations. Total assets under management by the Trust Department were
approximately $157 million at December 31, 1994, as compared to approximately
$118 million at December 31, 1993, and $117 million at December 31, 1992.
MORTGAGE BANKING DIVISION
The Bank opened a Mortgage Banking Division in July 1992. The purpose
of this division is to originate residential mortgage loans for sale on the
secondary market. The primary revenue of this division is the premium received
on the sale of such mortgage loans and their related servicing rights. The Bank
funds both loans which are originated directly by a mortgage banking officer and
loans purchased through a network of mortgage brokers. The Bank is currently
selling both the loans and the related servicing rights through a correspondent.
During 1993 the Bank was designated as an approved seller/servicer by the
Federal National Mortgage Association and the Federal Home Loan Corporation,
known in the industry as Fannie Mae and Freddie Mac, respectively. During 1994
the increased upward pressure on interest rates caused mortgage refinancing and
home purchases to significantly decline. This required the Bank in June 1994 to
restructure its mortgage operations and focus all of its efforts on the
wholesale mortgage market. This change reduced the operating costs within the
mortgage business unit; however, the operating results for the last half of 1994
did not return to acceptable levels of return on investment corresponding to the
risks involved. Based on these factors the Bank determined to close its
mortgage operations effective March 31, 1995. In connection with this action,
the Bank anticipates incurring a $180,000 after tax charge related to this
operation in the first quarter of 1995. The Bank will continue to offer
mortgage loans to its market area and client base through its regional offices.
COMPETITION
The banking business in the Bank's service area is highly competitive,
as it is throughout California. Many of the major branch banking institutions
in California have one or more offices in the Bank's service area. The Bank
competes in the marketplace for deposits and loans, principally against these
banks, other independent community banks, savings and loan associations, credit
unions and other financial institutions.
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The major advantages that larger branch institutions have over the
Bank are their ability to provide wide ranging advertising programs; to allocate
their investment assets in areas of higher yields and demands; and, by virtue of
their greater total capitalization, to utilize substantially higher lending
limits than the Bank. These banks can also offer certain services, such as
international banking, which are not offered directly by the Bank. However, the
Bank is able to offer most of these services indirectly, through its
correspondent institutions. Smaller independent banks, including the Bank, have
found a market niche by providing specialized services, and by targeting clients
whose credit needs are below levels generally sought by the major branch banks.
The Bank defines its service area as the cities of Cupertino, San
Jose, Palo Alto, and the surrounding cities in Santa Clara County and San Mateo
County. Banks and savings and loan operations in Santa Clara County
collectively held approximately $21 billion in deposits as of June 30, 1994 (the
latest date as of which complete deposit data was available). Based on this
data, the Bank had a market share in Santa Clara County of approximately .93% at
June 30, 1994.
To compete with the major financial institutions in its service area,
the Bank relies upon customized services and direct personal contacts by its
officers, directors and staff. For clients whose loan demands exceed the Bank's
legal lending limit, the Bank seeks to arrange such loans on a participation
basis with other lenders, primarily other community banks in the San Francisco
Bay Area.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business in which profitability depends primarily on
interest rate differentials. In general, the difference between the interest
rates paid by the Bank on its deposits and its other borrowings and the interest
rates received by the Bank on loans extended to its customers and on securities
held in the Bank's investment portfolio will be the principal factor affecting
the Bank's earnings. The interest rates paid and received by the Bank are
sensitive to many factors which are beyond the control of the Bank, including
the influence of domestic and foreign economic conditions. The earnings and
growth of the Bank and the Company will also be affected not only by general
economic conditions, including inflation, recession and unemployment, but also
by monetary and fiscal policies of the United States and federal agencies,
particularly the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). The Federal Reserve Board can and does implement national
monetary policy, such as seeking to curb inflation and/or combat recession, by
its open market operations in United States Government securities, by its
control of the discount rates applicable to borrowing by banks from the Federal
Reserve System and by its establishment of reserve requirements for financial
institutions subject to its regulation. The actions of the Federal Reserve
Board in these areas influence the growth of bank loans, investments and
deposits, and also affect the interest rates charged on loans and paid on
deposits. Changes in the financial services industry as a result of such
governmental policies and regulations have often contributed to increases in the
cost of funds of banks and other depository institutions and may continue to
affect such cost, and consequently the earnings of such institutions. However,
the degree, timing and full extent of the impact of the laws or of possible
changes to the laws on banking in general, and the business of the Bank in
particular, presently cannot be predicted.
SUPERVISION AND REGULATION
The following information is qualified in its entirety by reference to
the statutory and regulatory provisions described, which statutes and
regulations are subject to change at any time.
THE BANK HOLDING COMPANY
The Company is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and is subject to
supervision by the Federal Reserve Board. As a bank holding company, the
Company is required to file with the Federal Reserve Board an annual report and
such other additional information as the Federal Reserve Board may require
pursuant to the BHCA. The Federal Reserve Board may also make examinations of
the Company and the Bank. Under the BHCA, bank holding companies may not
(subject to certain limited exceptions) directly or indirectly acquire the
ownership or control of substantially all of the assets or more than 5% of any
class of voting shares of any company, including a bank, without the prior
written approval of the Federal Reserve Board. The
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BHCA prohibits the Federal Reserve Board from approving the acquisition by a
bank holding company of substantially all the assets or more than 5% of any
class of voting shares of any bank (or its holding company) located in a state
other than the state in which the operations of the bank holding company's bank
subsidiaries are principally conducted, unless the statutes of the state in
which the acquiree bank is located expressly permit such an acquisition.
In addition, subject to certain exceptions, bank holding companies are
prohibited under the BHCA from engaging in non-banking activities. One
principal exception to this prohibition is for activities found by the Federal
Reserve Board to be so closely related to banking as to be properly incident
thereto. For each application to engage in non-banking activities, the Federal
Reserve Board is required to consider whether the performance of such activities
can reasonably be expected to produce benefits to the public such as greater
convenience, increased competition, or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest, or unsound banking practices.
Subsidiary banks of a bank holding company are subject to restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or any of its subsidiaries, on investments in the stocks or
securities thereof, and on the taking of any such stock or securities as
collateral for loans to any borrowers. Furthermore, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with extensions of credit, the lease or sale of any property or the
furnishing of other banking services.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the Superintendent of Banks of the State of California (the
"Superintendent").
CAPITAL ADEQUACY OF THE COMPANY
The Federal Reserve Board has adopted risk based capital guidelines
for bank holding companies. The minimum guideline for the ratio of total
capital to risk weighted assets (including certain off-balance-sheet activities)
is 8%. At least half of the total capital is to be composed of common
stockholders' equity, minority interests in the equity accounts of consolidated
subsidiaries and a limited amount of perpetual preferred stock, less disallowed
intangibles including goodwill ("Tier 1 Capital"). The remainder of a bank's
allowable capital may include subordinated debt, other preferred stock and a
limited amount of loan loss reserves ("Tier 2 Capital").
In addition, the Federal Reserve Board has established minimum
leverage ratio guidelines for bank holding companies. These guidelines provide
for a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to total assets,
less goodwill) of 3% for bank holding companies that meet certain specified
criteria, including having the highest regulatory rating. All other bank
holding companies are generally required to maintain a minimum Tier 1 Capital
leverage ratio of 3% plus an additional 100 to 200 basis points. The guidelines
also provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets (i.e. goodwill, core deposit intangibles and purchased mortgage servicing
rights). Furthermore, the guidelines indicate that the Federal Reserve Board
will continue to consider a "tangible Tier 1 Capital leverage ratio" (deducting
all intangibles) in evaluating proposals for expansion or new activities.
At December 31, 1994, the Company had total capital and leverage
capital ratios above the minimums required by the Federal Reserve Board.
THE BANK
The Bank, as a national banking association, is subject to the
National Bank Act and to primary supervision, examination and regulation by the
Comptroller of the Currency (the "Comptroller"). The Comptroller regulates the
number and locations of branch offices of a national bank. The Bank is also a
member of the Federal Reserve System and is subject to applicable provisions of
the Federal Reserve Act and regulations issued pursuant thereto. Each
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depositor's accounts with the Bank are insured by the Bank Insurance Fund, which
is managed by the Federal Deposit Insurance Corporation ("FDIC"), to the maximum
aggregate amount permitted by law, which is currently $100,000 for all insured
deposits of the depositor. For this protection, the Bank pays a semi-annual
assessment and is subject to the rules and regulations of the FDIC pertaining to
deposit insurance and other matters. The Federal Reserve Board requires banks
to maintain non-interest bearing reserves against certain of their transactional
accounts (primarily deposit accounts that may be accessed by writing checks) and
non-personal time deposits.
As a creditor and a financial institution, the Bank is subject to
certain regulations promulgated by the Federal Reserve Board including, without
limitation, Regulation B (Equal Credit Opportunity Act), Regulation D
(Reserves), Regulation E (Electronic Funds Transfers Act) and Regulation F
(interbank liabilities), Regulation Z (Truth in Lending Act), Regulation CC
(Expedited Funds Availability Act), and Regulation DD (Truth in Savings Act).
As creditors on loans secured by real property and as owners of real property,
the Bank may be subject to potential liability under various statutes and
regulations applicable to property owners including statutes and regulations
relating to the environmental condition of the property. The Bank is also
subject to applicable provisions of California law, insofar as they do not
conflict with or are not preempted by federal banking law. California law
exempts banks from the usury laws.
The supervision, regulation and examination of the Bank by the bank
regulatory agencies are generally intended to protect depositors and are not
intended to protect the Company's shareholders.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the Reigle/Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") was signed into law.
The Interstate Act effectively permits nationwide banking. The Interstate Act
provides that one year after enactment, adequately capitalized and adequately
managed bank holding companies may acquire banks in any state, even in those
jurisdictions that currently bar acquisitions by out-of-state institutions,
subject to deposit concentration limits. The deposit concentration limits
provide that regulatory approval by the Federal Reserve Board may not be granted
for a proposed interstate acquisition if, after the acquisition, the acquirer on
a consolidated basis would control more than 10% of the total deposits
nationwide or would control more than 30% of deposits in the state where the
acquiring institution is located. The deposit concentration state limit does
not apply for initial acquisitions in a state and in every case, may be waived
by state regulatory authority. Interstate acquisitions are subject to
compliance with the Community Reinvestment Act ("CRA"). States are permitted to
impose age requirements not to exceed five years on target banks for interstate
acquisitions. States are not allowed to opt-out of interstate banking.
Branching between states may be accomplished either by merging
separate banks located in different states into one legal entity, or by
establishing de novo branches in another state. Consolidation of banks is not
permitted until June 1, 1997, provided that the state has not passed legislation
"opting-out" of interstate branching. If a state opts-out prior to June 1,
1997, then banks located in that state may not participate in interstate
branching. A state may opt-in to interstate branching by bank consolidation or
by de novo branching by passing appropriate legislation earlier than June 1,
1997. Interstate branching is also subject to a 30% statewide deposit
concentration limit on a consolidated basis, and a 10% nationwide deposit
concentration limit. The laws of the host state regarding community
reinvestment, fair lending, consumer protection (including usury limits) and the
establishment of branches shall apply to the interstate branches.
De novo branching by an out-of-state bank is not permitted unless the
host state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to the initial acquisition of a bank in the host state other
than deposit concentration limits.
Effective one year after enactment, the Interstate Act permits bank
subsidiaries of a bank holding company to act as agents for affiliated
depository institutions in receiving deposits, renewing time deposits, closing
loans, servicing loans and receiving payments on loans and other obligations. A
bank acting as an agent for an affiliate shall not be considered a branch of the
affiliate. Any agency relationship between affiliates must be on terms that are
consistent with safe and sound banking practices. The authority for an agency
relationship for receiving deposits includes the taking of deposits for an
existing account, but is not meant to include the opening or origination of new
deposit accounts. Subject to certain
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conditions, insured savings associations which were affiliated with banks as of
June 1, 1994, may act as agents for such banks. An affiliate bank or savings
association may not conduct any activity as an agent which such institution is
prohibited from conducting as a principal.
If an interstate bank decides to close a branch located in a low or
moderate income area, it must comply with additional branch closing notice
requirements. The appropriate regulatory agency is authorized to consult with
community organizations to explore options to maintain banking services in the
affected community where the branch is to be closed.
To ensure that interstate branching does not result in taking deposits
without regard to a community's credit needs, the regulatory agencies are
directed to implement regulations prohibiting interstate branches from being
used as "deposit production offices". The regulations to implement its
provisions are due by June 1, 1997. The regulations must include a provision to
the effect that if loans made by an interstate branch are less than fifty
percent of the average of all depository institutions in the state, then the
regulator must review the loan portfolio of the branch. If the regulator
determines that the branch is not meeting the credit needs of the community, it
has the authority to close the branch and to prohibit the bank from opening new
branches in that state.
Effective January 1, 1991, California adopted legislation permitting
any out-of-state bank holding company to acquire an existing California bank if
its state of principal business provides reciprocal rights to California bank
holding companies. The Superintendent has determined that substantial
reciprocity exists between California and a variety of states including Arizona,
Oregon, Washington, and New York. Although these changes have had the impact of
increasing competition among banks and between banks and other financial service
providers, the long-term effects of this increased competition on the Bank and
on the competition which may arise as a result of the Interstate Act, cannot be
determined at this time.
CAPITAL ADEQUACY OF THE BANK
In 1989, the Federal Reserve Board, along with the Comptroller and the
FDIC, established an interagency risk-based capital framework that establishes
uniform risk-based capital guidelines for certain banking organizations in the
United States. Under these guidelines, both assets reported on the balance
sheet and certain off-balance sheet items are assigned to certain risk
categories. Each category has an assigned risk weight. Capital ratios are then
calculated by dividing the capital by a weighted (according to risk) sum of the
assets and off-balance sheet items.
On February 28, 1991, the FDIC adopted minimum "leverage ratio"
standards for certain banking organizations. The leverage ratio is a ration of
Tier 1 capital to quarterly average total assets. The minimum required leverage
ratio is 3.0% Tier 1 capital for banks that meet certain specified criteria,
including having the highest regulatory rating. All other banks are generally
required to maintain a leverage ratio of between 4.0% and 5.0% Tier 1 capital.
At December 31, 1994, the Bank had capital ratios, both risk-adjusted
and leverage, which placed it in the "well capitalized" category. For an
analysis of the capital ratios of the Bank as of December 31, 1994, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Capital Resources" in the 1994 Annual Report to Shareholders, which
is incorporated herein by reference. The Company does not presently expect that
compliance with regulatory capital guidelines will have a material adverse
effect on the business of the Company or the Bank. The Company anticipates that
if significant asset growth continues in the future, such growth may necessitate
the addition of capital to comply with regulatory guidelines.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT
The Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") mandated changes that continue to affect the financial
institutions industry. FIRREA substantially revised the regulatory structure of
the banking, savings and financial services industries. Many of these changes
directly affect the Bank and the Company. Deposits at commercial banks such as
the Bank are now insured by the Bank Insurance Fund ("BIF") of the FDIC.
9
<PAGE>
FIRREA requires the banking regulatory agencies to make written
evaluations after examining a depository institution for compliance with the
Community Reinvestment Act ("CRA"). The CRA evaluations now include a public
section, including the CRA rating agency assigned to the bank, and a
confidential section, which is not released to either the public or the
institution, except under limited circumstances. The regulatory guidelines now
require each institution to place the written evaluation in its CRA public file
at its head office and at one designated office in each local community. FIRREA
also revised the rating system for CRA compliance.
FIRREA mandated appraisals by state-certified or state-licensed
appraisers for loans made by financial institutions over certain amounts.
Effective December 31, 1992, an appraisal by a state-certified appraiser is
required for the following types of bank loans secured by real estate: (1) any
real estate loan transaction having a value of $1 million or more, or (2) any
non-residential real estate transaction or complex residential real estate
transaction in the amount of $250,000 or more. In addition, an appraisal by a
state-licensed appraiser is required for any real-estate transaction having a
value of more than $100,000. The State of California has established a program
for the licenser and certification of real estate appraisers in order to meet
the requirements of FIRREA.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1990 ("FDICIA") was signed into law. Among other things,
FDICIA recapitalized the BIF, implemented deposit insurance reform, and imposed
new supervisory standards requiring annual examinations, independent audits,
uniform accounting and management standards and prompt corrective action for
problem institutions. As a result of FDICIA, depository institutions and their
affiliates are subject to federal standards which govern asset growth, interest
rate exposure, executive compensation, and many other areas of depository
institution operations. Only the most highly capitalized and well-managed
institutions are allowed to expand their operations and activities.
Undercapitalized institutions are subject to activity limitations and other
restrictions.
BIF Recapitalization. FDICIA provides increased funding for the BIF,
primarily by increasing the authority of the FDIC to borrow from the U.S.
Treasury Department. A significant portion of any such borrowing will be repaid
by insurance premiums assessed on BIF members, including the Bank, sufficient to
repay any borrowed funds within 15 years and to provide BIF reserves of $1.25
for each $100 of insured deposits. FDICIA also provides authority for special
assessments against insured deposits.
Risk Based Deposit Insurance Rates. On January 1, 1994, a permanent
risk-based deposit premium assessment system became effective under which each
depository institution is placed in one of nine assessment categories based on
certain capital and supervisory measures. The assessment rates under the system
range from 0.23 percent to 0.31 percent of domestic deposits depending on the
assessment category into which an insured bank is placed. It is possible that
such assessments may be increased or decreased and that there may be additional
special assessments in the future. A significant increase in the assessment
rate or an additional special assessment could have an adverse impact on the
Bank's and the Company's results of operations. Increases in deposit insurance
assessment rates add to an insured bank's operating costs. These cost increases
can have a measurable effect upon a bank's profitability and capitalization.
Increases in deposit insurance assessment expenses do not, however, necessarily
lead to equally proportionate declines in bank profits. The Company does not
anticipate that an increase or decrease in its deposit insurance assessment rate
will significantly impact the Bank's profitability or capitalization.
Brokered Deposits. Under FDIC regulations governing the receipt of
brokered deposits, a bank cannot accept brokered deposits (which term is defined
to mean deposits with an interest rate which exceeds significantly prevailing
rates in its market) unless (i) it is well capitalized or (ii) it is adequately
capitalized and has received a waiver from the FDIC. Except under certain
conditions, a bank that cannot accept brokered deposits also cannot offer "pass-
through" insurance on certain employee benefit accounts. The Bank is considered
to be well capitalized for purposes of this regulation and in 1994 began
accepting limited amounts of brokered deposits to help manage its liquidity
position.
10
<PAGE>
Prompt Corrective Regulatory Action. FDICIA categorizes banking
institutions as well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. A bank is
subject to corrective action if it is not adequately capitalized. Significantly
and critically undercapitalized banks are subject to extensive federal
regulatory control, including closure. A bank's capital tier depends upon where
its capital levels are in relation to various relevant capital measures, which
include a risk-based capital measure and a leverage capital measure, and upon
certain other factors. The federal banking authorities adopted regulations
effective December 19, 1992, which define the capital measures a bank must meet
in order to be considered well capitalized as a ratio of total capital to risk-
weighted assets of not less than 10.0%, a ratio of Tier 1 capital to risk-
weighted assets of not less than 6.0% and a leverage ratio of Tier 1 capital to
average quarterly assets of not less than 5.0%. A bank will be considered
adequately capitalized if it has a ratio of total capital to risk-weighted
assets of not less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets
of not less than 4.0%, and a leverage ratio of Tier 1 capital to average
quarterly assets of not less than 4.0%. The capital levels for the
undercapitalized category are defined as any level under 8.0% for the total
risk-based capital ratio, under 4.0% for the Tier 1 risk-based capital ratio, or
under 4.0% for the Tier 1 leverage ratio. A bank will be considered
significantly undercapitalized if it has a ratio of total capital to risk-
weighted assets that is less than 6.0%, a ratio of Tier 1 capital to risk-
weighted assets that is less than 3.0%, or a Tier 1 leverage ratio that is less
than 3.0%. A bank will be considered critically undercapitalized if it has a
ratio of tangible equity to total assets that is equal to or less than 2.0%. In
addition to FDICIA's capital requirements, a financial institution may be
reclassified and subject to corrective action if it receives a less than
satisfactory rating in its most recent examination for its assets, management,
earnings or liquidity. The Company and the Bank were considered "well
capitalized" at December 31, 1994.
FDICIA also requires an insured institution which does not meet any
one of the statutory or regulatory capital requirements applicable to it to
submit a capital restoration plan for improving its capital. In addition,
FDICIA prohibits an insured institution from making a capital distribution if it
fails to meet any capital requirements. FDICIA also contains a number of
consumer banking provisions, including disclosure requirements and substantive
contractual limitations with respect to deposit accounts, and places
restrictions on a bank's dealings with "large customers" if a principal officer
or director of the "large customer" is a member of the bank's audit committee.
Real Estate Lending. As required by FDICIA, on December 19, 1992, the
federal banking agencies adopted uniform regulations prescribing standards for
real estate lending effective March 19, 1993. The uniform rules require
depository institutions to adopt and maintain comprehensive written real estate
lending policies that are consistent with safe and sound banking practices, as
well as establish loan-to-value limitations on real estate lending by insured
depository institutions. The loan-to-value limits do not apply to loans
guaranteed by the U.S. Government or backed by the full faith and credit of a
state government; loans facilitating the sale of real estate acquired by the
lending institution in the ordinary course of collecting a debt previously
contracted; loans where real estate is taken as additional collateral solely
through an abundance of caution by the lender; loans renewed, refinanced, or
restructured by the original lender to the same borrower, without the
advancement of new funds; or loans originated prior to the effective date of the
regulation. The new regulations also allow lending institutions to make a
limited amount of loans that do not conform to the regulations' loan-to-value
limitations. The Bank has amended its real estate lending policies to comply
with this legislation; such amendments are not expected to adversely affect the
Bank's operations or profitability.
Standards for Safety and Soundness. In September of 1992 the FDIC
proposed regulations to require management to establish and maintain an internal
control structure and procedures to ensure compliance with laws and regulations
concerning bank safety and soundness on matters such as loan underwriting and
documentation, asset quality, earnings, internal rate risk exposure and
compensation and other employee benefits. The proposals, among other things,
establish the maximum ratio of classified assets to total capital at 1.0 and the
minimum level of earnings sufficient to absorb losses without impairing capital.
The proposals provide that a bank's earnings are sufficient to absorb losses
without impairing capital if the bank is in compliance with minimum capital
requirements and the bank would, if its net income or loss over the last four
quarters continued over the next four quarters, remain in compliance with
minimum capital requirements. Any institution which fails to comply with these
standards must submit a compliance plan. The failure to submit a plan or to
comply with an approved plan will subject the institution to further enforcement
action. Finally, independent auditors would be required to attest to or report
separately on assertions in management's report, by using audit procedures
agreed upon by the FDIC for determining the extent of compliance with laws and
regulations
11
<PAGE>
concerning bank safety and soundness. In anticipation of the adoption by the
FDIC of the proposed regulations, the Bank is in the process of documenting and
establishing additional internal control structures and procedures, as
necessary, to ensure compliance with new requirements imposed by FDICIA and the
regulations thereunder concerning the Bank's safety and soundness. The Bank's
audit committee is composed entirely of outside directors.
PAYMENT OF DIVIDENDS
There are statutory and regulatory requirements applicable to the
payment of dividends by the Bank to the Company and by the Company to its
shareholders.
By the Company. The Company began paying cash dividends in December
1994. The Company anticipates continuing to pay cash dividends on a semi-annual
basis to the shareholders of the Company, when and as declared by its Board of
Directors, out of funds legally available therefor, subject to the restrictions
set forth in the California General Corporation Law (the "Corporation Law").
The amount of the annual dividend is anticipated to range between 10% to 25% of
estimated annual earnings. The Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The Corporation Law
further provides that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets the following two generally stated
conditions: (i) the corporation's assets equal at least 1.25 times its
liabilities, and (ii) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and interest expense for the two preceding fiscal years was less
than the average of the corporation's interest expense for such fiscal years,
the corporation's current assets must equal at least 1.25 times it current
liabilities. The primary source of funds for payment of dividends by the
Company would be obtained from dividends received from the Bank.
By the Bank. The board of directors of a national bank may declare
the payment of dividends from funds legally available therefore, depending upon
the earnings, financial condition and cash needs of the bank and general
business conditions. A national bank may not pay dividends from its capital.
All dividends must be paid out of net profits then on hand, after deducting
losses and bad debts. A national bank is further restricted from declaring a
dividend on its shares of common stock until its surplus fund equals the amount
of capital stock, or, if the surplus fund does not equal the amount of capital
stock, until one-tenth of the bank's net profits of the preceding half year in
the case of quarterly or semiannual dividends, or the preceding two consecutive
half-year periods in the case of an annual dividend, are transferred to the
surplus fund. Furthermore, if the total of all dividends declared by a bank in
any calendar year would exceed the total of its retained net profits of that
year combined with its net profits of the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock, then
the approval of the Comptroller is required for the payment of any dividends.
Guidelines of the Comptroller set forth factors which are to be
considered by a national bank in determining the payment of dividends. A
national bank, in assessing the payment of dividends, is to evaluate the bank's
capital position, its maintenance of an adequate allowance for loan and lease
losses, and the need to revise or develop a comprehensive capital plan, complete
with financial projections, budgets and dividend guidelines. The Comptroller
has broad authority to prohibit a national bank from engaging in banking
practices which it considers to be unsafe and unsound. It is possible,
depending upon the financial condition of the national bank in question and
other factors, that the Comptroller may assert that the payment of dividends or
other payments by a bank is considered an unsafe or unsound banking practice
and, therefore, direct the bank to implement corrective action to address such a
practice. Accordingly, the future payment of cash dividends by the Bank to the
Company will not only depend upon the Bank's earnings during any fiscal period,
but also upon the assessment of the Bank's Board of Directors of the capital
requirements of the Bank and other factors, including dividend guidelines and
the maintenance of an adequate allowance for loan and lease losses.
POLICY STATEMENT ON ALLOWANCE FOR LOAN LOSSES
In 1993, the Federal banking agencies, through the Federal Financial
Institutions Examination Council, issued a uniform policy statement on the
adequacy of the reserves for loan and lease losses. The policy statement
establishes a
12
<PAGE>
benchmark equal to the sum of (a) 100% of assets classified as uncollectible,
(b) 50% of assets classified as doubtful, (c) 15 % of assets classified
substandard and (d) estimated credit losses on other assets over the upcoming 12
months. Federal bank examiners will measure the reasonableness of a banks'
methodology for computing its reserves against this benchmark which is designed
to be neither a floor nor a safe harbor.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The CRA requires banks, as well as other lenders, to identify the
communities served by the bank's offices and to identify the types of credit the
bank is prepared to extend within such communities. The CRA also requires an
assessment of the performance of the bank in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
applications for mergers, acquisitions, and other transactions. An
unsatisfactory CRA rating may be the basis for denying such an application. The
Bank is subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and CRA activities. In addition to
substantive penalties and corrective measures that may be required for a
violation of certain fair lending laws, the Federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities.
On March 8, 1994, the Federal Interagency Task Force on Fair Lending
issued a policy statement, which became effective April 15, 1994, on
discrimination in lending. The policy statement describes the three methods
that Federal agencies will use to prove discrimination: overt evidence of
discrimination, evidence of disparate treatment, and evidence of disparate
impact.
In connection with its assessment of CRA performance, the regulators
assign a rating of "outstanding," "satisfactory," needs to improve," or
"substantial noncompliance." The OCC conducts examinations of a bank's CRA
performance as part of its regular examination process.
PENDING LEGISLATION AND REGULATIONS
Certain legislative and regulatory proposals which could affect the
Company, the Bank and the banking business in general are pending, or may be
introduced, before the U.S. Congress, the California State Legislature, and
Federal and State government agencies. The U.S. Congress is considering
numerous bills that could reform the banking laws substantially, particularly if
the current legal barriers between commercial banking and investment banking are
eliminated, as is now being proposed.
It is not known to what extent, if any, these proposals will be
enacted or what effect such legislation would have on the structure, regulation,
or competitive relationship of financial institutions. It is likely, however,
that many of these proposals would subject the Company and the Bank to increased
regulation, disclosure and reporting requirements and would increase competition
to the Bank and its cost of doing business.
In addition to pending legislative changes, the various banking
regulatory agencies frequently propose rules and regulations to implement and
enforce already existing legislation. FDICIA requires the regulatory agencies
to adopt numerous rules, regulations, standards and guidelines over the next
several years. Some of these regulations have been proposed. With respect to
others, the agencies have solicited comments from the industry on the form the
regulations should take. It cannot be predicted whether or in what form any
such legislation or regulations will be enacted or the effect that such
legislation may have on the business of the Company and the Bank.
COMPETITORS
Commercial banks, in general, have historically been less restricted
in the types of loans they may lawfully make than have been non-bank financial
institutions. However, the Depository Institutions Deregulation and Monetary
Control Act, enacted in 1980, has increased the ability of non-banking
institutions to compete with banks in lending activities. Federally chartered
savings and loan associations may now invest up to 10% of their assets in
commercial corporate, business or agricultural loans, and may offer credit card
services. Federal credit unions have previously been authorized
13
<PAGE>
by law to offer certain types of consumer loans. Additionally, since December
31, 1980, banks and other financial institutions, nationwide, have been
permitted to offer check-like services, such as negotiable order of withdrawal
(NOW) accounts, on which interest or dividends may be paid under certain
circumstances.
SELECTED STATISTICAL INFORMATION
The following tables present selected financial information regarding
the Bank's loans and deposits. This information should be read in conjunction
with the company's Consolidated Financial Statements and the notes thereto and
Management's Discussion and Analysis of Financial condition and Results of
Operations included in the Company's 1994 annual Report to Shareholders, which
has been incorporated herein by reference.
TABLE I - LOAN MATURITIES - The following table details the maturity structure
of the Bank's Commercial, SBA, Technology and Real Estate Construction and Land
loan portfolio at December 31, 1994.
<TABLE>
<CAPTION>
(Dollars in thousands) Commercial, Real Estate,
SBA and Construction and
Technology Land
-------------------------------------------------------------------------------
<S> <C> <C>
One year or less:
Floating Rate $46,508 $16,760
Fixed Rate 4,034 420
One to Five Years:
Floating Rate 29,086 788
Fixed Rate 2,032 149
After Five Years:
Floating Rate 24 --
Fixed Rate 11 --
------- -------
Total $81,695 $18,117
======= =======
</TABLE>
TABLE II - COMPOSITION OF LOANS - The following tables details the composition
of the Bank's gross loan portfolio at:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
(Dollars in Millions) $ % $ % $ % $ % $ %
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 81.7 58.6 77.7 57.7 73.5 56.9 60.6 57.8 46.6 48.9
Real Estate Construction
and Land 18.1 13.0 19.1 14.2 23.0 17.8 17.0 16.3 26.5 27.8
Real Estate Term 13.1 9.4 12.1 9.0 11.2 8.7 9.6 9.2 5.8 6.1
Consumer 21.1 15.1 18.2 13.5 16.6 12.8 17.5 16.7 16.3 17.2
-------------------------------------------------------------------------------------------------------------------------------
Total 134.0 96.1 127.1 94.4 124.3 96.2 104.7 100.0 95.2 100.0
-------------------------------------------------------------------------------------------------------------------------------
Loans Held For Sale 5.4 3.9 7.6 5.6 4.9 3.8 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Total Loans $139.4 100.0 $134.7 100.0 $129.2 100.0 $104.7 100.0 $95.2 100.0
===============================================================================================================================
</TABLE>
TABLE III - NON-PERFORMING LOANS -The following table details the Bank's non-
performing loan portfolio for the last five years.
<TABLE>
<CAPTION>
December 31
(Dollars in thousands) 1994 1993 1992 1991 1990
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual $3,244 $ 997 $ 513 $ 738 $ --
Accruing Loans Past Due 1,371 1,903 -- 55 --
90 days or more
Restructured Loans -- -- -- -- 1,380
----------------------------------------------------------------------
Total $4,615 $2,900 $ 513 $ 793 $1,380
======================================================================
</TABLE>
14
<PAGE>
TABLE IV - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES - The Bank's allocation of
its allowance for loan losses for the past five years is detailed as follows for
years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
(Dollars in thousands) $ % $ % $ % $ % $ %
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount of allowance allocated to:
Commercial 1,846 60.2 1,511 59.1 1,216 58.0 1,018 57.8 558 48.9
Real Estate Construction
and land 180 13.3 308 14.5 263 18.2 184 16.3 295 27.8
Real Estate Term 495 9.7 391 9.2 56 8.9 48 9.2 42 6.1
Consumer 245 15.5 10 13.8 190 13.1 217 16.7 187 17.2
Loans Held for Sale 14 4.0 27 5.8 23 3.8
Unallocated 138 (2.7) -- (2.4) -- (2.0) 3 -- 219 --
-------------------------------------------------------------------------------------------------------------------------------
Total $2,918 100.0 $2,247 100.0 $1,748 100.0 $1,470 100.0 $1,301 100.0
===============================================================================================================================
</TABLE>
TABLE V - The following table summarizes the activity in the Bank's allowance
for loan losses for the past five years:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at the beginning of period $ 2,247 $ 1,748 $1,470 $1,301 $1,107
Charge Offs:
Commercial (748) (1,069) (520) (23) (142)
Real Estate-Construction (123) -- (62) (188) --
Real Estate- term -- -- -- -- --
Consumer installment (141) (159) (145) (2) --
--------------------------------------------------------------------------------------------------------------------------
Total (1,012) (1,228) (727) (213) (142)
Recoveries:
Commercial 57 -- 4 -- 5
Real Estate-construction -- -- 95 -- --
Real Estate-term -- -- -- -- --
Consumer installment 6 48 4 -- --
--------------------------------------------------------------------------------------------------------------------------
Total 63 48 103 -- 5
--------------------------------------------------------------------------------------------------------------------------
Net charge-offs (949) (1,180) (624) (213) (137)
Provision charged to income 1,620 1,679 902 382 331
==========================================================================================================================
Balance at the end of period $ 2,918 $ 2,247 $1,748 $1,470 $1,301
</TABLE>
15
<PAGE>
Table VI - MATURITIES OF CERTIFICATES OF DEPOSIT
The following table presents the Bank's maturities of certificates of deposit
over $100,000 issued by the Bank as of December 31, 1994.
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1994
<S> <C>
Three months or less $19,502
Three to six months 4,674
Six to twelve months 1,344
Over twelve months ---
-------
Total $25,520
=======
</TABLE>
For information regarding certain required disclosures of the maturities of
investments, refer to Note 2 in the Company's 1994 Annual Report to Shareholders
which is incorporated herein by reference.
EMPLOYEES
---------
The Company has no salaried employees, since all officers of the
Company are employees of the Bank. At December 31, 1994, the Bank had 111 full
time equivalent employees. Management believes that its employee relations are
good and that the benefits provided by the Bank to its employees are
competitive.
ITEM 2. PROPERTIES
The Company leases, from an unaffiliated party, approximately 19,000
square feet of office space, consisting of a portion of the first and second
floors of a two-story building at the intersection of Stevens Creek Boulevard
and Torre Avenue in Cupertino, California. The lease commenced on October 1,
1992, and has a term of ten years, with two consecutive five-year renewal
options. The current minimum monthly rental payments are approximately $42,000,
and are subject to annual adjustments depending on the percentage increase in
the consumer price index over the prior period. The rent is further subject to
adjustment upon exercise of each renewal option, to an amount equal to the then
current market rental rate for similar properties. At December 31, 1994, the
Company subleased all 19,000 square feet of the leased premises to the Bank for
an amount equivalent to the Company's expense related to such premises.
The Bank has entered into a lease for 3,900 square feet of office
space on the ground floor of Sixty South Market Street, San Jose, CA, effective
August 1, 1993. The lease has a term of five years, with an option to extend for
an additional five years. The monthly rent is approximately $5,200 and is
subject to annual adjustments. The rent is subject to adjustment upon exercise
of the renewal option to an amount equal to the then current market rental rate
for similar space.
Effective March 28, 1994, the Bank extended its lease for 5,300 square
feet of office space at 3 Palo Alto Square in Palo Alto, CA, which currently
accommodates its Palo Alto regional banking office, and its Emerging Growth
Industries division. The term is for eight years, with a base rent of $11,125
per month, with scheduled annual increases. The Company has an option to extend
the lease for two additional five-year periods.
Effective June 16, 1994, the Bank leased 2,100 square feet of office
space at 3530 Camino Del Rio North, San Diego, CA. This space is currently
utilized by the Banks wholesale mortgage origination unit. The term of the
lease is approximately 21 months, with a base rent of approximately $2,200 per
month.
The Company believes that its facilities are well maintained and
adequate to meet its current requirements.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS. On January 25, 1994, Sumitomo Bank ("Sumitomo") as
-----------------
trustee for the California Dental Guild Real Estate Mortgage Fund II ("Fund
II"), filed suit against the Bank in the Superior Court of the State of
California, Santa Clara County, alleging negligence by the Bank and, by
amendment of the complaint, one of its officers, in connection with the
administration of a trust account. Sumitomo brought suit in its capacity as
successor trustee for Fund II, and currently seeks monetary damages of
approximately $2.2 million. Discovery for this litigation is still in process
and no trial date has currently been scheduled.
After consultation with its litigation counsel, the Bank believes that
it has defenses to the claims made by Sumitomo and will vigorously defend the
suit. However, 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. Accordingly, no assurance can be given that Sumitomo's claims will be
decided in favor of the Bank.
The Bank believes that, if there were to be an unfavorable outcome of
this suit, the Bank's litigation reserves and, based upon advice of litigation
counsel, its coverages under a professional liability and director and officer
insurance policies, would be adequate to cover any reasonably determined
liability for the alleged claims. In any event, the Bank believes that the
Sumitomo suit will not have a material adverse effect on the financial
statements of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this Item is incorporated by reference to
the section entitled "Stock Activity" on page 21 of the Company's 1994 Annual
Report to Shareholders.
At December 31, 1994 there were approximately 403 holders of record of
the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by
reference to the table entitled "Financial Highlights" on page 1 of the
Company's 1994 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by
reference to the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 10 through 21 of the
Company's 1994 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to the Company's Consolidated Financial Statements and the notes
thereto, and the Independent Auditor's Report thereon, set forth on pages 22
through 38 of the Company's 1994 Annual Report to Shareholders.
17
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The information required to be reported on this item has been
previously reported in a Form 8-K filed on October 20, 1994.
PART III
Certain information required by Part III is omitted from this Report
in that the Company intends to file its definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to the information relating to the directors of the Company set forth
under the captions "Election of Directors" and "Compliance with Section 16)a) of
the Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information relating to executive compensation set forth under
captions "Executive Compensation and Other Matters" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference related to ownership of equity securities as set forth under the
caption "General Information - Stock Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information relating to certain relationships and related
transactions set forth under the caption "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements.
The following Consolidated Financial Statements of Cupertino
National Bancorp and Independent Auditors' Report are contained
in and incorporated by reference herein to the Company's 1994
Annual Report to Shareholders:
Consolidated Balance Sheets - At December 31, 1994 and 1993
Consolidated Statements of Income - For the years ended December
31, 1994, 1993 and 1992.
18
<PAGE>
Consolidated Statements of Shareholders' Equity -For the years
ended December 31, 1994, 1993 and 1992.
Consolidated Statements of Cash Flows - For the years ended
December 31, 1994, 1993 and 1992.
Notes to Consolidated Financial Statements.
Independent Auditors' Reports.
With the exception of the information incorporated by reference
to the Company's 1994 Annual Report to Shareholders in Parts I,
II and IV of this Form 10-K, the Company's 1994 Annual Report to
Shareholders is not to be deemed filed as part of this Report.
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required, or because the required
information is included in Management's Discussion and Analysis
of Financial Condition and Results of Operations or in the
Consolidated Financial Statements and Notes thereto contained in
the Company's 1994 Annual Report to Shareholders, which are
incorporated herein by reference.
(3) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed
as part of, or are incorporated by reference into, this Report.
Exhibit Nos. 10.2, 10.5, 10.7, 10.8, 10.9 and 10.10 are
management contracts or are compensatory plans or arrangements
covering executive officers or directors of the Company.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the
fourth quarter of fiscal 1994:
Date of Report Items Reported
-------------- --------------
September 7, 1994 Pursuant to Item 5, the Company reported the
announcement of the resignation of Scott
Montgomery as an officer and director of the
Company and as a director of the Bank
effective September 30, 1994.
October 20, 1994 Pursuant to Item 4, the Company reported
changing its independent public accountants
from Deloitte & Touche, LLP to Coopers &
Lybrand, L.L.P.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ C. Donald Allen
-------------------------------
C. Donald Allen, Director and
Chief Executive Officer
Dated:
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints C. Donald Allen and Steven C. Smith or
either of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her, and in his or her
name, place and stead, in any and all capacities to sign any and all amendments
to this Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchanges
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue of hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<C> <S> <C>
/s/ C. Donald Allen Director and
--------------------- Chief Executive Officer
C. Donald Allen (Principal Executive Officer)
/s/ Steven C. Smith Executive Vice President, CFO,
--------------------- Acting Chief Operating Officer
Steven C. Smith and Corporate Secretary
(Principal Financial and Accounting Officer)
/s/ David K. Chui Director
---------------------
David K. Chui
/s/ Carl E. Cookson Director
---------------------
Carl E. Cookson
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jerry R. Crowley Director March 30, 1995
---------------------
Jerry R. Crowley
/s/ Janet M. DeCarli Director March 30, 1995
---------------------
Janet M. DeCarli
/s/ John M. Gatto Director March 30, 1995
---------------------
John M. Gatto
/s/ William H. Guengerich Director March 30, 1995
-------------------------
William H. Guengerich
/s/ James E. Jackson Director March 30, 1995
-------------------------
James E. Jackson
/s/ Rex D. Lindsay Director and March 30, 1995
------------------------- Vice Chairman of the Board
Rex D. Lindsay
/s/ Glen McLaughlin Director and March 30, 1995
------------------------- Chairman of the Board
Glen McLaughlin
/s/ Norman Meltzer Director March 30, 1995
-------------------------
Norman Meltzer
/s/ Dick J. Randall Director March 30, 1995
-------------------------
Dick J. Randall
/s/ Dennis S. Whittaker Director March 30, 1995
-------------------------
Dennis S. Whittaker
</TABLE>
21
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Number Exhibit Numbered Page
------ ------- -------------
<C> <S> <C>
3.1 Amended Articles of Incorporation of Cupertino National
Bancorp-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.
10.1 Lease - Banking Facility--filed as Exhibit 10.1 of
Registrant's Exhibits to Amendment No. 1 to Form S-18
Registration Statement (No. 2-94390), as filed with the
Commission on December 11, 1984 and incorporated herein by
reference.
10.2* 1985 Stock Option Plan, filed as Exhibit 10.2 of Registrant's
Exhibits to Form 10-K for the fiscal year ended December 31,
1993, as filed with the Commission on March 25, 1994 and
incorporated herein by reference.
10.3 Form of incentive stock option agreement for use with 1985
Stock Option Plan filed--as Exhibit 4.4 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.
10.4 Form of non-statutory stock option agreement or use with 1985
Stock Option Plan--incorporated herein by reference and filed
as Exhibit 4.5 of Registrant's Exhibits to Form S-8
Registration Statement (No. 33-36057), as filed with the
Commission on July 25, 1990.
10.5* 1986 Non-Qualified Stock Option Plan--filed as Exhibit 10.3 of
Registrant's Exhibits to Form 10-K for the fiscal year ended
December 31, 1986, as filed with the Commission on March 31,
1987 and incorporated herein by reference.
10.6 Form of non-qualified stock option agreement for use with 1986
Non-Qualified Stock Option Plan--filed as Exhibit 10.7 of
Registrant's Exhibits to Form 10-K for the fiscal year ended
December 31, 1986, as filed with the Commission on March 31,
1987 and incorporated herein by reference .
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Number Exhibit Numbered Page
------ ------- -------------
<C> <S> <C>
10.7* 1989 Non-Qualified Stock Option Plan--filed as
Exhibit 10.11 of Registrant's Form S-2 registration
statement (No. 33-30297), filed with the Commission
on August 2, 1989 and incorporated herein by reference.
10.8* Employment Agreement with C. Donald Allen dated July 1,
1990--filed as Exhibit 10.9 of Registrant's Exhibits to
Form 10-K for the fiscal year ended December 31, 1990,
as filed with the Commission on March 30, 1991 and
incorporated herein by reference.
10.9* Cupertino National Bancorp Stock Purchase Plan--filed as
Exhibit 10.10 of Registrant's Exhibits to Form 10-K for
the fiscal year ended December 31, 1990, as filed with
the Commission on March 30, 1991, and incorporated herein
by reference.
10.10* Salary Continuation Agreement with C. Donald Allen dated
August 1, 1993, filed as Exhibit 10.10 of Registrant's
Exhibits to Form 10-K for the fiscal year ended December 31,
1993, as filed with the Commission on March 25, 1994, and
incorporated herein by reference.
10.11* Salary Continuation Agreement with Scott Montgomery dated
August 1, 1993, filed as Exhibit 10.11 of Registrants
Exhibits to Form 10-K for the fiscal year ended December 31,
1993, as filed with the Commission on September 7, 1994,
and incorporated herein by reference.
13.1 1994 Annual Report to Shareholders (to be deemed filed only
to the extent required by the instructions to exhibits for
Reports on Form 10-K)
22 Subsidiaries of the Registrant--filed as Exhibit 22.1 of
Registrant's Exhibits to Form 10-K for the fiscal year ended
December 31, 1985, as filed with the Commission on March 31,
1986 and incorporated herein by reference.
23.1 Independent Auditor's Consent - Coopers & Lybrand, L.L.P.
23.2 Independent Auditor's Consent - Deloitte & Touche, LLP
25.1 Power of Attorney. Reference is made to page 21 of this
report.
27.0 Financial Data Schedule
</TABLE>
_____
*A management contract or compensatory plan or arrangement
required to be filed pursuant to Item 14(c).
23
<PAGE>
EXHIBIT 13.1
Cupertino National Bancorp
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Provision for Loan Losses
The provision for loan losses is the annual cost of providing an allowance or
reserve for future losses on loans. The loan loss provision amount for each year
is dependent on many factors, including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
the quality of the loan portfolio, the value of the underlying collateral on
problem loans and the general economic conditions in the Bank's market area. The
Bank performs a monthly assessment of the risk inherent in its loan portfolio,
as well as a review of each asset determined to have identified weaknesses.
Based on this analysis, which includes reviewing historical loss trends, current
economic conditions, industry concentrations and specific reviews of assets
classified with identified weaknesses, the Bank allocates reserves to its loans
and other risk asset portfolio. The reserve has specific allocations for credits
where the probability of a loss can be defined and reasonably determined, while
the balance of the reserve allocations are based on historical data, including
delinquency trends, economic conditions in our market area, combined with
industry loss averages. The provision for loan losses in 1994 was $1.6 million,
compared to $1.7 million in 1993 and $.9 million in 1992. The increase in the
loan loss provision in 1994 and 1993 when compared to 1992 continues to reflect
the weakness in the economic conditions within the Bank's market area and the
credit risk inherent in its loan portfolio. The Bank believes that adverse
economic conditions in its market area have contributed to this trend.
Other Income
Total other income decreased to $3.1 million in 1994, compared to $3.2 million
in 1993 and $1.7 million in 1992. The following table summarizes the sources of
other income in:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of mortgage loans $ 993 $1,525 $ 250
Gain on sale of SBA loans 685 435 337
Trust fees 593 494 462
Loan documentation fees, net 276 284 115
Depositor service fees 267 252 264
Gain on sale of investment securities -- -- 61
Other 265 164 175
------------------------
Total $3,079 $3,154 $1,664
------------------------
</TABLE>
The largest portion of the decrease in other income is due to the mortgage
banking business unit, which began operations in July 1992. The division
generated $993,000 in gains on the sale of mortgage loans in 1994, compared to
$1,525,000 in 1993, and $250,000 in 1992. The sharp rise in interest rates
during 1994 had the largest impact on mortgage income, causing a reduction in
the volume of refinancing and origination in the residential mortgage markets.
In part to counteract a reduction in mortgage income due to a rise in interest
rates in 1994, and expand into new, growing markets, the Bank opened a mortgage
loan origination office in San Diego, California in June 1994. While this
improved the Bank's loan funding capabilities, it did not offset the overall
market decline. During the first two months of 1995, this decline continued and
the Bank determined it was in the best interest of the shareholders to close the
mortgage operations effective March 31, 1995.
Loan documentation income, which represents the charge to clients for expenses
incurred by the Bank to document and process loans, decreased slightly to
$276,000 for 1994, as compared to $284,000 in 1993 and $115,000 in 1992. The
decrease in loan documentation income in 1994 as compared to 1993, is primarily
attributable to a reduction in the quantity of loan originations in 1994 as
compared to 1993.
Fees received by the Trust Department of the Bank increased to $593,000 in
1994, as compared to $494,000 in 1993 and $462,000 in 1992. The Trust Department
had approximately $157 million in total assets at December 31, 1994, compared
with approximately $118 million in 1993 and approximately $117 million in 1992.
The fiduciary assets of the Trust Department at December 31, 1994, consisted of
50% in employee benefit plans, 26% in individual trusts, with custodial, court
trusts and other similar arrangements providing the balance.
<PAGE>
Premiums recognized on the sale of SBA loans increased to $685,000 for 1994,
as compared to $435,000 in 1993 and $337,000 in 1992. During 1994 the Bank's SBA
division was granted Preferred Lender status by the Small Business
Administration. This status should enhance the Bank's ability to increase its
market share by improving loan application turnaround time.
Service charges on depositor accounts remained stable with $267,000 in 1994,
$252,000 in 1993 and $264,000 in 1992.
Operating Expenses
Operating expenses totaled $10.4 million for 1994, compared to $10.2 million for
1993, and $6.7 million for 1992. The ratio of operating expenses to average
assets for these periods was 5.3%, 5.6%, and 4.2%, respectively.
The following table represents the major components of operating expenses for
the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits $ 5,724 $ 5,014 $3,592
Occupancy and equipment 1,400 1,226 956
Professional services and legal costs 911 1,379 391
FDIC Insurance and regulatory assessments 485 414 341
Other real estate, net 48 288 (80)
Other 1,500 1,425 1,030
-----------------------------
Total before client services 10,068 9,746 6,230
Client services 376 478 456
-----------------------------
Total $10,444 $10,224 $6,686
-----------------------------
Efficiency ratio before client services 71.10% 73.16% 59.06%
-----------------------------
Efficiency ratio 73.75% 76.75% 63.39%
-----------------------------
Total operating expenses to average assets 5.27% 5.58% 4.24%
=============================
</TABLE>
The efficiency ratio is computed by dividing total non-interest expenses by
net interest income and other income. An increase in the ratio indicates that
more resources are being allocated to generate the same (or greater) volume of
income while a decrease would indicate a more efficient allocation of resources.
The Company's efficiency ratio for the last half of 1994 was 67.42% as the
Company continued to focus on controlling operating expenses.
Compensation expenses increased in 1994 to $5.7 million compared to $5.0
million in 1993 and $3.6 million in 1992, primarily due to expanded operations,
including the establishment of the Emerging Growth Industries division and the
mortgage loan production office in San Diego, California.
Occupancy and equipment expenses increased as a result of growth in staff,
technological improvements in the Bank's computer system and the investment in
the Emerging Growth Industries division and the mortgage loan production office
in San Diego, California.
Expenses for professional services, including legal, consulting and audit
services, decreased to $911,000 in 1994, as compared to $1.4 million in 1993 and
$391,000 in 1992. While the 1994 decrease was primarily due to a non-recurring
legal settlement and related legal fees of $720,000 recorded in 1993, the
increasing trend from 1992 to 1994 was caused by increased legal fees related to
the loan collection and workout activity created in part by the continuing
troubled economic conditions in California.
Client service expenses decreased to $376,000 in 1994, compared to $478,000 in
1993 and $456,000 in 1992 as a result of a decrease in the volume of non-
interest bearing demand deposits for which the Bank provides services.
FDIC and OCC regulatory assessments increased to $485,000 in 1994, compared to
$414,000 in 1993 and $341,000 in 1992 as a result of increased deposit growth.
The FDIC assessment may decline in future years as the FDIC Bank Insurance Fund
is estimated to be fully funded in late 1995. This could result in a significant
reduction in FDIC assessment expense for the last quarter 1995 and in future
years.
<PAGE>
Cupertino National Bancorp
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Other operating expenses increased by $75,000 in 1994 from 1993 primarily due
to increased lending volume and general growth of the Bank. The $395,000
increase in other operating expense from 1992 to 1993 was due to increased costs
related to the lending and mortgage banking operations.
Income Taxes
The Company's effective income tax rate for 1994 was 35.0%, compared to 37.5% in
1993 and 40.4% in 1992. The decrease in this rate is due primarily to the effect
of the California Franchise Tax Enterprise Zone Credit recognized in 1994 and
the impact of tax exempt municipal income in both 1994 and 1993 when compared to
1992.
Financial Condition
Assets
Total assets increased to $223.1 million at December 31, 1994, an increase of
15.8% from the $192.6 million at December 31, 1993, which was an 11.6% increase
from the $172.5 million one year earlier. The growth in 1994 assets is primarily
centered in the investment portfolio combined with marginal growth in the loan
portfolio.
Loans
Total loans, excluding loans held for sale, increased 5.4% to $134.0 million at
December 31, 1994 compared to $127.1 million at December 31, 1993. Total loans
increased 2.2% in 1993 from $124.3 million at year-end 1992.
The Bank's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending. The Bank's
lending is focused in the Santa Clara and San Mateo Counties. While no specific
industry concentration is significant, the Bank's lending is concentrated in an
area that is highly dependent on the technology industry and its supporting
companies. Thus, the Bank's borrowers could be adversely impacted by a downturn
in this sector of the economy and this could impact their ability to repay their
loans.
The following table presents the composition of the loan portfolio at the end
of each of the last three years:
<TABLE>
<CAPTION>
1994 1993 1992
------------------ ----------------- ------------------
(Dollars in thousands) Amount % Amount % Amount %
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 81,695 60.2% $ 77,699 59.1% $ 73,523 57.9%
Real estate construction & land 18,117 13.3 19,090 14.5 23,049 18.2
Real estate term 13.133 9.7 12,075 9.2 11,225 8.9
Consumer & other 21,059 15.5 18,214 13.8 16,551 13.1
-----------------------------------------------------------
Total 134,004 98.7 127,078 96.6 125,348 98.1
Deferred fees and discounts (847) (0.6) (923) (0.7) (693) (0.5)
Allowance for loan losses (2,918) (2.1) (2,247) (1.7) (1,748) (1.4)
-----------------------------------------------------------
Net loans 130,239 96.0 123,908 94.2 121,907 96.2
Loans held for sale 5,383 4.0 7,625 5.8 4,841 3.8
-----------------------------------------------------------
Total loans $135,622 100.0% $131,533 100.0% $126,748 100.0%
===========================================================
</TABLE>
Credit Quality
The Bank's objective is to limit the risk inherent in its loan portfolio through
stringent loan policies and loan review procedures. The loan policy of the Bank
is approved each year by its Board of Directors and is managed through periodic
reviews of such policies in relation to current economic activity and the degree
of risk (both credit and interest rate) in the current portfolio. A Director's
Loan Committee supervises the lending activities of the Bank. This committee
consists of four outside directors
<PAGE>
and the Chairman/CEO, the President/COO, the Executive Vice President/Senior
Credit Officer (currently vacant), the Senior Vice President/Commercial Manager
and the Vice President/Credit Administration. The officers in this group make up
the Officer's Loan Committee. Loan requests exceeding individual officer
approval limits are submitted to the Officer's Loan Committee, and those which
exceed its limits are submitted to the Director's Loan Committee for final
approval.
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 the Director's
Loan Committee review and monitor problem loans on a regular basis.
Management generally places loans on non-accrual when they become 90 days past
due, unless they are well secured and in the process of collection. When a loan
is placed on non-accrual status, any interest, previously accrued but not
collected is reversed from income. Loans are charged off when management
determines that collection has become unlikely. Restructured loans are those
where the Bank has granted a concession on the interest paid or original
repayment terms due to financial difficulties of the borrower. Other real estate
owned consists of real property acquired through foreclosure on the related
collateral underlying defaulted loans. The following table summarizes non-
accrual loans, loans past due 90 days and still accruing, restructured loans,
and other real estate owned at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
------------------------------------------------------------------------------
Non-performing assets
<S> <C> <C> <C>
Non-accrual loans $ 3,244 $ 997 $ 513
Accruing loans past 90 days or more 1,371 1,903 --
Restructured loans -- -- --
Other real estate owned 375 618 3,717
-----------------------------
Total non-performing assets $ 4,990 $ 3,518 $4,230
-----------------------------
Ratio of the reserve for loan losses to
total non-performing assets 58% 64% 41%
</TABLE>
The following table details the Bank's classified assets for the years ended
December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Classified assets:
Loans
Substandard $10,927 $ 9,885 $10,906
Doubtful 1,781 942 649
Loss -- -- --
-----------------------------
Total 12,708 10,827 11,555
OREO 375 618 3,717
-----------------------------
Total classified assets $13,083 $11,445 $15,272
-----------------------------
Ratio of classified assets to:
Total assets 5.9% 5.9% 8.9%
Total loans and OREO 9.4% 8.5% 11.5%
Ratio of reserve for loan losses to
classified assets 22.3% 19.6% 11.4%
============================
</TABLE>
The increase in non-performing and classified assets reflects the continued
lethargy in the Northern California economy. The increase is primarily related
to a $2.3 million loan to one borrower ($1.7 million real estate secured). The
Bank is aggressively pursuing collection of this loan.
<PAGE>
Cupertino National Bancorp
Management's Discussion Analysis of
Financial Condition and Results of Opertions (Continued)
<TABLE>
<CAPTION>
The following table summarizes activity in the allowance for loan losses
for the past three years.
Summary of Loan
Loss Experience
(Dollars in thousands) Years ended December 31, 1994 1993 1992
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during period $127,264 $127,210 $114,780
-------------------------------
Allowance for loan losses:
Balance at beginning of period $ 2,247 $ 1,748 $ 1,470
Charge-Offs:
Commercial (748) (1,069) (520)
Real estate - construction (123) -- (62)
Real estate - term -- -- --
Consumer installment (141) (159) (145)
-------------------------------
Total (1,012) (1,228) (727)
-------------------------------
Recoveries:
Commercial 57 -- 4
Real estate - construction -- -- 95
Real estate - term -- -- --
Consumer installment 6 48 4
-------------------------------
Total 63 48 103
-------------------------------
Net charge-offs (949) (1,180) (624)
Provision charged to income 1,620 1,679 902
-------------------------------
Balance at end of period $ 2,918 $ 2,247 $ 1,748
-------------------------------
Net charge-offs to average loans outstanding during period .75% .93% .54%
-------------------------------
Allowance as a percentage of loans 2.09% 1.67% 1.35%
===============================
</TABLE>
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 allowance for loan loss increased at
December 31, 1994 to 2.09% of outstanding loans compared to 1.67% at December
31, 1993 and 1.35% at December 31, 1992. The following table details the
allocation of the reserve for loan losses:
<TABLE>
<CAPTION>
Allocation of Loan Loss Reserve
1994 1993 1992
---------------------- -------------------- ---------------------
Percent of Percent of Percent of
(Dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,846 60.2% $1,511 59.1% $1,216 58.0%
Real estate - construction 180 13.3 308 14.5 263 18.2
Real estate - term 495 9.7 391 9.2 56 8.9
Consumer installment 245 15.5 10 13.8 190 13.1
Loans held for sale 14 4.0 27 5.8 23 3.8
Unallocated - deferred fees, commitments
and loss reserves 138 (2.7) -- (2.4) -- (2.0)
-----------------------------------------------------------------------
Total $2,918 100.0% $2,247 100.0% $1,748 100.0%
=======================================================================
</TABLE>
Although management believes that the allowance for loan losses is adequate,
future provisions will be subject to continuing evaluations of the inherent risk
in the portfolio. Further or continued downturns in the economy and other
factors could make additional provisions necessary.
<PAGE>
Deposits
Deposits reached $186.7 million at December 31, 1994, an increase of 6.3% as
compared to deposits of $175.7 at December 31, 1993. Deposits in 1993 increased
12.2% from $156.6 million at December 31, 1992.
Total average deposits increased 3.5% to $172.4 million for 1994, compared to
an average of $166.6 for 1993. Average deposits in 1993 represented an increase
of 16.9% over average deposits of $142.5 in 1992. The increase in deposits was
primarily due to the continued marketing efforts directed at commercial business
clients and continued growth in the Bank's regional offices in San Jose and Palo
Alto.
Non-interest bearing deposits were $53.9 million at December 31, 1994,
compared to $62.8 million at December 31, 1993, and $62.3 million at December
31, 1992. On average, non-interest bearing deposits in 1994 were $50.4 million,
compared to $55.7 million in 1993 and $45.4 million in 1992. The decrease in
non-interest bearing deposits was due to a decline in title company balances,
which were larger in 1993 due to the large volume of real estate financing
activity during the favorable interest rate environment at that time. However,
the Bank continues to focus on non-interest bearing deposits to help maintain
its effective net interest yield. As its regional offices expand the Bank
anticipates this funding source to remain stable.
Money market and other interest-bearing demand accounts reached $82.0 million
at year-end 1994, an increase of 21.3% from the prior year. The continued
efforts by the Bank to market these low cost deposit products contributed
significantly toward the continued growth.
Time certificates of deposit of $100,000 or more, savings and other time
deposits totaled $50.9 million or 27.3% of total deposits at December 31, 1994,
compared to $45.4 million (25.8% of total deposits) at December 31, 1993, and
$43.3 million (27.7% of total deposits) at December 31, 1992.
Time certificates of deposit $100,000 or more, represented 13.7% of total
deposits at December 31, 1994, compared with 17.8% and 16.8% at December 31,
1993 and 1992, respectively.
Substantially all of the Bank's deposits originate in Cupertino, San Jose,
Palo Alto and the surrounding communities in Santa Clara and San Mateo Counties.
The Bank has one large deposit relationship with a local title company in which
three directors of the Company serve as members of the board, and one of the
directors has an ownership interest. Average monthly deposits from this client,
including both non-interest and interest bearing demand accounts, averaged
between $3.9 million and $12.6 million during 1994, compared to a range of
$11.3 million and $19.0 million for 1993. The balance at December 31, 1994 was
$4.6 million, compared to $14.7 million for December 31, 1993. Management
believes that the loss of this client would not have a materially adverse effect
on the Bank's liquidity, but might impact the Bank's net interest margin on a
short-term basis.
Liquidity
Liquidity management 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 wish to withdraw funds or require funds to meet their credit
needs. Without proper liquidity management, the Bank would not be able to
perform the primary function of a financial intermediary and would, therefore,
not be able to meet the needs of the communities it serves.
The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its client base,
but to maintain an appropriate balance between interest-sensitive assets and
liabilities so that the Bank can also meet the return on investment requirements
of its shareholders. Daily monitoring of the sources and uses of funds is
necessary to maintain an acceptable cash position that meets both requirements.
Contingency plans exist and could be implemented on a timely basis to minimize
any risk associated with dramatic changes in market conditions. An example of
this is the Bank's $17 million in Fed Fund's purchase lines which provide back-
up liquidity, $100 million in institutional deposit or brokered deposit lines
and $60 million in reverse repurchase lines. All of these sources combine to
provide a solid liquidity base for growth.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a lesser
extent, sales of loans available for sale. Other short-term investments such as
federal funds sold and maturing interest bearing deposits with other banks are
additional sources of liquidity funding. The liability portion of the balance
sheet provides liquidity through various clients' interest bearing and non-
interest bearing deposit
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
accounts. Federal funds purchased and other short term borrowings are
additional sources of liquidity and basically represent the Company's
incremental borrowing capacity. These sources of liquidity are short-term in
nature and are used as necessary to fund asset growth and meet short-term
liquidity needs.
Interest Rate Risk Management
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.
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 time horizons: 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. The differences are known as interest
sensitivity gaps. The following table shows the Bank's interest sensitivity gaps
for different intervals as of December 31, 1994:
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
Repricing Periods
Greater Greater
Than Than Greater Total Total
Immediate 2 Days To Months 1 Year 3 Yrs Than Rate Non-Rate
(Dollars in thousands) One Day 6 Months 7-12 to 3 Yrs to 5 Yrs 5 Yrs Sensitive Sensitive Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 9,326 $ 9,326
Short term investments $ 10,400 $10,400 10,400
Investment securities $ 4,328 $10,444 $13,966 $ 8,159 $22,675 59,572 934 60,506
Loans 119,246 2,332 624 5,331 3,680 3,376 134,589 4,501 130,090
Loan loss/unearned fees (3,765) (3,765)
Other assets 7,282 7,282
---------------------------------------------------------------------------------------------------
Total assets 129,646 6,660 11,068 19,297 11,839 26,051 204,561 18,278 222,839
===================================================================================================
Liabilities and Equity:
Deposits
Demand 54,278 54,278
Now, MMDA, and savings 88,355 88,355 88,355
Time deposits 41,591 2,980 376 26 44,973 44,973
Other borrowed funds 17,256 17,256 17,256
Other liabilities 1,126 1,126
Shareholders' equity 16,851 16,851
---------------------------------------------------------------------------------------------------
Total liabilities and equity 105,611 41,591 2,980 376 26 150,584 72,255 222,839
===================================================================================================
Total asset GAP
GAP $ 24,035 $(34,931) $ 8,088 $18,921 $11,813 $26,051 $53,977 $(53,977) $ --
Cumulative GAP $ 24,035 $(10,896) $ (2,808) $16,113 $27,926 $53,977 $53,977 $ -- $ --
Cumulative GAP/total assets 10.78% (4.89)% (1.26)% 7.23% 12.53% 24.22% 24.22% --% --%
</TABLE>
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.
<PAGE>
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity analysis table. These prepayments may have significant effects on
the Bank's net interest margin. Because of these factors an 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 interest income during
periods of falling rates. While the Company's current negative one year GAP
portion would indicate net interest income should 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 Company's interest earning assets and interest
bearing liabilities. In a simulation analysis on the impact of rising interest
rates, the rates on the Company's interest bearing liabilities reprice at a
slower pace than its assets, thus providing increased net interest income. This
positive impact is aided by the currently high level of core deposit liabilities
retained by the Bank. To maximize yield and increase its net interest income,
the Company increased its portfolio of investment securities during the latter
part of the second and early third quarter of 1994. These securities have an
expected average life of 3 years to 5 years, and are being funded with short
term liabilities, which created the negative GAP position, but allowed the Bank
to improve its overall net interest income. To the extent rates continue to rise
the positive impact of this strategy would decline, but is expected to be offset
by the repricing of its assets, since the majority of the loan portfolio floats
with the Prime Rate.
Capital Resources
Shareholders' equity at December 31, 1994 increased to $18.0 million, from $16.2
million at December 31, 1993, and $15.2 million at December 31, 1992. During
1994 the company paid a 5% stock dividend and a cash dividend of $.10 per share.
The Company believes that a strong capital position is vital to the continued
profitability of the Company, and promotes depositor and investor confidence,
while providing a solid foundation for the future growth of the organization.
The Company has provided the majority of its capital requirements through the
retention of earnings.
Under banking regulatory risk-based capital measures for banks and bank
holding companies, a banking organization's reported balance sheet is converted
to risk-based amounts by assigning each asset to a risk category, which is then
multiplied by the risk weight for that category. Off-balance sheet exposures are
converted to risk-based amounts through a two-step process. First, off-balance
sheet assets and credit equivalent amounts (e.g., standby letters of credit) are
multiplied by a credit conversion factor depending on the defined categorization
of the particular item. Then the converted items are assigned to a risk category
that weights items according to their relative risk. The total of the risk
weighted on- and off-balance sheet amounts represents a banking organization's
risk-adjusted assets for purposes of determining capital ratios under the risk-
based guidelines. Risk-adjusted assets can either exceed or be less than
reported assets, depending on the risk profile of the banking organization.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
stockholders' equity, qualifying perpetual preferred stock, and minority
interests, less goodwill. Supplementary capital includes the allowance for loan
losses (subject to certain limitations), other perpetual preferred stock,
certain other capital instruments, and term subordinated debt. The Company's
major capital components are stockholders' equity in core capital, and the
allowance for loan losses in supplementary capital.
At December 31, 1994, the minimum risk-based capital requirements were 4.0%
for core capital, and 8.0% for total capital. Federal banking regulators have
also adopted leverage capital guidelines to supplement risk-based measures. The
leverage ratio is determined by dividing Tier 1 capital as defined under the
risk-based guidelines by average total assets (not-risk adjusted) for the
preceding quarter. The minimum leverage ratio is 3.0% although banking
organizations are expected to exceed that amount by 1.0% - 2.0% or more,
depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), the Federal Reserve Board, the Comptroller and the FDIC have adopted
regulations, effective December 19, 1992, setting forth a five-tier scheme for
measuring the capital adequacy of the financial institutions they supervise. The
two highest levels recognized under these regulations are as follows:
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Tier 1 Risk-Based Total Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
----------------------------------------------------------------------------
<S> <C> <C> <C>
Well-capitalized 6.0% 10.0% 5.0%
Adequately capitalized 4.0% 8.0% 4.0%
</TABLE>
At December 31, 1994, the Company's risk-based capital ratios were 10.8% for
Tier 1 risk based capital and 12.1% for total risk-based capital, compared to
December 31, 1993 ratios of 10.6% and 12.1% respectively. The Company's leverage
ratio was 8.4% at December 31, 1994, and 8.4% at December 31, 1993. These ratios
exceeded the well-capitalized guidelines shown above.
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital:
Shareholders' equity $ 18,037 $ 16,219 $ 15,174
--------------------------------
Tier 2 capital:
Allowance for loan losses 2,918 2,247 1,748
--------------------------------
Allowable amount for Tier 2 Capital 2,082 2,298 2,168
--------------------------------
Total Risk Based Capital 20,119 18,466 16,922
--------------------------------
Risk-adjusted assets 166,552 153,177 144,514
--------------------------------
Total assets 223,144 192,574 172,526
--------------------------------
Tier 1 capital/risk adjusted assets:
Company's capital ratio 10.8% 10.6% 10.5%
Minimum regulatory requirement 4.0% 4.0% 4.0%
Total Risk-based capital/risk adjusted assets:
Company's capital ratio 12.1% 12.1% 11.7%
Minimum regulatory requirement 8.0% 80% 8.0%
Tier 1 capital/total assets:
Company's leverage ratio 8.4% 8.4% 8.8%
Minimum regulatory requirement 3.0% 3.0% 3.0%
--------------------------------
</TABLE>
BUSINESS RISKS
Certain characteristics and dynamics of the Bank's business and of the financial
markets may create risks to the Bank's long-term success and its financial
results. These risks include:
Geographic Concentration and Santa Clara Valley Economy -- All of the Bank's
operations are located in Santa Clara County in Northern California. As a result
of this geographic concentration, the Bank's results of operations depend
largely upon local economic conditions, which have been relatively volatile in
recent years. Accordingly, there can be no assurance that the Bank's existing
and prospective customers will be responsive to, or have the need for, the
services offered by the Bank. Further, no assurance can be given that the Bank
will not be adversely affected if the economic downturn persists or if economic
conditions otherwise worsen.
Key Employees; Recent Changes in Management -- The Bank's future performance is
substantially dependent upon its ability to attract and retain qualified
personnel. Since January 1, 1994, several members of senior management have left
the Bank, including its President, its Executive Vice President of Technology
Lending, and two Chief Credit Officers. While the loss of the services of key
employees could have a material adverse effect upon the Bank, the losses to date
have not had a material adverse impact on the Bank's operations or financial
condition. The competition for key employees is intense and there is no
assurance that the Bank will be able to retain its existing personnel or
attract, retain and motivate additional qualified personnel in the future.
However, the Bank believes it provides a quality work environment and
competitive benefits package for its employees, as well as providing excellent
opportunities for professional growth for all of its personnel. Accordingly, the
Bank believes these factors will continue to allow it to attract qualified
personnel.
<PAGE>
Government Regulation and Recent Legislation -- The Bank and its operations are
subject to extensive state and federal supervision, regulation and legislation.
The turmoil in the savings and loan industry has spawned significant new
legislation, and increased regulatory scrutiny of lending practices, among other
changes. These trends frequently affect the Bank in ways that increases the
Bank's cost of doing business. The Bank cannot predict the precise impact of
recent legislation, nor the probable course or impact of future legislation or
regulatory actions affecting the financial services industry.
Effects of Inflation-- The impact of inflation on a financial institution
differs significantly from that exerted on an industrial concern, primarily
because its assets and liabilities consist largely of monetary items. The most
direct effect of inflation is higher interest rates. However, the Bank's
earnings are affected by the spread between the yield on earning assets and
rates 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 adjustments in staff expense and occupancy expense,
based upon consumer price indexes. In the opinion of management, inflation has
not had a material effect on the consolidated results of operations.
Pending Litigation -- The Bank is involved in a lawsuit in which the plaintiff
alleges the Bank and one of its officers were negligent in the performance of
their duties as trustee. The suit seeks monetary damages of approximately $2.2
million. After consultation with counsel, the Bank believes that it has defenses
to the claims; however, litigation is subject to inherent uncertainties and
accordingly, no assurance can be given that Sumitomo's claim will be decided in
favor of the Bank. In any event, the Bank believes that any liability that could
arise from the alleged claim would not have a material adverse effect on the
financial statements of the Bank.
Potential Combination -- As previously announced, the Bank is engaged in
preliminary discussions with South Valley Bancorporation regarding a potential
business combination. Given the preliminary nature of the discussion, there is
no assurance that such a transaction will be consummated or that, if
consummated, such transaction will benefit shareholders. Such a transaction, if
any, would be subject to the execution of definitive agreements by the parties
and any required regulatory and shareholder and other corporate approvals.
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS') No. 114 "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114") which was subsequently amended by SFAS
No. 118. Under the provisions of SFAS No. 114, a loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreements. SFAS No. 114 requires creditors to measure impairment of a
loan based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the underlying collateral
("the value"). If the value of the impaired loan is less than the recorded
investment in the loan, a creditor shall recognize the impairment by creating a
valuation allowance with a corresponding charge to bad debt expense. This
statement also applies to restructured loans and loans previously accounted for
as in-substance foreclosures. SFAS No. 114 and SFAS No. 118 apply to financial
statements for fiscal years beginning after December 15, 1994. Earlier
implementation is permitted. The Bank does not expect a material impact on its
financial statements from adopting SFAS No. 114 and SFAS No 118.
Stock Activity -- The common stock of the Company is traded on the NASDAQ
National Market System under the symbol CUNB. There were 403 holders of record
of the Company's common stock at December 31, 1994.
The following table presents the high and low prices of the Company's common
stock, as reported on the NASDAQ National Market System during 1994, 1993 and
1992, adjusted for the effect of stock dividends:
<TABLE>
<CAPTION>
1994 1993 1992
-------------- -------------- -------------
High Low High Low High Low
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Quarter:
First $10.00 $8.81 $10.80 $7.56 $7.89 $6.70
Second $10.38 $9.00 $10.80 $9.07 $8.42 $6.70
Third $10.00 $9.00 $10.89 $9.52 $8.53 $7.56
Fourth $10.00 $8.75 $10.80 $8.57 $8.42 $7.34
</TABLE>
On November 30, 1994, the Company paid a $.10 per share dividend to its
shareholders. The Company anticipates continuing to pay cash dividends on a
semi-annual basis to the shareholders of the Company.
<PAGE>
Cupertino National Bancorp
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in Thousands) December 31, 1994 1993
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 9,326 $ 10,550
Federal funds sold 10,400 3,800
-------------------------------------
Cash and cash equivalents 19,726 14,350
Other short-term investments (cost approximates market) -- 3,097
Investment securities 60,506 36,342
Loans, net 130,239 123,908
Loans held for sale 5,383 7,625
-------------------------------------
Total loans, net 135,622 131,533
Premises and equipment, net 1,434 1,408
Other real estate owned 375 618
Interest receivables and other assets 5,481 5,226
-------------------------------------
Total $223,144 $192,574
=====================================
Liabilities and Shareholders' Equity:
Deposits:
Demand, non-interest-bearing $53,880 $ 62,751
NOW 8,331 6,769
Money Market Demand Accounts 73,623 60,803
Savings 5,951 6,343
Other time certificates 19,417 7,799
Time certificates, $100 and over 25,520 31,275
------------------------------------
Total deposits 186,722 175,740
Other borrowings 17,256 --
Other liabilities 1,129 615
------------------------------------
Total liabilities 205,107 176,355
Commitments (Note 12)
Shareholders' Equity:
Preferred stock, no par value: 4,000,000 shares authorized;
none issued -- --
Common stock, no par value: 6,000,000 shares
authorized;sharesoutstanding: 1,557,008 in 1994 and
1,401,826 in 1993 14,901 13,582
Retained earnings 3,136 2,637
--------------------------------------
Total shareholders' equity 18,037 16,219
--------------------------------------
Total $223,144 $192,574
======================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Cupertino National Bancorp
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) For the years ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest on loans $12,608 $ 11,895 $ 11,150
Interest on investment securities:
Taxable 2,451 830 622
Non-taxable 94 145 204
-------------------------------
Total investment securities 2,545 975 826
Other interest income 208 463 450
-------------------------------
Total interest income 15,361 13,333 12,426
-------------------------------
Interest Expense:
Interest on deposits 3,897 3,156 3,540
Interest on short-term borrowings 382 10 2
-------------------------------
Total interest expense 4,279 3,166 3,542
-------------------------------
Net interest income 11,082 10,167 8,884
Provision for loan losses 1,620 1,679 902
-------------------------------
Net interest income after provision for loan losses 9,462 8,488 7,982
-------------------------------
Other Income:
Gain on sale of mortgage loans 993 1,525 250
Gain on sale of SBA loans 685 435 337
Trust fees 593 494 462
Loan documentation fees, net 276 284 115
Depositor service fees 267 252 264
Gain on sale of investment securities -- -- 61
Other 265 164 175
-------------------------------
Total other income 3,079 3,154 1,664
-------------------------------
Operating Expenses:
Compensation and benefits 5,724 5,014 3,592
Occupancy and equipment 1,400 1,226 956
Professional services and legal costs 911 1,379 391
FDIC insurance and regulatory assessments 485 414 341
Client services 376 478 456
Other real estate, net 48 288 (80)
Other 1,500 1,425 1,030
-------------------------------
Total operating expenses 10,444 10,224 6,686
-------------------------------
Income before income tax expense 2,097 1,418 2,960
Income tax expense 734 538 1,197
-------------------------------
Net income $ 1,363 $ 880 $ 1,763
===============================
Net income per common and common equivalent share $ 0.84 $ 0.55 $ 1.16
===============================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
For the years ended December 31, 1994, 1993 and 1992 ------------------------------ Retained Shareholders'
(Dollars in thousands) Shares Amount earnings equity
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1992 1,115,819 $ 10,814 $ 2,497 $ 13,311
Stock options exercised 12,354 68 -- 68
Stock issued in Employee Stock Purchase Plan 4,716 36 -- 36
Two 5% stock dividends --
fractional shares paid in cash 115,357 1,066 (1,070) (4)
Net income -- -- 1,763 1,763
--------------------------------------------------------------
Balance, December 31, 1992 1,248,246 11,984 3,190 15,174
Stock options exercised 16,472 106 -- 106
Stock issued in Employee Stock Purchase Plan 7,604 63 -- 63
Two 5% stock dividends --
fractional shares paid in cash 129,504 1,429 (1,433) (4)
Net income -- -- 880 880
---------------------------------------------------------------
Balance, December 31, 1993 1,401,826 13,582 2,637 16,219
Stock options exercised 74,468 543 -- 543
Stock issued in Employee Stock Purchase Plan 8,238 69 -- 69
One 5% stock dividend --
fractional shares paid in cash 72,476 707 (708) (1)
Cash dividend $.10 per share -- -- (156) (156)
Net income -- -- 1,363 1,363
---------------------------------------------------------------
Balance, December 31, 1994 1,557,008 $ 14,901 $ 3,136 $ 18,037
==============================================================
</TABLE>
See notes to consolidated financial
statements.
<PAGE>
Cupertino National Bancorp
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands) For the years ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows - Operating Activities:
Net income $ 1,363 $ 880 $ 1,763
Reconciliation of net income to net
cash from operations:
Provision for loan losses 1,620 1,679 902
Depreciation and leasehold amortization 490 477 334
Deferred income taxes 128 (246) (81)
Accrued interest receivable and other assets (255) (627) (394)
Accrued interest payable and other liabilities 514 (187) (19)
Deferred loan fees (76) 229 204
Gain on sale of investment securities -- -- 61
Proceeds from sales of loans held for sale 125,342 152,982 26,208
Origination of loans for resale (123,100) (151,518) (30,462)
Other real estate owned, net 48 221 (80)
----------------------------------------
Operating cash flows, net 6,074 3,890 (1,564)
----------------------------------------
Cash Flows - Investing Activities:
Sales of investment securies -- -- 1,670
Maturities of investment securities and other short-term
investments 12,983 31,125 22,434
Purchase of investments securities and other short-term
investments (34,050) (42,983) (38,584)
Loans, net (8,250) (8,157) (23,632)
Investment in other real estate owned -- (219) (1,057)
Sale of other real estate owned 576 3,097 893
Premises and equipment (516) (850) (498)
Purchase of life insurance policies -- (2,175) --
Other, net 21 -- --
----------------------------------------
Investing cash flows, net (29,236) (20,162) (38,774)
----------------------------------------
Cash Flows - Financing Activities:
Net change in non-interest-bearing deposits (8,871) 458 19,473
Net change in interest-bearing deposits 19,853 18,732 13,102
Net change in short-term borrowings 17,256 -- (2,500)
Stock issued 457 169 104
Payment of stock dividend fractional shares (1) (4) (4)
Cash dividend (156) -- --
----------------------------------------
Financing cash flows, net 28,538 19,355 30,175
----------------------------------------
Net increase (decrease) in cash and cash equivalents 5,376 3,083 (10,163)
Cash and cash equivalents at beginning
of year 14,350 11,267 21,430
----------------------------------------
Cash and cash equivalents at end of year $ 19,726 $ 14,350 $ 11,267
========================================
Cash flows - supplemental disclosures:
Cash paid during the period for:
Interest on deposits and other
borrowings $ 4,148 $ 3,181 $ 3,679
Income taxes 535 722 1,171
Non-cash transactions:
Additions to other real estate owned 375 -- 2,913
========================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Cupertino National Bancorp
Notes to Consolidated Financial Statements
NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include the
accounts of Cupertino National Bancorp ('CUNB or the Company') and its
subsidiary Cupertino National Bank & Trust ("CNB or the Bank"). CUNB is the
holding company of CNB. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1994 presentation.
Cash and Cash Equivalents -- For purposes of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods. CNB is required by the
Federal Reserve System to maintain non-interest earning cash reserves
against certain of its transaction accounts. At December 31, 1994 the required
reserves totaled $982,000.
Investment Securities -- In accordance with Statement of Financial Accounting
Standard No. 115, ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities" which was adopted by the Company on January 1, 1994, all
investment securities are classified as held-to-maturity because management has
the positive intent and ability to hold all of the debt securities until
maturity. Accordingly, these securities are carried at their remaining unpaid
principal balances, net of unamortized and discounts are accredited using the
level yield method over the estimated remaining term of the underlying
security.
Prior to the adoption of SFAS No. 115, all investment securities were
considered held for investment because the Company had the ability and
management had the intent to hold these securities to maturity. Accordingly,
these securities were carried at amortized cost.
Loans -- Interest on loans is credited to income as earned and is accrued only
if deemed collectible. Accrued interest is generally reversed against current
income on loans over 90 days contractually delinquent and on other loans which
have developed inherent problems prior to being 90 days delinquent. The Bank
charges fees for originating loans, which are recognized as an adjustment of the
loan yield over the life of the loan by a method approximating the effective
interest method. Direct costs of originating the loan are capitalized and
recognized over the life of the loan as a reduction of the yield.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the statement of operations. Other loan fees and charges
representing service costs for the repayment of loans, for delinquent payments
or for miscellaneous loan services are recognized when collected.
Other Real Estate Owned -- Real estate acquired through foreclosure is carried
at the lower of cost, or fair value less anticipated cost of disposition.
Subsequent decreases in fair value are recognized as charges to expense and the
net costs of maintaining and operating foreclosed properties are expensed as
incurred.
Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the lesser of the lease terms or
estimated useful lives of the assets, which are generally 3 to 10 years.
Income Taxes -- Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," was adopted by CUNB on a prospective basis,
effective January 1, 1993. Under SFAS 109 the Company changed from the deferred
method to the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates to
the differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Allowance for Loan Losses -- The allowance for loan losses is maintained at a
level deemed appropriate by Management to adequately provide for known and
unidentified losses in the loan portfolio. The allowance is based upon a number
of factors, including prevailing and anticipated economic trends, industry
experience, industry and geographic concentrations, estimated collateral values,
management's assessment of credit risk on known and unidentified losses in the
loam portfolio, delinquency trends, historical loss experience, CNB's
underwriting practices and other relevant factors. Additions to the allowance,
in the form of provisions are reflected in current operations, while charge-offs
to the allowance are made when a loss is determined to have occurred.
Income Per Share -- Income per share, adjusted for stock dividends, is based on
weighted average common and common equivalent shares outstanding of 1,628,500 in
1994, 1,587,000 in 1993 and 1,510,700 in 1992.
<PAGE>
Sales and Servicing of Small Business Administration (SBA) Loans -- The Company
originates loans to customers under SBA programs that generally provide for SBA
guarantees of 70% to 90% of each loan. The Company generally sells the
guaranteed portion of each loan to an investor and retains the unguaranteed
portion in its own portfolio.
Gains on these sales are earned through the sale of the guaranteed portion
of the loan for an amount in excess of the adjusted carrying value of the
portion of the loan sold. The Company allocates the carrying value of such loans
between the portion sold, the portion retained and a value assigned to the right
to service the loan. The difference between the adjusted carrying value of the
portion retained and the face amount of the portion retained is amortized to
interest income over the life of the related loan using a method which
approximates the interest method. The value assigned to the right to service is
also amortized over the estimated life of the loan.
Loan Sales -- In addition to SBA loans, the Company originates real estate loans
for sale and sells participations in other commercial loans. All loans held for
sale are carried at the lower of aggregate cost or market. The Company
recognizes gains or losses upon the sale of loans and participating interest in
loans. The gain or loss is based on consideration received, unpaid loan
balances, contractual interest rates, imputed loan servicing fees, estimated
remaining life of the loans and stipulated interest to be paid to the purchaser.
Any resulting deferred premium or discount is included in other assets and
amortized into operations over the estimated remaining life of the loans sold
using a method which approximates the interest method. The value assigned to the
right to service the loans is also amortized over the estimated life of the
loans.
NOTE 2 - CASH EQUIVALENTS AND INVESTMENT SECURITIES
U.S. Government and agency obligations, municipal securities and other
securities are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1994 Book Value Unrealized Gains Unrealized Losses Market Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $10,420 $-- $ 115 $10,305
U.S. Agency obligations:
Mortgage-backed obligations 8,989 -- 415 8,574
Fixed and variable rate notes 34,348 3 1,563 32,788
State and political subdivisions 1,482 4 2 1,484
Other mortgage-backed obligations 4,334 -- 228 4,106
----------------------------------------------------------------
Total securities held to maturity 59,573 7 2,323 57,257
----------------------------------------------------------------
Other securities
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 703 -- -- 703
----------------------------------------------------------------
Total other securities 933 -- -- 933
----------------------------------------------------------------
Total securities $60,506 $ 7 $2,323 $58,190
================================================================
Weighted average yield /(1)/ 6.0%
----------------------------------------------------------------
December 31, 1993
U.S. Treasury obligations $12,031 $11 $ 10 $12,032
U.S. Agency obligations - fixed and variable rate notes 21,035 43 74 21,004
State and political subdivisions 2,374 43 -- 2,417
Other mortgage-backed obligations -- -- -- --
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 672 -- -- 672
----------------------------------------------------------------
Total securities held for investment $36,342 $97 $ 84 $36,355
----------------------------------------------------------------
Weighted average yield /(1)/ 3.9%
================================================================
</TABLE>
/(1)/ Yield includes unadjusted tax exempt obligations. The tax equivalent yield
was 6.1% and 4.1% as of December 31, 1994 and 1993, respectively.
<PAGE>
Cupertino National Bancorp
Notes to Consolidated Financial Statements (Continued)
Securities with a carrying value of $24,868,000 and $11,935,000 at December 31,
1994 and 1993, respectively were pledged to secure public deposits and for other
purposes required by law or contract.
The following table shows book value and estimated market value of the
Company's investment securities by maturities at December 31, 1994 (yields on
tax-exempt obligations have not been adjusted to a tax equivalent basis).
<TABLE>
<CAPTION>
1996 2000 2005 and
(Dollars in thousands) 1995 through 1999 through 2005 Thereafter
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 7,457 $ 2,963 $ 0 $ 0
U.S. Agency obligations
Mortgage-Backed obligations /(1)/ -- 111 2,851 6,027
Fixed and variable rate notes /(2)/ 5,833 19,050 6,472 2,993
State and Political Subdivisions 1,482 -- -- --
Other Mortgage-Backed obligations /(1)/ -- -- -- 4,334
-----------------------------------------------------
Total investment securities (held to maturity) 14,772 22,124 9,323 13,354
-----------------------------------------------------
Other securities
Federal Reserve Bank stock 230 -- -- --
Federal Home Loan Bank stock 703 -- -- --
-----------------------------------------------------
Total other securities 933 0 0 0
-----------------------------------------------------
Total securities $15,705 $22,124 $9,323 $13,354
-----------------------------------------------------
Market value 15,524 21,040 8,860 12,766
-----------------------------------------------------
Weighted average yield 4.5% 5.3% 7.4% 7.8%
=====================================================
</TABLE>
(1) Mortgage-backed securities are shown at contractual maturity, however the
average life of these Mortgage-backed securities may be much less due to
principal prepayments.
(2) Certain U.S. Agency fixed and variable rate note obligations may be called,
without penalty, at the discretion of the issuer. This may cause the actual
maturities to differ significantly from the contractual
maturity dates.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock are investments
required to be maintained in the Federal Reserve Bank and Federal Home Loan Bank
to maintain membership and support activity levels.
NOTE 3 - LOANS
The following is a summary of loans by category as of December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
---------------------------------------------------------------
<S> <C> <C>
Commercial $ 81,695 $ 77,699
Real estate construction and land 18,117 19,090
Real estate term 13,133 12,075
Consumer and other 21,059 18,214
-------------------
Total 134,004 127,078
Less deferred loan fees and discounts 847 923
Less allowance for loan losses 2,918 2,247
-------------------
Total loans, net 130,239 123,908
Loans held for sale 5,383 7,625
-------------------
Total loans $135,622 $131,533
===================
</TABLE>
<PAGE>
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" which was
subsequently amended by SFAS No. 118, effective for years beginning after
December 15, 1994, requires creditors to account for loans that are impaired
(loans where the creditor does not anticipate receiving all amounts due
according to the contractual term of the loan agreement) based primarily on the
present value of expected future cash flows discounted at the effective loan
rate or the fair value of the underlying collateral. The Bank does not expect a
material impact on its financial statements from adopting SFAS No. 114 and SFAS
No. 118.
The Bank's service area has a concentration of high technology companies, and
accordingly, the ability of any of the Bank's borrower to repay loans may be
affected by the performance of this sector of the economy. Virtually all loans
are collateralized. Generally, real estate loans are secured by real property,
and commercial and other loans are secured by bank deposits and business or
personal assets. Repayment is generally expected from the sale of the related
property for real estate construction loans and from the cash flow of the
borrower for commercial and other loans.
As discussed in Note 1, the Company originates loans guaranteed by the U. S.
Small Business Administration (SBA). The Company sells to outside investors,
usually at a price in excess of par, the guaranteed portion of these loans and
retains the remaining unguaranteed portion in its loan portfolio. When the
Company sells the guaranteed portion of such loans, it transfers the SBA
guarantee to the buyer and retains the servicing function. At December 31, 1994
and 1993, the Company serviced $23,339,122 and $15,633,230 in SBA loans,
respecively. In addition, the Company retained an interest in loans guaranteed
by the SBA in the amounts of $4,783,053, and $3,234,929, respectively, for 1994
and 1993. The Company and the SBA would share in any losses on these loans on a
pro rata basis.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
-------------------------------------------------------------
<S> <C> <C> <C>
Balance January 1 $2,247 $1,748 $1,470
Loans charged off (1,012) (1,228) (727)
Recoveries 63 48 103
Provision for loan losses 1,620 1,679 902
-------------------------
Balance December 31 $2,918 $2,247 $1,748
=========================
</TABLE>
The following table sets forth non-performing loans as of December 31, 1994,
1993 and 1992. Non-performing loans are defined as loans which are on non-
accrual status, loans which have been restructured, and loans which are 90 days
past due but are still accruing interest. Interest income foregone on the
following non-performing loans totaled $275,000, $129,000 and $23,000 for the
years ended December 31, 1994, 1993 and 1992, respectively. Interest income
recognized on the non-performing loans approximated $50,000, $25,000 and $25,000
for the years ended December 31, 1994, 1993 and 1992, respectively .
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
-------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $3,244 $ 997 $513
Accruing loans past due 90 days or more 1,371 1,903 --
Restructured loans -- -- --
------------------------------
Total 4,615 $2,900 $513
==============================
</TABLE>
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - OTHER REAL ESTATE OWNED
Other real estate owned consists of the following at December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired through foreclosure $ 375 $ 780
Allowance for estimated losses -- (162)
-----------------
Total $ 375 $ 618
=================
</TABLE>
The following summarizes other real estate operations for the years
ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from:
Real estate operations, net $ (6) $ 10 $ 170
Provision for estimated losses (42) (231) (90)
--------------------------
Real estate owned, net (48) $ (221) $ 80
==========================
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, are comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 993 $ 889
Furniture and equipment 2,463 2,050
Automobiles 140 141
------------------
Total 3,596 3,080
Accumulated depreciation and amortization (2,162) (1,672)
-------------------
Premises and equipment, net $ 1,434 $ 1,408
==================
</TABLE>
NOTE 7 - SHORT TERM BORROWINGS
Short term borrowings are detailed as follows (in thousands):
<TABLE>
<CAPTION>
December 31 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased
Balance at December 31 $ 7,000 $ -- $ --
Average balance 1,800 277 55
Maximum amount outstanding at any month end 12,000 -- --
Average interest rate:
During the year 4.18% 3.56% 3.68%
At December 31 6.50% -- --
Securities sold under agreements to repurchase
Balance at December 31 $10,256 -- --
Average balance 5,908 -- --
Maximum amount outstanding at any month end 24,153 -- --
Average interest rate:
During the year 5.13% -- --
At December 31 6.29% -- --
</TABLE>
<PAGE>
Federal funds purchased generally mature the day following the date of
purchase while securities sold under agreements to repurchase generally mature
within 30 days from the various dates of sale. The Bank has unused Federal Funds
Purchased lines of $10 million at December 31, 1994.
NOTE 8 - INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
-------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 518 $ 539 $ 890
State 88 245 388
-----------------------
Total current expense 606 784 1,278
-----------------------
Deferred:
Federal 125 (148) (25)
State 3 (98) (56)
-----------------------
Total deferred expense (benefit) 128 (246) (81)
-----------------------
Total expense $ 734 $ 538 $1,197
=======================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components on
the Company's deferred income tax assets (liabilities) as of December 31, 1994
and 1993 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993
-------------------------------------------
<S> <C> <C>
Loan loss reserves $ 904 $ 768
OREO valuation -- 78
Deferred compensation 48 65
State income taxes 243 19
Other (124) 13
---------------
Deferred tax asset $1,071 $ 943
===============
</TABLE>
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes" on a prospective basis effective January 1,
1993. This standard supersedes Accounting Principles Board Opinion (APB) No.11
which was previously used by the Company to account for income taxes. There was
no cumulative effect on the Company's 1993 financial statements of adopting SFAS
No. 109. Due to the availability of net operating loss carrybacks, no valuation
allowance under SFAS No. 109 has been provided in 1994 and 1993. For the year
ended December 31, 1992, the Company accounted for income taxes in accordance
with APB No. 11. The components of the deferred tax expense (benefit), which
results from differences in the recognition of certain items for tax and
financial reporting purposes, were as follows:
<PAGE>
Cupertino National Bancorp
Notes to Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $ 136 $ (97) $(116)
Cash basis income tax reporting -- (12) 19
State income taxes 224 93 (6)
Other (232) (230) 22
----- ----- -----
Total deferred expense (benefit) $ 128 $(246) $ (81)
===== ===== =====
</TABLE>
A reconciliation from the statutory income tax rate to be consolidated effective
income tax rate follows, for the years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 34.0%
California franchise tax expense, net of federal
income tax benefit 2.9 6.9 7.4
Exempt income (4.1) (3.2) (2.1)
Other, net 1.2 (1.2) 1.1
----- ---- ----
Effective income tax rate 35.0% 37.5% 40.4%
===== ==== ====
</TABLE>
NOTE 9 - OTHER OPERATING EXPENSES
The major components of other noninterest expense are as follows for the years
ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Supplies $ 197 $ 153 $ 99
Telephone 163 113 76
Director fees 145 142 113
Insurance 144 137 54
Correspondent bank charges 118 106 87
Advertising 87 88 83
Other 646 686 518
------ ------ ------
Total $1,500 $1,425 $1,030
====== ====== ======
</TABLE>
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has stock option plans under which incentive and non-statutory stock
options may be granted to employees and directors to purchase up to 346,802
shares of common stock at prices not less than the fair market value of such
stock at the date the options are granted.
<PAGE>
Options generally expire 10 years after the date of grant and generally
become exercisable in annual installments of 20 percent to 33 percent. As of
December 31, 1994 options for 235,661 shares were exercisable and options for
28,550 shares were available for future grant. Additional stock option
information follows:
<TABLE>
<CAPTION>
Options outstanding
Number of shares Option price per share
---------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1992 338,500 $3.98 - $ 8.10
Granted 24,245 6.66 - 8.02
Exercised (15,494) 3.98 - 5.50
Canceled (4,173) 5.50 - 8.10
------------------------------------
Balance, December 31,1992 343,078 $4.24 - $ 8.10
Granted 12,806 7.99 - 10.65
Exercised (18,781) 4.54 - 8.10
Canceled (6,707) 7.60 - 8.10
-------------------------------------
Balance, December 31,1993 330,396 $4.24 - $10.65
Granted 75,465 8.81 - 10.00
Exercised (76,888) 4.67 - 8.50
Canceled (10,721) 4.46 - 9.88
-------------------------------------
Balance, December 31, 1994 318,252 $4.25 - $10.66
=====================================
</TABLE>
Adjusted for stock dividends in 1994, 1993 and 1992
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary as a contribution to the
plan. The Company matches the employee contributions at a rate set by the Board
of Directors (currently 50% of the first 6% of deferral of an individual's
salary). The matching contribution vests ratably over the first three years of
employment. The Company contributed $72,500 to the plan in 1994, $67,000 in 1993
and $52,000 in 1992.
The Company has established an Employee Stock Purchase Plan under section
423(b) of the tax code which allows eligible employees to set aside up to 10% of
their compensation toward the purchase of the Company's stock. Under the plan,
the purchase price is 85% of the lower of the fair market value at the beginning
or end of each three month offering period. During 1994, employees purchased
8,238 shares of common stock for an aggregate purchase price of $69,000 compared
to the purchase of 7,604 shares of common stock for an aggregate purchase price
of $63,000 in 1993. At December 31, 1994, 15,486 shares were reserved for future
issuance under the plan.
NOTE 11 - RELATED PARTY TRANSACTIONS
Loans are made to executive officers, directors and their affiliates, subject
to approval by the Directors' Loan Committee and the Board of Directors. An
analysis of total loans to related parties for the year ended December 31, 1994
is shown below:
<TABLE>
<CAPTION>
(Dollars in Thousands)
---------------------------------------------------------------------------
<S> <C>
Balance, January 1, 1994 $ 2,435
Additions 2,519
Repayment (1,967)
-------------------------------------
Balance December 31, 1994 $ 2,987
=====================================
</TABLE>
Three of the Company's directors are also directors (one of whom is the
principal shareholder) of a title company which has a deposit relationship with
the Bank. Average monthly deposits from this title company ranged between $ 3.9
million and $ 12.6 million for the year. At December 31, 1994 the deposit
balance from this title company was $ 4.6 million.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases the facilities from which it operates all of its activities.
Future minimum lease commitments under all non-cancelable operating leases are
as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994
----------------------------------
<S> <C>
1995 $ 666
1996 654
1997 665
1998 644
1999 608
1,614
------
Total $4,851
======
</TABLE>
Total rent expense was approximately $589,000, $475,000 and $393,000, for
1994, 1993, and 1992, respectively.
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. At December 31, 1994, commitments to fund loans and outstanding
standby letters of credit were approximately $60.6 million and $2.5 million,
respectively. At December 31, 1994 no losses are anticipated as a result of
these commitments.
Loan commitments which typically have fixed expiration dates and require the
payment of a fee are typically contingent upon the borrower meeting certain
financial and other covenants. Approximately $17.4 million of these commitments
relate to real estate construction and land loans and are expected to fund
within the next 12 months. However, the remainder relate primarily to revolving
lines of credit or other commercial loans, and many of these commitments are
expected to expire without being drawn upon, therefore the total commitments do
not necessarily represent future cash requirements. The Bank evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt or equity
securities, or business assets.
Stand-by letters of credit are conditional commitments written by the Bank to
guarantee the performance of a client to a third party. These guarantees are
issued primarily relating to purchases of inventory by the Bank's commercial
clients, and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients, and the Bank accordingly uses
evaluation and collateral requirements similar to those for loan commitments.
Virtually all such commitments are collateralized.
The Company is a defendant in a number of lawsuits, the most significant of
which alleges that the Company did not perform its fiduciary duties as trustee
properly and, as a result, the trust incurred losses on real estate investments
that were purchased. The plaintiff is seeking damages of approximately $2.2
million related to this lawsuit. The Company's management believes ultimate
liability with respect to any of the aforementioned matters will not have a
material adverse effect on the consolidated financial statements of the Company.
NOTE 13 - REGULATORY MATTERS
The Company and the Bank are subject to capital guidelines issued by the Federal
Reserve Board of Governors (the "FRB") and the Office of the Comptroller of the
Currency (the OCC). These agencies have established uniform risk-based capital
guidelines for commercial banks. Under this framework, balance sheet assets and
certain off balance sheet commitments are weighted by risk and compared to
capital. Capital is assigned to tiers, with common equity included in Tier 1
capital and the allowance for loan losses included in Tier II capital.
Additionally, regulatory agencies have adopted a 3% minimum leverage ratio of
Tier 1 capital to total assets. Banks anticipating significant asset growth are
expected to maintain leverage ratios in excess of the minimum, between 4% to 5%.
<PAGE>
The capital ratios, as detailed below, for the Company exceed the regulatory
guidelines at December 31, 1994, 1993 and 1992. The capital ratios for the
Company are presented in the following table:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------------------------
<S> <C> <C> <C>
Capital ratios:
Tier 1 leverage 8.4% 8.4% 8.8%
Regulatory minimum 3.0% 3.0% 3.0%
Tier 1 risk-based capital 10.8% 10.6% 10.5%
Regulatory minimum 4.0% 4.0% 4.0%
Total risk-based capital 12.1% 12.1% 11.7%
Regulatory minimum 8.0% 8.0% 8.0%
=====================
</TABLE>
Banks that exceed a leverage ratio of 5%, a Tier 1 risk-based capital ratio of
6% and a total risk-based capital ratio of 10% are deemed to be "well-
capitalized" under FDICIA's "prompt corrective action" regulations.
NOTE 14 - RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
One of the principal sources of cash for the Company is dividends from its
subsidiary Bank. Total dividends which may be declared by the Bank without
receiving prior approval from regulatory authorities are limited to the lesser
of the Bank's retained earnings or the net income of the Bank for the latest
three fiscal years, less dividends previously declared during that period. Under
these restrictions and considering minimum regulatory capital requirements, the
Bank is able to declare dividends not exceeding $4,000,000 at December 31, 1994.
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In particular,
the Bank is prohibited from lending to the Company unless the loans are secured
by specified types of collateral. Such secured loans and other advances from the
Bank are limited to 10% of the Bank's Shareholders' Equity, or a maximum of
$1,685,000 at December 31, 1994. No such advances were made during 1994.
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The financial statement of Cupertino National Bancorp (parent company only)
follow:
<TABLE>
<CAPTION>
Parent Company Only Statement of Financial Condition
(Dollars in thousands) December 31, 1994 1993
------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 883 $ 690
Investment in bank 16,851 15,472
Other assets 305 100
-------------------
Total $18,039 $16,262
===================
Liabilities and shareholders' equity:
Other liabilities $ 2 $ 43
-------------------
Total liabilities $ 2 $ 43
-------------------
Shareholders' equity:
Common stock 14,901 13,582
Retained earnings 3,136 2,637
-------------------
Total shareholders' equity 18,037 16,219
-------------------
Total liabilities and shareholders' equity $18,039 $16,262
===================
</TABLE>
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
Parent Company Only Statements of Operations
(Dollars in thousands) Years ended December 31, 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 17 $ 14 $ 17
Other income 14 12 22
-----------------------
Total 31 26 39
-----------------------
Expenses:
Occupancy and equipment 410 384 333
Less rentals received from
the bank (409) (384) (328)
-----------------------
Net occupancy and equipment 1 -- 5
Other expense 46 20 17
-----------------------
Total 47 20 22
-----------------------
Income before income taxes and equity
in undistributed net income of the Bank (16) 6 17
Income tax expense -- 2 16
-----------------------
Income (loss) before equity in undistributed
net income of the Bank (16) 4 1
Equity in undistributed net
income of the Bank 1,379 876 1,762
-----------------------
Net income $1,363 $ 880 $1,763
=======================
<CAPTION>
Parent Company Only Statements of Cash Flows
(Dollars in thousands) Years ended December 31, 1994 1993 1992
------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows-operating activities:
Net income $ 1,363 $ 880 $1,763
Reconciliation of net income to net cash
from operations:
Equity in undistributed net income of the Bank (1,379) (876) (1,762)
Other assets (205) (100) 5
Other liabilities (41) -- 16
-------------------------
Operating cash flows, net (262) (96) 22
-------------------------
Cash flows -- financing activities:
Stock issued 613 169 104
Payment of stock dividend fractional shares (2) (4) (4)
Payment of cash dividend (156) -- --
-------------------------
Financing cash flows, net 455 165 100
-------------------------
Net increase in cash and cash equivalents 193 69 122
Cash and cash equivalents at the beginning of year 690 621 499
-------------------------
Cash and cash equivalents at end of the year $ 883 $ 690 $ 621
=========================
</TABLE>
<PAGE>
Cupertino National Bancorp
Consolidated Balance Sheets
NOTE 16-FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments of the Company as of December
31, 1994 and 1993 are as follows:
The estimated fair value of financial instruments of the Company as of
December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 19,726 $19,726 $ 14,350 $ 14,350
Other short-term investment securities -- -- 3,097 3,097
Investment securities 60,506 58,190 36,342 36,358
Loans, net 130,239 130,000 123,908 124,000
Loans held for sale 5,383 5,383 7,625 7,625
---------------------------------------------------
Total loans, net $135,622 $135,383 $131,533 $131,625
Financial liabilities:
Deposits:
Demand, non-interest-bearing $ 53,880 $53,880 $ 62,751 $ 62,751
NOW 8,331 8,331 6,769 6,769
Money Market Demand Accounts 73,623 73,623 60,803 60,803
Savings 5,951 5,951 6,343 6,343
Other time certificates 19,417 19,410 7,799 7,810
Time certificates, $100 and over 25,520 25,513 31,275 31,309
---------------------------------------------------
Total deposits $186,722 $186,708 $175,740 $175,785
Off balance sheet financial instruments
Commitments to extend credit $ 60,612 $60,612 $ 46,681 $ 46,681
Standby letters of credit 2,481 2,481 2,082 2,082
---------------------------------------------------
</TABLE>
The estimated fair values do not represent actual amounts that may be realized
upon any sale or liquidation of the related assets or liabilities. The values do
not give effect to discounts or premiums to fair value which may occur when
financial instruments are sold in large quantities. The fair value amounts
presented above represent the Company's best estimate of fair value using the
methodologies discussed below:
Cash and cash equivalents -- The carrying value reported in the balance sheet
for cash and cash equivalents approximates fair value.
Securities -- Fair values for investment securities are based on quoted market
prices.
Loans -- The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit liabilities -- The fair value for all deposits without fixed maturities
is considered to be equal to carrying value. The fair value for time deposits is
based upon the appropriate discount rates for similar pools.
Off-balance sheet instruments -- The fair value of commitments to extend credit
and standby letters of credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counter parties. For fixed-
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The Bank's commitments to
extend credit approximate fair value at December 31, 1994 and 1993.
<PAGE>
Cupertino National Bancorp
Report of Independent Accountants
The Board of Directors and Shareholders, Cupertino National Bancorp:
We have audited the accompanying consolidated balance sheet of Cupertino
National Bancorp and Subsidiary as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Cupertino
National Bancorp and Subsidiary for the years ended December 31, 1993 and 1992
were audited by other auditors, whose report, dated January 18, 1994, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Cupertino National
Bancorp and Subsidiary at December 31, 1994, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
San Francisco, California
January 30, 1995
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Cupertino National Bancorp and Subsidiary on Forms S-8 (File No. 33-17368, No.
33-17369, and No. 33-31193) of our report dated January 30, 1995, on our audit
of the consolidated financial statements of Cupertino National Bancorp and
Subsidiary as of December 31, 1994 and for the year ended December 31, 1994
which report is incorporated by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand, L.L.P.
San Francisco, California
March 28, 1995
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No. 33-
17368, No. 33-17369 and No. 33-31193 of Cupertino National Bancorp on Forms S-8
of our report dated January 18, 1994, included in this Annual Report on Form 10-
K of Cupertino National Bancorp for the year ended December 31, 1994.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
March 28, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT AND 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 9,326
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 60,506
<INVESTMENTS-MARKET> 58,190
<LOANS> 133,157
<ALLOWANCE> 2,918
<TOTAL-ASSETS> 223,144
<DEPOSITS> 186,722
<SHORT-TERM> 17,256
<LIABILITIES-OTHER> 1,129
<LONG-TERM> 0
<COMMON> 14,901
0
0
<OTHER-SE> 3,136
<TOTAL-LIABILITIES-AND-EQUITY> 223,144
<INTEREST-LOAN> 12,608
<INTEREST-INVEST> 2,545
<INTEREST-OTHER> 208
<INTEREST-TOTAL> 15,361
<INTEREST-DEPOSIT> 3,897
<INTEREST-EXPENSE> 4,279
<INTEREST-INCOME-NET> 11,082
<LOAN-LOSSES> 1,620
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,444
<INCOME-PRETAX> 2,097
<INCOME-PRE-EXTRAORDINARY> 1,363
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,363
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
<YIELD-ACTUAL> 6.16
<LOANS-NON> 3,244
<LOANS-PAST> 1,371
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,247
<CHARGE-OFFS> 1,012
<RECOVERIES> 63
<ALLOWANCE-CLOSE> 2,918
<ALLOWANCE-DOMESTIC> 2,780
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 138
</TABLE>
