<PAGE>
WASHINGTON, D.C. 20549
FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________.
Commission file number 0-18015
CUPERTINO NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0060898
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20230 STEVENS CREEK BOULEVARD, CUPERTINO, CALIFORNIA, 95014
(Address of principal executive offices) (Zip Code)
(408) 996-1144
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
___ ___
Outstanding shares of Common Stock, no par value, as of October 30, 1996:
1,919,020
This report contains a total of 19 pages.
1 of 19
<PAGE>
CUPERTINO NATIONAL BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 1996 and December 31, 1995............... 3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1996 and 1995............................ 4
Consolidated Statements of Cash Flows
for the Three Months and Nine Months Ended
September 30, 1996 and 1995............................ 5
Notes to Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 7
PART II. OTHER INFORMATION
Items 1-3,
Item 5. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders.... 18
Item 6. Exhibits and Reports on Form 8-K....................... 18
Signatures............................................. 18
Index to Exhibits...................................... 19
2 of 19
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited....dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 20,273 $ 16,207
Federal funds sold 4,600 12,900
-------- --------
Cash and cash equivalents 24,873 29,107
Investment securities:
Held to maturity (Market value $57,436 at
September 30, 1996; $53,001 at December 31, 1995) 57,895 52,571
Available for sale (Cost $1,001 at September 30,
1996; $3,504 at December 31, 1995) 1,002 3,509
Other securities 1,021 969
-------- --------
Total investment securities 59,918 57,049
Loans:
Commercial 125,878 88,646
Real estate-construction and land 30,481 23,889
Real estate-term 36,401 23,026
Consumer and other 32,758 28,666
Deferred loan fees and discounts (1,185) (851)
-------- --------
Loans 224,333 163,376
Allowance for loan losses (3,451) (2,683)
-------- --------
Total loans 220,882 160,693
Premises and equipment, net 3,186 1,917
Accrued interest receivable and other assets 10,696 10,333
-------- --------
Total assets $319,555 $259,099
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 72,707 $ 58,986
NOW 11,212 10,158
Money Market Demand Accounts 146,223 114,021
Savings 8,866 7,995
Other time certificates 21,243 17,830
Time certificates, $100 and over 34,651 27,104
-------- --------
Total deposits 294,902 236,094
Accrued interest payable and other liabilities 865 1,333
Subordinated debentures 3,000 3,000
-------- --------
Total liabilities 298,767 240,427
Shareholders' equity:
Preferred stock, no par value: 4,000,000 shares
authorized; none issued -- --
Common stock, no par value: 6,000,000 shares
authorized; shares outstanding: 1,916,708 at
September 30, 1996 and 1,808,828 at
December 31, 1995 18,436 17,680
Retained earnings 2,352 992
-------- --------
Total shareholders' equity 20,788 18,672
-------- --------
Total liabilities and shareholders' equity $319,555 $259,099
======== ========
See notes to consolidated financial statements.
- ---------------------------------------------------------------------------------
</TABLE>
3 of 19
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited....dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ ------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans $5,414 $4,065 $14,626 $11,884
Interest on investment securities:
Taxable 940 840 2,688 2,677
Non-taxable - 7 - 43
------ ------ ------- -------
Total Investment securities 940 847 2,688 2,720
Other interest income 97 186 336 323
------ ------ ------- -------
Total interest income 6,451 5,098 17,650 14,927
INTEREST EXPENSE:
Interest on deposits 2,132 1,755 5,880 4,746
Other interest expense 92 73 283 728
------ ------ ------- -------
Total interest expense 2,224 1,828 6,163 5,474
------ ------ ------- -------
Net interest income 4,227 3,270 11,487 9,453
PROVISION FOR LOAN LOSSES 399 75 864 591
------ ------ ------- -------
Net interest income after provision
for loan losses 3,828 3,195 10,623 8,862
OTHER INCOME:
Gain on sale of mortgage loans - - - 138
Other loan fees 59 51 108 99
Trust Fees 375 178 1,028 469
Gain on sale of SBA loans 122 63 375 213
Depositor service fees 149 78 368 215
Other 122 81 384 219
------ ------ ------- -------
Total other income 827 451 2,263 1,353
OPERATING EXPENSES:
Compensation and benefits 1,974 1,694 5,672 4,930
Occupancy and equipment 551 430 1,514 1,217
Legal settlement & costs - - - 1,700
Professional services 234 277 675 712
FDIC insurance and regulatory assessments 15 22 55 282
Client services 105 95 320 256
Other real estate, net 5 1 35 35
Other 860 463 2,124 1,377
------ ------ ------- -------
Total operating expenses 3,744 2,982 10,395 10,509
------ ------ ------- -------
INCOME (LOSS) BEFORE INCOME TAX 911 664 2,491 (294)
Income tax expense (benefit) 350 260 943 (150)
------ ------ ------- -------
NET INCOME (LOSS) $ 561 $ 404 $ 1,548 $ (144)
====== ====== ======= =======
Net income (loss) per common and
common equivalent share $ .27 $ .21 $ .76 $ (.08)
====== ====== ======= =======
See notes to consolidated financial statements.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
4 of 19
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited....dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1996 1995
--------------------
<S> <C> <C>
CASH FLOWS--OPERATING ACTIVITIES:
Net income (loss) $ 1,548 $ (144)
Reconciliation of net income to net cash from operations:
Provision for loan losses 864 591
Depreciation and amortization 334 446
Accrued interest receivable and other assets (415) (565)
Accrued interest payable and other liabilities (340) (680)
Net change in deferred loan fees and discounts 334 139
Proceeds from sales of loans held for sale 4,738 16,364
Origination of loans held for sale (4,738) (10,981)
Other real estate owned, net - 17
-------- --------
Operating cash flows, net 2,325 5,187
CASH FLOWS--INVESTING ACTIVITIES:
Maturities of investment securities:
Held-to-maturity 16,620 16,349
Available-for-sale 2,500 -
Purchase of investment securities:
Held-to-maturity (19,909) (8,035)
Available-for-sale - (2,492)
Net change in loans (61,604) (17,475)
Sale of other real estate owned 217 358
Purchase of life insurance policies - (2,381)
Purchase of premises and equipment, net (1,812) (654)
Other, net (5) -
-------- --------
Investing cash flows, net (63,993) (14,330)
CASH FLOWS--FINANCING ACTIVITIES:
Net change in noninterest-bearing deposits 13,721 365
Net change in interest-bearing deposits 45,087 20,618
Net change in short-term borrowings - (6,203)
Subordinated debt issuance - 2,475
Stock purchased by employees and stock options exercised 632 456
Cash dividends (187) (160)
-------- --------
Financing cash flows, net 59,253 17,551
-------- --------
Net increase (decrease) in cash and cash equivalents (2,415) 8,408
Cash and cash equivalents at beginning of period 29,107 19,726
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,692 $ 28,134
======== ========
CASH FLOWS--SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on deposits and other borrowings $ 6,222 $ 5,402
Income taxes 925 210
Non-cash transactions:
Additions to other real estate owned - -
See notes to consolidated financial statements.
- ------------------------------------------------------------------------------------
</TABLE>
5 of 19
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
September 30, 1996
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Cupertino National Bancorp ("CUNB" or the Company) and its
subsidiary, Cupertino National Bank & Trust (the Bank or CNB). These financial
statements reflect, in management's opinion, all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation of CUNB's
financial position and the results of its operations and cash flows for the
periods presented. Certain amounts for prior periods have been reclassified to
conform to current period presentation. The results for the three months and
nine months ended September 30, 1996 are not necessarily indicative of the
results expected for any subsequent period or for the entire year ending
December 31, 1996. These financial statements should be read in conjunction
with the financial statements included in the 1995 Annual Report to
Shareholders.
2. SHARE AND PER SHARE AMOUNTS
Earnings per common and common equivalent share are calculated based upon the
weighted average number of shares outstanding during the period, plus equivalent
shares representing the effect of dilutive stock options. The number of shares
used to compute earnings per share were 2,065,168 and 1,887,930 for the three
months ended September 30, 1996 and 1995, respectively and 2,028,664 and
1,872,600 for the nine months ended September 30, 1996 and 1995, respectively.
6 of 19
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
CUNB reported net income for the third quarter of 1996 of $561,000, or $.27
per common and common equivalent share, compared to $404,000, or $.21 per common
and common equivalent share, reported in the third quarter of last year. Return
on average assets and return on average common equity annualized for the third
quarter of 1996 and 1995 were 0.75 % and 11.10 %, respectively.
For the nine months ended September 30, 1996, the Company posted net income of
$1,548,000, or $.76 per common and common equivalent share, compared to a loss
of $144,000, or $.08 per common and common equivalent share, for the comparable
period in 1995. The annualized return on average assets and return on average
equity for the first nine months of 1996 were 0.75% and 10.49%, respectively.
Non-performing assets (including nonaccruing loans, loans 90 days past due and
other real estate owned (OREO)) totaled $3.1 million at September 30, 1996,
compared to 3.3 million at December 31, 1995 and $2.9 million at September 30,
1995. The ratio of non-performing assets to total assets was 0.97% at September
30, 1996, compared to 1.29% at December 31, 1995 and 1.23% at September 30,
1995. The Bank's portfolio of classified assets increased to $8.2 million, or
2.58% of total assets at September 30, 1996, from $7.9 million or 3.06% of total
assets at December 31, 1995 and $8.6 million or 3.61% of total assets at
September 30, 1995.
The reserve for loan losses was $3.5 million at September 30, 1996, compared
with $2.7 million at December 31, 1995 and $2.5 million at September 30, 1995.
The provision for loan losses was $399,000 for the third quarter of 1996,
compared to $265,000 recorded in the second quarter of 1996, and $75,000
recorded in the third quarter of 1995. For the first nine months of 1996, the
provision for loan losses was $864,000, an increase of $273,000 from the first
nine months of 1995. Net charge-offs were $96,000 for the first nine months of
1996, compared to $987,000 for the first nine months of 1995. The ratio of the
reserve for loan losses to non-performing assets was 111.3% at September 30,
1996 compared with 80.3% at December 31, 1995 and 85.7% at September 30, 1995.
Shareholders' equity increased $2.1 million to $20.8 million, or 6.50% of
assets, at September 30, 1996 from $18.7 million, or 7.21% of assets, at
December 31, 1995. The increase was due to net earnings, stock purchased by
directors and employees through stock option plans and stock purchased through
the Employee Stock Purchase Plan, and was partially offset by a cash dividend
payment of $.10 per common share, totaling $187,000, made to shareholders during
the second quarter of 1996.
CUNB's Tier 1 and total risk-based capital ratios were 7.88% and 10.27% at
September 30, 1996, respectively, compared with 9.18% and 11.91% at December 31,
1995, respectively. The leverage ratio declined to 6.98% at September 30, 1996
from 7.78% at December 31, 1995. The decline in capital ratios is due to asset
growth during 1996. At September 30, 1996, CUNB's risk-based capital and
leverage ratios, as well as those of the Bank, exceeded the ratios for a well-
capitalized financial institution as defined in FDICIA under the prompt
corrective action guidelines. The Company will seek to maintain its well
capitalized position to ensure flexibility in its operations.
CUNB's common stock closed at $15.50 per share on September 30, 1996,
representing 146% of the $10.85 book value per common share, compared with
$14.50 per share and 138% of the $10.52 book value per common share at June 30,
1996 and $10.00 per share and 90% of the $11.15 book value per common share at
September 30, 1995.
7 of 19
<PAGE>
MERGER
Cupertino National Bancorp signed the Second Amended and Restated Agreement and
Plan of Reorganization and Merger dated August 20, 1996 (the Agreement) whereby
Cupertino National Bancorp will merge, in a merger of equals, with and into Mid-
Peninsula Bancorp and Mid-Peninsula Bancorp will change its name to Greater Bay
Bancorp (GBB). The merger will result in the formation of the largest multi-
bank holding company based in the San Francisco Peninsula/South Bay region, and
the third-largest publicly traded independent bank holding company in the San
Francisco Bay area, with total assets of approximately $500 million and equity
of over $40 million. Mid-Peninsula Bank (MPB) and Cupertino National Bank &
Trust (CNB) will operate as wholly-owned subsidiaries of Greater Bay Bancorp and
will focus on serving the greater Bay area, including the Peninsula and South
Bay markets, through their seven office locations.
The terms of the Agreement provide for Cupertino National Bancorp shareholders
to receive 0.81522 of a share of Mid-Peninsula Bancorp stock for each share of
Cupertino National Bancorp in a tax-free exchange to be accounted for as a
pooling-of-interests. As part of the Agreement, Mid-Peninsula has listed its
shares on the NASDAQ National Market, and concurrent with closing, will be
renamed Greater Bay Bancorp. Following the merger, the shareholders of Mid-
Peninsula Bancorp will own approximately 51% of the combined company and the
shareholders of Cupertino National Bancorp will own approximately 49% of the
combined company, giving effect to all outstanding options.
Greater Bay Bancorp's new Board of directors will consist of five directors from
Cupertino National Bancorp and five from Mid-Peninsula Bancorp, with Duncan L.
Matteson (Chairman of Mid-Peninsula Bancorp) and John M. Gatto (Chairman of
Cupertino National Bancorp) serving as co-Chairman. David L. Kalkbrenner, who
will serve as President and Chief Executive Officer of Greater Bay Bancorp, will
continue as President and Chief Executive Officer of MPB and C. Donald Allen
will remain as Chairman and Chief Executive Officer of CNB. Steven C. Smith,
the Chief Operating Officer of CNB, will serve as Chief Operating Officer and
Chief Financial Officer of GBB. David R. Hood, Executive Vice President and
Senior Loan Officer of CNB, will serve as Executive Vice President and Senior
Credit Officer of GBB.
In connection with the Agreement, Cupertino National Bancorp and Mid-Peninsula
Bancorp have granted each other options to purchase up to 19.0% of the
outstanding shares of each others common stock under certain circumstances in
the event the transaction is terminated.
The Shareholders of both entities approved the merger on October 30, 1996 and it
is anticipated the merger will close by year end 1996.
8 of 19
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table presents the Company's average balance sheet, net interest
income and interest rates for the quarterly periods presented:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30,1996 June 30, 1996
--------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate
--------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) (4) $206,625 $5,414 10.42% $176,030 $4,696 10.70%
Investment securities,
short term
investments and
cash equivalents 64,207 1,038 6.43% 64,660 995 6.17%
------- ----- ----- ------- ----- -----
Total interest-earning
assets 270,832 6,452 9.48% 240,690 5,691 9.48%
Noninterest-earning assets 26,189 27,079
------- -------
Total Assets $297,021 $267,769
======= =======
Interest-bearing liabilities:
Deposits:
NOW and MMDA $148,483 1,391 3.73% $126,485 1,147 3.64%
Savings deposits 8,920 78 3.50% 12,106 115 3.81%
Time deposits 50,156 665 5.27% 44,824 582 5.21%
------- ----- ----- ------- ----- -----
Total Deposits 207,559 2,134 4.09% 183,415 1,844 4.03%
Borrowings 3,422 92 10.70% 3,113 87 11.21%
------- ----- ----- ------- ----- -----
Total interest-bearing
liabilities 210,981 2,226 4.20% 186,528 1,931 4.15%
------- ----- ---- ------- ----- -----
Noninterest-bearing deposits 64,488 60,088
Other noninterest-bearing
liabilities 1,507 1,456
------- -------
Total noninterest-bearing
liabilities 65,995 61,544
Shareholders' equity 20,045 19,697
------- -------
Total liabilities and
shareholders'
equity $297,021 $267,769
======= =======
Net interest income;
interest rate spread $4,226 5.28% $3,760 5.33%
===== ===== ===== =====
Net interest-earning assets;
net yield (3) $ 59,851 6.21% $ 54,162 6.27%
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1995
---------------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance (1) Interest Rate
- --------------------- ---------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans (2) (4) $145,729 $4,065 11. 07%
Investment securities,
short term investments and
cash equivalents 66,943 1,033 6.12%
-------- ----- -----
Total interest-earning
assets 212,672 5,098 9.51%
Noninterest-earning assets 18,433
-------
Total Assets $231,105
=======
Interest-bearing liabilities:
Deposits:
NOW and MMDA $107,446 1,102 4.07%
Savings deposits 5,639 48 3.38%
Time deposits 44,369 605 5.41%
------- ----- -----
Total Deposits 157,454 1,755 4.42%
Borrowings 4,948 73 5.85%
------- ----- -----
Total interest-bearing
liabilities 162,402 1,828 4.47%
------- ----- -----
Noninterest-bearing deposits 50,119
Other noninterest-bearing
liabilities 622
-------
Total noninterest-bearing
liabilities 50,741
Shareholders' equity 17,962
-------
Total liabilities and
shareholders'
equity $231,105
=======
Net interest income;
interest rate spread $3,270 5.04%
===== =====
Net interest-earning assets;
net yield (3) $ 50,270 6.10%
======= =====
</TABLE>
(1) Average balances are computed using an average of the daily balances during
the period.
(2) Non-accrual loans are included in the average balance column; however, only
collected interest is included in the interest column.
(3) The net yield on interest-earning assets during the period equals
annualized net interest income divided by average interest-earning assets
for the period.
(4) Loan fees totaling $366, $388 and $249 are included in loan interest income
for the periods ended September 30, 1996, June 30, 1996 and September 30,
1995, respectively.
9 of 19
<PAGE>
The following table presents the dollar amount of certain changes in interest
income and expense for each major component of interest-earning assets and
interest-bearing liabilities and the difference attributable to changes in
average rates and volumes for the quarterly periods indicated:
<TABLE>
<CAPTION>
Three months ended September 30, 1996 Three months ended September 30, 1996
compared with June 30, 1996 compared with September 30, 1995
favorable (unfavorable) favorable (unfavorable)
---------------------- ----------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
- --------------------- ------- ----- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans $ 838 $( 120) $ 718 $1,595 $(246) $1,349
Interest on investment securities, short-term
investments and cash equivalents (6) 49 43 (44) 49 5
----- ------ ----- ------ ----- ------
Change in total interest income 832 (71) 761 1,551 (197) 1,354
Interest expense on deposits
NOW and MMDA (213) (31) (244) (388) 99 (289)
Savings deposits 28 9 37 (28) (2) (30)
Time deposits (75) (8) (83) (76) 16 (60)
----- ------ ----- ------ ----- ------
(260) (30) (290) (492) 113 (379)
Interest expense on borrowings (9) 4 (5) 27 (46) (19)
----- ------ ----- ------ ----- ------
Change in total interest expense (269) (26) (295) (465) 67 (398)
----- ------ ----- ------ ----- ------
Increase (decrease) in net interest income $ 563 $ (97) $ 466 $1,086 $(130) $ 956
===== ====== ===== ====== ===== ======
</TABLE>
(1) In the analysis, the change due to both rate and volume has been allocated
proportionately.
CUNB's net interest income for the third quarter of 1996 was $4.2 million, a
$400,000 increase over the second quarter of 1996, and a $900,000 increase over
the third quarter of 1995. When compared to the second quarter of 1996, average
earning assets increased by $30.1 million, and the net yield on earning assets
decreased from 6.27% in the second quarter of 1996 to 6.21% in the third quarter
of 1996. This was primarily due to an increase in the average rates paid on
interest-bearing liabilities.
Compared to the third quarter of 1995, average earning assets during the third
quarter of 1996 increased by $58.2 million. This was due to increased loan
demand since the previous year's third quarter. Average loans in the third
quarter of 1996 increased by $60.9 million, or 41.8%, over the third quarter of
1995. The Company's average interest-bearing deposits grew $50.1 million and
noninterest-bearing deposits grew by $14.4 million since the 1995 third quarter.
10 of 19
<PAGE>
The following tables present the Companys average balance sheet, net interest
income and interest rates for the nine-month periods presented, as well as the
analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1996
------------------------------------
Average Average
(Dollars in thousands) Balance(1) Interest Yield/Rate
- ---------------------- ------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans (2)(4) $185,101 $14,626 10.55%
Investment securities, short term
investments and cash equivalents 63,929 3,024 6.32%
-------- ------- ------
Total interest-earning assets 249,030 17,650 9.47%
Noninterest-earning assets 24,977
--------
Total Assets $274,007
========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $132,463 3,712 3.74%
Savings deposits 10,909 300 3.68%
Time deposits 47,377 1,868 5.27%
-------- ------- ------
Total Deposits 190,749 5,880 4.12%
Borrowings 3,347 283 11.28%
-------- ------- ------
Total interest-bearing liabilities 194,096 6,163 4.24%
-------- ------- ------
Noninterest-bearing deposits 59,574
Other noninterest-bearing liabilities 682
--------
Total noninterest-bearing liabilities 60,256
Shareholders' equity 19,655
--------
Total liabilities and
shareholder's equity $274,007
========
Net interest income; Interest rate spread $11,487 5.23%
======= =====
Net interest-earning assets; net yield (3) $ 54,934
========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30, 1995
------------------------------------
Average Average
(Dollars in thousands) Balance(1) Interest Yield/Rate
- ---------------------- -----------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans (2)(4) $143,710 $11,884 11.06%
Investment securities, short term
investments and cash equivalents 66,007 3,043 6.16%
-------- ------- ------
Total interest-earning assets 209,717 14,927 9.52%
Noninterest-earning assets 16,852
--------
Total Assets $226,569
========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $ 92,343 2,780 4.03%
Savings deposits 5,379 138 3.43%
Time deposits 45,271 1,828 5.40%
-------- ------- ------
Total Deposits 142,993 4,746 4.44%
Borrowings 15,877 728 6.13%
-------- ------- ------
Total interest-bearing liabilities 158,870 5,474 4.61%
-------- ------- ------
Noninterest-bearing deposits 48,526
Other noninterest-bearing liabilities 963
--------
Total noninterest-bearing liabilities 49,489
Shareholders' equity 18,210
--------
Total liabilities and
shareholder's equity $226,569
========
Net interest income; Interest rate spread $ 9,453 4.91%
======= ======
Net interest-earning assets; net yield (3) $ 50,847 6.03%
======== ======
</TABLE>
(1) Average balances are computed using an average of the daily balances
during the period.
(2) Non-accrual loans are included in the average balance column; however,
only collected interest is included in the interest column.
(3) The net yield on interest-earning assets during the period equals
annualized net interest income divided by average interest-earning assets
for the period.
(4) Loan fees totaling $1,070 and $644 are included in loan interest income for
the periods ended September 30, 1996 and September 30, 1995, respectively.
<TABLE>
Nine months ended September 30, 1996
compared with September 30, 1995
favorable (unfavorable)
------------------------------------------------
(Dollars in thousands) Volume Rate Total
- --------------------- ------- --------- -------
<S> <C> <C> <C>
Interest income on loans $ 3,302 $ (560) $ 2,742
Interest on investment securities,
short-term investments and
cash equivalents (96) 77 (19)
------- --------- -------
Change in total interest income 3,206 (483) 2,723
Interest expense on deposits
NOW and MMDA (1,138) 206 (932)
Savings deposits (151) (11) (162)
Time deposits (85) 45 (40)
------- --------- -------
(1,374) 240 (1,134)
Interest expense on borrowings 810 (365) 445
------- --------- -------
Change in total interest expense (564) (125) (689)
------- --------- -------
Increase (decrease) in net interest income $ 2,642 $ (608) $ 2,034
======= ========= =======
</TABLE>
11 of 19
<PAGE>
For the nine month period ended September 30, 1996, the Company experienced an
increase in net interest income of $2.0 million when compared to the first nine
months of 1995. This increase was mainly due to the increased volume in the
loan portfolio, the decreased volume in short-term borrowings, and the
decreased average rate paid on deposits, partially offset by reduced yields on
loans, the increased average rate paid on other borrowings, and the increased
volume of interest-bearing deposits. For the nine months ended September 30,
1996, average other borrowings primarily consisted of $3.0 million of
subordinated debt which was issued at 11.5% in the Fall of 1995 and qualifies as
Tier 2 regulatory capital. For the nine months ended September 30, 1996, the
Company's net interest spread of 5.22% reflected an increase from 4.91% for the
same period in 1995. This was primarily due to the reduction in the Company's
cost of deposits.
The trend of interest rates in the economy has remained flat during 1996;
however, there are indications that inflation may be increasing slightly. An
increase in inflation will put pressure on the Federal Reserve to increase
interest rates. If interest rates rise, there is likely to be a slight increase
in CNB's interest rate margin, thereby increasing net interest income.
The Company provides client services to several of its noninterest-bearing
demand deposit customers. The amount of credit available to clients is based on
a calculation of their average noninterest-bearing deposit balance, adjusted for
float and reserves, multiplied by an earnings credit rate, generally the 90-day
Treasury Bill rate. The credit can be utilized to pay for services including
messenger service, account reconciliation and other similar services. If the
cost of the services provided exceeds the available credit, the customer is
charged for the difference.
The impact of this expense on the Company's net interest spread and net yield on
interest earning assets was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Average noninterest-bearing demand deposits $64,488 $50,119 $59,574 $48,526
Client Service expense 105 95 320 256
Client Service cost annualized 0.65% 0.76% 0.72% 0.71%
Impact on Net Yield
- -------------------
Net yield on interest earning assets 6.21% 6.10% 6.16% 6.03%
Impact of client services (0.15%) (0.18%) (0.17%) (0.16%)
------- ------- ------- -------
Adjusted net yield 6.06% 5.92% 5.99% 5.86%
======= ======= ======= =======
</TABLE>
The negative impact on the net yield on interest-earning assets is caused by the
reduction of net interest income by the cost of client service expenses, which
reduces the yield on interest-earning assets. The cost for client service
expense has been relatively stable, and reflects the Company's efforts in the
management of client service expense.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is measured as the difference between the volumes of
assets and liabilities in the Bank's current portfolio that are subject to
repricing at intervals of (a) one day or immediate, (b) two days to six months,
(c) seven to twelve months, (d) one to three years, (e) three to five years, (f)
over five years and (g) on a cumulative basis. Allocations of assets and
liabilities, including noninterest-bearing sources of funds, to specific periods
are based upon management's assessment of contractual or anticipated repricing
characteristics. The differences between the volumes of assets and liabilities
in these intervals are known as "sensitivity gaps." The following table shows
interest sensitivity gaps for different intervals at September 30, 1996:
12 of 19
<PAGE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
Repricing Periods
Less than Less than
Immediate 2 Days To 7-12 1 Year 3 Yrs
(Dollars in thousands) One Day 6 Months Months to 3 Yrs to 5 Yrs
- --------------------- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ - $ - $ - $ - $ -
Short term investments 4,600 - - - -
Investment securities - 3,002 2,504 10,760 14,018
Loans 166,254 2,943 2,183 10,285 8,855
Loan loss reserve/unearned fees - - - - -
Other assets - - - - -
-------- -------- -------- -------- -------
Total assets $170,854 $ 5,945 $ 4,687 $ 21,045 $22,873
======== ======== ======== ======== =======
Liabilities and Equity:
Deposits
Demand $ - $ - $ - $ - $ -
NOW, MMDA, and savings 166,301 - - - -
Time deposits - 48,273 7,008 592 11
Subordinated debt 3,000 - - - -
Other liabilities - - - - -
Shareholders' equity - - - - -
-------- -------- -------- -------- -------
Total liabilities and equity $169,301 $ 48,273 $ 7,008 $ 592 $ 11
======== ======== ======== ======== =======
Gap $ 1,553 $(42,328) $ (2,321) $ 20,453 $22,862
Cumulative Gap $ 1,553 $(40,775) $(43,096) $(22,643) $ 219
Cumulative Gap/total assets 0.57% (14.97%) (15.83%) (8.32%) 0.08%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
Repricing Periods
Total
Less Than Total Rate Non-rate
(Dollars in thousands) 5 Yrs Sensitive Sensitive Total
- ---------------------- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ - $ - $ 20,273 $ 20,273
Short term investments - 4,600 - 4,600
Investment securities 28,613 58,897 1,021 59,918
Loans 31,713 222,233 3,111 225,344
Loan loss reserve/unearned fees - - (4,636) (4,636)
Other assets - - 14,056 14,056
------- -------- -------- --------
Total assets $60,326 $285,730 $ 33,825 $319,555
======= ======== ======== ========
Liabilities and Equity:
Deposits
Demand $ - $ - $ 72,707 $ 72,707
NOW, MMDA, and savings - 166,301 - 166,301
Time deposits 10 55,894 - 55,894
Subordinated debt - 3,000 - 3,000
Other liabilities - - 865 865
Shareholders' equity - - 20,788 20,788
------- -------- -------- --------
Total liabilities and equity $ 10 $225,195 $ 94,360 $319,555
======= ======== ======== ========
Gap $60,316 $ 60,535 $(60,535) $ -
Cumulative Gap $60,535 $ 60,535 $ - $ -
Cumulative Gap/total assets 22.23% 22.23% 0% -
</TABLE>
The management of interest rate sensitivity, or interest rate risk management,
is a function of the repricing characteristics of the Bank's portfolio of assets
and liabilities. These repricing characteristics are subject to changes in
interest rates either at replacement, repricing or maturity during the life of
the instruments. Interest rate risk management focuses on the maturity
structure of assets and liabilities and their repricing characteristics during
periods of changes in market interest rates. Effective interest rate risk
management seeks to ensure that both assets and liabilities respond to changes
in interest rates within an acceptable time frame, thereby reducing the effect
of interest rate movements on net interest income.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing of
both the asset and its supporting liability can remain the same, thus impacting
net interest income. This characteristic is referred to as "basis risk" and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity table above. These prepayments may have significant effects on the
Bank's net interest margin. Because of these factors, the interest sensitivity
gap report may not provide a complete assessment of the Bank's exposure to
changes in interest rates.
13 of 19
<PAGE>
NON-INTEREST INCOME
The following table provides details of non-interest income for the previous
five quarters.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1996 1996 1996 1995 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Loan fees $ 59 $ 34 $ 15 $ 11 $ 51
Trust fees 375 344 309 241 178
Gain on sale of SBA loans 122 123 130 153 63
Depositor service fees 149 121 98 92 92
Other 122 185 77 54 67
----- ----- ----- ----- -----
Total other income $ 827 $ 807 $ 629 $ 551 $ 451
===== ===== ===== ===== =====
</TABLE>
Non-interest income was $827,000 for the third quarter of 1996, an increase of
$20,000 from the second quarter of 1996, and of $376,000 from the third quarter
of 1995. The increase in the 1996 third quarter from the second quarter of 1996
and from the third quarter of 1995 was primarily due to an increase in trust fee
income.
The increase of $910,000 in total noninterest income from the nine months ended
September 30, 1995 to the nine months ended September 30, 1996 was primarily
due to increased trust fee income and warrant income.
NON-INTEREST EXPENSE
The following table provides details of non-interest expense for the previous
five quarters:
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1996 1996 1996 1995 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $1,974 $1,998 $1,700 $1,774 $1,694
Occupancy and equipment 551 489 473 470 430
Professional services 234 248 193 269 277
Legal settlement and costs - - - - -
FDIC insurance and assessments 15 21 20 62 22
Supplies, telephone and postage 161 160 130 117 109
Data processing 42 38 50 42 39
Client services 105 95 120 81 95
Other real estate, net 5 6 24 - 1
Other 657 444 442 366 315
------ ------ ------ ------ ------
Total operating expenses $3,744 $3,499 $3,152 $3,181 $2,982
====== ====== ====== ====== ======
</TABLE>
Compensation and benefits expense for the third quarter decreased by $24,000
when compared to the second quarter of 1996, and increased by $280,000 from the
comparable quarter of 1995. The increase in compensation, occupancy and
supplies expense during the third quarter of 1996 and the first nine months of
1996, from the 1995 third quarter and the 1995 first nine months, respectively,
is primarily due to the opening of the new downtown Palo Alto branch office in
June 1996 which also included facilities for CNB's expanded trust operations.
Total FDIC insurance and assessments declined by $226,000 from the nine months
ended September 30, 1995 to the nine months ended September 30, 1996, reflecting
the change in assessment rates for banks insured by the Bank Insurance Fund of
the FDIC.
INCOME TAX
The provision for income taxes for the third quarter of 1996 of $350,000
reflects an effective tax rate for the quarter of approximately 38%, compared to
a tax benefit recorded for the third quarter of 1995 of $260,000 with an
effective tax rate of 39%.
14 of 19
<PAGE>
FINANCIAL CONDITION
CAPITAL RATIOS
The Companys and the Banks leverage ratios (Tier 1 capital to average quarterly
assets), Tier 1 risk-based capital ratios and and total risk-based capital
ratios were as follows:
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------------------
Tier 1 Capital to Tier 1 Capital to Total Capital to
Average Risk-weighted Risk-weighted
Quarterly Assets Assets Assets
------------------------------------------------------------------
BALANCE % BALANCE % BALANCE %
<S> <C> <C> <C> <C> <C> <C>
(Dollar in thousands)
CNB $20,381 6.89% $20,381 7.75% $26,670 10.14%
Well capitalized requirement $14,790 5.00% $15,778 6.00% $26,297 10.00%
------------------------------------------------------------------
Excess capital $ 5,591 1.89% $ 4,603 1.75% $ 373 0.14%
==================================================================
Cupertino National Bancorp $20,736 6.98% $20,736 7.88% $27,029 10.27%
Well capitalized requirement $14,851 5.00% $15,794 6.00% $26,324 10.00%
------------------------------------------------------------------
Excess capital $ 5,885 1.98% $ 4,942 1.88% $ 705 0.27%
==================================================================
</TABLE>
To be considered well capitalized, as defined under the regulatory framework for
prompt corrective action, an institution must have a Tier 1 risk-based capital
ratio of 6% or greater, a total risk-based capital ratio of 10% or greater and a
leverage ratio of 5% or greater. To be considered adequately capitalized, as
defined under the regulatory framework for prompt corrective action, an
institution must have a Tier 1 risk-based capital ratio of 4% or greater, a
total risk-based capital ratio of 8% or greater and a leverage ratio of 3% or
greater. All of the Company's and the Bank's risk-based capital and leverage
ratios exceed the ratios for a well capitalized financial institution for all
periods presented above.
LIQUIDITY
Liquidity is defined as the ability of a company to convert assets into cash or
cash equivalents without significant loss, and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the Bank's
ability to meet the day-to-day cash flow requirements of the Bank's clients who
either want to withdraw funds or require funds to meet their credit needs.
Through an Asset/Liability Management Committee, the Bank actively monitors its
commitments to fund loans, as well as the composition and maturity schedule of
its loan and deposit portfolios. To manage its liquidity, the Bank maintains
$20 million in inter-bank Fed Fund purchase lines, as well as approximately $100
million in institutional deposit or brokered deposit lines, and $46 million in
reverse repurchase lines.
15 of 19
<PAGE>
PROVISION AND RESERVE FOR LOAN LOSSES
The following schedule details the activity in the Bank's reserve for loan
losses and related ratios for each of the last five quarters:
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1996 1996 1996 1995 1995
- --------------------- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at
beginning of period $ 3,043 $2,907 $2,683 $2,522 $2,454
Provision charged to operations 399 265 200 90 75
Loans charged off (74) (165) - (54) (15)
Loan recoveries 83 36 24 125 8
------- ------ ------ ------ ------
Reserve for loan losses at
end of period $ 3,451 $3,043 $2,907 $2,683 $2,522
======= ====== ====== ====== ======
Ratio of:
Reserve for loan losses to loans 1.54% 1.63% 1.67% 1.64% 1.69%
Reserve for loan losses to
nonperforming assets 111.25% 86.08% 84.95% 80.26% 85.67%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses was $399,000 in the third quarter of 1996,
compared to $265,000 in the second quarter of 1996, and to $75,000 in the third
quarter of 1995. The provision for loan losses for the first nine months of
1996 was $864,000 compared to $591,000 in the comparable period in 1995.
Management considers changes in the size and character of the loan portfolio,
changes in non-performing and past due loans, historical loan loss experience,
and the existing and prospective economic conditions when determining the
adequacy of the loan loss reserve. The reserve for loan losses was $3.45 million
at September 30, 1996, compared with $3.04 million at June 30, 1996, and $2.52
million at September 30, 1995.
The ratio of the reserve for loan losses to total loans was 1.54% at September
30, 1996, compared with 1.63% at June 30, 1996, and 1.69% at September 30,
1995. The ratio of the reserve for loan losses to total nonperforming assets,
including foreclosed real estate, was 111.25% at September 30, 1996, compared to
86.08% at June 30, 1996 and 85.67% at September 30, 1995.
NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AND FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1996 1996 1996 1995 1995
- --------------------- --------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans $2,457 $2,214 $2,325 $2,513 $2,539
Restructured loans - - - - -
Accruing loans past due 90 days or more 645 1,104 880 830 405
------ ------ ------ ------ ------
Total nonperforming loans 3,102 3,318 3,205 3,343 2,944
OREO - 217 217 - -
------ ------ ------ ------ ------
Total nonperforming assets $3,102 $3,535 $3,422 $3,343 $2,944
====== ====== ====== ====== ======
Total nonperforming assets to total assets 0.97% 1.29% 1.34% 1.29% 1.23%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
16 of 19
<PAGE>
Over the past year, total nonperforming assets have remained relatively stable
with totals of $3.1 million at September 30, 1996, compared with $3.5 million at
June 30, 1996, and $2.9 million at September 30, 1995. Nonperforming loans,
which include non-accruing loans, restructured loans, and accruing loans which
are past due 90 days or more, were $3.1 million at September 30, 1996, compared
with $3.3 million at December 31, 1995, and $2.9 million at September 30, 1995.
It is the Bank's policy to discontinue the accrual of interest when the ability
of a borrower to repay principal or interest is, in doubt, or when a loan is
past due 90 days or more, except when, in managements judgment, the loan is well
secured and in the process of collection.
The Bank has an active credit administration function which includes, in
addition to internal reviews, the regular use of an outside loan review firm to
review the quality of the loan portfolio. Senior management, and an internal
asset review committee review problem loans on a regular basis.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on industrial concerns, primarily because its assets and
liabilities consist largely of monetary items. The most direct effect of
inflation on a financial institution is fluctuation in interest rates. However,
net interest income is affected by the spread between interest rates received on
assets and those paid on interest bearing liabilities, rather than the absolute
level of interest rates. Additionally, there may be some upward pressure on the
Company's operating expenses, such as increases in occupancy expenses based on
consumer price indices. In the opinion of management, inflation has not had
material effect on the operating results of the Company.
17 of 19
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - ITEM 3, ITEM 5
Not applicable
ITEM 4 - NONE
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Report.
(a) Exhibits - Listed on Index to Exhibits
(b) Reports on Form 8-K for the quarter covered by this report:
(1) The Company filed a Report on Form 8-K on July 12, 1996 reporting, on
Item 5. "Other Events," the signing of a definitive agreement for a
merger of equals of Registrant with and into Mid-Peninsula Bancorp and
that Mid-Peninsula Bancorp will change its name to Greater Bay Bancorp
concurrent with closing of the merger. The Amended and Restated
Agreement and Plan of Reorganization and Merger dated June 26, 1996 was
filed as an exhibit to the form 8-K and is incorporated herein by
reference.
(2) The Company filed a Report on Form 8-K on August 21, 1996 reporting, on
Item 5. "Other Events," the signing of an amended definitive agreement
for a merger of equals of Registrant with and into Mid-Peninsula Bancorp
and that Mid-Peninsula Bancorp will change its name to Greater Bay
Bancorp concurrent with closing of the merger. The Second Amended and
Restated Agreement and Plan of Reorganization and Merger dated August
20, 1996 was filed as an exhibit to the Form 8-K and is incorporated
herein by reference.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CUPERTINO NATIONAL BANCORP
(REGISTRANT)
BY:
/S/ STEVEN C. SMITH
- ---------------------
STEVEN C. SMITH
EXECUTIVE VICE PRESIDENT,
CHIEF OPERATING OFFICER
/S/ HEIDI R. WULFE
- ------------------
HEIDI R. WULFE
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
DATE: NOVEMBER 12, 1996
18 of 19
<PAGE>
INDEX TO EXHIBITS
NUMBER EXHIBIT
- ------ -------
2.1 Second Amended and Restated Agreement and Plan of Reorganization and
Merger dated August 20, 1996 (filed as Exhibit 2.1 of Registrant's report
on Form 8-K, dated August 21, 1996 and incorporated herein by reference).
10.1 Cupertino Shareholder Agreement and Mid-Peninsula Shareholder
Agreement, each dated as of June 26, 1996, pursuant to Second Amended
and Restated Agreement and Plan of Reorganization and Merger dated
August 20, 1996. (Filed as Exhibit 10.1 of registrant's report on form
10 Q as of June 30, 1996 and incorporated herein by reference).
10.2 Form of Cupertino Affiliate Agreement and Mid-Peninsula Affiliate
Agreement with directors and certain officers, pursuant to Second
Amended and Restated Agreement and Plan of Reorganization and Merger
dated August 20, 1996. (Filed as Exhibit 10.2 of registrant's report on
form 10 Q as of June 30, 1996 and incorporated herein by reference).
10.3 Stock Option Agreement pursuant to Second Amended and Restated Agreement
and Plan of Reorganization and Merger dated August 20, 1996. (Filed as
Exhibit 10.3 of registrant's report on form 10 Q as of June 30, 1996 and
incorporated herein by reference).
10.4 Letter agreement, dated as of May 10, 1996, regarding the rendering of a
fairness opinion and Indemnity Agreement, dated as of May 10, 1996,
pursuant to Second Amended and Restated Agreement and Plan of
Reorganization and Merger dated August 20, 1996, between Cupertino and
Sutro & Co. Incorporated. (Filed as Exhibit 10.4 of registrant's report
on form 10Q as of June 30, 1996 and incorporated herein by reference).
10.5 Letter agreement, dated as of June 5, 1996, regarding the providing of
financial advisory services pursuant to Second Amended and Restated
Agreement and Plan of Reorganization and Merger dated August 20, 1996,
between Cupertino and Hovde Financial, Inc. (Filed as Exhibit 10.5 of
registrant's report on form 10 Q as of June 30, 1996 and incorporated
herein by reference).
27 Financial Data Schedule
_____
19 of 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 20,273
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,023
<INVESTMENTS-CARRYING> 57,845
<INVESTMENTS-MARKET> 57,436
<LOANS> 224,333
<ALLOWANCE> 3,451
<TOTAL-ASSETS> 319,555
<DEPOSITS> 294,902
<SHORT-TERM> 0
<LIABILITIES-OTHER> 865
<LONG-TERM> 3,000
0
0
<COMMON> 18,436
<OTHER-SE> 2,352
<TOTAL-LIABILITIES-AND-EQUITY> 319,555
<INTEREST-LOAN> 5,414
<INTEREST-INVEST> 940
<INTEREST-OTHER> 97
<INTEREST-TOTAL> 6,451
<INTEREST-DEPOSIT> 2,132
<INTEREST-EXPENSE> 2,224
<INTEREST-INCOME-NET> 4,227
<LOAN-LOSSES> 399
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,744
<INCOME-PRETAX> 911
<INCOME-PRE-EXTRAORDINARY> 911
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 561
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 6.21
<LOANS-NON> 2,457
<LOANS-PAST> 645
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,232
<ALLOWANCE-OPEN> 3,043
<CHARGE-OFFS> 74
<RECOVERIES> 83
<ALLOWANCE-CLOSE> 3,451
<ALLOWANCE-DOMESTIC> 3,451
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,387
</TABLE>
