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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, 1995
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 __________
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
------------------- -----------------------------------------
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
--- ---
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]
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 15,
1996, as reported on the NASDAQ National Market System, was approximately
$17,688,283. 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 15, 1996 was 1,857,105.
_______________
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 16, 1996 (Part III), and (2)
registrant's Annual Report to Shareholders for the year ended December 31, 1995
(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 & Trust ("CNB"), a wholly-
owned subsidiary of the Company, is a national bank conducting a commercial
banking business. The Company was organized in August 1984, and CNB began
operations in May 1985. The Company and CNB 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 CNB and as the
lessee and sublessor to CNB of the premises on which CNB's headquarters is
located.
CNB 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. CNB'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.
CNB 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 $35 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. CNB'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 CNB's primary service area. Such loans typically range
between approximately $200,000 and $3,400,000. Loans to professional and other
individual clients, whose income typically equals or exceeds the median income
for CNB'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.
CNB 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, CNB 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, CNB opened its Emerging Growth Industries department,
which evolved in 1995 into the 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 CNB'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.
CNB 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, CNB 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 CNB to enhance its funding sources as the
FHLB allows members to borrow funds by pledging securities and mortgage loans as
collateral.
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MARKET AREA AND CLIENT BASE
CNB concentrates on providing service to clients in Santa Clara County
and San Mateo County. CNB is headquartered in Cupertino, California which is in
the center of the geographical area which is referred to as "Silicon Valley".
The City of Cupertino has a population of approximately 51,300 and its average
annual household income exceeds $97,200. 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. CNB 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.
In March 1991, CNB opened its first regional office in downtown San
Jose. This office was established to better serve existing clients of CNB, as
well as to gain new relationships from clients based in the growing financial
center in the southern portion of Santa Clara County. In May 1992, CNB opened
a second regional office in Palo Alto to better serve its clients in Northern
Santa Clara and Southern San Mateo County. CNB intends to open its fourth
office in downtown Palo Alto, in the spring of 1996.
Many of the directors of the Company and CNB, and their affiliates,
maintain deposit and loan relationships with the Bank. See Note 11 of Notes to
Consolidated Financial Statements in the Company's 1995 Annual Report,
incorporated herein by reference, for information regarding loans to affiliates
and other significant related party transactions.
SOURCES OF FUNDS
Most of CNB's deposits are obtained from small and medium-sized
businesses, business executives, professionals and other individuals. At
December 31, 1995, CNB had a total of 7,621 deposit accounts, representing 2,894
non-interest-bearing deposit (checking) accounts with an average balance of
approximately $16,372 each, 3,726 interest-bearing demand, money market demand,
and savings accounts with an average balance of approximately $28,176 each, and
1,001 time deposit accounts with an average balance of approximately $45,267
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.
CNB has one deposit relationship with a title company, in which three
of the directors of CNB serve as directors (one CNB director is also the
principal shareholder and chief executive officer of the title company).
Deposit balances from this client in both non-interest-bearing demand accounts
and money market accounts totaled $775,000 on December 31, 1995 and ranged
between $7,000 and $8.5 million during 1995.
LENDING ACTIVITIES
CNB's loan portfolio is centered in commercial lending to small and
medium-sized businesses in the manufacturing and service industries. CNB has
also been an active lender in residential real estate construction.
Approximately 54% of CNB's portfolio was in commercial loans at
December 31, 1995 and real estate construction loans represented approximately
15% of total loans, primarily for residential projects. In addition, 14% of
CNB's loans were real estate term loans, which are primarily secured by
commercial properties. The balance of the portfolio consists of consumer loans.
CNB's loan clients are primarily located in Cupertino, San Jose, Palo Alto and
the surrounding communities in Santa Clara County and San Mateo County.
The majority of loans are collateralized. Generally, real estate loans
are secured by real property, and commercial and other loans are secured CNB
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.
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The interest rates charged for the loans made by CNB 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 CNB and CNB's cost of funds. A majority of the loans in CNB's portfolio
have a floating rate.
In its commercial loan portfolio, CNB 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 guarantees 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.
CNB's Venture Lending Division works with a variety of technology
companies, ranging from multimedia, software and telecommunications providers to
biotechnology and medical advice firms. Venture Lending provides innovative
financing and other financial services tailored to the needs of startup and
growth-stage companies.
While the commercial loan portfolio of CNB is not concentrated in any
one industry, CNB's service area has a concentration of technology companies,
and accordingly, the ability of any of CNB's borrowers to repay loans may be
affected by the performance of this sector of the economy.
CNB'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, CNB concentrated its construction loan activity in the market for owner-
occupied custom residences. During 1994, real estate values began to
stabilize and CNB began to cautiously enter the construction loan market for
small townhouse and single family home projects. During 1995, CNB continued to
expand its real estate construction portfolio with the help of the improving
real estate market in northern California, although there can be no assurance
that this trend will continue.
Residential real estate construction loans are typically secured by
first deeds of trust and require guarantees 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. CNB 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). CNB
monitors projects during the construction phase through regular construction
inspections and a disbursement program tied to the percentage of completion of
each project.
CNB'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. CNB also has a minimal
portfolio of credit card loans, issued as an additional service to its clients.
LOAN ADMINISTRATION
The loan policy of CNB 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. The Directors' Loan Committee oversees the lending
activities of the Bank. This committee consists of three outside directors, the
Chairman/Chief Executive Officer, the Executive Vice President-Senior Loan
Officer, Senior Vice President-Venture Lending Division Manager, Senior Vice
President-Commercial Lending and the Senior Vice President-Chief Credit
Officer. The officers in this group make up the Officers' Loan Committee.
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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.
CNB's credit administration function includes, in addition to internal
reviews, the regular use of an outside loan review firm to review the quality
of the loan portfolio. CNB 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
CNB'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
CNB's Trust Department commenced operations in July 1988 and in 1995,
CNB renewed its focus on the expansion of its trust operations. The Trust
Department offers a full range of fee-based trust services directly to its
clients and administers several 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 $270 million at December 31, 1995 compared to $157 million at
December 31, 1994 and $118 million at December 31, 1993. The 72% increase in
trust assets is attributable to the addition of several new trust officers and
the new Executive Vice President-Senior Trust Officer. CNB anticipates this
rapid rise to continue in 1996 as we increase our presence in the Palo Alto
marketplace with a new office scheduled to open in the late spring of 1996.
There can be no assurances that the growth will continue at the rate experienced
in 1995.
MORTGAGE BANKING DIVISION
CNB opened a Mortgage Banking Division in July 1992. The purpose of
this division was to originate residential mortgage loans for sale on the
secondary market. The primary revenue of this division was from the premium
received on the sale of such mortgage loans and their related servicing rights.
CNB funded both loans which were originated directly by a mortgage banking
officer and loans purchased through a network of mortgage brokers. CNB was
selling both the loans and the related servicing rights through a correspondent.
During 1993, CNB 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 CNB 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, CNB determined to close its mortgage
operations effective March 31, 1995. In connection with this action, CNB
incurred a $180,000 after tax charge related to this operation in the first
quarter of 1995.
COMPETITION
The banking business in CNB'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 CNB's service area. CNB 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.
The major advantages that larger branch institutions have over CNB 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 CNB. These banks can also offer certain services, such as international
banking, which are not offered directly by CNB. However, CNB is able to offer
most of these services
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indirectly, through its correspondent institutions. Smaller independent banks,
including CNB, 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.
CNB 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. To compete with the major financial institutions in its service area,
CNB relies upon customized services and direct personal contacts by its
officers, directors and staff. For clients whose loan demands exceed CNB's
legal lending limit, CNB 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 CNB on its deposits and its other borrowings and the interest
rates received by CNB on loans extended to its clients and on securities held in
its investment portfolio will be the principal factor affecting CNB's earnings.
The interest rates paid and received by CNB are sensitive to many factors which
are beyond CNB's control, including the influence of domestic and foreign
economic conditions. The earnings and growth of CNB 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
implements 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 complete statutory and regulatory provisions that are summarized below,
which statutes and regulations are subject to change at any time. Several
initiatives to revise the powers and supervision of financial institutions have
been proposed and it is not possible to determine which, if any, of these
changes will be adopted.
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 CNB. 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.
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
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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. Under these guidelines the minimum 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, 1995, the Company and CNB had total capital and
leverage capital ratios above the minimums required by the Federal Reserve
Board.
CNB
CNB, 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. CNB 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 depositor's
accounts with CNB are insured by the Bank Insurance Fund, which is managed by
the FDIC, to the maximum aggregate amount permitted by law, which is currently
$100,000 for all insured deposits of the depositor. For this protection, CNB
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, CNB 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
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Act), Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth
in Savings Act). As a creditor on loans secured by real property and as an owner
of real property, CNB 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. CNB 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 CNB 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 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.
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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 or other
regulatory changes, 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 ratio of
Tier 1 capital to quarterly average total assets. The minimum required leverage
ratio is 3.0% 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, 1995, CNB had capital ratios, both risk-adjusted and
leverage, which placed it in the "well capitalized" category. For an analysis
of the capital ratios of CNB as of December 31, 1995, see "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Capital Resources" in the 1995 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 CNB. 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 CNB and the Company. Deposits at commercial banks such as CNB
are now insured by the Bank Insurance Fund ("BIF") of the FDIC.
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 CNB, 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.
9
<PAGE>
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 1991 ("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 CNB, 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
at that time ranged from 0.25 percent to 0.31 percent of domestic deposits
depending on the assessment category into which an insured bank is placed. Once
the BIF reached reserves equal to $1.25 for each $100 of insured deposits the
assessment ratio would decline. Effective July 1995, the BIF attained its level
of required reserves and the assessment ratios under the system were adjusted to
a range of 0.0 percent (a minimum of $500 per quarter is assessed, however) to
0.27 percent.
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 significantly exceeds 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. CNB 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.
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
10
<PAGE>
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 CNB were considered "well capitalized" at December 31, 1995.
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. CNB 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 failed to comply with these
standards would be required to submit a compliance plan. The failure to submit
a plan or to comply with an approved plan would 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 concerning bank safety and soundness. In
anticipation of the adoption by the FDIC of the proposed regulations, CNB has
taken steps to document and establish additional internal control structures and
procedures, as necessary, to ensure compliance with new requirements imposed by
FDICIA and the regulations thereunder concerning CNB's safety and soundness.
CNB's audit committee is composed entirely of outside directors.
11
<PAGE>
PAYMENT OF DIVIDENDS
There are statutory and regulatory requirements applicable to the
payment of dividends by CNB 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 generally 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 CNB.
By CNB. 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 CNB to the
Company will not only depend upon CNB's earnings during any fiscal period, but
also upon the assessment of CNB's Board of Directors of the capital requirements
of CNB 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 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.
12
<PAGE>
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. CNB
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, CNB 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 CNB 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 CNB.
SUBORDINATED DEBENTURE
In 1995, the Company consummated a private offering of $3.0 million in
11.5% subordinated notes. The notes, which will mature on September 15, 2005,
were offered to the Board of Directors, bank officers and other accredited
investors within the meaning of Rule 501 under the Securities Act of 1933, as
amended. The debentures are redeemable by the Company after September 30, 1998
at a premium ranging from 0% to 5% of the premium redeemed. In an identical
transaction, CNB issued subordinated debt to the Company in an equal amount.
The notes qualify as Tier 2 capital of CNB.
13
<PAGE>
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 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 1995 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, Venture Lending and Real Estate Construction and
Land loan portfolio at December 31, 1995.
<TABLE>
<CAPTION>
(Dollars in Thousands) Commercial, Real estate
SBA and construction and
Loan due in: Venture Lending Land
- -------------------------------------------------------------------------------
<S> <C> <C>
One year or less:
Floating Rate $54,151 $23,480
Fixed Rate 1,435 409
One to five years:
Floating Rate 27,293 --
Fixed Rate 5,172 --
After five years:
Floating Rate -- --
Fixed Rate 501 --
------- -------
Total $88,552 $23,889
======= =======
</TABLE>
TABLE II - COMPOSITION OF LOANS - The following table details the composition of
CNB's gross loan portfolio at:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------
(Dollars in millions) $ % $ % $ % $ % $ %
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 88.6 54.0 81.7 58.6 77.7 57.7 73.5 56.9 60.6 57.8
Real estate construction
and Land 23.9 14.5 18.1 13.0 19.1 14.2 23.0 17.8 17.0 16.3
Real estate term 23.0 14.0 13.1 9.4 12.1 9.0 11.2 8.7 9.6 9.2
Consumer 28.7 17.5 21.1 15.1 18.2 13.5 16.6 12.8 17.5 16.7
-----------------------------------------------------------------------------------------------
Total 164.2 100.0 134.0 96.1 127.1 94.4 124.3 96.2 104.7 100.0
-----------------------------------------------------------------------------------------------
Loans Held For Sale -- -- 5.4 3.9 7.6 5.6 4.9 3.8 -- --
-----------------------------------------------------------------------------------------------
Total Loans $164.2 100.0 $139.4 100.0 $134.7 100.0 $129.2 100.0 $104.7 100.0
===============================================================================================
</TABLE>
14
<PAGE>
TABLE III - NON-PERFORMING LOANS -The following table details CNB's
non-performing loan portfolio for the last five years.
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual $2,513 $3,244 $ 997 $513 $738
Accruing loans past due 830 1,371 1,903 -- 55
90 days or more
Restructured loans -- -- -- -- --
------------------------------------------------------
Total $3,343 $4,615 $2,900 $513 $793
Percent of total loans 2.0% 3.3% 2.2% .4% .8%
------------------------------------------------------
</TABLE>
TABLE IV - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES - CNB's allocation of its
allowance for loan losses for the past five years is detailed as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
----------------------------------------------------------------------------------------------------------
$ Percent to $ Percent to $ Percent to $ Percent to $ Percent to
total loans total loans total loans total loans total loans
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount of allowance
allocated to:
Commercial $1,057 0.65 $1,834 1.32 $1,496 1.11 $1,216 0.94 $1,018 0.97
Real estate
construction
and land 153 0.09 180 0.13 308 0.23 263 0.20 184 0.18
Real estate term 696 0.43 132 0.09 391 0.29 56 0.05 48 0.04
Consumer 273 0.17 273 0.19 10 0.01 190 0.14 217 0.20
Loans held for sale -- -- 14 0.01 27 0.02 23 0.02 -- --
Unallocated 504 0.30 485 0.35 15 0.01 -- -- 3 .01
----------------------------------------------------------------------------------------------------------
Total $2,683 1.64 $2,918 2.09 $2,247 1.67 $1,748 1.35 $1,470 1.40
==========================================================================================================
</TABLE>
TABLE V - The following table summarizes the activity in CNB's allowance for
loan losses for the past five years:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------
(Dollars in thousands) 1995 1994 1993 1992 1991
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at the beginning
of period $ 2,918 $ 2,247 $ 1,748 $1,470 $1,301
Charge Offs:
Commercial (973) (748) (1,069) (520) (23)
Real estate construction -- (123) -- (62) (188)
Real estate term -- -- -- -- --
Consumer installment (101) (141) (159) (145) (2)
-------------------------------------------------------
Total (1,074) (1,012) (1,228) (727) (213)
Recoveries:
Commercial 156 57 -- 4 --
Real estate construction -- -- -- 95 --
Real state term -- -- -- -- --
Consumer installment 2 6 48 4 --
-------------------------------------------------------
Total 158 63 48 103 --
Net charge-offs (916) (949) (1,180) (624) (213)
-------------------------------------------------------
Provision charged to income 681 1,620 1,679 902 382
-------------------------------------------------------
Balance at the end of period $ 2,683 $ 2,918 $ 2,247 $1,748 $1,470
=======================================================
</TABLE>
15
<PAGE>
Table VI - IMPAIRED LOANS
The following table details the carrying value of CNB's impaired loans, in
accordance with FASB 114, by type of loan as of December 31, 1995:
<TABLE>
<CAPTION>
Net
Recorded Valuation Carrying
(Dollars in thousands) Amount Allowance Value
-----------------------------------
<S> <C> <C> <C>
Commercial $ 851 $260 $ 591
Real Estate - Construction
and Land -- -- --
Real Estate - Term 1,662 249 1,413
-----------------------------------
Total $2,513 $509 $2,004
===================================
</TABLE>
All the above impaired loans were measured based on the fair value of the
loan's collateral. The allowance for loan losses for all other loans, including
consumer loans which are considered to be small homogenous loans as defined by
FAS 114, is determined based on the methodology discussed in the Company's
Annual Report.
CNB considers a loan impaired when, based on current information and
events, it is probable that CNB will be unable to collect all amounts due
according to the contractual terms of the loan agreement. This policy is
generally consistent with CNB's nonaccrual policy. Loans which are over 90 days
contractually delinquent and loans which have developed inherent problems prior
to being 90 days delinquent are considered impaired. An insignificant delay or
shortfall in the amount of payments is not considered an event that, when
considered in isolation, would automatically cause a loan to be considered
impaired for purposes of FAS 114. Examples for insignificant delays or
shortfalls may include, depending on the specific facts and circumstances, those
that are associated with temporary stoppage in operations due to equipment
failure or a natural disaster, or due to tight cash flows during the off-peak
season of a business loan customer. CNB did not recognize interest on impaired
loans during the year ended December 31, 1995.
Table VII - MATURITIES OF CERTIFICATES OF DEPOSIT
The following table presents the maturities of CNB's certificates of deposit
over $100,000 as of December 31, 1995.
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------
<S> <C>
Three months or less $21,256
Three to six months 4,489
Six to twelve months 1,210
Over twelve months 149
-------
Total $27,104
=======
</TABLE>
For information regarding certain required disclosures of the maturities of
investments, refer to Note 2 in the Company's 1995 Annual Report to Shareholders
which is incorporated herein by reference.
16
<PAGE>
EMPLOYEES
The Company has no salaried employees, since all officers of the
Company are employees of CNB. At December 31, 1995, CNB had 109 full time
equivalent employees. Management believes that its employee relations are good
and that the benefits provided by CNB to its employees are competitive.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Annual Report
on Form 10-K, certain items herein constitute forward-looking statements,
including without limitation, certain matters discussed under Part I, Item 1,
"Business," under the headings "Market Area and Client Base," "Trust
Department," "Supervision and Regulation--Capital Adequacy of the Bank" and "--
Federal Deposit Insurance Corporation Improvement Act of 1991 --Risk Based
Deposit Insurance Rates," Part I, Item 3, "Legal Proceedings," and Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operation" (incorporated herein by reference). The matters referred to in such
statements involve risks and uncertainties including, but not limited to, the
impact of economic conditions (both generally and more specifically in the
markets the Bank operates), the impact of competition for the Bank's Clients
from other providers of financial services, the impact of government legislation
and regulation (which changes from time to time and over which the Bank has no
control), and other risks detailed in this Report and in the Company's other
filings with the Securities and Exchange Commission.
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 CNB for an
amount equivalent to the Company's expense related to such premises.
CNB 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, CNB 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.
On July 13, 1995, CNB entered into an agreement to lease, upon
completion, approximately 6,000 square feet of a new building currently under
construction. The leased space is located at 400 Emerson Street, Palo Alto, CA.
This space will accommodate a new branch office, as well as, the new
headquarters for CNB's Trust Division. The twelve year lease will have a base
rent of $16,500 per month with a rental adjustment schedule which increases the
base rent every two years. The adjustment will be based on a consumer price
index but shall not be less than four percent over the two year period and not
greater than ten percent over the two year period. CNB anticipates occupancy
in late Spring, 1996.
The Company believes that its facilities are well maintained and
adequate to meet its current requirements.
17
<PAGE>
ITEM 3. 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 CNB in the Superior Court of the State of California, Santa Clara
County, alleging negligence by CNB 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 for
monetary damages of approximately $2.2 million.
In July 1995, CNB entered into an agreement with Sumitomo to settle
the litigation for approximately $1.8 million. The Company believes, based on
advice from counsel, that it is highly probable that insurance coverage for a
significant portion of this settlement is available under its director and
officer liability insurance policy and its professional liability insurance
policy, as well as the errors and omissions policy of the insurance agent which
sold the Company these policies. The Company's insurance company has denied the
Company's claim for coverage under these policies and the Company has initiated
litigation against the insurance company as well as the agent from whom the
Company obtained such policies. However due to the uncertainty associated with
such recovery, the Company has reflected the $1.8 million cost of the legal
settlement in its 1995 earnings.
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 22 of the Company's 1995 Annual
Report to Shareholders.
At December 31, 1995, there were approximately 402 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 1995 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 9 through 22 of the
Company's 1995 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 23
through 41 of the Company's 1995 Annual Report to Shareholders.
18
<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, which is
incorporated herein by reference.
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 Subsidiary and Independent Accountants'
Report are contained in and incorporated by reference herein to
the Company's 1995 Annual Report to Shareholders:
Consolidated Balance Sheets - At December 31, 1995 and 1994
19
<PAGE>
Consolidated Statements of Income - For the years ended December
31, 1995, 1994 and 1993.
Consolidated Statements of Shareholders' Equity -For the years
ended December 31, 1995, 1994 and 1993.
Consolidated Statements of Cash Flows - For the years ended
December 31, 1995, 1994 and 1993.
Notes to Consolidated Financial Statements.
Independent Accountants' Reports.
With the exception of the information incorporated by reference
to the Company's 1995 Annual Report to Shareholders in Parts I,
II and IV of this Form 10-K, the Company's 1995 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 1995 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, 10.10, 101.11, 10.15,
10.13, 10.14 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 1995:
Date of Report Items Reported
-------------- --------------
October 10, 1995 Pursuant to Item 5, the Company reported
entering into a form of Debenture Agreement
with certain of its Officers, Directors and
other accredited investors with the meaning
of Rule 501 under the Securities Act of
1933, as amended, dated September 27, 1995.
20
<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: March 29, 1996
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
- --------- ----- ----
<S> <C> <C>
/s/ C. Donald Allen Director and March 29, 1996
- ------------------------- Chief Executive Officer
C. Donald Allen (Principal Executive Officer)
/s/ Steven C. Smith Executive Vice President, March 29, 1996
- ------------------------- Chief Operating Officer
Steven C. Smith
/s/ Heidi Wulfe Senior Vice President March 29, 1996
- ------------------------- Chief Financial Officer
Heidi Wulfe (Principal Financial and
Accounting Officer)
/s/ David K. Chui Director March 29, 1996
- -------------------------
David K. Chui
/s/ Carl E. Cookson Director March 29, 1996
- -------------------------
Carl E. Cookson
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Jerry R. Crowley Director March 29, 1996
- -------------------------
Jerry R. Crowley
/s/ Janet M. DeCarli Director March 29, 1996
- -------------------------
Janet M. DeCarli
/s/ John M. Gatto Director March 29, 1996
- ------------------------- Chairman of the Board
John M. Gatto
/s/ William H. Guengerich Director March 29, 1996
- -------------------------
William H. Guengerich
/s/ James E. Jackson Director March 29, 1996
- -------------------------
James E. Jackson
/s/ Rex D. Lindsay Director and March 29, 1996
- ------------------------- Vice Chairman of the Board
Rex D. Lindsay
/s/ Glen McLaughlin Director and March 29, 1996
- -------------------------
Glen McLaughlin
/s/ Norman Meltzer Director March 29, 1996
- -------------------------
Norman Meltzer
/s/ Dick J. Randall Director March 29, 1996
- -------------------------
Dick J. Randall
/s/ Dennis S. Whittaker Director March 29, 1996
- -------------------------
Dennis S. Whittaker
</TABLE>
22
<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.
4.2 Form of Subordinated Debentures filed as Exhibit 1 of
Registrant's Exhibits to Form 8-K as filed with the
Commission on October 25, 1995 and incorporated 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
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
<C> <S> <C>
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.
10.7** 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.
10.12 Litigation Settlement filed as Exhibit 10.12 of
Registrant's Exhibits to Form 10-Q as filed with the
Commission for quarter end September 30, 1995, and
incorporated herein by reference.
10.13 Emerson Lease filed as Exhibit 10.13 of Registrant's
Exhibits to Form 10-Q as filed with the Commission for
quarter end September 30, 1995, and incorporated herein
by reference.
10.14 1995 Stock Option Plan as Exhibit 10.14 of Registrant's
Form S-8 registration statement filed with the Commission
on September 7, 1995 and incorporated herein by reference.
10.15** Cupertino National Bancorp 401(k) Profit Sharing Plan as
Exhibit 10.15 of Registrant's Form S-8 registration
statement filed with the Commission on September 7, 1995
and incorporated herein by reference.
10.16** Cupertino National Bancorp Employee Stock Purchase Plan as
Exhibit 10.16 of Registrant's Form S-8 registration
statement filed with the Commission on September 7, 1995
and incorporated herein by reference.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Number Exhibit Numbered Page
- ------ ------- -------------
<C> <S> <C>
10.17** Form of Salary Continuation Agreement with certain
executive officers.
13.1 1995 Annual Report to Shareholders (to be deemed filed
only to the extent required by the instructions to
exhibits for Reports on Form 10-K).
22.1 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 Accountants' Consent - Coopers & Lybrand, L.L.P.
23.2 Independent Auditors' Consent - Deloitte & Touche, LLP
25.1 Power of Attorney. Reference is made to page 21 of this report.
27.0 Financial Data Schedule
</TABLE>
* Previously filed.
** A management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c).
25
<PAGE>
EXHIBIT 10.17
CUPERTINO NATIONAL BANK & TRUST
EMPLOYMENT, SEVERANCE AND
RETIREMENT BENEFITS AGREEMENT
THIS EMPLOYMENT, SEVERANCE AND RETIREMENT BENEFITS AGREEMENT (the
"Agreement") is made and entered on this ____ day of __________ and is effective
as of _________________, by and between CUPERTINO NATIONAL BANCORP (the
"Corporation"), its wholly owned subsidiary CUPERTINO NATIONAL BANK & TRUST (the
"Bank") and _____________ ("Employee").
The Corporation, Bank and Employee agree as follows:
1. DEFINITIONS
-----------
1.1 "Agreement" means only the agreement contained in this document
and as modified in writing pursuant to section 10.5 herein.
1.2 "Anniversary Date" means the date one (1) year from the
Effective Date.
1.3 "Bank" means Cupertino National Bank & Trust, and any successor
to its business or assets which executes and delivers the Agreement as provided
by section 10.2 herein or which becomes bound by this Agreement by operation of
law.
1.4 "Board" means the Board of Directors of the Bank.
1.5 "Cause" means (1) Employee's acts of personal dishonesty;
willful misconduct; breach of fiduciary duty or violation of banking law
involving an intent to obtain personal or family profit; willful violation of
any law, rule, or regulation which results in action against or restrictions
imposed on the Bank by regulatory authorities; habitual abuse of substances (as
corroborated by a physician) or extended unexcused absence from work; or (2)
Employee's continued failure to substantially perform Employee's duties (which
failure may be determined by the Board by reference to the quality of the
Company's financial condition or operating performance) with the Bank (other
than any failure resulting from Disability) after a written demand for
substantial performance is given to Employee by the Board which demand
specifically identifies the manner in which the Board believes that Employee has
not substantially performed Employee's duties. The definition of "Cause" as set
forth in subsection (1) hereof is sometimes referred to separately herein as
"Personal Conduct/Cause," and the definition of "Cause" as set forth in
subsection (2) is sometimes referred to separately herein as
"Performance/Cause." The term "Cause," standing alone, shall mean either
Personal Conduct/Cause or Performance/Cause or both. For purposes of the
definition of Personal Conduct/Cause, an act, or failure to act, on the
Employee's part shall be
<PAGE>
considered "willful" only if done, or omitted to be done, by him without
reasonable belief that such act, or failure to act, is in the best interests of
the Employer.
1.6 "Change in Control" means a change in the Board of Directors, or
the Corporation or the Bank following:
1.6.1 The acquisition, directly or indirectly, of more than 25%
of the outstanding shares of any class of voting securities of the Corporation
or the Bank by any Person; or
1.6.2 A merger, consolidated or sale of all or substantially
all of the assets of the Corporation or the Bank, such that the individuals
constituting the Corporation Board or the Board of the Bank immediately prior to
such period shall cease to constitute a majority of such Board, unless the
election of each director who was not a director prior thereto was approved by
vote of at least two-thirds of the directors then in office who were directors
prior to such period.
1.6.3 Notwithstanding the foregoing, any change in the Board of
either the Corporation or the Bank which occurs within the twenty-four (24)
month period following the Effective Date as a result of a merger with South
Valley Bancorporation, shall NOT constitute a Change in Control for purposes of
this Agreement.
1.7 "Control" means the possession, direct or indirect, by any
Person or "group" (as defined in section 13(d)(3) of the Securities Exchange Act
of 1934, as amended) of the power to direct or cause the direction of the
management policies of the Corporation or the Bank, whether through ownership of
voting securities, by contract, or otherwise, and in any case means the ability
to determine the election of a majority of the directors of the Corporation or
the Bank.
1.8 "Corporation" means Cupertino National Bancorp and any successor
to its business or assets which executes and delivers the agreement as provided
by section 10.2 herein, or which becomes bound by this Agreement by operation of
law.
1.9 "Corporation Board" means the Board of Directors of Cupertino
National Bancorp.
1.10 "Disability" means physical or mental illness resulting in
absence on a full-time basis from Employee's duties with Employer for one-
hundred eighty (180) consecutive calendar days. Disability shall be deemed to
have occurred only after the following procedure has been satisfied: If within
thirty (30) days after written notice of proposed Termination for Disability is
given to Employee by Employer, Employee has
2
<PAGE>
not returned to the full-time performance of Employee's duties, Employer may
terminate Employee by giving written notice of Termination for Disability. Such
notice may be given by Employer following Employee's absence from Employee's
duties by reason of physical or mental disability for one-hundred fifty (150)
consecutive calendar days.
1.11 "Effective Date" means _________________.- Salary Continuation
Agreement.
1.12 "Employee" means ______________.
1.13 "Employer" means the Corporation, the Bank or one of their
subsidiaries which is Employee's employer on the date of a Change in Control. If
Employee has more than one such employer on the date of a Change in Control, it
means the employer who makes payment of Employee's monthly salary, and if two or
more employers do so, each shall be deemed to be Employer for the purposes of
this Agreement on a pro rata basis as to the amount of Employee's working time
devoted to each, as a percentage of Employee's salary. "Employer" shall include
any successor to the business or assets of an Employer and which executes the
agreement provided by section 10.2 or which becomes bound by this Agreement by
operation of law.
1.14 "Person" means an individual, a corporation, a partnership, an
association, a joint stock company, a trust, any unincorporated organization or
a government or political subdivision thereof.
1.15 "Resignation for Good Reason" or "Resign for Good Reason" means
the cessation of Employee's employment upon written notice given by Employee to
Employer as provided in section 5.4.1 herein.
1.16 "Retirement" or "Retire" means voluntary termination by Employee
of his/her employment with Employer other than for reason of death, Disability
or Resignation for Good Reason, as those terms are defined herein.
1.17 "Salary" shall mean regular annual base cash compensation
exclusive of incentive or bonus compensation or noncash compensation benefits.
1.18 "Retirement Age" for purposes of this Agreement is sixty (60)
years of age.
1.19 "Termination" or "Terminated" means cessation of Employee's
employment upon written notice (with or without Cause) given to Employee, by
Employer or the Board, or their successors.
3
<PAGE>
2. POSITION AND DUTIES
-------------------
2.1 Employee shall be employed by the Bank as its _______________
_______________________ reporting to the Executive Management Committee,
of which Employee will be a member, effective _______________ ("the
Commencement Date"). As __________________________________________, Employee
agrees to devote his full business time, energy and skill to his duties at the
Bank. These duties shall include, but not be limited to, any duties consistent
with his position which may be assigned to Employee from time to time by the
Bank's President.
2.2 CODE OF PERSONAL AND BUSINESS CONDUCT. Employee agrees to abide
-------------------------------------
by the terms and conditions of the Bank's standard employee Code of Personal &
Business Conduct executed by Employee and attached here as Exhibit A.
3. TERM
----
3.1 The term of this Agreement shall commence as of the Effective
Date and shall continue until the Termination, Retirement, Resignation for Good
Reason (as defined in section 5.4.1) or death of Employee, whichever occurs
first. This Agreement and all of its terms and conditions may be terminated upon
written agreement by the parties. Notwithstanding the foregoing, nothing
contained herein shall imply the existence of a contract or assurance of
employment between Employee and Employer, nor shall this Agreement alter
Employer's personnel policies and practices, including the right to terminate
Employee at any time with or without cause.
3.2 Notwithstanding the right of Bank to terminate Employee, any
such Termination shall be governed by section 5 below.
4. COMPENSATION
------------
4.1 SALARY. Employee shall be paid a monthly salary of __________
------
(____________ on an annual basis), subject to applicable withholding, in
accordance with the Bank's normal payroll procedures.
4.2 BENEFITS. Employee shall have the right, on the same basis as
--------
other members of senior management of the Bank, to participate in and to receive
benefits under any of the Bank's employee benefits plans, including medical,
dental, life and disability group insurance plans as well as the Bank's 401(k)
Plan and Employee Stock Purchase Plan.
4
<PAGE>
4.3 VACATION. Employee shall accrue vacation at a rate of 2.083
--------
days per month, the equivalent of five (5) weeks over a one (1) year period.
4.4 STOCK OPTIONS. Stock options will be granted at the discretion
-------------
of the Board of Directors. The shares will vest under the provisions of the
Bank's 1995 Stock Option Plan.
4.5 PERFORMANCE BONUS. Employee will be eligible for a performance
-----------------
bonus up to ___ of base salary based upon goals, which will be set annually by
the Board.
4.6 CAR ALLOWANCE. _______ per month.
-------------
4.7 DEFERRED COMPENSATION. The Bank will provide Retirement
---------------------
compensation benefits as provided in paragraph 6 set forth below.
4.9 COMPENSATION FREEZE. Subject to the terms and conditions
herein, and for a period for three (3) years from the Effective Date, Employee's
total annual Salary and standard employee benefits from Employer set forth above
shall remain the same; provided, however, that Employee's Salary shall be
increased annually to allow for a cost of living increase, such increase to be
determined based on the U.S. Department of Labor Bureau of Labor Statistics
Consumer Price Index for All Urban Consumers in the San Francisco, Oakland and
Bay Area. In addition, it is within the complete discretion of the Employer to
increase such amount of total compensation at any time and for any reason,
including a promotion of Employee to a new position or title; however, other
than the cost-of-living increase to Salary as provided for herein, nothing in
this Agreement shall suggest or imply that the Board is under any duty or
obligation to increase Employee's Salary or other compensation or standard
employee benefits at any time during the three (3) year period following the
Effective Date. Employee's current salary, his current participation in
incentive compensation programs of the Employer and a description of current
standard employee benefits are set forth above.
5. TERMINATION OF EMPLOYMENT
-------------------------
5.1 The provisions of this section 5 shall govern the benefits, if
any, which Employee shall receive upon Termination of his Employment.
5.2 BENEFITS UPON VOLUNTARY TERMINATION. In the event that Employee
-----------------------------------
voluntarily resigns from his employment with the Bank, or in the event that his
employment terminates as a result of his death or disability, Employee shall be
entitled to
5
<PAGE>
no compensation or benefits from the Bank other than those earned under
paragraph 4 above through the date of his termination.
5.3 BENEFITS UPON OTHER TERMINATION. Employee agrees that his
-------------------------------
employment may be terminated by the Bank at any time, with or without cause. In
the event of the termination of Employee's employment by the Bank for the
reasons set forth below, he shall be entitled to the following:
5.3.1 TERMINATION FOR PERSONAL CONDUCT/CAUSE. The payments set
--------------------------------------
forth in section 5.3.2 hereof shall not apply if at any time Employee is
terminated upon a good faith finding of Personal Conduct/Cause by the Board;
provided, however, that Employee shall be given written notice of the Board's
finding of conduct by Employee amounting to Personal Conduct/Cause for such
Termination. Such notice shall be accompanied by a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the members of
the Board adopted at a duly-noticed meeting of the Board, and finding in good
faith that Employee engaged in conduct amounting to Personal Conduct/Cause and
specifying the particulars thereof.
5.3.2 If the Employee is Terminated for Performance/Cause or
other than by reason of death, Retirement, Disability or Personal Conduct/Cause,
as set forth herein, or if Employee Resigns for Good Reason, as defined in
section 5.4.1 below, the Bank shall pay to Employee ___________ months' Salary
("Severance Payment") at a rate equivalent to the then-current Salary of
Employee.
5.3.3 The Bank shall have the option of paying Severance
Payments in a lump-sum payment, or by salary continuation payments made under
the Bank's normal employee compensation schedule. If the Bank chooses the lump-
sum payment option, such payment shall be made not later than the tenth (10th)
day following the date of cessation of employment, Termination or Resignation
for Good Reason.
5.3.4 Although a payment triggering such section is not
intended hereby, amounts otherwise due under this section will be reduced if,
and to the extent that, such reduction will increase the net amount Employee
will receive under this Agreement after taking into account the imposition of
the excise tax under section 4999 of the Internal Revenue Code, if applicable.
5.4 If a Change in Control occurs during the Term of this Agreement,
Employee may thereafter be entitled to a payment set forth in section 5.3.2 in
accordance with the terms hereof, subject to the following limitations:
6
<PAGE>
5.4.1 RESIGNATION FOR GOOD REASON. The payments set forth in section
---------------------------
5.3.2 hereof shall apply if, after a Change of Control but within one year
thereafter, Employee Resigns for Good Reason, upon the happening of one or more
of the following events (unless such event or occurrence is applied generally to
all officers and employees of Employer and any parent or successor of any of
them), any of which will constitute Good Reason for Employee's Resignation:
5.4.1.1 Without Employee's express written consent,
Employee's assignment to any duties substantially inconsistent with Employee's
position, duties, responsibilities and status with Employer immediately prior to
a Change in Control, or any removal of Employee from any such position to a
position substantially inferior to such prior position;
5.4.1.2 A reduction by Employer of Employee's Salary or of
any bonus compensation formula applicable to Employee as in effect prior to a
Change in Control;
5.4.1.3 A failure by Employer to maintain any of the employee
benefits to which Employee was entitled prior to a Change in Control at a level
substantially similar to or greater than that in effect prior to a Change in
Control, through the continuation of the same or substantially similar plans,
programs and policies;
5.4.1.4 The failure by Employer to provide Employee with the
same number of paid vacation days and leave to which Employee would be entitled
as salaried employee of Employer, or any parent or successor of Employer;
5.4.1.5 Employer requiring Employee to travel on employer's
business to an extent substantially greater than Employee's present business
travel obligations; or the relocation of Employee's office at least sixty (60)
miles from its current location, without Employee's consent; and
5.4.1.6 The failure of the Bank to obtain the assumption of
this Agreement by any successor of Employer as contemplated in section 10.2
below.
5.4.2 The events described above are the only events which shall
constitute Good Reason.
6. CERTAIN RETIREMENT BENEFITS
---------------------------
6.1 Subject to the special terms and conditions contained below,
upon cessation of Employee's employment with Employer, if the Employee has
reached the Retirement
7
<PAGE>
Age, or as soon thereafter as Employee reaches the Retirement Age, the Bank
hereby agrees that the Employee and Employee's spouse shall become the joint
owners (with right of survival) with the Bank of the annual increase of the cash
surrender value of the policy thereafter arising; however, the Employee's (and
Employee's spouse's) right to draw against such increase (such draw to reduce
eventual death benefits) shall never exceed _______ per 12-month period (the
"Retirement Draw Benefit"). The shared right to ownership of this increase shall
continue for the lifetime of the Employee and the lifetime of the Employee's
surviving spouse, but in no event longer than 40 years.
6.1.1 The Retirement Draw Benefit will be made available by means of
a split-dollar insurance policy which is to be purchased by the Bank within
thirty (30) days of the date of this Agreement, and for which the premium
payment split between the Bank and Employee and the payment terms are outlined
in Exhibit B to this Agreement.
6.1.2 Subject to the provisions of sections 6.1.3 and 6.1.4 herein,
Employee's right to the Retirement Draw Benefit shall not fully vest unless he
has been employed by Employer for seven (7) years from the Effective Date. If
Employee's employment with Employer ends any time before a date one (1) year
from the date of this Agreement (the "Anniversary Date"), Employee will not have
any right to, or interest in, the Retirement Draw Benefit. If Employee's
employment ends at any time after the Anniversary Date, but prior to the seven
(7) year date of full vesting, Employee's right to one-seventh (1/7) of the
Retirement Draw Benefit--i.e., the right to draw _________, or one-seventh of
________, per 12-month period--will vest on the Anniversary Date, and Employee's
right to the Retirement Draw Benefit will continue to proportionately vest
thereafter on a monthly basis, on the first date of each month following the
Anniversary Date, until employment ends.
6.1.3 Subject to the provisions of section 6.1.2 herein, if prior to
a Change in Control and during the Term hereof, Employee is Terminated for any
reason other than Disability, the vesting of Employee's right to the Retirement
Draw Benefit will cease as of the date of termination. If prior to a Change of
Control and during the Term hereof, Employee is Terminated by reason of
Disability, the vesting of Employee's right to the Retirement Draw Benefit will
cease as of the date of termination unless the Board in its sole and absolute
discretion approves additional vesting.
6.1.4 Notwithstanding the provisions of section 6.1.2 herein, if
after a Change in Control and during the Term hereof, Employee is Terminated, or
Resigns for Good Reason, as provided in section 5.4.1 herein, Employee's right
to the Retirement Draw Benefit shall immediately vest in full, and such benefit
shall become available to Employee when Employee reaches Retirement Age.
8
<PAGE>
7. FEDERAL INCOME TAX WITHHOLDING
------------------------------
7.1 The Bank shall withhold from any compensation or benefits
payable under this Agreement all federal, state, city or other taxes or
deductions as shall be required pursuant to any law, governmental regulation or
ruling.
8. ARBITRATION
-----------
8.1 Any controversy between the parties hereto, including the
construction, application or breach of any of the terms, covenants or conditions
of this Agreement, and all claims relating to or arising from Employee's
employment or Termination, including all statutory claims (including but not
limited to all statutes dealing with employment discrimination), shall on a
timely written request of one party served upon the other, be submitted to
arbitration and be governed by the California Arbitration Act as set forth in
the California Code of Civil Procedure (presently sections 1280 et seq.). The
-- ---
parties agree that any written request for arbitration must be made within one
year after the initiating party first learned or should have learned in the
exercise of reasonable diligence of the essential facts upon which the claim is
based, or first suffered any harm, or first learned or should have learned in
the exercise of reasonable diligence of the breach of this Agreement, whichever
is earlier. Any claim not raised within such time limitation shall be waived
and forever barred. The arbitration shall take place in Santa Clara County,
California.
8.2 The parties may agree upon one arbitrator, but in the event
they cannot agree, there shall be three (3), one named in writing by each of the
parties within ten (10) days after demand for arbitration is given, and a third
chosen by the two so appointed; provided further that if the two appointed
cannot agree on the choice, then application shall be made to a presiding judge
of the Santa Clara County Superior Court for the purpose of designating a third
arbitrator. The applying party (who may suggest in such application the names of
a suitable third arbitrator) shall provide the other party at least 48 hours
prior notice of the application so that such other party may have the
opportunity to submit one or more names of persons suitable to serve as the
designated third arbitrator. The presiding judge shall have discretion to
designate the third arbitrator from among the names suggested by either party or
from among any other persons such judge deems appropriate. The cost of such
arbitration, including reasonable attorneys' fees, shall be borne by the losing
party or in such proportions as the arbitrator(s) shall decide. Arbitration
shall be the exclusive remedy of the parties and the award of the arbitrator(s)
shall be final and binding upon the parties.
9
<PAGE>
9. GENERAL PROVISIONS
------------------
9.1 NONASSIGNABILITY. Neither this Agreement nor any right or
----------------
interest hereunder shall be assignable by Employee, provided, however, that
nothing in this section 10 shall preclude (i) Employee from designating a
beneficiary to receive any benefits payable hereunder upon Employee's death, or
(ii) Employee's executors, administrators, or other legal representatives of
Employee's estate from assigning any rights hereunder to the person or persons
entitled thereto.
9.2 ASSUMPTION. The Bank shall require any successor in interest
----------
(whether direct or indirect or as a result of purchase, merger, consolidation,
Change in Control or otherwise) to all or substantially all of the business
and/or assets of the Corporation or the Bank to expressly assume and agree to
perform the obligations under this Agreement.
9.3 NO ATTACHMENT. Except as required or permitted by law, no
-------------
right to receive payments under this Agreement shall be subject to anticipation,
commutation, alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to execution, attachment, levy, or similar process of
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect. The payments due
Employee under section 5 herein shall not be deemed earned until the conditions
set forth in section 5 occur, if ever.
9.4 BINDING AGREEMENT. This Agreement contains the entire
-----------------
understanding among the parties regarding Employee's relationship with Bank and
Corporation and supersedes any prior employment agreements. This Agreement shall
be binding upon, and inure to the benefit of, Employee, the Bank and the
Corporation, and their respective heirs, successors and assigns. Each party
acknowledges that no representations, inducements, promises, or agreements have
been made by any party, or anyone acting on behalf of any party, which are not
embodied herein and that no other agreement, statement, or promise not contained
in this Agreement shall be valid or binding on either party except as provided
herein.
9.5 AMENDMENT OR AUGMENTATION OF AGREEMENT. This Agreement may not
--------------------------------------
be modified or amended except by an instrument in writing signed by the parties
hereto. Unless expressly agreed to in writing by the parties hereto, no
additional rights or compensation, even if given or accepted, shall be deemed to
modify or otherwise affect the express terms and conditions of this Agreement.
9.6 WAIVER. No term or condition of this Agreement shall be deemed
------
to have been waived, nor shall there be any estoppel against the enforcement of
any provision of
10
<PAGE>
this Agreement except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any act other than that specifically
waived.
9.7 CONDITION OF THE BANK AND THE CORPORATION. Notwithstanding
-----------------------------------------
anything in this Agreement, no payment shall be made under section 5 without
regulatory approval if any of the following events or circumstances exist: (i)
the Bank is insolvent or a conservator or receiver has been appointed for it;
(ii) the Comptroller of the Currency or other appropriate federal banking agency
has made a determination that the Bank or the Corporation is in a "troubled
condition" as defined by applicable regulations of such federal banking agency;
(iii) the Bank or the Corporation is assigned a composite rating of 4 or 5 by
the appropriate federal banking agency or is informed in writing by the OCC that
it is rated a 4 or 5 under the Uniform Financial Institution's Rating System of
the Federal Financial Institution's Examination Council; or (iv) the OCC has
initiated a proceeding against the Bank to terminate or suspend deposit
insurance for the Bank.
9.8 SEVERABILITY. If, for any reason, any provision of this
------------
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held invalid, and each such other provision shall to the
full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the rest of such provision not held invalid, and the rest of
such provision together with all other provisions of this Agreement shall, to
the full extent consistent with law, continue in full force and effect. (If this
Agreement is held totally invalid or cannot be enforced, then to the full extent
permitted by law any prior employment agreement, whether oral or written,
express or implied, between the Bank and/or its affiliates, (or any successor
thereof) and Employee shall be deemed reinstated as if this Agreement had not
been executed.)
9.9 NOTICES. All notices, requests, demands and other
-------
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered or if mailed by United States certified or
registered mail, prepaid, to the parties or their permitted assignees at the
following addresses (or at such other address as shall be given in writing by
either party to the other):
To: Cupertino National Bank & Trust
20230 Stevens Creek Boulevard
Cupertino, CA 95014-2244
Attention: Chairman of the Board
11
<PAGE>
To: Employee at the last known address contained in the
personnel records of the Bank
9.10 HEADINGS. The headings of paragraphs herein are included
--------
solely for convenience of reference and shall not control the meaning or
interpretation of any of the provisions of this Agreement.
9.11 GOVERNING LAW. This Agreement has been executed and delivered
-------------
in the State of California, and its validity, interpretation, performance, and
enforcement shall be governed by the laws of said State.
9.12 ADVICE OF COUNSEL. Employee has been encouraged to consult
-----------------
with legal counsel of Employee's choosing concerning the terms of this Agreement
prior to executing this Agreement. Any failure by Employee to consult with
competent counsel prior to executing this Agreement shall not be a basis for
rescinding or otherwise avoiding the binding effect of this Agreement. The
parties acknowledge that they are entering into this Agreement freely and
voluntarily, with full understanding of the terms of the Agreement.
Interpretation of the terms of this Agreement shall not be construed
12
<PAGE>
for or against either party on the basis of the identity of the party who
drafted the provision in question.
CORPORATION: BANK:
CUPERTINO NATIONAL BANCORP CUPERTINO NATIONAL BANK & TRUST
By: _____________________________ By: ______________________________
_____________________________ ______________________________
Its: _____________________________ Its: ______________________________
_____________________________ ______________________________
EMPLOYEE:
____________________________________
13
<PAGE>
EXHIBIT 13.1
1995 Annual Report
[PHOTOGRAPH]
[LOGO]
C
N
B
CUPERTINO NATIONAL
BANCORP
<PAGE>
Mission Statement
Cupertino National Bancorp is a value-added California financial services
company dedicated to providing the highest standard of service to our clients
through an empowered professional staff, while achieving a premier return for
our shareholders.
About the Cover
Monolithic Hoover Tower on the Stanford University campus stands as a symbol of
the intellectual prowess and unbridled creativity that spawned the world-
renowned Silicon Valley. Cupertino National Bank & Trust is expanding to better
serve the businesses and residents of the highly desirable Peninsula area with
the Spring 1996 opening of our Emerson office in downtown Palo Alto.
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of operations:
Interest income $ 20,293 $ 15,361 $ 13,333 $ 12,426 $ 12,634
Interest expense 7,354 4,279 3,166 3,542 4,988
---------------------------------------------------------------------
Net interest income 12,939 11,082 10,167 8,884 7,646
Provision for loan losses 681 1,620 1,679 902 382
---------------------------------------------------------------------
Net interest income after provision
for loan losses 12,258 9,462 8,488 7,982 7,264
Other income 1,902 3,079 3,154 1,664 890
Operating expenses 13,690 10,444 10,224 6,686 5,271
---------------------------------------------------------------------
Income before income taxes 470 2,097 1,418 2,960 2,883
Income tax expense 157 734 538 1,197 1,140
---------------------------------------------------------------------
Net Income $ 313 $ 1,363 $ 880 $ 1,763 $ 1,743
---------------------------------------------------------------------
Per share data:(1)
Net income per primary share $ 0.16 $ 0.76 $ 0.50 $ 1.05 $ 1.04
Net income per fully diluted share $ 0.16 $ 0.76 $ 0.50 $ 1.05 $ 1.04
Cash dividend per share $ 0.20 $ 0.10 -- -- --
Dividend payout ratio 125% 13% -- -- --
Book value per share $ 10.32 $ 10.53 $ 10.02 $ 9.55 $ 8.49
---------------------------------------------------------------------
Balance at year end:
Total assets $259,099 $223,144 $192,574 $172,526 $140,607
Loans, net 160,693 135,622 131,533 126,748 104,191
Deposits 236,094 186,722 175,740 156,550 123,975
Other borrowings -- 17,256 -- -- --
Subordinated debt 3,000 -- -- -- --
Shareholders' equity 18,672 18,037 16,219 15,174 13,311
---------------------------------------------------------------------
Average daily balances:
Total assets $229,903 $198,162 $183,297 $157,535 $124,810
Loans, net 143,280 127,264 127,210 114,780 96,961
Deposits 197,396 172,385 166,581 142,451 111,564
Shareholders' equity 18,326 17,410 15,337 14,379 12,434
---------------------------------------------------------------------
Selected statistics:
Return on average assets 0.1% 0.7% 0.5% 1.1% 1.4%
Return on average shareholders' equity 1.7% 7.8% 5.7% 12.3% 14.0%
Average equity to average assets 8.0% 8.8% 8.4% 9.1% 10.0%
---------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been restated to reflect stock dividends of 10% in
December 1995, and 5% each, in May 1994, June and December 1993 and in May and
December 1992 and 1991.
<PAGE>
To Our Shareholders, Clients and Friends
Even as continued deregulation and consolidation cause the financial industry to
become more competitive, exciting opportunities are emerging in many areas. In
1995, we positioned ourselves to move quickly and effectively so we can
capitalize on the most promising of these opportunities as they arise.
For Cupertino National Bancorp (CNB), 1995 can be divided into two distinct
halves. During the first six months of the year, we faced considerable
challenges. The closing of our mortgage division and termination of merger
discussions with another bank in the first quarter resulted in charges against
earnings of approximately $500,000. We also reached a litigation settlement in
the second quarter, which resulted in a charge of $1.7 million.
But beginning in the third quarter of 1995, the company rebounded
strongly, with excellent asset growth, solid performance from several of our
divisions, and a healthy increase in profits quarter-to-quarter. The improvement
in our operating results, combined with the continued upswing of the economy,
gives us solid reasons to be optimistic about 1996.
Loans
(in millions)
[CHART APPEARS HERE]
Page 2
<PAGE>
Modest profits
For the year ended December 31, 1995, CNB recorded net income of $313,000, or
$.16 per share, compared to $1.4 million, or $.76 per share, in 1994. Without
the charges mentioned above, the company's 1995 net income would have increased
to $1.65 million.
Total assets rose 16% to $259.1 million, while deposits increased by nearly
$50 million, or 26%, to $236.1 million. With the addition of our new Executive
Vice President and Senior Lending Officer, David Hood, in 1995, loans grew by
more than $30 million, or 23%, to $160.7 million. Equally important, the quality
of the bank's assets showed significant improvement over last year. Total non-
performing assets declined from $5 million at year-end 1994 to $3.3 million at
the end of 1995, and total classified assets fell from $13.1 million to $7.9
million over the same period.
[CHART APPEARS HERE]
In the fall of 1995, CNB was successful in adding $3.0 million to our
capital base through a private placement of subordinated debt. A substantial
portion of the offering was subscribed by directors, officers and other
accredited investors, an indication of their confidence in our future. Our
strong capital position -- which according to regulatory guidelines classifies
the holding company and bank as a well-capitalized financial institution --
enables us to more readily take advantage of growth opportunities in our market
area and will be a key to our success in 1996.
Page 3
<PAGE>
Cupertino National Bancorp's vision is to be a technologically advanced $1
billion family of financial services companies headquartered in the Silicon
Valley, serving clients throughout the United States.
In 1995, your company made progress in a number of areas that more effectively
position us to deliver value to shareholders in the years ahead. Recognizing an
opportunity in the marketplace, in the second quarter of the year we invested in
a major initiative to expand our Trust Group, with the objective of creating the
strongest locally based trust operation in Northern California.
We added several new officers to our team, led by Hall Palmer, who was
named Executive Vice President and Senior Trust Officer of the Bank. The results
of this reformation were immediate and dramatic. The Trust Group's assets under
management soared 72% to $270 million by year-end, with most of that growth
occurring since May. Further, we expect this rapid rise to continue in 1996 as
we penetrate the Palo Alto marketplace with a new office scheduled to open this
spring.
[PHOTOGRAPH]
In the 1950s and 1960s, the Santa Clara Valley was primarily an agricultural
region, filled with rows upon rows of fruit trees.
Page 4
<PAGE>
Another business unit that had a strong year was Venture Lending. Founded
in March as the successor to our Emerging Growth Industries division, Venture
Lending provides innovative debt financing and other financial services tailored
to the needs of startup and growth-stage companies.
Under the direction of Senior Vice President and Managing Director Daniel
Michener, the division got off to a fast start, closing 29 transactions totaling
more than $34 million in financing commitments in its first ten months. This
successful launch helped Venture Lending begin turning a profit in only its
second full quarter in business. To further expand our range of financing
services, in October the Bank established an Asset-Based Lending division.
Designed to serve companies that may be undercapitalized or experiencing
temporary operating weakness, the new division specializes in both asset-based
loans and factoring.
To provide a steady deal flow for the new division and to optimize
collateral monitoring controls, CNB has set up participation arrangements with
two Bay Area financial services companies: an independent asset-based lender in
Palo Alto; and an independent factoring company based in Cupertino.
[PHOTOGRAPH]
Today, this rich and fertile valley remains an idyllic place to live, with an
excellent climate, vibrant economy and many educational and cultural
opportunities.
Page 5
<PAGE>
New Emerson Office to Open
Another major development that started in 1995 and should be completed by early
spring is the construction of our new Emerson office in downtown Palo Alto. The
full-service office, our fourth, is designed to provide increased convenience
for small businesses, professionals and other individuals in downtown Palo Alto
and surrounding neighborhoods.
In addition to offering business and consumer banking services, the Emerson
office will serve as the headquarters for our fast-growing Trust Group,
affording higher visibility and better access to the desirable Peninsula
marketplace. We look forward to providing a quality banking and trust
alternative in the Palo Alto marketplace.
[PHOTOGRAPH]
When it opens in May, CNR's Emerson office, at 400 Emerson Street in Palo Alto,
will serve the small businesses, professionals, and residents located in or near
the downtown area.
Other key accomplishments in 1995 include:
o Introduction of CNB Cash Manager, a PC-based cash management service
that literally puts the bank at our clients' fingertips. The service
was well received in 1995 and we expect significant growth in usage
and added features during 1996.
o Introduction of our Venture Sweep Account, which links a client's
checking account to a series of investment funds to simplify corporate
cash management requirements.
o Upgrade of our computer system to support the needs of CNB and our
clients into the next millennium.
Page 6
<PAGE>
o Incorporation of leading edge technology in every facet of the bank's
operations. For example, Venture Lending is on the Internet's World
Wide Web, and everyone at the bank has access to e-mail over the
Internet, thus improving our communications link with our clients.
Strengthening of Our Management Team
1995 was a very successful year for CNB in building its management team for the
future. Steven C. Smith, Executive Vice President and Chief Financial Office was
promoted to Chief Operating Officer to head CNB's Executive Management Committee
in its commitment to improving operating results, continuing earning asset
growth and quality client service. Steve's promotion opened the Chief Financial
Officer position which was filled early January 1996 by Heidi Wulfe, a Certified
Public Accountant with over 20 years of financial services experience. Ms. Wulfe
was named Senior Vice President and Chief Financial Officer.
These changes combined with the addition of David R. Hood, Executive Vice
President and Senior Lending Officer and Hall Palmer, Executive Vice President
and Senior Trust Officer had significantly added to the depth and quality of
CNB's management team.
In 1995, we overcame significant obstacles to maintain our growth and
remain profitable. By continuing our focus on improving asset quality and taking
advantage of opportunities when and where they arise, we are confident that we
will continue to report significant improvements in 1996.
/s/ C. Donald Allen /s/ Glen McLaughlin
C. Donald Allen Glen McLaughlin
President and Chief Executive Officer Chairman
Page 7
<PAGE>
In mid-January, following a tradition established by founding chairman James
Jackson, Glen McLaughlin stepped aside after a six-year term as chairman of the
board. During his tenure from 1990 through 1995, he oversaw the growth of your
company from one office to three and from $100 million to more than $250 million
in assets. He also provided invaluable service to the bank and our shareholders,
both in his official capacity as chairman and as a close personal friend. We
shall miss his leadership of the board, but are pleased that he will continue to
serve as a director.
Glen will be replaced by John Gatto, a 10-year member of the board, who has
chaired the Director's Loan Committee for the bank for 8 years. We look forward
to the significant contributions John will make during his term.
/s/ C. Donald Allen
Page 8
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations
BUSINESS OVERVIEW
Cupertino National Bancorp (the "Company") is a California corporation and bank
holding company for Cupertino National Bank & Trust (the "Bank"), a national
bank with headquarters in Cupertino, California and regional offices in San Jose
and Palo Alto, California. Substantially all of the Company's consolidated net
income, assets and equity are derived from its investment in the Bank.
The Company's business strategy is to provide quality financial
services to middle market and emerging growth businesses, real estate
construction and development companies and individuals, executives and
professionals located in Cupertino, San Jose, Palo Alto and the surrounding
communities of Santa Clara and San Mateo Counties. The financial services
include corporate and personal relationship banking, residential lending, SBA
lending and personal and corporate trust services.
The following discussion and analysis is intended to supplement and
highlight information contained in the accompanying consolidated financial
statements and the financial highlights presented elsewhere in this report.
RESULTS OF OPERATIONS
Net Income Summary
The Company ended 1995 with net income of $313,000, a decrease of 78% from 1994.
Net income for 1994 of $1.4 million was a 59% increase over 1993's net income of
$880,000. Net income per common and common equivalent share was $.16 in 1995,
compared with $.76 in 1994 and $.50 in 1993. The return on average assets and
average shareholders' equity were 0.14% and 1.71% in 1995, compared with 0.70%
and 7.80% in 1994 and 0.50% and 5.70% in 1993, respectively.
The decrease in net earnings in 1995 includes a loss of approximately
$1.7 million related to a litigation settlement recorded in the second quarter
of 1995 and approximately $500,000 in charges related to the closing of the
mortgage division and the termination of merger discussions with another bank in
the first quarter of 1995. Excluding these charges, net income for the year
would have been $1.65 million. The increase in net income for 1994 was primarily
due to an increase in net interest income in 1994 compared to 1993.
Net Interest Income
Net interest income for 1995 was $12.9 million, compared to $11.1 million in
1994, an increase of $1.8 million or 16.0%. Net interest income for 1994
increased $.9 million or 9% over the $10.2 million in 1993. Net interest income
depends primarily on the volume of interest-earning assets and interest-bearing
liabilities in relation to the net interest spread (the difference between the
yield earned on the Company's interest-earning assets and the interest rate paid
on the Company's interest-bearing liabilities) as well as the relative balances
of interest-earning assets and interest-bearing liabilities. The smaller the
level of interest-earning assets when compared to the level of interest-bearing
liabilities, the greater the interest rate spread must be in order to achieve
positive net interest income. For 1995, the Company had $211.3 million of
average interest-earning assets compared to $179.9 million in 1994 and $165.1
million in 1993.
The following table displays the components of the Company's interest
rate spread on interest bearing funds and the effective yield for each period.
<TABLE>
<CAPTION>
For the Years Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Average rate for the period:
Interest-earning assets 9.61% 8.54% 8.07%
Interest-bearing liabilities 4.56% 3.30% 2.85%
----------------------------------------
Spread on interest-bearing funds 5.05% 5.24% 5.22%
Contribution of interest-free funds 1.07% 0.92% 0.94%
----------------------------------------
Effective yield for the period 6.12% 6.16% 6.16%
----------------------------------------
</TABLE>
Page 9
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
The effective yield in 1995 was 6.12% compared to 6.16% in 1994 and in
1993. The average rate on interest-earning assets increased from 8.54% in 1994
to 9.61% in 1995, an increase of 107 basis points. The average rate on interest-
bearing liabilities increased to 4.56% in 1995 from 3.30% in 1994, an increase
of 126 basis points. The increase in the average rate of interest-earning
assets due to the increased volume of loans and securities, and the higher
interest rates received on these assets, were partly offset by higher interest
expense rates on increased volumes of deposits and other short term borrowings.
The following table presents, for the periods indicated, the Company's
total dollar amount of interest income from average interest-earning assets and
the resultant yields, as well as the interest expense on average interest-
bearing liabilities and the resultant costs, expressed both in dollars and
rates. The table also sets forth the net interest income and the net earning
balance for the periods indicated.
INTEREST RATE SPREAD ANALYSIS
<TABLE>
<CAPTION>
Years Ended December 31, 1995 1994 1993
---------------------------- --------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(2) $146,650 $16,158 11.02% $127,264 $12,608 9.91% $127,210 $11,895 9.35%
Investment securities, short term
investments and cash equivalents 64,613 4,135 6.40% 52,664 2,753 5.23% 37,913 1,438 3.79%
----------------------------------------------------------------------------------------
Total interest-earning assets(3) 211,263 20,293 9.61% 179,928 15,361 8.54% 165,123 13,333 8.07%
Noninterest-earning assets 18,640 18,234 18,174
----------------------------------------------------------------------------------------
Total assets $229,903 $20,293 8.83% $198,162 $15,361 7.75% $183,297 $13,333 7.27%
========================================================================================
Interest-bearing liabilities:
Deposits:
NOW and MMDA $ 96,772 $ 3,868 4.00% $ 75,062 $ 2,192 2.92% $ 66,820 $ 1,755 2.63%
Savings deposits 6,052 202 3.34% 6,885 177 2.57% 6,677 255 3.82%
Time deposits 45,284 2,440 5.39% 40,010 1,528 3.82% 37,494 1,146 3.06%
----------------------------------------------------------------------------------------
Total Deposits 148,108 6,510 4.40% 121,957 3,897 3.20% 110,991 3,156 2.84%
Borrowings 13,334 844 6.33% 7,788 382 4.90% 288 10 3.47%
----------------------------------------------------------------------------------------
Total interest-bearing liabilities 161,442 7,354 4.56% 129,745 4,279 3.30% 111,279 3,166 2.85%
----------------------------------------------------------------------------------------
Noninterest-bearing deposits 49,289 50,428 55,685
Other noninterest-bearing liabilities 846 579 996
Total noninterest-bearing liabilites 50,135 51,007 56,681
Shareholders' equity 18,326 17,410 15,337
----------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $229,903 7,354 3.20% $198,162 4,279 2.16% 183,297 3,166 1.73%
========================================================================================
Net interest income; Interest rate spread(4) $12,939 5.05% $11,082 5.24% $10,167 5.22%
========================================================================================
Net earning balance; Net yield
on interest-earning assets(3) $ 49,821 6.12% $ 50,183 6.16% $ 53,844 6.16%
========================================================================================
</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 (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
(4) Loan fees totaling $969, $870 and $790 are included in loan interest income
for the years 1995, 1994 and 1993, respectively.
Page 10
<PAGE>
CUPERTINO NATIONAL BANCORP
The most significant impact on the Company's net interest income
between periods is derived from the interaction of change in the volume of and
rates earned or paid on interest-earning assets and interest-bearing
liabilities. The volume of earning dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods.
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 periods indicated.
RATE/VOLUME VARIANCE ANALYSIS
<TABLE>
<CAPTION>
Year Ended December 31, 1995 Year Ended December 31, 1994
compared with December 31, 1994 compared with December 31, 1993
favorable (unfavorable) favorable (unfavorable)
----------------------------------- ----------------------------------
(Dollars in thousands)(1) Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans $ 2,136 $ 1,414 $ 3,550 $ 5 $ 708 $ 713
Interest income on investment
securities, short-term invest-
ments and cash equivalents 765 617 1,382 771 544 1,315
---------------------------------------------------------------------------------
Total interest income 2,901 2,031 4,932 776 1,252 2,028
---------------------------------------------------------------------------------
Interest expense on deposits
NOW and MMDA (868) (808) (1,676) (241) (196) (437)
Savings deposits 28 (53) (25) (5) 83 78
Time deposits (284) (628) (912) (96) (286) (382)
---------------------------------------------------------------------------------
Interest expense on deposits (1,124) (1,489) (2,613) (342) (399) (741)
Interest expense on borrowings (351) (111) (462) (368) (4) (372)
---------------------------------------------------------------------------------
Total interest expense (1,475) (1,600) (3,075) (710) (403) (1,113)
---------------------------------------------------------------------------------
Increase in net interest income $ 1,426 $ 431 $ 1,857 $ 66 $ 849 $ 915
=================================================================================
</TABLE>
(1) In this analysis, the unallocated change due to the volume/rate variance
has been allocated to volume.
The Company has non-interest bearing liabilities on which it pays for
certain client services expense. These expenses include messenger, check
supplies and other related items and are included in operating expenses. If
these costs had been included in interest expense, the impact of these expenses
on the Company's net interest spread and net yield on interest earning assets
would have been as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing demand deposits $49,289 $50,428 $55,685
Client Service expense(1) 337 376 478
Client Service cost annualized 0.68% 0.75% 0.86%
Impact on Net Yield
Net yield on interest earning assets 6.12% 6.16% 6.16%
Impact of client services (.16) (.21) (.29)
------------------------------
Adjusted net yield(2) 5.96% 5.95% 5.87%
------------------------------
</TABLE>
(1) Included in client services expense are $18,000, $94,000 and $187,000 for
1995, 1994 and 1993, respectively, related to a title company which is
considered to be a related party.
(2) Non-interest bearing liabilities are included in the cost of funds
calculation to determine adjusted net yield on interest-earning assets.
Page 11
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
The impact on the net yield on interest earning assets is caused by
off-setting net interest income by the cost of client service expenses, which
reduces the yield on interest earning assets. The cost for client service
expense is trending down and reflects the Company's efforts in managing its
client service expense and also reflects a lower earnings credit rate.
The trend of interest rates in the economy continued to move downward
during the last half of 1995. This trend may continue during the first half of
1996 and then level off, as the Federal Reserve Board attempts to curb inflation
without limiting growth. If interest rates remain relatively flat, the Bank's
net interest margin should remain stable. However, as interest rates move
downward, net interest income is negatively impacted. The increase in net
interest income in 1995 was mainly due to an increase in the loan and investment
portfolios' interest income, net of the related funding cost. The increase in
net interest income in 1994 was primarily due to an increased volume of interest
earning assets, as well as an increase in the spread between the average rates
received on interest earning assets and the average rates paid on interest
bearing liabilities.
Average earning assets were $212.9 million in 1995, compared to $179.9
million in 1994, and $165.1 million in 1993. The growth in earning assets was
concentrated in the loan portfolio as the Bank focused its efforts in deploying
the Bank's funds into loans because of the higher returns than could be achieved
on alternative investment opportunities. Average loans increased in 1995 to
$146.7 million from $127.3 million in 1994 and $127.2 million in 1993. Average
securities also increased in 1995 to $64.6 million from $52.7 million in 1994
and $37.9 million in 1993.
The average yield on loans was 11.02% in 1995, compared to 9.91% in
1994 and 9.35% in 1993. The yield on loans increased due to the mix and volume
of loans and improved pricing on loan products. The Company experienced loan
growth in all loan categories in 1995, most notably in real estate term and
construction lending which accounted for $15.7 million or 52% of the increase.
In 1994, the Company's mix of loans was relatively stable when compared to 1993.
The Company anticipates that construction activity will continue to improve with
the local economy in 1996 and that real estate term and construction lending
volumes will increase in 1996.
Other earning assets consist of investment securities, overnight
federal funds sold, and other short-term investments, such as banker's
acceptances and commercial paper. These investments are maintained to provide
diversity and stability to the Bank's income stream, as well as to meet the
liquidity requirements of the Bank and to meet pledging requirements on certain
deposits. These investments typically have a lower yield than loans. The average
yield on other earning assets increased to 6.40% in 1995 from 5.23% in 1994 and
from 3.79% in 1993, as the Company adjusted the composition of its investment
portfolio to improve net interest income and slightly extended the average
maturity of the investment portfolio.
Interest expense increased during 1995 to $7.4 million from $4.3
million in 1994, compared to $3.2 million in 1993. The increase in 1995 was due
to both higher rates and increased volumes of interest bearing deposits and
borrowings. Average interest bearing deposits increased by $26.2 million in 1995
compared to an $11.0 million increase in 1994, while average borrowings
increased by $5.5 million in 1995 compared to 7.5 million in 1994.
Non-interest bearing liabilities averaged $50.1 million in 1995,
compared with $51.0 million in 1994, and $56.7 million in 1993.
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 detailed 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 provides
reserves for potential losses. The reserves have specific allocations for
credits where the probability of a loss can
Page 12
<PAGE>
CUPERTINO NATIONAL BANCORP
be defined and reasonably determined, while the balance of the reserve
allocations are based on historical data, delinquency trends, economic
conditions in the Bank's market area and industry averages. The provision for
loan losses in 1995 was $681,000 compared to $1.6 million in 1994 and $1.7
million in 1993. The decrease in the provision for loan losses in 1995 reflects
the Bank's improved credit quality, as it continued to experience reductions in
classified and non-performing assets. The larger loan loss provisions in 1994
and 1993 when compared to 1995 reflected the weakness in the economic conditions
within the Bank's market area and the credit risk inherent in its loan portfolio
during that time period.
Other Income
Total other income decreased to $1.9 million in 1995 compared to $3.1 million in
1994 and to $3.2 million in 1993. Other income consists of depositor service
charges, fees received for services provided or obtained in the loan approval
process, fees received for trust services, the net premium and servicing value
recognized upon the sale of the guarantee portion of SBA loans, revenue from the
origination and sale of residential mortgages and other miscellaneous income.
The following table summarizes the sources of other income in the years
indicated:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sale of mortgage loans $ 137 $ 993 $1,525
Gain on sale of SBA loans 366 685 435
Trust fees 710 593 494
Loan documentation fees, net 103 276 284
Depositor service fees 291 267 252
Other 295 265 164
----------------------------------
Total $1,902 $3,079 $3,154
==================================
</TABLE>
The largest portion of the decrease in other income in 1995 and 1994 is
due to the decline in the activities of the mortgage banking business unit. The
division generated $137,000 in gains on the sale of mortgage loans in 1995,
compared to $993,000 in 1994 and $1,525,000 in 1993. In early 1995, the Company
determined to close the mortgage banking business unit due to the sharp rise in
interest rates during 1994 and the impact the rate rise had on fundings.
Loan documentation income, which represents the charge to clients for
expenses incurred by the Bank to document and process loans, decreased to
$103,000 for 1995, as compared to $276,000 in 1994 and $284,000 in 1993. The
decrease in 1995 as compared to 1994, is primarily attributable to a reduction
in the quantity of loan originations from the mortgage banking business unit
during 1995.
Fees received by the Trust Department of the Bank increased to $710,000
in 1995, as compared to $593,000 in 1994, and $494,000 in 1993. Trust fees for
1995 increased by 20% over 1994 as the Trust Department had approximately $275
million in total assets at December 31, 1995, compared with approximately $157
million in 1994 and approximately $118 million in 1993. The increase in trust
fee income is directly related to the Company's decision to increase its
investment in the trust business. During 1995, the Company added several new
trust employees who generated over $100 million in new trust business. It is
anticipated they will continue to be successful in increasing their trust
relationships in 1996.
Premiums recognized on the sale of SBA loans decreased to $366,000 for
1995 as compared to $685,000 for 1994, and $435,000 in 1993. This was offset by
increased interest income on SBA loans retained and reflected a change in the
guarantee percentage pledged by the SBA, along with a reduction in premiums on
loans sold.
Service charges on depositor accounts increased to $291,000 in 1995
compared to $267,000 in 1994 and $252,000 in 1993. The increase is attributable
to the growth of new deposit relationships since 1993.
Operating Expenses
Operating expenses totaled $13.7 million for 1995, compared to $10.4 million for
1994 and $10.2 million for 1993. The ratio of operating expenses to average
assets for these periods was 6.0%, 5.3%, and 5.6%, respectively.
Page 13
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
The following table represents the major components of operating
expenses for the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation & benefits $ 6,704 $ 5,724 $ 5,014
Occupancy & equipment 1,687 1,400 1,226
Professional services and legal costs 2,681 911 1,379
FDIC Insurance and regulatory assessments 344 485 414
Other real estate, net 35 48 288
Other 1,902 1,500 1,425
-------------------------------
Total before client services 13,353 10,068 9,746
Client services 337 376 478
-------------------------------
Total $ 13,690 $ 10,444 $ 10,224
===============================
Efficiency ratio before client services 89.37% 71.10% 73.16%
===============================
Efficiency ratio 91.63% 73.75% 76.75%
===============================
Total operating expenses to average assets 5.96% 5.27% 5.58%
===============================
</TABLE>
The efficiency ratio is computed by dividing total non-interest (or
operating) expenses by net interest income and other income. An increase in the
ratio indicates that more resources are being utilized 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 1995 was 91.6%
compared to 73.7% in 1994 and 76.7% in 1993. The sharp increase in the
efficiency ratio in 1995 was a result of the litigation settlement, the expenses
associated with the closing of the mortgage business unit and merger discussions
with another bank in our market area. Without these charges, the noninterest
expenses would have been $11.5 million with an efficiency ratio of 77.4%.
Compensation expenses increased in 1995 to $6.7 million compared to
$5.7 million in 1994 and $5.0 million in 1993, primarily due to the growth in
the Bank's Trust and Venture Lending business units, combined with increased
incentive payments for new business generated.
Expenses for professional services, including legal, consulting and
audit services, increased to $2.7 million in 1995, as compared to $911,000 in
1994 and $1.4 million in 1993. The increase in 1995 is attributed to the one-
time charge of $1.7 million for a legal settlement related to trust department
activities.
Client service expenses decreased to $337,000 in 1995, compared to
$376,000 in 1994 and $478,000 in 1993 as a result of a decrease in the volume of
non-interest bearing demand deposits for which the Bank provides services.
FDIC deposit insurance and OCC regulatory assessments decreased to
$344,000 in 1995 compared to $485,000 in 1994, and $414,000 in 1993. FDIC
insurance declined and is expected to decline in future years as the FDIC has
lowered deposit insurance premiums, since the bank insurance fund was fully
funded in March 1995.
Other operating expenses increased by $402,000 in 1995 from 1994
primarily due to the one-time charge of closing the mortgage business unit and
the increased lending volume, which increased related other operating expenses.
The $75,000 increase from 1993 to 1994 was due to increased costs related to the
lending and mortgage banking operations.
Income Taxes
The Company's income tax rate for 1995 was 33.4% compared 35.0% in 1994 and
37.5% in 1993. The effective rates in all years are lower than the statutory
rates due primarily to the effect of the California Franchise Tax Enterprise
Zone Credit and exempt interest income.
Page 14
<PAGE>
CUPERTINO NATIONAL BANK
FINANCIAL CONDITION
Assets
Total assets increased to $259.1 million in 1995, a 16.1% increase from the
$223.1 million one year earlier, compared to an increase of 15.8% from $192.6
million in 1993. The increase in 1995 was primarily due to the increase in
outstanding loans where the increase in 1994 was primarily due to the increase
in securities.
Loans
Total gross loans, excluding loans held for sale, increased 22.5% to $164.2
million at December 31, 1995 compared to $134.0 million at December 31, 1994.
Total loans increased 5.4% in 1994 from $127.1 million at year-end 1993. The
significant increase in loan volume in 1995 is due to an improving economy
coupled with an increased focus on loan growth.
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>
1995 1994 1993
----------------------- ----------------------- -------------------------
(DolLars in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 88,646 55.2% $ 81,695 60.2% $ 77,699 59.1%
Real estate construction & land 23,889 14.9% 18,117 13.3% 19,090 14.5%
Real estate term 23,026 14.3% 13,133 9.7% 12,075 9.2%
Consumer & other 28,666 17.8% 21,059 15.5% 18,214 13.8%
---------------------------------------------------------------------------------------------
Total loans, gross 164,227 102.2% 134,004 98.7% 127,078 96.6%
Deferred fees and discounts (851) (0.5)% (847) (0.6)% (923) (0.7)%
---------------------------------------------------------------------------------------------
Total loans, net of deferred fees 163,376 101.7% 133,157 98.1% 126,155 95.9%
Allowance for loan losses (2,683) (1.7)% (2,918) (2.1)% (2,247) (1.7)%
---------------------------------------------------------------------------------------------
Net loans 160,693 100.0% 130,239 96.0% 123,908 94.2%
Loans held for sale -- -- 5,383 4.0% 7,625 5.8%
---------------------------------------------------------------------------------------------
Total loans $160,693 100.0% $135,622 100.0% $131,533 100.0%
=============================================================================================
</TABLE>
Credit Quality
One of the Bank's objectives is to limit the risk inherent in its loan portfolio
through stringent loan policies and continuous 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. The Director's Loan Committee supervises the lending
activities of the Bank. This committee consists of three outside directors, the
Chairman/CEO, the Executive Vice President/Senior Loan Officer, Senior Vice
President/Commercial Manager and the Senior 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 actively review and monitor problem loans on a regular
basis.
Page 15
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
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) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-performing assets
Non-accrual loans $2,513 $3,244 $ 997
Accruing loans past due 90 days or more 830 1,371 1,903
Restructured loans -- -- --
Other real estate owned -- 375 618
---------------------------------
Total non-performing assets $3,343 $4,990 $3,518
---------------------------------
Ratio of the allowance for loan losses to
total non-performing assets 80% 58% 64%
</TABLE>
The following table details the Bank's classified assets for the years ended
December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Classified assets
Loans
Substandard $7,277 $10,927 $ 9,885
Doubtful 601 1,781 942
Loss -- -- --
---------------------------------
Total 7,878 12,708 10,827
OREO -- 375 618
---------------------------------
Total classified assets $7,878 $13,083 $11,445
---------------------------------
Ratio of classified assets to:
Total assets 3.0% 5.9% 5.9%
Total loans and OREO 4.8% 9.4% 8.5%
Ratio of allowance for loan losses to classified assets 34.1% 22.3% 19.6%
=================================
</TABLE>
Total non-performing assets declined to $3.3 million at December 31,
1995 from $5.0 million at December 31, 1994. In addition, total classified
assets declined to $7.9 million from $13.1 million during the same time period.
The allowance for loan losses represented 80.2% of non-performing assets at
December 31, 1995, compared to 58.5% at December 31, 1994. The significant
improvement in the credit quality in 1995 is a reflection of an improving
economy coupled with the focused effort of the Company to reduce the level of
problem assets.
Page 16
<PAGE>
CUPERTINO NATIONAL BANCORP
The following table summarizes activity in the allowance for loan losses for the
past three years.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(Dollars in thousands) Years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans, net of unearned income:
Average outstanding during period $ 145,940 $ 127,264 $ 127,210
---------------------------------------------------
Allowance for loan losses:
Balance at beginning of period $ 2,918 $ 2,247 $ 1,748
Charge-offs:
Commercial (973) (748) (1,069)
Real estate - construction -- (123) --
Real estate - term -- -- --
Consumer - installment (101) (141) (159)
---------------------------------------------------
Total (1,074) (1,012) (1,228)
Recoveries:
Commercial 156 57 --
Real estate - construction -- -- --
Real estate - term -- -- --
Consumer - installment 2 6 48
---------------------------------------------------
Total 158 63 48
---------------------------------------------------
Net charge-offs (916) (949) (1,180)
Provision charged to income 681 1,620 1,679
---------------------------------------------------
Balance at end of period $ 2,683 $ 2,918 $ 2,247
===================================================
Net charge-offs to average loans outstanding during period 0.63% 0.75% 0.93%
===================================================
Allowance as a percentage of loans 1.64% 2.09% 1.67%
===================================================
</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 losses
decreased at December 31, 1995 to 1.64% of average outstanding loans compared to
2.09% at December 31, 1994 and 1.67% at December 31, 1993. The following table
details the allocation of the allowance for loan losses:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ------------------------
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 $1,057 0.65% $1,834 1.32% $1,496 1.11%
Real estate - construction 153 0.09% 180 0.13% 308 0.23%
Real estate - term 696 0.43% 132 0.09% 391 0.29%
Consumer installment 273 0.17% 273 0.19% 10 0.01%
Loans held for sale -- --% 14 0.01% 27 0.02%
Unallocated - deferred fees, commit-
ments and loss reserves 504 0.30% 485 0.35% 15 0.01%
------------------------------------------------------------------------------------
Total $2,683 1.64% $2,918 2.09% $2,247 1.67%
====================================================================================
</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 and if the economy declines or asset quality
deteriorates, additional provisions could be required.
Page 17
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
Deposits
Deposits reached $236.1 million at December 31, 1995, an increase of 26.5% as
compared to deposits of $186.7 at December 31, 1994. In 1994, deposits increased
6.3% from $175.7 million at December 31, 1993.
Total average deposits increased 14.5% to $197.2 million for 1995
compared to an average of $172.4 million for 1994. In 1994, average deposits
increased 3.5% over average deposits of $166.6 million in 1993. The increase in
deposits was due to the continued marketing efforts directed at commercial
business clients and the continued growth in the Bank's regional offices in San
Jose and Palo Alto.
Non-interest bearing deposits were $59.0 million at December 31, 1995
compared to $53.9 million at December 31, 1994 and $62.8 million at December 31,
1993. Average non-interest bearing deposits in 1995 were $49.3 million compared
to $50.4 million in 1994 and $55.8 million in 1993. As its regional offices
expand, the Bank anticipates this funding source to increase.
Money market and other interest-bearing demand accounts reached $124.1
million at year end 1995, an increase of 51.5% from the prior year. Money market
and other interest-bearing demand deposits of $81.9 million at December 31, 1994
were up 34.7% from $60.8 million at December 31, 1993. The continued efforts by
the Bank to market these low cost deposit products accounts for the continued
growth.
Time certificates of deposit of more than $100,000, savings and other
time deposits totaled $52.9 million or 22.4% of total deposits at December 31,
1995 compared to $50.9 million or 27.3% of total deposits at December 31, 1994
and $45.4 million or 25.8% of total deposits at December 31, 1993.
Liquidity and Other Borrowings
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,
including the Bank's $17 million in federal fund 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. As of December 31, 1995, the Bank
had $10.0 million in institutional deposits outstanding and no outstanding
federal funds purchased.
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 held 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 clients' interest bearing and non-
interest bearing deposit accounts. Federal funds purchased and other short term
borrowings are additional sources of liquidity and 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. Interest rate risk management
focuses on the maturity structure of assets and liabilities and their repricing
characteristics
Page 18
<PAGE>
CUPERTINO NATIONAL BANCORP
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
interest sensitivity gaps for different intervals as of December 31, 1995:
INTEREST SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
Repricing Periods Total
Immediate 2 Days To Months >1 Year > 3 Yrs Total 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 -- $ 16,207 $ 16,207
Short term investments $ 12,900 $ 12,900 12,900
Investment securities $ 8,476 $ 9,009 $ 7,986 $ 9,823 $20,786 56,080 969 57,049
Loans 131,621 2,355 3,040 7,564 4,098 12,329 161,007 3,220 164,227
Loan loss/unearned fees -- (3,534) (3,534)
Other assets -- 12,250 12,250
----------------------------------------------------------------------------------------------------
Total assets 144,521 10,831 12,049 15,550 13,921 33,115 229,987 29,112 259,099
====================================================================================================
Liabilities and Equity:
Deposits
Demand -- 58,986 58,986
NOW, MMDA, and savings 132,174 132,174 132,174
Time deposits 36,493 2,823 5,602 16 44,934 44,934
Subordinated debt 3,000 3,000 3,000
Other liabilities -- 1,333 1,333
Shareholders' equity -- 18,672 18,672
----------------------------------------------------------------------------------------------------
Total liabilities and equity 132,174 36,493 2,823 5,602 16 3,000 180,108 78,991 259,099
====================================================================================================
Gap $ 12,347 $(25,662) $ 9,226 $ 9,948 $13,905 $30,115 $ 49,879 $(49,879) $ --
Cumulative Gap $ 12,347 $(13,315) $(4,089) $ 5,859 $19,764 $49,879 $ 49,879 $ -- $ --
Cumulative Gap/total assets 4.77% (5.14)% (1.58)% 2.26% 7.63% 19.25% 19.25% -- --
</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.
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.
Page 19
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
Capital Resources
Shareholders' equity at December 31, 1995 increased to $18.7 million from $18.0
million at December 31, 1994 and from $16.2 million at December 31, 1993. During
1995, the Company paid a 10% stock dividend and two cash dividends of $.10 per
share each.
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.
In the third quarter of 1995, the Company increased its capital base by
successfully raising $3.0 million of subordinated debt which qualifies as Tier 2
Capital (see below). The private offering was subscribed substantially by the
Company's directors, officers and other accredited investors of the Company.
Under 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. The converted items are then 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 and subordinated debt in supplementary capital.
At December 31, 1995, the minimum risk-based capital requirements to be
considered adequately capitalized are 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 Office of the Comptroller of
the Currency 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:
<TABLE>
<CAPTION>
Tier 1 Total
Risk-Based 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, 1995, the Company's risk-based capital ratios were 9.2%
for Tier I risk based capital and 11.9% for total risk-based capital, compared
to 10.8% and 12.1% as of December 31, 1994, respectively. The Company's leverage
ratio was 7.8% at December 31, 1995, compared to 8.4% at December 31, 1994.
These ratios all exceeded the well-capitalized guidelines shown above.
Page 20
<PAGE>
CUPERTINO NATIONAL BANCORP
The Company's capital ratios are indicated in the following table:
<TABLE>
<CAPTION>
( Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Tier 1 capital:
Shareholders' equity $ 18,672 $ 18,037
Tier 2 capital:
Allowance for loan losses allowable for Tier 2 capital 2,541 2,082
Subordinated debt 3,000 --
-------------------
Total Risk Based Capital $ 24,213 $ 20,119
-------------------
Risk-adjusted assets $203,310 $166,552
===================
Total assets $259,099 $223,144
===================
Tier 1 capital/risk adjusted assets:
Company's capital ratio 9.18% 10.80%
Minimum regulatory requirement 4.00% 4.00%
===================
Total Risk-based capital/risk adjusted assets:
Company's capital ratio 11.91% 12.10%
Minimum regulatory requirement 8.00% 8.00%
===================
Tier 1 capital/total assets:
Company's capital ratio 7.78% 8.40%
Minimum regulatory requirement 3.00% 3.00%
===================
</TABLE>
BUSINESS RISKS
Certain characteristics and dynamics of the Bank's business and of the financial
markets may create risks in the Bank's long-term success and its financial
results. These risks include:
Geographic Concentration and Local Economy - All of the Bank's operations are
located in Santa Clara County and San Mateo County in Northern California. As a
result of the geographic concentration, the Bank's results of operation depend
largely upon local economic conditions, which have been relatively volatile in
the last few years. Accordingly, there can be no assurance that the Bank's
existing and prospective clients 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 there were an economic downturn. An
economic downturn could also produce a decline in real estate prices which would
potentially have a material adverse effect on the Bank's lending activities and
on the quality of the Bank's real estate loan portfolio.
Government Regulation and Recent Legislation - The Bank and its operations are
subject to extensive state and federal supervision, regulation and legislation.
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. Additionally, action taken to respond to budget
deficits, such as a reduction in SBA funding, could adversely affect loan demand
or the ability of potential borrowers to qualify for such loans.
Effects of Inflation, Interest Rate Changes - 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
Page 21
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
expense, based upon consumer price indices. In the opinion of management,
inflation has not had a material effect on the consolidated results of
operations over the last few years. Interest rates are highly sensitive to many
factors which are beyond the control of the Bank. Changes in interest rates will
influence the growth of loans, investments and deposits. and affect the rates
charged on loans and paid on deposits. The nature, timing and impact of any
future changes in interest rates or monetary and fiscal policies are not
predictable.
Competition -- The banking business in the Bank's market area is highly
competitive with respect to both loans and deposits. Deregulation and continued
advances in interstate banking may increase this competition, including by a
number of institutions that have significantly greater financial resources than
the Bank.
This Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. These forward-looking
statements relate to expectations of the business environment in which the Bank
operates, projections of future performance, perceived opportunities in the
market and statements regarding the Bank's mission and vision. Actual results
and conditions could differ materially from those contained in the forward-
looking statements as a result of business risks identified above as well as the
Company's ability to manage credit and fiduciary risks, control its cost, and
attract and retain high quality personnel, while continuing to provide value-
added, relationship-oriented banking services and competitive financial
products.
ACCOUNTING PRONOUNCEMENTS
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", 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. The Company adopted SFAS No. 114 on January 1, 1995. The adoption
of SFAS No. 114 did not result in any additional provision for credit losses
during 1995. Income recognition on impaired loans conforms to the method the
Company uses for income recognition on nonaccrual loans.
STOCK ACTIVITY
The common stock of the Company is traded on the NASDAQ National Market System
under the symbol CUNB. There were 402 holders of record of the Company's common
stock at December 31, 1995.
The following table presents the high and low prices of the Company's
common stock, as reported on the NASDAQ National Market System during 1995, 1994
and 1993 adjusted for the effect of stock dividends:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------- ------------------- --------------------
Quarter High Low High Low High Low
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $ 9.03 $ 9.01 $10.00 $8.81 $10.80 $7.56
Second $ 9.12 $ 8.98 $10.38 $9.00 $10.80 $9.07
Third $ 9.64 $ 9.48 $10.00 $9.00 $10.89 $9.52
Fourth $ 12.06 $ 12.36 $10.00 $8.75 $10.80 $8.57
</TABLE>
On May 30, 1995 and December 15, 1995, the Company paid a $.10 per share
dividend to its shareholders.
Page 22
<PAGE>
CUPERTINO NATIONAL BANCORP
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in thousands) December 31, 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 16,207 $ 9,326
Federal funds sold 12,900 10,400
-------------------
Cash and cash equivalents 29,107 19,726
Investment securities 57,049 60,506
Loans, net 160,693 130,239
Loans held for sale -- 5,383
-------------------
Total loans, net 160,693 135,622
Premises and equipment, net 1,917 1,434
Other real estate owned -- 375
Interest receivables and other assets 10,333 5,481
-------------------
Total assets $259,099 $223,144
===================
Liabilities and Shareholders' Equity
Deposits:
Demand, non-interest-bearing $ 58,986 $ 53,880
NOW 10,158 8,331
Money Market Demand Accounts 114,021 73,623
Savings 7,995 5,951
Other time certificates 17,830 19,417
Time certificates, $100 and over 27,104 25,520
-------------------
Total deposits 236,094 186,722
Other borrowings -- 17,256
Subordinated debt 3,000 --
Other liabilities 1,333 1,129
-------------------
Total liabilities 240,427 205,107
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; shares
outstanding: 1,808,828 in 1995 and 1,557,008 in 1994 17,680 14,901
Retained earnings 992 3,136
-------------------
Total shareholders' equity 18,672 18,037
-------------------
Total liabilities and shareholders' equity $259,099 $223,144
===================
</TABLE>
See notes to consolidated financial statements
Page 23
<PAGE>
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts) For the years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Interest on loans $16,158 $12,608 $11,895
Interest on investment securities:
Taxable 3,582 2,451 830
Non-taxable 43 94 145
---------------------------------------------
Total investment securities 3,625 2,545 975
Other interest income 510 208 463
---------------------------------------------
Total interest income 20,293 15,361 13,333
---------------------------------------------
Interest Expense:
Interest on deposits 6,510 3,897 3,156
Interest on short-term borrowings 769 382 10
Interest on subordinated debt 75 -- --
---------------------------------------------
Total interest expense 7,354 4,279 3,166
---------------------------------------------
Net interest income 12,939 11,082 10,167
Provision for loan losses 681 1,620 1,679
---------------------------------------------
Net interest income after provision for loan losses 12,258 9,462 8,488
---------------------------------------------
Other Income:
Gain on sale of mortgage loans 137 993 1,525
Gain on sale of SBA loans 366 685 435
Trust fees 710 593 494
Loan documentation fees, net 103 276 284
Depositor service fees 291 267 252
Other 295 265 164
---------------------------------------------
Total other income 1,902 3,079 3,154
---------------------------------------------
Operating Expenses:
Compensation and benefits 6,704 5,724 5,014
Occupancy and equipment 1,687 1,400 1,226
Professional services and legal costs 2,681 911 1,379
FDIC insurance and regulatory assessments 344 485 414
Client services 337 376 478
Other real estate, net 35 48 288
Other 1,902 1,500 1,425
---------------------------------------------
Total operating expenses 13,690 10,444 10,224
---------------------------------------------
Income before income tax expense 470 2,097 1,418
Income tax expense 157 734 538
---------------------------------------------
Net Income $ 313 $ 1,363 $ 880
=============================================
Net income per common and common equivalent share $ 0.16 $ 0.76 $ 0.50
=============================================
</TABLE>
See notes to consolidated financial statements.
Page 24
<PAGE>
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
For the years ended December 31, 1995, 1994 and 1993 Common Stock Unrealized Retained Shareholders'
(Dollars in thousands) Shares Amount Gains earnings equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 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
Two 5% stock dividends - 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
Stock options exercised 68,851 418 -- 418
Stock issued in Employee Stock Purchase Plan 10,472 80 -- 80
Stock issued in 401K Plan 8,257 95 -- 95
Two $.10 cash dividends -- -- (324) (324)
10% stock dividend 164,240 2,135 (2,135) --
Cash paid in lieu of fractional shares -- -- (3) (3)
Disqualifying disposition of common stock -- 13 -- 13
Nonqualified stock option exercises -- 38 -- 38
Unrealized gain on available for sale securities -- -- $ 5 -- 5
Net Income -- -- -- 313 313
--------------------------------------------------------------
Balance, December 31, 1995 1,808,828 $ 17,680 $ 5 $ 987 $ 18,672
==============================================================
</TABLE>
See notes to consolidated financial statements
Page 25
<PAGE>
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Dollars in thousands) For the years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows -- Operating Activities:
Net Income $ 313 $ 1,363 $ 880
Reconciliation of net income to net cash from operations:
Provision for loan losses 681 1,620 1,679
Depreciation and leasehold amortization 580 490 477
Deferred income taxes 371 128 (246)
Accrued interest receivables and other assets (1,479) (255) (627)
Accrued interest payables and other liabilities 204 514 (187)
Deferred loan fees and discounts, net (4) (76) 229
Proceeds from sale of loans held for sale 16,364 125,342 152,982
Origination of loans for resale (10,981) (123,100) (151,518)
Other real estate owned, net -- 48 221
-----------------------------------
Operating cash flows, net 6,049 6,074 3,890
-----------------------------------
Cash Flows -- Investing Activities:
Maturities of investment securities and other short-term investments
Held-to maturity 26,090 12,983 31,125
Purchase of investment securities and other short-term investments
Held to maturity (19,104) (34,050) (42,983)
Available for sale (3,524) -- --
Loans, net (31,131) (8,250) (8,157)
Investment in other real estate owned -- -- (219)
Sale of other real estate owned 375 576 3,097
Premises and equipment (1,063) (516) (850)
Purchase of insurance policies (3,744) -- (2,175)
Other, net -- 21 --
-----------------------------------
Investing cash flows, net (32,101) (29,236) (20,162)
-----------------------------------
Cash Flows -- Financing Activities:
Net change in non-interest-bearing deposits 5,106 (8,871) 458
Net change in interest-bearing deposits 44,266 19,853 18,732
Net change in short-term borrowings (17,256) 17,256 --
Subordinated debt issued 3,000 -- --
Proceeds fron the sale of stock 644 457 169
Fractional shares paid in cash (3) (1) (4)
Cash dividend (324) (156) --
-----------------------------------
Financing cash flows, net 35,433 28,538 19,355
-----------------------------------
Net increase in cash and cash equivalents 9,381 5,376 3,083
Cash and cash equivalents at beginning of year 19,726 14,350 11,267
-----------------------------------
Cash and cash equivalents at end of year $ 29,107 $ 19,726 $ 14,350
===================================
Cash Flows -- Supplemental Disclosures:
Cash paid during the period for:
Interest on deposits and other borrowings $ 7,368 $ 4,148 $ 3,181
Income taxes 210 535 722
Non-cash transactions:
Additions to other real estate owned -- 375 --
===================================
</TABLE>
See notes to consolidated financial statements.
Page 26
<PAGE>
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations
The consolidated financial statements include the accounts of Cupertino National
Bancorp ("CUNB" or the "Company") and its wholly-owned subsidiary, Cupertino
National Bank and 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 1995 presentation.
The Bank and its operating divisions; SBA Lending Division, Commercial
Lending Division, Venture Lending Division, Asset Based Lending Division,
Consumer Lending Division, Real Estate Lending Division and Trust Division serve
the Santa Clara Valley through its regional offices in Cupertino, San Jose and
Palo Alto, California. The Bank intends to open its fourth office in downtown
Palo Alto, California, in the Spring of 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of certain revenues and expenses during the reporting
period. Actual results could differ from those estimates.
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, 1995, the required reserves totaled $798,000.
Investment Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which was adopted by the
Company in 1994, requires that investment securities be classified into three
portfolios, and accounted for as follows: 1) debt and equity securities for
which the Company has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost; 2) debt and
equity securities that are bought and held principally for the purpose of
selling in the near term are classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings; and 3) debt
and equity securities not classified as either held to maturity or trading
securities are classified as available for sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. CUNB currently maintains $53.5
million of its securities in the held to maturity category as it has the intent
and ability to hold the securities until maturity and $3.5 million in the
available for sale category.
Prior to the adoption of SFAS No. 115, all investment securities were
considered held to maturity because the Company had the ability and 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.
Page 27
<PAGE>
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
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.
The Bank designates certain of its loans receivable as being held for
sale and they are recorded at fair market value. In determining the level of
loans held for sale, the Bank considers whether loans (a) would be sold as part
of its asset/liability management strategy, or (b) may be sold in response to
changes in interest rates, changes in payment risk, the need to increase
regulatory capital or other similar factors.
Other Real Estate Owned
Real estate acquired through foreclosure is carried at the lower of cost or fair
value less estimated selling costs. Subsequent decreases in fair value are
recognized as charges to expense.
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
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.
Allowance for Loan Losses
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", was issued in
May 1993 and was subsequently amended by SFAS No. 118 in October 1994. The
provisions of these statements are effective for fiscal years beginning after
December 15, 1994 and are applicable to all creditors and to all loans that are
individually and specifically evaluated for impairment, uncollateralized as well
as collateralized. It requires that impaired loans be measured at either, (1)
the present value of expected cash flows at the loan's effective rate, (2) the
loan's observable market price, or (3) the fair market value of the collateral
of the loan. In general, these statements are not applicable to large groups of
smaller-balance loans that are collectively evaluated for impairment such as
credit cards, residential mortgage and/or consumer installment loans. Adoption
of SFAS Nos. 114 and 118 did not have a material effect on the financial
statements of the Company in 1995. Income recognition on impaired loans conforms
to the method the Company uses for income recognition on nonaccrual loans.
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 inherent in the 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 operating results, while charge-offs to the allowance are
made when a loss is determined to have occurred. Because the allowance for
possible loan losses is based on estimates, ultimate losses may vary from the
current estimates.
Income per Share
Income per share, adjusted for stock dividends, is based on weighted average
common and common equivalent shares outstanding of 1,894,400 in 1995; 1,628,500
in 1994 and 1,587,000 in 1993.
Page 28
<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 and servicing rights 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. Funding for the SBA programs
depend on annual appropriations by the U.S.
Congress.
NOTE 2 -- INVESTMENT SECURITIES
U.S. Government and agency obligations, municipal securities and other
securities are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
(Dollars in thousands) December 31,1995 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 5,987 $ 24 $ -- $ 6,011
U.S. Agency obligations:
Mortgage-backed obligations 8,190 159 -- 8,349
Fixed and variable rate notes 34,199 145 -- 34,344
Other mortgage-backed obligations 4,195 102 -- 4,297
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 739 -- -- 739
------------------------------------------------
Total securities held to maturity 53,540 430 -- 53,970
U.S. Treasury obligations available for sale 3,504 5 -- 3,509
------------------------------------------------
Total securities $57,044 $435 $ -- $57,479
================================================
December 31, 1994
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
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 703 -- -- 703
Other mortgage-backed obligations 4,334 -- 228 4,106
------------------------------------------------
Total securities held to maturity 60,506 7 2,323 58,190
Total securities available for sale -- -- -- --
------------------------------------------------
Total securities $60,506 $ 7 $2,323 $58,190
================================================
</TABLE>
Page 29
<PAGE>
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
Securities with a carrying value of $14,509,000 and $24,868,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public deposits
and for other purposes required by law or contract. During 1995, 1994 and 1993,
there were no sales of securities.
The following table shows amortized cost and estimated market value of
the Company's investment securities by year of maturity at December 31, 1995.
<TABLE>
<CAPTION>
1997 2001 2006 and
(Dollars in thousands) 1996 through 2000 through 2006 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury obligations $ 5,987 $ -- $ -- $ -- $ 5,987
U.S. Agency obligations:
Mortgage-backed obligations (1) -- 95 2,730 5,337 8,162
Fixed and variable rate notes (2) 8,000 17,727 6,485 1,987 34,199
Other mortgage-backed obligations (1) -- -- -- 4,224 4,224
Federal Reserve Bank stock -- -- -- 230 230
Federal Home Loan Bank stock -- -- -- 739 739
---------------------------------------------------------------------
Total investment securities held to maturity 13,987 17,822 9,215 12,517 53,541
U.S. Treasury obligations available for sale 3,504 -- -- -- 3,504
---------------------------------------------------------------------
Total securities $17,491 $17,822 $9,215 $12,517 $57,045
---------------------------------------------------------------------
Market Value $17,478 $17,800 $9,471 $12,732 $57,481
=====================================================================
Weighted average yield 4.8% 6.6% 7.5% 7.8% 6.8%
=====================================================================
</TABLE>
(1) Mortgage-backed securities are shown at contractual maturity, however the
average life of these mortgage-backed securities may differ 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
Investments in the Federal Reserve Bank and the Federal Home Loan Bank
are required in order to maintain membership and support activity levels.
NOTE 3 - LOANS
<TABLE>
<CAPTION>
The following is a summary of loans by category as of December 31:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial $ 88,646 $ 81,695
Real estate construction and land 23,889 18,117
Real estate term 23,026 13,133
Consumer and other 28,666 21,059
----------------------
Total loans, gross 164,227 134,004
Deferred loan fees and discounts (851) (847)
----------------------
Total loans, net of deferred fees 163,376 133,157
Allowance for loan losses (2,683) (2,918)
----------------------
Total loans, net 160,693 130,239
Loans held for sale -- 5,383
----------------------
Total loans $160,693 $135,622
======================
</TABLE>
Page 30
<PAGE>
CUPERTINO NATIONAL BANK
NOTE 4-ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
The following summarizes the activity in the allowance for loan losses for the
years ended December 31:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance January 1 $ 2,918 $ 2,247 $ 1,748
Loans charged off (1,074) (1,012) (1,228)
Recoveries 158 63 48
Provision for loan losses 681 1,620 1,679
--------------------------------------
Balance December 31 $ 2,683 $ 2,918 $ 2,247
======================================
</TABLE>
The following table sets forth non-performing loans as of December 31,
1995, 1994 and 1993. 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 non-
performing loans outstanding at year-end totaled $245,000, $275,000 and $129,000
for the years ended December 31, 1995, 1994 and 1993, respectively. Interest
income recognized on the non-performing loans approximated $63,000, $50,000 and
$25,000 for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-accrual loans $2,513 $3,244 $ 997
Accruing loans past due 90 days or more 830 1,371 1,903
Restructured loans -- -- --
-------------------------------
Total $3,343 $4,615 $2,900
===============================
</TABLE>
At December 31, 1995, the recorded investment in impaired loans was
approximately $2.5 million with a corresponding valuation allowance of $509,000.
For the year ended December 31, 1995, the average recorded investment in
impaired loans was approximately $2.6 million. The Company did not recognize
interest on impaired loans during the twelve months ended December 31, 1995.
NOTE 5 - OTHER REAL ESTATE OWNED
<TABLE>
<CAPTION>
Other real estate owned consists of the following at December 31:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Real estate acquired through foreclosure $-- $375
Allowance for estimated loan losses -- --
------------------
Other real estate owned, net $-- $375
==================
<CAPTION>
The following summarizes other real estate operations, which are
included in operating expenses, for the years ended December 31:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) from:
Real estate operations, net $(18) $ (6) $ 10
Provision for estimated losses (17) (42) (231)
--------------------------------
Other real estate, net $(35) $(48) $(221)
================================
</TABLE>
Page 31
<PAGE>
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
NOTE 6 - PREMISIES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment at December 31, 1995 and 1994 are comprised of the
following:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements $ 853 $ 993
Furniture and equipment 2,717 2,463
Automobiles 157 140
------------------------
Total 3,727 3,596
Accumulated depreciation and amortization (2,167) (2,162)
Fixed assets in progress 357 --
------------------------
Premises and equipment, net $ 1,917 $ 1,434
========================
</TABLE>
NOTE 7 - OTHER BORROWINGS
Short term borrowings are detailed as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal funds purchased
Balance at December 31 $ -- $ 7,000 $ --
Average Balance 1,120 1,800 277
Maximum amount outstanding at any month end 5,600 12,000 --
Average interest rate:
During the year 5.96% 4.18% 3.56%
At December 31 -- 6.50% --
Securities sold under agreements to repurchase
Balance at December 31 $ -- $10,256 $ --
Average Balance 11,486 5,908 --
Maximum amount outstanding at any month end 26,994 24,153 --
Average interest rate:
During the year 6.12% 5.13% --
At December 31 -- 6.29% --
</TABLE>
Federal funds purchased generally mature the following day after the
purchase while securities sold under agreements to repurchase generally mature
within 30 days from the various dates of sale.
In 1995, the Company consummated a private offering of $3.0 million in
11.5% subordinated notes. The notes, which will mature on September 15, 2005,
were offered to the Board of Directors, bank officers and other accredited
investors within the meaning of Rule 501 under the Securities Act of 1933, as
amended. The debentures are redeemable by the Company after September 30, 1998
at a premium ranging from 0% to 5% of the premium redeemed. The notes qualify as
Tier 2 capital of the Bank (see Note 13).
Page 32
<PAGE>
CUPERTINO NATIONAL BANK
NOTE 8- INCOME TAXES
<TABLE>
<CAPTION>
Income tax expense was comprised of the following for the years ended December
31:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $(214) $518 $ 539
State -- 88 245
Total current expense (benefit) (214) 606 784
Deferred:
Federal 373 125 (148)
State (2) 3 (98)
Total deferred expense (benefit) 371 128 (246)
Total expense $ 157 $734 $ 538
</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 of the Company's deferred income tax assets (liabilities) as of
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Loan loss reserves $ 605 $ 904
OREO valuation -- --
Deferred compensation 72 48
State income taxes 148 243
Other (125) (124)
--------------------------
Deferred tax asset $ 700 $ 1,071
==========================
</TABLE>
No valuation allowance has been provided in 1995 and 1994. The
components of the deferred tax benefit, which results from differences in the
recognition of certain items for tax and financial reporting purposes, were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for loan losses $299 $ 136 $ (97)
Cash basis income tax reporting -- -- (12)
State income taxes 1 224 93
Other 71 (232) (230)
--------------------------------
Total deferred expense (benefit) $371 $ 128 $(246)
================================
</TABLE>
Page 33
<PAGE>
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statuatory federal tax rate 35.0% 35.0% 35.0%
California franchise tax expense, net of federal income tax benefit -- 2.9% 6.9%
Exempt income (8.7)% (4.1)% (3.2)%
Other, net 6.7% 1.2%
-----------------------------------------
Effective income tax rate 33.0% 35.0% 37.5%
=========================================
</TABLE>
NOTE 9 - OTHER OPERATING EXPENSES
<TABLE>
<CAPTION>
The major components of other operating expense are as follows for the years
ended December 31:
(Dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplies $ 202 $ 197 $ 153
Telephone 169 163 113
Director fees 147 145 142
Insurance 150 144 137
Correspondent bank charges 158 118 106
Advertising 209 87 88
Other 867 646 686
-------------------------------------
Total $1,902 $1,500 $1,425
=====================================
</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 415,746
shares of common stock at prices not less than the fair market value of such
stock at the date the options are granted.
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, 1995, options for 266,330 shares were exercisable and options for
60,429 shares were available for future grant. Additional stock option
information follows:
<TABLE>
<CAPTION>
Options outstanding(1)
Number of shares Option price per share
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1993 377,386 $3.85-$ 7.29
Granted 14,087 7.26- 9.68
Exercised (20,659) 4.13- 7.36
Canceled (7,378) 6.91- 7.36
--------------------------------
Balance, December 31, 1993 363,436 $3.85-$ 9.68
Granted 83,012 8.00- 9.09
Exercised (84,577) 4.25- 7.28
Canceled (11,793) 4.05- 8.98
--------------------------------
Balance, December 31, 1994 350,078 $3.85-$ 9.68
Granted 124,823 7.95- 12.95
Exercised (75,736) 3.85- 11.68
Canceled (43,848) 4.99- 11.81
--------------------------------
Balance, December 31, 1995 355,317 $3.85-$12.95
--------------------------------
</TABLE>
(1) Adjusted for stock dividends in 1995, 1994 and 1993
Page 34
<PAGE>
CUPERTINO NATIONAL BANK
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 $95,000 to the plan in 1995, $72,500 in
1994, and $67,000 in 1993.
The Company has established an Employee Stock Purchase Plan, as
amended, under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 10% of their compensation toward the purchase of
the Company's stock for an aggregate total of 71,722 shares. 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 1995, employees purchased 11,519
shares of common stock for an aggregate purchase price of $80,000 compared to
the purchase of 9,062 shares of common stock for an aggregate purchase price of
$69,000 in 1994. There are 29,975 shares remaining in the plan available for
purchase by employees at December 31, 1995.
During 1993 and 1995, the Company entered into deferred compensation
agreements with certain Bank executive officers. Under these agreements, the
Company is generally obligated to provide for each such employee or their
beneficiaries, during a period of up to between 30 and 40 years after the
employee's death, disability or retirement, annual benefits ranging from $50,000
to $78,000. The estimated present value of future benefits to be paid is being
accrued over the vesting period of the participants. Expenses accrued for this
plan for the years ended December 31, 1995, 1994 and 1993 totaled $90,000,
$72,000 and $48,000, respectively. The Company and the employees are the
beneficiaries of life insurance policies that have been purchased as a method of
financing the benefits under the agreements . These benefits will be funded
through loans drawn on the policies' cash surrender value over the retirement
period of each employee. At December 31, 1995, the Company's cash surrender
value of these policies was $6.0 million which is included in other assets.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 "Accounting for Stock-Based Compensation". Under the
provisions of SFAS No. 123, the Company is encouraged, but not required, to
measure compensation costs related to its employee stock compensation plans
under the fair market value method. Under this method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. If the Company
elects not to recognize compensation expense under this method, it is required
to disclose the pro forma net income and earnings per share effects based on the
SFAS No. 123 fair value methodology. SFAS No. 123 applies to financial
statements for fiscal years beginning after December 15, 1995. Earlier
implementation is permitted. The Company will implement the requirements of SFAS
No. 123 in 1996 and intends to only adopt the disclosure provisions of this
statement.
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, 1995
is shown as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- --------------------------------------------------------------------------------
<S> <C>
Balance, January 1, 1995 $ 2,987
Additions 1,040
Repayments (1,830)
---------
Balance, December 31, 1995 $ 2,197
=========
</TABLE>
Page 35
<PAGE>
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
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 as of
December 31, 1995 are as follows (includes lease payments for a branch location
currently under construction, estimated to open in April 1996):
<TABLE>
<CAPTION>
(Dollars in thousands) 1995
- --------------------------------------------------------------------------------
<S> <C>
1996 $ 786
1997 863
1998 842
1999 806
2000 814
Thereafter 2,384
-------
Total $6,495
=======
</TABLE>
During 1995, the Company entered into a twelve year operating lease
contract for an additional branch location in Palo Alto, California, which will
commence upon completion of construction and occupying the building. Annual
lease payments will be approximately $198,000.
Total rent expense was approximately $724,000, $589,000 and $475,000
for 1995, 1994 and 1993, 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, 1995, commitments to fund loans and outstanding
standby letters of credit were approximately $100.2 million and $2.2 million,
respectively. The Bank's exposure to credit loss is limited to amounts funded or
drawn; however, at December 31, 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 $59.7 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.
In the ordinary course of business there are various assertions, claims
and legal proceedings pending against the Company. Management is of the opinion
that the ultimate resolution of these proceedings will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
In July 1995, the Company settled a lawsuit for $1,080,000 (net of tax)
which alleges that the Company did not perform its fiduciary duties and, as a
result, the trust incurred losses on real estate investments that were
purchased. The Company believes that insurance coverage for this settlement is
available to the Company under various insurance policies and the Company is
currently in the process of pursuing recovery under these policies. However, due
to the uncertainty associated with the recovery, the Company reflected the
$1,080,000 expense of the legal settlement in 1995 earnings.
Page 36
<PAGE>
NOTE 13 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum capital amounts and ratios (as
defined in the regulations) and are set forth in the table below. At December
31, 1995, the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1995, the Bank is categorized as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that determination that management believes have
changed the Bank's category. The Company's 1995 and 1994 capital ratios are as
follows;
<TABLE>
<CAPTION>
For Capital Under Prompt Corrective
Actual Adequacy Purpose Action Provisions:
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total Capital (to Risk Weighted Assets $24,214 11.91% $16,285 8.00% $20,331 10.00%
Tier I Capital (to Risk Weighted Assets $18,672 9.18% $ 8,135 4.00% $12,199 6.00%
Tier I Capital (to Average Assets) $18,672 7.78% $ 9,196 4.00% $11,495 5.00%
As of December 31, 1994
Total Capital (to Risk Weighted Assets $20,955 12.0% $13,855 8.00% $17,318 10.00%
Tier I Capital (to Risk Weighted Assets $18,037 10.83% $ 6,662 4.00% $ 9,993 6.00%
Tier I Capital (to Average Assets) $18,037 8.39% $ 8,599 4.00% $10,749 5.00%
</TABLE>
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 $2,076,000 as of December 31,
1995.
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 $1,765,000 at December 31, 1995. No such advances were made during
1995 or exist as of December 31, 1995.
Page 37
<PAGE>
NOTE 15 - PARENT ONLY FINANCIAL STATEMENT
The financial statements of Cupertino National Bancorp (parent company only)
follow:
<TABLE>
<CAPTION>
Parent Company Only Balance Sheets
(Dollars in thousands) December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 898 $ 883
Investment in CNB 17,650 16,851
Subordinated debentures purchased by CNB 3,000 0
Other assets 126 305
-----------------------
Total $ 21,674 $ 18,039
=======================
Liabilities and shareholders' equity:
Subordinated debt $ 3,000 $ 0
Other liabilities 2 2
-----------------------
Total liabilities 3,002 2
Shareholders' equity
Common stock 17,680 14,901
Retained earnings 992 3,136
-----------------------
Total shareholders' equity 18,672 18,037
-----------------------
Total liabilities and shareholders' equity $ 21,674 $ 18,039
=======================
<CAPTION>
Parent Company Only Statements of Operations
(Dollars in thousands) Years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 34 $ 17 $ 14
Other income 10 14 12
-----------------------------------
Total 44 31 26
-----------------------------------
Expenses:
Occupancy and equipment 441 410 384
Less rentals received from the Bank (441) (409) (384)
-----------------------------------
Net occupancy and equipment -- 1 --
Other expense 48 46 20
-----------------------------------
Total 48 47 20
-----------------------------------
Income before taxes and equity in undistributed net income of the Bank (4) (16) 6
Income tax expense -- -- 2
-----------------------------------
Income (loss) before equity in undistributed net income of the Bank (4) (16) 4
Equity in undistributed net income of the Bank 317 1,379 876
Net Income $ 313 $ 1,363 $ 880
===================================
</TABLE>
Page 38
<PAGE>
<TABLE>
<CAPTION>
Parent Company Only Statements of Cash Flows
(Dollars in thousands) Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows -- operating activities:
Net income $ 313 $ 1,363 $ 880
Reconciliation of net income to net cash from operations:
Equity in undistributed net income of the Bank (317) (1,379) (876)
Net change in other assets 28 (205) (100)
Net change in other liabilities -- (41) --
---------------------------------
Operating cash flows, net 24 (262) (96)
---------------------------------
Cash flows -- investing activities:
Principal repayment of loans receivable 150 -- --
Purchase of subordinated debentures by CNB (3,000) -- --
Capital contribution to the Bank (425) -- --
---------------------------------
Investing cash flows, net (3,275) -- --
---------------------------------
Cash flows -- financing activities:
Proceeds from issuance of subordinated debt 3,000 -- --
Proceeds from exercise of stock options and employee stock purchases 593 613 169
Cash paid in lieu of fractional shares on stock dividends (3) (2) (4)
Payment of cash dividends (324) (156) --
---------------------------------
Financing cash flows, net 3,266 455 165
---------------------------------
Net increase in cash and cash equivalents 15 193 69
Cash and cash equivalents at the beginning of the year 883 690 621
---------------------------------
Cash and cash equivalents at the end of the year $ 898 $ 883 $ 690
=================================
</TABLE>
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments of the Company as of December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 29,107 $ 29,107 $ 19,726 $ 19,726
Investment securities 57,049 57,481 60,506 58,190
Loans, net 160,693 160,854 130,239 130,000
Loans held for sale -- -- 5,383 5,383
--------------------------------------------------
Total loans, net 160,693 160,854 135,622 135,383
--------------------------------------------------
Financial liabilities:
Deposits:
Demand, non-interest bearing 58,986 58,986 53,880 53,880
NOW 10,158 10,158 8,331 8,331
Money Market Demand Accounts 114,021 114,021 73,623 73,623
Savings 7,995 7,995 5,951 5,951
Other time certificates 17,830 17,823 19,417 19,410
Time certificates, $100 and over 27,104 27,094 25,520 25,513
--------------------------------------------------
Total deposits 236,094 236,077 186,722 186,708
Subordinated debt 3,000 3,000 -- --
Short term borrowings -- -- 17,256 17,256
--------------------------------------------------
</TABLE>
Page 39
<PAGE>
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
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 and borrowings
The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities.
Page 40
<PAGE>
CUPERTINO NATIONAL BANCORP
Report of Independent Accountants
The Board of Directors and Shareholders,
Cupertino National Bancorp:
We have audited the accompanying consolidated balance sheets of Cupertino
National Bancorp and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years 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 audits. The consolidated
statements of operations, shareholders' equity and cash flows of Cupertino
National Bancorp & Subsidiary for the year ended December 31, 1993 were audited
by other auditors whose report dated January 18, 1994 expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cupertino
National Bancorp and Subsidiary at December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Coopers & Lybrand, L.L.P.
San Francisco, California
January 26, 1996
Page 43
<PAGE>
Board of Directors and Officers
Board Members
C. Donald Allen
President and Chief Executive Officer
Cupertino National Bancorp
Chairman of the Board and
Chief Executive Officer
Cupertino National Bank & Trust
David K. Chui
President and Chief Executive Officer
PANCAL (commercial and residential
real estate)
Carl E. Cookson
Chairman of the Board
Santa Clara Land Title Company
(title insurance)
Jerry R. Crowley
Chairman and Chief Executive Officer
Treehouse, Ltd. (venture capital)
Janet M. DeCarli
Broker
Cornish & Carey Realtors
(residential and commercial real estate)
John M. Gatto
Chairman of the Board
Cupertino National Bancorp and
Chairman of the Executive Committee
Cupertino National Bank & Trust
Architect
Maria Enterprises
(real estate development)
William H. Guengerich
Private investor
James E. Jackson
Attorney at Law
Jackson , Abdalah, Rodriguez & Wong
Rex D. Lindsay
Vice Chairman of the Board
Cupertino National Bancorp and
Cupertino National Bank & Trust
Rancher and private investor
Glen McLaughlin
Chairman of the Board
Venture Leasing Associates
(general equipment leasing)
Norman Meltzer
Real estate developer, Retired
Dick J. Randall
Rancher and private investor
Dennis W. Whittaker
President
Whittaker Insurance Agency, Inc.
(personal and commercial
insurance sales)
Officers
C. Donald Allen
President and Chief Executive Officer
Cupertino National Bancorp
Chairman of the Board and
Chief Executive Officer
Cupertino National Bank & Trust
Kenneth D. Brenner
Executive Vice President
Sales and Marketing
Manager, Palo Alto Office
David R. Hood
Executive Vice President
Senior Lending Officer
Hall Palmer
Executive Vice President
Senior Trust Officer
Steven C. Smith
Executive Vice President,
Chief Operating Officer
Cupertino National Bancorp and
Cupertino National Bank & Trust
Colleen Carlsted
Senior Vice President, Manager
Commercial Loans
Raul Galano
Senior Vice President, Manager
Trust Operations
Nord Hastings
Senior Vice President
Chief Credit Officer
Donald McMullen
Senior Vice President
Manager, Commercial Loans
Daniel R. Michener
Senior Vice President, Manager
Venture Lending and Asset Based Lending
Jeffrey Whalen
Senior Vice President,
Business Development
Manager, San Jose Office
Heidi R. Wulfe
Senior Vice President, Chief Financial
Officer, Cupertino National Bancorp
and Cupertino National Bank & Trust
Janice K. Alder
Vice President, Commercial Loans
Ralph W. Barnett
Vice President, Manager
SBA Loans
Julie Bellestri
Vice President, Manager
Emerson Office
Karen L. Blase
Vice President, Manager
MIS
Cathy Colgan
Vice President, Senior Trust Officer
Benner Davenport
Vice President, Trust Officer
Michael David
Vice President
Business Development, Venture Lending
Daniel Duarte
Vice President, Manager Consumer
Lending and Special Assets
Cecilia K. Fu
Vice President, Manager
Construction Loans
Cheryl Howell
Vice President, Senior Trust Officer
Madalyn A. Knittle
Vice President, Manager
Human Resources
Jon Krogstad
Vice President, Venture Lending
Joan Leis
Vice President, Cashier
William McKinley
Vice President, Commercial Loans
Robert Mazza
Vice President, Construction Loans
Ruth Matosich
Vice President, Manager
Note Department
Tammy Okuda
Vice President, Commercial Loans
Stella PeBenito
Vice President, Trust Investment Officer
Robert ProFaca
Vice President, Commercial Loans
Debra Reed
Vice President, Senior Trust Officer
Addy D. Soreco
Vice President, Commercial Loans
Helen Craig Titus
Vice President, Senior Trust Officer
Nannette Walton
Vice President, Asset Based Lending
<PAGE>
Corporate Directory
Stock Market Makers
Cupertino National Bancorp's common stock is traded on the
NASDAQ National Market System under the symbol CUNB. The newspaper abbreviation
is CupNBk.
Marc Arnett
Hoefer & Arnett
San Francisco, California
(800) 346-5544
Ron Lohbeck
Sutro & Co.
San Jose, California
(408) 292-2442
Mark T. Curtis
Smith Barney
Palo Alto, California
(415) 493-5300
Frank Seay
Dean Witter Reynolds, Inc.
San Jose, California
(408) 286-6060
Phillip Hage
Van Kasper & Company
San Francisco, California
(415) 391-5600
Scott Burford or Randall Kinoshita
Burford Capital/GBS Financial
La Crescenta, California
(800) 765-5558
Legal Counsel
Gray, Cary, Ware & Freidenrich
Palo Alto, California
Certified Public Accountants
Coopers & Lybrand, L.L.P.
San Francisco, California
Shareholder Relations
A copy of Cupertino National Bancorp's Form 10K annual
report, filed with the Securities and Exchange Comission, is available without
charge. Requests for Form 10K or other shareholder information should be
directed to: Shelly Binnebose Assistant Corporate Secretary Cupertino National
Bancorp 20230 Stevens Creek Boulevard Cupertino, California 95014 Telephone
(408) 725-2347 FAX (408) 996-0657
Registrar and Transfer Agent
U.S. Stock Transfer Corporation
1745 Gardena Avenue, 2nd Floor
Glendale, California 92104
(818) 502-1404
Corporate and Bank
Headquarters
20230 Stevens Creek Boulevard
Cupertino, California 95014
Telephone (408) 996-1144
FAX (408) 996-0657
San Jose Office
60 South Market Street
San Jose, California 95113
Telephone (408) 286-1595
FAX (408) 971-4233
Palo Alto Square Office
3 Palo Alto Square
Palo Alto, California 94306
Telephone (415) 852-0300
FAX (415) 493-6662
Emerson Office
400 Emerson Street
Palo Alto, California 94301
Telephone (415) 833-1400
FAX (415) 473-1326
Related Financial Services
Small Business Administration
Real Estate Construction
Consumer Lending
Cupertino, California 95014
Telephone (408) 996-1144
FAX (408) 996-0657
Venture Lending
Asset Based Lending
3 Palo Alto Square
Palo Alto, California 94306
Telephone (415) 813-8319
FAX (415) 843-6969
The Trust Group
400 Emerson Street
Palo Alto, California 94301
Telephone (415) 833-1400
FAX (415) 473-1326
[LOGO]
EQUAL HOUSING
LENDER
<PAGE>
[LOGO]
C
N
B
CUPERTINO NATIONAL BANK & TRUST
Corporate and Bank Headquarters
20230 Stevens Creek Boulevard
Cupertino, California 95014
Telephone (408) 996-1144
FAX (408) 996-0657
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND L.L.P.]
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, No. 33-62429 and No. 33-31193) of our report dated January 26, 1996,
on our audits of the consolidated financial statements of Cupertino National
Bancorp and Subsidiary as of December 31, 1995 and 1994 and for the years then
ended which report is incorporated by reference in this Annual Report on Form
10-K.
Coopers & Lybrand L.L.P.
San Francisco, California
March 25, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
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.
DELOITTE & TOUCHE LLP
San Jose, California
March 25, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1995 ANNUAL
REPORT AND IS QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,207
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 12,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,509
<INVESTMENTS-CARRYING> 53,540
<INVESTMENTS-MARKET> 53,970
<LOANS> 163,376
<ALLOWANCE> 2,683
<TOTAL-ASSETS> 259,099
<DEPOSITS> 236,094
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,333
<LONG-TERM> 3,000
17,680
0
<COMMON> 0
<OTHER-SE> 992
<TOTAL-LIABILITIES-AND-EQUITY> 259,099
<INTEREST-LOAN> 16,158
<INTEREST-INVEST> 3,625
<INTEREST-OTHER> 510
<INTEREST-TOTAL> 20,293
<INTEREST-DEPOSIT> 6,510
<INTEREST-EXPENSE> 7,354
<INTEREST-INCOME-NET> 12,939
<LOAN-LOSSES> 681
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,690
<INCOME-PRETAX> 470
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 313
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<YIELD-ACTUAL> 6.12
<LOANS-NON> 2,513
<LOANS-PAST> 830
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,878
<ALLOWANCE-OPEN> 2,918
<CHARGE-OFFS> 1,074
<RECOVERIES> 158
<ALLOWANCE-CLOSE> 2,683
<ALLOWANCE-DOMESTIC> 2,683
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
