-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, K+0uTlAfASHqbJvVRSigXoY+AKm0ifPCV2xHy1gYRi3//QYSpt8OGIu++LsO/apl ru0kKJQ6GAE1GXbY7TIT0w== 0000898430-95-000841.txt : 19950516 0000898430-95-000841.hdr.sgml : 19950516 ACCESSION NUMBER: 0000898430-95-000841 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUPERTINO NATIONAL BANCORP CENTRAL INDEX KEY: 0000757790 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 330060898 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18015 FILM NUMBER: 95538692 BUSINESS ADDRESS: STREET 1: 20230 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961144 10-Q 1 FORM 10-Q DATED 03/31/95 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to . ---------------- ---------------- Commission file number 0-18015 CUPERTINO NATIONAL BANCORP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 33-0060898 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20230 STEVENS CREEK BOULEVARD, CUPERTINO, CALIFORNIA, 95014 (Address of principal executive offices) (Zip Code) (408) 996-1144 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No --- --- Outstanding shares of Common Stock, no par value, as of May 1, 1995: 1,589,511. This report contains a total of 17 pages. 1 CUPERTINO NATIONAL BANCORP INDEX
DESCRIPTION PAGE PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED BALANCE SHEETS AS OF March 31, 1995 AND December 31, 1994... 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED March 31, 1995 AND 1994................ 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED March 31, 1995 AND 1994................ 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.... 7 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS........ 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES...................... 17
2 PART I. FINANCIAL INFORMATION CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
(Unaudited...Dollars in thousands) March 31, December 31, 1995 1994 - ----------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 18,416 $ 9,326 Federal funds sold -- 10,400 - ----------------------------------------------------------------------------------------------------- Cash and cash equivalents 18,416 19,726 Other short-term investments -- -- Investment securities Held to maturity 59,892 59,573 (Market Value $58,900 at March 31, 1995; and $57,257 at December 31, 1994) Other securities 944 933 - ----------------------------------------------------------------------------------------------------- Total investment securities 60,836 60,506 Loans: Commercial 82,194 81,695 Real estate-construction 21,855 18,117 Real estate-term 15,292 13,133 Consumer and other 23,113 21,059 Deferred loan fees, net (743) (847) - ----------------------------------------------------------------------------------------------------- Loans 141,711 133,157 Allowance for credit losses (2,359) (2,918) - ----------------------------------------------------------------------------------------------------- Loans, net 139,352 130,239 Loans held for sale 5,805 5,383 Total loans 145,157 135,622 Premises and equipment, net 1,543 1,434 Accrued interest receivable and other assets 7,309 5,856 - ----------------------------------------------------------------------------------------------------- TOTAL $233,261 $223,144 ===================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, non-interest-bearing $ 52,767 $ 53,880 NOW 7,629 8,331 Money Market Demand Accounts 76,143 73,623 Savings 5,897 5,951 Other time certificates 25,105 19,417 Time certificates, $100 and over 20,959 25,520 - ----------------------------------------------------------------------------------------------------- Total deposits 188,500 186,722 Short-term borrowings 25,220 17,256 Accrued interest payable and other liabilities 1,186 1,129 - ----------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 214,906 205,107 Shareholders' equity: Preferred stock, no par value: 4,000,000 shares authorized; none issued -- -- Common stock, no par value: 6,000,000 shares authorized; shares outstanding: 1,586,748, at March 31, 1995 and 1,557,008 at December 31, 1994 15,113 14,901 Retained earnings 3,242 3,136 - ----------------------------------------------------------------------------------------------------- Total shareholders' equity 18,355 18,037 - ----------------------------------------------------------------------------------------------------- TOTAL $233,261 $223,144 =====================================================================================================
See notes to consolidated financial statements 3 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
(Unaudited...dollars in thousands, except per share data) Three Months Ended March 31, ------------------------ 1995 1994 - ----------------------------------------------------------------------------------------------------- Interest income: Interest on loans $ 3,799 $ 2,943 Interest on investment securities: Taxable 917 335 Non-taxable 18 28 - ----------------------------------------------------------------------------------------------------- Total Investment securities 935 363 Other interest income 29 33 - ----------------------------------------------------------------------------------------------------- Total interest income 4,763 3,339 Interest expense: Interest on deposits 1,365 726 Other interest expense 367 35 - ----------------------------------------------------------------------------------------------------- Total interest expense 1,732 761 - ----------------------------------------------------------------------------------------------------- Net interest income 3,031 2,578 Provision for loan losses 431 235 - ----------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 2,600 2,343 Other income: Gain on sale of mortgage loans 85 425 Other loan fees 20 135 Trust Fees 156 142 Gain on sale of SBA loans 105 111 Depositor service fees 71 69 Other 56 75 - ----------------------------------------------------------------------------------------------------- Total other income 493 957 Operating expenses: Compensation and benefits 1,635 1,520 Occupancy and equipment 396 319 Professional services 204 141 FDIC insurance and regulatory assessments 125 115 Client services 88 107 Other real estate, net 41 34 Other 438 360 - ----------------------------------------------------------------------------------------------------- Total operating expenses 2,927 2,596 - ----------------------------------------------------------------------------------------------------- Income before income tax expense 166 704 Income tax expense 60 254 - ----------------------------------------------------------------------------------------------------- Net income $ 106 $ 450 ===================================================================================================== Net income per common and common equivalent share $0.06 $0.28 - -----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 4 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited...dollars in thousands) Three Months Ended March 31, ----------------------------- 1995 1994 - ----------------------------------------------------------------------------------------- CASH FLOWS-OPERATING ACTIVITIES: Net income $ 106 $ 450 Reconciliation of net income to net cash from operations: Provision for credit losses 431 235 Depreciation and amortization 70 123 Accrued interest receivable and other assets (659) 653 Accrued interest, expenses and other liabilities 57 (245) Deferred loan fees (104) 21 Proceeds from sales of loans held for sale 10,061 44,376 Origination of loans held for resale (10,483) (42,619) Other real estate owned, net 37 25 - ----------------------------------------------------------------------------------------- Operating cash flows, net (484) 3,019 CASH FLOWS - INVESTING ACTIVITIES: Maturities of investment securities and other short-term investments 1,676 5,639 Purchase of investment securities and other short-term investments (2,010) -- Loans, net (9,440) 2,689 Sale of other real estate owned 338 -- Purchase of Life Insurance Policies (1,170) -- Premises and equipment, net (174) (69) - ----------------------------------------------------------------------------------------- Investing cash flows, net (10,780) 8,259 CASH FLOWS - FINANCING ACTIVITIES: Non-interest bearing deposits, net (1,113) (2,599) Interest bearing deposits, net 2,891 (1,826) Short-term borrowings, net 7,964 7,000 Stock issued to employees 212 233 - ----------------------------------------------------------------------------------------- Financing cash flows, net 9,954 2,808 - ----------------------------------------------------------------------------------------- Net increase/ (decrease) in cash and cash equivalents (1,310) 14,086 Cash and cash equivalents at beginning of period 19,726 14,350 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 18,416 $ 28,436 ========================================================================================= CASH FLOWS - SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest on deposits and other borrowings $ 1,765 $ 748 Income taxes -- -- - -----------------------------------------------------------------------------------------
See notes to consolidated financial statements 5 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS March 31, 1995 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Cupertino National Bancorp ("CUNB") and its subsidiary, Cupertino National Bank & Trust. These financial statements reflect, in management's opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of CUNB's financial position and the results of its operations and cash flows for the periods presented. Certain amounts for prior periods have been reclassified to conform to current period presentation. The results for the three months ended March 31, 1995 are not necessarily indicative of the results expected for any subsequent quarter or for the entire year ending December 31, 1995. These financial statements should be read in conjunction with the financial statements for 1994 included in the Annual Report to Shareholders for 1994. 2. ADOPTION OF ACCOUNTING PRONOUNCEMENT The Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, on January 1, 1995. Under this new standard, a loan is considered impaired if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Since most of the Company's loans are collateral dependent, the calculation of the impaired loans is generally based on the fair value of the collateral. The adoption of SFAS No. 114 did not result in any additional provision for credit losses at January 1, 1995. Income recognition on impaired loans conforms to the method the Company uses for income recognition on nonaccrual loans. At March 31, 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $2.7 million, with a corresponding valuation allowance of $.6 million. For the quarter ended March 31, 1995, the average recorded investment in impaired loans was approximately $3.1 million. The Company did not recognize interest on impaired loans during the first quarter of 1995. 3. SHARE AND PER SHARE AMOUNTS Earnings per common and common equivalent share are calculated based upon the weighted average number of shares outstanding during the period, plus equivalent shares representing the effect of dilutive stock options. The number of shares used to compute earnings per share were 1,661,400 and 1,607,100 for the three months ended March 31, 1995 and 1994, respectively. Per share amounts have been adjusted for the 5% stock dividend paid in May 1994. 6 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Analysis Of Operations CUNB reported net income for the first quarter of 1995 of $106,000, or $.06 per common and common equivalent share, a decrease from the $450,000, or $.28 per common equivalent share, of net income reported in the first quarter of last year. Return on average assets annualized for the first quarters of 1995 and 1994 were .19% and .97%, respectively, while return on average common equity annualized was 2.31% for the first quarter of 1995, compared with 11.37% for the first quarter of 1994. The earnings for the first quarter of 1995 were adversely effected by nonrecurring charges totaling $275,000 net of tax, related to the closing of the mortgage banking operations ($170,000), the costs of the cancellation of merger discussions with South Valley National Bank ($70,000), and severance payments to a former executive officer ($35,000). Excluding these charges, first quarter 1995 earnings would have been $381,000, with a return on average assets and average shareholder's equity of .68% and 8.32%, respectively. Non-performing assets (including nonaccrual loans, loans 90 days past due and OREO) totaled $3.0 million at March 31, 1995, a decline of $2.0 million, or 40%, from December 31, 1994. The ratio of non-performing assets to loans plus foreclosed properties was 2.66% at March 31, 1995, down from 3.60% at December 31, 1994 and slightly higher than the 2.33% at March 31, 1994. The Bank's portfolio of classified assets declined to $12.0 million, or 5.37% of total assets, at March 31, 1995, from $13.1 million or 5.87% of total assets at December 31, 1994 and $10.9 million or 5.57% of total assets at March 31, 1994. The reserve for loan losses was $2.4 million at March 31, 1995, compared with $2.9 million at December 31, 1994 and $2.0 million at March 31, 1994. The provision for loan losses was $431,000 for the first quarter of 1995, an increase of $196,000 over the first quarter of 1994. Net charge-offs were $1.0 million for the first quarter of 1995, compared to $544,000 for the first quarter of 1994 (primarily related to a $614,000 charge-off on an unsecured loan). The Bank is aggressively pursuing collection on this debt, however, for regulatory purposes it must be charged-off and when collected, it will be accounted for as a recovery. The ratio of the reserve for loan losses to non- performing assets was 78% at March 31, 1995 compared with 58% at December 1994 and 66% at March 31, 1994. Shareholders' equity increased $318,000 to $18.4 million, or 7.87% of assets, at March 31, 1995 from $18.0 million or 8.08% of assets at December 31, 1994. The decline in the ratio was due to the growth in earning assets in the first quarter of 1995. CUNB's Tier 1 and Total Risk-based capital ratios were 10.1% and 11.4% at March 31, 1995, respectively, compared with 10.8% and 12.1% at December 31, 1994, respectively. The Leverage ratio declined slightly to 8.2% at March 31, 1995 from 8.4% at December 31, 1994, reflecting the increase in average quarterly assets in combination with the earnings for the first quarter of 1995. CUNB's Risk-based capital and Leverage ratios, as well as those of the bank, exceed the ratios for a well-capitalized financial institution as defined in FDICIA under the prompt corrective action regulations. CUNB's common stock closed at $9.00 per share on March 31, 1995, representing 78% of the $11.57 book value per common share, compared with $9.25 per share and 80% of the $11.58 book value per common share at December 31, 1994. 7 NET INTEREST INCOME The following are the Bank's average balance sheet, net interest income and interest rates for the periods presented:
March 31, 1995 December 31, 1994 March 31, 1994 ----------------------------------------------------------------------------------------- Avg. Avg. Avg. Avg. Yield/ Avg. Yield/ Avg. Yield/ ($ in 000's) Bal. Int. Rate Bal. Int. Rate Bal. Int. Rate - ------------------------------------------------------------------------------------------------------------------------------------ Interest earning assets: Loans (2) (4) $146,385 $3,799 10.38% $135,073 $3,513 10.40% $130,528 $2,943 9.02% Investment securities, short term investments and cash equivalents 62,518 964 6.17 65,435 957 5.85 38,079 396 4.16 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets (3b) 208,903 4,763 9.12 200,508 4,470 8.92 168,607 3,339 7.92 Noninterest-earning assets 14,190 14,381 17,648 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $223,093 $214,889 $186,255 ==================================================================================================================================== Interest bearing liabilities: Deposits: NOW and MMDA $ 81,598 775 3.80 $ 83,340 708 3.40 $ 66,018 405 2.45 Savings deposits 6,097 48 3.15 7,382 53 2.86 6,050 33 2.20 Time deposits 46,058 543 4.71 41,906 474 4.53 37,021 288 3.11 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 133,753 1,365 4.08 132,628 1,235 3.73 109,089 726 2.66 Borrowings 24,445 367 6.01 17,445 228 5.23 4,120 35 3.40 - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 158,198 1,732 4.38 150,073 1,463 3.90 113,209 761 2.69 ------ ----- ------ ----- ------ ---- Noninterest-bearing deposits 45,887 45,674 56,058 Other noninterest-bearing liabilities 674 974 425 - ----------------------------------------------------------------------------------------------------------------------------------- Total noninterest-bearing liabilities 46,561 46,648 56,483 Shareholders' equity 18,334 18,168 16,563 - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $223,093 $214,889 $186,255 -------- -------- -------- Net interest income; interest rate spread (3a) $3,031 4.74% $3,007 5.02% $2,578 5.23% ------ ----- ------ ----- ------ ---- Net margin $ 50,705 5.88% $ 50,435 5.95% $ 55,397 6.20% ====================================================================================================================================
1) Average balances are computed using an average of the daily balances during the period. 2) Nonaccrual loans are included in the average balance column; however, only collected interest on such loans is included in the interest column. 3) The net margin on interest-earning assets during the period equals (3a) the difference between the interest income on interest-earning assets and interest expense on interest-bearing liabilities, divided by (3b) average interest-earning assets for the period. 4) Loan fees totaling $186, $193 and $208 are included in loan interest income for the periods ended March 31, 1995, December 31, 1994 and March 31, 1994, respectively.
Three months ended March 31, 1995 Three months ended March 31, 1995 compared with December 31, 1994 compared with March 31, 1994 favorable (unfavorable) favorable (unfavorable) (Dollars in thousands) Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------------------------------------------ Interest income on loans $ 293 $ (7) $ 286 $ 412 $ 444 $ 856 Interest on investment securities, short-term investments and cash equivalents (45) 51 6 377 191 568 - ------------------------------------------------------------------------------------------------------------------- 248 44 292 789 635 1,424 Interest expense on deposits NOW and MMDA 16 (83) (67) (148) (222) (370) Savings deposits 10 (5) 5 (1) (14) (15) Time Deposits (49) (19) (68) (107) (148) (255) - ------------------------------------------------------------------------------------------------------------------- (23) (107) (130) (256) (384) (640) Interest expense on borrowings (105) (34) (139) (305) (27) (332) ----- ----- ----- ----- ----- ------ (128) (141) (269) (561) (411) (972) - ------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income $ 120 $ (97) $ 23 $ 228 $ 224 $ 452 ----- ----- ----- ----- ----- ------
(1) In the analysis, the change due to the volume rate variance has been allocated to volume 8 CUNB's net interest income for the first quarter of 1995 was $3.0 million, which was equal to the fourth quarter of 1994, and $453,000 over the first quarter of 1994. When compared to the fourth quarter of 1994, average earning assets increased by $8.4 million, but the interest rate spread decreased from 5.02% in the fourth quarter of 1994 to 4.74% in the first quarter of 1995. This was mainly due to a rising interest rate environment and increased competition for loans and deposits, which resulted in higher rates being paid on deposit accounts, and more competitive loan rates offered to our loan clients. The average yield on loans for the first quarter of 1995 was also affected to some extent by non-accruing loans, and lower accrued loan fees. It is anticipated that the pressure on interest margins will continue in 1995. When compared to the first quarter of 1994, average earning assets at March 31, 1995, increased by $40.3 million or 23.9% in June to August. This was primarily due to an increase of $32.0 million in the investment securities portfolio undertaken in 1994, when loan demand was relatively flat. Average loans in the first quarter of 1995 increased by $15.9 million (12.1%) over the first quarter of 1994. Average noninterest bearing deposits declined by approximately $10 million from the first quarter of 1994 to the first quarter of 1995. This change in the asset and liability mix, in addition to the aforementioned increasing interest rate environment resulted in a reduction in the net interest spread from 5.23% to 4.74%, and a reduction in the net interest margin from 6.20% to 5.88%. Another factor impacting the net interest spread and margin was the Company's increased investment in held-to-maturity securities, which improved net interest income but reduced the net interest spread and margin. The held- to-maturity securities were purchased in the third and fourth quarter of 1994 to increase the Bank's earning asset base during a period where loan volume was relatively flat. The impact of this on the spread and margin will decline as the loan portfolio increases. The Company provides client services to several of its non-interest bearing demand deposit customers. The amount of credit available to clients is based on a calculation of their average non-interest bearing deposit balance, adjusted for float and reserves, multiplied by an earnings credit rate, generally the 90- day T-Bill rate. The credit can be utilized to pay for services including messenger service, account reconciliation and other similar services. If the services provided exceed the available credit, the customer is charged for the difference. The impact of this on the Company's net interest spread and net yield on interest earning assets would have been as follows:
March 30, December 31, March 30, 1995 1994 1994 - ----------------------------------------------------------------------------- Non-interest bearing demand deposits $45,887 $45,674 $56,058 Client Service expense 88 86 107 Client Service cost annualized .78% .75% .77% Impact on Net Yield - ------------------- Net yield on interest earning assets 5.88% 5.95% 6.20% Impact on client services (.17) (.17) (.34) ------- ------- ------- Adjusted net yield (1) 5.71% 5.78% 5.94% ======= ======= =======
(1) Non-interest bearing liabilities are included in cost of funds calculation to determine adjusted spread. The negative impact on the net yield on interest earning assets is caused by off-setting net interest income by the cost of client service expenses, which reduces the yield on interest earning assets. The cost for 9 client service expense is trending down and reflects the Company's efforts in the management of client service expense. The trend of interest rates in the economy continues to move upward through the first quarter of 1995 and it is anticipated this trend will continue through 1995, as the Federal Reserve attempts to control inflation, while not disrupting the slow and steady economic growth occurring in most areas of the United States economy. If the interest rate trends continue upward at a slow and steady pace, the Bank's net interest margin should remain relatively stable and the credit risk associated with higher borrowing rates should not significantly impact CNB's earnings. INTEREST RATE SENSITIVITY Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at various intervals; one day or immediate, two days to six months; seven to twelve months, one to three years, three to five years, over five years and on a cumulative basis. Allocations of assets and liabilities including noninterest bearing sources of funds, to specific periods are based upon management's assessment of contractual or anticipated repricing characteristics. The differences between the volumes of assets and liabilities are known as sensitivity gaps. The following table shows interest sensitivity gaps for different intervals as of March 31, 1995:
INTEREST SENSITIVITY REPORT CUPERTINO NATIONAL BANK Repricing Periods - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Total Total Day Months Months > 1 Year > 3 Years Rate Non-Rate One 1-6 7-12 to 3 Yrs to 5 Yrs >5 Years Sensitive Sensitive Total - ----------------------------------------------------------------------------------------------------------------------------------- Assets: Cash & due from Banks $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 18,416 $ 18,416 Investment securities -- 8,751 5,550 14,966 8,157 22,518 59,892 944 60,836 Loans 124,756 5,025 694 6,908 3,038 4,433 144,854 3,306 148,160 Other assets -- -- -- -- -- -- -- 8,895 8,895 Loan loss & unearned fees -- -- -- -- -- -- -- (3,102) (3,102) - ----------------------------------------------------------------------------------------------------------------------------------- Total assets 124,756 13,776 6,194 21,874 11,195 26,951 204,746 28,459 233,205 =================================================================================================================================== Liabilities & equity: Deposits Demand -- -- -- -- -- -- -- 53,615 53,615 NOW, MMDA, and Savings 89,937 -- -- -- -- -- 89,937 -- 89,937 Time deposits -- 43,045 3,014 203 25 -- 46,287 -- 46,287 Other borrowed funds 25,219 -- -- -- -- -- 25,219 -- 25,219 Other liabilities -- -- -- -- -- -- -- 1,185 1,185 Shareholder's equity -- ----- -- -- -- -- -- 16,962 16,962 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liability & Equity 115,156 43,045 3,014 203 25 -- 161,443 71,762 $233,205 =================================================================================================================================== Total asset GAP GAP $ 9,600 $(29,269) $ 3,180 $21,672 $11,170 $26,951 $ 43,303 $(43,303) -------- -------- -------- ------- ------- ------- -------- -------- Cumulative GAP $ 9,600 $(19,669) $(16,489) $ 5,183 $16,353 $43,303 $ 43,303 $ 0 -------- -------- -------- ------- ------- ------- -------- -------- Cumulative GAP/Total assets 4.11% -8.43% -7.06% 2.22% 7.01% 18.55% 18.55% 0%
The management of interest rate sensitivity, or interest rate risk management, is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. These repricing characteristics are subject to changes in interest rates either as replacement, repricing or maturity during the life of the instruments. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate risk management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of interest rate movements on net interest income. 10 Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing of both the asset and its supporting liability can remain the same, thus impacting net interest income. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity table above. These prepayments may have significant effects on the Bank's net interest margin. Because of these factors, the interest sensitivity gap report may not provide a complete assessment of the Bank's exposure to changes in interest rates. The Bank currently has a negative cumulative GAP position for periods up to one year, and a positive cumulative GAP thereafter. A positive cumulative GAP position would be expected to provide increased net interest income during periods of rising interest rates and would decrease net income during periods of falling rates. While the Company's current negative one year GAP position would indicate net interest income will decrease during periods of rising interest rates, the actual impact would be an increase to net interest income. The primary reason this occurs is the lagging effect between the repricing characteristics of the Bank's interest earning assets and interest bearing liabilities. In a simulation analysis on the impact of rising interest rates, the rates on the Bank's interest bearing liabilities reprice at a slower pace than its assets, thus providing positive net interest income when interest rates increase. NON-INTEREST INCOME
Quarter Ended - ----------------------------------------------------------------------------------------------------- March 31, December 31, September 30 , June 30, March 31, (in thousands) 1995 1994 1994 1994 1994 - ----------------------------------------------------------------------------------------------------- Gain on sale of mortgage loans $ 85 $ 218 $ 222 $ 128 $ 425 Loan fees 20 78 39 25 135 Trust fees 156 146 163 142 142 Gain on sale of SBA loans 105 343 151 79 111 Depositor service fees 71 64 69 65 69 Other 56 59 57 75 75 - ----------------------------------------------------------------------------------------------------- Total other income $ 493 $ 908 $ 701 $ 514 $ 957 - -----------------------------------------------------------------------------------------------------
Non-interest income was $493,000 for the first quarter of 1995, a decrease of $415,000 from the fourth quarter of 1994, and a decrease of $464,000 from the first quarter of 1994. Gains on the sale of mortgage loans declined throughout 1994 and are one of the primary reasons for the decline in other income in the first quarter of 1995. Gains on the sale of loans decreased $171,000 versus the fourth quarter of 1994 and $346,000 versus the first quarter of 1994. Since the decline in gain on sale of mortgage loans has continued since early 1994, the Bank determined it was in the best interest of the shareholders to close the mortgage operations effective March 31, 1995. Additionally, loan fees have decreased $58,000 versus the fourth quarter of 1995, and $115,000 versus the first quarter of 1994, as loan documentation income has been reduced due to competitive pressure in the Bank's market area. 11 NON-INTEREST EXPENSE
Quarter Ended - ------------------------------------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, (in thousands) 1995 1994 1994 1994 1994 - ------------------------------------------------------------------------------------------------------- Compensation and benefits $1,635 $1,270 $1,397 $1,537 $1,520 Occupancy and equipment 396 372 362 349 319 Professionals services legal settlement 204 557 109 104 141 FDIC insurance and assessments 125 127 127 115 115 Supplies, telephone and postage 128 119 110 120 100 Data processing 33 29 32 30 20 Client services 88 86 86 95 107 Other real estate, net 41 7 9 (1) 34 Other 277 208 276 217 240 - ------------------------------------------------------------------------------------------------------- Total operating expenses $2,927 $2,775 $2,508 $2,566 $2,596 - -------------------------------------------------------------------------------------------------------
Non-interest expenses were $2.9 million for the first quarter of 1995, an increase of $0.2 million from the fourth quarter of 1994, and $0.3 million from the first quarter of 1994. Compensation and benefits expense increased $365,000 versus the fourth quarter of 1994, and $115,000 from the comparable quarter of 1994, $32,000 related to the closing of the mortgage division, as well as $57,000 of severance for one senior Bank officer. The balance of $276,000 versus the fourth quarter of 1994, and $26,000 versus the first quarter of 1994, is attributable to growth in staffing, incentive increases, and merit increases. Professional services expense increased $63,000 compared to the first quarter of 1994 primarily due a one time $120,000 charge related to merger discussions with South Valley National Bank, partially offset by lower legal expense in the first quarter of 1995. When compared to the fourth quarter of 1994, professional services expense decreased $353,000 as legal expenses declined due to non-recurring legal accruals recorded in the fourth quarter of 1994. INCOME TAXES The provision for income taxes for the first quarter of 1995 was $60,000 compared with $254,000 for the same quarter a year ago. CUNB did not require a valuation allowance related to its deferred tax asset. 12 FINANCIAL CONDITION Capitalization The Company's and the Bank's risk-based capital and leverage ratios were as follows:
- ---------------------------------------------------------------------------------------------------------- CAPITALIZATION March 31, December 31, September 30, June 30, March 31, (in thousands) 1995 1994 1994 1994 1994 - ---------------------------------------------------------------------------------------------------------- CONSOLIDATED COMPANY - -------------------- GAAP EQUITY RATIO: GAAP equity $ 18,355 $ 18,037 $ 17,872 $ 17,406 $ 16,902 Total assets 223,261 216,318 216,318 212,296 195,587 Equity to assets ratio 7.87% 8.34% 8.26% 8.20% 8.64% LEVERAGE RATIO: GAAP equity $ 18,355 $ 18,037 $ 17,872 $ 17,406 $ 16,902 Average quarterly assets 223,093 214,889 206,467 185,988 185,133 Leverage capital ratio 8.23% 8.39% 8.66% 9.36% 9.13% Minimum requirement 3.00% 3.00% 3.00% 3.00% 3.00% Well capitalized requirement 5.00% 5.00% 5.00% 5.00% 5.00% RISK-BASED CAPITAL RATIOS: Tier I capital $ 18,355 $ 18,037 $ 17,872 $ 17,406 $ 16,902 Tier II capital 2,268 2,082 2,086 1,951 1,967 - ----------------------------------------------------------------------------------------------------------- Total risk-based capital $ 20,623 $ 20,119 $ 19,958 $ 19,357 $ 18,869 =========================================================================================================== Risk-based assets 181,474 166,592 166,889 161,590 157,379 Tier I risk-based capital ratio 10.11% 10.83% 10.71% 10.77% 10.74% Minimum requirement 4.00% 4.00% 4.00% 4.00% 4.00% Well capitalized requirement 6.00% 6.00% 6.00% 6.00% 6.00% =========================================================================================================== Total Risk-based Capital Ratio 11.36% 12.08% 11.96% 11.98% 11.99% Minimum requirement 8.00% 8.00% 8.00% 8.00% 8.00% Well capitalized requirement 10.00% 10.00% 10.00% 10.00% 10.00% BANK ONLY - --------- Gaap equity ratio: GAAP equity $ 16,962 $ 16,851 $ 16,624 $ 16,168 $ 15,921 Total assets 233,205 222,839 216,312 212,276 195,581 Equity to assets ratio 7.27% 7.56% 7.69% 7.62% 8.14% Leverage ratio: GAAP equity $ 16,962 $ 16,851 $ 16,624 $ 16,168 $ 15,921 Regulatory Accounting Adjustment (65) (65) (57) (48) (80) - ----------------------------------------------------------------------------------------------------------- Regulatory Equity $ 16,897 $ 16,786 $ 16,567 $ 16,120 $ 15,841 - ----------------------------------------------------------------------------------------------------------- Average quarterly assets $222,901 $214,785 $206,367 $185,888 $185,033 Leverage capital ratio 7.58% 7.82% 8.03% 8.67% 8.56% Minimum requirement 3.00% 3.00% 3.00% 3.00% 3.00% Well capitalized requirement 5.00% 5.00% 5.00% 5.00% 5.00% Risk-based Capital Ratios: Tier I capital $ 16,897 $ 16,786 $ 16,567 $ 16,120 $ 15,841 Tier II capital 2,268 2,079 2,084 1,951 1,967 - ----------------------------------------------------------------------------------------------------------- Total risk-based capital $ 19,165 $ 18,865 $ 18,651 $ 18,071 $ 17,808 =========================================================================================================== Risk-based assets $181,417 $166,288 $166,691 $161,571 $157,374 Tier I risk-based capital ratio 9.31% 10.09% 10.01% 10.02% 10.07% Minimum requirement 4.00% 4.00% 4.00% 4.00% 4.00% Well capitalized requirement 6.00% 6.00% 6.00% 6.00% 6.00% Total Risk-based Capital Ratio 10.56% 11.34% 11.19% 11.18% 11.32% Minimum requirement 8.00% 8.00% 8.00% 8.00% 8.00% Well capitalized requirement 10.00% 10.00% 10.00% 10.00% 10.00% - -----------------------------------------------------------------------------------------------------------
13 CUNB's Tier 1 and Total Risk-based capital ratios were 10.10% and 11.35% at March 31, 1995, respectively, compared with 10.83% and 12.08% at December 31, 1994, and 10.74% and 11.99% respectively at March 31, 1994. The leverage ratio, a measure of Tier 1 capital to average quarterly assets, was 8.26% at March 31, 1995 compared to 8.39% at December 31, 1994 and 9.13% at March 31, 1994. To be considered well capitalized as defined under the regulatory framework for prompt corrective action, an institution must have a risk-based Tier 1 capital ratio of 6.0% or greater, a risk-based total capital ratio of 10% or greater and a leverage ratio of 5.0% or greater. CUNB's risk-based capital and leverage ratios have exceeded the ratios for a well-capitalized financial institution under FDICIA's prompt corrective action regulations for all periods presented. The Bank's Tier 1 and Total Risk-based capital ratios were 9.30% and 10.55% at March 31, 1995, respectively, compared with 10.09% and 11.34% at December 31, 1994, and 10.07% and 11.32% respectively at March 31, 1994. The leverage ratio, a measure of Tier 1 capital to average quarterly assets, was 7.61% at March 31, 1995 compared to 7.82% at December 31, 1994 and 8.56% at March 31, 1994. To be considered well capitalized as defined under the regulatory framework for prompt corrective action, an institution must have a risk-based Tier 1 capital ratio of 6.0% or greater, a risk-based total capital ratio of 10% or greater and a leverage ratio of 5.0% or greater. The Bank's risk-based capital and leverage ratios have exceeded the ratios for a well-capitalized financial institution for all periods presented above. The company and the Bank seek to maintain capital ratios at levels that will maintain their status as a well-capitalized financial institution. LIQUIDITY Liquidity is defined as the ability of a company to convert assets in cash or cash equivalents without significant loss, and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Bank's ability to meet the day-to-day cash flow requirements of the Bank's clients who either want to withdraw funds or require funds to meet their credit needs. Through an Asset Liability Management Committee, the Bank actively monitors its commitments to fund loans, as well as the composition and maturity schedule of its loan and deposit portfolios. To manage its liquidity, the Bank maintains $17 million in inter-bank Fed Fund purchase lines, as well as $100 million in institutional deposit or brokered deposit lines, and $60 million in reverse repurchase lines. 14 PROVISION AND RESERVE FOR LOAN LOSSES The following schedule details the activity in the Bank's reserve for loan losses and related ratios for the period involved:
Quarter ended - ----------------------------------------------------------------------------------------------------------- March 31, December 30, September 30, June 30, March 31, (in millions) 1995 1994 1994 1994 1994 - ----------------------------------------------------------------------------------------------------------- Reserve for loan losses at beginning of period $ 2,918 $2,286 $1,951 $1,989 $2,247 Provision charged to operations 431 785 450 150 235 Loans charged off (1,001) (153) (123) (191) (544) Loan recoveries 11 -- 8 3 51 - ----------------------------------------------------------------------------------------------------------- Reserve for loan losses at end of period $ 2,359 $2,918 $2,286 $1,951 $1,989 =========================================================================================================== Ratio of: Reserve for loan losses to loans 1.60% 2.09% 1.66% 1.55% 1.53% Reserve for loan losses to Nonperforming assets 78.66% 58.47% 50.67% 49.82% 65.82% - -----------------------------------------------------------------------------------------------------------
The provision for loan losses was $431,000 in the first quarter of 1995, down substantially from $785,000 in the fourth quarter of 1994, and slightly higher than the $235,000 in the first quarter of 1994. Net charge-offs were $990,000 for the first quarter of 1995, compared to $153,000 in the fourth quarter of 1994, and $493,000 in the first quarter of 1994. On an annualized basis, net charge-offs were 2.72% of average loans in the first quarter of 1995, compared to 0.45% of average loans in the fourth quarter of 1994, and 1.51% of average loans in the first quarter of 1994. Management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the loan loss reserve. The reserve for loan losses was $2.4 million at March 31, 1995, compared with $2.9 million at December 31, 1994, and $2.0 million at March 31, 1994. The ratio of the reserve for loan losses to total loans was 1.60% at March 31, 1995, compared with 2.09% at December 31, 1994, and 1.53% at March 31, 1994. The ratio of the reserve for loan losses to total nonperforming assets, including foreclosed real estate, was 78.66% at March 31, 1995, compared to 58.47% at December 31, 1994 and 65.82% at March 31, 1994. NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE AND FORECLOSED PROPERTIES
------------------------------------------------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, (in millions) 1995 1994 1994 1994 1994 - -------------------------------------------------------------------------------------------------------------------- Non-accruing loans $2,743 $3,244 $3,162 $3,694 $ 705 Restructured loans -- -- -- -- -- Accruing loans past due 90 days or more 256 1,371 762 10 1,662 - -------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 2,999 4,615 3,924 3,704 2,367 OREO 0 375 587 212 593 ------ ------ ------ ------ ------ Total nonperforming assets $2,999 $4,990 $4,511 $3,916 $2,960 ==================================================================================================================== Total nonperforming loans to total assets 1.29% 2.24% 2.08% 1.84% 1.51% ====================================================================================================================
15 Total nonperforming assets were $3.0 million at March 31, 1995, compared with $5.0 million at December 31, 1994, and $3.0 million at March 31, 1994. Nonperforming loans, which includes non-accruing loans, restructured loans, and accruing loans which are past due 90 days or more, were $3.0 million at March 31, 1995, compared with $4.6 million at December 31, 1994, and $2.4 million at March 31, 1994. Accruing loans past due 90 days or more, which are well secured and in the process of collection, were $0.3 million at March 31, 1995, compared with $1.4 million at December 31, 1994, and $1.7 million at March 31, 1994. It is the Bank's policy to discontinue the accrual of interest when the ability of a borrower to repay principal or interest is in doubt, or when a loan is past due 90 days or more, except when, in management's judgment, the loan is well secured and in the process of collection. At March 31, 1994 the Bank had no foreclosed properties, compared with $375,000 at December 31, 1994, and $593,000 at March 31, 1994. The decrease in foreclosed property reflects management's efforts to actively market and dispose of any properties so acquired. The Bank has an active credit administration function which includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. Senior management, and an internal asset review committee actively review problem loans on a regular basis. EFFECTS OF INFLATION The impact of inflation on a financial institution differs significantly from that exerted on industrial concerns, primarily because its assets and liabilities consist largely of monetary items. The most direct effect of inflation on a financial institution is fluctuation in interest rates. However, net interest income is affected by the spread between interest rates received on assets and those paid on interest bearing liabilities, rather than the absolute level of interest rates. Additionally, there may be some upward pressure on the Company's operating expenses, such as increases in occupancy expenses based on consumer price indices. In the opinion of management, inflation has not had material effect on the operating results of the Company. PART II. OTHER INFORMATION ITEM 1 - Legal Proceedings The Company has previously reported on pending litigation brought against the Bank by Sumitomo Bank ("Sumitomo"), as trustee for the California Dental Guild Mortgage Fund II. The complaint seeks monetary damages of $2.2 million. While no trial date is currently scheduled, discovery for this litigation is substantially complete, and the Bank and Sumitomo have recently been engaged in active settlement negotiations. There is no assurance that a settlement will be reached, and no assurance that if the matter goes to trial, what the outcome will be as litigation is subject to inherent uncertainties, especially in cases such as this where issues of trustee standards of care may be decided by a lay jury. The Bank believes, based on advice of counsel, that it is probable that insurance coverage for this lawsuit is available to the Bank under both a $2 million director and officer liability policy, as well as a $1 million professional liability policy. The Bank has recently initiated litigation against the insurance carriers in pursuit of such coverage, and against the agent from whom the Bank obtained the policies. 16 If a settlement were to be reached, the Company cannot presently predict what the after tax cost of settlement will be, nor whether or to what extent any amount paid in settlement will be recovered under the insurance policies. The Company believes, however, based on the advice of its counsel, that an acceptable settlement can be negotiated which would be within the aggregate policy limits, and which should be substantially and perhaps completely recoverable under the insurance policies. The Company therefore believes that the Bank's litigation reserves, together with the insurance coverage, should be adequate to cover a settlement without causing a material adverse impact on the financial condition of the Bank. However, because of the advanced stage of the Sumitomo litigation relative to the insurance coverage litigation recently commenced by the Bank, a settlement of the former may be reached before resolution of the latter; consequently, the impact of any settlement on the Bank's financial statements may be greater at the outset than it actually will be once the insurance coverage issues are resolved. ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K for the quarter covered by this report - None SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. CUPERTINO NATIONAL BANCORP (REGISTRANT) s/ STEVEN C. SMITH - --------------------------- STEVEN C. SMITH EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER & ACTING CHIEF OPERATING OFFICER DATE: MAY 11, 1995 17 EX-27 2 FDS/10-Q DATED 03/31/95
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR PERIOD ENDED 3/31/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-1995 JAN-01-1995 MAR-31-1995 18,416 0 0 0 0 59,892 58,900 145,157 2,359 233,261 188,500 25,220 1,186 0 15,113 0 0 3,242 233,261 3,799 935 29 4,763 1,365 1,732 3,031 431 0 2,927 166 106 0 0 106 0.06 0.06 .058 2,743 256 0 0 2,918 1,001 11 2,359 2,359 0 0
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