-----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, hUFnGkAnPYlkv9uxrq6cIR6G041LTFhbANMSs4BSIf6dZdXL/IuLGI0EtUYsuxrG BmNdOHJe/mzMuoR1nbOHOw== 0000898430-95-001489.txt : 19950814 0000898430-95-001489.hdr.sgml : 19950814 ACCESSION NUMBER: 0000898430-95-001489 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 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: 95560929 BUSINESS ADDRESS: STREET 1: 20230 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961144 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1995 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- AND EXCHANGE ACT OF 1934 For the transition period from to . ------------------ ---------------- Commission file number 0-18015 CUPERTINO NATIONAL BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 33-0060898 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20230 STEVENS CREEK BOULEVARD, CUPERTINO, CALIFORNIA, 95014 (Address of principal executive offices) (Zip Code) (408) 996-1144 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No --- --- Outstanding shares of Common Stock, no par value, as of July 19, 1995: 1,602,100. This report contains a total of 18 pages. 1 of 18 CUPERTINO NATIONAL BANCORP INDEX
DESCRIPTION PAGE PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED BALANCE SHEETS AS OF June 30, 1995 AND December 31, 1994................ 3 CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS AND SIX MONTHS ENDED June 30, 1995 AND 1994............................. 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED June 30, 1995 AND 1994............................. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 7 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.................................. 17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................... 18 SIGNATURES......................................... 18
2 of 18 PART I. FINANCIAL INFORMATION CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited...Dollars in thousands)
June 30, December 31, 1995 1994 - -------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 12,730 $ 9,326 Federal funds sold 19,500 10,400 - -------------------------------------------------------------------------------------- Cash and cash equivalents 32,230 19,726 Other short-term investments -- -- Investment securities Held to maturity 55,362 59,573 (Market value $55,631 at June 30, 1995; $57,257 at December 31, 1994) Available for sale 2,495 -- (Cost 2,491 at June 30, 1995) Other securities 951 933 - -------------------------------------------------------------------------------------- Total investment securities 58,808 60,506 Loans: Commercial 79,100 81,695 Real estate-construction 21,825 18,117 Real estate-term 18,349 13,133 Consumer and other 26,150 21,059 Deferred loan fees and discounts (600) (847) - -------------------------------------------------------------------------------------- Loans 144,824 133,157 Allowance for credit losses (2,454) (2,918) - -------------------------------------------------------------------------------------- Loans, net 142,370 130,622 Loans held for sale -- 5,383 - -------------------------------------------------------------------------------------- Total loans 142,370 135,622 Premises and equipment, net 1,539 1,434 Accrued interest receivable and other assets 8,632 5,856 - -------------------------------------------------------------------------------------- TOTAL $243,579 $223,144 ====================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest-bearing $ 61,086 $ 53,880 NOW 9,230 8,331 Money Market Demand Accounts 84,360 73,623 Savings 4,630 5,951 Other time certificates 36,581 19,417 Time certificates, $100 and over 19,264 25,520 - -------------------------------------------------------------------------------------- Total deposits 215,151 186,722 Short-term borrowings 8,654 17,256 Accrued interest payable and other liabilities 2,152 1,129 - -------------------------------------------------------------------------------------- TOTAL LIABILITIES 225,957 205,107 Shareholders' equity: Preferred stock, no par value: 4,000,000 shares authorized; none issued -- -- Common stock, no par value: 6,000,000 shares authorized; shares outstanding: 1,599,928 at June 30, 1995 and 1,557,008 at December 31, 1994 15,190 14,901 Retained earnings 2,432 3,136 - -------------------------------------------------------------------------------------- Total shareholders' equity 17,622 18,037 - -------------------------------------------------------------------------------------- TOTAL $243,579 $223,144 ======================================================================================
See notes to consolidated financial statements 3 of 18 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited...dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, --------------------- ---------------------- 1995 1994 1995 1994 - ------------------------------------------------------------------------------------------------------ Interest income: Interest on loans $ 4,021 $ 2,920 $7,820 $ 5,863 Interest on investment securities: Taxable 920 399 1,837 734 Non-taxable 18 28 36 56 - ------------------------------------------------------------------------------------------------------ Total Investment securities 938 427 1,873 790 Other interest income 108 80 137 113 - ------------------------------------------------------------------------------------------------------ Total interest income 5,067 3,427 9,830 6,766 Interest expense: Interest on deposits 1,625 840 2,991 1,566 Other interest expense 288 13 655 48 - ------------------------------------------------------------------------------------------------------ Total interest expense 1,913 853 3,646 1,614 - ------------------------------------------------------------------------------------------------------ Net interest income 3,154 2,574 6,184 5,152 Provision for loan losses 85 150 516 385 - ------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 3,069 2,424 5,668 4,767 Other income: Gain on sale of mortgage loans 51 128 137 553 Other loan fees 29 25 48 160 Trust Fees 135 142 291 284 Gain on sale of SBA loans 45 79 150 190 Depositor service fees 67 65 138 134 Other 80 75 137 150 - ------------------------------------------------------------------------------------------------------ Total other income 407 514 901 1,471 Operating expenses: Compensation and benefits 1,600 1,537 3,236 3,057 Occupancy and equipment 392 349 788 668 Legal settlement & costs 1,700 -- 1,700 -- Professional services 230 104 435 245 FDIC insurance and regulatory assessments 135 115 260 231 Client services 91 95 179 202 Other real estate, net (7) (1) 34 33 Other 459 367 896 726 - ------------------------------------------------------------------------------------------------------ Total operating expenses 4,600 2,566 7,528 5,162 - ------------------------------------------------------------------------------------------------------ Income before income tax expense (1,124) 372 (959) 1,076 Income tax (benefit) expense (470) 126 (411) 380 - ------------------------------------------------------------------------------------------------------ Net (loss) income $ (654) $ 246 $ (548) $ 696 - ------------------------------------------------------------------------------------------------------ Net (loss) income per common and common equivalent share $(.39) $.15 $(.33) $.43 - ------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 4 of 18 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited...dollars in thousands)
Six Months Ended June 30, ---------------------------- 1995 1994 - ----------------------------------------------------------------------------------------- CASH FLOWS-OPERATING ACTIVITIES: Net income $ (548) $ 696 Reconciliation of net income to net cash from operations: Provision for credit losses 516 385 Depreciation and amortization 293 266 Accrued interest receivable and other assets (894) 122 Accrued interest, expenses and other liabilities 1,023 243 Net change in deferred loan fees (247) 63 Proceeds from sales of loans held for sale 16,364 66,339 Origination of loans held for resale (10,981) (61,951) Other real estate owned, net 17 25 - ----------------------------------------------------------------------------------------- Operating cash flows, net 5,543 6,188 CASH FLOWS - INVESTING ACTIVITIES: Maturities of investment securities Held-to-maturity 6,237 5,649 Available-for-sale -- -- Purchase of investment securities Held-to-maturity (2,045) (20,972) Available-for-sale (2,495) -- Net change in loans (12,400) 2,850 Sale of other real estate owned 358 381 Purchase of life insurance policies (2,257) -- Purchase of premises and equipment (397) (257) Other net 5 45 - ----------------------------------------------------------------------------------------- Investing cash flows, net (12,994) (12,304) CASH FLOWS - FINANCING ACTIVITIES: Non-interest bearing deposits, net 7,206 (1,975) Interest bearing deposits, net 21,223 14,177 Short-term borrowings, net (8,603) 6,090 Stock issued to employees 289 361 Cash dividends (160) (3) - ----------------------------------------------------------------------------------------- Financing cash flows, net 19,955 18,650 - ----------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 12,504 12,534 Cash and cash equivalents at beginning of period 19,726 14,350 - ----------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 32,230 $ 26,884 =========================================================================================
See notes to consolidated financial statements 5 of 18 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS June 30, 1995 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Cupertino National Bancorp ("CUNB" or the "Company") and its subsidiary, Cupertino National Bank & Trust (the "Bank"). These financial statements reflect, in management's opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of CUNB's financial position and the results of its operations and cash flows for the periods presented. Certain amounts for prior periods have been reclassified to conform to current period presentation. The results for the three months ended June 30, 1995 are not necessarily indicative of the results expected for any subsequent quarter or for the entire year ending December 31, 1995. These financial statements should be read in conjunction with the financial statements for 1994 included in the Annual Report to Shareholders for 1994. 2. ADOPTION OF ACCOUNTING PRONOUNCEMENT The Company adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, on January 1, 1995. Under this new standard, a loan is considered impaired if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Since most of the Company's loans are collateral dependent, the calculation of the impaired loans is generally based on the fair value of the collateral. The adoption of SFAS No. 114 did not result in any additional provision for credit losses at January 1, 1995. Income recognition on impaired loans conforms to the method the Company uses for income recognition on nonaccrual loans. At June 30, 1995, the recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $2.4 million, with a corresponding valuation allowance of $547,000. For the quarter and six months ended June 30, 1995, the average recorded investment in impaired loans was approximately $2.5 million and $2.9 million, respectively. The Company did not recognize interest on impaired loans during the second quarter or the six months ended June 30, 1995. 3. SHARE AND PER SHARE AMOUNTS Earnings per common and common equivalent share are calculated based upon the weighted average number of shares outstanding during the period, plus equivalent shares representing the effect of dilutive stock options. The number of shares used to compute earnings per share were 1,687,100 and 1,640,000 for the three months ended June 30, 1995 and 1994, respectively and 1,674,000 and 1,628,600 for the six months ended June 30, 1995 and 1994, respectively. 4. CONTINGENCIES In July 1995, the Company settled a lawsuit for $1,020,000 (net of tax) brought against the Bank by the successor trustee of California Dental Guild Mortgage Fund II. The Company believes that it is highly probable that insurance coverage for a significant portion of this settlement is available under its director and officer's liability policy and a professional liability insurance policy, as well as and the errors and omissions policy of the insurance agent which sold the Company these policies. The Company's insurance company has denied the Company's claim for coverage under these policies, and the Company has initiated litigation against the insurance company as well as the agent from whom the Company obtained such policies. However, due to the uncertainty associated with recovery under its claims, the Company has reflected the $1,020,000 expense (net of tax) of the legal settlement in second quarter 1995 earnings. 6 of 18 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS CUNB reported a net loss for the second quarter of 1995 of $(654,000), or $(.39) per common and common equivalent share, compared to net income of $246,000, or $.15 per common and common equivalent share, reported in the second quarter of last year. The net loss in the recent quarter was largely due to the settlement of litigation that was pending against CUNB, as discussed below. Return on average assets annualized for the second quarters of 1995 and 1994 were (1.14%) and .53%, respectively, while return on average common equity annualized was (14.26%) for the second quarter of 1995, compared with 5.70% for the second quarter of 1994. The earnings for the second quarter of 1995 were adversely effected by an accrual of $1,020,000 (net of tax) for the settlement of trust department litigation with Sumitomo Bank, which was acting as successor trustee for the California Dental Guild Mortgage Fund II. The Company believes, based on the advice of counsel, that it is highly probable that insurance coverage for a significant portion of the settlement amount is available under its director and officer insurance policy and its professional liability insurance policy, as well as the errors and omissions policy of its insurance agent. The Company's insurance company has denied the Company's claim for coverage under these policies, and the Company has initiated litigation against the insurance companies who issued the policies as well as the agent from whom the Company obtained such policies. For a more complete discussion see Part II Item 1 - Legal Proceedings. Excluding this charge, second quarter 1995 earnings would have been $366,000, with a return on average assets and return on average shareholder's equity of .64% and 7.98%, respectively. For the six months ended June 30, 1995, the Company posted a net loss of $(548,000) or $(.33) per common and equivalent share, compared to net income of $696,000 or $.43 per common and equivalent share for the same period in 1994. The annualized return on average assets and return on average equity for the first six months of 1995 were (0.49%) and (5.98%), respectively, compared to 0.75% and 8.28% for the comparable period in 1994. Net income of $106,000 for the first quarter of 1995 included approximately $275,000 in non-recurring expenses (net of tax) related to the closing of the Bank's mortgage operations, the costs incurred related to canceled merger discussions, and severance payments to a former executive officer. Excluding the legal settlement charge and related costs, as well as the non-recurring charges from the first quarter, the net income for the six months ended June 30, 1995 would have been $747,000, with an adjusted return on average assets and return on average shareholder's equity of 0.66% and 8.15%, respectively. Non-performing assets (including nonaccrual loans, loans 90 days past due and OREO) totaled $3.6 million at June 30, 1995, a decrease of $1.4 million from December 31, 1994, and a decrease of $0.3 million from June 30, 1994. The ratio of non-performing assets to loans plus foreclosed properties was 2.48% at June 30, 1995, down from 3.60% at December 31, 1994 and 3.11% at June 30, 1995. The Bank's portfolio of classified assets declined to $8.7 million, or 3.57% of total assets, at June 30, 1995, from $13.1 million or 5.86% of total assets at December 31, 1994 and $10.3 million or 4.88% of total assets at June 30, 1994. The reserve for loan losses was $2.5 million at June 30, 1995, compared with $2.9 million at December 31, 1994 and $2.0 million at June 30, 1994. The provision for loan losses was $85,000 for the second quarter of 1995, a substantial decrease from the $431,000 recorded in the first quarter of 1995, and $150,000 recorded in the second quarter of 1994. The reduced provision for the second quarter was reflective of improved credit quality, as the Company experienced net recoveries of $10,000 versus net charge-offs of $990,000 in the first quarter (primarily related to a $614,000 charge-off on an unsecured loan). For the first six months of 1995, the provision for loan losses was $516,000, an increase of $131,000 over the first half of 1994. Net charge-offs were $980,000 for the first six months of 1995, compared to $681,000 for the first half of 1994. The ratio of the reserve for loan losses to 7 of 18 non-performing assets was 68.3% at June 30, 1995 compared with 58.5% at December 31, 1994 and 49.8% at June 30, 1994. Shareholders' equity decreased $733,000 to $17.6 million, or 7.23% of assets, at June 30, 1995 from $18.0 million or 8.08% of assets at December 31, 1994. The decline in the ratio was due to the growth in assets in the fist six months of 1995, coupled with the reduction in equity due primarily to the legal settlement charge recorded in the second quarter of 1995, and a dividend payment made to shareholders during the quarter. CUNB's Tier 1 and Total Risk-based capital ratios were 9.6% and 10.9% at June 30, 1995, respectively, compared with 10.8% and 12.1% at December 31, 1994, respectively. The Leverage ratio declined to 7.6% at June 30, 1995 from 8.4% at December 31, 1995. These declines reflect the growth in assets in combination with the legal settlement charge and dividend payment during the second quarter of 1995. At June 30, 1995, CUNB's Risk-based capital and Leverage ratios, as well as those of the Bank, exceeded the ratios for a well-capitalized financial institution as defined in FDICIA under the prompt corrective action regulations. The Company will seek to maintain its well capitalized position to ensure flexibility in its operations. CUNB's common stock closed at $9.375 per share on June 30, 1995, representing 85% of the $11.02 book value per common share, compared with $9.00 per share and 78% of the $11.57 book value per common share at March 31, 1995. NET INTEREST INCOME The following are the Company's average balance sheet, net interest income and interest rates for the periods presented:
Three Months Ended Three Months Ended Three Months Ended June 30, 1995 March 31, 1995 June 30, 1994 ----------------------------- -------------------------------- ----------------------------- Avg. Avg. Avg. Avg. Yield/ Avg. Yield/ Avg. Yield/ ($ in 000's) Bal. Int. Rate Bal. Int. Rate Bal. Int. Rate - ------------------------------------------------------------------------------------------------------------------------------------ Interest earning assets: Loans (2) (4) $145,249 $ 4,021 11.07% $141,558 $ 3,799 10.73% $125,566 $2,925 9.32% Investment securities, short term investments and cash equivalents 67,948 1,046 6.16% 63,092 964 6.11% 45,359 502 4.43% - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets (3b) 213,197 5,067 9.51% 204,650 4,763 9.31% 170,926 3,427 8.02% Noninterest-earning assets 17,068 13,452 16,046 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $230,265 $218,102 $186,972 3,427 ==================================================================================================================================== Interest bearing liabilities: Deposits: NOW and MMDA $ 88,998 $ 903 4.06% $ 80,473 $ 775 3.85% $ 73,393 $ 489 2.67% Savings deposits 4,759 42 3.51% 5,741 48 3.34% 6,074 37 2.45% Time deposits 49,188 680 5.53% 42,234 543 5.14% 36,807 314 3.41% - ------------------------------------------------------------------------------------------------------------------------------------ Total interest bearing deposits 142,945 1,625 4.55% 128,448 1,366 4.25% 116,274 840 2.89% Borrowings 18,414 288 6.26% 24,486 367 6.00% 1,155 13 4.36% - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 161,359 1,913 4.74% 152,934 1,733 4.53% 117,429 853 2.91% - ------------------------------------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits 49,365 46,060 52,562 Other noninterest-bearing liabilities 1,202 773 50 - ------------------------------------------------------------------------------------------------------------------------------------ Total noninterest-bearing liabilities 50,567 46,833 52,612 Shareholders' equity 18,339 18,335 16,931 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $230,265 $218,102 $186,972 ======== ======== ======== Net interest income; interest rate spread (3a) $ 3,154 4.76% $ 3,031 4.78% $2,574 5.11% ======== ======== ====== Net margin $ 51,838 5.93% $ 51,716 6.01% $ 54,120 6.04% ====================================================================================================================================
1) Average balances are computed using an average of the daily balances during the period. 2) Nonaccrual loans are included in the average balance column; however, only collected interest on such loans is included in the interest column. 3) The net margin on interest-earning assets during the period equals (3a) the difference between the interest income on interest-earning assets and interest expense on interest-bearing liabilities, divided by (3b) average interest-earning assets for the period. 4) Loan fees totaling $209, $186, and $211 are included in loan interest income for the periods ended June 30, 1995, March 31, 1995 and June 30, 1994, respectively. 8 of 18
Three months ended June 30, 1995 Three months ended June 30, 1995 compared with March 31, 1995 compared with June 30, 1994 favorable (unfavorable) favorable (unfavorable) (Dollars in thousands) Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------------------------------------ Interest income on loans $ 102 $ 120 $ 222 $ 544 $ 552 $ 1,096 Interest on investment securities, short-term investments and cash equivalents 75 7 82 348 196 544 - ------------------------------------------------------------------------------------------------------------ 177 127 304 892 748 1,640 Interest expense on deposits NOW and MMDA (86) (42) (128) (158) (256) (414) Savings deposits 8 (2) 6 11 (16) (5) Time Deposits (96) (42) (138) (171) (195) (366) - ------------------------------------------------------------------------------------------------------------ (174) (86) (260) (318) (467) (785) Interest expense on borrowings 95 (16) (79) (270) (5) (275) ----- ----- ----- ----- ----- ------- (79) (102) (181) (588) (472) (1,060) - ------------------------------------------------------------------------------------------------------------ Increase (decrease) in net interest income $ 98 $ 25 $ 123 $ 304 $ 276 $ 580 ===== ===== ===== ===== ===== =======
(1) In the analysis, the change due to the volume rate variance has been allocated to volume CUNB's net interest income for the second quarter of 1995 was $3.2 million, a $123,000 increase over the first quarter of 1995. When compared to the first quarter of 1995, average earning assets increased by $8.5 million, while the net yield on earning assets decreased slightly from 6.01% in the first quarter of 1995 to 5.93% in the second quarter of 1995. This was mainly due to a rising interest rate environment and increased competition for loans and deposits, which resulted in higher rates being paid on deposit accounts, and more competitive loan rates offered to our loan clients. The average yield on loans for the second quarter of 1995 was also affected to some extent by non-accruing loans, and lower accrued loan fees. It is anticipated that the pressure on loan rates may continue in 1995. However, with the temporary decline of interest rates implemented by the Federal Reserve, the pressure on deposit rates may be reduced. Compared to the second quarter of 1994, average earning assets during the second quarter of 1995 increased by $42.3 million. This was due to an increase in the investment securities portfolio undertaken in 1994, when loan demand was relatively flat, coupled with increased loan demand in the latter part of 1994 and the first half of 1995. Average loans in the second quarter of 1995 increased by $19.6 million (15%) over the second quarter of 1994. The Company's mix of funding sources shifted toward higher cost short term borrowings in the latter half of 1994 to finance the increased investment in the securities portfolio. This increased net interest income but reduced the net interest spread and margin. 9 of 18 The following are the Company's average balance sheet, net interest income and interest rates for the periods presented:
Six Months Ended Six Months Ended June 30, 1995 June 30, 1994 -------------------------------- ---------------------------- Avg. Avg. Avg. Yield/ Avg. Yield/ ($ in 000's) Bal. Int. Rate Bal. Int. Rate - ---------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans (2) (4) $143,414 $7,820 10.91% $128,033 $5,868 9.17% Investment securities, short term investments and cash equivalents 65,533 2,010 6.13% 41,739 898 4.30% - ---------------------------------------------------------------------------------------------------------------------- Total interest-earning assets (3b) 208,947 9,830 9.41% 169,772 6,766 7.97% Noninterest-earning assets 15,270 -- 16,796 -- - ---------------------------------------------------------------------------------------------------------------------- Total assets $224,217 $9,830 $186,568 6,766 ====================================================================================================================== Interest bearing liabilities: Deposits: NOW and MMDA $ 84,665 $1,678 3.96% $ 69,726 $ 894 2.56% Savings deposits 5,247 90 3.42% 6,062 70 2.32% Time deposits 45,731 1,223 5.35% 36,913 602 3.26% - ---------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 135,643 2,991 4.41% 112,701 1,566 2.78% Borrowings 21,433 655 6.11% 2,316 48 4.11% - ---------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 157,076 3,646 4.64% 115,017 1,614 2.81% - ---------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 47,722 54,301 Other noninterest-bearing liabilities 1,082 438 - ---------------------------------------------------------------------------------------------------------------------- Total noninterest-bearing liabilities 48,804 54,739 Shareholders' equity 18,339 16,813 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $224,217 $186,568 ======== ======== Net interest income; interest rate spread (3a) $6,184 4.77% $5,152 5.16% ====== ====== Net margin $ 51,871 5.97% $ 54,755 6.12% =====================================================================================================================
1) Average balances are computed using an average of the daily balances during the period. 2) Nonaccrual loans are included in the average balance column; however, only collected interest on such loans is included in the interest column. 3) The net margin on interest-earning assets during the period equals (3a) the difference between the interest income on interest-earning assets and interest expense on interest-bearing liabilities, divided by (3b) average interest-earning assets for the period. 4) Loan fees totaling $395 and $441 are included in loan interest income for the periods ended June 30, 1995, and June 30, 1994, respectively.
Six months ended June 30, 1995 compared with June 30, 1994 favorable (unfavorable) (Dollars in thousands) Volume Rate Net - ---------------------------------------------------------------------------- Interest income on loans $ 1,395 $ 557 $ 1,952 Interest on investment securities, short-term investments and cash equivalents 921 191 1,112 - ---------------------------------------------------------------------------- 2,316 748 3,064 Interest expense on deposits NOW and MMDA (540) (244) (784) Savings deposits 2 (17) (19) Time Deposits (428) (193) (621) - ---------------------------------------------------------------------------- (970) (454) (1,424) Interest expense on borrowings (595) (12) (607) ------- ----- ------- (1,565) (466) (2,031) - ---------------------------------------------------------------------------- Increase (decrease) in net interest income $ 726 $ 305 $ 1,033 ======= ===== =======
(1) In the analysis, the change due to the volume rate variance has been allocated to volume 10 of 18 For the six month period ended June 30, 1995, the company experienced an increase in net interest income of $1.0 million when compared to the comparable period of 1994. This increase was mainly due to the increased volume in the lending and securities portfolios, and higher interest rates received on these assets, partly offset by higher interest expense rates on increased volumes of deposits and other short term borrowings. For the six months ended June 30, 1995, the Company's net interest margin of 5.97% reflected a decline from 6.12% for the same period in 1994. This again was due to the shift in the Company's asset and liability mix as discussed above, as well as increased competition for deposits and loans. The trend of interest rates in the economy has reversed, and it appears that interest rates will level off or possibly decline slightly for the remainder of 1995, as the Federal Reserve attempts to control inflation, but achieve a "soft landing." If the interest rates remain relatively flat, the Bank's net interest margin should remain relatively stable. The Company provides client services to several of its non-interest bearing demand deposit customers. The amount of credit available to clients is based on a calculation of their average non-interest bearing deposit balance, adjusted for float and reserves, multiplied by an earnings credit rate, generally the 90- day T-Bill rate. The credit can be utilized to pay for services including messenger service, account reconciliation and other similar services. If the cost of the services provided exceeds the available credit, the customer is charged for the difference. The impact of this expense on the Company's net interest spread and net yield on interest earning assets was as follows:
Three Months Ended Six Months Ended -------------------- -------------------- June 30, June 30, June 30, June 30, 1995 1994 1995 1994 - -------------------------------------------------------------------------------------- Non-interest bearing demand deposits $49,365 $52,562 $47,722 $54,301 Client Service expense 91 95 161 202 Client Service cost annualized .74% .72% .67% .74% Impact on Net Yield - ------------------- Net yield on interest earning assets 5.93% 6.04% 5.97% 6.12% Impact of client services (.17) (.16) (.16) (.24) ---- ------- ------- ------- Adjusted net yield (1) 5.76% 5.88% 5.81% 5.88% ==== ======= ======= =======
(1) Non-interest bearing liabilities are included in cost of funds calculation to determine adjusted spread. The negative impact on the net yield on interest earning assets is caused by off-setting net interest income by the cost of client service expenses, which reduces the yield on interest earning assets. The cost for client service expense has been relatively stable, and reflects the Company's efforts in the management of client service expense. INTEREST RATE SENSITIVITY Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at intervals of (1) one day or immediate, (2) two days to six months, (3) seven to twelve months, (4) one to three years, (5) three to five years, (6) over five years and (7) on a cumulative basis. Allocations of assets and liabilities, including noninterest-bearing sources of funds, to specific periods are based upon management's assessment of contractual or anticipated repricing characteristics. The 11 of 18 differences between the volumes of assets and liabilities are known as "sensitivity gaps." The following table shows interest sensitivity gaps for different intervals at June 30, 1995: INTEREST SENSITIVITY REPORT
CUPERTINO NATIONAL BANK & TRUST Repricing Periods ================================================================================================================================= Greater Greater (Dollars in thousands) than than Greater Total Total Day Months Months 1 Year 3 Years than Rate Non-Rate One 1-6 7-12 to 3 Yrs to 5 Yrs 5 Years Sensitive Sensitive Total ================================================================================================================================= Assets: Cash & due from Banks $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 12,730 $ 12,730 Short term investments 19,500 -- -- -- -- -- 19,500 -- 19,500 Investment securities -- 10,459 8,446 9,999 6,606 22,343 57,853 951 58,804 Loans 123,800 1,407 2,361 6,046 3,338 4,839 141,791 3,432 145,223 Other assets -- -- -- -- -- -- -- (3,054) (3,054) Loan loss & unearned fees -- -- -- -- -- -- -- 10,645 10,645 - --------------------------------------------------------------------------------------------------------------------------------- Total assets 143,300 11,866 10,807 16,045 9,944 27,182 219,144 24,704 243,848 ================================================================================================================================= Liabilities & equity: Deposits Demand -- -- -- -- -- -- -- 61,752 -- NOW, MMDA, and Savings 98,849 -- -- -- -- -- 98,849 -- 98,849 Time deposits 41,411 8,879 5,273 25 123 55,711 -- 55,711 Other borrowed funds 8,654 -- -- -- -- -- 8,654 -- 8,654 Other liabilities -- -- -- -- -- -- -- 2,150 2,150 Shareholder's equity -- -- -- -- -- -- -- 16,732 16,732 - --------------------------------------------------------------------------------------------------------------------------------- Total Liability & Equity 107,503 41,411 8,879 5,273 25 123 163,214 80,634 $243,848 ================================================================================================================================= Total asset GAP GAP $ 35,797 $(29,545) $ 1,928 $10,772 $ 9,919 $27,059 $ 55,930 $(55,930) -- Cumulative GAP $ 35,797 $ 6,252 $ 8,180 $18,952 $28,871 $55,930 $ 55,930 $ 0 -- Cumulative GAP/Total assets 14.68% 2.56% 3.35% 7.77% 11.84% 22.94% 22.94% 0% --
The management of interest rate sensitivity, or interest rate risk management, is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. These repricing characteristics are subject to changes in interest rates either as replacement, repricing or maturity during the life of the instruments. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate risk management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby reducing the effect of interest rate movements on net interest income. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing of both the asset and its supporting liability can remain the same, thus impacting net interest income. This characteristic is referred to as a "basis risk" and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity table above. These prepayments may have significant effects on the Bank's net interest margin. Because of these factors, the interest sensitivity gap report may not provide a complete assessment of the Bank's exposure to changes in interest rates. 12 of 18
NON-INTEREST INCOME Quarter Ended - -------------------------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (in thousands) 1995 1995 1994 1994 1994 - -------------------------------------------------------------------------------------------------- Gain on sale of mortgage loans $ 51 $ 85 $ 218 $ 222 $ 128 Loan fees 22 20 78 39 25 Trust fees 135 156 146 163 142 Gain on sale of SBA loans 45 105 343 151 79 Depositor service fees 67 71 64 69 65 Other 87 56 59 57 75 - -------------------------------------------------------------------------------------------------- Total other income $ 407 $ 493 $ 908 $ 701 $ 514 - --------------------------------------------------------------------------------------------------
Non-interest income was $404,000 for the second quarter of 1995, a decrease of $89,000 from the first quarter of 1995, and a decrease of $110,000 from the second quarter of 1994. Relative to the first quarter of 1995, most of the decline was due to $60,000 decrease in gain on sale of SBA loans and a $34,000 decrease in gain on sale of mortgage loans. The decline in the SBA category was due to the generally cyclical nature of this business, while the decline in mortgage revenue was due to the closure of the Company's wholesale mortgage business unit at the end of the first quarter of 1995.
NON-INTEREST EXPENSE Quarter Ended - ----------------------------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (in thousands) 1995 1995 1994 1994 1994 - ----------------------------------------------------------------------------------------------------- Compensation and benefits $1,600 $1,635 $1,270 $1,397 $1,537 Occupancy and equipment 392 396 372 362 349 Professionals services 230 204 307 109 104 Legal settlement and costs 1,700 -- 250 -- -- FDIC insurance and assessments 135 125 127 127 115 Supplies, telephone and postage 108 128 119 110 120 Data processing 30 33 29 32 30 Client services 91 70 86 86 95 Other real estate, net (7) 41 7 9 (1) Other 321 295 208 276 217 - ----------------------------------------------------------------------------------------------------- Total operating expenses $4,600 $2,927 $2,775 $2,508 $2,566 ====== ====== ====== ====== ======
Non-interest expenses were $4.6 million for the second quarter of 1995, an increase of $1.67 million from the first quarter of 1995, and $2.0 million from the second quarter of 1994. Most of the increase is due to the $1.9 million legal settlement related to the Sumitomo litigation (see Part II Item 1 - Legal Proceedings), $1.7 million of which was expensed in the second quarter of 1995. Compensation and benefits expense decreased $35,000 versus the first quarter of 1995, but increased by $63,000 from the comparable quarter of 1994. The decrease during the second quarter of 1995 was due to the closure of the wholesale mortgage business unit. The increase of other expense to $318,000 in the second quarter from $277,000 in the first quarter was largely due to an increase in marketing and advertising expense of $34,000. INCOME TAXES The provision for income taxes for the second quarter of 1995 was a credit of $470,000, compared with an expense of $126,000 for the same quarter a year ago. The difference was primarily due to the operating loss experienced by the Company in the second quarter of 1995, due to the settlement of litigation with Sumitomo. CUNB did not require a valuation allowance related to its deferred tax asset. 13 of 18 FINANCIAL CONDITION CAPITAL RATIOS The Company's and the Bank's risk-based capital and leverage ratios were as follows:
- ------------------------------------------------------------------------------------------------------- CAPITAL RATIOS June 30, March 31, December 31, September 30, June 30, (in thousands) 1995 1995 1994 1994 1994 - ------------------------------------------------------------------------------------------------------- CONSOLIDATED COMPANY - -------------------- GAAP EQUITY RATIO: GAAP equity $ 17,622 $ 18,355 $ 18,037 $ 17,872 $ 17,406 Total assets 243,579 233,261 223,144 216,318 212,296 Equity to assets ratio 7.23% 7.87% 8.08% 8.26% 8.20% LEVERAGE RATIO: GAAP equity $ 17,622 $ 18,355 $ 18,037 $ 17,872 $ 17,406 Average quarterly assets 230,265 223,093 214,889 206,467 185,988 Leverage capital ratio 7.65% 8.23% 8.39% 8.66% 9.36% Minimum requirement 3.00% 3.00% 3.00% 3.00% 3.00% Well capitalized requirement 5.00% 5.00% 5.00% 5.00% 5.00% RISK-BASED CAPITAL RATIOS: Tier I capital $ 17,622 $ 18,355 $ 18,037 $ 17,872 $ 17,406 Tier II capital allowed 2,288 2,268 2,082 2,086 1,951 - ------------------------------------------------------------------------------------------------------- Total risk-based capital $ 19,910 $ 20,623 $ 20,119 $ 19,958 $ 19,357 ======================================================================================================= RISK-BASED ASSETS 183,000 181,474 166,592 166,889 161,590 TIER I RISK-BASED CAPITAL RATIO 9.63% 10.11% 10.83% 10.71% 10.77% Minimum requirement 4.00% 4.00% 4.00% 4.00% 4.00% Well capitalized requirement 6.00% 6.00% 6.00% 6.00% 6.00% TOTAL RISK-BASED CAPITAL RATIO 10.88% 11.36% 12.08% 11.96% 11.98% Minimum requirement 8.00% 8.00% 8.00% 8.00% 8.00% Well capitalized requirement 10.00% 10.00% 10.00% 10.00% 10.00% ======================================================================================================= BANK ONLY - --------- GAAP EQUITY RATIO: GAAP equity $ 16,732 $ 16,962 $ 16,851 $ 16,624 $ 16,168 Total assets 243,579 233,205 222,839 216,312 212,276 Equity to assets ratio 6.87% 7.27% 7.56% 7.69% 7.62% LEVERAGE RATIO: GAAP equity $ 16,732 $ 16,962 $ 16,851 $ 16,624 $ 16,168 Regulatory Accounting Adjustment (30) (65) (65) (57) (48) - ------------------------------------------------------------------------------------------------------- Regulatory Equity $ 16,702 $ 16,897 $ 16,786 $ 16,567 $ 16,120 - ------------------------------------------------------------------------------------------------------- Average quarterly assets $230,109 $222,901 $214,785 $206,367 $185,888 Leverage capital ratio 7.26% 7.58% 7.82% 8.03% 8.67% Minimum requirement 3.00% 3.00% 3.00% 3.00% 3.00% Well capitalized requirement 5.00% 5.00% 5.00% 5.00% 5.00% RISK-BASED CAPITAL RATIOS: Tier I capital $ 16,732 $ 16,897 $ 16,786 $ 16,567 $ 16,120 Tier II capital 2,285 2,268 2,079 2,084 1,951 - ------------------------------------------------------------------------------------------------------- Total risk-based capital $ 19,017 $ 19,165 $ 18,865 $ 18,651 $ 18,071 - ------------------------------------------------------------------------------------------------------- RISK-BASED ASSETS $182,837 $181,417 $166,288 $166,691 $161,571 TIER I RISK-BASED CAPITAL RATIO 9.15% 9.31% 10.09% 10.01% 10.02% Minimum requirement 4.00% 4.00% 4.00% 4.00% 4.00% Well capitalized requirement 6.00% 6.00% 6.00% 6.00% 6.00% TOTAL RISK-BASED CAPITAL RATIO 10.40% 10.56% 11.34% 11.19% 11.18% Minimum requirement 8.00% 8.00% 8.00% 8.00% 8.00% Well capitalized requirement 10.00% 10.00% 10.00% 10.00% 10.00% =======================================================================================================
14 of 18 CUNB's Tier 1 and Total Risk-based capital ratios were 9.63% and 10.88% at June 30, 1995, respectively, compared with 10.83% and 12.08%, respectively, at December 31, 1994, and 10.77% and 11.98%, respectively, at June 30, 1994. The leverage ratio, a measure of Tier 1 capital to average quarterly assets, was 7.65% at June 30, 1995, compared to 8.39% at December 31, 1994 and 9.36% at June 30, 1994. To be considered well capitalized as defined under the regulatory framework for prompt corrective action, an institution must have a risk-based Tier 1 capital ratio of 6.0% or greater, a risk-based total capital ratio of 10% or greater and a leverage ratio of 5.0% or greater. CUNB's risk-based capital and leverage ratios have exceeded the ratios for a well capitalized financial institution for all periods presented above. The Bank's Tier 1 and Total Risk-based capital ratios were 9.15% and 10.40%, respectively, at June 30, 1995, compared with 10.09% and 11.34%, respectively, at December 31, 1994, and 10.02% and 11.18%, respectively, at June 30, 1994. The leverage ratio, a measure of Tier 1 capital to average quarterly assets, was 7.26% at June 30, 1995, compared to 7.82% at December 31, 1994 and 8.67% at June 30, 1994. To be considered well capitalized as defined under the regulatory framework for prompt corrective action, an institution must have a risk-based Tier 1 capital ratio of 6.0% or greater, a risk-based total capital ratio of 10% or greater and a leverage ratio of 5.0% or greater. The Bank's risk-based capital and leverage ratios have exceeded the ratios for a well capitalized financial institution for all periods presented above. The Company and the Bank seek to maintain capital ratios at levels that will maintain their status as a well capitalized financial institution. During the second quarter of 1995, the holding company made an additional investment of $425,000 in common equity of the Bank. LIQUIDITY Liquidity is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss, and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Bank's ability to meet the day-to-day cash flow requirements of the Bank's clients who either want to withdraw funds or require funds to meet their credit needs. Through an Asset Liability Management Committee, the Bank actively monitors its commitments to fund loans, as well as the composition and maturity schedule of its loan and deposit portfolios. To manage its liquidity, the Bank maintains $20 million in inter-bank Fed Fund purchase lines, as well as $100 million in institutional deposit or brokered deposit lines, and $60 million in reverse repurchase lines. PROVISION AND RESERVE FOR LOAN LOSSES The following schedule details the activity in the Bank's reserve for loan losses and related ratios for each of the last five quarters:
Quarter ended - --------------------------------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (in millions) 1995 1995 1994 1994 1994 - --------------------------------------------------------------------------------------------------------- Reserve for loan losses at beginning of period $2,359 $ 2,918 $2,286 $1,951 $1,989 Provision charged to operations 85 431 785 450 150 Loans charged off (4) (1,001) (153) (123) (191) Loan recoveries 14 11 -- 8 3 - --------------------------------------------------------------------------------------------------------- Reserve for loan losses at end of period $2,454 $ 2,359 $2,918 $2,286 $1,951 ========================================================================================================= Ratio of: Reserve for loan losses to loans 1.70% 1.60% 2.09% 1.66% 1.55% Reserve for loan losses to Nonperforming assets 68.33% 78.66% 58.47% 50.67% 49.82% - ---------------------------------------------------------------------------------------------------------
The provision for loan losses was $85,000 in the second quarter of 1995, down substantially from $431,000 in the first quarter of 1995, and the $150,000 in the second quarter of 1994. The second quarter of 1995 included net 15 of 18 recoveries of $10,000, compared to net charge-offs of $990,000 in the first quarter of 1995, and net charge-offs of $188,000 in the second quarter of 1994. For the first two quarters of 1995 net charge-offs were $980,000, or 1.36% of average loans (on an annualized basis), compared to $681,000 (1.06% of average loans) for the same period in 1994. Management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the loan loss reserve. The reserve for loan losses was $2.45 million at June 30, 1995, compared with $2.36 million at March 31, 1995, and $1.95 million at June 30, 1994. The ratio of the reserve for loan losses to total loans was 1.70% at June 30, 1995, compared with 1.60% at March 31, 1995, and 1.55% at June 30, 1994. The ratio of the reserve for loan losses to total nonperforming assets, including foreclosed real estate, was 68.33% at June 30, 1995, compared to 78.66% at March 31, 1995 and 49.82% at June 30, 1994. NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE AND FORECLOSED PROPERTIES
- ----------------------------------------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (in millions) 1995 1995 1994 1994 1994 - ----------------------------------------------------------------------------------------------------------------- Non-accruing loans $2,426 $2,743 $3,244 $3,162 $3,694 Restructured loans -- -- -- -- -- Accruing loans past due 90 days or more 1,166 256 1,371 762 10 - ----------------------------------------------------------------------------------------------------------------- Total nonperforming loans 3,592 2,999 4,615 3,924 3,704 OREO -- -- 375 587 212 ------ ------ ------ ------ ------ Total nonperforming assets 3,592 $2,999 $4,990 $4,511 $3,916 ================================================================================================================ Total nonperforming loans to total assets 1.47% 1.29% 2.24% 2.08% 1.84% ================================================================================================================
Total nonperforming assets were $3.6 million at June 30, 1995, compared with $3.0 million at March 31, 1995, and $3.9 million at June 30, 1994. Nonperforming loans, which includes non-accruing loans, restructured loans, and accruing loans which are past due 90 days or more, were $3.6 million at June 30, 1995, compared with $3.0 million at March 31, 1995, and $3.7 million at June 30, 1994. Accruing loans past due 90 days or more, which are well secured and in the process of collection, were $1.2 million at June 30, 1995, compared with $0.3 million at March 31, 1995, and $0.01 million at June 30, 1994. It is the Bank's policy to discontinue the accrual of interest when the ability of a borrower to repay principal or interest is in doubt, or when a loan is past due 90 days or more, except when, in management's judgment, the loan is well secured and in the process of collection. At June 30, 1995 the Bank had no foreclosed properties, compared with $375,000, at December 31, 1994, and $212,000 at June 30, 1994. The Bank has an active credit administration function which includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. Senior management, and an internal asset review committee review problem loans on a regular basis. EFFECTS OF INFLATION The impact of inflation on a financial institution differs significantly from that exerted on industrial concerns, primarily because its assets and liabilities consist largely of monetary items. The most direct effect of inflation on a financial institution is fluctuation in interest rates. However, net interest income is affected by the spread between interest rates received on assets and those paid on interest bearing liabilities, rather than the absolute level 16 of 18 of interest rates. Additionally, there may be some upward pressure on the Company's operating expenses, such as increases in occupancy expenses based on consumer price indices. In the opinion of management, inflation has not had material effect on the operating results of the Company. PART II. OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS The Company has previously reported on pending litigation brought against the Bank by Sumitomo Bank ("Sumitomo"), as trustee for the California Dental Guild Mortgage Fund II, which alleged that the Bank did not perform its fiduciary duties as a trustee properly. The Bank and Sumitomo have recently agreed upon the terms of a settlement agreement. Under the settlement agreement, the Bank made a payment of $1,850,000 to fully settle the litigation on July 21, 1995. The Company believes, based on the advice of counsel, that it is highly probable that insurance coverage for a significant portion of this settlement amount is available under its director and officer liability insurance policy and its professional liability insurance policy, as well as the errors and omissions policy of the insurance agent which sold the Company these policies. The company's insurance company has denied the Company's claim for coverage under these policies, and the Company has initiated litigation against the insurance company as well as the agent from whom the Company obtained such policies. However, due to the uncertainty associated with recovery under its claims, the Company has reflected the expense of the legal settlement in second quarter 1995 earnings. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders of the Company was held on May 25, 1995. (b) The following 13 persons nominated by management were elected as directors at the meeting:
For Opposed --------- ------- C. Donald Allen 1,216,509 20,550 David K. Chui 1,224,329 12,730 Carl E. Cookson 1,224,329 12,730 Jerry R. Crowley 1,224,329 12,730 Janet M. DeCarli 1,224,329 12,730 John M. Gatto 1,224,329 12,730 William H. Guengerich 1,224,329 12,730 James E. Jackson 1,224,329 12,730 Rex D. Lindsay 1,206,742 30,305 Glen McLaughlin 1,205,754 30,305 Norman Meltzer 1,224,329 12,730 Dick J. Randall 1,206,754 30,305 Dennis Whittaker 1,224,329 12,730
(c) A proposal to approve the adoption of the Company's 1995 Stock Option Plan was approved by a vote of 872,994 shares. (d) A proposal to approve an amendment to the Company's Employee Stock Purchase Plan to (i) increase the number of shares of the Company's Common Stock reserved for issuance thereunder from 40,202 to 65,202 and (ii) permit otherwise eligible directors administering the plan who are also employees to participate in the plan was approved by a vote of 908,668 shares in favor, 38,661 shares opposed and 94,071 shares abstaining. 17 of 18 (e) A proposal to ratify the appointment of Coopers & Lybrand L.L.P. as the Company's independent accountants for the current fiscal year was approved by a vote of 1,208,838. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Report. (a) Exhibits . Financial Data Schedule (b) Reports on Form 8-K for the quarter covered by this report - None SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. CUPERTINO NATIONAL BANCORP (REGISTRANT) BY: /s/ STEVEN C. SMITH - ---------------------------- STEVEN C. SMITH EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER & CHIEF FINANCIAL OFFICER DATE: AUGUST 9, 1995 18 of 18 EX-27 2 FINANCIAL DATA SCHEDULE ARTICLE 9
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1995 JAN-01-1995 JUN-30-1995 12,730 0 19,500 0 2,495 55,362 55,631 142,370 2,454 243,579 215,151 8,654 2,152 0 15,190 0 0 2,432 243,579 7,820 1,873 137 9,830 2,991 3,646 6,184 516 0 7,528 (959) (548) 0 0 (548) (0.33) (0.33) 5.97 2,426 1,166 0 0 2,918 1,005 25 2,454 2,454 0 0
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