-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TlZ4NSeWH1zi9NCXeP4FnhjlABf+ntT7jr8gGbJkCjQfczfEYdfBPioTRu6tD49o lX9Jr5oB5fiz+oPTGW/xQw== 0000898430-96-001046.txt : 19960401 0000898430-96-001046.hdr.sgml : 19960401 ACCESSION NUMBER: 0000898430-96-001046 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18015 FILM NUMBER: 96540563 BUSINESS ADDRESS: STREET 1: 20230 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961144 10-K405 1 FORM 10-K FOR PERIOD ENDED 12/31/95 Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended DECEMBER 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ____________ to __________ Commission file number 0-18015 CUPERTINO NATIONAL BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 33-0060898 (State of incorporation) (IRS employer identification number) 20230 STEVENS CREEK BOULEVARD, CUPERTINO, CA 95014 (Address of principal executive offices) (408) 996-1144 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained herein, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on March 15, 1996, as reported on the NASDAQ National Market System, was approximately $17,688,283. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of COMMON STOCK, NO PAR VALUE, of registrant outstanding as of March 15, 1996 was 1,857,105. _______________ DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference into Parts I, II, III, and IV of this Form 10-K Report: (1) Proxy Statement for registrant's Annual Meeting of Shareholders to be held May 16, 1996 (Part III), and (2) registrant's Annual Report to Shareholders for the year ended December 31, 1995 (Parts I, II and IV). 1 PART I ITEM 1. BUSINESS GENERAL Cupertino National Bancorp (the "Company") is a California corporation and bank holding company. Cupertino National Bank & Trust ("CNB"), a wholly- owned subsidiary of the Company, is a national bank conducting a commercial banking business. The Company was organized in August 1984, and CNB began operations in May 1985. The Company and CNB have their principal offices at 20230 Stevens Creek Boulevard, Cupertino CA 95014. The Company's current activities are principally acting as the holding company for CNB and as the lessee and sublessor to CNB of the premises on which CNB's headquarters is located. CNB provides a wide range of commercial banking services to small and medium-sized businesses, real estate firms, business executives, professionals and other individuals. Trust services are provided by a separate department of the Bank to support the trust needs of its clients. CNB's strategy emphasizes acquiring and developing relationships with clients in the Bank's service area. Personal service officers are assigned to each borrowing client to provide continuity to the relationship. CNB provides commercial loans for working capital and business expansion to small and medium-sized businesses with annual revenues in the range of $1 million to $35 million. Commercial loans typically include revolving lines of credit collateralized by inventory, accounts receivable or leasehold improvements, loans to purchase equipment, and loans for general working capital purposes, collateralized by equipment. CNB's commercial customers are drawn from a wide variety of manufacturing, wholesale and service businesses, and are not concentrated in any one particular industry. Loans to real estate construction and development companies are primarily for construction of single- family residences in CNB's primary service area. Such loans typically range between approximately $200,000 and $3,400,000. Loans to professional and other individual clients, whose income typically equals or exceeds the median income for CNB's service area, cover a full range of consumer services, such as automobile, aircraft, home improvement and home equity loans, and other secured and unsecured lines of credit, including credit cards. CNB has a Small Business Administration ("SBA") department which makes loans to assist smaller clients and those who are starting new businesses in obtaining financing. The loans are generally 65% to 80% guaranteed by the SBA. In 1994, CNB was named a Preferred Lender by the SBA. Preferred Lender status is awarded by the SBA to lenders who have demonstrated superior ability to generate, underwrite and service loans guaranteed by the SBA, and results in more rapid turn around of loan applications submitted to the SBA for approval. In May 1994, CNB opened its Emerging Growth Industries department, which evolved in 1995 into the Venture Lending group to serve the needs of companies in their start-up and development phase. This unit was developed to meet the needs of clients in CNB's service area by allowing them to access a banking relationship early in their development. The loans to this target group of clients are generally secured by the accounts receivable, inventory and equipment of the companies. The financial strength of these companies also tends to be bolstered by the presence of venture capital investors among the shareholders. CNB is a member of the Federal Reserve System and the deposits of the Bank's clients are insured up to $100,000 by the Federal Deposit Insurance Corporation ("FDIC"). In 1992, CNB became a member of the Federal Home Loan Bank of San Francisco ("FHLB") in order to enhance its ability to service its loan clients. This membership allows CNB to enhance its funding sources as the FHLB allows members to borrow funds by pledging securities and mortgage loans as collateral. 2 MARKET AREA AND CLIENT BASE CNB concentrates on providing service to clients in Santa Clara County and San Mateo County. CNB is headquartered in Cupertino, California which is in the center of the geographical area which is referred to as "Silicon Valley". The City of Cupertino has a population of approximately 51,300 and its average annual household income exceeds $97,200. Among metropolitan areas, Santa Clara County ranks third in California in median household income. The commercial base of Santa Clara County is diverse and includes computer and semiconductor manufacturing, professional services, printing and publishing, aerospace, defense, real estate construction, and wholesale and retail trade. CNB has not concentrated on attracting commercial clients from any single industry, although it has in the past emphasized lending to the residential real estate construction industry in its service area. In March 1991, CNB opened its first regional office in downtown San Jose. This office was established to better serve existing clients of CNB, as well as to gain new relationships from clients based in the growing financial center in the southern portion of Santa Clara County. In May 1992, CNB opened a second regional office in Palo Alto to better serve its clients in Northern Santa Clara and Southern San Mateo County. CNB intends to open its fourth office in downtown Palo Alto, in the spring of 1996. Many of the directors of the Company and CNB, and their affiliates, maintain deposit and loan relationships with the Bank. See Note 11 of Notes to Consolidated Financial Statements in the Company's 1995 Annual Report, incorporated herein by reference, for information regarding loans to affiliates and other significant related party transactions. SOURCES OF FUNDS Most of CNB's deposits are obtained from small and medium-sized businesses, business executives, professionals and other individuals. At December 31, 1995, CNB had a total of 7,621 deposit accounts, representing 2,894 non-interest-bearing deposit (checking) accounts with an average balance of approximately $16,372 each, 3,726 interest-bearing demand, money market demand, and savings accounts with an average balance of approximately $28,176 each, and 1,001 time deposit accounts with an average balance of approximately $45,267 each. Rates paid on deposits vary among the categories of deposits due to different terms, the size of the individual deposit, and rates paid by competitors on similar deposits. CNB has one deposit relationship with a title company, in which three of the directors of CNB serve as directors (one CNB director is also the principal shareholder and chief executive officer of the title company). Deposit balances from this client in both non-interest-bearing demand accounts and money market accounts totaled $775,000 on December 31, 1995 and ranged between $7,000 and $8.5 million during 1995. LENDING ACTIVITIES CNB's loan portfolio is centered in commercial lending to small and medium-sized businesses in the manufacturing and service industries. CNB has also been an active lender in residential real estate construction. Approximately 54% of CNB's portfolio was in commercial loans at December 31, 1995 and real estate construction loans represented approximately 15% of total loans, primarily for residential projects. In addition, 14% of CNB's loans were real estate term loans, which are primarily secured by commercial properties. The balance of the portfolio consists of consumer loans. CNB's loan clients are primarily located in Cupertino, San Jose, Palo Alto and the surrounding communities in Santa Clara County and San Mateo County. The majority of loans are collateralized. Generally, real estate loans are secured by real property, and commercial and other loans are secured CNB deposits or business and personal assets. Repayment is generally expected from the sale of the related property for real estate construction loans, and from the cash flow of the borrower for commercial and other loans. 3 The interest rates charged for the loans made by CNB vary with the degree of risk, size and maturity of the loans. Rates are generally affected by competition, associated factors stemming from the client's deposit relationship with CNB and CNB's cost of funds. A majority of the loans in CNB's portfolio have a floating rate. In its commercial loan portfolio, CNB provides personalized financial services to the diverse commercial and professional businesses in its market area, but does not concentrate on any particular industry. Commercial loans consist chiefly of short-term loans (normally with a maturity of under one year) for working capital. Significant emphasis is placed on the borrower's earnings history, capitalization, secondary sources of repayment (such as accounts receivable), and in some instances, third party guarantees or highly liquid collateral (e.g., time deposits). Commercial loan pricing is generally at a rate tied to the prime rate (as quoted in the Wall Street Journal) or the Bank's reference rate. CNB's Venture Lending Division works with a variety of technology companies, ranging from multimedia, software and telecommunications providers to biotechnology and medical advice firms. Venture Lending provides innovative financing and other financial services tailored to the needs of startup and growth-stage companies. While the commercial loan portfolio of CNB is not concentrated in any one industry, CNB's service area has a concentration of technology companies, and accordingly, the ability of any of CNB's borrowers to repay loans may be affected by the performance of this sector of the economy. CNB's residential real estate construction loan activity has focused on providing short-term (less than one year maturity) loans to local individuals, partnerships and corporations in the local residential real estate industry for the construction of single family residences. During 1992 through 1993, CNB concentrated its construction loan activity in the market for owner- occupied custom residences. During 1994, real estate values began to stabilize and CNB began to cautiously enter the construction loan market for small townhouse and single family home projects. During 1995, CNB continued to expand its real estate construction portfolio with the help of the improving real estate market in northern California, although there can be no assurance that this trend will continue. Residential real estate construction loans are typically secured by first deeds of trust and require guarantees of the borrower. The economic viability of the project and the borrower's credit-worthiness are primary considerations in the loan underwriting decision. Generally, these loans provide an attractive yield, but may carry a higher than normal risk of loss or delinquency, particularly if general real estate values decline or the loan underwriting process is based upon inaccurate appraisals. CNB utilizes independent local appraisers and conservative loan-to-value ratios (e.g. loans generally not exceeding 65% to 75% of the appraised value of the property). CNB monitors projects during the construction phase through regular construction inspections and a disbursement program tied to the percentage of completion of each project. CNB's consumer loan portfolio is divided between installment loans for the purchase of such items as automobiles and aircraft, and home improvement loans and equity lines of credit which are often secured by residential real estate. Installment loans tend to be fixed rate and longer-term (one to five year maturity), while the equity line type loans are generally floating rate, and are reviewed for renewal on an annual basis. CNB also has a minimal portfolio of credit card loans, issued as an additional service to its clients. LOAN ADMINISTRATION The loan policy of CNB is approved each year by its Board of Directors and is managed through periodic reviews of such policies in relation to current economic activity and the degree of risk (both credit and interest rate) in the current portfolio. The Directors' Loan Committee oversees the lending activities of the Bank. This committee consists of three outside directors, the Chairman/Chief Executive Officer, the Executive Vice President-Senior Loan Officer, Senior Vice President-Venture Lending Division Manager, Senior Vice President-Commercial Lending and the Senior Vice President-Chief Credit Officer. The officers in this group make up the Officers' Loan Committee. 4 Sole lending authority is granted to officers on a limited basis. Loan requests exceeding individual officer approval limits are submitted to the Officers' Loan Committee, and those which exceed its limit are submitted to the Directors' Loan Committee for final approval. Both of these committees meet on a regular basis in order to provide timely responses to the Bank's clients. CNB's credit administration function includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. CNB has an internal asset review committee (IARC) that meets monthly to review delinquencies, non-performing assets, classified assets and other pertinent information for the purpose of evaluating credit risk within CNB's loan portfolio and to recommend general reserve percentages and specific reserve allocations. The IARC reports to the Board of Directors on a quarterly basis. TRUST DEPARTMENT CNB's Trust Department commenced operations in July 1988 and in 1995, CNB renewed its focus on the expansion of its trust operations. The Trust Department offers a full range of fee-based trust services directly to its clients and administers several types of retirement plans, including corporate pension plans, 401(k) plans and individual retirement plans, with an emphasis on the investment management, custodianship and trusteeship of such plans. In addition, the Trust Department acts as executor, administrator, guardian and/or trustee in the administration of the estates of individuals. Investment and custodial services are provided for corporations, individuals and non-profit organizations. Total assets under management by the Trust Department were approximately $270 million at December 31, 1995 compared to $157 million at December 31, 1994 and $118 million at December 31, 1993. The 72% increase in trust assets is attributable to the addition of several new trust officers and the new Executive Vice President-Senior Trust Officer. CNB anticipates this rapid rise to continue in 1996 as we increase our presence in the Palo Alto marketplace with a new office scheduled to open in the late spring of 1996. There can be no assurances that the growth will continue at the rate experienced in 1995. MORTGAGE BANKING DIVISION CNB opened a Mortgage Banking Division in July 1992. The purpose of this division was to originate residential mortgage loans for sale on the secondary market. The primary revenue of this division was from the premium received on the sale of such mortgage loans and their related servicing rights. CNB funded both loans which were originated directly by a mortgage banking officer and loans purchased through a network of mortgage brokers. CNB was selling both the loans and the related servicing rights through a correspondent. During 1993, CNB was designated as an approved seller/servicer by the Federal National Mortgage Association and the Federal Home Loan Corporation, known in the industry as Fannie Mae and Freddie Mac, respectively. During 1994, the increased upward pressure on interest rates caused mortgage refinancing and home purchases to significantly decline. This required CNB in June 1994 to restructure its mortgage operations and focus all of its efforts on the wholesale mortgage market. This change reduced the operating costs within the mortgage business unit; however, the operating results for the last half of 1994 did not return to acceptable levels of return on investment corresponding to the risks involved. Based on these factors, CNB determined to close its mortgage operations effective March 31, 1995. In connection with this action, CNB incurred a $180,000 after tax charge related to this operation in the first quarter of 1995. COMPETITION The banking business in CNB's service area is highly competitive, as it is throughout California. Many of the major branch banking institutions in California have one or more offices in CNB's service area. CNB competes in the marketplace for deposits and loans, principally against these banks, other independent community banks, savings and loan associations, credit unions and other financial institutions. The major advantages that larger branch institutions have over CNB are their ability to provide wide ranging advertising programs; to allocate their investment assets in areas of higher yields and demands; and, by virtue of their greater total capitalization, to utilize substantially higher lending limits than CNB. These banks can also offer certain services, such as international banking, which are not offered directly by CNB. However, CNB is able to offer most of these services 5 indirectly, through its correspondent institutions. Smaller independent banks, including CNB, have found a market niche by providing specialized services, and by targeting clients whose credit needs are below levels generally sought by the major branch banks. CNB defines its service area as the cities of Cupertino, San Jose, Palo Alto, and the surrounding cities in Santa Clara County and San Mateo County. To compete with the major financial institutions in its service area, CNB relies upon customized services and direct personal contacts by its officers, directors and staff. For clients whose loan demands exceed CNB's legal lending limit, CNB seeks to arrange such loans on a participation basis with other lenders, primarily other community banks in the San Francisco Bay Area. EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION Banking is a business in which profitability depends primarily on interest rate differentials. In general, the difference between the interest rates paid by CNB on its deposits and its other borrowings and the interest rates received by CNB on loans extended to its clients and on securities held in its investment portfolio will be the principal factor affecting CNB's earnings. The interest rates paid and received by CNB are sensitive to many factors which are beyond CNB's control, including the influence of domestic and foreign economic conditions. The earnings and growth of CNB and the Company will also be affected not only by general economic conditions, including inflation, recession and unemployment, but also by monetary and fiscal policies of the United States and federal agencies, particularly the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Federal Reserve Board implements national monetary policy, such as seeking to curb inflation and/or combat recession, by its open market operations in United States Government securities, by its control of the discount rates applicable to borrowing by banks from the Federal Reserve System and by its establishment of reserve requirements for financial institutions subject to its regulation. The actions of the Federal Reserve Board in these areas influence the growth of bank loans, investments and deposits, and also affect the interest rates charged on loans and paid on deposits. Changes in the financial services industry as a result of such governmental policies and regulations have often contributed to increases in the cost of funds of banks and other depository institutions and may continue to affect such cost, and consequently the earnings of such institutions. However, the degree, timing and full extent of the impact of the laws or of possible changes to the laws on banking in general, and the business of the Bank in particular, presently cannot be predicted. SUPERVISION AND REGULATION The following information is qualified in its entirety by reference to the complete statutory and regulatory provisions that are summarized below, which statutes and regulations are subject to change at any time. Several initiatives to revise the powers and supervision of financial institutions have been proposed and it is not possible to determine which, if any, of these changes will be adopted. The Bank Holding Company The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is subject to supervision by the Federal Reserve Board. As a bank holding company, the Company is required to file with the Federal Reserve Board an annual report and such other additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may also make examinations of the Company and CNB. Under the BHCA, bank holding companies may not (subject to certain limited exceptions) directly or indirectly acquire the ownership or control of substantially all of the assets or more than 5% of any class of voting shares of any company, including a bank, without the prior written approval of the Federal Reserve Board. In addition, subject to certain exceptions, bank holding companies are prohibited under the BHCA from engaging in non-banking activities. One principal exception to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking as to be properly incident thereto. For each application to engage in non-banking activities, the Federal Reserve Board is required to consider whether the performance of such activities can reasonably be expected to produce benefits to the public such as greater convenience, increased competition, or gains in efficiency, that 6 outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. Subsidiary banks of a bank holding company are subject to restrictions imposed by the Federal Reserve Act on any extensions of credit to the bank holding company or any of its subsidiaries, on investments in the stocks or securities thereof, and on the taking of any such stock or securities as collateral for loans to any borrowers. Furthermore, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with extensions of credit, the lease or sale of any property or the furnishing of other banking services. The Company is also a bank holding company within the meaning of Section 3700 of the California Financial Code. As such, the Company and its subsidiaries are subject to examination by, and may be required to file reports with, the Superintendent of Banks of the State of California (the "Superintendent"). Capital Adequacy of the Company The Federal Reserve Board has adopted risk-based capital guidelines for bank holding companies. Under these guidelines the minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities) is 8%. At least half of the total capital is to be composed of common stockholders' equity, minority interests in the equity accounts of consolidated subsidiaries and a limited amount of perpetual preferred stock, less disallowed intangibles including goodwill ("Tier 1 Capital"). The remainder of a bank's allowable capital may include subordinated debt, other preferred stock and a limited amount of loan loss reserves ("Tier 2 Capital"). In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to total assets, less goodwill) of 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies are generally required to maintain a minimum Tier 1 Capital leverage ratio of 3% plus an additional 100 to 200 basis points. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets (i.e. goodwill, core deposit intangibles and purchased mortgage servicing rights). Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "tangible Tier 1 Capital leverage ratio" (deducting all intangibles) in evaluating proposals for expansion or new activities. At December 31, 1995, the Company and CNB had total capital and leverage capital ratios above the minimums required by the Federal Reserve Board. CNB CNB, as a national banking association, is subject to the National Bank Act and to primary supervision, examination and regulation by the Comptroller of the Currency (the "Comptroller"). The Comptroller regulates the number and locations of branch offices of a national bank. CNB is also a member of the Federal Reserve System and is subject to applicable provisions of the Federal Reserve Act and regulations issued pursuant thereto. Each depositor's accounts with CNB are insured by the Bank Insurance Fund, which is managed by the FDIC, to the maximum aggregate amount permitted by law, which is currently $100,000 for all insured deposits of the depositor. For this protection, CNB pays a semi-annual assessment and is subject to the rules and regulations of the FDIC pertaining to deposit insurance and other matters. The Federal Reserve Board requires banks to maintain non-interest bearing reserves against certain of their transactional accounts (primarily deposit accounts that may be accessed by writing checks) and non-personal time deposits. As a creditor and a financial institution, CNB is subject to certain regulations promulgated by the Federal Reserve Board including, without limitation, Regulation B (Equal Credit Opportunity Act), Regulation D (Reserves), Regulation E (Electronic Funds Transfers Act) and Regulation F (interbank liabilities), Regulation Z (Truth in Lending 7 Act), Regulation CC (Expedited Funds Availability Act), and Regulation DD (Truth in Savings Act). As a creditor on loans secured by real property and as an owner of real property, CNB may be subject to potential liability under various statutes and regulations applicable to property owners including statutes and regulations relating to the environmental condition of the property. CNB is also subject to applicable provisions of California law, insofar as they do not conflict with or are not preempted by federal banking law. California law exempts banks from the usury laws. The supervision, regulation and examination of CNB by the bank regulatory agencies are generally intended to protect depositors and are not intended to protect the Company's shareholders. Interstate Banking and Branching On September 29, 1994, the Reigle/Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") was signed into law. The Interstate Act effectively permits nationwide banking. The Interstate Act provides that one year after enactment, adequately capitalized and adequately managed bank holding companies may acquire banks in any state, even in those jurisdictions that currently bar acquisitions by out-of-state institutions, subject to deposit concentration limits. The deposit concentration limits provide that regulatory approval by the Federal Reserve Board may not be granted for a proposed interstate acquisition if, after the acquisition, the acquirer on a consolidated basis would control more than 10% of the total deposits nationwide or would control more than 30% of deposits in the state where the acquiring institution is located. The deposit concentration state limit does not apply for initial acquisitions in a state and in every case, may be waived by state regulatory authority. Interstate acquisitions are subject to compliance with the Community Reinvestment Act ("CRA"). States are permitted to impose age requirements not to exceed five years on target banks for interstate acquisitions. States are not allowed to opt-out of interstate banking. Branching between states may be accomplished either by merging separate banks located in different states into one legal entity, or by establishing de novo branches in another state. Consolidation of banks is not permitted until June 1, 1997, provided that the state has not passed legislation "opting-out" of interstate branching. If a state opts-out prior to June 1, 1997, then banks located in that state may not participate in interstate branching. A state may opt-in to interstate branching by bank consolidation or by de novo branching by passing appropriate legislation earlier than June 1, 1997. Interstate branching is also subject to a 30% statewide deposit concentration limit on a consolidated basis, and a 10% nationwide deposit concentration limit. The laws of the host state regarding community reinvestment, fair lending, consumer protection (including usury limits) and the establishment of branches shall apply to the interstate branches. De novo branching by an out-of-state bank is not permitted unless the host state expressly permits de novo branching by banks from out-of-state. The establishment of an initial de novo branch in a state is subject to the same conditions as apply to the initial acquisition of a bank in the host state other than deposit concentration limits. Effective one year after enactment, the Interstate Act permits bank subsidiaries of a bank holding company to act as agents for affiliated depository institutions in receiving deposits, renewing time deposits, closing loans, servicing loans and receiving payments on loans and other obligations. A bank acting as an agent for an affiliate shall not be considered a branch of the affiliate. Any agency relationship between affiliates must be on terms that are consistent with safe and sound banking practices. The authority for an agency relationship for receiving deposits includes the taking of deposits for an existing account, but is not meant to include the opening or origination of new deposit accounts. Subject to certain conditions, insured savings associations which were affiliated with banks as of June 1, 1994, may act as agents for such banks. An affiliate bank or savings association may not conduct any activity as an agent which such institution is prohibited from conducting as a principal. If an interstate bank decides to close a branch located in a low or moderate income area, it must comply with additional branch closing notice requirements. The appropriate regulatory agency is authorized to consult with community organizations to explore options to maintain banking services in the affected community where the branch is to be closed. 8 To ensure that interstate branching does not result in taking deposits without regard to a community's credit needs, the regulatory agencies are directed to implement regulations prohibiting interstate branches from being used as "deposit production offices". The regulations to implement its provisions are due by June 1, 1997. The regulations must include a provision to the effect that if loans made by an interstate branch are less than fifty percent of the average of all depository institutions in the state, then the regulator must review the loan portfolio of the branch. If the regulator determines that the branch is not meeting the credit needs of the community, it has the authority to close the branch and to prohibit the bank from opening new branches in that state. Effective January 1, 1991, California adopted legislation permitting any out-of-state bank holding company to acquire an existing California bank if its state of principal business provides reciprocal rights to California bank holding companies. The Superintendent has determined that substantial reciprocity exists between California and a variety of states including Arizona, Oregon, Washington, and New York. Although these changes have had the impact of increasing competition among banks and between banks and other financial service providers, the long-term effects of this increased competition on the Bank and on the competition which may arise as a result of the Interstate Act or other regulatory changes, cannot be determined at this time. Capital Adequacy of the Bank In 1989, the Federal Reserve Board, along with the Comptroller and the FDIC, established an interagency risk-based capital framework that establishes uniform risk-based capital guidelines for certain banking organizations in the United States. Under these guidelines, both assets reported on the balance sheet and certain off-balance sheet items are assigned to certain risk categories. Each category has an assigned risk weight. Capital ratios are then calculated by dividing the capital by a weighted (according to risk) sum of the assets and off-balance sheet items. On February 28, 1991, the FDIC adopted minimum "leverage ratio" standards for certain banking organizations. The leverage ratio is a ratio of Tier 1 capital to quarterly average total assets. The minimum required leverage ratio is 3.0% for banks that meet certain specified criteria, including having the highest regulatory rating. All other banks are generally required to maintain a leverage ratio of between 4.0% and 5.0% Tier 1 capital. At December 31, 1995, CNB had capital ratios, both risk-adjusted and leverage, which placed it in the "well capitalized" category. For an analysis of the capital ratios of CNB as of December 31, 1995, see "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Capital Resources" in the 1995 Annual Report to Shareholders, which is incorporated herein by reference. The Company does not presently expect that compliance with regulatory capital guidelines will have a material adverse effect on the business of the Company or CNB. The Company anticipates that if significant asset growth continues in the future, such growth may necessitate the addition of capital to comply with regulatory guidelines. Financial Institutions Reform, Recovery and Enforcement Act The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") mandated changes that continue to affect the financial institutions industry. FIRREA substantially revised the regulatory structure of the banking, savings and financial services industries. Many of these changes directly affect CNB and the Company. Deposits at commercial banks such as CNB are now insured by the Bank Insurance Fund ("BIF") of the FDIC. FIRREA requires the banking regulatory agencies to make written evaluations after examining a depository institution for compliance with the Community Reinvestment Act ("CRA"). The CRA evaluations now include a public section, including the CRA rating agency assigned to CNB, and a confidential section, which is not released to either the public or the institution, except under limited circumstances. The regulatory guidelines now require each institution to place the written evaluation in its CRA public file at its head office and at one designated office in each local community. FIRREA also revised the rating system for CRA compliance. 9 FIRREA mandated appraisals by state-certified or state-licensed appraisers for loans made by financial institutions over certain amounts. Effective December 31, 1992, an appraisal by a state-certified appraiser is required for the following types of bank loans secured by real estate: (1) any real estate loan transaction having a value of $1 million or more, or (2) any non-residential real estate transaction or complex residential real estate transaction in the amount of $250,000 or more. In addition, an appraisal by a state-licensed appraiser is required for any real estate transaction having a value of more than $100,000. The State of California has established a program for the licenser and certification of real estate appraisers in order to meet the requirements of FIRREA. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was signed into law. Among other things, FDICIA recapitalized the BIF, implemented deposit insurance reform, and imposed new supervisory standards requiring annual examinations, independent audits, uniform accounting and management standards and prompt corrective action for problem institutions. As a result of FDICIA, depository institutions and their affiliates are subject to federal standards which govern asset growth, interest rate exposure, executive compensation, and many other areas of depository institution operations. Only the most highly capitalized and well-managed institutions are allowed to expand their operations and activities. Undercapitalized institutions are subject to activity limitations and other restrictions. BIF Recapitalization. FDICIA provides increased funding for the BIF, primarily by increasing the authority of the FDIC to borrow from the U.S. Treasury Department. A significant portion of any such borrowing will be repaid by insurance premiums assessed on BIF members, including CNB, sufficient to repay any borrowed funds within 15 years and to provide BIF reserves of $1.25 for each $100 of insured deposits. FDICIA also provides authority for special assessments against insured deposits. Risk Based Deposit Insurance Rates. On January 1, 1994, a permanent risk-based deposit premium assessment system became effective under which each depository institution is placed in one of nine assessment categories based on certain capital and supervisory measures. The assessment rates under the system at that time ranged from 0.25 percent to 0.31 percent of domestic deposits depending on the assessment category into which an insured bank is placed. Once the BIF reached reserves equal to $1.25 for each $100 of insured deposits the assessment ratio would decline. Effective July 1995, the BIF attained its level of required reserves and the assessment ratios under the system were adjusted to a range of 0.0 percent (a minimum of $500 per quarter is assessed, however) to 0.27 percent. Brokered Deposits. Under FDIC regulations governing the receipt of brokered deposits, a bank cannot accept brokered deposits (which term is defined to mean deposits with an interest rate which significantly exceeds prevailing rates in its market) unless (i) it is well capitalized or (ii) it is adequately capitalized and has received a waiver from the FDIC. Except under certain conditions, a bank that cannot accept brokered deposits also cannot offer "pass- through" insurance on certain employee benefit accounts. CNB is considered to be well capitalized for purposes of this regulation and in 1994 began accepting limited amounts of brokered deposits to help manage its liquidity position. Prompt Corrective Regulatory Action. FDICIA categorizes banking institutions as well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A bank is subject to corrective action if it is not adequately capitalized. Significantly and critically undercapitalized banks are subject to extensive federal regulatory control, including closure. A bank's capital tier depends upon where its capital levels are in relation to various relevant capital measures, which include a risk-based capital measure and a leverage capital measure, and upon certain other factors. The federal banking authorities adopted regulations effective December 19, 1992, which define the capital measures a bank must meet in order to be considered well capitalized as a ratio of total capital to risk- weighted assets of not less than 10.0%, a ratio of Tier 1 capital to risk- weighted assets of not less than 6.0% and a leverage ratio of Tier 1 capital to average quarterly assets of not less than 5.0%. A bank will be considered adequately capitalized if it has a ratio of total capital to risk-weighted assets of not less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of not less than 4.0%, and a leverage ratio of Tier 1 capital to average quarterly assets of not less than 4.0%. The capital levels for the undercapitalized category are defined as any level under 8.0% for the total risk-based 10 capital ratio, under 4.0% for the Tier 1 risk-based capital ratio, or under 4.0% for the Tier 1 leverage ratio. A bank will be considered significantly undercapitalized if it has a ratio of total capital to risk-weighted assets that is less than 6.0%, a ratio of Tier 1 capital to risk-weighted assets that is less than 3.0%, or a Tier 1 leverage ratio that is less than 3.0%. A bank will be considered critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. In addition to FDICIA's capital requirements, a financial institution may be reclassified and subject to corrective action if it receives a less than satisfactory rating in its most recent examination for its assets, management, earnings or liquidity. The Company and CNB were considered "well capitalized" at December 31, 1995. FDICIA also requires an insured institution which does not meet any one of the statutory or regulatory capital requirements applicable to it to submit a capital restoration plan for improving its capital. In addition, FDICIA prohibits an insured institution from making a capital distribution if it fails to meet any capital requirements. FDICIA also contains a number of consumer banking provisions, including disclosure requirements and substantive contractual limitations with respect to deposit accounts, and places restrictions on a bank's dealings with "large customers" if a principal officer or director of the "large customer" is a member of the bank's audit committee. Real Estate Lending. As required by FDICIA, on December 19, 1992, the federal banking agencies adopted uniform regulations prescribing standards for real estate lending effective March 19, 1993. The uniform rules require depository institutions to adopt and maintain comprehensive written real estate lending policies that are consistent with safe and sound banking practices, as well as establish loan-to-value limitations on real estate lending by insured depository institutions. The loan-to-value limits do not apply to loans guaranteed by the U.S. Government or backed by the full faith and credit of a state government; loans facilitating the sale of real estate acquired by the lending institution in the ordinary course of collecting a debt previously contracted; loans where real estate is taken as additional collateral solely through an abundance of caution by the lender; loans renewed, refinanced, or restructured by the original lender to the same borrower, without the advancement of new funds; or loans originated prior to the effective date of the regulation. The new regulations also allow lending institutions to make a limited amount of loans that do not conform to the regulations' loan-to-value limitations. CNB has amended its real estate lending policies to comply with this legislation; such amendments are not expected to adversely affect the Bank's operations or profitability. Standards for Safety and Soundness. In September of 1992, the FDIC proposed regulations to require management to establish and maintain an internal control structure and procedures to ensure compliance with laws and regulations concerning bank safety and soundness on matters such as loan underwriting and documentation, asset quality, earnings, internal rate risk exposure and compensation and other employee benefits. The proposals, among other things, establish the maximum ratio of classified assets to total capital at 1.0 and the minimum level of earnings sufficient to absorb losses without impairing capital. The proposals provide that a bank's earnings are sufficient to absorb losses without impairing capital if the bank is in compliance with minimum capital requirements and the bank would, if its net income or loss over the last four quarters continued over the next four quarters, remain in compliance with minimum capital requirements. Any institution which failed to comply with these standards would be required to submit a compliance plan. The failure to submit a plan or to comply with an approved plan would subject the institution to further enforcement action. Finally, independent auditors would be required to attest to or report separately on assertions in management's report, by using audit procedures agreed upon by the FDIC for determining the extent of compliance with laws and regulations concerning bank safety and soundness. In anticipation of the adoption by the FDIC of the proposed regulations, CNB has taken steps to document and establish additional internal control structures and procedures, as necessary, to ensure compliance with new requirements imposed by FDICIA and the regulations thereunder concerning CNB's safety and soundness. CNB's audit committee is composed entirely of outside directors. 11 PAYMENT OF DIVIDENDS There are statutory and regulatory requirements applicable to the payment of dividends by CNB to the Company and by the Company to its shareholders. By the Company. The Company began paying cash dividends in December 1994. The Company anticipates continuing to pay cash dividends on a semi-annual basis to the shareholders of the Company, when and as declared by its Board of Directors, out of funds legally available therefor, subject to the restrictions set forth in the California General Corporation Law (the "Corporation Law"). The amount of the annual dividend is anticipated to generally range between 10% to 25% of estimated annual earnings. The Corporation Law provides that a corporation may make a distribution to its shareholders if the corporation's retained earnings equal at least the amount of the proposed distribution. The Corporation Law further provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may nevertheless make a distribution to its shareholders if it meets the following two generally stated conditions: (i) the corporation's assets equal at least 1.25 times its liabilities, and (ii) the corporation's current assets equal at least its current liabilities or, if the average of the corporation's earnings before taxes on income and interest expense for the two preceding fiscal years was less than the average of the corporation's interest expense for such fiscal years, the corporation's current assets must equal at least 1.25 times it current liabilities. The primary source of funds for payment of dividends by the Company would be obtained from dividends received from CNB. By CNB. The board of directors of a national bank may declare the payment of dividends from funds legally available therefore, depending upon the earnings, financial condition and cash needs of the bank and general business conditions. A national bank may not pay dividends from its capital. All dividends must be paid out of net profits then on hand, after deducting losses and bad debts. A national bank is further restricted from declaring a dividend on its shares of common stock until its surplus fund equals the amount of capital stock, or, if the surplus fund does not equal the amount of capital stock, until one-tenth of the bank's net profits of the preceding half year in the case of quarterly or semiannual dividends, or the preceding two consecutive half-year periods in the case of an annual dividend, are transferred to the surplus fund. Furthermore, if the total of all dividends declared by a bank in any calendar year would exceed the total of its retained net profits of that year combined with its net profits of the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock, then the approval of the Comptroller is required for the payment of any dividends. Guidelines of the Comptroller set forth factors which are to be considered by a national bank in determining the payment of dividends. A national bank, in assessing the payment of dividends, is to evaluate the bank's capital position, its maintenance of an adequate allowance for loan and lease losses, and the need to revise or develop a comprehensive capital plan, complete with financial projections, budgets and dividend guidelines. The Comptroller has broad authority to prohibit a national bank from engaging in banking practices which it considers to be unsafe and unsound. It is possible, depending upon the financial condition of the national bank in question and other factors, that the Comptroller may assert that the payment of dividends or other payments by a bank is considered an unsafe or unsound banking practice and, therefore, direct the bank to implement corrective action to address such a practice. Accordingly, the future payment of cash dividends by CNB to the Company will not only depend upon CNB's earnings during any fiscal period, but also upon the assessment of CNB's Board of Directors of the capital requirements of CNB and other factors, including dividend guidelines and the maintenance of an adequate allowance for loan and lease losses. Policy Statement on Allowance for Loan Losses In 1993, the Federal banking agencies, through the Federal Financial Institutions Examination Council, issued a uniform policy statement on the adequacy of the reserves for loan and lease losses. The policy statement establishes a benchmark equal to the sum of (a) 100% of assets classified as uncollectible, (b) 50% of assets classified as doubtful, (c) 15% of assets classified substandard and (d) estimated credit losses on other assets over the upcoming 12 months. Federal bank examiners will measure the reasonableness of a banks' methodology for computing its reserves against this benchmark which is designed to be neither a floor nor a safe harbor. 12 Community Reinvestment Act and Fair Lending Developments The CRA requires banks, as well as other lenders, to identify the communities served by the bank's offices and to identify the types of credit the bank is prepared to extend within such communities. The CRA also requires an assessment of the performance of the bank in meeting the credit needs of its community and to take such assessment into consideration in reviewing applications for mergers, acquisitions, and other transactions. An unsatisfactory CRA rating may be the basis for denying such an application. CNB is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and CRA activities. In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the Federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. On March 8, 1994, the Federal Interagency Task Force on Fair Lending issued a policy statement, which became effective April 15, 1994, on discrimination in lending. The policy statement describes the three methods that Federal agencies will use to prove discrimination: overt evidence of discrimination, evidence of disparate treatment, and evidence of disparate impact. In connection with its assessment of CRA performance, the regulators assign a rating of "outstanding," "satisfactory," needs to improve," or "substantial noncompliance." The OCC conducts examinations of a bank's CRA performance as part of its regular examination process. PENDING LEGISLATION AND REGULATIONS Certain legislative and regulatory proposals which could affect the Company, CNB and the banking business in general are pending, or may be introduced, before the U.S. Congress, the California State Legislature, and Federal and State government agencies. The U.S. Congress is considering numerous bills that could reform the banking laws substantially, particularly if the current legal barriers between commercial banking and investment banking are eliminated, as is now being proposed. It is not known to what extent, if any, these proposals will be enacted or what effect such legislation would have on the structure, regulation, or competitive relationship of financial institutions. It is likely, however, that many of these proposals would subject the Company and CNB to increased regulation, disclosure and reporting requirements and would increase competition to the Bank and its cost of doing business. In addition to pending legislative changes, the various banking regulatory agencies frequently propose rules and regulations to implement and enforce already existing legislation. FDICIA requires the regulatory agencies to adopt numerous rules, regulations, standards and guidelines over the next several years. Some of these regulations have been proposed. With respect to others, the agencies have solicited comments from the industry on the form the regulations should take. It cannot be predicted whether or in what form any such legislation or regulations will be enacted or the effect that such legislation may have on the business of the Company and CNB. SUBORDINATED DEBENTURE In 1995, the Company consummated a private offering of $3.0 million in 11.5% subordinated notes. The notes, which will mature on September 15, 2005, were offered to the Board of Directors, bank officers and other accredited investors within the meaning of Rule 501 under the Securities Act of 1933, as amended. The debentures are redeemable by the Company after September 30, 1998 at a premium ranging from 0% to 5% of the premium redeemed. In an identical transaction, CNB issued subordinated debt to the Company in an equal amount. The notes qualify as Tier 2 capital of CNB. 13 COMPETITORS Commercial banks, in general, have historically been less restricted in the types of loans they may lawfully make than have been non-bank financial institutions. However, the Depository Institutions Deregulation and Monetary Control Act, enacted in 1980, has increased the ability of non-banking institutions to compete with banks in lending activities. Federally chartered savings and loan associations may now invest up to 10% of their assets in commercial corporate, business or agricultural loans, and may offer credit card services. Federal credit unions have previously been authorized by law to offer certain types of consumer loans. Additionally, since December 31, 1980, banks and other financial institutions, nationwide, have been permitted to offer check-like services, such as negotiable order of withdrawal (NOW) accounts, on which interest or dividends may be paid under certain circumstances. SELECTED STATISTICAL INFORMATION The following tables present selected financial information regarding the Bank's loans and deposits. This information should be read in conjunction with the company's Consolidated Financial Statements and the notes thereto and Management's Discussion and Analysis of Financial condition and Results of Operations included in the Company's 1995 Annual Report to Shareholders, which has been incorporated herein by reference. TABLE I - LOAN MATURITIES - The following table details the maturity structure of the Bank's Commercial, SBA, Venture Lending and Real Estate Construction and Land loan portfolio at December 31, 1995.
(Dollars in Thousands) Commercial, Real estate SBA and construction and Loan due in: Venture Lending Land - ------------------------------------------------------------------------------- One year or less: Floating Rate $54,151 $23,480 Fixed Rate 1,435 409 One to five years: Floating Rate 27,293 -- Fixed Rate 5,172 -- After five years: Floating Rate -- -- Fixed Rate 501 -- ------- ------- Total $88,552 $23,889 ======= =======
TABLE II - COMPOSITION OF LOANS - The following table details the composition of CNB's gross loan portfolio at:
December 31 ----------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------------------------- (Dollars in millions) $ % $ % $ % $ % $ % ----------------------------------------------------------------------------------------------- Commercial 88.6 54.0 81.7 58.6 77.7 57.7 73.5 56.9 60.6 57.8 Real estate construction and Land 23.9 14.5 18.1 13.0 19.1 14.2 23.0 17.8 17.0 16.3 Real estate term 23.0 14.0 13.1 9.4 12.1 9.0 11.2 8.7 9.6 9.2 Consumer 28.7 17.5 21.1 15.1 18.2 13.5 16.6 12.8 17.5 16.7 ----------------------------------------------------------------------------------------------- Total 164.2 100.0 134.0 96.1 127.1 94.4 124.3 96.2 104.7 100.0 ----------------------------------------------------------------------------------------------- Loans Held For Sale -- -- 5.4 3.9 7.6 5.6 4.9 3.8 -- -- ----------------------------------------------------------------------------------------------- Total Loans $164.2 100.0 $139.4 100.0 $134.7 100.0 $129.2 100.0 $104.7 100.0 ===============================================================================================
14 TABLE III - NON-PERFORMING LOANS -The following table details CNB's non-performing loan portfolio for the last five years.
December 31 ------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 ------------------------------------------------------ Non-accrual $2,513 $3,244 $ 997 $513 $738 Accruing loans past due 830 1,371 1,903 -- 55 90 days or more Restructured loans -- -- -- -- -- ------------------------------------------------------ Total $3,343 $4,615 $2,900 $513 $793 Percent of total loans 2.0% 3.3% 2.2% .4% .8% ------------------------------------------------------
TABLE IV - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES - CNB's allocation of its allowance for loan losses for the past five years is detailed as follows:
December 31 ---------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 ---------------------------------------------------------------------------------------------------------- $ Percent to $ Percent to $ Percent to $ Percent to $ Percent to total loans total loans total loans total loans total loans ---------------------------------------------------------------------------------------------------------- Amount of allowance allocated to: Commercial $1,057 0.65 $1,834 1.32 $1,496 1.11 $1,216 0.94 $1,018 0.97 Real estate construction and land 153 0.09 180 0.13 308 0.23 263 0.20 184 0.18 Real estate term 696 0.43 132 0.09 391 0.29 56 0.05 48 0.04 Consumer 273 0.17 273 0.19 10 0.01 190 0.14 217 0.20 Loans held for sale -- -- 14 0.01 27 0.02 23 0.02 -- -- Unallocated 504 0.30 485 0.35 15 0.01 -- -- 3 .01 ---------------------------------------------------------------------------------------------------------- Total $2,683 1.64 $2,918 2.09 $2,247 1.67 $1,748 1.35 $1,470 1.40 ==========================================================================================================
TABLE V - The following table summarizes the activity in CNB's allowance for loan losses for the past five years:
December 31 ------------------------------------------------------- (Dollars in thousands) 1995 1994 1993 1992 1991 ------------------------------------------------------- Allowance for loan losses: Balance at the beginning of period $ 2,918 $ 2,247 $ 1,748 $1,470 $1,301 Charge Offs: Commercial (973) (748) (1,069) (520) (23) Real estate construction -- (123) -- (62) (188) Real estate term -- -- -- -- -- Consumer installment (101) (141) (159) (145) (2) ------------------------------------------------------- Total (1,074) (1,012) (1,228) (727) (213) Recoveries: Commercial 156 57 -- 4 -- Real estate construction -- -- -- 95 -- Real state term -- -- -- -- -- Consumer installment 2 6 48 4 -- ------------------------------------------------------- Total 158 63 48 103 -- Net charge-offs (916) (949) (1,180) (624) (213) ------------------------------------------------------- Provision charged to income 681 1,620 1,679 902 382 ------------------------------------------------------- Balance at the end of period $ 2,683 $ 2,918 $ 2,247 $1,748 $1,470 =======================================================
15 Table VI - IMPAIRED LOANS The following table details the carrying value of CNB's impaired loans, in accordance with FASB 114, by type of loan as of December 31, 1995:
Net Recorded Valuation Carrying (Dollars in thousands) Amount Allowance Value ----------------------------------- Commercial $ 851 $260 $ 591 Real Estate - Construction and Land -- -- -- Real Estate - Term 1,662 249 1,413 ----------------------------------- Total $2,513 $509 $2,004 ===================================
All the above impaired loans were measured based on the fair value of the loan's collateral. The allowance for loan losses for all other loans, including consumer loans which are considered to be small homogenous loans as defined by FAS 114, is determined based on the methodology discussed in the Company's Annual Report. CNB considers a loan impaired when, based on current information and events, it is probable that CNB will be unable to collect all amounts due according to the contractual terms of the loan agreement. This policy is generally consistent with CNB's nonaccrual policy. Loans which are over 90 days contractually delinquent and loans which have developed inherent problems prior to being 90 days delinquent are considered impaired. An insignificant delay or shortfall in the amount of payments is not considered an event that, when considered in isolation, would automatically cause a loan to be considered impaired for purposes of FAS 114. Examples for insignificant delays or shortfalls may include, depending on the specific facts and circumstances, those that are associated with temporary stoppage in operations due to equipment failure or a natural disaster, or due to tight cash flows during the off-peak season of a business loan customer. CNB did not recognize interest on impaired loans during the year ended December 31, 1995. Table VII - MATURITIES OF CERTIFICATES OF DEPOSIT The following table presents the maturities of CNB's certificates of deposit over $100,000 as of December 31, 1995.
(Dollars in thousands) - ---------------------- Three months or less $21,256 Three to six months 4,489 Six to twelve months 1,210 Over twelve months 149 ------- Total $27,104 =======
For information regarding certain required disclosures of the maturities of investments, refer to Note 2 in the Company's 1995 Annual Report to Shareholders which is incorporated herein by reference. 16 EMPLOYEES The Company has no salaried employees, since all officers of the Company are employees of CNB. At December 31, 1995, CNB had 109 full time equivalent employees. Management believes that its employee relations are good and that the benefits provided by CNB to its employees are competitive. FORWARD-LOOKING STATEMENTS Except for the historical information contained in this Annual Report on Form 10-K, certain items herein constitute forward-looking statements, including without limitation, certain matters discussed under Part I, Item 1, "Business," under the headings "Market Area and Client Base," "Trust Department," "Supervision and Regulation--Capital Adequacy of the Bank" and "-- Federal Deposit Insurance Corporation Improvement Act of 1991 --Risk Based Deposit Insurance Rates," Part I, Item 3, "Legal Proceedings," and Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation" (incorporated herein by reference). The matters referred to in such statements involve risks and uncertainties including, but not limited to, the impact of economic conditions (both generally and more specifically in the markets the Bank operates), the impact of competition for the Bank's Clients from other providers of financial services, the impact of government legislation and regulation (which changes from time to time and over which the Bank has no control), and other risks detailed in this Report and in the Company's other filings with the Securities and Exchange Commission. ITEM 2. PROPERTIES The Company leases, from an unaffiliated party, approximately 19,000 square feet of office space, consisting of a portion of the first and second floors of a two-story building at the intersection of Stevens Creek Boulevard and Torre Avenue in Cupertino, California. The lease commenced on October 1, 1992, and has a term of ten years, with two consecutive five-year renewal options. The current minimum monthly rental payments are approximately $42,000, and are subject to annual adjustments depending on the percentage increase in the consumer price index over the prior period. The rent is further subject to adjustment upon exercise of each renewal option, to an amount equal to the then current market rental rate for similar properties. At December 31, 1994, the Company subleased all 19,000 square feet of the leased premises to CNB for an amount equivalent to the Company's expense related to such premises. CNB has entered into a lease for 3,900 square feet of office space on the ground floor of Sixty South Market Street, San Jose, CA, effective August 1, 1993. The lease has a term of five years, with an option to extend for an additional five years. The monthly rent is approximately $5,200 and is subject to annual adjustments. The rent is subject to adjustment upon exercise of the renewal option to an amount equal to the then current market rental rate for similar space. Effective March 28, 1994, CNB extended its lease for 5,300 square feet of office space at 3 Palo Alto Square in Palo Alto, CA, which currently accommodates its Palo Alto regional banking office, and its Emerging Growth Industries division. The term is for eight years, with a base rent of $11,125 per month, with scheduled annual increases. The Company has an option to extend the lease for two additional five-year periods. On July 13, 1995, CNB entered into an agreement to lease, upon completion, approximately 6,000 square feet of a new building currently under construction. The leased space is located at 400 Emerson Street, Palo Alto, CA. This space will accommodate a new branch office, as well as, the new headquarters for CNB's Trust Division. The twelve year lease will have a base rent of $16,500 per month with a rental adjustment schedule which increases the base rent every two years. The adjustment will be based on a consumer price index but shall not be less than four percent over the two year period and not greater than ten percent over the two year period. CNB anticipates occupancy in late Spring, 1996. The Company believes that its facilities are well maintained and adequate to meet its current requirements. 17 ITEM 3. LEGAL PROCEEDINGS On January 25, 1994, Sumitomo Bank ("Sumitomo") as trustee for the California Dental Guild Real Estate Mortgage Fund II ("Fund II"), filed suit against CNB in the Superior Court of the State of California, Santa Clara County, alleging negligence by CNB and, by amendment of the complaint, one of its officers, in connection with the administration of a trust account. Sumitomo brought suit in its capacity as successor trustee for Fund II for monetary damages of approximately $2.2 million. In July 1995, CNB entered into an agreement with Sumitomo to settle the litigation for approximately $1.8 million. The Company believes, based on advice from counsel, that it is highly probable that insurance coverage for a significant portion of this settlement is available under its director and officer liability insurance policy and its professional liability insurance policy, as well as the errors and omissions policy of the insurance agent which sold the Company these policies. The Company's insurance company has denied the Company's claim for coverage under these policies and the Company has initiated litigation against the insurance company as well as the agent from whom the Company obtained such policies. However due to the uncertainty associated with such recovery, the Company has reflected the $1.8 million cost of the legal settlement in its 1995 earnings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The information required by this Item is incorporated by reference to the section entitled "Stock Activity" on page 22 of the Company's 1995 Annual Report to Shareholders. At December 31, 1995, there were approximately 402 holders of record of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated herein by reference to the table entitled "Financial Highlights" on page 1 of the Company's 1995 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 9 through 22 of the Company's 1995 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated herein by reference to the Company's Consolidated Financial Statements and the notes thereto, and the Independent Auditor's Report thereon, set forth on pages 23 through 41 of the Company's 1995 Annual Report to Shareholders. 18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES The information required to be reported on this item has been previously reported in a Form 8-K filed on October 20, 1994, which is incorporated herein by reference. PART III Certain information required by Part III is omitted from this Report in that the Company intends to file its definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information therein is incorporated herein by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the information relating to the directors of the Company set forth under the captions "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information relating to executive compensation set forth under captions "Executive Compensation and Other Matters" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference related to ownership of equity securities as set forth under the caption "General Information - Stock Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the information relating to certain relationships and related transactions set forth under the caption "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: (1) Financial Statements. The following Consolidated Financial Statements of Cupertino National Bancorp and Subsidiary and Independent Accountants' Report are contained in and incorporated by reference herein to the Company's 1995 Annual Report to Shareholders: Consolidated Balance Sheets - At December 31, 1995 and 1994 19 Consolidated Statements of Income - For the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Shareholders' Equity -For the years ended December 31, 1995, 1994 and 1993. Consolidated Statements of Cash Flows - For the years ended December 31, 1995, 1994 and 1993. Notes to Consolidated Financial Statements. Independent Accountants' Reports. With the exception of the information incorporated by reference to the Company's 1995 Annual Report to Shareholders in Parts I, II and IV of this Form 10-K, the Company's 1995 Annual Report to Shareholders is not to be deemed filed as part of this Report. (2) Financial Statement Schedules. All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in Management's Discussion and Analysis of Financial Condition and Results of Operations or in the Consolidated Financial Statements and Notes thereto contained in the Company's 1995 Annual Report to Shareholders, which are incorporated herein by reference. (3) Exhibits. The exhibits listed on the accompanying Exhibit Index are filed as part of, or are incorporated by reference into, this Report. Exhibit Nos. 10.2, 10.5, 10.7, 10.8, 10.9, 10.10, 101.11, 10.15, 10.13, 10.14 are management contracts or are compensatory plans or arrangements covering executive officers or directors of the Company. (b) Reports on Form 8-K. The Company filed the following reports on Form 8-K during the fourth quarter of fiscal 1995: Date of Report Items Reported -------------- -------------- October 10, 1995 Pursuant to Item 5, the Company reported entering into a form of Debenture Agreement with certain of its Officers, Directors and other accredited investors with the meaning of Rule 501 under the Securities Act of 1933, as amended, dated September 27, 1995. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CUPERTINO NATIONAL BANCORP By: /s/ C. Donald Allen -------------------------------- C. Donald Allen, Director and Chief Executive Officer Dated: March 29, 1996 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints C. Donald Allen and Steven C. Smith or either of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her, and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchanges Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue of hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ C. Donald Allen Director and March 29, 1996 - ------------------------- Chief Executive Officer C. Donald Allen (Principal Executive Officer) /s/ Steven C. Smith Executive Vice President, March 29, 1996 - ------------------------- Chief Operating Officer Steven C. Smith /s/ Heidi Wulfe Senior Vice President March 29, 1996 - ------------------------- Chief Financial Officer Heidi Wulfe (Principal Financial and Accounting Officer) /s/ David K. Chui Director March 29, 1996 - ------------------------- David K. Chui /s/ Carl E. Cookson Director March 29, 1996 - ------------------------- Carl E. Cookson
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Signature Title Date - --------- ----- ---- /s/ Jerry R. Crowley Director March 29, 1996 - ------------------------- Jerry R. Crowley /s/ Janet M. DeCarli Director March 29, 1996 - ------------------------- Janet M. DeCarli /s/ John M. Gatto Director March 29, 1996 - ------------------------- Chairman of the Board John M. Gatto /s/ William H. Guengerich Director March 29, 1996 - ------------------------- William H. Guengerich /s/ James E. Jackson Director March 29, 1996 - ------------------------- James E. Jackson /s/ Rex D. Lindsay Director and March 29, 1996 - ------------------------- Vice Chairman of the Board Rex D. Lindsay /s/ Glen McLaughlin Director and March 29, 1996 - ------------------------- Glen McLaughlin /s/ Norman Meltzer Director March 29, 1996 - ------------------------- Norman Meltzer /s/ Dick J. Randall Director March 29, 1996 - ------------------------- Dick J. Randall /s/ Dennis S. Whittaker Director March 29, 1996 - ------------------------- Dennis S. Whittaker
22 INDEX TO EXHIBITS
Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 3.1 Amended Articles of Incorporation of Cupertino National Bancorp - filed as Exhibit 4.1 of Registrant's Exhibits to Form S-8 Registration Statement (No. 33-36057), as filed with the Securities and Exchange Commission (the "Commission") on July 25, 1990 and incorporated herein by reference. 3.2 Bylaws of Cupertino National Bancorp--filed as Exhibit of Registrant's Exhibits to Form S-8 Registration Statement (No. 33-36057), as filed with the Commission on July 25, 1990 and incorporated herein by reference. 4.1 Specimen Stock Certificate filed as Exhibit 4.1 of Registrant's Exhibits to Form S-2 Registration Statement (No. 33-30297), as filed with the Commission on August 2, 1989 and incorporated herein by reference. 4.2 Form of Subordinated Debentures filed as Exhibit 1 of Registrant's Exhibits to Form 8-K as filed with the Commission on October 25, 1995 and incorporated by reference. 10.1 Lease - Banking Facility--filed as Exhibit 10.1 of Registrant's Exhibits to Amendment No. 1 to Form S-18 Registration Statement (No. 2-94390), as filed with the Commission on December 11, 1984 and incorporated herein by reference. 10.2** 1985 Stock Option Plan, filed as Exhibit 10.2 of Registrant's Exhibits to Form 10-K for the fiscal year ended December 31, 1993, as filed with the Commission on March 25, 1994 and incorporated herein by reference. 10.3 Form of incentive stock option agreement for use with 1985 Stock Option Plan filed--as Exhibit 4.4 of Registrant's Exhibits to Form S-8 Registration Statement (No. 33-36057), as filed with the Commission on July 25, 1990 and incorporated herein by reference. 10.4 Form of non-statutory stock option agreement or use with 1985 Stock Option Plan--incorporated herein by reference and filed as Exhibit 4.5 of Registrant's Exhibits to Form S-8 Registration Statement (No. 33-36057), as filed with the Commission on July 25, 1990. 10.5** 1986 Non-Qualified Stock Option Plan--filed as Exhibit 10.3 of Registrant's Exhibits to Form 10-K for the fiscal year ended December 31, 1986, as filed with the Commission on March 31, 1987 and incorporated herein by reference. 10.6 Form of non-qualified stock option agreement for use with 1986 Non-Qualified Stock Option Plan--filed as Exhibit 10.7
23
Sequentially Number Exhibit Numbered Page - ------ ------- ------------- Form 10-K for the fiscal year ended December 31, 1986, as filed with the Commission on March 31, 1987 and incorporated herein by reference. 10.7** 1989 Non-Qualified Stock Option Plan--filed as Exhibit 10.11 of Registrant's Form S-2 registration statement (No. 33-30297), filed with the Commission on August 2, 1989 and incorporated herein by reference. 10.8** Employment Agreement with C. Donald Allen dated July 1, 1990--filed as Exhibit 10.9 of Registrant's Exhibits to Form 10-K for the fiscal year ended December 31, 1990, as filed with the Commission on March 30, 1991 and incorporated herein by reference. 10.9** Cupertino National Bancorp Stock Purchase Plan--filed as Exhibit 10.10 of Registrant's Exhibits to Form 10-K for the fiscal year ended December 31, 1990, as filed with the Commission on March 30, 1991, and incorporated herein by reference. 10.10** Salary Continuation Agreement with C. Donald Allen dated August 1, 1993, filed as Exhibit 10.10 of Registrant's Exhibits to Form 10-K for the fiscal year ended December 31, 1993, as filed with the Commission on March 25, 1994, and incorporated herein by reference. 10.11** Salary Continuation Agreement with Scott Montgomery dated August 1, 1993, filed as Exhibit 10.11 of Registrants Exhibits to Form 10-K for the fiscal year ended December 31, 1993, as filed with the Commission on September 7, 1994, and incorporated herein by reference. 10.12 Litigation Settlement filed as Exhibit 10.12 of Registrant's Exhibits to Form 10-Q as filed with the Commission for quarter end September 30, 1995, and incorporated herein by reference. 10.13 Emerson Lease filed as Exhibit 10.13 of Registrant's Exhibits to Form 10-Q as filed with the Commission for quarter end September 30, 1995, and incorporated herein by reference. 10.14 1995 Stock Option Plan as Exhibit 10.14 of Registrant's Form S-8 registration statement filed with the Commission on September 7, 1995 and incorporated herein by reference. 10.15** Cupertino National Bancorp 401(k) Profit Sharing Plan as Exhibit 10.15 of Registrant's Form S-8 registration statement filed with the Commission on September 7, 1995 and incorporated herein by reference. 10.16** Cupertino National Bancorp Employee Stock Purchase Plan as Exhibit 10.16 of Registrant's Form S-8 registration statement filed with the Commission on September 7, 1995 and incorporated herein by reference.
24
Sequentially Number Exhibit Numbered Page - ------ ------- ------------- 10.17** Form of Salary Continuation Agreement with certain executive officers. 13.1 1995 Annual Report to Shareholders (to be deemed filed only to the extent required by the instructions to exhibits for Reports on Form 10-K). 22.1 Subsidiaries of the Registrant--filed as Exhibit 22.1 of Registrant's Exhibits to Form 10-K for the fiscal year ended December 31, 1985, as filed with the Commission on March 31, 1986 and incorporated herein by reference. 23.1 Independent Accountants' Consent - Coopers & Lybrand, L.L.P. 23.2 Independent Auditors' Consent - Deloitte & Touche, LLP 25.1 Power of Attorney. Reference is made to page 21 of this report. 27.0 Financial Data Schedule
* Previously filed. ** A management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). 25 EX-10.17 2 EMPLOYMENT SEVERANCE AND RETIREMENT BEN AGRMNT EXHIBIT 10.17 CUPERTINO NATIONAL BANK & TRUST EMPLOYMENT, SEVERANCE AND RETIREMENT BENEFITS AGREEMENT THIS EMPLOYMENT, SEVERANCE AND RETIREMENT BENEFITS AGREEMENT (the "Agreement") is made and entered on this ____ day of __________ and is effective as of _________________, by and between CUPERTINO NATIONAL BANCORP (the "Corporation"), its wholly owned subsidiary CUPERTINO NATIONAL BANK & TRUST (the "Bank") and _____________ ("Employee"). The Corporation, Bank and Employee agree as follows: 1. DEFINITIONS ----------- 1.1 "Agreement" means only the agreement contained in this document and as modified in writing pursuant to section 10.5 herein. 1.2 "Anniversary Date" means the date one (1) year from the Effective Date. 1.3 "Bank" means Cupertino National Bank & Trust, and any successor to its business or assets which executes and delivers the Agreement as provided by section 10.2 herein or which becomes bound by this Agreement by operation of law. 1.4 "Board" means the Board of Directors of the Bank. 1.5 "Cause" means (1) Employee's acts of personal dishonesty; willful misconduct; breach of fiduciary duty or violation of banking law involving an intent to obtain personal or family profit; willful violation of any law, rule, or regulation which results in action against or restrictions imposed on the Bank by regulatory authorities; habitual abuse of substances (as corroborated by a physician) or extended unexcused absence from work; or (2) Employee's continued failure to substantially perform Employee's duties (which failure may be determined by the Board by reference to the quality of the Company's financial condition or operating performance) with the Bank (other than any failure resulting from Disability) after a written demand for substantial performance is given to Employee by the Board which demand specifically identifies the manner in which the Board believes that Employee has not substantially performed Employee's duties. The definition of "Cause" as set forth in subsection (1) hereof is sometimes referred to separately herein as "Personal Conduct/Cause," and the definition of "Cause" as set forth in subsection (2) is sometimes referred to separately herein as "Performance/Cause." The term "Cause," standing alone, shall mean either Personal Conduct/Cause or Performance/Cause or both. For purposes of the definition of Personal Conduct/Cause, an act, or failure to act, on the Employee's part shall be considered "willful" only if done, or omitted to be done, by him without reasonable belief that such act, or failure to act, is in the best interests of the Employer. 1.6 "Change in Control" means a change in the Board of Directors, or the Corporation or the Bank following: 1.6.1 The acquisition, directly or indirectly, of more than 25% of the outstanding shares of any class of voting securities of the Corporation or the Bank by any Person; or 1.6.2 A merger, consolidated or sale of all or substantially all of the assets of the Corporation or the Bank, such that the individuals constituting the Corporation Board or the Board of the Bank immediately prior to such period shall cease to constitute a majority of such Board, unless the election of each director who was not a director prior thereto was approved by vote of at least two-thirds of the directors then in office who were directors prior to such period. 1.6.3 Notwithstanding the foregoing, any change in the Board of either the Corporation or the Bank which occurs within the twenty-four (24) month period following the Effective Date as a result of a merger with South Valley Bancorporation, shall NOT constitute a Change in Control for purposes of this Agreement. 1.7 "Control" means the possession, direct or indirect, by any Person or "group" (as defined in section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the power to direct or cause the direction of the management policies of the Corporation or the Bank, whether through ownership of voting securities, by contract, or otherwise, and in any case means the ability to determine the election of a majority of the directors of the Corporation or the Bank. 1.8 "Corporation" means Cupertino National Bancorp and any successor to its business or assets which executes and delivers the agreement as provided by section 10.2 herein, or which becomes bound by this Agreement by operation of law. 1.9 "Corporation Board" means the Board of Directors of Cupertino National Bancorp. 1.10 "Disability" means physical or mental illness resulting in absence on a full-time basis from Employee's duties with Employer for one- hundred eighty (180) consecutive calendar days. Disability shall be deemed to have occurred only after the following procedure has been satisfied: If within thirty (30) days after written notice of proposed Termination for Disability is given to Employee by Employer, Employee has 2 not returned to the full-time performance of Employee's duties, Employer may terminate Employee by giving written notice of Termination for Disability. Such notice may be given by Employer following Employee's absence from Employee's duties by reason of physical or mental disability for one-hundred fifty (150) consecutive calendar days. 1.11 "Effective Date" means _________________.- Salary Continuation Agreement. 1.12 "Employee" means ______________. 1.13 "Employer" means the Corporation, the Bank or one of their subsidiaries which is Employee's employer on the date of a Change in Control. If Employee has more than one such employer on the date of a Change in Control, it means the employer who makes payment of Employee's monthly salary, and if two or more employers do so, each shall be deemed to be Employer for the purposes of this Agreement on a pro rata basis as to the amount of Employee's working time devoted to each, as a percentage of Employee's salary. "Employer" shall include any successor to the business or assets of an Employer and which executes the agreement provided by section 10.2 or which becomes bound by this Agreement by operation of law. 1.14 "Person" means an individual, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization or a government or political subdivision thereof. 1.15 "Resignation for Good Reason" or "Resign for Good Reason" means the cessation of Employee's employment upon written notice given by Employee to Employer as provided in section 5.4.1 herein. 1.16 "Retirement" or "Retire" means voluntary termination by Employee of his/her employment with Employer other than for reason of death, Disability or Resignation for Good Reason, as those terms are defined herein. 1.17 "Salary" shall mean regular annual base cash compensation exclusive of incentive or bonus compensation or noncash compensation benefits. 1.18 "Retirement Age" for purposes of this Agreement is sixty (60) years of age. 1.19 "Termination" or "Terminated" means cessation of Employee's employment upon written notice (with or without Cause) given to Employee, by Employer or the Board, or their successors. 3 2. POSITION AND DUTIES ------------------- 2.1 Employee shall be employed by the Bank as its _______________ _______________________ reporting to the Executive Management Committee, of which Employee will be a member, effective _______________ ("the Commencement Date"). As __________________________________________, Employee agrees to devote his full business time, energy and skill to his duties at the Bank. These duties shall include, but not be limited to, any duties consistent with his position which may be assigned to Employee from time to time by the Bank's President. 2.2 CODE OF PERSONAL AND BUSINESS CONDUCT. Employee agrees to abide ------------------------------------- by the terms and conditions of the Bank's standard employee Code of Personal & Business Conduct executed by Employee and attached here as Exhibit A. 3. TERM ---- 3.1 The term of this Agreement shall commence as of the Effective Date and shall continue until the Termination, Retirement, Resignation for Good Reason (as defined in section 5.4.1) or death of Employee, whichever occurs first. This Agreement and all of its terms and conditions may be terminated upon written agreement by the parties. Notwithstanding the foregoing, nothing contained herein shall imply the existence of a contract or assurance of employment between Employee and Employer, nor shall this Agreement alter Employer's personnel policies and practices, including the right to terminate Employee at any time with or without cause. 3.2 Notwithstanding the right of Bank to terminate Employee, any such Termination shall be governed by section 5 below. 4. COMPENSATION ------------ 4.1 SALARY. Employee shall be paid a monthly salary of __________ ------ (____________ on an annual basis), subject to applicable withholding, in accordance with the Bank's normal payroll procedures. 4.2 BENEFITS. Employee shall have the right, on the same basis as -------- other members of senior management of the Bank, to participate in and to receive benefits under any of the Bank's employee benefits plans, including medical, dental, life and disability group insurance plans as well as the Bank's 401(k) Plan and Employee Stock Purchase Plan. 4 4.3 VACATION. Employee shall accrue vacation at a rate of 2.083 -------- days per month, the equivalent of five (5) weeks over a one (1) year period. 4.4 STOCK OPTIONS. Stock options will be granted at the discretion ------------- of the Board of Directors. The shares will vest under the provisions of the Bank's 1995 Stock Option Plan. 4.5 PERFORMANCE BONUS. Employee will be eligible for a performance ----------------- bonus up to ___ of base salary based upon goals, which will be set annually by the Board. 4.6 CAR ALLOWANCE. _______ per month. ------------- 4.7 DEFERRED COMPENSATION. The Bank will provide Retirement --------------------- compensation benefits as provided in paragraph 6 set forth below. 4.9 COMPENSATION FREEZE. Subject to the terms and conditions herein, and for a period for three (3) years from the Effective Date, Employee's total annual Salary and standard employee benefits from Employer set forth above shall remain the same; provided, however, that Employee's Salary shall be increased annually to allow for a cost of living increase, such increase to be determined based on the U.S. Department of Labor Bureau of Labor Statistics Consumer Price Index for All Urban Consumers in the San Francisco, Oakland and Bay Area. In addition, it is within the complete discretion of the Employer to increase such amount of total compensation at any time and for any reason, including a promotion of Employee to a new position or title; however, other than the cost-of-living increase to Salary as provided for herein, nothing in this Agreement shall suggest or imply that the Board is under any duty or obligation to increase Employee's Salary or other compensation or standard employee benefits at any time during the three (3) year period following the Effective Date. Employee's current salary, his current participation in incentive compensation programs of the Employer and a description of current standard employee benefits are set forth above. 5. TERMINATION OF EMPLOYMENT ------------------------- 5.1 The provisions of this section 5 shall govern the benefits, if any, which Employee shall receive upon Termination of his Employment. 5.2 BENEFITS UPON VOLUNTARY TERMINATION. In the event that Employee ----------------------------------- voluntarily resigns from his employment with the Bank, or in the event that his employment terminates as a result of his death or disability, Employee shall be entitled to 5 no compensation or benefits from the Bank other than those earned under paragraph 4 above through the date of his termination. 5.3 BENEFITS UPON OTHER TERMINATION. Employee agrees that his ------------------------------- employment may be terminated by the Bank at any time, with or without cause. In the event of the termination of Employee's employment by the Bank for the reasons set forth below, he shall be entitled to the following: 5.3.1 TERMINATION FOR PERSONAL CONDUCT/CAUSE. The payments set -------------------------------------- forth in section 5.3.2 hereof shall not apply if at any time Employee is terminated upon a good faith finding of Personal Conduct/Cause by the Board; provided, however, that Employee shall be given written notice of the Board's finding of conduct by Employee amounting to Personal Conduct/Cause for such Termination. Such notice shall be accompanied by a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board adopted at a duly-noticed meeting of the Board, and finding in good faith that Employee engaged in conduct amounting to Personal Conduct/Cause and specifying the particulars thereof. 5.3.2 If the Employee is Terminated for Performance/Cause or other than by reason of death, Retirement, Disability or Personal Conduct/Cause, as set forth herein, or if Employee Resigns for Good Reason, as defined in section 5.4.1 below, the Bank shall pay to Employee ___________ months' Salary ("Severance Payment") at a rate equivalent to the then-current Salary of Employee. 5.3.3 The Bank shall have the option of paying Severance Payments in a lump-sum payment, or by salary continuation payments made under the Bank's normal employee compensation schedule. If the Bank chooses the lump- sum payment option, such payment shall be made not later than the tenth (10th) day following the date of cessation of employment, Termination or Resignation for Good Reason. 5.3.4 Although a payment triggering such section is not intended hereby, amounts otherwise due under this section will be reduced if, and to the extent that, such reduction will increase the net amount Employee will receive under this Agreement after taking into account the imposition of the excise tax under section 4999 of the Internal Revenue Code, if applicable. 5.4 If a Change in Control occurs during the Term of this Agreement, Employee may thereafter be entitled to a payment set forth in section 5.3.2 in accordance with the terms hereof, subject to the following limitations: 6 5.4.1 RESIGNATION FOR GOOD REASON. The payments set forth in section --------------------------- 5.3.2 hereof shall apply if, after a Change of Control but within one year thereafter, Employee Resigns for Good Reason, upon the happening of one or more of the following events (unless such event or occurrence is applied generally to all officers and employees of Employer and any parent or successor of any of them), any of which will constitute Good Reason for Employee's Resignation: 5.4.1.1 Without Employee's express written consent, Employee's assignment to any duties substantially inconsistent with Employee's position, duties, responsibilities and status with Employer immediately prior to a Change in Control, or any removal of Employee from any such position to a position substantially inferior to such prior position; 5.4.1.2 A reduction by Employer of Employee's Salary or of any bonus compensation formula applicable to Employee as in effect prior to a Change in Control; 5.4.1.3 A failure by Employer to maintain any of the employee benefits to which Employee was entitled prior to a Change in Control at a level substantially similar to or greater than that in effect prior to a Change in Control, through the continuation of the same or substantially similar plans, programs and policies; 5.4.1.4 The failure by Employer to provide Employee with the same number of paid vacation days and leave to which Employee would be entitled as salaried employee of Employer, or any parent or successor of Employer; 5.4.1.5 Employer requiring Employee to travel on employer's business to an extent substantially greater than Employee's present business travel obligations; or the relocation of Employee's office at least sixty (60) miles from its current location, without Employee's consent; and 5.4.1.6 The failure of the Bank to obtain the assumption of this Agreement by any successor of Employer as contemplated in section 10.2 below. 5.4.2 The events described above are the only events which shall constitute Good Reason. 6. CERTAIN RETIREMENT BENEFITS --------------------------- 6.1 Subject to the special terms and conditions contained below, upon cessation of Employee's employment with Employer, if the Employee has reached the Retirement 7 Age, or as soon thereafter as Employee reaches the Retirement Age, the Bank hereby agrees that the Employee and Employee's spouse shall become the joint owners (with right of survival) with the Bank of the annual increase of the cash surrender value of the policy thereafter arising; however, the Employee's (and Employee's spouse's) right to draw against such increase (such draw to reduce eventual death benefits) shall never exceed _______ per 12-month period (the "Retirement Draw Benefit"). The shared right to ownership of this increase shall continue for the lifetime of the Employee and the lifetime of the Employee's surviving spouse, but in no event longer than 40 years. 6.1.1 The Retirement Draw Benefit will be made available by means of a split-dollar insurance policy which is to be purchased by the Bank within thirty (30) days of the date of this Agreement, and for which the premium payment split between the Bank and Employee and the payment terms are outlined in Exhibit B to this Agreement. 6.1.2 Subject to the provisions of sections 6.1.3 and 6.1.4 herein, Employee's right to the Retirement Draw Benefit shall not fully vest unless he has been employed by Employer for seven (7) years from the Effective Date. If Employee's employment with Employer ends any time before a date one (1) year from the date of this Agreement (the "Anniversary Date"), Employee will not have any right to, or interest in, the Retirement Draw Benefit. If Employee's employment ends at any time after the Anniversary Date, but prior to the seven (7) year date of full vesting, Employee's right to one-seventh (1/7) of the Retirement Draw Benefit--i.e., the right to draw _________, or one-seventh of ________, per 12-month period--will vest on the Anniversary Date, and Employee's right to the Retirement Draw Benefit will continue to proportionately vest thereafter on a monthly basis, on the first date of each month following the Anniversary Date, until employment ends. 6.1.3 Subject to the provisions of section 6.1.2 herein, if prior to a Change in Control and during the Term hereof, Employee is Terminated for any reason other than Disability, the vesting of Employee's right to the Retirement Draw Benefit will cease as of the date of termination. If prior to a Change of Control and during the Term hereof, Employee is Terminated by reason of Disability, the vesting of Employee's right to the Retirement Draw Benefit will cease as of the date of termination unless the Board in its sole and absolute discretion approves additional vesting. 6.1.4 Notwithstanding the provisions of section 6.1.2 herein, if after a Change in Control and during the Term hereof, Employee is Terminated, or Resigns for Good Reason, as provided in section 5.4.1 herein, Employee's right to the Retirement Draw Benefit shall immediately vest in full, and such benefit shall become available to Employee when Employee reaches Retirement Age. 8 7. FEDERAL INCOME TAX WITHHOLDING ------------------------------ 7.1 The Bank shall withhold from any compensation or benefits payable under this Agreement all federal, state, city or other taxes or deductions as shall be required pursuant to any law, governmental regulation or ruling. 8. ARBITRATION ----------- 8.1 Any controversy between the parties hereto, including the construction, application or breach of any of the terms, covenants or conditions of this Agreement, and all claims relating to or arising from Employee's employment or Termination, including all statutory claims (including but not limited to all statutes dealing with employment discrimination), shall on a timely written request of one party served upon the other, be submitted to arbitration and be governed by the California Arbitration Act as set forth in the California Code of Civil Procedure (presently sections 1280 et seq.). The -- --- parties agree that any written request for arbitration must be made within one year after the initiating party first learned or should have learned in the exercise of reasonable diligence of the essential facts upon which the claim is based, or first suffered any harm, or first learned or should have learned in the exercise of reasonable diligence of the breach of this Agreement, whichever is earlier. Any claim not raised within such time limitation shall be waived and forever barred. The arbitration shall take place in Santa Clara County, California. 8.2 The parties may agree upon one arbitrator, but in the event they cannot agree, there shall be three (3), one named in writing by each of the parties within ten (10) days after demand for arbitration is given, and a third chosen by the two so appointed; provided further that if the two appointed cannot agree on the choice, then application shall be made to a presiding judge of the Santa Clara County Superior Court for the purpose of designating a third arbitrator. The applying party (who may suggest in such application the names of a suitable third arbitrator) shall provide the other party at least 48 hours prior notice of the application so that such other party may have the opportunity to submit one or more names of persons suitable to serve as the designated third arbitrator. The presiding judge shall have discretion to designate the third arbitrator from among the names suggested by either party or from among any other persons such judge deems appropriate. The cost of such arbitration, including reasonable attorneys' fees, shall be borne by the losing party or in such proportions as the arbitrator(s) shall decide. Arbitration shall be the exclusive remedy of the parties and the award of the arbitrator(s) shall be final and binding upon the parties. 9 9. GENERAL PROVISIONS ------------------ 9.1 NONASSIGNABILITY. Neither this Agreement nor any right or ---------------- interest hereunder shall be assignable by Employee, provided, however, that nothing in this section 10 shall preclude (i) Employee from designating a beneficiary to receive any benefits payable hereunder upon Employee's death, or (ii) Employee's executors, administrators, or other legal representatives of Employee's estate from assigning any rights hereunder to the person or persons entitled thereto. 9.2 ASSUMPTION. The Bank shall require any successor in interest ---------- (whether direct or indirect or as a result of purchase, merger, consolidation, Change in Control or otherwise) to all or substantially all of the business and/or assets of the Corporation or the Bank to expressly assume and agree to perform the obligations under this Agreement. 9.3 NO ATTACHMENT. Except as required or permitted by law, no ------------- right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy, or similar process of assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. The payments due Employee under section 5 herein shall not be deemed earned until the conditions set forth in section 5 occur, if ever. 9.4 BINDING AGREEMENT. This Agreement contains the entire ----------------- understanding among the parties regarding Employee's relationship with Bank and Corporation and supersedes any prior employment agreements. This Agreement shall be binding upon, and inure to the benefit of, Employee, the Bank and the Corporation, and their respective heirs, successors and assigns. Each party acknowledges that no representations, inducements, promises, or agreements have been made by any party, or anyone acting on behalf of any party, which are not embodied herein and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party except as provided herein. 9.5 AMENDMENT OR AUGMENTATION OF AGREEMENT. This Agreement may not -------------------------------------- be modified or amended except by an instrument in writing signed by the parties hereto. Unless expressly agreed to in writing by the parties hereto, no additional rights or compensation, even if given or accepted, shall be deemed to modify or otherwise affect the express terms and conditions of this Agreement. 9.6 WAIVER. No term or condition of this Agreement shall be deemed ------ to have been waived, nor shall there be any estoppel against the enforcement of any provision of 10 this Agreement except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 9.7 CONDITION OF THE BANK AND THE CORPORATION. Notwithstanding ----------------------------------------- anything in this Agreement, no payment shall be made under section 5 without regulatory approval if any of the following events or circumstances exist: (i) the Bank is insolvent or a conservator or receiver has been appointed for it; (ii) the Comptroller of the Currency or other appropriate federal banking agency has made a determination that the Bank or the Corporation is in a "troubled condition" as defined by applicable regulations of such federal banking agency; (iii) the Bank or the Corporation is assigned a composite rating of 4 or 5 by the appropriate federal banking agency or is informed in writing by the OCC that it is rated a 4 or 5 under the Uniform Financial Institution's Rating System of the Federal Financial Institution's Examination Council; or (iv) the OCC has initiated a proceeding against the Bank to terminate or suspend deposit insurance for the Bank. 9.8 SEVERABILITY. If, for any reason, any provision of this ------------ Agreement is held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and each such other provision shall to the full extent consistent with law continue in full force and effect. If any provision of this Agreement shall be held invalid in part, such invalidity shall in no way affect the rest of such provision not held invalid, and the rest of such provision together with all other provisions of this Agreement shall, to the full extent consistent with law, continue in full force and effect. (If this Agreement is held totally invalid or cannot be enforced, then to the full extent permitted by law any prior employment agreement, whether oral or written, express or implied, between the Bank and/or its affiliates, (or any successor thereof) and Employee shall be deemed reinstated as if this Agreement had not been executed.) 9.9 NOTICES. All notices, requests, demands and other ------- communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if mailed by United States certified or registered mail, prepaid, to the parties or their permitted assignees at the following addresses (or at such other address as shall be given in writing by either party to the other): To: Cupertino National Bank & Trust 20230 Stevens Creek Boulevard Cupertino, CA 95014-2244 Attention: Chairman of the Board 11 To: Employee at the last known address contained in the personnel records of the Bank 9.10 HEADINGS. The headings of paragraphs herein are included -------- solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 9.11 GOVERNING LAW. This Agreement has been executed and delivered ------------- in the State of California, and its validity, interpretation, performance, and enforcement shall be governed by the laws of said State. 9.12 ADVICE OF COUNSEL. Employee has been encouraged to consult ----------------- with legal counsel of Employee's choosing concerning the terms of this Agreement prior to executing this Agreement. Any failure by Employee to consult with competent counsel prior to executing this Agreement shall not be a basis for rescinding or otherwise avoiding the binding effect of this Agreement. The parties acknowledge that they are entering into this Agreement freely and voluntarily, with full understanding of the terms of the Agreement. Interpretation of the terms of this Agreement shall not be construed 12 for or against either party on the basis of the identity of the party who drafted the provision in question. CORPORATION: BANK: CUPERTINO NATIONAL BANCORP CUPERTINO NATIONAL BANK & TRUST By: _____________________________ By: ______________________________ _____________________________ ______________________________ Its: _____________________________ Its: ______________________________ _____________________________ ______________________________ EMPLOYEE: ____________________________________ 13 EX-13.1 3 ANNUAL REPORT EXHIBIT 13.1 1995 Annual Report [PHOTOGRAPH] [LOGO] C N B CUPERTINO NATIONAL BANCORP Mission Statement Cupertino National Bancorp is a value-added California financial services company dedicated to providing the highest standard of service to our clients through an empowered professional staff, while achieving a premier return for our shareholders. About the Cover Monolithic Hoover Tower on the Stanford University campus stands as a symbol of the intellectual prowess and unbridled creativity that spawned the world- renowned Silicon Valley. Cupertino National Bank & Trust is expanding to better serve the businesses and residents of the highly desirable Peninsula area with the Spring 1996 opening of our Emerson office in downtown Palo Alto. Financial Highlights
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ Results of operations: Interest income $ 20,293 $ 15,361 $ 13,333 $ 12,426 $ 12,634 Interest expense 7,354 4,279 3,166 3,542 4,988 --------------------------------------------------------------------- Net interest income 12,939 11,082 10,167 8,884 7,646 Provision for loan losses 681 1,620 1,679 902 382 --------------------------------------------------------------------- Net interest income after provision for loan losses 12,258 9,462 8,488 7,982 7,264 Other income 1,902 3,079 3,154 1,664 890 Operating expenses 13,690 10,444 10,224 6,686 5,271 --------------------------------------------------------------------- Income before income taxes 470 2,097 1,418 2,960 2,883 Income tax expense 157 734 538 1,197 1,140 --------------------------------------------------------------------- Net Income $ 313 $ 1,363 $ 880 $ 1,763 $ 1,743 --------------------------------------------------------------------- Per share data:(1) Net income per primary share $ 0.16 $ 0.76 $ 0.50 $ 1.05 $ 1.04 Net income per fully diluted share $ 0.16 $ 0.76 $ 0.50 $ 1.05 $ 1.04 Cash dividend per share $ 0.20 $ 0.10 -- -- -- Dividend payout ratio 125% 13% -- -- -- Book value per share $ 10.32 $ 10.53 $ 10.02 $ 9.55 $ 8.49 --------------------------------------------------------------------- Balance at year end: Total assets $259,099 $223,144 $192,574 $172,526 $140,607 Loans, net 160,693 135,622 131,533 126,748 104,191 Deposits 236,094 186,722 175,740 156,550 123,975 Other borrowings -- 17,256 -- -- -- Subordinated debt 3,000 -- -- -- -- Shareholders' equity 18,672 18,037 16,219 15,174 13,311 --------------------------------------------------------------------- Average daily balances: Total assets $229,903 $198,162 $183,297 $157,535 $124,810 Loans, net 143,280 127,264 127,210 114,780 96,961 Deposits 197,396 172,385 166,581 142,451 111,564 Shareholders' equity 18,326 17,410 15,337 14,379 12,434 --------------------------------------------------------------------- Selected statistics: Return on average assets 0.1% 0.7% 0.5% 1.1% 1.4% Return on average shareholders' equity 1.7% 7.8% 5.7% 12.3% 14.0% Average equity to average assets 8.0% 8.8% 8.4% 9.1% 10.0% ---------------------------------------------------------------------
(1) Per share amounts have been restated to reflect stock dividends of 10% in December 1995, and 5% each, in May 1994, June and December 1993 and in May and December 1992 and 1991. To Our Shareholders, Clients and Friends Even as continued deregulation and consolidation cause the financial industry to become more competitive, exciting opportunities are emerging in many areas. In 1995, we positioned ourselves to move quickly and effectively so we can capitalize on the most promising of these opportunities as they arise. For Cupertino National Bancorp (CNB), 1995 can be divided into two distinct halves. During the first six months of the year, we faced considerable challenges. The closing of our mortgage division and termination of merger discussions with another bank in the first quarter resulted in charges against earnings of approximately $500,000. We also reached a litigation settlement in the second quarter, which resulted in a charge of $1.7 million. But beginning in the third quarter of 1995, the company rebounded strongly, with excellent asset growth, solid performance from several of our divisions, and a healthy increase in profits quarter-to-quarter. The improvement in our operating results, combined with the continued upswing of the economy, gives us solid reasons to be optimistic about 1996. Loans (in millions) [CHART APPEARS HERE] Page 2 Modest profits For the year ended December 31, 1995, CNB recorded net income of $313,000, or $.16 per share, compared to $1.4 million, or $.76 per share, in 1994. Without the charges mentioned above, the company's 1995 net income would have increased to $1.65 million. Total assets rose 16% to $259.1 million, while deposits increased by nearly $50 million, or 26%, to $236.1 million. With the addition of our new Executive Vice President and Senior Lending Officer, David Hood, in 1995, loans grew by more than $30 million, or 23%, to $160.7 million. Equally important, the quality of the bank's assets showed significant improvement over last year. Total non- performing assets declined from $5 million at year-end 1994 to $3.3 million at the end of 1995, and total classified assets fell from $13.1 million to $7.9 million over the same period. [CHART APPEARS HERE] In the fall of 1995, CNB was successful in adding $3.0 million to our capital base through a private placement of subordinated debt. A substantial portion of the offering was subscribed by directors, officers and other accredited investors, an indication of their confidence in our future. Our strong capital position -- which according to regulatory guidelines classifies the holding company and bank as a well-capitalized financial institution -- enables us to more readily take advantage of growth opportunities in our market area and will be a key to our success in 1996. Page 3 Cupertino National Bancorp's vision is to be a technologically advanced $1 billion family of financial services companies headquartered in the Silicon Valley, serving clients throughout the United States. In 1995, your company made progress in a number of areas that more effectively position us to deliver value to shareholders in the years ahead. Recognizing an opportunity in the marketplace, in the second quarter of the year we invested in a major initiative to expand our Trust Group, with the objective of creating the strongest locally based trust operation in Northern California. We added several new officers to our team, led by Hall Palmer, who was named Executive Vice President and Senior Trust Officer of the Bank. The results of this reformation were immediate and dramatic. The Trust Group's assets under management soared 72% to $270 million by year-end, with most of that growth occurring since May. Further, we expect this rapid rise to continue in 1996 as we penetrate the Palo Alto marketplace with a new office scheduled to open this spring. [PHOTOGRAPH] In the 1950s and 1960s, the Santa Clara Valley was primarily an agricultural region, filled with rows upon rows of fruit trees. Page 4 Another business unit that had a strong year was Venture Lending. Founded in March as the successor to our Emerging Growth Industries division, Venture Lending provides innovative debt financing and other financial services tailored to the needs of startup and growth-stage companies. Under the direction of Senior Vice President and Managing Director Daniel Michener, the division got off to a fast start, closing 29 transactions totaling more than $34 million in financing commitments in its first ten months. This successful launch helped Venture Lending begin turning a profit in only its second full quarter in business. To further expand our range of financing services, in October the Bank established an Asset-Based Lending division. Designed to serve companies that may be undercapitalized or experiencing temporary operating weakness, the new division specializes in both asset-based loans and factoring. To provide a steady deal flow for the new division and to optimize collateral monitoring controls, CNB has set up participation arrangements with two Bay Area financial services companies: an independent asset-based lender in Palo Alto; and an independent factoring company based in Cupertino. [PHOTOGRAPH] Today, this rich and fertile valley remains an idyllic place to live, with an excellent climate, vibrant economy and many educational and cultural opportunities. Page 5 New Emerson Office to Open Another major development that started in 1995 and should be completed by early spring is the construction of our new Emerson office in downtown Palo Alto. The full-service office, our fourth, is designed to provide increased convenience for small businesses, professionals and other individuals in downtown Palo Alto and surrounding neighborhoods. In addition to offering business and consumer banking services, the Emerson office will serve as the headquarters for our fast-growing Trust Group, affording higher visibility and better access to the desirable Peninsula marketplace. We look forward to providing a quality banking and trust alternative in the Palo Alto marketplace. [PHOTOGRAPH] When it opens in May, CNR's Emerson office, at 400 Emerson Street in Palo Alto, will serve the small businesses, professionals, and residents located in or near the downtown area. Other key accomplishments in 1995 include: o Introduction of CNB Cash Manager, a PC-based cash management service that literally puts the bank at our clients' fingertips. The service was well received in 1995 and we expect significant growth in usage and added features during 1996. o Introduction of our Venture Sweep Account, which links a client's checking account to a series of investment funds to simplify corporate cash management requirements. o Upgrade of our computer system to support the needs of CNB and our clients into the next millennium. Page 6 o Incorporation of leading edge technology in every facet of the bank's operations. For example, Venture Lending is on the Internet's World Wide Web, and everyone at the bank has access to e-mail over the Internet, thus improving our communications link with our clients. Strengthening of Our Management Team 1995 was a very successful year for CNB in building its management team for the future. Steven C. Smith, Executive Vice President and Chief Financial Office was promoted to Chief Operating Officer to head CNB's Executive Management Committee in its commitment to improving operating results, continuing earning asset growth and quality client service. Steve's promotion opened the Chief Financial Officer position which was filled early January 1996 by Heidi Wulfe, a Certified Public Accountant with over 20 years of financial services experience. Ms. Wulfe was named Senior Vice President and Chief Financial Officer. These changes combined with the addition of David R. Hood, Executive Vice President and Senior Lending Officer and Hall Palmer, Executive Vice President and Senior Trust Officer had significantly added to the depth and quality of CNB's management team. In 1995, we overcame significant obstacles to maintain our growth and remain profitable. By continuing our focus on improving asset quality and taking advantage of opportunities when and where they arise, we are confident that we will continue to report significant improvements in 1996. /s/ C. Donald Allen /s/ Glen McLaughlin C. Donald Allen Glen McLaughlin President and Chief Executive Officer Chairman Page 7 In mid-January, following a tradition established by founding chairman James Jackson, Glen McLaughlin stepped aside after a six-year term as chairman of the board. During his tenure from 1990 through 1995, he oversaw the growth of your company from one office to three and from $100 million to more than $250 million in assets. He also provided invaluable service to the bank and our shareholders, both in his official capacity as chairman and as a close personal friend. We shall miss his leadership of the board, but are pleased that he will continue to serve as a director. Glen will be replaced by John Gatto, a 10-year member of the board, who has chaired the Director's Loan Committee for the bank for 8 years. We look forward to the significant contributions John will make during his term. /s/ C. Donald Allen Page 8 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations BUSINESS OVERVIEW Cupertino National Bancorp (the "Company") is a California corporation and bank holding company for Cupertino National Bank & Trust (the "Bank"), a national bank with headquarters in Cupertino, California and regional offices in San Jose and Palo Alto, California. Substantially all of the Company's consolidated net income, assets and equity are derived from its investment in the Bank. The Company's business strategy is to provide quality financial services to middle market and emerging growth businesses, real estate construction and development companies and individuals, executives and professionals located in Cupertino, San Jose, Palo Alto and the surrounding communities of Santa Clara and San Mateo Counties. The financial services include corporate and personal relationship banking, residential lending, SBA lending and personal and corporate trust services. The following discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and the financial highlights presented elsewhere in this report. RESULTS OF OPERATIONS Net Income Summary The Company ended 1995 with net income of $313,000, a decrease of 78% from 1994. Net income for 1994 of $1.4 million was a 59% increase over 1993's net income of $880,000. Net income per common and common equivalent share was $.16 in 1995, compared with $.76 in 1994 and $.50 in 1993. The return on average assets and average shareholders' equity were 0.14% and 1.71% in 1995, compared with 0.70% and 7.80% in 1994 and 0.50% and 5.70% in 1993, respectively. The decrease in net earnings in 1995 includes a loss of approximately $1.7 million related to a litigation settlement recorded in the second quarter of 1995 and approximately $500,000 in charges related to the closing of the mortgage division and the termination of merger discussions with another bank in the first quarter of 1995. Excluding these charges, net income for the year would have been $1.65 million. The increase in net income for 1994 was primarily due to an increase in net interest income in 1994 compared to 1993. Net Interest Income Net interest income for 1995 was $12.9 million, compared to $11.1 million in 1994, an increase of $1.8 million or 16.0%. Net interest income for 1994 increased $.9 million or 9% over the $10.2 million in 1993. Net interest income depends primarily on the volume of interest-earning assets and interest-bearing liabilities in relation to the net interest spread (the difference between the yield earned on the Company's interest-earning assets and the interest rate paid on the Company's interest-bearing liabilities) as well as the relative balances of interest-earning assets and interest-bearing liabilities. The smaller the level of interest-earning assets when compared to the level of interest-bearing liabilities, the greater the interest rate spread must be in order to achieve positive net interest income. For 1995, the Company had $211.3 million of average interest-earning assets compared to $179.9 million in 1994 and $165.1 million in 1993. The following table displays the components of the Company's interest rate spread on interest bearing funds and the effective yield for each period.
For the Years Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Average rate for the period: Interest-earning assets 9.61% 8.54% 8.07% Interest-bearing liabilities 4.56% 3.30% 2.85% ---------------------------------------- Spread on interest-bearing funds 5.05% 5.24% 5.22% Contribution of interest-free funds 1.07% 0.92% 0.94% ---------------------------------------- Effective yield for the period 6.12% 6.16% 6.16% ----------------------------------------
Page 9 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) The effective yield in 1995 was 6.12% compared to 6.16% in 1994 and in 1993. The average rate on interest-earning assets increased from 8.54% in 1994 to 9.61% in 1995, an increase of 107 basis points. The average rate on interest- bearing liabilities increased to 4.56% in 1995 from 3.30% in 1994, an increase of 126 basis points. The increase in the average rate of interest-earning assets due to the increased volume of loans and securities, and the higher interest rates received on these assets, were partly offset by higher interest expense rates on increased volumes of deposits and other short term borrowings. The following table presents, for the periods indicated, the Company's total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest- bearing liabilities and the resultant costs, expressed both in dollars and rates. The table also sets forth the net interest income and the net earning balance for the periods indicated. INTEREST RATE SPREAD ANALYSIS
Years Ended December 31, 1995 1994 1993 ---------------------------- --------------------------- ---------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ (Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Loans(2) $146,650 $16,158 11.02% $127,264 $12,608 9.91% $127,210 $11,895 9.35% Investment securities, short term investments and cash equivalents 64,613 4,135 6.40% 52,664 2,753 5.23% 37,913 1,438 3.79% ---------------------------------------------------------------------------------------- Total interest-earning assets(3) 211,263 20,293 9.61% 179,928 15,361 8.54% 165,123 13,333 8.07% Noninterest-earning assets 18,640 18,234 18,174 ---------------------------------------------------------------------------------------- Total assets $229,903 $20,293 8.83% $198,162 $15,361 7.75% $183,297 $13,333 7.27% ======================================================================================== Interest-bearing liabilities: Deposits: NOW and MMDA $ 96,772 $ 3,868 4.00% $ 75,062 $ 2,192 2.92% $ 66,820 $ 1,755 2.63% Savings deposits 6,052 202 3.34% 6,885 177 2.57% 6,677 255 3.82% Time deposits 45,284 2,440 5.39% 40,010 1,528 3.82% 37,494 1,146 3.06% ---------------------------------------------------------------------------------------- Total Deposits 148,108 6,510 4.40% 121,957 3,897 3.20% 110,991 3,156 2.84% Borrowings 13,334 844 6.33% 7,788 382 4.90% 288 10 3.47% ---------------------------------------------------------------------------------------- Total interest-bearing liabilities 161,442 7,354 4.56% 129,745 4,279 3.30% 111,279 3,166 2.85% ---------------------------------------------------------------------------------------- Noninterest-bearing deposits 49,289 50,428 55,685 Other noninterest-bearing liabilities 846 579 996 Total noninterest-bearing liabilites 50,135 51,007 56,681 Shareholders' equity 18,326 17,410 15,337 ---------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $229,903 7,354 3.20% $198,162 4,279 2.16% 183,297 3,166 1.73% ======================================================================================== Net interest income; Interest rate spread(4) $12,939 5.05% $11,082 5.24% $10,167 5.22% ======================================================================================== Net earning balance; Net yield on interest-earning assets(3) $ 49,821 6.12% $ 50,183 6.16% $ 53,844 6.16% ========================================================================================
(1) Average balances are computed using an average of the daily balances during the period. (2) Non-accrual loans are included in the average balance column; however, only collected interest is included in the interest column. (3) The net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. (4) Loan fees totaling $969, $870 and $790 are included in loan interest income for the years 1995, 1994 and 1993, respectively. Page 10 CUPERTINO NATIONAL BANCORP The most significant impact on the Company's net interest income between periods is derived from the interaction of change in the volume of and rates earned or paid on interest-earning assets and interest-bearing liabilities. The volume of earning dollars in loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in the net interest income between periods. The following table presents the dollar amount of certain changes in interest income and expense for each major component of interest-earning assets and interest-bearing liabilities and the difference attributable to changes in average rates and volumes for the periods indicated. RATE/VOLUME VARIANCE ANALYSIS
Year Ended December 31, 1995 Year Ended December 31, 1994 compared with December 31, 1994 compared with December 31, 1993 favorable (unfavorable) favorable (unfavorable) ----------------------------------- ---------------------------------- (Dollars in thousands)(1) Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------------------------------------------------------------ Interest income on loans $ 2,136 $ 1,414 $ 3,550 $ 5 $ 708 $ 713 Interest income on investment securities, short-term invest- ments and cash equivalents 765 617 1,382 771 544 1,315 --------------------------------------------------------------------------------- Total interest income 2,901 2,031 4,932 776 1,252 2,028 --------------------------------------------------------------------------------- Interest expense on deposits NOW and MMDA (868) (808) (1,676) (241) (196) (437) Savings deposits 28 (53) (25) (5) 83 78 Time deposits (284) (628) (912) (96) (286) (382) --------------------------------------------------------------------------------- Interest expense on deposits (1,124) (1,489) (2,613) (342) (399) (741) Interest expense on borrowings (351) (111) (462) (368) (4) (372) --------------------------------------------------------------------------------- Total interest expense (1,475) (1,600) (3,075) (710) (403) (1,113) --------------------------------------------------------------------------------- Increase in net interest income $ 1,426 $ 431 $ 1,857 $ 66 $ 849 $ 915 =================================================================================
(1) In this analysis, the unallocated change due to the volume/rate variance has been allocated to volume. The Company has non-interest bearing liabilities on which it pays for certain client services expense. These expenses include messenger, check supplies and other related items and are included in operating expenses. If these costs had been included in interest expense, the impact of these expenses on the Company's net interest spread and net yield on interest earning assets would have been as follows:
(Dollars in thousands) Years Ended December 31 1995 1994 1993 - -------------------------------------------------------------------------------- Non-interest bearing demand deposits $49,289 $50,428 $55,685 Client Service expense(1) 337 376 478 Client Service cost annualized 0.68% 0.75% 0.86% Impact on Net Yield Net yield on interest earning assets 6.12% 6.16% 6.16% Impact of client services (.16) (.21) (.29) ------------------------------ Adjusted net yield(2) 5.96% 5.95% 5.87% ------------------------------
(1) Included in client services expense are $18,000, $94,000 and $187,000 for 1995, 1994 and 1993, respectively, related to a title company which is considered to be a related party. (2) Non-interest bearing liabilities are included in the cost of funds calculation to determine adjusted net yield on interest-earning assets. Page 11 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) The impact on the net yield on interest earning assets is caused by off-setting net interest income by the cost of client service expenses, which reduces the yield on interest earning assets. The cost for client service expense is trending down and reflects the Company's efforts in managing its client service expense and also reflects a lower earnings credit rate. The trend of interest rates in the economy continued to move downward during the last half of 1995. This trend may continue during the first half of 1996 and then level off, as the Federal Reserve Board attempts to curb inflation without limiting growth. If interest rates remain relatively flat, the Bank's net interest margin should remain stable. However, as interest rates move downward, net interest income is negatively impacted. The increase in net interest income in 1995 was mainly due to an increase in the loan and investment portfolios' interest income, net of the related funding cost. The increase in net interest income in 1994 was primarily due to an increased volume of interest earning assets, as well as an increase in the spread between the average rates received on interest earning assets and the average rates paid on interest bearing liabilities. Average earning assets were $212.9 million in 1995, compared to $179.9 million in 1994, and $165.1 million in 1993. The growth in earning assets was concentrated in the loan portfolio as the Bank focused its efforts in deploying the Bank's funds into loans because of the higher returns than could be achieved on alternative investment opportunities. Average loans increased in 1995 to $146.7 million from $127.3 million in 1994 and $127.2 million in 1993. Average securities also increased in 1995 to $64.6 million from $52.7 million in 1994 and $37.9 million in 1993. The average yield on loans was 11.02% in 1995, compared to 9.91% in 1994 and 9.35% in 1993. The yield on loans increased due to the mix and volume of loans and improved pricing on loan products. The Company experienced loan growth in all loan categories in 1995, most notably in real estate term and construction lending which accounted for $15.7 million or 52% of the increase. In 1994, the Company's mix of loans was relatively stable when compared to 1993. The Company anticipates that construction activity will continue to improve with the local economy in 1996 and that real estate term and construction lending volumes will increase in 1996. Other earning assets consist of investment securities, overnight federal funds sold, and other short-term investments, such as banker's acceptances and commercial paper. These investments are maintained to provide diversity and stability to the Bank's income stream, as well as to meet the liquidity requirements of the Bank and to meet pledging requirements on certain deposits. These investments typically have a lower yield than loans. The average yield on other earning assets increased to 6.40% in 1995 from 5.23% in 1994 and from 3.79% in 1993, as the Company adjusted the composition of its investment portfolio to improve net interest income and slightly extended the average maturity of the investment portfolio. Interest expense increased during 1995 to $7.4 million from $4.3 million in 1994, compared to $3.2 million in 1993. The increase in 1995 was due to both higher rates and increased volumes of interest bearing deposits and borrowings. Average interest bearing deposits increased by $26.2 million in 1995 compared to an $11.0 million increase in 1994, while average borrowings increased by $5.5 million in 1995 compared to 7.5 million in 1994. Non-interest bearing liabilities averaged $50.1 million in 1995, compared with $51.0 million in 1994, and $56.7 million in 1993. Provision for Loan Losses The provision for loan losses is the annual cost of providing an allowance or reserve for future losses on loans. The loan loss provision amount for each year is dependent on many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in the Bank's market area. The Bank performs a monthly assessment of the risk inherent in its loan portfolio, as well as a detailed review of each asset determined to have identified weaknesses. Based on this analysis, which includes reviewing historical loss trends, current economic conditions, industry concentrations and specific reviews of assets classified with identified weaknesses, the Bank provides reserves for potential losses. The reserves have specific allocations for credits where the probability of a loss can Page 12 CUPERTINO NATIONAL BANCORP be defined and reasonably determined, while the balance of the reserve allocations are based on historical data, delinquency trends, economic conditions in the Bank's market area and industry averages. The provision for loan losses in 1995 was $681,000 compared to $1.6 million in 1994 and $1.7 million in 1993. The decrease in the provision for loan losses in 1995 reflects the Bank's improved credit quality, as it continued to experience reductions in classified and non-performing assets. The larger loan loss provisions in 1994 and 1993 when compared to 1995 reflected the weakness in the economic conditions within the Bank's market area and the credit risk inherent in its loan portfolio during that time period. Other Income Total other income decreased to $1.9 million in 1995 compared to $3.1 million in 1994 and to $3.2 million in 1993. Other income consists of depositor service charges, fees received for services provided or obtained in the loan approval process, fees received for trust services, the net premium and servicing value recognized upon the sale of the guarantee portion of SBA loans, revenue from the origination and sale of residential mortgages and other miscellaneous income. The following table summarizes the sources of other income in the years indicated:
(Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Gain on sale of mortgage loans $ 137 $ 993 $1,525 Gain on sale of SBA loans 366 685 435 Trust fees 710 593 494 Loan documentation fees, net 103 276 284 Depositor service fees 291 267 252 Other 295 265 164 ---------------------------------- Total $1,902 $3,079 $3,154 ==================================
The largest portion of the decrease in other income in 1995 and 1994 is due to the decline in the activities of the mortgage banking business unit. The division generated $137,000 in gains on the sale of mortgage loans in 1995, compared to $993,000 in 1994 and $1,525,000 in 1993. In early 1995, the Company determined to close the mortgage banking business unit due to the sharp rise in interest rates during 1994 and the impact the rate rise had on fundings. Loan documentation income, which represents the charge to clients for expenses incurred by the Bank to document and process loans, decreased to $103,000 for 1995, as compared to $276,000 in 1994 and $284,000 in 1993. The decrease in 1995 as compared to 1994, is primarily attributable to a reduction in the quantity of loan originations from the mortgage banking business unit during 1995. Fees received by the Trust Department of the Bank increased to $710,000 in 1995, as compared to $593,000 in 1994, and $494,000 in 1993. Trust fees for 1995 increased by 20% over 1994 as the Trust Department had approximately $275 million in total assets at December 31, 1995, compared with approximately $157 million in 1994 and approximately $118 million in 1993. The increase in trust fee income is directly related to the Company's decision to increase its investment in the trust business. During 1995, the Company added several new trust employees who generated over $100 million in new trust business. It is anticipated they will continue to be successful in increasing their trust relationships in 1996. Premiums recognized on the sale of SBA loans decreased to $366,000 for 1995 as compared to $685,000 for 1994, and $435,000 in 1993. This was offset by increased interest income on SBA loans retained and reflected a change in the guarantee percentage pledged by the SBA, along with a reduction in premiums on loans sold. Service charges on depositor accounts increased to $291,000 in 1995 compared to $267,000 in 1994 and $252,000 in 1993. The increase is attributable to the growth of new deposit relationships since 1993. Operating Expenses Operating expenses totaled $13.7 million for 1995, compared to $10.4 million for 1994 and $10.2 million for 1993. The ratio of operating expenses to average assets for these periods was 6.0%, 5.3%, and 5.6%, respectively. Page 13 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) The following table represents the major components of operating expenses for the years ended December 31:
(Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Compensation & benefits $ 6,704 $ 5,724 $ 5,014 Occupancy & equipment 1,687 1,400 1,226 Professional services and legal costs 2,681 911 1,379 FDIC Insurance and regulatory assessments 344 485 414 Other real estate, net 35 48 288 Other 1,902 1,500 1,425 ------------------------------- Total before client services 13,353 10,068 9,746 Client services 337 376 478 ------------------------------- Total $ 13,690 $ 10,444 $ 10,224 =============================== Efficiency ratio before client services 89.37% 71.10% 73.16% =============================== Efficiency ratio 91.63% 73.75% 76.75% =============================== Total operating expenses to average assets 5.96% 5.27% 5.58% ===============================
The efficiency ratio is computed by dividing total non-interest (or operating) expenses by net interest income and other income. An increase in the ratio indicates that more resources are being utilized to generate the same (or greater) volume of income while a decrease would indicate a more efficient allocation of resources. The Company's efficiency ratio for 1995 was 91.6% compared to 73.7% in 1994 and 76.7% in 1993. The sharp increase in the efficiency ratio in 1995 was a result of the litigation settlement, the expenses associated with the closing of the mortgage business unit and merger discussions with another bank in our market area. Without these charges, the noninterest expenses would have been $11.5 million with an efficiency ratio of 77.4%. Compensation expenses increased in 1995 to $6.7 million compared to $5.7 million in 1994 and $5.0 million in 1993, primarily due to the growth in the Bank's Trust and Venture Lending business units, combined with increased incentive payments for new business generated. Expenses for professional services, including legal, consulting and audit services, increased to $2.7 million in 1995, as compared to $911,000 in 1994 and $1.4 million in 1993. The increase in 1995 is attributed to the one- time charge of $1.7 million for a legal settlement related to trust department activities. Client service expenses decreased to $337,000 in 1995, compared to $376,000 in 1994 and $478,000 in 1993 as a result of a decrease in the volume of non-interest bearing demand deposits for which the Bank provides services. FDIC deposit insurance and OCC regulatory assessments decreased to $344,000 in 1995 compared to $485,000 in 1994, and $414,000 in 1993. FDIC insurance declined and is expected to decline in future years as the FDIC has lowered deposit insurance premiums, since the bank insurance fund was fully funded in March 1995. Other operating expenses increased by $402,000 in 1995 from 1994 primarily due to the one-time charge of closing the mortgage business unit and the increased lending volume, which increased related other operating expenses. The $75,000 increase from 1993 to 1994 was due to increased costs related to the lending and mortgage banking operations. Income Taxes The Company's income tax rate for 1995 was 33.4% compared 35.0% in 1994 and 37.5% in 1993. The effective rates in all years are lower than the statutory rates due primarily to the effect of the California Franchise Tax Enterprise Zone Credit and exempt interest income. Page 14 CUPERTINO NATIONAL BANK FINANCIAL CONDITION Assets Total assets increased to $259.1 million in 1995, a 16.1% increase from the $223.1 million one year earlier, compared to an increase of 15.8% from $192.6 million in 1993. The increase in 1995 was primarily due to the increase in outstanding loans where the increase in 1994 was primarily due to the increase in securities. Loans Total gross loans, excluding loans held for sale, increased 22.5% to $164.2 million at December 31, 1995 compared to $134.0 million at December 31, 1994. Total loans increased 5.4% in 1994 from $127.1 million at year-end 1993. The significant increase in loan volume in 1995 is due to an improving economy coupled with an increased focus on loan growth. The Bank's loan portfolio is concentrated in commercial (primarily manufacturing, service and technology) and real estate lending. The Bank's lending is focused in the Santa Clara and San Mateo Counties. While no specific industry concentration is significant, the Bank's lending is concentrated in an area that is highly dependent on the technology industry and its supporting companies. Thus, the Bank's borrowers could be adversely impacted by a downturn in this sector of the economy and this could impact their ability to repay their loans. The following table presents the composition of the loan portfolio at the end of each of the last three years:
1995 1994 1993 ----------------------- ----------------------- ------------------------- (DolLars in thousands) Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------------------------------------------ Commercial $ 88,646 55.2% $ 81,695 60.2% $ 77,699 59.1% Real estate construction & land 23,889 14.9% 18,117 13.3% 19,090 14.5% Real estate term 23,026 14.3% 13,133 9.7% 12,075 9.2% Consumer & other 28,666 17.8% 21,059 15.5% 18,214 13.8% --------------------------------------------------------------------------------------------- Total loans, gross 164,227 102.2% 134,004 98.7% 127,078 96.6% Deferred fees and discounts (851) (0.5)% (847) (0.6)% (923) (0.7)% --------------------------------------------------------------------------------------------- Total loans, net of deferred fees 163,376 101.7% 133,157 98.1% 126,155 95.9% Allowance for loan losses (2,683) (1.7)% (2,918) (2.1)% (2,247) (1.7)% --------------------------------------------------------------------------------------------- Net loans 160,693 100.0% 130,239 96.0% 123,908 94.2% Loans held for sale -- -- 5,383 4.0% 7,625 5.8% --------------------------------------------------------------------------------------------- Total loans $160,693 100.0% $135,622 100.0% $131,533 100.0% =============================================================================================
Credit Quality One of the Bank's objectives is to limit the risk inherent in its loan portfolio through stringent loan policies and continuous loan review procedures. The loan policy of the Bank is approved each year by its Board of Directors and is managed through periodic reviews of such policies in relation to current economic activity and the degree of risk (both credit and interest rate) in the current portfolio. The Director's Loan Committee supervises the lending activities of the Bank. This committee consists of three outside directors, the Chairman/CEO, the Executive Vice President/Senior Loan Officer, Senior Vice President/Commercial Manager and the Senior Vice President/Credit Administration. The officers in this group make up the Officer's Loan Committee. Loan requests exceeding individual officer approval limits are submitted to the Officer's Loan Committee, and those which exceed its limits are submitted to the Director's Loan Committee for final approval. The Bank has an active credit administration function which includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. Senior management and the Director's Loan Committee actively review and monitor problem loans on a regular basis. Page 15 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Management generally places loans on non-accrual when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on non-accrual status, any interest previously accrued but not collected is reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where the Bank has granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. Other real estate owned consists of real property acquired through foreclosure on the related collateral underlying defaulted loans. The following table summarizes non- accrual loans, loans past due 90 days and still accruing, restructured loans, and other real estate owned at December 31:
(Dollars in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- Non-performing assets Non-accrual loans $2,513 $3,244 $ 997 Accruing loans past due 90 days or more 830 1,371 1,903 Restructured loans -- -- -- Other real estate owned -- 375 618 --------------------------------- Total non-performing assets $3,343 $4,990 $3,518 --------------------------------- Ratio of the allowance for loan losses to total non-performing assets 80% 58% 64%
The following table details the Bank's classified assets for the years ended December 31:
(Dollars in thousands) 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- Classified assets Loans Substandard $7,277 $10,927 $ 9,885 Doubtful 601 1,781 942 Loss -- -- -- --------------------------------- Total 7,878 12,708 10,827 OREO -- 375 618 --------------------------------- Total classified assets $7,878 $13,083 $11,445 --------------------------------- Ratio of classified assets to: Total assets 3.0% 5.9% 5.9% Total loans and OREO 4.8% 9.4% 8.5% Ratio of allowance for loan losses to classified assets 34.1% 22.3% 19.6% =================================
Total non-performing assets declined to $3.3 million at December 31, 1995 from $5.0 million at December 31, 1994. In addition, total classified assets declined to $7.9 million from $13.1 million during the same time period. The allowance for loan losses represented 80.2% of non-performing assets at December 31, 1995, compared to 58.5% at December 31, 1994. The significant improvement in the credit quality in 1995 is a reflection of an improving economy coupled with the focused effort of the Company to reduce the level of problem assets. Page 16 CUPERTINO NATIONAL BANCORP The following table summarizes activity in the allowance for loan losses for the past three years. SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands) Years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Loans, net of unearned income: Average outstanding during period $ 145,940 $ 127,264 $ 127,210 --------------------------------------------------- Allowance for loan losses: Balance at beginning of period $ 2,918 $ 2,247 $ 1,748 Charge-offs: Commercial (973) (748) (1,069) Real estate - construction -- (123) -- Real estate - term -- -- -- Consumer - installment (101) (141) (159) --------------------------------------------------- Total (1,074) (1,012) (1,228) Recoveries: Commercial 156 57 -- Real estate - construction -- -- -- Real estate - term -- -- -- Consumer - installment 2 6 48 --------------------------------------------------- Total 158 63 48 --------------------------------------------------- Net charge-offs (916) (949) (1,180) Provision charged to income 681 1,620 1,679 --------------------------------------------------- Balance at end of period $ 2,683 $ 2,918 $ 2,247 =================================================== Net charge-offs to average loans outstanding during period 0.63% 0.75% 0.93% =================================================== Allowance as a percentage of loans 1.64% 2.09% 1.67% ===================================================
Management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the loan loss reserve. The allowance for loan losses decreased at December 31, 1995 to 1.64% of average outstanding loans compared to 2.09% at December 31, 1994 and 1.67% at December 31, 1993. The following table details the allocation of the allowance for loan losses:
1995 1994 1993 ---------------------- ---------------------- ------------------------ Percent of Percent of Percent of (Dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------------------------------------------------------------ Commercial $1,057 0.65% $1,834 1.32% $1,496 1.11% Real estate - construction 153 0.09% 180 0.13% 308 0.23% Real estate - term 696 0.43% 132 0.09% 391 0.29% Consumer installment 273 0.17% 273 0.19% 10 0.01% Loans held for sale -- --% 14 0.01% 27 0.02% Unallocated - deferred fees, commit- ments and loss reserves 504 0.30% 485 0.35% 15 0.01% ------------------------------------------------------------------------------------ Total $2,683 1.64% $2,918 2.09% $2,247 1.67% ====================================================================================
Although management believes that the allowance for loan losses is adequate, future provisions will be subject to continuing evaluations of the inherent risk in the portfolio and if the economy declines or asset quality deteriorates, additional provisions could be required. Page 17 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Deposits Deposits reached $236.1 million at December 31, 1995, an increase of 26.5% as compared to deposits of $186.7 at December 31, 1994. In 1994, deposits increased 6.3% from $175.7 million at December 31, 1993. Total average deposits increased 14.5% to $197.2 million for 1995 compared to an average of $172.4 million for 1994. In 1994, average deposits increased 3.5% over average deposits of $166.6 million in 1993. The increase in deposits was due to the continued marketing efforts directed at commercial business clients and the continued growth in the Bank's regional offices in San Jose and Palo Alto. Non-interest bearing deposits were $59.0 million at December 31, 1995 compared to $53.9 million at December 31, 1994 and $62.8 million at December 31, 1993. Average non-interest bearing deposits in 1995 were $49.3 million compared to $50.4 million in 1994 and $55.8 million in 1993. As its regional offices expand, the Bank anticipates this funding source to increase. Money market and other interest-bearing demand accounts reached $124.1 million at year end 1995, an increase of 51.5% from the prior year. Money market and other interest-bearing demand deposits of $81.9 million at December 31, 1994 were up 34.7% from $60.8 million at December 31, 1993. The continued efforts by the Bank to market these low cost deposit products accounts for the continued growth. Time certificates of deposit of more than $100,000, savings and other time deposits totaled $52.9 million or 22.4% of total deposits at December 31, 1995 compared to $50.9 million or 27.3% of total deposits at December 31, 1994 and $45.4 million or 25.8% of total deposits at December 31, 1993. Liquidity and Other Borrowings Liquidity management is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Bank's ability to meet the day-to-day cash flow requirements of the Bank's clients, who either wish to withdraw funds or require funds to meet their credit needs. Without proper liquidity management, the Bank would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities it serves. The primary function of asset and liability management is not only to assure adequate liquidity in order for the Bank to meet the needs of its client base, but to maintain an appropriate balance between interest-sensitive assets and liabilities so that the Bank can also meet the return on investment requirements of its shareholders. Daily monitoring of the sources and uses of funds is necessary to maintain an acceptable cash position that meets both requirements. Contingency plans exist and could be implemented on a timely basis to minimize any risk associated with dramatic changes in market conditions, including the Bank's $17 million in federal fund purchase lines which provide back-up liquidity, $100 million in institutional deposit or brokered deposit lines and $60 million in reverse repurchase lines. All of these sources combine to provide a solid liquidity base for growth. As of December 31, 1995, the Bank had $10.0 million in institutional deposits outstanding and no outstanding federal funds purchased. The asset portion of the balance sheet provides liquidity primarily through loan principal repayments, maturities of investment securities and, to a lesser extent, sales of loans held for sale. Other short-term investments such as federal funds sold and maturing interest bearing deposits with other banks are additional sources of liquidity funding. The liability portion of the balance sheet provides liquidity through clients' interest bearing and non- interest bearing deposit accounts. Federal funds purchased and other short term borrowings are additional sources of liquidity and represent the Company's incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. Interest Rate Risk Management Interest rate risk management is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics Page 18 CUPERTINO NATIONAL BANCORP during periods of changes in market interest rates. Effective interest rate risk management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby minimizing the effect of interest rate movements on net interest income. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at various time horizons: one day or immediate, two days to six months, seven to twelve months, one to three years, three to five years, over five years and on a cumulative basis. The differences are known as interest sensitivity gaps. The following table shows interest sensitivity gaps for different intervals as of December 31, 1995: INTEREST SENSITIVITY ANALYSIS
Repricing Periods Total Immediate 2 Days To Months >1 Year > 3 Yrs Total Rate Non-Rate (Dollars in thousands) One Day 6 Months 7-12 to 3 Yrs to 5 Yrs > 5 Yrs Sensitive Sensitive Total - ------------------------------------------------------------------------------------------------------------------------------------ Assets: Cash and due from banks -- $ 16,207 $ 16,207 Short term investments $ 12,900 $ 12,900 12,900 Investment securities $ 8,476 $ 9,009 $ 7,986 $ 9,823 $20,786 56,080 969 57,049 Loans 131,621 2,355 3,040 7,564 4,098 12,329 161,007 3,220 164,227 Loan loss/unearned fees -- (3,534) (3,534) Other assets -- 12,250 12,250 ---------------------------------------------------------------------------------------------------- Total assets 144,521 10,831 12,049 15,550 13,921 33,115 229,987 29,112 259,099 ==================================================================================================== Liabilities and Equity: Deposits Demand -- 58,986 58,986 NOW, MMDA, and savings 132,174 132,174 132,174 Time deposits 36,493 2,823 5,602 16 44,934 44,934 Subordinated debt 3,000 3,000 3,000 Other liabilities -- 1,333 1,333 Shareholders' equity -- 18,672 18,672 ---------------------------------------------------------------------------------------------------- Total liabilities and equity 132,174 36,493 2,823 5,602 16 3,000 180,108 78,991 259,099 ==================================================================================================== Gap $ 12,347 $(25,662) $ 9,226 $ 9,948 $13,905 $30,115 $ 49,879 $(49,879) $ -- Cumulative Gap $ 12,347 $(13,315) $(4,089) $ 5,859 $19,764 $49,879 $ 49,879 $ -- $ -- Cumulative Gap/total assets 4.77% (5.14)% (1.58)% 2.26% 7.63% 19.25% 19.25% -- --
Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing of both the asset and its supporting liability can remain the same, thus impacting net interest income. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis table. These prepayments may have significant effects on the Bank's net interest margin. Because of these factors, an interest sensitivity gap report may not provide a complete assessment of the Bank's exposure to changes in interest rates. Page 19 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) Capital Resources Shareholders' equity at December 31, 1995 increased to $18.7 million from $18.0 million at December 31, 1994 and from $16.2 million at December 31, 1993. During 1995, the Company paid a 10% stock dividend and two cash dividends of $.10 per share each. The Company believes that a strong capital position is vital to the continued profitability of the Company, and promotes depositor and investor confidence, while providing a solid foundation for the future growth of the organization. The Company has provided the majority of its capital requirements through the retention of earnings. In the third quarter of 1995, the Company increased its capital base by successfully raising $3.0 million of subordinated debt which qualifies as Tier 2 Capital (see below). The private offering was subscribed substantially by the Company's directors, officers and other accredited investors of the Company. Under regulatory risk-based capital measures for banks and bank holding companies, a banking organization's reported balance sheet is converted to risk- based amounts by assigning each asset to a risk category, which is then multiplied by the risk weight for that category. Off-balance sheet exposures are converted to risk-based amounts through a two-step process. First, off-balance sheet assets and credit equivalent amounts (e.g., standby letters of credit) are multiplied by a credit conversion factor depending on the defined categorization of the particular item. The converted items are then assigned to a risk category that weights items according to their relative risk. The total of the risk weighted on- and off-balance sheet amounts represents a banking organization's risk-adjusted assets for purposes of determining capital ratios under the risk- based guidelines. Risk-adjusted assets can either exceed or be less than reported assets, depending on the risk profile of the banking organization. A banking organization's total qualifying capital includes two components, core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core capital, which must comprise at least half of total capital, includes common stockholders' equity, qualifying perpetual preferred stock, and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, certain other capital instruments, and term subordinated debt. The Company's major capital components are stockholders' equity in core capital, and the allowance for loan losses and subordinated debt in supplementary capital. At December 31, 1995, the minimum risk-based capital requirements to be considered adequately capitalized are 4.0% for core capital and 8.0% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter. The minimum leverage ratio is 3.0%, although banking organizations are expected to exceed that amount by 1.0%, 2.0% or more, depending on their circumstances. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC have adopted regulations, effective December 19, 1992, setting forth a five-tier scheme for measuring the capital adequacy of the financial institutions they supervise. The two highest levels recognized under these regulations are as follows:
Tier 1 Total Risk-Based Risk-Based Leverage Capital Ratio Capital Ratio Ratio - -------------------------------------------------------------------------------- Well-capitalized 6.0% 10.0% 5.0% Adequately Capitalized 4.0% 8.0% 4.0%
At December 31, 1995, the Company's risk-based capital ratios were 9.2% for Tier I risk based capital and 11.9% for total risk-based capital, compared to 10.8% and 12.1% as of December 31, 1994, respectively. The Company's leverage ratio was 7.8% at December 31, 1995, compared to 8.4% at December 31, 1994. These ratios all exceeded the well-capitalized guidelines shown above. Page 20 CUPERTINO NATIONAL BANCORP The Company's capital ratios are indicated in the following table:
( Dollars in thousands) 1995 1994 - -------------------------------------------------------------------------------- Tier 1 capital: Shareholders' equity $ 18,672 $ 18,037 Tier 2 capital: Allowance for loan losses allowable for Tier 2 capital 2,541 2,082 Subordinated debt 3,000 -- ------------------- Total Risk Based Capital $ 24,213 $ 20,119 ------------------- Risk-adjusted assets $203,310 $166,552 =================== Total assets $259,099 $223,144 =================== Tier 1 capital/risk adjusted assets: Company's capital ratio 9.18% 10.80% Minimum regulatory requirement 4.00% 4.00% =================== Total Risk-based capital/risk adjusted assets: Company's capital ratio 11.91% 12.10% Minimum regulatory requirement 8.00% 8.00% =================== Tier 1 capital/total assets: Company's capital ratio 7.78% 8.40% Minimum regulatory requirement 3.00% 3.00% ===================
BUSINESS RISKS Certain characteristics and dynamics of the Bank's business and of the financial markets may create risks in the Bank's long-term success and its financial results. These risks include: Geographic Concentration and Local Economy - All of the Bank's operations are located in Santa Clara County and San Mateo County in Northern California. As a result of the geographic concentration, the Bank's results of operation depend largely upon local economic conditions, which have been relatively volatile in the last few years. Accordingly, there can be no assurance that the Bank's existing and prospective clients will be responsive to, or have the need for, the services offered by the Bank. Further, no assurance can be given that the Bank will not be adversely affected if there were an economic downturn. An economic downturn could also produce a decline in real estate prices which would potentially have a material adverse effect on the Bank's lending activities and on the quality of the Bank's real estate loan portfolio. Government Regulation and Recent Legislation - The Bank and its operations are subject to extensive state and federal supervision, regulation and legislation. The Bank cannot predict the precise impact of recent legislation, nor the probable course or impact of future legislation or regulatory actions affecting the financial services industry. Additionally, action taken to respond to budget deficits, such as a reduction in SBA funding, could adversely affect loan demand or the ability of potential borrowers to qualify for such loans. Effects of Inflation, Interest Rate Changes - The impact of inflation on a financial institution differs significantly from that exerted on an industrial concern, primarily because its assets and liabilities consist largely of monetary items. The most direct effect of inflation is higher interest rates. However, the Bank's earnings are affected by the spread between the yield on earning assets and rates paid on interest-bearing liabilities rather than the absolute level of interest rates. Additionally, there may be some upward pressure on the Company's operating expenses, such as adjustments in staff expense and occupancy Page 21 CUPERTINO NATIONAL BANCORP Management's Discussion and Analysis of Financial Condition and Results of Operations (Cont.) expense, based upon consumer price indices. In the opinion of management, inflation has not had a material effect on the consolidated results of operations over the last few years. Interest rates are highly sensitive to many factors which are beyond the control of the Bank. Changes in interest rates will influence the growth of loans, investments and deposits. and affect the rates charged on loans and paid on deposits. The nature, timing and impact of any future changes in interest rates or monetary and fiscal policies are not predictable. Competition -- The banking business in the Bank's market area is highly competitive with respect to both loans and deposits. Deregulation and continued advances in interstate banking may increase this competition, including by a number of institutions that have significantly greater financial resources than the Bank. This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements relate to expectations of the business environment in which the Bank operates, projections of future performance, perceived opportunities in the market and statements regarding the Bank's mission and vision. Actual results and conditions could differ materially from those contained in the forward- looking statements as a result of business risks identified above as well as the Company's ability to manage credit and fiduciary risks, control its cost, and attract and retain high quality personnel, while continuing to provide value- added, relationship-oriented banking services and competitive financial products. ACCOUNTING PRONOUNCEMENTS In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (`SFAS') No. 114 "Accounting by Creditors for Impairment of a Loan", which was subsequently amended by SFAS No. 118. Under the provisions of SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreements. SFAS No. 114 requires creditors to measure impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral ("the value"). If the value of the impaired loan is less than the recorded investment in the loan, a creditor shall recognize the impairment by creating a valuation allowance with a corresponding charge to bad debt expense. This statement also applies to restructured loans and loans previously accounted for as in-substance foreclosures. The Company adopted SFAS No. 114 on January 1, 1995. The adoption of SFAS No. 114 did not result in any additional provision for credit losses during 1995. Income recognition on impaired loans conforms to the method the Company uses for income recognition on nonaccrual loans. STOCK ACTIVITY The common stock of the Company is traded on the NASDAQ National Market System under the symbol CUNB. There were 402 holders of record of the Company's common stock at December 31, 1995. The following table presents the high and low prices of the Company's common stock, as reported on the NASDAQ National Market System during 1995, 1994 and 1993 adjusted for the effect of stock dividends:
1995 1994 1993 -------------------- ------------------- -------------------- Quarter High Low High Low High Low - ------------------------------------------------------------------------------------------------------------------ First $ 9.03 $ 9.01 $10.00 $8.81 $10.80 $7.56 Second $ 9.12 $ 8.98 $10.38 $9.00 $10.80 $9.07 Third $ 9.64 $ 9.48 $10.00 $9.00 $10.89 $9.52 Fourth $ 12.06 $ 12.36 $10.00 $8.75 $10.80 $8.57
On May 30, 1995 and December 15, 1995, the Company paid a $.10 per share dividend to its shareholders. Page 22 CUPERTINO NATIONAL BANCORP Consolidated Balance Sheets
(Dollars in thousands) December 31, 1995 1994 - ---------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 16,207 $ 9,326 Federal funds sold 12,900 10,400 ------------------- Cash and cash equivalents 29,107 19,726 Investment securities 57,049 60,506 Loans, net 160,693 130,239 Loans held for sale -- 5,383 ------------------- Total loans, net 160,693 135,622 Premises and equipment, net 1,917 1,434 Other real estate owned -- 375 Interest receivables and other assets 10,333 5,481 ------------------- Total assets $259,099 $223,144 =================== Liabilities and Shareholders' Equity Deposits: Demand, non-interest-bearing $ 58,986 $ 53,880 NOW 10,158 8,331 Money Market Demand Accounts 114,021 73,623 Savings 7,995 5,951 Other time certificates 17,830 19,417 Time certificates, $100 and over 27,104 25,520 ------------------- Total deposits 236,094 186,722 Other borrowings -- 17,256 Subordinated debt 3,000 -- Other liabilities 1,333 1,129 ------------------- Total liabilities 240,427 205,107 Commitments (Note 12) Shareholders' Equity Preferred stock, no par value: 4,000,000 shares authorized; none issued Common stock, no par value: 6,000,000 shares authorized; shares outstanding: 1,808,828 in 1995 and 1,557,008 in 1994 17,680 14,901 Retained earnings 992 3,136 ------------------- Total shareholders' equity 18,672 18,037 ------------------- Total liabilities and shareholders' equity $259,099 $223,144 ===================
See notes to consolidated financial statements Page 23 CUPERTINO NATIONAL BANCORP Consolidated Statements of Operations
(Dollars in thousands, except per share amounts) For the years ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income: Interest on loans $16,158 $12,608 $11,895 Interest on investment securities: Taxable 3,582 2,451 830 Non-taxable 43 94 145 --------------------------------------------- Total investment securities 3,625 2,545 975 Other interest income 510 208 463 --------------------------------------------- Total interest income 20,293 15,361 13,333 --------------------------------------------- Interest Expense: Interest on deposits 6,510 3,897 3,156 Interest on short-term borrowings 769 382 10 Interest on subordinated debt 75 -- -- --------------------------------------------- Total interest expense 7,354 4,279 3,166 --------------------------------------------- Net interest income 12,939 11,082 10,167 Provision for loan losses 681 1,620 1,679 --------------------------------------------- Net interest income after provision for loan losses 12,258 9,462 8,488 --------------------------------------------- Other Income: Gain on sale of mortgage loans 137 993 1,525 Gain on sale of SBA loans 366 685 435 Trust fees 710 593 494 Loan documentation fees, net 103 276 284 Depositor service fees 291 267 252 Other 295 265 164 --------------------------------------------- Total other income 1,902 3,079 3,154 --------------------------------------------- Operating Expenses: Compensation and benefits 6,704 5,724 5,014 Occupancy and equipment 1,687 1,400 1,226 Professional services and legal costs 2,681 911 1,379 FDIC insurance and regulatory assessments 344 485 414 Client services 337 376 478 Other real estate, net 35 48 288 Other 1,902 1,500 1,425 --------------------------------------------- Total operating expenses 13,690 10,444 10,224 --------------------------------------------- Income before income tax expense 470 2,097 1,418 Income tax expense 157 734 538 --------------------------------------------- Net Income $ 313 $ 1,363 $ 880 ============================================= Net income per common and common equivalent share $ 0.16 $ 0.76 $ 0.50 =============================================
See notes to consolidated financial statements. Page 24 CUPERTINO NATIONAL BANCORP Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1995, 1994 and 1993 Common Stock Unrealized Retained Shareholders' (Dollars in thousands) Shares Amount Gains earnings equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance, January 1, 1993 1,248,246 $ 11,984 $ 3,190 $ 15,174 Stock options exercised 16,472 106 -- 106 Stock issued in Employee Stock Purchase Plan 7,604 63 -- 63 Two 5% stock dividends - fractional shares paid in cash 129,504 1,429 (1,433) (4) Net income -- -- 880 880 -------------------------------------------------------------- Balance, December 31, 1993 1,401,826 13,582 2,637 16,219 Stock options exercised 74,468 543 -- 543 Stock issued in Employee Stock Purchase Plan 8,238 69 -- 69 Two 5% stock dividends - fractional shares paid in cash 72,476 707 (708) (1) Cash dividend $.10 per share -- -- (156) (156) Net Income -- -- 1,363 1,363 -------------------------------------------------------------- Balance, December 31, 1994 1,557,008 14,901 3,136 18,037 Stock options exercised 68,851 418 -- 418 Stock issued in Employee Stock Purchase Plan 10,472 80 -- 80 Stock issued in 401K Plan 8,257 95 -- 95 Two $.10 cash dividends -- -- (324) (324) 10% stock dividend 164,240 2,135 (2,135) -- Cash paid in lieu of fractional shares -- -- (3) (3) Disqualifying disposition of common stock -- 13 -- 13 Nonqualified stock option exercises -- 38 -- 38 Unrealized gain on available for sale securities -- -- $ 5 -- 5 Net Income -- -- -- 313 313 -------------------------------------------------------------- Balance, December 31, 1995 1,808,828 $ 17,680 $ 5 $ 987 $ 18,672 ==============================================================
See notes to consolidated financial statements Page 25 CUPERTINO NATIONAL BANCORP Consolidated Statements of Cash Flows
(Dollars in thousands) For the years ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Cash Flows -- Operating Activities: Net Income $ 313 $ 1,363 $ 880 Reconciliation of net income to net cash from operations: Provision for loan losses 681 1,620 1,679 Depreciation and leasehold amortization 580 490 477 Deferred income taxes 371 128 (246) Accrued interest receivables and other assets (1,479) (255) (627) Accrued interest payables and other liabilities 204 514 (187) Deferred loan fees and discounts, net (4) (76) 229 Proceeds from sale of loans held for sale 16,364 125,342 152,982 Origination of loans for resale (10,981) (123,100) (151,518) Other real estate owned, net -- 48 221 ----------------------------------- Operating cash flows, net 6,049 6,074 3,890 ----------------------------------- Cash Flows -- Investing Activities: Maturities of investment securities and other short-term investments Held-to maturity 26,090 12,983 31,125 Purchase of investment securities and other short-term investments Held to maturity (19,104) (34,050) (42,983) Available for sale (3,524) -- -- Loans, net (31,131) (8,250) (8,157) Investment in other real estate owned -- -- (219) Sale of other real estate owned 375 576 3,097 Premises and equipment (1,063) (516) (850) Purchase of insurance policies (3,744) -- (2,175) Other, net -- 21 -- ----------------------------------- Investing cash flows, net (32,101) (29,236) (20,162) ----------------------------------- Cash Flows -- Financing Activities: Net change in non-interest-bearing deposits 5,106 (8,871) 458 Net change in interest-bearing deposits 44,266 19,853 18,732 Net change in short-term borrowings (17,256) 17,256 -- Subordinated debt issued 3,000 -- -- Proceeds fron the sale of stock 644 457 169 Fractional shares paid in cash (3) (1) (4) Cash dividend (324) (156) -- ----------------------------------- Financing cash flows, net 35,433 28,538 19,355 ----------------------------------- Net increase in cash and cash equivalents 9,381 5,376 3,083 Cash and cash equivalents at beginning of year 19,726 14,350 11,267 ----------------------------------- Cash and cash equivalents at end of year $ 29,107 $ 19,726 $ 14,350 =================================== Cash Flows -- Supplemental Disclosures: Cash paid during the period for: Interest on deposits and other borrowings $ 7,368 $ 4,148 $ 3,181 Income taxes 210 535 722 Non-cash transactions: Additions to other real estate owned -- 375 -- ===================================
See notes to consolidated financial statements. Page 26 CUPERTINO NATIONAL BANK Notes to Consolidated Financial Statements Years Ended December 31, 1995, 1994 and 1993 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation and Nature of Operations The consolidated financial statements include the accounts of Cupertino National Bancorp ("CUNB" or the "Company") and its wholly-owned subsidiary, Cupertino National Bank and Trust ("CNB" or the "Bank"). CUNB is the holding company of CNB. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1995 presentation. The Bank and its operating divisions; SBA Lending Division, Commercial Lending Division, Venture Lending Division, Asset Based Lending Division, Consumer Lending Division, Real Estate Lending Division and Trust Division serve the Santa Clara Valley through its regional offices in Cupertino, San Jose and Palo Alto, California. The Bank intends to open its fourth office in downtown Palo Alto, California, in the Spring of 1996. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. CNB is required by the Federal Reserve System to maintain non-interest earning cash reserves against certain of its transaction accounts. At December 31, 1995, the required reserves totaled $798,000. Investment Securities Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which was adopted by the Company in 1994, requires that investment securities be classified into three portfolios, and accounted for as follows: 1) debt and equity securities for which the Company has the positive intent and ability to hold to maturity are classified as held to maturity and reported at amortized cost; 2) debt and equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and 3) debt and equity securities not classified as either held to maturity or trading securities are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. CUNB currently maintains $53.5 million of its securities in the held to maturity category as it has the intent and ability to hold the securities until maturity and $3.5 million in the available for sale category. Prior to the adoption of SFAS No. 115, all investment securities were considered held to maturity because the Company had the ability and intent to hold these securities to maturity. Accordingly, these securities were carried at amortized cost. Loans Interest on loans is credited to income as earned and is accrued only if deemed collectible. Accrued interest is generally reversed against current income on loans over 90 days contractually delinquent and on other loans which have developed inherent problems prior to being 90 days delinquent. The Bank charges fees for originating loans, which are recognized as an adjustment of the loan yield over the life of the loan by a method approximating the effective interest method. Direct costs of originating the loan are capitalized and recognized over the life of the loan as a reduction of the yield. Page 27 CUPERTINO NATIONAL BANK Notes to Consolidated Financial Statements (Cont.) When a loan is sold, unamortized fees and capitalized direct costs are recognized in the statement of operations. Other loan fees and charges representing service costs for the repayment of loans, for delinquent payments or for miscellaneous loan services are recognized when collected. The Bank designates certain of its loans receivable as being held for sale and they are recorded at fair market value. In determining the level of loans held for sale, the Bank considers whether loans (a) would be sold as part of its asset/liability management strategy, or (b) may be sold in response to changes in interest rates, changes in payment risk, the need to increase regulatory capital or other similar factors. Other Real Estate Owned Real estate acquired through foreclosure is carried at the lower of cost or fair value less estimated selling costs. Subsequent decreases in fair value are recognized as charges to expense. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the lesser of the lease terms or estimated useful lives of the assets, which are generally 3 to 10 years. Income Taxes Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Allowance for Loan Losses SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", was issued in May 1993 and was subsequently amended by SFAS No. 118 in October 1994. The provisions of these statements are effective for fiscal years beginning after December 15, 1994 and are applicable to all creditors and to all loans that are individually and specifically evaluated for impairment, uncollateralized as well as collateralized. It requires that impaired loans be measured at either, (1) the present value of expected cash flows at the loan's effective rate, (2) the loan's observable market price, or (3) the fair market value of the collateral of the loan. In general, these statements are not applicable to large groups of smaller-balance loans that are collectively evaluated for impairment such as credit cards, residential mortgage and/or consumer installment loans. Adoption of SFAS Nos. 114 and 118 did not have a material effect on the financial statements of the Company in 1995. Income recognition on impaired loans conforms to the method the Company uses for income recognition on nonaccrual loans. The allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known and unidentified losses in the loan portfolio. The allowance is based upon a number of factors, including prevailing and anticipated economic trends, industry experience, industry and geographic concentrations, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency trends, historical loss experience, CNB's underwriting practices and other relevant factors. Additions to the allowance, in the form of provisions, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred. Because the allowance for possible loan losses is based on estimates, ultimate losses may vary from the current estimates. Income per Share Income per share, adjusted for stock dividends, is based on weighted average common and common equivalent shares outstanding of 1,894,400 in 1995; 1,628,500 in 1994 and 1,587,000 in 1993. Page 28 Sales and Servicing of Small Business Administration ("SBA") Loans The Company originates loans to customers under SBA programs that generally provide for SBA guarantees of 70% to 90% of each loan. The Company generally sells the guaranteed portion of each loan to an investor and retains the unguaranteed portion and servicing rights in its own portfolio. Gains on these sales are earned through the sale of the guaranteed portion of the loan for an amount in excess of the adjusted carrying value of the portion of the loan sold. The Company allocates the carrying value of such loans between the portion sold, the portion retained and a value assigned to the right to service the loan. The difference between the adjusted carrying value of the portion retained and the face amount of the portion retained is amortized to interest income over the life of the related loan using a method which approximates the interest method. The value assigned to the right to service is also amortized over the estimated life of the loan. Funding for the SBA programs depend on annual appropriations by the U.S. Congress. NOTE 2 -- INVESTMENT SECURITIES U.S. Government and agency obligations, municipal securities and other securities are summarized as follows:
Amortized Unrealized Unrealized Market (Dollars in thousands) December 31,1995 Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 5,987 $ 24 $ -- $ 6,011 U.S. Agency obligations: Mortgage-backed obligations 8,190 159 -- 8,349 Fixed and variable rate notes 34,199 145 -- 34,344 Other mortgage-backed obligations 4,195 102 -- 4,297 Federal Reserve Bank stock 230 -- -- 230 Federal Home Loan Bank stock 739 -- -- 739 ------------------------------------------------ Total securities held to maturity 53,540 430 -- 53,970 U.S. Treasury obligations available for sale 3,504 5 -- 3,509 ------------------------------------------------ Total securities $57,044 $435 $ -- $57,479 ================================================ December 31, 1994 U.S. Treasury obligations $10,420 $ -- $ 115 $10,305 U.S. Agency obligations: Mortgage-backed obligations 8,989 -- 415 8,574 Fixed and variable rate notes 34,348 3 1,563 32,788 State and political subdivisions 1,482 4 2 1,484 Federal Reserve Bank stock 230 -- -- 230 Federal Home Loan Bank stock 703 -- -- 703 Other mortgage-backed obligations 4,334 -- 228 4,106 ------------------------------------------------ Total securities held to maturity 60,506 7 2,323 58,190 Total securities available for sale -- -- -- -- ------------------------------------------------ Total securities $60,506 $ 7 $2,323 $58,190 ================================================
Page 29 CUPERTINO NATIONAL BANK Notes to Consolidated Financial Statements (Cont.) Securities with a carrying value of $14,509,000 and $24,868,000 at December 31, 1995 and 1994, respectively, were pledged to secure public deposits and for other purposes required by law or contract. During 1995, 1994 and 1993, there were no sales of securities. The following table shows amortized cost and estimated market value of the Company's investment securities by year of maturity at December 31, 1995.
1997 2001 2006 and (Dollars in thousands) 1996 through 2000 through 2006 Thereafter Total - ----------------------------------------------------------------------------------------------------------------------- U.S. Treasury obligations $ 5,987 $ -- $ -- $ -- $ 5,987 U.S. Agency obligations: Mortgage-backed obligations (1) -- 95 2,730 5,337 8,162 Fixed and variable rate notes (2) 8,000 17,727 6,485 1,987 34,199 Other mortgage-backed obligations (1) -- -- -- 4,224 4,224 Federal Reserve Bank stock -- -- -- 230 230 Federal Home Loan Bank stock -- -- -- 739 739 --------------------------------------------------------------------- Total investment securities held to maturity 13,987 17,822 9,215 12,517 53,541 U.S. Treasury obligations available for sale 3,504 -- -- -- 3,504 --------------------------------------------------------------------- Total securities $17,491 $17,822 $9,215 $12,517 $57,045 --------------------------------------------------------------------- Market Value $17,478 $17,800 $9,471 $12,732 $57,481 ===================================================================== Weighted average yield 4.8% 6.6% 7.5% 7.8% 6.8% =====================================================================
(1) Mortgage-backed securities are shown at contractual maturity, however the average life of these mortgage-backed securities may differ due to principal prepayments. (2) Certain U.S. Agency fixed and variable rate note obligations may be called, without penalty,at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates Investments in the Federal Reserve Bank and the Federal Home Loan Bank are required in order to maintain membership and support activity levels. NOTE 3 - LOANS
The following is a summary of loans by category as of December 31: (Dollars in thousands) 1995 1994 - -------------------------------------------------------------------------------- Commercial $ 88,646 $ 81,695 Real estate construction and land 23,889 18,117 Real estate term 23,026 13,133 Consumer and other 28,666 21,059 ---------------------- Total loans, gross 164,227 134,004 Deferred loan fees and discounts (851) (847) ---------------------- Total loans, net of deferred fees 163,376 133,157 Allowance for loan losses (2,683) (2,918) ---------------------- Total loans, net 160,693 130,239 Loans held for sale -- 5,383 ---------------------- Total loans $160,693 $135,622 ======================
Page 30 CUPERTINO NATIONAL BANK NOTE 4-ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for the years ended December 31: (Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Balance January 1 $ 2,918 $ 2,247 $ 1,748 Loans charged off (1,074) (1,012) (1,228) Recoveries 158 63 48 Provision for loan losses 681 1,620 1,679 -------------------------------------- Balance December 31 $ 2,683 $ 2,918 $ 2,247 ======================================
The following table sets forth non-performing loans as of December 31, 1995, 1994 and 1993. Non-performing loans are defined as loans which are on non- accrual status, loans which have been restructured, and loans which are 90 days past due but are still accruing interest. Interest income foregone on non- performing loans outstanding at year-end totaled $245,000, $275,000 and $129,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Interest income recognized on the non-performing loans approximated $63,000, $50,000 and $25,000 for the years ended December 31, 1995, 1994 and 1993.
(Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Non-accrual loans $2,513 $3,244 $ 997 Accruing loans past due 90 days or more 830 1,371 1,903 Restructured loans -- -- -- ------------------------------- Total $3,343 $4,615 $2,900 ===============================
At December 31, 1995, the recorded investment in impaired loans was approximately $2.5 million with a corresponding valuation allowance of $509,000. For the year ended December 31, 1995, the average recorded investment in impaired loans was approximately $2.6 million. The Company did not recognize interest on impaired loans during the twelve months ended December 31, 1995. NOTE 5 - OTHER REAL ESTATE OWNED
Other real estate owned consists of the following at December 31: (Dollars in thousands) 1995 1994 - -------------------------------------------------------------------------------- Real estate acquired through foreclosure $-- $375 Allowance for estimated loan losses -- -- ------------------ Other real estate owned, net $-- $375 ================== The following summarizes other real estate operations, which are included in operating expenses, for the years ended December 31: (Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Income (loss) from: Real estate operations, net $(18) $ (6) $ 10 Provision for estimated losses (17) (42) (231) -------------------------------- Other real estate, net $(35) $(48) $(221) ================================
Page 31 CUPERTINO NATIONAL BANK Notes to Consolidated Financial Statements (Cont.) NOTE 6 - PREMISIES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are comprised of the following: (Dollars in thousands) 1995 1994 - -------------------------------------------------------------------------------- Leasehold improvements $ 853 $ 993 Furniture and equipment 2,717 2,463 Automobiles 157 140 ------------------------ Total 3,727 3,596 Accumulated depreciation and amortization (2,167) (2,162) Fixed assets in progress 357 -- ------------------------ Premises and equipment, net $ 1,917 $ 1,434 ========================
NOTE 7 - OTHER BORROWINGS Short term borrowings are detailed as follows:
(Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------------- Federal funds purchased Balance at December 31 $ -- $ 7,000 $ -- Average Balance 1,120 1,800 277 Maximum amount outstanding at any month end 5,600 12,000 -- Average interest rate: During the year 5.96% 4.18% 3.56% At December 31 -- 6.50% -- Securities sold under agreements to repurchase Balance at December 31 $ -- $10,256 $ -- Average Balance 11,486 5,908 -- Maximum amount outstanding at any month end 26,994 24,153 -- Average interest rate: During the year 6.12% 5.13% -- At December 31 -- 6.29% --
Federal funds purchased generally mature the following day after the purchase while securities sold under agreements to repurchase generally mature within 30 days from the various dates of sale. In 1995, the Company consummated a private offering of $3.0 million in 11.5% subordinated notes. The notes, which will mature on September 15, 2005, were offered to the Board of Directors, bank officers and other accredited investors within the meaning of Rule 501 under the Securities Act of 1933, as amended. The debentures are redeemable by the Company after September 30, 1998 at a premium ranging from 0% to 5% of the premium redeemed. The notes qualify as Tier 2 capital of the Bank (see Note 13). Page 32 CUPERTINO NATIONAL BANK NOTE 8- INCOME TAXES
Income tax expense was comprised of the following for the years ended December 31: (Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Current: Federal $(214) $518 $ 539 State -- 88 245 Total current expense (benefit) (214) 606 784 Deferred: Federal 373 125 (148) State (2) 3 (98) Total deferred expense (benefit) 371 128 (246) Total expense $ 157 $734 $ 538
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company's deferred income tax assets (liabilities) as of December 31, 1995 and 1994 are as follows:
(Dollars in thousands) 1995 1994 - -------------------------------------------------------------------------------- Loan loss reserves $ 605 $ 904 OREO valuation -- -- Deferred compensation 72 48 State income taxes 148 243 Other (125) (124) -------------------------- Deferred tax asset $ 700 $ 1,071 ==========================
No valuation allowance has been provided in 1995 and 1994. The components of the deferred tax benefit, which results from differences in the recognition of certain items for tax and financial reporting purposes, were as follows:
(Dollars in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Provision for loan losses $299 $ 136 $ (97) Cash basis income tax reporting -- -- (12) State income taxes 1 224 93 Other 71 (232) (230) -------------------------------- Total deferred expense (benefit) $371 $ 128 $(246) ================================
Page 33 CUPERTINO NATIONAL BANK Notes to Consolidated Financial Statements (Cont.) A reconciliation from the statutory income tax rate to the consolidated effective income tax rate follows, for the years ended December 31:
(Dollars in thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------- Statuatory federal tax rate 35.0% 35.0% 35.0% California franchise tax expense, net of federal income tax benefit -- 2.9% 6.9% Exempt income (8.7)% (4.1)% (3.2)% Other, net 6.7% 1.2% ----------------------------------------- Effective income tax rate 33.0% 35.0% 37.5% =========================================
NOTE 9 - OTHER OPERATING EXPENSES
The major components of other operating expense are as follows for the years ended December 31: (Dollars in thousands) 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Supplies $ 202 $ 197 $ 153 Telephone 169 163 113 Director fees 147 145 142 Insurance 150 144 137 Correspondent bank charges 158 118 106 Advertising 209 87 88 Other 867 646 686 ------------------------------------- Total $1,902 $1,500 $1,425 =====================================
NOTE 10 - EMPLOYEE BENEFIT PLANS The Company has stock option plans under which incentive and non-statutory stock options may be granted to employees and directors to purchase up to 415,746 shares of common stock at prices not less than the fair market value of such stock at the date the options are granted. Options generally expire 10 years after the date of grant and generally become exercisable in annual installments of 20 percent to 33 percent. As of December 31, 1995, options for 266,330 shares were exercisable and options for 60,429 shares were available for future grant. Additional stock option information follows:
Options outstanding(1) Number of shares Option price per share - -------------------------------------------------------------------------------------------------------------- Balance, January 1, 1993 377,386 $3.85-$ 7.29 Granted 14,087 7.26- 9.68 Exercised (20,659) 4.13- 7.36 Canceled (7,378) 6.91- 7.36 -------------------------------- Balance, December 31, 1993 363,436 $3.85-$ 9.68 Granted 83,012 8.00- 9.09 Exercised (84,577) 4.25- 7.28 Canceled (11,793) 4.05- 8.98 -------------------------------- Balance, December 31, 1994 350,078 $3.85-$ 9.68 Granted 124,823 7.95- 12.95 Exercised (75,736) 3.85- 11.68 Canceled (43,848) 4.99- 11.81 -------------------------------- Balance, December 31, 1995 355,317 $3.85-$12.95 --------------------------------
(1) Adjusted for stock dividends in 1995, 1994 and 1993 Page 34 CUPERTINO NATIONAL BANK The Company has a 401(k) tax deferred savings plan under which eligible employees may elect to defer a portion of their salary as a contribution to the plan. The Company matches the employee contributions at a rate set by the Board of Directors (currently 50% of the first 6% of deferral of an individual's salary). The matching contribution vests ratably over the first three years of employment. The Company contributed $95,000 to the plan in 1995, $72,500 in 1994, and $67,000 in 1993. The Company has established an Employee Stock Purchase Plan, as amended, under section 423(b) of the Internal Revenue Code which allows eligible employees to set aside up to 10% of their compensation toward the purchase of the Company's stock for an aggregate total of 71,722 shares. Under the plan, the purchase price is 85% of the lower of the fair market value at the beginning or end of each three month offering period. During 1995, employees purchased 11,519 shares of common stock for an aggregate purchase price of $80,000 compared to the purchase of 9,062 shares of common stock for an aggregate purchase price of $69,000 in 1994. There are 29,975 shares remaining in the plan available for purchase by employees at December 31, 1995. During 1993 and 1995, the Company entered into deferred compensation agreements with certain Bank executive officers. Under these agreements, the Company is generally obligated to provide for each such employee or their beneficiaries, during a period of up to between 30 and 40 years after the employee's death, disability or retirement, annual benefits ranging from $50,000 to $78,000. The estimated present value of future benefits to be paid is being accrued over the vesting period of the participants. Expenses accrued for this plan for the years ended December 31, 1995, 1994 and 1993 totaled $90,000, $72,000 and $48,000, respectively. The Company and the employees are the beneficiaries of life insurance policies that have been purchased as a method of financing the benefits under the agreements . These benefits will be funded through loans drawn on the policies' cash surrender value over the retirement period of each employee. At December 31, 1995, the Company's cash surrender value of these policies was $6.0 million which is included in other assets. In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 "Accounting for Stock-Based Compensation". Under the provisions of SFAS No. 123, the Company is encouraged, but not required, to measure compensation costs related to its employee stock compensation plans under the fair market value method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. If the Company elects not to recognize compensation expense under this method, it is required to disclose the pro forma net income and earnings per share effects based on the SFAS No. 123 fair value methodology. SFAS No. 123 applies to financial statements for fiscal years beginning after December 15, 1995. Earlier implementation is permitted. The Company will implement the requirements of SFAS No. 123 in 1996 and intends to only adopt the disclosure provisions of this statement. NOTE 11 - RELATED PARTY TRANSACTIONS Loans are made to executive officers, directors and their affiliates, subject to approval by the Directors' Loan Committee and the Board of Directors. An analysis of total loans to related parties for the year ended December 31, 1995 is shown as follows:
(Dollars in thousands) - -------------------------------------------------------------------------------- Balance, January 1, 1995 $ 2,987 Additions 1,040 Repayments (1,830) --------- Balance, December 31, 1995 $ 2,197 =========
Page 35 CUPERTINO NATIONAL BANK Notes to Consolidated Financial Statements (Cont.) NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES The Company leases the facilities from which it operates all of its activities. Future minimum lease commitments under all non-cancelable operating leases as of December 31, 1995 are as follows (includes lease payments for a branch location currently under construction, estimated to open in April 1996):
(Dollars in thousands) 1995 - -------------------------------------------------------------------------------- 1996 $ 786 1997 863 1998 842 1999 806 2000 814 Thereafter 2,384 ------- Total $6,495 =======
During 1995, the Company entered into a twelve year operating lease contract for an additional branch location in Palo Alto, California, which will commence upon completion of construction and occupying the building. Annual lease payments will be approximately $198,000. Total rent expense was approximately $724,000, $589,000 and $475,000 for 1995, 1994 and 1993, respectively. In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees and commitments to extend credit, that are not reflected in the accompanying consolidated financial statements. At December 31, 1995, commitments to fund loans and outstanding standby letters of credit were approximately $100.2 million and $2.2 million, respectively. The Bank's exposure to credit loss is limited to amounts funded or drawn; however, at December 31, no losses are anticipated as a result of these commitments. Loan commitments which typically have fixed expiration dates and require the payment of a fee are typically contingent upon the borrower meeting certain financial and other covenants. Approximately $59.7 million of these commitments relate to real estate construction and land loans and are expected to fund within the next 12 months. However, the remainder relate primarily to revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon, therefore the total commitments do not necessarily represent future cash requirements. The Bank evaluates each potential borrower and the necessary collateral on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities, or business assets. Stand-by letters of credit are conditional commitments written by the Bank to guarantee the performance of a client to a third party. These guarantees are issued primarily relating to purchases of inventory by the Bank's commercial clients, and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients, and the Bank accordingly uses evaluation and collateral requirements similar to those for loan commitments. Virtually all such commitments are collateralized. In the ordinary course of business there are various assertions, claims and legal proceedings pending against the Company. Management is of the opinion that the ultimate resolution of these proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company. In July 1995, the Company settled a lawsuit for $1,080,000 (net of tax) which alleges that the Company did not perform its fiduciary duties and, as a result, the trust incurred losses on real estate investments that were purchased. The Company believes that insurance coverage for this settlement is available to the Company under various insurance policies and the Company is currently in the process of pursuing recovery under these policies. However, due to the uncertainty associated with the recovery, the Company reflected the $1,080,000 expense of the legal settlement in 1995 earnings. Page 36 NOTE 13 - REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum capital amounts and ratios (as defined in the regulations) and are set forth in the table below. At December 31, 1995, the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1995, the Bank is categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that determination that management believes have changed the Bank's category. The Company's 1995 and 1994 capital ratios are as follows;
For Capital Under Prompt Corrective Actual Adequacy Purpose Action Provisions: (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ----------------------------------------------------------------------------------------------------------------- As of December 31, 1995: Total Capital (to Risk Weighted Assets $24,214 11.91% $16,285 8.00% $20,331 10.00% Tier I Capital (to Risk Weighted Assets $18,672 9.18% $ 8,135 4.00% $12,199 6.00% Tier I Capital (to Average Assets) $18,672 7.78% $ 9,196 4.00% $11,495 5.00% As of December 31, 1994 Total Capital (to Risk Weighted Assets $20,955 12.0% $13,855 8.00% $17,318 10.00% Tier I Capital (to Risk Weighted Assets $18,037 10.83% $ 6,662 4.00% $ 9,993 6.00% Tier I Capital (to Average Assets) $18,037 8.39% $ 8,599 4.00% $10,749 5.00%
NOTE 14-RESTRICTIONS ON SUBSIDIARY TRANSACTIONS One of the principal sources of cash for the Company is dividends from its subsidiary Bank. Total dividends which may be declared by the Bank without receiving prior approval from regulatory authorities are limited to the lesser of the Bank's retained earnings or the net income of the Bank for the latest three fiscal years, less dividends previously declared during that period. Under these restrictions and considering minimum regulatory capital requirements, the Bank is able to declare dividends not exceeding $2,076,000 as of December 31, 1995. The Bank is subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Bank is prohibited from lending to the Company unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Bank are limited to 10% of the Bank's shareholders' equity, or a maximum of $1,765,000 at December 31, 1995. No such advances were made during 1995 or exist as of December 31, 1995. Page 37 NOTE 15 - PARENT ONLY FINANCIAL STATEMENT The financial statements of Cupertino National Bancorp (parent company only) follow:
Parent Company Only Balance Sheets (Dollars in thousands) December 31, 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 898 $ 883 Investment in CNB 17,650 16,851 Subordinated debentures purchased by CNB 3,000 0 Other assets 126 305 ----------------------- Total $ 21,674 $ 18,039 ======================= Liabilities and shareholders' equity: Subordinated debt $ 3,000 $ 0 Other liabilities 2 2 ----------------------- Total liabilities 3,002 2 Shareholders' equity Common stock 17,680 14,901 Retained earnings 992 3,136 ----------------------- Total shareholders' equity 18,672 18,037 ----------------------- Total liabilities and shareholders' equity $ 21,674 $ 18,039 ======================= Parent Company Only Statements of Operations (Dollars in thousands) Years ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- Income: Interest income $ 34 $ 17 $ 14 Other income 10 14 12 ----------------------------------- Total 44 31 26 ----------------------------------- Expenses: Occupancy and equipment 441 410 384 Less rentals received from the Bank (441) (409) (384) ----------------------------------- Net occupancy and equipment -- 1 -- Other expense 48 46 20 ----------------------------------- Total 48 47 20 ----------------------------------- Income before taxes and equity in undistributed net income of the Bank (4) (16) 6 Income tax expense -- -- 2 ----------------------------------- Income (loss) before equity in undistributed net income of the Bank (4) (16) 4 Equity in undistributed net income of the Bank 317 1,379 876 Net Income $ 313 $ 1,363 $ 880 ===================================
Page 38
Parent Company Only Statements of Cash Flows (Dollars in thousands) Years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------- Cash flows -- operating activities: Net income $ 313 $ 1,363 $ 880 Reconciliation of net income to net cash from operations: Equity in undistributed net income of the Bank (317) (1,379) (876) Net change in other assets 28 (205) (100) Net change in other liabilities -- (41) -- --------------------------------- Operating cash flows, net 24 (262) (96) --------------------------------- Cash flows -- investing activities: Principal repayment of loans receivable 150 -- -- Purchase of subordinated debentures by CNB (3,000) -- -- Capital contribution to the Bank (425) -- -- --------------------------------- Investing cash flows, net (3,275) -- -- --------------------------------- Cash flows -- financing activities: Proceeds from issuance of subordinated debt 3,000 -- -- Proceeds from exercise of stock options and employee stock purchases 593 613 169 Cash paid in lieu of fractional shares on stock dividends (3) (2) (4) Payment of cash dividends (324) (156) -- --------------------------------- Financing cash flows, net 3,266 455 165 --------------------------------- Net increase in cash and cash equivalents 15 193 69 Cash and cash equivalents at the beginning of the year 883 690 621 --------------------------------- Cash and cash equivalents at the end of the year $ 898 $ 883 $ 690 =================================
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments of the Company as of December 31, 1995 and 1994 are as follows:
1995 1994 Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value - -------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 29,107 $ 29,107 $ 19,726 $ 19,726 Investment securities 57,049 57,481 60,506 58,190 Loans, net 160,693 160,854 130,239 130,000 Loans held for sale -- -- 5,383 5,383 -------------------------------------------------- Total loans, net 160,693 160,854 135,622 135,383 -------------------------------------------------- Financial liabilities: Deposits: Demand, non-interest bearing 58,986 58,986 53,880 53,880 NOW 10,158 10,158 8,331 8,331 Money Market Demand Accounts 114,021 114,021 73,623 73,623 Savings 7,995 7,995 5,951 5,951 Other time certificates 17,830 17,823 19,417 19,410 Time certificates, $100 and over 27,104 27,094 25,520 25,513 -------------------------------------------------- Total deposits 236,094 236,077 186,722 186,708 Subordinated debt 3,000 3,000 -- -- Short term borrowings -- -- 17,256 17,256 --------------------------------------------------
Page 39 CUPERTINO NATIONAL BANK Notes to Consolidated Financial Statements (Cont.) Cash and cash equivalents The carrying value reported in the balance sheet for cash and cash equivalents approximates fair value. Securities Fair values for investment securities are based on quoted market prices. Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposit liabilities and borrowings The fair value for all deposits without fixed maturities and short term borrowings is considered to be equal to the carrying value. The fair value for fixed rate time deposits and subordinated debt are estimated by discounting future cash flows using interest rates currently offered on time deposits or subordinated debt with similar remaining maturities. Page 40 CUPERTINO NATIONAL BANCORP Report of Independent Accountants The Board of Directors and Shareholders, Cupertino National Bancorp: We have audited the accompanying consolidated balance sheets of Cupertino National Bancorp and Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated statements of operations, shareholders' equity and cash flows of Cupertino National Bancorp & Subsidiary for the year ended December 31, 1993 were audited by other auditors whose report dated January 18, 1994 expressed an unqualified opinion on those statements. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cupertino National Bancorp and Subsidiary at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand, L.L.P. Coopers & Lybrand, L.L.P. San Francisco, California January 26, 1996 Page 43 Board of Directors and Officers Board Members C. Donald Allen President and Chief Executive Officer Cupertino National Bancorp Chairman of the Board and Chief Executive Officer Cupertino National Bank & Trust David K. Chui President and Chief Executive Officer PANCAL (commercial and residential real estate) Carl E. Cookson Chairman of the Board Santa Clara Land Title Company (title insurance) Jerry R. Crowley Chairman and Chief Executive Officer Treehouse, Ltd. (venture capital) Janet M. DeCarli Broker Cornish & Carey Realtors (residential and commercial real estate) John M. Gatto Chairman of the Board Cupertino National Bancorp and Chairman of the Executive Committee Cupertino National Bank & Trust Architect Maria Enterprises (real estate development) William H. Guengerich Private investor James E. Jackson Attorney at Law Jackson , Abdalah, Rodriguez & Wong Rex D. Lindsay Vice Chairman of the Board Cupertino National Bancorp and Cupertino National Bank & Trust Rancher and private investor Glen McLaughlin Chairman of the Board Venture Leasing Associates (general equipment leasing) Norman Meltzer Real estate developer, Retired Dick J. Randall Rancher and private investor Dennis W. Whittaker President Whittaker Insurance Agency, Inc. (personal and commercial insurance sales) Officers C. Donald Allen President and Chief Executive Officer Cupertino National Bancorp Chairman of the Board and Chief Executive Officer Cupertino National Bank & Trust Kenneth D. Brenner Executive Vice President Sales and Marketing Manager, Palo Alto Office David R. Hood Executive Vice President Senior Lending Officer Hall Palmer Executive Vice President Senior Trust Officer Steven C. Smith Executive Vice President, Chief Operating Officer Cupertino National Bancorp and Cupertino National Bank & Trust Colleen Carlsted Senior Vice President, Manager Commercial Loans Raul Galano Senior Vice President, Manager Trust Operations Nord Hastings Senior Vice President Chief Credit Officer Donald McMullen Senior Vice President Manager, Commercial Loans Daniel R. Michener Senior Vice President, Manager Venture Lending and Asset Based Lending Jeffrey Whalen Senior Vice President, Business Development Manager, San Jose Office Heidi R. Wulfe Senior Vice President, Chief Financial Officer, Cupertino National Bancorp and Cupertino National Bank & Trust Janice K. Alder Vice President, Commercial Loans Ralph W. Barnett Vice President, Manager SBA Loans Julie Bellestri Vice President, Manager Emerson Office Karen L. Blase Vice President, Manager MIS Cathy Colgan Vice President, Senior Trust Officer Benner Davenport Vice President, Trust Officer Michael David Vice President Business Development, Venture Lending Daniel Duarte Vice President, Manager Consumer Lending and Special Assets Cecilia K. Fu Vice President, Manager Construction Loans Cheryl Howell Vice President, Senior Trust Officer Madalyn A. Knittle Vice President, Manager Human Resources Jon Krogstad Vice President, Venture Lending Joan Leis Vice President, Cashier William McKinley Vice President, Commercial Loans Robert Mazza Vice President, Construction Loans Ruth Matosich Vice President, Manager Note Department Tammy Okuda Vice President, Commercial Loans Stella PeBenito Vice President, Trust Investment Officer Robert ProFaca Vice President, Commercial Loans Debra Reed Vice President, Senior Trust Officer Addy D. Soreco Vice President, Commercial Loans Helen Craig Titus Vice President, Senior Trust Officer Nannette Walton Vice President, Asset Based Lending Corporate Directory Stock Market Makers Cupertino National Bancorp's common stock is traded on the NASDAQ National Market System under the symbol CUNB. The newspaper abbreviation is CupNBk. Marc Arnett Hoefer & Arnett San Francisco, California (800) 346-5544 Ron Lohbeck Sutro & Co. San Jose, California (408) 292-2442 Mark T. Curtis Smith Barney Palo Alto, California (415) 493-5300 Frank Seay Dean Witter Reynolds, Inc. San Jose, California (408) 286-6060 Phillip Hage Van Kasper & Company San Francisco, California (415) 391-5600 Scott Burford or Randall Kinoshita Burford Capital/GBS Financial La Crescenta, California (800) 765-5558 Legal Counsel Gray, Cary, Ware & Freidenrich Palo Alto, California Certified Public Accountants Coopers & Lybrand, L.L.P. San Francisco, California Shareholder Relations A copy of Cupertino National Bancorp's Form 10K annual report, filed with the Securities and Exchange Comission, is available without charge. Requests for Form 10K or other shareholder information should be directed to: Shelly Binnebose Assistant Corporate Secretary Cupertino National Bancorp 20230 Stevens Creek Boulevard Cupertino, California 95014 Telephone (408) 725-2347 FAX (408) 996-0657 Registrar and Transfer Agent U.S. Stock Transfer Corporation 1745 Gardena Avenue, 2nd Floor Glendale, California 92104 (818) 502-1404 Corporate and Bank Headquarters 20230 Stevens Creek Boulevard Cupertino, California 95014 Telephone (408) 996-1144 FAX (408) 996-0657 San Jose Office 60 South Market Street San Jose, California 95113 Telephone (408) 286-1595 FAX (408) 971-4233 Palo Alto Square Office 3 Palo Alto Square Palo Alto, California 94306 Telephone (415) 852-0300 FAX (415) 493-6662 Emerson Office 400 Emerson Street Palo Alto, California 94301 Telephone (415) 833-1400 FAX (415) 473-1326 Related Financial Services Small Business Administration Real Estate Construction Consumer Lending Cupertino, California 95014 Telephone (408) 996-1144 FAX (408) 996-0657 Venture Lending Asset Based Lending 3 Palo Alto Square Palo Alto, California 94306 Telephone (415) 813-8319 FAX (415) 843-6969 The Trust Group 400 Emerson Street Palo Alto, California 94301 Telephone (415) 833-1400 FAX (415) 473-1326 [LOGO] EQUAL HOUSING LENDER [LOGO] C N B CUPERTINO NATIONAL BANK & TRUST Corporate and Bank Headquarters 20230 Stevens Creek Boulevard Cupertino, California 95014 Telephone (408) 996-1144 FAX (408) 996-0657 EX-23.1 4 COOPER'S & LYBRAND CONSENT [LETTERHEAD OF COOPERS & LYBRAND L.L.P.] EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Cupertino National Bancorp and Subsidiary on Forms S-8 (File No. 33-17368, No. 33-17369, No. 33-62429 and No. 33-31193) of our report dated January 26, 1996, on our audits of the consolidated financial statements of Cupertino National Bancorp and Subsidiary as of December 31, 1995 and 1994 and for the years then ended which report is incorporated by reference in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. San Francisco, California March 25, 1996 EX-23.2 5 DELOITTE & TOUCHE CONSENT EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-17368, No. 33-17369 and No. 33-31193 of Cupertino National Bancorp on Forms S-8 of our report dated January 18, 1994, included in this Annual Report on Form 10-K of Cupertino National Bancorp for the year ended December 31, 1994. DELOITTE & TOUCHE LLP San Jose, California March 25, 1996 EX-27 6 ARTICLE 5, FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1995 ANNUAL REPORT AND IS QUALIFIED IN TIS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 16,207 0 12,900 0 3,509 53,540 53,970 163,376 2,683 259,099 236,094 0 1,333 3,000 17,680 0 0 992 259,099 16,158 3,625 510 20,293 6,510 7,354 12,939 681 0 13,690 470 0 0 0 313 0.16 0.16 6.12 2,513 830 0 7,878 2,918 1,074 158 2,683 2,683 0 0
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