-----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, VMhTjEf5hf9Wdot/NHz9mtc9Bnqwk6Q3FjS377nVpQZnCDSwScfIWE6KNHY3msiX Hddd4KkrWa0MFJBrFAmWrg== 0000898430-96-001828.txt : 19960515 0000898430-96-001828.hdr.sgml : 19960515 ACCESSION NUMBER: 0000898430-96-001828 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUPERTINO NATIONAL BANCORP CENTRAL INDEX KEY: 0000757790 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 330060898 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18015 FILM NUMBER: 96562724 BUSINESS ADDRESS: STREET 1: 20230 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961144 10-Q 1 FORM 10-Q FOR PERIOD ENDED 03/31/96 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- AND EXCHANGE ACT OF 1934 For the transition period from to . ----- ------ Commission file number 0-18015 CUPERTINO NATIONAL BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 33-0060898 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20230 STEVENS CREEK BOULEVARD, CUPERTINO, CALIFORNIA 95014 (Address of principal executive offices) (Zip Code) (408) 996-1144 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Outstanding shares of Common Stock, no par value, as of April 29, 1996: 1,869,413 This report contains a total of 15 pages. 1 of 15 CUPERTINO NATIONAL BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets as of March 31, 1996 and December 31, 1995............. 3 Consolidated Statements of Income for the Three Months Ended March 31, 1996 and 1995....... 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1995....... 5 Notes to Consolidated Financial Statements...... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 7 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................. 16 Signatures....................................... 16 2 of 15
PART I. FINANCIAL INFORMATION CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, (Unaudited...dollars in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 13,933 $ 16,207 Federal funds sold 900 12,900 - ----------------------------------------------------------------------------------------------------------- Cash and cash equivalents 14,833 29,107 Other short-term investments -- -- Investment securities Held to maturity (Market value $52,372 at March 31, 1996; $53,970 at December 31, 1995) 52,242 52,571 Available for sale (Cost $2,505 at March 31, 1996; $3,504 at December 31, 1995) 2,508 3,509 Other securities 991 969 - ----------------------------------------------------------------------------------------------------------- Total investment securities 55,741 57,049 Loans: Commercial 92,087 88,646 Real estate-construction and land 24,875 23,889 Real estate-term 28,898 23,026 Consumer and other 29,512 28,666 Deferred loan fees and discounts (867) (851) - ----------------------------------------------------------------------------------------------------------- Loans 174,505 163,376 Allowance for loan losses (2,907) (2,683) - ----------------------------------------------------------------------------------------------------------- Total loans 171,598 160,693 Premises and equipment, net 2,179 1,917 Accrued interest receivable and other assets 10,609 10,333 - ----------------------------------------------------------------------------------------------------------- TOTAL $254,960 $259,099 =========================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest-bearing $ 61,477 $ 58,986 NOW 8,310 10,158 Money Market Demand Accounts 104,092 114,021 Savings 11,127 7,995 Other time certificates 18,426 17,830 Time certificates, $100 and over 28,398 27,104 - ----------------------------------------------------------------------------------------------------------- Total deposits 231,830 236,094 Accrued interest payable and other liabilities 720 1,333 Subordinated debentures 3,000 3,000 - ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 235,550 240,427 Shareholders' equity: Preferred stock, no par value: 4,000,000 shares authorized; none issued -- -- Common stock, no par value: 6,000,000 shares authorized; shares outstanding: 1,857,667 at March 31, 1996 and 1,808,828 at December 31, 1995 17,947 17,680 Retained earnings 1,463 992 - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 19,410 18,672 - ----------------------------------------------------------------------------------------------------------- TOTAL $254,960 $259,099 ===========================================================================================================
See notes to consolidated financial statements 3 of 15 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited...dollars in thousands, except per share data)
Three Months Ended March 31, -------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------------ Interest income: Interest on loans $4,517 $3,799 Interest on investment securities: Taxable 903 917 Non-taxable -- 18 - ------------------------------------------------------------------------------------------------ Total Investment securities 903 935 Other interest income 88 29 - ------------------------------------------------------------------------------------------------ Total interest income 5,508 4,763 Interest expense: Interest on deposits 1,905 1,365 Other interest expense 103 367 - ------------------------------------------------------------------------------------------------ Total interest expense 2,008 1,732 - ------------------------------------------------------------------------------------------------ Net interest income 3,500 3,031 Provision for loan losses 200 431 - ------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 3,300 2,600 Other income: Gain on sale of mortgage loans -- 85 Trust Fees 309 156 Gain on sale of SBA loans 130 105 Depositor service fees 77 71 Other 113 76 - ------------------------------------------------------------------------------------------------ Total other income 629 493 Operating expenses: Compensation and benefits 1,840 1,635 Occupancy and equipment 473 396 Professional services 193 204 FDIC insurance and regulatory assessments 20 125 Client services 120 88 Other real estate, net 24 41 Other 482 438 - ------------------------------------------------------------------------------------------------ Total operating expenses 3,152 2,927 - ------------------------------------------------------------------------------------------------ Income before income tax expense 777 166 Income tax expense 304 60 - ------------------------------------------------------------------------------------------------ Net income $ 473 $ 106 ================================================================================================ Net income per common and common equivalent share $0.24 $0.06 ================================================================================================
See notes to consolidated financial statements 4 of 15 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited...dollars in thousands)
Three Months Ended March 31, ---------------------------- 1996 1995 - ----------------------------------------------------------------------------------------------- CASH FLOWS-OPERATING ACTIVITIES: Net income $ 473 $ 106 Reconciliation of net income to net cash from operations: Provision for loan losses 200 431 Depreciation and amortization 167 70 Accrued interest receivable and other assets (65) (622) Accrued interest, expenses and other liabilities (613) 57 Net change in deferred loan fees and discounts, net (15) (104) Proceeds from sales of loans held for sale 2,515 10,061 Origination of loans held for sale (2,515) (10,483) - ---------------------------------------------------------------------------------------------- Operating cash flows, net 147 (484) CASH FLOWS - INVESTING ACTIVITIES: Maturities of investment securities Held-to-maturity 2,330 1,676 Available-for-sale 1,000 -- Purchase of investment securities Held-to-maturity (2,019) (2,010) Net change in loans (11,307) (9,440) Sale of other real estate owned -- 338 Purchase of life insurance policies -- (1,170) Purchase of premises and equipment (429) (174) - ---------------------------------------------------------------------------------------------- Investing cash flows, net (10,425) (10,780) CASH FLOWS - FINANCING ACTIVITIES: Net change in non-interest bearing deposits, net 2,490 (1,113) Net change in interest bearing deposits, net (6,754) 2,891 Net change in short-term borrowings, net -- 7,964 Stock options exercised 268 212 - ---------------------------------------------------------------------------------------------- Financing cash flows, net (3,996) 9,954 - ---------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (14,274) (1,310) Cash and cash equivalents at beginning of period 29,107 19,726 - ---------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $14,833 $18,416 ============================================================================================== CASH FLOWS - SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest on deposits and other borrowings $ 2,010 $ 1,765 Income taxes 247 -- Non-cash transactions: Additions to other real estate owned 217 --
See notes to consolidated financial statements 5 of 15 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of Cupertino National Bancorp ("CUNB" or the "Company") and its subsidiary, Cupertino National Bank & Trust ("CNB" or the "Bank"). These financial statements reflect, in management's opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of CUNB's financial position and the results of its operations and cash flows for the periods presented. Certain amounts for prior periods have been reclassified to conform to current period presentation. The results for the three months ended March 31, 1996 are not necessarily indicative of the results expected for any subsequent quarter or for the entire year ending December 31, 1996. These financial statements should be read in conjunction with the financial statements for 1995 included in the Annual Report to Shareholders for 1995. 2. SHARE AND PER SHARE AMOUNTS Earnings per common and common equivalent shares are calculated based upon the weighted average number of shares outstanding during the period, plus equivalent shares representing the effect of dilutive stock options. The number of shares used to compute earnings per share were 2,004,368 and 1,827,540 for the three months ended March 31, 1996 and 1995, respectively. Per share amounts have been adjusted for the 10% stock dividend paid in December 1995. 6 of 15 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW CUNB reported net income for the first quarter of 1996 of $473,000 or $0.24 per common and common equivalent share, compared to net income of $106,000 or $0.06 per common and common equivalent share, reported in the first quarter of last year. Return on average assets annualized for the first quarters of 1996 and 1995 were 0.73% and 0.19% respectively, while annualized return on average common equity was 10.22% for the first quarter of 1996, compared with 2.31% for the first quarter of 1995. Nonperforming assets (including nonaccrual loans, loans 90 days past due and other real estate owned ("OREO")) totaled $3.4 million at March 31, 1996, an increase of $79,000 from December 31, 1995, and an increase of $423,000 from March 31, 1995. The ratio of nonperforming assets to loans plus foreclosed properties was 1.96% at March 31, 1996, down from 2.04% at December 31, 1995 and 2.10% at March 31, 1995. Classified assets totaled $11.4 million, or 4.48% of total assets, at March 31, 1996, compared to $7.9 million or 3.05% of total assets at December 31, 1995 and $12.0 million or 5.13% of total assets at March 31, 1995. The reserve for loan losses was $2.9 million at March 31, 1996, compared with $2.7 million at December 31, 1995 and $2.4 million at March 31, 1995. The provision for loan losses was $200,000 for the first quarter of 1996, compared to $431,000 recorded in the first quarter of 1995. There were no charge-offs during the first quarter of 1996 compared to net charge-offs of $1.0 million for the first quarter of 1995. The ratio of the reserve for loan losses to nonperforming assets was 85% at March 31, 1996, compared with 80% at December 31, 1995 and 78% at March 31, 1995. Shareholders' equity increased $738,000 to $19.4 million, or 7.6% of assets, at March 31, 1996, from $18.7 million or 7.2% of assets at December 31, 1995. The increase in the ratio was primarily due to increased shareholders' equity as a result of the first quarter earnings and proceeds from the exercise of stock options, combined with a slight decline in total assets in the first three months of 1996. CUNB's Tier 1 and total risk-based capital ratios were 9.14% and 11.80% at March 31, 1996, respectively, compared with 9.18% and 11.91% at December 31, 1995, respectively. The leverage ratio declined to 7.50% at March 31, 1996, from 7.78% at December 31, 1995. The decline in the capital ratios reflects the Bank's growth during the past year. At March 31, 1996, CUNB's risk-based capital and leverage ratios, as well as those of the Bank, exceeded the ratios for a well-capitalized financial institution as defined in FDICIA under the prompt corrective action regulations. The Company will seek to maintain its well capitalized position to ensure flexibility in its operations. CUNB's common stock closed at $13.50 per share on March 31, 1996, representing approximately 129% of the $10.45 book value per common share, compared with $13.25 per share and 128% of the $10.32 book value per common share at December 31, 1995. On April 18, 1996, CUNB declared a cash dividend of $.10 per share payable on May 30, 1996 to holders of record on May 17, 1996. 7 of 15 RESULTS OF OPERATIONS NET INTEREST INCOME The following table presents the Company's average balance sheet, net interest income and the resultant yields for the quarterly periods presented:
March 31, 1996 March 31, 1995 -------------- -------------- Avg. Avg. Avg. Yield/ Avg. Yield/ (Dollars in thousands) Bal. Int. Rate Bal. Int. Rate - --------------------------------------------------------------------------------------------------------------------------- Interest earning assets: Loans (2) (4) $169,650 $4,517 10.68% $146,385 $3,799 10.38% Investment securities, short term investments and cash equivalents 62,913 991 6.32% 62,518 964 6.17% - --------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 232,563 5,508 9.50% 208,903 4,763 9.12% Noninterest-earning assets 26,259 14,190 - --------------------------------------------------------------------------------------------------------------------------- Total assets $258,822 $5,508 8.54% $223,093 $4,763 8.54% =========================================================================================================================== Interest bearing liabilities: Deposits: NOW and MMDA $122,248 $1,176 3.87% $ 81,598 $ 774 3.80% Savings deposits 11,720 107 3.66% 6,097 48 3.15% Time deposits 47,122 622 5.29% 46,058 543 4.71% - --------------------------------------------------------------------------------------------------------------------------- Total interest bearing deposits 181,090 1,905 4.22% 133,753 1,365 4.08% Borrowings 3,504 103 11.79% 24,445 367 6.01% - --------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 184,594 2,008 4.37% 158,198 1,732 4.38% - --------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 54,092 45,887 Other noninterest-bearing liabilities 1,021 674 - --------------------------------------------------------------------------------------------------------------------------- Total noninterest-bearing liabilities 55,113 46,561 Shareholders' equity 19,115 18,334 - --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $258,822 $2,008 3.11% $223,093 $1,732 3.10% - --------------------------------------------------------------------------------------------------------------------------- Net interest income; interest rate spread $3,500 5.13% $3,031 4.74% - --------------------------------------------------------------------------------------------------------------------------- Net interest-earning assets; net margin (3) $ 47,969 6.03% $ 50,705 5.88% ===========================================================================================================================
1) Average balances are computed using an average of the daily balances during the period. 2) Nonaccrual loans are included in the average balance column; however, only collected interest on such loans is included in the interest column. 3) The net margin on interest-earning assets during the period equals net interest income, divided by average interest-earning assets for the period. 4) Loan fees totaling $316 and $186 are included in loan interest income for the periods ended March 31, 1996 and 1995, respectively. 8 of 15 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 rate and volumes for the periods indicated.
Three months ended March 31, 1996 Three months ended March 31, 1996 compared with December 31, 1995 compared with March 31, 1995 favorable (unfavorable) favorable (unfavorable) (Dollars in thousands) Volume Rate Net Volume Rate Net - -------------------------------------------------------------------------------------------------------------------------------- Interest income Loans $435 $(190) $ 245 $ 619 $ 101 $ 720 Investments Cash equivalents (69) (31) (100) 6 21 27 - -------------------------------------------------------------------------------------------------------------------------------- Total interest income on interest earning assets: 366 (221) 145 625 122 747 Interest expense NOW and MMDA 115 (58) 57 392 11 403 Savings deposits 37 9 46 51 8 59 Time deposits 24 13 37 14 65 79 - -------------------------------------------------------------------------------------------------------------------------------- Total deposits 176 (36) 140 457 84 541 Interest expense on borrowings (3) (9) (12) (616) 352 (264) - -------------------------------------------------------------------------------------------------------------------------------- Total interest expense on interest bearing liabilities 173 (45) 128 (159) 436 277 - -------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in net interest income $193 $(176) $ 17 $ 784 $(314) $ 470 ==== ====== ===== ===== ====== ===== - --------------------------------------------------------------------------------------------------------------------------------
(1) In the analysis, the change due to the volume/rate variance has been allocated to volume CUNB's net interest income for the first quarter of 1996 was $3.5 million, a $16,000 increase over the fourth quarter of 1995. When compared to the fourth quarter of 1995, average earning assets increased by $12.0 million, while the net yield on average earning assets decreased slightly from 9.65% in the fourth quarter of 1995 to 9.50% in the first quarter of 1996. This was mainly due to a prime rate decrease of 25 basis points during the first quarter of 1996. Compared to the first quarter of 1995, average earning assets during the first quarter of 1996 increased by $23.7 million. Average loans in the first quarter of 1996 increased by $23.3 million, 15.9% over the first quarter of 1995. The Company provides client services to several of its noninterest-bearing demand deposit customers. The amount of credit available to clients is based on a calculation of their average noninterest-bearing deposit balance, adjusted for float and reserves, multiplied by an earnings credit rate, generally the average of the month's 30 day T-Bill rate. The credit can be utilized to pay for services including messenger service, account reconciliation and other similar services. If the cost of the services provided exceeds the available credit, the customer is charged for the difference. 9 of 15 The impact of this expense on the Company's net interest spread and net yield on interest-earning assets was as follows:
Three Months Ended --------------------------------------- March 31, December 31, March 31, (Dollars in thousands) 1996 1995 1995 - -------------------------------------------------------------------------------- Noninterest-bearing demand deposits $54,092 $51,554 $45,887 Client Service expense 120 81 70 Client Service cost annualized 0.89% 0.62% 0.62% Impact on Net Yield - ------------------- Net yield on interest earning assets 6.03% 6.27% 5.88% Impact of client services (0.20) (0.15) (0.13) ------- ------- ------- Adjusted net yield (1) 5.83% 6.12% 5.75% ======= ======= ======= - ---------------------------------------------------------------------------------
(1) Noninterest-bearing liabilities are included in cost of funds calculation to determine adjusted spread. The negative impact on the net yield on interest earning assets is caused by off-setting net interest income by the cost of client service expenses, which reduces the yield on interest-earning assets. The cost for client service expense has increased in 1996 due to increased volume of activity in services to noninterest-bearing demand deposit clients. INTEREST RATE SENSITIVITY Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in CNB's current portfolio that are subject to repricing at intervals of (1) one day or immediate, (2) two days to six months, (3) seven to twelve months, (4) one to five years, (5) over five years and (6) on a cumulative basis. Allocations of assets and liabilities, including noninterest-bearing sources of funds, to specific periods are based upon management's assessment of contractual or anticipated repricing characteristics. The differences between the volumes of assets and liabilities are known as "sensitivity gaps". The following table shows interest sensitivity gaps for different intervals at March 31, 1996:
INTEREST RATE SENSITIVITY REPORT CUPERTINO NATIONAL BANK & TRUST Repricing Periods ================================================================================================================================== (Dollars in thousands) Greater Greater Greater Total Total than 1 day Months than 1 Year than Rate Non-Rate one day to 6 months 7-12 to 5 Years 5 Years Sensitive Sensitive Total ================================================================================================================================== Assets: Cash & due from Banks $ -- $ -- $ -- $ -- $ -- $ -- $ 13,933 $ 13,933 Short term investments 900 -- -- -- -- 900 -- 900 Investment securities -- 12,496 3,005 18,794 20,455 54,750 991 55,741 Loans 137,706 3,182 2,111 11,871 16,905 171,775 3,597 175,372 Other assets -- -- -- -- -- -- 12,787 12,788 Loan loss & unearned fees -- -- -- -- -- -- (3,773) (3,774) - ---------------------------------------------------------------------------------------------------------------------------------- Total assets $138,606 $ 15,678 $ 5,116 $30,665 $37,360 $227,425 $ 27,535 $254,960 ================================================================================================================================== Liabilities & equity: Deposits Demand -- -- -- -- -- -- 61,476 61,476 NOW, MMDA, and Savings 123,529 -- -- -- -- 123,529 -- 123,529 Time deposits -- 35,306 5,831 5,688 -- 46,825 -- 46,825 Other borrowed funds 3,000 -- -- -- -- 3,000 -- 3,000 Other liabilities -- -- -- -- -- -- 720 720 Shareholder's equity -- -- -- -- -- -- 19,410 19,410 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liability & Equity $126,529 $ 35,306 $ 5,831 $ 5,688 -- $173,354 $ 81,606 $254,960 ================================================================================================================================== Total asset GAP GAP $ 12,077 ($19,628) ($715) $24,977 $37,360 $ 54,071 ($54,071) -- Cumulative GAP $ 12,077 ($7,551) ($8,266) $16,711 $54,071 $ 54,071 $ 0 -- Cumulative GAP/Total assets 4.73% (2.96)% (3.24)% 6.56% 21.20% 21.20% 0% -- - ----------------------------------------------------------------------------------------------------------------------------------
10 of 15 The management of interest rate sensitivity, or interest rate risk management, is a function of the repricing characteristics of CNB's portfolio of assets and liabilities. These repricing characteristics are subject to changes in interest rates either as replacement, repricing or maturity during the life of the instruments. Interest rate risk management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate risk management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable time frame, thereby reducing the effect of interest rate movements on net interest income. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing of both the asset and its supporting liability can remain the same, thus impacting net interest income. This characteristic is referred to as a "basis risk" and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity table above. These prepayments may have significant effects on the Bank's net interest margin. Because of these factors, the interest sensitivity gap report may not provide a complete assessment of CNB's exposure to changes in interest rates.
NON-INTEREST INCOME Quarter Ended - ------------------------------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 1996 1995 1995 1995 1995 - ------------------------------------------------------------------------------------------------- Gain on sale of mortgage loans $ -- $ -- $ -- $ 51 $ 85 Loan fees 15 11 51 22 20 Trust fees 309 241 178 135 156 Gain on sale of SBA loans 130 153 63 45 105 Depositor service fees 77 75 78 67 71 Other 98 71 81 87 56 - ------------------------------------------------------------------------------------------------ Total other income $629 $551 $451 $407 $493 ================================================================================================
Non-interest income was $629,000 for the first quarter of 1996, an increase of $78,000 from the fourth quarter of 1995, and an increase of $136,000 from the first quarter of 1995. Non-interest income has been generally increasing over the past year, primarily from rising trust fees and SBA fees resulting from increased activity. As CNB considers these areas to be primary business focal points, it is anticipated this trend will continue as the trust department increases its assets under management and the SBA group increases its loan activity. 11 of 15
NON-INTEREST EXPENSE Quarter Ended - ------------------------------------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, (Dollars in thousands) 1996 1995 1995 1995 1995 - ------------------------------------------------------------------------------------------------------- Compensation and benefits $1,840 $1,774 $1,694 $1,600 $1,635 Occupancy and equipment 473 470 430 392 396 Professional services 193 269 277 230 204 Legal settlement and costs -- -- -- 1,700 -- FDIC insurance and assessments 20 62 22 135 125 Supplies, telephone and postage 130 117 109 108 128 Data processing 50 42 39 30 33 Client services 120 81 95 91 70 Other real estate, net 24 -- 1 (7) 41 Other 302 366 315 321 295 - ------------------------------------------------------------------------------------------------------- Total operating expenses $3,152 $3,181 $2,982 $4,600 $2,927 ====== ====== ====== ====== ====== - -------------------------------------------------------------------------------------------------------
Non-interest expenses were $3.2 million for the first quarter of 1996, a decrease of $29,000 from the fourth quarter of 1995, and an increase of $225,000 from the first quarter of 1995. The decrease from the fourth quarter of 1995 is attributed to lower FDIC deposit insurance premiums. The Company's FDIC insurance premium will continue to be lower than prior periods, as the FDIC insurance fund has been recapitalized allowing all banks to benefit from lower premiums. The increase in the first quarter of 1996, when compared to the first quarter of 1995, was primarily due to increased compensation and benefits expense. INCOME TAXES CUNB's income tax expense was provided according to statutory ratios in effect for the current year, offset by deductions for certain tax credits. CUNB did not require a valuation allowance related to its deferred tax asset. FINANCIAL CONDITION CAPITAL RATIOS The Company's and the Bank's total risk-based capital and leverage ratios were as follows:
March 31, 1996 December 31, 1995 --------------------------------------------------------------------------------------- Tier 1 Capital to Total Capital to Tier 1 Capital to Total Capital to Average Risk-weighted Average Risk-Weighted Quarterly Assets Assets Quarterly Assets Assets --------------------------------------------------------------------------------------- BALANCE % BALANCE % BALANCE % BALANCE % Cupertino National Bank $18,084 6.99% $23,739 11.18% $17,650 7.36% $23,180 11.41% Well capitalized requirement 12,933 5.00% 21,218 10.00% 11,989 5.00% 20,318 10.00% --------------------------------------------------------------------------------------- Excess capital $ 5,151 1.99% $ 2,521 1.18% $ 5,661 2.36% $ 2,862 1.41% ======================================================================================= Cupertino National Bancorp $19,408 7.50% $25,068 11.80% $18,672 7.78% $24,213 11.91% Well capitalized requirement 12,941 5.00% 21,242 10.00% 12,000 5.00% 20,331 10.00% --------------------------------------------------------------------------------------- Excess capital $ 6,467 2.50% $ 3,827 1.80% $ 6,672 2.78% $ 3,882 1.91% =======================================================================================
In addition, the Company's and the Bank's Tier 1 risk-based capital ratio was 9.14% and 8.51%, respectively, at March 31, 1996, compared with 9.18% and 8.74%, respectively, at December 31, 1995. To be considered well capitalized as defined under the regulatory framework for prompt corrective action, an institution must have a risk-based Tier 1 capital ratio of 6.0% or greater, a risk- 12 of 15 based total capital ratio of 10% or greater and a leverage ratio of 5.0% or greater. All of the Company's and the Bank's regulatory capital ratios have exceeded the ratios required for a well capitalized financial institution for all periods presented above. CUNB and CNB seek to maintain capital ratios at levels that will maintain their status as a well capitalized financial institution. LIQUIDITY Liquidity is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss, and to raise additional funds by increasing liabilities. Liquidity management involves maintaining CNB's ability to meet the day-to-day cash flow requirements of CNB's clients who either want to withdraw funds or require funds to meet their credit needs. Through an Asset Liability Management Committee, CNB actively monitors its commitments to fund loans, as well as the composition and maturity schedule of its loan and deposit portfolios. To manage its liquidity, CNB maintains $17 million in inter-bank Fed Fund purchase lines, as well as $100 million in institutional deposit or brokered deposit lines, and $60 million in reverse repurchase lines. All sources combined provide a solid liquidity base for growth. As of March 31, 1996, CNB had $10.0 million in institutional deposits outstanding and no outstanding federal funds purchased. PROVISION AND RESERVE FOR LOAN LOSSES The following schedule details the activity in the Bank's reserve for loan losses and related ratios for each of the last five quarters:
Quarter ended - --------------------------------------------------------------------------------------------------------- March 31, December 31, September 30, June 30, March 31, (Dollars in millions) 1996 1995 1995 1995 1995 - --------------------------------------------------------------------------------------------------------- Reserve for loan losses at beginning of period $2,683 $2,522 $2,454 $2,359 $ 2,918 Provision charged to operations 200 90 75 85 431 Loans charged off -- (54) (15) (4) (1,001) Loan recoveries 24 125 8 14 11 - --------------------------------------------------------------------------------------------------------- Reserve for loan losses at end of period $2,907 $2,683 $2,522 $2,454 $ 2,359 ========================================================================================================= Ratio of: Reserve for loan losses to loans 1.67% 1.64% 1.69% 1.70% 1.60% Reserve for loan losses to Nonperforming assets 84.95% 80.26% 85.90% 68.33% 78.66% - ---------------------------------------------------------------------------------------------------------
The provision for loan losses was $200,000 in the first quarter of 1996, an increase of $110,000 from the $90,000 in the fourth quarter of 1995, and a significant decrease from the $431,000 in the first quarter of 1995. Management considers changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the loan loss reserve. The reserve for loan losses was $2.9 million at March 31, 1996, compared with $2.4 million at March 31, 1995. The ratio of the reserve for loan losses to total loans was 1.67% at March 31, 1996, compared with 1.64% at December 31, 1995, and 1.60% at March 31, 1995. The ratio of the reserve for loan losses to total nonperforming assets, including foreclosed real estate, was 84.95% at March 31, 1996, compared to 80.26% at December 31, 1995 and 78.66% at March 31, 1995. 13 of 15 NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE AND CLASSIFIED ASSETS
- ------------------------------------------------------------------------------------------------------------------ March 31, December 31, September 30, June 30, March 31, (Dollars in millions) 1996 1995 1995 1995 1995 - ------------------------------------------------------------------------------------------------------------------ Non-accruing loans $2,325 $2,513 $2,539 $2,426 $2,743 Restructured loans -- -- -- -- -- Accruing loans past due 90 days or more 880 830 405 1,166 256 - ------------------------------------------------------------------------------------------------------------------ Total nonperforming loans $3,205 $3,343 $2,944 $3,592 $2,999 OREO 217 -- -- -- -- ------ ------ ------ ------ ------ Total nonperforming assets $3,422 $3,343 $2,944 $3,592 $2,999 ================================================================================================================== Total nonperforming loans to total assets 1.34% 1.29% 1.22% 1.47% 1.29% ==================================================================================================================
Total nonperforming assets were $3.4 million at March 31, 1996, compared with $3.3 million at December 31, 1995, and $3.0 million at March 31, 1995. Nonperforming loans, which includes non-accruing loans, restructured loans, and accruing loans which are past due 90 days or more, were $3.2 million at March 31, 1996, compared with $3.3 million at December 31, 1995, and $3.0 million at March 31, 1995. Accruing loans past due 90 days or more, which are well secured and in the process of collection, were $880,000 at March 31, 1996, compared with $830,000 at December 31, 1995, and $256,000 at March 31, 1995. It is CNB's policy to discontinue the accrual of interest when the ability of a borrower to repay principal or interest is in doubt, or when a loan is past due 90 days or more, except when, in management's judgment, the loan is well secured and in the process of collection. Total classified assets increased to $11.4 million at March 31, 1996, from $7.9 million at December 31, 1995. The $3.5 million increase is primarily due to an increase in classified technology loans. As CNB has focused strategically on technology loans through the Venture Lending department, the volume of this type of loan has increased significantly. As of March 31, 1996, CNB had one foreclosed property for $217,000, compared with none at December 31, 1995, and March 31, 1995. CNB has an active credit administration function which includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. Senior management, and an internal asset review committee review problem loans on a regular basis. EFFECTS OF INFLATION The impact of inflation on a financial institution differs significantly from that exerted on industrial concerns, primarily because its assets and liabilities consist largely of monetary items. The most direct effect of inflation on a financial institution is fluctuation in interest rates. However, net interest income is affected by the spread between interest rates received on assets and those paid on interest bearing liabilities, rather than the absolute level of interest rates. Additionally, there may be some upward pressure on the Company's operating expenses, such as increases in occupancy expenses based on consumer price indices. In the opinion of management, inflation has not had material effect on the operating results of the Company. 14 of 15 PART II. OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Report. (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K for the quarter covered by this report - NONE SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. CUPERTINO NATIONAL BANCORP (REGISTRANT) BY: /s/ HEIDI R. WULFE - ------------------------------ HEIDI R. WULFE SENIOR VICE PRESIDENT & CHIEF FINANCIAL OFFICER DATE: MAY 10, 1996 15 of 15 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1996 JAN-31-1996 MAR-31-1996 13,933 170,630 900 0 3,497 52,241 52,372 174,505 2,907 254,960 231,830 0 720 3,000 0 0 17,947 1,463 254,960 4,517 903 88 5,508 1,905 2,008 3,500 200 0 3,151 777 777 0 0 473 .24 .24 6.03 2,325 880 0 11,400 2,683 0 24 2,907 2,907 0 256
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