-----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, Uad2D6G8yckezHn0liQikmDXkD8QldZrqoF7RYcrc/Qm0zh8wC2FwZxORWk4omov VQf9SRfzAgBED95TBlS03A== 0001012870-96-000658.txt : 19961118 0001012870-96-000658.hdr.sgml : 19961118 ACCESSION NUMBER: 0001012870-96-000658 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 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: 96662904 BUSINESS ADDRESS: STREET 1: 20230 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961144 10-Q 1 FORM 10-Q WASHINGTON, D.C. 20549 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION (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 September 30, 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 October 30, 1996: 1,919,020 This report contains a total of 19 pages. 1 of 19 CUPERTINO NATIONAL BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995............... 3 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1996 and 1995............................ 4 Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended September 30, 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 Items 1-3, Item 5. Not applicable Item 4. Submission of Matters to a Vote of Security Holders.... 18 Item 6. Exhibits and Reports on Form 8-K....................... 18 Signatures............................................. 18 Index to Exhibits...................................... 19 2 of 19 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited....dollars in thousands)
September 30, December 31, 1996 1995 --------------------------- ASSETS Cash and due from banks $ 20,273 $ 16,207 Federal funds sold 4,600 12,900 -------- -------- Cash and cash equivalents 24,873 29,107 Investment securities: Held to maturity (Market value $57,436 at September 30, 1996; $53,001 at December 31, 1995) 57,895 52,571 Available for sale (Cost $1,001 at September 30, 1996; $3,504 at December 31, 1995) 1,002 3,509 Other securities 1,021 969 -------- -------- Total investment securities 59,918 57,049 Loans: Commercial 125,878 88,646 Real estate-construction and land 30,481 23,889 Real estate-term 36,401 23,026 Consumer and other 32,758 28,666 Deferred loan fees and discounts (1,185) (851) -------- -------- Loans 224,333 163,376 Allowance for loan losses (3,451) (2,683) -------- -------- Total loans 220,882 160,693 Premises and equipment, net 3,186 1,917 Accrued interest receivable and other assets 10,696 10,333 -------- -------- Total assets $319,555 $259,099 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest-bearing $ 72,707 $ 58,986 NOW 11,212 10,158 Money Market Demand Accounts 146,223 114,021 Savings 8,866 7,995 Other time certificates 21,243 17,830 Time certificates, $100 and over 34,651 27,104 -------- -------- Total deposits 294,902 236,094 Accrued interest payable and other liabilities 865 1,333 Subordinated debentures 3,000 3,000 -------- -------- Total liabilities 298,767 240,427 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: 1,916,708 at September 30, 1996 and 1,808,828 at December 31, 1995 18,436 17,680 Retained earnings 2,352 992 -------- -------- Total shareholders' equity 20,788 18,672 -------- -------- Total liabilities and shareholders' equity $319,555 $259,099 ======== ======== See notes to consolidated financial statements. - ---------------------------------------------------------------------------------
3 of 19 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited....dollars in thousands, except per share data)
Quarter Ended Nine Months Ended September 30, September 30, ------------------ ------------------------ 1996 1995 1996 1995 ---- ---- ---- ---- INTEREST INCOME: Interest on loans $5,414 $4,065 $14,626 $11,884 Interest on investment securities: Taxable 940 840 2,688 2,677 Non-taxable - 7 - 43 ------ ------ ------- ------- Total Investment securities 940 847 2,688 2,720 Other interest income 97 186 336 323 ------ ------ ------- ------- Total interest income 6,451 5,098 17,650 14,927 INTEREST EXPENSE: Interest on deposits 2,132 1,755 5,880 4,746 Other interest expense 92 73 283 728 ------ ------ ------- ------- Total interest expense 2,224 1,828 6,163 5,474 ------ ------ ------- ------- Net interest income 4,227 3,270 11,487 9,453 PROVISION FOR LOAN LOSSES 399 75 864 591 ------ ------ ------- ------- Net interest income after provision for loan losses 3,828 3,195 10,623 8,862 OTHER INCOME: Gain on sale of mortgage loans - - - 138 Other loan fees 59 51 108 99 Trust Fees 375 178 1,028 469 Gain on sale of SBA loans 122 63 375 213 Depositor service fees 149 78 368 215 Other 122 81 384 219 ------ ------ ------- ------- Total other income 827 451 2,263 1,353 OPERATING EXPENSES: Compensation and benefits 1,974 1,694 5,672 4,930 Occupancy and equipment 551 430 1,514 1,217 Legal settlement & costs - - - 1,700 Professional services 234 277 675 712 FDIC insurance and regulatory assessments 15 22 55 282 Client services 105 95 320 256 Other real estate, net 5 1 35 35 Other 860 463 2,124 1,377 ------ ------ ------- ------- Total operating expenses 3,744 2,982 10,395 10,509 ------ ------ ------- ------- INCOME (LOSS) BEFORE INCOME TAX 911 664 2,491 (294) Income tax expense (benefit) 350 260 943 (150) ------ ------ ------- ------- NET INCOME (LOSS) $ 561 $ 404 $ 1,548 $ (144) ====== ====== ======= ======= Net income (loss) per common and common equivalent share $ .27 $ .21 $ .76 $ (.08) ====== ====== ======= ======= See notes to consolidated financial statements. - -------------------------------------------------------------------------------------------------------------------
4 of 19 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited....dollars in thousands)
Nine Months Ended September 30, -------------------- 1996 1995 -------------------- CASH FLOWS--OPERATING ACTIVITIES: Net income (loss) $ 1,548 $ (144) Reconciliation of net income to net cash from operations: Provision for loan losses 864 591 Depreciation and amortization 334 446 Accrued interest receivable and other assets (415) (565) Accrued interest payable and other liabilities (340) (680) Net change in deferred loan fees and discounts 334 139 Proceeds from sales of loans held for sale 4,738 16,364 Origination of loans held for sale (4,738) (10,981) Other real estate owned, net - 17 -------- -------- Operating cash flows, net 2,325 5,187 CASH FLOWS--INVESTING ACTIVITIES: Maturities of investment securities: Held-to-maturity 16,620 16,349 Available-for-sale 2,500 - Purchase of investment securities: Held-to-maturity (19,909) (8,035) Available-for-sale - (2,492) Net change in loans (61,604) (17,475) Sale of other real estate owned 217 358 Purchase of life insurance policies - (2,381) Purchase of premises and equipment, net (1,812) (654) Other, net (5) - -------- -------- Investing cash flows, net (63,993) (14,330) CASH FLOWS--FINANCING ACTIVITIES: Net change in noninterest-bearing deposits 13,721 365 Net change in interest-bearing deposits 45,087 20,618 Net change in short-term borrowings - (6,203) Subordinated debt issuance - 2,475 Stock purchased by employees and stock options exercised 632 456 Cash dividends (187) (160) -------- -------- Financing cash flows, net 59,253 17,551 -------- -------- Net increase (decrease) in cash and cash equivalents (2,415) 8,408 Cash and cash equivalents at beginning of period 29,107 19,726 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,692 $ 28,134 ======== ======== CASH FLOWS--SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Interest on deposits and other borrowings $ 6,222 $ 5,402 Income taxes 925 210 Non-cash transactions: Additions to other real estate owned - - See notes to consolidated financial statements. - ------------------------------------------------------------------------------------
5 of 19 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY Notes to Consolidated Condensed Financial Statements September 30, 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 (the Bank or CNB). 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 and nine months ended September 30, 1996 are not necessarily indicative of the results expected for any subsequent period or for the entire year ending December 31, 1996. These financial statements should be read in conjunction with the financial statements included in the 1995 Annual Report to Shareholders. 2. SHARE AND PER SHARE AMOUNTS Earnings per common and common equivalent share are calculated based upon the weighted average number of shares outstanding during the period, plus equivalent shares representing the effect of dilutive stock options. The number of shares used to compute earnings per share were 2,065,168 and 1,887,930 for the three months ended September 30, 1996 and 1995, respectively and 2,028,664 and 1,872,600 for the nine months ended September 30, 1996 and 1995, respectively. 6 of 19 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW CUNB reported net income for the third quarter of 1996 of $561,000, or $.27 per common and common equivalent share, compared to $404,000, or $.21 per common and common equivalent share, reported in the third quarter of last year. Return on average assets and return on average common equity annualized for the third quarter of 1996 and 1995 were 0.75 % and 11.10 %, respectively. For the nine months ended September 30, 1996, the Company posted net income of $1,548,000, or $.76 per common and common equivalent share, compared to a loss of $144,000, or $.08 per common and common equivalent share, for the comparable period in 1995. The annualized return on average assets and return on average equity for the first nine months of 1996 were 0.75% and 10.49%, respectively. Non-performing assets (including nonaccruing loans, loans 90 days past due and other real estate owned (OREO)) totaled $3.1 million at September 30, 1996, compared to 3.3 million at December 31, 1995 and $2.9 million at September 30, 1995. The ratio of non-performing assets to total assets was 0.97% at September 30, 1996, compared to 1.29% at December 31, 1995 and 1.23% at September 30, 1995. The Bank's portfolio of classified assets increased to $8.2 million, or 2.58% of total assets at September 30, 1996, from $7.9 million or 3.06% of total assets at December 31, 1995 and $8.6 million or 3.61% of total assets at September 30, 1995. The reserve for loan losses was $3.5 million at September 30, 1996, compared with $2.7 million at December 31, 1995 and $2.5 million at September 30, 1995. The provision for loan losses was $399,000 for the third quarter of 1996, compared to $265,000 recorded in the second quarter of 1996, and $75,000 recorded in the third quarter of 1995. For the first nine months of 1996, the provision for loan losses was $864,000, an increase of $273,000 from the first nine months of 1995. Net charge-offs were $96,000 for the first nine months of 1996, compared to $987,000 for the first nine months of 1995. The ratio of the reserve for loan losses to non-performing assets was 111.3% at September 30, 1996 compared with 80.3% at December 31, 1995 and 85.7% at September 30, 1995. Shareholders' equity increased $2.1 million to $20.8 million, or 6.50% of assets, at September 30, 1996 from $18.7 million, or 7.21% of assets, at December 31, 1995. The increase was due to net earnings, stock purchased by directors and employees through stock option plans and stock purchased through the Employee Stock Purchase Plan, and was partially offset by a cash dividend payment of $.10 per common share, totaling $187,000, made to shareholders during the second quarter of 1996. CUNB's Tier 1 and total risk-based capital ratios were 7.88% and 10.27% at September 30, 1996, respectively, compared with 9.18% and 11.91% at December 31, 1995, respectively. The leverage ratio declined to 6.98% at September 30, 1996 from 7.78% at December 31, 1995. The decline in capital ratios is due to asset growth during 1996. At September 30, 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 guidelines. The Company will seek to maintain its well capitalized position to ensure flexibility in its operations. CUNB's common stock closed at $15.50 per share on September 30, 1996, representing 146% of the $10.85 book value per common share, compared with $14.50 per share and 138% of the $10.52 book value per common share at June 30, 1996 and $10.00 per share and 90% of the $11.15 book value per common share at September 30, 1995. 7 of 19 MERGER Cupertino National Bancorp signed the Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996 (the Agreement) whereby Cupertino National Bancorp will merge, in a merger of equals, with and into Mid- Peninsula Bancorp and Mid-Peninsula Bancorp will change its name to Greater Bay Bancorp (GBB). The merger will result in the formation of the largest multi- bank holding company based in the San Francisco Peninsula/South Bay region, and the third-largest publicly traded independent bank holding company in the San Francisco Bay area, with total assets of approximately $500 million and equity of over $40 million. Mid-Peninsula Bank (MPB) and Cupertino National Bank & Trust (CNB) will operate as wholly-owned subsidiaries of Greater Bay Bancorp and will focus on serving the greater Bay area, including the Peninsula and South Bay markets, through their seven office locations. The terms of the Agreement provide for Cupertino National Bancorp shareholders to receive 0.81522 of a share of Mid-Peninsula Bancorp stock for each share of Cupertino National Bancorp in a tax-free exchange to be accounted for as a pooling-of-interests. As part of the Agreement, Mid-Peninsula has listed its shares on the NASDAQ National Market, and concurrent with closing, will be renamed Greater Bay Bancorp. Following the merger, the shareholders of Mid- Peninsula Bancorp will own approximately 51% of the combined company and the shareholders of Cupertino National Bancorp will own approximately 49% of the combined company, giving effect to all outstanding options. Greater Bay Bancorp's new Board of directors will consist of five directors from Cupertino National Bancorp and five from Mid-Peninsula Bancorp, with Duncan L. Matteson (Chairman of Mid-Peninsula Bancorp) and John M. Gatto (Chairman of Cupertino National Bancorp) serving as co-Chairman. David L. Kalkbrenner, who will serve as President and Chief Executive Officer of Greater Bay Bancorp, will continue as President and Chief Executive Officer of MPB and C. Donald Allen will remain as Chairman and Chief Executive Officer of CNB. Steven C. Smith, the Chief Operating Officer of CNB, will serve as Chief Operating Officer and Chief Financial Officer of GBB. David R. Hood, Executive Vice President and Senior Loan Officer of CNB, will serve as Executive Vice President and Senior Credit Officer of GBB. In connection with the Agreement, Cupertino National Bancorp and Mid-Peninsula Bancorp have granted each other options to purchase up to 19.0% of the outstanding shares of each others common stock under certain circumstances in the event the transaction is terminated. The Shareholders of both entities approved the merger on October 30, 1996 and it is anticipated the merger will close by year end 1996. 8 of 19 RESULTS OF OPERATIONS NET INTEREST INCOME The following table presents the Company's average balance sheet, net interest income and interest rates for the quarterly periods presented:
Three Months Ended Three Months Ended September 30,1996 June 30, 1996 -------------------------------------------------------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate --------------------------------------------- ----------------------------------------- Interest-earning assets: Loans (2) (4) $206,625 $5,414 10.42% $176,030 $4,696 10.70% Investment securities, short term investments and cash equivalents 64,207 1,038 6.43% 64,660 995 6.17% ------- ----- ----- ------- ----- ----- Total interest-earning assets 270,832 6,452 9.48% 240,690 5,691 9.48% Noninterest-earning assets 26,189 27,079 ------- ------- Total Assets $297,021 $267,769 ======= ======= Interest-bearing liabilities: Deposits: NOW and MMDA $148,483 1,391 3.73% $126,485 1,147 3.64% Savings deposits 8,920 78 3.50% 12,106 115 3.81% Time deposits 50,156 665 5.27% 44,824 582 5.21% ------- ----- ----- ------- ----- ----- Total Deposits 207,559 2,134 4.09% 183,415 1,844 4.03% Borrowings 3,422 92 10.70% 3,113 87 11.21% ------- ----- ----- ------- ----- ----- Total interest-bearing liabilities 210,981 2,226 4.20% 186,528 1,931 4.15% ------- ----- ---- ------- ----- ----- Noninterest-bearing deposits 64,488 60,088 Other noninterest-bearing liabilities 1,507 1,456 ------- ------- Total noninterest-bearing liabilities 65,995 61,544 Shareholders' equity 20,045 19,697 ------- ------- Total liabilities and shareholders' equity $297,021 $267,769 ======= ======= Net interest income; interest rate spread $4,226 5.28% $3,760 5.33% ===== ===== ===== ===== Net interest-earning assets; net yield (3) $ 59,851 6.21% $ 54,162 6.27% ======= ===== ======= =====
Three Months Ended September 30, 1995 --------------------------------------------- Average Average Yield/ (Dollars in thousands) Balance (1) Interest Rate - --------------------- --------------------------------------------- Interest-earning assets: Loans (2) (4) $145,729 $4,065 11. 07% Investment securities, short term investments and cash equivalents 66,943 1,033 6.12% -------- ----- ----- Total interest-earning assets 212,672 5,098 9.51% Noninterest-earning assets 18,433 ------- Total Assets $231,105 ======= Interest-bearing liabilities: Deposits: NOW and MMDA $107,446 1,102 4.07% Savings deposits 5,639 48 3.38% Time deposits 44,369 605 5.41% ------- ----- ----- Total Deposits 157,454 1,755 4.42% Borrowings 4,948 73 5.85% ------- ----- ----- Total interest-bearing liabilities 162,402 1,828 4.47% ------- ----- ----- Noninterest-bearing deposits 50,119 Other noninterest-bearing liabilities 622 ------- Total noninterest-bearing liabilities 50,741 Shareholders' equity 17,962 ------- Total liabilities and shareholders' equity $231,105 ======= Net interest income; interest rate spread $3,270 5.04% ===== ===== Net interest-earning assets; net yield (3) $ 50,270 6.10% ======= =====
(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 annualized net interest income divided by average interest-earning assets for the period. (4) Loan fees totaling $366, $388 and $249 are included in loan interest income for the periods ended September 30, 1996, June 30, 1996 and September 30, 1995, respectively. 9 of 19 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 quarterly periods indicated:
Three months ended September 30, 1996 Three months ended September 30, 1996 compared with June 30, 1996 compared with September 30, 1995 favorable (unfavorable) favorable (unfavorable) ---------------------- ---------------------- (Dollars in thousands) Volume Rate Total Volume Rate Total - --------------------- ------- ----- ------ ------ ----- ------ Interest income on loans $ 838 $( 120) $ 718 $1,595 $(246) $1,349 Interest on investment securities, short-term investments and cash equivalents (6) 49 43 (44) 49 5 ----- ------ ----- ------ ----- ------ Change in total interest income 832 (71) 761 1,551 (197) 1,354 Interest expense on deposits NOW and MMDA (213) (31) (244) (388) 99 (289) Savings deposits 28 9 37 (28) (2) (30) Time deposits (75) (8) (83) (76) 16 (60) ----- ------ ----- ------ ----- ------ (260) (30) (290) (492) 113 (379) Interest expense on borrowings (9) 4 (5) 27 (46) (19) ----- ------ ----- ------ ----- ------ Change in total interest expense (269) (26) (295) (465) 67 (398) ----- ------ ----- ------ ----- ------ Increase (decrease) in net interest income $ 563 $ (97) $ 466 $1,086 $(130) $ 956 ===== ====== ===== ====== ===== ======
(1) In the analysis, the change due to both rate and volume has been allocated proportionately. CUNB's net interest income for the third quarter of 1996 was $4.2 million, a $400,000 increase over the second quarter of 1996, and a $900,000 increase over the third quarter of 1995. When compared to the second quarter of 1996, average earning assets increased by $30.1 million, and the net yield on earning assets decreased from 6.27% in the second quarter of 1996 to 6.21% in the third quarter of 1996. This was primarily due to an increase in the average rates paid on interest-bearing liabilities. Compared to the third quarter of 1995, average earning assets during the third quarter of 1996 increased by $58.2 million. This was due to increased loan demand since the previous year's third quarter. Average loans in the third quarter of 1996 increased by $60.9 million, or 41.8%, over the third quarter of 1995. The Company's average interest-bearing deposits grew $50.1 million and noninterest-bearing deposits grew by $14.4 million since the 1995 third quarter. 10 of 19 The following tables present the Companys average balance sheet, net interest income and interest rates for the nine-month periods presented, as well as the analysis of variances due to rate and volume:
Nine months ended September 30, 1996 ------------------------------------ Average Average (Dollars in thousands) Balance(1) Interest Yield/Rate - ---------------------- ------------------------------------ Interest-earning assets: Loans (2)(4) $185,101 $14,626 10.55% Investment securities, short term investments and cash equivalents 63,929 3,024 6.32% -------- ------- ------ Total interest-earning assets 249,030 17,650 9.47% Noninterest-earning assets 24,977 -------- Total Assets $274,007 ======== Interest-bearing liabilities: Deposits: NOW and MMDA $132,463 3,712 3.74% Savings deposits 10,909 300 3.68% Time deposits 47,377 1,868 5.27% -------- ------- ------ Total Deposits 190,749 5,880 4.12% Borrowings 3,347 283 11.28% -------- ------- ------ Total interest-bearing liabilities 194,096 6,163 4.24% -------- ------- ------ Noninterest-bearing deposits 59,574 Other noninterest-bearing liabilities 682 -------- Total noninterest-bearing liabilities 60,256 Shareholders' equity 19,655 -------- Total liabilities and shareholder's equity $274,007 ======== Net interest income; Interest rate spread $11,487 5.23% ======= ===== Net interest-earning assets; net yield (3) $ 54,934 ========
Nine months ended September 30, 1995 ------------------------------------ Average Average (Dollars in thousands) Balance(1) Interest Yield/Rate - ---------------------- ----------------------------------- Interest-earning assets: Loans (2)(4) $143,710 $11,884 11.06% Investment securities, short term investments and cash equivalents 66,007 3,043 6.16% -------- ------- ------ Total interest-earning assets 209,717 14,927 9.52% Noninterest-earning assets 16,852 -------- Total Assets $226,569 ======== Interest-bearing liabilities: Deposits: NOW and MMDA $ 92,343 2,780 4.03% Savings deposits 5,379 138 3.43% Time deposits 45,271 1,828 5.40% -------- ------- ------ Total Deposits 142,993 4,746 4.44% Borrowings 15,877 728 6.13% -------- ------- ------ Total interest-bearing liabilities 158,870 5,474 4.61% -------- ------- ------ Noninterest-bearing deposits 48,526 Other noninterest-bearing liabilities 963 -------- Total noninterest-bearing liabilities 49,489 Shareholders' equity 18,210 -------- Total liabilities and shareholder's equity $226,569 ======== Net interest income; Interest rate spread $ 9,453 4.91% ======= ====== Net interest-earning assets; net yield (3) $ 50,847 6.03% ======== ======
(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 annualized net interest income divided by average interest-earning assets for the period. (4) Loan fees totaling $1,070 and $644 are included in loan interest income for the periods ended September 30, 1996 and September 30, 1995, respectively. Nine months ended September 30, 1996 compared with September 30, 1995 favorable (unfavorable) ------------------------------------------------ (Dollars in thousands) Volume Rate Total - --------------------- ------- --------- ------- Interest income on loans $ 3,302 $ (560) $ 2,742 Interest on investment securities, short-term investments and cash equivalents (96) 77 (19) ------- --------- ------- Change in total interest income 3,206 (483) 2,723 Interest expense on deposits NOW and MMDA (1,138) 206 (932) Savings deposits (151) (11) (162) Time deposits (85) 45 (40) ------- --------- ------- (1,374) 240 (1,134) Interest expense on borrowings 810 (365) 445 ------- --------- ------- Change in total interest expense (564) (125) (689) ------- --------- ------- Increase (decrease) in net interest income $ 2,642 $ (608) $ 2,034 ======= ========= =======
11 of 19 For the nine month period ended September 30, 1996, the Company experienced an increase in net interest income of $2.0 million when compared to the first nine months of 1995. This increase was mainly due to the increased volume in the loan portfolio, the decreased volume in short-term borrowings, and the decreased average rate paid on deposits, partially offset by reduced yields on loans, the increased average rate paid on other borrowings, and the increased volume of interest-bearing deposits. For the nine months ended September 30, 1996, average other borrowings primarily consisted of $3.0 million of subordinated debt which was issued at 11.5% in the Fall of 1995 and qualifies as Tier 2 regulatory capital. For the nine months ended September 30, 1996, the Company's net interest spread of 5.22% reflected an increase from 4.91% for the same period in 1995. This was primarily due to the reduction in the Company's cost of deposits. The trend of interest rates in the economy has remained flat during 1996; however, there are indications that inflation may be increasing slightly. An increase in inflation will put pressure on the Federal Reserve to increase interest rates. If interest rates rise, there is likely to be a slight increase in CNB's interest rate margin, thereby increasing net interest income. 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 90-day Treasury Bill rate. The credit can be utilized to pay for services including messenger service, account reconciliation and other similar services. If the cost of the services provided exceeds the available credit, the customer is charged for the difference. The impact of this expense on the Company's net interest spread and net yield on interest earning assets was as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 ------- ------- ------- ------- Average noninterest-bearing demand deposits $64,488 $50,119 $59,574 $48,526 Client Service expense 105 95 320 256 Client Service cost annualized 0.65% 0.76% 0.72% 0.71% Impact on Net Yield - ------------------- Net yield on interest earning assets 6.21% 6.10% 6.16% 6.03% Impact of client services (0.15%) (0.18%) (0.17%) (0.16%) ------- ------- ------- ------- Adjusted net yield 6.06% 5.92% 5.99% 5.86% ======= ======= ======= =======
The negative impact on the net yield on interest-earning assets is caused by the reduction of net interest income by the cost of client service expenses, which reduces the yield on interest-earning assets. The cost for client service expense has been relatively stable, and reflects the Company's efforts in the management of client service expense. INTEREST RATE SENSITIVITY Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in the Bank's current portfolio that are subject to repricing at intervals of (a) one day or immediate, (b) two days to six months, (c) seven to twelve months, (d) one to three years, (e) three to five years, (f) over five years and (g) 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 in these intervals are known as "sensitivity gaps." The following table shows interest sensitivity gaps for different intervals at September 30, 1996: 12 of 19
INTEREST SENSITIVITY ANALYSIS Repricing Periods Less than Less than Immediate 2 Days To 7-12 1 Year 3 Yrs (Dollars in thousands) One Day 6 Months Months to 3 Yrs to 5 Yrs - --------------------- ------------------------------------------------------------------------------------ Assets: Cash and due from banks $ - $ - $ - $ - $ - Short term investments 4,600 - - - - Investment securities - 3,002 2,504 10,760 14,018 Loans 166,254 2,943 2,183 10,285 8,855 Loan loss reserve/unearned fees - - - - - Other assets - - - - - -------- -------- -------- -------- ------- Total assets $170,854 $ 5,945 $ 4,687 $ 21,045 $22,873 ======== ======== ======== ======== ======= Liabilities and Equity: Deposits Demand $ - $ - $ - $ - $ - NOW, MMDA, and savings 166,301 - - - - Time deposits - 48,273 7,008 592 11 Subordinated debt 3,000 - - - - Other liabilities - - - - - Shareholders' equity - - - - - -------- -------- -------- -------- ------- Total liabilities and equity $169,301 $ 48,273 $ 7,008 $ 592 $ 11 ======== ======== ======== ======== ======= Gap $ 1,553 $(42,328) $ (2,321) $ 20,453 $22,862 Cumulative Gap $ 1,553 $(40,775) $(43,096) $(22,643) $ 219 Cumulative Gap/total assets 0.57% (14.97%) (15.83%) (8.32%) 0.08% - ---------------------------------------------------------------------------------------------------------------------------------
INTEREST SENSITIVITY ANALYSIS Repricing Periods Total Less Than Total Rate Non-rate (Dollars in thousands) 5 Yrs Sensitive Sensitive Total - ---------------------- ----------------------------------------------------------------------- Assets: Cash and due from banks $ - $ - $ 20,273 $ 20,273 Short term investments - 4,600 - 4,600 Investment securities 28,613 58,897 1,021 59,918 Loans 31,713 222,233 3,111 225,344 Loan loss reserve/unearned fees - - (4,636) (4,636) Other assets - - 14,056 14,056 ------- -------- -------- -------- Total assets $60,326 $285,730 $ 33,825 $319,555 ======= ======== ======== ======== Liabilities and Equity: Deposits Demand $ - $ - $ 72,707 $ 72,707 NOW, MMDA, and savings - 166,301 - 166,301 Time deposits 10 55,894 - 55,894 Subordinated debt - 3,000 - 3,000 Other liabilities - - 865 865 Shareholders' equity - - 20,788 20,788 ------- -------- -------- -------- Total liabilities and equity $ 10 $225,195 $ 94,360 $319,555 ======= ======== ======== ======== Gap $60,316 $ 60,535 $(60,535) $ - Cumulative Gap $60,535 $ 60,535 $ - $ - Cumulative Gap/total assets 22.23% 22.23% 0% -
The management of interest rate sensitivity, or interest rate risk management, is a function of the repricing characteristics of the Bank's portfolio of assets and liabilities. These repricing characteristics are subject to changes in interest rates either at 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 "basis risk" and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity table above. These prepayments may have significant effects on the Bank's net interest margin. Because of these factors, the interest sensitivity gap report may not provide a complete assessment of the Bank's exposure to changes in interest rates. 13 of 19 NON-INTEREST INCOME The following table provides details of non-interest income for the previous five quarters.
Quarter Ended ------------------------------------------------------------------- September 30, June 30, March 31, December 31, September 30, (Dollars in thousands) 1996 1996 1996 1995 1995 ----- ----- ----- ----- ----- Loan fees $ 59 $ 34 $ 15 $ 11 $ 51 Trust fees 375 344 309 241 178 Gain on sale of SBA loans 122 123 130 153 63 Depositor service fees 149 121 98 92 92 Other 122 185 77 54 67 ----- ----- ----- ----- ----- Total other income $ 827 $ 807 $ 629 $ 551 $ 451 ===== ===== ===== ===== =====
Non-interest income was $827,000 for the third quarter of 1996, an increase of $20,000 from the second quarter of 1996, and of $376,000 from the third quarter of 1995. The increase in the 1996 third quarter from the second quarter of 1996 and from the third quarter of 1995 was primarily due to an increase in trust fee income. The increase of $910,000 in total noninterest income from the nine months ended September 30, 1995 to the nine months ended September 30, 1996 was primarily due to increased trust fee income and warrant income. NON-INTEREST EXPENSE The following table provides details of non-interest expense for the previous five quarters:
Quarter Ended ------------------------------------------------------------------- September 30, June 30, March 31, December 31, September 30, (Dollars in thousands) 1996 1996 1996 1995 1995 ------ ------ ------ ------ ------ Compensation and benefits $1,974 $1,998 $1,700 $1,774 $1,694 Occupancy and equipment 551 489 473 470 430 Professional services 234 248 193 269 277 Legal settlement and costs - - - - - FDIC insurance and assessments 15 21 20 62 22 Supplies, telephone and postage 161 160 130 117 109 Data processing 42 38 50 42 39 Client services 105 95 120 81 95 Other real estate, net 5 6 24 - 1 Other 657 444 442 366 315 ------ ------ ------ ------ ------ Total operating expenses $3,744 $3,499 $3,152 $3,181 $2,982 ====== ====== ====== ====== ======
Compensation and benefits expense for the third quarter decreased by $24,000 when compared to the second quarter of 1996, and increased by $280,000 from the comparable quarter of 1995. The increase in compensation, occupancy and supplies expense during the third quarter of 1996 and the first nine months of 1996, from the 1995 third quarter and the 1995 first nine months, respectively, is primarily due to the opening of the new downtown Palo Alto branch office in June 1996 which also included facilities for CNB's expanded trust operations. Total FDIC insurance and assessments declined by $226,000 from the nine months ended September 30, 1995 to the nine months ended September 30, 1996, reflecting the change in assessment rates for banks insured by the Bank Insurance Fund of the FDIC. INCOME TAX The provision for income taxes for the third quarter of 1996 of $350,000 reflects an effective tax rate for the quarter of approximately 38%, compared to a tax benefit recorded for the third quarter of 1995 of $260,000 with an effective tax rate of 39%. 14 of 19 FINANCIAL CONDITION CAPITAL RATIOS The Companys and the Banks leverage ratios (Tier 1 capital to average quarterly assets), Tier 1 risk-based capital ratios and and total risk-based capital ratios were as follows:
September 30, 1996 ------------------------------------------------------------------ Tier 1 Capital to Tier 1 Capital to Total Capital to Average Risk-weighted Risk-weighted Quarterly Assets Assets Assets ------------------------------------------------------------------ BALANCE % BALANCE % BALANCE % (Dollar in thousands) CNB $20,381 6.89% $20,381 7.75% $26,670 10.14% Well capitalized requirement $14,790 5.00% $15,778 6.00% $26,297 10.00% ------------------------------------------------------------------ Excess capital $ 5,591 1.89% $ 4,603 1.75% $ 373 0.14% ================================================================== Cupertino National Bancorp $20,736 6.98% $20,736 7.88% $27,029 10.27% Well capitalized requirement $14,851 5.00% $15,794 6.00% $26,324 10.00% ------------------------------------------------------------------ Excess capital $ 5,885 1.98% $ 4,942 1.88% $ 705 0.27% ==================================================================
To be considered well capitalized, as defined under the regulatory framework for prompt corrective action, an institution must have a Tier 1 risk-based capital ratio of 6% or greater, a total risk-based capital ratio of 10% or greater and a leverage ratio of 5% or greater. To be considered adequately capitalized, as defined under the regulatory framework for prompt corrective action, an institution must have a Tier 1 risk-based capital ratio of 4% or greater, a total risk-based capital ratio of 8% or greater and a leverage ratio of 3% or greater. All of the Company's and the Bank's risk-based capital and leverage ratios exceed the ratios for a well capitalized financial institution for all periods presented above. LIQUIDITY Liquidity is defined as the ability of a company to convert assets into cash or cash equivalents without significant loss, and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Bank's ability to meet the day-to-day cash flow requirements of the Bank's clients who either want to withdraw funds or require funds to meet their credit needs. Through an Asset/Liability Management Committee, the Bank actively monitors its commitments to fund loans, as well as the composition and maturity schedule of its loan and deposit portfolios. To manage its liquidity, the Bank maintains $20 million in inter-bank Fed Fund purchase lines, as well as approximately $100 million in institutional deposit or brokered deposit lines, and $46 million in reverse repurchase lines. 15 of 19 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 -------------------------------------------------------------------------- September 30, June 30, March 31, December 31, September 30, (Dollars in thousands) 1996 1996 1996 1995 1995 - --------------------- -------------------------------------------------------------------------- Reserve for loan losses at beginning of period $ 3,043 $2,907 $2,683 $2,522 $2,454 Provision charged to operations 399 265 200 90 75 Loans charged off (74) (165) - (54) (15) Loan recoveries 83 36 24 125 8 ------- ------ ------ ------ ------ Reserve for loan losses at end of period $ 3,451 $3,043 $2,907 $2,683 $2,522 ======= ====== ====== ====== ====== Ratio of: Reserve for loan losses to loans 1.54% 1.63% 1.67% 1.64% 1.69% Reserve for loan losses to nonperforming assets 111.25% 86.08% 84.95% 80.26% 85.67% - -------------------------------------------------------------------------------------------------------------
The provision for loan losses was $399,000 in the third quarter of 1996, compared to $265,000 in the second quarter of 1996, and to $75,000 in the third quarter of 1995. The provision for loan losses for the first nine months of 1996 was $864,000 compared to $591,000 in the comparable period in 1995. Management considers changes in the size and character of the loan portfolio, changes in non-performing and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the loan loss reserve. The reserve for loan losses was $3.45 million at September 30, 1996, compared with $3.04 million at June 30, 1996, and $2.52 million at September 30, 1995. The ratio of the reserve for loan losses to total loans was 1.54% at September 30, 1996, compared with 1.63% at June 30, 1996, and 1.69% at September 30, 1995. The ratio of the reserve for loan losses to total nonperforming assets, including foreclosed real estate, was 111.25% at September 30, 1996, compared to 86.08% at June 30, 1996 and 85.67% at September 30, 1995. NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE AND FORECLOSED PROPERTIES
Quarter ended -------------------------------------------------------------------------- September 30, June 30, March 31, December 31, September 30, (Dollars in thousands) 1996 1996 1996 1995 1995 - --------------------- -------------------------------------------------------------------------- Non-accruing loans $2,457 $2,214 $2,325 $2,513 $2,539 Restructured loans - - - - - Accruing loans past due 90 days or more 645 1,104 880 830 405 ------ ------ ------ ------ ------ Total nonperforming loans 3,102 3,318 3,205 3,343 2,944 OREO - 217 217 - - ------ ------ ------ ------ ------ Total nonperforming assets $3,102 $3,535 $3,422 $3,343 $2,944 ====== ====== ====== ====== ====== Total nonperforming assets to total assets 0.97% 1.29% 1.34% 1.29% 1.23% - ------------------------------------------------------------------------------------------------------------------
16 of 19 Over the past year, total nonperforming assets have remained relatively stable with totals of $3.1 million at September 30, 1996, compared with $3.5 million at June 30, 1996, and $2.9 million at September 30, 1995. Nonperforming loans, which include non-accruing loans, restructured loans, and accruing loans which are past due 90 days or more, were $3.1 million at September 30, 1996, compared with $3.3 million at December 31, 1995, and $2.9 million at September 30, 1995. It is the Bank's policy to discontinue the accrual of interest when the ability of a borrower to repay principal or interest is, in doubt, or when a loan is past due 90 days or more, except when, in managements judgment, the loan is well secured and in the process of collection. The Bank has an active credit administration function which includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. Senior management, and an internal asset review committee review problem loans on a regular basis. EFFECTS OF INFLATION The impact of inflation on a financial institution differs significantly from that exerted on industrial concerns, primarily because its assets and liabilities consist largely of monetary items. The most direct effect of inflation on a financial institution is fluctuation in interest rates. However, net interest income is affected by the spread between interest rates received on assets and those paid on interest bearing liabilities, rather than the absolute level 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. 17 of 19 PART II. OTHER INFORMATION ITEM 1 - ITEM 3, ITEM 5 Not applicable ITEM 4 - NONE 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 - Listed on Index to Exhibits (b) Reports on Form 8-K for the quarter covered by this report: (1) The Company filed a Report on Form 8-K on July 12, 1996 reporting, on Item 5. "Other Events," the signing of a definitive agreement for a merger of equals of Registrant with and into Mid-Peninsula Bancorp and that Mid-Peninsula Bancorp will change its name to Greater Bay Bancorp concurrent with closing of the merger. The Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996 was filed as an exhibit to the form 8-K and is incorporated herein by reference. (2) The Company filed a Report on Form 8-K on August 21, 1996 reporting, on Item 5. "Other Events," the signing of an amended definitive agreement for a merger of equals of Registrant with and into Mid-Peninsula Bancorp and that Mid-Peninsula Bancorp will change its name to Greater Bay Bancorp concurrent with closing of the merger. The Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996 was filed as an exhibit to the Form 8-K and is incorporated herein by reference. SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. CUPERTINO NATIONAL BANCORP (REGISTRANT) BY: /S/ STEVEN C. SMITH - --------------------- STEVEN C. SMITH EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER /S/ HEIDI R. WULFE - ------------------ HEIDI R. WULFE SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER DATE: NOVEMBER 12, 1996 18 of 19 INDEX TO EXHIBITS NUMBER EXHIBIT - ------ ------- 2.1 Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996 (filed as Exhibit 2.1 of Registrant's report on Form 8-K, dated August 21, 1996 and incorporated herein by reference). 10.1 Cupertino Shareholder Agreement and Mid-Peninsula Shareholder Agreement, each dated as of June 26, 1996, pursuant to Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996. (Filed as Exhibit 10.1 of registrant's report on form 10 Q as of June 30, 1996 and incorporated herein by reference). 10.2 Form of Cupertino Affiliate Agreement and Mid-Peninsula Affiliate Agreement with directors and certain officers, pursuant to Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996. (Filed as Exhibit 10.2 of registrant's report on form 10 Q as of June 30, 1996 and incorporated herein by reference). 10.3 Stock Option Agreement pursuant to Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996. (Filed as Exhibit 10.3 of registrant's report on form 10 Q as of June 30, 1996 and incorporated herein by reference). 10.4 Letter agreement, dated as of May 10, 1996, regarding the rendering of a fairness opinion and Indemnity Agreement, dated as of May 10, 1996, pursuant to Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996, between Cupertino and Sutro & Co. Incorporated. (Filed as Exhibit 10.4 of registrant's report on form 10Q as of June 30, 1996 and incorporated herein by reference). 10.5 Letter agreement, dated as of June 5, 1996, regarding the providing of financial advisory services pursuant to Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996, between Cupertino and Hovde Financial, Inc. (Filed as Exhibit 10.5 of registrant's report on form 10 Q as of June 30, 1996 and incorporated herein by reference). 27 Financial Data Schedule _____ 19 of 19 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS DEC-31-1996 JUL-01-1996 SEP-30-1996 20,273 0 4,600 0 2,023 57,845 57,436 224,333 3,451 319,555 294,902 0 865 3,000 0 0 18,436 2,352 319,555 5,414 940 97 6,451 2,132 2,224 4,227 399 0 3,744 911 911 0 0 561 .27 .27 6.21 2,457 645 0 8,232 3,043 74 83 3,451 3,451 0 1,387
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