EXHIBIT 13.1
Cupertino National Bancorp
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Provision for Loan Losses
The provision for loan losses is the annual cost of providing an allowance or
reserve for future losses on loans. The loan loss provision amount for each year
is dependent on many factors, including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
the quality of the loan portfolio, the value of the underlying collateral on
problem loans and the general economic conditions in the Bank's market area. The
Bank performs a monthly assessment of the risk inherent in its loan portfolio,
as well as a review of each asset determined to have identified weaknesses.
Based on this analysis, which includes reviewing historical loss trends, current
economic conditions, industry concentrations and specific reviews of assets
classified with identified weaknesses, the Bank allocates reserves to its loans
and other risk asset portfolio. The reserve has specific allocations for credits
where the probability of a loss can be defined and reasonably determined, while
the balance of the reserve allocations are based on historical data, including
delinquency trends, economic conditions in our market area, combined with
industry loss averages. The provision for loan losses in 1994 was $1.6 million,
compared to $1.7 million in 1993 and $.9 million in 1992. The increase in the
loan loss provision in 1994 and 1993 when compared to 1992 continues to reflect
the weakness in the economic conditions within the Bank's market area and the
credit risk inherent in its loan portfolio. The Bank believes that adverse
economic conditions in its market area have contributed to this trend.
Other Income
Total other income decreased to $3.1 million in 1994, compared to $3.2 million
in 1993 and $1.7 million in 1992. The following table summarizes the sources of
other income in:
(Dollars in thousands) 1994 1993 1992
---------------------------------------------------------------------
Gain on sale of mortgage loans $ 993 $1,525 $ 250
Gain on sale of SBA loans 685 435 337
Trust fees 593 494 462
Loan documentation fees, net 276 284 115
Depositor service fees 267 252 264
Gain on sale of investment securities -- -- 61
Other 265 164 175
------------------------
Total $3,079 $3,154 $1,664
------------------------
The largest portion of the decrease in other income is due to the mortgage
banking business unit, which began operations in July 1992. The division
generated $993,000 in gains on the sale of mortgage loans in 1994, compared to
$1,525,000 in 1993, and $250,000 in 1992. The sharp rise in interest rates
during 1994 had the largest impact on mortgage income, causing a reduction in
the volume of refinancing and origination in the residential mortgage markets.
In part to counteract a reduction in mortgage income due to a rise in interest
rates in 1994, and expand into new, growing markets, the Bank opened a mortgage
loan origination office in San Diego, California in June 1994. While this
improved the Bank's loan funding capabilities, it did not offset the overall
market decline. During the first two months of 1995, this decline continued and
the Bank determined it was in the best interest of the shareholders to close the
mortgage operations effective March 31, 1995.
Loan documentation income, which represents the charge to clients for expenses
incurred by the Bank to document and process loans, decreased slightly to
$276,000 for 1994, as compared to $284,000 in 1993 and $115,000 in 1992. The
decrease in loan documentation income in 1994 as compared to 1993, is primarily
attributable to a reduction in the quantity of loan originations in 1994 as
compared to 1993.
Fees received by the Trust Department of the Bank increased to $593,000 in
1994, as compared to $494,000 in 1993 and $462,000 in 1992. The Trust Department
had approximately $157 million in total assets at December 31, 1994, compared
with approximately $118 million in 1993 and approximately $117 million in 1992.
The fiduciary assets of the Trust Department at December 31, 1994, consisted of
50% in employee benefit plans, 26% in individual trusts, with custodial, court
trusts and other similar arrangements providing the balance.
Premiums recognized on the sale of SBA loans increased to $685,000 for 1994,
as compared to $435,000 in 1993 and $337,000 in 1992. During 1994 the Bank's SBA
division was granted Preferred Lender status by the Small Business
Administration. This status should enhance the Bank's ability to increase its
market share by improving loan application turnaround time.
Service charges on depositor accounts remained stable with $267,000 in 1994,
$252,000 in 1993 and $264,000 in 1992.
Operating Expenses
Operating expenses totaled $10.4 million for 1994, compared to $10.2 million for
1993, and $6.7 million for 1992. The ratio of operating expenses to average
assets for these periods was 5.3%, 5.6%, and 4.2%, respectively.
The following table represents the major components of operating expenses for
the years ended December 31:
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------
Compensation and benefits $ 5,724 $ 5,014 $3,592
Occupancy and equipment 1,400 1,226 956
Professional services and legal costs 911 1,379 391
FDIC Insurance and regulatory assessments 485 414 341
Other real estate, net 48 288 (80)
Other 1,500 1,425 1,030
-----------------------------
Total before client services 10,068 9,746 6,230
Client services 376 478 456
-----------------------------
Total $10,444 $10,224 $6,686
-----------------------------
Efficiency ratio before client services 71.10% 73.16% 59.06%
-----------------------------
Efficiency ratio 73.75% 76.75% 63.39%
-----------------------------
Total operating expenses to average assets 5.27% 5.58% 4.24%
=============================
The efficiency ratio is computed by dividing total non-interest expenses by
net interest income and other income. An increase in the ratio indicates that
more resources are being allocated to generate the same (or greater) volume of
income while a decrease would indicate a more efficient allocation of resources.
The Company's efficiency ratio for the last half of 1994 was 67.42% as the
Company continued to focus on controlling operating expenses.
Compensation expenses increased in 1994 to $5.7 million compared to $5.0
million in 1993 and $3.6 million in 1992, primarily due to expanded operations,
including the establishment of the Emerging Growth Industries division and the
mortgage loan production office in San Diego, California.
Occupancy and equipment expenses increased as a result of growth in staff,
technological improvements in the Bank's computer system and the investment in
the Emerging Growth Industries division and the mortgage loan production office
in San Diego, California.
Expenses for professional services, including legal, consulting and audit
services, decreased to $911,000 in 1994, as compared to $1.4 million in 1993 and
$391,000 in 1992. While the 1994 decrease was primarily due to a non-recurring
legal settlement and related legal fees of $720,000 recorded in 1993, the
increasing trend from 1992 to 1994 was caused by increased legal fees related to
the loan collection and workout activity created in part by the continuing
troubled economic conditions in California.
Client service expenses decreased to $376,000 in 1994, compared to $478,000 in
1993 and $456,000 in 1992 as a result of a decrease in the volume of non-
interest bearing demand deposits for which the Bank provides services.
FDIC and OCC regulatory assessments increased to $485,000 in 1994, compared to
$414,000 in 1993 and $341,000 in 1992 as a result of increased deposit growth.
The FDIC assessment may decline in future years as the FDIC Bank Insurance Fund
is estimated to be fully funded in late 1995. This could result in a significant
reduction in FDIC assessment expense for the last quarter 1995 and in future
years.
Cupertino National Bancorp
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Other operating expenses increased by $75,000 in 1994 from 1993 primarily due
to increased lending volume and general growth of the Bank. The $395,000
increase in other operating expense from 1992 to 1993 was due to increased costs
related to the lending and mortgage banking operations.
Income Taxes
The Company's effective income tax rate for 1994 was 35.0%, compared to 37.5% in
1993 and 40.4% in 1992. The decrease in this rate is due primarily to the effect
of the California Franchise Tax Enterprise Zone Credit recognized in 1994 and
the impact of tax exempt municipal income in both 1994 and 1993 when compared to
1992.
Financial Condition
Assets
Total assets increased to $223.1 million at December 31, 1994, an increase of
15.8% from the $192.6 million at December 31, 1993, which was an 11.6% increase
from the $172.5 million one year earlier. The growth in 1994 assets is primarily
centered in the investment portfolio combined with marginal growth in the loan
portfolio.
Loans
Total loans, excluding loans held for sale, increased 5.4% to $134.0 million at
December 31, 1994 compared to $127.1 million at December 31, 1993. Total loans
increased 2.2% in 1993 from $124.3 million at year-end 1992.
The Bank's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending. The Bank's
lending is focused in the Santa Clara and San Mateo Counties. While no specific
industry concentration is significant, the Bank's lending is concentrated in an
area that is highly dependent on the technology industry and its supporting
companies. Thus, the Bank's borrowers could be adversely impacted by a downturn
in this sector of the economy and this could impact their ability to repay their
loans.
The following table presents the composition of the loan portfolio at the end
of each of the last three years:
1994 1993 1992
------------------ ----------------- ------------------
(Dollars in thousands) Amount % Amount % Amount %
------------------------------------------------------------------------------------------------
Commercial $ 81,695 60.2% $ 77,699 59.1% $ 73,523 57.9%
Real estate construction & land 18,117 13.3 19,090 14.5 23,049 18.2
Real estate term 13.133 9.7 12,075 9.2 11,225 8.9
Consumer & other 21,059 15.5 18,214 13.8 16,551 13.1
-----------------------------------------------------------
Total 134,004 98.7 127,078 96.6 125,348 98.1
Deferred fees and discounts (847) (0.6) (923) (0.7) (693) (0.5)
Allowance for loan losses (2,918) (2.1) (2,247) (1.7) (1,748) (1.4)
-----------------------------------------------------------
Net loans 130,239 96.0 123,908 94.2 121,907 96.2
Loans held for sale 5,383 4.0 7,625 5.8 4,841 3.8
-----------------------------------------------------------
Total loans $135,622 100.0% $131,533 100.0% $126,748 100.0%
===========================================================
Credit Quality
The Bank's objective is to limit the risk inherent in its loan portfolio through
stringent loan policies and loan review procedures. The loan policy of the Bank
is approved each year by its Board of Directors and is managed through periodic
reviews of such policies in relation to current economic activity and the degree
of risk (both credit and interest rate) in the current portfolio. A Director's
Loan Committee supervises the lending activities of the Bank. This committee
consists of four outside directors
and the Chairman/CEO, the President/COO, the Executive Vice President/Senior
Credit Officer (currently vacant), the Senior Vice President/Commercial Manager
and the Vice President/Credit Administration. The officers in this group make up
the Officer's Loan Committee. Loan requests exceeding individual officer
approval limits are submitted to the Officer's Loan Committee, and those which
exceed its limits are submitted to the Director's Loan Committee for final
approval.
The Bank has an active credit administration function which includes, in
addition to internal reviews, the regular use of an outside loan review firm to
review the quality of the loan portfolio. Senior management and the Director's
Loan Committee review and monitor problem loans on a regular basis.
Management generally places loans on non-accrual when they become 90 days past
due, unless they are well secured and in the process of collection. When a loan
is placed on non-accrual status, any interest, previously accrued but not
collected is reversed from income. Loans are charged off when management
determines that collection has become unlikely. Restructured loans are those
where the Bank has granted a concession on the interest paid or original
repayment terms due to financial difficulties of the borrower. Other real estate
owned consists of real property acquired through foreclosure on the related
collateral underlying defaulted loans. The following table summarizes non-
accrual loans, loans past due 90 days and still accruing, restructured loans,
and other real estate owned at December 31:
(Dollars in thousands) 1994 1993 1992
------------------------------------------------------------------------------
Non-performing assets
Non-accrual loans $ 3,244 $ 997 $ 513
Accruing loans past 90 days or more 1,371 1,903 --
Restructured loans -- -- --
Other real estate owned 375 618 3,717
-----------------------------
Total non-performing assets $ 4,990 $ 3,518 $4,230
-----------------------------
Ratio of the reserve for loan losses to
total non-performing assets 58% 64% 41%
The following table details the Bank's classified assets for the years ended
December 31:
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------
Classified assets:
Loans
Substandard $10,927 $ 9,885 $10,906
Doubtful 1,781 942 649
Loss -- -- --
-----------------------------
Total 12,708 10,827 11,555
OREO 375 618 3,717
-----------------------------
Total classified assets $13,083 $11,445 $15,272
-----------------------------
Ratio of classified assets to:
Total assets 5.9% 5.9% 8.9%
Total loans and OREO 9.4% 8.5% 11.5%
Ratio of reserve for loan losses to
classified assets 22.3% 19.6% 11.4%
============================
The increase in non-performing and classified assets reflects the continued
lethargy in the Northern California economy. The increase is primarily related
to a $2.3 million loan to one borrower ($1.7 million real estate secured). The
Bank is aggressively pursuing collection of this loan.
Cupertino National Bancorp
Management's Discussion Analysis of
Financial Condition and Results of Opertions (Continued)
The following table summarizes activity in the allowance for loan losses
for the past three years.
Summary of Loan
Loss Experience
(Dollars in thousands) Years ended December 31, 1994 1993 1992
------------------------------------------------------------------------------------------------
Loans, net of unearned income:
Average outstanding during period $127,264 $127,210 $114,780
-------------------------------
Allowance for loan losses:
Balance at beginning of period $ 2,247 $ 1,748 $ 1,470
Charge-Offs:
Commercial (748) (1,069) (520)
Real estate - construction (123) -- (62)
Real estate - term -- -- --
Consumer installment (141) (159) (145)
-------------------------------
Total (1,012) (1,228) (727)
-------------------------------
Recoveries:
Commercial 57 -- 4
Real estate - construction -- -- 95
Real estate - term -- -- --
Consumer installment 6 48 4
-------------------------------
Total 63 48 103
-------------------------------
Net charge-offs (949) (1,180) (624)
Provision charged to income 1,620 1,679 902
-------------------------------
Balance at end of period $ 2,918 $ 2,247 $ 1,748
-------------------------------
Net charge-offs to average loans outstanding during period .75% .93% .54%
-------------------------------
Allowance as a percentage of loans 2.09% 1.67% 1.35%
===============================
Management considers changes in the size and character of the loan portfolio,
changes in non-performing and past due loans, historical loan loss experience,
and the existing and prospective economic conditions when determining the
adequacy of the loan loss reserve. The allowance for loan loss increased at
December 31, 1994 to 2.09% of outstanding loans compared to 1.67% at December
31, 1993 and 1.35% at December 31, 1992. The following table details the
allocation of the reserve for loan losses:
Allocation of Loan Loss Reserve
1994 1993 1992
---------------------- -------------------- ---------------------
Percent of Percent of Percent of
(Dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans
----------------------------------------------------------------------------------------------------------------------
Commercial $1,846 60.2% $1,511 59.1% $1,216 58.0%
Real estate - construction 180 13.3 308 14.5 263 18.2
Real estate - term 495 9.7 391 9.2 56 8.9
Consumer installment 245 15.5 10 13.8 190 13.1
Loans held for sale 14 4.0 27 5.8 23 3.8
Unallocated - deferred fees, commitments
and loss reserves 138 (2.7) -- (2.4) -- (2.0)
-----------------------------------------------------------------------
Total $2,918 100.0% $2,247 100.0% $1,748 100.0%
=======================================================================
Although management believes that the allowance for loan losses is adequate,
future provisions will be subject to continuing evaluations of the inherent risk
in the portfolio. Further or continued downturns in the economy and other
factors could make additional provisions necessary.
Deposits
Deposits reached $186.7 million at December 31, 1994, an increase of 6.3% as
compared to deposits of $175.7 at December 31, 1993. Deposits in 1993 increased
12.2% from $156.6 million at December 31, 1992.
Total average deposits increased 3.5% to $172.4 million for 1994, compared to
an average of $166.6 for 1993. Average deposits in 1993 represented an increase
of 16.9% over average deposits of $142.5 in 1992. The increase in deposits was
primarily due to the continued marketing efforts directed at commercial business
clients and continued growth in the Bank's regional offices in San Jose and Palo
Alto.
Non-interest bearing deposits were $53.9 million at December 31, 1994,
compared to $62.8 million at December 31, 1993, and $62.3 million at December
31, 1992. On average, non-interest bearing deposits in 1994 were $50.4 million,
compared to $55.7 million in 1993 and $45.4 million in 1992. The decrease in
non-interest bearing deposits was due to a decline in title company balances,
which were larger in 1993 due to the large volume of real estate financing
activity during the favorable interest rate environment at that time. However,
the Bank continues to focus on non-interest bearing deposits to help maintain
its effective net interest yield. As its regional offices expand the Bank
anticipates this funding source to remain stable.
Money market and other interest-bearing demand accounts reached $82.0 million
at year-end 1994, an increase of 21.3% from the prior year. The continued
efforts by the Bank to market these low cost deposit products contributed
significantly toward the continued growth.
Time certificates of deposit of $100,000 or more, savings and other time
deposits totaled $50.9 million or 27.3% of total deposits at December 31, 1994,
compared to $45.4 million (25.8% of total deposits) at December 31, 1993, and
$43.3 million (27.7% of total deposits) at December 31, 1992.
Time certificates of deposit $100,000 or more, represented 13.7% of total
deposits at December 31, 1994, compared with 17.8% and 16.8% at December 31,
1993 and 1992, respectively.
Substantially all of the Bank's deposits originate in Cupertino, San Jose,
Palo Alto and the surrounding communities in Santa Clara and San Mateo Counties.
The Bank has one large deposit relationship with a local title company in which
three directors of the Company serve as members of the board, and one of the
directors has an ownership interest. Average monthly deposits from this client,
including both non-interest and interest bearing demand accounts, averaged
between $3.9 million and $12.6 million during 1994, compared to a range of
$11.3 million and $19.0 million for 1993. The balance at December 31, 1994 was
$4.6 million, compared to $14.7 million for December 31, 1993. Management
believes that the loss of this client would not have a materially adverse effect
on the Bank's liquidity, but might impact the Bank's net interest margin on a
short-term basis.
Liquidity
Liquidity management is defined as the ability of a company to convert assets
into cash or cash equivalents without significant loss and to raise additional
funds by increasing liabilities. Liquidity management involves maintaining the
Bank's ability to meet the day-to-day cash flow requirements of the Bank's
clients, who either wish to withdraw funds or require funds to meet their credit
needs. Without proper liquidity management, the Bank would not be able to
perform the primary function of a financial intermediary and would, therefore,
not be able to meet the needs of the communities it serves.
The primary function of asset and liability management is not only to assure
adequate liquidity in order for the Bank to meet the needs of its client base,
but to maintain an appropriate balance between interest-sensitive assets and
liabilities so that the Bank can also meet the return on investment requirements
of its shareholders. Daily monitoring of the sources and uses of funds is
necessary to maintain an acceptable cash position that meets both requirements.
Contingency plans exist and could be implemented on a timely basis to minimize
any risk associated with dramatic changes in market conditions. An example of
this is the Bank's $17 million in Fed Fund's purchase lines which provide back-
up liquidity, $100 million in institutional deposit or brokered deposit lines
and $60 million in reverse repurchase lines. All of these sources combine to
provide a solid liquidity base for growth.
The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a lesser
extent, sales of loans available for sale. Other short-term investments such as
federal funds sold and maturing interest bearing deposits with other banks are
additional sources of liquidity funding. The liability portion of the balance
sheet provides liquidity through various clients' interest bearing and non-
interest bearing deposit
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
accounts. Federal funds purchased and other short term borrowings are
additional sources of liquidity and basically represent the Company's
incremental borrowing capacity. These sources of liquidity are short-term in
nature and are used as necessary to fund asset growth and meet short-term
liquidity needs.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing characteristics of
the Bank's portfolio of assets and liabilities. These repricing characteristics
are subject to changes in interest rates either as replacement, repricing or
maturity during the life of the instruments. Interest rate risk management
focuses on the maturity structure of assets and liabilities and their repricing
characteristics during periods of changes in market interest rates. Effective
interest rate risk management seeks to ensure that both assets and liabilities
respond to changes in interest rates within an acceptable time frame, thereby
minimizing the effect of interest rate movements on net interest income.
Interest rate sensitivity is measured as the difference between the volumes of
assets and liabilities in the Bank's current portfolio that are subject to
repricing at various time horizons: one day or immediate, two days to six
months, seven to twelve months, one to three years, three to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps. The following table shows the Bank's interest sensitivity gaps
for different intervals as of December 31, 1994:
INTEREST SENSITIVITY ANALYSIS
Repricing Periods
Greater Greater
Than Than Greater Total Total
Immediate 2 Days To Months 1 Year 3 Yrs Than Rate Non-Rate
(Dollars in thousands) One Day 6 Months 7-12 to 3 Yrs to 5 Yrs 5 Yrs Sensitive Sensitive Total
-----------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 9,326 $ 9,326
Short term investments $ 10,400 $10,400 10,400
Investment securities $ 4,328 $10,444 $13,966 $ 8,159 $22,675 59,572 934 60,506
Loans 119,246 2,332 624 5,331 3,680 3,376 134,589 4,501 130,090
Loan loss/unearned fees (3,765) (3,765)
Other assets 7,282 7,282
---------------------------------------------------------------------------------------------------
Total assets 129,646 6,660 11,068 19,297 11,839 26,051 204,561 18,278 222,839
===================================================================================================
Liabilities and Equity:
Deposits
Demand 54,278 54,278
Now, MMDA, and savings 88,355 88,355 88,355
Time deposits 41,591 2,980 376 26 44,973 44,973
Other borrowed funds 17,256 17,256 17,256
Other liabilities 1,126 1,126
Shareholders' equity 16,851 16,851
---------------------------------------------------------------------------------------------------
Total liabilities and equity 105,611 41,591 2,980 376 26 150,584 72,255 222,839
===================================================================================================
Total asset GAP
GAP $ 24,035 $(34,931) $ 8,088 $18,921 $11,813 $26,051 $53,977 $(53,977) $ --
Cumulative GAP $ 24,035 $(10,896) $ (2,808) $16,113 $27,926 $53,977 $53,977 $ -- $ --
Cumulative GAP/total assets 10.78% (4.89)% (1.26)% 7.23% 12.53% 24.22% 24.22% --% --%
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing of
both the asset and its supporting liability can remain the same, thus impacting
net interest income. This characteristic is referred to as a basis risk and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity analysis table. These prepayments may have significant effects on
the Bank's net interest margin. Because of these factors an interest sensitivity
gap report may not provide a complete assessment of the Bank's exposure to
changes in interest rates.
The Bank currently has a negative cumulative GAP position for periods up to
one year, and a positive cumulative GAP thereafter. A positive cumulative GAP
position would be expected to provide increased net interest income during
periods of rising interest rates and would decrease net interest income during
periods of falling rates. While the Company's current negative one year GAP
portion would indicate net interest income should decrease during periods of
rising interest rates, the actual impact would be an increase to net interest
income. The primary reason this occurs is the lagging effect between the
repricing characteristics of the Company's interest earning assets and interest
bearing liabilities. In a simulation analysis on the impact of rising interest
rates, the rates on the Company's interest bearing liabilities reprice at a
slower pace than its assets, thus providing increased net interest income. This
positive impact is aided by the currently high level of core deposit liabilities
retained by the Bank. To maximize yield and increase its net interest income,
the Company increased its portfolio of investment securities during the latter
part of the second and early third quarter of 1994. These securities have an
expected average life of 3 years to 5 years, and are being funded with short
term liabilities, which created the negative GAP position, but allowed the Bank
to improve its overall net interest income. To the extent rates continue to rise
the positive impact of this strategy would decline, but is expected to be offset
by the repricing of its assets, since the majority of the loan portfolio floats
with the Prime Rate.
Capital Resources
Shareholders' equity at December 31, 1994 increased to $18.0 million, from $16.2
million at December 31, 1993, and $15.2 million at December 31, 1992. During
1994 the company paid a 5% stock dividend and a cash dividend of $.10 per share.
The Company believes that a strong capital position is vital to the continued
profitability of the Company, and promotes depositor and investor confidence,
while providing a solid foundation for the future growth of the organization.
The Company has provided the majority of its capital requirements through the
retention of earnings.
Under banking regulatory risk-based capital measures for banks and bank
holding companies, a banking organization's reported balance sheet is converted
to risk-based amounts by assigning each asset to a risk category, which is then
multiplied by the risk weight for that category. Off-balance sheet exposures are
converted to risk-based amounts through a two-step process. First, off-balance
sheet assets and credit equivalent amounts (e.g., standby letters of credit) are
multiplied by a credit conversion factor depending on the defined categorization
of the particular item. Then the converted items are assigned to a risk category
that weights items according to their relative risk. The total of the risk
weighted on- and off-balance sheet amounts represents a banking organization's
risk-adjusted assets for purposes of determining capital ratios under the risk-
based guidelines. Risk-adjusted assets can either exceed or be less than
reported assets, depending on the risk profile of the banking organization.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
stockholders' equity, qualifying perpetual preferred stock, and minority
interests, less goodwill. Supplementary capital includes the allowance for loan
losses (subject to certain limitations), other perpetual preferred stock,
certain other capital instruments, and term subordinated debt. The Company's
major capital components are stockholders' equity in core capital, and the
allowance for loan losses in supplementary capital.
At December 31, 1994, the minimum risk-based capital requirements were 4.0%
for core capital, and 8.0% for total capital. Federal banking regulators have
also adopted leverage capital guidelines to supplement risk-based measures. The
leverage ratio is determined by dividing Tier 1 capital as defined under the
risk-based guidelines by average total assets (not-risk adjusted) for the
preceding quarter. The minimum leverage ratio is 3.0% although banking
organizations are expected to exceed that amount by 1.0% - 2.0% or more,
depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), the Federal Reserve Board, the Comptroller and the FDIC have adopted
regulations, effective December 19, 1992, setting forth a five-tier scheme for
measuring the capital adequacy of the financial institutions they supervise. The
two highest levels recognized under these regulations are as follows:
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Tier 1 Risk-Based Total Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
----------------------------------------------------------------------------
Well-capitalized 6.0% 10.0% 5.0%
Adequately capitalized 4.0% 8.0% 4.0%
At December 31, 1994, the Company's risk-based capital ratios were 10.8% for
Tier 1 risk based capital and 12.1% for total risk-based capital, compared to
December 31, 1993 ratios of 10.6% and 12.1% respectively. The Company's leverage
ratio was 8.4% at December 31, 1994, and 8.4% at December 31, 1993. These ratios
exceeded the well-capitalized guidelines shown above.
(Dollars in thousands) 1994 1993 1992
--------------------------------------------------------------------------------
Tier 1 capital:
Shareholders' equity $ 18,037 $ 16,219 $ 15,174
--------------------------------
Tier 2 capital:
Allowance for loan losses 2,918 2,247 1,748
--------------------------------
Allowable amount for Tier 2 Capital 2,082 2,298 2,168
--------------------------------
Total Risk Based Capital 20,119 18,466 16,922
--------------------------------
Risk-adjusted assets 166,552 153,177 144,514
--------------------------------
Total assets 223,144 192,574 172,526
--------------------------------
Tier 1 capital/risk adjusted assets:
Company's capital ratio 10.8% 10.6% 10.5%
Minimum regulatory requirement 4.0% 4.0% 4.0%
Total Risk-based capital/risk adjusted assets:
Company's capital ratio 12.1% 12.1% 11.7%
Minimum regulatory requirement 8.0% 80% 8.0%
Tier 1 capital/total assets:
Company's leverage ratio 8.4% 8.4% 8.8%
Minimum regulatory requirement 3.0% 3.0% 3.0%
--------------------------------
BUSINESS RISKS
Certain characteristics and dynamics of the Bank's business and of the financial
markets may create risks to the Bank's long-term success and its financial
results. These risks include:
Geographic Concentration and Santa Clara Valley Economy -- All of the Bank's
operations are located in Santa Clara County in Northern California. As a result
of this geographic concentration, the Bank's results of operations depend
largely upon local economic conditions, which have been relatively volatile in
recent years. Accordingly, there can be no assurance that the Bank's existing
and prospective customers will be responsive to, or have the need for, the
services offered by the Bank. Further, no assurance can be given that the Bank
will not be adversely affected if the economic downturn persists or if economic
conditions otherwise worsen.
Key Employees; Recent Changes in Management -- The Bank's future performance is
substantially dependent upon its ability to attract and retain qualified
personnel. Since January 1, 1994, several members of senior management have left
the Bank, including its President, its Executive Vice President of Technology
Lending, and two Chief Credit Officers. While the loss of the services of key
employees could have a material adverse effect upon the Bank, the losses to date
have not had a material adverse impact on the Bank's operations or financial
condition. The competition for key employees is intense and there is no
assurance that the Bank will be able to retain its existing personnel or
attract, retain and motivate additional qualified personnel in the future.
However, the Bank believes it provides a quality work environment and
competitive benefits package for its employees, as well as providing excellent
opportunities for professional growth for all of its personnel. Accordingly, the
Bank believes these factors will continue to allow it to attract qualified
personnel.
Government Regulation and Recent Legislation -- The Bank and its operations are
subject to extensive state and federal supervision, regulation and legislation.
The turmoil in the savings and loan industry has spawned significant new
legislation, and increased regulatory scrutiny of lending practices, among other
changes. These trends frequently affect the Bank in ways that increases the
Bank's cost of doing business. The Bank cannot predict the precise impact of
recent legislation, nor the probable course or impact of future legislation or
regulatory actions affecting the financial services industry.
Effects of Inflation-- The impact of inflation on a financial institution
differs significantly from that exerted on an industrial concern, primarily
because its assets and liabilities consist largely of monetary items. The most
direct effect of inflation is higher interest rates. However, the Bank's
earnings are affected by the spread between the yield on earning assets and
rates paid on interest-bearing liabilities rather than the absolute level of
interest rates. Additionally, there may be some upward pressure on the Company's
operating expenses, such as adjustments in staff expense and occupancy expense,
based upon consumer price indexes. In the opinion of management, inflation has
not had a material effect on the consolidated results of operations.
Pending Litigation -- The Bank is involved in a lawsuit in which the plaintiff
alleges the Bank and one of its officers were negligent in the performance of
their duties as trustee. The suit seeks monetary damages of approximately $2.2
million. After consultation with counsel, the Bank believes that it has defenses
to the claims; however, litigation is subject to inherent uncertainties and
accordingly, no assurance can be given that Sumitomo's claim will be decided in
favor of the Bank. In any event, the Bank believes that any liability that could
arise from the alleged claim would not have a material adverse effect on the
financial statements of the Bank.
Potential Combination -- As previously announced, the Bank is engaged in
preliminary discussions with South Valley Bancorporation regarding a potential
business combination. Given the preliminary nature of the discussion, there is
no assurance that such a transaction will be consummated or that, if
consummated, such transaction will benefit shareholders. Such a transaction, if
any, would be subject to the execution of definitive agreements by the parties
and any required regulatory and shareholder and other corporate approvals.
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS') No. 114 "Accounting by Creditors for
Impairment of a Loan" ("SFAS No. 114") which was subsequently amended by SFAS
No. 118. Under the provisions of SFAS No. 114, a loan is considered impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan agreements. SFAS No. 114 requires creditors to measure impairment of a
loan based on the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the underlying collateral
("the value"). If the value of the impaired loan is less than the recorded
investment in the loan, a creditor shall recognize the impairment by creating a
valuation allowance with a corresponding charge to bad debt expense. This
statement also applies to restructured loans and loans previously accounted for
as in-substance foreclosures. SFAS No. 114 and SFAS No. 118 apply to financial
statements for fiscal years beginning after December 15, 1994. Earlier
implementation is permitted. The Bank does not expect a material impact on its
financial statements from adopting SFAS No. 114 and SFAS No 118.
Stock Activity -- The common stock of the Company is traded on the NASDAQ
National Market System under the symbol CUNB. There were 403 holders of record
of the Company's common stock at December 31, 1994.
The following table presents the high and low prices of the Company's common
stock, as reported on the NASDAQ National Market System during 1994, 1993 and
1992, adjusted for the effect of stock dividends:
1994 1993 1992
-------------- -------------- -------------
High Low High Low High Low
-------------------------------------------------------------
Quarter:
First $10.00 $8.81 $10.80 $7.56 $7.89 $6.70
Second $10.38 $9.00 $10.80 $9.07 $8.42 $6.70
Third $10.00 $9.00 $10.89 $9.52 $8.53 $7.56
Fourth $10.00 $8.75 $10.80 $8.57 $8.42 $7.34
On November 30, 1994, the Company paid a $.10 per share dividend to its
shareholders. The Company anticipates continuing to pay cash dividends on a
semi-annual basis to the shareholders of the Company.
Cupertino National Bancorp
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands) December 31, 1994 1993
------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ 9,326 $ 10,550
Federal funds sold 10,400 3,800
-------------------------------------
Cash and cash equivalents 19,726 14,350
Other short-term investments (cost approximates market) -- 3,097
Investment securities 60,506 36,342
Loans, net 130,239 123,908
Loans held for sale 5,383 7,625
-------------------------------------
Total loans, net 135,622 131,533
Premises and equipment, net 1,434 1,408
Other real estate owned 375 618
Interest receivables and other assets 5,481 5,226
-------------------------------------
Total $223,144 $192,574
=====================================
Liabilities and Shareholders' Equity:
Deposits:
Demand, non-interest-bearing $53,880 $ 62,751
NOW 8,331 6,769
Money Market Demand Accounts 73,623 60,803
Savings 5,951 6,343
Other time certificates 19,417 7,799
Time certificates, $100 and over 25,520 31,275
------------------------------------
Total deposits 186,722 175,740
Other borrowings 17,256 --
Other liabilities 1,129 615
------------------------------------
Total liabilities 205,107 176,355
Commitments (Note 12)
Shareholders' Equity:
Preferred stock, no par value: 4,000,000 shares authorized;
none issued -- --
Common stock, no par value: 6,000,000 shares
authorized;sharesoutstanding: 1,557,008 in 1994 and
1,401,826 in 1993 14,901 13,582
Retained earnings 3,136 2,637
--------------------------------------
Total shareholders' equity 18,037 16,219
--------------------------------------
Total $223,144 $192,574
======================================
See notes to consolidated financial statements.
Cupertino National Bancorp
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts) For the years ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest on loans $12,608 $ 11,895 $ 11,150
Interest on investment securities:
Taxable 2,451 830 622
Non-taxable 94 145 204
-------------------------------
Total investment securities 2,545 975 826
Other interest income 208 463 450
-------------------------------
Total interest income 15,361 13,333 12,426
-------------------------------
Interest Expense:
Interest on deposits 3,897 3,156 3,540
Interest on short-term borrowings 382 10 2
-------------------------------
Total interest expense 4,279 3,166 3,542
-------------------------------
Net interest income 11,082 10,167 8,884
Provision for loan losses 1,620 1,679 902
-------------------------------
Net interest income after provision for loan losses 9,462 8,488 7,982
-------------------------------
Other Income:
Gain on sale of mortgage loans 993 1,525 250
Gain on sale of SBA loans 685 435 337
Trust fees 593 494 462
Loan documentation fees, net 276 284 115
Depositor service fees 267 252 264
Gain on sale of investment securities -- -- 61
Other 265 164 175
-------------------------------
Total other income 3,079 3,154 1,664
-------------------------------
Operating Expenses:
Compensation and benefits 5,724 5,014 3,592
Occupancy and equipment 1,400 1,226 956
Professional services and legal costs 911 1,379 391
FDIC insurance and regulatory assessments 485 414 341
Client services 376 478 456
Other real estate, net 48 288 (80)
Other 1,500 1,425 1,030
-------------------------------
Total operating expenses 10,444 10,224 6,686
-------------------------------
Income before income tax expense 2,097 1,418 2,960
Income tax expense 734 538 1,197
-------------------------------
Net income $ 1,363 $ 880 $ 1,763
===============================
Net income per common and common equivalent share $ 0.84 $ 0.55 $ 1.16
===============================
See notes to consolidated financial statements.
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Shareholders' Equity
Common Stock
For the years ended December 31, 1994, 1993 and 1992 ------------------------------ Retained Shareholders'
(Dollars in thousands) Shares Amount earnings equity
------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1992 1,115,819 $ 10,814 $ 2,497 $ 13,311
Stock options exercised 12,354 68 -- 68
Stock issued in Employee Stock Purchase Plan 4,716 36 -- 36
Two 5% stock dividends --
fractional shares paid in cash 115,357 1,066 (1,070) (4)
Net income -- -- 1,763 1,763
--------------------------------------------------------------
Balance, December 31, 1992 1,248,246 11,984 3,190 15,174
Stock options exercised 16,472 106 -- 106
Stock issued in Employee Stock Purchase Plan 7,604 63 -- 63
Two 5% stock dividends --
fractional shares paid in cash 129,504 1,429 (1,433) (4)
Net income -- -- 880 880
---------------------------------------------------------------
Balance, December 31, 1993 1,401,826 13,582 2,637 16,219
Stock options exercised 74,468 543 -- 543
Stock issued in Employee Stock Purchase Plan 8,238 69 -- 69
One 5% stock dividend --
fractional shares paid in cash 72,476 707 (708) (1)
Cash dividend $.10 per share -- -- (156) (156)
Net income -- -- 1,363 1,363
---------------------------------------------------------------
Balance, December 31, 1994 1,557,008 $ 14,901 $ 3,136 $ 18,037
==============================================================
See notes to consolidated financial
statements.
Cupertino National Bancorp
Consolidated Statements of Cash Flows
(Dollars in thousands) For the years ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------------------------------
Cash Flows - Operating Activities:
Net income $ 1,363 $ 880 $ 1,763
Reconciliation of net income to net
cash from operations:
Provision for loan losses 1,620 1,679 902
Depreciation and leasehold amortization 490 477 334
Deferred income taxes 128 (246) (81)
Accrued interest receivable and other assets (255) (627) (394)
Accrued interest payable and other liabilities 514 (187) (19)
Deferred loan fees (76) 229 204
Gain on sale of investment securities -- -- 61
Proceeds from sales of loans held for sale 125,342 152,982 26,208
Origination of loans for resale (123,100) (151,518) (30,462)
Other real estate owned, net 48 221 (80)
----------------------------------------
Operating cash flows, net 6,074 3,890 (1,564)
----------------------------------------
Cash Flows - Investing Activities:
Sales of investment securies -- -- 1,670
Maturities of investment securities and other short-term
investments 12,983 31,125 22,434
Purchase of investments securities and other short-term
investments (34,050) (42,983) (38,584)
Loans, net (8,250) (8,157) (23,632)
Investment in other real estate owned -- (219) (1,057)
Sale of other real estate owned 576 3,097 893
Premises and equipment (516) (850) (498)
Purchase of life insurance policies -- (2,175) --
Other, net 21 -- --
----------------------------------------
Investing cash flows, net (29,236) (20,162) (38,774)
----------------------------------------
Cash Flows - Financing Activities:
Net change in non-interest-bearing deposits (8,871) 458 19,473
Net change in interest-bearing deposits 19,853 18,732 13,102
Net change in short-term borrowings 17,256 -- (2,500)
Stock issued 457 169 104
Payment of stock dividend fractional shares (1) (4) (4)
Cash dividend (156) -- --
----------------------------------------
Financing cash flows, net 28,538 19,355 30,175
----------------------------------------
Net increase (decrease) in cash and cash equivalents 5,376 3,083 (10,163)
Cash and cash equivalents at beginning
of year 14,350 11,267 21,430
----------------------------------------
Cash and cash equivalents at end of year $ 19,726 $ 14,350 $ 11,267
========================================
Cash flows - supplemental disclosures:
Cash paid during the period for:
Interest on deposits and other
borrowings $ 4,148 $ 3,181 $ 3,679
Income taxes 535 722 1,171
Non-cash transactions:
Additions to other real estate owned 375 -- 2,913
========================================
See notes to consolidated financial statements.
Cupertino National Bancorp
Notes to Consolidated Financial Statements
NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The 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"). CUNB is the
holding company of CNB. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1994 presentation.
Cash and Cash Equivalents -- For purposes of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods. CNB is required by the
Federal Reserve System to maintain non-interest earning cash reserves
against certain of its transaction accounts. At December 31, 1994 the required
reserves totaled $982,000.
Investment Securities -- In accordance with Statement of Financial Accounting
Standard No. 115, ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities" which was adopted by the Company on January 1, 1994, all
investment securities are classified as held-to-maturity because management has
the positive intent and ability to hold all of the debt securities until
maturity. Accordingly, these securities are carried at their remaining unpaid
principal balances, net of unamortized and discounts are accredited using the
level yield method over the estimated remaining term of the underlying
security.
Prior to the adoption of SFAS No. 115, all investment securities were
considered held for investment because the Company had the ability and
management had the intent to hold these securities to maturity. Accordingly,
these securities were carried at amortized cost.
Loans -- Interest on loans is credited to income as earned and is accrued only
if deemed collectible. Accrued interest is generally reversed against current
income on loans over 90 days contractually delinquent and on other loans which
have developed inherent problems prior to being 90 days delinquent. The Bank
charges fees for originating loans, which are recognized as an adjustment of the
loan yield over the life of the loan by a method approximating the effective
interest method. Direct costs of originating the loan are capitalized and
recognized over the life of the loan as a reduction of the yield.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the statement of operations. Other loan fees and charges
representing service costs for the repayment of loans, for delinquent payments
or for miscellaneous loan services are recognized when collected.
Other Real Estate Owned -- Real estate acquired through foreclosure is carried
at the lower of cost, or fair value less anticipated cost of disposition.
Subsequent decreases in fair value are recognized as charges to expense and the
net costs of maintaining and operating foreclosed properties are expensed as
incurred.
Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
computed on a straight-line basis over the lesser of the lease terms or
estimated useful lives of the assets, which are generally 3 to 10 years.
Income Taxes -- Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," was adopted by CUNB on a prospective basis,
effective January 1, 1993. Under SFAS 109 the Company changed from the deferred
method to the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred income taxes are recognized for the tax
consequences of temporary differences by applying enacted statutory tax rates to
the differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS 109, the effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.
Allowance for Loan Losses -- The allowance for loan losses is maintained at a
level deemed appropriate by Management to adequately provide for known and
unidentified losses in the loan portfolio. The allowance is based upon a number
of factors, including prevailing and anticipated economic trends, industry
experience, industry and geographic concentrations, estimated collateral values,
management's assessment of credit risk on known and unidentified losses in the
loam portfolio, delinquency trends, historical loss experience, CNB's
underwriting practices and other relevant factors. Additions to the allowance,
in the form of provisions are reflected in current operations, while charge-offs
to the allowance are made when a loss is determined to have occurred.
Income Per Share -- Income per share, adjusted for stock dividends, is based on
weighted average common and common equivalent shares outstanding of 1,628,500 in
1994, 1,587,000 in 1993 and 1,510,700 in 1992.
Sales and Servicing of Small Business Administration (SBA) Loans -- The Company
originates loans to customers under SBA programs that generally provide for SBA
guarantees of 70% to 90% of each loan. The Company generally sells the
guaranteed portion of each loan to an investor and retains the unguaranteed
portion in its own portfolio.
Gains on these sales are earned through the sale of the guaranteed portion
of the loan for an amount in excess of the adjusted carrying value of the
portion of the loan sold. The Company allocates the carrying value of such loans
between the portion sold, the portion retained and a value assigned to the right
to service the loan. The difference between the adjusted carrying value of the
portion retained and the face amount of the portion retained is amortized to
interest income over the life of the related loan using a method which
approximates the interest method. The value assigned to the right to service is
also amortized over the estimated life of the loan.
Loan Sales -- In addition to SBA loans, the Company originates real estate loans
for sale and sells participations in other commercial loans. All loans held for
sale are carried at the lower of aggregate cost or market. The Company
recognizes gains or losses upon the sale of loans and participating interest in
loans. The gain or loss is based on consideration received, unpaid loan
balances, contractual interest rates, imputed loan servicing fees, estimated
remaining life of the loans and stipulated interest to be paid to the purchaser.
Any resulting deferred premium or discount is included in other assets and
amortized into operations over the estimated remaining life of the loans sold
using a method which approximates the interest method. The value assigned to the
right to service the loans is also amortized over the estimated life of the
loans.
NOTE 2 - CASH EQUIVALENTS AND INVESTMENT SECURITIES
U.S. Government and agency obligations, municipal securities and other
securities are summarized as follows:
(Dollars in thousands) December 31, 1994 Book Value Unrealized Gains Unrealized Losses Market Value
-------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $10,420 $-- $ 115 $10,305
U.S. Agency obligations:
Mortgage-backed obligations 8,989 -- 415 8,574
Fixed and variable rate notes 34,348 3 1,563 32,788
State and political subdivisions 1,482 4 2 1,484
Other mortgage-backed obligations 4,334 -- 228 4,106
----------------------------------------------------------------
Total securities held to maturity 59,573 7 2,323 57,257
----------------------------------------------------------------
Other securities
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 703 -- -- 703
----------------------------------------------------------------
Total other securities 933 -- -- 933
----------------------------------------------------------------
Total securities $60,506 $ 7 $2,323 $58,190
================================================================
Weighted average yield /(1)/ 6.0%
----------------------------------------------------------------
December 31, 1993
U.S. Treasury obligations $12,031 $11 $ 10 $12,032
U.S. Agency obligations - fixed and variable rate notes 21,035 43 74 21,004
State and political subdivisions 2,374 43 -- 2,417
Other mortgage-backed obligations -- -- -- --
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 672 -- -- 672
----------------------------------------------------------------
Total securities held for investment $36,342 $97 $ 84 $36,355
----------------------------------------------------------------
Weighted average yield /(1)/ 3.9%
================================================================
/(1)/ Yield includes unadjusted tax exempt obligations. The tax equivalent yield
was 6.1% and 4.1% as of December 31, 1994 and 1993, respectively.
Cupertino National Bancorp
Notes to Consolidated Financial Statements (Continued)
Securities with a carrying value of $24,868,000 and $11,935,000 at December 31,
1994 and 1993, respectively were pledged to secure public deposits and for other
purposes required by law or contract.
The following table shows book value and estimated market value of the
Company's investment securities by maturities at December 31, 1994 (yields on
tax-exempt obligations have not been adjusted to a tax equivalent basis).
1996 2000 2005 and
(Dollars in thousands) 1995 through 1999 through 2005 Thereafter
---------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 7,457 $ 2,963 $ 0 $ 0
U.S. Agency obligations
Mortgage-Backed obligations /(1)/ -- 111 2,851 6,027
Fixed and variable rate notes /(2)/ 5,833 19,050 6,472 2,993
State and Political Subdivisions 1,482 -- -- --
Other Mortgage-Backed obligations /(1)/ -- -- -- 4,334
-----------------------------------------------------
Total investment securities (held to maturity) 14,772 22,124 9,323 13,354
-----------------------------------------------------
Other securities
Federal Reserve Bank stock 230 -- -- --
Federal Home Loan Bank stock 703 -- -- --
-----------------------------------------------------
Total other securities 933 0 0 0
-----------------------------------------------------
Total securities $15,705 $22,124 $9,323 $13,354
-----------------------------------------------------
Market value 15,524 21,040 8,860 12,766
-----------------------------------------------------
Weighted average yield 4.5% 5.3% 7.4% 7.8%
=====================================================
(1) Mortgage-backed securities are shown at contractual maturity, however the
average life of these Mortgage-backed securities may be much less due to
principal prepayments.
(2) Certain U.S. Agency fixed and variable rate note obligations may be called,
without penalty, at the discretion of the issuer. This may cause the actual
maturities to differ significantly from the contractual
maturity dates.
Federal Reserve Bank Stock and Federal Home Loan Bank Stock are investments
required to be maintained in the Federal Reserve Bank and Federal Home Loan Bank
to maintain membership and support activity levels.
NOTE 3 - LOANS
The following is a summary of loans by category as of December 31:
(Dollars in thousands) 1994 1993
---------------------------------------------------------------
Commercial $ 81,695 $ 77,699
Real estate construction and land 18,117 19,090
Real estate term 13,133 12,075
Consumer and other 21,059 18,214
-------------------
Total 134,004 127,078
Less deferred loan fees and discounts 847 923
Less allowance for loan losses 2,918 2,247
-------------------
Total loans, net 130,239 123,908
Loans held for sale 5,383 7,625
-------------------
Total loans $135,622 $131,533
===================
SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" which was
subsequently amended by SFAS No. 118, effective for years beginning after
December 15, 1994, requires creditors to account for loans that are impaired
(loans where the creditor does not anticipate receiving all amounts due
according to the contractual term of the loan agreement) based primarily on the
present value of expected future cash flows discounted at the effective loan
rate or the fair value of the underlying collateral. The Bank does not expect a
material impact on its financial statements from adopting SFAS No. 114 and SFAS
No. 118.
The Bank's service area has a concentration of high technology companies, and
accordingly, the ability of any of the Bank's borrower to repay loans may be
affected by the performance of this sector of the economy. Virtually all loans
are collateralized. Generally, real estate loans are secured by real property,
and commercial and other loans are secured by bank deposits and business or
personal assets. Repayment is generally expected from the sale of the related
property for real estate construction loans and from the cash flow of the
borrower for commercial and other loans.
As discussed in Note 1, the Company originates loans guaranteed by the U. S.
Small Business Administration (SBA). The Company sells to outside investors,
usually at a price in excess of par, the guaranteed portion of these loans and
retains the remaining unguaranteed portion in its loan portfolio. When the
Company sells the guaranteed portion of such loans, it transfers the SBA
guarantee to the buyer and retains the servicing function. At December 31, 1994
and 1993, the Company serviced $23,339,122 and $15,633,230 in SBA loans,
respecively. In addition, the Company retained an interest in loans guaranteed
by the SBA in the amounts of $4,783,053, and $3,234,929, respectively, for 1994
and 1993. The Company and the SBA would share in any losses on these loans on a
pro rata basis.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for the
years ended December 31:
(Dollars in thousands) 1994 1993 1992
-------------------------------------------------------------
Balance January 1 $2,247 $1,748 $1,470
Loans charged off (1,012) (1,228) (727)
Recoveries 63 48 103
Provision for loan losses 1,620 1,679 902
-------------------------
Balance December 31 $2,918 $2,247 $1,748
=========================
The following table sets forth non-performing loans as of December 31, 1994,
1993 and 1992. Non-performing loans are defined as loans which are on non-
accrual status, loans which have been restructured, and loans which are 90 days
past due but are still accruing interest. Interest income foregone on the
following non-performing loans totaled $275,000, $129,000 and $23,000 for the
years ended December 31, 1994, 1993 and 1992, respectively. Interest income
recognized on the non-performing loans approximated $50,000, $25,000 and $25,000
for the years ended December 31, 1994, 1993 and 1992, respectively .
(Dollars in thousands) 1994 1993 1992
-------------------------------------------------------------------------
Non-accrual loans $3,244 $ 997 $513
Accruing loans past due 90 days or more 1,371 1,903 --
Restructured loans -- -- --
------------------------------
Total 4,615 $2,900 $513
==============================
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - OTHER REAL ESTATE OWNED
Other real estate owned consists of the following at December 31:
(Dollars in thousands) 1994 1993
------------------------------------------------------------------------------
Real estate acquired through foreclosure $ 375 $ 780
Allowance for estimated losses -- (162)
-----------------
Total $ 375 $ 618
=================
The following summarizes other real estate operations for the years
ended December 31:
(Dollars in thousands) 1994 1993 1992
------------------------------------------------------------------------------
Income (loss) from:
Real estate operations, net $ (6) $ 10 $ 170
Provision for estimated losses (42) (231) (90)
--------------------------
Real estate owned, net (48) $ (221) $ 80
==========================
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, are comprised of the following:
(Dollars in thousands) 1994 1993
------------------------------------------------------------------------------
Leasehold improvements $ 993 $ 889
Furniture and equipment 2,463 2,050
Automobiles 140 141
------------------
Total 3,596 3,080
Accumulated depreciation and amortization (2,162) (1,672)
-------------------
Premises and equipment, net $ 1,434 $ 1,408
==================
NOTE 7 - SHORT TERM BORROWINGS
Short term borrowings are detailed as follows (in thousands):
December 31 1994 1993 1992
------------------------------------------------------------------------------
Federal funds purchased
Balance at December 31 $ 7,000 $ -- $ --
Average balance 1,800 277 55
Maximum amount outstanding at any month end 12,000 -- --
Average interest rate:
During the year 4.18% 3.56% 3.68%
At December 31 6.50% -- --
Securities sold under agreements to repurchase
Balance at December 31 $10,256 -- --
Average balance 5,908 -- --
Maximum amount outstanding at any month end 24,153 -- --
Average interest rate:
During the year 5.13% -- --
At December 31 6.29% -- --
Federal funds purchased generally mature the day following the date of
purchase while securities sold under agreements to repurchase generally mature
within 30 days from the various dates of sale. The Bank has unused Federal Funds
Purchased lines of $10 million at December 31, 1994.
NOTE 8 - INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31:
(Dollars in thousands) 1994 1993 1992
-------------------------------------------------------------
Current:
Federal $ 518 $ 539 $ 890
State 88 245 388
-----------------------
Total current expense 606 784 1,278
-----------------------
Deferred:
Federal 125 (148) (25)
State 3 (98) (56)
-----------------------
Total deferred expense (benefit) 128 (246) (81)
-----------------------
Total expense $ 734 $ 538 $1,197
=======================
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components on
the Company's deferred income tax assets (liabilities) as of December 31, 1994
and 1993 are as follows:
(Dollars in thousands) 1994 1993
-------------------------------------------
Loan loss reserves $ 904 $ 768
OREO valuation -- 78
Deferred compensation 48 65
State income taxes 243 19
Other (124) 13
---------------
Deferred tax asset $1,071 $ 943
===============
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes" on a prospective basis effective January 1,
1993. This standard supersedes Accounting Principles Board Opinion (APB) No.11
which was previously used by the Company to account for income taxes. There was
no cumulative effect on the Company's 1993 financial statements of adopting SFAS
No. 109. Due to the availability of net operating loss carrybacks, no valuation
allowance under SFAS No. 109 has been provided in 1994 and 1993. For the year
ended December 31, 1992, the Company accounted for income taxes in accordance
with APB No. 11. The components of the deferred tax expense (benefit), which
results from differences in the recognition of certain items for tax and
financial reporting purposes, were as follows:
Cupertino National Bancorp
Notes to Consolidated Financial Statements (Continued)
(Dollars in thousands) 1994 1993 1992
----------------------------------------------------------------------------
Provision for loan losses $ 136 $ (97) $(116)
Cash basis income tax reporting -- (12) 19
State income taxes 224 93 (6)
Other (232) (230) 22
----- ----- -----
Total deferred expense (benefit) $ 128 $(246) $ (81)
===== ===== =====
A reconciliation from the statutory income tax rate to be consolidated effective
income tax rate follows, for the years ended December 31:
1994 1993 1992
--------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 34.0%
California franchise tax expense, net of federal
income tax benefit 2.9 6.9 7.4
Exempt income (4.1) (3.2) (2.1)
Other, net 1.2 (1.2) 1.1
----- ---- ----
Effective income tax rate 35.0% 37.5% 40.4%
===== ==== ====
NOTE 9 - OTHER OPERATING EXPENSES
The major components of other noninterest expense are as follows for the years
ended December 31:
(Dollars in thousands) 1994 1993 1992
-----------------------------------------------------------------------------
Supplies $ 197 $ 153 $ 99
Telephone 163 113 76
Director fees 145 142 113
Insurance 144 137 54
Correspondent bank charges 118 106 87
Advertising 87 88 83
Other 646 686 518
------ ------ ------
Total $1,500 $1,425 $1,030
====== ====== ======
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has stock option plans under which incentive and non-statutory stock
options may be granted to employees and directors to purchase up to 346,802
shares of common stock at prices not less than the fair market value of such
stock at the date the options are granted.
Options generally expire 10 years after the date of grant and generally
become exercisable in annual installments of 20 percent to 33 percent. As of
December 31, 1994 options for 235,661 shares were exercisable and options for
28,550 shares were available for future grant. Additional stock option
information follows:
Options outstanding
Number of shares Option price per share
---------------------------------------------------------------------------
Balance, January 1, 1992 338,500 $3.98 - $ 8.10
Granted 24,245 6.66 - 8.02
Exercised (15,494) 3.98 - 5.50
Canceled (4,173) 5.50 - 8.10
------------------------------------
Balance, December 31,1992 343,078 $4.24 - $ 8.10
Granted 12,806 7.99 - 10.65
Exercised (18,781) 4.54 - 8.10
Canceled (6,707) 7.60 - 8.10
-------------------------------------
Balance, December 31,1993 330,396 $4.24 - $10.65
Granted 75,465 8.81 - 10.00
Exercised (76,888) 4.67 - 8.50
Canceled (10,721) 4.46 - 9.88
-------------------------------------
Balance, December 31, 1994 318,252 $4.25 - $10.66
=====================================
Adjusted for stock dividends in 1994, 1993 and 1992
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary as a contribution to the
plan. The Company matches the employee contributions at a rate set by the Board
of Directors (currently 50% of the first 6% of deferral of an individual's
salary). The matching contribution vests ratably over the first three years of
employment. The Company contributed $72,500 to the plan in 1994, $67,000 in 1993
and $52,000 in 1992.
The Company has established an Employee Stock Purchase Plan under section
423(b) of the tax code which allows eligible employees to set aside up to 10% of
their compensation toward the purchase of the Company's stock. Under the plan,
the purchase price is 85% of the lower of the fair market value at the beginning
or end of each three month offering period. During 1994, employees purchased
8,238 shares of common stock for an aggregate purchase price of $69,000 compared
to the purchase of 7,604 shares of common stock for an aggregate purchase price
of $63,000 in 1993. At December 31, 1994, 15,486 shares were reserved for future
issuance under the plan.
NOTE 11 - RELATED PARTY TRANSACTIONS
Loans are made to executive officers, directors and their affiliates, subject
to approval by the Directors' Loan Committee and the Board of Directors. An
analysis of total loans to related parties for the year ended December 31, 1994
is shown below:
(Dollars in Thousands)
---------------------------------------------------------------------------
Balance, January 1, 1994 $ 2,435
Additions 2,519
Repayment (1,967)
-------------------------------------
Balance December 31, 1994 $ 2,987
=====================================
Three of the Company's directors are also directors (one of whom is the
principal shareholder) of a title company which has a deposit relationship with
the Bank. Average monthly deposits from this title company ranged between $ 3.9
million and $ 12.6 million for the year. At December 31, 1994 the deposit
balance from this title company was $ 4.6 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases the facilities from which it operates all of its activities.
Future minimum lease commitments under all non-cancelable operating leases are
as follows:
(Dollars in Thousands) 1994
----------------------------------
1995 $ 666
1996 654
1997 665
1998 644
1999 608
1,614
------
Total $4,851
======
Total rent expense was approximately $589,000, $475,000 and $393,000, for
1994, 1993, and 1992, respectively.
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. At December 31, 1994, commitments to fund loans and outstanding
standby letters of credit were approximately $60.6 million and $2.5 million,
respectively. At December 31, 1994 no losses are anticipated as a result of
these commitments.
Loan commitments which typically have fixed expiration dates and require the
payment of a fee are typically contingent upon the borrower meeting certain
financial and other covenants. Approximately $17.4 million of these commitments
relate to real estate construction and land loans and are expected to fund
within the next 12 months. However, the remainder relate primarily to revolving
lines of credit or other commercial loans, and many of these commitments are
expected to expire without being drawn upon, therefore the total commitments do
not necessarily represent future cash requirements. The Bank evaluates each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt or equity
securities, or business assets.
Stand-by letters of credit are conditional commitments written by the Bank to
guarantee the performance of a client to a third party. These guarantees are
issued primarily relating to purchases of inventory by the Bank's commercial
clients, and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients, and the Bank accordingly uses
evaluation and collateral requirements similar to those for loan commitments.
Virtually all such commitments are collateralized.
The Company is a defendant in a number of lawsuits, the most significant of
which alleges that the Company did not perform its fiduciary duties as trustee
properly and, as a result, the trust incurred losses on real estate investments
that were purchased. The plaintiff is seeking damages of approximately $2.2
million related to this lawsuit. The Company's management believes ultimate
liability with respect to any of the aforementioned matters will not have a
material adverse effect on the consolidated financial statements of the Company.
NOTE 13 - REGULATORY MATTERS
The Company and the Bank are subject to capital guidelines issued by the Federal
Reserve Board of Governors (the "FRB") and the Office of the Comptroller of the
Currency (the OCC). These agencies have established uniform risk-based capital
guidelines for commercial banks. Under this framework, balance sheet assets and
certain off balance sheet commitments are weighted by risk and compared to
capital. Capital is assigned to tiers, with common equity included in Tier 1
capital and the allowance for loan losses included in Tier II capital.
Additionally, regulatory agencies have adopted a 3% minimum leverage ratio of
Tier 1 capital to total assets. Banks anticipating significant asset growth are
expected to maintain leverage ratios in excess of the minimum, between 4% to 5%.
The capital ratios, as detailed below, for the Company exceed the regulatory
guidelines at December 31, 1994, 1993 and 1992. The capital ratios for the
Company are presented in the following table:
1994 1993 1992
------------------------------------------------------
Capital ratios:
Tier 1 leverage 8.4% 8.4% 8.8%
Regulatory minimum 3.0% 3.0% 3.0%
Tier 1 risk-based capital 10.8% 10.6% 10.5%
Regulatory minimum 4.0% 4.0% 4.0%
Total risk-based capital 12.1% 12.1% 11.7%
Regulatory minimum 8.0% 8.0% 8.0%
=====================
Banks that exceed a leverage ratio of 5%, a Tier 1 risk-based capital ratio of
6% and a total risk-based capital ratio of 10% are deemed to be "well-
capitalized" under FDICIA's "prompt corrective action" regulations.
NOTE 14 - RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
One of the principal sources of cash for the Company is dividends from its
subsidiary Bank. Total dividends which may be declared by the Bank without
receiving prior approval from regulatory authorities are limited to the lesser
of the Bank's retained earnings or the net income of the Bank for the latest
three fiscal years, less dividends previously declared during that period. Under
these restrictions and considering minimum regulatory capital requirements, the
Bank is able to declare dividends not exceeding $4,000,000 at December 31, 1994.
The Bank is subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In particular,
the Bank is prohibited from lending to the Company unless the loans are secured
by specified types of collateral. Such secured loans and other advances from the
Bank are limited to 10% of the Bank's Shareholders' Equity, or a maximum of
$1,685,000 at December 31, 1994. No such advances were made during 1994.
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The financial statement of Cupertino National Bancorp (parent company only)
follow:
Parent Company Only Statement of Financial Condition
(Dollars in thousands) December 31, 1994 1993
------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 883 $ 690
Investment in bank 16,851 15,472
Other assets 305 100
-------------------
Total $18,039 $16,262
===================
Liabilities and shareholders' equity:
Other liabilities $ 2 $ 43
-------------------
Total liabilities $ 2 $ 43
-------------------
Shareholders' equity:
Common stock 14,901 13,582
Retained earnings 3,136 2,637
-------------------
Total shareholders' equity 18,037 16,219
-------------------
Total liabilities and shareholders' equity $18,039 $16,262
===================
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Parent Company Only Statements of Operations
(Dollars in thousands) Years ended December 31, 1994 1993 1992
------------------------------------------------------------------------------
Income:
Interest income $ 17 $ 14 $ 17
Other income 14 12 22
-----------------------
Total 31 26 39
-----------------------
Expenses:
Occupancy and equipment 410 384 333
Less rentals received from
the bank (409) (384) (328)
-----------------------
Net occupancy and equipment 1 -- 5
Other expense 46 20 17
-----------------------
Total 47 20 22
-----------------------
Income before income taxes and equity
in undistributed net income of the Bank (16) 6 17
Income tax expense -- 2 16
-----------------------
Income (loss) before equity in undistributed
net income of the Bank (16) 4 1
Equity in undistributed net
income of the Bank 1,379 876 1,762
-----------------------
Net income $1,363 $ 880 $1,763
=======================
Parent Company Only Statements of Cash Flows
(Dollars in thousands) Years ended December 31, 1994 1993 1992
------------------------------------------------------------------------------
Cash flows-operating activities:
Net income $ 1,363 $ 880 $1,763
Reconciliation of net income to net cash
from operations:
Equity in undistributed net income of the Bank (1,379) (876) (1,762)
Other assets (205) (100) 5
Other liabilities (41) -- 16
-------------------------
Operating cash flows, net (262) (96) 22
-------------------------
Cash flows -- financing activities:
Stock issued 613 169 104
Payment of stock dividend fractional shares (2) (4) (4)
Payment of cash dividend (156) -- --
-------------------------
Financing cash flows, net 455 165 100
-------------------------
Net increase in cash and cash equivalents 193 69 122
Cash and cash equivalents at the beginning of year 690 621 499
-------------------------
Cash and cash equivalents at end of the year $ 883 $ 690 $ 621
=========================
Cupertino National Bancorp
Consolidated Balance Sheets
NOTE 16-FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments of the Company as of December
31, 1994 and 1993 are as follows:
The estimated fair value of financial instruments of the Company as of
December 31, 1994 and 1993 are as follows:
1994 1993
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
-------------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 19,726 $19,726 $ 14,350 $ 14,350
Other short-term investment securities -- -- 3,097 3,097
Investment securities 60,506 58,190 36,342 36,358
Loans, net 130,239 130,000 123,908 124,000
Loans held for sale 5,383 5,383 7,625 7,625
---------------------------------------------------
Total loans, net $135,622 $135,383 $131,533 $131,625
Financial liabilities:
Deposits:
Demand, non-interest-bearing $ 53,880 $53,880 $ 62,751 $ 62,751
NOW 8,331 8,331 6,769 6,769
Money Market Demand Accounts 73,623 73,623 60,803 60,803
Savings 5,951 5,951 6,343 6,343
Other time certificates 19,417 19,410 7,799 7,810
Time certificates, $100 and over 25,520 25,513 31,275 31,309
---------------------------------------------------
Total deposits $186,722 $186,708 $175,740 $175,785
Off balance sheet financial instruments
Commitments to extend credit $ 60,612 $60,612 $ 46,681 $ 46,681
Standby letters of credit 2,481 2,481 2,082 2,082
---------------------------------------------------
The estimated fair values do not represent actual amounts that may be realized
upon any sale or liquidation of the related assets or liabilities. The values do
not give effect to discounts or premiums to fair value which may occur when
financial instruments are sold in large quantities. The fair value amounts
presented above represent the Company's best estimate of fair value using the
methodologies discussed below:
Cash and cash equivalents -- The carrying value reported in the balance sheet
for cash and cash equivalents approximates fair value.
Securities -- Fair values for investment securities are based on quoted market
prices.
Loans -- The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Deposit liabilities -- The fair value for all deposits without fixed maturities
is considered to be equal to carrying value. The fair value for time deposits is
based upon the appropriate discount rates for similar pools.
Off-balance sheet instruments -- The fair value of commitments to extend credit
and standby letters of credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counter parties. For fixed-
rate loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The Bank's commitments to
extend credit approximate fair value at December 31, 1994 and 1993.
Cupertino National Bancorp
Report of Independent Accountants
The Board of Directors and Shareholders, Cupertino National Bancorp:
We have audited the accompanying consolidated balance sheet of Cupertino
National Bancorp and Subsidiary as of December 31, 1994, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Cupertino
National Bancorp and Subsidiary for the years ended December 31, 1993 and 1992
were audited by other auditors, whose report, dated January 18, 1994, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Cupertino National
Bancorp and Subsidiary at December 31, 1994, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
San Francisco, California
January 30, 1995