EXHIBIT 13.1
1995 Annual Report
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[LOGO]
C
N
B
CUPERTINO NATIONAL
BANCORP
Mission Statement
Cupertino National Bancorp is a value-added California financial services
company dedicated to providing the highest standard of service to our clients
through an empowered professional staff, while achieving a premier return for
our shareholders.
About the Cover
Monolithic Hoover Tower on the Stanford University campus stands as a symbol of
the intellectual prowess and unbridled creativity that spawned the world-
renowned Silicon Valley. Cupertino National Bank & Trust is expanding to better
serve the businesses and residents of the highly desirable Peninsula area with
the Spring 1996 opening of our Emerson office in downtown Palo Alto.
Financial Highlights
(Dollars in thousands, except per share amounts) 1995 1994 1993 1992 1991
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Results of operations:
Interest income $ 20,293 $ 15,361 $ 13,333 $ 12,426 $ 12,634
Interest expense 7,354 4,279 3,166 3,542 4,988
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Net interest income 12,939 11,082 10,167 8,884 7,646
Provision for loan losses 681 1,620 1,679 902 382
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Net interest income after provision
for loan losses 12,258 9,462 8,488 7,982 7,264
Other income 1,902 3,079 3,154 1,664 890
Operating expenses 13,690 10,444 10,224 6,686 5,271
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Income before income taxes 470 2,097 1,418 2,960 2,883
Income tax expense 157 734 538 1,197 1,140
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Net Income $ 313 $ 1,363 $ 880 $ 1,763 $ 1,743
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Per share data:(1)
Net income per primary share $ 0.16 $ 0.76 $ 0.50 $ 1.05 $ 1.04
Net income per fully diluted share $ 0.16 $ 0.76 $ 0.50 $ 1.05 $ 1.04
Cash dividend per share $ 0.20 $ 0.10 -- -- --
Dividend payout ratio 125% 13% -- -- --
Book value per share $ 10.32 $ 10.53 $ 10.02 $ 9.55 $ 8.49
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Balance at year end:
Total assets $259,099 $223,144 $192,574 $172,526 $140,607
Loans, net 160,693 135,622 131,533 126,748 104,191
Deposits 236,094 186,722 175,740 156,550 123,975
Other borrowings -- 17,256 -- -- --
Subordinated debt 3,000 -- -- -- --
Shareholders' equity 18,672 18,037 16,219 15,174 13,311
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Average daily balances:
Total assets $229,903 $198,162 $183,297 $157,535 $124,810
Loans, net 143,280 127,264 127,210 114,780 96,961
Deposits 197,396 172,385 166,581 142,451 111,564
Shareholders' equity 18,326 17,410 15,337 14,379 12,434
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Selected statistics:
Return on average assets 0.1% 0.7% 0.5% 1.1% 1.4%
Return on average shareholders' equity 1.7% 7.8% 5.7% 12.3% 14.0%
Average equity to average assets 8.0% 8.8% 8.4% 9.1% 10.0%
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(1) Per share amounts have been restated to reflect stock dividends of 10% in
December 1995, and 5% each, in May 1994, June and December 1993 and in May and
December 1992 and 1991.
To Our Shareholders, Clients and Friends
Even as continued deregulation and consolidation cause the financial industry to
become more competitive, exciting opportunities are emerging in many areas. In
1995, we positioned ourselves to move quickly and effectively so we can
capitalize on the most promising of these opportunities as they arise.
For Cupertino National Bancorp (CNB), 1995 can be divided into two distinct
halves. During the first six months of the year, we faced considerable
challenges. The closing of our mortgage division and termination of merger
discussions with another bank in the first quarter resulted in charges against
earnings of approximately $500,000. We also reached a litigation settlement in
the second quarter, which resulted in a charge of $1.7 million.
But beginning in the third quarter of 1995, the company rebounded
strongly, with excellent asset growth, solid performance from several of our
divisions, and a healthy increase in profits quarter-to-quarter. The improvement
in our operating results, combined with the continued upswing of the economy,
gives us solid reasons to be optimistic about 1996.
Loans
(in millions)
[CHART APPEARS HERE]
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Modest profits
For the year ended December 31, 1995, CNB recorded net income of $313,000, or
$.16 per share, compared to $1.4 million, or $.76 per share, in 1994. Without
the charges mentioned above, the company's 1995 net income would have increased
to $1.65 million.
Total assets rose 16% to $259.1 million, while deposits increased by nearly
$50 million, or 26%, to $236.1 million. With the addition of our new Executive
Vice President and Senior Lending Officer, David Hood, in 1995, loans grew by
more than $30 million, or 23%, to $160.7 million. Equally important, the quality
of the bank's assets showed significant improvement over last year. Total non-
performing assets declined from $5 million at year-end 1994 to $3.3 million at
the end of 1995, and total classified assets fell from $13.1 million to $7.9
million over the same period.
[CHART APPEARS HERE]
In the fall of 1995, CNB was successful in adding $3.0 million to our
capital base through a private placement of subordinated debt. A substantial
portion of the offering was subscribed by directors, officers and other
accredited investors, an indication of their confidence in our future. Our
strong capital position -- which according to regulatory guidelines classifies
the holding company and bank as a well-capitalized financial institution --
enables us to more readily take advantage of growth opportunities in our market
area and will be a key to our success in 1996.
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Cupertino National Bancorp's vision is to be a technologically advanced $1
billion family of financial services companies headquartered in the Silicon
Valley, serving clients throughout the United States.
In 1995, your company made progress in a number of areas that more effectively
position us to deliver value to shareholders in the years ahead. Recognizing an
opportunity in the marketplace, in the second quarter of the year we invested in
a major initiative to expand our Trust Group, with the objective of creating the
strongest locally based trust operation in Northern California.
We added several new officers to our team, led by Hall Palmer, who was
named Executive Vice President and Senior Trust Officer of the Bank. The results
of this reformation were immediate and dramatic. The Trust Group's assets under
management soared 72% to $270 million by year-end, with most of that growth
occurring since May. Further, we expect this rapid rise to continue in 1996 as
we penetrate the Palo Alto marketplace with a new office scheduled to open this
spring.
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In the 1950s and 1960s, the Santa Clara Valley was primarily an agricultural
region, filled with rows upon rows of fruit trees.
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Another business unit that had a strong year was Venture Lending. Founded
in March as the successor to our Emerging Growth Industries division, Venture
Lending provides innovative debt financing and other financial services tailored
to the needs of startup and growth-stage companies.
Under the direction of Senior Vice President and Managing Director Daniel
Michener, the division got off to a fast start, closing 29 transactions totaling
more than $34 million in financing commitments in its first ten months. This
successful launch helped Venture Lending begin turning a profit in only its
second full quarter in business. To further expand our range of financing
services, in October the Bank established an Asset-Based Lending division.
Designed to serve companies that may be undercapitalized or experiencing
temporary operating weakness, the new division specializes in both asset-based
loans and factoring.
To provide a steady deal flow for the new division and to optimize
collateral monitoring controls, CNB has set up participation arrangements with
two Bay Area financial services companies: an independent asset-based lender in
Palo Alto; and an independent factoring company based in Cupertino.
[PHOTOGRAPH]
Today, this rich and fertile valley remains an idyllic place to live, with an
excellent climate, vibrant economy and many educational and cultural
opportunities.
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New Emerson Office to Open
Another major development that started in 1995 and should be completed by early
spring is the construction of our new Emerson office in downtown Palo Alto. The
full-service office, our fourth, is designed to provide increased convenience
for small businesses, professionals and other individuals in downtown Palo Alto
and surrounding neighborhoods.
In addition to offering business and consumer banking services, the Emerson
office will serve as the headquarters for our fast-growing Trust Group,
affording higher visibility and better access to the desirable Peninsula
marketplace. We look forward to providing a quality banking and trust
alternative in the Palo Alto marketplace.
[PHOTOGRAPH]
When it opens in May, CNR's Emerson office, at 400 Emerson Street in Palo Alto,
will serve the small businesses, professionals, and residents located in or near
the downtown area.
Other key accomplishments in 1995 include:
o Introduction of CNB Cash Manager, a PC-based cash management service
that literally puts the bank at our clients' fingertips. The service
was well received in 1995 and we expect significant growth in usage
and added features during 1996.
o Introduction of our Venture Sweep Account, which links a client's
checking account to a series of investment funds to simplify corporate
cash management requirements.
o Upgrade of our computer system to support the needs of CNB and our
clients into the next millennium.
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o Incorporation of leading edge technology in every facet of the bank's
operations. For example, Venture Lending is on the Internet's World
Wide Web, and everyone at the bank has access to e-mail over the
Internet, thus improving our communications link with our clients.
Strengthening of Our Management Team
1995 was a very successful year for CNB in building its management team for the
future. Steven C. Smith, Executive Vice President and Chief Financial Office was
promoted to Chief Operating Officer to head CNB's Executive Management Committee
in its commitment to improving operating results, continuing earning asset
growth and quality client service. Steve's promotion opened the Chief Financial
Officer position which was filled early January 1996 by Heidi Wulfe, a Certified
Public Accountant with over 20 years of financial services experience. Ms. Wulfe
was named Senior Vice President and Chief Financial Officer.
These changes combined with the addition of David R. Hood, Executive Vice
President and Senior Lending Officer and Hall Palmer, Executive Vice President
and Senior Trust Officer had significantly added to the depth and quality of
CNB's management team.
In 1995, we overcame significant obstacles to maintain our growth and
remain profitable. By continuing our focus on improving asset quality and taking
advantage of opportunities when and where they arise, we are confident that we
will continue to report significant improvements in 1996.
/s/ C. Donald Allen /s/ Glen McLaughlin
C. Donald Allen Glen McLaughlin
President and Chief Executive Officer Chairman
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In mid-January, following a tradition established by founding chairman James
Jackson, Glen McLaughlin stepped aside after a six-year term as chairman of the
board. During his tenure from 1990 through 1995, he oversaw the growth of your
company from one office to three and from $100 million to more than $250 million
in assets. He also provided invaluable service to the bank and our shareholders,
both in his official capacity as chairman and as a close personal friend. We
shall miss his leadership of the board, but are pleased that he will continue to
serve as a director.
Glen will be replaced by John Gatto, a 10-year member of the board, who has
chaired the Director's Loan Committee for the bank for 8 years. We look forward
to the significant contributions John will make during his term.
/s/ C. Donald Allen
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CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations
BUSINESS OVERVIEW
Cupertino National Bancorp (the "Company") is a California corporation and bank
holding company for Cupertino National Bank & Trust (the "Bank"), a national
bank with headquarters in Cupertino, California and regional offices in San Jose
and Palo Alto, California. Substantially all of the Company's consolidated net
income, assets and equity are derived from its investment in the Bank.
The Company's business strategy is to provide quality financial
services to middle market and emerging growth businesses, real estate
construction and development companies and individuals, executives and
professionals located in Cupertino, San Jose, Palo Alto and the surrounding
communities of Santa Clara and San Mateo Counties. The financial services
include corporate and personal relationship banking, residential lending, SBA
lending and personal and corporate trust services.
The following discussion and analysis is intended to supplement and
highlight information contained in the accompanying consolidated financial
statements and the financial highlights presented elsewhere in this report.
RESULTS OF OPERATIONS
Net Income Summary
The Company ended 1995 with net income of $313,000, a decrease of 78% from 1994.
Net income for 1994 of $1.4 million was a 59% increase over 1993's net income of
$880,000. Net income per common and common equivalent share was $.16 in 1995,
compared with $.76 in 1994 and $.50 in 1993. The return on average assets and
average shareholders' equity were 0.14% and 1.71% in 1995, compared with 0.70%
and 7.80% in 1994 and 0.50% and 5.70% in 1993, respectively.
The decrease in net earnings in 1995 includes a loss of approximately
$1.7 million related to a litigation settlement recorded in the second quarter
of 1995 and approximately $500,000 in charges related to the closing of the
mortgage division and the termination of merger discussions with another bank in
the first quarter of 1995. Excluding these charges, net income for the year
would have been $1.65 million. The increase in net income for 1994 was primarily
due to an increase in net interest income in 1994 compared to 1993.
Net Interest Income
Net interest income for 1995 was $12.9 million, compared to $11.1 million in
1994, an increase of $1.8 million or 16.0%. Net interest income for 1994
increased $.9 million or 9% over the $10.2 million in 1993. Net interest income
depends primarily on the volume of interest-earning assets and interest-bearing
liabilities in relation to the net interest spread (the difference between the
yield earned on the Company's interest-earning assets and the interest rate paid
on the Company's interest-bearing liabilities) as well as the relative balances
of interest-earning assets and interest-bearing liabilities. The smaller the
level of interest-earning assets when compared to the level of interest-bearing
liabilities, the greater the interest rate spread must be in order to achieve
positive net interest income. For 1995, the Company had $211.3 million of
average interest-earning assets compared to $179.9 million in 1994 and $165.1
million in 1993.
The following table displays the components of the Company's interest
rate spread on interest bearing funds and the effective yield for each period.
For the Years Ended December 31 1995 1994 1993
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Average rate for the period:
Interest-earning assets 9.61% 8.54% 8.07%
Interest-bearing liabilities 4.56% 3.30% 2.85%
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Spread on interest-bearing funds 5.05% 5.24% 5.22%
Contribution of interest-free funds 1.07% 0.92% 0.94%
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Effective yield for the period 6.12% 6.16% 6.16%
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CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
The effective yield in 1995 was 6.12% compared to 6.16% in 1994 and in
1993. The average rate on interest-earning assets increased from 8.54% in 1994
to 9.61% in 1995, an increase of 107 basis points. The average rate on interest-
bearing liabilities increased to 4.56% in 1995 from 3.30% in 1994, an increase
of 126 basis points. The increase in the average rate of interest-earning
assets due to the increased volume of loans and securities, and the higher
interest rates received on these assets, were partly offset by higher interest
expense rates on increased volumes of deposits and other short term borrowings.
The following table presents, for the periods indicated, the Company's
total dollar amount of interest income from average interest-earning assets and
the resultant yields, as well as the interest expense on average interest-
bearing liabilities and the resultant costs, expressed both in dollars and
rates. The table also sets forth the net interest income and the net earning
balance for the periods indicated.
INTEREST RATE SPREAD ANALYSIS
Years Ended December 31, 1995 1994 1993
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Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
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Interest-earning assets:
Loans(2) $146,650 $16,158 11.02% $127,264 $12,608 9.91% $127,210 $11,895 9.35%
Investment securities, short term
investments and cash equivalents 64,613 4,135 6.40% 52,664 2,753 5.23% 37,913 1,438 3.79%
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Total interest-earning assets(3) 211,263 20,293 9.61% 179,928 15,361 8.54% 165,123 13,333 8.07%
Noninterest-earning assets 18,640 18,234 18,174
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Total assets $229,903 $20,293 8.83% $198,162 $15,361 7.75% $183,297 $13,333 7.27%
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Interest-bearing liabilities:
Deposits:
NOW and MMDA $ 96,772 $ 3,868 4.00% $ 75,062 $ 2,192 2.92% $ 66,820 $ 1,755 2.63%
Savings deposits 6,052 202 3.34% 6,885 177 2.57% 6,677 255 3.82%
Time deposits 45,284 2,440 5.39% 40,010 1,528 3.82% 37,494 1,146 3.06%
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Total Deposits 148,108 6,510 4.40% 121,957 3,897 3.20% 110,991 3,156 2.84%
Borrowings 13,334 844 6.33% 7,788 382 4.90% 288 10 3.47%
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Total interest-bearing liabilities 161,442 7,354 4.56% 129,745 4,279 3.30% 111,279 3,166 2.85%
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Noninterest-bearing deposits 49,289 50,428 55,685
Other noninterest-bearing liabilities 846 579 996
Total noninterest-bearing liabilites 50,135 51,007 56,681
Shareholders' equity 18,326 17,410 15,337
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Total liabilities and
shareholders' equity $229,903 7,354 3.20% $198,162 4,279 2.16% 183,297 3,166 1.73%
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Net interest income; Interest rate spread(4) $12,939 5.05% $11,082 5.24% $10,167 5.22%
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Net earning balance; Net yield
on interest-earning assets(3) $ 49,821 6.12% $ 50,183 6.16% $ 53,844 6.16%
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(1) Average balances are computed using an average of the daily balances during
the period.
(2) Non-accrual loans are included in the average balance column; however, only
collected interest is included in the interest column.
(3) The net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
(4) Loan fees totaling $969, $870 and $790 are included in loan interest income
for the years 1995, 1994 and 1993, respectively.
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CUPERTINO NATIONAL BANCORP
The most significant impact on the Company's net interest income
between periods is derived from the interaction of change in the volume of and
rates earned or paid on interest-earning assets and interest-bearing
liabilities. The volume of earning dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods.
The following table presents the dollar amount of certain changes in
interest income and expense for each major component of interest-earning assets
and interest-bearing liabilities and the difference attributable to changes in
average rates and volumes for the periods indicated.
RATE/VOLUME VARIANCE ANALYSIS
Year Ended December 31, 1995 Year Ended December 31, 1994
compared with December 31, 1994 compared with December 31, 1993
favorable (unfavorable) favorable (unfavorable)
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(Dollars in thousands)(1) Volume Rate Net Volume Rate Net
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Interest income on loans $ 2,136 $ 1,414 $ 3,550 $ 5 $ 708 $ 713
Interest income on investment
securities, short-term invest-
ments and cash equivalents 765 617 1,382 771 544 1,315
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Total interest income 2,901 2,031 4,932 776 1,252 2,028
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Interest expense on deposits
NOW and MMDA (868) (808) (1,676) (241) (196) (437)
Savings deposits 28 (53) (25) (5) 83 78
Time deposits (284) (628) (912) (96) (286) (382)
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Interest expense on deposits (1,124) (1,489) (2,613) (342) (399) (741)
Interest expense on borrowings (351) (111) (462) (368) (4) (372)
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Total interest expense (1,475) (1,600) (3,075) (710) (403) (1,113)
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Increase in net interest income $ 1,426 $ 431 $ 1,857 $ 66 $ 849 $ 915
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(1) In this analysis, the unallocated change due to the volume/rate variance
has been allocated to volume.
The Company has non-interest bearing liabilities on which it pays for
certain client services expense. These expenses include messenger, check
supplies and other related items and are included in operating expenses. If
these costs had been included in interest expense, the impact of these expenses
on the Company's net interest spread and net yield on interest earning assets
would have been as follows:
(Dollars in thousands) Years Ended December 31 1995 1994 1993
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Non-interest bearing demand deposits $49,289 $50,428 $55,685
Client Service expense(1) 337 376 478
Client Service cost annualized 0.68% 0.75% 0.86%
Impact on Net Yield
Net yield on interest earning assets 6.12% 6.16% 6.16%
Impact of client services (.16) (.21) (.29)
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Adjusted net yield(2) 5.96% 5.95% 5.87%
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(1) Included in client services expense are $18,000, $94,000 and $187,000 for
1995, 1994 and 1993, respectively, related to a title company which is
considered to be a related party.
(2) Non-interest bearing liabilities are included in the cost of funds
calculation to determine adjusted net yield on interest-earning assets.
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CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
The impact on the net yield on interest earning assets is caused by
off-setting net interest income by the cost of client service expenses, which
reduces the yield on interest earning assets. The cost for client service
expense is trending down and reflects the Company's efforts in managing its
client service expense and also reflects a lower earnings credit rate.
The trend of interest rates in the economy continued to move downward
during the last half of 1995. This trend may continue during the first half of
1996 and then level off, as the Federal Reserve Board attempts to curb inflation
without limiting growth. If interest rates remain relatively flat, the Bank's
net interest margin should remain stable. However, as interest rates move
downward, net interest income is negatively impacted. The increase in net
interest income in 1995 was mainly due to an increase in the loan and investment
portfolios' interest income, net of the related funding cost. The increase in
net interest income in 1994 was primarily due to an increased volume of interest
earning assets, as well as an increase in the spread between the average rates
received on interest earning assets and the average rates paid on interest
bearing liabilities.
Average earning assets were $212.9 million in 1995, compared to $179.9
million in 1994, and $165.1 million in 1993. The growth in earning assets was
concentrated in the loan portfolio as the Bank focused its efforts in deploying
the Bank's funds into loans because of the higher returns than could be achieved
on alternative investment opportunities. Average loans increased in 1995 to
$146.7 million from $127.3 million in 1994 and $127.2 million in 1993. Average
securities also increased in 1995 to $64.6 million from $52.7 million in 1994
and $37.9 million in 1993.
The average yield on loans was 11.02% in 1995, compared to 9.91% in
1994 and 9.35% in 1993. The yield on loans increased due to the mix and volume
of loans and improved pricing on loan products. The Company experienced loan
growth in all loan categories in 1995, most notably in real estate term and
construction lending which accounted for $15.7 million or 52% of the increase.
In 1994, the Company's mix of loans was relatively stable when compared to 1993.
The Company anticipates that construction activity will continue to improve with
the local economy in 1996 and that real estate term and construction lending
volumes will increase in 1996.
Other earning assets consist of investment securities, overnight
federal funds sold, and other short-term investments, such as banker's
acceptances and commercial paper. These investments are maintained to provide
diversity and stability to the Bank's income stream, as well as to meet the
liquidity requirements of the Bank and to meet pledging requirements on certain
deposits. These investments typically have a lower yield than loans. The average
yield on other earning assets increased to 6.40% in 1995 from 5.23% in 1994 and
from 3.79% in 1993, as the Company adjusted the composition of its investment
portfolio to improve net interest income and slightly extended the average
maturity of the investment portfolio.
Interest expense increased during 1995 to $7.4 million from $4.3
million in 1994, compared to $3.2 million in 1993. The increase in 1995 was due
to both higher rates and increased volumes of interest bearing deposits and
borrowings. Average interest bearing deposits increased by $26.2 million in 1995
compared to an $11.0 million increase in 1994, while average borrowings
increased by $5.5 million in 1995 compared to 7.5 million in 1994.
Non-interest bearing liabilities averaged $50.1 million in 1995,
compared with $51.0 million in 1994, and $56.7 million in 1993.
Provision for Loan Losses
The provision for loan losses is the annual cost of providing an allowance or
reserve for future losses on loans. The loan loss provision amount for each year
is dependent on many factors, including loan growth, net charge-offs, changes in
the composition of the loan portfolio, delinquencies, management's assessment of
the quality of the loan portfolio, the value of the underlying collateral on
problem loans and the general economic conditions in the Bank's market area. The
Bank performs a monthly assessment of the risk inherent in its loan portfolio,
as well as a detailed review of each asset determined to have identified
weaknesses. Based on this analysis, which includes reviewing historical loss
trends, current economic conditions, industry concentrations and specific
reviews of assets classified with identified weaknesses, the Bank provides
reserves for potential losses. The reserves have specific allocations for
credits where the probability of a loss can
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CUPERTINO NATIONAL BANCORP
be defined and reasonably determined, while the balance of the reserve
allocations are based on historical data, delinquency trends, economic
conditions in the Bank's market area and industry averages. The provision for
loan losses in 1995 was $681,000 compared to $1.6 million in 1994 and $1.7
million in 1993. The decrease in the provision for loan losses in 1995 reflects
the Bank's improved credit quality, as it continued to experience reductions in
classified and non-performing assets. The larger loan loss provisions in 1994
and 1993 when compared to 1995 reflected the weakness in the economic conditions
within the Bank's market area and the credit risk inherent in its loan portfolio
during that time period.
Other Income
Total other income decreased to $1.9 million in 1995 compared to $3.1 million in
1994 and to $3.2 million in 1993. Other income consists of depositor service
charges, fees received for services provided or obtained in the loan approval
process, fees received for trust services, the net premium and servicing value
recognized upon the sale of the guarantee portion of SBA loans, revenue from the
origination and sale of residential mortgages and other miscellaneous income.
The following table summarizes the sources of other income in the years
indicated:
(Dollars in thousands) 1995 1994 1993
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Gain on sale of mortgage loans $ 137 $ 993 $1,525
Gain on sale of SBA loans 366 685 435
Trust fees 710 593 494
Loan documentation fees, net 103 276 284
Depositor service fees 291 267 252
Other 295 265 164
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Total $1,902 $3,079 $3,154
==================================
The largest portion of the decrease in other income in 1995 and 1994 is
due to the decline in the activities of the mortgage banking business unit. The
division generated $137,000 in gains on the sale of mortgage loans in 1995,
compared to $993,000 in 1994 and $1,525,000 in 1993. In early 1995, the Company
determined to close the mortgage banking business unit due to the sharp rise in
interest rates during 1994 and the impact the rate rise had on fundings.
Loan documentation income, which represents the charge to clients for
expenses incurred by the Bank to document and process loans, decreased to
$103,000 for 1995, as compared to $276,000 in 1994 and $284,000 in 1993. The
decrease in 1995 as compared to 1994, is primarily attributable to a reduction
in the quantity of loan originations from the mortgage banking business unit
during 1995.
Fees received by the Trust Department of the Bank increased to $710,000
in 1995, as compared to $593,000 in 1994, and $494,000 in 1993. Trust fees for
1995 increased by 20% over 1994 as the Trust Department had approximately $275
million in total assets at December 31, 1995, compared with approximately $157
million in 1994 and approximately $118 million in 1993. The increase in trust
fee income is directly related to the Company's decision to increase its
investment in the trust business. During 1995, the Company added several new
trust employees who generated over $100 million in new trust business. It is
anticipated they will continue to be successful in increasing their trust
relationships in 1996.
Premiums recognized on the sale of SBA loans decreased to $366,000 for
1995 as compared to $685,000 for 1994, and $435,000 in 1993. This was offset by
increased interest income on SBA loans retained and reflected a change in the
guarantee percentage pledged by the SBA, along with a reduction in premiums on
loans sold.
Service charges on depositor accounts increased to $291,000 in 1995
compared to $267,000 in 1994 and $252,000 in 1993. The increase is attributable
to the growth of new deposit relationships since 1993.
Operating Expenses
Operating expenses totaled $13.7 million for 1995, compared to $10.4 million for
1994 and $10.2 million for 1993. The ratio of operating expenses to average
assets for these periods was 6.0%, 5.3%, and 5.6%, respectively.
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CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
The following table represents the major components of operating
expenses for the years ended December 31:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Compensation & benefits $ 6,704 $ 5,724 $ 5,014
Occupancy & equipment 1,687 1,400 1,226
Professional services and legal costs 2,681 911 1,379
FDIC Insurance and regulatory assessments 344 485 414
Other real estate, net 35 48 288
Other 1,902 1,500 1,425
-------------------------------
Total before client services 13,353 10,068 9,746
Client services 337 376 478
-------------------------------
Total $ 13,690 $ 10,444 $ 10,224
===============================
Efficiency ratio before client services 89.37% 71.10% 73.16%
===============================
Efficiency ratio 91.63% 73.75% 76.75%
===============================
Total operating expenses to average assets 5.96% 5.27% 5.58%
===============================
The efficiency ratio is computed by dividing total non-interest (or
operating) expenses by net interest income and other income. An increase in the
ratio indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio for 1995 was 91.6%
compared to 73.7% in 1994 and 76.7% in 1993. The sharp increase in the
efficiency ratio in 1995 was a result of the litigation settlement, the expenses
associated with the closing of the mortgage business unit and merger discussions
with another bank in our market area. Without these charges, the noninterest
expenses would have been $11.5 million with an efficiency ratio of 77.4%.
Compensation expenses increased in 1995 to $6.7 million compared to
$5.7 million in 1994 and $5.0 million in 1993, primarily due to the growth in
the Bank's Trust and Venture Lending business units, combined with increased
incentive payments for new business generated.
Expenses for professional services, including legal, consulting and
audit services, increased to $2.7 million in 1995, as compared to $911,000 in
1994 and $1.4 million in 1993. The increase in 1995 is attributed to the one-
time charge of $1.7 million for a legal settlement related to trust department
activities.
Client service expenses decreased to $337,000 in 1995, compared to
$376,000 in 1994 and $478,000 in 1993 as a result of a decrease in the volume of
non-interest bearing demand deposits for which the Bank provides services.
FDIC deposit insurance and OCC regulatory assessments decreased to
$344,000 in 1995 compared to $485,000 in 1994, and $414,000 in 1993. FDIC
insurance declined and is expected to decline in future years as the FDIC has
lowered deposit insurance premiums, since the bank insurance fund was fully
funded in March 1995.
Other operating expenses increased by $402,000 in 1995 from 1994
primarily due to the one-time charge of closing the mortgage business unit and
the increased lending volume, which increased related other operating expenses.
The $75,000 increase from 1993 to 1994 was due to increased costs related to the
lending and mortgage banking operations.
Income Taxes
The Company's income tax rate for 1995 was 33.4% compared 35.0% in 1994 and
37.5% in 1993. The effective rates in all years are lower than the statutory
rates due primarily to the effect of the California Franchise Tax Enterprise
Zone Credit and exempt interest income.
Page 14
CUPERTINO NATIONAL BANK
FINANCIAL CONDITION
Assets
Total assets increased to $259.1 million in 1995, a 16.1% increase from the
$223.1 million one year earlier, compared to an increase of 15.8% from $192.6
million in 1993. The increase in 1995 was primarily due to the increase in
outstanding loans where the increase in 1994 was primarily due to the increase
in securities.
Loans
Total gross loans, excluding loans held for sale, increased 22.5% to $164.2
million at December 31, 1995 compared to $134.0 million at December 31, 1994.
Total loans increased 5.4% in 1994 from $127.1 million at year-end 1993. The
significant increase in loan volume in 1995 is due to an improving economy
coupled with an increased focus on loan growth.
The Bank's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending. The Bank's
lending is focused in the Santa Clara and San Mateo Counties. While no specific
industry concentration is significant, the Bank's lending is concentrated in an
area that is highly dependent on the technology industry and its supporting
companies. Thus, the Bank's borrowers could be adversely impacted by a downturn
in this sector of the economy and this could impact their ability to repay their
loans.
The following table presents the composition of the loan portfolio at
the end of each of the last three years:
1995 1994 1993
----------------------- ----------------------- -------------------------
(DolLars in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $ 88,646 55.2% $ 81,695 60.2% $ 77,699 59.1%
Real estate construction & land 23,889 14.9% 18,117 13.3% 19,090 14.5%
Real estate term 23,026 14.3% 13,133 9.7% 12,075 9.2%
Consumer & other 28,666 17.8% 21,059 15.5% 18,214 13.8%
---------------------------------------------------------------------------------------------
Total loans, gross 164,227 102.2% 134,004 98.7% 127,078 96.6%
Deferred fees and discounts (851) (0.5)% (847) (0.6)% (923) (0.7)%
---------------------------------------------------------------------------------------------
Total loans, net of deferred fees 163,376 101.7% 133,157 98.1% 126,155 95.9%
Allowance for loan losses (2,683) (1.7)% (2,918) (2.1)% (2,247) (1.7)%
---------------------------------------------------------------------------------------------
Net loans 160,693 100.0% 130,239 96.0% 123,908 94.2%
Loans held for sale -- -- 5,383 4.0% 7,625 5.8%
---------------------------------------------------------------------------------------------
Total loans $160,693 100.0% $135,622 100.0% $131,533 100.0%
=============================================================================================
Credit Quality
One of the Bank's objectives is to limit the risk inherent in its loan portfolio
through stringent loan policies and continuous loan review procedures. The loan
policy of the Bank is approved each year by its Board of Directors and is
managed through periodic reviews of such policies in relation to current
economic activity and the degree of risk (both credit and interest rate) in the
current portfolio. The Director's Loan Committee supervises the lending
activities of the Bank. This committee consists of three outside directors, the
Chairman/CEO, the Executive Vice President/Senior Loan Officer, Senior Vice
President/Commercial Manager and the Senior Vice President/Credit
Administration. The officers in this group make up the Officer's Loan Committee.
Loan requests exceeding individual officer approval limits are submitted to the
Officer's Loan Committee, and those which exceed its limits are submitted to the
Director's Loan Committee for final approval.
The Bank has an active credit administration function which includes,
in addition to internal reviews, the regular use of an outside loan review firm
to review the quality of the loan portfolio. Senior management and the
Director's Loan Committee actively review and monitor problem loans on a regular
basis.
Page 15
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
Management generally places loans on non-accrual when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on non-accrual status, any interest previously accrued but
not collected is reversed from income. Loans are charged off when management
determines that collection has become unlikely. Restructured loans are those
where the Bank has granted a concession on the interest paid or original
repayment terms due to financial difficulties of the borrower. Other real estate
owned consists of real property acquired through foreclosure on the related
collateral underlying defaulted loans. The following table summarizes non-
accrual loans, loans past due 90 days and still accruing, restructured loans,
and other real estate owned at December 31:
(Dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
Non-performing assets
Non-accrual loans $2,513 $3,244 $ 997
Accruing loans past due 90 days or more 830 1,371 1,903
Restructured loans -- -- --
Other real estate owned -- 375 618
---------------------------------
Total non-performing assets $3,343 $4,990 $3,518
---------------------------------
Ratio of the allowance for loan losses to
total non-performing assets 80% 58% 64%
The following table details the Bank's classified assets for the years ended
December 31:
(Dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
Classified assets
Loans
Substandard $7,277 $10,927 $ 9,885
Doubtful 601 1,781 942
Loss -- -- --
---------------------------------
Total 7,878 12,708 10,827
OREO -- 375 618
---------------------------------
Total classified assets $7,878 $13,083 $11,445
---------------------------------
Ratio of classified assets to:
Total assets 3.0% 5.9% 5.9%
Total loans and OREO 4.8% 9.4% 8.5%
Ratio of allowance for loan losses to classified assets 34.1% 22.3% 19.6%
=================================
Total non-performing assets declined to $3.3 million at December 31,
1995 from $5.0 million at December 31, 1994. In addition, total classified
assets declined to $7.9 million from $13.1 million during the same time period.
The allowance for loan losses represented 80.2% of non-performing assets at
December 31, 1995, compared to 58.5% at December 31, 1994. The significant
improvement in the credit quality in 1995 is a reflection of an improving
economy coupled with the focused effort of the Company to reduce the level of
problem assets.
Page 16
CUPERTINO NATIONAL BANCORP
The following table summarizes activity in the allowance for loan losses for the
past three years.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands) Years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income:
Average outstanding during period $ 145,940 $ 127,264 $ 127,210
---------------------------------------------------
Allowance for loan losses:
Balance at beginning of period $ 2,918 $ 2,247 $ 1,748
Charge-offs:
Commercial (973) (748) (1,069)
Real estate - construction -- (123) --
Real estate - term -- -- --
Consumer - installment (101) (141) (159)
---------------------------------------------------
Total (1,074) (1,012) (1,228)
Recoveries:
Commercial 156 57 --
Real estate - construction -- -- --
Real estate - term -- -- --
Consumer - installment 2 6 48
---------------------------------------------------
Total 158 63 48
---------------------------------------------------
Net charge-offs (916) (949) (1,180)
Provision charged to income 681 1,620 1,679
---------------------------------------------------
Balance at end of period $ 2,683 $ 2,918 $ 2,247
===================================================
Net charge-offs to average loans outstanding during period 0.63% 0.75% 0.93%
===================================================
Allowance as a percentage of loans 1.64% 2.09% 1.67%
===================================================
Management considers changes in the size and character of the loan
portfolio, changes in non-performing and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the loan loss reserve. The allowance for loan losses
decreased at December 31, 1995 to 1.64% of average outstanding loans compared to
2.09% at December 31, 1994 and 1.67% at December 31, 1993. The following table
details the allocation of the allowance for loan losses:
1995 1994 1993
---------------------- ---------------------- ------------------------
Percent of Percent of Percent of
(Dollars in thousands) Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Commercial $1,057 0.65% $1,834 1.32% $1,496 1.11%
Real estate - construction 153 0.09% 180 0.13% 308 0.23%
Real estate - term 696 0.43% 132 0.09% 391 0.29%
Consumer installment 273 0.17% 273 0.19% 10 0.01%
Loans held for sale -- --% 14 0.01% 27 0.02%
Unallocated - deferred fees, commit-
ments and loss reserves 504 0.30% 485 0.35% 15 0.01%
------------------------------------------------------------------------------------
Total $2,683 1.64% $2,918 2.09% $2,247 1.67%
====================================================================================
Although management believes that the allowance for loan losses is
adequate, future provisions will be subject to continuing evaluations of the
inherent risk in the portfolio and if the economy declines or asset quality
deteriorates, additional provisions could be required.
Page 17
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
Deposits
Deposits reached $236.1 million at December 31, 1995, an increase of 26.5% as
compared to deposits of $186.7 at December 31, 1994. In 1994, deposits increased
6.3% from $175.7 million at December 31, 1993.
Total average deposits increased 14.5% to $197.2 million for 1995
compared to an average of $172.4 million for 1994. In 1994, average deposits
increased 3.5% over average deposits of $166.6 million in 1993. The increase in
deposits was due to the continued marketing efforts directed at commercial
business clients and the continued growth in the Bank's regional offices in San
Jose and Palo Alto.
Non-interest bearing deposits were $59.0 million at December 31, 1995
compared to $53.9 million at December 31, 1994 and $62.8 million at December 31,
1993. Average non-interest bearing deposits in 1995 were $49.3 million compared
to $50.4 million in 1994 and $55.8 million in 1993. As its regional offices
expand, the Bank anticipates this funding source to increase.
Money market and other interest-bearing demand accounts reached $124.1
million at year end 1995, an increase of 51.5% from the prior year. Money market
and other interest-bearing demand deposits of $81.9 million at December 31, 1994
were up 34.7% from $60.8 million at December 31, 1993. The continued efforts by
the Bank to market these low cost deposit products accounts for the continued
growth.
Time certificates of deposit of more than $100,000, savings and other
time deposits totaled $52.9 million or 22.4% of total deposits at December 31,
1995 compared to $50.9 million or 27.3% of total deposits at December 31, 1994
and $45.4 million or 25.8% of total deposits at December 31, 1993.
Liquidity and Other Borrowings
Liquidity management is defined as the ability of a company to convert assets
into cash or cash equivalents without significant loss and to raise additional
funds by increasing liabilities. Liquidity management involves maintaining the
Bank's ability to meet the day-to-day cash flow requirements of the Bank's
clients, who either wish to withdraw funds or require funds to meet their credit
needs. Without proper liquidity management, the Bank would not be able to
perform the primary function of a financial intermediary and would, therefore,
not be able to meet the needs of the communities it serves.
The primary function of asset and liability management is not only to
assure adequate liquidity in order for the Bank to meet the needs of its client
base, but to maintain an appropriate balance between interest-sensitive assets
and liabilities so that the Bank can also meet the return on investment
requirements of its shareholders. Daily monitoring of the sources and uses of
funds is necessary to maintain an acceptable cash position that meets both
requirements. Contingency plans exist and could be implemented on a timely basis
to minimize any risk associated with dramatic changes in market conditions,
including the Bank's $17 million in federal fund purchase lines which provide
back-up liquidity, $100 million in institutional deposit or brokered deposit
lines and $60 million in reverse repurchase lines. All of these sources combine
to provide a solid liquidity base for growth. As of December 31, 1995, the Bank
had $10.0 million in institutional deposits outstanding and no outstanding
federal funds purchased.
The asset portion of the balance sheet provides liquidity primarily
through loan principal repayments, maturities of investment securities and, to a
lesser extent, sales of loans held for sale. Other short-term investments such
as federal funds sold and maturing interest bearing deposits with other banks
are additional sources of liquidity funding. The liability portion of the
balance sheet provides liquidity through clients' interest bearing and non-
interest bearing deposit accounts. Federal funds purchased and other short term
borrowings are additional sources of liquidity and represent the Company's
incremental borrowing capacity. These sources of liquidity are short-term in
nature and are used as necessary to fund asset growth and meet short-term
liquidity needs.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing characteristics of
the Bank's portfolio of assets and liabilities. Interest rate risk management
focuses on the maturity structure of assets and liabilities and their repricing
characteristics
Page 18
CUPERTINO NATIONAL BANCORP
during periods of changes in market interest rates. Effective interest rate risk
management seeks to ensure that both assets and liabilities respond to changes
in interest rates within an acceptable time frame, thereby minimizing the effect
of interest rate movements on net interest income. Interest rate sensitivity is
measured as the difference between the volumes of assets and liabilities in the
Bank's current portfolio that are subject to repricing at various time horizons:
one day or immediate, two days to six months, seven to twelve months, one to
three years, three to five years, over five years and on a cumulative basis. The
differences are known as interest sensitivity gaps. The following table shows
interest sensitivity gaps for different intervals as of December 31, 1995:
INTEREST SENSITIVITY ANALYSIS
Repricing Periods Total
Immediate 2 Days To Months >1 Year > 3 Yrs Total Rate Non-Rate
(Dollars in thousands) One Day 6 Months 7-12 to 3 Yrs to 5 Yrs > 5 Yrs Sensitive Sensitive Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks -- $ 16,207 $ 16,207
Short term investments $ 12,900 $ 12,900 12,900
Investment securities $ 8,476 $ 9,009 $ 7,986 $ 9,823 $20,786 56,080 969 57,049
Loans 131,621 2,355 3,040 7,564 4,098 12,329 161,007 3,220 164,227
Loan loss/unearned fees -- (3,534) (3,534)
Other assets -- 12,250 12,250
----------------------------------------------------------------------------------------------------
Total assets 144,521 10,831 12,049 15,550 13,921 33,115 229,987 29,112 259,099
====================================================================================================
Liabilities and Equity:
Deposits
Demand -- 58,986 58,986
NOW, MMDA, and savings 132,174 132,174 132,174
Time deposits 36,493 2,823 5,602 16 44,934 44,934
Subordinated debt 3,000 3,000 3,000
Other liabilities -- 1,333 1,333
Shareholders' equity -- 18,672 18,672
----------------------------------------------------------------------------------------------------
Total liabilities and equity 132,174 36,493 2,823 5,602 16 3,000 180,108 78,991 259,099
====================================================================================================
Gap $ 12,347 $(25,662) $ 9,226 $ 9,948 $13,905 $30,115 $ 49,879 $(49,879) $ --
Cumulative Gap $ 12,347 $(13,315) $(4,089) $ 5,859 $19,764 $49,879 $ 49,879 $ -- $ --
Cumulative Gap/total assets 4.77% (5.14)% (1.58)% 2.26% 7.63% 19.25% 19.25% -- --
Changes in the mix of earning assets or supporting liabilities can
either increase or decrease the net interest margin without affecting interest
rate sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing of
both the asset and its supporting liability can remain the same, thus impacting
net interest income. This characteristic is referred to as a basis risk and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Bank's net interest margin. Because of these factors, an interest
sensitivity gap report may not provide a complete assessment of the Bank's
exposure to changes in interest rates.
Page 19
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
Capital Resources
Shareholders' equity at December 31, 1995 increased to $18.7 million from $18.0
million at December 31, 1994 and from $16.2 million at December 31, 1993. During
1995, the Company paid a 10% stock dividend and two cash dividends of $.10 per
share each.
The Company believes that a strong capital position is vital to the
continued profitability of the Company, and promotes depositor and investor
confidence, while providing a solid foundation for the future growth of the
organization. The Company has provided the majority of its capital requirements
through the retention of earnings.
In the third quarter of 1995, the Company increased its capital base by
successfully raising $3.0 million of subordinated debt which qualifies as Tier 2
Capital (see below). The private offering was subscribed substantially by the
Company's directors, officers and other accredited investors of the Company.
Under regulatory risk-based capital measures for banks and bank holding
companies, a banking organization's reported balance sheet is converted to risk-
based amounts by assigning each asset to a risk category, which is then
multiplied by the risk weight for that category. Off-balance sheet exposures are
converted to risk-based amounts through a two-step process. First, off-balance
sheet assets and credit equivalent amounts (e.g., standby letters of credit) are
multiplied by a credit conversion factor depending on the defined categorization
of the particular item. The converted items are then assigned to a risk category
that weights items according to their relative risk. The total of the risk
weighted on- and off-balance sheet amounts represents a banking organization's
risk-adjusted assets for purposes of determining capital ratios under the risk-
based guidelines. Risk-adjusted assets can either exceed or be less than
reported assets, depending on the risk profile of the banking organization.
A banking organization's total qualifying capital includes two
components, core capital (Tier 1 capital) and supplementary capital (Tier 2
capital). Core capital, which must comprise at least half of total capital,
includes common stockholders' equity, qualifying perpetual preferred stock, and
minority interests, less goodwill. Supplementary capital includes the allowance
for loan losses (subject to certain limitations), other perpetual preferred
stock, certain other capital instruments, and term subordinated debt. The
Company's major capital components are stockholders' equity in core capital, and
the allowance for loan losses and subordinated debt in supplementary capital.
At December 31, 1995, the minimum risk-based capital requirements to be
considered adequately capitalized are 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter. The minimum leverage
ratio is 3.0%, although banking organizations are expected to exceed that amount
by 1.0%, 2.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991 (FDICIA), the Federal Reserve Board, the Office of the Comptroller of
the Currency and the FDIC have adopted regulations, effective December 19, 1992,
setting forth a five-tier scheme for measuring the capital adequacy of the
financial institutions they supervise. The two highest levels recognized under
these regulations are as follows:
Tier 1 Total
Risk-Based Risk-Based Leverage
Capital Ratio Capital Ratio Ratio
- --------------------------------------------------------------------------------
Well-capitalized 6.0% 10.0% 5.0%
Adequately Capitalized 4.0% 8.0% 4.0%
At December 31, 1995, the Company's risk-based capital ratios were 9.2%
for Tier I risk based capital and 11.9% for total risk-based capital, compared
to 10.8% and 12.1% as of December 31, 1994, respectively. The Company's leverage
ratio was 7.8% at December 31, 1995, compared to 8.4% at December 31, 1994.
These ratios all exceeded the well-capitalized guidelines shown above.
Page 20
CUPERTINO NATIONAL BANCORP
The Company's capital ratios are indicated in the following table:
( Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Tier 1 capital:
Shareholders' equity $ 18,672 $ 18,037
Tier 2 capital:
Allowance for loan losses allowable for Tier 2 capital 2,541 2,082
Subordinated debt 3,000 --
-------------------
Total Risk Based Capital $ 24,213 $ 20,119
-------------------
Risk-adjusted assets $203,310 $166,552
===================
Total assets $259,099 $223,144
===================
Tier 1 capital/risk adjusted assets:
Company's capital ratio 9.18% 10.80%
Minimum regulatory requirement 4.00% 4.00%
===================
Total Risk-based capital/risk adjusted assets:
Company's capital ratio 11.91% 12.10%
Minimum regulatory requirement 8.00% 8.00%
===================
Tier 1 capital/total assets:
Company's capital ratio 7.78% 8.40%
Minimum regulatory requirement 3.00% 3.00%
===================
BUSINESS RISKS
Certain characteristics and dynamics of the Bank's business and of the financial
markets may create risks in the Bank's long-term success and its financial
results. These risks include:
Geographic Concentration and Local Economy - All of the Bank's operations are
located in Santa Clara County and San Mateo County in Northern California. As a
result of the geographic concentration, the Bank's results of operation depend
largely upon local economic conditions, which have been relatively volatile in
the last few years. Accordingly, there can be no assurance that the Bank's
existing and prospective clients will be responsive to, or have the need for,
the services offered by the Bank. Further, no assurance can be given that the
Bank will not be adversely affected if there were an economic downturn. An
economic downturn could also produce a decline in real estate prices which would
potentially have a material adverse effect on the Bank's lending activities and
on the quality of the Bank's real estate loan portfolio.
Government Regulation and Recent Legislation - The Bank and its operations are
subject to extensive state and federal supervision, regulation and legislation.
The Bank cannot predict the precise impact of recent legislation, nor the
probable course or impact of future legislation or regulatory actions affecting
the financial services industry. Additionally, action taken to respond to budget
deficits, such as a reduction in SBA funding, could adversely affect loan demand
or the ability of potential borrowers to qualify for such loans.
Effects of Inflation, Interest Rate Changes - The impact of inflation on a
financial institution differs significantly from that exerted on an industrial
concern, primarily because its assets and liabilities consist largely of
monetary items. The most direct effect of inflation is higher interest rates.
However, the Bank's earnings are affected by the spread between the yield on
earning assets and rates paid on interest-bearing liabilities rather than the
absolute level of interest rates. Additionally, there may be some upward
pressure on the Company's operating expenses, such as adjustments in staff
expense and occupancy
Page 21
CUPERTINO NATIONAL BANCORP
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Cont.)
expense, based upon consumer price indices. In the opinion of management,
inflation has not had a material effect on the consolidated results of
operations over the last few years. Interest rates are highly sensitive to many
factors which are beyond the control of the Bank. Changes in interest rates will
influence the growth of loans, investments and deposits. and affect the rates
charged on loans and paid on deposits. The nature, timing and impact of any
future changes in interest rates or monetary and fiscal policies are not
predictable.
Competition -- The banking business in the Bank's market area is highly
competitive with respect to both loans and deposits. Deregulation and continued
advances in interstate banking may increase this competition, including by a
number of institutions that have significantly greater financial resources than
the Bank.
This Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act. These forward-looking
statements relate to expectations of the business environment in which the Bank
operates, projections of future performance, perceived opportunities in the
market and statements regarding the Bank's mission and vision. Actual results
and conditions could differ materially from those contained in the forward-
looking statements as a result of business risks identified above as well as the
Company's ability to manage credit and fiduciary risks, control its cost, and
attract and retain high quality personnel, while continuing to provide value-
added, relationship-oriented banking services and competitive financial
products.
ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards (`SFAS') No. 114 "Accounting by Creditors for
Impairment of a Loan", which was subsequently amended by SFAS No. 118. Under the
provisions of SFAS No. 114, a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreements. SFAS
No. 114 requires creditors to measure impairment of a loan based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or the fair value of the underlying collateral ("the value"). If the value
of the impaired loan is less than the recorded investment in the loan, a
creditor shall recognize the impairment by creating a valuation allowance with a
corresponding charge to bad debt expense. This statement also applies to
restructured loans and loans previously accounted for as in-substance
foreclosures. The Company adopted SFAS No. 114 on January 1, 1995. The adoption
of SFAS No. 114 did not result in any additional provision for credit losses
during 1995. Income recognition on impaired loans conforms to the method the
Company uses for income recognition on nonaccrual loans.
STOCK ACTIVITY
The common stock of the Company is traded on the NASDAQ National Market System
under the symbol CUNB. There were 402 holders of record of the Company's common
stock at December 31, 1995.
The following table presents the high and low prices of the Company's
common stock, as reported on the NASDAQ National Market System during 1995, 1994
and 1993 adjusted for the effect of stock dividends:
1995 1994 1993
-------------------- ------------------- --------------------
Quarter High Low High Low High Low
- ------------------------------------------------------------------------------------------------------------------
First $ 9.03 $ 9.01 $10.00 $8.81 $10.80 $7.56
Second $ 9.12 $ 8.98 $10.38 $9.00 $10.80 $9.07
Third $ 9.64 $ 9.48 $10.00 $9.00 $10.89 $9.52
Fourth $ 12.06 $ 12.36 $10.00 $8.75 $10.80 $8.57
On May 30, 1995 and December 15, 1995, the Company paid a $.10 per share
dividend to its shareholders.
Page 22
CUPERTINO NATIONAL BANCORP
Consolidated Balance Sheets
(Dollars in thousands) December 31, 1995 1994
- ----------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 16,207 $ 9,326
Federal funds sold 12,900 10,400
-------------------
Cash and cash equivalents 29,107 19,726
Investment securities 57,049 60,506
Loans, net 160,693 130,239
Loans held for sale -- 5,383
-------------------
Total loans, net 160,693 135,622
Premises and equipment, net 1,917 1,434
Other real estate owned -- 375
Interest receivables and other assets 10,333 5,481
-------------------
Total assets $259,099 $223,144
===================
Liabilities and Shareholders' Equity
Deposits:
Demand, non-interest-bearing $ 58,986 $ 53,880
NOW 10,158 8,331
Money Market Demand Accounts 114,021 73,623
Savings 7,995 5,951
Other time certificates 17,830 19,417
Time certificates, $100 and over 27,104 25,520
-------------------
Total deposits 236,094 186,722
Other borrowings -- 17,256
Subordinated debt 3,000 --
Other liabilities 1,333 1,129
-------------------
Total liabilities 240,427 205,107
Commitments (Note 12)
Shareholders' Equity
Preferred stock, no par value: 4,000,000 shares authorized; none issued
Common stock, no par value: 6,000,000 shares authorized; shares
outstanding: 1,808,828 in 1995 and 1,557,008 in 1994 17,680 14,901
Retained earnings 992 3,136
-------------------
Total shareholders' equity 18,672 18,037
-------------------
Total liabilities and shareholders' equity $259,099 $223,144
===================
See notes to consolidated financial statements
Page 23
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts) For the years ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest on loans $16,158 $12,608 $11,895
Interest on investment securities:
Taxable 3,582 2,451 830
Non-taxable 43 94 145
---------------------------------------------
Total investment securities 3,625 2,545 975
Other interest income 510 208 463
---------------------------------------------
Total interest income 20,293 15,361 13,333
---------------------------------------------
Interest Expense:
Interest on deposits 6,510 3,897 3,156
Interest on short-term borrowings 769 382 10
Interest on subordinated debt 75 -- --
---------------------------------------------
Total interest expense 7,354 4,279 3,166
---------------------------------------------
Net interest income 12,939 11,082 10,167
Provision for loan losses 681 1,620 1,679
---------------------------------------------
Net interest income after provision for loan losses 12,258 9,462 8,488
---------------------------------------------
Other Income:
Gain on sale of mortgage loans 137 993 1,525
Gain on sale of SBA loans 366 685 435
Trust fees 710 593 494
Loan documentation fees, net 103 276 284
Depositor service fees 291 267 252
Other 295 265 164
---------------------------------------------
Total other income 1,902 3,079 3,154
---------------------------------------------
Operating Expenses:
Compensation and benefits 6,704 5,724 5,014
Occupancy and equipment 1,687 1,400 1,226
Professional services and legal costs 2,681 911 1,379
FDIC insurance and regulatory assessments 344 485 414
Client services 337 376 478
Other real estate, net 35 48 288
Other 1,902 1,500 1,425
---------------------------------------------
Total operating expenses 13,690 10,444 10,224
---------------------------------------------
Income before income tax expense 470 2,097 1,418
Income tax expense 157 734 538
---------------------------------------------
Net Income $ 313 $ 1,363 $ 880
=============================================
Net income per common and common equivalent share $ 0.16 $ 0.76 $ 0.50
=============================================
See notes to consolidated financial statements.
Page 24
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1995, 1994 and 1993 Common Stock Unrealized Retained Shareholders'
(Dollars in thousands) Shares Amount Gains earnings equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 1,248,246 $ 11,984 $ 3,190 $ 15,174
Stock options exercised 16,472 106 -- 106
Stock issued in Employee Stock Purchase Plan 7,604 63 -- 63
Two 5% stock dividends - fractional shares paid in cash 129,504 1,429 (1,433) (4)
Net income -- -- 880 880
--------------------------------------------------------------
Balance, December 31, 1993 1,401,826 13,582 2,637 16,219
Stock options exercised 74,468 543 -- 543
Stock issued in Employee Stock Purchase Plan 8,238 69 -- 69
Two 5% stock dividends - fractional shares paid in cash 72,476 707 (708) (1)
Cash dividend $.10 per share -- -- (156) (156)
Net Income -- -- 1,363 1,363
--------------------------------------------------------------
Balance, December 31, 1994 1,557,008 14,901 3,136 18,037
Stock options exercised 68,851 418 -- 418
Stock issued in Employee Stock Purchase Plan 10,472 80 -- 80
Stock issued in 401K Plan 8,257 95 -- 95
Two $.10 cash dividends -- -- (324) (324)
10% stock dividend 164,240 2,135 (2,135) --
Cash paid in lieu of fractional shares -- -- (3) (3)
Disqualifying disposition of common stock -- 13 -- 13
Nonqualified stock option exercises -- 38 -- 38
Unrealized gain on available for sale securities -- -- $ 5 -- 5
Net Income -- -- -- 313 313
--------------------------------------------------------------
Balance, December 31, 1995 1,808,828 $ 17,680 $ 5 $ 987 $ 18,672
==============================================================
See notes to consolidated financial statements
Page 25
CUPERTINO NATIONAL BANCORP
Consolidated Statements of Cash Flows
(Dollars in thousands) For the years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Cash Flows -- Operating Activities:
Net Income $ 313 $ 1,363 $ 880
Reconciliation of net income to net cash from operations:
Provision for loan losses 681 1,620 1,679
Depreciation and leasehold amortization 580 490 477
Deferred income taxes 371 128 (246)
Accrued interest receivables and other assets (1,479) (255) (627)
Accrued interest payables and other liabilities 204 514 (187)
Deferred loan fees and discounts, net (4) (76) 229
Proceeds from sale of loans held for sale 16,364 125,342 152,982
Origination of loans for resale (10,981) (123,100) (151,518)
Other real estate owned, net -- 48 221
-----------------------------------
Operating cash flows, net 6,049 6,074 3,890
-----------------------------------
Cash Flows -- Investing Activities:
Maturities of investment securities and other short-term investments
Held-to maturity 26,090 12,983 31,125
Purchase of investment securities and other short-term investments
Held to maturity (19,104) (34,050) (42,983)
Available for sale (3,524) -- --
Loans, net (31,131) (8,250) (8,157)
Investment in other real estate owned -- -- (219)
Sale of other real estate owned 375 576 3,097
Premises and equipment (1,063) (516) (850)
Purchase of insurance policies (3,744) -- (2,175)
Other, net -- 21 --
-----------------------------------
Investing cash flows, net (32,101) (29,236) (20,162)
-----------------------------------
Cash Flows -- Financing Activities:
Net change in non-interest-bearing deposits 5,106 (8,871) 458
Net change in interest-bearing deposits 44,266 19,853 18,732
Net change in short-term borrowings (17,256) 17,256 --
Subordinated debt issued 3,000 -- --
Proceeds fron the sale of stock 644 457 169
Fractional shares paid in cash (3) (1) (4)
Cash dividend (324) (156) --
-----------------------------------
Financing cash flows, net 35,433 28,538 19,355
-----------------------------------
Net increase in cash and cash equivalents 9,381 5,376 3,083
Cash and cash equivalents at beginning of year 19,726 14,350 11,267
-----------------------------------
Cash and cash equivalents at end of year $ 29,107 $ 19,726 $ 14,350
===================================
Cash Flows -- Supplemental Disclosures:
Cash paid during the period for:
Interest on deposits and other borrowings $ 7,368 $ 4,148 $ 3,181
Income taxes 210 535 722
Non-cash transactions:
Additions to other real estate owned -- 375 --
===================================
See notes to consolidated financial statements.
Page 26
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements
Years Ended December 31, 1995, 1994 and 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations
The consolidated financial statements include the accounts of Cupertino National
Bancorp ("CUNB" or the "Company") and its wholly-owned subsidiary, Cupertino
National Bank and Trust ("CNB" or the "Bank"). CUNB is the holding company of
CNB. All significant intercompany transactions and balances have been
eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1995 presentation.
The Bank and its operating divisions; SBA Lending Division, Commercial
Lending Division, Venture Lending Division, Asset Based Lending Division,
Consumer Lending Division, Real Estate Lending Division and Trust Division serve
the Santa Clara Valley through its regional offices in Cupertino, San Jose and
Palo Alto, California. The Bank intends to open its fourth office in downtown
Palo Alto, California, in the Spring of 1996.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of certain revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of cash flows, cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds are sold
for one-day periods. CNB is required by the Federal Reserve System to maintain
non-interest earning cash reserves against certain of its transaction accounts.
At December 31, 1995, the required reserves totaled $798,000.
Investment Securities
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", which was adopted by the
Company in 1994, requires that investment securities be classified into three
portfolios, and accounted for as follows: 1) debt and equity securities for
which the Company has the positive intent and ability to hold to maturity are
classified as held to maturity and reported at amortized cost; 2) debt and
equity securities that are bought and held principally for the purpose of
selling in the near term are classified as trading securities and reported at
fair value, with unrealized gains and losses included in earnings; and 3) debt
and equity securities not classified as either held to maturity or trading
securities are classified as available for sale securities and reported at fair
value, with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity. CUNB currently maintains $53.5
million of its securities in the held to maturity category as it has the intent
and ability to hold the securities until maturity and $3.5 million in the
available for sale category.
Prior to the adoption of SFAS No. 115, all investment securities were
considered held to maturity because the Company had the ability and intent to
hold these securities to maturity. Accordingly, these securities were carried at
amortized cost.
Loans
Interest on loans is credited to income as earned and is accrued only if deemed
collectible. Accrued interest is generally reversed against current income on
loans over 90 days contractually delinquent and on other loans which have
developed inherent problems prior to being 90 days delinquent. The Bank charges
fees for originating loans, which are recognized as an adjustment of the loan
yield over the life of the loan by a method approximating the effective interest
method. Direct costs of originating the loan are capitalized and recognized over
the life of the loan as a reduction of the yield.
Page 27
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the statement of operations. Other loan fees and charges
representing service costs for the repayment of loans, for delinquent payments
or for miscellaneous loan services are recognized when collected.
The Bank designates certain of its loans receivable as being held for
sale and they are recorded at fair market value. In determining the level of
loans held for sale, the Bank considers whether loans (a) would be sold as part
of its asset/liability management strategy, or (b) may be sold in response to
changes in interest rates, changes in payment risk, the need to increase
regulatory capital or other similar factors.
Other Real Estate Owned
Real estate acquired through foreclosure is carried at the lower of cost or fair
value less estimated selling costs. Subsequent decreases in fair value are
recognized as charges to expense.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line
basis over the lesser of the lease terms or estimated useful lives of the
assets, which are generally 3 to 10 years.
Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates to the differences between
the financial statement carrying amounts and the tax bases of existing assets
and liabilities.
Allowance for Loan Losses
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", was issued in
May 1993 and was subsequently amended by SFAS No. 118 in October 1994. The
provisions of these statements are effective for fiscal years beginning after
December 15, 1994 and are applicable to all creditors and to all loans that are
individually and specifically evaluated for impairment, uncollateralized as well
as collateralized. It requires that impaired loans be measured at either, (1)
the present value of expected cash flows at the loan's effective rate, (2) the
loan's observable market price, or (3) the fair market value of the collateral
of the loan. In general, these statements are not applicable to large groups of
smaller-balance loans that are collectively evaluated for impairment such as
credit cards, residential mortgage and/or consumer installment loans. Adoption
of SFAS Nos. 114 and 118 did not have a material effect on the financial
statements of the Company in 1995. Income recognition on impaired loans conforms
to the method the Company uses for income recognition on nonaccrual loans.
The allowance for loan losses is maintained at a level deemed
appropriate by management to adequately provide for known and unidentified
losses in the loan portfolio. The allowance is based upon a number of factors,
including prevailing and anticipated economic trends, industry experience,
industry and geographic concentrations, estimated collateral values,
management's assessment of credit risk inherent in the portfolio, delinquency
trends, historical loss experience, CNB's underwriting practices and other
relevant factors. Additions to the allowance, in the form of provisions, are
reflected in current operating results, while charge-offs to the allowance are
made when a loss is determined to have occurred. Because the allowance for
possible loan losses is based on estimates, ultimate losses may vary from the
current estimates.
Income per Share
Income per share, adjusted for stock dividends, is based on weighted average
common and common equivalent shares outstanding of 1,894,400 in 1995; 1,628,500
in 1994 and 1,587,000 in 1993.
Page 28
Sales and Servicing of Small Business Administration ("SBA") Loans
The Company originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Company generally
sells the guaranteed portion of each loan to an investor and retains the
unguaranteed portion and servicing rights in its own portfolio.
Gains on these sales are earned through the sale of the guaranteed
portion of the loan for an amount in excess of the adjusted carrying value of
the portion of the loan sold. The Company allocates the carrying value of such
loans between the portion sold, the portion retained and a value assigned to the
right to service the loan. The difference between the adjusted carrying value of
the portion retained and the face amount of the portion retained is amortized to
interest income over the life of the related loan using a method which
approximates the interest method. The value assigned to the right to service is
also amortized over the estimated life of the loan. Funding for the SBA programs
depend on annual appropriations by the U.S.
Congress.
NOTE 2 -- INVESTMENT SECURITIES
U.S. Government and agency obligations, municipal securities and other
securities are summarized as follows:
Amortized Unrealized Unrealized Market
(Dollars in thousands) December 31,1995 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 5,987 $ 24 $ -- $ 6,011
U.S. Agency obligations:
Mortgage-backed obligations 8,190 159 -- 8,349
Fixed and variable rate notes 34,199 145 -- 34,344
Other mortgage-backed obligations 4,195 102 -- 4,297
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 739 -- -- 739
------------------------------------------------
Total securities held to maturity 53,540 430 -- 53,970
U.S. Treasury obligations available for sale 3,504 5 -- 3,509
------------------------------------------------
Total securities $57,044 $435 $ -- $57,479
================================================
December 31, 1994
U.S. Treasury obligations $10,420 $ -- $ 115 $10,305
U.S. Agency obligations:
Mortgage-backed obligations 8,989 -- 415 8,574
Fixed and variable rate notes 34,348 3 1,563 32,788
State and political subdivisions 1,482 4 2 1,484
Federal Reserve Bank stock 230 -- -- 230
Federal Home Loan Bank stock 703 -- -- 703
Other mortgage-backed obligations 4,334 -- 228 4,106
------------------------------------------------
Total securities held to maturity 60,506 7 2,323 58,190
Total securities available for sale -- -- -- --
------------------------------------------------
Total securities $60,506 $ 7 $2,323 $58,190
================================================
Page 29
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
Securities with a carrying value of $14,509,000 and $24,868,000 at
December 31, 1995 and 1994, respectively, were pledged to secure public deposits
and for other purposes required by law or contract. During 1995, 1994 and 1993,
there were no sales of securities.
The following table shows amortized cost and estimated market value of
the Company's investment securities by year of maturity at December 31, 1995.
1997 2001 2006 and
(Dollars in thousands) 1996 through 2000 through 2006 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------
U.S. Treasury obligations $ 5,987 $ -- $ -- $ -- $ 5,987
U.S. Agency obligations:
Mortgage-backed obligations (1) -- 95 2,730 5,337 8,162
Fixed and variable rate notes (2) 8,000 17,727 6,485 1,987 34,199
Other mortgage-backed obligations (1) -- -- -- 4,224 4,224
Federal Reserve Bank stock -- -- -- 230 230
Federal Home Loan Bank stock -- -- -- 739 739
---------------------------------------------------------------------
Total investment securities held to maturity 13,987 17,822 9,215 12,517 53,541
U.S. Treasury obligations available for sale 3,504 -- -- -- 3,504
---------------------------------------------------------------------
Total securities $17,491 $17,822 $9,215 $12,517 $57,045
---------------------------------------------------------------------
Market Value $17,478 $17,800 $9,471 $12,732 $57,481
=====================================================================
Weighted average yield 4.8% 6.6% 7.5% 7.8% 6.8%
=====================================================================
(1) Mortgage-backed securities are shown at contractual maturity, however the
average life of these mortgage-backed securities may differ due to
principal prepayments.
(2) Certain U.S. Agency fixed and variable rate note obligations may be called,
without penalty,at the discretion of the issuer. This may cause the actual
maturities to differ significantly from the contractual maturity dates
Investments in the Federal Reserve Bank and the Federal Home Loan Bank
are required in order to maintain membership and support activity levels.
NOTE 3 - LOANS
The following is a summary of loans by category as of December 31:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Commercial $ 88,646 $ 81,695
Real estate construction and land 23,889 18,117
Real estate term 23,026 13,133
Consumer and other 28,666 21,059
----------------------
Total loans, gross 164,227 134,004
Deferred loan fees and discounts (851) (847)
----------------------
Total loans, net of deferred fees 163,376 133,157
Allowance for loan losses (2,683) (2,918)
----------------------
Total loans, net 160,693 130,239
Loans held for sale -- 5,383
----------------------
Total loans $160,693 $135,622
======================
Page 30
CUPERTINO NATIONAL BANK
NOTE 4-ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for the
years ended December 31:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Balance January 1 $ 2,918 $ 2,247 $ 1,748
Loans charged off (1,074) (1,012) (1,228)
Recoveries 158 63 48
Provision for loan losses 681 1,620 1,679
--------------------------------------
Balance December 31 $ 2,683 $ 2,918 $ 2,247
======================================
The following table sets forth non-performing loans as of December 31,
1995, 1994 and 1993. Non-performing loans are defined as loans which are on non-
accrual status, loans which have been restructured, and loans which are 90 days
past due but are still accruing interest. Interest income foregone on non-
performing loans outstanding at year-end totaled $245,000, $275,000 and $129,000
for the years ended December 31, 1995, 1994 and 1993, respectively. Interest
income recognized on the non-performing loans approximated $63,000, $50,000 and
$25,000 for the years ended December 31, 1995, 1994 and 1993.
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Non-accrual loans $2,513 $3,244 $ 997
Accruing loans past due 90 days or more 830 1,371 1,903
Restructured loans -- -- --
-------------------------------
Total $3,343 $4,615 $2,900
===============================
At December 31, 1995, the recorded investment in impaired loans was
approximately $2.5 million with a corresponding valuation allowance of $509,000.
For the year ended December 31, 1995, the average recorded investment in
impaired loans was approximately $2.6 million. The Company did not recognize
interest on impaired loans during the twelve months ended December 31, 1995.
NOTE 5 - OTHER REAL ESTATE OWNED
Other real estate owned consists of the following at December 31:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Real estate acquired through foreclosure $-- $375
Allowance for estimated loan losses -- --
------------------
Other real estate owned, net $-- $375
==================
The following summarizes other real estate operations, which are
included in operating expenses, for the years ended December 31:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Income (loss) from:
Real estate operations, net $(18) $ (6) $ 10
Provision for estimated losses (17) (42) (231)
--------------------------------
Other real estate, net $(35) $(48) $(221)
================================
Page 31
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
NOTE 6 - PREMISIES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are comprised of the
following:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Leasehold improvements $ 853 $ 993
Furniture and equipment 2,717 2,463
Automobiles 157 140
------------------------
Total 3,727 3,596
Accumulated depreciation and amortization (2,167) (2,162)
Fixed assets in progress 357 --
------------------------
Premises and equipment, net $ 1,917 $ 1,434
========================
NOTE 7 - OTHER BORROWINGS
Short term borrowings are detailed as follows:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------------
Federal funds purchased
Balance at December 31 $ -- $ 7,000 $ --
Average Balance 1,120 1,800 277
Maximum amount outstanding at any month end 5,600 12,000 --
Average interest rate:
During the year 5.96% 4.18% 3.56%
At December 31 -- 6.50% --
Securities sold under agreements to repurchase
Balance at December 31 $ -- $10,256 $ --
Average Balance 11,486 5,908 --
Maximum amount outstanding at any month end 26,994 24,153 --
Average interest rate:
During the year 6.12% 5.13% --
At December 31 -- 6.29% --
Federal funds purchased generally mature the following day after the
purchase while securities sold under agreements to repurchase generally mature
within 30 days from the various dates of sale.
In 1995, the Company consummated a private offering of $3.0 million in
11.5% subordinated notes. The notes, which will mature on September 15, 2005,
were offered to the Board of Directors, bank officers and other accredited
investors within the meaning of Rule 501 under the Securities Act of 1933, as
amended. The debentures are redeemable by the Company after September 30, 1998
at a premium ranging from 0% to 5% of the premium redeemed. The notes qualify as
Tier 2 capital of the Bank (see Note 13).
Page 32
CUPERTINO NATIONAL BANK
NOTE 8- INCOME TAXES
Income tax expense was comprised of the following for the years ended December
31:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Current:
Federal $(214) $518 $ 539
State -- 88 245
Total current expense (benefit) (214) 606 784
Deferred:
Federal 373 125 (148)
State (2) 3 (98)
Total deferred expense (benefit) 371 128 (246)
Total expense $ 157 $734 $ 538
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of the Company's deferred income tax assets (liabilities) as of
December 31, 1995 and 1994 are as follows:
(Dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------
Loan loss reserves $ 605 $ 904
OREO valuation -- --
Deferred compensation 72 48
State income taxes 148 243
Other (125) (124)
--------------------------
Deferred tax asset $ 700 $ 1,071
==========================
No valuation allowance has been provided in 1995 and 1994. The
components of the deferred tax benefit, which results from differences in the
recognition of certain items for tax and financial reporting purposes, were as
follows:
(Dollars in thousands) 1995 1994 1993
- --------------------------------------------------------------------------------
Provision for loan losses $299 $ 136 $ (97)
Cash basis income tax reporting -- -- (12)
State income taxes 1 224 93
Other 71 (232) (230)
--------------------------------
Total deferred expense (benefit) $371 $ 128 $(246)
================================
Page 33
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31:
(Dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
Statuatory federal tax rate 35.0% 35.0% 35.0%
California franchise tax expense, net of federal income tax benefit -- 2.9% 6.9%
Exempt income (8.7)% (4.1)% (3.2)%
Other, net 6.7% 1.2%
-----------------------------------------
Effective income tax rate 33.0% 35.0% 37.5%
=========================================
NOTE 9 - OTHER OPERATING EXPENSES
The major components of other operating expense are as follows for the years
ended December 31:
(Dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Supplies $ 202 $ 197 $ 153
Telephone 169 163 113
Director fees 147 145 142
Insurance 150 144 137
Correspondent bank charges 158 118 106
Advertising 209 87 88
Other 867 646 686
-------------------------------------
Total $1,902 $1,500 $1,425
=====================================
NOTE 10 - EMPLOYEE BENEFIT PLANS
The Company has stock option plans under which incentive and non-statutory stock
options may be granted to employees and directors to purchase up to 415,746
shares of common stock at prices not less than the fair market value of such
stock at the date the options are granted.
Options generally expire 10 years after the date of grant and generally
become exercisable in annual installments of 20 percent to 33 percent. As of
December 31, 1995, options for 266,330 shares were exercisable and options for
60,429 shares were available for future grant. Additional stock option
information follows:
Options outstanding(1)
Number of shares Option price per share
- --------------------------------------------------------------------------------------------------------------
Balance, January 1, 1993 377,386 $3.85-$ 7.29
Granted 14,087 7.26- 9.68
Exercised (20,659) 4.13- 7.36
Canceled (7,378) 6.91- 7.36
--------------------------------
Balance, December 31, 1993 363,436 $3.85-$ 9.68
Granted 83,012 8.00- 9.09
Exercised (84,577) 4.25- 7.28
Canceled (11,793) 4.05- 8.98
--------------------------------
Balance, December 31, 1994 350,078 $3.85-$ 9.68
Granted 124,823 7.95- 12.95
Exercised (75,736) 3.85- 11.68
Canceled (43,848) 4.99- 11.81
--------------------------------
Balance, December 31, 1995 355,317 $3.85-$12.95
--------------------------------
(1) Adjusted for stock dividends in 1995, 1994 and 1993
Page 34
CUPERTINO NATIONAL BANK
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary as a contribution to the
plan. The Company matches the employee contributions at a rate set by the Board
of Directors (currently 50% of the first 6% of deferral of an individual's
salary). The matching contribution vests ratably over the first three years of
employment. The Company contributed $95,000 to the plan in 1995, $72,500 in
1994, and $67,000 in 1993.
The Company has established an Employee Stock Purchase Plan, as
amended, under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 10% of their compensation toward the purchase of
the Company's stock for an aggregate total of 71,722 shares. Under the plan, the
purchase price is 85% of the lower of the fair market value at the beginning or
end of each three month offering period. During 1995, employees purchased 11,519
shares of common stock for an aggregate purchase price of $80,000 compared to
the purchase of 9,062 shares of common stock for an aggregate purchase price of
$69,000 in 1994. There are 29,975 shares remaining in the plan available for
purchase by employees at December 31, 1995.
During 1993 and 1995, the Company entered into deferred compensation
agreements with certain Bank executive officers. Under these agreements, the
Company is generally obligated to provide for each such employee or their
beneficiaries, during a period of up to between 30 and 40 years after the
employee's death, disability or retirement, annual benefits ranging from $50,000
to $78,000. The estimated present value of future benefits to be paid is being
accrued over the vesting period of the participants. Expenses accrued for this
plan for the years ended December 31, 1995, 1994 and 1993 totaled $90,000,
$72,000 and $48,000, respectively. The Company and the employees are the
beneficiaries of life insurance policies that have been purchased as a method of
financing the benefits under the agreements . These benefits will be funded
through loans drawn on the policies' cash surrender value over the retirement
period of each employee. At December 31, 1995, the Company's cash surrender
value of these policies was $6.0 million which is included in other assets.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 "Accounting for Stock-Based Compensation". Under the
provisions of SFAS No. 123, the Company is encouraged, but not required, to
measure compensation costs related to its employee stock compensation plans
under the fair market value method. Under this method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. If the Company
elects not to recognize compensation expense under this method, it is required
to disclose the pro forma net income and earnings per share effects based on the
SFAS No. 123 fair value methodology. SFAS No. 123 applies to financial
statements for fiscal years beginning after December 15, 1995. Earlier
implementation is permitted. The Company will implement the requirements of SFAS
No. 123 in 1996 and intends to only adopt the disclosure provisions of this
statement.
NOTE 11 - RELATED PARTY TRANSACTIONS
Loans are made to executive officers, directors and their affiliates, subject to
approval by the Directors' Loan Committee and the Board of Directors. An
analysis of total loans to related parties for the year ended December 31, 1995
is shown as follows:
(Dollars in thousands)
- --------------------------------------------------------------------------------
Balance, January 1, 1995 $ 2,987
Additions 1,040
Repayments (1,830)
---------
Balance, December 31, 1995 $ 2,197
=========
Page 35
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases the facilities from which it operates all of its activities.
Future minimum lease commitments under all non-cancelable operating leases as of
December 31, 1995 are as follows (includes lease payments for a branch location
currently under construction, estimated to open in April 1996):
(Dollars in thousands) 1995
- --------------------------------------------------------------------------------
1996 $ 786
1997 863
1998 842
1999 806
2000 814
Thereafter 2,384
-------
Total $6,495
=======
During 1995, the Company entered into a twelve year operating lease
contract for an additional branch location in Palo Alto, California, which will
commence upon completion of construction and occupying the building. Annual
lease payments will be approximately $198,000.
Total rent expense was approximately $724,000, $589,000 and $475,000
for 1995, 1994 and 1993, respectively.
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. At December 31, 1995, commitments to fund loans and outstanding
standby letters of credit were approximately $100.2 million and $2.2 million,
respectively. The Bank's exposure to credit loss is limited to amounts funded or
drawn; however, at December 31, no losses are anticipated as a result of these
commitments.
Loan commitments which typically have fixed expiration dates and
require the payment of a fee are typically contingent upon the borrower meeting
certain financial and other covenants. Approximately $59.7 million of these
commitments relate to real estate construction and land loans and are expected
to fund within the next 12 months. However, the remainder relate primarily to
revolving lines of credit or other commercial loans, and many of these
commitments are expected to expire without being drawn upon, therefore the total
commitments do not necessarily represent future cash requirements. The Bank
evaluates each potential borrower and the necessary collateral on an individual
basis. Collateral varies, but may include real property, bank deposits, debt or
equity securities, or business assets.
Stand-by letters of credit are conditional commitments written by the
Bank to guarantee the performance of a client to a third party. These guarantees
are issued primarily relating to purchases of inventory by the Bank's commercial
clients, and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients, and the Bank accordingly uses
evaluation and collateral requirements similar to those for loan commitments.
Virtually all such commitments are collateralized.
In the ordinary course of business there are various assertions, claims
and legal proceedings pending against the Company. Management is of the opinion
that the ultimate resolution of these proceedings will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
In July 1995, the Company settled a lawsuit for $1,080,000 (net of tax)
which alleges that the Company did not perform its fiduciary duties and, as a
result, the trust incurred losses on real estate investments that were
purchased. The Company believes that insurance coverage for this settlement is
available to the Company under various insurance policies and the Company is
currently in the process of pursuing recovery under these policies. However, due
to the uncertainty associated with the recovery, the Company reflected the
$1,080,000 expense of the legal settlement in 1995 earnings.
Page 36
NOTE 13 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum capital amounts and ratios (as
defined in the regulations) and are set forth in the table below. At December
31, 1995, the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1995, the Bank is categorized as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that determination that management believes have
changed the Bank's category. The Company's 1995 and 1994 capital ratios are as
follows;
For Capital Under Prompt Corrective
Actual Adequacy Purpose Action Provisions:
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------
As of December 31, 1995:
Total Capital (to Risk Weighted Assets $24,214 11.91% $16,285 8.00% $20,331 10.00%
Tier I Capital (to Risk Weighted Assets $18,672 9.18% $ 8,135 4.00% $12,199 6.00%
Tier I Capital (to Average Assets) $18,672 7.78% $ 9,196 4.00% $11,495 5.00%
As of December 31, 1994
Total Capital (to Risk Weighted Assets $20,955 12.0% $13,855 8.00% $17,318 10.00%
Tier I Capital (to Risk Weighted Assets $18,037 10.83% $ 6,662 4.00% $ 9,993 6.00%
Tier I Capital (to Average Assets) $18,037 8.39% $ 8,599 4.00% $10,749 5.00%
NOTE 14-RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
One of the principal sources of cash for the Company is dividends from its
subsidiary Bank. Total dividends which may be declared by the Bank without
receiving prior approval from regulatory authorities are limited to the lesser
of the Bank's retained earnings or the net income of the Bank for the latest
three fiscal years, less dividends previously declared during that period. Under
these restrictions and considering minimum regulatory capital requirements, the
Bank is able to declare dividends not exceeding $2,076,000 as of December 31,
1995.
The Bank is subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates. In
particular, the Bank is prohibited from lending to the Company unless the loans
are secured by specified types of collateral. Such secured loans and other
advances from the Bank are limited to 10% of the Bank's shareholders' equity, or
a maximum of $1,765,000 at December 31, 1995. No such advances were made during
1995 or exist as of December 31, 1995.
Page 37
NOTE 15 - PARENT ONLY FINANCIAL STATEMENT
The financial statements of Cupertino National Bancorp (parent company only)
follow:
Parent Company Only Balance Sheets
(Dollars in thousands) December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 898 $ 883
Investment in CNB 17,650 16,851
Subordinated debentures purchased by CNB 3,000 0
Other assets 126 305
-----------------------
Total $ 21,674 $ 18,039
=======================
Liabilities and shareholders' equity:
Subordinated debt $ 3,000 $ 0
Other liabilities 2 2
-----------------------
Total liabilities 3,002 2
Shareholders' equity
Common stock 17,680 14,901
Retained earnings 992 3,136
-----------------------
Total shareholders' equity 18,672 18,037
-----------------------
Total liabilities and shareholders' equity $ 21,674 $ 18,039
=======================
Parent Company Only Statements of Operations
(Dollars in thousands) Years ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
Income:
Interest income $ 34 $ 17 $ 14
Other income 10 14 12
-----------------------------------
Total 44 31 26
-----------------------------------
Expenses:
Occupancy and equipment 441 410 384
Less rentals received from the Bank (441) (409) (384)
-----------------------------------
Net occupancy and equipment -- 1 --
Other expense 48 46 20
-----------------------------------
Total 48 47 20
-----------------------------------
Income before taxes and equity in undistributed net income of the Bank (4) (16) 6
Income tax expense -- -- 2
-----------------------------------
Income (loss) before equity in undistributed net income of the Bank (4) (16) 4
Equity in undistributed net income of the Bank 317 1,379 876
Net Income $ 313 $ 1,363 $ 880
===================================
Page 38
Parent Company Only Statements of Cash Flows
(Dollars in thousands) Years ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------
Cash flows -- operating activities:
Net income $ 313 $ 1,363 $ 880
Reconciliation of net income to net cash from operations:
Equity in undistributed net income of the Bank (317) (1,379) (876)
Net change in other assets 28 (205) (100)
Net change in other liabilities -- (41) --
---------------------------------
Operating cash flows, net 24 (262) (96)
---------------------------------
Cash flows -- investing activities:
Principal repayment of loans receivable 150 -- --
Purchase of subordinated debentures by CNB (3,000) -- --
Capital contribution to the Bank (425) -- --
---------------------------------
Investing cash flows, net (3,275) -- --
---------------------------------
Cash flows -- financing activities:
Proceeds from issuance of subordinated debt 3,000 -- --
Proceeds from exercise of stock options and employee stock purchases 593 613 169
Cash paid in lieu of fractional shares on stock dividends (3) (2) (4)
Payment of cash dividends (324) (156) --
---------------------------------
Financing cash flows, net 3,266 455 165
---------------------------------
Net increase in cash and cash equivalents 15 193 69
Cash and cash equivalents at the beginning of the year 883 690 621
---------------------------------
Cash and cash equivalents at the end of the year $ 898 $ 883 $ 690
=================================
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments of the Company as of December
31, 1995 and 1994 are as follows:
1995 1994
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 29,107 $ 29,107 $ 19,726 $ 19,726
Investment securities 57,049 57,481 60,506 58,190
Loans, net 160,693 160,854 130,239 130,000
Loans held for sale -- -- 5,383 5,383
--------------------------------------------------
Total loans, net 160,693 160,854 135,622 135,383
--------------------------------------------------
Financial liabilities:
Deposits:
Demand, non-interest bearing 58,986 58,986 53,880 53,880
NOW 10,158 10,158 8,331 8,331
Money Market Demand Accounts 114,021 114,021 73,623 73,623
Savings 7,995 7,995 5,951 5,951
Other time certificates 17,830 17,823 19,417 19,410
Time certificates, $100 and over 27,104 27,094 25,520 25,513
--------------------------------------------------
Total deposits 236,094 236,077 186,722 186,708
Subordinated debt 3,000 3,000 -- --
Short term borrowings -- -- 17,256 17,256
--------------------------------------------------
Page 39
CUPERTINO NATIONAL BANK
Notes to Consolidated Financial Statements (Cont.)
Cash and cash equivalents
The carrying value reported in the balance sheet for cash and cash equivalents
approximates fair value.
Securities
Fair values for investment securities are based on quoted market prices.
Loans
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Deposit liabilities and borrowings
The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities.
Page 40
CUPERTINO NATIONAL BANCORP
Report of Independent Accountants
The Board of Directors and Shareholders,
Cupertino National Bancorp:
We have audited the accompanying consolidated balance sheets of Cupertino
National Bancorp and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
statements of operations, shareholders' equity and cash flows of Cupertino
National Bancorp & Subsidiary for the year ended December 31, 1993 were audited
by other auditors whose report dated January 18, 1994 expressed an unqualified
opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cupertino
National Bancorp and Subsidiary at December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Coopers & Lybrand, L.L.P.
San Francisco, California
January 26, 1996
Page 43
Board of Directors and Officers
Board Members
C. Donald Allen
President and Chief Executive Officer
Cupertino National Bancorp
Chairman of the Board and
Chief Executive Officer
Cupertino National Bank & Trust
David K. Chui
President and Chief Executive Officer
PANCAL (commercial and residential
real estate)
Carl E. Cookson
Chairman of the Board
Santa Clara Land Title Company
(title insurance)
Jerry R. Crowley
Chairman and Chief Executive Officer
Treehouse, Ltd. (venture capital)
Janet M. DeCarli
Broker
Cornish & Carey Realtors
(residential and commercial real estate)
John M. Gatto
Chairman of the Board
Cupertino National Bancorp and
Chairman of the Executive Committee
Cupertino National Bank & Trust
Architect
Maria Enterprises
(real estate development)
William H. Guengerich
Private investor
James E. Jackson
Attorney at Law
Jackson , Abdalah, Rodriguez & Wong
Rex D. Lindsay
Vice Chairman of the Board
Cupertino National Bancorp and
Cupertino National Bank & Trust
Rancher and private investor
Glen McLaughlin
Chairman of the Board
Venture Leasing Associates
(general equipment leasing)
Norman Meltzer
Real estate developer, Retired
Dick J. Randall
Rancher and private investor
Dennis W. Whittaker
President
Whittaker Insurance Agency, Inc.
(personal and commercial
insurance sales)
Officers
C. Donald Allen
President and Chief Executive Officer
Cupertino National Bancorp
Chairman of the Board and
Chief Executive Officer
Cupertino National Bank & Trust
Kenneth D. Brenner
Executive Vice President
Sales and Marketing
Manager, Palo Alto Office
David R. Hood
Executive Vice President
Senior Lending Officer
Hall Palmer
Executive Vice President
Senior Trust Officer
Steven C. Smith
Executive Vice President,
Chief Operating Officer
Cupertino National Bancorp and
Cupertino National Bank & Trust
Colleen Carlsted
Senior Vice President, Manager
Commercial Loans
Raul Galano
Senior Vice President, Manager
Trust Operations
Nord Hastings
Senior Vice President
Chief Credit Officer
Donald McMullen
Senior Vice President
Manager, Commercial Loans
Daniel R. Michener
Senior Vice President, Manager
Venture Lending and Asset Based Lending
Jeffrey Whalen
Senior Vice President,
Business Development
Manager, San Jose Office
Heidi R. Wulfe
Senior Vice President, Chief Financial
Officer, Cupertino National Bancorp
and Cupertino National Bank & Trust
Janice K. Alder
Vice President, Commercial Loans
Ralph W. Barnett
Vice President, Manager
SBA Loans
Julie Bellestri
Vice President, Manager
Emerson Office
Karen L. Blase
Vice President, Manager
MIS
Cathy Colgan
Vice President, Senior Trust Officer
Benner Davenport
Vice President, Trust Officer
Michael David
Vice President
Business Development, Venture Lending
Daniel Duarte
Vice President, Manager Consumer
Lending and Special Assets
Cecilia K. Fu
Vice President, Manager
Construction Loans
Cheryl Howell
Vice President, Senior Trust Officer
Madalyn A. Knittle
Vice President, Manager
Human Resources
Jon Krogstad
Vice President, Venture Lending
Joan Leis
Vice President, Cashier
William McKinley
Vice President, Commercial Loans
Robert Mazza
Vice President, Construction Loans
Ruth Matosich
Vice President, Manager
Note Department
Tammy Okuda
Vice President, Commercial Loans
Stella PeBenito
Vice President, Trust Investment Officer
Robert ProFaca
Vice President, Commercial Loans
Debra Reed
Vice President, Senior Trust Officer
Addy D. Soreco
Vice President, Commercial Loans
Helen Craig Titus
Vice President, Senior Trust Officer
Nannette Walton
Vice President, Asset Based Lending
Corporate Directory
Stock Market Makers
Cupertino National Bancorp's common stock is traded on the
NASDAQ National Market System under the symbol CUNB. The newspaper abbreviation
is CupNBk.
Marc Arnett
Hoefer & Arnett
San Francisco, California
(800) 346-5544
Ron Lohbeck
Sutro & Co.
San Jose, California
(408) 292-2442
Mark T. Curtis
Smith Barney
Palo Alto, California
(415) 493-5300
Frank Seay
Dean Witter Reynolds, Inc.
San Jose, California
(408) 286-6060
Phillip Hage
Van Kasper & Company
San Francisco, California
(415) 391-5600
Scott Burford or Randall Kinoshita
Burford Capital/GBS Financial
La Crescenta, California
(800) 765-5558
Legal Counsel
Gray, Cary, Ware & Freidenrich
Palo Alto, California
Certified Public Accountants
Coopers & Lybrand, L.L.P.
San Francisco, California
Shareholder Relations
A copy of Cupertino National Bancorp's Form 10K annual
report, filed with the Securities and Exchange Comission, is available without
charge. Requests for Form 10K or other shareholder information should be
directed to: Shelly Binnebose Assistant Corporate Secretary Cupertino National
Bancorp 20230 Stevens Creek Boulevard Cupertino, California 95014 Telephone
(408) 725-2347 FAX (408) 996-0657
Registrar and Transfer Agent
U.S. Stock Transfer Corporation
1745 Gardena Avenue, 2nd Floor
Glendale, California 92104
(818) 502-1404
Corporate and Bank
Headquarters
20230 Stevens Creek Boulevard
Cupertino, California 95014
Telephone (408) 996-1144
FAX (408) 996-0657
San Jose Office
60 South Market Street
San Jose, California 95113
Telephone (408) 286-1595
FAX (408) 971-4233
Palo Alto Square Office
3 Palo Alto Square
Palo Alto, California 94306
Telephone (415) 852-0300
FAX (415) 493-6662
Emerson Office
400 Emerson Street
Palo Alto, California 94301
Telephone (415) 833-1400
FAX (415) 473-1326
Related Financial Services
Small Business Administration
Real Estate Construction
Consumer Lending
Cupertino, California 95014
Telephone (408) 996-1144
FAX (408) 996-0657
Venture Lending
Asset Based Lending
3 Palo Alto Square
Palo Alto, California 94306
Telephone (415) 813-8319
FAX (415) 843-6969
The Trust Group
400 Emerson Street
Palo Alto, California 94301
Telephone (415) 833-1400
FAX (415) 473-1326
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EQUAL HOUSING
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CUPERTINO NATIONAL BANK & TRUST
Corporate and Bank Headquarters
20230 Stevens Creek Boulevard
Cupertino, California 95014
Telephone (408) 996-1144
FAX (408) 996-0657