SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996 OR
______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________T O_________
COMMISSION FILE NUMBER 0-25034
------------------
MID-PENINSULA BANCORP
------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 77-0387041
- ------------------------------------ ----------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
420 Cowper Street Palo Alto CA 94301
- ----------------------------------------- ----------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (415) 323-5150
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None
- ------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
-------- --------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Shares Outstanding at May 8, 1996
- -------------------------- ------------------------------------
Common Stock 1,590,943
Page 1 of 16
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(unaudited)
(in thousands)
ASSETS March 31, 1996 December 31, 1995
- ------ -------------- -----------------
Cash and due from banks $ 10,349 $ 13,304
Federal funds sold 34,000 15,700
Investment securities:
Available-for-sale, at fair value 46,770 58,533
Held-to-maturity, at amortized cost 855 857
(fair value of $839,200 & $838,000 as of
March 31, 1996 and December 31, 1995,
respectively.) 430 430
Federal reserve bank stock
Loans:
Commercial 95,860 92,971
Real estate - construction 12,643 8,783
Real estate - other 28,254 24,296
Less deferred loan fees (477) (448)
----------- -----------
Total loans 136,280 125,602
Less allowance for loan losses (1,836) (1,716)
----------- -----------
Net loans 134,444 123,886
Premises and equipment, net 964 995
Accrued interest and other assets 5,177 5,030
----------- -----------
Total Assets $ 232,989 $ 218,735
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand - non-interest bearing $ 37,031 $ 37,077
Demand - interest bearing 11,169 11,926
Savings and money market 114,059 102,124
Time certificates, $100,000 and over 37,848 36,682
Other time certificates 9,103 7,886
----------- -----------
Total Deposits 209,210 195,695
Accrued interest and other liabilities 1,796 1,600
----------- -----------
Total Liabilities 211,006 197,295
Shareholders' Equity:
Common stock , no par value - 6,000,000 shares
authorized; 1,590,943 and 1,571,757 shares issued
and outstanding , in 1996 & 1995, respectively 15,592 15,425
Unrealized loss on securities available-for-sale, net (789) (626)
Retained earnings 7,180 6,641
----------- -----------
Total Shareholders' Equity 21,983 21,440
----------- -----------
Total Liabilities and Shareholders' Equity $ 232,989 $ 218,735
----------- -----------
----------- -----------
Page 2 of 16
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(unaudited)
(in thousands, except share and per share amounts)
Three Months Ended
March 31, 1996 March 31, 1995
Interest Income:
Interest and fees on loans $ 3,419 $ 2,900
Interest on investment securities 752 546
Interest on federal funds sold 285 448
---------- ----------
Total interest income 4,456 3,894
Interest Expense:
Demand, interest bearing 52 52
Savings and money market accounts 1,027 976
Time certificates & other 473 359
Other time certificates & other 112 86
---------- -----------
Total interest expense 1,664 1,473
---------- -----------
Net interest income 2,792 2,421
Provision for possible loan losses 120 75
---------- -----------
Net interest income after provision
for possible loan losses 2,672 2,346
Non-interest income:
Service charges and other fees 131 87
Investment gains 13 0
Other 38 7
---------- ----------
Total non-interest income 182 94
Non-interest expenses:
Salaries and benefits 954 827
Occupancy and equipment 284 226
Merger-related expenses 0 2
Regulatory expenses 7 94
Professional services 79 83
Data Processing 31 28
Marketing 44 53
Other 140 109
---------- ----------
Total non-interest expenses 1,539 1,422
---------- ----------
Income before income taxes 1,315 1,018
Provision for income taxes 538 394
---------- ----------
Net Income $ 777 $ 624
---------- ----------
---------- ----------
Earnings per share $ 0.49 $ 0.41
---------- ----------
---------- ----------
Weighted average common shares outstanding 1,581,615 1,523,432
Page 3 of 16
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended
MARCH 31,1996 MARCH 31, 1995
------------------------------
Cash flows from operating activities:
Net Income $ 777 $ 624
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss (gain) on sale of securities (13) 0
Provision for possible loan losses 120 75
Depreciation and amortization 79 56
Decrease (increase) in interest receivable (7) (113)
Decrease (increase) in other assets 147 (198)
Increase (decrease) in deferred loan fees 29 (103)
Increase (decrease) in other liabilities 243 (50)
--------- ---------
Net cash provided from operating activities 1,375 291
--------- ---------
Cash flows from investment activities:
Net decrease (increase) in loans (10,707) (980)
Purchases of AFS securities (322) (4,891)
Purchases of held-to-maturity securities 0 (10,645)
Principal payments on AFS securities 16 4
Sales of AFS securities 9,000 0
Maturities of available-for-sale securities 2,741 1,513
Purchase of life insurance policy (235) 0
Capital retirements (expenditures), net (48) 17
--------- ---------
Net cash used by investing activities 445 (14,982)
--------- ---------
Cash Flows from financing activities:
Net increase (decrease) in deposits 13,515 13,922
Dividends paid (157) (153)
Stock options exercised 167 0
--------- ---------
Net cash provided by (used) by financing activities 13,525 13,769
--------- ---------
Net increase (decrease) in cash and equivalents 15,345 (922)
Cash and equivalents at beginning of period 29,004 35,196
--------- ---------
Cash and cash equivalents at end of period $ 44,349 $ 34,274
--------- ---------
--------- ---------
Supplemental disclosure:
Income taxes paid $ 350 $ 210
Interest paid $ 1,677 $ 1,477
Page 4 of 16
MID-PENINSULA BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
March 31, 1996
(unaudited)
Note 1 - DESCRIPTION OF BUSINESS
Mid-Peninsula Bancorp is a California corporation organized in 1984
under the name San Mateo County Bancorp ("San Mateo") to act as the
bank holding company of San Mateo County National Bank which
subsequently changed its name to WestCal National Bank ("WestCal") in
1991. In 1994, WestCal was merged with and into Mid-Peninsula Bank, a
California state licensed bank organized in 1987 (the "Bank") in a
transaction in which the Bank survived and became the wholly-owned
subsidiary of San Mateo, and San Mateo concurrently changed its name
to Mid-Peninsula Bancorp (the "Company").
The headquarters of the Company and the Bank is located in Palo Alto,
California and the Bank conducts its banking business through its
offices in Palo Alto, San Mateo and San Carlos, California. Other
than holding the shares of the Bank, the Company conducts no
significant activities, although it is authorized, with the prior
approval of the Board of Governors of the Federal Reserve System (the
"Board of Governors"), the Company's principal regulator, to engage in
a variety of activities which are deemed closely related to the
business of banking.
The Bank engages in general commercial banking emphasizing small and
medium-sized businesses, and professionals located in its market area
in and adjacent to the San Francisco Peninsula from Los Altos and
Mountain View on the South to Daly City on the North and offers a full
range of commercial banking services, including the acceptance of
demand, savings and time deposits, and the making of commercial loans,
including short-term loans for businesses and professionals, personal
loans, and real estate secured loans, which generally do not include
long-term mortgage loans. The Bank offers traveler's checks, safe
deposit boxes, notary public, customer courier and other customary
bank services. The Bank is a member of the STAR System ATM network
and, through this system, offers ATM access at numerous locations.
Note 2 - BASIS OF PRESENTATION
In the opinion of the Company, the unaudited consolidated financial
statements, prepared on the accrual basis of accounting, contain all
adjustments (consisting of only normal recurring adjustments) which
are necessary to present fairly the financial position of the Company
and subsidiary at March 31, 1996 and December 31, 1995, and the
results of its operations for the three month periods ended March 31,
1996 and 1995.
Certain information and footnote disclosures normally presented in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The results of operations for
the three month period ended March 31, 1996 are not necessarily
indicative of the operating results for the full year ending December
31, 1996.
Page 5 of 16
Note 3 CONSOLIDATION
The accompanying consolidated condensed financial statements include
the accounts of the Company and its wholly owned subsidiary, Mid-
Peninsula Bank. All material intercompany accounts and
transactions have been eliminated in consolidation.
Note 4 PER SHARE DATA
Earnings per common share are calculated by dividing net income by the
weighted average shares of common stock outstanding during the year
plus the effect when dilutive of stock options. The weighted average
shares outstanding for the quarters ended March 31, 1996 and 1995 were
1,581,615 and 1,523,432, respectively.
Note 5 RECLASSIFICATIONS
Certain amounts in the accompanying 1996 and 1995 consolidated
condensed financial statements have been reclassified to conform with
the 1996 consolidated condensed financial statements presentation.
Note 6 ACCOUNTING PRONOUNCEMENT
In October, 1995, the FASB issued SFAS No. 123, Accounting for Stock-
Based Compensation. SFAS No. 123 establishes accounting and disclosure
requirements using a fair value method of accounting for stock based
employee compensation plans. Under SFAS No. 123, the Company may
either adopt the new fair value based accounting method or continue
the intrinsic value based method and provide proforma disclosures of
net income and earnings per share as if the accounting provisions of
SFAS No. 123 and such adoption had no effect on the Company's
consolidated net earnings or cash flows. The provisions of
SFAS No. 123 became effective January 1, 1996.
Page 6 of 16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MID-PENINSULA BANCORP AND SUBSIDIARY
OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS
Total assets were $232,989,000 at March 31, 1996, an increase of $14,254,000 or
7% over total assets of $218,735,000 at December 31, 1995. From December 31,
1995 to March 31, 1996, total loans increased $10,678,000 (9%), held-to-maturity
securities decreased $2,000 (0.02%), available-for-sale securities decreased
$11,763,000 (20%), federal funds sold increased $18,300,000 (117%), while cash,
premises and other assets had a net decrease of $2,839,000 (17%). The
substantial decrease in investment securities was due in part to the increase in
total loans and the increase of federal funds sold. The increase in asset size
was funded primarily from a $13,515,000 (7%) increase in deposits, a $543,000
(3%) increase in shareholders equity, and by a $196,000 (12%) increase in other
liabilities. The Bank's loan to deposit ratio increased from 64.18% at December
31, 1995 to 65.14% at March 31, 1996.
LOANS
Total outstanding commercial loans were $95,860,000 at March 31, 1996 compared
to $92,971,000 at December 31, 1995, an increase of $2,889,000 (3%). Real
estate construction loans increased $3,860,000 (44%) to $12,643,000 at March 31,
1996 compared to $8,783,000 at December 31, 1995, while other real estate loans
increased $3,958,000 (16%) to $28,254,000 at March 31, 1996 compared to
$24,296,000 at December 31, 1995. The Company lends primarily to small and
medium-sized businesses within its market area which is the San Francisco
Peninsula limited by Mountain View to the south and Daly City to the north. The
majority of the Company's loan portfolio consists of unsecured loans and real
estate loans to small to medium sized businesses.
The Company follows the policy of discontinuing the accrual of interest income
and reversing any accrued and unpaid interest when the payment of principal or
interest is 90 days past due, unless the loan is both well-secured and in the
process of collection.
At March 31, 1996, the Company had no non-accrual loans, the same as at December
31, 1995. The Company had no loans that were 90 or more days past due at the
close of either period. The ratio of non-performing loans to total loans was
0.00% at March 31, 1996, the same as at December 31, 1995.
Inherent in the lending function is the fact that loan losses will be
experienced and that the risk of loss will vary with the type of loan extended
and the creditworthiness of the borrower. To reflect the estimated risks of
loss associated with its loan portfolio, additions were made to the Company's
allowance for possible loan losses. As an integral part of this process, the
allowance for possible loan losses is subject to review and possible adjustment
as a result of regulatory examinations conducted by governmental agencies and
through management assessments of risk. The Company's entire allowance
Page 7 of 16
is a valuation allocation; that is, it has been created by direct charges
against operations through the provision for possible loan losses, modified by
loan charge-offs and loan recoveries.
The provision for possible loan losses charged against operations is based upon
the actual net loan losses incurred plus an amount for other factors, which in
management's judgment deserve recognition in estimating possible loan losses.
The Company evaluates the adequacy of its allowance for possible loan losses on
an ongoing basis. Periodically, the Company has contracted with outsiders to
perform an independent loan review. Both internal and external evaluations take
into account the following: specific loan conditions as determined by
management, the historical relationship between charge-offs and the level of the
allowance, the estimated future loss in all significant loans, known
deterioration in concentrations of credit, certain classes of loans or pledged
collateral, historical loss experience based on volume and types of loans, the
results of any independent review or evaluation of the loan portfolio quality
conducted by or at the direction of Company management or by the bank regulatory
agencies, trends in delinquencies and non-accruals, lending policies and
procedures including those for charge-off, collection and recovery, national and
local economic conditions and their effect on specific local industries, and the
experience, ability and depth of lending management and staff. These factors
are essentially judgmental and may not be reduced to a mathematical formula.
The ratio of the allowance for possible loan losses to total loans was 1.35% at
March 31, 1996 compared to 1.37% at December 31, 1995. The Company provided an
additional $120,000 during the first quarter of 1996 as an additional hedge
against possible loan losses in a larger loan portfolio. There were no charge-
offs during the quarter. The Company evaluates the allowance for possible loan
losses based upon an analysis of specific categories of loans. The adequacy of
the allowance is determinable only on an approximate basis since estimates as to
the magnitude and timing of loan losses are not predictable because of the
impact of external events. Management then considers the adequacy of the
allowance for possible loan losses in relation to the total loan portfolio.
Management believes that the allowance for credit losses at March 31, 1996 is
adequate, based on information currently available. However, no prediction of
the ultimate level of loans charge-off in future periods can be made with any
certainty.
LIQUIDITY MANAGEMENT
Liquidity represents the ability of the Company to meet the requirements of
customer borrowing needs as well as fluctuations in deposit flows. Core
deposits, which include demand, interest-bearing demand, savings, money market,
and time certificates of deposit under $100,000, provide a relatively stable
funding base. Core deposits represented 82% of total deposits at March 31, 1996
compared to 81% of total deposits at year-end 1995. The Company's principal
sources of asset liquidity are cash and due from banks, federal funds sold, and
unpledged available-for-sale investment securities. At March 31, 1996, these
sources totaled $85,119,000 or 40.69% of total deposits compared to $80,032,000
or 40.90% at year-end 1995. In the opinion of management, there are sufficient
resources to meet the liquidity needs of the Company at present and foreseeable
future levels.
Page 8 of 16
INTEREST RATE SENSITIVITY
The Company defines interest rate sensitivity as the measure of the relationship
between market interest rates and net interest income due to repricing
characteristics of assets, liabilities and off-balance sheet instruments.
Generally, if assets and liabilities do not reprice at the same time and in
equal volumes, the potential for exposure to interest rate fluctuations exists.
In order to maximize the net yield on earning assets and maintain the interest
rate spread during periods of fluctuating interest rates, management monitors
the repricing period of interest earning assets as compared with interest
bearing liabilities. The difference between the amount of assets and
liabilities that reprice in any given time period is referred to as the interest
rate sensitivity gap. While the Company attempts to manage its exposure to
interest rate sensitivity, due to its size and direct competition from the major
banks, it must offer products which are competitive in the market place, even if
they are less than optimum with respect to the Bank's interest rate exposure.
The following table sets forth the distribution of repricing opportunities of
the Bank's earning assets and interest bearing liabilities as of March 31, 1996,
the interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), the cumulative interest rate gap, the
interest rate gap (i.e., interest rate sensitive assets divided by interest rate
sensitive liabilities) and the cumulative interest rate gap ratio. The table
sets forth the time periods during which earning assets and interest-bearing
liabilities will mature or may reprice in accordance with their contractual
terms. However, the table does not necessarily indicate the impact of general
interest rate movement on the net interest margin since the repricing of various
categories of assets and liabilities indicated as repricing within the same
period may in fact reprice at different times within such periods and at
different rates.
INTEREST RATE SENSITIVITY
(in thousands, except ratios)
Next Day Four One
through Months through After
Assets and liabilities three through five five
which mature or reprice Immediately months one Year years Years Total
- -----------------------------------------------------------------------------------------------------------------
Federal funds sold $ 34,000 -- -- -- -- 34,000
Investment securities -- 15,859 5,021 14,791 12,385 48,056
Loans 122,880 2,267 8,208 2,773 407 136,535
- -----------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS $ 156,880 18,126 13,229 17,564 12,792 218,591
- -----------------------------------------------------------------------------------------------------------------
Demand, money market
and savings $ 126,430 -- -- -- -- 126,430
Time Deposits -- 35,939 10,718 294 -- 46,591
- -----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 126,430 35,939 10,718 294 -- 173,381
- -----------------------------------------------------------------------------------------------------------------
Interest rate gap $ 30,450 (17,813) 2,511 17,270 12,792 45,210
- -----------------------------------------------------------------------------------------------------------------
Cumulative interest
rate gap $ 30,450 12,637 15,148 32,418 45,210
- -----------------------------------------------------------------------------------------------------------------
Interest rate gap ratio 1.24* (0.50)* 1.13* 59.74*
- -----------------------------------------------------------------------------------------------------------------
Cumulative interest
rate gap ratio 1.24* 1.08* 1.09* 1.19*
- -----------------------------------------------------------------------------------------------------------------
Page 9 of 16
CAPITAL RESOURCES
Capital management is a continuous process of providing adequate capital for
current needs and anticipated future growth. Capital serves as a source of funds
for the acquisition of fixed and other assets and protects depositors against
potential losses. As the Company's assets increase, so do its capital
requirements.
The Board of Governors and the FDIC have adopted risk-based capital guidelines
for evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, the Company and the Bank are required to
maintain capital equal to at least 8.00% of its assets and commitments to extend
credit, weighted by risk of which at least 4.00% must consist primarily of
common equity (including retained earnings) and the remainder may consist of
subordinated debt, cumulative preferred stock or a limited amount of loan loss
reserves.
The Board of Governors also adopted a 3.00% minimum leverage ratio for banking
organizations as a supplement to the risk-weighted capital guidelines. The
leverage ratio is generally calculated using Tier 1 capital (as defined under
risk-based capital guidelines) divided by quarterly average net total assets
(excluding intangible assets and certain other adjustments). The leverage ratio
establishes a limit on the ability of banking organizations, including the
Company and the Bank, to increase assets and liabilities without increasing
capital proportionately.
The Board of Governors emphasized that the leverage ratio constitutes a minimum
requirement for well-run banking organizations having diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and a composite rating of 1 under the regulatory rating
system for banks and 1 under the regulatory rating system for bank holding
companies. Banking organizations experiencing or anticipating significant
growth, as well as those organizations which do not exhibit the characteristics
of a strong well-run banking organization described above, will be required to
maintain minimum capital ranging generally from 100 to 200 basis points in
excess of the leverage ratio. The FDIC adopted a substantially similar leverage
ratio for state non-member banks.
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). The FDICIA, among other matters,
substantially revises banking regulations and establishes a framework for
determination of capital adequacy of financial institutions. Under the FDlCIA,
financial institutions are placed into one of five capital adequacy categories
as follows; (1) Well Capitalized, consisting of institutions with a total risk-
based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of
6.00% or greater and a leverage ratio of 5.00% or greater, and the institution
is not subject to an order, written agreement, capital directive or prompt
corrective action directive; (2) Adequately Capitalized, consisting of
institutions with a total risk-based capital ratio of 8.00% or greater, a Tier 1
risk-based capital ratio of 4.00% or greater and a leverage ratio of 4.00% or
greater, and the institution does not meet the definition of a well capitalized
institution; (3) Undercapitalized, consisting of institutions with a total risk-
based capital ratio of less than 8.00%, a Tier 1 risk-based capital ratio of
less that 4.00% or a leverage ratio of less than 4.00%; (4) Significantly
Undercapitalized, consisting of institutions with a total risk-based capital
ratio of less than 6.00%, a Tier 1 risk-based capital ratio of less than 3.00%
or a leverage ratio of less than 3.00%; (5) Critically Undercapitalized,
consisting of an institution with a ratio off tangible equity to total assets
that is equal to or less than 2.00%.
Page 10 of 16
Financial institutions classified as undercapitalized or below are subject to
various limitations including, among other matters, certain supervisory actions
by bank regulatory authorities and restrictions related to (i) growth of assets,
(ii) payment of interest on subordinated indebtedness, (iii) payment of
dividends or other capital distribution, and (iv) payment of management fees to
a parent holding company. The FDICIA requires the bank regulatory authorities
to initiate corrective action regarding financial institutions which fail to
meet minimum capital requirements. Such action may result in orders to, among
other matters, augment capital and reduce total assets. Critically
undercapitalized financial institutions may also be subject to appointment of a
receiver or conservator unless the financial institution submits an adequate
capitalization plan.
The following table sets forth the Company's risk-weighted and leverage capital
ratios as of March 31, 1996 and December 31, 1995. As indicated in the table,
the Company's capital ratios significantly exceeded the minimum capital levels
required by current federal regulations.
RISK-BASED CAPITAL
(in thousands, except ratios)
March 31. 1995 December 31, 1995
----------------- -----------------
Ratios Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------
Tier 1 Capital $ 21,797 13.33% 21,440 14.36%
Tier 1 Capital minimum
requirement $ 6,539 4.00% 5,971 4.00%
- -----------------------------------------------------------------------------
Total Capital $ 23,633 14.46% 23,156 15.51%
Total Capital minimum
requirement $ 13,078 8.00% 11,944 8.00%
- -----------------------------------------------------------------------------
Total risk-adjusted assets $ 163,482 149,296
- -----------------------------------------------------------------------------
Leverage Ratio:
- -----------------------------------------------------------------------------
Tier 1 Capital to adjusted
total assets $ 21,797 10.78% 21,440 9.76%
- -----------------------------------------------------------------------------
Quarterly average
total assets $ 221,012 219,783
- ------------------------------------------------------------------------------
Page 11 of 16
INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on manufacturing, or other commercial concerns, primarily because
its assets and liabilities are largely monetary. In general, inflation
primarily affects the Company indirectly through its effect on market rates of
interest, and thus the ability of the Bank to attract loan customers. Inflation
affects the growth of total assets by increasing the level of loan demand, and
potentially adversely affects the Company's capital adequacy because loan growth
in inflationary periods can increase at rates higher than the rate that capital
grows through retention of earnings which the Company may generate in the
future. In addition to its effects on interest rates, inflation directly
affects the Company by increasing the Company's operating expenses. The effect
of inflation upon the Company's results of operations was not material for the
periods covered by this report.
Page 12 of 16
RESULTS OF OPERATIONS
Three months Ended March 31, 1996
Compared with the
Three months Ended March 31, 1995
Net income of $777,000 for the three months ended March 31, 1996 increased
$153,000 or 25% as compared to the $624,000 earned for the same period ended
March 31, 1995. The increase in net income for the period was primarily due to
an increase in net interest income that was higher than the increases noted in
the provision for possible loan losses and operating expenses aided by an
increase in non-interest income.
Net interest income for March 31, 1996 was $2,792,000, compared to $2,421,000
for the same period ended March 31, 1995, an increase of $371,000 or 15%. 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 the three months
ended March 31, 1996, the Company had $207,275,000 of average interest-earning
assets compared to $178,256,000 for the same period ended March 31, 1995, an
increase of $28,749,000 or 16%. The Company's yield on earning assets for the
three months ended March 31, 1996 decreased to 8.70% compared to 8.79% during
the comparable period in 1995. The decrease in earnings yields reflects the
highly competitive nature of the Bank's market as well as declines in interest
rates in the Federal funds and securities markets. Interest income increased
$562,000 or 14% for the three months ended March 31, 1996 compared to the same
1995 period due to the increase in average earnings assets offset by the
decline in earning asset yields.
The following table presents, for the periods indicated, the Company's total
dollar amount of interest income, on a tax equivalent basis, from average
interest-earning assets and the resultant yields, as well as the interest
expense of 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.
Average deposits for the Company for the three months ended March 31, 1996 were
$197,580,000, a $28,550,000 or 17% increase compared to the quarter ended March
31, 1995. The Company's average cost of funds for the period ended March 31,
1996 was 3.37% which yielded a net spread of 4.65%. This compares to an average
cost of funds of 3.49% and a net spread of 4.61% for the comparable 1995 period.
Interest expense of $1,664,000 for the three months ended March 31, 1996 was
$191,000 or 13% more than the comparable 1995 period. Net interest income for
the period ended March 31, 1996 increased $371,000 or 15% to $2,792,000 and
resulted from increased levels of earning assets at higher earning asset yields
and deposits at moderately increased levels of interest-bearing expense rates.
Page 13 of 16
INTEREST RATE SPREAD ANALYSIS
(in thousands, except percentages)
March 31, 1996 March 31, 1995
------------------------------------ ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------
Assets:
Loans (1) $ 131,986 3,419 10.36% 109,025 2,900 10.64%
Taxable investments 40,472 595 5.88 31,063 467 6.01
Non-taxable investments (2) 12,091 209 6.91 6,555 106 6.47
Federal funds sold 22,726 285 5.02 31,883 448 5.62
- -----------------------------------------------------------------------------------------------------------------------
Total earning assets 207,275 4,508 8.70% 178,526 3,921 8.79%
- -----------------------------------------------------------------------------------------------------------------------
Cash and due from banks 9,557 7,528
Premises and equipment, net 920 917
Other Assets 3,260 1,157
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 221,012 188,128
- -----------------------------------------------------------------------------------------------------------------------
Liabilities and Equity
Demand w/ interest, $ 10,180 52 2.04% 10,032 52 2.07%
Savings and money market 109,278 1,027 3.76 93,357 976 4.18
Time deposits $100,000 and over 36,142 473 5.23 30,232 359 4.75
Other time deposits 8,586 112 5.22 7,459 86 4.61
- -----------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 164,186 1,664 4.05% 141,080 1,473 4.18%
Non-interest demand deposits 33,394 27,950
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 197,580 1,664 3.37% 169,030 1,473 3.49%
Other Liabilities 1,634 921
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 199,214 169,951
Shareholders' equity 21,798 18,177
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $ 221,012 188,128
- -----------------------------------------------------------------------------------------------------------------------
Net interest spread 4.65% 4.61%
Net interest income/margin (3) $ 2,844 5.49% 2,448 5.48%
1. Loan interest includes loan fees of $194,000 and $147,000 for March 1996
and March 1995, respectively.
2. Tax exempt interest income includes $53,000 and $27,000 for March 1996 and
March 1995, respectively, to adjust to a fully taxable equivalent basis using
the Federal statutory rate of 34%.
3. Net interest margin is computed by dividing net interest income by total
average earning assets as adjusted for any non-accrual loans.
Page 14 of 16
The Company provided $120,000 to the allowance for possible loan losses for the
three months ended March 31, 1996 compared to $75,000 for the comparable period
in 1995. This modest addition to the allowance recognizes the improvement of the
local economy, resulting in a lower level of classified loans and charge-offs.
No Loans were charged-off for the three months ended March 31, 1996, the same as
during the comparable period ending March 31, 1995.
Non-interest income was $182,000 during the period ending March 31, 1996
compared to $94,000 during the comparable period in 1995 due primarily to an
increase of service charge income.
Salaries and benefits expense for the three months ended March 31, 1996 was
$954,000, a $127,000 or 15% increase over the comparable period in 1995. This
increase includes normal cost of living increases and selective additions to
staff to take advantage of a larger, more complex market area and service
organization.
Other non-interest expenses including occupancy expense were $585,000 for the
period ended March 31, 1996 compared to $595,000 for the same period in 1995 a
$10,000 or 2% decrease due primarily to decreased regulatory expense.
Applicable income taxes of $538,000 for the three months ended March 31, 1996
were $144,000 or 37% higher than for the comparable 1995 period. The Company's
effective tax rate for the three months ending March 31, 1996 was 40.90%
compared to 38.70% for the comparable period in 1995.
Page 15 of 16
PART 11-OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a vote of Security Holders
None
Item 5 - Other Materially Important Events
None
Item 6 - Exhibits and Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
MID-PENINSULA BANCORP
MAY 9, 1996 By: /s/ David L. Kalkbrenner
- ----------- ---------------------------------
Date David L. Kalkbrenner
President and
Chief Executive Officer
(Principal Executive Officer)
May 9, 1996 By: /s/ Carol H. Rowland
- ----------- ---------------------------------
Date Carol H. Rowland
First Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 16 of 16