SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
- --------- Exchange Act of 1934
For the Quarterly period ended June 30, 1996 or
------------------------------
- --------- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------ ------------
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
-----------------
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 July 30, 1996
------------ -----------------------------------
Common Stock 1,635,843
The Index to Exhibits is located at page 22.
Page 1 of 69 Pages
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
(Dollars in thousands)
Assets: June 30, 1996 December 31, 1995
- ------ ------------- -----------------
(unaudited) (audited)
Cash and due from banks $ 12,024 $ 13,304
Federal funds sold 36,400 15,700
Investment Securities:
Available-for-sale, at fair value 47,855 58,533
Held-to-maturity, at amortized cost 2,397 857
(fair value of $2,412,000 &
$838,000 in 1996 and 1995
respectively)
Federal reserve bank stock 430 430
Loans:
Commercial 107,107 92,971
Real estate - construction 15,117 8,783
Real estate - other 26,197 24,296
Less deferred loan fees (454) (448)
-------- --------
Total loans 147,967 125,602
Less allowance for possible
loan losses (1,933) (1,716)
-------- --------
Net loans 146,034 123,886
Premises and equipment, net 1,026 995
Accrued interest and other assets 5,246 5,030
-------- --------
Total Assets $251,412 $218,735
-------- --------
-------- --------
Liabilities and Shareholders' Equity
- ------------------------------------
Deposits:
Demand, noninterest-bearing $ 41,764 $ 37,077
Demand, interest-bearing 10,214 11,926
Savings and money market 117,090 102,124
Time certificates, $100,000 and over 49,079 36,682
Other time certificates 8,987 7,886
-------- --------
Total deposits 227,134 195,695
Accrued interest and other liabilities 1,480 1,600
-------- --------
Total liabilities 228,614 197,295
Shareholders' equity:
Common stock, no par value -
6,000,000 shares authorized;
1,628,343 and 1,571,757 shares
issued and outstanding in 1996
& 1995, respectively 15,966 15,425
Unrealized loss on securities
available-for-sale, net (897) (626)
Retained earnings 7,729 6,641
-------- --------
Total Shareholders' equity 22,798 21,440
-------- --------
Total Liabilities and Shareholders'
equity $251,412 $218,735
-------- --------
-------- --------
Page 2 of 69 Pages
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(unaudited)
(in thousands, except share and per share amounts)
Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
1996 1995 1996 1995
---------- ---------- ---------- ----------
Interest income:
Loans (including fees) $ 3,622 $ 3,081 $ 7,041 $ 5,981
Investment securities 630 813 1,382 1,359
Federal funds sold 424 351 709 799
---------- ---------- ---------- ----------
Total interest income 4,676 4,245 9,132 8,139
Interest expense:
Demand, interest-bearing 54 56 106 108
Savings and money market 1,048 1,023 2,075 1,999
Time certificates, $100,000 and over 540 460 1,013 819
Other time certificates 114 92 226 178
---------- ---------- ---------- ----------
Total interest expense 1,756 1,631 3,420 3,104
---------- ---------- ---------- ----------
Net interest income 2,920 2,614 5,712 5,035
Provision for possible loan losses 100 80 220 155
---------- ---------- ---------- ----------
Net interest income after provision for
possible loan losses 2,820 2,534 5,492 4,880
Noninterest income 97 147 279 242
Noninterest expenses:
Salaries and employee benefits 978 854 1,932 1,681
Occupancy and equipment 288 241 572 467
Other 307 456 608 826
---------- ---------- ---------- ----------
Total noninterest expense 1,573 1,551 3,112 2,974
---------- ---------- ---------- ----------
Income before income taxes 1,344 1,130 2,659 2,148
Income taxes 550 453 1,088 847
---------- ---------- ---------- ----------
Net income $ 794 $ 677 $ 1,571 $ 1,301
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common share
Equivalents outstanding 1,620,865 1,540,762 1,629,992 1,537,216
Earnings per weighted average share $0.49 $0.44 $0.96 $0.85
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Page 3 of 69 Pages
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
June 30 June 30
1996 1995
------- -------
Cash flows from operating activities:
Net income $ 1,571 $ 1,301
Adjustments to reconcile net income to net cash
provided by operating activities -
Loss (gain) on sale of securities 97 (3)
Provision for possible loan losses 220 155
Depreciation and amortization 160 142
Increase in interest receivable 93 (114)
Increase in other assets (293) (205)
Increase(decrease) in deferred tax benefit 58 140
Increase(decrease) in deferred loan fees 6 (108)
Decrease in other liabilities (120) (235)
Amortization of Premium - Securities (88) (78)
------- -------
Net cash provided from operating activities 1,704 995
------- -------
Cash flows from investing activities:
Net increase in loans (22,368) (5,897)
Purchases of available-for-sale securities (11,414) 1,447
Purchases of held-to-maturity securities (1,540) (25,482)
Principal payments on available-for-sale securities 25 26
Sales of available-for-sale securities 5,490 -
Maturities/calls of available-for-sale securities 16,045 -
Maturities/calls of held-to-maturity securities - 1,000
Additional investment in other real estate owned - (476)
Purchase of life insurance policy (297) (2,235)
Capital expenditures, net (191) (97)
------- -------
Net cash used by investing activities (14,250) (31,714)
------- -------
Cash Flows from financing activities:
Net increase in deposits 31,526 20,814
Dividends paid (640) (306)
Stock options exercised 1,080 21
------- -------
Net cash provided by (used) by financing activities 31,966 20,529
------- -------
Net increase in cash and equivalents 19,420 (10,190)
Cash and cash equivalents at beginning of period 29,004 35,196
------- -------
Cash and cash equivalents at end of period $48,424 $25,006
------- -------
------- -------
Supplemental disclosures:
Income taxes paid $ 760 $ 1,135
Interest paid $ 3,420 $ 3,130
Page 4 of 69 Pages
MID-PENINSULA BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
June 30, 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 condensed 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 June 30, 1996 and
December 31, 1995, and the results of its operations for the
quarter and year-to-date periods ended June 30, 1996 and 1995.
Page 5 of 69 Pages
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 quarter and year-to-date periods ended June 30, 1996 are
not necessarily indicative of the operating results for the full
year ending December 31, 1996.
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 June 30, 1996 and
1995 were 1,620,865 and 1,524,806 respectively.
Note 5 RECLASSIFICATIONS
Certain amounts in the accompanying 1995 consolidated condensed
financial statements have been reclassified to conform with the
1996 consolidated condensed financial statements presentation.
Note 6 CASH DIVIDEND
The company paid a quarterly cash dividend of $0.15 per share on
July 12, 1996 to shareholders of record on June 28, 1996.
Page 6 of 69 Pages
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 $251,412,000 at June 30, 1996, an increase of $32,677,000
or 15% over total assets of $218,735,000 at December 31, 1995. From December
31, 1995 to June 30, 1996, total loans increased $22,365,000 (18%),
held-to-maturity securities increased $1,540,000 (180%), available-for-sale
securities decreased $10,678,000 (18%), federal funds sold increased
$20,700,000 (132%), while cash, premises and other assets had a net decrease
of $1,033,000 (5%). 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 $31,439,000
(16%) increase in deposits, a $1,358,000 (6%) increase in shareholders'
equity, offset by a $120,000 (8%) decrease in other liabilities. The Bank's
loan to deposit ratio increased from 64.18% at December 31, 1995 to 65.15% at
June 30, 1996.
LOANS
Total outstanding commercial loans were $107,107,000 at June 30, 1996
compared to $92,971,000 at December 31, 1995, an increase of $14,136,000
(15%). Real estate construction loans increased $6,334,000 (72%) to
$15,117,000 at June 30, 1996 compared to $8,783,000 at December 31, 1995,
while other real estate loans increased $1,901,000 (8%) to $26,197,000 at
June 30, 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.
Management generally places loans on nonaccrual status when they become 90
days past due, unless the loan is well secured and in the process of
collection. Loans are charged off when, in the opinion of management,
collection appears unlikely. At June 30, 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 June 30, 1996, the
same as at December 31, 1995. The Company had no troubled debt or
restructured loans, potential problem loans or loan concentrations at June
30, 1996 and 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
Page 7 of 69 Pages
entire allowance 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 1.31%
at June 30, 1996 compared to 1.37% at December 31, 1995. The Company provided
an additional $220,000 during the first half of 1996 as an additional hedge
against possible loan losses in a larger loan portfolio. There were $3,000
in charge-offs during the period. 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 June 30, 1996 is adequate, based on information currently
available. However, no prediction of the ultimate level of loan charge-offs
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 78% of total deposits at June
30, 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 June
30, 1996, these sources totaled $90,279,000 or 39.75% 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 69 Pages
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 June 30,
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.
REPRICING PERIODS
ONE 2-180 181-365 > 1 YEAR OVER NON-RATE
(Dollars in thousands) DAY DAYS DAYS TO 5 YEARS 5 YEARS SENSITIVE TOTAL
- -----------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE ASSETS:
FEDERAL FUNDS SOLD $ 36,400 - - - - 36,400
AVAILABLE-FOR-SALE INV. 12,118 2,043 5,837 19,213 8,644 - 47,855
HELD-TO-MATURITY INV. - - 853 541 1,003 - 2,397
OTHER INVESTMENTS - - - - 430 - 430
LOANS 130,092 6,310 2,731 8,137 184 967 148,421
LOAN LOSS/UNEARNED FEES - - - - - (2,387) (2,387)
CASH AND DUE FROM BANKS - - - - - 12,024 12,024
OTHER ASSETS - - - - - 6,272 6,272
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $178,610 8,353 9,421 27,891 10,261 16,876 251,412
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES AND
EQUITY:
DEPOSITS
DEMAND $ - - - - - 41,764 41,764
INTEREST CHECKING 10,214 - - - - - 10,214
MMDA AND SAVINGS 117,090 - - - - - 117,090
TIME DEPOSITS
> $100 MILLION - 42,290 6,689 100 - - 49,079
< $100 MILLION - 6,438 2,302 247 - - 8,987
OTHER LIABILITIES - - - - - 1,480 1,480
SHAREHOLDERS' EQUITY - - - - - 22,798 22,798
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $127,304 48,728 8,991 347 - 66,042 251,412
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
GAP $ 51,306 (40,375) 430 27,544 10,261 (49,166) -
CUMULATIVE GAP 51,306 10,931 11,361 38,905 49,166 - -
CUMULATIVE GAP/TOTAL ASSETS 20.41% 4.35% 4.52% 15.47% 19.56% - -
Page 9 of 69 Pages
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 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
Page 10 of 69 Pages
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%.
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 June 30, 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 Ratio
(unaudited)
June 30, 1996 December 31, 1995
--------------- -----------------
Ratios (dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------
Tier 1 capital $ 22,784 12.15% $ 21,440 14.36%
Tier 1 capital minimum requirement $ 7,499 4.00% $ 5,971 4.00%
Total capital $ 24,717 13.18% $ 23,156 15.51%
Total capital minimum requirement $ 14,999 8.00% $ 11,944 8.00%
Total risk based assets $187,492 $149,296
Leverage Capital Ratio
(unaudited)
June 30, 1996 December 31, 1995
--------------- -----------------
Ratios (dollars in thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------
Tier 1 capital to adjusted total assets $ 22,784 9.97% $ 21,440 9.76%
Quarterly average total assets $228,568 $219,783
Page 11 of 69 Pages
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.
MERGER
Mid-Peninsula Bancorp and Cupertino National Bancorp signed an Amended and
Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996
(the "Agreement"), whereby Cupertino National Bancorp will merge with and
into Mid-Peninsula Bancorp and Mid-Peninsula Bancorp will change its name to
Greater Bay Bancorp. Mid-Peninsula Bank and Cupertino National Bank & Trust
will operate as wholly-owned subsidiaries of Greater Bay Bancorp and will
focus on serving the greater Bay area, including the Peninsula and South Bay
markets, through their seven office locations.
The terms of the Agreement provide for Cupertino National Bancorp
shareholders to receive .81522 of a share of Mid-Peninsula Bancorp common
stock for each share of Cupertino National Bancorp common stock in a tax-free
exchange to be accounted for as a "pooling-of-interests." As part of the
Agreement, Mid-Peninsula will list its shares on the Nasdaq National Market,
and, concurrent with closing, will be renamed Greater Bay Bancorp. Following
the merger, the shareholders of Mid-Peninsula Bancorp will own approximately
51% of the combined company and the shareholders of Cupertino National
Bancorp will own approximately 49% of the combined company, giving effect to
all outstanding options.
Greater Bay Bancorp's new Board of directors will consist of five directors
from Mid-Peninsula Bancorp and five from Cupertino National Bancorp, with
Duncan L. Matteson (Chairman of Mid-Peninsula Bancorp) and John M. Gatto
(Chairman of Cupertino National Bancorp) serving as co-Chairmen. David L.
Kalkbrenner, who will serve as President and Chief Executive Officer of
Greater Bay Bancorp, will continue as President and Chief Executive Officer
of Mid-Peninsula Bank, and C. Donald Allen will remain as Chairman and Chief
Executive Officer of Cupertino National Bank & Trust. Steven C. Smith, the
Chief Operating Officer of Cupertino National Bancorp, will serve as Chief
Operating Officer and Chief Financial Officer of Greater Bay Bancorp.
In connection with the Agreement, Mid-Peninsula Bancorp and Cupertino
National Bancorp have granted each other options to purchase up to 19.0% of
the outstanding shares of each other's common stock under certain
circumstances in the event the transaction is terminated. The merger is
expected to be completed in the fourth quarter of 1996, subject to
shareholder and regulatory approvals.
Page 12 of 69 Pages
RESULTS OF OPERATIONS
Three months Ended June 30, 1996
Compared with the
Three months Ended June 30, 1995
Net income of $794,000 for the three months ended June 30, 1996 increased
$117,000 or 17% as compared to the $677,000 earned for the same period ended
June 30, 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 June 30, 1996 was $2,920,000, compared to $2,614,000
for the same period ended June 30, 1995, an increase of $306,000 or 12%. 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 June 30, 1996, the Company had $221,874,000 of average
interest-earning assets compared to $189,217,000 for the same period ended
June 30, 1995, an increase of $32,657,000 or 17%. The Company's yield on
interest-earning assets for the three months ended June 30, 1996 decreased to
8.56% compared to 8.97% during the comparable period in 1995. The decrease in
earnings yield 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 $431,000 or 10% for the three months ended
June 30, 1996 compared to the same 1995 period due to the increase in average
interest-earning assets offset by the decline in earning asset yields.
Average deposits for the Company for the three months ended June 30, 1996
were $211,649,000, a $31,404,000 or 17% increase compared to the quarter
ended June 30, 1995. The Company's average cost of funds for the period ended
June 30, 1996 was 3.32% which yielded a net spread of 4.51%. This compares to
an average cost of funds of 3.62% and a net spread of 4.74% for the
comparable 1995 period. Interest expense of $1,756,000 for the three months
ended June 30, 1996 was $125,000 or 8% more than the comparable 1995 period.
Net interest income for the period ended June 30, 1996 increased $306,000 or
12% to $2,920,000 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 69 Pages
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 average earning balances for the periods
indicated.
AVERAGE BALANCE SHEET
MID-PENINSULA BANCORP AND SUBSIDIARY
Average Balance Sheet
Three Months ended June 30
(unaudited)
(in thousands, except percentages) 1996 1995
- -----------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate(1) Balance Interest Rate (1)
- ------------------------------------------------------------------------------------------
Assets:
Loans $143,125 $3,622(2) 10.12% $112,767 $3,081(2) 10.93%
Taxable investments 34,105 493 5.78% 45,405 709 6.25%
Non-taxable investments 11,915 208 6.98% 7,589 104 5.48%
Fed funds sold and other 32,729 424 5.18% 23,456 351 5.99%
-------- ------- ------ --------- ------- ------
Total earning assets 221,874 $4,747 8.56% 189,217 $4,245 8.97%
Cash and due from banks 10,103 7,412
Premises and equipment, net 899 931
Other assets (3) 3,254 2,455
-------- --------
Total assets $236,130 $200,015
-------- --------
-------- --------
Liabilities and Shareholders'
Equity:
Deposits:
Demand with interest $ 11,711 $ 54 1.84% $ 11,588 $ 56 1.93%
Savings and money market 111,093 1,048 3.77% 97,835 1,023 4.18%
Time deposits GREATER THAN
$100,000 41,717 540 5.18% 37,241 460 4.94%
Other time deposits 8,922 114 5.11% 7,270 92 5.06%
-------- ------- ------ --------- ------- ------
Total interest-bearing deposits 173,443 1,756 3.32% 153,934 1,631 3.62%
------- -------
Non-interest deposits 38,206 26,311
Other liabilities 2,031 1,145
-------- --------
Total liabilities 213,680 181,390
Shareholders' equity 22,450 18,625
-------- --------
Total liabilities and equity $236,130 $200,015
-------- --------
-------- --------
Net interest spread 4.51% 4.73%
Net interest income
and margin $2,991 5.39% $2,614 5.53%
- -----------------------------------------------------------------------------------------
(1) Annualized
(2) Loan interest income includes fee income of $187,000 and $156,000 for
the quarters ended June 30, 1996 and 1995, respectively
(3) Includes the average allowances for loan losses of $1,875,000 and
$1,536,000 and average deferred loan fees of $428,000 and $341,000
for the quarters ended June 30, 1996 and 1995, respectively
The Company provided $100,000 to the allowance for possible loan losses for
the three months ended June 30, 1996 compared to $80,000 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.
Net charge-offs were $3,000 for the three months ended June 30, 1996 ,
compared to net recoveries of $2,000 in the three month period ending June
30, 1995.
Page 14 of 69 Pages
Non-interest income was $97,000 during the period ending June 30, 1996
compared to $147,000 during the comparable period in 1995 due primarily to an
investment loss.
Salaries and benefits expense for the three months ended June 30, 1996 was
$978,000, a $124,000 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 $595,000 for the
period ended June 30, 1996 compared to $697,000 for the same period in 1995,
a $102,000 or 15% decrease due primarily to decreased FDIC insurance premiums.
Applicable income taxes of $550,000 for the three months ended June 30, 1996
were $97,000 or 21% higher than for the comparable 1995 period. The Company's
effective tax rate for the three months ending June 30, 1996 was 41% compared
to 40% for the comparable period in 1995.
Page 15 of 69 Pages
RESULTS OF OPERATIONS
Six months Ended June 30, 1996
Compared with the
Six months Ended June 30, 1995
Net income of $1,571,000 for the six months ended June 30, 1996 increased
$270,000 or 21% as compared to the $1,301,000 earned for the same period
ended June 30, 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 the six months ended June 30, 1996 was $5,712,000,
compared to $5,035,000 for the same period ended June 30, 1995, an increase
of $677,000 or 13%. 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 six months ended June
30, 1996, the Company had $214,574,000 of average interest-earning assets
compared to $184,192,000 for the same period ended June 30, 1995, an increase
of $30,382,000 or 16%. The Company's yield on interest-earning assets for
the six months ended June 30, 1996 decreased to 8.65% compared to 8.84%
during the comparable period in 1995. The decrease in earnings yield 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 $993,000 or 12% for the six months ended June 30, 1996 compared to
the same 1995 period due to the increase in interest earning assets offset
by the decline in earning asset yields.
Average deposits for the Company for the six months ended June 30, 1996 were
$204,318,000, a $29,649,000 or 17% increase compared to the period ended June
30, 1995. The Company's average cost of funds for the period ended June 30,
1996 was 3.35% which yielded a net spread of 4.59%. This compares to an
average cost of funds of 3.55% and a net spread of 4.63% for the comparable
1995 period. Interest expense of $3,420,000 for the six months ended June 30,
1996 was $316,000 or 10% more than the comparable 1995 period. Net interest
income for the period ended June 30, 1996 increased $677,000 or 13% to
$5,712,000 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 16 of 69 Pages
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 average earning balances for the periods
indicated.
AVERAGE BALANCE SHEET
MID-PENINSULA BANCORP AND SUBSIDIARY
Average Balance Sheet
Six Months ended June 30
(unaudited)
(in thousands, except percentages) 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate (1) Balance Interest Rate (1)
- -------------------------------------------------------------------------------------------------------------------------
Assets:
Loans $137,555 $7,041(2) 10.24% $111,100 $5,981(2) 10.77%
Taxable investments 36,646 1,088 5.94% 38,868 1,176 6.05%
Non-taxable investments 12,003 445 7.41% 6,578 183 5.56%
Fed funds sold and other 28,370 709 5.00% 27,646 799 5.78%
-------- ------ ------ ------- ----- ------
Total earning assets 214,574 $9,283 8.65% 184,192 $8,139 8.84%
Cash and due from banks 9,830 7,470
Premises and equipment, net 909 924
Other assets(3) 3,255 1,522
-------- -------
Total assets $228,568 $194,108
-------- --------
-------- --------
Liabilities and Shareholders'
Equity:
Deposits:
Demand with interest $11,438 $ 106 1.85% $ 10,814 $ 108 2.00%
Savings and money market 109,397 2,075 3.79% 95,609 1,999 4.18%
Time deposits GREATER THAN
$100,000 38,930 1,013 5.20% 33,755 819 4.85%
Other time deposits 8,753 226 5.16% 7,365 178 4.83%
------- ------- ------ -------- -------
Total interest-bearing deposits 168,518 3,420 4.06% 147,543 3,104 4.21%
------- -------
Non-interest deposits 35,800 27,126
Other liabilities 2,106 1,033
------- --------
Total liabilities 206,424 175,702
Shareholders' equity 22,144 18,406
------- --------
Total liabilities and equity $228,568 $194,108
-------- --------
-------- --------
Net interest spread 4.59% 4.63%
Net interest income
and margin $5,863 5.46% $ 5,035 5.47%
- -------------------------------------------------------------------------------------------------------------------------
(1) Annualized
(2) Loan interest income includes fee income of $381,000 and $303,000 for six
months ended June 30, 1996 and 1995, respectively
(3) Includes the average allowances for loan losses of $1,819,000 and
$1,484,000 and average deferred loan fees of $466,000 and $365,000 for
the six months ended June 30, 1996 and 1995, respectively
The Company provided $220,000 to the allowance for possible loan losses for
the six months ended June 30, 1996 compared to $155,000 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.
Net charge-offs were $3,000 for the six months ended June 30, 1996, compared
to $3,000 net recoveries in the six month period ending June 30, 1995.
Page 17 of 69 Pages
Non-interest income was $279,000 during the period ending June 30, 1996
compared to $242,000 during the comparable period in 1995 due primarily to an
increase in service charge income.
Salaries and benefits expense for the six months ended June 30, 1996 was
$1,932,000, a $251,000 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 $1,180,000 for
the period ended June 30, 1996 compared to $1,293,000 for the same period in
1995 a $113,000 or 9% decrease due primarily to decreased regulatory expense.
Applicable income taxes of $1,088,000 for the six months ended June 30, 1996
were $241,000 or 28% higher than for the comparable 1995 period. The
Company's effective tax rate for the six months ending June 30, 1996 was 41%
compared to 39% for the comparable period in 1995.
Page 18 of 69 Pages
PART II-OTHER INFORMATION
Item 4 - Submission of Matters to a vote of Security Holders
The annual meeting of the Shareholders of Mid-Peninsula Bancorp was held
on May 22, 1996 at 5:00 p.m. in the lobby of Mid-Peninsula Bank.
There were 1,258,538 shares equaling 79% of the outstanding shares
represented at the meeting.
The following 15 incumbent Directors were reelected as Directors, in
each case by vote of a majority of the votes cast in the election of
directors and there were no nominees in opposition:
Lawrence A. Aufmuth Helen C. Leong
John F Blokker George M. Marcus
Allan F. Brown Duncan L. Matteson
Owen D. Conley Donald H. Seiler
Murray B. Dey Warren R. Thoits
Donald L Hammond Bruce E. Van Alstyne
David L. Kalkbrenner Edwin E. van Bronkhorst
R. Hewlett Lee
Page 19 of 69 Pages
Item 6 - Exhibits and Reports on Form 8-K
(a) (2.1) Amended and Restated Agreement and Plan of
Reorganization andMerger dated June 26, 1996,
incorporated by reference from Exhibit 2.1 of
Registrant's report on Form 8-K filed with the
Commission on July 12, 1996.
(3.1) Articles of Incorporation, as amended, incorporated by
reference from Exhibit 3.1 of Registrant's annual
Report on Form 10-K for the year ended December 31,
1994, filed with the Commission on March 30, 1995.
(3.2) Bylaws, as amended, incorporated by reference from
Exhibit 3.2 to Registration Statement No. 33-79798
on Form S-4, filed with the Commission on June 6, 1994.
(10.1) Shareholder Agreement pursuant to Amended and Restated
Agreement and Plan of Reorganization and Merger dated
June 26, 1996.
(10.2) Form of Affiliate Agreement pursuant to Amended and
Restated Agreement and Plan of Reorganization and
Merger dated June 26, 1996.
(10.3) Stock Option Agreements pursuant to Amended and
Restated Agreement and Plan of Reorganization and
Merger dated June 26, 1996.
(10.4) Alex Brown & Sons, Inc. Agreement dated May 28, 1996.
(27.1) Financial Data Schedule
(99.1) Press Release dated June 19, 1996, incorporated by
reference from Exhibit 99.1 of Registrant's report on
Form 8-K, filed with the Commission on July 12, 1996.
(b) Form 8-K dated May 22, 1996, filed with the Commission on
June 3, 1996.
Page 20 of 69 Pages
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
July 31, 1996 By: /s/ DAVID L. KALKBRENNER
-----------------------------
President and
Chief Executive Officer
(Principal Executive Officer)
July 31, 1996
By: /s/ CAROL H. ROWLAND
-----------------------------
Carol H. Rowland
First Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 21 of 69 Pages
EXHIBIT INDEX
SEQUENTIAL
PAGE
EXHIBIT NO: DESCRIPTION NUMBER
- ----------- ----------- ----------
10.1 Shareholder Agreement dated pursuant
to Amended and Restated Agreement and
Plan of Reorganization and Merger dated
June 26, 1996. 23 - 28
10.2 Form of Affiliate Agreement pursuant to
Amended and Restated Agreement and
Plan of Reorganization and Merger
dated June 26, 1996. Agreement
and Plan of Reorganization and Merger
dated June 26, 1996. 29
10.3 Stock Option Agreements pursuant to
Amended and Restated Agreement and
Plan of Reorganization and Merger
dated June 26, 1996. 30 - 59
10.4 Alex Brown and Sons, Inc Agreement dated
May 28, 1996. 60 - 68
27.1 Financial Data Schedule 69
Page 22 of 69 Pages