<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1996
REGISTRATION NO.: 333-10781
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MID-PENINSULA BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 6711 77-0387041
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
420 COWPER STREET
PALO ALTO, CALIFORNIA 94301
(415) 323-5150
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DAVID L. KALKBRENNER
CHIEF EXECUTIVE OFFICER
420 COWPER STREET
PALO ALTO, CALIFORNIA 94301
(415) 323-5150
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
WITH A COPY TO:
<TABLE>
<S> <C> <C>
Glenn T. Dodd, Esq. John W. Carr, Esq. Paul H. Irving, Esq.
Bronson, Bronson & McKinnon LLP Bronson, Bronson & McKinnon LLP Manatt, Phelps & Phillips, LLP
10 Almaden Boulevard, Suite 600 505 Montgomery Street 11355 West Olympic Boulevard
San Jose, California 95113-2237 San Francisco, California Los Angeles, California 90064-1614
95111-2514
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT HAS BECOME EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock without par value..... 1,560,500 $19.75 $30,819,875 $10,627.54
</TABLE>
(1) Based on approximate number of shares to be issued in respect of outstanding
shares of common stock of Mid-Peninsula Bancorp.
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) and (f).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MID-PENINSULA BANCORP
CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4
ITEM LOCATION IN PROSPECTUS
----------- ----------------------------------------------------
<S> <C> <C> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside
Front Cover Page of Joint Proxy
Statement/Prospectus............................... Cover Page of Registration Statement; This Cross
Reference Sheet; Outside Front Cover Page of Proxy
Statement/Prospectus
2. Inside Front and Outside Back
Cover Pages of Joint Proxy
Statement/Prospectus............................... Inside Front and Outside Back Cover Pages of Proxy
Statement/Prospectus; Available Information;
Incorporation of Certain Documents by Reference;
Table of Contents
3. Risk Factors; Ratio of Earnings to Fixed Charges and
Other Information.................................. Proxy Statement/Prospectus Cover Page; Summary
4. Terms of the Transaction............................ Proxy Statement/Prospectus Cover Page; The Merger;
Description of Mid-Peninsula Capital Stock
5. Pro Forma Financial Information..................... Summary -- Pro Forma Financial Data
6. Material Contracts with Company Being Acquired...... Not applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters...... Not applicable
8. Interests of Named Experts and Counsel.............. Not applicable
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Description of Mid-Peninsula Capital Stock --
Indemnification Provisions
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants......... Not applicable
11. Incorporation of Certain Information by Reference... Not applicable
12. Information with Respect to S-2 or S-3
Registrants........................................ Available Information; Incorporation of Certain
Documents by Reference
13. Incorporation of Certain Information by Reference... Incorporation of Certain Documents by Reference
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants............................. Not applicable
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3
Companies.......................................... Not applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-4
ITEM LOCATION IN PROSPECTUS
----------- ----------------------------------------------------
16. Information with Respect to S-2 or S-3 Companies.... Available Information: Incorporation of Certain
Documents by Reference
<S> <C> <C> <C>
17. Information with Respect to Companies Other than S-2
or S-3 Companies................................... Not applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
Are to be Solicited................................ Joint Proxy Statement/Prospectus; Summary; The
Mid-Peninsula Meeting; The Cupertino Meeting;
Security Ownership of Certain Beneficial Owners and
Management of Mid-Peninsula; Mid-Peninsula
Executive Compensation; Security Ownership of
Certain Beneficial Owners and Management of
Cupertino; Executive Compensation of Cupertino
19. Information if Proxies, Consents or Authorizations
Are Not to be Solicited in an Exchange Offer....... Not applicable
</TABLE>
<PAGE>
[MID-PENINSULA LETTERHEAD]
September 25, 1996
To Our Shareholders:
We are pleased to enclose a Notice of Special Meeting of Mid-Peninsula
Bancorp, a Notice of Special Meeting of Cupertino National Bancorp, and a Joint
Proxy Statement/Prospectus (the "Joint Proxy Statement/Prospectus") relating to
actions to be taken at both meetings. At the Special Meetings of both companies,
the shareholders will be asked:
1) To approve the principal terms of the Second Amended and Restated
Agreement and Plan of Reorganization and Merger dated as of August 20, 1996
(the "Reorganization Agreement"), by and between Mid-Peninsula Bancorp
("Mid-Peninsula") and Cupertino National Bancorp ("Cupertino"), pursuant to
which, among other things, Cupertino will be merged on a merger of equals
basis with and into Mid-Peninsula (the "Merger") with Mid-Peninsula
surviving the Merger and changing its name to Greater Bay Bancorp
("Bancorp"). The former subsidiaries of Mid-Peninsula and Cupertino,
Mid-Peninsula Bank ("MPB") and Cupertino National Bank & Trust ("CNB"),
respectively, will continue to operate as separate subsidiaries of Bancorp.
Upon consummation of the Merger, each outstanding share of Cupertino Common
Stock, no par value ("Cupertino Share" or "Cupertino Shares", will be
converted into the right to receive 0.81522 (the "Conversion Ratio") share
of Bancorp Common Stock, no par value ("Bancorp Share" or "Bancorp Shares"),
in an exchange intended to be tax-free except to the extent of any cash
received in exchange for fractional shares. Shares of Common Stock of
Mid-Peninsula ("Mid-Peninsula Shares") outstanding immediately prior to the
Merger will remain outstanding after the consummation of the Merger as
shares of Bancorp. A copy of the Reorganization Agreement is included in the
Joint Proxy Statement/Prospectus as Appendix A.
At the Mid-Peninsula Special Meeting (the "Mid-Peninsula Meeting"), the
shareholders of Mid-Peninsula will also be asked to consider and vote upon
the following additional matters. APPROVAL OF ITEMS 2 THROUGH 5 IS A
CONDITION PRECEDENT TO THE MERGER; APPROVAL OF ITEM 6 IS NOT A CONDITION TO
THE MERGER. ALL OF ITEMS 2 THROUGH 6, IF APPROVED, WILL BECOME EFFECTIVE
ONLY WITH RESPECT TO THE AFFAIRS OF BANCORP FOLLOWING THE CONSUMMATION OF
THE MERGER:
2) To amend the bylaws to provide for a range in the number of
authorized directors of not less than seven and not more than thirteen, and
to fix the number of directors at ten until changed as provided in the
bylaws.
3) To amend the articles of incorporation to establish super-majority
voting requirements equal to a two-thirds vote of the Board of Directors
applicable to certain matters, including (a) a merger, sale of control or
sale of material assets of Bancorp, (b) material acquisitions by Bancorp,
(c) creation of new business units of Bancorp, MPB and CNB, (d) material
changes in operating budgets of Bancorp, MPB or CNB, (e) material changes in
the business organization or organizational structure of Bancorp, MPB or
CNB, (f) termination of any executive or senior officer appointed to the
Executive Management Committee of Bancorp, and (g) any change in the
authorized range of directors of Bancorp.
(4) To approve the adoption of the Greater Bay Bancorp 1996 Stock Option
Plan (the "Bancorp Option Plan"), and to authorize an increase in the number
of shares issuable by Bancorp pursuant to all stock option plans of Bancorp,
including the Mid-Peninsula 1994 Stock Option Plan and the Bancorp Option
Plan, from 457,037 to 967,890 shares.
<PAGE>
(5) To amend the articles of incorporation to change the name of the
corporation to Greater Bay Bancorp.
(6) To amend the articles of incorporation regarding director liability
and indemnification of agents, and to approve and ratify certain proposed
indemnification agreements between Bancorp and its directors, officers and
other corporate agents, including future directors and officers.
(7) In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting.
More detailed information about the specified proposals and other matters
regarding the Mid-Peninsula Meeting is included in the attached Joint Proxy
Statement/Prospectus.
THE BOARD OF DIRECTORS OF MID-PENINSULA HAS APPROVED THE REORGANIZATION
AGREEMENT AND THE RELATED MATTERS AND TRANSACTIONS CONTEMPLATED THEREBY AND
RECOMMENDS THAT THE HOLDERS OF MID-PENINSULA SHARES VOTE TO APPROVE THE
REORGANIZATION AGREEMENT AND RELATED MATTERS AND TRANSACTIONS AT THE
MID-PENINSULA MEETING.
If the Merger is consummated, holders of Mid-Peninsula Shares who comply
with the requirements of Chapter 13 of the California General Corporation Law
("Chapter 13") may have the right to receive from Bancorp a cash payment equal
to the fair market value of their Mid-Peninsula Shares determined in accordance
with Chapter 13. See "DISSENTING SHAREHOLDERS' RIGHTS -- Mid-Peninsula" in the
attached Joint Proxy Statement/Prospectus for a discussion of the availability
of dissenters' rights and a description of the procedures which must be followed
to enforce such rights under Chapter 13, pertinent provisions of which are
included as Appendix D to the Joint Proxy Statement/Prospectus.
Whether or not you plan to attend the Mid-Peninsula Meeting, please sign and
return the accompanying proxy card in the postage-paid envelope as soon as
possible so that your shares will be represented at the Mid-Peninsula Meeting.
The Board of Directors suggests that you vote "FOR" each proposal listed on the
proxy card. If you attend the Mid-Peninsula Meeting and ask to vote in person,
you may withdraw your proxy at that time. It is important that your
Mid-Peninsula Shares be represented at the Mid-Peninsula Meeting.
David L. Kalkbrenner Duncan L. Matteson
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
<PAGE>
MID-PENINSULA BANCORP
420 COWPER STREET
PALO ALTO, CALIFORNIA 94301
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1996
------------------------
TO THE SHAREHOLDERS OF MID-PENINSULA BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its bylaws and the call of the
Board of Directors, a Special Meeting of Shareholders (the "Mid-Peninsula
Meeting") of Mid-Peninsula Bancorp, a California corporation ("Mid-Peninsula"),
will be held at 5:00 p.m., California time, on October 30, 1996, at
Mid-Peninsula Bank, located at 420 Cowper Street, Palo Alto, California, for the
following purposes, all as set forth in the attached Joint Proxy
Statement/Prospectus:
1) To approve the principal terms of the Second Amended and Restated
Agreement and Plan of Reorganization and Merger dated as of August 20, 1996
(the "Reorganization Agreement"), by and between Mid-Peninsula and Cupertino
National Bancorp ("Cupertino"), pursuant to which, among other things,
Cupertino will be merged on a merger of equals basis with and into
Mid-Peninsula (the "Merger") with Mid-Peninsula surviving the Merger and
changing its name to Greater Bay Bancorp ("Bancorp"). The former
subsidiaries of Mid-Peninsula and Cupertino, Mid-Peninsula Bank ("MPB") and
Cupertino National Bank & Trust ("CNB"), respectively, will continue to
operate as separate subsidiaries of Bancorp. Upon consummation of the
Merger, each outstanding share of Common Stock, no par value, of Cupertino
("Cupertino Share" or "Cupertino Shares") will be converted into the right
to receive 0.81522 (the "Conversion Ratio") share of Bancorp Common Stock,
no par value ("Bancorp Share" or "Bancorp Shares"), in an exchange intended
to be tax-free except to the extent of any cash received in exchange for
fractional shares. Shares of Common Stock of Mid-Peninsula ("Mid-Peninsula
Shares") outstanding immediately prior to the Merger will remain outstanding
after the consummation of the Merger as shares of Bancorp. A copy of the
Reorganization Agreement is included in the Joint Proxy Statement/Prospectus
as Appendix A.
At the Mid-Peninsula Meeting, the shareholders of Mid-Peninsula will also be
asked to consider and vote upon the following additional matters. APPROVAL OF
ITEMS 2 THROUGH 5 IS A CONDITION PRECEDENT TO THE MERGER; APPROVAL OF ITEM 6 IS
NOT A CONDITION TO THE MERGER. ALL OF ITEMS 2 THROUGH 6, IF APPROVED, WILL
BECOME EFFECTIVE ONLY WITH RESPECT TO THE AFFAIRS OF BANCORP FOLLOWING THE
CONSUMMATION OF THE MERGER:
2) To amend the bylaws to provide for a range in the number of
authorized directors of not less than seven and not more than thirteen, and
to fix the number of directors at ten until changed as provided in the
bylaws.
3) To amend the articles of incorporation to establish super-majority
voting requirements equal to a two-thirds vote of the Board of Directors
applicable to certain matters, including (a) a merger, sale of control or
sale of material assets of Bancorp, (b) material acquisitions by Bancorp,
(c) creation of new business units of Bancorp, MPB or CNB, (d) material
changes in operating budgets of Bancorp, MPB or CNB, (e) material changes in
the business organization or organizational structure of Bancorp, MPB or
CNB, (f) termination of any executive or senior officer appointed to the
Executive Management Committee of Bancorp, and (g) any change in the
authorized range of directors of Bancorp.
(4) To approve the adoption of the Greater Bay Bancorp 1996 Stock Option
Plan (the "Bancorp Option Plan"), and to authorize an increase in the number
of shares issuable by Bancorp pursuant to all stock option plans of Bancorp,
including the Mid-Peninsula 1994 Stock Option Plan and the Bancorp Option
Plan, from 457,037 to 967,890 shares.
<PAGE>
(5) To amend the articles of incorporation to change the name of the
corporation to Greater Bay Bancorp.
(6) To amend the articles of incorporation regarding director liability
and indemnification of agents, and to approve and ratify certain proposed
indemnification agreements between Bancorp and its directors, officers and
other corporate agents, including future directors and officers.
(7) In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting.
More detailed information about the specified proposals and other matters
regarding the Mid-Peninsula Meeting is included in the attached Joint Proxy
Statement/Prospectus.
THE BOARD OF DIRECTORS OF MID-PENINSULA HAS APPROVED THE REORGANIZATION
AGREEMENT AND THE RELATED MATTERS AND TRANSACTIONS CONTEMPLATED THEREBY AND
RECOMMENDS THAT THE HOLDERS OF MID-PENINSULA SHARES VOTE TO APPROVE THE
REORGANIZATION AGREEMENT AND RELATED MATTERS AND TRANSACTIONS AT THE
MID-PENINSULA MEETING.
If the Merger is consummated, holders of Mid-Peninsula Shares who comply
with the requirements of Chapter 13 of the California General Corporation Law
("Chapter 13") may have the right to receive from Bancorp a cash payment equal
to the fair market value of their Mid-Peninsula Shares determined in accordance
with Chapter 13. See "DISSENTING SHAREHOLDERS' RIGHTS -- Mid-Peninsula" in the
attached Joint Proxy Statement/Prospectus for a discussion of the availability
of dissenters' rights and a description of the procedures which must be followed
to enforce such rights under Chapter 13, pertinent provisions of which are
included as Appendix D to the Joint Proxy Statement/Prospectus.
Shareholders of record at the close of business on September 9, 1996 are
entitled to notice of and to vote at the Mid-Peninsula Meeting.
By order of the Board of Directors
Warren R. Thoits, SECRETARY
Palo Alto, California
September 25, 1996
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE MID-PENINSULA MEETING IN PERSON. IF YOU DO ATTEND THE MID-PENINSULA
MEETING, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON. THE PROXY MAY BE
REVOKED AT ANY TIME PRIOR TO ITS EXERCISE.
IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS, PLEASE
INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE MID-PENINSULA
MEETING.
<PAGE>
[CUPERTINO LETTERHEAD]
September 25, 1996
To Our Shareholders:
We are pleased to enclose a Notice of Special Meeting of Cupertino National
Bancorp ("Cupertino"), a Notice of Special Meeting of Mid-Peninsula Bancorp
("Mid-Peninsula"), and a Joint Proxy Statement/Prospectus (the "Joint Proxy
Statement/Prospectus") relating to actions to be taken at both meetings. At the
Special Meetings of both companies, the shareholders will be asked to approve
the principal terms of the Second Amended and Restated Agreement and Plan of
Reorganization and Merger dated as of August 20, 1996 (the "Reorganization
Agreement"), by and between Mid-Peninsula and Cupertino, pursuant to which,
among other things, Cupertino will be merged on a merger of equals basis with
and into Mid-Peninsula (the "Merger") with Mid-Peninsula surviving the Merger
and changing its name to Greater Bay Bancorp ("Bancorp"). The former
subsidiaries of Mid-Peninsula and Cupertino, Mid-Peninsula Bank ("MPB") and
Cupertino National Bank & Trust ("CNB"), respectively, will continue to operate
as separate subsidiaries of Bancorp. Upon consummation of the Merger, each
outstanding share of Cupertino Common Stock, no par value ("Cupertino Share" or
"Cupertino Shares"), will be converted into the right to receive 0.81522 (the
"Conversion Ratio") share of Bancorp Common Stock, no par value ("Bancorp Share"
or "Bancorp Shares"), in an exchange intended to be tax-free except to the
extent of any cash received in exchange for fractional shares. Shares of Common
Stock of Mid-Peninsula ("Mid-Peninsula Shares") outstanding immediately prior to
the Merger will remain outstanding after the consummation of the Merger as
shares of Bancorp. A copy of the Reorganization Agreement is included in the
Joint Proxy Statement/Prospectus as Appendix A.
More detailed information about the specified proposals and other matters
regarding the Cupertino Special Meeting (the "Cupertino Meeting") is included in
the attached Joint Proxy Statement/ Prospectus.
THE BOARD OF DIRECTORS OF CUPERTINO HAS APPROVED THE REORGANIZATION
AGREEMENT AND THE RELATED MATTERS AND TRANSACTIONS CONTEMPLATED THEREBY AND
RECOMMENDS THAT THE HOLDERS OF CUPERTINO SHARES VOTE TO APPROVE THE
REORGANIZATION AGREEMENT AND RELATED MATTERS AND TRANSACTIONS AT THE CUPERTINO
MEETING.
If the Merger is consummated, holders of Cupertino Shares who comply with
the requirements of Chapter 13 of the California General Corporation Law
("Chapter 13") may have the right to receive from Bancorp a cash payment equal
to the fair market value of their Cupertino Shares determined in accordance with
Chapter 13. See "DISSENTING SHAREHOLDERS' RIGHTS -- Cupertino" in the attached
Joint Proxy Statement/Prospectus for a discussion of the availability of
dissenters' rights and a description of the procedures which must be followed to
enforce such rights under Chapter 13, pertinent provisions of which are included
as Appendix D to the Joint Proxy Statement/Prospectus.
Whether or not you plan to attend the Cupertino Meeting, please sign and
return the accompanying proxy card in the postage-paid envelope as soon as
possible so that your shares will be represented at the Cupertino Meeting. The
Board of Directors suggests that you vote "FOR" the proposal to
<PAGE>
approve the principal terms of the Reorganization Agreement. If you attend the
Cupertino Meeting and ask to vote in person, you may withdraw your proxy at that
time. It is important that your Cupertino Shares be represented at the Cupertino
Meeting.
C. Donald Allen John M. Gatto
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD
<PAGE>
CUPERTINO NATIONAL BANCORP
20230 STEVENS CREEK BOULEVARD
CUPERTINO, CALIFORNIA 95014
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1996
------------------------
TO THE SHAREHOLDERS OF CUPERTINO NATIONAL BANCORP:
NOTICE IS HEREBY GIVEN that, pursuant to its bylaws and the call of the
Board of Directors, a Special Meeting of Shareholders (the "Cupertino Meeting")
of Cupertino National Bancorp, a California corporation ("Cupertino"), will be
held at 5:00 p.m. California time, on October 30, 1996 at the Saratoga Country
Club, located at 1990 Prospect Road, Saratoga, California, for the following
purposes, all as set forth in the attached Joint Proxy Statement/Prospectus:
1) To approve the principal terms of the Second Amended and Restated
Agreement and Plan of Reorganization and Merger dated as of August 20, 1996
(the "Reorganization Agreement"), by and between Mid-Peninsula Bancorp
("Mid-Peninsula") and Cupertino, pursuant to which, among other things,
Cupertino will be merged on a merger of equals basis with and into
Mid-Peninsula (the "Merger") with Mid-Peninsula surviving the Merger and
changing its name to Greater Bay Bancorp ("Bancorp"). The former
subsidiaries of Mid-Peninsula and Cupertino, Mid-Peninsula Bank ("MPB") and
Cupertino National Bank & Trust ("CNB"), respectively, will continue to
operate as separate subsidiaries of Bancorp. Upon consummation of the
Merger, each outstanding share of Cupertino Common Stock, no par value
("Cupertino Share" or "Cupertino Shares") will be converted into the right
to receive 0.81522 (the "Conversion Ratio") share of Bancorp Common Stock,
no par value ("Bancorp Share" or "Bancorp Shares"), in an exchange intended
to be tax-free except to the extent of any cash received in exchange for
fractional shares. Shares of Common Stock of Mid-Peninsula ("Mid-Peninsula
Shares") outstanding immediately prior to the Merger will remain outstanding
after the consummation of the Merger as shares of Bancorp. A copy of the
Reorganization Agreement is included in the Joint Proxy Statement/
Prospectus as Appendix A.
Only those shareholders of record at the close of business on September 9,
1996 shall be entitled to notice of and to vote at the Cupertino Meeting. For
ten days prior to the meeting, a complete list of the shareholders entitled to
vote at the meeting will be available for examination by any shareholder for any
purpose relating to the meeting during ordinary business hours at Cupertino's
offices at 20230 Stevens Creek Boulevard, Cupertino, California, 95014.
If the Merger is consummated, holders of Cupertino Shares who comply with
the requirements of Chapter 13 of the California General Corporation Law
("Chapter 13") may have the right to receive from Bancorp a cash payment of the
fair market value of their Cupertino Shares determined in accordance with
Chapter 13. See "DISSENTING SHAREHOLDERS' RIGHTS -- Cupertino" in the attached
Joint Proxy Statement/Prospectus for a discussion of the availability of
dissenters' rights and a description of the procedures which must be followed to
enforce such rights under Chapter 13, pertinent provisions of which are included
as Appendix D to the Joint Proxy Statement/Prospectus and incorporated herein by
this reference.
More detailed information about the specified proposals and other matters
regarding the Cupertino Meeting is included in the attached Joint Proxy
Statement/Prospectus.
<PAGE>
THE BOARD OF DIRECTORS OF CUPERTINO HAS APPROVED THE REORGANIZATION
AGREEMENT AND THE RELATED MATTERS AND TRANSACTIONS CONTEMPLATED THEREBY AND
RECOMMENDS THAT THE HOLDERS OF CUPERTINO SHARES VOTE TO APPROVE THE
REORGANIZATION AGREEMENT AND RELATED MATTERS AND TRANSACTIONS AT THE CUPERTINO
MEETING.
By order of the Board of Directors
C. Donald Allen
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Cupertino, California
September 25, 1996
IT IS VERY IMPORTANT THAT EVERY SHAREHOLDER VOTE. WE URGE YOU TO SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO
ATTEND THE CUPERTINO MEETING IN PERSON. IF YOU DO ATTEND THE CUPERTINO
MEETING, YOU MAY WITHDRAW YOUR PROXY AT THAT TIME. THE PROXY MAY BE REVOKED AT
ANY TIME PRIOR TO ITS EXERCISE.
IN ORDER TO FACILITATE THE PROVIDING OF ADEQUATE ACCOMMODATIONS, PLEASE
INDICATE ON THE PROXY WHETHER OR NOT YOU EXPECT TO ATTEND THE CUPERTINO
MEETING.
<PAGE>
MID-PENINSULA BANCORP
CUPERTINO NATIONAL BANCORP
------------------
JOINT PROXY STATEMENT
FOR SPECIAL MEETINGS OF SHAREHOLDERS
TO BE HELD ON OCTOBER 30, 1996
------------------------
MID-PENINSULA BANCORP
PROSPECTUS
This Joint Proxy Statement/Prospectus is furnished to the shareholders of
Mid-Peninsula Bancorp, a California corporation ("Mid-Peninsula"), and to the
shareholders of Cupertino National Bancorp, a California corporation
("Cupertino"), in connection with the solicitation by their respective Boards of
Directors of proxies to be used at special meetings of their shareholders.
At the special meetings of Mid-Peninsula (the "Mid-Peninsula Meeting") and
Cupertino (the "Cupertino Meeting"), the shareholders of each company will be
asked to consider and act upon, among other things, a proposal to approve the
principal terms of the Second Amended and Restated Agreement and Plan of
Reorganization and Merger dated as of August 20, 1996 (the "Reorganization
Agreement"), by and between Mid-Peninsula and Cupertino, pursuant to which,
among other things, Cupertino will be merged on a merger of equals basis with
and into Mid-Peninsula (the "Merger") with Mid-Peninsula surviving the Merger
and changing its name to Greater Bay Bancorp ("Bancorp"). The former
subsidiaries of Mid-Peninsula and Cupertino, Mid-Peninsula Bank ("MPB") and
Cupertino National Bank & Trust ("CNB"), respectively, will continue to operate
as separate subsidiaries of Bancorp. Upon consummation of the Merger (the
"Effective Time of the Merger"), each outstanding share of Cupertino Common
Stock, no par value, ("Cupertino Share" or "Cupertino Shares") will be converted
into the right to receive 0.81522 (the "Conversion Ratio") share of Bancorp
Common Stock, no par value ("Bancorp Share" or "Bancorp Shares"), in an exchange
intended to be tax free except to the extent of any cash received in exchange
for fractional shares. Shares of Common Stock of Mid-Peninsula ("Mid-Peninsula
Shares") outstanding immediately prior to the Merger will remain outstanding
after the Effective Time of the Merger as shares of Bancorp. Based on the number
of fully diluted Mid-Peninsula Shares outstanding as of the record date for the
Mid-Peninsula Meeting, the Bancorp Shares to be issued to Cupertino shareholders
pursuant to the Reorganization Agreement will represent approximately 49% of the
fully diluted Bancorp Shares outstanding following the Merger.
If the Merger is consummated, the Board of Directors of Bancorp will
comprise five (5) members from each of the current Mid-Peninsula Board of
Directors and the current Cupertino Board of Directors. For a description of
these and other actions to be taken at the special meetings, see "INFORMATION
CONCERNING MID-PENINSULA MEETING ONLY" and "INFORMATION CONCERNING CUPERTINO
MEETING ONLY."
This Joint Proxy Statement/Prospectus is first being mailed to the
shareholders of Mid-Peninsula and Cupertino on or about September 25, 1996.
This Joint Proxy Statement/Prospectus also constitutes the Prospectus of
Mid-Peninsula under the Securities Act of 1933, as amended (the "Securities
Act"), for the public offering of the Bancorp Shares to be issued in the Merger.
See "DESCRIPTION OF MID-PENINSULA CAPITAL STOCK -- Mid-Peninsula Shares." This
Joint Proxy Statement/Prospectus does not cover any resales of such securities,
and no person is authorized to make any use of this Joint Proxy
Statement/Prospectus in connection with any such resale.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 25, 1996
<PAGE>
AVAILABLE INFORMATION
Each of Mid-Peninsula and Cupertino is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files reports and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy and
information statements and other information filed by each of Mid-Peninsula and
Cupertino can be inspected and copied at the Commission's public reference room
located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the public
reference facilities in the Commission's regional offices located at Room 1228,
75 Park Place, New York, New York 10007 and Room 3190, 230 South Dearborn
Street, Chicago, Illinois 60604. In addition, copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549.
Mid-Peninsula has filed a Registration Statement (No. 333-10781) with the
Commission under the Securities Act relating to the Mid-Peninsula Shares to be
issued in the Merger (the "Registration Statement"). This Joint Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the Exhibits thereto, certain parts of which are
omitted in accordance with the Commission's rules and regulations. The
Registration Statement and the Exhibits thereto may be inspected and copied, at
prescribed rates, at the public reference facilities maintained by the
Commission at the addresses set forth above. All information concerning
Mid-Peninsula contained in this Joint Proxy Statement/Prospectus has been
furnished by Mid-Peninsula, and all information concerning Cupertino has been
furnished by Cupertino.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Statements contained in this Joint Proxy Statement/Prospectus or in any
documents incorporated by reference in this Joint Proxy Statement/Prospectus
relating to the contents of any contract or other documents referred to herein
or therein are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
The following documents filed with the Commission are incorporated herein by
reference: (i) Mid-Peninsula's Annual Report on Form 10-K for the year ended
December 31, 1995; (ii) Mid-Peninsula's Quarterly Reports on Form 10-Q for the
quarters ended March 31 and June 30, 1996; (iii) Cupertino's Annual Report on
Form 10-K for the year ended December 31, 1995; and (iv) Cupertino's Quarterly
Reports on Form 10-Q for the quarters ended March 31 and June 30, 1996.
MID-PENINSULA'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
AND CUPERTINO'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995
ARE ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS APPENDICES B AND C,
RESPECTIVELY. MID-PENINSULA'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED JUNE 30, 1996 AND CUPERTINO'S QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED JUNE 30, 1996 ARE ATTACHED TO THIS JOINT PROXY
STATEMENT/PROSPECTUS AS APPENDICES G AND H, RESPECTIVELY.
Other than the historical facts contained herein, this Joint Proxy
Statement/Prospectus contains forward-looking statements that may involve
substantial risks and uncertainties. For a discussion of such risks and
uncertainties, please see Appendices B, C, G and H referred to in the previous
paragraph. In addition to the risks and uncertainties discussed in these
Appendices, the following factors should be considered. The successful
combination of Mid-Peninsula and Cupertino is dependent on a number of factors,
including but not limited to the timing and extent of any cost savings which
might be realized in the combination and the ability of Bancorp and its
subsidiaries to compete effectively in their expanded market areas. There can be
no assurance that cost savings will be realized on a timely basis or that such
entities will effectively compete in their expanded markets. As the banking
industry in California continues to consolidate and face increased competition
from other types of financial services companies, community banks such as MPB
and CNB will continue to confront increased competition for customers.
ii
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR IN THE
DOCUMENTS INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATION
NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY MID-PENINSULA OR CUPERTINO. THIS JOINT PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT
PROXY STATEMENT/ PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF MID-PENINSULA OR CUPERTINO SINCE THE DATE HEREOF OR
THAT THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS OR IN THE
DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THEREOF.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SUMMARY.................................................................................................... 1
The Meetings............................................................................................. 1
The Parties.............................................................................................. 2
The Merger............................................................................................... 2
Exchange of Stock Certificates........................................................................... 7
Dissenters' Rights....................................................................................... 7
Historical and Pro Forma per Share Data for Mid-Peninsula and Cupertino.................................. 7
Comparative Stock Price Information...................................................................... 8
Certain Mid-Peninsula and Cupertino Financial Data....................................................... 10
Mid-Peninsula Bancorp Summary Consolidated Financial Data................................................ 10
Cupertino National Bancorp Summary Consolidated Financial Data........................................... 11
Unaudited Pro Forma Combined Financial Information....................................................... 12
Unaudited Pro Forma Combined Financial Summary........................................................... 12
Unaudited Pro Forma Combined Balance Sheet as of June 30, 1996........................................... 13
Unaudited Pro Forma Combined Income Statement for the Six Month Ended June 30, 1996...................... 14
Unaudited Pro Forma Combined Income Statement for the Year Ended December 31, 1995....................... 15
Unaudited Pro Forma Combined Income Statement for the Year Ended December 31, 1994....................... 16
Unaudited Pro Forma Combined Income Statement for the Year Ended December 31, 1993....................... 17
INTRODUCTION............................................................................................... 18
THE MID-PENINSULA MEETING.................................................................................. 19
Record Date.............................................................................................. 19
Proxies.................................................................................................. 19
Costs of Solicitation of Proxies......................................................................... 19
Quorum................................................................................................... 20
Vote Required............................................................................................ 20
THE CUPERTINO MEETING...................................................................................... 20
Record Date.............................................................................................. 20
Proxies.................................................................................................. 20
Costs of Solicitation of Proxies......................................................................... 21
Quorum................................................................................................... 21
Vote Required............................................................................................ 21
PROPOSAL NUMBER 1: TO APPROVE THE PRINCIPAL TERMS OF THE REORGANIZATION AGREEMENT PURSUANT TO WHICH, AMONG
OTHER THINGS, CUPERTINO WILL BE MERGED ON A MERGER OF EQUALS BASIS WITH AND INTO MID-PENINSULA AND
MID-PENINSULA WILL CHANGE ITS NAME TO GREATER BAY BANCORP. UPON CONSUMMATION OF THE MERGER, EACH
OUTSTANDING CUPERTINO SHARE WILL BE CONVERTED INTO THE RIGHT TO RECEIVE 0.81522 BANCORP SHARE IN A
TAX-FREE EXCHANGE......................................................................................... 21
THE MERGER................................................................................................. 21
Background of the Merger................................................................................. 21
Recommendation of the Boards of Directors and Reasons for the Merger..................................... 25
Opinion of Mid-Peninsula Financial Advisor............................................................... 27
Opinion of Cupertino Financial Advisor................................................................... 31
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Other Financial Advisor Agreement........................................................................ 36
Terms of the Merger...................................................................................... 36
Effective Time of the Merger............................................................................. 36
Regulatory Approval...................................................................................... 36
Agreements with Certain Shareholders..................................................................... 37
Agreements with Affiliates............................................................................... 37
Interests of Certain Persons in the Merger............................................................... 38
Employee Benefit Plans................................................................................... 39
Summary of Employee Stock Purchase Plan.................................................................. 39
Certain Related Transactions............................................................................. 42
Certain Federal Income Tax Consequences.................................................................. 42
Exchange Procedures...................................................................................... 45
Post-Merger Operations................................................................................... 45
Sales of Bancorp Shares.................................................................................. 46
Nasdaq Listing........................................................................................... 46
Accounting Treatment..................................................................................... 46
THE REORGANIZATION AGREEMENT............................................................................... 46
Conditions to the Merger................................................................................. 46
Nonsolicitation.......................................................................................... 48
Treatment of Stock Options............................................................................... 49
Termination and its Effects, including Payment in the Event of a Business Combination.................... 49
Covenants; Conduct of Business Prior to Effective Time of the Merger..................................... 50
Expenses................................................................................................. 52
Amendment................................................................................................ 52
THE OPTION AGREEMENTS...................................................................................... 52
DISSENTING SHAREHOLDERS' RIGHTS............................................................................ 56
Mid-Peninsula............................................................................................ 56
Cupertino................................................................................................ 57
MID-PENINSULA.............................................................................................. 58
DESCRIPTION OF MID-PENINSULA CAPITAL STOCK................................................................. 59
Mid-Peninsula Shares..................................................................................... 59
Common Stock............................................................................................. 59
Mid-Peninsula Preferred Stock............................................................................ 60
Indemnification Provisions............................................................................... 60
CUPERTINO.................................................................................................. 61
COMPARISON OF SHAREHOLDER RIGHTS........................................................................... 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CUPERTINO................................ 66
Beneficial Ownership Table............................................................................... 66
Board of Directors and Executive Officers................................................................ 68
Committees of the Cupertino Board........................................................................ 70
CUPERTINO EXECUTIVE COMPENSATION........................................................................... 71
Summary Compensation Table............................................................................... 71
Option Grants in Last Fiscal Year........................................................................ 72
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Value................................ 72
Employment, Severance and Change of Control Arrangements................................................. 73
Retirement Benefits...................................................................................... 74
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Compensation of Directors................................................................................ 74
Compensation Committee Interlocks and Insider Participation.............................................. 75
Compliance With Section 16(a) of the Exchange Act........................................................ 75
Report of the Executive Committee of the Board of Directors on Executive Compensation.................... 75
COMPARISON OF CUPERTINO SHAREHOLDER RETURN................................................................. 76
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF MID-PENINSULA............................ 77
Security Ownership of Certain Beneficial Owners.......................................................... 77
Security Ownership of Management......................................................................... 77
Board of Directors and Executive Officers................................................................ 79
Committees of the Mid-Peninsula Board.................................................................... 82
Compensation of Directors................................................................................ 82
MID-PENINSULA EXECUTIVE COMPENSATION....................................................................... 83
Summary Compensation Table............................................................................... 83
Option/SAR Grants Table.................................................................................. 84
Option/SAR Exercises and Year-End Value Table............................................................ 84
Employment Contracts and Termination of Employment and Change in Control Arrangements.................... 84
Compliance with Section 16(a) of the Exchange Act........................................................ 85
CERTAIN MID-PENINSULA RELATIONSHIPS AND RELATED TRANSACTIONS............................................... 86
Transactions with Management and Others.................................................................. 86
Certain Business Relationships........................................................................... 86
Indebtedness of Management............................................................................... 86
INFORMATION CONCERNING MID-PENINSULA MEETING ONLY.......................................................... 87
PROPOSAL NUMBER 2: TO AMEND THE BYLAWS TO CHANGE THE AUTHORIZED NUMBER OF DIRECTORS TO NOT LESS THAN SEVEN
AND NOT MORE THAN THIRTEEN, AND TO FIX THE NUMBER OF DIRECTORS AT TEN UNTIL CHANGED AS PROVIDED IN THE
BYLAWS.................................................................................................... 87
PROPOSAL NUMBER 3: TO AMEND THE ARTICLES OF INCORPORATION TO ESTABLISH SUPER-MAJORITY VOTE REQUIREMENTS
EQUAL TO A TWO-THIRDS VOTE OF THE BOARD OF DIRECTORS APPLICABLE TO CERTAIN MATTERS, INCLUDING (A) A
MERGER, SALE OF CONTROL OR SALE OF MATERIAL ASSETS OF BANCORP, (B) ACQUISITIONS BY BANCORP, (C) CREATION
OF NEW BUSINESS UNITS OF BANCORP, MPB OR CNB, (D) MATERIAL CHANGES IN OPERATING BUDGETS OF BANCORP, MPB OR
CNB, (E) MATERIAL CHANGES IN THE BUSINESS ORGANIZATION OR ORGANIZATIONAL STRUCTURE OF BANCORP, MPB OR CNB,
(F) TERMINATION OF ANY EXECUTIVE OR SENIOR OFFICER APPOINTED TO THE EXECUTIVE MANAGEMENT COMMITTEE OF
BANCORP, AND (G) ANY CHANGE IN THE AUTHORIZED RANGE OF DIRECTORS OF BANCORP............................... 87
PROPOSAL NUMBER 4: TO APPROVE THE GREATER BAY BANCORP 1996 STOCK OPTION PLAN AND TO AUTHORIZE AN INCREASE
IN THE TOTAL NUMBER OF SHARES AVAILABLE FOR ISSUANCE PURSUANT TO ALL STOCK OPTION PLANS OF GREATER BAY
BANCORP FROM 457,037 TO 967,890 SHARES.................................................................... 89
General.................................................................................................. 89
Summary of Proposed Bancorp Option Plan.................................................................. 90
Benefits Under New Plan.................................................................................. 93
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROPOSAL NUMBER 5: TO CHANGE THE NAME OF MID-PENINSULA TO GREATER BAY BANCORP.............................. 94
PROPOSAL NUMBER 6: DIRECTOR LIABILITY, INDEMNIFICATION OF AGENTS AND INDEMNIFICATION AGREEMENTS............ 95
Introduction............................................................................................. 95
Prior Amendments to Articles and Bylaws of MPB........................................................... 95
Other Protection......................................................................................... 96
The Article Amendment.................................................................................... 96
Indemnification Agreements............................................................................... 98
Certain Proceedings...................................................................................... 99
Indemnification for Liabilities Under the Securities Act................................................. 99
Vote Required to Approve the Article Amendment and Indemnification Agreements............................ 100
SHAREHOLDER PROPOSALS...................................................................................... 101
OTHER MATTERS.............................................................................................. 101
LEGAL MATTERS.............................................................................................. 101
EXPERTS.................................................................................................... 101
</TABLE>
APPENDICES
<TABLE>
<S> <C>
Appendix A Reorganization Agreement
Appendix B Mid-Peninsula 1995 Annual Report on Form 10-K
Appendix C Cupertino 1995 Annual Report on Form 10-K
Appendix D Sections 1300-1304 of the California General Corporation Law
Appendix E Alex. Brown & Sons Incorporated Opinion
Appendix F Sutro Opinion
Appendix G Mid-Peninsula Form 10-Q Quarterly Report (June 30, 1996)
Appendix H Cupertino Form 10-Q Quarterly Report (June 30, 1996)
Appendix I Bancorp Option Plan
Appendix J Form of Indemnification Agreement
</TABLE>
vii
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION INCLUDED ELSEWHERE IN THIS
JOINT PROXY STATEMENT/PROSPECTUS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THAT INFORMATION. SHAREHOLDERS ARE URGED TO REVIEW CAREFULLY THE ENTIRE JOINT
PROXY STATEMENT/PROSPECTUS (INCLUDING THE APPENDICES AND THE DOCUMENTS
INCORPORATED BY REFERENCE).
THE MEETINGS
MID-PENINSULA. The Mid-Peninsula Meeting will be held at 5:00 p.m.,
California time, on October 30, 1996 at Mid-Peninsula Bank, located at 420
Cowper Street, Palo Alto, California. Mid-Peninsula's shareholders will consider
and vote on a proposal to approve the principal terms of the Reorganization
Agreement.
AS CONDITIONS TO THE MERGER AND CONDITIONED UPON THE CONSUMMATION OF THE
MERGER, Mid-Peninsula shareholders will also be asked (i) to amend the bylaws of
Mid-Peninsula to provide for a range in the authorized number of directors of
not less than seven nor more than thirteen, and to fix the number of directors
at ten until changed as provided in the bylaws; (ii) to amend the articles of
incorporation to establish super-majority voting requirements equal to a
two-thirds vote of the Board of Directors applicable to certain matters,
including (a) a merger, sale of control or sale of material assets of Bancorp,
(b) material acquisitions by Bancorp, (c) creation of new business units of
Bancorp, MPB or CNB, (d) material changes in operating budgets of Bancorp, MPB
or CNB, (e) material changes in the business organization or organizational
structure of Bancorp, MPB or CNB, (f) termination of any executive or senior
officer appointed to Executive Management Committee of Bancorp, and (g) any
change in the authorized range of directors of Bancorp; (iii) to approve the
adoption of the Bancorp Option Plan and to authorize an increase in the number
of shares issuable by Bancorp pursuant to the Mid-Peninsula 1994 Stock Option
Plan (the "1994 Option Plan") and the Greater Bay Bancorp 1996 Stock Option Plan
(the "Bancorp Option Plan"), from 457,037 to 967,890 shares; and (iv) to amend
the articles of incorporation of Mid-Peninsula to change its name to Greater Bay
Bancorp.
In addition, Mid-Peninsula shareholders will be asked to amend the articles
of incorporation regarding director liability and indemnification of agents, and
to approve and ratify certain proposed indemnification agreements between
Bancorp and its directors, officers and other corporate agents, including future
directors and officers. This proposal is not a condition of the Merger, but will
not take effect unless the Merger is consummated.
The close of business on September 9, 1996 has been set as the record date
(the "Mid-Peninsula Record Date") for determining which shareholders are
entitled to receive notice of and to vote at the Mid-Peninsula Meeting. On the
Mid-Peninsula Record Date, there were 1,637,593 Mid-Peninsula Shares
outstanding, held of record by approximately 560 shareholders. See "THE
MID-PENINSULA MEETING."
CUPERTINO. The Cupertino Meeting will be held at 5:00 p.m., California
time, on October 30, 1996, at the Saratoga Country Club, located at 1990
Prospect Road, Saratoga, California. Cupertino's shareholders will consider and
vote on a proposal to approve the principal terms of the Reorganization
Agreement. The close of business on September 9, 1996 has been set as the record
date (the "Cupertino Record Date") for determining which shareholders are
entitled to receive notice of and to vote at the Cupertino Meeting. On the
Cupertino Record Date, there were 1,905,958 Cupertino Shares outstanding, held
of record by approximately 380 shareholders. See "THE CUPERTINO MEETING."
THE PARTIES
MID-PENINSULA. Mid-Peninsula is a California corporation incorporated in
1984 under the name San Mateo County Bancorp ("San Mateo") to act as the bank
holding company of San Mateo County National Bank, subsequently renamed WestCal
National Bank ("WestCal"). In 1994, WestCal was merged with and into MPB in a
transaction in which MPB survived and became the wholly owned subsidiary of San
Mateo, which concurrently changed its name to Mid-Peninsula Bancorp. Mid-
Peninsula is registered as a bank holding company under the Bank Holding Company
Act of 1956, as
1
<PAGE>
amended (the "Bank Holding Company Act"). As of June 30, 1996, it had total
assets of $251.4 million. Mid-Peninsula's sole subsidiary is MPB, which provides
Mid-Peninsula's principal source of income through dividends paid by MPB.
Mid-Peninsula, through its banking subsidiary, provides banking and financial
services in and adjacent to the San Francisco Peninsula from Los Altos and
Mountain View on the south to Daly City on the north. See "MID-PENINSULA."
The principal executive office of Mid-Peninsula is located at 420 Cowper
Street, Palo Alto, California 94301, telephone number (415) 323-5150.
MPB. MPB is a California state-chartered bank founded in 1987. As of June
30, 1996, it had total loans of $148.0 million, total deposits of $227.1 million
and total assets of $251.4 million. MPB provides a wide range of commercial
banking services to individuals and business concerns through its branch offices
in Palo Alto, San Mateo and San Carlos. The principal executive office of MPB is
located at 420 Cowper Street, Palo Alto, California 94301, telephone number
(415) 323-5150.
CUPERTINO NATIONAL BANCORP. Cupertino is a California corporation
incorporated in 1984 and is registered as a bank holding company under the Bank
Holding Company Act. As of June 30, 1996, it had total assets of $274.4 million.
Cupertino's sole subsidiary is CNB, which provides Cupertino's principal source
of income through dividends paid by CNB. Cupertino, through its banking
subsidiary, provides banking and financial services throughout Cupertino, San
Jose, Palo Alto and the surrounding communities in Santa Clara County and San
Mateo County.
The principal executive office of Cupertino is located at 20230 Stevens
Creek Boulevard, Cupertino, California 95014, telephone number (408) 996-1144.
CNB. CNB is a national bank founded in 1985. As of June 30, 1996, it had
total loans of $185.3 million, total deposits of $251.4 million and total assets
of $273.0 million. CNB provides a wide range of financial services through its
branch offices in Cupertino, San Jose and Palo Alto. The principal executive
office of CNB is located at 20230 Stevens Creek Boulevard, Cupertino, California
95014, telephone number (408) 996-1144.
THE MERGER
GENERAL. Pursuant to the terms of the Reorganization Agreement, Cupertino
will be merged on a merger of equals basis with and into Mid-Peninsula, with
Mid-Peninsula surviving the Merger and changing its name to Greater Bay Bancorp.
At the Effective Time of the Merger, each Cupertino Share issued and outstanding
immediately prior to the consummation of the Merger (other than shares as to
which statutory dissenters' rights are perfected) will automatically, without
any action on the part of the holder thereof, be canceled and converted into the
right to receive 0.81522 Bancorp Share. Each Mid-Peninsula Share issued and
outstanding immediately prior to the consummation of the Merger shall remain
outstanding as a share of Bancorp. No fractional Bancorp Shares will be issued
in the Merger, but cash will be paid to holders of Cupertino Shares in lieu
thereof. Based on the number of the fully diluted Mid-Peninsula Shares
outstanding as of the Mid-Peninsula Record Date, the Bancorp Shares to be issued
to the Cupertino shareholders pursuant to the Reorganization Agreement will
represent approximately 49% of the fully diluted shares of Bancorp following the
Merger.
BACKGROUND AND REASONS FOR THE MERGER AND MANAGEMENT'S
RECOMMENDATIONS. Mid-Peninsula and Cupertino have from time to time considered
alternatives to increase the value of their franchises to provide a greater
shareholder return. Beginning early in 1996, Mid-Peninsula and Cupertino
executives and board members separately considered various merger possibilities.
On February 26, 1996, Mid-Peninsula addressed a letter to the Cupertino Board
expressing interest in a merger of equals transaction. Following further
negotiations, a revised expression of interest letter was sent to the Cupertino
Board by Mid-Peninsula on April 30, 1996. During the month following, the
parties and their advisors prepared a definitive agreement which was executed
June 5, 1996, and re-executed in a revised and restated form on June 26, 1996,
and again on August 20, 1996. See "THE MERGER -- Background of the Merger" and
"-- Recommendations of the Boards of Directors and Reasons for the Merger."
2
<PAGE>
ACCORDINGLY, THE BOARDS OF DIRECTORS OF MID-PENINSULA AND CUPERTINO HAVE
APPROVED THE REORGANIZATION AGREEMENT AND THE TRANSACTIONS CONTEMPLATED IN
CONNECTION THEREWITH AND RECOMMEND APPROVAL OF THE PRINCIPAL TERMS OF THE
REORGANIZATION AGREEMENT BY THE SHAREHOLDERS OF MID-PENINSULA AND CUPERTINO,
RESPECTIVELY. See "THE MERGER -- Background of the Merger" and "Recommendation
of the Boards of Directors and Reasons for the Merger."
MID-PENINSULA FAIRNESS OPINION. The Mid-Peninsula Board has received an
oral opinion (the "Alex. Brown Opinion") from the investment banking firm of
Alex. Brown & Sons Incorporated ("Alex. Brown") that, as of June 4, 1996, the
Conversion Ratio is fair, from a financial point of view, to the shareholders of
Mid-Peninsula. The Alex. Brown Opinion was confirmed in writing as of June 5,
1996, and reaffirmed as of September 23, 1996. A copy of the Alex. Brown Opinion
as reaffirmed on September 23, 1996, is attached to this Joint Proxy
Statement/Prospectus as Appendix E. See "THE MERGER -- Opinion of Mid-Peninsula
Financial Advisor."
CUPERTINO FAIRNESS OPINION. Cupertino has received a written opinion (the
"Sutro Opinion") from the investment banking firm of Sutro & Co., Incorporated
("Sutro") that the consideration to be received in the Merger is fair, from a
financial point of view, to the shareholders of Cupertino as of August 14, 1996.
A copy of the Sutro Opinion is attached hereto as Appendix F. See "THE MERGER --
Opinion of Cupertino Financial Advisor."
CUPERTINO FINANCIAL ADVISOR. Cupertino has engaged Hovde Financial, Inc.
("Hovde") as a financial advisor in connection with the Merger to provide, among
other things, advice regarding cost savings opportunities and revenue
enhancements which can be effected following the Merger. An affiliate of Hovde
is a principal shareholder of Cupertino. See "THE MERGER -- Other Financial
Advisor Agreement" and "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF CUPERTINO."
CONDITIONS TO THE MERGER; TERMINATION. The obligation of each of the
parties to the Reorganization Agreement to consummate the Merger is subject to
the satisfaction or waiver on or before the Effective Time of the Merger of,
among other things, the following conditions: (i) the approval by the
shareholders of Mid-Peninsula and Cupertino of the principal terms of the
Reorganization Agreement; (ii) the absence of any judgment, decree, injunction,
order or proceeding which prohibits or restricts the effectuation of, or
threatens to invalidate, the Merger; (iii) the receipt of all required
governmental approvals and consents and satisfaction of all other statutory or
regulatory requirements; (iv) a letter from KPMG Peat Marwick, LLP, independent
accountants of Mid-Peninsula ("KPMG") that the Merger will qualify for pooling
of interests accounting treatment; and (v) the performance of covenants, the
accuracy of representations and warranties and the receipt of various legal
opinions, officers' certificates and other documents, as provided in the
Reorganization Agreement. See "THE REORGANIZATION AGREEMENT."
The Reorganization Agreement may be terminated at any time prior to the
Effective Time of the Merger by the mutual consent of Mid-Peninsula and
Cupertino, or, among other things, by either party (i) if any approval of
shareholders of Mid-Peninsula or Cupertino required for the Merger is not
obtained at the applicable meeting; (ii) upon the expiration of 30 days after
any regulatory authority or governmental authority denies or refuses to grant
any approval required to be obtained in order to consummate the transactions
contemplated by the Reorganization Agreement, unless within 30 days of such
denial all parties agree to submit a new application to the regulatory or
governmental authority which refused to grant such approval; (iii) in the event
that Cupertino, CNB or their affiliates, or Mid-Peninsula, MPB or their
affiliates, enter into a Business Combination (as defined in the Reorganization
Agreement), provided that termination based thereon shall not terminate the
option agreement signed by Cupertino or Mid-Peninsula, as the case may be (the
"Mid-Peninsula Option Agreement" and the "Cupertino Option Agreement,"
collectively, the "Option Agreements"), or the obligation of the party entering
into a Business Combination to pay to the other party, on demand, the sum of
$750,000; (iv) if a materially adverse change shall have occurred since March
31,
3
<PAGE>
1996, in the business, financial condition, results of operations or assets of
the other party or its bank subsidiary; or (v) if the Merger is not consummated
by December 31, 1996, provided that, if the only conditions to the closing (the
"Closing") which then remain unsatisfied are the receipt of regulatory approvals
or the expiration of any waiting periods under applicable law or regulation, the
Closing will be automatically extended to February 28, 1997, or such other date
as the parties may agree upon, for the purpose of obtaining such approvals or
the expiration of such waiting periods.
REGULATORY APPROVALS. Application for prior approval of the Merger was
filed with the Federal Reserve Bank of San Francisco (the "FRB") on August 21,
1996. There can be no assurances that the required approval will be obtained, or
as to conditions or timing of such approval. See "THE MERGER -- Regulatory
Approval."
AGREEMENTS WITH CERTAIN SHAREHOLDERS. Cupertino has entered into a
shareholder agreement ("Shareholder Agreement") with certain shareholders of
Mid-Peninsula, each of whom is also a director or an executive officer of
Mid-Peninsula (the "Mid-Peninsula Shareholders") and Mid-Peninsula has entered
into a Shareholder Agreement with certain shareholders of Cupertino, each of
whom is also a director or an executive officer of Cupertino or CNB (the
"Cupertino Shareholders"), pursuant to which the Mid-Peninsula Shareholders and
Cupertino Shareholders have agreed generally (i) to vote all Mid-Peninsula
Shares and Cupertino Shares which they own or hold in trust in favor of the
approval of the Reorganization Agreement, thereby increasing the likelihood that
the Reorganization Agreement will be approved by the shareholders of both
companies and (ii) not to sell or otherwise transfer any of their Mid-Peninsula
Shares or Cupertino Shares prior to the Effective Time of the Merger. See "THE
MERGER -- Agreements with Certain Shareholders."
Current directors, executive officers and other persons deemed by Cupertino
or Mid-Peninsula to be affiliates of Cupertino or Mid-Peninsula have entered
into agreements (the "Affiliate Agreements") with Mid-Peninsula or Cupertino, as
the case may be, restricting such persons' ability to sell Cupertino Shares,
Mid-Peninsula Shares or Bancorp Shares which such persons hold or may acquire in
connection with the Merger except in accordance with such Affiliate Agreements.
See "THE MERGER -- Agreements with Certain Shareholders."
INTERESTS OF CERTAIN PERSONS IN THE MERGER. At the Effective Time of the
Merger, the Board of Directors of Bancorp will comprise 10 directors, five
members from each of the Mid-Peninsula Board of Directors (the "Mid-Peninsula
Board") and the Cupertino Board of Directors (the "Cupertino Board"). The five
members from the Mid-Peninsula Board are expected to be David L. Kalkbrenner,
Duncan L. Matteson, Donald H. Seiler, Warren R. Thoits and Edwin E. van
Bronkhorst. The five members from the Cupertino Board are expected to be John M.
Gatto, James E. Jackson, Rex D. Lindsay, Glen McLaughlin and Dick J. Randall.
At the Effective Time of the Merger, the following officers of Mid-Peninsula
and Cupertino shall become the executive officers of Bancorp and shall be
appointed to the positions indicated: (i) David L. Kalkbrenner, President and
Chief Executive Officer, (ii) Steven C. Smith, Executive Vice President, Chief
Operating Officer and Chief Financial Officer, and (iii) David R. Hood,
Executive Vice President and Chief Credit Officer.
In addition, the following persons will be named to the Executive Management
Committee of Bancorp, with the following additional titles and positions held
with MPB or CNB as indicated:
(i) from Mid-Peninsula -- David L. Kalkbrenner, President and Chief
Executive Officer of MPB, Director of MPB and CNB, and Chairman of the
Executive Management Committee; Murray B. Dey, Executive Vice President of
MPB; Carol R. Rowland, First Vice President and Chief Financial Officer of
MPB; Susan K. Black, Executive Vice President, Relationship Management
Administration, of MPB; and Kimberly S. Burgess, Senior Vice President, Bank
Support Services, of MPB.
(ii) from Cupertino -- C. Donald Allen, Chairman of the Board and Chief
Executive Officer of CNB; Steven C. Smith, Executive Vice President and
Chief Operating Officer of CNB and Vice-
4
<PAGE>
Chairman of the Executive Management Committee; David R. Hood, Executive
Vice President and Senior Lending Officer of CNB; Hall Palmer, Executive
Vice President, Trust Group of CNB; Kenneth D. Brenner, Executive Vice
President, Strategic Marketing and Business Development, of CNB; and Heidi
R. Wulfe, Senior Vice President and Chief Financial Officer of CNB.
The officers and employees of Mid-Peninsula, Cupertino, MPB and CNB who
become officers or employees of Bancorp, MPB or CNB will be entitled to
participate in all employee benefits and benefit programs of Bancorp, MPB or
CNB, as the case may be, in accordance with the terms of such plans or programs.
As of the Mid-Peninsula Record Date, the directors and executive officers of
Mid-Peninsula held 340,309 Mid-Peninsula Shares (not including shares such
persons could acquire through the exercise of options), constituting
approximately 20% of the outstanding Mid-Peninsula Shares as of such date. The
affirmative vote of approximately an additional 30% of the outstanding
Mid-Peninsula Shares entitled to vote at the Mid-Peninsula Meeting will be
required in order to approve the Reorganization Agreement. In addition,
directors and executive officers of Mid-Peninsula held as of such date options
to purchase 156,181 Mid-Peninsula Shares, of which 54,400 options are
exercisable within 60 days of the Mid-Peninsula Record Date.
As of the Cupertino Record Date, the directors and executive officers of
Cupertino (including the executive officers of CNB) beneficially owned 485,100
Cupertino Shares (not including shares such persons could acquire through the
exercise of options), constituting approximately 25% of the outstanding
Cupertino Shares as of such date. The affirmative vote of approximately an
additional 25% of the outstanding Cupertino Shares entitled to vote at the
Cupertino Meeting will be required in order to approve the Reorganization
Agreement. In addition, directors and executive officers of Cupertino (including
the executive officers of CNB) held as of such date options to purchase 225,069
Cupertino Shares, which, upon the consummation of the Merger, will be exchanged
for substitute options with substantially the same terms granted by Bancorp
("Substitute Options"), subject to approval of the Bancorp Option Plan and of
the increase in the number of shares issuable pursuant to all stock option plans
of Bancorp by Mid-Peninsula shareholders at the Mid-Peninsula Meeting. See "THE
REORGANIZATION AGREEMENT -- Treatment of Options." If options for Cupertino
shares are exercised prior to the Merger, the Cupertino Shares acquired will be
converted into the right to receive Bancorp Shares at the Effective Time of the
Merger in the same manner as will the Cupertino Shares held by all other
Cupertino shareholders.
Alex. Brown has provided certain investment banking advice and services to
Mid-Peninsula, including advice with respect to the Merger, pursuant to a
written agreement with Mid-Peninsula. As compensation for such services,
Mid-Peninsula has agreed to pay Alex. Brown a fee of $200,000. See "THE MERGER
- -- Opinion of Mid-Peninsula Financial Advisor."
Sutro has provided certain services to Cupertino including issuance of a
fairness opinion in connection with the Merger pursuant to a written agreement
with Cupertino. As compensation for such services, Cupertino has agreed to pay
Sutro a fee of $175,000. See "THE MERGER -- Opinion of Cupertino Financial
Advisor."
Hovde has provided certain services to Cupertino as a financial advisor,
including, among other things, advice regarding post-Merger cost savings
opportunities and revenue enhancements. As compensation for such services,
Cupertino has agreed to pay Hovde $125,000 upon satisfaction of certain
conditions. See "THE MERGER --- Other Financial Advisor Agreement."
OPTION AGREEMENTS. As a condition to entering into the Reorganization
Agreement, each of Mid-Peninsula and Cupertino required the other to enter into
an Option Agreement. The Option Agreements provide for the grant of options to
purchase shares of the issuing party's common stock. Mid-Peninsula granted to
Cupertino an option to purchase up to 19.0% of the outstanding Mid-Peninsula
Shares at a price equal to $20.45 per share, subject to adjustment as provided
in the Mid-Peninsula Option Agreement; Cupertino granted to Mid-Peninsula an
option to purchase up to 19.0% of the
5
<PAGE>
Cupertino Shares at a price equal to $14.80 per share, subject to adjustment as
provided in the Cupertino Option Agreement. The options were priced at the
average of the closing trading prices for the respective stocks during the
period from June 10 through June 14, inclusive. The Merger was announced on June
5, 1996. The option price determination was deferred to the fifth day after the
date of the Reorganization Agreement in order to allow the trading prices of the
respective stocks to adjust to the announcement of the Merger. An average of the
closing prices for the subsequently ensuing five trading days was used in order
to moderate the effects of any resulting price increases or declines. The Option
Agreements provide that the holder of the option is entitled to purchase the
option shares upon the occurrence of certain events that create the potential
for another party to acquire control of the issuing party. See "THE OPTION
AGREEMENTS."
The Option Agreements could have the effect of discouraging persons who now
or prior to the Effective Time of the Merger might be interested in acquiring
all or a significant interest in either Mid-Peninsula or Cupertino from
considering or proposing such an acquisition, even if such persons were prepared
to propose greater consideration per Cupertino Share than the consideration per
share represented by the Conversion Ratio or a higher price per Mid-Peninsula
Share than the market price. In addition, the Reorganization Agreement provides
that Mid-Peninsula and Cupertino and their respective subsidiaries will not
enter into or solicit or encourage any merger, exchange of stock, sale of assets
or similar transaction providing for the acquisition of all or a substantial
part of them or their respective subsidiaries, or disclose nonpublic information
to any potential acquiring party or other person having a role with respect to
such a transaction.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. An opinion from Bronson, Bronson &
McKinnon LLP, counsel for Mid-Peninsula ("Bronson"), limited to certain material
federal tax consequences of the Merger, is required to be delivered to the
parties as a condition to the Closing of the Merger. Assuming the opinion is not
withdrawn or changed before the Effective Time of the Merger, and based upon the
continuing accuracy of certain assumptions and representations of parties to the
Reorganization Agreement, it is the opinion of Bronson that the Merger will
constitute a reorganization under Section 368(a)(1)(A) of the Internal Revenue
Code of 1986, as amended (the "Code"), if carried out in the manner set forth in
the Reorganization Agreement and that (1) a shareholder whose Cupertino Shares
are exchanged solely for Bancorp Shares in the Merger will not recognize any
gain or loss for federal income tax purposes as a result of that exchange,
except with respect to cash proceeds received in lieu of fractional shares; (2)
the tax basis of the Bancorp Shares received by Cupertino shareholders will be
the same as the basis of the Cupertino Shares surrendered in exchange therefor,
decreased by the amount of basis allocated to the fractional shares that are
hypothetically received by the shareholder and redeemed for cash, and increased
by any gain recognized on the exchange (not including any gain recognized for
the receipt of cash in lieu of fractional shares); (3) the holding period of the
Bancorp Shares received by the Cupertino shareholders will include the period
during which the Cupertino Shares surrendered in exchange therefor were held,
provided that the Cupertino Shares are held as a capital asset in the hands of
the Cupertino shareholders at the Effective Time of the Merger; and (4) the
payment of cash in lieu of fractional Bancorp Shares will be treated as if each
fractional share was distributed as part of the exchange and then redeemed by
Bancorp. Pursuant to Section 302(a) of the Code, these cash payments will be
treated as having been received as distributions in full payment in exchange for
the Bancorp Shares. Any gain or loss recognized upon such exchange (as
determined under Section 1001 and subject to the limitations of Section 267)
will be capital gain or loss provided the fractional share would constitute a
capital asset in the hands of the exchanging shareholder. See "THE MERGER --
Certain Federal Income Tax Consequences."
ACCOUNTING TREATMENT OF THE MERGER. The Merger will be treated as a pooling
of interests for accounting and financial reporting purposes. Prior to the
Effective Time of the Merger and as a condition precedent to the Closing,
Mid-Peninsula's independent accountants, KPMG will issue a letter that the
accounting and financial reporting treatment of the Merger will qualify as a
pooling of interests.
6
<PAGE>
EXCHANGE OF STOCK CERTIFICATES
As soon as practicable after the Effective Time of the Merger, Bancorp will
send to Cupertino shareholders of record at the Effective Time of the Merger a
letter of transmittal advising the shareholders of Cupertino of the procedure
for surrendering certificates representing Cupertino Shares in exchange for
certificates representing Bancorp Shares and cash in lieu of fractional Bancorp
Shares. SHAREHOLDERS SHOULD NOT SURRENDER THEIR CERTIFICATES UNTIL THEY RECEIVE
THE LETTER OF TRANSMITTAL. All Bancorp Shares issued in the Merger will be
deemed issued as of the Effective Time of the Merger.
The holder of a certificate representing Cupertino Shares will have no
rights with respect to such shares other than to surrender such certificates, as
provided in the letter of transmittal, in exchange for certificates representing
Bancorp Shares and cash in lieu of fractional Bancorp Shares or, in the event
such holder has dissented from the Merger, to surrender such certificates in
connection with a request to receive the fair market value of the shares
represented by such certificates. See "DISSENTING SHAREHOLDERS' RIGHTS." Upon
surrender of any certificate representing Cupertino Shares to be exchanged for
Bancorp Shares, the holder thereof shall be entitled to receive (i) a
certificate representing the Bancorp Shares to which such holder is entitled and
a check in the amount of any cash to be paid to such holder, and (ii) funds on
account of dividends and other distributions paid to holders of record of
Bancorp Shares as of a record date after the Effective Time of the Merger but
prior to surrender. See "THE MERGER -- Exchange Procedures."
DISSENTERS' RIGHTS
Because Mid-Peninsula Shares are traded on the Nasdaq National Market
("Nasdaq"), dissenters' rights will be available to the shareholders of
Mid-Peninsula only if the holders of five percent (5%) or more of Mid-Peninsula
Shares make a written demand upon Mid-Peninsula for the purchase of dissenting
shares in accordance with Chapter 13 of the California General Corporation Law.
If this condition is satisfied and the Merger is consummated, shareholders of
Mid-Peninsula who dissent from the Merger by complying with the procedures set
forth in Chapter 13 would be entitled to receive from Bancorp an amount equal to
the fair market value of their Mid-Peninsula Shares as of June 4, 1996, the day
before the public announcement of the Merger. The procedure for perfecting
dissenters' rights is summarized under the caption "DISSENTING SHAREHOLDERS'
RIGHTS -- Mid-Peninsula" and the pertinent provisions of Chapter 13 of the
California General Corporation Law are included as Appendix D to this Joint
Proxy Statement/Prospectus.
Because Cupertino Shares are traded on the Nasdaq National Market
("Nasdaq"), dissenters' rights will be available to the shareholders of
Cupertino only if the holders of five percent (5%) or more of Cupertino Shares
make a written demand upon Cupertino for the purchase of dissenting shares in
accordance with Chapter 13 of the California General Corporation Law. If this
condition is satisfied and the Merger is consummated, shareholders of Cupertino
who dissent from the Merger by complying with the procedures set forth in
Chapter 13 would be entitled to receive from Bancorp an amount equal to the fair
market value of their Cupertino Shares as of June 4, 1996, the day before the
public announcement of the Merger. The procedure for perfecting dissenters'
rights is summarized under the caption "DISSENTING SHAREHOLDERS' RIGHTS --
Cupertino" and the pertinent provisions of Chapter 13 of the California General
Corporation Law are included as Appendix D to this Joint Proxy
Statement/Prospectus.
HISTORICAL AND PRO FORMA PER SHARE DATA FOR MID-PENINSULA AND CUPERTINO
The following summary of comparative per share data sets forth certain
historical information for Mid-Peninsula and Cupertino, certain pro forma
information for Bancorp after giving effect to the Merger as a pooling of
interests transaction for accounting purposes, assuming it had been in effect at
the beginning at the earliest period presented, and equivalent pro forma
information for Cupertino
7
<PAGE>
based on the pro forma Bancorp information. This data is based upon and should
be read in conjunction with information set forth in the financial statements
and related notes of Mid-Peninsula and Cupertino, which are included or
incorporated by reference herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE."
<TABLE>
<CAPTION>
MID- EQUIVALENT OF ONE
PER COMMON SHARE PENINSULA (1) CUPERTINO BANCORP (2) CUPERTINO SHARE (3)
- ------------------------------------------------------ ------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Net Income:
Six months ended June 30, 1996...................... $ 0.96 $ 0.49 $ 0.78 $ 0.64
1995................................................ 1.70 0.16 0.96 0.79
1994................................................ 0.78 0.76 0.85 0.70
1993................................................ 1.04 0.50 0.84 0.68
Cash Dividends Declared:
Six months ended June 30, 1996...................... $ 0.30 $ 0.10 $ 0.30 $ 0.25
1995................................................ 0.40 0.18 0.40 0.33
1994................................................ 0.22 0.09 0.22 0.18
1993................................................ 0.16 -- 0.16 0.13
Book Value:
June 30, 1996....................................... $ 14.00 $ 10.52 $ 13.12 $ 10.69
December 31, 1995................................... 13.64 10.32 13.17 10.73
</TABLE>
- ------------------------
(1) The historical Mid-Peninsula and Bancorp pro forma amounts include WestCal,
as if that merger were completed as of the earliest period presented.
(2) The pro forma combined per share data for net income has been calculated
using Mid-Peninsula's weighted average number of shares of common stock
outstanding for the period presented increased by Cupertino's weighted
average number of shares of common stock outstanding multiplied by the
Conversion Ratio of 0.81522 shares for each share of Cupertino common stock,
as if these shares were outstanding for each period presented. The pro forma
combined per share data for dividends declared represents the historical per
share data for Mid-Peninsula only. The pro forma combined book value per
share has been calculated using shares of Mid-Peninsula common stock
outstanding increased by the Cupertino common stock outstanding multiplied
by the Conversion Ratio of 0.81522 for each share of Cupertino common stock
as if these shares were outstanding as of each period presented. Such pro
forma per share data assumes no dissenting Mid-Peninsula or Cupertino
shareholders.
(3) The equivalent pro forma Cupertino per share information has been calculated
by multiplying the pro forma combined per share information by the
Conversion Ratio of 0.81522.
COMPARATIVE STOCK PRICE INFORMATION
Mid-Peninsula is required, as a condition to the Merger, to list the
Mid-Peninsula Shares and Bancorp Shares to be issued in the Merger on Nasdaq.
Mid-Peninsula Shares have been accepted for listing on Nasdaq, and trading
commenced September 9, 1996. Cupertino Shares are traded on Nasdaq. The
following table sets forth, for the periods indicated, the high and low bid
prices of Mid-
8
<PAGE>
Peninsula Shares as reported by Hoefer & Arnett, PaineWebber, Inc. and Van
Kasper & Company, the principal market makers for Mid-Peninsula Shares, or as
reported on Nasdaq, and the high and low closing prices of Cupertino Shares, as
reported on Nasdaq, for the periods indicated.
<TABLE>
<CAPTION>
PRICE PER SHARE
------------------------------------------
MID-PENINSULA SHARES
CUPERTINO SHARES
-------------------- --------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1994
First Quarter......................................................... $ 15.50 $ 14.00 $ 10.00 $ 8.81
Second Quarter........................................................ 15.75 15.00 10.38 9.00
Third Quarter......................................................... 15.25 14.50 10.00 9.00
Fourth Quarter........................................................ 13.00 12.50 10.00 8.75
1995
First Quarter......................................................... $ 13.63 $ 13.00 $ 9.03 $ 9.01
Second Quarter........................................................ 15.25 13.00 9.12 8.98
Third Quarter......................................................... 17.00 15.25 9.64 9.48
Fourth Quarter........................................................ 16.88 15.75 12.36 12.06
1996
First Quarter......................................................... $ 18.75 $ 16.50 $ 14.25 $ 13.00
Second Quarter........................................................ 22.13 17.75 15.25 13.00
Third Quarter (through September 9, 1996)............................. 20.75 19.00 15.75 14.50
</TABLE>
The following table sets forth the high and low bid prices of Mid-Peninsula
Shares as reported by Hoefer & Arnett and the closing price of Cupertino Shares
as reported on Nasdaq on June 4, 1996, the last trading day before the first
public announcement of the Merger, and the equivalent per share price per
Cupertino Share based on the Mid-Peninsula Share price as of that date, assuming
a Conversion Ratio of 0.81522 Bancorp Share for each Cupertino Share:
<TABLE>
<CAPTION>
MID-PENINSULA SHARES CUPERTINO SHARES
-------------------- ---------------------------------
HISTORICAL HISTORICAL EQUIVALENT
-------------------- ----------- --------------------
BID ASK CLOSING ASK BID
--------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
June 4, 1996................. $ 20.75 $ 20.75 $ 13.75 $ 16.87 $ 16.87
</TABLE>
9
<PAGE>
CERTAIN MID-PENINSULA AND CUPERTINO FINANCIAL DATA
The following tables set forth certain selected financial data for
Mid-Peninsula and Cupertino for each year in the five-year period ended December
31, 1995, and certain selected unaudited financial data for Mid-Peninsula and
Cupertino for the six-month period ended June 30, 1996, and is qualified in its
entirety by the financial information incorporated by reference herein and
provided herewith. See "AVAILABLE INFORMATION" and "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
MID-PENINSULA BANCORP
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED JUNE YEAR ENDED DECEMBER 31,
30, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
Results of operations:
Interest income............................. $ 9,132 $ 16,940 $ 12,440 $ 10,524 $ 10,310 $ 11,511
Interest expense............................ 3,420 6,538 4,233 3,331 3,964 5,592
----------- --------- --------- --------- --------- ---------
Net interest income......................... 5,712 10,402 8,207 7,193 6,346 5,919
Provision for loan losses................... 220 275 203 266 230 172
----------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses..................................... 5,492 10,127 8,004 6,927 6,116 5,747
Other income................................ 279 404 216 424 463 287
Operating expenses.......................... 3,112 5,996 5,787 4,936 4,511 4,271
----------- --------- --------- --------- --------- ---------
Income before income taxes.................. 2,659 4,535 2,433 2,415 2,068 1,763
Income tax expense.......................... 1,088 1,814 1,232 852* 686* 683
----------- --------- --------- --------- --------- ---------
Net income.................................. $ 1,571 $ 2,721 $ 1,201 $ 1,563 $ 1,382 $ 1,080
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Per share data:
Net income per share........................ $ 0.96 $ 1.70 $ 0.78 $ 1.04 $ 0.94 $ 0.73
Cash dividend per share..................... $ 0.30 $ 0.40 $ 0.22 $ 0.16 $ 0.12 $ 0.06
Dividend payout ratio....................... 31% 24% 28% 15% 13% 8%
Book value per share........................ $ 14.00 $ 13.64 $ 11.82 $ 12.28 $ 11.36 $ 10.55
Balance at period end:
Total assets................................ $ 251,412 $ 218,735 $ 178,470 $ 166,002 $ 152,642 $ 140,499
Loans, net.................................. 146,034 123,886 107,128 100,324 99,586 90,844
Deposits.................................... 227,134 195,695 159,572 147,560 135,560 124,349
Shareholders' equity........................ 22,798 21,440 18,003 17,840 16,445 15,280
Average daily balances:
Total assets................................ $ 228,568 $ 204,845 $ 178,639 $ 158,034 $ 143,317 $ 127,481
Loans, net.................................. 135,281 113,985 102,862 99,174 93,198 83,586
Deposits.................................... 204,318 183,931 159,870 140,464 127,052 122,925
Shareholders' equity........................ 22,144 19,722 17,664 16,958 15,585 13,920
Selected statistics:
Return on average assets.................... 1.37% 1.33% 0.67% 0.99% 0.96% 0.85%
Return on average shareholders' equity...... 14.19% 13.80% 6.80% 9.22% 8.87% 7.45%
Average equity to average assets............ 9.69% 9.63% 9.89% 10.73% 10.87% 10.92%
</TABLE>
- ------------------------------
*Note: Tax benefit from cumulative effect of changes in accounting principle of
$83,000 and $58,000 in 1993 and 1992, respectively.
10
<PAGE>
CUPERTINO NATIONAL BANCORP
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED JUNE YEAR ENDED DECEMBER 31,
30, -----------------------------------------------------
1996 1995 1994 1993 1992 1991
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
Results of operations:
Interest income............................. $ 11,199 $ 20,293 $ 15,361 $ 13,333 $ 12,426 $ 12,634
Interest expense............................ 3,939 7,354 4,279 3,166 3,542 4,988
----------- --------- --------- --------- --------- ---------
Net interest income......................... 7,260 12,939 11,082 10,167 8,884 7,646
Provision for loan losses................... 465 681 1,620 1,679 902 382
----------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses..................................... 6,795 12,258 9,462 8,488 7,982 7,264
Other income................................ 1,436 1,902 3,079 3,154 1,664 890
Operating expenses.......................... 6,651 13,690 10,444 10,224 6,686 5,271
----------- --------- --------- --------- --------- ---------
Income before income taxes.................. 1,580 470 2,097 1,418 2,960 2,883
Income tax expense.......................... 593 157 734 538 1,197 1,140
----------- --------- --------- --------- --------- ---------
Net income.................................. $ 987 $ 313 $ 1,363 $ 880 $ 1,763 $ 1,743
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Per share data:(1)
Net income per share........................ $ 0.49 $ 0.16 $ 0.76 $ 0.50 $ 1.05 $ 1.04
Cash dividend per share..................... $ 0.10 $ 0.18 $ 0.09 -- -- --
Dividend payout ratio....................... 20% 113% 12% -- -- --
Book value per share........................ $ 10.52 $ 10.32 $ 10.53 $ 10.02 $ 9.55 $ 8.49
Balance at period end:
Total assets................................ $ 274,396 $ 259,099 $ 223,144 $ 192,574 $ 172,526 $ 140,607
Loans, net.................................. 182,432 160,693 135,622 131,533 126,748 104,191
Deposits.................................... 250,139 236,094 186,722 175,740 156,550 123,975
Other borrowings............................ -- -- 17,256 -- -- --
Subordinated debt........................... 3,000 3,000 -- -- -- --
Shareholders' equity........................ 19,983 18,672 18,037 16,219 15,174 13,311
Average daily balances:
Total assets................................ $ 262,924 $ 229,903 $ 198,162 $ 183,297 $ 157,535 $ 124,810
Loans, net.................................. 170,518 143,280 127,264 127,210 114,780 96,961
Deposits.................................... 239,343 197,396 172,385 166,581 142,451 111,564
Shareholders' equity........................ 19,369 18,326 17,410 15,337 14,379 12,434
Selected statistics:
Return on average assets.................... 0.8% 0.1% 0.7% 0.5% 1.1% 1.4%
Return on average shareholders' equity...... 10.2% 1.7% 7.8% 5.7% 12.3% 14.0%
Average equity to average assets............ 7.4% 8.0% 8.8% 8.4% 9.1% 10.0%
</TABLE>
- ------------------------------
(1) Net income per share, cash dividends per share and book value per share
have been restated to reflect stock dividends of 10% in 1995, 5% in 1994
and 10% in each of 1993, 1992 and 1991.
11
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following Unaudited Pro Forma Combined Balance Sheet as of June 30, 1996
and Unaudited Pro Forma Combined Statements of Income for the six months ended
June 30, 1996 and the years ended December 31, 1993, 1994 and 1995 have been
prepared to reflect the effects of the Merger on the historical results of
Mid-Peninsula. The Unaudited Pro Forma Combined Balance Sheet has been prepared
as if the Merger occurred on June 30, 1996. The pro forma financial information
set forth below is unaudited and not necessarily indicative of the results that
will actually occur in the future.
The pro forma financial statements reflect Mid-Peninsula's acquisition of
WestCal which was completed on October 7, 1994. The Unaudited Pro Forma Combined
Statements of Income have been prepared as if the WestCal acquisition occurred
on January 1, 1993.
UNAUDITED PRO FORMA COMBINED FINANCIAL SUMMARY
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED -------------------------------------
JUNE 30, 1996 1995 1994 1993
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Period End Balances:
Securities held to maturity............................... $ 51,151 $ 54,397 $ 76,216 $ 51,500
Securities available for sale............................. 48,858 62,037 16,953 22,898
Net loans................................................. 328,466 284,579 242,750 231,857
Total earning assets...................................... 466,808 412,385 349,775 320,106
Total assets.............................................. 525,808 477,834 401,614 358,576
Total deposits............................................ 477,273 431,789 346,294 323,300
Total shareholders' equity................................ 41,681 40,112 36,040 34,059
Consolidated Operating Results:
Net interest income....................................... $ 12,972 $ 23,341 $ 19,289 $ 17,360
Provision for loan losses................................. (685) (956) (1,823) (1,945)
Non-interest income....................................... 1,715 2,306 3,295 3,578
Non-interest expense...................................... 9,763 19,686 16,231 15,160
Income before income taxes................................ 4,239 5,005 4,530 3,833
Income tax expense........................................ 1,681 1,971 1,966 1,473
Cumulative effect of change in accounting principles...... -- -- -- 83
Net income................................................ 2,558 3,034 2,564 2,443
Common Share Data:
Earnings per common and common equivalent share........... $ 0.78 $ 0.96 $ 0.85 $ 0.84
Cash dividends per share.................................. $ 0.30 $ 0.40 $ 0.22 $ 0.16
Book value per share...................................... $ 13.12 $ 13.17 $ 12.35 $ 12.27
Weighted average and common equivalent shares............. 3,267 3,144 3,000 2,926
</TABLE>
12
<PAGE>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-PENINSULA &
MID-PENINSULA CUPERTINO ADJUSTMENTS CUPERTINO COMBINED
----------------- ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks............... $ 12,024 $ 16,419 $ 28,443
Federal funds sold.................... 36,400 11,000 47,400
Securities held-to-maturity........... 2,397 47,322 49,719
Securities available-for-sale......... 47,855 1,003 48,858
FRB and FHLB stock.................... 430 1,002 1,432
Loans, net............................ 146,034 182,432 328,466
Premises and equipment................ 1,026 3,232 4,258
Other real estate owned............... -- 217 217
Other assets.......................... 5,246 11,769 17,015
----------------- ------------ ----------
TOTAL ASSETS........................ $ 251,412 $ 274,396 $ 525,808
----------------- ------------ ----------
----------------- ------------ ----------
LIABILITIES
Deposits.............................. $ 227,134 $ 250,139 $ 477,273
Subordinated debt..................... -- 3,000 3,000
----------------- ------------ ------- ----------
Other liabilities..................... 1,480 1,274 1,100(1) 3,854
----------------- ------------ ------- ----------
TOTAL LIABILITIES....................... 228,614 254,413 1,100 484,127
SHAREHOLDERS' EQUITY.................... 22,798 19,983 (1,100) 41,681
----------------- ------------ ------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................. $ 251,412 $ 274,396 -- $ 525,808
----------------- ------------ ------- ----------
----------------- ------------ ------- ----------
</TABLE>
- ------------------------
(1) The following table reflects all nonrecurring Mid-Peninsula and Cupertino
estimated merger related costs as of June 30, 1996. These costs are not
included in the Unaudited Pro Forma Combined Income Statement but are
included on the Unaudited Pro Forma Combined Balance Sheet as a reduction to
equity capital. These costs will be charged to expense immediately following
the consummation of the Merger. Such estimated merger related costs are
summarized below (in thousands):
<TABLE>
<CAPTION>
MID-PENINSULA CUPERTINO COMBINED
--------------- ----------- -----------
<S> <C> <C> <C>
Financial advisory..................................... $ 250 $ 250 $ 500
Professional fees...................................... 275 225 500
Printing and other..................................... 50 50 100
----- ----- -----------
Total............................................ $ 575 $ 525 $ 1,100
----- ----- -----------
----- ----- -----------
</TABLE>
13
<PAGE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-PENINSULA &
MID-PENINSULA CUPERTINO ADJUSTMENTS CUPERTINO COMBINED
----------------- ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Interest and fees on loans and leases... $ 7,041 $ 9,212 $ 16,253
Interest on investment securities....... 1,382 1,748 3,130
Interest on federal funds sold.......... 709 239 948
------- ------------ --------
TOTAL INTEREST INCOME............. 9,132 11,199 20,331
Interest on deposits.................... 3,420 3,939 7,359
------- ------------ --------
Net interest income..................... 5,712 7,260 12,972
Provision for loan loss................. 220 465 685
------- ------------ --------
Net interest income after provision for
loan loss.............................. 5,492 6,795 12,287
Noninterest income...................... 279 1,436 1,715
Noninterest expense..................... 3,112 6,651 9,763
------- ------------ --------
Income before taxes..................... 2,659 1,580 4,239
Taxes on income......................... 1,088 593 1,681
------- ------------ --------
NET INCOME........................ $ 1,571 $ 987 $ 2,558
------- ------------ --------
------- ------------ --------
Earnings per share...................... $ 0.96 $ 0.49 $ 0.78
Weighted average shares outstanding..... 1,630 2,008 3,267
</TABLE>
14
<PAGE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-PENINSULA &
MID-PENINSULA CUPERTINO ADJUSTMENTS CUPERTINO COMBINED
----------------- ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Interest and fees on loans and leases... $ 12,239 $ 16,158 $ 28,397
Interest on investment securities....... 3,121 3,625 6,746
Interest on federal funds sold/ other
interest income........................ 1,580 510 2,090
-------- ------------ --------
TOTAL INTEREST INCOME............. 16,940 20,293 37,233
Interest on deposits.................... 6,538 7,354 13,892
-------- ------------ --------
Net interest income..................... 10,402 12,939 23,341
Provision for loan loss................. 275 681 956
-------- ------------ --------
Net interest income after provision for
loan loss.............................. 10,127 12,258 22,385
Non interest income..................... 404 1,902 2,306
Non interest expense.................... 5,996 13,690 19,686
-------- ------------ --------
Income before taxes..................... 4,535 470 5,005
Taxes on income......................... 1,814 157 1,971
-------- ------------ --------
NET INCOME........................ $ 2,721 $ 313 $ 3,034
-------- ------------ --------
-------- ------------ --------
Earnings per share...................... $ 1.70 $ 0.16 $ 0.96
Weighted average shares outstanding..... 1,600 1,894 3,144
</TABLE>
15
<PAGE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-PENINSULA &
MID-PENINSULA CUPERTINO ADJUSTMENTS CUPERTINO COMBINED
----------------- ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Interest and fees on loans and leases... $ 9,504 $ 12,608 $ 22,112
Interest on investment securities....... 1,356 2,545 3,901
Interest on federal funds sold.......... 1,580 208 1,788
-------- ------------ --------
TOTAL INTEREST INCOME............. 12,440 15,361 27,801
Interest on deposits.................... 4,233 4,279 8,512
-------- ------------ --------
Net interest income..................... 8,207 11,082 19,289
Provision for loan loss................. 203 1,620 1,823
-------- ------------ --------
Net interest income after provision for
loan loss.............................. 8,004 9,462 17,466
Noninterest income...................... 216 3,079 3,295
Noninterest expense..................... 5,787 10,444 16,231
-------- ------------ --------
Income before taxes..................... 2,433 2,097 4,530
Taxes on income (loss).................. 1,232 734 1,966
-------- ------------ --------
NET INCOME........................ $ 1,201 $ 1,363 $ 2,564
-------- ------------ --------
-------- ------------ --------
Earnings per share...................... $ 0.78 $ 0.76 $ 0.85
Weighted average shares outstanding..... 1,540 1,791 3,000
</TABLE>
16
<PAGE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MID-PENINSULA &
MID-PENINSULA CUPERTINO ADJUSTMENTS CUPERTINO COMBINED
----------------- ------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Interest and fees on loans and leases... $ 8,492 $ 11,895 $ 20,387
Interest on investment securities....... 1,518 975 2,493
Interest on federal funds sold/ other
interest income........................ 514 463 977
-------- ------------ --------
TOTAL INTEREST INCOME............. 10,524 13,333 23,857
Interest on deposits.................... 3,331 3,166 6,497
-------- ------------ --------
Net interest income..................... 7,193 10,167 17,360
Provision for loan loss................. 266 1,679 1,945
-------- ------------ --------
Net interest income after provision for
loan loss.............................. 6,927 8,488 15,415
Noninterest income...................... 424 3,154 3,578
Noninterest expense..................... 4,936 10,224 15,160
-------- ------------ --------
Income before taxes..................... 2,415 1,418 3,833
Taxes on income......................... 935 538 1,473
Cumulative effect of change in
accounting principles.................. 83 -- 83
-------- ------------ --------
NET INCOME........................ $ 1,563 $ 880 $ 2,443
-------- ------------ --------
-------- ------------ --------
Earnings per share...................... $ 1.04 $ 0.50 $ 0.84
Weighted average shares outstanding..... 1,503 1,745 2,926
</TABLE>
17
<PAGE>
INTRODUCTION
This Joint Proxy Statement/Prospectus is being furnished by Mid-Peninsula to
the holders of Mid-Peninsula Shares in connection with the solicitation of
proxies by the Mid-Peninsula Board for use at the Mid-Peninsula Meeting to be
held at 5:00 p.m., California time, on October 30, 1996, at Mid-Peninsula Bank,
located at 420 Cowper Street, Palo Alto, California and any adjournment or
adjournments thereof. One purpose of both the Cupertino Meeting and the
Mid-Peninsula Meeting is to consider and vote on a proposal to approve the
principal terms of the Reorganization Agreement. As a result of the Merger,
Cupertino will be merged on a merger of equals basis with and into Mid-
Peninsula. Pursuant to the terms of the Reorganization Agreement, at the
Effective Time of the Merger, each Cupertino Share issued and outstanding
immediately prior to the consummation of the Merger (other than shares as to
which statutory dissenters' rights are perfected) will automatically, and
without any action on the part of the holder thereof, be canceled and converted
into the right to receive 0.81522 Bancorp Share. Each Mid-Peninsula Share issued
and outstanding immediately prior to the consummation of the Merger shall remain
outstanding as a share of Bancorp.
THE SHAREHOLDERS OF MID-PENINSULA WILL ALSO CONSIDER AND VOTE ON PROPOSALS
WHICH ARE CONDITIONS TO THE MERGER AND WILL NOT TAKE EFFECT UNLESS THE MERGER IS
CONSUMMATED: (i) To amend the bylaws of Mid-Peninsula to provide for a range in
the authorized number of directors of not less than seven nor more than thirteen
and to fix the number of directors at ten until changed as provided in the
bylaws; (ii) to amend the articles of incorporation to establish super-majority
voting requirements equal to a two-thirds vote of the Board of Directors
applicable to certain matters, including (a) a merger, sale of control or sale
of material assets of Bancorp, (b) material acquisitions by Bancorp, (c)
creation of new business units of Bancorp, MPB or CNB, (d) material changes in
operating budgets of Bancorp, MPB or CNB, (e) material changes in the business
organization or organizational structure of Bancorp, MPB or CNB, (f) termination
of any executive or senior officer appointed to the Executive Management
Committee of Bancorp, and (g) any change in the authorized range of directors of
Bancorp; (iii) to approve the adoption of the Bancorp Option Plan and to
authorize an increase in the number of shares issuable by Bancorp pursuant to
all stock option plans of Bancorp from 457,037 to 967,890 shares; (iv) to amend
the articles of incorporation of Mid-Peninsula to change its name to Greater Bay
Bancorp.
The Mid-Peninsula shareholders will also be asked to amend the articles of
incorporation regarding liability of directors and indemnification of agents,
and to approve entering into certain indemnification agreements between Bancorp
and its directors, officers and other agents, including future officers and
directors. THIS PROPOSAL IS NOT A CONDITION TO THE MERGER, BUT IF APPROVED WILL
NOT TAKE EFFECT UNLESS THE MERGER IS CONSUMMATED.
This Joint Proxy Statement/Prospectus also constitutes the prospectus of
Mid-Peninsula with respect to the Bancorp Shares to be issued pursuant to the
Reorganization Agreement. It is presently anticipated that approximately
1,560,500 Bancorp Shares will be issued pursuant to the Reorganization Agreement
and the transactions which are described therein. Based on the fully diluted
number of Mid-Peninsula Shares outstanding on the Mid-Peninsula Record Date, the
Bancorp Shares anticipated to be issued to Cupertino shareholders pursuant to
the Reorganization Agreement will represent approximately 49% of the fully
diluted Bancorp Shares outstanding following the Merger.
THE MID-PENINSULA BOARD HAS APPROVED THE REORGANIZATION AGREEMENT, THE
ISSUANCE OF THE BANCORP SHARES PURSUANT THERETO, AND THE TRANSACTIONS
CONTEMPLATED THEREBY. THE MID-PENINSULA BOARD BELIEVES THAT THE TERMS OF THE
MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF
MID-PENINSULA AND RECOMMENDS THAT THE HOLDERS OF MID-PENINSULA SHARES VOTE TO
APPROVE THE PROPOSALS DESCRIBED ABOVE AT THE MID-PENINSULA MEETING. SEE "THE
MERGER -- Recommendation of the Boards of Directors and Reasons for the Merger."
18
<PAGE>
This Joint Proxy Statement/Prospectus is also being furnished by Cupertino
to the holders of Cupertino Shares in connection with the solicitation of
proxies by the Cupertino Board for use at the Cupertino Meeting to be held 5:00
p.m. California time, on October 30, 1996 at the Saratoga Country Club, located
at 1990 Prospect Road, Saratoga, California, and any adjournment or adjournments
thereof. The purpose of the Cupertino Meeting is to consider and vote upon a
proposal to approve the principal terms of the Reorganization Agreement.
THE CUPERTINO BOARD HAS APPROVED THE REORGANIZATION AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY. THE CUPERTINO BOARD BELIEVES THAT THE TERMS
OF THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE SHAREHOLDERS OF
CUPERTINO AND RECOMMENDS THAT THE HOLDERS OF CUPERTINO SHARES VOTE TO APPROVE
THE PRINCIPAL TERMS OF THE REORGANIZATION AGREEMENT AT THE CUPERTINO MEETING.
SEE "THE MERGER -- Recommendation of the Boards of Directors and Reasons for the
Merger."
The principal executive offices of Mid-Peninsula are located at 420 Cowper
Street, Palo Alto, California 94301. The principal executive offices of
Cupertino are located at 20230 Stevens Creek Boulevard, Cupertino, California
95014.
THE MID-PENINSULA MEETING
RECORD DATE
The Mid-Peninsula Board has fixed the close of business on September 9, 1996
(the "Mid-Peninsula Record Date"), as the record date for the determination of
shareholders entitled to notice of, and to vote at, the Mid-Peninsula Meeting.
Accordingly, only holders of record of Mid-Peninsula Shares at the close of
business on the Mid-Peninsula Record Date will be entitled to vote at the Mid-
Peninsula Meeting and any adjournment thereof. As of the Mid-Peninsula Record
Date, there were 1,637,593 Mid-Peninsula Shares outstanding held by
approximately 560 shareholders of record.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the Mid-Peninsula Meeting and does
not return the signed proxy card, such holder's shares will not be voted and
this will have the effect of a vote against the matters to be voted on at the
Mid-Peninsula Meeting. Shareholders are urged to mark the box on the proxy card
to indicate how the shares represented by the proxy card are to be voted. If a
shareholder returns a signed proxy card but does not indicate how his or her
shares are to be voted, such shares will be voted "FOR" all proposals. The proxy
card also confers discretionary authority on the individuals appointed by the
Mid-Peninsula Board named on the proxy card to vote the shares represented
thereby on any other matter that is properly presented for action at the
Mid-Peninsula Meeting. No matters other than those set forth in this Joint Proxy
Statement/Prospectus, and appropriate procedural matters, may be considered at
the Mid-Peninsula Meeting. A shareholder who has given a proxy may revoke it at
any time prior to its exercise at the Mid-Peninsula Meeting by delivering an
instrument of revocation to the Secretary of Mid-Peninsula, by duly executing
and submitting a proxy card bearing a later date, or by appearing at the Mid-
Peninsula Meeting and voting in person. The mere presence at the Mid-Peninsula
Meeting of the person who has given a proxy will not revoke such proxy. In
addition, brokers who hold Mid-Peninsula Shares as nominees will not have
discretionary authorization to vote such shares on any of the matters to be
voted thereon in the absence of written instructions from the beneficial owners.
COSTS OF SOLICITATION OF PROXIES
Proxies will be solicited through the use of the mail. In addition, certain
directors, officers and employees of Mid-Peninsula may solicit proxies (for no
additional compensation) by personal interview, telephone, telex, telegram or
similar means of communication. All costs of solicitation will be borne by
Mid-Peninsula.
19
<PAGE>
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding Mid-Peninsula Shares is necessary to
constitute a quorum at the Mid-Peninsula Meeting. Abstentions will be counted
for purposes of establishing a quorum and will have the same legal effect as a
vote against the adoption of the proposals to be voted upon.
VOTE REQUIRED
Mid-Peninsula shareholders are entitled to one vote at the Mid-Peninsula
Meeting for each Mid-Peninsula Share held of record by them on the Mid-Peninsula
Record Date. All proposals require the affirmative vote of a majority of the
outstanding shares entitled to vote, either in person or by properly executed
proxies, except that Proposal Number 6 with respect to approval of the Bancorp
Option Plan and of the increase in the number of shares issuable under all
Bancorp stock option plans requires the approval of a majority of the
Mid-Peninsula Shares present or represented by proxy and entitled to vote at the
Mid-Peninsula Meeting. Under applicable California law, (1) an abstention with
respect to any proposal will be counted in determining the presence of a quorum
and will have the same effect as a vote against the proposal, and (2) a broker
non-vote will not be counted in determining the presence of a quorum with
respect to any proposal and will have no effect on the outcome of the proposal.
As of the Mid-Peninsula Record Date, directors and executive officers of
Mid-Peninsula beneficially owned an aggregate of 340,309 Mid-Peninsula Shares
(not including shares issuable upon exercise of stock options), or approximately
20% of those outstanding as of the Mid-Peninsula Record Date. Mid-Peninsula has
been advised that all of its directors and executive officers intend to vote all
such shares in favor of the proposal to approve the principal terms of the
Reorganization Agreement and in favor of the related proposals to be presented
at the Mid-Peninsula Meeting. See "THE MERGER -- Agreements with Certain
Shareholders."
THE CUPERTINO MEETING
RECORD DATE
The Cupertino Board has fixed the close of business on September 9, 1996
(the "Cupertino Record Date") as the record date for the determination of
shareholders entitled to notice of, and to vote at, the Cupertino Meeting.
Accordingly, only holders of record of Cupertino Shares at the close of business
on the Cupertino Record Date will be entitled to vote at the Cupertino Meeting.
As of the Cupertino Record Date, there were 1,905,958 Cupertino Shares
outstanding held by approximately 380 shareholders of record.
PROXIES
When a proxy card is returned, properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a shareholder does not attend the Cupertino Meeting and if a
shareholder does not return the signed proxy card, such holder's shares will not
be voted and this will have the effect of a vote against the approval of the
principal terms of the Reorganization Agreement. Shareholders are urged to mark
the box on the proxy card to indicate how their shares are to be voted. If a
shareholder returns a signed proxy card but does not indicate how the shares
represented by the proxy card are to be voted, such shares will be voted "FOR"
approval of the principal terms of the Reorganization Agreement. The proxy card
also confers discretionary authority on the individuals appointed by the
Cupertino Board named on the proxy card to vote the shares represented thereby
on any other matter that is properly presented for action at the Cupertino
Meeting. No matters other than those set forth in this Joint Proxy
Statement/Prospectus, and appropriate procedural matters, may be considered at
the Cupertino Meeting. A shareholder who has given a proxy may revoke it at any
time prior to its exercise at the Cupertino Meeting by delivering an instrument
of revocation to the Secretary of Cupertino, by duly executing and submitting a
proxy card bearing a later date, or by appearing at the Cupertino Meeting and
voting in person. The mere presence at the Cupertino Meeting of the person who
has given a proxy will not revoke such proxy. In
20
<PAGE>
addition, brokers who hold Cupertino Shares as nominees will not have
discretionary authority to vote such shares in connection with the proposal to
approve the principal terms of the Reorganization Agreement in the absence of
written instructions from the beneficial owners.
COSTS OF SOLICITATION OF PROXIES
Proxies will be solicited through the use of the mail. In addition, certain
directors, officers and employees of Cupertino may solicit proxies (for no
additional compensation) by personal interview, telephone, telex, telegram or
similar means of communication. All costs of solicitation will be borne by
Cupertino.
QUORUM
The presence, either in person or by properly executed proxies, of the
holders of a majority of the outstanding Cupertino Shares is necessary to
constitute a quorum at the Cupertino Meeting. Abstentions will be counted for
purposes of establishing a quorum and will have the same legal effect as a vote
against the adoption of the proposal to be voted upon.
VOTE REQUIRED
Cupertino shareholders are entitled to one vote at the Cupertino Meeting for
each Cupertino Share held of record by them on the Cupertino Record Date. The
proposal concerning the approval of the principal terms of the Reorganization
Agreement requires the affirmative vote of the holders of a majority of the
outstanding Cupertino Shares, either in person or by properly executed proxies.
Under applicable California law, (1) an abstention with respect to the proposal
will be counted in determining the presence of a quorum and will have the same
effect as a vote against the proposal, and (2) a broker non-vote will not be
counted in determining the presence of a quorum with respect to the proposal and
will have no effect on the outcome of the proposal.
As of the Cupertino Record Date, directors and executive officers of
Cupertino (including the executive officers of CNB) beneficially owned an
aggregate of 485,100 Cupertino Shares (not including shares issuable upon
exercise of stock options), or approximately 25% of those outstanding as of the
Cupertino Record Date. Cupertino has been advised that all such shares will be
voted in favor of the proposal to approve the principal terms of the
Reorganization Agreement. See "THE MERGER -- Agreements with Certain
Shareholders."
PROPOSAL NUMBER 1
TO APPROVE THE PRINCIPAL TERMS OF THE REORGANIZATION AGREEMENT PURSUANT TO
WHICH, AMONG OTHER THINGS, CUPERTINO WILL BE MERGED ON A MERGER OF EQUALS BASIS
WITH AND INTO MID-PENINSULA AND MID-PENINSULA WILL CHANGE ITS NAME TO GREATER
BAY BANCORP. UPON CONSUMMATION OF THE MERGER, EACH OUTSTANDING CUPERTINO SHARE
WILL BE CONVERTED INTO THE RIGHT TO RECEIVE 0.81522 BANCORP SHARE IN A TAX-FREE
EXCHANGE.
THE MERGER
The Reorganization Agreement provides for the merger of Cupertino on a
merger of equals basis with and into Mid-Peninsula, with Mid-Peninsula surviving
the Merger and changing its name to Greater Bay Bancorp. The obligation of the
parties to consummate the Merger is subject to the satisfaction of certain
conditions, including the approval of the principal terms of the Reorganization
Agreement by the shareholders of Mid-Peninsula and Cupertino. See "THE
REORGANIZATION AGREEMENT -- Conditions to the Merger" and "THE MERGER --
Regulatory Approvals."
BACKGROUND OF THE MERGER
MID-PENINSULA. The following is a brief description of the events which
resulted in the execution of the Reorganization Agreement by Mid-Peninsula and
Cupertino on August 20, 1996.
21
<PAGE>
The Mid-Peninsula Board has periodically considered various alternatives to
increase the value of the Mid-Peninsula franchise and provide greater return to
shareholders. The acquisition of WestCal National Bank and its holding company
in October 1994 was accomplished to help achieve the goals of (i) developing a
greater banking presence in Santa Clara and San Mateo counties by increasing the
number of banking offices of the combined banks to three, (ii) producing an
entity better able to meet competitive challenges inherent in the banking
industry, (iii) allowing the combined banks to maximize utilization of capital,
and (iv) providing an opportunity to take advantage of the operating
efficiencies which the combination of the banks made available.
Although the acquisition of WestCal National Bank gave Mid-Peninsula an
entry into the northern San Mateo county market, Mid-Peninsula still lacked
significant market share in Santa Clara county south of Palo Alto. Accordingly,
when the management of Mid-Peninsula became aware of other potential
opportunities for mergers or acquisitions during the period since the WestCal
acquisition, the Mid-Peninsula Board authorized further inquiries, as a result
of which informal discussions were held with three different banks, two located
in San Mateo county and one located in Santa Clara county. These discussions did
not progress beyond informal discussions and did not include Cupertino or CNB.
In December 1995, representatives of Alex. Brown first called on
Mid-Peninsula to discuss with management Mid-Peninsula's strategic direction and
potential merger opportunities, including the possibility of a merger of equals
between Mid-Peninsula and Cupertino. In subsequent meetings, Alex. Brown
provided financial information and analysis for review by Mid-Peninsula,
including an analysis of the potential combination of Cupertino and
Mid-Peninsula. On February 26, 1996, by authorization of the Mid-Peninsula
Board, a letter expressing an interest in such a transaction was transmitted by
Mid-Peninsula to the Cupertino Board. After consideration of this letter,
Cupertino preliminarily retained the banking finance and advisory firm of Smith
& Crowley, Inc., of San Francisco, California to advise the Cupertino Board
regarding the Mid-Peninsula expression of interest.
Members of Mid-Peninsula and Cupertino Board committees met six times
between March 13, 1996, and April 23, 1996 for further discussions, as a result
of which Mid-Peninsula submitted to the Cupertino Board a revised letter dated
April 30, 1996 (the "April 30 Letter"). The April 30 Letter superseded in its
entirety the letter of February 26, 1996, expressed continued interest in a
merger with Cupertino, set forth on a non-binding basis certain proposed
material terms resulting from the previous discussions between the parties since
the delivery of the prior letter, and indicated a desire that the parties would
use their best efforts to negotiate and enter into a definitive agreement of
merger at the earliest practicable date, but not later than May 31, 1996. The
April 30 Letter also invited Cupertino specifically to advise Mid-Peninsula of
any concerns which it might have but did not believe to be satisfactorily
addressed in the April 30 Letter.
The Cupertino Board, responding by letter of its Chairman, John M. Gatto,
dated May 6, 1996 (the "May 6 Letter"), expressed its desire also to proceed
towards the execution of a definitive agreement by the parties, identified
Cupertino's chosen legal counsel and financial advisor with respect to the
proposed transaction, and presented certain matters for consideration, both to
clarify the parties' general understandings and to identify certain logistical
items some of which, the letter stated, would need to be addressed in a
definitive agreement. Mid-Peninsula had a special board meeting on May 7, 1996,
to discuss the May 6 Letter and review projections, at the end of which the
Mid-Peninsula Board authorized management to retain Alex. Brown as its financial
advisor and to advise Mid-Peninsula legal counsel to commence drafting a
definitive agreement for review by the parties. At the same time and at
Cupertino's request stated in the May 6 Letter, the parties entered into a
confidentiality agreement dated May 8, 1996, permitting the parties and their
agents and advisors on a confidential basis to confer and to conduct due
diligence investigations regarding each other's business, financial and legal
affairs. The terms of Alex. Brown's engagement were substantially agreed upon by
May 10, 1996.
22
<PAGE>
The parties continued on an almost daily basis throughout the month of May
to confer and discuss proposed terms of a definitive agreement and to conduct
due diligence investigations. On May 28, 1996, Mid-Peninsula executed an
engagement letter formally retaining Alex. Brown to provide ongoing investment
banking advice and services as well as with respect to the proposed transaction.
Representatives of Alex. Brown attended a meeting of the Mid-Peninsula Board on
June 4, 1996, at which the Mid-Peninsula Board approved the Reorganization
Agreement, and rendered an oral opinion that, as of such date, the Conversion
Ratio pursuant to the Reorganization Agreement was fair, from a financial point
of view, to the holders of Mid-Peninsula Shares. The Alex. Brown Opinion was
confirmed in writing on June 5, 1996, the date when the Reorganization Agreement
was originally executed and public announcement of it was first made.
In approving the Reorganization Agreement, the Mid-Peninsula Board
considered, among other matters, the following :
- That the Merger would provide geographic expansion and greater market
presence in contiguous markets.
- That the Merger would make Mid-Peninsula more competitive in the middle
market with increased assets in excess of $500 million and an increased
lending limit.
- That MPB would obtain access to services which it currently does not
offer, including trust and investment services, venture lending, Small
Business Administration lending and asset based lending.
- That, as a result of the Merger, Mid-Peninsula would achieve a size and
critical mass which it could not realize on a standalone basis for several
years.
- That Bancorp would be the only independent bank holding company with
offices from San Mateo to San Jose, California, and the third largest
independent bank holding company in the San Francisco Bay area.
- That the Merger could potentially result in increased liquidity and
greater long-term value for Mid-Peninsula shareholders.
An amended and restated Reorganization Agreement was executed June 26, 1996,
in order to make certain necessary technical corrections concerning the delivery
of various documents related to the Merger. A Second Amended and Restated
Agreement was executed as of August 20, 1996, to make further technical
corrections and to delete from the agreement certain conditions with respect to
employment agreements.
CUPERTINO -- The following is brief a description of the events which
resulted in the execution of the Reorganization Agreement by Cupertino and
Mid-Peninsula on August 20, 1996.
In late 1994 and early 1995, there was significant executive level turnover
at Cupertino and the Cupertino Board began to evaluate the long-term prospects
and opportunities for Cupertino to determine the best strategic alternatives,
including to remain independent, to sell, to acquire or to look for a "merger of
equals" partner. During this time period Cupertino established an Executive
Management Committee ("EMC"), which was comprised originally of Steven C. Smith,
Executive Vice President and Chief Operating Officer of Cupertino and CNB, C.
Donald Allen, Chairman and Chief Executive Officer of CNB and President and
Chief Executive Officer of Cupertino, and Kenneth D. Brenner, Executive Vice
President, Strategic Marketing of CNB and two members who are no longer with
Cupertino, to manage the day-to-day operations of Cupertino and CNB. During late
1994, Cupertino had received overtures regarding an opportunity to be acquired
by another financial institution within its market area. The Board of Directors
determined at that time that combining with an organization that had stable
management would be in the best interests of Cupertino and its shareholders and
entered into a confidentiality agreement to begin the process toward a business
combination. However, after approximately two months it became apparent that the
philosophies of the two companies were not compatible and merger discussions
were terminated.
23
<PAGE>
During this period, the EMC recruited two new members to its ranks, David R.
Hood, Executive Vice President and Senior Lending Officer of CNB, and Hall
Palmer, Executive Vice President and Senior Trust Officer of CNB. Additionally,
the EMC was successful in recruiting a new manager for its Venture Lending
division, which had been formed in mid-1994. With these additions and the
settlement of a significant lawsuit relating to its trust operations,
Cupertino's business began to show significant improvement and the Cupertino
Board began to reassess Cupertino's strategic direction.
During mid-1995, the Cupertino Board and management held a retreat where the
direction of Cupertino was discussed. While a consensus emerged that the
long-term prospects for Cupertino were improving, management and the Cupertino
Board realized that the banking environment was changing rapidly through
consolidation and that to effectively compete in the long term would require
significant growth, through internal means or through mergers and acquisitions.
The Cupertino Board and management also recognized that, to raise capital for
growth or to merge, it was imperative to improve the operating results and
increase the price of Cupertino's stock.
Over the next several months, Cupertino's results continued to improve, and
its stock price increased from a low of $7.95 in May 1995 to $15.00 in December
1995, adjusted for stock dividends. In late 1995, Cupertino began to engage in
exploratory discussions with other financial institutions regarding the
possibility of combining to improve market share and compete effectively. Two
financial institutions expressed interest in writing and Cupertino's Chairman
met with the Chairman of Mid-Peninsula, one of the interested financial
institutions, in mid-February 1996, to review the possibility of a business
combination. During this same period, the Chief Operating Officer of Cupertino
met with the executive management of the other financial institution which had
expressed an interest in combining with Cupertino. The written expressions of
interest were reported in detail to the Cupertino Board and it was determined
that a meeting to review the strategic direction of Cupertino should be
conducted to ensure that the strategic direction chosen for Cupertino was in the
best long-term interest of the Cupertino shareholders.
The investment banking firm of Smith & Crowley was engaged to evaluate
Cupertino's strategic options, as well as to review the two specific
alternatives before the Cupertino Board. On March 2, 1996, Smith & Crowley
presented to the Cupertino Board and management its analysis concerning the
strategic alternatives available to Cupertino. The Cupertino Board determined
that Cupertino had a valuable franchise that needed to continue to grow to
enhance shareholder value. It also determined that the shareholders would be
best served by expanding on the Peninsula and maintaining a commitment to the
commercial business, real estate, trust and venture lending business model that
was beginning to show significant promise. The Cupertino Board considered it
imperative to only pursue opportunities where superior client service and a
focus on quality would be the standard of a combined financial services
organization. In addition, the Cupertino Board concluded that it was important
to retain influence at the Board and management level to ensure that the
interests of Cupertino's shareholders were addressed. The Cupertino Board
finally determined that unless an acceptable merger partner was identified with
appropriate attributes, that the best strategy for Cupertino was to continue to
grow in the near term on a standalone basis.
The Cupertino Board established a merger and acquisition committee ("the M&A
Committee") comprised of John Gatto, Chairman of Cupertino, Rex Lindsay, Vice
Chairman of Cupertino, C. Donald Allen, President and Chief Executive Officer of
Cupertino and Steven C. Smith, Executive Vice President and Chief Operating
Officer of Cupertino to further explore the opportunities presented by the two
interested financial institutions. The M&A Committee then held a meeting to
determine their strategy to evaluate the options presented. It was decided that
initial meetings with their counterparts at both institutions would be the best
way to begin the process, and meetings were scheduled during April 1996 to
evaluate the two institutions. During the course of the meetings, a wide range
of topics was discussed, including strategic direction, client service issues,
shareholder value concerns, employee relations and business opportunities. After
each meeting with the other
24
<PAGE>
institutions counterparts, the M&A Committee met to evaluate the isues. After a
thorough analysis, it was determined that a special meeting of the Cupertino
Board could be called to evaluate the alternatives.
At a special meeting of the Cupertino Board, held on May 2, 1996, the
alternatives, including a retain and grow strategy, were reviewed. After
detailed discussions and analysis, it was determined that the opportunity to
proceed with a merger of equals transaction with Mid-Peninsula would provide the
best long-term value to the shareholders as well as the clients and employees of
Cupertino. In that regard, and with the advice of its advisors, the Cupertino
Board voted unanimously to enter into a confidentiality agreement with
Mid-Peninsula and to communicate to the other interested party the decision to
pursue a different option. The Cupertino Board also reviewed alternative
investment banking firms to provide financial analysis and a fairness opinion on
the transaction and ultimately selected Sutro as its advisor. The Board also
authorized management to obtain additional independent resources to evaluate the
financial and legal position of Mid-Peninsula. Cupertino hired Manatt, Phelps &
Phillips, LLP, a law partnership, Coopers & Lybrand, L.L.P., a certified public
accounting firm and Garrett & Associates, a loan review firm (collectively "the
Advisors") to assist in the review of the financial condition of Mid-Peninsula.
A confidentiality agreement with Mid-Peninsula was entered into on May 8,
1996 and due diligence began immediately. Over the course of the next several
weeks, the due diligence process was completed and on June 5, 1996, the Board of
Directors met to review the final results of the due diligence process and to
review the Reorganization Agreement and related agreements which had been
negotiated during this time period. The Advisors presented their findings to the
Board of Directors which indicated they had no serious concerns regarding the
financial condition or operations of Mid-Peninsula. Sutro presented its findings
and draft fairness opinion which indicated that from a financial point of view
the transaction was fair to Cupertino's shareholders. Based on this advice and
following substantial discussion and analysis, the Cupertino Board voted
unanimously to approve the Merger.
An amended and restated Reorganization Agreement was executed June 26, 1996,
in order to make certain necessary technical corrections concerning the delivery
of various documents related to the Merger. A Second Amended and Restated
Agreement was executed as of August 20, 1996, to make further technical
corrections and to delete from the agreement certain conditions with respect to
employment agreements.
RECOMMENDATION OF THE BOARDS OF DIRECTORS AND REASONS FOR THE MERGER
MID-PENINSULA. The Mid-Peninsula Board unanimously approved the Merger at a
meeting on June 4, 1996. The Mid-Peninsula Board believes that the terms of the
Merger are fair to, and in the best interests of, Mid-Peninsula and its
shareholders and unanimously recommends that the shareholders of Mid-Peninsula
vote "FOR" approval of the principal terms of the Reorganization Agreement.
In reaching its conclusion, the Mid-Peninsula Board considered certain
information, including, among other things, (i) information concerning the
financial performance and condition, business operations, capital levels, asset
quality, loan portfolio breakdown and prospects of Cupertino; (ii) the structure
of the transaction, including the fact that Mid-Peninsula shareholders would
retain approximately 51% of the common equity of Bancorp on a fully diluted
basis, Mr. Kalkbrenner would continue to serve as Chief Executive Officer of
Bancorp, and the Board of Directors of Bancorp would comprise five directors
designated by the Mid-Peninsula Board and five directors designated by the
Cupertino Board; (iii) the principal terms of the Reorganization Agreement, the
Option Agreements and other documents to be executed in connection with the
Merger, and its review of such documents with its financial and legal advisors;
(iv) the presentation of Alex. Brown, (v) the opinion of Alex. Brown that the
Conversion Ratio is fair to the shareholders of Mid-Peninsula from a financial
point of view; (vi) the Mid-Peninsula Board's review with its financial advisors
of alternatives to the Merger, the
25
<PAGE>
range of possible values to Mid-Peninsula shareholders obtainable through
implementation of alternatives and the timing and likelihood of the same; (vii)
the Mid-Peninsula Board's review with its financial advisors of other merger
targets; (viii) the compatibility of Cupertino with Mid-Peninsula and their
complementary lines of business; (ix) the geographic distribution of CNB offices
relative to Mid-Peninsula's strategic plan; (x) the ability of a larger
institution to compete in the current and anticipated banking environment and to
leverage the expense structure; (xi) the effect of the Merger on existing
shareholders, employees, officers and customers of Mid-Peninsula; (xii) the
current and prospective economic environment and regulatory and competitive
burdens and constraints facing commercial banks; (xiii) the impact of the Merger
on the communities served by MPB and CNB, and the increased ability to serve the
communities through the larger branch office network; (xiv) the results of the
due diligence conducted as to the financial condition of Cupertino and the
prospects of economic viability of the combined institution; and (xv) the pro
forma financial statements of the combined companies and the capitalization of
the combined companies in excess of "well capitalized" requirements of federal
regulatory agencies.
In addition, in analyzing the proposed transaction, the Mid-Peninsula Board
considered that CNB possesses an excellent commercial and retail deposit base
which complements MPB's commercial focus and provides broader geographic
coverage of strategic target markets already identified and initially penetrated
by MPB. The larger size of the combined company would increase shareholder
liquidity, make future acquisitions more possible, leverage the expense
structure and increase the lending limit. The fixed Conversion Ratio of 0.81522
provides shareholders of Cupertino with a premium over the market price for
their stock. In determining the Conversion Ratio, Mid-Peninsula and Alex. Brown
analyzed the relative contributions of each company relative to: assets, loans,
non-performing assets ("NPAs"), allowance for loan and lease losses ("ALLL"),
deposits, equity, tangible equity, loans/deposits, NPAs/assets, ALLL/NPAs,
equity/assets, net interest income, non-interest income, non-interest expense,
provision for taxes, net income, return on assets and return on equity. After
significant discussion and analysis of a number of factors, not all of which are
set forth herein, the parties, with the assistance of Alex. Brown and Sutro,
arrived at a determination that the 51%/49% ownership of Bancorp, on a fully
diluted basis, was appropriate.
The Mid-Peninsula Board did not assign any specific or relative weights to
the factors considered above.
CUPERTINO. The Cupertino Board approved the Merger at its meeting on June
5, 1996. The Cupertino Board believes that the terms of the Merger are fair to,
and in the best interests of Cupertino and its shareholders and recommends that
the shareholders of Cupertino vote "FOR" approval of the principal terms of the
Reorganization Agreement.
In reaching its conclusion, the Cupertino Board considered information
provided at meetings held on June 4, 1996, including, among other things, (i)
information concerning the financial performance and condition, business
operations, capital levels, asset quality, loan portfolio breakdown and
prospects of Mid-Peninsula; (ii) the structure of the transaction, including the
fact that Cupertino shareholders would retain approximately 49% of the common
equity of Bancorp on a fully diluted basis, and that MPB and CNB will continue
to operate as separate entities unless a two-thirds majority of the Board of
Directors of Bancorp determines otherwise; (iii) the fact that Steven C. Smith
would serve as Executive Vice President, Chief Operating Officer and Chief
Financial Officer of Bancorp, that David R. Hood would serve as Executive Vice
President and Chief Credit Officer of Bancorp, and that the Board of Directors
of Bancorp would be comprised of five directors designated by the Cupertino
Board and five directors designated by the Mid-Peninsula Board; (iv) the
principal terms of the Reorganization Agreement, the Option Agreements, and
other documents to be executed in connection with the Merger; (v) the
presentation of Sutro and the opinion of Sutro that the Merger is fair to the
shareholders of Cupertino from a financial point of view; (vi) the results of
its due diligence examination of Mid-Peninsula; (vii) the terms of other recent
comparable combinations of bank holding companies; (viii) the Cupertino Board's
review with its financial advisors of alternatives to the Merger; (ix) the fact
that a two-thirds vote of the Board of Directors of Bancorp will be required to
effectuate certain
26
<PAGE>
material changes with respect to Bancorp, MPB and CNB; (x) the current and
prospective economic environment and regulatory and competitive burdens and
constraints facing community banks; and (xi) the pro forma financial statements
of the combined companies and the capitalization of the combined companies in
excess of "well capitalized" requirements of federal regulatory agencies.
The Cupertino Board did not assign any specific or relative weights to the
factors considered above.
OPINION OF MID-PENINSULA FINANCIAL ADVISOR
Mid-Peninsula retained Alex. Brown to provide certain investment banking
advice and services, including advice with respect to the Merger and related
matters. Alex. Brown was selected to act as Mid-Peninsula's financial advisor
based upon its qualifications, expertise and reputation, as well as its
familiarity with Mid-Peninsula's business and market area. Alex. Brown regularly
publishes research reports regarding the financial services industry and the
businesses and securities of publicly owned companies in that industry.
Representatives of Alex. Brown attended a meeting of the Mid-Peninsula Board
on June 4, 1996 at which the Mid-Peninsula Board approved the Reorganization
Agreement. At such meeting, Alex. Brown made a presentation to the Mid-Peninsula
Board and rendered an oral opinion (the "Alex. Brown Opinion") to the
Mid-Peninsula Board that, as of such date, the Conversion Ratio pursuant to the
Reorganization Agreement was fair, from a financial point of view, to the
holders of Mid-Peninsula Shares. The Alex. Brown Opinion was confirmed in
writing as of June 5, 1996 and reaffirmed as of the date of this Joint Proxy
Statement/Prospectus. Alex. Brown relied upon analyses such as those described
below in connection with rendering the Alex. Brown Opinion and providing its
written opinion as of the date hereof. No limitations were imposed by the
Mid-Peninsula Board upon Alex. Brown with respect to the investigations made or
procedures followed by it in rendering the Alex. Brown Opinion or the written
confirmation thereof.
THE FULL TEXT OF THE WRITTEN CONFIRMATION OF THE ALEX. BROWN OPINION, WHICH
SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS APPENDIX E AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF MID-PENINSULA ARE URGED TO
READ THE WRITTEN CONFIRMATION OF THE ALEX. BROWN OPINION IN ITS ENTIRETY. THE
ALEX. BROWN OPINION WAS DIRECTED TO THE MID-PENINSULA BOARD, ADDRESSES ONLY THE
FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONVERSION RATIO PURSUANT TO
THE REORGANIZATION AGREEMENT, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
SHAREHOLDER OF MID-PENINSULA AS TO HOW SUCH SHAREHOLDER SHOULD VOTE. THE ALEX.
BROWN OPINION WAS RENDERED TO THE MID-PENINSULA BOARD FOR ITS CONSIDERATION IN
DETERMINING WHETHER TO APPROVE THE REORGANIZATION AGREEMENT. THE FOLLOWING
SUMMARY OF THE ALEX. BROWN OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF THE WRITTEN CONFIRMATION OF THE ALEX. BROWN OPINION.
In arriving at the Alex. Brown Opinion, Alex. Brown reviewed certain
publicly available financial information and other information concerning
Mid-Peninsula and Cupertino and certain internal financial analyses and other
information furnished to it by Mid-Peninsula and Cupertino. Alex. Brown also
held discussions with members of the senior management of Mid-Peninsula and
Cupertino regarding the business and prospects of their respective financial
institutions and the joint prospects of the combined company. In addition, Alex.
Brown (i) reviewed the reported price and trading activity of the Mid-Peninsula
Shares and the Cupertino Shares, (ii) compared certain financial and stock
market information of Mid-Peninsula and Cupertino, respectively, with similar
information of certain comparable companies whose securities are publicly traded
(see "Opinion of Mid-Peninsula Financial Advisor -- ANALYSIS OF SELECTED
PUBLICLY TRADED COMPANIES"), (iii) reviewed the Reorganization Agreement, (iv)
reviewed the financial terms of certain recent business combinations which Alex.
Brown deemed comparable to the Merger, in whole or in part (see "Opinion of
Mid-Peninsula Financial Advisor -- ANALYSIS OF SELECTED MERGER OF EQUALS
TRANSACTIONS"), (v) reviewed the potential pro forma impact of the Merger on
Mid-Peninsula's financial condition, operating results and per share
27
<PAGE>
figures (see "Opinion of Mid-Peninsula Financial Advisor -- PRO FORMA MERGER
ANALYSIS") and (vi) performed such other studies and analyses and considered
such other factors as Alex. Brown deemed appropriate.
In conducting its review and arriving at the Alex. Brown Opinion, Alex.
Brown assumed and relied upon, without independent verification, the accuracy,
completeness and fairness of all of the financial and other information reviewed
by and discussed with them for purposes of rendering the Alex. Brown Opinion.
With respect to the financial forecasts and other information reviewed by Alex.
Brown in rendering the Alex. Brown Opinion (including, without limitation,
projected cost savings and revenue enhancements from the Merger), Alex. Brown
assumed that such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
respective managements of Mid-Peninsula and Cupertino as to the likely future
financial performance of Mid-Peninsula and Cupertino. Alex. Brown did not make
or obtain any independent evaluations or appraisals of the assets or liabilities
of either Mid-Peninsula or Cupertino or their respective subsidiaries, nor did
it review any individual loan files of Mid-Peninsula or Cupertino. Alex. Brown
is not an expert in the evaluation of allowances for loan losses, has not made
an independent evaluation of the adequacy of the allowance for loan losses set
forth in the balance sheets of Mid-Peninsula and Cupertino at March 31, 1996,
and has assumed such allowances were adequate and complied fully with applicable
law, regulatory policy and sound banking practice as of the date of such
financial statements. Alex. Brown assumed that the Merger will have the tax,
accounting and legal effects (including, without limitation, that the Merger
will be accounted for as a pooling of interests) described in the Reorganization
Agreement. Moreover, Alex. Brown also assumed that the Merger in all respects
is, and will be consummated, in compliance with all laws and regulations
applicable to Mid-Peninsula and Cupertino.
In connection with rendering the Alex. Brown Opinion, Alex. Brown performed
a variety of financial analyses, which are summarized below. While the following
summary describes all analyses and factors that Alex. Brown deemed material in
its presentation to the Mid-Peninsula Board, it is not a comprehensive
description of all analyses and factors considered by Alex. Brown. The
preparation of a fairness opinion is a complex process involving various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances
and, therefore, such an opinion is not readily susceptible to summary
description. Accordingly, notwithstanding the separate factors discussed below,
Alex. Brown believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by them,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying the Alex. Brown Opinion. No one of the
analyses performed by Alex. Brown was assigned a greater significance than any
other. The analyses performed by Alex. Brown are not necessarily indicative of
actual values or future results, which may be significantly more or less
favorable than suggested by such analyses. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. Additionally,
analyses relating to the values of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold. The Alex. Brown
Opinion is based on market, economic and other conditions as they existed and
could be evaluated as of the date of the Alex. Brown Opinion.
CONTRIBUTION ANALYSIS. Alex. Brown analyzed the contribution of
Mid-Peninsula and Cupertino to, among other things, total assets, total loans,
total deposits, total equity, total tangible equity, non-performing assets and
the allowance for loan losses of the pro forma Bancorp as of March 31, 1996 and
to, among other things, net interest income, the provision for loan losses,
non-interest income. non-interest expense, core revenue (net interest income
plus non-interest income), pre-tax, pre-provision income and net income of the
pro forma Bancorp for the twelve months ended March 31, 1996. Alex. Brown also
analyzed the contribution of Mid-Peninsula and Cupertino to net income on an
historic basis for 1991, 1992, 1993, 1994 and 1995, as well as on a projected
basis for 1996, 1997 and 1998 (based on estimates prepared by the respective
managements of Mid-Peninsula and Cupertino).
28
<PAGE>
The analysis showed, among other things, that based on Bancorp's pro forma
balance sheet as of March 31, 1996, Mid-Peninsula would contribute approximately
48% of total assets, approximately 44% of total loans, approximately 39% of the
allowance for loan losses, approximately 47% of total deposits, approximately
53% of total equity and total tangible equity, and none of the non-performing
assets of Bancorp.
The analysis also showed, among other things, that based on Bancorp's pro
forma income statements for the twelve months ended March 31, 1996,
Mid-Peninsula would contribute approximately 45% of net interest income,
approximately 42% of the provision for loan losses, approximately 27% of
non-interest income, approximately 33% of non-interest expense, approximately
43% of core revenue, approximately 62% of pre-tax, pre-provision income, and
approximately 63% of net income. The analysis further showed that on an historic
basis, Mid-Peninsula would have contributed approximately 38%, 44%, 64%, 47% and
62% of the net income in each of 1991, 1992, 1993, 1994 and 1995, respectively,
and approximately 59%, 52% and 48% of projected net income in each of 1996, 1997
and 1998, respectively.
With a Conversion Ratio of 0.81522 Bancorp Share per Cupertino Share, the
Mid-Peninsula shareholders would own approximately 51% of Bancorp, giving effect
to all outstanding options.
ANALYSIS OF SELECTED MERGER OF EQUALS TRANSACTIONS. In preparing the Alex.
Brown Opinion, Alex. Brown analyzed the financial terms, to the extent publicly
available, of certain selected merger of equals transactions which it deemed
comparable in whole or in part to the Merger. The merger of equals transactions
selected (the "Comparable Transactions") consisted of 16 transactions announced
since January 1990 between commercial banks and/or bank holding companies, as
well as between thrifts and/or thrift holding companies. Alex. Brown noted that
no transaction used in the selected merger of equals transaction analysis was
identical to the Merger. The analysis reviewed the relative contributions of
each of the parties to the mergers, as of the date of the most recent financial
information available prior to announcement of the transaction, with respect to
total assets, total deposits, total shareholders' equity, latest twelve months'
("LTM") net income, pro forma ownership, and the number of Board directorships.
The average contribution of the surviving party for each of these measures was
approximately 52%, 54%, 54%, 52%, 53% and 51%, respectively. Such statistics
were compared against the relative contributions of Mid-Peninsula in the Merger
(see "Opinion of Mid-Peninsula Financial Advisor -- Contribution Analysis").
Alex. Brown also calculated the merger consideration represented by the
conversion ratio in each of the Comparable Transactions relative to the target
company's LTM earnings per share, book value per share, tangible book value per
share, market value one day prior to announcement of the transaction, and 30
days prior to announcement of the transaction, and compared such multiples and
premiums to the implied multiples and premiums of the Merger, based on closing
prices of Mid-Peninsula and Cupertino of $20.75 and $14.00, respectively, on May
31, 1996. The mean multiple of LTM earnings per share in the Comparable
Transactions was 11.2x, compared to 19.0x in the Merger; the mean premium to
book value per share in the Comparable Transactions was 25.5%, compared to 61.9%
in the Merger; the mean premium to tangible book value per share in the
Comparable Transactions was 42.9%, compared to 61.9% in the Merger; the mean
premium to market value one day prior to announcement of the transaction in the
Comparable Transactions was 9.3%, compared to 20.8% in the Merger; and the mean
premium to market value 30 days prior to announcement of the transaction in the
Comparable Transactions was 9.8%, compared to 27.7% in the Merger. Alex. Brown
noted that each of the statistics for the Merger was within the range of
premiums and multiples paid in the Comparable Transactions.
Alex. Brown further compared the historical pro forma earnings per share and
book value per share pickup (dilution) to shareholders of the surviving party in
the Comparable Transactions, giving effect to the conversion ratio in each such
transaction, to the projected 1996 and 1997 earnings per share pickup (dilution)
for Mid-Peninsula shareholders resulting from the Merger. Based on this
29
<PAGE>
analysis, the projected 1996 earnings per share dilution resulting from the
Merger was 16.5%, compared to a range of 18.9% dilution to 11.4% pickup for the
Comparable Transactions. The mean earnings per share dilution for the Comparable
Transactions was 1.6%. Alex. Brown noted that, because of the timing of the
closing of the Merger, the pro forma projected 1996 earnings did not reflect any
of the projected cost savings or revenue enhancements of Bancorp. Giving effect
to such projected cost savings and revenue enhancements in 1997, the first full
year of combined operations of Bancorp, the projected earnings per share pickup
for Mid-Peninsula shareholders was 14.0%. The book value per share dilution for
Mid-Peninsula shareholders resulting from the Merger was (3.5)%, compared to a
range of (15.3)% dilution to 19.8% pickup, and a mean of (2.1)% dilution, for
the Comparable Transactions.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES. In arriving at the Alex.
Brown Opinion, Alex. Brown, using publicly available information, compared
selected financial and stock market information, including, among other things,
the composition of earning assets, loan and deposit growth, asset quality
ratios, loan loss reserve levels, net interest margin, the ratio of fee income
to total revenue, the ratio of general and administrative expenses to average
assets, the efficiency ratio, the ratio of net income to average assets and
average equity, capitalization ratios, and the multiple of price to book value,
tangible book value and LTM earnings, for Cupertino and a selected group of
banks and bank holding companies deemed similar, in whole or in part, to
Cupertino.
The group of banks and bank holding companies comprised selected California
institutions with total assets between $179.6 million and $433.4 million as of
March 31, 1996. A total of 10 institutions were included (the "Selected Banks").
As of May 31, 1996, the mean multiples implied by the market price of the common
stock of the Selected Banks to the Selected Banks' LTM earnings per share, book
value per share and tangible book value per share at or for the period ending
March 31, 1996 were 12.0x, 151.0% and 151.5%, respectively, for the Selected
Banks, and 14.6x, 134.0% and 134.0%, respectively, for Cupertino. Alex. Brown
noted that although Cupertino Shares traded at a premium to the average trading
level of the Selected Banks on a price to LTM earnings basis, reflecting
Cupertino's depressed earnings during that period, the Cupertino Shares traded
at a discount to the average trading level of the Selected Banks on a price to
book value and a price to tangible book value basis. Alex. Brown further noted
that no company used in the Selected Banks analysis was identical to Cupertino.
DISCOUNTED CASH FLOW ANALYSIS. Using a discounted cash flow analysis, Alex.
Brown prepared an estimated valuation of each of Mid-Peninsula, Cupertino and
Bancorp based on the present value of the future dividend streams and the
terminal value that each of Mid-Peninsula, Cupertino and Bancorp were estimated
to produce over a three and one-half year period ending December 31, 1999.
Projection ranges for Mid-Peninsula and Cupertino were provided by the
respective managements of each organization, and were based upon various factors
and assumptions, many of which are beyond the control of Mid-Peninsula and/or
Cupertino. Such projections were also adjusted, based on discussions with the
management of Mid-Peninsula, to present a "conservative" case for each company.
These projections are, by their nature, forward-looking and may differ
materially from the actual values or actual future results, which may be
significantly more or less favorable than suggested by such projections.
The implied future dividend stream projection was based upon the assumption
that each of Mid-Peninsula, Cupertino and Bancorp would maximize yearly dividend
payments subject to maintaining a constant year-end ratio of shareholders'
equity to total assets of 7.0%. Estimated terminal values were calculated by
applying multiples ranging from 10.0x to 12.0x projected net income. The
dividend streams and terminal values were discounted to present values using a
range of discount rates from 12.5% to 17.5%. The discounted cash flow analysis
produced a range of net present values per Mid-Peninsula Share (excluding shares
subject to unexercised options) of approximately $21.50 to $28.50 in the
conservative case and approximately $24.00 to $32.00 in the expected case, and a
range of approximately $15.00 to $21.00 per Cupertino Share (excluding shares
subject to unexercised options) in the conservative case and approximately
$18.50 to $26.00 in the expected case. Giving effect to
30
<PAGE>
projected cost savings and revenue enhancements, the analysis produced a range
of net present values per share of Bancorp (excluding shares subject to
unexercised options) of approximately $27.00 to $36.50 in the conservative case
and approximately $30.25 to $41.25 in the expected case. These analyses do not
purport to be indicative of actual values or expected values or an appraisal
range of the Mid-Peninsula Shares, the Cupertino Shares, or the common stock of
Bancorp. Alex. Brown noted that the discounted cash flow analysis is a widely
used valuation methodology, but that such analysis relies on numerous
assumptions, including dividend payout rates, terminal values and discount
rates, the future values of which may differ significantly from such estimates.
PRO FORMA MERGER ANALYSIS. Alex. Brown analyzed the pro forma effects of
the Merger on Mid-Peninsula shareholders by comparing, among other things, the
projected fully diluted earnings per share for 1997 and 1998, and the book value
per share as of March 31, 1996, for Mid-Peninsula with the pro forma estimates
of fully diluted earnings per share for 1997 and 1998 and book value per share
as of March 31, 1996 for Bancorp. The analysis did not include non-recurring
transaction expenses and assumed, unless otherwise stated, that Merger-related
cost savings would be fully realized in 1997, and that revenue enhancements
would be realized in 1997, 1998 and 1999 as a result of incremental earning
assets and additional trust fee income. The projected cost savings represent
approximately 3.3% of Bancorp's projected noninterest expense in 1997 on a
pre-tax basis. The Merger is viewed by Mid-Peninsula and Cupertino as a merger
of equals transaction in which cost savings are less important than the
strategic benefits of the Merger. Based on certain assumptions, including those
with respect to cost savings and revenue enhancements from the Merger, and the
stand-alone earnings projections of Mid-Peninsula (based on estimates provided
by Mid-Peninsula management) and Cupertino (based on estimates provided by
Cupertino management), the analysis showed that the Merger would be accretive to
Mid-Peninsula's estimated earnings per share in 1997 by 10.4% in the
conservative case and 14.0% in the expected case.
ADDITIONAL CONSIDERATIONS. In arriving at its opinion, Alex. Brown also
considered a number of qualitative factors that might result from the Merger,
including enhanced lending capabilities, greater management depth, improved
liquidity for shareholders, and increased acquisition opportunities for Bancorp
compared to Mid-Peninsula.
COMPENSATION OF FINANCIAL ADVISOR. Pursuant to the terms of an engagement
letter (the "Engagement Letter") dated May 28, 1996, Mid-Peninsula will pay
Alex. Brown an aggregate fee of $200,000 for acting as Financial Advisor in
connection with the Merger, including rendering the Alex. Brown Opinion, against
which will be credited a $25,000 retainer fee paid upon execution of the
Engagement Letter. Of the fee, $75,000 was paid on the delivery of the Alex.
Brown Opinion, with the remainder of the fee payable upon inclusion of the Alex.
Brown Opinion in this Joint Proxy Statement/ Prospectus. Whether or not the
Merger is consummated, Mid-Peninsula also has agreed to reimburse Alex. Brown
for its reasonable out-of-pocket expenses incurred in connection with the
transaction. Mid-Peninsula has also agreed to indemnify Alex. Brown and certain
related persons against certain liabilities relating to or arising out of its
engagement.
OPINION OF CUPERTINO FINANCIAL ADVISOR
In May 1996, Sutro was retained by Cupertino to render an opinion to the
Cupertino Board regarding the fairness, from a financial point of view, of the
consideration to be received by the shareholders of Cupertino in the Merger. On
June 5, 1996, Sutro delivered to the Cupertino Board its opinion to the effect
that, as of the date of its opinion and based on and subject to the assumptions,
factors and limitations set forth in the opinion and so described below, the
consideration proposed to be received by the shareholders of Cupertino, based on
a pro forma exchange ratio of 0.81522, is fair to the shareholders of Cupertino
from a financial point of view. This opinion was subsequently reaffirmed by
issuance to the Cupertino Board of a written opinion, dated September 23, 1996,
which is attached to the Joint Proxy/Prospectus Statement as Appendix F and is
incorporated herein by reference. The shareholders of Cupertino are urged to
read the attached opinion letter (the "Sutro Opinion") in its entirety.
31
<PAGE>
The Sutro Opinion is directed to the Cupertino Board and does not constitute
a recommendation to any Cupertino shareholder as to how such shareholder should
vote with respect to the Merger. Sutro was not requested to and did not make any
recommendation to the Cupertino Board as to the form or amount of consideration
to be received by shareholders of Cupertino in the Merger. Sutro was not
requested to opine as to, and the Sutro Opinion does not address, the Cupertino
Board's underlying business decision to proceed with or effect the Merger.
In reaching its conclusion as to the fairness of the consideration to be
received by shareholders of Cupertino in the Merger and in its presentation to
the Cupertino Board, Sutro did not rely on any single analysis or factor
described below, assign weights to the analyses or factors considered by it, or
make any conclusions as to how the results of any given analysis, taken alone,
supported its fairness opinion. The preparation of a fairness opinion is a
complex process and not necessarily susceptible to partial analysis or summary
description. Sutro believes that its analysis must be considered as a whole and
that selecting portions of its analysis, or factors considered by it, without
considering all factors and analyses, would create a misleading view of the
process underlying the Sutro Opinion.
The analyses developed by Sutro are not necessarily indicative of future
values or future results, which may be significantly more or less favorable than
suggested by the analyses. Analyses relating to the value of companies do not
purport to be appraisals or valuations or necessarily reflect the price at which
companies may actually be sold. No company or transaction used in any analysis
for the purpose of comparison, is identical to Cupertino, Mid-Peninsula or the
Merger. Accordingly, an analysis of results is not mathematical, rather it
involves complex considerations and judgments concerning the differences in
financial and operating characteristics of Comparable Companies (as defined
below) and other factors that could affect the public trading value of such
companies.
In connection with the delivery of the Sutro Opinion, Sutro reviewed, among
other things, (i) the Joint Proxy Statement/Prospectus for the Merger, (ii) the
Reorganization Agreement, (iii) certain publicly available information relative
to Cupertino, (iv) certain internal financial information of Cupertino prepared
for financial planning purposes and furnished to Sutro by the management of
Cupertino, (v) certain financial and securities data of Cupertino and companies
deemed similar to Cupertino, (vi) certain financial information for both a
regional and a national peer group of companies with operating characteristics
similar to those of Cupertino, (vii) to the extent that information was publicly
available, the financial terms of certain merger transactions deemed similar to
the Merger, (viii) publicly available information related to Mid-Peninsula, (ix)
certain internal financial information of Mid-Peninsula prepared for financial
planning purposes and furnished to Sutro by the management of Mid-Peninsula, (x)
certain internal financial information of the combined company resulting from
the Merger prepared for financial planning purposes and furnished to Sutro by
the management of Cupertino, and (xi) certain financial and securities data of
Mid-Peninsula. In addition, Sutro engaged in discussions with members of
management of Cupertino and Mid-Peninsula concerning the respective financial
condition, current operating results and business outlook of Cupertino and
Mid-Peninsula, including the prospects for the combined company, and Cupertino's
and Mid-Peninsula's plans relating to the combined company.
In delivering its opinion, Sutro prepared and delivered to the Cupertino
Board certain analyses and other information relevant to the Sutro Opinion. For
the purposes of the Sutro Opinion, Sutro annualized the first quarter results
for 1996 of Cupertino, which Sutro believed to be more relevant than the prior
twelve-month results for comparison purposes, due to the effect of extraordinary
items on the results for that twelve month period. The following is a summary of
those analyses:
SELECTED MARKET INFORMATION. Sutro reviewed certain stock trading
characteristics of Cupertino Shares and Mid-Peninsula Shares, including stock
prices and volume comparisons for several periods, and summarized for the
Cupertino Board information for a one-year period ending May 24, 1996.
DILUTION ANALYSIS. Sutro analyzed the fully diluted earnings per share and
tangible book value per share of Cupertino for the twelve-month period ended
March 31, 1996 and for the year ended December 31, 1996 as projected by the
management of Cupertino. Sutro also calculated pro forma
32
<PAGE>
estimates of fully diluted earnings per share and tangible book value per share
for the combined company for the twelve-month period ended March 31, 1996 and
for the projected year ended December 31, 1996. Projections for the year ended
December 31, 1996 do not include non-recurring transaction expenses or projected
pre-tax earnings enhancements or expense reductions. This analysis showed, among
other things, that, on a share equivalent basis, holders of Cupertino Shares
would realize accretion of 22.9% in earnings per share (without giving effect to
transaction expenses) and accretion of 10.8% in tangible book value per share
for the twelve-month period ended March 31, 1996. For the year ended December
31, 1996, holders of Cupertino Shares would realize accretion of 16.3% in
earnings per share and accretion of 8.7% in tangible book value per share.
CONTRIBUTION ANALYSIS. Sutro analyzed certain historical income statement
and balance sheet data for Cupertino and Mid-Peninsula for the year ended
December 31, 1995 and for the twelve-month period ended March 31, 1996, as well
as projected data for Cupertino and Mid-Peninsula for the year ended December
31, 1996 (based upon estimates prepared by the management of each party). Based
on a pro forma exchange ratio of 0.81522, the holders of Cupertino Shares will
own 49.0% of the combined company on a fully diluted basis (i.e., assuming the
exercise of all outstanding options). The analysis showed, among other things,
that for the year ended December 31, 1995, for the twelve-month period ended
March 31, 1996 and for the projected year ended December 31, 1996, Cupertino
would contribute the following percentages of the pro forma amounts of the
combined company: 9.4%, 18.3% and 40.7%, respectively, of pre-tax income; 10.3%,
19.1% and 41.1%, respectively, of net income; 54.2%, 52.3% and 54.6%,
respectively, of total assets; 54.7%, 52.6% and 53.5%, respectively, of total
deposits; 54.9%, 52.7% and 55.2%, respectively, of tangible book value; 56.5%,
56.1% and 57.1%, respectively, of net loans; and 61.0%, 61.3% and 62.2%,
respectively, of loan loss reserves.
HISTORICAL AND PROJECTED FINANCIAL PERFORMANCE COMPARISON. Sutro prepared
comparisons of various historical and projected measures of performance ratios,
yields, margins and financial condition for Cupertino and the combined company,
including a comparison of return on average assets and average equity. For the
twelve-month period ended March 31, 1996, Cupertino and Mid-Peninsula achieved
the following selected performance measures: a return on average assets of 0.77%
for Cupertino compared to 1.36% for Mid-Peninsula and a return on average common
equity of 10.3% for Cupertino compared to 14.2% for Mid-Peninsula. For the
projected year ended December 31, 1996, the analysis indicated a projected
return on average assets of 0.81% for Cupertino compared to 1.35% for
Mid-Peninsula and a projected 11.2% return on average common equity for
Cupertino compared to 14.0% for Mid-Peninsula.
DISCOUNTED CASH FLOW ANALYSIS. Sutro developed an estimated stand-alone
valuation for Cupertino by analyzing the future expected cash flows a holder of
Cupertino Shares might receive over a two and one-half year period ending
December 31, 1998, and discounting the cash flows back to present values.
Estimated terminal values were calculated by applying stock price multiples
ranging from 1.20x to 1.40x to projected, fully diluted tangible book value. The
future cash flows were discounted to present values using a range of discount
rates from 6% to 14%. In this analysis, the cash flows were assumed to consist
of recurring $0.10 semi-annual and $0.15 quarterly dividends for Cupertino and
the combined company, respectively, plus the estimated terminal value at
December 31, 1998. The stand-alone valuation analysis indicated a value per
share for Cupertino Shares ranging from $11.67 to $17.74.
Additionally, Sutro performed a discounted cash flow analysis of the value
of the consideration to be received by the Cupertino shareholders, based on the
0.81522 pro forma exchange ratio for the merger, to examine the present and
future value of the combined company assuming differing levels of cost savings
and revenue enhancements which were provided by Cupertino's management. The
analyses illustrate the effect of such cost savings and revenue enhancements on
the present value of the consideration to be received by the Cupertino
shareholders. Estimated terminal values were calculated by applying stock price
multiples ranging from 1.40x to 1.60x to projected, fully diluted tangible book
value. Valuation ranges for the consideration to be received by the Cupertino
shareholders were analyzed, on a fully diluted share basis, under each of the
following scenarios: (i) a valuation
33
<PAGE>
which assumed no synergies or revenue enhancements for the combined companies
indicated a value range of $12.76 to $18.39; (ii) a valuation which assumed
moderate costs savings for the combined companies indicated a value range of
$12.94 to $18.64; (iii) a valuation which assumed greater cost savings and
certain revenue enhancements for the combined companies indicated a value range
of $13.49 to $19.42; and (iv) a valuation which assumed the same level of costs
savings analyzed in the item (iii) and greater revenue enhancements for the
combined companies indicated a value range of $13.57 to $19.52.
SELECTED COMPARABLE TRANSACTION ANALYSIS. Sutro reviewed selected
information for 38 merger-of-equals transactions announced since January 1,
1991, between commercial banks and/or bank holding companies. Sutro reviewed
certain transaction terms and calculated the following multiples: (i) deal price
to the seller's tangible book ranged from 0.8x to 2.6x, with a mean of 1.4x and
a median of 1.4x; (ii) deal price to the buyer's tangible book ranged from 0.5x
to 2.2x, with a mean of 1.2x and a median of 1.2x; (iii) deal price to the
seller's latest twelve-month earnings per share ranged from 7.0x to 19.1x, with
a mean of 11.4x and a median of 10.7x; (iv) the seller's year to date return on
average assets ranged from 0.43% to 1.79%, with a mean of 0.92% and a median of
0.95%; and (v) the buyer's year to date return on average assets ranged from
2.23% to 2.25%, with a mean of 0.94% and a median of 1.07%.
SELECTED COMPARABLE COMPANIES ANALYSIS. Sutro compared certain financial
information and stock market information relating to Cupertino to corresponding
data and ratios for Mid-Peninsula and for a group of Western Region-based
commercial banks and bank holding companies deemed similar to Cupertino. The
companies selected (the "Comparable Companies") were: Bank of Commerce,
California Community Bancshares, California State Bank, Columbia Banking System,
Inc., CU Bancorp, Foothill Independent Bancorp, Sierra Tahoe Bancorp and
Transworld Bancorp.
Based on the closing prices for shares of common stock of Cupertino and each
of the Comparable Companies on May 24, 1996, Sutro calculated the following
multiples: (i) market price to latest twelve-month ("LTM") earnings per share of
14.3x for Cupertino and 16.3x for Mid-Peninsula compared to a range of 10.7x to
20.7x, a mean of 15.1x and a median of 14.6x for the Comparable Companies; and
(ii) market price to tangible book value of 1.3x for Cupertino and 1.4x for
Mid-Peninsula compared to a range of 1.1x to 1.7x, a mean of 1.4x and a median
of 1.3x for the Comparable Companies.
Sutro also analyzed certain financial information and stock market
information relating to Cupertino to corresponding data and ratios for peer
groups of National and Western Region-based commercial banks and bank holding
companies deemed similar to Cupertino. First, Sutro reviewed all National and
Regional banks for which meaningful data was available. Sutro subsequently
divided the National and Regional peer groups into quartiles according to each
institution's return on average assets.
Based on its return on average assets of 0.77%, Cupertino compared closely
to the third and fourth quartiles in the National peer group where the return on
average assets ranged from 0.78% to 1.06% and -4.90% to 0.78%, respectively.
Based on the closing prices on May 24, 1996 for shares of common stock of
Cupertino and the institutions included in the National peer group, Sutro
calculated the following multiples: (i) market price to LTM earnings per share
of 14.3x for Cupertino compared to a range of 9.6x to 27.4x, and a median of
12.9x for the third quartile, and a range of 5.0x to 69.4x, and a median of
18.0x for the fourth quartile; and (ii) market price to tangible book value of
1.3x for Cupertino compared to a range of 1.1x to 2.8x, and a median of 1.4x for
the third quartile, and a range of 0.6x to 2.0x, and a median of 1.2x for the
fourth quartile. In the opinion of Sutro, a pro forma valuation based on a
tangible book multiple provides a more reliable valuation estimate than a
valuation based on an earnings per share multiple since the LTM earnings per
share result calculated for Cupertino is based on Cupertino's annualized
earnings for the quarter ended March 31, 1996. Based on Cupertino's current
tangible book value per share of $10.45, the tangible book multiples for the
third and fourth quartiles in the National peer group imply per share valuation
ranges of $13.55 to $14.98 and $12.19 to $13.47, respectively.
34
<PAGE>
Based on its return on average assets, Cupertino compared closely to the
third quartile in the Regional peer group where the return on average assets
ranged from 0.55% to 1.00%. Based on the closing prices on May 24, 1996 for
Cupertino Shares and the institutions included in the Regional peer group, Sutro
calculated the following multiples: (i) market price to LTM earnings per share
of 14.3x for Cupertino compared to a range of 5.0x to 20.7x, and a median of
11.7x for the third quartile; and (ii) market price to tangible book value of
1.3x for Cupertino compared to a range of 0.6x to 1.7x for the third quartile.
Based on Cupertino's current tangible book per share of $10.45, the tangible
book multiples for the third quartile in the Regional peer group imply a per
share valuation range of $11.51 to $12.72.
ADDITIONAL CONSIDERATIONS. Sutro also considered a number of qualitative
factors that might result from the Merger, including enhanced commercial loan
capabilities, greater management depth, improved liquidity for shareholders and
increased acquisition opportunities for the combined companies as compared to
Cupertino.
For purposes of the Sutro Opinion, Sutro relied upon the accuracy,
completeness and fairness of the financial and other information made available
to it and, in connection with its engagement, did not undertake to independently
verify such information. Cupertino's and Mid-Peninsula's management represented
to Sutro that the information provided by Cupertino and Mid-Peninsula had a
reasonable basis and, with respect to financial planning data and other business
outlook information, reflected the best available estimates, and that they were
not aware of any information or fact that would make the information provided to
Sutro incomplete or misleading. Sutro assumed the Merger will be recorded using
the pooling of interests method of accounting under generally accepted
accounting principles.
In arriving at the Sutro Opinion, Sutro did not perform, nor was it
furnished, an appraisal or valuation of specific assets or liabilities of
Cupertino or Mid-Peninsula and expressed no opinion regarding the liquidation
value of any entity. No limitations were imposed by the Cupertino Board on the
scope of Sutro's investigation or the procedures to be followed in rendering its
opinion. Sutro expressed no opinion as to the price at which Cupertino Shares or
Mid-Peninsula Shares have traded or may trade at a future time. The Sutro
Opinion is based upon information available to Sutro and the facts and
circumstances as they existed and were subject to evaluation on the date of the
Sutro Opinion. Events occurring after such date could materially affect the
assumptions used in preparing the Sutro Opinion.
In the normal course of its business, Sutro may, from time to time, actively
trade securities of Cupertino and Mid-Peninsula for its own account or the
account of its customers and, accordingly, may at any time have a long or short
position in such securities. Additionally, Sutro or its affiliates may, from
time to time, produce research materials regarding Cupertino or Mid-Peninsula.
Since the date of its engagement with respect to the Merger, Sutro has not held
a long or short position for its own account in Cupertino Shares or
Mid-Peninsula Shares. Prior to this transaction, Sutro has not been engaged to
provide investment banking services to Cupertino or Mid-Peninsula.
Sutro is a nationally recognized investment banking firm and, as a customary
part of its investment banking business, is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
underwriting and secondary distributions of securities, private placements and
valuations for estate, corporate and other purposes. Sutro was selected by the
Cupertino Board based on Sutro's qualifications, expertise and reputation.
For rendering its fairness opinion to the Cupertino Board in connection with
the Merger, Cupertino has agreed to pay Sutro fees aggregating $175,000. The
payment of such fees is scheduled as follows: (a) a non-refundable retainer of
$25,000, payable upon Cupertino's execution of its letter agreement with Sutro,
plus (b) a fee of $37,500, payable upon the execution of a definitive agreement
to effect the Merger, plus (c) an additional fee of $37,500, payable upon the
mailing of a proxy statement to Cupertino's shareholders concerning the Merger,
plus (d) an additional fee of $75,000,
35
<PAGE>
payable upon closing of the Merger. Cupertino has also agreed to pay the
reasonable out-of-pocket expenses of Sutro and to indemnify Sutro against
certain liabilities incurred (including liabilities under the federal securities
laws) in connection with the engagement of Sutro by Cupertino.
OTHER FINANCIAL ADVISOR AGREEMENT
In June 1996, Hovde was retained by Cupertino as a financial advisor to
provide advice concerning the Merger. The Hovde engagement contemplates that
Hovde will advise the Cupertino Board regarding post-Merger cost savings
opportunities and revenue enhancements, as well as shareholder relations and
communications and assistance concerning other matters related to the Merger. In
connection with the Hovde engagement, Cupertino agreed to pay Hovde: (a) a
non-refundable retainer of $30,000 (to be applied to the Completion Fee as
described in (c) below); (b) a Definitive Agreement Fee equal to 25% of the
Completion Fee (to be applied to the Completion Fee as described in (c) below);
and (c) a Completion Fee equal to $125,000 to be paid upon consummation of the
Merger. In addition, Cupertino agreed to reimburse Hovde for certain expenses
not to exceed $5,000 without Cupertino's prior written consent, and to indemnify
Hovde against certain liabilities in connection with the engagement. An
affiliate of Hovde is a principal shareholder of Cupertino; see "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CUPERTINO."
TERMS OF THE MERGER
Upon the Effective Time of the Merger, Cupertino will be merged on a merger
of equals basis with and into Mid-Peninsula, with Mid-Peninsula surviving the
Merger and changing its name to Greater Bay Bancorp. MPB and CNB, the bank
subsidiaries of Mid-Peninsula and Cupertino, respectively, will continue to
operate as separate wholly owned subsidiaries of Bancorp following the Merger.
At the Effective Time of the Merger, each Cupertino Share issued and outstanding
immediately prior to the Effective Time of the Merger, except any shares held by
shareholders of Cupertino dissenting from the Merger, will, on and after the
Effective Time of the Merger, be converted into the right to receive 0.81522
Bancorp Share pursuant to the Conversion Ratio. No fractional shares will be
issued in the Merger. In lieu thereof, each holder of Cupertino Shares who would
otherwise be entitled to receive a fractional share will receive an amount in
cash equal to the market value per Bancorp Share calculated (to the nearest
hundredth) by taking the average of the closing bid and asked prices per Mid-
Peninsula Share quoted by each brokerage firm then acting as a market maker of
Mid-Peninsula Shares, for each of the twenty (20) consecutive trading days up to
and including the last business day of the month-end immediately preceding the
date of the Closing (the "Determination Date") (whether or not there were any
trades in Mid-Peninsula Shares on such days), multiplied by the fraction of a
Bancorp Share to which such holder otherwise would be entitled. No such holder
shall be entitled to dividends, voting rights, interest on the value of, or any
other rights in respect of a fractional share.
EFFECTIVE TIME OF THE MERGER
The Merger will be effective upon the filing with the Secretary of State of
the State of California of the Merger Agreement, a copy of which is included as
Exhibit A to the copy of the Reorganization Agreement attached as Appendix A to
the Joint Proxy Statement/Prospectus. The parties expect this filing to occur on
or before December 31, 1996.
REGULATORY APPROVAL
The consummation of the Merger is subject to the approval of the FRB.
Receipt of all requisite regulatory approvals and consents is a condition
precedent to the consummation of the Merger. See "THE REORGANIZATION AGREEMENT
- -- Conditions to the Merger."
An application for the prior approval of the Merger was filed with the FRB
on August 21, 1996. There can be no assurances that the required approval will
be obtained, or as to conditions or timing of such approval.
Although neither Cupertino nor Mid-Peninsula is aware of any reason why the
requisite approval of and consent to the Merger would not be granted, there can
be no assurance such approval and consent will be obtained or that, if obtained,
such approval and consent will not include conditions
36
<PAGE>
which would be of a type that would relieve Cupertino and Mid-Peninsula from
their obligations to consummate the Merger. See "THE REORGANIZATION AGREEMENT --
Conditions to the Merger" and "-- Termination."
In determining whether to approve the Merger, the FRB will consider factors
such as the financial condition of Mid-Peninsula, the effects of the Merger on
Mid-Peninsula, the effects of the Merger on competition, the financial and
managerial resources and future prospects of Mid-Peninsula and Cupertino
separately and as a combined entity, and the convenience and needs of the
communities served by them. The Bank Holding Company Act prohibits approval of
the Merger if it would have specified anti-competitive effects unless the FRB
finds those effects are clearly outweighed by the probable benefits of the
Merger.
AGREEMENTS WITH CERTAIN SHAREHOLDERS
Each director or executive officer of Cupertino (including the executive
officers of CNB) who is also a shareholder of Cupertino (the "Cupertino
Shareholders") has entered into a Shareholder Agreement with Mid-Peninsula (the
"Cupertino Shareholder Agreement") and each director or executive officer of
Mid-Peninsula who is also a shareholder of Mid-Peninsula (the "Mid-Peninsula
Shareholders") has entered into a Shareholder Agreement with Cupertino (the
"Mid-Peninsula Shareholder Agreement", and together with the Cupertino
Shareholder Agreement, the "Shareholder Agreements") pursuant to which each such
person has agreed to vote their Mid-Peninsula Shares or Cupertino Shares in
favor of the Merger and the transactions contemplated thereby and pursuant to
the Reorganization Agreement, and to recommend to shareholders, subject to the
exercise of fiduciary duties, that they vote in favor of the principal terms of
the Reorganization Agreement. The Shareholder Agreements will terminate
immediately upon the earlier of the Effective Time of the Merger or termination
of the Reorganization Agreement.
Under the Cupertino Shareholder Agreement, the Cupertino Shareholders have
agreed that they will vote 485,100 Cupertino Shares (approximately 25% of the
outstanding Cupertino Shares entitled to vote at the Cupertino Meeting) to
approve the principal terms of the Reorganization Agreement, increasing the
likelihood that the Merger will be approved. The affirmative vote of the holders
of approximately an additional 25% of the outstanding Cupertino Shares entitled
to vote at the Cupertino Meeting will be required in order to approve the
Reorganization Agreement.
Under the Mid-Peninsula Shareholder Agreement, the Mid-Peninsula
Shareholders have agreed to vote 340,309 Mid-Peninsula Shares (approximately 20%
of the outstanding Mid-Peninsula Shares entitled to vote at the Mid-Peninsula
Meeting) to approve the principal terms of the Reorganization Agreement,
increasing the likelihood that the Reorganization Agreement will be approved.
The affirmative vote of the holders of approximately an additional 30% of the
outstanding Mid-Peninsula Shares will be required in order to approve the
principal terms of the Reorganization Agreement.
AGREEMENTS WITH AFFILIATES
Persons who are deemed by Mid-Peninsula or Cupertino to be affiliates of
Mid-Peninsula or Cupertino have entered into Affiliate Agreements with
Mid-Peninsula or Cupertino, as the case may be, pursuant to which they have
agreed, among other things, not to (i) purchase, sell, transfer or otherwise
dispose of, or reduce their risk of ownership or investment in, Cupertino Shares
or Mid-Peninsula Shares prior to the Merger, including the sale, purchase,
acquisition or transfer of Cupertino Shares or Mid-Peninsula Shares in a manner
which may render pooling of interests accounting treatment unavailable in the
Merger; or (ii) sell, transfer or dispose of any Mid-Peninsula Shares or Bancorp
Shares which such persons now beneficially own or may acquire in connection with
the Merger or any securities which may be paid as a dividend or otherwise
distributed thereon or with respect thereto or issued or delivered in exchange
or substitution therefor (all such shares and other securities herein sometimes
collectively referred to as "Restricted Securities"), or any option, right or
other interest with respect to any Restricted Securities, unless such sale,
transfer or disposition is effected (A) pursuant to an exemption from the
registration requirements of the Securities Act as provided in the Affiliate
Agreement, or (B) pursuant to an effective registration statement under, and
37
<PAGE>
in compliance with, the Securities Act (provided that such persons may make bona
fide gifts or distributions without consideration so long as the recipients
thereof agree not to sell, transfer or otherwise dispose of the Mid-Peninsula or
Bancorp Shares except as provided in the Affiliate Agreements).
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Cupertino Record Date, the directors and executive officers of
Cupertino (including the executive officers of CNB) beneficially owned 485,100
Cupertino Shares, not including shares such persons may acquire through the
exercise of vested stock options. On such date, directors and executive officers
of Cupertino (including the executive officers of CNB) held options to acquire
225,069 Cupertino Shares. Options not exercised prior to the Effective Time of
the Merger will be converted into options to acquire Bancorp Shares on
substantially the same terms and conditions as the options to purchase Cupertino
Shares held by such persons prior to the Merger ("Substitute Options"), subject
to approval by Mid-Peninsula shareholders at the Mid-Peninsula Meeting of the
Bancorp Option Plan and the increase in the number of Bancorp Shares and options
for Bancorp Shares which may be issued pursuant to all stock option plans of
Bancorp following the Merger. See "THE REORGANIZATION AGREEMENT -- Treatment of
Options." Immediately after the Effective Time of the Merger, the current
directors and executive officers of Cupertino (including the executive officers
of CNB) as a group will own approximately 15% of the outstanding shares of
Bancorp.
As of the Mid-Peninsula Record Date, the directors and executive officers of
Mid-Peninsula owned 340,309 Mid-Peninsula Shares not including shares such
persons may acquire through the exercise of stock options. On such date,
directors and executive officers of Mid-Peninsula held options to acquire
Mid-Peninsula Shares, of which 54,400 are exercisable within 60 days of the
Mid-Peninsula Record Date.
At the Effective Time of the Merger, the Board of Directors of Bancorp will
comprise five members from each of the current Boards of Directors of
Mid-Peninsula and Cupertino. The five members from the Mid-Peninsula Board are
expected to be David L. Kalkbrenner, Duncan L. Matteson, Donald H. Seiler,
Warren R. Thoits and Edwin E. van Bronkhorst. See "INFORMATION CONCERNING MID-
PENINSULA MEETING ONLY -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT -- Board of Directors and Executive Officers." The five members from
the Cupertino Board are expected to be John M. Gatto, James E. Jackson, Rex D.
Lindsay, Glen McLaughlin and Dick J. Randall. See "INFORMATION CONCERNING
CUPERTINO MEETING ONLY -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT -- Board of Directors and Executive Officers."
Cupertino has arranged to purchase directors' and officers' tail insurance
(the "D&O Tail"), under which the persons serving as officers and directors of
Cupertino immediately prior to the Effective Time of the Merger shall be covered
for a period of three years from the Effective Time of the Merger with respect
to acts or omissions occurring prior to the Effective Time of the Merger which
were taken by such officers and directors in their capacities as such. The D&O
Tail is required to provide substantially the same coverage as the directors'
and officers insurance policy currently maintained by Cupertino.
At the Effective Time of the Merger, the following persons shall become the
executive officers of Bancorp and shall be appointed to the positions indicated:
(i) David L. Kalkbrenner, President and Chief Executive Officer, (ii) Steven C.
Smith, Executive Vice President, Chief Operating Officer and Chief Financial
Officer; and (iii) David R. Hood, Executive Vice President and Chief Credit
Officer.
Pursuant to the terms of an engagement letter dated May 28, 1996 (the
"Engagement Letter"), Mid-Peninsula will pay Alex. Brown an aggregate fee of
$200,000 for acting as financial advisor in connection with the Merger,
including rendering the Alex. Brown Opinion, against which will be credited a
$25,000 retainer fee paid upon execution of the Engagement Letter. Of the fee,
$75,000 was paid on the delivery of the Alex. Brown Opinion, with the remainder
of the fee payable upon inclusion
38
<PAGE>
of the Alex. Brown Opinion in this Joint Proxy Statement/Prospectus. Whether or
not the Merger is consummated, Mid-Peninsula also has agreed to reimburse Alex.
Brown for its reasonable out-of-pocket expenses incurred in connection with the
transaction. Mid-Peninsula has also agreed to indemnify Alex. Brown and certain
related persons against certain liabilities relating to or arising out of its
engagement.
For rendering its fairness opinion to the Cupertino Board in connection with
the Merger, Cupertino has agreed to pay Sutro fees aggregating $175,000. The
payment of such fees is scheduled as follows: (a) a non-refundable retainer of
$25,000, payable upon Cupertino's execution of its letter agreement with Sutro,
plus (b) a fee of $37,500, payable upon the execution of a definitive agreement
to effect the Merger, plus (c) an additional fee of $37,500, payable upon the
mailing of a proxy statement to Cupertino's shareholders concerning the Merger,
plus (d) an additional fee of $75,000, payable upon closing of the Merger.
Cupertino has also agreed to pay the reasonable out-of-pocket expenses of Sutro
and to indemnify Sutro against certain liabilities incurred (including
liabilities under the federal securities laws) in connection with the engagement
of Sutro by Cupertino.
For providing advice regarding post-Merger cost savings opportunities and
revenue enhancements, Cupertino has agreed to pay Hovde a fee of $125,000 upon
consummation of the Merger, to reimburse Hovde for certain expenses, and to
indemnify Hovde against certain liabilities. An affiliate of Hovde is a
principal shareholder of Cupertino; see "SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF CUPERTINO."
EMPLOYEE BENEFIT PLANS
Mid-Peninsula and Cupertino have agreed that, other than the 401(k) Plan of
Mid-Peninsula and Employee Stock Purchase Plan of Cupertino discussed below (the
"ESPP"), which will survive the Merger as employee benefit plans of Bancorp, and
the Bancorp Option Plan which the shareholders of Mid-Peninsula are asked to
approve and which will take effect as of the Effective Time of the Merger,
either party's employee benefit plans may be terminated, frozen, modified or
merged into the other party's plans on or after the Effective Time of the Merger
in accordance with applicable laws and regulations and the provisions of the
Code, as determined by mutual agreement of the parties or by Bancorp. The former
officers and employees of Cupertino and Mid-Peninsula who become officers or
employees of Bancorp will be entitled to participate in all employee benefits
and benefit programs of Bancorp in accordance with the terms of such plans or
programs, provided, however, that each employee of Mid-Peninsula or Cupertino
who becomes an employee of Bancorp ("Transferred Employee") will receive credit
for his or her years of service with Mid-Peninsula or Cupertino, as applicable,
for purposes of eligibility and vesting under Bancorp's employee benefit plans,
and provided further that each Transferred Employee who elects coverage under
Bancorp's indemnity health plan within thirty days after coverage is extended to
him or her shall not be subject to any pre-existing condition limitation under
such indemnity health plan.
SUMMARY OF EMPLOYEE STOCK PURCHASE PLAN
The Cupertino Board adopted the Cupertino National Bancorp Employee Stock
Purchase Plan (the "ESPP") in February 1991, and the shareholders of Cupertino
approved the ESPP in April 1991. At the 1996 Annual Meeting of Cupertino, its
shareholders approved an increase, previously approved by the Cupertino Board,
in the total number of Cupertino Shares reserved for issuance under the ESPP
from 73,934 to 133,934 Cupertino Shares. As of June 30, 1996, 82,318 Cupertino
Shares were available for issuance under the ESPP. As of July 1, 1996, the
Cupertino Board suspended the operation of the ESPP pending the Merger, so that
no additional Cupertino Shares will be issued pursuant to the ESPP until the
Merger is consummated or the Reorganization Agreement is terminated.
The ESPP provides for the purchase of Cupertino Shares by employees of
Cupertino and any subsidiaries designated by the Cupertino Board. Management of
both Cupertino and Mid-Peninsula believe that the ESPP has been an important
factor in attracting and retaining qualified employees essential to the success
of Cupertino, and, although not required to do so by the Reorganization
39
<PAGE>
Agreement, have agreed that the ESPP shall become effective as an employee
benefit plan of Bancorp, thus enabling eligible employees of Bancorp, MPB and
CNB following the Merger to continue to purchase Bancorp Shares under the terms
and conditions of the ESPP. The number of Bancorp Shares which will be reserved
and available for purchase and sale pursuant to the ESPP will be 82,318.
The following summary of the ESPP is qualified in its entirety by the
specific language of the ESPP, a copy of which is available to any shareholder
upon request. The numbers of shares specified in this section and elsewhere in
this Joint Proxy Statement/Prospectus have been adjusted to reflect stock
dividends of Cupertino effected from time to time prior to the date of this
Joint Proxy Statement/Prospectus.
GENERAL. The ESPP is intended to qualify as an "employee stock purchase
plan" under section 423 of the Code. The ESPP will give each participant the
right at the beginning of each offering period under the plan to purchase shares
of the Common Stock of Bancorp (a "Purchase Right"), which Purchase Right will
be exercised on each purchase date under the ESPP unless the participant has
withdrawn from participation in the offering or in the plan prior to such
purchase date. As previously approved by the Cupertino shareholders, a maximum
of 82,318 of the authorized but unissued shares of the Common Stock of Bancorp
may be issued under the ESPP following the Merger. In the event of any stock
dividend, stock split, combination or reclassification of the Common Stock or
any other increase or decrease in the number of shares of Common Stock effected
without receipt of consideration by Bancorp, or, at the Board's discretion in
the event of any reorganization, recapitalization, rights offering,
consolidation or merger of Bancorp, proportional adjustments will be made to the
number of shares subject to the ESPP and outstanding Purchase Rights and to the
purchase price. If any Purchase Right expires or terminates, the shares of
Common Stock subject to such Purchase Right are returned to the ESPP and may
again be subjected to a Purchase Right.
ADMINISTRATION. The ESPP will be administered by the Board of Directors of
Bancorp or by a duly appointed committee thereof.
ELIGIBILITY. Any employee of Bancorp or of any subsidiary corporation of
Bancorp designated by the Board of Directors of Bancorp, including MPB and CNB,
will be eligible to participate in the ESPP so long as the employee has been
customarily employed for at least 20 hours per week and has completed three
months of continuous employment. Previous employment by Cupertino,
Mid-Peninsula, CNB or MPB will count towards meeting this requirement. However,
no employee who owns or holds options to purchase, or as a result of
participation in the ESPP would own or hold options to purchase, 5% or more of
the total combined voting power or value of all classes of stock of Bancorp will
be entitled to participate in the ESPP. As of July 30, 1996, approximately 170
employees of Cupertino, Mid-Peninsula, CNB and MPB combined would have been
eligible to participate in the ESPP, had the Merger occurred on that date.
OFFERINGS. Generally, each offering of shares under the ESPP (an
"Offering") is for a period of three months, commencing on the first day of each
calendar quarter. However, the Board may establish a different term for one or
more Offerings or different commencement or ending dates.
PARTICIPATION AND PURCHASE OF SHARES. Participation in the ESPP will be
limited to eligible employees who authorize payroll deductions, which may not
exceed 10% of compensation for each pay period during an Offering or such other
rate as the Board determines. If an Offering is shorter than 13 weeks, the
maximum withholding percentage will equal 10%, or such other rate determined by
the Board, multiplied by 13 and divided by the number of weeks in the Offering.
Once an employee becomes a participant in the ESPP, the employee will
automatically participate in each successive Offering until such time as the
employee ceases to be an eligible employee, withdraws from the ESPP, or
terminates employment.
Subject to certain limitations, each participant in an Offering will have a
Purchase Right equal to 10% of the participant's base compensation for the
Offering (determined at the rate of base compensation in effect on the first day
of the Offering) divided by 85% of the fair market value of a share of
40
<PAGE>
Common Stock on the first day of the Offering. Participants may not purchase
Bancorp Shares having a fair market value exceeding $25,000 for each calendar
year in which the participant participates in the ESPP (measured by the fair
market value of the Common Stock on the first day of the Offering in which the
shares are purchased).
At the end of each Offering, a participant will acquire the number of
Bancorp Shares determined by dividing the total amount of payroll deductions
from the participant's compensation during the Offering by the purchase price,
limited in any case by the number of shares subject to the participant's
Purchase Right for the Offering. The purchase price per share at which the
shares will be sold under the ESPP generally will equal 85% of the lesser of the
fair market value of a Bancorp Share on the first day of the Offering or on the
last day of the Offering. The fair market value of the Common Stock on any
relevant date generally will be the average of the high and low sales prices per
Bancorp Share on such date as reported on Nasdaq. As of July 30, 1996, the fair
market value of a Cupertino Share was $14.81. The fair market value of Bancorp
Shares cannot be predicted. Any payroll deductions under the ESPP not applied to
the purchase of shares will be returned to the participant, except for an amount
insufficient to purchase another whole share, which amount may be applied to the
next Offering.
A participant may withdraw from an Offering at any time without affecting
his or her eligibility to participate in future Offerings. However, once a
participant withdraws from an Offering, that participant may not again
participate in the same Offering.
MERGER OR SALE. In the event of a merger of Bancorp or a sale of all or
substantially all of its assets, the Board may accelerate the last day of the
current Offering to a date on or before the effective date of the transaction
unless the successor corporation or a parent or subsidiary corporation thereof
assumes or substitutes substantially equivalent purchase rights for those
outstanding under the ESPP. Unless otherwise provide by the Board, the current
Offering will terminate immediately prior to a dissolution or liquidation of
Bancorp.
TERMINATION OR AMENDMENT. The ESPP will continue until terminated by the
Board of Directors of Bancorp or until all of the shares reserved for issuance
under the ESPP have been issued. The Board may amend or terminate the ESPP at
any time, except that the approval of the shareholders of Bancorp will be
required within twelve months of the adoption of any amendment increasing the
number of shares authorized for issuance under the ESPP, changing the
designation of employees eligible to participate in the ESPP, or materially
increasing the benefits which may accrue to participants under the ESPP.
FEDERAL INCOME TAX CONSEQUENCES. The following summary is intended only as
a general guide as to the United States federal income tax consequences under
current law of participation in the ESPP and does not attempt to describe all
potential tax consequences. Furthermore, the tax consequences are complex and
subject to change, and a taxpayer's particular situation may be such that some
variation of the described rules will be applicable.
A participant will recognize no taxable income either as a result of
commencing to participate in the ESPP or purchasing Bancorp Shares under the
terms of the ESPP. If a participant disposes of shares purchased under the ESPP
within two years from the first day of the applicable Offering or within one
year from the purchase date(a "disqualifying disposition"), the participant will
realize ordinary income in the year of such disposition equal to the amount by
which the fair market value of the shares on the date the shares were purchased
exceeds the purchase price. The amount of the ordinary income will be added to
the participant's basis in the shares, and any additional gain or resulting loss
recognized on the disposition of the shares will be a capital gain or loss. A
capital gain or loss will be long-term if the participant's holding period is
more than twelve months, otherwise it will be short-term.
If the participant disposes of shares purchased under the ESPP at least two
years after the first day of the applicable Offering and at least one year after
the date of purchase, the participant will
41
<PAGE>
realize ordinary income in the year of disposition equal to the lesser of (i)
the excess of the fair market value of the shares on the date of disposition
over the purchase price or (ii) 15% of the fair market value of the shares on
the first day of the applicable Offering. The amount of any ordinary income will
be added to the participant's basis in the shares, and any additional gain
recognized upon the disposition after such basis adjustment will be a long-term
capital gain. If the fair market value of the shares on the date of disposition
is less than the purchase price, there will be no ordinary income and any loss
recognized will be a long-term capital loss.
If the participant still owns the shares at the time of death, ordinary
income will be recognized in the year of death equal to the lesser of (i) the
excess of the fair market value of the shares on the date of death over the
purchase price or (ii) 15% of the fair market value of the shares on the first
day of the Offering in which the shares were purchased.
Bancorp should be entitled to a tax deduction in the year of a disqualifying
disposition equal to the amount of ordinary income recognized by the participant
as a result of the disposition, except to the extent such deduction is limited
by section 162(m) of the Code, which imposes a $1 million cap on the amount of
compensation paid to a corporation's five most highly-compensated executive
officers that the corporation may deduct in any year for federal income tax
purposes, subject to the exclusion of certain forms of incentive-based
compensation. In all other cases, no deduction will be allowed to Bancorp.
CERTAIN RELATED TRANSACTIONS
As a condition to entering into the Reorganization Agreement, Mid-Peninsula
and Cupertino each required the other to enter into an Option Agreement pursuant
to which the issuing party granted to the other an option to purchase shares of
the issuing party's common stock, representing 19.0% of such party's issued and
outstanding shares. The Option Agreements could have the effect of discouraging
persons who now or prior to the Effective Time of the Merger might be interested
in acquiring all or a significant interest in either Mid-Peninsula or Cupertino.
Mid-Peninsula granted to Cupertino an option to purchase up to 19.0% of
Mid-Peninsula Shares at a price equal to $20.45 per share, subject to adjustment
as provided in the Mid-Peninsula Option Agreement. Cupertino granted to
Mid-Peninsula an option to purchase up to 19.0% of Cupertino Shares at a price
equal to $14.80 per share, subject to adjustment as provided in the Cupertino
Option Agreement. The option prices are equal to the average of the closing
prices for the respective stocks during the period from June 10 through June 14,
1996, inclusive. Each Option Agreement provides that the holder of the option is
entitled to purchase the option shares upon the occurrence of certain events
that create the potential for another party to acquire control of the issuing
party. See "THE OPTION AGREEMENTS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
A condition to the consummation of the Merger is that Bronson, counsel to
Mid-Peninsula, deliver to Mid-Peninsula and Cupertino its opinion setting forth
certain conclusions regarding the tax effects of the Merger under federal income
tax law and California income and franchise tax law. Bronson has advised
Mid-Peninsula and Cupertino that the following discussion is a fair and accurate
summary of all material federal income tax consequences of the Merger affecting
shareholders of Cupertino and Mid-Peninsula.
The discussion and conclusions set forth below are based upon the Code, the
Treasury Regulations, and existing administrative and judicial interpretations
thereof as of the date of this Joint Proxy Statement/Prospectus, all of which
are subject to change, possibly with retroactive effect. Any such change could
affect the continuing validity of this summary. This summary, moreover, does not
discuss all aspects of federal income taxation that may be relevant either to a
particular shareholder in light of personal circumstances or to certain types of
shareholders subject to special treatment under the federal income tax laws (for
example, life insurance companies, tax-exempt organizations, foreign investors,
dealers in securities and taxpayers subject to the alternative minimum tax), and
this
42
<PAGE>
summary does not discuss any aspect of state, local or foreign tax laws. ALL
CUPERTINO AND MID-PENINSULA SHAREHOLDERS SHOULD THEREFORE CONSULT THEIR OWN TAX
ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM ARISING FROM THE MERGER.
Mid-Peninsula and Cupertino intend that the Merger qualify as a
reorganization within the meaning of Section 368(a) of the Code (a
"Reorganization"). If the Merger qualifies as a Reorganization, the exchange of
Cupertino Shares for Bancorp Shares pursuant to the Merger will not be a taxable
event except to the extent of cash received for fractional shares. (The receipt
of cash by dissenters, if any, who exercise dissenters' rights will also be
treated as a taxable event.) The purpose of this discussion is to advise
Cupertino shareholders of the conditions that must be satisfied in order for the
exchange of stock pursuant to the Merger to qualify as a Reorganization.
Neither Mid-Peninsula nor Cupertino intends to apply for a ruling from the
Internal Revenue Service ("IRS") with respect to the federal income tax
consequences of the Merger. There can be no assurance that the IRS will not take
a view contrary to those expressed herein. Cupertino and Mid-Peninsula
shareholders should also be aware that an opinion of Bronson, unlike a ruling,
is not binding on the IRS.
Based upon the continuing accuracy of certain assumptions and
representations of the parties to the merger, it is the opinion of Bronson that
the Merger will constitute a Reorganization under Section 368(a) of the Code, if
carried out in the manner set forth in the Reorganization Agreement, and that:
1. A shareholder whose Cupertino Shares are exchanged solely for
Bancorp Shares in the Merger will not recognize any gain or loss for federal
income tax purposes as a result of that exchange, except with respect to
cash proceeds received in lieu of fractional shares;
2. The tax basis of the Bancorp Shares received by Cupertino
shareholders will be the same as the basis of the Cupertino Shares
surrendered in exchange therefor, decreased by the amount of basis allocated
to the fractional shares that are hypothetically received by the shareholder
and redeemed for cash, and increased by any gain recognized on the exchange
(not including any gain recognized for the receipt of cash in lieu of
fractional shares);
3. The holding period of the Bancorp Shares received by the Cupertino
shareholders will include the period during which the Cupertino Shares
surrendered in exchange therefor were held, provided that the Cupertino
Shares are held as a capital asset in the hands of the Cupertino
shareholders at the Effective Time of the Merger; and
4. The payment of cash in lieu of fractional Bancorp Shares will be
treated as if each fractional share was distributed as part of the exchange
and then redeemed by Bancorp. Pursuant to Section 302(a) of the Code, these
cash payments will be treated as having been received as distributions in
full payment in exchange for the Bancorp Shares. Any gain or loss recognized
upon such exchange (as determined under Section 1001 and subject to the
limitations of Section 267) will be capital gain or loss provided the
fractional share would constitute a capital asset in the hands of the
exchanging shareholder.
The opinion of Bronson is subject to certain assumptions and qualifications
and is based upon the accuracy of certain representations of the parties to the
Merger. Of particular importance to the opinion of Bronson are assumptions and
representations relating to the Merger's satisfaction of one of the requirements
for a Reorganization -- the "continuity of interest" requirement.
In order for the continuity of interest requirement to be met, holders of
Cupertino Shares must not, pursuant to a plan or intent existing at or prior to
the Merger, dispose of so much of either (i) their Cupertino Shares in
anticipation of the Merger (including Cupertino Shares surrendered in the
exercise of dissenters' rights, if any), or (ii) the Bancorp Shares to be
received in the Merger (collectively, the "Planned Dispositions") and retained
such that holders of Cupertino Shares, as a group, no longer have a significant,
direct or indirect, equity interest in the Cupertino business being conducted
43
<PAGE>
after the Merger. Holders of Cupertino Shares will generally be regarded as
having a significant equity interest as long as the Bancorp Shares received in
the Merger (after taking into account Planned Dispositions), in the aggregate,
represent a substantial portion of the entire consideration received by the
holders of Cupertino Shares in the Merger. The IRS advance ruling guidelines
require 50% continuity of interest. In accordance with these guidelines,
Cupertino and Mid-Peninsula have made representations that this will be the
case. Holders of Cupertino Shares should be aware that the actual number of
shares (if any) of Cupertino Shares for which dissenters' rights are exercised
cannot be determined until after the vote of shareholders with respect to the
Merger. If the continuity of interest requirement is not satisfied because of a
significant number of Planned Dispositions (including the exercise of
dissenters' rights), the Merger will be treated as a taxable event.
If the merger is treated as a taxable event, holders of Cupertino Shares
whose shares are exchanged in the Merger will recognize gain or loss for federal
income tax purposes in an amount equal to the difference between the adjusted
tax basis of their Cupertino Shares surrendered and the fair market value of the
Bancorp Shares received in exchange therefor plus any cash proceeds received in
lieu of fractional shares. The gain or loss will be capital gain or loss if the
Cupertino Shares are held as capital assets at the Effective Time of the Merger.
Capital losses by an individual are deductible for federal income tax purposes
against capital gains for the same taxable year and against up to $3,000 of
other income ($1,500 for a married individual filing a separate return) for the
same taxable year. Any excess capital loss realized by an individual may be
carried forward to subsequent years. If the Merger is a taxable event, a
holder's aggregate basis in the Bancorp Shares received in the Merger will be
equal to the fair market value of such shares at the Effective Time of the
Merger, and the holding period for those shares will not include the period
during which the holder held the Cupertino Shares exchanged therefor.
Irrespective of whether or not the Merger qualifies as a Reorganization,
holders of Cupertino Shares or Mid-Peninsula Shares who are entitled to cash
payment for their shares pursuant to Chapter 13 of the California General
Corporation Law should recognize capital gain or loss for federal income tax
purposes (if such shares are held as capital assets at the Effective Time of the
Merger) in an amount equal to the difference between the adjusted tax basis for
their shares and the amount of cash received in exchange therefor, provided that
holders of Cupertino Shares or Mid-Peninsula Shares do not actually or
constructively own any Bancorp Shares immediately after the exchange under the
provisions and limitations of Section 302. If such shareholders do so own any
Bancorp Shares, then the receipt of cash for their shares pursuant to Chapter 13
of the California General Corporation Law will be treated like the receipt of a
dividend.
Shareholders of Cupertino will be required to provide their social security
numbers or their taxpayer identification numbers or, in some circumstances,
certain other information to the Exchange Agent (as defined below) in order to
avoid the "backup withholding" requirements that might otherwise apply under the
Code.
The foregoing discussion of the expected federal income tax consequences of
the Merger is based on current authorities. There is no assurance that
legislative or administrative changes or court decisions may not be forthcoming
that would significantly change these expected consequences. Any such changes
may or may not be retroactive with respect to transactions prior to the date of
those changes.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR
INFORMATION ONLY. CUPERTINO AND MID-PENINSULA SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS FOR MORE ADVICE AS TO THE FEDERAL INCOME TAX CONSEQUENCES
TO THEM ARISING FROM THE EXCHANGE OF THEIR CUPERTINO SHARES PURSUANT TO THE
MERGER, AS WELL AS ADVICE AS TO THE APPLICATION AND EFFECT OF STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS.
44
<PAGE>
EXCHANGE PROCEDURES
As soon as practicable after the Effective Time of the Merger, U.S. Stock
Transfer Corporation, which has been appointed by Mid-Peninsula with the consent
of Cupertino to effect the exchange (the "Exchange Agent"), will mail to each
holder of record of outstanding Cupertino Shares a letter of transmittal which
is to be used by each Cupertino shareholder to return to the Exchange Agent the
stock certificates representing the Cupertino Shares owned by him (the "Old
Certificates"), which certificates should be duly endorsed in blank by such
Cupertino shareholder. As soon as practicable after receiving such Old
Certificates from a Cupertino shareholder together with the duly executed letter
of transmittal and any other items specified by the letter of transmittal, the
Exchange Agent will deliver to such Cupertino shareholder new certificates ("New
Certificates") representing the appropriate number of Bancorp Shares, together
with checks for payment of cash in lieu of fractional shares. No dividends or
other distributions that are declared on Bancorp Shares will be paid to persons
otherwise entitled to receive the same until the Old Certificates have been
surrendered in exchange for New Certificates, but upon such surrender, such
dividends or other distributions, from and after the Effective Time of the
Merger, will be paid to such persons in accordance with the terms of Bancorp
Shares. No interest will be paid to the Cupertino shareholders on the cash or
the value of the Bancorp Shares into which their shares of Cupertino Shares will
be converted.
If the Bancorp Shares and/or the cash, or any part thereof, are to be
delivered to a person other than the record holder of the Old Certificates of
Cupertino Shares surrendered in exchange therefor, (i) the certificate so
surrendered must be properly endorsed or accompanied by appropriate stock powers
and otherwise be in proper form of transfer, (ii) the transfer must otherwise be
proper, and (iii) the person requesting the transfer must pay to the Exchange
Agent any transfer or other taxes payable by reason of the transfer or must
establish to the satisfaction of the Exchange Agent that such taxes have been
paid or are not required to be paid.
POST-MERGER OPERATIONS
At the Effective Time of the Merger, the Board of Directors of Bancorp will
consist of ten directors of which five directors will be from the Cupertino
Board and five directors will be from the Mid-Peninsula Board. On or prior to
the Effective Time of the Merger, Mid-Peninsula will deliver to Cupertino the
written resignations of ten directors of Mid-Peninsula and Cupertino will
deliver to Mid-Peninsula the written resignations of nine directors of
Cupertino. The parties have agreed that such ten persons remaining as directors
of Bancorp following the Merger will be nominated by management for election as
directors of Bancorp at each annual or special meeting of shareholders of
Bancorp at which directors are elected for a period of not less than two years
from the Effective Time of the Merger. If any such person fails or declines to
serve as a director, the vacancy created thereby shall be filled during such two
(2) year period by a nominee selected by a majority of the group consisting of
former Mid-Peninsula or Cupertino directors, respectively, of which such person
was a member prior to the Merger.
At the Effective Time of the Merger, the following persons will become the
executive officers of Bancorp and shall be appointed to the positions indicated:
(i) David L. Kalkbrenner, President and Chief Executive Officer, (ii) Steven C.
Smith, Executive Vice President, Chief Operating Officer and Chief Financial
Officer, and (iii) David R. Hood, Executive Vice President and Chief Credit
Officer.
The parties will establish an Executive Management Committee of Bancorp
comprising management personnel to facilitate and coordinate operations of
Bancorp and such other matters as the parties may agree upon. At the Effective
Time of the Merger, the eleven persons named below will be appointed to the
Executive Management Committee with the titles and positions held with Bancorp,
MPB and CNB as indicated:
From Mid-Peninsula: David L. Kalkbrenner, President and Chief Executive
Officer of Bancorp and MPB and Chairman of the Executive Management Committee;
Murray B. Dey, Executive Vice
45
<PAGE>
President of MPB; Carol R. Rowland, First Vice President and Chief Financial
Officer of MPB; Susan K. Black, Executive Vice President, Relationship
Management Administration, of MPB; and Kimberly S. Burgess, Senior Vice
President, Bank Support Services, of MPB.
From Cupertino: C. Donald Allen, Chairman of the Board and Chief Executive
Officer of CNB; Steven C. Smith, Executive Vice President and Chief Operating
Officer of Bancorp and CNB, Chief Financial Officer of Bancorp and Vice Chairman
of the Executive Management Committee; David R. Hood, Executive Vice President
of Bancorp and CNB, Chief Credit Officer of Bancorp and Senior Lending Officer
of CNB; Hall Palmer, Executive Vice President, Trust Group of CNB; Kenneth D.
Brenner, Executive Vice President, Strategic Marketing and Business Development,
of CNB; and Heidi R. Wulfe, Senior Vice President of Bancorp and CNB and Chief
Financial Officer of CNB.
The parties intend that the Boards of Directors and management of Bancorp's
subsidiary banks, MPB and CNB, will remain substantially the same following the
Effective Time of the Merger, except that David L. Kalkbrenner will be appointed
to the Board of Directors of CNB and John M. Gatto will be appointed to the
Board of Directors of MPB.
SALES OF BANCORP SHARES
The Bancorp Shares to be issued to shareholders of Cupertino in the Merger
have been registered under the Securities Act. Such shares will be freely
transferable under the Securities Act, except for shares issued to any person
who may be deemed to be an "affiliate" of Cupertino within the meaning of Rule
145 under the Securities Act.
NASDAQ LISTING
Mid-Peninsula Shares were accepted for listing on Nasdaq commencing
September 9, 1996, and the listing will include the Bancorp Shares to be issued
in the Merger. A condition to the consummation of the Merger is that such
Bancorp Shares to be issued in the Merger be authorized for listing, upon notice
of issuance, on Nasdaq.
ACCOUNTING TREATMENT
The Merger is expected to be treated as a "pooling of interests" for
accounting and financial reporting purposes. As a condition precedent to the
Merger, KPMG will issue a letter stating that the Merger qualifies for pooling
of interests accounting and financial reporting treatment.
THE REORGANIZATION AGREEMENT
CERTAIN PROVISIONS OF THE REORGANIZATION AGREEMENT ARE SUMMARIZED BELOW.
THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE COMPLETE TEXT OF THE REORGANIZATION AGREEMENT, WHICH IS
REPRINTED AS APPENDIX A TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS
INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS OF MID-PENINSULA AND CUPERTINO
ARE URGED TO READ THE REORGANIZATION AGREEMENT AND THE EXHIBITS THERETO IN THEIR
ENTIRETY.
CONDITIONS TO THE MERGER
The obligations of each of the parties to consummate the Merger are subject
to certain substantially identical conditions, including, among others, that:
(i) the representations and warranties of the parties made in the
Reorganization Agreement remain true and correct as of the Closing Date and
the Effective Time of the Merger;
(ii) there will not have occurred, since March 31, 1996, any materially
adverse change in the business, financial condition, results of operations,
or assets of Cupertino and CNB, taken as a whole, or of Mid-Peninsula and
MPB, taken as a whole, and neither Cupertino nor CNB, nor Mid-Peninsula nor
MPB, shall be a party to or threatened with, and to the best of Cupertino's
or Mid-Peninsula's knowledge, as the case may be, there is no reasonable
basis for, any legal action or other proceeding before any court, any
arbitrator of any kind or any government agency, which
46
<PAGE>
legal action or proceeding, in the reasonable judgment of Cupertino or
Mid-Peninsula, as the case may be, could materially adversely affect
Cupertino and CNB, taken as a whole, or Mid-Peninsula and MPB, taken as a
whole, or their business, financial condition, results of operations or
assets;
(iii) the principal terms of the Reorganization Agreement shall have been
approved by a majority of the outstanding shares of Mid-Peninsula and
Cupertino;
(iv) Cupertino and Mid-Peninsula shall have received from each other's
counsel certain legal opinions rendered by them in connection with the
Merger;
(v) no legal, administrative, arbitration, investigatory or other
proceeding by any government agency or regulatory authority shall have been
instituted or threatened to restrain or prohibit the Merger or the
transactions contemplated by the Reorganization Agreement;
(vi) all government approvals required in connection with the Merger must
be in effect, and all prescribed conditions or requirements must have been
satisfied, except that no such approval will be deemed to have been received
if it requires the divestiture or cessation of any of the present businesses
or operations conducted by either of the parties or imposes any other
condition or requirement which either Mid-Peninsula or Cupertino in its
reasonable judgment shall deem to be materially burdensome (for purposes of
the Reorganization Agreement no condition or requirement is to be considered
"materially burdensome" if (1) it does not materially differ from conditions
or requirements regularly imposed in orders approving transactions of the
type contemplated by the Reorganization Agreement and (2) compliance with
such condition or requirement would not (a) require the taking of any action
materially inconsistent with the manner in which Mid-Peninsula or Cupertino
has conducted its business previously, (b) have a material adverse effect
upon the business, financial condition or results of operations of
Mid-Peninsula or Cupertino, or (c) preclude satisfaction of any of the
conditions to the Reorganization Agreement);
(vii) Mid-Peninsula and Cupertino will have received an opinion from
counsel for Mid-Peninsula that the Merger will not result in the recognition
of gain or loss for federal income tax purposes, nor will the issuance of
Bancorp Shares result in the recognition of gain or loss to holders of
Cupertino Shares who receive Bancorp Shares in the Merger;
(viii) Mid-Peninsula and Cupertino will have received certain "comfort
letters" from each other's independent accountants;
(ix) holders of not more than nine percent (9%) of the outstanding shares
of Mid-Peninsula and Cupertino shall have perfected dissenter's rights
pursuant to Chapter 13 of the California General Corporation Law;
(x) Cupertino and Mid-Peninsula shall have received from persons deemed
to be affiliates of either Mid-Peninsula or Cupertino signed affiliate
agreements restricting, among other things, transactions by them in shares
of Mid-Peninsula, Cupertino or Bancorp which might render pooling of
interests accounting unavailable in the Merger;
(xi) the Cupertino Board shall have received the Sutro Opinion and it
shall not have been withdrawn, and the Mid-Peninsula Board shall have
received the Alex. Brown Opinion and it shall not have been withdrawn;
(xii) Mid-Peninsula shall have received a letter from KPMG, subject to
customary qualifications and receipt of such certifications as may be
reasonable and customary in connection with such letters, satisfactory in
form and substance to Mid-Peninsula and its counsel, to the effect that the
Merger shall qualify for the pooling of interests method of accounting in
accordance with generally accepted accounting principles and all applicable
rules, regulations and policies of the Commission, and no court, tribunal,
regulatory authority or other government agency shall have determined that
the Merger fails or will fail to qualify for pooling of interests accounting
treatment;
47
<PAGE>
(xiii) Mid-Peninsula and Cupertino shall have received certain agreements
from members of the Boards of Directors and the executive officers of
Mid-Peninsula and Cupertino (including the executive officers of CNB)
pursuant to which each such person in their capacity as a shareholder
commits to vote their Mid-Peninsula Shares or Cupertino Shares in favor of
the Merger and to recommend to shareholders, subject to the exercise of
fiduciary duties, that they vote in favor of the Merger;
(xiv) Cupertino and CNB, and Mid-Peninsula and MPB, each on a consolidated
basis, shall have met or exceeded certain performance tests with respect to
their capital ratios, loan loss reserves and total shareholders' equity;
(xv) Mid-Peninsula Shares shall have been listed for trading on Nasdaq
and Mid-Peninsula shall have taken all necessary action to similarly list
shares of Bancorp under a symbol mutually agreed upon by the parties; and
(xvi) Mid-Peninsula shall have executed and delivered to Cupertino a
supplemental debenture agreement whereby Bancorp shall assume the
obligations of Cupertino to the holders of its 11.5% Subordinated Debentures
Due 2005, and counsel for Cupertino shall have delivered to Cupertino an
opinion with respect to such supplemental debenture agreement in form and
substance satisfactory to Cupertino.
If these and other conditions are not satisfied or waived, the
Reorganization Agreement may be terminated. The Reorganization Agreement may
also be terminated upon the occurrence of certain other events. See
"TERMINATION."
NONSOLICITATION
Under the terms of the Reorganization Agreement, each party has agreed,
subject to the fiduciary duties of its Board of Directors, not to:
(i) effect or agree to effect or enter into a Business Combination (as
defined below), acquire or agree to acquire any of its own capital stock or
the capital stock or asset (except in a fiduciary capacity or in the
ordinary course of business) of any other entity, or commence any
proceedings for winding up and dissolution affecting either of them;
(ii) solicit or encourage, directly or indirectly, any inquiries,
discussions or proposals for, continue, propose or enter into discussions or
negotiations looking toward, or enter into any agreement or understanding
providing for, any Business Combination;
(iii) disclose, directly or indirectly, any nonpublic information to any
corporation, partnership, person or other entity or group concerning such
party's business and properties or afford any such other party access to its
properties, books or records or otherwise assist or encourage any such other
party in connection with the foregoing; or
(iv) furnish or cause to be furnished any information concerning its
business, financial condition, operations, properties or prospects to
another person, having any actual or prospective role with respect to any
such Business Combination.
The term "Business Combination" means a transaction or series of transactions
with one or more third persons, groups or entities providing for the acquisition
of all or a substantial part of either party or their respective subsidiaries,
whether by way of merger, exchange of stock, sale of assets, or otherwise.
Notwithstanding the foregoing, if the Board of Directors of either party
receives a bona fide unsolicited offer for a Business Combination and reasonably
determines, upon advice of counsel, that as a result of such offer, any duty to
act or to refrain from doing any act pursuant to the Reorganization Agreement is
inconsistent with its continuing fiduciary duties to its shareholders, then such
duty to act or to refrain from doing any act shall be excused and such failure
to act or refrain from doing any act shall not constitute the failure of any
condition, breach of any covenant or otherwise constitute
48
<PAGE>
any breach of the Reorganization Agreement, or create any claim or cause of
action asserting any liability against any member of the Board of Directors of
that party, provided, however, that the provisions of the Reorganization
Agreement affecting the right of either party to terminate in the event of such
a Business Combination or to exercise the option given by the other party (see
"-- Termination and its Effects, including Payment in the Event of a Business
Combination" and "OPTION AGREEMENTS") shall continue in effect.
TREATMENT OF STOCK OPTIONS
Persons holding options to purchase Cupertino Shares have the right under
the Reorganization Agreement to either exercise any vested portion of the option
prior to the Effective Time of the Merger, or to surrender the option to
Mid-Peninsula and receive a Substitute Option exercisable for (a) the number of
shares of Bancorp equal to the number of Cupertino Shares for which such person
held options multiplied by the Conversion Ratio and rounded up to the nearest
whole share, and (b) at an exercise price adjusted by dividing the pre-Merger
exercise price for such options by the Conversion Ratio, rounded to the nearest
penny.
Substitute Options shall be, to the greatest extent practicable, vested to
the same extent as before the Merger, shall continue to vest on the same vesting
schedule as provided under the original applicable option agreement, shall be
exercisable as provided in the original applicable option agreement and shall
otherwise preserve the characteristics, terms and conditions of the original
option to the greatest extent possible, subject to the requirements of law.
Substitute Options will be granted and issued pursuant to the Bancorp Option
Plan to be voted on by shareholders of Mid-Peninsula at the Mid-Peninsula
Meeting.
Each option to purchase Mid-Peninsula Shares issued and outstanding
immediately prior to the Effective Time of the Merger will not be affected by
the Merger.
TERMINATION AND ITS EFFECTS, INCLUDING PAYMENT IN THE EVENT OF A BUSINESS
COMBINATION
The Reorganization Agreement may be terminated at any time:
(i) prior to the Effective Time of the Merger, by mutual consent of the
Boards of Directors of Mid-Peninsula and Cupertino;
(ii) by the Board of Directors of Mid-Peninsula or Cupertino if the
shareholders of either corporation fail to approve the Merger and related
transactions and/or proposals;
(iii) by the Board of Directors of either Mid-Peninsula or Cupertino if
any governmental or regulatory authority denies or refuses to grant any
approval, consent or authorization required to be obtained to consummate
transactions contemplated by the Reorganization Agreement, unless within 30
days after such denial or refusal, Mid-Peninsula and Cupertino agree to
resubmit the application to the regulatory authority that has denied or
refused to grant the approval, consent or qualification requested;
(iv) on or after December 31, 1996, by the Board of Directors of
Cupertino or Mid-Peninsula if any of the conditions to the obligations under
the Reorganization Agreement of Cupertino or Mid-Peninsula, respectively,
have not been fulfilled;
(v) by the Board of Directors of Cupertino if a materially adverse
change shall have occurred since March 31, 1996, in the business, financial
condition, results of operations or assets of Mid-Peninsula or MPB, or by
the Board of Directors of Mid-Peninsula if a materially adverse change shall
have occurred since March 31, 1996, in the business, financial condition,
results of operations or assets of Cupertino or CNB;
(vi) by the Board of Directors of Mid-Peninsula or Cupertino in the event
that Cupertino, CNB or their affiliates enter into a Business Combination,
or by the Board of Directors of Cupertino and Mid-Peninsula in the event
Mid-Peninsula, MPB or their affiliates enter into a Business Combination,
provided that termination for such reason shall not terminate the Option
Agreements delivered by the parties in accordance with the Reorganization
Agreement; or
49
<PAGE>
(vii) by the Board of Directors of either party upon the expiration of
twenty (20) days after it has delivered to the other party notice of its
breach of or failure to satisfy any covenant or agreement contained in the
Reorganization Agreement resulting in a material impairment of the benefit
reasonably expected to be derived by the party giving notice from the
performance or satisfaction of such covenant or agreement (provided that
such breach has not been waived or cured prior to expiration of such twenty
(20) day period).
The Reorganization Agreement will be terminated if the Closing shall not
have occurred by December 31, 1996, provided, however, that if the only
conditions to the Closing which remain unsatisfied at December 31, 1996 are the
receipt of required government approvals or the expiration of any waiting
periods under applicable law or regulation, the Closing will be automatically
extended to February 28, 1997, or such other date as the parties may mutually
agree upon, for the purpose of obtaining such approvals or the expiration of
such waiting periods.
Termination of the Reorganization Agreement will not terminate or affect the
obligations of the parties with respect to the payment of expenses in connection
with the proposed Merger (see "Expenses" below) or to maintain the
confidentiality of the other party's information obtained pursuant to the
Reorganization Agreement. In addition, if either party terminates the
Reorganization Agreement because it or the other party has engaged in a Business
Combination, the party which has entered into the Business Combination must pay
the other party on demand $750,000.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME OF THE MERGER
The Reorganization Agreement provides that, during the period from the date
of the Reorganization Agreement to the Effective Time of the Merger, each party
will conduct its respective business in the ordinary course as conducted prior
to execution of the Reorganization Agreement in compliance with customary safe
and sound banking practices and applicable laws and regulations (the "Ordinary
Course of Business"). Without the prior written consent of the other party,
which will be deemed to have been given if no response is provided within three
days after either party receives any written request for such a consent, the
parties have agreed that neither party will:
(i) sell, lease, pledge, assign, encumber or otherwise dispose of any of
its assets except in the Ordinary Course of Business, for adequate value,
without recourse and consistent with its customary practice;
(ii) take any action to create, relocate or terminate the operations of
any banking office or branch, or to form any new subsidiary or affiliated
entity;
(iii) settle or otherwise take any action to release or reduce any of its
rights with respect to any litigation involving a claim of more than
$25,000; or
(iv) cause its officers to commit to any loan which does not comply in
all material respects with its credit policies in effect and as disclosed
and provided to the other party prior to the date of the Reorganization
Agreement. Each party must promptly notify the other in writing of the
classification of any loan as substandard, doubtful or loss, or the filing
or commencement of any legal action or other proceeding or investigation
against it.
Except where consistent with disclosed past practices, the parties further
have agreed that neither party may (unless the other party has given its prior
written consent):
(i) increase the compensation of its directors, officers, employees or
agents (including but not limited to compensation through any profit
sharing, pension, retirement, severance, incentive or other employee benefit
program or arrangement);
(ii) pay or commit to pay any bonus;
(iii) grant any stock option, warrant or other right to acquire capital
stock (except Substitute Options as provided in the Reorganization
Agreement); or
50
<PAGE>
(iv) enter into any employment agreement (other than any such employment
agreement that may arise by operation of law upon the hiring of any new
employee) or consulting agreement with any director, officer, employee or
agent, or hire any new employee at an annual rate in excess of that party's
current customary practice.
Except with the prior written consent of the other party, the parties have
further agreed that neither party may:
(i) amend the bylaws or articles of incorporation or association of
itself or a subsidiary;
(ii) make any change in its authorized, issued or outstanding capital
stock or any other equity security, or issue, grant, sell, pledge, assign or
otherwise encumber or dispose of, or purchase, redeem, retire or otherwise
acquire (other than in a fiduciary capacity), shares of or securities
convertible into capital stock or other equity securities of itself or any
subsidiary, or enter into any agreement, call or commitment of any character
to do so;
(iii) grant or issue any stock option relating to or right to acquire
shares of its capital stock or other equity security, or agree to do any of
the foregoing, except as expressly provided in the Reorganization Agreement
or upon exercise of options granted under the 1994 Option Plan or stock
option plans of Cupertino and outstanding at the time the Reorganization
Agreement was executed; or
(iv) declare, set aside or pay any dividend or other distribution in
respect of its common stock (including, without limitation, any stock
dividend or distribution) other than regular quarterly or semi-annual cash
dividends on its common stock in amounts substantially equivalent to cash
dividends paid in the two years prior to the date of the Reorganization
Agreement (it being understood that declaration of a quarterly or
semi-annual cash dividend equal to the most recent previous quarterly or
semi-annual cash dividend will be deemed to meet this standard).
The Reorganization Agreement also provides that each party will:
(i) make no capital expenditures in excess of $50,000 in the aggregate,
except within existing operating and capital budgets previously approved in
writing by the other party;
(ii) give prompt written notice of the occurrence or threat of any event
which could cause or constitute a breach of its representations, warranties
or covenants contained in the Reorganization Agreement, and use its best
efforts to prevent or remedy such breach or threat of breach;
(iii) deliver to the other party copies of certain financial statements
and other documents and reports filed with the Commission and bank
regulatory agencies;
(iv) issue no press release or written statement for general circulation
relating to the Merger unless previously reviewed and approved by the other
party (which approval will not be unreasonably withheld or delayed), and
cooperate with the other party in the development and distribution of all
news releases and other public information disclosures with respect to the
Merger, provided that either party may, without the consent of the other
party, make any disclosure with regard to the Merger that it determines with
advice of counsel is required under any applicable law or regulation;
(v) give the other party and its agents full access, during normal
business hours and upon reasonable request, to all of its properties, books,
contracts, commitments and records, allow the other party to make copies of
such materials, and furnish the other party with all such information
concerning its affairs as the other party may reasonably request;
(vi) use its best efforts to cause its independent accountants to make
available to the other party, its accountants, counsel and other agents, to
the extent reasonably requested in connection with such review, such
independent accountants' work papers and documentation relating to its work
papers and its audits of the books and records of each party;
51
<PAGE>
(vii) provide the other party copies of certain reports and reviews with
respect to loans which are classified, past due, on nonaccrual or
restructured, and copies of quarterly call reports submitted to regulators;
and
(viii) use its best efforts to cause its officers, directors, employees,
auditors, and attorneys to cooperate with the other in its reasonable
requests for information.
EXPENSES
The parties have agreed to comply with generally accepted accounting
principles, without right of reimbursement from the other party and whether or
not the transactions contemplated by the Reorganization Agreement are
consummated, relating to the payment of costs and expenses incurred in
connection with the Merger, including without limitation, costs incident to the
preparation of the Reorganization Agreement and the Merger Agreement, the
Registration Statement and Joint Proxy Statement/Prospectus (including the
audited financial statements of the parties contained therein), and incident to
the consummation of the Merger and of the other transactions contemplated by it,
including the fees and disbursements of counsel, accountants, consultants and
financial advisers employed by each party.
Notwithstanding the foregoing, each party has agreed to pay one-half of (i)
the printing costs of the Registration Statement and the Joint Proxy
Statement/Prospectus, (ii) all fees and costs payable pursuant to state
"blue-sky" securities laws, (iii) fees and costs related to obtaining a tax
opinion, (iv) fees and costs related to obtaining a letter from KPMG regarding
pooling of interests accounting treatment, (v) the fee required to be paid to
the Commission to register the Bancorp Shares, (vi) the fees and costs related
to the preparation of the Bancorp Option Plan including the cost of obtaining
any permits or approvals of government agencies and regulatory authorities and
applicable filing fees, (vii) the fees related to preparation and filing of
applications with government agencies or regulatory authorities, and (viii) the
fees and costs related to the listing of the Mid-Peninsula Shares and Bancorp
Shares with Nasdaq for trading on the Nasdaq National Market System.
Mid-Peninsula and Cupertino each will bear the costs of distributing the Joint
Proxy Statement/Prospectus and other information relating to the proposed Merger
to its shareholders and of conducting the Mid-Peninsula and Cupertino Meetings,
respectively.
AMENDMENT
Subject to applicable law, the Reorganization Agreement may be amended at
any time prior to the Effective Time of the Merger without the approval of the
shareholders of Mid-Peninsula or Cupertino with respect to any of its terms
except the terms relating to the Conversion Ratio or the form or amount of
consideration to be delivered to the Cupertino shareholders in the Merger.
THE OPTION AGREEMENTS
As a condition to entering into the Reorganization Agreement, Mid-Peninsula
and Cupertino entered into reciprocal stock option agreements (the
"Mid-Peninsula Option Agreement" and the "Cupertino Option Agreement",
respectively, and together the "Option Agreements").
Pursuant to the Mid-Peninsula Option Agreement, Mid-Peninsula granted to
Cupertino an option (the "Mid-Peninsula Option") to purchase up to 307,504
authorized but unissued shares of Mid-Peninsula common stock for $20.45 per
share. Similarly, pursuant to the Cupertino Option Agreement, Cupertino granted
to Mid-Peninsula an option (the "Cupertino Option") to purchase up to 361,065
authorized but unissued shares of Cupertino common stock for $14.80 per share.
The Mid-Peninsula Option will become exercisable in whole or in part at any
time and from time to time following the occurrence of a Purchase Event (defined
below) and until the first to occur of the following events (each, a
"Termination Event"), upon which the Mid-Peninsula Option will terminate: (a)
the Effective Time of the Merger; (b) 12 months after the first occurrence of a
Purchase Event; (c) 18 months after the termination of the Reorganization
Agreement on or following the occurrence of a Preliminary Purchase Event (as
defined below); (d) termination of the Reorganization
52
<PAGE>
Agreement in accordance with the terms thereof prior to the occurrence of a
Purchase Event or a Preliminary Purchase Event; or (e) the date on which the
Cupertino Option shall have become exercisable, in whole or in part, in
accordance with its terms. Notwithstanding anything to the contrary, (i) the
Mid-Peninsula Option may not be exercised at any time when Cupertino is in
breach of any of its covenants or agreements contained in the Reorganization
Agreement such that Mid-Peninsula shall be entitled (without regard to any grace
period provided therein) to terminate the Reorganization Agreement pursuant to
Section 12b(xi) thereof, (ii) the Mid-Peninsula Option Agreement shall terminate
automatically upon the termination of the Reorganization Agreement by Mid-
Peninsula pursuant to Section 12b(xi) thereof; and (iii) any purchase of shares
on exercise of the Mid-Peninsula Option shall be subject to compliance with
applicable law.
For purposes of the Mid-Peninsula Option Agreement, the term "Preliminary
Purchase Event" means: (a) any person (other than Cupertino or its subsidiary)
shall have acquired beneficial ownership of, or the right to acquire beneficial
ownership of, or any "group" (as defined under the Exchange Act and the rules
and regulations thereunder) shall have been formed which beneficially owns or
has the right to acquire beneficial ownership of, 10% or more of the then
outstanding shares of Mid-Peninsula's common stock; (b) any person (other than
Cupertino or its subsidiary) shall have commenced, or shall have filed a
registration statement under the Securities Act with respect to, a tender offer
or exchange offer to purchase any shares of Mid-Peninsula's common stock such
that, upon consummation of such offer, such person would own or control 10% or
more of the then outstanding shares of Mid-Peninsula's common stock (such an
offer being referred to herein as a "Tender Offer" or an "Exchange Offer",
respectively); (c) Mid-Peninsula, without having received Cupertino's prior
written consent, shall have entered into an agreement with any person (other
than Cupertino or its subsidiary) with respect to, or the Mid-Peninsula Board
shall have recommended that Mid-Peninsula's shareholders approve or accept, a
purchase or other acquisition (including by way of merger, consolidation, share
exchange or any similar transaction), other than by Mid-Peninsula or its
subsidiary, representing 10% or more of the voting power of Mid-Peninsula or any
of its subsidiaries; (d) any person (other than Cupertino or its subsidiary)
shall have filed an application or notice with the FRB or other federal or state
regulatory authority, which application or notice has been accepted for
processing, for approval to engage in an Acquisition Transaction (defined
below); or (e) the holders of a majority of the outstanding Mid-Peninsula Shares
shall not have approved the Reorganization Agreement at the Mid-Peninsula
Meeting, such meeting shall not have been held or shall have been canceled prior
to termination of the Reorganization Agreement, or the Mid-Peninsula Board shall
have withdrawn or modified in a manner adverse to Cupertino its recommendation
with respect to the Reorganization Agreement, in each case after it shall have
been publicly announced that any person (other than Cupertino or its subsidiary)
shall have (i) made or disclosed an intention to make a proposal to engage in an
Acquisition Transaction or (ii) commenced a Tender Offer or filed a registration
statement under the Securities Act with respect to an Exchange Offer.
The term "Purchase Event" means: (a) the Mid-Peninsula Board shall have
approved, or recommended to Mid-Peninsula's shareholders that they approve, a
proposal received by Mid-Peninsula from a person (other than Cupertino or its
subsidiary) to effect an Acquisition Transaction, Tender Offer or Exchange
Offer; (b) Mid-Peninsula, without having received Cupertino's prior written
consent, shall have entered into an agreement with any person (other than
Cupertino or its subsidiary) to effect an Acquisition Transaction; (c) any
person (other than Cupertino or its subsidiary) shall have acquired beneficial
ownership (as such term is defined in Rule 13d-3 promulgated under the Exchange
Act) of or the right to acquire beneficial ownership of, or any "group" (as such
term is defined under the Exchange Act and the rules and regulations promulgated
thereunder) shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of 15% or more of the then outstanding
Mid-Peninsula Shares.
The term "Acquisition Transaction" means: (a) a merger, consolidation or
similar transaction involving Mid-Peninsula or any of its subsidiaries (other
than internal mergers, reorganizations, consolidations or dissolutions involving
only Mid-Peninsula and/or existing subsidiaries and other
53
<PAGE>
than a merger, consolidation or similar transaction in which the common
shareholders of Mid-Peninsula immediately prior thereto in the aggregate own at
least 75% of the common stock of the surviving or successor corporation
immediately after the consummation thereof); (b) the disposition, by sale,
lease, exchange or otherwise, of 15% or more of the consolidated assets or
deposit liabilities of Mid-Peninsula and its subsidiaries; or (c) a purchase or
other acquisition (including by way of merger, consolidation, share exchange or
any similar transaction), other than by Mid-Peninsula or its subsidiaries, of
securities representing 15% or more of the voting power of Mid-Peninsula or any
of its subsidiaries.
If prior notification to or approval of the FRB or any other regulatory
authority is required as a condition precedent to the purchase of Mid-Peninsula
Shares upon exercise of the Mid-Peninsula Option, then (a) the holder of the
Mid-Peninsula Option is required to promptly file and process the required
notice or application for approval; (b) Mid-Peninsula must cooperate with such
holder in the filing of the required notice or application for approval and the
obtaining of any such approval; and (c) the Closing Date (as defined in the
Mid-Peninsula Option Agreement) may be extended for such period of time, not to
exceed six months, as may be necessary to permit such holder to submit such
filing to, and, if necessary, to obtain such approval from, the FRB or other
applicable regulatory authority; provided, however, that the notice exercising
the Mid-Peninsula Option and such governmental filing must be made no later than
the date on which the Mid-Peninsula Option would otherwise terminate.
The number of shares subject to the Mid-Peninsula Option (the "Option
Shares") and/or the exercise price of the Mid-Peninsula Option (the "Purchase
Price") are subject to adjustment in the event of a change in Mid-Peninsula's
common stock, whether by reason of a stock dividend, stock split,
recapitalization, share exchange or similar transaction, so that the holder of
the Mid-Peninsula Option shall be entitled to receive, upon exercise of the
Mid-Peninsula Option, the number and class of shares or other securities or
property that the holder would have received as if the Mid-Peninsula Option had
been exercised immediately prior to such event. In addition, if Mid-Peninsula
issues additional shares of its common stock, other than pursuant to a
transaction described in the preceding sentence, then the number of Option
Shares shall be increased so that the Mid-Peninsula Option will at all times
entitle the holder to acquire, upon exercise of the Mid-Peninsula Option, up to
19% of the number of shares of Mid-Peninsula's common stock then issued and
outstanding (without regard to shares of stock issued upon exercise of the
Mid-Peninsula Option).
At any time after the first occurrence of a Repurchase Event (as defined
below), at the written request of the holder of the Mid-Peninsula Option
delivered to Mid-Peninsula prior to the occurrence of a Termination Event,
Mid-Peninsula is required to repurchase from the holder (a) the Option and (b)
all Option Shares theretofore purchased by the holder pursuant to the
Mid-Peninsula Option with respect to which the holder then has beneficial
ownership. Such repurchase shall be at an aggregate price (the "Repurchase
Consideration") equal to the sum of: (i) the aggregate Purchase Price paid by
the holder for any Option Shares acquired pursuant to the Option with respect to
which the holder then has beneficial ownership; (ii) the excess, if any, of (A)
the Applicable Price (as defined below) for each Option Share over (B) the
Purchase Price per Option Share, multiplied by the number of Option Shares with
respect to which the Option has not been exercised; and (iii) the excess, if
any, of the Applicable Price over the Purchase Price paid (or, in the case of
Option Shares with respect to which the Option has been exercised but the
closing date for such exercise has not occurred, payable) by the holder for each
Option Share with respect to which the Option has been exercised and with
respect to which the holder then has beneficial ownership, multiplied by the
number of such shares.
However, to the extent that Mid-Peninsula is prohibited under applicable
law, regulation or administrative policy from repurchasing all or any portion of
the Mid-Peninsula Option or Option Shares, then Mid-Peninsula must (a) promptly
give notice of such fact to the holder; (b) from time to time subject to the
last sentence of this paragraph, deliver to the holder that portion of the
Repurchase Consideration that it is not then so prohibited from paying; and (c)
at the holder's request, promptly file any required notice or application for
approval and expeditiously process the same. The holder
54
<PAGE>
then has the right (i) to revoke its repurchase request with respect to the
portion of the Mid-Peninsula Option or Option Shares that Mid-Peninsula is
prohibited from repurchasing; (ii) to require Mid-Peninsula to deliver to the
holder the Mid-Peninsula Option and/or Option Shares which Mid-Peninsula is
prohibited from repurchasing; and (iii) to exercise the Option as to the number
of Option Shares for which the Mid-Peninsula Option was exercisable at the
Request Date (defined in the Mid-Peninsula Option Agreement) less the number of
such Option Shares in respect of which the Repurchase Consideration has been
lawfully paid. Notwithstanding anything in the Mid-Peninsula Option Agreement to
the contrary, Mid-Peninsula is not obligated to repurchase all or any part of
the Mid-Peninsula Option or Option Shares pursuant to more than one written
request from the holder, except that Mid-Peninsula is obligated to repurchase,
pursuant to more than one written request, any Mid-Peninsula Option or Option
Shares in the event that the holder (A) has revoked its request for repurchase
in accordance with the provisions of this paragraph prior to the occurrence of a
Termination Event and (B) has delivered, prior to such event, a new written
notice requesting a repurchase. If a Termination Event occurs prior to, or is
scheduled to occur within, sixty (60) days after the date of the notice by
Mid-Peninsula described in clause (a) above, then, notwithstanding the
occurrence of such Termination Event, the holder shall have the right to receive
the Repurchase Consideration to the extent Mid-Peninsula is or becomes, within a
sixty (60) day period from the date of such notice by Mid-Peninsula, legally
permitted to repurchase. Except as set forth in the preceding sentence, the
holder's repurchase rights shall terminate concurrently with the termination of
the holder's right to exercise the Mid-Peninsula Option.
For purposes of the Mid-Peninsula Option Agreement, the "Applicable Price"
means the highest of (a) the highest price per share of Mid-Peninsula common
stock paid for any such share by the person or groups described in section
8(e)(i) of the Mid-Peninsula Option Agreement; (b) the price per share of
Mid-Peninsula common stock received by holders of Mid-Peninsula common stock in
connection with any merger or other business combination transaction described
in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) of the Mid-Peninsula Option Agreement;
or (c) the highest bid price per share of Mid-Peninsula common stock as quoted
by the brokerage firms acting as market makers for Mid-Peninsula's common stock
prior to the listing of Mid-Peninsula's common stock on Nasdaq and thereafter on
Nasdaq or any other principal trading market or securities exchange on which
such shares are traded as reported by a recognized source during the 60 business
days preceding the date on which the holder exercises its repurchase rights;
provided, however, that in the event of a sale of less than all of
Mid-Peninsula's assets, the Applicable Price shall be the sum of the price paid
in such sale for such assets or deposit liabilities and the current market value
of the remaining consolidated net assets of Mid-Peninsula as determined by a
nationally recognized investment banking firm selected by the holder (or a
majority of the holders, if there is more than one holder) and reasonably
acceptable to Mid-Peninsula, divided by the number of shares of the
Mid-Peninsula common stock outstanding at the time of such sale. If the
consideration to be offered, paid or received pursuant to either of the
foregoing clauses (a) or (b) shall be other than in cash, the value of such
consideration shall be determined in good faith by an independent nationally
recognized investment banking firm selected by the holder (or a majority of the
holders) and reasonably acceptable to Mid-Peninsula.
A "Repurchase Event" is deemed to occur if (a) any person (other than
Cupertino or its subsidiary) shall have acquired beneficial ownership of (as
such term is defined in Rule 13d-3 promulgated under the Exchange Act) or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under the Exchange Act and the rules and regulations promulgated
thereunder) shall have been formed which beneficially owns, or has the right to
acquire beneficial ownership of, 50% or more of the then outstanding shares of
Mid-Peninsula common stock or (b) any of the transactions described in Section
7(b)(i), 7(b)(ii) or 7(b)(iii) of the Mid-Peninsula Option Agreement shall be
consummated.
The terms of the Cupertino Option Agreement are reciprocal to and
substantially the same as those contained in the Mid-Peninsula Option Agreement.
55
<PAGE>
DISSENTING SHAREHOLDERS' RIGHTS
MID-PENINSULA
Because Mid-Peninsula Shares are traded on Nasdaq, dissenters' rights will
be available to the shareholders of Mid-Peninsula only if the holders of five
percent (5%) or more of Mid-Peninsula Shares make a written demand upon
Mid-Peninsula for the purchase of dissenting shares in accordance with Chapter
13 of the California General Corporation Law. Such a demand is not effective for
any purpose unless it is received by Mid-Peninsula not later than the date of
the Mid-Peninsula Meeting, and must be addressed to Mid-Peninsula Bancorp, 420
Cowper Street, Palo Alto, California 94301, Attention: David L.Kalkbrenner. If
this condition is satisfied and the Merger is consummated, shareholders of
Mid-Peninsula who dissent from the Merger by complying with the procedures set
forth in Chapter 13 of the California General Corporation Law would be entitled
to receive from Bancorp an amount equal to the fair market value of their shares
as of June 4, 1996, the day before the public announcement of the Merger. The
bid and ask prices for Mid-Peninsula Shares on June 4, 1996 were $20.75. A copy
of the pertinent provisions of Chapter 13 of the California General Corporation
Law is attached hereto as Appendix D and should be read for more complete
information concerning dissenters' rights. THE REQUIRED PROCEDURE SET FORTH IN
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW MUST BE FOLLOWED EXACTLY OR
ANY DISSENTERS' RIGHTS MAY BE LOST. The information set forth below is a general
summary of dissenters' rights as they apply to Mid-Peninsula shareholders and is
qualified in its entirety by reference to Appendix D.
In order to be entitled to exercise dissenters' rights, a shareholder of
Mid-Peninsula must vote "Against" the Merger. Thus, any shareholder who fails to
vote or who returns a proxy without voting instructions or with instructions to
vote "For" the Merger, or to "Abstain," will lose his or her dissenters' rights.
If the holders of five percent (5%) or more of the outstanding Mid-Peninsula
Shares have submitted written demands for Mid-Peninsula to purchase their
shares, these demands are received by Mid-Peninsula on or before the date of the
Mid-Peninsula Meeting, and the Merger is approved by the Mid-Peninsula
shareholders, Mid-Peninsula will have ten days after such approval to send to
those shareholders who have voted against the approval of the Merger and who
have submitted timely written demands for Mid-Peninsula to repurchase their
shares written notice of such approval accompanied by a copy of the pertinent
provisions of Chapter 13 of the California General Corporation Law, a statement
of the price determined by Mid-Peninsula to represent the fair market value of
the dissenting shares as of June 4, 1996, and a brief description of the
procedure to be followed if a shareholder desires to exercise dissenters'
rights. Within 30 days after the date on which the notice of the approval of the
Merger is mailed, the dissenting shareholder must surrender to Mid-Peninsula, at
the office designated in the notice of approval, the certificates representing
the dissenting shares to be stamped or endorsed with a statement that they are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. Any Mid-Peninsula Shares that are
transferred prior to their submission for endorsement lose their status as
dissenting shares.
If Mid-Peninsula and the dissenting shareholder agree that the surrendered
shares are dissenting shares and agree upon the price of the shares, the
dissenting shareholder will be entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the agreement. Payment
of the fair value of the dissenting shares shall be made within 30 days after
the amount thereof has been agreed upon or 30 days after any statutory or
contractual conditions to the Merger have been satisfied, whichever is later,
subject to the surrender of the certificates therefor, unless provided otherwise
by agreement.
If Mid-Peninsula denies that the shares surrendered are dissenting shares or
Mid-Peninsula and the dissenting shareholder fail to agree upon a fair market
value of such Mid-Peninsula Shares, then the dissenting shareholder of
Mid-Peninsula must, within six months after the notice of approval is mailed,
file a complaint at the Superior Court of the proper county requesting the court
to make such
56
<PAGE>
determinations or intervene in any pending action brought by any other
dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenter's rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting Mid-Peninsula shareholder may not withdraw his or her dissent
or demand for payment unless Mid-Peninsula or Bancorp consents to such
withdrawal.
CUPERTINO
Because Cupertino Shares are traded on Nasdaq, dissenters' rights will be
available to the shareholders of Cupertino only if the holders of five percent
(5%) or more of Cupertino Shares make a written demand upon Cupertino for the
purchase of dissenting shares in accordance with Chapter 13 of the California
General Corporation Law. Such a demand is not effective for any purpose unless
it is received by Cupertino not later than the date of the Cupertino Meeting,
and must be addressed to Cupertino National Bancorp, 20230 Stevens Creek
Boulevard, Cupertino, California 95014, Attention: Steven C. Smith. If this
condition is satisfied and the Merger is consummated, shareholders of Cupertino
who dissent from the Merger by complying with the procedures set forth in
Chapter 13 of the California General Corporation Law would be entitled to
receive from Bancorp an amount equal to the fair market value of their shares as
of June 4, 1996, the day before the public announcement of the Merger. The
closing price for Cupertino Shares as reported on Nasdaq on June 4, 1996 was
$13.75. A copy of the pertinent provisions of Chapter 13 of the California
General Corporation Law is attached hereto as Appendix D and should be read for
more complete information concerning dissenters' rights. THE REQUIRED PROCEDURE
SET FORTH IN CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW MUST BE
FOLLOWED EXACTLY OR ANY DISSENTERS' RIGHTS MAY BE LOST. The information set
forth below is a general summary of dissenters' rights as they apply to
Cupertino shareholders and is qualified in its entirety by reference to Appendix
D.
In order to be entitled to exercise dissenters' rights, a shareholder of
Cupertino must vote "Against" the Merger. Thus, any shareholder who fails to
vote or who returns a proxy without voting instructions or with instructions to
vote "For" the Merger, or to "Abstain," will lose his or her dissenters' rights.
If the holders of five percent (5%) or more of the outstanding Cupertino
Shares have submitted written demands for Cupertino to purchase their shares,
these demands are received by Cupertino on or before the date of the Cupertino
Meeting, and the Merger is approved by the Cupertino shareholders, Cupertino
will have ten days after such approval to send to those shareholders who have
voted against the approval of the Merger and who have submitted timely written
demands for Cupertino to repurchase their shares written notice of such approval
accompanied by a copy of the pertinent provisions of Chapter 13 of the
California General Corporation Law, a statement of the price determined by
Cupertino to represent the fair market value of the dissenting shares as of June
4, 1996, and a brief description of the procedure to be followed if a
shareholder desires to exercise dissenters' rights. Within 30 days after the
date on which the notice of the approval of the Merger is mailed, the dissenting
shareholder must surrender to Cupertino, at the office designated in the notice
of approval, the certificates representing the dissenting shares to be stamped
or endorsed with a statement that they are dissenting shares or to be exchanged
for certificates of appropriate denomination so stamped or endorsed. Any
Cupertino Shares that are transferred prior to their submission for endorsement
lose their status as dissenting shares.
If Cupertino and the dissenting shareholder agree that the surrendered
shares are dissenting shares and agree upon the price of the shares, the
dissenting shareholder will be entitled to the agreed price with interest
thereon at the legal rate on judgments from the date of the agreement. Payment
of the fair value of the dissenting shares shall be made within 30 days after
the amount thereof has been
57
<PAGE>
agreed upon or 30 days after any statutory or contractual conditions to the
Merger have been satisfied, whichever is later, subject to the surrender of the
certificates therefor, unless provided otherwise by agreement.
If Cupertino denies that the shares surrendered are dissenting shares or
Cupertino and the dissenting shareholder fail to agree upon a fair market value
of such Cupertino Shares, then the dissenting shareholder of Cupertino must,
within six months after the notice of approval is mailed, file a complaint at
the Superior Court of the proper county requesting the court to make such
determinations or intervene in any pending action brought by any other
dissenting shareholder. If the complaint is not filed or intervention in a
pending action is not made within the specified six-month period, the
dissenter's rights are lost. If the fair market value of the dissenting shares
is at issue, the court will determine, or will appoint one or more impartial
appraisers to determine, such fair market value.
A dissenting Cupertino shareholder may not withdraw his or her dissent or
demand for payment unless Cupertino or Bancorp consents to such withdrawal.
MID-PENINSULA
Mid-Peninsula 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
MPB, a California state-chartered bank organized in 1987, in a transaction in
which MPB survived and became the wholly owned subsidiary of San Mateo, and San
Mateo concurrently changed its name to Mid-Peninsula Bancorp.
The headquarters of Mid-Peninsula and MPB is located in Palo Alto,
California, and MPB conducts its banking business through its offices in Palo
Alto, San Mateo and San Carlos, California. Other than holding the shares of
MPB, Mid-Peninsula conducts no significant activities, although it is
authorized, with the prior approval of the FRB, to engage in a variety of
activities which are deemed closely related to the business of banking.
MPB 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 in the south to Daly
City in 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. MPB offers traveler's checks, safe deposit boxes,
notary public, customer courier and other customary bank services. MPB is a
member of the STAR System ATM network and, through this system offers ATM access
at numerous locations.
MPB's commercial lending focus is to provide short-term loans and lines of
credit to professional service firms and local businesses. Commercial clients
include small businesses, light industry manufacturing companies and various
professional service firms. Emphasis is placed on the borrower's earnings,
history, capitalization, secondary sources of repayment (such as accounts
receivable) and, in many instances, tertiary sources of repayment (such as
personal guarantees or personal assets). Through community involvement in
Chambers of Commerce, Rotary Clubs, civic organizations and redevelopment
activities, officers of MPB stay in close contact with the leaders and decision
makers within the communities served by MPB.
In addition, MPB offers interim construction loans, generally for
single-family residences and multi-unit projects. Real estate and construction
loans are typically secured by first deeds of trust and guarantees from
principals of the borrower where applicable. The economic viability of the
project and the borrower's creditworthiness are primary considerations in the
loan underwriting decision. MPB uses independent local appraisers, conservative
loan-to-value ratios (e.g., generally not to exceed 75% of the appraised value
of the property) and close monitoring of the projects during the construction
58
<PAGE>
phase. In the absence of rapid declines in real estate values, ultimate
collectibility of these secured loans is considered by Mid-Peninsula's
management to be better than the average mix of commercial loans. MPB presently
does not make long-term fixed or variable rate real estate loans and, therefore,
material sustained increases or decreases in general interest rate levels have
only a short-term effect on MPB's net yield on real estate loans.
As of June 30, 1996, commercial loans and lines of credit represented
approximately 72% of MPB's total loan portfolio, real estate loans approximately
18% of the total loan portfolio, and real estate construction loans
approximately 10% of the total loan portfolio.
MPB's deposits are obtained primarily from individuals (including corporate
executives and entrepreneurs), small and medium-sized businesses, and
professionals. MPB's deposits are not obtained from a single depositor or group
of affiliated depositors, the loss of any one of which would have a material
adverse effect on the business of MPB, nor is a material portion of MPB's loans
concentrated within a single industry or group of related industries. As of June
30, 1996, MPB had approximately $41.8 million of noninterest-bearing demand
deposits, with an average account balance of approximately $26,533,
approximately $10.2 million in interest-bearing demand deposits with an average
account balance of approximately $18,950, and approximately $176.7 million in
interest-bearing time and savings deposits with an average account balance of
approximately $99,849. MPB's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC") up to the legal limit thereon, which is
currently $100,000 per depositor.
MPB had 62 full-time employees on June 30, 1996, and Mid-Peninsula had no
employees other than unsalaried officers. Regular bank hours are from 9:30 A.M.
to 4:00 P.M., Monday through Friday at MPB's main offices located at 420 Cowper
Street, Palo Alto, California, telephone number (415) 323-5150, and other
offices located at 100 South Ellsworth Avenue, San Mateo, California, telephone
number (415) 375-1555, and 1313 Laurel Street, San Carlos, California, telephone
number (415) 595-4445.
DESCRIPTION OF MID-PENINSULA CAPITAL STOCK
MID-PENINSULA SHARES
The authorized capital stock of Mid-Peninsula consists of 6,000,000
Mid-Peninsula Shares, and 4,000,000 shares of Preferred Stock, no par value. As
of the Mid-Peninsula Record Date, 1,637,593 Mid-Peninsula Shares were
outstanding. No shares of Preferred Stock are outstanding. Below is a
description of the Mid-Peninsula Shares and Preferred Stock. See also
"COMPARISON OF SHAREHOLDER RIGHTS."
COMMON STOCK
Each Mid-Peninsula Share is entitled to participate pro rata in
distributions upon liquidation. The holders of Mid-Peninsula Shares may receive
dividends as declared by the Board of Directors out of funds legally available
therefor. Holders of Mid-Peninsula Shares have no preemptive, subscription,
conversion, redemption or similar rights. All outstanding Mid-Peninsula Shares
are fully paid and non-assessable. The holders of a majority of the outstanding
Mid-Peninsula Shares will have the voting power to approve mergers, sales of
substantially all of Mid-Peninsula's assets and similar material corporate
transactions. Holders of Mid-Peninsula Shares are entitled to one vote for each
Mid-Peninsula Share on all matters submitted to a vote of shareholders, except
that for the election of directors each shareholder has cumulative voting rights
and is entitled to as many votes as shall equal the number of shares held by
such shareholder multiplied by the number of directors to be elected, and such
shareholder may cast all his or her votes for a single candidate or distribute
such votes among any or all of the candidates as he or she chooses. However, no
shareholder shall be entitled to cumulate votes for a candidate (that is, to
cast for any candidate a number of votes greater than the number of shares of
stock held by such shareholder) unless such candidate's name has been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting prior to the voting of the
59
<PAGE>
shareholder's intention to cumulate votes. The rights, privileges and
preferences of the holders of Mid-Peninsula Shares are subject to the rights of
the holders of any shares of Mid-Peninsula Preferred Stock that may be
designated and issued by Mid-Peninsula in the future.
MID-PENINSULA PREFERRED STOCK
The Mid-Peninsula Board has the authority, without further shareholder
action, to issue from time to time a maximum of 4,000,000 shares of Preferred
Stock in one or more series and with such terms and at such times and for such
consideration as the Mid-Peninsula Board may determine. The authority of the
Mid-Peninsula Board includes the determination or fixing of the following with
respect to shares of such class or any series thereof: (i) the number of shares
and designation or title thereof; (ii) rights as to dividends; (iii) whether and
upon what terms, including sinking funds, the shares are to be redeemable; (iv)
whether and upon what terms the shares are to be convertible; (v) the voting
rights, if any, which shall apply, provided, however, that in no event shall any
holder of any series of the Preferred Stock be entitled to more than one vote
for each share of Preferred Stock held by such holder; and (vi) the rights of
the holders upon the dissolution, or upon the distribution of assets, of
Mid-Peninsula. Any shares of Preferred Stock which may be issued may rank prior
to Mid-Peninsula Shares as to payment of dividends and upon liquidation. No
Preferred Stock of Mid-Peninsula is currently outstanding.
INDEMNIFICATION PROVISIONS
Article V of MPB's Articles of Incorporation provides that the liability of
the directors of MPB for monetary damages shall be eliminated to the fullest
extent permissible under California law and that MPB is authorized to provide
for the indemnification of agents (as defined in Section 317 of the California
General Corporation Law) of MPB, to the extent not prohibited by applicable
sections of California law, in excess of that expressly permitted by Section 317
for breach of duty to the corporation and its shareholders. Indemnification
Agreements between MPB and its directors and executive officers permit excess
indemnification generally and, without limiting such generality, certain types
of such excess indemnification in specified circumstances.
It is proposed at the Mid-Peninsula Meeting to amend the articles of
incorporation of Bancorp to contain a provision substantially identical to
Article V of MPB's Articles of Incorporation described above. See "PROPOSAL
NUMBER 6 -- DIRECTOR LIABILITY, INDEMNIFICATION OF AGENTS AND INDEMNIFICATION
AGREEMENTS."
There is no action or proceeding pending or, to the knowledge of
Mid-Peninsula, threatened which may result in a claim for indemnification by any
director, officer, employee or agent of Mid-Peninsula or MPB.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Mid-Peninsula
or MPB pursuant to the provisions described above or otherwise, Mid-Peninsula
has been advised that in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Mid-Peninsula or MPB of expenses incurred
or paid by a director, officer or controlling person of Mid-Peninsula or MPB in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the shares offered
hereby, Mid-Peninsula or Bancorp will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
CUPERTINO
Cupertino is a California corporation and bank holding company. CNB, a
wholly owned subsidiary of Cupertino, is a national bank conducting a commercial
banking business. Cupertino was organized
60
<PAGE>
in August 1984, and CNB began operations in May 1985. Cupertino and CNB have
their principal offices at 20230 Stevens Creek Boulevard, Cupertino, California
95014. Cupertino's current activities are principally acting as the holding
company for CNB and as the lessee and sublessor to CNB of the premises on which
CNB's headquarters is located.
CNB provides a wide range of commercial banking services to small and
medium-sized businesses, real estate firms, business executives, professionals
and other individuals. Trust services are provided by a separate department of
CNB to support the trust needs of its clients. CNB's strategy emphasizes
acquiring and developing relationships with clients in CNB's service area.
Personal service officers are assigned to each borrowing client to provide
continuity to the relationship.
CNB provides commercial loans for working capital and business expansion to
small and medium-sized businesses with annual revenues in the range of $1
million to $35 million. Commercial loans typically include revolving lines of
credit collateralized by inventory, accounts receivable or leasehold
improvements, loans to purchase equipment, and loans for general working capital
purposes, collateralized by equipment. CNB's commercial customers are drawn from
a wide variety of manufacturing, wholesale and service businesses, and are not
concentrated in any one particular industry. Loans to real estate construction
and development companies are primarily for construction of single-family
residences in CNB's primary service area. Such loans typically range between
approximately $200,000 and $3,700,000. Loans to professional and other
individual clients, whose income typically equals or exceeds the median income
for CNB's service area, cover a full range of consumer services, such as
automobile, aircraft, home improvement and home equity loans, and other secured
and unsecured lines of credit, including credit cards.
CNB has a Small Business Administration ("SBA") department which makes loans
to assist smaller clients and those who are starting new businesses in obtaining
financing. The loans are generally 65% to 80% guaranteed by the SBA. In 1994,
CNB was named a Preferred Lender by the SBA. Preferred Lender status is awarded
by the SBA to lenders who have demonstrated superior ability to generate,
underwrite and service loans guaranteed by the SBA, and results in more rapid
turnaround of loan applications submitted to the SBA for approval.
In May 1994, CNB opened its Emerging Growth Industries department, which
evolved in 1995 into the Venture Lending division to serve the needs of
companies in their start-up and development phase. This unit was developed to
meet the needs of clients in CNB's service area by allowing them to access a
banking relationship early in their development. The loans to this target group
of clients are generally secured by the accounts receivable, inventory and
equipment of the companies. The financial strength of these companies also tends
to be bolstered by the presence of venture capital investors among the
shareholders.
CNB is a member of the Federal Reserve System and the deposits of its
clients are insured up to $100,000 by the FDIC. In 1992, CNB became a member of
the Federal Home Loan Bank of San Francisco ("FHLB") in order to enhance its
ability to service its loan clients. This membership allows CNB to enhance its
funding sources as the FHLB allows members to borrow funds by pledging
securities and mortgage loans as collateral.
CNB concentrates on providing service to clients in Santa Clara County and
San Mateo County. CNB is headquartered in Cupertino, California which is in the
center of the geographical area which is referred to as "Silicon Valley". The
city of Cupertino has a population of approximately 51,300 and its average
annual household income exceeds $97,200. Among metropolitan areas, Santa Clara
County ranks third in California in median household income.
The commercial base of Santa Clara County is diverse and includes computer
and semiconductor manufacturing, professional services, printing and publishing,
aerospace, defense, real estate construction, and wholesale and retail trade.
CNB has not concentrated on attracting commercial clients from any single
industry, although it has in the past emphasized lending to the residential real
estate construction industry in its service area.
61
<PAGE>
In March 1991, CNB opened its first regional office in downtown San Jose.
This office was established to better serve existing clients of CNB, as well as
to gain new relationships from clients based in the growing financial center in
the southern portion of Santa Clara County. In May 1992, CNB opened a second
regional office in Palo Alto to better serve its clients in Northern Santa Clara
and Southern San Mateo County. CNB opened its fourth office in downtown Palo
Alto in the spring of 1996.
Many of the directors of Cupertino and CNB, and their affiliates, maintain
deposit and loan relationships with CNB. Most of CNB's deposits are obtained
from small and medium-sized businesses, business executives, professionals and
other individuals. At June 30, 1996, CNB had approximately $66.3 million in
noninterest-bearing deposit (checking) accounts with an average balance of
approximately $20,200 each, approximately $144.3 million in interest-bearing
demand, money market demand, and savings accounts with an average balance of
approximately $34,100 each, and approximately $39.6 million in time deposit
accounts with an average balance of approximately $34,400 each. Rates paid on
deposits vary among the categories of deposits due to terms, the size of the
individual deposit, and rates paid by competitors on similar deposits.
CNB has one deposit relationship with a title company, in which three of the
directors of CNB serve as directors (one CNB director is also the principal
shareholder and chief executive officer of the title company). Deposit balances
from this client in both non-interest-bearing demand accounts and money market
accounts totaled $423,400 on June 30, 1996, and ranged between $700,000 and $8.5
million during 1995.
CNB's loan portfolio is centered in commercial lending to small and
medium-sized businesses in the manufacturing and service industries. CNB has
also been an active lender in residential real estate construction.
Approximately 53% of CNB's portfolio was in commercial loans at June 30, 1996,
and real estate construction loans represented approximately 14% of total loans,
primarily for residential projects. In addition, 18% of CNB's loans were real
estate term loans, which are primarily secured by commercial properties. The
balance of the portfolio consists of consumer loans. CNB's loan clients are
primarily located in Cupertino, San Jose, Palo Alto and the surrounding
communities in Santa Clara County and San Mateo County.
The majority of loans are collateralized. Generally, real estate loans are
secured by real property, and commercial and other loans are secured by CNB
deposits or business and personal assets. Repayment is generally expected from
the sale of the related property for real estate construction loans, and from
the cash flow of the borrower for commercial and other loans.
The interest rates charged for the loans made by CNB vary with the degree of
risk, size and maturity of the loans. Rates are generally affected by
competition, associated factors stemming from the client's deposit relationship
with CNB, and CNB's cost of funds. A majority of the loans in CNB's portfolio
have a floating rate.
In its commercial loan portfolio, CNB provides personalized financial
services to the diverse commercial and professional businesses in its market
area, but does not concentrate on any particular industry. Commercial loans
consist chiefly of short-term loans (normally with a maturity of under one year)
for working capital. Significant emphasis is placed on the borrower's earnings
history, capitalization, secondary sources of repayment (such as accounts
receivable), and in some instances, third party guarantees or highly liquid
collateral (e.g., time deposits). Commercial loan pricing is generally at a rate
tied to the prime rate (as quoted in the Wall Street Journal) or CNB's reference
rate.
CNB's Venture Lending division works with a variety of technology companies,
ranging from multimedia, software and telecommunications providers to
biotechnology and medical advice firms. The Venture Lending Division provides
innovative financing and other financial services tailored to the needs of
start-up and growth-stage companies.
While the commercial loan portfolio of CNB is not concentrated in any one
industry, CNB's service area has a concentration of technology companies, and
accordingly, the ability of any of CNB's
62
<PAGE>
borrowers to repay loans may be affected by the performance of this sector of
the economy. CNB's residential real estate construction loan activity has
focused on providing short-term (less than one year maturity) loans to local
individuals, partnerships and corporations in the local residential real estate
industry for the construction of single-family residences. During 1992 through
1993, CNB concentrated its construction loan activity in the market for
owner-occupied custom residences. During 1994, real estate values began to
stabilize and CNB began to cautiously enter the construction loan market for
small townhouse and single-family home projects. During 1995, CNB continued to
expand its real estate construction portfolio with the help of the improving
real estate market in northern California, although there can be no assurance
that this trend will continue.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability of
the project and the borrower's creditworthiness are primary considerations in
the loan underwriting decision. Generally, these loans provide an attractive
yield, but may carry a higher than normal risk of loss or delinquency,
particularly if general real estate values decline or the loan underwriting
process is based upon inaccurate appraisals. CNB utilizes independent local
appraisers and conservative loan-to-value ratios (e.g. loans generally not
exceeding 65% to 75% of the appraised value of the property). CNB monitors
projects during the construction phase through regular construction inspections
and a disbursement program tied to the percentage of completion of each project.
CNB's consumer loan portfolio is divided between installment loans for the
purchase of such items as automobiles and aircraft, and home improvement loans
and equity lines of credit which are often secured by residential real estate.
Installment loans tend to be fixed rate and longer-term (one-to five-year
maturity), while the equity line type loans are generally floating rate, and are
reviewed for renewal on an annual basis. CNB also has a minimal portfolio of
credit card loans, issued as an additional service to its clients.
The loan policy of CNB 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 Directors' Loan Committee oversees the lending activities
of CNB. This committee consists of three outside directors, the Chairman/Chief
Executive Officer, the Executive Vice President-Senior Loan Officer, Senior Vice
President-Venture Lending Division Manager, Senior Vice President-Commercial
Lending and the Senior Vice President-Chief Credit Officer. The officers in this
group make up the Officers' Loan Committee.
Sole lending authority is granted to officers on a limited basis. Loan
requests exceeding individual officer approval limits are submitted to the
Officers' Loan Committee, and those which exceed its limit are submitted to the
Directors' Loan Committee for final approval. Both of these committees meet on a
regular basis in order to provide timely responses to CNB's clients.
CNB's credit administration function includes, in addition to internal
reviews, the regular use of an outside loan review firm to review the quality of
the loan portfolio. CNB has an Internal Asset Review Committee ("IARC") that
meets monthly to review delinquencies, non-performing assets, classified assets
and other pertinent information for the purpose of evaluating credit risk within
CNB's loan portfolio, and to recommend general reserve percentages and specific
reserve allocations. The IARC reports to the Board of Directors on a quarterly
basis.
CNB's Trust Group commenced operations in July 1988, and in 1995 CNB renewed
its focus on the expansion of its trust operations. The Trust Group offers a
full range of fee-based trust services directly to its clients and administers
several types of retirement plans, including corporate pension plans, 401(k)
plans and individual retirement plans, with an emphasis on the investment
management, custodianship and trusteeship of such plans. In addition, the Trust
Group acts as executor, administrator, guardian and/or trustee in the
administration of the estates of individuals. Investment and custodial services
are provided for corporations, individuals and non-profit organizations. Total
assets under management by the Trust Group were approximately $322.6 million at
June 30, 1996, compared to $192.7 million at June 30, 1995, and $143.0 million
at June 30, 1994. The 67% increase in
63
<PAGE>
trust assets during the year ended June 30, 1996, is attributable to the
addition of several new trust officers and the new Executive Vice
President-Senior Trust Officer. CNB anticipates this growth to continue in 1996
as it increases its presence in the Palo Alto marketplace with the new office
which opened in the late spring of 1996. There can be no assurances that the
growth will continue at the rate experienced previously.
CNB opened a Mortgage Banking Division in July 1992. The purpose of this
division was to originate residential mortgage loans for sale on the secondary
market. The primary revenue of this division was from the premiums received on
the sale of such mortgage loans and their related servicing rights. CNB funded
both loans which were originated directly by a mortgage banking officer and
loans purchased through a network of mortgage brokers. CNB was selling both the
loans and the related servicing rights through a correspondent. During 1993, CNB
was designated as an approved seller/servicer by the Federal National Mortgage
Association and the Federal Home Loan Corporation, known in the industry as
Fannie Mae and Freddie Mac, respectively. During 1994, the increased upward
pressure on interest rates caused mortgage refinancing and home purchases to
significantly decline. This required CNB in June 1994 to restructure its
mortgage operations and focus all of its efforts on the wholesale mortgage
market. This change reduced the operating costs within the mortgage business
unit; however, the operating results for the last half of 1994 did not return to
acceptable levels of return on investment relative to the risks involved. Based
on these factors, CNB determined to close its mortgage operations effective
March 31, 1995. In connection with this action, CNB incurred a $180,000
after-tax charge related to this operation in the first quarter of 1995.
COMPARISON OF SHAREHOLDER RIGHTS
Mid-Peninsula and Cupertino are incorporated under and subject to all the
provisions of the California General Corporation Law (the "GCL"). Upon
consummation of the Merger, except for those persons, if any, who perfect
dissenters' rights under the GCL, and except for the Mid-Peninsula Option, which
will be canceled as a result of the Merger (see "THE OPTION AGREEMENTS"), the
shareholders of Cupertino will become shareholders of Bancorp. The following
discussion assumes that the Merger will be consummated, and compares the
articles of incorporation and bylaws of Cupertino and Bancorp insofar as they
affect the rights of shareholders. This discussion is only a summary, does not
purport to be complete, and is qualified in its entirety by reference to the
GCL, the common law thereunder and the full text of the Mid-Peninsula (i.e.,
Bancorp) Articles and Bylaws and Cupertino's Articles and Bylaws.
The Articles of Incorporation of Cupertino and Bancorp are substantially
identical in all material respects insofar as the rights of their shareholders
are concerned. Each company has the same authorized capitalization (6,000,000
shares of common and 4,000,000 shares of preferred stock) and both companies
limit the liability of directors and authorize indemnification of agents to the
maximum extent as permitted under California law.
The Cupertino Articles expressly prohibit the issuance of shares of
convertible common stock and deny the holders of common stock preemptive rights
to purchase shares of any type or series issued by Cupertino. However,
California law requires that the issuance of convertible shares and the grant of
preemptive rights must be affirmatively provided for in a corporation's articles
of incorporation. The articles of incorporation of both Cupertino and Bancorp,
therefore, would have to be amended by their shareholders in order for either
corporation to have authority to issue convertible shares or for their common
stockholders to possess preemptive rights.
The Bancorp Articles will include a provision requiring a super majority
vote of the Bancorp Board with respect to certain matters. Approval of this
provision by the Mid-Peninsula shareholders is a condition of the Merger. See
"PROPOSAL NUMBER 3."
The Bylaws of Cupertino and Bancorp are substantially identical in all
material respects, except with respect to the following:
64
<PAGE>
(1) The Bylaws of Cupertino provide that the Board may appoint one or
more Vice-Chairmen to fulfill the duties of the Chairman in the event of his
absence or disability. The Bancorp Bylaws provide that, in the absence of
the Chairman, the President of Bancorp shall preside over meetings of the
Bancorp Board.
(2) The Bancorp Bylaws establish certain requirements with respect to
nomination of directors by stockholders of Bancorp. Notice of intention to
make nominations must be in writing delivered to the President of Bancorp
not less than 21 nor more than 60 days prior to the meeting of shareholders
called to elect directors or, if less than 21 days' notice of the meeting is
given to shareholders, no later than 10 days following the mailing of the
notice of meeting. No such requirements are contained in the Cupertino
Bylaws; hence, under California law, nomination of a candidate to the
Cupertino Board is not required to be made in order for votes to be cast in
the candidate's favor, subject to the condition that no shareholder may
cumulate votes (i.e., cast for any one candidate a number of votes greater
than the number of votes which the shareholder normally is entitled to cast)
for any candidate who has not been nominated prior to voting for directors.
Certain rules established by Nasdaq affect the rights of shareholders of
Cupertino and Mid-Peninsula. The same rules, since it is a condition of the
Merger that the Bancorp Shares be listed on Nasdaq, will apply to all
shareholders of Bancorp, including former shareholders of Cupertino and Mid
Peninsula.
THE MID-PENINSULA BOARD RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 1 AND WILL
VOTE ALL PROXIES HELD BY IT "FOR" PROPOSAL NUMBER 1, UNLESS A SHAREHOLDER
DIRECTS OTHERWISE. EACH MEMBER OF THE MID-PENINSULA BOARD, AS A SHAREHOLDER, HAS
AGREED TO VOTE ALL SHARES HELD BY THEM IN FAVOR OF PROPOSAL NUMBER 1.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING
MID-PENINSULA SHARES ENTITLED TO VOTE.
THE CUPERTINO BOARD RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 1 AND WILL VOTE
ALL PROXIES HELD BY IT "FOR" PROPOSAL NUMBER 1, UNLESS A SHAREHOLDER DIRECTS
OTHERWISE. EACH MEMBER OF THE CUPERTINO BOARD, AS A SHAREHOLDER, HAS AGREED TO
VOTE ALL SHARES HELD BY THEM IN FAVOR OF PROPOSAL NUMBER 1.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING
CUPERTINO SHARES ENTITLED TO VOTE.
65
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CUPERTINO
BENEFICIAL OWNERSHIP TABLE
The following table sets forth certain information, as of the Cupertino
Record Date, with respect to the beneficial ownership of Cupertino Shares by (i)
all persons known by Cupertino to be the beneficial owners of more than 5% of
the outstanding Cupertino Shares, (ii) each director of Cupertino, (iii) each
executive officer of Cupertino and CNB named in the Summary Compensation Table
below, and (iv) all executive officers and directors of Cupertino and CNB as a
group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF PERCENTAGE
BENEFICIAL OWNERS SHARES OF CLASS
- -------------------------------------------------------------------------------- --------- ------------
<S> <C> <C>
Financial Institution Partners, L.P. (1) ....................................... 170,245 8.93%
1110 Lake Cook Road
Suite 165
Buffalo Grove, IL 60089
Dick J. Randall (2) ............................................................ 130,666 6.13
20230 Stevens Creek Boulevard
Cupertino, CA 95014
C. Donald Allen (3)............................................................. 66,938 3.15
David K. Chui (4)............................................................... 22,356 1.05
Carl E. Cookson (5)............................................................. 26,040 1.22
Jerry R. Crowley (6)............................................................ 33,216 1.56
Janet M. DeCarli (7)............................................................ 25,668 1.20
John M. Gatto (8)............................................................... 29,922 1.40
William H. Guengerich (9)....................................................... 24,848 1.17
James E. Jackson (10)........................................................... 59,665 2.80
Rex D. Lindsay (11)............................................................. 60,512 2.84
Glen McLaughlin (12)............................................................ 54,549 2.56
Norman Meltzer (13)............................................................. 21,057 *
Dennis S. Whittaker (14)........................................................ 19,691 *
Steven C. Smith (15)............................................................ 26,193 1.23
Kenneth D. Brenner (16)......................................................... 18,142 *
David Hood (17)................................................................. 11,519 *
Hall Palmer (18)................................................................ 14,206 *
All Directors and Executive Officers as a Group (17 Persons) (19)............... 645,188 30.28%
</TABLE>
- ------------------------
* Less than 1%
(1) Financial Institution Partners, L.P. ("Partners") is a Delaware limited
partnership, the general partner of which is Hovde Capital, Inc.
("Capital"). According to the Schedule 13D of Partners and Capital of
November 1, 1995, Partners and Capital share voting power with respect to
these shares. Capital is an affiliate of Hovde.
(2) Includes 120,623 held by the Dick J. and Carolyn L. Randall Trust and 9,816
shares issuable upon the exercise of options which are exercisable within
60 days of the Cupertino Record Date.
66
<PAGE>
(3) Includes 509 shares held by Mr. Allen's wife, 4,391 Shares held in an IRA
for Mr. Allen, 734 shares held in a 401(k) plan for Mr. Allen and 26,341
shares issuable upon the exercise of options which are exercisable within
60 days of the Cupertino Record Date.
(4) Includes 7,539 shares issuable upon the exercise of options which are
exercisable within 60 days of the Cupertino Record Date.
(5) Includes 17,817 shares held jointly by Carl E. Cookson and his spouse, and
7,996 shares issuable upon the exercise of options which are exercisable
within 60 days of the Cupertino Record Date.
(6) Includes 26,812 shares held by the Crowley Family Inter Vivos Trust, 2,343
shares held by Mr. Crowley's spouse's IRA, 2,813 shares held in Mr.
Crowley's IRA, and 1,248 shares issuable upon the exercise of options which
are exercisable within 60 days of the Cupertino Record Date.
(7) Includes 18,516 shares held by Janet M. DeCarli as Trustee of the DeCarli
Living Trust; 2,443 shares held by Ms. DeCarli's pension trust; and 3,655
shares issuable upon the exercise of options which are exercisable within
60 days of the Cupertino Record Date.
(8) Includes 9,707 shares issuable upon the exercise of options which are
exercisable within 60 days of the Cupertino Record Date.
(9) Includes 12,471 shares held jointly by William H. Guengerich and his
spouse, 6,835 shares held in an IRA for Mr. Guengerich and 5,542 shares
issuable upon the exercise of options which are exercisable within 60 days
of the Cupertino Record Date.
(10) Includes 38,692 shares held jointly by James E. Jackson and his spouse,
1,867 shares held in an IRA-FBO Mr. Jackson's spouse, 8,606 shares held in
an IRA for Mr. Jackson, 1,700 shares held in a 401(k) plan for Mr.
Jackson, 696 shares held directly by Mr. Jackson's spouse, and 8,104
shares issuable upon the exercise of options which are exercisable within
60 days of the Cupertino Record Date.
(11) Includes 45,298 shares held by the Rex D. and Leanor L. Lindsay Family
Trust, 2,339 shares held by Mr. Lindsay as custodian for his minor
grandchildren, and 12,648 shares issuable upon the exercise of options
which are exercisable within 60 days of the Cupertino Record Date.
(12) Includes 5,964 shares in a Keogh account and 24,894 shares issuable upon
the exercise of options which are exercisable within 60 days of the
Cupertino Record Date.
(13) Includes 8,526 shares held in the name of Mr. Meltzer's spouse and 732
shares issuable upon the exercise of options which are exercisable within
60 days of the Cupertino Record Date.
(14) Includes 464 shares held directly by Mr. Whittaker's spouse, and 5,858
shares issuable upon the exercise of options which are exercisable within
60 days of the Cupertino Record Date.
(15) Includes 1,690 shares held in a 401(k) plan and 13,778 shares issuable
upon the exercise of options which are exercisable within 60 days of the
Cupertino Record Date.
(16) Includes 4,400 shares held in a 401(k) plan and 11,350 shares issuable
upon the exercise of options which are exercisable within 60 days of the
Cupertino Record Date.
(17) Includes 5,680 shares held in an IRA and 5,500 shares issuable upon the
exercise of options which are exercisable within 60 days of the Cupertino
Record Date.
(18) Includes 1,900 shares held in an IRA and 5,500 shares issuable upon the
exercise of options which are exercisable within 60 days of the Cupertino
Record Date.
(19) Includes 160,209 shares issuable upon the exercise of options which are
exercisable within 60 days of the Cupertino Record Date.
67
<PAGE>
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth for Cupertino's directors and executive officers
(including the executive officers of CNB) certain information with respect to
age and background.
<TABLE>
<CAPTION>
NAME POSITION(S) WITH CUPERTINO/CNB AGE SINCE
- --------------------------- ------------------------------------------------------------ --- ---------
<S> <C> <C> <C>
C. Donald Allen President and Chief Executive Officer of Cupertino, Chairman 61 1984
of the Board and Chief Executive Officer of CNB; Director,
Cupertino/CNB
David K. Chui Director, Cupertino/CNB 51 1984
Carl E. Cookson Director, Cupertino/CNB 63 1984
Jerry R. Crowley Director, Cupertino/CNB 57 1984
Janet M. DeCarli Director, Cupertino/CNB 59 1984
John M. Gatto Chairman of the Board of Cupertino; Director of CNB 58 1984
William H. Guengerich Director, Cupertino/CNB 64 1984
James E. Jackson Director, Cupertino/CNB 61 1984
Rex D. Lindsay Vice Chairman of the Board of Cupertino; Director of CNB 71 1984
Glen McLaughlin Director, Cupertino/CNB 61 1984
Norman Meltzer Director, Cupertino/CNB 66 1984
Dick J. Randall Director, Cupertino/CNB 65 1984
Dennis S. Whittaker Director, Cupertino/CNB 50 1984
OTHER EXECUTIVE OFFICERS OF CUPERTINO/CNB:
Kenneth D. Brenner Executive Vice President/Strategic Marketing CNB 50 1992
David R. Hood Executive Vice President and Senior Lending Officer, CNB 51 1995
Hall Palmer Executive Vice President and Senior Trust Officer, CNB 56 1995
Steven C. Smith Executive Vice President and Chief Operating Officer, 45 1993
Cupertino/CNB
Heidi R. Wulfe Senior Vice President and Chief Financial Officer, 41 1996
Cupertino/CNB
</TABLE>
C. DONALD ALLEN has served as the President and Chief Executive Officer of
Cupertino and Chairman of the Board and Chief Executive Officer of CNB for the
past five years.
DAVID K. CHUI has served as the President and Chief Executive Officer of
PAN-CAL Investment Co., a commercial and residential real estate development
company, since September 1977.
CARL E. COOKSON has served as the Chairman of the Board of the Santa Clara
Land Title Company, a title insurance company, for the past five years.
JERRY R. CROWLEY has served as the President and Chief Executive Officer of
Treehouse Ltd., a venture capital firm, since June 1991. From January 1987 to
June 1991, Mr. Crowley served as Chairman, President and Chief Executive Officer
of Gazelle Microcircuits, Inc., a semiconductor manufacturer.
JANET M. DECARLI has been a real estate broker for Cornish and Carey
Realtors, a real estate firm, since June 1993. From September 1989 to June 1993,
Ms. DeCarli was a real estate broker for Prudential California Realty, a real
estate firm.
68
<PAGE>
JOHN M. GATTO is the Chairman of the Board of Directors of Cupertino and
Chairman of the Executive Committee of Cupertino and CNB. Mr. Gatto has been the
sole proprietor of Maria Enterprises, a development consultant company, since
December 1993. Prior to that time, from 1984 to 1993, Mr. Gatto was an architect
for Cypress Properties, a real estate development company.
WILLIAM H. GUENGERICH has been a private investor since March 1993. From
July 1977 until his retirement in March 1993, Mr. Guengerich served as Director
of Employee Relations of Measurex Corporation, an electronics manufacturing
company.
JAMES E. JACKSON has been an attorney-at-law at the law firm Jackson,
Abdalah & Rodriguez, a Professional Corporation, since January 1989.
REX D. LINDSAY serves as the Vice Chairman of the Board of Directors of
Cupertino. For the past five years, Mr. Lindsay has been a rancher and a private
investor.
GLEN MCLAUGHLIN was the Chairman of the Board of Directors of Cupertino and
Chairman of the Executive Committee of Cupertino from 1990 through 1995. Mr.
McLaughlin has also served as the Chairman of Venture Leasing Associates, an
equipment leasing company, since December 1986.
NORMAN MELTZER has been a private investor since 1995. From January 1991
until his retirement in 1995, Mr. Meltzer was an independent real estate broker
involved in real estate development. Mr. Meltzer was President of Resource
Planning Associates Inc., a child-care facilities development company, from
January 1990 to December 1990. Prior to that time, Mr. Meltzer was a Vice
President for Interland Corporation, a real estate development company, from
1982 until January 1990.
DICK J. RANDALL has been a private investor and rancher since 1993. From
1962 until his retirement in 1993, Mr. Randall served as the President of The
William Lyon Co., a real estate developer and construction company.
DENNIS S. WHITTAKER has served as the President of Whittaker Insurance
Agency Inc., a personal and commercial insurance sales company, since January
1987.
KENNETH D. BRENNER joined CNB in February 1992 as Executive Vice President.
Prior to that time, he served as Senior Vice President, Business Development for
Silicon Valley Bank from 1985 to 1992.
DAVID R. HOOD joined CNB in April 1995 as Executive Vice President and
Senior Lending Officer. From April 1985 to March 1995, he held positions of Vice
President, Senior Vice President and Senior Loan Officer, Executive Vice
President and Senior Lending Officer, and President of University Bank & Trust
("University"). From 1967 to 1985 Mr. Hood held various positions of which the
most recent was Vice President and Manager of the San Mateo Business Loan Center
for Wells Fargo Bank, N.A.
HALL PALMER joined CNB in May 1995 as Executive Vice President and Senior
Trust Officer. Prior to that time, from May 1987 to May 1995, Mr. Palmer served
as Executive Vice President and Senior Trust Officer for University. From 1984
to 1987, Mr. Palmer was Senior Vice President and Executive Trust Officer for
Key Bank of Oregon. From 1968 to 1984, Mr. Palmer was Manager and Trust Officer
for Wells Fargo Bank, N.A.
STEVEN C. SMITH, a certified public accountant, joined Cupertino and CNB in
December 1993 as Senior Vice President and Chief Financial Officer, and in 1995
was named Executive Vice President and Chief Operating Officer of Cupertino and
CNB. From July 1993 to December 1993, Mr. Smith served as Executive Vice
President and Chief Financial Officer of Commercial Pacific Bank. From December
1991 to July 1993, Mr. Smith served as Executive Vice President and Chief
Financial Officer of First Charter Bank. From 1984 to 1991, Mr. Smith served as
Senior Vice President of Finance and Treasurer of Fidelity Federal Bank, a
federal savings bank.
HEIDI R. WULFE, a certified public accountant, joined Cupertino and CNB in
January 1996 as Senior Vice President and Chief Financial Officer. From November
1989 to January 1996, Ms. Wulfe served as Senior Vice President and Controller
for Fidelity Federal Bank, a federal savings bank. From
69
<PAGE>
1987 to 1989, she was Vice President and Controller at Antelope Valley Savings
and Loan Association. From 1977 to 1987, she was employed by Grant Thorton,
Accountants and Management Consultants, as an Audit Manager.
COMMITTEES OF THE CUPERTINO BOARD
During the fiscal year ended December 31, 1995, the Board held twelve (12)
meetings. Each director serving on the Cupertino Board in fiscal year 1995
attended at least 75% of the aggregate of such meetings of the Cupertino Board
and the Committees on which he or she served.
Cupertino does not have a standing Nominating Committee, but does have an
Audit Committee and an Executive Committee that served the function of a
Compensation Committee during 1995.
The Audit Committee's function is to review with Cupertino's independent
accountants and management the annual financial statements and independent
accountants' opinion, review the scope and results of the examination of
Cupertino's financial statements by the independent accountants, approve all
professional services and related fees performed by the independent accountants,
recommend the retention of the independent accountants to the Board, subject to
ratification by the shareholders, and periodically review Cupertino's accounting
policies and internal accounting and financial controls. The members of the
Audit Committee during fiscal 1995 were Messrs. Crowley, McLaughlin and Randall.
During the fiscal year ended December 31, 1995, the Audit Committee held four
(4) meetings.
During 1995, the Executive Committee served as the Salary and Compensation
Committee, whose function is to review and approve salary, bonus levels and
stock option grants. The members of the Executive Committee during fiscal 1995
were Messrs. Gatto, Lindsay, McLaughlin and Randall. During the fiscal year end
December 31, 1995, the Executive Committee held fourteen (14) meetings. For
additional information concerning the Executive Committee, see "Report of the
Executive Committee of the Board of Directors on Executive Compensation" and
"Executive Compensation and Other Matters -- Executive Committee Interlocks and
Insider Participation."
The nonemployee members of the Executive Committee also serve as the Option
Committee, whose function is to administer the Directors 1989 Non-Qualified
Stock Option Plan and the Employee Stock Purchase Plan.
70
<PAGE>
CUPERTINO EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation of
the Chief Executive Officer and the Chief Operating Officer of Cupertino and the
three executive officers of CNB as of December 31, 1995 whose total salary and
bonus for the year ended December 31, 1995 exceeded $100,000. In all cases,
payment was for services in all capacities to Cupertino and/or its subsidiaries,
during the fiscal years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($) (#) ($)
- -------------------------------------- --------- ----------- --------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
C. Donald Allen, 1995 $ 174,362 $ 7,500 $ 8,150(3) -- $ 6,430(6)
President and Chief Executive 1994 146,755 30,000 8,400(3) -- 2,753(4)
Officer of Cupertino; Chairman of 1993 150,000 -- -- -- 4,497(4)
the Board and Chief Executive
Officer of CNB
Steven C. Smith (5), 1995 $ 127,500 $ 48,000 -- 11,000 $ 7,013(6)
Executive Vice President and Chief 1994 103,416 30,000 -- 4,043 830(4)
Operating Officer of Cupertino and 1993 4,167 -- -- --
CNB
Kenneth D. Brenner, 1995 $ 216,701 -- -- 5,975 $ 7,270(6)
Executive Vice President of CNB 1994 180,355 $ 5,000 -- 3,509 3,789(4)
1993 153,318 -- -- 3,508 3,428(4)
David R. Hood (7), 1995 $ 85,462 $ 48,000 -- 16,500 $ 2,153(8)
Executive Vice President and Senior
Lending Officer of CNB
Hall Palmer (9), 1995 $ 80,000 $ 48,000 -- 16,500 $ 2,580(8)
Executive Vice President and Senior
Trust Officer of CNB
</TABLE>
- ------------------------
(1) Annual salary includes amounts deferred by the executive under Cupertino's
401(k) Profit Sharing Plan.
(2) Bonuses are paid based on Cupertino's performance and individual objectives
set by the Executive Committee.
(3) Consists of payments for services as a director (see "Compensation of
Directors").
(4) Consists of Cupertino's matching contribution under the 401(k) plan. This
plan is open to all employees of Cupertino and CNB after service
requirements are met.
(5) Mr. Smith joined Cupertino in December 1993.
(6) Consists of Cupertino's matching contribution of $4,500 for each officer
under the 401(k) plan and premiums paid by CNB under a split-dollar life
insurance policy (the "Retirement Policy") maintained by CNB to fund certain
retirement benefits granted pursuant to an agreement with the officer. See
"Retirement Benefits." These premiums amounted to $1,930 in the case of Mr.
Allen, $2,513 in the case of Mr. Smith and $2,770 in the case of Mr.
Brenner.
(7) Mr. Hood joined CNB in April 1995.
(8) Consists of payments made by CNB under the officer's Retirement Policy.
(9) Mr. Palmer joined CNB in May 1995.
71
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides the specified information concerning grants of
options to purchase Cupertino Shares made during the year ended December 31,
1995 to the persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION ----------------------
NAME GRANTED(2) FISCAL YEAR BASE PRICE(3) DATE 5% 10%
- ------------------------------------ ----------- ------------- ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
C. Donald Allen..................... -- -- -- -- -- --
Steven C. Smith..................... 11,000 11.6 $ 8.30 07/01/01 $ 13,050 $ 70,444
Kenneth D. Brenner.................. 5,975 6.3 $ 8.18 05/10/01 $ 16,622 $ 37,710
David R. Hood....................... 16,500 17.4 $ 7.95 04/14/01 $ 44,612 $ 101,209
Hall Palmer......................... 16,500 17.4 $ 7.95 05/01/01 $ 44,612 $ 101,209
</TABLE>
- ------------------------
(1) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, based on rules of the Commission. Actual gains, if any, on stock
option exercises are dependent on the future performance of Cupertino
Shares, overall market conditions and the option holders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved. One Cupertino Share purchased in 1995 at
$8.30 would yield profits of $2.82 per share at 5% appreciation over six
years, or $6.40 per share at 10% appreciation over the same period. One
Cupertino Share purchased in 1995 at $8.18 would yield profits of $2.78 per
share at 5% appreciation over six years, or $6.31 per share at 10%
appreciation over the same period. One Cupertino Share purchased in 1995 at
$7.95 would yield profits of $2.70 per share at 5% appreciation over six
years, or $6.13 per share at 10% appreciation over the same period.
(2) Generally, options granted under Cupertino's 1995 Stock Option Plan (the
"1995 Option Plan") vest in annual installments over three or five years,
subject to the optionee's continuous employment with Cupertino and/or CNB,
and are exercisable to the extent vested. See also "Employment, Severance
and Change of Control Arrangements."
(3) All options listed were granted at the estimated fair market value on the
date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUE
The following table provides the specified information concerning exercises
of options to purchase Cupertino Shares in the fiscal year ended December 31,
1995, and unexercised options held as of December 31, 1995, by the persons named
in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT 12/31/95 12/31/95(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. Donald Allen................. 21,327 $ 191,943 26,341 -- $ 213,291 $ --
Steven C. Smith................. -- -- 6,362 19,681 30,145 96,160
Kenneth D. Brenner.............. -- -- 7,016 9,484 43,311 48,061
David R. Hood................... -- -- -- 16,500 -- 87,375
Hall Palmer..................... -- -- -- 16,500 -- 87,375
</TABLE>
- ------------------------
(1) Based on the closing price of Cupertino Shares on December 29, 1995, the
last trading day in 1995, which was $13.25.
72
<PAGE>
EMPLOYMENT, SEVERANCE AND CHANGE OF CONTROL ARRANGEMENTS
Cupertino entered into an employment agreement with C. Donald Allen on July
1, 1990 (the "Employment Agreement"). The agreement has an initial term of two
years, and thereafter renews annually for twelve months each July 1, unless
sixty days prior written notice of nonrenewal is given by either Mr. Allen or
Cupertino. The agreement provides for a base salary, subject to annual increase
by the Cupertino Board, payment of an annual cash bonus solely at the discretion
of the Cupertino Board, use of a bank-owned automobile, customary group medical
and dental coverage, and reimbursement of expenses incurred on behalf of CNB and
Cupertino. The agreement specifies the payment of twelve months' base salary
upon termination of Mr. Allen's employment due to a "change in control" of
Cupertino (as defined in the agreement), and for the payment of salary for six
months or until the agreement expires, whichever period is less, upon
termination of Mr. Allen's employment by Cupertino without "cause" (as defined
in the agreement). In April 1994, the Employment Agreement was modified to
memorialize the termination of the agreement effective as of July 1, 1994.
CNB entered into an Executive Salary Continuation Agreement with C. Donald
Allen on August 1, 1993. The agreement provides for annual benefit of up to
$100,000 to be paid to Mr. Allen or his designated beneficiary over a period of
one hundred and eighty (180) months. The benefit is effective upon: (i) Mr.
Allen's attainment of sixty-five (65) years of age or his death or disability
prior to such time if he were actively employed by Cupertino at the time; (ii)
termination of his employment by Cupertino without "cause" (as defined in the
agreement); and (iii) termination or constructive termination of his employment
by Cupertino after the occurrence of a "change of control" in Cupertino or CNB
as defined in the agreement. Although this agreement is intended to provide Mr.
Allen with an additional incentive to remain in the employ of CNB, the agreement
states it shall not be deemed to constitute a contract of employment between Mr.
Allen and CNB nor shall any provision of the agreement restrict the right of Mr.
Allen to terminate his employment. The agreement shall have no impact or effect
upon any separate written Employment Agreement which Mr. Allen may have with
CNB.
CNB has entered into an Employment, Severance and Retirement Benefits
Agreement (an "Employment Agreement") with each of Steven C. Smith, Kenneth
Brenner, Hall Palmer and David R. Hood, dated September 1, 1994, September 1,
1994, May 1, 1995 and August 14, 1995, respectively. Each Employment Agreement
sets the officer's beginning annual salary, subject to annual cost of living
adjustments, with the initial salary payable to Mr. Smith being set at $135,000
and the initial salary payable to Messrs. Brenner, Palmer and Hood being set at
$120,000. In addition, the Employment Agreements with Messrs. Palmer and Hood
provided that each of them would be granted an option to purchase 16,500
Cupertino Shares, as adjusted for stock dividends, under Cupertino's 1995 Stock
Option Plan. Each of the Employment Agreements entitles the officer to severance
benefits equal to 12 months' salary in the event such officer's employment is
terminated for any reasons other than death, disability, retirement or certain
acts of misconduct, or in the event such officer resigns within one year after a
change in control of Cupertino, upon a reduction in responsibilities or
compensation, or certain other events deemed to be unfavorable to the officer.
In addition, the Employment Agreements entitle each officer to certain
retirement benefits. See "Retirement Benefits."
Options granted under Cupertino's 1985 Stock Option Plan and Cupertino's
1989 Non-Qualified Stock Option Plan contain provisions pursuant to which, in
the event of a dissolution or reorganization of Cupertino or any reorganization,
merger or consolidation in which Cupertino does not survive, all unexercised
options will become exercisable in full until five days prior to such event,
unless the surviving corporation substitutes substantially equivalent options to
purchase such corporation's stock.
Cupertino's 1995 Stock Option Plan provides that a "Transfer of Control" of
Cupertino will occur in the event of (i) a sale or exchange by the shareholders
of all or substantially all of Cupertino's voting stock or (ii) certain mergers
or consolidations to which Cupertino is a party, in which, in either case, the
shareholders of Cupertino immediately before such sale, exchange, merger or
consolidation do not
73
<PAGE>
retain beneficial ownership of at least a majority of the voting stock of
Cupertino or its successor. A Transfer of Control will also occur in the event
of a sale of all or substantially all of the assets of Cupertino (unless the
shareholders of Cupertino immediately before such event retain beneficial
ownership of at least a majority of the voting stock of the corporation to which
the assets were transferred) or a liquidation or dissolution of Cupertino. At
the discretion of the Cupertino Board, options granted under the 1995 Stock
Option Plan may provide that, in the event of a Transfer of Control, such
outstanding option will become exercisable in full either automatically or at
the discretion of the Cupertino Board unless the option is assumed or the
successor corporation substitutes substantially equivalent options to purchase
stock of the successor corporation.
Alternatively, the Cupertino Board may provide in the grant of an option
that such option will become exercisable in full automatically upon a Transfer
of Control and, in addition, the successor corporation may assume or substitute
a substantially equivalent option to purchase stock of the successor corporation
for the outstanding option.
RETIREMENT BENEFITS
Pursuant to the Employment Agreements between CNB and each of Messrs. Smith,
Brenner, Palmer and Hood, each such officer and his spouse (should she survive
him) is entitled to retirement benefits based upon the proceeds of a
split-dollar life insurance policy maintained by CNB for each officer's benefit.
Each officer may begin receiving benefits at retirement age, as defined in the
individual officer's agreement or upon termination of employment, whichever
occurs later. Benefits are payable in the form of draws against the annual
increase in the cash surrender value of the officer's insurance policy from the
time benefits commence, up to a maximum annual draw of $44,000 for Mr. Palmer,
$55,000 for Messrs. Brenner and Hood and $60,000 for Mr. Smith (or such lessor
amount as shall have vested, as described below) with the increase in value in
excess of such amount becoming the property of CNB. The right to make such draws
continues during the lifetime of the officer and his surviving spouse, but in no
case longer than 40 years. The right to this retirement benefit vests to the
extent of 1/84 of such amount monthly hereafter, provided that vesting is
subject to acceleration in full following a change in control where the officer
is terminated or resigns for good reason. See "Employment, Severance and Change
of Control Arrangements."
COMPENSATION OF DIRECTORS
During 1995, each director of Cupertino was paid a retainer of $6,600 per
year (payable at the rate of $550 per month) and, in addition, a fee of $150 for
attendance at each meeting of the Cupertino Board. Each non-employee director
was also paid a fee of $50 for attendance at each committee meeting ($75 for
each meeting of the Loan & Audit Committee, with the chairman receiving an
additional $25 per meeting) of the Board of Directors of Cupertino and CNB.
For 1996, the Chairman and Vice Chairman of the Board will receive annual
retainers of $15,000 and $12,500, respectively. All other directors will receive
an annual retainer of $10,000. In addition, the Chairman of the Directors' Loan
Committee will receive an annual retainer of $4,500 and other members will
receive annual retainers of $4,000. The Chairman of the Audit Committee will
receive an annual retainer of $2,000 and Audit Committee members will each
receive an annual retainer of $1,500. The Trust Committee Chairman will receive
an annual retainer of $2,000 and Trust Committee members will each receive
$1,500. The Compensation Committee members will each receive an annual retainer
of $1,000.
Each director of Cupertino is eligible to participate in Cupertino's
Directors 1989 Non-Qualified Stock Option Plan (the "1989 Option Plan"). The
1989 Option Plan provides for the grant of nonstatutory options to directors of
Cupertino and its subsidiaries. Options granted under the 1989 Option Plan
generally vest over a period of three years.
74
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Committee acts as the Executive Compensation Committee of
Cupertino. The Committee's members during fiscal 1995 were Glen McLaughlin, then
Chairman of the Board, Rex D. Lindsay, Vice Chairman of the Board, John M. Gatto
(currently the Chairman of Cupertino) and Dick J. Randall. Additionally, the
Executive Committee's actions are ratified by the Cupertino Board.
The directors and officers of Cupertino, and certain of the business and
professional organizations with which they are associated, have had, but are not
obligated to have, banking transactions with CNB in the ordinary course of
business. Loans and commitments to loan in such transactions have been and will
continue to be made in accordance with applicable laws and on substantially the
same terms, including interest rates and collateral requirements, as those
prevailing at the time for comparable transactions with other persons of similar
creditworthiness and will not involve more than the normal risk of
collectibility or present other unfavorable features. At December 31, 1995, the
aggregate amount of loans and commitments to loan outstanding to directors,
officers and such organizations was $2,197,000.
CNB has a significant deposit relationship with Santa Clara Land Title
Company, of which Carl E. Cookson is Chairman and majority shareholder, and for
which Rex D. Lindsay and Dick J. Randall serve as directors and shareholders.
Average monthly deposits in CNB by Santa Clara Land Title Company ranged between
$700,000 and $8.5 million during 1995, and amounted to $423,400 at June 30,
1996. The deposit arrangements with this customer have been and will continue to
be on substantially the same terms as those prevailing at the time for
comparable deposits from other customers.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires Cupertino's executive officers,
directors and persons who beneficially own more than 10% of Cupertino Shares to
file initial reports of ownership and reports of changes in ownership with the
SEC. Such persons are required by Commission regulations to furnish Cupertino
with copies of all Section 16(a) forms filed by such persons.
Based solely on Cupertino's review of such forms furnished to Cupertino and
written representations from certain reporting persons, Cupertino believes that
all filing requirements applicable to Cupertino's executive officers, directors
and more than 10% shareholders were complied with properly.
REPORT OF THE EXECUTIVE COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The compensation of the executive officers of Cupertino and CNB is reviewed
and approved annually by the Executive Committee of the Cupertino Board, which
also serves as the Compensation Committee of Cupertino and CNB. Cupertino's
executive officers are also executive officers of CNB. During 1995, Glen
McLaughlin, Rex D. Lindsay, John M. Gatto and Dick J. Randall were members of
the Executive Committee.
The Executive Committee's philosophy is that compensation should be designed
to reflect the value created for shareholders while supporting Cupertino's
strategic goals. The committee reviews the compensation of top executives to
insure that Cupertino's compensation programs are linked to its financial
performance and shareholders' interests and total compensation opportunities are
aimed at the 75th percentile of those offered by employers of comparable size in
our industry. Annual compensation for Cupertino's and CNB's executive officers
consists of three elements:
1) Salary, which is determined on the basis of factors such as the
individual officer's level of responsibility and comparison to similar
positions in Cupertino and/or CNB and comparable companies in the industry.
Salaries are reviewed by the Executive Committee on an annual basis.
2) Annual cash incentive bonuses, which are determined on the basis of
individual performance and the performance of Cupertino measured primarily
in terms of increases in Cupertino's return on shareholders' equity, return
on average assets, earnings per share, asset growth, net interest margin,
credit losses and expense controls. The annual incentive compensation plan
is
75
<PAGE>
funded from Cupertino's pre-tax income. Individual awards for executive
officers are based upon percentages of the total bonus pool based on the
individual's position and the Executive Committee's assessment of such
individual's contribution in such position, determined by the performance of
Cupertino and CNB based upon measurable goals, adjusted annually. While many
of the factors considered in determining whether to award an incentive bonus
are objective, the Executive Committee may exercise its subjective judgment
in determining actual bonus amounts. During 1995 the Committee awarded
incentive bonuses to certain executive officers, including the Chief
Executive Officer, based on a number of criteria, including the performance
of Cupertino and the participant and the individual's achievement of goals
specified by the Cupertino Board. See "SUMMARY COMPENSATION TABLE."
3) Stock option grants, which are intended to increase the executive's
interests in Cupertino's long-term success and to link the interests of the
executives with those of the shareholders as measured by Cupertino's share
price. Stock options are granted at the prevailing market value of Cupertino
Shares and will only have value if Cupertino Shares increase in price.
Generally, options vest in equal amounts over three or five years.
COMPARISON OF CUPERTINO SHAREHOLDER RETURN
Set forth below is a line graph comparing the annual percentage change in
the cumulative total return on Cupertino Shares with the cumulative total return
of the Total Return Index for Nasdaq U.S. Stocks ("Nasdaq US") and the Nasdaq
Bank Stock Index ("Nasdaq Banks") as of the end of each of Cupertino's last five
fiscal years.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
CNB $ 100.00 108.36 122.81 158.93 154.36 243.22
Nasdaq US $ 100.00 160.56 186.87 214.51 209.69 296.30
Nasdaq Banks $ 100.00 164.09 238.85 272.39 271.41 404.35
</TABLE>
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR END) CNB NASDAQ NASDAQ US BANKS
- ------------------------------------------------------------- --------- --------- ------------------
<S> <C> <C> <C>
December 31, 1990............................................ $ 100.00 $ 100.00 $ 100.00
December 31, 1991............................................ $ 108.36 $ 160.56 $ 164.09
December 31, 1992............................................ $ 122.81 $ 186.87 $ 238.85
December 31, 1993............................................ $ 158.93 $ 214.51 $ 272.39
December 31, 1994............................................ $ 154.36 $ 209.69 $ 271.41
December 31, 1995............................................ $ 243.22 $ 296.30 $ 404.35
</TABLE>
- ------------------------
(1) The last trading day in 1994 was December 30, 1994 and the last trading day
in 1995 was December 29, 1995.
76
<PAGE>
(2) Assumes that $100.00 was invested on December 31, 1990 in Cupertino Shares
and each index, and that all dividends were reinvested; returns have been
adjusted for stock dividends declared by Cupertino. Shareholder returns over
the indicated period should not be considered indicative of future
shareholder returns.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF MID-PENINSULA
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of the Mid-Peninsula Record Date, no individual known to Mid-Peninsula
owned more than five percent (5%) of the outstanding Mid-Peninsula Shares.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of the Mid-Peninsula Record
Date concerning the equity ownership of directors and executive officers named
in the Summary Compensation Table and directors and executive officers of
Mid-Peninsula and MPB as a group. Unless otherwise indicated, each director and
executive officer listed below possesses sole voting power and sole investment
power. All of the shares shown in the following table are owned both of record
and beneficially except as indicated in the notes to the table. Mid-Peninsula
has only one class of stock outstanding, Mid-Peninsula Shares. There are no
current arrangements known to Mid-Peninsula that may result in a change in
control of Mid-Peninsula.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
NAME AND ADDRESS(1) OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS(2)
- ------------------------------------------------------------------------ ------------------- -------------------
<S> <C> <C>
Lawrence A. Aufmuth..................................................... 8,134(3) .50%
John F. Blokker......................................................... 25,830(4) 1.58%
Allan F. Brown.......................................................... 25,830(5) 1.58%
Owen D. Conley.......................................................... 25,030(6) 1.52%
Murray B. Dey........................................................... 21,132(7) 1.29%
Donald L. Hammond....................................................... 25,830(8) 1.58%
David L. Kalkbrenner.................................................... 31,317(9) 1.90%
R. Hewlett Lee, M.D..................................................... 6,928(10) .42%
Helen C. Leong.......................................................... 25,830(11) 1.58%
George M. Marcus........................................................ 31,274(12) 1.91%
Duncan L. Matteson...................................................... 40,750(13) 2.49%
Carol H. Rowland........................................................ 27,349(14) 1.67%
Donald H. Seiler........................................................ 25,830(15) 1.58%
Warren R. Thoits........................................................ 28,065(16) 1.71%
Bruce E. Van Alstyne.................................................... 21,250(17) 1.29%
Edwin E. van Bronkhorst................................................. 24,330(18) 1.48%
All directors and executive officers as a group (16 persons)............ 394,709(19) 24.10%
</TABLE>
- ------------------------
(1)The address for beneficial owners, all of whom are incumbent directors or
executive officers of Mid-Peninsula and MPB, is the address of
Mid-Peninsula, 420 Cowper Street, Palo Alto, California, 94301-1504.
(2)Includes shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(3)Includes 7,384 shares held in Mr. Aufmuth's IRA Rollover Account and 750
shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(4)Includes 12,290 shares held as separate property by Mr. Blokker's spouse and
1,250 shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
77
<PAGE>
(5)Includes 12,290 shares owned of record by the Vance M. Brown & Sons, Inc.
Profit Sharing Plan, of which Allan F. Brown is a beneficiary, and includes
1,250 shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(6)Includes 13,780 shares held with Mr. Conley's spouse as community property
and 11,250 shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(7) Includes 14,582 shares held jointly with Mr. Dey's spouse as trustees of
the Murray B. Dey and Wendy H. Dey Trust dated April 23, 1982 and 6,550
shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(8) Includes 24,580 shares held jointly with Mr. Hammond's spouse and 1,250
shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(9) Includes 9,963 shares held jointly with Mr. Kalkbrenner's spouse, 9,047
shares held in Mr. Kalkbrenner's IRA account and 12,307 shares subject to
stock options exercisable within 60 days of the Mid-Peninsula Record Date.
(10) Includes 5,678 shares held jointly with Dr. Lee's spouse as trustees of the
R. Hewlett Lee and Elizabeth P. Lee Family Trust dated July 26, 1983 and
1,250 shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(11) Includes 24,580 shares held jointly with Mrs. Leong's spouse and 1,250
shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(12) Includes 1,250 shares subject to stock options exercisable within 60 days
of the Mid-Peninsula Record Date.
(13) Includes 30,000 shares held jointly with Mr. Matteson's spouse, 9,000
shares held by the Matteson Realty Services, Inc. Defined Benefit Employees'
Retirement Trust and 1,750 shares subject to stock options exercisable
within 60 days of the Mid-Peninsula Record Date.
(14) Includes 13,608 shares held jointly with Ms. Rowland's spouse, 7,948 shares
held in Ms. Rowland's IRA account and 5,793 shares subject to stock options
exercisable within 60 days of the Mid-Peninsula Record Date.
(15) Includes 24,580 shares held jointly with Mr. Seiler's spouse as Trustee of
the Seiler Family Trust and 1,250 shares subject to stock options
exercisable within 60 days of the Mid-Peninsula Record Date.
(16) Includes 9,832 shares held by Mr. Thoits as Trustee of the Warren R. Thoits
Trust dated December 30, 1983, 5,836 shares held by Thoits Brothers, Inc.,
10,647 shares for which Mr. Thoits is the record holding trustee and 1,750
shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(17) Includes 3,750 shares subject to stock options exercisable within 60 days
of the Mid-Peninsula Record Date.
(18) Includes 22,850 shares held jointly with Mr. van Bronkhorst's spouse as
Trustees of the E. E. van Bronkhorst Trust dated July 12, 1977 and 1,750
shares subject to stock options exercisable within 60 days of the
Mid-Peninsula Record Date.
(19) Includes 54,400 shares subject to stock options exercisable within 60 days
of the Mid-Peninsula Record Date.
78
<PAGE>
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of the Mid-Peninsula
Record Date with respect to members of the Mid-Peninsula Board and all executive
officers. Mid-Peninsula knows of no arrangements, including any pledge by any
person of securities of the operation of which may, at a subsequent date, result
in a change in control of Mid-Peninsula. There are no arrangements or
understandings by which any of the executive officers or directors of either
Mid-Peninsula or MPB were selected. There is no family relationship between any
of the directors or executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ----------------------------------------------------------------------------
<S> <C> <C>
Lawrence A. Aufmuth 52 Director of Mid-Peninsula and MPB since August 16, 1995.
John F. Blokker 66 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively.
Allan F. Brown 69 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively.
Owen D. Conley 73 Director of Mid-Peninsula and MPB since October 7, 1994.
Murray B. Dey 54 Executive Vice-President and Director of Mid-Peninsula and MPB since October
7, 1994 and October 9, 1987, respectively.
Donald L. Hammond 69 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively.
David L. Kalkbrenner 57 President, Chief Executive Officer and Director of Mid-Peninsula and MPB
since October 7, 1994 and October 9, 1987, respectively.
R. Hewlett Lee, M.D. 70 Director of Mid-Peninsula and MPB since October 7, 1994 and February 21,
1990, respectively.
Helen C. Leong 69 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively.
George M. Marcus 55 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively.
Duncan L. Matteson 62 Chairman of the Board and Director of Mid-Peninsula and MPB since October 7,
1994 and October 9, 1987, respectively.
Carol H. Rowland 60 First Vice President and Chief Financial Officer (Principal Financial and
Accounting Officer) of Mid-Peninsula and MPB since October 7, 1994 and
October 9, 1987, respectively.
Donald H. Seiler 67 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively.
Warren R. Thoits 74 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively; Secretary of Mid-Peninsula
Bruce E. Van Alstyne 69 Director of Mid-Peninsula and MPB since October 7, 1994.
Edwin E. van Bronkhorst 72 Director of Mid-Peninsula and MPB since October 7, 1994 and October 9, 1987,
respectively.
</TABLE>
The following is a brief account of the business experience during the past
five years of each director and executive officer listed above.
LAWRENCE A. AUFMUTH is a partner in the law firm of Aufmuth, Fox, Weed &
LeBlanc. He is a graduate of Brown University with a law degree from Stanford
University and is certified as a Specialist in Taxation Law by the State Bar of
California. From 1971 to 1988, Mr. Aufmuth was with Ware & Freidenrich in Palo
Alto where he was chairman of its Tax Department. He is a former director of
University Bank & Trust Company and was active in its Trust and Compensation
Committees.
79
<PAGE>
JOHN F. BLOKKER is the president and chief executive officer of Luxcom,
Inc., a voice, video and data communication company located in Fremont,
California. He was formerly a general partner of Hambrecht & Quist Venture
Partners (1985-1988) and was employed by the Hewlett-Packard Company from 1957
to 1985. His last position with Hewlett-Packard, from 1981 to 1985, was as vice
president and general manager of the components group. Mr. Blokker is currently
a director of Circon, Inc. and the Whittier Trust Company. He is a trustee of
the Foundation for Hope, San Jose, California, a member of the Board of
Overseers of the Hoover Institute, Palo Alto, California, and a member of the
Board of Directors of the Cato Institute, Washington D.C.
ALLAN F. BROWN is the chairman of Vance Brown, Inc., a construction firm
located in Palo Alto, and is a managing partner of Park City Leasing. He is a
native of Palo Alto and a Stanford University graduate. He was a member of the
Stanford athletic board from 1979 to 1983 and is currently a member of the
Stanford University major gifts committee, a director of the Peninsula Open
Space Trust, a trustee of Channing House, and a trustee of the Sierra Club
Foundation.
OWEN D. CONLEY was a director and chairman of the board of directors of San
Mateo County Bancorp and WestCal National Bank from 1985 to October 7, 1994. Mr.
Conley has been owner, president and chief executive officer of Liberty Lease,
Inc., Redwood City, an automobile, truck and equipment leasing company, since
1975.
MURRAY B. DEY has over 30 years of banking experience and worked for Crocker
National Bank from 1964 to 1986 prior to the opening of Mid-Peninsula Bank in
1987. From 1975 to 1982, he was the vice president and assistant manager of the
main office of Crocker Bank in Palo Alto. He became the manager of that office
in 1982 and held that position until 1984. From 1984 to 1986 he was the area
market manager in the Palo Alto/Menlo Park area. He currently serves as a member
of the board of directors, Senior Coordinating Council of Palo Alto, Inc.; is
president and treasurer of the Home Equity Loan Program for Seniors, Inc.; and
is a member of the Community Cabinet of the Lucile Packard Childrens' Hospital
at Stanford.
DONALD L. HAMMOND was employed by the Hewlett-Packard Company beginning in
1959, and he held various management positions within that company until his
retirement in 1988 as director of HP Laboratories. He is a consultant to several
companies and universities in commercialization of technology, and serves on the
board of directors of Nellcor Puritan Bennett and Tridex Corporation. He has
been a resident of the local area for more than 30 years and served 11 years on
the Palo Alto Board of Education, including three years as president of the
board. He is a member and fellow of the Institute of Electrical and Electronic
Engineers and a member of the National Academy of Engineering.
DAVID L. KALKBRENNER has over 30 years of experience in banking. He was
employed by Crocker National Bank from 1963 to 1986. From 1981 to 1986, he
served as first vice president and regional manager of the mid-Peninsula region,
with administrative offices located in Palo Alto. He was responsible for the
administration of 14 full-service branches from San Carlos to Sunnyvale, a
business banking center in Palo Alto and the private banking office, also
located in Palo Alto. From 1977 to 1981, he was vice president and manager of
the main office of Crocker Bank in Palo Alto. He is a member of the board of
directors of the College of Notre Dame and is a former director of the Palo Alto
Chamber of Commerce and the Community Association for the Retarded.
R. HEWLETT LEE, M.D. is a trustee of the Palo Alto Medical Foundation and a
director emeritus of the Stanford University Hospital. He was chairman of the
Board of Governors of the Palo Alto Medical Foundation and executive director of
the Palo Alto Medical Clinic 1981-1989, was a general and cancer surgeon at the
clinic from 1956 through 1989, and was the clinic's vice director from 1964 to
1981. He is a past trustee of California Blue Shield (1974-1983), and is a
co-founder of "Lifeguard" HMO and "TakeCare" HMO, both of which are health plans
serving the Northern California area. He presently is serving on several
health-related nonprofit boards.
80
<PAGE>
HELEN C. LEONG was the chairman and chief executive officer of Advanced
Polymer Systems, Inc., a health-oriented company with technology focusing on
health care products and pharmaceuticals, from 1985 to 1988. She remains a
member of the board of directors of Advanced Polymer Systems and is a scientific
consultant to the company. She is on the board of directors and is a member of
the compensation and investment committees of Erox Corporation and is a general
partner of CLW Associates, involved in real estate investments, and is the
managing partner of Leong Ventures, a venture capital group specializing in
investments in health care and biotechnology. She is a member of the board of
directors of the Peninsula Children's Center and the Career Action Center.
GEORGE M. MARCUS is the founder and chairman of The Marcus & Millichap
Company, the nation's fourth largest commercial real estate brokerage firm, and
is a director of Essex Property Trust, a real estate investment trust company.
He is currently an advisor to the University of California, Berkeley, Center for
Real Estate and Urban Economics, and serves on the board of trustees of the Fine
Arts Museums of San Francisco. Mr. Marcus is a former founding director of Plaza
Bank of Commerce in San Jose.
DUNCAN L. MATTESON is president of The Matteson Companies, a diversified
group of real estate investment and property management corporations located in
Menlo Park. He has been actively involved in the real estate investment and
securities industries in the Palo Alto/Menlo Park Area since 1959. He is a
member of the Executive Committee of the Stanford Heart Council, and serves as a
trustee of the Palo Alto Medical Foundation. As an appointee of the Governor,
Mr. Matteson is Vice President of the Board of Directors of the Cow Palace. He
is the immediate past-chairman of the National Multi-Housing Council, a group of
the leading apartment owners and managers throughout the United States.
CAROL H. ROWLAND has been Chief Financial Officer of MPB since 1987. She
served as senior vice president and chief financial officer of Burlingame Bank
and Trust, Burlingame, California, from 1985 to 1987. Prior to that, she served
for five years as senior vice president and chief financial officer of
University National Bank & Trust Company, Palo Alto, California.
DONALD H. SEILER is the founder and managing partner of Seiler & Company,
Certified Public Accountants, in Redwood City and San Francisco. He has been a
certified public accountant in San Francisco and the Peninsula area since 1952.
He is presently a director of Ross Stores, Inc., serves on the audit committee
of Stanford Health Services, is a past-president of the Jewish Community
Federation of San Francisco, the Peninsula and Marin and Sonoma Counties. He is
on the board of directors of the Peninsula Community Foundation.
WARREN R. THOITS is a partner with the Palo Alto law firm of Thoits, Love,
Hershberger & McLean. He is a native of Palo Alto and a graduate of Stanford
University and its School of Law. Mr. Thoits has been very active in community
and charitable organizations, having served as president of the Palo Alto
Chamber of Commerce, the Palo Alto Rotary Club and as chairman of the Palo Alto
Area Chapter, American Red Cross. He was formerly a member of the board of
directors of Northern California Savings and Loan Association (now Great Western
Bank).
BRUCE E. VAN ALSTYNE was a director of San Mateo County Bancorp and WestCal
National Bank from 1985 to October 7, 1994. Mr. Van Alstyne has over 35 years of
experience in the investment banking industry. In 1985, Mr. Van Alstyne founded
the investment counseling firm of Van Alstyne and Company, Inc., located in
Portola Valley. He is currently a member of the Investment Advisory Committee
for the Foundation for the San Mateo County Community College District.
EDWIN E. VAN BRONKHORST retired from the Hewlett-Packard Company in 1984 and
was, prior to his retirement, senior vice president, chief financial officer and
treasurer of that company and served on its board from 1962 to 1984. He
currently serves as a member of the board of directors of the California Water
Service Company and Nellcor Puritan Bennett and is a trustee and treasurer of
the David & Lucile Packard Foundation.
81
<PAGE>
None of Mid-Peninsula's Directors is a director of any other company with a
class of securities registered pursuant to Section 12 of the Exchange Act or
subject to the requirements of Section 15(d) of such Act or any company
registered as an investment company under the Investment Company Act of 1940,
whose common stock is registered pursuant to Section 12 of the Exchange Act
except for the following: Director Hammond is a director of Nellcor Puritan
Bennett, a medical equipment manufacturer located in Pleasanton, California and
he is a director of Tridex, Inc., a manufacturer of ophthalmic instruments
located in Mountain View, California; Director Leong is also a director of
Advanced Polymer Systems, a polymeric delivery systems company located in
Redwood City, California, and a director of Erox Corporation, a manufacturer of
fragrances containing synthesized human pheromones located in Fremont,
California; Director Marcus is also a director of Essex Property Trust, a real
estate investment trust company located in Palo Alto, California; Director
Seiler is also a director of Ross Stores, Inc., a retail department store chain
headquartered in Newark, California; and Director Van Bronkhorst is also a
director of Nellcor Puritan Bennett, a medical equipment manufacturer located in
Pleasanton, California, and California Water Service Company, a water service
provider located in San Jose, California.
COMMITTEES OF THE MID-PENINSULA BOARD
The Audit Committee, with the guidance of KPMG, conducts the Annual
Directors Audit. Donald H. Seiler, Donald L. Hammond, R. Hewlett Lee, M.D., Owen
D. Conley and Allan F. Brown serve on this committee, which met three (3) times
in 1995. The purpose of this committee is to review the internal controls and
financial reporting for Mid-Peninsula and MPB and to examine the findings and
reports of the outside auditors and bank examiners.
The Mid-Peninsula Board has not established nominating or compensation
committees. The Executive Committee performs the functions of the nominating and
compensation committees. The Executive Committee has responsibility for
considering appropriate candidates for election as directors of Mid-Peninsula
and establishing and reviewing compensation of the chief executive officer and
overall compensation of employees. Duncan L. Matteson, Edwin E. van Bronkhorst,
Donald H. Seiler, Warren R. Thoits and David L. Kalkbrenner serve on this
committee, which met five (5) times in 1995.
MPB's Loan Committee has responsibility for establishing loan policy and
approving loans which exceed certain dollar limits. Duncan L. Matteson, Edwin E.
van Bronkhorst, Allan F. Brown, David L. Kalkbrenner and Murray B. Dey serve on
this committee, which met fifteen (15) times in 1995.
MPB's Investment Committee has responsibility for establishing investment
policy and reviews the investment portfolio. Edwin E. van Bronkhorst, Helen C.
Leong, George M. Marcus, Bruce E. Van Alstyne, David L. Kalkbrenner and Carol H.
Rowland serve on this committee, which met five (5) times in 1995.
All Mid-Peninsula directors attended at least seventy-five percent (75%) of
the aggregate of the total number of meetings of the board and committees on
which they served during 1995, and all MPB directors attended at least
seventy-five (75%) of the aggregate of the total number of meetings of the board
and committees on which they served during 1995.
COMPENSATION OF DIRECTORS
Directors of Mid-Peninsula receive no fees for their participation in
Mid-Peninsula's directors' meetings. Directors of MPB receive $200 for each
board meeting attended. Non-employee directors of MPB received $150 for each
committee meeting attended in 1995. Non-employee directors of MPB's Loan
Committee received a $500 per month retainer as well as $150 for each meeting
attended during 1995. The total fees paid to all directors of Mid-Peninsula in
1995 was $59,550.
82
<PAGE>
MID-PENINSULA EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Set forth below is the summary compensation paid or accrued during the
fiscal years ended December 31, 1993, 1994 and 1995 to David L. Kalkbrenner,
Murray B. Dey and Carol H. Rowland, the only executive officers of Mid-Peninsula
and MPB during the periods presented.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
AWARDS
----------------------
ANNUAL COMPENSATION SECURITIES PAYOUTS
---------------------------------------- RESTRICTED UNDERLYING ---------
OTHER ANNUAL STOCK OPTIONS/ LTIP
SALARY(1) BONUS(2) COMPENSATION(3) AWARD(S) SARS(4) PAYOUTS
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ---------------------------- --------- ----------- --------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
David L. Kalkbrenner, 1995 $ 150,000 $ 97,000 $ 8,400 -- 15,000 --
President and CEO 1994 $ 142,210 $ 74,000 $ 8,400 -- 1,062 --
1993 $ 139,300 $ 73,000 $ 8,400 -- 4,459 --
Murray B. Dey, 1995 $ 120,000 $ 67,000 $ 6,000 -- -- --
Exec. Vice President 1994 $ 115,870 $ 42,000 $ 6,000 -- 1,062 --
1993 $ 113,500 $ 45,000 $ 6,000 -- 3,344 --
Carol H. Rowland, 1995 $ 107,740 $ 40,000 $ 4,800 -- 5,000 --
First Vice President 1994 $ 105,360 $ 20,250 $ 4,800 -- 1,062 --
and CFO 1993 $ 103,200 $ 26,000 $ 4,800 -- 2,230 --
<CAPTION>
ALL OTHER
COMPENSATION(5)
NAME AND PRINCIPAL POSITION ($)
- ---------------------------- ----------------
<S> <C>
David L. Kalkbrenner, $ 45,033
President and CEO $ 13,142
$ 11,996
Murray B. Dey, $ 23,891
Exec. Vice President $ 10,089
$ 9,401
Carol H. Rowland, $ 30,069
First Vice President $ 8,391
and CFO $ 7,966
</TABLE>
- ------------------------
(1) Amounts shown include cash and non-cash compensation earned and received by
executive officers as well as amounts earned but deferred at the election of
those officers under the 401(k) Plan. Amounts deferred under the 401(k) Plan
were $8,994 in 1993, $9,240 in 1994 and $ 9,240 in 1995, respectively, for
each named executive officer.
(2) Amounts indicated as bonus payments were earned for performance during 1993,
1994 and 1995, but paid in the first quarters of 1994, 1995 and 1996,
respectively.
(3) No executive officer received perquisites or other personal benefits in
excess of the lesser of $50,000 or 10% of each such officer's total annual
salary and bonus during 1993, 1994 or 1995.
(4) Under the 1994 Option Plan, options may be granted to directors and key,
full-time salaried officers and employees of Mid-Peninsula and MPB. Options
granted under the Option Plan are either incentive options or non-statutory
options. Options granted under the 1994 Option Plan become exercisable in
accordance with a vesting schedule established at the time of grant. Vesting
may not extend beyond ten years from the date of grant. Options granted
under the 1994 Option Plan are adjusted to protect against dilution in the
event of certain changes in Mid-Peninsula's capitalization, including stock
splits and stock dividends. All options granted to the named executive
officers were incentive stock options and have an exercise price equal to
the fair market value of Mid-Peninsula Shares (or, as applicable, MPB's
Common Stock) on the date of grant. The amounts shown have been adjusted to
give effect to a five percent stock dividend in December 1993, and the
conversion ratio pertaining to the merger transaction whereby WestCal
National Bank merged with and into MPB and MPB became a wholly owned
subsidiary of Mid-Peninsula, which transaction was consummated on October 7,
1994. The terms of the 1994 Option Plan also apply to options to purchase
Mid-Peninsula Shares which were originally granted under MPB's 1987 Stock
Option Plan, and assumed by Mid-Peninsula.
(5) Amounts shown for David L. Kalkbrenner include $2,200 in director fees,
$3,050 in term life insurance premiums, $6,746 in 401(k) matching
contributions in 1993, $2,600 in director fees, $3,612 in term life
insurance premiums and $6,930 in 401(k) matching contributions in 1994 and
$2,400 in director fees, $3,903 in term life insurance premiums, $31,800
accrued under Mr. Kalkbrenner's Salary Continuation Agreement and $6,930 in
401(k) matching contributions
83
<PAGE>
in 1995. Amounts shown for Murray B. Dey include $2,655 in term life
insurance premiums and $6,746 in 401(k) matching contributions in 1993,
$3,159 in term life insurance premiums and $6,930 in 401(k) matching
contributions in 1994 and $2,060 in term life insurance premiums, $14,901
accrued under Mr. Dey's Salary Continuation Agreement and $6,930 in 401(k)
matching contributions in 1995. Amounts shown for Carol H. Rowland include
$1,220 in term life insurance premiums and $6,746 in 401(k) matching
contributions in 1993, $1,461 in term life insurance premiums and $6,930 in
401(k) matching contributions in 1994 and $1,115 in term life insurance
premiums, $22,024 accrued under Ms. Rowland's Salary Continuation Agreement
and $6,930 in 401(k) matching contributions in 1995.
OPTION/SAR GRANTS TABLE
The following table provides information regarding stock options granted to
the named executive officers during 1995.
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE
- ----------------------------------------------------------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
David L. Kalkbrenner....................................... 15,000 37.5% 12.75 01/18/05
Murray B. Dey.............................................. -- -- -- --
Carol H. Rowland........................................... 5,000 12.5% 12.75 01/18/05
</TABLE>
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth certain information concerning unexercised
options under the 1994 Option Plan as of the Mid-Peninsula Record Date.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FY-END (#) FY-END ($)
ACQUIRED ON VALUE ---------------- ----------------
EXERCISE REALIZED(1) EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE(2) UNEXERCISABLE(1)
- --------------------------------------------------- ------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
David L. Kalkbrenner............................... 4,889 14,863 17,224/12,894 96,401/54,601
Murray B. Dey...................................... 1,424 4,329 10,238/ 1,366 61,143/ 6,565
Carol H. Rowland................................... 949 2,885 8,385/ 4,971 47,000/20,936
</TABLE>
- ------------------------
(1) The aggregate value has been determined based upon the average of the bid
and asked prices for Mid-Peninsula Shares at exercise or year-end, minus the
exercise price.
(2) Adjusted to give effect to the conversion ratio pertaining to the merger
transaction whereby WestCal National Bank merged with and into MPB and MPB
became a wholly owned subsidiary of Mid-Peninsula.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Effective March 3, 1992, MPB entered into a two-year employment agreement
with David L. Kalkbrenner, President and Chief Executive Officer, which provides
for automatic one-year extensions until the agreement is terminated as described
below. The agreement, as amended, provides for, among other things: (a) a base
salary of $135,000 per year, as adjusted at the discretion of the Mid-Peninsula
Board; (b) a discretionary annual bonus based upon the pre-tax net profits of
MPB; (c) payment to Mr. Kalkbrenner of his base salary (reduced by the amount
received by him from state
84
<PAGE>
disability insurance or worker's compensation or other similar insurance through
policies provided by MPB) for a period of six months if he becomes disabled so
that he is unable to perform his duties; (d) four weeks annual vacation leave;
(e) a $500,000 life insurance policy; (f) an automobile allowance of $700 per
month; and (g) reimbursement for ordinary and necessary expenses incurred by Mr.
Kalkbrenner in connection with his employment. The agreement may be terminated
with or without cause, but if the agreement is terminated due to the occurrence
of circumstances that make it impossible or impractical for MPB to conduct or
continue its business, the loss by MPB of its legal capacity to contract, MPB's
breach of the terms of the agreement, or in MPB's discretion by giving not less
than 30 days' prior written notice of termination, Mr. Kalkbrenner will be
entitled to receive severance compensation equal to 24 months' of Mr.
Kalkbrenner's then existing base salary. The agreement further provides that in
the event of a "change in control" as defined therein and within a period of two
years following consummation of such change in control: (a) Mr. Kalkbrenner's
employment is terminated; or (b) any adverse change occurs in the nature and
scope of Mr. Kalkbrenner's position, responsibilities, duties, salary, benefits
or location of employment; or (c) any event occurs which reasonably constitutes
a demotion, significant diminution or constructive termination of Mr.
Kalkbrenner's employment, Mr. Kalkbrenner will be entitled to receive severance
compensation in an amount equal to two and one-half times his average annual
compensation for the five years immediately preceding the change in control (or
for such shorter time Mr. Kalkbrenner was employed by MPB).
Recognizing the importance of building and retaining a competent management
team, in 1995 the Board of Directors of MPB purchased life insurance policies on
the lives of Mr. Kalkbrenner, Mr. Dey, Ms. Rowland and three other key employees
and adopted a conditional non-qualified deferred compensation plan in a form
proposed by Bank Compensation Strategies Group, and endorsed by the California
Bankers Association, the American Bankers Association, as well as numerous other
state banking associations in order to indirectly offset anticipated costs for
certain death, disability and post-employment/retirement benefits for such
employees. In March 1996, a fourth key employee was included in this plan. MPB
is the sole owner and beneficiary under the life insurance policies. Under the
terms of the plan, differing death, disability and post-employment/retirement
benefits are to be provided to such key employees. The terms for these
agreements are intended to provide an incentive for each employee to remain with
Mid-Peninsula and MPB by defining and increasing, over the employee's term of
employment, the amounts each employee will receive upon the occurrence of
certain specified events, including formal retirement on or after a specified
age. The agreements provide maximum annual benefit payments of $85,000 to Mr.
Kalkbrenner, $60,000 to Mr. Dey, $45,000 to Ms. Rowland, and $36,000 for each
other key employee. The annual benefit amount is payable in equal monthly
installments over a fifteen (15) year period (ten years for Carol Rowland). In
the event of an employee's death, all remaining amounts due are to be paid to
the employee's designated beneficiary over the remaining payout period. Other
events which may alter when payment of the annual benefit is to begin, or the
amount which is to be paid, include: (i) "disability" prior to retirement (a
term specifically defined in each agreement), in which case the employee will
begin to receive a different and lesser annual amount starting shortly after the
defined retirement age; and (ii) either termination of employment without cause
or constructive termination following a "change of control," in which case the
employee will be entitled to receive all or a portion of the maximum annual
benefit depending upon the employee involved and the employee's length of
service prior to termination. Generally, in those situations where the employee
is terminated for cause, or where the employee voluntarily terminates his or her
employment prior to retirement or other event triggering a right to payments
under the agreement, the employee will not be entitled to the payment of any
benefits. Due to special circumstances, however, and depending upon the date her
employment is terminated, it is expected that Carol Rowland would be entitled to
an amount not in excess of $30,000, plus interest if her employment is
terminated for cause or voluntarily by her prior to retirement.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires Mid-Peninsula's directors,
executive officers and beneficial owners of 10% or more of Mid-Peninsula's
equity securities to file with the Commission
85
<PAGE>
initial reports of ownership and reports of changes of ownership of
Mid-Peninsula's equity securities. Officers, directors and such shareholders are
required by regulation to furnish Mid-Peninsula with copies of all Section 16(a)
forms they file. To Mid-Peninsula's knowledge, based solely on review of the
copies of such reports furnished to Mid-Peninsula and written representations
that no other reports were required, during the fiscal year ended December 31,
1995, except for Director Aufmuth who failed to timely file one report on Form 4
for the month of November, 1995 but filed the report on January 9, 1996, all
Section 16(a) filing requirements applicable to its executive officers,
directors and beneficial owners of 10% or more of Mid-Peninsula's equity
securities appear to have been met.
CERTAIN MID-PENINSULA RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Except as described below, there have been no transactions, or series of
similar transactions, during 1995, or any currently proposed transaction, or
series of similar transactions, to which Mid-Peninsula or MPB was or is to be a
party, in which the amount involved exceeded or will exceed $60,000 and in which
any director of Mid-Peninsula or MPB, executive officer of Mid-Peninsula or MPB,
any shareholder owning of record or beneficially 5% or more of the outstanding
Mid-Peninsula Shares, or any member of the immediate family of any of the
foregoing persons, had, or will have, a direct or indirect material interest.
MPB leases its offices at 420 Cowper Street, Palo Alto, California 94301
from MPB Associates, a tenant-in-common arrangement in which seven directors of
MPB hold an approximate 51% interest. The acquisition of MPB's leased premises
by MPB Associates in 1990 did not result in a change in the terms of MPB's
lease.
The lease, which originally expired in May 1993, has been extended through
January 2000. The lease covers a ground floor area of 8,817 net rentable square
feet and a second floor area of 9,217 net rentable square feet. MPB pays an
annual rental of $560,000 for the entire leased space. Additionally, MPB pays
real property taxes, utilities, and building insurance, to the extent they
exceed, on an annual basis, $1.40 per rentable square foot, $1.60 per rentable
square foot, and $0.17 per rentable square floor, respectively. The rent will be
adjusted every twelve months beginning June 1, 1997 in accordance with the
change in the immediately preceding year over 1992 in the Consumer Price Index
for All Urban Consumers, San Francisco/Oakland Metropolitan Area, All-Items
(1967 = 100) as published by the U.S. Department of Labor, Bureau of Labor
Statistics. The lease also contains a provision granting MPB a right of first
refusal to purchase the building during the term of the lease upon the same
terms and conditions that the landlord is willing to accept from a third party.
CERTAIN BUSINESS RELATIONSHIPS
Director Warren R. Thoits is a member of the law firm of Thoits, Love,
Hershberger & McLean, which firm performed legal services for Mid-Peninsula
and/or MPB in 1995 and is expected to perform legal services for Mid-Peninsula
and/or MPB in 1996. The fees paid to said firm by Mid-Peninsula and/ or MPB in
1995 did not exceed five percent (5%) of said firm's gross revenues for the
year.
INDEBTEDNESS OF MANAGEMENT
Mid-Peninsula, through MPB, has had, and expects in the future to have
banking transactions in the ordinary course of its business with many of
Mid-Peninsula's directors and officers and their associates, including
transactions with corporations of which such persons are directors, officers or
controlling shareholders, on substantially the same terms (including interest
rates and collateral) as those prevailing for comparable transactions with
others. Management believes that in 1995 such transactions comprising loans did
not involve more than the normal risk of collectibility or present other
unfavorable features. Loans to executive officers of Mid-Peninsula and MPB are
subject to limitations as to amount and purposes prescribed in part by the
Federal Reserve Act, as amended.
86
<PAGE>
INFORMATION CONCERNING MID-PENINSULA MEETING ONLY
PROPOSALS TO BE VOTED ON ONLY BY MID-PENINSULA SHAREHOLDERS AND TO BE EFFECTIVE
ONLY UPON THE CONSUMMATION OF THE MERGER
APPROVAL OF THE FOLLOWING PROPOSALS NUMBER 2 THROUGH 5 IS A CONDITION TO THE
MERGER. APPROVAL OF PROPOSAL NUMBER 6 IS NOT A CONDITION TO THE MERGER. IF
APPROVED, ALL PROPOSALS WILL TAKE EFFECT ONLY IF THE MERGER IS CONSUMMATED AND
AT THE EFFECTIVE TIME OF THE MERGER.
PROPOSAL NUMBER 2
TO AMEND THE BYLAWS TO CHANGE THE AUTHORIZED NUMBER OF DIRECTORS TO NOT LESS
THAN SEVEN AND NOT MORE THAN THIRTEEN, AND TO FIX THE NUMBER OF DIRECTORS AT TEN
UNTIL CHANGED AS PROVIDED IN THE BYLAWS.
The bylaws of Mid-Peninsula currently provide that the number of directors
of Mid-Peninsula may not be less than nine nor more than seventeen, with the
exact number to be fixed from time to time by resolution of the Mid-Peninsula
Board. The Reorganization Agreement requires that, effective at the Effective
Time of the Merger, the bylaws of Mid-Peninsula be amended to change the
permitted range of the number of directors of Bancorp to be from seven to
thirteen, the number of directors be fixed at ten, and the Board of Directors of
Bancorp immediately following the Merger consist of five members of the current
Mid-Peninsula Board and five members of the current Cupertino Board. The five
members from the Mid-Peninsula Board are expected to be David L. Kalkbrenner,
Duncan L. Matteson, Donald H. Seiler, Warren R. Thoits and Edwin E. van
Bronkhorst. The five members from the Cupertino Board are expected to be John M.
Gatto, James E. Jackson, Rex D. Lindsay, Glen McLaughlin and Dick J. Randall.
THE MID-PENINSULA BOARD RECOMMENDS A VOTE "FOR" AN AMENDMENT OF ARTICLE IV,
SECTION 1, SUBDIVISIONS (a) AND (b) OF THE MID-PENINSULA BYLAWS TO READ AS
FOLLOWS, EFFECTIVE AT THE EFFECTIVE TIME OF THE MERGER:
"SECTION 1. NUMBER OF DIRECTORS. (a) The authorized number of directors
shall be no less than seven (7) nor more than thirteen (13). The exact number of
directors shall be fixed from time to time, within the limits specified in this
subdivision, by an amendment of subdivision (b) of this section adopted by the
Board of Directors.
(b) The exact number of directors shall be ten (10) until changed as
provided in subdivision (a) of this section."
THE MID-PENINSULA BOARD RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 2 AND WILL
VOTE ALL PROXIES HELD BY IT "FOR" PROPOSAL NUMBER 2, UNLESS A SHAREHOLDER
DIRECTS OTHERWISE.
APPROVAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING
MID-PENINSULA SHARES ENTITLED TO VOTE AT THE MID-PENINSULA MEETING. IN THE EVENT
THAT THIS PROPOSAL IS NOT APPROVED, THE EXISTING RANGE OF DIRECTORS WOULD REMAIN
THE SAME.
PROPOSAL NUMBER 3
TO AMEND THE ARTICLES OF INCORPORATION TO ESTABLISH SUPER-MAJORITY VOTE
REQUIREMENTS EQUAL TO A TWO-THIRDS VOTE OF THE BOARD OF DIRECTORS APPLICABLE TO
CERTAIN MATTERS, INCLUDING (A) A MERGER, SALE OF CONTROL OR SALE OF MATERIAL
ASSETS OF BANCORP, (B) ACQUISITIONS BY BANCORP, (C) CREATION OF NEW BUSINESS
UNITS OF THE SURVIVING CORPORATION OR ITS SUBSIDIARIES, MPB AND CNB, (D)
MATERIAL CHANGES IN OPERATING BUDGETS OF BANCORP OR ITS SUBSIDIARIES, MPB AND
CNB, (E) MATERIAL CHANGES IN THE BUSINESS ORGANIZATION OR ORGANIZATIONAL
STRUCTURE OF BANCORP OR ITS SUBSIDIARIES, MPB AND CNB, (F) TERMINATION OF ANY
87
<PAGE>
EXECUTIVE OR SENIOR OFFICER APPOINTED TO THE EXECUTIVE MANAGEMENT COMMITTEE OF
BANCORP, AND (G) ANY CHANGE IN THE AUTHORIZED RANGE OF DIRECTORS OF BANCORP.
As required by the Reorganization Agreement as a condition to the closing of
the Merger, this proposal, if approved by the shareholders of Mid-Peninsula,
will add the following new Article Five ("Article Five") to Mid-Peninsula's
Articles of Incorporation, effective, if the Merger is consummated, at the
Effective Time of the Merger:
"FIVE: SUPER-MAJORITY VOTING BY DIRECTORS
The vote of not less than two-thirds of all members of the board
of directors shall be required to approve any of the following
types of matters affecting the corporation:
(a) Any merger, sale of control or sale of material assets
of the corporation.
(b) Any material acquisition by the corporation.
(c) The creation of any new business unit of the
corporation or any subsidiary of the corporation.
(d) Any operating budget, or any material change therein,
of the corporation or any subsidiary of the corporation.
(e) Any material change in the business organization or
organizational structure of the corporation or any subsidiary of
the corporation.
(f) Termination of the employment of any executive or
senior officer appointed to the Executive Management Committee
of the corporation.
(g) Any change in the authorized range of the number of
directors of the corporation."
The approval of Article Five as a condition of the Merger was agreed to by
Mid-Peninsula and Cupertino in order to assure the continuity of the policies
and organizational structure, including identity of executive management
personnel, of Bancorp and its subsidiaries MPB and CNB (as such policies and
structure were agreed to in the Reorganization Agreement) by requiring a greater
than majority vote to authorize any material changes with respect to such
matters.
California law ordinarily requires that all matters of the types which are
the subject of Article Five, to the extent that they may require approval by the
board of directors of a corporation, may be approved or adopted by vote of a
majority of the members of the board of directors present at a meeting duly held
at which a quorum is present. Since the Board of Directors of Bancorp will
consist initially of ten (10) members, of which a quorum would be six (6), the
vote of a majority, or four (4) members, of such a quorum otherwise would be
sufficient to approve matters of the types which are the subject of Article Five
at any duly called meeting of the board at which a mere quorum were present. By
contrast, the adoption of Article Five will make it necessary for any such
matter to be approved by not less than two-thirds, or seven (7), of the initial
members of the Bancorp Board, each of whom is required to be renominated for
election as a director for at least two years following the Effective Time of
the Merger. Thus, any such matters could not be approved at any meeting of the
Bancorp Board at which a mere quorum were present, since a majority of a quorum
mathematically could never equal or exceed two-thirds of the total number of
directors.
Consequently, approval of Article Five by the shareholders of Mid-Peninsula
will make it possible for a minority of the members of the Bancorp Board, voting
as a bloc, to delay or impede action by a majority of the board of directors
with respect to any matters presented for Board approval which may be subject to
the provisions of Article Five.
88
<PAGE>
THE MID-PENINSULA BOARD RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 3 AND WILL
VOTE ALL PROXIES HELD BY IT "FOR" PROPOSAL NUMBER 3, UNLESS A SHAREHOLDER
DIRECTS OTHERWISE.
CALIFORNIA LAW REQUIRES THAT PROPOSAL NUMBER 3 BE APPROVED BY A MAJORITY OF
THE OUTSTANDING SHARES OF MID-PENINSULA ENTITLED TO VOTE AT THE MID-PENINSULA
MEETING.
PROPOSAL NUMBER 4
TO APPROVE THE GREATER BAY BANCORP 1996 STOCK OPTION PLAN AND TO AUTHORIZE
AN INCREASE IN THE TOTAL NUMBER OF SHARES AVAILABLE FOR ISSUANCE PURSUANT TO ALL
STOCK OPTION PLANS OF GREATER BAY BANCORP FROM 457,037 TO 967,890 SHARES.
GENERAL
The Reorganization Agreement requires that Mid-Peninsula take all action
necessary either to adopt a new stock option plan or to amend the 1994 Option
Plan so as to enable Bancorp to issue Substitute Options. The Mid-Peninsula
Board has determined that this objective may be accomplished by adoption of a
new stock option plan, which has been designated the Greater Bay Bancorp 1996
Stock Option Plan (the "Bancorp Option Plan"), and by increasing the total
number of shares available for option under all stock option plans of Bancorp
from 457,037 shares (the present maximum number of Mid-Peninsula Shares which
may be issued under the 1994 Option Plan) to 967,890 shares. The Mid-Peninsula
shareholders are requested to approve both these proposals, which were approved
September 18, 1996, by the Mid-Peninsula Board.
The Mid-Peninsula Board intends to terminate the 1994 Option Plan as of the
Effective Time of the Merger, so that the only stock option plan of Bancorp
after the Effective Time of the Merger will be the Bancorp Option Plan. However,
all grants outstanding under the 1994 Option Plan at the Effective Time of the
Merger will continue to be exercisable in accordance with their terms and will
be unaffected by the termination of the 1994 Option Plan.
Currently the 1994 Option Plan permits the granting of options for a total
amount of 457,037 Mid-Peninsula Shares, of which options for a total of 251,138
shares are outstanding and a total of 73,651 shares are available for granting
additional options. This amount is clearly insufficient to permit Bancorp to
fulfill its obligation under the Reorganization Agreement to grant Substitute
Options. Assuming that Substitute Options must be granted to replace all options
currently outstanding under Cupertino stock option plans for a total of 311,874
Cupertino Shares, a total of not less than 254,245 additional Bancorp Shares
(i.e., the product of the Conversion Ratio times 311,874) must be made available
for the grant of Substitute Options.
The Mid-Peninsula Board believes that, in addition, it is prudent to be able
to provide incentive and rewards to the larger employee base of Bancorp and its
new subsidiary, CNB, by increasing the number of shares available for option
under all stock option plans of Bancorp by a sufficient number to be able to
provide for the future grant of options beyond the immediate obligation to grant
Substitute Options. Since a commonly applied standard for the maximum number of
shares which should be available for issuance under all stock-based compensation
plans of any one company is thirty percent (30%) of outstanding shares, the
Mid-Peninsula Board believes that a number equal to thirty percent of the number
of shares which will be outstanding after the Merger (assuming that all
outstanding Cupertino Shares are exchanged for Bancorp Shares) is an appropriate
maximum number of shares to reserve for the Bancorp stock option plans.
Under the foregoing assumption, a total of 3,226,299 Bancorp Shares would be
outstanding following the Merger. Thirty percent of this number of shares is
967,890 shares. Since the number of Cupertino or Mid-Peninsula Shares, if any,
as to which dissenters' rights may be exercised by shareholders of either
Mid-Peninsula or Cupertino will not be finally ascertained until after the
Merger, and since such shares, if any, will remain outstanding following the
Merger until dissenters' rights with respect to them have been perfected and the
shares are surrendered and canceled in exchange for
89
<PAGE>
cash, no adjustment of the above calculated maximum number of shares to be
available for option under Bancorp stock option plans following the Merger is
necessary due to any exercise of dissenters' rights.
SUMMARY OF PROPOSED BANCORP OPTION PLAN
The following discussion summarizes the principal features of the Bancorp
Option Plan. This description is qualified in its entirety by reference to the
full text of the Bancorp Option Plan, a copy of which is attached to the Joint
Proxy/Prospectus as Appendix I and is incorporated here by reference.
PURPOSE OF THE PLAN. The purpose of the Bancorp Option Plan is to offer
selected employees, directors and consultants of Bancorp an opportunity to
acquire a proprietary interest in the success of Bancorp, or to increase such
interest, by purchasing Shares of Bancorp's Common Stock.
The options issued under the Bancorp Option Plan, at the discretion of the
Bancorp Board or a committee appointed by the Bancorp Board, may be either
incentive stock options or non-qualified stock options.
ADMINISTRATION. The Bancorp Board will have authority to administer the
Bancorp Option Plan but may delegate its administrative powers to one or more
committees of the Bancorp Board. With respect to the participation of employees
who are subject to Section 16 of the Exchange Act, the Bancorp Option Plan may
be administered by a committee composed solely of two or more members of the
Board of Directors who qualify as "nonemployee directors" as defined in
Commission Rule 16b-3 under the Exchange Act. With respect to the chief
executive officer of Bancorp, the Bancorp Option Plan may be administered by a
committee composed solely of two or more members of the Board of Directors who
qualify as "outside directors" for such purpose as defined by the Internal
Revenue Service. If the committee members meet both such qualifications, then
one committee may administer the Bancorp Option Plan.
The Bancorp Board may appoint a separate committee, consisting of one or
more members of the Bancorp Board who do not meet such qualifications. Such
committee may administer the Bancorp Option Plan with respect to employees who
are not officers of Bancorp or members of the Bancorp Board, may grant options
under the Bancorp Option Plan to such employees and may determine the timing,
number of shares and other terms of such grants.
SHARES RESERVED. The total number of Mid-Peninsula Shares presently
reserved for issuance upon exercise of options granted under the 1994 Option
Plan is 457,037. Subject to approval of this Proposal Number 4 by the
shareholders of Mid-Peninsula, this total number will be increased to 967,890
shares, including (i) shares issuable by Bancorp pursuant to options which are
outstanding under the 1994 Option Plan at the Effective Time of the Merger, (ii)
shares issuable pursuant to Substitute Options, and (iii) shares issuable
pursuant to options first granted under the Bancorp Option Plan after the
Effective Time of the Merger. If any option granted under the 1994 Option Plan
or the Bancorp Option Plan for any reason expires, is canceled or otherwise
terminates after the Effective Time of the Merger without having been exercised
in full, the shares not purchased under such option will again become available
for grant under the Bancorp Option Plan.
ELIGIBILITY. Any individual who is a common-law employee of Bancorp or any
subsidiary of Bancorp, including MPB and CNB, any member of the Bancorp Board,
and any independent contractor who performs services for Bancorp or a subsidiary
and who is not a member of the Bancorp Board will be eligible to participate in
the Bancorp Option Plan.
TERMS OF OPTIONS. Under the Bancorp Option Plan, the Bancorp Board or the
Committee (as the case may be) selects the individuals to whom options will be
granted, the type of option to be granted, the exercise price of each option,
the number of shares covered by such option and the other terms and conditions
of each option. The eligible individuals are able to receive incentive and
non-qualified stock options; provided, however, that the aggregate fair market
value (determined at the time the incentive stock option is granted) of the
stock with respect to which incentive stock options are exercisable for the
first time by the optionee during any calendar year (under all incentive stock
option plans of
90
<PAGE>
Bancorp) may not exceed one hundred thousand dollars ($100,000). Should it be
determined that any incentive stock option granted exceeds such maximum, such
incentive stock option is considered to be a non-qualified stock option and not
to qualify for treatment as an incentive stock option under Section 422 of the
Code to the extent, but only to the extent, of such excess.
The vesting of any option granted under the Bancorp Option Plan will be
determined by the Committee at its sole discretion, provided however, that (i)
each option agreement must provide for immediate exercisability of the entire
option in the event of a change in control of Bancorp, and (ii) in the event
that an optionee's service as an employee, director or non-director consultant
of Bancorp terminates, the option will be exercisable only to the extent it was
vested as of the date of such termination, unless otherwise specified in the
option agreement.
For purposes of the above provisions, a "change in control" will mean
either:
(i) A change occurs in the composition of the Bancorp Board, as a result
of which fewer than one-half of the incumbent directors are directors who
either had been directors of Bancorp (or of Cupertino or Mid-Peninsula) for
24 months prior to such change, or were elected, or nominated for election,
to the Bancorp Board with the affirmative votes of at least a majority of
the directors who had been directors of Bancorp at the Effective Time of the
Merger or 24 months prior to such change (whichever is later) and who were
still in office at the time of the election or nomination; or
(ii) Any person, company or governmental or political subdivision,
agency or instrumentality is or becomes the beneficial owner, directly or
indirectly, of securities of Bancorp representing 50 percent or more of the
combined voting power of Bancorp's then outstanding securities.
The exercise price of each option granted pursuant to the Bancorp Option
Plan ordinarily may not be less than one hundred percent (100%) of the fair
market value of the stock subject to the option on the date the option is
granted; provided, however, that the purchase price of the stock subject to an
incentive stock option may not be less than one hundred ten percent (110%) for
incentive stock options where the optionee owns stock possessing more than ten
percent (10%) of the total combined voting power of Bancorp.
SUBSTITUTE OPTIONS. If Bancorp at any time succeeds to the business of
another corporation through merger or consolidation, or through the acquisition
of stock or assets of such corporation, options may be granted under the Bancorp
Option Plan in substitution of options previously granted by such corporation to
purchase shares of its stock, which options are outstanding at the date of the
succession. It is specifically intended that this provision of the Bancorp
Option Plan authorizes the granting and issuance of Substitute Options pursuant
to the terms of the Reorganization Agreement.
Except as otherwise provided in the Reorganization Agreement, the Committee
will have discretion to determine the extent to which Substitute Options will be
granted, the persons to receive Substitute Options, the number of shares to be
subject to Substitute Options, and the terms and conditions of Substitute
Options which shall, to the extent permissible within the terms and conditions
of the Plan, be equivalent to the terms and conditions of the options
surrendered in exchange for Substitute Options. The exercise price per share of
Substitute Options may be determined without regard to the requirement that
options be granted at an exercise price per share not less than fair market
value, provided, however, that the exercise price of each Substitute Option must
be an amount such that, in the sole and absolute judgment of the Committee, the
economic benefit provided by such Substitute Option is not greater than the
economic benefit represented by the surrendered option as of the date the
Substitute Option is granted.
PAYMENT FOR SHARES. The exercise price of shares issued pursuant to
exercise of a nonstatutory stock option under the Bancorp Option Plan may be
made (i) all or in part with shares which have already been owned by the
optionee or his or her representative for more than 6 months, valued at their
fair market value on the date when the new shares are purchased, (ii) by the
delivery (on a form prescribed by Bancorp) of an irrevocable direction to a
securities broker approved by Bancorp to sell
91
<PAGE>
shares and to deliver all or part of the sales proceeds to Bancorp in payment of
all or part of the exercise price and any withholding taxes, or (iii) by the
delivery (on a form prescribed by Bancorp) of an irrevocable direction to pledge
shares to a securities broker or lender approved by Bancorp, as security for a
loan, and to deliver all or part of the loan proceeds to Bancorp in payment of
all or part of the exercise price and any withholding taxes. In the discretion
of the Committee, payment of the exercise price of incentive stock options may
be accepted in any of such forms or as the Committee may otherwise provide in
the option agreement.
ADJUSTMENTS UPON CHANGES IN SHARES. In the event of a subdivision of the
outstanding shares of Bancorp, a declaration of a dividend payable in such
shares, a declaration of a dividend payable in a form other than such shares in
an amount that has a material effect on the value of outstanding shares, a
combination or consolidation of the outstanding shares by reclassification or
otherwise into a lesser number of shares, a recapitalization, a spinoff or a
similar occurrence, the Committee may make appropriate adjustments in one or
more of the number of shares available for future grants, the limit set upon the
number of options which may be granted to any single individual in one year, the
number of shares covered by each outstanding option, or the exercise price under
each outstanding option.
In the event that Bancorp is a party to a merger or other reorganization,
outstanding options will be subject to the agreement of merger or
reorganization, which (subject to the "change in control" provision described
above) may provide, without other limitation, for the assumption of outstanding
options under the Bancorp Option Plan by the surviving corporation or its
parent, for their continuation by Bancorp (if Bancorp is the surviving
corporation), for payment of a cash settlement per share of the option equal to
the difference between the amount to be paid for one share of Bancorp under such
agreement and the exercise price per share of the option, or for the
acceleration of their exercisability followed by the cancellation of options not
exercised, in all cases without the optionees' consent. Any cancellation may not
occur until after such acceleration is effective and optionees have been
notified of such acceleration and have had reasonable opportunity to exercise
their options.
EXPIRATION, TERMINATION AND TRANSFER OF OPTIONS. Under the Bancorp Option
Plan, no incentive option may extend more than ten years (or five years, in the
case of an incentive option granted to an employee who owns more than 10 percent
of the combined voting power of all classes of stock of Bancorp) from the date
of grant; the terms of all options otherwise may be determined by the Committee
in its sole discretion. In the event of termination of employment due to death
or total and permanent disability, options will expire twelve months after such
termination unless the options by their terms were scheduled to expire earlier.
If the optionee's employment is terminated for cause, the option expires 30 days
after Bancorp gives notice of such termination; for such purposes, "cause" is
defined to include embezzlement, fraud, dishonesty, breach of fiduciary duty,
the deliberate disregard of rules of Bancorp which results in loss, damage or
injury to Bancorp, the unauthorized disclosure of any of the secrets or
confidential information of Bancorp the inducement of any client or customer of
Bancorp to break any contract with Bancorp or the inducement of any principal
for whom Bancorp acts as agent to terminate such agency relationship, the
engagement in any conduct which constitutes unfair competition with Bancorp, the
removal of the optionee from office by any court or bank regulatory agency, or
such other similar acts which the Committee in its discretion may determine to
constitute good cause for termination of optionee's service. During an
optionee's lifetime, the optionee's incentive options may be exercised only by
him or her and may not be transferred. An optionee's nonstatutory options also
will not be transferable during the optionee's lifetime, except to the extent
otherwise permitted in the option agreement. Subject to prior permitted
transfers, in the event of an optionee's death, the optionee's option(s) will
not be transferable other than by will, by written beneficiary designation or by
the laws of descent and distribution.
TERMINATION AND AMENDMENT OF THE PLAN. The Bancorp Board may amend, suspend
or terminate the Bancorp Option Plan at any time and for any reason. An
amendment of the Plan shall be subject to the approval of the shareholders of
Bancorp only to the extent required by applicable laws or regulations. If not
previously terminated by the Bancorp Board, the Bancorp Option Plan will
terminate ten years from the Effective Time of the Merger.
92
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES. The following discussion is only a summary
of the principal federal income tax consequences of the options and rights to be
granted under the Bancorp Option Plan, and is based on existing federal law
(including administrative regulations and rulings) which is subject to change,
in some cases retroactively. State and local tax consequences may differ. This
discussion is also qualified by the particular circumstances of individual
optionees, which may substantially alter or modify the federal income tax
consequences discussed.
Incentive stock options and non-qualified stock options are treated
differently for federal income tax purposes. Incentive stock options are
intended to comply with the requirements of Section 422 of the Code.
Non-qualified stock options need not comply with such requirements.
An optionee is not taxed on the grant or exercise of an incentive stock
option. The difference between the exercise price and the fair market value of
the shares on the exercise date will, however, be a preference item for the
purposes of the alternative minimum tax. If an optionee holds the shares
acquired upon exercise of an incentive stock option for at least two years
following grant and at least one year following exercise, the optionee's gain,
if any, upon a subsequent disposition of such shares is long-term capital gain.
The measure of the gain is the difference between the proceeds received on
disposition and the optionee's basis in the shares (which generally equals the
exercise price). If an optionee disposes of stock acquired pursuant to exercise
of an incentive stock option before satisfying the one- and two-year holding
periods described above, the optionee will recognize both ordinary income and
capital gain the year of disposition. The amount of ordinary income will be the
lesser of (i) the amount realized on disposition less the optionee's adjusted
basis in the stock (usually the exercise price) or (ii) the difference between
the fair market value of the stock on the exercise date and the option price.
The balance of the consideration received on such a disposition will be
long-term capital gain if the stock had been held for at least one year
following exercise of the incentive stock option. Bancorp will not be entitled
to an income tax deduction on the grant or exercise of an incentive stock option
or on the optionee's disposition of the shares after satisfying the holding
period requirement described above. If the holding periods are not satisfied,
Bancorp will be entitled to a deduction in the year the optionee disposes of the
shares, in an amount equal to the ordinary income recognized by the optionee.
An optionee is not taxed on the grant of a non-qualified stock option. Upon
exercise however, the optionee recognizes ordinary income equal to the
difference between the option price and the fair market value of the shares on
the date of exercise. Bancorp will be entitled to an income tax deduction in the
year of exercise in the amount recognized by the optionee as ordinary income.
Any gain on subsequent disposition of the shares is long-term capital gain if
the shares are held for at least one year following exercise. Bancorp will not
receive a deduction for this gain.
BENEFITS UNDER NEW PLAN
The following table discloses the benefits or amounts which would have been
received under the Bancorp Option Plan by the specified persons and groups who
will be granted Substitute Options under the Bancorp Option Plan pursuant to the
terms of the Reorganization Agreement, if the Substitute Options had been
granted and were fully exercisable as of the Cupertino Record Date.
93
<PAGE>
Because the Substitute Options will be granted at differing prices and with
different vesting schedules, and because the fair market value of a Bancorp
Share at the time or times when Substitute Options may be exercised cannot be
predicted or determined, it is not possible to state the dollar value, if any,
of the benefit(s) which may be realized by the holders of Substitute Options.
<TABLE>
<CAPTION>
NUMBER OF BANCORP
NAME AND POSITION DOLLAR VALUE(1) SHARES (2)
- -------------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
C. Donald Allen .................................................... $ 285,900 22,289
President and Chief Executive Officer
Steven C. Smith .................................................... 202,514 23,026
Executive Vice President, Chief Operating Officer
Kenneth D. Brenner ................................................. 137,959 14,270
Executive Vice President, Strategic Marketing
David Hood ......................................................... 136,841 15,082
Executive Vice President, Senior Lending Officer
Hall Palmer ........................................................ 136,841 15,082
Executive Vice President, Senior Trust Officer
Executive officers as a group (5 persons)........................... 900,054 89,747
Non-executive directors as a group (12 persons)..................... 1,035,498 93,734
Non-executive employees as a group (51 persons)..................... 562,217 77,423
--------------- --------
Total Cupertino Options Outstanding................................. $ 2,497,768 260,904
</TABLE>
- ------------------------
(1) Based upon the difference between the exercise price per share of each
outstanding exercisable Cupertino option and the closing Nasdaq price per
Mid-Peninsula Share (times the Conversion Ratio) as of the Cupertino Record
Date.
(2) Represents number of Cupertino Shares exercisable under outstanding
Cupertino options, multiplied by the Conversion Ratio.
APPROVAL OF PROPOSAL NUMBER 4 IS A CONDITION PRECEDENT TO THE MERGER. THE
MID-PENINSULA BOARD RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 4 AND WILL VOTE ALL
PROXIES HELD BY IT "FOR" PROPOSAL NUMBER 4, UNLESS A SHAREHOLDER DIRECTS
OTHERWISE.
APPROVAL OF THE BANCORP OPTION PLAN AND OF THE INCREASE IN THE NUMBER OF
SHARES WHICH MAY BE ISSUED PURSUANT TO ALL STOCK OPTION PLANS OF BANCORP
REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE MID-PENINSULA SHARES PRESENT
OR REPRESENTED AT THE MID-PENINSULA MEETING (PROVIDING A QUORUM IS PRESENT).
PROPOSAL NUMBER 5
TO CHANGE THE NAME OF MID-PENINSULA TO GREATER BAY BANCORP
Pursuant to the Reorganization Agreement, Mid-Peninsula has agreed to take
all necessary corporate action to change the name of Mid-Peninsula to Greater
Bay Bancorp effective at the Effective Time of the Merger. The Mid-Peninsula
Board believes that the name Greater Bay Bancorp will be more indicative of the
greater market area, capitalization and business mission of Bancorp.
Pursuant to this proposal, Article One of the Articles of Incorporation of
Mid-Peninsula will be amended, as of the Effective Time of the Merger, to read
as follows:
"ONE: NAME.
The name of the corporation is Greater Bay Bancorp."
94
<PAGE>
ANY CHANGE IN THE NAME OF MID-PENINSULA IS REQUIRED BY CALIFORNIA LAW TO BE
APPROVED BY VOTE OF A MAJORITY OF THE OUTSTANDING MID-PENINSULA SHARES.
THE MID-PENINSULA BOARD RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 5. ALL
PROXIES HELD BY THE MID-PENINSULA BOARD WILL BE VOTED "FOR" PROPOSAL NUMBER 5,
UNLESS A SHAREHOLDER INDICATES OTHERWISE.
PROPOSAL NUMBER 6
DIRECTOR LIABILITY, INDEMNIFICATION OF AGENTS
AND INDEMNIFICATION AGREEMENTS
INTRODUCTION
California law enacted in 1987 (the "Indemnification Law") permits the
limitation of liability of directors and indemnification of directors, officers
and other agents to a greater extent than otherwise permitted under prior
California law. Similar legislation has been adopted in many other states. The
Indemnification Law permits a California corporation to adopt a provision in its
articles of incorporation reducing or eliminating the liability of a director to
the corporation or its shareholders for monetary damages for breach of the
fiduciary duty of care, provided that such liability does not arise from certain
proscribed conduct (including intentional misconduct and breach of the duty of
loyalty). The Indemnification Law in this regard relates only to actions brought
by shareholders on behalf of the corporation (i.e., "derivative actions") and
does not apply to claims brought by outside parties. The Indemnification Law
also permits a corporation to include a provisions in its articles of
incorporation allowing the corporation to include in its bylaws, and in
agreements between the corporation and its directors, officers and other agents,
provisions expanding the scope of indemnification beyond that specifically
provided under California law.
PRIOR AMENDMENTS TO ARTICLES AND BYLAWS OF MPB
In response to the Indemnification Law, the Board of Directors and
shareholders of MPB previously approved amendments to MPB's Articles of
Incorporation in the following form (the "Article Amendment"), which limit the
personal liability of MPB directors for monetary damages for a breach of such
directors' fiduciary duty of care and allow MPB to expand the scope of its
indemnification of directors, officers and other agents to the fullest extent
permitted by California law:
(a) The liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
(b) The indemnification of an agent [as defined in California
Corporations Code section 317(a)] of this corporation, whether by bylaws,
agreement or otherwise, for breach of duty to this corporation and its
stockholders, may, to the extent not prohibited under California
Corporations Code sections 317 and 204(a)(10), exceed the indemnification
otherwise permitted by section 317 of the Corporations Code.
In order to provide full protection to MPB's directors, officers and other
agents, the Board of Directors of MPB also approved the use of indemnification
agreements, and the shareholders approved and ratified such proposed
indemnification agreements in the form attached to this Joint Proxy
Statement/Prospectus as Appendix J, between MPB and its directors, and such
current and future officers and other agents as the directors might designate
("Indemnification Agreements").
The Mid-Peninsula Board believes that adoption of the Article Amendment and
approval of the Indemnification Agreements by the shareholders of Mid-Peninsula
will serve the best interest of Bancorp and its shareholders by strengthening
Bancorp's ability to attract and retain the services of knowledgeable and
experienced persons to serve as directors, officers and other agents. Cupertino
has previously adopted the Article Amendment in substantially the same form. If
the Article Amendment
95
<PAGE>
is approved by shareholders at the Mid-Peninsula Meeting, the limited liability
provisions of the Article Amendment will not apply retroactively, but will
become effective only at the Effective Time of the Merger.
The Mid-Peninsula Board has determined that the proposed Article Amendment
and Indemnification Agreements will be in the best interests of Bancorp and its
shareholders. The Mid-Peninsula Board believes that Bancorp's ability to
continue to attract and retain experienced individuals to serve as directors and
officers will be enhanced by providing to officers and directors increased
protection from the risk of litigation and personal liability. To date,
Mid-Peninsula has not experienced difficulty in attracting and retaining
qualified individuals to serve as directors. However, Mid-Peninsula expects that
Bancorp will continue to seek individuals who are not also employees of Bancorp,
CNB or MPB to serve as directors and believes that such persons may be less
willing to serve as directors if they are not afforded additional protection
from liability as permitted by the Indemnification Law.
OTHER PROTECTION
INDEMNIFICATION UNDER STATE STATUTES AND BYLAWS. Mid-Peninsula and
Cupertino are (and Bancorp will be) subject to the Indemnification Law, which
provides a detailed statutory framework covering indemnification of any officer,
director or other agent of a corporation who is made or threatened to be made a
party to any legal proceeding by reason of his or her service on behalf of the
corporation. Such law provides that indemnification against expenses actually
and reasonably incurred in connection with any such proceeding shall be made to
any such person who has been successful "on the merits" in the defense of any
such proceeding, but does not require indemnification in any other circumstance.
The law provides that a corporation may indemnify any agent of the corporation,
including officers and directors, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in a third party
proceeding against such person by reason of his or her service on behalf of the
corporation, provided the person acted in good faith and in a manner he or she
reasonably believed to be in the best interests of the corporation. The law
further provides that in derivative suits the corporation may indemnify such a
person against expenses incurred in such a proceeding, provided such person
acted in good faith and in a manner he or she believed to be in the best
interest of the corporation and its shareholders. Indemnification is not
available in derivative actions (i) for amounts paid or expenses incurred in
connection with a matter that is settled or otherwise disposed of without court
approval or (ii) with respect to matters which the agent shall have been
adjudged to be liable to the corporation unless the court shall determine that
such person is entitled to indemnification.
The Indemnification Law permits the advancing of expenses incurred in
defending any proceeding against a corporate agent by reason of his or her
service on behalf of the corporation upon the giving of a promise to repay any
such sums in the event it is later determined that such person is not entitled
to be indemnified. Finally, the Indemnification Law provides that the
indemnification provided by the statute is not exclusive of other rights to
which those seeking indemnification may be entitled, by bylaw, agreement or
otherwise, to the extent additional rights are authorized in a corporation's
articles of incorporation. The law further permits a corporation to procure
insurance on behalf of its directors, officers and agents against any liability
incurred by any such individual, even if a corporation would not otherwise have
the power under applicable law to indemnify the director, officer or agent for
such expenses.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. Mid-Peninsula presently
maintains a policy of directors' and officers' liability insurance which will
continue to cover officers and directors of Bancorp. However, there is no
assurance that such coverage will continue to be available with such breadth of
coverage as Bancorp may deem advisable and at reasonable expense. Accordingly,
the Mid-Peninsula Board believes that it will serve Bancorp's interests to
supplement any insurance coverage which Bancorp may maintain in the future by
agreeing by contract to indemnify directors and officers to the fullest extent
permitted under applicable law.
96
<PAGE>
THE ARTICLE AMENDMENT
The following discussion summarizes certain material changes to Bancorp's
Articles of Incorporation which would be effected by the Article Amendment.
LIMITATION OF LIABILITY. The Article Amendment would eliminate director
liability to Bancorp or its shareholders for monetary damages arising out of a
director's breach of his or her duty of care to the fullest extent permissible
under California law. The breach of the duty of care by a director could, in the
absence of the Article Amendment, result in liability for monetary damages
caused to Bancorp or its shareholders. Liability for a breach of the duty of
care arises when directors fail to exercise sufficient care in reaching
decisions or otherwise exercising their responsibilities as directors. The
Article Amendment will not eliminate the director's duty; it will only eliminate
monetary damage awards occasioned by a breach of that duty. Accordingly, if the
Article Amendment is approved by the shareholders and filed with the California
Secretary of State, a breach of the duty of care would remain a valid basis for
a suit seeking to stop a proposed transaction from occurring. After the
transaction has occurred, however, the shareholders may not have a claim against
directors for monetary damages based on the breach of the duty, even if that
breach involved negligence or gross negligence on the part of the directors.
The Indemnification Law does not, however, permit the limitation or
elimination of directors' liability for monetary damages based on claims arising
out of (i) acts or omissions which involve misconduct or a knowing and culpable
violation of the law; (ii) acts or omissions that a director believes to be
contrary to the best interests of Bancorp and its shareholders or that involve
the absence of good faith on the part of the director; (iii) any transaction
from which the director derives an improper personal benefit; (iv) acts or
omissions which show a reckless disregard for the director's duty to Bancorp or
its shareholders in circumstances in which the director was aware, or should
have been aware, in the ordinary course of performing a director's duties of a
risk of serious injury to Bancorp or its shareholders; (v) acts or omissions
which constitute an unexcused pattern of inattention which amounts to an
abdication of the director's duty to Bancorp or its shareholders; (vi)
transactions between Bancorp and its directors or corporations which have
interrelated directors under Section 310 of the California General Corporation
Law; or (vii) improper distributions, loans or guarantees under Section 316 of
the California General Corporation Law.
The limitation of liability provisions of the proposed Article Amendment
apply only to directors and do not eliminate or limit the liability of officers
of Bancorp, including officers who are also directors, for any act or omission
as an officer.
INDEMNIFICATION. The Indemnification Law provides a detailed statutory
framework covering indemnification of officers, directors and other corporate
agents of Bancorp who are made or threatened to be made a party to any legal
proceeding by reason of their service to Bancorp. The Bancorp Board may amend
Bancorp's Bylaws to require indemnification of directors and officers of Bancorp
to the fullest extent permitted under California law and to authorize
indemnification of other agents of Bancorp to the same extent. The
Indemnification law permits a corporation to indemnify its directors, officers
and other corporate agents under circumstances which supplement the
indemnification specifically permitted under the statutory framework.
Assuming the approval of this Proposal by the shareholders of Mid-Peninsula,
the changes to Bancorp's Articles of Incorporation effected by the Article
Amendment will provide that Bancorp will indemnify its officers and directors to
the fullest extent permitted by law. It is intended that Bancorp will enter into
Indemnification Agreements with directors and officers substantially identical
to the form of Indemnification Agreement attached hereto as Appendix J. Each
Indemnification Agreement will constitutes a binding, legal obligation of
Bancorp, and may not be amended without the consent of the individual who is
protected by such Indemnification Agreement.
The shareholders should recognize that the directors have a direct personal
interest in the approval of the Article Amendment and in the Indemnification
Agreements, which could be at variance with the interests of the shareholders.
The Article Amendment may reduce the likelihood of
97
<PAGE>
shareholders or management bringing a lawsuit against directors on behalf of
Bancorp for breach of fiduciary duty even though such an action, if successful,
might otherwise have benefited Bancorp and its shareholders. The Article
Amendment and Indemnification Agreements make it more likely that a suit against
directors will result in full or partial indemnification by Bancorp than would
be the case in the absence of such indemnification provisions in Bancorp's
Articles of Incorporation or without the proposed Indemnification Agreements.
INDEMNIFICATION AGREEMENTS
The proposed Indemnification Agreements attempt to provide to Bancorp
directors, including the ten directors of Cupertino and Mid-Peninsula who will
be appointed to the Board of Directors of Bancorp and all future directors of
Bancorp, and to such current and future officers and other agents of Bancorp as
its directors may designate, the maximum indemnification allowed under
applicable law and under Bancorp's Articles of Incorporation and Bylaws. The
Indemnification Agreements provide indemnification which expands the scope of
indemnification provided by the Indemnification Law. It has not yet been
determined, however, to what extent the indemnification expressly permitted by
California law may be expanded, and therefore the validity and scope of
indemnification provided by the Indemnification Agreements may be subject to
future judicial interpretation.
Any award of indemnification to a director, officer or other agent would
come directly from the assets of Bancorp, thereby affecting a shareholder's
investment. It should be noted that if the Indemnification Agreements are
approved by the shareholders, they will by their terms apply to conduct of
Bancorp directors, officers and other agents occurring prior to the effective
date of such Agreements. However, under California law, indemnification may not
be permissible for acts occurring prior to the filing of the Article Amendment
with the California Secretary of State, if such indemnification exceeds the
scope of the Indemnification Law.
The Indemnification Agreements set forth a number of procedural and
substantive matters which are not addressed or are addressed in less detail in
the Indemnification Law, including the following:
- The Indemnification Agreements establish a standard of conduct that the
person to be indemnified must have acted "in a manner such person did not
believe to be contrary to the best interests of the corporation." This
standard is an expansion of the standard under the Indemnification Law
that the person must have acted "in a manner such person reasonably
believed to be in the best interests of the corporation."
- The Indemnification Agreements establish the presumption that the
indemnified party has met the applicable standard of conduct required for
indemnification. In addition, the Reviewing Party (as defined in the
Indemnification Agreements) may make the determination that
indemnification is proper in any circumstances for which the indemnified
party has requested to be indemnified. The Indemnification Law requires a
finding in each specific case by the board of directors, independent legal
counsel or the shareholders that the applicable standard of conduct has
been met.
- The Indemnification Agreements provide that litigation expenses shall be
advanced to an indemnified party at his or her request provided that he or
she will be required to repay the amount advanced if it is ultimately
determined that he or she is not entitled to indemnification for such
expenses. The Indemnification Law provides that such expenses may be
advanced against such an undertaking upon authorization by the board of
directors.
- The Indemnification Agreements explicitly provide that in a derivative
suit the indemnified party will be entitled to indemnification against
amounts paid in settlement, to the fullest extent permitted by law, where
the indemnified party meets the applicable standard of conduct. As noted
above, indemnification of any such amount would be paid out of Bancorp's
funds. The Indemnification Law does not provide for such indemnification
without court approval. The enforceability of the provisions in the
Indemnification Agreements providing for settlement
98
<PAGE>
payments in derivative suits has not been judicially interpreted by the
courts and may be subject to public policy limitations. The Board of
Directors has not sought a legal opinion as to the enforceability of these
provisions because of the lack of judicial interpretation of the
Indemnification Law to date.
- In the event Bancorp does not pay a requested indemnification amount, the
Indemnification Agreements allow the indemnified party to contest this
determination by petitioning a court to make an independent determination
of whether such party is entitled to indemnification under the
Indemnification Agreements. In the event of such a contest, the burden of
proving that the indemnified party did not meet the applicable standard of
conduct will be on Bancorp. If Bancorp fails to establish that the
applicable standard of conduct has not been met, the indemnified party
will be entitled to indemnification, which will include reimbursement for
expenses incurred by the indemnified party in such contest in establishing
the right to indemnification. The Indemnification Law does not set forth
any procedure for contesting a corporation's determination of a party's
right to indemnification or establish which party bears the burden of
proof with respect to a challenge to such a determination.
- The Indemnification Agreements explicitly provide for partial
indemnification of costs and expenses in the event that an indemnified
party is not entitled to full indemnification under the terms of the
Indemnification Agreements. The Indemnification Law does not specifically
address this issue. It does, however, provide that to the extent that an
indemnified party has been successful on the merits, he or she shall be
entitled to such indemnification.
- The Indemnification Agreements automatically incorporate future changes in
the laws which increase the protection available to the indemnitee. Such
changes will apply to Bancorp without further shareholders approval and
may further impair shareholders' rights or subject Bancorp's assets to
risk of loss in the event of large indemnification claims. Each
Indemnification Agreement constitutes a binding, legal obligation of
Bancorp, and may not be amended without the consent of the individual who
is protected by such Indemnification Agreement.
- The Indemnification Agreements explicitly provide that actions by an
indemnified party serving at the request of Bancorp as a director,
officer, or agent of an employee benefit plan, corporation, partnership,
joint venture or other enterprise, whether or not owned or controlled by
Bancorp, shall be covered by the indemnification. The Indemnification Law
provides that a corporation may so indemnify such parties. It should be
noted that by agreeing by contract to indemnify such parties, Bancorp may
be exposed to liability for actions of an entity over which it may not
exercise control, which liability could adversely affect Bancorp's
financial position.
The proposed Indemnification Agreements, together with the limitation on the
director's liability and the indemnification provided by the Article Amendment,
reduce significantly the number of instances in which directors might be held
liable to Bancorp for monetary damages for breach of their fiduciary duties.
Therefore, it should be noted that the ten directors of Mid-Peninsula and
Cupertino who will be directors of Bancorp have a direct personal interest in
the approval and ratification of the Indemnification Agreements.
THE FOREGOING DISCUSSION OF THE INDEMNIFICATION AGREEMENTS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FORM OF INDEMNIFICATION AGREEMENT ATTACHED TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AS EXHIBIT J, WHICH YOU ARE URGED TO READ
AND CONSIDER CAREFULLY.
CERTAIN PROCEEDINGS
Mid-Peninsula is not aware of any material pending or threatened legal
proceedings against any of its or Cupertino's directors or officers which may
result in a claim for indemnification.
99
<PAGE>
INDEMNIFICATION FOR LIABILITIES UNDER THE SECURITIES ACT
The Commission has expressed its opinion that indemnification of directors,
officers and controlling persons of a corporation against liabilities arising
under the Securities Act is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Bancorp of
expenses incurred or paid by a director, officer or controlling person of
Bancorp in the successful defense of any such action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
securities which have been registered, Bancorp will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
VOTE REQUIRED TO APPROVE THE ARTICLE AMENDMENT AND INDEMNIFICATION AGREEMENTS
Section 310 of the California General Corporation Law provides that no
contract between a corporation and one or more of its directors is either void
or voidable because such director or directors are parties to such contract if
the material facts as to the transaction and as to such director's interest are
disclosed or known to the shareholders and such contract is approved by the
affirmative vote of a majority of the shares voting at the meeting, with the
shares owned by the interested directors not entitled to vote thereon, or the
contract has been approved by a disinterested majority of the board. If the
contract has not been so approved, the contract is not void or voidable if the
person asserting the validity of the contract sustains the burden of proving
that the contract was just and reasonable to the corporation at the time it was
authorized.
Although Mid-Peninsula believes that the form of Indemnification Agreement
will be just and reasonable to Bancorp, and that shareholder approval may not
therefore be required to validate the Indemnification Agreements, Mid-Peninsula
believes that it is appropriate to submit the Indemnification Agreements to the
shareholders for their consideration. If the Indemnification Agreements are
approved by the shareholders, they will not be void or voidable and Bancorp's
shareholders may not later assert a claim that the Indemnification Agreements
are invalid due to improper authorization; however, the shareholders may
challenge the validity of the Indemnification Agreements on other grounds. If
the Indemnification Agreements are not approved by the shareholders, Bancorp may
reconsider the implementation of such Agreements. Whether or not shareholders
approve the Indemnification Agreements, the Board of Directors may in the future
approve other forms of indemnification agreements which may or may not be
submitted to shareholders for approval. If such agreements were implemented in
the absence of shareholder approval, the invalidity of such agreements could
thereafter be asserted by any shareholder. In such an instance, the person
asserting the validity of the contracts bears the burden of proving that they
were just and reasonable to Bancorp at the time they were authorized.
APPROVAL OF THE ARTICLE AMENDMENT WILL REQUIRE THE AFFIRMATIVE VOTE OF A
MAJORITY OF THE OUTSTANDING MID-PENINSULA SHARES AS OF THE MID-PENINSULA RECORD
DATE.
APPROVAL OF THE INDEMNIFICATION AGREEMENTS WILL REQUIRE THE AFFIRMATIVE VOTE
OF A MAJORITY OF THE MID-PENINSULA SHARES VOTING IN PERSON AND BY PROXY AT THE
MID-PENINSULA MEETING, WITH THE SHARES OWNED BY THE INTERESTED DIRECTORS NOT
ENTITLED TO VOTE.
THE MID-PENINSULA BOARD HAS APPROVED THE ARTICLE AMENDMENT AND THE
INDEMNIFICATION AGREEMENTS AND RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
APPROVAL OF THE ARTICLE AMENDMENTS AND THE INDEMNIFICATION AGREEMENTS. ALL
PROXIES HELD BY THE MID-PENINSULA BOARD WILL BE VOTED FOR PROPOSAL NUMBER 6
UNLESS A SHAREHOLDER INDICATES OTHERWISE.
100
<PAGE>
SHAREHOLDER PROPOSALS
Any shareholder desiring to submit a proposal for action at the 1997 Annual
Meeting of Shareholders which is desired to be presented in Bancorp's proxy
statement with respect to such meeting, should submit such proposal to Bancorp
at its principal place of business no later than December 27, 1996, which is 120
days prior to the anticipated mailing date of the proxy materials for the 1997
Annual Meeting.
OTHER MATTERS
Except for procedural matters, no matters other than those set forth in this
Joint Proxy Statement/Prospectus may be brought before the Mid-Peninsula Meeting
or the Cupertino Meeting.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Bancorp Shares
will be reviewed for Mid-Peninsula by Bronson, Bronson & McKinnon LLP.
EXPERTS
MID-PENINSULA. The consolidated financial statements of Mid-Peninsula as of
December 31, 1995 and 1994, and for each of years in the three-year period ended
December 31, 1995, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP
("KPMG"), independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing. On October 7, 1994, Mid-Peninsula acquired San Mateo County Bancorp on
a pooling-of-interests basis. The consolidated financial statements of San Mateo
County Bancorp as of and for the year ended December 31, 1993, which are
included in the 1993 restated consolidated financial statements, were audited by
other auditors, whose report contained an explanatory paragraph regarding the
adoption of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes and SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. KPMG's report, insofar as it relates to the
amounts included for San Mateo County Bancorp, is based solely on the report of
the other auditors.
CUPERTINO. The consolidated financial statements of Cupertino and CNB as of
and for the years ended December 31, 1995 and 1994 incorporated by reference in
this Joint Proxy Statement/Prospectus and elsewhere in the Registration
Statement have been incorporated by reference herein in reliance on the report
of Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The financial statements incorporated in this Joint Proxy
Statement/Prospectus by reference from the Annual Report of Cupertino on Form
10-K for the year ended December 31, 1995 relating to the financial statements
of Cupertino for the year ended December 31, 1993 have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
101
<PAGE>
APPENDIX A
SECOND AMENDED AND RESTATED
AGREEMENT
AND
PLAN OF REORGANIZATION AND MERGER
BY AND BETWEEN
MID-PENINSULA BANCORP
AND
CUPERTINO NATIONAL BANCORP
AUGUST 20, 1996
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
THIS SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER, dated as of August 20, 1996, ("Agreement"), amends and restates an
Amended and Restated Agreement and Plan of Reorganization and Merger made and
entered into as of June 26, 1996, by and between Mid-Peninsula Bancorp, a
California corporation ("Mid-Peninsula"), and Cupertino National Bancorp, a
California corporation ("Cupertino").
A. The Boards of Directors of Mid-Peninsula and Cupertino deem it advisable
and in the best interests of Mid-Peninsula, Cupertino, their subsidiaries and
their respective shareholders that Mid-Peninsula and Cupertino enter into a
business combination, with the expectation that the resulting company will
combine the best elements of both Mid-Peninsula and Cupertino. Pursuant to such
business combination, Cupertino shall merge with and into Mid-Peninsula (the
"Merger") and Mid-Peninsula will change its name to Greater Bay Bancorp
("Bancorp"). Following the Merger, Cupertino's subsidiary, Cupertino National
Bank & Trust ("CNB") and Mid-Peninsula's subsidiary, Mid-Peninsula Bank ("MPB"),
shall be wholly-owned subsidiaries of Bancorp.
B. This Agreement and the Merger Agreement attached as EXHIBIT A and
intended to be filed with the California Secretary of State (the "Merger
Agreement") have been approved by the Boards of Directors of Mid-Peninsula and
Cupertino, and the principal terms will be submitted for approval of the
shareholders of Cupertino and Mid-Peninsula at special meetings of their
respective shareholders.
C. The Merger is intended to qualify as a tax-free reorganization within
the meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the
"IRC").
D. Pursuant to the Merger, each Cupertino shareholder will receive, in
exchange for each share of Cupertino common stock ("Cupertino Share" or
"Cupertino Shares"), the number of shares of Bancorp common stock ("Bancorp
Share" or "Bancorp Shares") determined in accordance with the Conversion Ratio
as more fully set forth in this Agreement and in the Merger Agreement (the
"Conversion Ratio").
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and in the Merger Agreement, the parties hereto agree as
follows:
1. THE MERGER.
1.1 EFFECTIVE DATE. Subject to the terms and conditions of this Agreement,
the Merger shall become effective on the date ("Effective Date") and at the time
("Effective Time of the Merger") an executed copy of the Merger Agreement has
been filed with the California Secretary of State.
1.2 EFFECT OF THE MERGER. Subject to the terms and conditions of this
Agreement, at the Effective Time of the Merger, Cupertino shall be merged with
and into Mid-Peninsula and Mid-Peninsula will change its name to Greater Bay
Bancorp ("Bancorp"). All assets, rights, privileges, immunities, powers,
franchises and interests of Cupertino in and to every type of property (real,
personal and mixed) and choses in action, as they exist as of the Effective
Date, including appointments, designations and nominations and all other rights
and interests as trustee, executor, administrator, registrar of stocks and
bonds, guardian of estate, assignee, receiver and in every other fiduciary
capacity, shall pass and be transferred to and vest in Bancorp by virtue of the
Merger at the Effective Time of the Merger without any deed, conveyance or other
transfer; the separate existence of Cupertino shall cease and the corporate
existence of Mid-Peninsula (with the change of its name as described above) as
Bancorp and as a California corporation shall continue unaffected and unimpaired
by the Merger; and Bancorp shall be deemed to be the same entity as each of
Cupertino and Mid-Peninsula and shall be subject to all of their duties and
liabilities of every kind and description. Bancorp shall be responsible and
liable for all the liabilities and obligations of each of Mid-Peninsula and
Cupertino; and any claim existing or action or proceeding pending by or against
Mid-Peninsula or Cupertino may be prosecuted
A-1
<PAGE>
as if the Merger had not taken place, or Bancorp may be substituted in its
place. Neither the rights of creditors nor any liens upon the property of either
Mid-Peninsula or Cupertino shall be impaired by reason of the Merger.
2. CONVERSION AND CANCELLATION OF SHARES.
2.1 CONVERSION OF CUPERTINO SHARES. At the Effective Time of the Merger,
by virtue of the Merger and without any action on the part of any holder of
Cupertino Shares, subject to Section 2.2, 2.3 and 2.5 of this Agreement, each
outstanding Cupertino Share (other than any shares as to which dissenters'
rights have been perfected) shall be converted into the right to receive .81522
Bancorp Shares (the "Conversion Ratio").
2.2 FRACTIONAL SHARES. Notwithstanding any other provision hereof, no
fractional shares of Bancorp Shares shall be issued to holders of Cupertino
Shares. In lieu thereof, each such holder entitled to a fraction of a Bancorp
Share shall receive, at the time of surrender of the certificate or certificates
representing such holder's Cupertino Shares, an amount in cash equal to the
market value per share of the Mid-Peninsula common stock ("Mid-Peninsula
Shares"), calculated (to the nearest hundredth) by taking the average of the
closing bid and asked prices quoted by each brokerage firm then acting as a
market maker of Mid-Peninsula Shares, for each of the twenty (20) consecutive
trading days up to and including the last business day of the month-end
immediately preceding the Closing Date (the "Determination Date") (whether or
not there were any trades in Mid-Peninsula Shares on such days), multiplied by
the fraction of a Bancorp Share to which such holder otherwise would be
entitled. No such holder shall be entitled to dividends, voting rights, interest
on the value of, or any other rights in respect of a fractional share.
2.3 SURRENDER OF CUPERTINO SHARES.
a. Prior to the Effective Date, Mid-Peninsula shall appoint U.S. Stock
Transfer Corporation or its successor, or any other bank or trust company
(having capital of at least $50 million) mutually acceptable to Cupertino
and Mid-Peninsula, as exchange agent (the "Exchange Agent") for the purpose
of exchanging certificates representing Cupertino Shares and at and after
the Effective Time of the Merger, Bancorp shall issue and deliver to the
Exchange Agent such number of certificates representing Bancorp Shares and
cash for payment of fractional shares, as shall be required to be delivered
to holders of Cupertino Shares pursuant to Article 2 of the Merger
Agreement. As soon as practicable after the Effective Time of the Merger,
each holder of Cupertino Shares converted pursuant to Section 2.1, upon
surrender to the Exchange Agent of one or more certificates for such
Cupertino Shares for cancellation, will be entitled to receive a certificate
or certificates representing the number of Bancorp Shares determined in
accordance with Section 2.1 and a payment in cash with respect to fractional
shares, if any, determined in accordance with Section 2.2.
b. No dividends or other distributions of any kind which are declared
payable to shareholders of record of the Bancorp Shares after the Effective
Date will be paid to persons entitled to receive such certificates for
Bancorp Shares until such persons surrender their certificates representing
Cupertino Shares. Upon surrender of such certificates representing Cupertino
Shares, the holder thereof shall be paid, without interest, any dividends or
other distributions with respect to the Bancorp Shares as to which the
record date and payment date occurred on or after the Effective Date and on
or before the date of surrender.
c. If any certificate for Bancorp Shares is to be issued in a name
other than that in which the certificate for Cupertino Shares surrendered in
exchange therefor is registered, any transfer costs or expenses (except
taxes) required by reason of the issuance of certificates for such Bancorp
Shares in a name other than the registered holder of the certificate
surrendered shall be paid by Bancorp.
d. All dividends or distributions, and any cash to be paid pursuant to
Section 2.2 in lieu of fractional shares, if held by the Exchange Agent for
payment or delivery to the holders of
A-2
<PAGE>
unsurrendered certificates representing Cupertino Shares and unclaimed at
the end of one year from the Effective Date, shall (together with any
interest earned thereon) at such time be paid or redelivered by the Exchange
Agent to Bancorp, and after such time any holder of a certificate
representing Cupertino Shares who has not surrendered such certificate to
the Exchange Agent shall, subject to applicable law, look as a general
creditor only to Bancorp for payment or delivery of such dividends or
distributions or cash, as the case may be.
2.4 NO FURTHER TRANSFERS OF CUPERTINO SHARES. At the Effective Time of the
Merger, the stock transfer books of Cupertino shall be closed and no transfer of
Cupertino Shares theretofore outstanding shall thereafter be made.
2.5 ADJUSTMENTS. If, between the date of this Agreement and the Effective
Date, the outstanding shares of Mid-Peninsula Shares or Cupertino Shares shall
have been changed into a different number of shares or a different class by
reason of any reclassification, recapitalization, split-up, combination,
exchange of shares or readjustment, or a stock dividend thereon shall be
declared with a record date within such period, the number of Bancorp Shares to
be issued and delivered in the Merger in exchange for each outstanding Cupertino
Share shall be correspondingly adjusted.
2.6 TREATMENT OF STOCK OPTIONS.
a. Each person holding one or more options to purchase Cupertino Shares
("Cupertino Option" or "Cupertino Options") pursuant to Cupertino's (i) 1985
Stock Option Plan, (ii) 1986 Non-Qualified Stock Option Plan, (iii) 1989
Non-Qualified Stock Option Plan, or (iv) 1995 Stock Option Plan, each as
amended to date ("Cupertino Stock Option Plans") shall have the right, in
his or her discretion, to either:
(i) Exercise any vested portion (including any portion vested as a
result of the Merger) of the Cupertino option to acquire Cupertino Shares
prior to the Effective Date; or
(ii) As of the Effective Time of the Merger, surrender the Cupertino
Option agreement to Mid-Peninsula, in which event such person will be
entitled to receive a substitute option ("Substitute Option") exercisable
for (a) the number of Bancorp Shares equal to the number of Cupertino
Shares for which such person held Cupertino Options multiplied by the
Conversion Ratio and rounded up to the nearest whole share, and (b) the
exercise price for the shares subject to said options shall be adjusted
by dividing the pre-Merger exercise price for such Cupertino Options by
the Conversion Ratio, rounded to the nearest penny.
b. The Substitute Options to be received in exchange for Cupertino
Options shall be, to the greatest extent practicable, vested to the same
extent as before the Merger, shall continue to vest on the same vesting
schedule as provided under the original applicable Cupertino Option
agreement, shall be exercisable as provided in the original applicable
Cupertino Option agreement and shall otherwise preserve the
character-istics, terms and conditions of the original Cupertino Option to
the greatest extent possible, subject to the requirements of law and the
rules and regulations of the California Commissioner of Corporations.
3. COVENANTS OF THE PARTIES.
3.1 COVENANTS OF MID-PENINSULA.
a. AMENDMENT OF ARTICLES AND BYLAWS; VOTE REQUIREMENTS. The Board of
Directors of Mid-Peninsula shall take all necessary corporate action, to be
effective at the Effective Time of the Merger, to amend the Articles of
Incorporation and Bylaws of Mid-Peninsula to the extent required by
applicable law or regulation and subject to any required approvals of
shareholders, government agencies or regulatory authorities, to: (i) change
Mid-Peninsula's name to Greater Bay Bancorp; (ii) provide for a range in the
number of authorized directors of not less than seven (7) and not more than
thirteen (13), and to adopt a resolution fixing the exact number of
directors at ten (10); (iii) establish super-majority vote requirements
mutually agreed upon by the parties equal to a two-thirds vote of the Board
of Directors of Bancorp applicable to certain matters
A-3
<PAGE>
affecting Bancorp, including (a) a merger, sale of control or sale of
material assets of Bancorp, (b) acquisitions by Bancorp, (c) creation of new
business units of Bancorp or its subsidiaries, MPB and CNB, (d) material
changes in operating budgets of Bancorp or its subsidiaries, MPB and CNB,
(e) material changes in the business organization or organizational
structure of Bancorp or its subsidiaries, MPB and CNB, (f) termination of
any executive or senior officer appointed to the Executive Management
Committee of Bancorp, and (g) any change in the authorized range of
directors.
b. AMENDMENT OF MID-PENINSULA STOCK OPTION PLAN. Mid-Peninsula shall
take all necessary corporate action, including any required approval of the
shareholders of Mid-Peninsula, to amend its 1994 Stock Option Plan or
establish a new stock option plan and cause to be filed and become effective
under the Securities Act of 1933, as amended (the "1933 Act"), as of the
Effective Time of the Merger, a registration statement with respect to the
options to be granted and shares to be issued thereunder to fulfill the
obligations to grant Substitute Options to holders of Cupertino Options
pursuant to Section 2.6 of this Agreement.
c. NASDAQ STOCK MARKET LISTING. Mid-Peninsula shall take all necessary
action to list with the Nasdaq Stock Market for trading on the Nasdaq
National Market System (i) Mid-Peninsula Shares, as soon as practicable
following the execution of this Agreement and (ii) Bancorp Shares under a
symbol mutually agreed upon by the parties, to be effective from and after
the Effective Time of the Merger.
d. DEBENTURE AGREEMENT. Mid-Peninsula shall take all appropriate
action to cause the obligations of Cupertino to the holders of debentures
issued pursuant to certain 11.5% Subordinated Debenture Agreements Due 2005
and related Subscription Agreements and exhibits thereto, to be assumed by
Bancorp in a supplemental debenture agreement in form and substance
reasonably satisfactory to Mid-Peninsula and Cupertino and their respective
counsel, as of the Effective Time of the Merger. The form of such
supplemental debenture agreement shall be delivered by Mid-Peninsula to
Cupertino on or before the Document Delivery Date (as defined in Section
12b(xii)) of this Agreement.
3.2 COVENANTS OF CUPERTINO.
a. TERMINATION OF CUPERTINO STOCK OPTION PLANS. Cupertino shall take
all necessary action to cause the termination of the Cupertino Stock Option
Plans at the Effective Time of the Merger and the exercise or surrender (in
exchange for Substitute Options) of Cupertino Options outstanding
thereunder.
b. TERMINATION OR MERGER OF CUPERTINO BENEFIT PLANS. If requested by
Mid-Peninsula and subject to the mutual agreement of the parties, Cupertino
shall take all necessary action to cause the termination or merger of
Cupertino Benefit Plans at the Effective Time of the Merger.
3.3 MUTUAL COVENANTS OF MID-PENINSULA AND CUPERTINO.
a. APPOINTMENT OF EXECUTIVE OFFICERS. At the Effective Time of the
Merger, the following persons shall become the executive officers of Bancorp
and shall be appointed to the positions indicated: (i) David L. Kalkbrenner,
President and Chief Executive Officer, (ii) Steven C. Smith, Executive Vice
President, Chief Operating Officer and Chief Financial Officer, and (iii)
David R. Hood, Executive Vice President and Chief Credit Officer.
b. APPOINTMENT OF DIRECTORS. At the Effective Time of the Merger, the
five (5) directors named below of Mid-Peninsula and Cupertino, respectively,
shall become and constitute the Board of Directors of Bancorp, and Duncan L.
Matteson and John M. Gatto shall be appointed as co-chairmen of the Board of
Directors of Bancorp. The parties agree that such persons shall be nominated
by management for election as directors of Bancorp at each annual or special
meeting of shareholders of Bancorp at which directors are elected for a
period of not less than two (2) years from the Effective Date. If any such
person fails or declines to serve as a director, the vacancy
A-4
<PAGE>
created thereby shall be filled during such two (2) year period by a nominee
selected by a majority of the group consisting of former Mid-Peninsula or
Cupertino directors, respectively, of which such person was a member prior
to the Merger.
(i) from Mid-Peninsula: David L. Kalkbrenner, Duncan L. Matteson,
Donald H. Seiler, Warren R. Thoits and Edwin E. van Bronkhorst; and
(ii) from Cupertino: John M. Gatto, James E. Jackson, Rex D. Lindsay,
Glen McLaughlin and Dick J. Randall.
c. BOARD AND MANAGEMENT COMMITTEES. The parties shall establish (i)
such committees of the Board of Directors of Bancorp as may be mutually
agreed upon, and (ii) an Executive Management Committee of Bancorp comprised
of management personnel to facilitate and coordinate operations of Bancorp
and such other matters as the parties may agree upon. Each party's nominees
for appointment to committees of the Board of Directors of Bancorp shall be
identified to the other party on or before the Determination Date. At the
Effective Time of the Merger, the twelve (12) persons named below shall be
appointed to the Executive Management Committee with the titles and
positions held with Bancorp, MPB and CNB as indicated.
(i) from Mid-Peninsula: David L. Kalkbrenner, President and Chief
Executive Officer of Bancorp and MPB, Director of Bancorp, MPB and CNB,
and Chairman of the Executive Management Committee; Murray B. Dey,
Executive Vice President of MPB; Carol R. Rowland, First Vice President
and Chief Financial Officer of MPB; Susan K. Black, Executive Vice
President, Relationship Management Administration, of MPB; and Kimberly
S. Burgess, Senior Vice President, Bank Support Services, of MPB.
(ii) from Cupertino: C. Donald Allen, Chairman of the Board and Chief
Executive Officer of CNB; Steven C. Smith, Executive Vice President and
Chief Operating Officer of Bancorp and CNB, Chief Financial Officer of
Bancorp, and Vice-Chairman of the Executive Management Committee; David
R. Hood, Executive Vice President of Bancorp and CNB, Chief Credit
Officer of Bancorp and Senior Lending Officer of CNB; Hall Palmer,
Executive Vice President, Trust Group of Bancorp and CNB; Kenneth D.
Brenner, Executive Vice President, Marketing and Business Development, of
CNB; and Heidi R. Wulfe, Senior Vice President of Bancorp and CNB,
Controller of Bancorp and Chief Financial Officer of CNB.
d. BOARD AND MANAGEMENT OF SUBSIDIARIES. The parties intend that the
Boards of Directors and management of Bancorp's subsidiary banks, MPB and
CNB, shall remain substantially the same following the Effective Time of the
Merger; provided, that David L. Kalkbrenner shall be appointed to the Board
of Directors of CNB and John M. Gatto shall be appointed to the Board of
Directors of MPB.
e. APPROVAL BY SHAREHOLDERS. Each party shall cause the principal
terms of the Merger to be submitted promptly for the approval of its
shareholders at a meeting to be called and held in accordance with
applicable laws. Subject to its continuing fiduciary duty to its
shareholders, the Board of Directors of each party, in authorizing the
execution and delivery of this Agreement, unanimously recommends that the
principal terms of the Merger be approved. In connection with the call of
such meeting, each party shall cause the Joint Proxy Statement/Prospectus to
be mailed to its shareholders. Subject to its continuing fiduciary duty to
the shareholders of Mid-Peninsula or Cupertino, as the case may be, the
Board of Directors of each party shall at all times prior to and during such
meeting of its shareholders recommend that the principal terms of the Merger
be approved and, subject to such duty, use its best efforts to cause such
approval (and the Board of Directors of Mid-Peninsula shall recommend that
the amendments to its Articles of Incorporation, Bylaws and 1994 Stock
Option Plan be approved).
f. SHAREHOLDER LISTS AND OTHER INFORMATION. After execution hereof,
each party shall from time to time make available to the other party, upon
request, a list of its shareholders and their addresses, a list showing all
transfers of its common stock and such other information as the other
A-5
<PAGE>
party shall reasonably request regarding both the ownership and prior
transfers of each party's common stock, provided that no such information
shall be required for any period prior to the date of this Agreement.
g. GOVERNMENT APPROVALS. Each party will use its best efforts in good
faith to take or cause to be taken as promptly as practicable all such steps
as shall be necessary to obtain (i) the prior approval of the Merger by the
Board of Governors of the Federal Reserve System (the "FRB") under the Bank
Holding Company Act of 1956, as amended, and (ii) all other such consents or
approvals of government agencies and regulatory authorities as shall be
required by law or otherwise desirable, and shall do any and all acts and
things necessary or appropriate in order to cause the Merger to be
consummated on the terms provided in the Merger Agreement and this Agreement
as promptly as practicable. All approvals referred to in this Section 3.3(g)
are hereinafter referred to as the "Government Approvals."
h. CAPITAL COMMITMENTS AND EXPENDITURES. After the execution of this
Agreement, no new capital commitments shall be entered into, and no capital
expenditures shall be made by either party in excess of $50,000 in the
aggregate, including but not limited to, creation of any new branches and
acquisitions or leases of real property, except commitments or expenditures
within existing operating and capital budgets heretofore furnished to and
approved in writing by the other party.
i. NOTIFICATION OF BREACH OF REPRESENTATIONS, WARRANTIES AND
COVENANTS. Each party shall promptly give written notice to the other party
upon becoming aware of the occurrence or impending or threatened occurrence
of any event which would cause or constitute a breach of any of the
representations, warranties or covenants of that party contained or referred
to in the Merger Agreement or this Agreement and shall use its best efforts
to prevent the same or to remedy the same promptly.
j. FINANCIAL STATEMENTS.
(i) Each party has delivered or shall deliver to the other party
prior to the Effective Date true and correct copies of statements of
income, changes in shareholders' equity and statements of cash flows for
the three months ended March 31, 1996 (and any subsequent quarter-end
periods), and for the fiscal years ended December 31, 1995, 1994, 1993,
1992 and 1991, and balance sheets as of the three month period ended
March 31, 1996 (and any subsequent quarter-end periods), and as of
December 31, 1995, 1994, 1993, 1992 and 1991. Such financial statements
at December 31, 1995, 1994, 1993, 1992 and 1991 and for the fiscal years
ended December 31, 1995, 1994, 1993, 1992 and 1991 have been or shall be
audited by KPMG Peat Marwick LLP or its predecessor, Coopers & Lybrand
LLP, as independent public accountants for Mid-Peninsula during the
relevant periods, and Coopers & Lybrand LLP or its predecessor, Deloitte
& Touche LLP, as independent public accountants for Cupertino during the
relevant periods, and include or shall include an opinion of such
accounting firm to the effect that such financial statements have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods covered by such financial
statements and present fairly, in all material respects, the consolidated
financial position, results of operations and cash flows of each party at
the dates indicated and for the periods then ending. The opinions of such
accounting firm do not and shall not contain any qualifications.
(ii) Each party shall provide to the other party, at or prior to the
Effective Date, copies of all financial statements and proxy statements
issued or to be issued to its shareholders and/ or directors between the
date of this Agreement and the Effective Date.
(iii) Each party has delivered or shall deliver, to the other party
true and complete copies of its Annual Reports to Shareholders for the
years ended December 31, 1995, 1994, 1993, 1992 and 1991, all periodic
reports required to be filed by it pursuant to Section 13(a) or
A-6
<PAGE>
15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")
since December 31, 1990, all proxy statements and other written material
furnished to its shareholders since December 31, 1990, and all other
material reports, including call reports, relating to Mid-Peninsula, MPB,
Cupertino and CNB filed by Mid-Peninsula, MPB, Cupertino, or CNB with the
Federal Deposit Insurance Corporation ("FDIC"), FRB, Office of the
Comptroller of the Currency ("OCC"), or California Superintendent of
Banks ("Superintendent") during 1991 through the Effective Date. As of
their respective filing dates, each of the documents described in the
preceding sentence complied or shall comply in all material respects with
all legal and regulatory requirements applicable thereto.
k. COMPENSATION. Except as may be consistent with past practices
disclosed to each party by the other party, neither party shall make or
approve any increase in the compensation payable or to become payable by it
to any of its directors, officers, employees or agents (including but not
limited to compensation through any profit sharing, pension, retirement,
severance, incentive or other employee benefit program or arrangement), nor
shall any bonus payment or any agreement or commitment to make a bonus
payment be made, nor shall any stock option, warrant or other right to
acquire capital stock be granted (except as provided in Section 2.6), or
employment agreement (other than any such employment agreement that may
arise by operation of law upon the hiring of any new employee) or consulting
agreement be entered into by either party with any such directors, officers,
employees or agents unless the other party has given its prior written
consent. Nothing herein shall prevent the payment to either party's officers
and employees of regular salary increases, consistent with past practices in
connection with regular salary reviews or bonuses consistent with past
practices, as heretofore disclosed to the other party. Without the prior
written consent of the other party, neither party shall hire any new
employee at an annual rate in excess of that party's current customary
practice.
l. CONDUCT OF BUSINESS IN THE ORDINARY COURSE. Prior to the Effective
Time of the Merger:
(i) Both parties shall conduct their businesses (including the
businesses of their subsidiaries) in the ordinary course as heretofore
conducted. For purposes of this Agreement, the "Ordinary Course of
Business" of either party shall consist of the banking and related
businesses as presently conducted by it and its subsidiaries in
compliance with customary safe and sound banking practices and applicable
laws and regulations. Unless either party has given its previous written
consent (which shall be deemed to have been given if no response is
provided following written request therefor within three (3) business
days of receipt of such request) to any act or omission to the contrary,
each party shall, and shall cause its subsidiaries to, until the
Effective Date:
(a) preserve its business and business organizations intact;
(b) preserve the good will of customers and others having
business relations with it and take no action that would impair the
benefit to the other party of the goodwill of it or the other
benefits of the Merger;
(c) consult with the other party as to the making of any
decisions or the taking of any actions in matters other than in the
Ordinary Course of Business;
(d) maintain its properties in customary repair, working order
and condition (reasonable wear and tear excepted);
(e) comply with all laws, regulations and decrees applicable to
the conduct of its business;
(f) use its best efforts to keep in force at not less than its
present limits all policies of insurance (including deposit insurance
of the FDIC) to the extent reasonably practicable in light of the
prevailing market conditions in the insurance industry;
A-7
<PAGE>
(g) use its best efforts to keep available to the other party the
services of its present officers and employees (it being understood
that each party shall have the right to terminate the employment of
any of its officers or employees in accordance with its established
employment procedures);
(h) comply with all orders of and agreements or memoranda of
understanding with respect to it made by or with, the FDIC, FRB, OCC,
Superintendent, or any other government agency or regulatory
authority of competent jurisdiction, and promptly forward to the
other party all communications received from any such agency or
authority that are not prohibited by such agency or authority from
being so disclosed and inform the other party of any material
restrictions imposed by any government agency or regulatory authority
on its business;
(i) file in a timely manner (taking into account any extensions
duly obtained) all reports, tax returns and other documents required
to be filed with federal, state, local and other authorities;
(j) conduct an environmental audit prior to foreclosure on any
property concerning which it has knowledge, or should have knowledge,
that asbestos or asbestos-containing material, PCB's or
PCB-contaminated materials, any petroleum product, or hazardous
substance or waste (as defined under any applicable environmental
laws) was or is present, manufactured, recycled, reclaimed, released,
stored, treated, or disposed of, and provide the results of such
audit to and consult with the other party regarding the significance
of the audit prior to the foreclosure on any such property;
(k) not sell, lease, pledge, assign, encumber or otherwise
dispose of any of its assets except in the Ordinary Course of
Business, for adequate value, without recourse and consistent with
its customary practice;
(l) not take any action to create, relocate or terminate the
operations of any banking office or branch, or to form any new
subsidiary or affiliated entity; and
(m) not settle or otherwise take any action to release or reduce
any of its rights with respect to any litigation involving a claim of
more than $25,000 in which it is a party.
(ii) Neither party shall, without first having obtained the written
consent of the other party (which shall be deemed to have been given if
no response is provided following written request therefor within three
(3) business days of receipt of such request), cause its officers to
commit to any loan which does not comply in all material respects with
its credit policies in effect and as disclosed and provided to the other
party prior to the date of this Agreement (except venture loans
originated by CNB which shall be subject to the venture loan approval
procedures in effect at CNB and as disclosed to Mid-Peninsula prior to
the date of this Agreement).
(iii) Each party shall promptly notify the other party in writing upon
the occurrence by it of any of the following:
(a) the classification of any loan as substandard, doubtful or
loss; or
(b) the filing or commencement of any legal action or other
proceeding or investigation against it.
m. PRESS RELEASES. Neither party shall issue any press release or
written statement for general circulation relating to the Merger, this
Agreement or the Merger Agreement unless previously provided to the other
party for review and approval (which approval will not be unreasonably
withheld or delayed) and each party shall cooperate with the other party in
the development and distribution of all news releases and other public
information disclosures with respect to the Merger, this Agreement or the
Merger Agreement; provided that either party may,
A-8
<PAGE>
without the consent of the other party, make any disclosure with regard to
the Merger, this Agreement or the Merger Agreement that it determines with
advice of counsel is required under any applicable law or regulation.
n. NO MERGER OR SOLICITATION.
(i) Subject to the continuing fiduciary duty of the Board of
Directors of each party to its shareholders, prior to the Effective Time
of the Merger, neither party shall effect or agree to effect or enter
into a transaction or series of transactions with one or more third
persons, groups or entities providing for the acquisition of all or a
substantial part of either party or their respective subsidiaries,
whether by way of merger, exchange of stock, sale of assets, or otherwise
("Business Combination"), acquire or agree to acquire any of its own
capital stock or the capital stock or asset (except in a fiduciary
capacity or in the Ordinary Course of Business) of any other entity, or
commence any proceedings for winding up and dissolution affecting either
of them.
(ii) Subject to the continuing fiduciary duty of the Board of
Directors of each party to its shareholders, prior to the Effective Time
of the Merger, neither party nor any officer, director or affiliate of
either party, nor any investment banker, attorney, accountant or other
agent, advisor or representative retained by either party shall (a)
solicit or encourage, directly or indirectly, any inquiries, discussions
or proposals for, continue, propose or enter into discussions or
negotiations looking toward, or enter into any agreement or understanding
providing for, any Business Combination with any third party; or (b)
disclose, directly or indirectly, any nonpublic information to any
corporation, partnership, person or other entity or group concerning such
party's business and properties or afford any such other party access to
its properties, books or records or otherwise assist or encourage any
such other party in connection with the foregoing, or (c) furnish or
cause to be furnished any information concerning its business, financial
condition, operations, properties or prospects to another person, having
any actual or prospective role with respect to any such Business
Combination.
(iii) Each party shall notify the other party immediately of the
details of any indication of interest of any person, corporation, firm,
association or group to acquire by any means a controlling interest in it
or engage in any Business Combination with it.
(iv) Notwithstanding anything to the contrary contained in this
Agreement, in the event the Board of Directors of either party receives a
bona fide unsolicited offer for a Business Combination of it with another
entity, and reasonably determines, upon advice of counsel, that as a
result of such offer, any duty to act or to refrain from doing any act
pursuant to this Agreement is inconsistent with the continuing fiduciary
duties of the Board of Directors to its shareholders, subject to the
provisions of this Agreement including, without limitation, Section
12e(ii) and the rights accorded a party thereunder which shall remain in
effect, such duty to act or to refrain from doing any act shall be
excused and such failure to act or refrain from doing any act shall not
(a) constitute the failure of any condition, breach of any covenant or
otherwise constitute any breach of this Agreement, or (b) create any
claim or cause of action asserting any liability against any member of
the Board of Directors of that party.
o. EMPLOYEE BENEFIT PLANS. Both parties agree that other than the
Mid-Peninsula 1994 Stock Option Plan (as amended in accordance with Section
3.1(b) of this Agreement) and 401(k) Plan which shall survive as employee
benefit plans of Bancorp, either party's employee benefit plans may be
terminated, frozen, modified or merged into the other party's plans on or
after the Effective Date in accordance with applicable laws and regulations
and the provisions of the IRC, as determined by mutual agreement of the
parties or by Bancorp. On the Effective Date, Mid-Peninsula and Cupertino
employees that become employees of Bancorp will commence participation in
Bancorp's employee benefit plans in accordance with the terms and conditions
provided under such plans; provided, however, that each employee of
Mid-Peninsula and each employee of
A-9
<PAGE>
Cupertino who becomes an employee of Bancorp ("Transferred Employee") shall
receive credit for his or her years of service with Mid-Peninsula or
Cupertino, as applicable, for purposes of eligibility and vesting under
Bancorp's employee benefit plans; provided, further, that each Transferred
Employee who elects coverage under Bancorp's indemnity health plan within
thirty (30) days after coverage is extended to him or her shall not be
subject to any pre-existing condition limitation under such indemnity health
plan.
p. CHANGES IN CAPITAL STOCK; DIVIDENDS. On or after the date hereof
and at or prior to the Effective Time of the Merger, except with the prior
written consent of the other party or as otherwise provided in this
Agreement and the Merger Agreement:
(i) Neither party shall amend its Articles of Incorporation or the
Articles of Incorporation or Association of its subsidiary, as the case
may be, or Bylaws of either party or its subsidiary; make any change in
their respective authorized, issued or outstanding capital stock or any
other equity security; issue, grant, sell, pledge, assign or otherwise
encumber or dispose of, or purchase, redeem, retire or otherwise acquire
(other than in a fiduciary capacity), shares of or securities convertible
into, capital stock or other equity securities of their respective
companies, or enter into any agreement, call or commitment of any
character so to do; grant or issue any stock option relating to or right
to acquire shares of their capital stock or other equity security; or
agree to do any of the foregoing, except as expressly provided herein.
Nothing herein shall prohibit the issuance of shares upon exercise of
options granted under the Mid-Peninsula Stock Option Plan or Cupertino
Stock Option Plans and outstanding at the time this Agreement is
executed; and
(ii) Neither party shall declare, set aside or pay any dividend or
other distribution in respect of its common stock (including, without
limitation, any stock dividend or distribution) other than regular
quarterly or semi-annual cash dividends on its common stock in amounts
substantially equivalent to cash dividends paid in the two years prior to
the date hereof (it being understood that declaration of a quarterly or
semi-annual cash dividend equal to the most recent previous quarterly or
semi-annual cash dividend will be deemed to meet this standard).
q. ACCESS TO PROPERTIES, BOOKS AND RECORDS; CONFIDENTIALITY. Prior to
the Effective Time of the Merger, each party shall give the other party and
its counsel, accountants and agents, full access during normal business
hours and upon reasonable request, to all of its properties, books,
contracts, commitments and records including, but not limited to, the
corporate, financial and operational records, papers, reports, instructions,
procedures, tax returns and filings tax settlement letters, material
contracts or commitments, regulatory examinations and correspondences, and
shall allow the other party to make copies of such materials and shall
furnish the other party with all such information concerning its affairs as
the other party may reasonably request. Each party shall also use its best
efforts to cause its independent accountants to make available to the other
party, its accountants, counsel and other agents, to the extent reasonably
requested in connection with such review, such independent accountants' work
papers and documentation relating to its work papers and its audits of the
books and records of each party. The availability or actual delivery of such
information about either party shall not affect the covenants,
representations and warranties of either party contained in this Agreement
and in the Merger Agreement. Each party shall use its best efforts to cause
its officers, directors, employees, auditors, and attorneys to cooperate
with the other in its reasonable requests for information. Each party shall
treat as confidential all such information in the same manner as each party
treats similar confidential information of its own, and if this Agreement is
terminated, each party shall continue to treat all such information as
confidential and to cause its employees to keep all such information
confidential and shall return such documents theretofore delivered by the
other party as the other party shall request, and shall use such
information, or cause it to be used, solely for the purposes of evaluating
and completing the transactions contemplated hereby; provided that each
party may disclose any such information to the extent required by federal or
state securities laws
A-10
<PAGE>
or otherwise required by any government agency or regulatory authority, or
by generally accepted accounting principles. The foregoing confidentiality
obligations shall not apply in respect of any information publicly available
or to any information previously known to the party in question, the use of
which is not otherwise restricted. Notwithstanding the foregoing, the
parties agree to comply with the terms and provisions of that certain
Confidentiality Agreement entered into between the parties dated May 8,
1996, and any inconsistency between the terms and provisions of that
Confidentiality Agreement and the foregoing provisions shall be resolved in
favor of the terms and provisions contained in the Confidentiality
Agreement.
r. LOAN PERFORMANCE. From and after the date of this Agreement until
the Effective Date, each party will provide to the other the following
reports for each such month concurrent with the distribution of the monthly
board report materials for the respective Boards of Directors of MPB and
CNB:
(i) a status report on all loans classified as substandard, doubtful
or loss;
(ii) past due reports by loan;
(iii) non-accrual reports by loan;
(iv) loss reports by loan;
(v) restructured loans reports; and
(vi) quarterly call reports submitted to regulators during such month,
if any.
s. LOAN REVIEW. Prior to the Effective Date, each party will submit to
the other party (for such party's information only) a loan approval/credit
write-up document for any loan that is all of the following: (i) a new loan,
or a restructured (SFAS 15) loan, or a renewal of an existing loan
previously classified by management or internal policy or procedure of
either party or their subsidiaries, or by any outside review examiner,
accountant or any bank regulatory authority as "Other Loans Specially
Mentioned," "Special Mention," "Substandard," "Doubtful," or "Loss," or
classified using categories or words with similar import, and (ii) in a
commitment amount over $1,000,000 or when the aggregate debt of the borrower
and its affiliates and/or related interests will exceed $1,000,000.
t. PREPARATION OF JOINT PROXY STATEMENT/PROSPECTUS. Cupertino shall
cooperate with Mid-Peninsula in the preparation pursuant to Section 6 hereof
of a joint proxy statement and prospectus of Mid-Peninsula to be sent to the
shareholders of Mid-Peninsula and Cupertino (the proxy materials and
prospectus, together with any amendments or supplements thereto, being
herein referred to as the "Joint Proxy Statement/Prospectus").
4. REPRESENTATIONS AND WARRANTIES OF CUPERTINO.
In the following representations and warranties, all references to assets,
liabilities, properties, rights, obligations, financial condition, operations,
knowledge, information and other characteristics of Cupertino shall be deemed to
include reference to those characteristics of CNB on a consolidated basis,
except as the context otherwise indicates or requires. Cupertino represents and
warrants to Mid-Peninsula that, except as set forth on a Schedule delivered to
Mid-Peninsula on or before the Document Delivery Date, in form and substance
satisfactory to Mid-Peninsula and corresponding in number with the applicable
section:
a. CORPORATE STATUS AND POWER TO ENTER INTO AGREEMENTS. (i) Cupertino
is a corporation duly incorporated, validly existing and in good standing
under California law and is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended, (ii) subject to obtaining the
Government Approvals and approval of the principal terms of the Merger by
the Cupertino shareholders, Cupertino has all necessary corporate power to
enter into this Agreement and the Merger Agreement and to carry out all of
the terms and provisions hereof and thereof to be carried out by it, (iii)
CNB holds a currently valid license issued by the OCC to
A-11
<PAGE>
engage in the commercial banking business in California at the locations at
which it is licensed and currently conducts business, and (iv) neither
Cupertino nor CNB is subject to any directive, resolution, memorandum of
understanding or order of the FDIC, FRB, OCC or any other regulatory
authority having jurisdiction over its business or any of its assets or
properties. Neither the scope of the business of Cupertino or CNB nor the
location of their properties requires either of them to be licensed to do
business in any jurisdiction other than the State of California. CNB's
deposits are insured by the FDIC to the maximum extent permitted by
applicable law and regulation.
b. ARTICLES, BYLAWS, BOOKS AND RECORDS. The copies of the Articles of
Incorporation and Articles of Association and Bylaws of Cupertino and CNB,
respectively, heretofore delivered to Mid-Peninsula are complete and
accurate copies thereof as in effect on the date hereof. The minute books of
Cupertino and CNB made available to Mid-Peninsula contain a complete and
accurate record of all meetings of Cupertino's and CNB's respective Boards
of Directors (and committees thereof) and shareholders. The corporate books
and records (including financial statements) of Cupertino and CNB fairly
reflect the material transactions to which Cupertino and CNB are parties or
by which their properties are subject or bound, and such books and records
have been properly kept and maintained.
c. COMPLIANCE WITH LAWS, REGULATIONS AND DECREES. Cupertino and CNB
(i) have the corporate power to own or lease their properties and to conduct
their business as currently conducted, (ii) have complied in all material
respects with, and are not in material default of any laws, regulations,
ordinances, orders or decrees applicable to the conduct of their business
and the ownership of their properties, including but not limited to all
federal and state laws (including but not limited to the Bank Secrecy Act),
rules and regulations relating to the offer, sale or issuance of securities,
and the operation of a commercial bank, other than where such noncompliance
or default is not likely to result in a material limitation on the conduct
of the business of Cupertino or CNB or is not likely to otherwise have a
material adverse effect on Cupertino and CNB taken as a whole, (iii) have
not failed to file with the proper federal, state, local or other
authorities any material report or other document required to be filed, and
(iv) have all approvals, authorizations, consents, licenses, clearances and
orders of, and have currently effective all registrations with, all
government and regulatory authorities which are necessary to the business
and operations of Cupertino and CNB as now being conducted.
d. CAPITALIZATION. The authorized capital stock of Cupertino consists
of 6,000,000 shares of Cupertino common stock, no par value, of which
1,882,547 shares are duly authorized, validly issued, fully paid and
nonassessable and currently outstanding, and 4,000,000 shares of Cupertino
preferred stock of which no shares are outstanding. Said stock has been
offered, sold and issued in compliance with all applicable securities laws.
There are currently outstanding options to purchase 341,382 shares of
Cupertino common stock, at a weighted average exercise price of $7.87 per
share, issued pursuant to the Cupertino Stock Option Plans. Said options
were issued and, upon issuance in accordance with the terms of the
outstanding options said shares shall be issued, in compliance with all
applicable securities laws. Otherwise, there are no outstanding (i) options,
agreements, calls or commitments of any character which would obligate
Cupertino to issue, sell, pledge, assign or otherwise encumber or dispose
of, or to purchase, redeem or otherwise acquire, any Cupertino common stock
or any other equity security of Cupertino, or (ii) warrants or options
relating to, rights to acquire, or debt or equity securities convertible
into, shares of Cupertino common stock or any other equity security of
Cupertino. The outstanding common stock of Cupertino is registered with the
Securities and Exchange Commission (the "Commission") pursuant to Section
12(g) of the 1934 Act. Cupertino owns all of the outstanding equity
securities of CNB. Except as collateral for outstanding loans held in their
loan portfolios, neither Cupertino nor CNB owns, directly or indirectly, any
equity interest in any bank (other than Cupertino's ownership of CNB),
corporation or other entity.
A-12
<PAGE>
e. TRADEMARKS AND TRADE NAMES. To the best of the knowledge of
Cupertino, Cupertino and CNB (i) own and have the exclusive right to use all
trademarks, trade names, patents, copyrights, service marks, trade secrets,
or other intellectual property rights (collectively, "Intellectual Property
Rights") used in or necessary for the conduct of their businesses as now or
heretofore conducted; and (ii) are not infringing upon the Intellectual
Property Rights of any other person or entity. No claim is pending or
threatened by any person or entity against or otherwise affecting the use by
Cupertino or CNB of any Intellectual Property Rights and, to the best of its
knowledge, there is no valid basis for any such claim.
f. FINANCIAL STATEMENTS, REGULATORY REPORTS. No financial statement or
other document provided or to be provided to Mid-Peninsula as required by
Section 3.3(j) hereof, as of the date of such document, contained, or as to
documents to be delivered after the date hereof, will contain, any untrue
statement of a material fact, or, at the date thereof, omitted or will omit
to state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such statements were or
will be made, not misleading; provided, however, that information as of a
later date shall be deemed to modify contrary information as of any earlier
date. Cupertino and CNB have filed all material documents and reports
required to be filed by them with the FDIC, FRB, OCC, the Commission and any
other government agency or regulatory authority having jurisdiction over
their business, assets or properties. All such reports conform in all
material respects with the requirements promulgated by such government
agencies and regulatory authorities. All compliance or corrective action
relating to Cupertino and CNB required by government agencies and regulatory
authorities having jurisdiction over Cupertino or CNB has been taken. Except
as disclosed in such statements, reports or documents, neither Cupertino nor
CNB has received any notification, formally or informally, from any agency
or department of any federal, state or local government or any regulatory
authority or the staff thereof (i) asserting that it is not in compliance
with any of the statutes, regulations or ordinances which such government or
regulatory authority enforces, or (ii) threatening to revoke any license,
franchise, permit or government authorization. Cupertino and CNB have paid
all assessments made or imposed by any government agency. Cupertino has
delivered to Mid-Peninsula copies of all annual management letters and
opinions, and has made available to Mid-Peninsula for inspection all
reviews, correspondence and other documents in the files of Cupertino
prepared by Coopers & Lybrand LLP or any other certified public accountant
engaged by Cupertino and delivered to Cupertino since December 31, 1990. The
financial records of Cupertino have been, and are being and shall be,
maintained in all material respects in accordance with all applicable legal
and accounting requirements sufficient to insure that all transactions
reflected therein are, in all material respects, executed in accordance with
management's general or specific authorization and recorded in conformity
with generally accepted accounting principles at the time in effect. The
data processing equipment, data transmission equipment, related peripheral
equipment and software used by Cupertino in the operation of its business to
generate and retrieve its financial records are adequate for the current
needs of Cupertino.
g. TAX RETURNS.
(i) Cupertino and/or CNB has timely filed all federal, state, county,
local and foreign tax returns required to be filed by it, including,
without limitation, estimated tax, use tax, excise tax, real property and
personal property tax reports and returns, employer's withholding tax
returns, other withholding tax returns and Federal Unemployment Tax
Returns, and all other reports or other information required or requested
to be filed by either of them, and each such return, report or other
information was, when filed, complete and accurate in all material
respects. Cupertino and/or CNB has paid all taxes, fees and other
government charges, including any interest and penalties thereon, when
they have become due, except those that are being contested in good
faith, which contested matters have been disclosed to Mid-Peninsula.
Cupertino and/or CNB has not been requested to give nor has it given any
currently effective waivers extending the statutory period of limitation
applicable to any tax
A-13
<PAGE>
return required to be filed by it for any period. There are no claims
pending against Cupertino and/or CNB for any alleged deficiency in the
payment of any taxes, and Cupertino does not know of any pending or
threatened audits, investigations or claims for unpaid taxes or relating
to any liability in respect of any taxes. There have been no events,
including a change in ownership, that would result in a reappraisal and
establishment of a new base-year full value for purposes of applicable
provisions of the California Constitution, of any real property owned in
whole or in part by Cupertino or CNB or to the best of Cupertino's
knowledge, of any real property leased by Cupertino or CNB.
(ii) Cupertino has heretofore delivered to Mid-Peninsula copies of
all its tax returns with respect to taxes payable to the United States of
America and the State of California for the fiscal years ended December
31, 1995, 1994, 1993, 1992 and 1991.
(iii) No consent has been filed relating to Cupertino pursuant to
Section 341(f) of the IRC.
h. MATERIAL ADVERSE CHANGE. Except as heretofore disclosed in writing
by Cupertino to Mid-Peninsula, since December 31, 1995, there has been (i)
no material adverse change in the business, assets, licenses, permits,
franchises, results of operations or financial condition of Cupertino or CNB
(whether or not in the Ordinary Course of Business), (ii) no change in any
of the assets, licenses, permits or franchises of Cupertino or CNB that has
had or can reasonably be expected to have a material adverse effect on any
of the items listed in clause (h)(i) above, (iii) no damage, destruction, or
other casualty loss (whether or not covered by insurance) that has had or
can reasonably be expected to have a material adverse effect on any of the
items listed in clause (h)(i) above, (iv) no amendment, modification, or
termination of any existing, or entering into of any new, contract,
agreement, plan, lease, license, permit or franchise that is material to the
business, financial condition, assets, liabilities or operations of
Cupertino and CNB, except in the Ordinary Course of Business; and (v) no
disposition by Cupertino or CNB of one or more assets that, individually or
in the aggregate, are material to Cupertino or CNB, except sales of assets
in the Ordinary Course of Business.
i. NO UNDISCLOSED LIABILITIES. Except for items for which reserves
have been established in the unaudited balance sheets of Cupertino as of
March 31, 1996, Cupertino has not incurred or discharged, and is not legally
obligated with respect to, any indebtedness, liability (including, without
limitation, a liability arising out of an indemnification, guarantee, hold
harmless or similar arrangement) or obligation (accrued or contingent,
whether due or to become due, and whether or not subordinated to the claims
of its general creditors), other than as a result of operations in the
Ordinary Course of Business after such date. No agreement pursuant to which
any loans or other assets have been or will be sold by Cupertino or CNB
entitles the buyer of such loans or other assets, unless there is a material
breach of a representation or covenant by Cupertino or CNB, to cause
Cupertino or CNB to repurchase such loan or other asset or to pursue any
other form of recourse against Cupertino or CNB. Neither Cupertino nor CNB
has knowingly made or shall make any representation or covenant in any such
agreement that contained or shall contain any untrue statement of a material
fact or omitted or shall omit to state a material fact necessary in order to
make the statements contained therein, in light of the circumstances under
which such representations and/or covenants were made or shall be made, not
misleading. No cash, stock or other dividend or any other distribution with
respect to the Cupertino Shares has been declared, set aside or paid, nor
have any of the Cupertino Shares been purchased, redeemed or otherwise
acquired, directly or indirectly, by Cupertino since December 31, 1995.
A-14
<PAGE>
j. PROPERTIES AND LEASES.
(i) Cupertino and CNB have good and marketable title, free and clear
of all liens and encumbrances and the right of possession, subject to
existing leaseholds, to all real properties and good title, free and
clear of all liens and encumbrances, to all other property and assets,
tangible and intangible, reflected in the Cupertino balance sheet as of
March 31, 1996 (except property held as lessee under leases disclosed in
writing prior to the date hereof and except personal property sold or
otherwise disposed of since March 31, 1996, in the Ordinary Course of
Business), except for (a) liens for taxes or assessments not delinquent,
(b) such other liens and encumbrances and imperfections of title as do
not materially affect the value of such property as reflected in the
Cupertino balance sheet as of March 31, 1996, or as currently shown on
the books and records of Cupertino and which do not interfere with or
impair its present and continued use, or (c) exceptions disclosed in
title reports and preliminary title reports, copies of which have been
provided to Mid-Peninsula. All tangible properties of Cupertino and CNB
conform in all material respects with all applicable ordinances,
regulations and zoning laws. All tangible properties of Cupertino and CNB
are in a good state of maintenance and repair and are adequate for the
current business of Cupertino and CNB. No properties of Cupertino and
CNB, and, to the best of Cupertino's knowledge, no properties in which
Cupertino or CNB holds a collateral or contingent interest or purchase
option, are the subject of any pending or threatened investigation, claim
or proceeding relating to the use, storage or disposal on such property
of or contamination of such property by any toxic or hazardous waste
material or substance. To the best of Cupertino's knowledge, neither
Cupertino nor CNB owns, possesses or has a collateral or contingent
interest or purchase option in any properties or other assets which
contain or have located within or thereon any hazardous or toxic waste
material or substance unless the location of such hazardous or toxic
waste material or other substance or its use thereon conforms in all
material respects with all federal, state and local laws, rules,
regulations or other provisions regulating the discharge of materials
into the environment. As to any real property not owned or leased by
Cupertino or CNB and held as security for a loan or in which Cupertino or
CNB otherwise has an interest, neither Cupertino or CNB has controlled,
directed or participated in the operation or management of any such real
property or any facilities or enterprise conducted thereon, such that it
has become an owner or operator of such real property under applicable
environmental laws.
(ii) All properties held by Cupertino or CNB under leases are held
under valid, binding and enforceable leases, with such exceptions as are
not material and do not interfere with the conduct of the business of
Cupertino or CNB, and Cupertino and CNB enjoy quiet and peaceful
possession of such leased property. Neither Cupertino nor CNB is in
material default in any respect under any material lease, agreement or
obligation regarding its properties to which it is a party or by which it
is bound.
(iii) Except as disclosed to Mid-Peninsula in writing, all of
Cupertino's and CNB's rights and obligations under the leases referred to
in Section 4(j)(ii) above do not require the consent of any other party
to the transaction contemplated by this Agreement and the Merger
Agreement. Where required, Cupertino and CNB shall obtain, prior to the
Effective Date, the consent of such parties to such transaction.
k. MATERIAL CONTRACTS. Except as previously disclosed to Mid-Peninsula
in writing and excluding loans, lines of credit, loan commitments or letters
of credit to which Cupertino or CNB is a party, neither Cupertino nor CNB is
a party to or bound by any contract or other agreement made in the Ordinary
Course of Business which involves aggregate future payments by or to
Cupertino or CNB of more than $20,000 and which is made for a fixed period
expiring more than one year from the date hereof, and neither Cupertino nor
CNB is a party to or bound by any agreement not made in the Ordinary Course
of Business which is to be performed at or after the date hereof. Each of
the contracts and agreements disclosed to Mid-Peninsula pursuant to this
A-15
<PAGE>
Section 4(k) is a legal and binding obligation (subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to equitable principles of
general applicability), and no breach or default (and no condition which,
with notice or passage of time, or both, could become a breach or default)
exists with respect thereto.
l. CLASSIFIED LOANS. Except as previously disclosed to Mid-Peninsula
in writing, there are no loans presently owned by Cupertino or CNB that have
been classified by Cupertino or CNB management or Cupertino or CNB internal
policy or procedure, any outside review examiner, accountant or any bank
regulatory authority as "Other Loans Specially Mentioned," "Special
Mention," "Substandard," "Doubtful," or "Loss" or classified using
categories or words with similar import and all loans or portions thereof so
classified shall have been charged off to the extent required. Cupertino and
CNB regularly review and appropriately classify their loans in accordance
with all applicable legal and regulatory requirements and generally accepted
banking practices. All loans and investments of Cupertino and CNB are legal,
valid and binding obligations enforceable in accordance with their
respective terms and are not subject to any setoffs, counterclaims or
disputes (subject to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally and subject, as to enforceability, to
equitable principles of general applicability), except as disclosed to
Mid-Peninsula in writing or reserved for in the unaudited balance sheet of
Cupertino as of March 31, 1996, and were duly authorized under and made in
compliance with applicable federal and state laws and regulations. Neither
Cupertino nor CNB has any extensions of credit, investments, guarantees,
indemnification agreements or commitments for the same (including without
limitation commitments to issue letters of credit, to create acceptances, or
to repurchase securities, federal funds or other assets) other than those
documented on the books and records of Cupertino and CNB.
m. RESTRICTIONS ON INVESTMENTS. Except for pledges to secure public
and trust deposits and repurchase agreements in the Ordinary Course of
Business, none of the investments reflected in the Cupertino balance sheet
as of March 31, 1996, and none of the investments made by Cupertino or CNB
since March 31, 1996, is subject to any restriction, whether contractual or
statutory, which materially impairs the ability of Cupertino or CNB to
freely dispose of such investment at any time.
n. EMPLOYMENT BENEFIT PLANS/ERISA.
(i) Cupertino has provided to Mid-Peninsula an accurate list setting
forth all bonus, incentive compensation, profit-sharing, pension,
retirement, stock purchase, stock option, deferred compensation,
severance, hospitalization, medical, dental, vision, group insurance,
death benefit, disability and other fringe benefit plans, trust
agreements, arrangements and commitments of Cupertino and CNB (including
but not limited to any such plans, agreements, arrangements and
commitments applicable to former employees or retired employees, or for
which such persons are eligible) (collectively, "Employee Plans"), if
any, together with copies of all such Employee Plans that are documented
and any and all contracts of employment, and has made available to
Mid-Peninsula any Board of Directors' minutes (or committee minutes)
authorizing, approving or guaranteeing such Employee Plans and contracts;
and
(ii) All contributions, premiums or other payments due from Cupertino
and CNB to (or under) any Employee Plans have been fully paid or
adequately provided for on Cupertino's audited financial statements for
the year ended December 31, 1995 or unaudited financial statements for
the three months ended March 31, 1996. All accruals thereon (including,
where appropriate, proportional accruals for partial periods) have been
made in accordance with generally accepted accounting principles
consistently applied on a reasonable basis; and
(iii) Cupertino has disclosed in writing to Mid-Peninsula the names of
each director, officer and employee of Cupertino and CNB; and
A-16
<PAGE>
(iv) The Employee Plans have been administered where required in
substantial compliance with ERISA, the IRC and the terms of such Employee
Plans, and there is no pending or threatened litigation relating to any
such Employee Plan; and
(v) Cupertino and CNB have not offered in the past health benefits
for retired employees; and
(vi) Each Employee Plan is in full force and effect, and neither
Cupertino, CNB nor any other party is in material default under any of
them, and there have been no claims of default and there are no facts or
conditions which if continued, or on notice, will result in a material
default under any Employee Plans; and
(vii) Cupertino has provided to Mid-Peninsula a list of all agreements
or other understandings pursuant to which the consummation of the
transactions contemplated hereby will (a) entitle any current or former
employee or officer of Cupertino or CNB to severance pay, unemployment
compensation or any other payment, or (b) accelerate the time of payment
or vesting or increase the amount of compensation due any such employee
or officer.
o. COLLECTIVE BARGAINING AND EMPLOYMENT AGREEMENTS. Except as provided
in this Agreement or as previously disclosed to Mid-Peninsula in writing,
neither Cupertino nor CNB has any union or collective bargaining or written
employment agreements, contracts or other agreements with any labor
organization or with any member of management, or any management or
consultation agreement not terminable at will by Cupertino or CNB without
liability and no such contract or agreement has been requested by, or is
under discussion by management with, any group of employees, any member of
management or any other person. There are no material controversies pending
between Cupertino or CNB and any current or former employees, and to the
best of Cupertino's knowledge, there are no efforts presently being made by
any labor union seeking to organize any of such employees.
p. COMPENSATION OF OFFICERS AND EMPLOYEES. Except as previously
disclosed to Mid-Peninsula in writing, (i) no officer or employee of
Cupertino or CNB is receiving aggregate direct remuneration at a rate
exceeding $60,000 per annum, and (ii) the consummation of the transactions
contemplated by this Agreement and the Merger Agreement will not (either
alone or upon the occurrence of any additional or further acts or events)
result in any payment (whether of severance pay or otherwise) becoming due
from Cupertino, CNB or Mid-Peninsula to any employee of Cupertino or CNB.
q. LEGAL ACTIONS AND PROCEEDINGS. Except as previously disclosed to
Mid-Peninsula in writing, neither Cupertino nor CNB is a party to, or so far
as known to either of them, threatened with, and to Cupertino's knowledge,
there is no reasonable basis for, any legal action or other proceeding or
investigation before any court, any arbitrator of any kind or any government
agency, and neither Cupertino nor CNB is subject to any potential adverse
claim, the outcome of which could involve the payment or receipt by
Cupertino or CNB of any amount in excess of $50,000, unless an insurer has
agreed to defend against and pay the amount of any resulting liability
without reservation, or, if any such legal action, proceeding, investigation
or claim will not involve the payment by Cupertino or CNB of a monetary
amount, which could materially adversely affect Cupertino or CNB or their
business or property or the transactions contemplated hereby. Cupertino has
no knowledge of any pending or threatened claims or charges under the
Community Reinvestment Act, before the Equal Employment Opportunity
Commission, the California Department of Fair Housing & Economic
Development, the California Unemployment Appeals Board, or any federal or
state human relations commission or agency. There is no labor dispute,
strike, slow-down or stoppage pending or, to the best of the knowledge of
Cupertino, threatened against Cupertino or CNB.
A-17
<PAGE>
r. EXECUTION AND DELIVERY OF THE AGREEMENT.
(i) The execution and delivery of this Agreement and the Merger
Agreement have been duly authorized by the Board of Directors of
Cupertino and, when the principal terms of the Merger, this Agreement and
the Merger Agreement have been duly approved by the affirmative vote of
the holders of a majority of the outstanding Cupertino Shares at a
meeting of shareholders duly called and held, the Merger, this Agreement
and the Merger Agreement will be duly and validly authorized by all
necessary corporate action on the part of Cupertino.
(ii) This Agreement has been duly executed and delivered by Cupertino
and (assuming due execution and delivery by Mid-Peninsula) constitutes,
and the Merger Agreement, upon its execution and delivery by Cupertino
(and assuming due execution and delivery by Mid-Peninsula) will
constitute, a legal and binding obligation of Cupertino in accordance
with its terms.
(iii) The execution and delivery by Cupertino of this Agreement and
the Merger Agreement and the consummation of the transactions herein and
therein contemplated (a) do not violate any provision of the Articles of
Incorporation or Articles of Association or Bylaws of Cupertino or CNB,
respectively, or violate in any material respect any provision of federal
or state law or any government rule or regulation (assuming (1) receipt
of the Government Approvals, (2) receipt of the requisite Cupertino
shareholder approval referred to in Section 4(r)(i) hereof, (3) due
registration of the Bancorp Shares under the 1933 Act, and (4) receipt of
appropriate permits or approvals under state securities or "blue sky"
laws, and (b) do not require any consent of any person under, conflict in
any material respect with or result in a material breach of, or
accelerate the performance required by any of the terms of, any material
debt instrument, lease, license, covenant, agreement or understanding to
which Cupertino or CNB is a party or by which it is bound or any order,
ruling, decree, judgment, arbitration award or stipulation to which
Cupertino or CNB is subject, or constitute a material default thereunder
or result in the creation of any lien, claim, security interest,
encumbrance, charge, restriction or right of any third party of any kind
whatsoever upon any of the properties or assets of Cupertino or CNB.
s. RETENTION OF BROKER OR CONSULTANT. No broker, agent, finder,
consultant or other party (other than legal, compliance, loan auditors and
accounting advisors) has been retained by Cupertino or CNB or is entitled to
be paid based upon any agreements, arrangements or understandings made by
Cupertino or CNB in connection with any of the transactions contemplated by
this Agreement or the Merger Agreement, except that Cupertino has engaged
the firm of Sutro & Co. Incorporated to render an opinion regarding the
fairness of the consideration to be received by Cupertino shareholders in
the Merger. Cupertino has provided Mid-Peninsula with a true and accurate
copy of its agreement(s) with Sutro & Co. Incorporated.
t. INSURANCE. Cupertino and CNB are and continuously since their
inception have been, insured with reputable insurers against all risks
normally insured against by bank holding companies and banks, and all of the
insurance policies and bonds maintained by Cupertino and CNB are in full
force and effect, Cupertino and CNB are not in default thereunder and all
material claims thereunder have been filed in due and timely fashion. In the
best judgment of the management of Cupertino and CNB, such insurance
coverage is adequate for Cupertino and CNB. Since December 31, 1995, there
has not been any damage to, destruction of, or loss of any assets of
Cupertino or CNB not covered by insurance that could materially and
adversely affect the business, financial condition, properties, assets or
results of operations of Cupertino or CNB.
u. LOAN LOSS RESERVES. The allowance for loan losses in the Cupertino
balance sheets dated December 31, 1995, March 31, 1996, and as of the
Determination Date are and will be adequate in all material respects under
the requirements of all applicable state and federal laws and regulations to
provide for possible loan losses on outstanding loans, net of recoveries.
Cupertino has disclosed to Mid-Peninsula in writing prior to the date
hereof, and will promptly inform
A-18
<PAGE>
Mid-Peninsula of the amounts of all loans, leases, other extensions of
credit or commitments, or other interest-bearing assets of Cupertino and
CNB, that have been classified as of the date hereof or hereafter by
Cupertino or CNB management or Cupertino or CNB internal policy or
procedure, any outside review examiner, accountant or any bank regulatory
authority as "Other Loans Specially Mentioned," "Special Mention,"
"Substandard," "Doubtful," or "Loss" or classified using categories or words
with similar import in the case of loans (or that would have been so
classified, in the case of other interest-bearing assets, had they been
loans). Notwithstanding the above, Cupertino shall be under no obligation to
disclose to Mid-Peninsula any such classification by any bank regulatory
authority where such disclosure would violate any obligation of
confidentiality of Cupertino or CNB imposed by such bank regulatory
authority. Cupertino has furnished and will continue to furnish to
Mid-Peninsula true and accurate information concerning the loan portfolio of
Cupertino and CNB, and no material information with respect to the loan
portfolio has been or will be withheld from Mid-Peninsula.
v. TRANSACTIONS WITH AFFILIATES. Except in the Ordinary Course of
Business, neither Cupertino nor CNB has extended credit, committed itself to
extend credit, or transferred any asset to or assumed or guaranteed any
liability of the employees or directors of Cupertino or CNB, or to any
spouse or child of any of them, or to any of their "affiliates" or
"associates" as such terms are defined in Rule 405 under the 1933 Act.
Neither Cupertino nor CNB has entered into any other transactions with the
employees or directors of Cupertino or CNB or any spouse or child of any of
them, or any of their affiliates or associates, except as disclosed in
writing to Mid-Peninsula. Any such transactions have been on terms no less
favorable to Cupertino and CNB than those which would prevail in an
arms-length transaction with an independent third party. Neither Cupertino
nor CNB has violated any applicable regulation of any government agency or
regulatory authority having jurisdiction over Cupertino or CNB in connection
with any such transactions described in this subsection v.
w. INFORMATION IN MID-PENINSULA REGISTRATION STATEMENT. The
information pertaining to Cupertino which has been or will be furnished to
Mid-Peninsula for or on behalf of Cupertino for inclusion in the
Mid-Peninsula Registration Statement and the Joint Proxy
Statement/Prospectus, or in the applications to be filed to obtain the
Government Approvals (the "Applications"), does not and will not contain any
untrue statement of any material fact or omit or will omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made,
not misleading; provided, however, that information of a later date shall be
deemed to modify contrary information as of an earlier date. All financial
statements of Cupertino included in the Mid-Peninsula Registration Statement
and the Joint Proxy Statement/Prospectus, or the Applications, will present
fairly the financial condition and results of operations of Cupertino at the
dates and for the periods covered by such statements in accordance with
generally accepted accounting principles consistently applied throughout the
periods covered by such statements. Cupertino shall promptly advise
Mid-Peninsula in writing if prior to the Effective Time of the Merger
Cupertino shall obtain knowledge of any facts that would make it necessary
to amend or supplement the Mid-Peninsula Registration Statement, the Joint
Proxy Statement/Prospectus or any Application, in order to make the
statements therein not misleading or to comply with applicable law or
regulation.
x. ACCURACY AND EFFECTIVE DATE OF REPRESENTATIONS AND WARRANTIES,
COVENANTS AND AGREEMENTS. Each representation, warranty, covenant and
agreement of Cupertino set forth in this Agreement shall be deemed to be
made on and as of the date hereof (except to the extent that a
representation or warranty is qualified as set forth in a Schedule
corresponding in number with the applicable section of such representation
or warranty and delivered on or before the Document Delivery Date, and upon
such delivery it shall be deemed made on and as of the date of delivery),
the Closing Date and the Effective Time of the Merger. No representation or
warranty by Cupertino, and no statement by Cupertino in any certificate,
agreement, schedule or other document furnished or to be furnished in
connection with the transactions contemplated by this
A-19
<PAGE>
Agreement or the Merger Agreement, was or will be inaccurate, incomplete or
incorrect in any material respect as of the date furnished or contains or
will contain any untrue statement of a material fact or omits or will omit
to state any material fact necessary to make such representation, warranty
or statement not misleading to Mid-Peninsula.
5. REPRESENTATIONS AND WARRANTIES OF MID-PENINSULA.
In the following representations and warranties, all references to assets,
liabilities, properties, rights, obligations, financial condition, operations,
knowledge, information and other characteristics of Mid-Peninsula shall be
deemed to include reference to those characteristics of MPB on a consolidated
basis, except as the context otherwise indicates or requires. Mid-Peninsula
represents and warrants to Cupertino that, except as set forth on a Schedule
delivered to Cupertino on or before the Document Delivery Date, in form and
substance satisfactory to Cupertino and corresponding in number with the
applicable section:
a. CORPORATE STATUS AND POWER TO ENTER INTO AGREEMENTS. (i)
Mid-Peninsula is a corporation duly incorporated, validly existing and in
good standing under California law and is a registered bank holding company
under the Bank Holding Company Act of 1956, as amended, (ii) subject to
obtaining the Government Approvals and approval of the principal terms of
the Merger by the Mid-Peninsula shareholders, Mid-Peninsula has all
necessary corporate power to enter into this Agreement and the Merger
Agreement and to carry out all of the terms and provisions hereof and
thereof to be carried out by it, (iii) MPB holds a currently valid license
issued by the Superintendent to engage in the commercial banking business in
California at the locations at which it is licensed and currently conducts
business, and (iv) neither Mid-Peninsula nor MPB is subject to any
directive, resolution, memorandum of understanding or order of the FDIC,
FRB, Superintendent or any other regulatory authority having jurisdiction
over its business or any of its assets or properties. Neither the scope of
the business of Mid-Peninsula or MPB nor the location of their properties
requires either of them to be licensed to do business in any jurisdiction
other than the State of California. MPB's deposits are insured by the FDIC
to the maximum extent permitted by applicable law and regulation.
b. ARTICLES, BYLAWS, BOOKS AND RECORDS. The copies of the Articles of
Incorporation and Bylaws of Mid-Peninsula and MPB, respectively, heretofore
delivered to Cupertino are complete and accurate copies thereof as in effect
on the date hereof. The minute books of Mid-Peninsula and MPB made available
to Cupertino contain a complete and accurate record of all meetings of
Mid-Peninsula's and MPB's respective Boards of Directors (and committees
thereof) and shareholders. The corporate books and records (including
financial statements) of Mid-Peninsula and MPB fairly reflect the material
transactions to which Mid-Peninsula and MPB are parties or by which their
properties are subject or bound, and such books and records have been
properly kept and maintained.
c. COMPLIANCE WITH LAWS, REGULATIONS AND DECREES. Mid-Peninsula and
MPB (i) have the corporate power to own or lease their properties and to
conduct their business as currently conducted, (ii) have complied in all
material respects with, and are not in material default of any laws,
regulations, ordinances, orders or decrees applicable to the conduct of
their business and the ownership of their properties, including but not
limited to all federal and state laws (including but not limited to the Bank
Secrecy Act), rules and regulations relating to the offer, sale or issuance
of securities, and the operation of a commercial bank, other than where such
noncompliance or default is not likely to result in a material limitation on
the conduct of the business of Mid-Peninsula or MPB or is not likely to
otherwise have a material adverse effect on Mid-Peninsula and MPB taken as a
whole, (iii) have not failed to file with the proper federal, state, local
or other authorities any material report or other document required to be
filed, and (iv) have all approvals, authorizations, consents, licenses,
clearances and orders of, and have currently effective all registrations
with, all government agencies and regulatory authorities which are necessary
to the business and operations of Mid-Peninsula and MPB as now being
conducted.
A-20
<PAGE>
d. CAPITALIZATION. The authorized capital stock of Mid-Peninsula
consists of 6,000,000 shares of Mid-Peninsula common stock, no par value, of
which 1,608,443 shares are duly authorized, validly issued, fully paid and
nonassessable and currently outstanding, and 4,000,000 shares of
Mid-Peninsula preferred stock of which no shares are outstanding. Said stock
has been offered, sold and issued in compliance with all applicable
securities laws. There are currently outstanding options to purchase 278,538
shares of Mid-Peninsula common stock, at a weighted average exercise price
of $12.84 per share, issued pursuant to the Mid-Peninsula Stock Option Plan.
Said options were issued and, upon issuance in accordance with the terms of
the outstanding options said shares shall be issued, in compliance with all
applicable securities laws. Otherwise, there are no outstanding (i) options,
agreements, calls or commitments of any character which would obligate
Mid-Peninsula to issue, sell, pledge, assign or otherwise encumber or
dispose of, or to purchase, redeem or otherwise acquire, any Bancorp common
stock or any other equity security of Mid-Peninsula, or (ii) warrants or
options relating to, rights to acquire, or debt or equity securities
convertible into, shares of Bancorp common stock or any other equity
security of Mid-Peninsula. The outstanding common stock of Mid-Peninsula is
registered with the Securities and Exchange Commission (the "Commission")
pursuant to Section 12(g) of the 1934 Act. Mid-Peninsula owns all of the
outstanding equity securities of MPB. Except as collateral for outstanding
loans held in their loan portfolios, neither Mid-Peninsula nor MPB owns,
directly or indirectly, any equity interest in any bank (other than
Mid-Peninsula's ownership of MPB), corporation or other entity.
e. TRADEMARKS AND TRADE NAMES. To the best of the knowledge of
Mid-Peninsula, Mid-Peninsula and MPB (i) own and have the exclusive right to
use all Intellectual Property Rights used in or necessary for the conduct of
their businesses as now or heretofore conducted; and (ii) are not infringing
upon the Intellectual Property Rights of any other person or entity. No
claim is pending or threatened by any person or entity against or otherwise
affecting the use by Mid-Peninsula or MPB of any Intellectual Property
Rights and, to the best of its knowledge, there is no valid basis for any
such claim.
f. FINANCIAL STATEMENTS, REGULATORY REPORTS. No financial statement or
other document provided or to be provided to Cupertino as required by
Section 3.3(j) hereof, as of the date of such document, contained, or as to
documents to be delivered after the date hereof, will contain, any untrue
statement of a material fact, or, at the date thereof, omitted or will omit
to state a material fact necessary in order to make the statements contained
therein, in light of the circumstances under which such statements were or
will be made, not misleading; provided, however, that information as of a
later date shall be deemed to modify contrary information as of any earlier
date. Mid-Peninsula and MPB have filed all material documents and reports
required to be filed by them with the FDIC, FRB, Superintendent, the
Commission and any other government agency or regulatory authority having
jurisdiction over their business, assets or properties. All such reports
conform in all material respects with the requirements promulgated by such
government agencies and regulatory authorities. All compliance or corrective
action relating to Mid-Peninsula and MPB required by government agencies and
regulatory authorities having jurisdiction over Mid-Peninsula or MPB has
been taken. Except as disclosed in such statements, reports or documents,
neither Mid-Peninsula nor MPB has received any notification, formally or
informally, from any agency or department of any federal, state or local
government or any regulatory authority or the staff thereof (a) asserting
that it is not in compliance with any of the statutes, regulations or
ordinances which such government or regulatory authority enforces, or (b)
threatening to revoke any license, franchise, permit or government
authorization. Mid-Peninsula and MPB have paid all assessments made or
imposed by any government agency. Mid-Peninsula has delivered to Cupertino
copies of all annual management letters and opinions, and has made available
to Cupertino for inspection all reviews, correspondence and other documents
in the files of Mid-Peninsula prepared by KPMG Peat Marwick LLP or any other
certified public accountant engaged by Mid-Peninsula and delivered to
Mid-Peninsula since December 31, 1990. The financial records of
Mid-Peninsula have been, and are being and shall be, maintained in all
A-21
<PAGE>
material respects in accordance with all applicable legal and accounting
requirements sufficient to insure that all transactions reflected therein
are, in all material respects, executed in accordance with management's
general or specific authorization and recorded in conformity with generally
accepted accounting principles at the time in effect. The data processing
equipment, data transmission equipment, related peripheral equipment and
software used by Mid-Peninsula in the operation of its business to generate
and retrieve its financial records are adequate for the current needs of
Mid-Peninsula.
g. TAX RETURNS.
(i) Mid-Peninsula and/or MPB has timely filed all federal, state,
county, local and foreign tax returns required to be filed by it,
including, without limitation, estimated tax, use tax, excise tax, real
property and personal property tax reports and returns, employer's
withholding tax returns, other withholding tax returns and Federal
Unemployment Tax Returns, and all other reports or other information
required or requested to be filed by either of them, and each such
return, report or other information was, when filed, complete and
accurate in all material respects. Mid-Peninsula and/or MPB has paid all
taxes, fees and other government charges, including any interest and
penalties thereon, when they have become due, except those that are being
contested in good faith, which contested matters have been disclosed to
Cupertino. Mid-Peninsula and/or MPB has not been requested to give nor
has it given any currently effective waivers extending the statutory
period of limitation applicable to any tax return required to be filed by
it for any period. There are no claims pending against Mid-Peninsula
and/or MPB for any alleged deficiency in the payment of any taxes, and
Mid-Peninsula does not know of any pending or threatened audits,
investigations or claims for unpaid taxes or relating to any liability in
respect of any taxes. There have been no events, including a change in
ownership, that would result in a reappraisal and establishment of a new
base-year full value for purposes of applicable provisions of the
California Constitution, of any real property owned in whole or in part
by Mid-Peninsula or MPB or to the best of Mid-Peninsula's knowledge, of
any real property leased by Mid-Peninsula or MPB.
(ii) Mid-Peninsula has heretofore delivered to Cupertino copies of
all its tax returns with respect to taxes payable to the United States of
America and the State of California for the fiscal years ended December
31, 1995, 1994, 1993, 1992 and 1991.
(iii) No consent has been filed relating to Mid-Peninsula pursuant to
Section 341(f) of the IRC.
h. MATERIAL ADVERSE CHANGE. Except as heretofore disclosed in writing
by Mid-Peninsula to Cupertino, since December 31, 1995, there has been (i)
no material adverse change in the business, assets, licenses, permits,
franchises, results of operations or financial condition of Mid-Peninsula or
MPB (whether or not in the Ordinary Course of Business), (ii) no change in
any of the assets, licenses, permits or franchises of Mid-Peninsula or MPB
that has had or can reasonably be expected to have a material adverse effect
on any of the items listed in clause (h)(i) above, (iii) no damage,
destruction, or other casualty loss (whether or not covered by insurance)
that has had or can reasonably be expected to have a material adverse effect
on any of the items listed in clause (h)(i) above, (iv) no amendment,
modification, or termination of any existing, or entering into of any new,
contract, agreement, plan, lease, license, permit or franchise that is
material to the business, financial condition, assets, liabilities or
operations of Mid-Peninsula and MPB, except in the Ordinary Course of
Business, and (v) no disposition by Mid-Peninsula or MPB of one or more
assets that, individually or in the aggregate, are material to Mid-Peninsula
or MPB, except sales of assets in the Ordinary Course of Business.
i. NO UNDISCLOSED LIABILITIES. Except for items for which reserves
have been established in the unaudited balance sheets of Mid-Peninsula as of
March 31, 1996, Mid-Peninsula has not incurred or discharged, and is not
legally obligated with respect to, any indebtedness, liability (including,
without limitation, a liability arising out of an indemnification,
guarantee, hold
A-22
<PAGE>
harmless or similar arrangement) or obligation (accrued or contingent,
whether due or to become due, and whether or not subordinated to the claims
of its general creditors), other than as a result of operations in the
Ordinary Course of Business after such date. No agreement pursuant to which
any loans or other assets have been or will be sold by Mid-Peninsula or MPB
entitles the buyer of such loans or other assets, unless there is a material
breach of a representation or covenant by Mid-Peninsula or MPB, to cause
Mid-Peninsula or MPB to repurchase such loan or other asset or to pursue any
other form of recourse against Mid-Peninsula or MPB. Neither Mid-Peninsula
nor MPB has knowingly made or shall make any representation or covenant in
any such agreement that contained or shall contain any untrue statement of a
material fact or omitted or shall omit to state a material fact necessary in
order to make the statements contained therein, in light of the
circumstances under which such representations and/or covenants were made or
shall be made, not misleading. No cash, stock or other dividend or any other
distribution with respect to the Bancorp Shares has been declared, set aside
or paid, nor have any of the Bancorp Shares been purchased, redeemed or
otherwise acquired, directly or indirectly, by Mid-Peninsula since May 22,
1996.
j. PROPERTIES AND LEASES.
(i) Mid-Peninsula and MPB have good and marketable title, free and
clear of all liens and encumbrances and the right of possession, subject
to existing leaseholds, to all real properties and good title, free and
clear of all liens and encumbrances, to all other property and assets,
tangible and intangible, reflected in the Mid-Peninsula balance sheet as
of March 31, 1996 (except property held as lessee under leases disclosed
in writing prior to the date hereof and except personal property sold or
otherwise disposed of since March 31, 1996, in the Ordinary Course of
Business), except for (a) liens for taxes or assessments not delinquent,
(b) such other liens and encumbrances and imperfections of title as do
not materially affect the value of such property as reflected in the
Mid-Peninsula balance sheet as of March 31, 1996, or as currently shown
on the books and records of Mid-Peninsula and which do not interfere with
or impair its present and continued use, or (c) exceptions disclosed in
title reports and preliminary title reports, copies of which have been
provided to Cupertino. All tangible properties of Mid-Peninsula and MPB
conform in all material respects with all applicable ordinances,
regulations and zoning laws. All tangible properties of Mid-Peninsula and
MPB are in a good state of maintenance and repair and are adequate for
the current business of Mid-Peninsula and MPB. No properties of
Mid-Peninsula and MPB, and, to the best of Mid-Peninsula's knowledge, no
properties in which Mid-Peninsula or MPB holds a collateral or contingent
interest or purchase option, are the subject of any pending or threatened
investigation, claim or proceeding relating to the use, storage or
disposal on such property of or contamination of such property by any
toxic or hazardous waste material or substance. To the best of
Mid-Peninsula's knowledge, neither Mid-Peninsula nor MPB owns, possesses
or has a collateral or contingent interest or purchase option in any
properties or other assets which contain or have located within or
thereon any hazardous or toxic waste material or substance unless the
location of such hazardous or toxic waste material or other substance or
its use thereon conforms in all material respects with all federal, state
and local laws, rules, regulations or other provisions regulating the
discharge of materials into the environment. As to any real property not
owned or leased by Mid-Peninsula or MPB and held as security for a loan
or in which Mid-Peninsula or MPB otherwise has an interest, neither
Mid-Peninsula or MPB has controlled, directed or participated in the
operation or management of any such real property or any facilities or
enterprise conducted thereon, such that it has become an owner or
operator of such real property under applicable environmental laws.
(ii) All properties held by Mid-Peninsula or MPB under leases are
held under valid, binding and enforceable leases, with such exceptions as
are not material and do not interfere with the conduct of the business of
Mid-Peninsula or MPB, and Mid-Peninsula and MPB
A-23
<PAGE>
enjoy quiet and peaceful possession of such leased property. Neither
Mid-Peninsula nor MPB is in material default in any respect under any
material lease, agreement or obligation regarding its properties to which
it is a party or by which it is bound.
(iii) Except as disclosed to Cupertino in writing, all of
Mid-Peninsula's and MPB's rights and obligations under the leases
referred to in Section 5(j)(ii) above do not require the consent of any
other party to the transaction contemplated by this Agreement and the
Merger Agreement. Where required, Mid-Peninsula and MPB shall obtain,
prior to the Effective Date, the consent of such parties to such
transactions.
k. MATERIAL CONTRACTS. Except as previously disclosed to Cupertino in
writing and excluding loans, lines of credit, loan commitments or letters of
credit to which Mid-Peninsula or MPB is a party, neither Mid-Peninsula nor
MPB is a party to or bound by any contract or other agreement made in the
Ordinary Course of Business which involves aggregate future payments by or
to Mid-Peninsula or MPB of more than $20,000 and which is made for a fixed
period expiring more than one year from the date hereof, and neither
Mid-Peninsula nor MPB is a party to or bound by any agreement not made in
the Ordinary Course of Business which is to be performed at or after the
date hereof. Each of the contracts and agreements disclosed to Cupertino
pursuant to this Section 5(k) is a legal and binding obligation (subject to
applicable bankruptcy, insolvency and similar laws affecting creditors'
rights generally and subject, as to enforceability, to equitable principles
of general applicability), and no breach or default (and no condition which,
with notice or passage of time, or both, could become a breach or default)
exists with respect thereto.
l. CLASSIFIED LOANS. Except as previously disclosed to Cupertino in
writing, there are no loans presently owned by Mid-Peninsula or MPB that
have been classified by Mid-Peninsula or MPB management or Mid-Peninsula or
MPB internal policy or procedure, any outside review examiner, accountant or
any bank regulatory authority as "Other Loans Specially Mentioned," "Special
Mention," "Substandard," "Doubtful," or "Loss" or classified using
categories or words with similar import and all loans or portions thereof so
classified have been charged off to the extent required. Mid-Peninsula and
MPB regularly review and appropriately classify their loans in accordance
with all applicable legal and regulatory requirements and generally accepted
banking practices. All loans and investments of Mid-Peninsula and MPB are
legal, valid and binding obligations enforceable in accordance with their
respective terms and are not subject to any setoffs, counterclaims or
disputes (subject to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally and subject, as to enforceability, to
equitable principles of general applicability), except as disclosed to
Cupertino in writing or reserved for in the unaudited balance sheet of
Mid-Peninsula as of March 31, 1996, and were duly authorized under and made
in compliance with applicable federal and state laws and regulations.
Neither Mid-Peninsula nor MPB has any extensions of credit, investments,
guarantees, indemnification agreements or commitments for the same
(including without limitation commitments to issue letters of credit, to
create acceptances, or to repurchase securities, federal funds or other
assets) other than those documented on the books and records of
Mid-Peninsula and MPB.
m. RESTRICTIONS ON INVESTMENTS. Except for pledges to secure public
and trust deposits and repurchase agreements in the Ordinary Course of
Business, none of the investments reflected in the Mid-Peninsula balance
sheet as of March 31, 1996, and none of the investments made by Mid-
Peninsula or MPB since March 31, 1996, is subject to any restriction,
whether contractual or statutory, which materially impairs the ability of
Mid-Peninsula or MPB to freely dispose of such investment at any time.
n. EMPLOYMENT BENEFIT PLANS/ERISA.
(i) Mid-Peninsula has provided to Cupertino an accurate list setting
forth all bonus, incentive compensation, profit-sharing, pension,
retirement, stock purchase, stock option, deferred compensation,
severance, hospitalization, medical, dental, vision, group insurance,
death benefit, disability and other fringe benefit plans, trust
agreements, arrangements and
A-24
<PAGE>
commitments of Mid-Peninsula and MPB (including but not limited to any
such plans, agreements, arrangements and commitments applicable to former
employees or retired employees, or for which such persons are eligible)
(collectively, "Employee Plans"), if any, together with copies of all
such Employee Plans that are documented and any and all contracts of
employment, and has made available to Cupertino any Board of Directors'
minutes (or committee minutes) authorizing, approving or guaranteeing
such Employee Plans and contracts; and
(ii) All contributions, premiums or other payments due from
Mid-Peninsula and MPB to (or under) any Employee Plans have been fully
paid or adequately provided for on Mid-Peninsula's audited financial
statements for the year ended December 31, 1995 or unaudited financial
statements for the three months ended March 31, 1996. All accruals
thereon (including, where appropriate, proportional accruals for partial
periods) have been made in accordance with generally accepted accounting
principles consistently applied on a reasonable basis; and
(iii) Mid-Peninsula has disclosed in writing to Cupertino the names of
each director, officer and employee of Mid-Peninsula and MPB; and
(iv) The Employee Plans have been administered where required in
substantial compliance with ERISA, the IRC and the terms of such Employee
Plans, and there is no pending or threatened litigation relating to any
such Employee Plan; and
(v) Mid-Peninsula and MPB have not offered in the past health
benefits for retired employees; and
(vi) Each Employee Plan is in full force and effect, and neither
Mid-Peninsula, MPB nor any other party is in material default under any
of them, and there have been no claims of default and there are no facts
or conditions which if continued, or on notice, will result in a material
default under any Employee Plans; and
(vii) Mid-Peninsula has provided to Cupertino a list of all agreements
or other understandings pursuant to which the consummation of the
transactions contemplated hereby will (a) entitle any current or former
employee or officer of Mid-Peninsula or MPB to severance pay,
unemployment compensation or any other payment, or (b) accelerate the
time of payment or vesting or increase the amount of compensation due any
such employee or officer.
o. COLLECTIVE BARGAINING AND EMPLOYMENT AGREEMENTS. Except as provided
in this Agreement or as previously disclosed to Cupertino in writing,
neither Mid-Peninsula nor MPB has any union or collective bargaining or
written employment agreements, contracts or other agreements with any labor
organization or with any member of management, or any management or
consultation agreement not terminable at will by Mid-Peninsula or MPB
without liability and no such contract or agreement has been requested by,
or is under discussion by management with, any group of employees, any
member of management or any other person. There are no material
controversies pending between Mid-Peninsula or MPB and any current or former
employees, and to the best of Mid-Peninsula's knowledge, there are no
efforts presently being made by any labor union seeking to organize any of
such employees.
p. COMPENSATION OF OFFICERS AND EMPLOYEES. Except as previously
disclosed to Cupertino in writing, (i) no officer or employee of
Mid-Peninsula or MPB is receiving aggregate direct remuneration at a rate
exceeding $60,000 per annum, and (ii) the consummation of the transactions
contemplated by this Agreement and the Merger Agreement will not (either
alone or upon the occurrence of any additional or further acts or events)
result in any payment (whether of severance pay or otherwise) becoming due
from Mid-Peninsula, MPB or Cupertino to any employee of Mid-Peninsula or
MPB.
A-25
<PAGE>
q. LEGAL ACTIONS AND PROCEEDINGS. Except as previously disclosed to
Cupertino in writing, neither Mid-Peninsula nor MPB is a party to, or so far
as known to either of them, threatened with, and to Mid-Peninsula's
knowledge, there is no reasonable basis for, any legal action or other
proceeding or investigation before any court, any arbitrator of any kind or
any government agency, and neither Mid-Peninsula nor MPB is subject to any
potential adverse claim, the outcome of which could involve the payment or
receipt by Mid-Peninsula or MPB of any amount in excess of $50,000, unless
an insurer has agreed to defend against and pay the amount of any resulting
liability without reservation, or, if any such legal action, proceeding,
investigation or claim will not involve the payment by Mid-Peninsula or MPB
of a monetary amount, which could materially adversely affect Mid-Peninsula
or MPB or their business or property or the transactions contemplated
hereby. Mid-Peninsula has no knowledge of any pending or threatened claims
or charges under the Community Reinvestment Act, before the Equal Employment
Opportunity Commission, the California Department of Fair Housing & Economic
Development, the California Unemployment Appeals Board, or any federal or
state human relations commission or agency. There is no labor dispute,
strike, slow-down or stoppage pending or, to the best of the knowledge of
Mid-Peninsula, threatened against Mid-Peninsula or MPB.
r. EXECUTION AND DELIVERY OF THE AGREEMENT.
(i) The execution and delivery of this Agreement and the Merger
Agreement have been duly authorized by the Board of Directors of
Mid-Peninsula and, when the principal terms of the Merger, this Agreement
and the Merger Agreement have been duly approved by the affirmative vote
of the holders of a majority of the outstanding Bancorp Shares at a
meeting of shareholders duly called and held, the Merger, this Agreement
and the Merger Agreement will be duly and validly authorized by all
necessary corporate action on the part of Mid-Peninsula.
(ii) This Agreement has been duly executed and delivered by
Mid-Peninsula and (assuming due execution and delivery by Cupertino)
constitutes, and the Merger Agreement, upon its execution and delivery by
Mid-Peninsula (and assuming due execution and delivery by Cupertino) will
constitute, a legal and binding obligation of Mid-Peninsula in accordance
with its terms.
(iii) The execution and delivery by Mid-Peninsula of this Agreement
and the Merger Agreement and the consummation of the transactions herein
and therein contemplated (a) do not violate any provision of the Articles
of Incorporation or Bylaws of Mid-Peninsula or MPB, respectively, or
violate in any material respect any provision of federal or state law or
any government rule or regulation (assuming (1) receipt of the Government
Approvals, (2) receipt of the requisite Mid-Peninsula shareholder
approval referred to in Section 5(r)(i) hereof, (3) due registration of
the Bancorp Shares under the 1933 Act, and (4) receipt of appropriate
permits or approvals under state securities or "blue sky" laws, and (b)
do not require any consent of any person under, conflict in any material
respect with or result in a material breach of, or accelerate the
performance required by any of the terms of, any material debt
instrument, lease, license, covenant, agreement or understanding to which
Mid-Peninsula or MPB is a party or by which it is bound or any order,
ruling, decree, judgment, arbitration award or stipulation to which
Mid-Peninsula or MPB is subject, or constitute a material default
thereunder or result in the creation of any lien, claim, security
interest, encumbrance, charge, restriction or right of any third party of
any kind whatsoever upon any of the properties or assets of Mid-Peninsula
or MPB.
s. RETENTION OF BROKER OR CONSULTANT. No broker, agent, finder,
consultant or other party (other than legal, compliance, loan auditors and
accounting advisors) has been retained by Mid-Peninsula or MPB or is
entitled to be paid based upon any agreements, arrangements or
understandings made by Mid-Peninsula or MPB in connection with any of the
transactions contemplated by this Agreement or the Merger Agreement, except
that Mid-Peninsula has engaged the firm of Alex. Brown & Sons Incorporated
to act as its financial advisor and to render an opinion
A-26
<PAGE>
regarding the fairness of the Conversion Ratio in the Merger, from a
financial point of view, to Mid-Peninsula shareholders. Mid-Peninsula has
provided Cupertino with a true and accurate copy of its agreement(s) with
Alex. Brown & Sons Incorporated.
t. INSURANCE. Mid-Peninsula and MPB are and continuously since their
inception have been, insured with reputable insurers against all risks
normally insured against by bank holding companies and banks, and all of the
insurance policies and bonds maintained by Mid-Peninsula and MPB are in full
force and effect, Mid-Peninsula and MPB are not in default thereunder and
all material claims thereunder have been filed in due and timely fashion. In
the best judgment of the management of Mid-Peninsula and MPB, such insurance
coverage is adequate for Mid-Peninsula and MPB. Since December 31, 1995,
there has not been any damage to, destruction of, or loss of any assets of
Mid-Peninsula or MPB not covered by insurance that could materially and
adversely affect the business, financial condition, properties, assets or
results of operations of Mid-Peninsula or MPB.
u. LOAN LOSS RESERVES. The allowance for loan losses in the
Mid-Peninsula balance sheets dated December 31, 1995, March 31, 1996, and as
of the Determination Date are and will be adequate in all material respects
under the requirements of all applicable state and federal laws and
regulations to provide for possible loan losses on outstanding loans, net of
recoveries. Mid-Peninsula has disclosed to Cupertino in writing prior to the
date hereof, and will promptly inform Cupertino of the amounts of all loans,
leases, other extensions of credit or commitments, or other interest-bearing
assets of Mid-Peninsula and MPB, that have been classified as of the date
hereof or hereafter by Mid-Peninsula or MPB management or Mid-Peninsula or
MPB internal policy or procedure, any outside review examiner, accountant or
any bank regulatory authority as "Other Loans Specially Mentioned," "Special
Mention," "Substandard," "Doubtful," or "Loss" or classified using
categories or words with similar import in the case of loans (or that would
have been so classified, in the case of other interest-bearing assets, had
they been loans). Notwithstanding the above, Mid-Peninsula shall be under no
obligation to disclose to Cupertino any such classification by any bank
regulatory authority, where such disclosure would violate any obligation of
confidentiality of Mid-Peninsula or MPB imposed by such bank regulatory
authority. Mid-Peninsula has furnished and will continue to furnish to
Cupertino true and accurate information concerning the loan portfolio of
Mid-Peninsula and MPB, and no material information with respect to the loan
portfolio has been or will be withheld from Cupertino.
v. TRANSACTIONS WITH AFFILIATES. Except in the Ordinary Course of
Business, neither Mid-Peninsula nor MPB has extended credit, committed
itself to extend credit, or transferred any asset to or assumed or
guaranteed any liability of the employees or directors of Mid-Peninsula or
MPB, or to any spouse or child of any of them, or to any of their
"affiliates" or "associates" as such terms are defined in Rule 405 under the
1933 Act. Neither Mid-Peninsula nor MPB has entered into any other
transactions with the employees or directors of Mid-Peninsula or MPB or any
spouse or child of any of them, or any of their affiliates or associates,
except as disclosed in writing to Cupertino. Any such transactions have been
on terms no less favorable to Mid-Peninsula and MPB than those which would
prevail in an arms-length transaction with an independent third party.
Neither Mid-Peninsula nor MPB has violated any applicable regulation of any
government agency or regulatory authority having jurisdiction over
Mid-Peninsula or MPB in connection with any such transactions described in
this subsection v.
w. INFORMATION IN MID-PENINSULA REGISTRATION STATEMENT. The
information pertaining to Mid-Peninsula which has been or will be included
in the Mid-Peninsula Registration Statement and the Joint Proxy
Statement/Prospectus, or in the Applications to be filed to obtain the
Government Approvals, does not and will not contain any untrue statement of
any material fact or omit or will omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light
of the circumstances under which they are made, not misleading; provided,
however, that information of a later date shall be deemed to modify contrary
information as of an earlier date. All financial statements of Mid-Peninsula
included in the Mid-Peninsula
A-27
<PAGE>
Registration Statement and the Joint Proxy Statement/Prospectus, or the
Applications, will present fairly the financial condition and results of
operations of Mid-Peninsula at the dates and for the periods covered by such
statements in accordance with generally accepted accounting principles
consistently applied throughout the periods covered by such statements.
Mid-Peninsula shall promptly advise Cupertino in writing if prior to the
Effective Time of the Merger Mid-Peninsula shall obtain knowledge of any
facts that would make it necessary to amend or supplement the Mid-Peninsula
Registration Statement, the Joint Proxy Statement/Prospectus or any
Application, in order to make the statements therein not misleading or to
comply with applicable law or regulation.
x. ACCURACY AND EFFECTIVE DATE OF REPRESENTATIONS AND WARRANTIES,
COVENANTS AND AGREEMENTS. Each representation, warranty, covenant and
agreement of Mid-Peninsula set forth in this Agreement shall be deemed to be
made on and as of the date hereof (except to the extent that a
representation or warranty is qualified as set forth in a Schedule
corresponding in number with the applicable section of such representation
or warranty and delivered on or before the Document Delivery Date, and upon
such delivery it shall be deemed made on and as of the date of delivery),
the Closing Date and the Effective Time of the Merger. No representation or
warranty by Mid-Peninsula, and no statement by Mid-Peninsula in any
certificate, agreement, schedule or other document furnished or to be
furnished in connection with the transactions contemplated by this Agreement
or the Merger Agreement, was or will be inaccurate, incomplete or incorrect
in any material respect as of the date furnished or contains or will contain
any untrue statement of a material fact or omits or will omit to state any
material fact necessary to make such representation, warranty or statement
not misleading to Cupertino.
6. SECURITIES ACT OF 1933; SECURITIES EXCHANGE ACT OF 1934.
a. PREPARATION AND FILING OF REGISTRATION STATEMENT. Mid-Peninsula
shall promptly prepare and file with the Commission (i) a registration
statement on the appropriate form (the "Mid-Peninsula Registration
Statement") under and pursuant to the provisions of the 1933 Act for the
purpose of registering a sufficient number of Mid-Peninsula Shares to
complete the exchange of Bancorp Shares for the outstanding Cupertino Shares
pursuant to the Conversion Ratio and the provisions of Section 2.1 above,
and (ii) in sufficient time to be effective on or before the Effective Time
of the Merger one or more registration statements or amendments to existing
registration statements under the 1933 Act for the purpose of registering
the maximum number of Bancorp Shares to which the holders of Substitute
Options may be entitled pursuant to Section 2.6 above at or after the
Effective Time of the Merger. Mid-Peninsula shall promptly prepare a Joint
Proxy Statement/Prospectus for the purpose of submitting the principal terms
of the Merger, this Agreement and the Merger Agreement to the shareholders
of Mid-Peninsula and Cupertino for approval. Cupertino shall cooperate in
all reasonable respects with regard to the preparation of the Joint Proxy
Statement/Prospectus. The Joint Proxy Statement/Prospectus in definitive
form is expected to serve as the prospectus to be included in the
Mid-Peninsula Registration Statement. Mid-Peninsula and Cupertino shall each
provide promptly to the other such information concerning its business and
financial condition and affairs as may be required or appropriate for
inclusion in the Mid-Peninsula Registration Statement or the Joint Proxy
Statement/Prospectus, and shall cause its counsel and auditors to cooperate
with the other's counsel and auditors in the preparation of the
Mid-Peninsula Registration Statement and the Joint Proxy Statement/
Prospectus.
b. EFFECTIVENESS OF REGISTRATION STATEMENT. Mid-Peninsula and
Cupertino shall use their best efforts to have the Mid-Peninsula
Registration Statement and any amendments or supplements thereto declared
effective under the 1933 Act as soon as practicable, and thereafter Mid-
Peninsula and Cupertino shall distribute the Joint Proxy
Statement/Prospectus to holders of their respective common stock in
accordance with applicable laws and the Articles of Incorporation and Bylaws
of each.
A-28
<PAGE>
c. SALES AND RESALES OF COMMON STOCK. Mid-Peninsula shall not be
required to maintain the effectiveness of the Mid-Peninsula Registration
Statement for the purpose of sale or resale of the Bancorp Shares by any
person.
d. RULE 145. Securities representing Bancorp Shares issued to
affiliates of Cupertino (as determined by counsel to Mid-Peninsula and
Cupertino) under Rule 145 of the 1933 Act pursuant to the Merger Agreement
may be subject to stop transfer orders which confirm that such securities
representing Bancorp Shares have been issued or transferred to the
registered holder as the result of a transaction to which Rule 145 under the
1933 Act applies, and that such securities may not be sold, hypothecated,
transferred or assigned, and the issuer or its transfer agent shall not be
required to give effect to any attempted sale, hypothecation, transfer or
assignment, except (i) pursuant to a then current effective registration
statement under the 1933 Act, (ii) in a transaction permitted by Rule 145 as
to which the issuer has, in the opinion of its counsel, received reasonably
satisfactory evidence of compliance with the provisions of Rule 145, or
(iii) in a transaction which, in the opinion of counsel satisfactory to the
issuer or as described in a "no action" or interpretive letter from the
staff of the Securities and Exchange Commission, is not required to be
registered under the 1933 Act.
7. CONDITIONS TO THE OBLIGATIONS OF MID-PENINSULA.
The obligations of Mid-Peninsula under this Agreement are, at its option,
subject to fulfillment at or prior to the Effective Time of the Merger of each
of the following conditions; provided, however, that any one or more of such
conditions may be waived by the Board of Directors of Mid-Peninsula at any time
at or prior to the Effective Time of the Merger:
a. REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Cupertino in Section 4 hereof shall be true and correct in all material
respects on and as of the date of this Agreement (except to the extent that
a representation or warranty is qualified as set forth in a Schedule
corresponding in number with the applicable section of such representation
or warranty and delivered on or before the Document Delivery Date, and upon
such delivery it shall be deemed made on and as of the date of delivery),
the Closing Date and the Effective Time of the Merger, with the same effect
as though such representations and warranties had been made on and as of
each such date or time except as to any representation or warranty which
specifically relates to an earlier date or time.
b. COMPLIANCE AND PERFORMANCE UNDER AGREEMENT. Cupertino shall have
performed and complied in all material respects with all terms, agreements,
covenants and conditions of this Agreement and the Merger Agreement required
to be performed or complied with by it at or prior to the Effective Time of
the Merger.
c. MATERIAL ADVERSE CHANGE. No materially adverse change shall have
occurred since March 31, 1996, in the business, financial condition, results
of operations or assets of Cupertino and CNB, taken as a whole, and neither
Cupertino nor CNB shall be a party to or threatened with, and to the best of
Cupertino's knowledge there is no reasonable basis for, any legal action or
other proceeding before any court, any arbitrator of any kind or any
government agency, which legal action or proceeding, in the reasonable
judgment of Mid-Peninsula, could materially adversely affect Cupertino and
CNB, taken as a whole, or their business, financial condition, results of
operations or assets.
d. APPROVAL OF AGREEMENT. The principal terms of the Merger, this
Agreement and the Merger Agreement shall have been duly approved by (i) the
affirmative vote or consent of the holders of a majority of the outstanding
Cupertino Shares and (ii) the affirmative vote or consent of the holders of
a majority of the outstanding Mid-Peninsula Shares.
A-29
<PAGE>
e. OFFICER'S CERTIFICATE. Mid-Peninsula shall have received a
certificate, dated the Effective Date, signed on behalf of Cupertino by its
President and Chief Financial Officer, in substantially the form delivered
to Mid-Peninsula on or before the Document Delivery Date.
f. OPINION OF COUNSEL. Manatt, Phelps & Phillips, LLP, counsel to
Cupertino, shall have delivered to Mid-Peninsula its opinion dated the
Effective Date in substantially the form delivered to Mid-Peninsula on or
before the Document Delivery Date.
g. ABSENCE OF PROCEEDINGS. No legal, administrative, arbitration,
investigatory or other proceeding by any government agency or regulatory
authority shall have been instituted or threatened to restrain or prohibit
the Merger or the transactions contemplated by this Agreement.
h. EFFECTIVENESS OF REGISTRATION STATEMENT. The Mid-Peninsula
Registration Statement and any amendments or supplements thereto shall have
become effective under the 1933 Act, no stop order suspending the
effectiveness of such Registration Statement shall be in effect and no
proceedings for such purpose shall have been initiated or threatened by or
before the Commission and the Mid-Peninsula Shares registered thereby shall
have received all state securities and "blue sky" permits or approvals
required to consummate the transactions contemplated by this Agreement and
the Merger Agreement.
i. GOVERNMENT APPROVALS. All Government Approvals shall be in effect,
and all conditions or requirements prescribed by law or by any such
Approvals shall have been satisfied; provided, however, that no Government
Approval shall be deemed to have been received if it shall require the
divestiture or cessation of any of the present businesses or operations
conducted by either of the parties hereto or shall impose any other
condition or requirement, which condition or requirement Mid-Peninsula in
its reasonable judgment shall deem to be materially burdensome (in which
case Mid-Peninsula shall promptly notify Cupertino). For purposes of this
agreement no condition or requirement shall be deemed to be "materially
burdensome" if such condition or requirement does not materially differ from
conditions or requirements regularly imposed in orders approving
transactions of the type contemplated by this Agreement and compliance with
such condition or requirement would not:
(i) require the taking of any action materially inconsistent with the
manner in which Mid-Peninsula or Cupertino has conducted its business
previously;
(ii) have a material adverse effect upon the business, financial
condition or results of operations of Mid-Peninsula or Cupertino; or
(iii) preclude satisfaction of any of the conditions to consummation
of the transactions contemplated by this Agreement.
j. TAX OPINION. Bronson, Bronson & McKinnon LLP, Mid-Peninsula's
counsel, shall have delivered to Mid-Peninsula and Cupertino a tax opinion
subject to customary assumptions and exceptions included in such opinions
and the prior delivery of certificates from Cupertino and Mid-Peninsula in
form and substance reasonably satisfactory to Mid-Peninsula's counsel,
substantially to the effect that under federal income tax law and California
income and franchise tax law:
(i) The Merger will not result in any recognized gain or loss to
Mid-Peninsula or Cupertino;
(ii) Except for any cash received in lieu of any fractional share, no
gain or loss will be recognized by holders of Cupertino Shares who
receive Bancorp Shares in exchange for the Cupertino Shares which they
hold;
A-30
<PAGE>
(iii) The holding period of Bancorp Shares exchanged for Cupertino
Shares will include the holding period of the Cupertino Shares for which
they are exchanged, assuming the Cupertino Shares are capital assets in
the hands of the holder thereof at the Effective Date; and
(iv) The basis of the Bancorp Shares received in the exchange will be
the same as the basis of the Cupertino Shares for which they are
exchanged, less any basis attributable to fractional shares for which
cash is received.
k. ACCOUNTANT'S COMFORT LETTERS. On or prior to the date of
effectiveness of the Mid-Peninsula Registration Statement, Mid-Peninsula
shall have received a comfort letter addressed to Mid-Peninsula from Coopers
& Lybrand LLP, independent public accountants for Cupertino, in form and
substance satisfactory to Mid-Peninsula and its counsel. Mid-Peninsula shall
also have received from Coopers & Lybrand LLP a comfort letter dated the
Effective Date, in form and substance satisfactory to Mid-Peninsula and its
counsel, as to such matters, as of a specified date not more than five (5)
business days prior to the Effective Date, as Mid-Peninsula may reasonably
request.
l. DISSENTING SHARES. Holders of not more than nine percent (9%) of
the outstanding Bancorp Shares and Cupertino Shares shall have perfected
dissenter's rights pursuant to Chapter 13 of the California General
Corporation Law.
m. UNAUDITED FINANCIALS. Not later than five (5) business days prior
to the Effective Date, Cupertino shall have furnished Mid-Peninsula a copy
of its most recently prepared unaudited month-end consolidated financial
statements, including a balance sheet and statement of income of Cupertino.
n. AFFILIATE AGREEMENTS. Mid-Peninsula shall have received signed
affiliate agreements on or before the Document Delivery Date, from each
person who, in the opinion of Cupertino's and Mid-Peninsula's counsel, might
be deemed to be an affiliate of Cupertino or Mid-Peninsula under Rule 144 or
145 of the 1933 Act. The agreements will include provisions restricting
certain actions by an affiliate related to Cupertino Shares or Mid-Peninsula
and/or Bancorp Shares, including the sale, purchase, acquisition or transfer
of Cupertino Shares or Mid-Peninsula and/or Bancorp Shares in a manner which
may render pooling-of-interests accounting treatment unavailable in the
Merger.
o. CLOSING DOCUMENTS. Mid-Peninsula shall have received such
certificates and other closing documents as counsel for Mid-Peninsula shall
reasonably request.
p. CONSENTS. Cupertino shall have received, or Mid-Peninsula shall
have satisfied itself that Cupertino will receive, all consents of third
parties as may be required including consents of other parties to and
required by material mortgages, notes, leases, franchises, agreements,
licenses and permits applicable to Cupertino and CNB, in each case in form
and substance reasonably satisfactory to Mid-Peninsula and its counsel, and
no such consent or license or permit shall have been withdrawn or suspended.
q. FAIRNESS OPINION. The Board of Directors of Mid-Peninsula shall
have received an opinion of Alex. Brown & Sons Incorporated, dated the date
of this Agreement and the date of mailing or a date within three (3) days
prior to the date of mailing the Joint Proxy Statement/ Prospectus, to the
effect that the Conversion Ratio in the Merger is fair, from a financial
point of view, to Mid-Peninsula shareholders, and such opinion shall not
have been withdrawn by the Effective Time of the Merger.
r. ACCOUNTING TREATMENT. Mid-Peninsula shall have received a letter
from KPMG Peat Marwick LLP, subject to customary qualifications and receipt
of such certificates as may reasonable and customary in connection with such
letters, satisfactory in form and substance to Mid-Peninsula and its
counsel, to the effect that the Merger shall qualify for the
pooling-of-interests
A-31
<PAGE>
method of accounting in accordance with generally accepted accounting
principles and all applicable rules, regulations and policies of the
Commission. There shall have been no determination by any court, tribunal,
regulatory authority or other government agency, that the Merger fails or
will fail to qualify for pooling-of-interests accounting treatment.
s. SHAREHOLDER AGREEMENTS. Mid-Peninsula and Cupertino shall have
received signed shareholder agreements from members of the Boards of
Directors and the executive officers of Mid-Peninsula and Cupertino on or
before the Document Delivery Date, pursuant to which each such person in
their capacity as a shareholder commits to vote their Mid-Peninsula Shares
or Cupertino Shares in favor of the Merger and the transactions contemplated
thereby and pursuant to this Agreement and the Merger Agreement, and to
recommend to shareholders, subject to the exercise of fiduciary duties, that
they vote in favor of the Merger and the transactions contemplated thereby
and pursuant to this Agreement and the Merger Agreement.
t. PERFORMANCE TESTS. As of the Determination Date, Closing Date and
the Effective Date, Cupertino and CNB on a consolidated basis shall have (i)
total shareholders' equity and leverage, tier 1 and total risk-based capital
ratios, respectively, in amounts required to comply with the "well
capitalized" category of applicable FDIC regulations, (ii) total reserves
for losses on outstanding loans to net loans equal to 1.60%, and (iii) total
shareholders' equity of not less than Twenty Million Dollars ($20,000,000).
u. STOCK OPTION AGREEMENT. Mid-Peninsula shall have received a signed
and dated stock option agreement from Cupertino on or before the Document
Delivery Date, granting an option to Mid-Peninsula to acquire up to nineteen
percent (19%) of the Cupertino Shares in the event of a Business Combination
between Cupertino and any third party.
v. NASDAQ LISTING. Mid-Peninsula shares shall have been listed with
the Nasdaq Stock Market for trading on the Nasdaq National Market System and
Mid-Peninsula shall have taken all necessary action to similarly list
Bancorp Shares under a symbol mutually agreed upon by the parties to be
effective from and after the Effective Time of the Merger.
w. DEBENTURE AGREEMENT. The supplemental debenture agreement to be
delivered pursuant to Section 3.1 of this Agreement shall have been signed
and delivered to Cupertino together with an opinion of Manatt, Phelps &
Phillips, LLP, in form and substance reasonably satisfactory to Cupertino,
Mid-Peninsula and their respective counsel.
8. CONDITIONS TO THE OBLIGATIONS OF CUPERTINO.
The obligations of Cupertino under this Agreement are, at its option,
subject to the fulfillment at or prior to the Effective Time of the Merger of
each of the following conditions provided, however, that any one or more of such
conditions may be waived by the Board of Directors of Cupertino at any time at
or prior to the Effective Time of the Merger:
a. REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Mid-Peninsula in Section 5 hereof shall be true and correct in all
material respects on and as of the date of this Agreement (except to the
extent that a representation or warranty is qualified as set forth in a
Schedule corresponding in number with the applicable section of such
representation or warranty and delivered on or before the Document Delivery
Date, and upon such delivery it shall be deemed made on and as of the date
of delivery), the Closing Date and the Effective Time of the Merger, with
the same effect as though such representations and warranties had been made
on and as of each such date or time except as to any representation or
warranty which specifically relates to an earlier date or time.
b. COMPLIANCE AND PERFORMANCE UNDER AGREEMENT. Mid-Peninsula shall
have performed and complied in all material respects with all terms,
agreements, covenants and conditions of this Agreement and the Merger
Agreement required to be performed or complied with by it at or prior to the
Effective Time of the Merger.
A-32
<PAGE>
c. MATERIAL ADVERSE CHANGE. No materially adverse change shall have
occurred since March 31, 1996, in the business, financial condition, results
of operations or assets of Mid-Peninsula and MPB, taken as a whole, and
neither Mid-Peninsula nor MPB shall be a party to or threatened with, and to
the best of Mid-Peninsula's knowledge there is no reasonable basis for, any
legal action or other proceeding before any court, any arbitrator of any
kind or any government agency, which legal action or proceeding, in the
reasonable judgment of Cupertino, could materially adversely affect
Mid-Peninsula and MPB, taken as a whole, or their business, financial
condition, results of operations or assets.
d. APPROVAL OF AGREEMENT. The principal terms of the Merger, this
Agreement and the Merger Agreement shall have been duly approved by (i) the
affirmative vote or consent of the holders of a majority of the outstanding
Mid-Peninsula Shares and (ii) the affirmative vote or consent of the holders
of a majority of the outstanding Cupertino Shares.
e. OFFICER'S CERTIFICATE. Cupertino shall have received a certificate,
dated the Effective Date, signed on behalf of Mid-Peninsula by its President
and Chief Financial Officer, in substantially the form delivered to
Cupertino on or before the Document Delivery Date.
f. OPINION OF COUNSEL. Bronson, Bronson & McKinnon LLP,
Mid-Peninsula's counsel, shall have delivered to Cupertino its opinion dated
the Effective Date in substantially the form delivered to Cupertino on or
before the Document Delivery Date.
g. ABSENCE OF PROCEEDINGS. No legal, administrative, arbitration,
investigatory or other proceeding by any government agency or regulatory
authority shall have been instituted or threatened to restrain or prohibit
the Merger or the transactions contemplated by this Agreement.
h. EFFECTIVENESS OF REGISTRATION STATEMENT. The Mid-Peninsula
Registration Statement and any amendments or supplements thereto shall have
become effective under the 1933 Act, no stop order suspending the
effectiveness of such Registration Statement shall be in effect and no
proceedings for such purpose shall have been initiated or threatened by or
before the Commission and the Bancorp Shares registered thereby shall have
received all state securities and "blue sky" permits or approvals required
to consummate the transactions contemplated by this Agreement and the Merger
Agreement.
i. GOVERNMENT APPROVALS. All Government Approvals shall be in effect,
and all conditions or requirements prescribed by law or by any such
Approvals shall have been satisfied; provided, however, that no Government
Approval shall be deemed to have been received if it shall require the
divestiture or cessation of any of the present businesses or operations
conducted by either of the parties hereto or shall impose any other
condition or requirement, which condition or requirement Cupertino in its
reasonable judgment shall deem to be materially burdensome (in which case
Cupertino shall promptly notify Mid-Peninsula). For purposes of this
agreement no condition or requirement shall be deemed to be "materially
burdensome" if such condition or requirement does not materially differ from
conditions or requirements regularly imposed in orders approving
transactions of the type contemplated by this Agreement and compliance with
such condition or requirement would not:
(i) require the taking of any action materially inconsistent with the
manner in which Cupertino or Mid-Peninsula has conducted its business
previously;
(ii) have a material adverse effect upon the business, financial
condition or results of operations of Cupertino or Mid-Peninsula; or
(iii) preclude satisfaction of any of the conditions to consummation
of the transactions contemplated by this Agreement.
j. TAX OPINION. Bronson, Bronson & McKinnon LLP, Mid-Peninsula's
counsel, shall have delivered to Mid-Peninsula and Cupertino a tax opinion
subject to customary assumptions and
A-33
<PAGE>
exceptions included in such opinions and the prior delivery of certificates
from Cupertino and Mid-Peninsula in form and substance reasonably
satisfactory to Mid-Peninsula's counsel, substantially to the effect that
under federal income tax law and California income and franchise tax law:
(i) The Merger will not result in any recognized gain or loss to
Cupertino or Mid-Peninsula;
(ii) Except for any cash received in lieu of any fractional share, no
gain or loss will be recognized by holders of Cupertino Shares who
receive Bancorp Shares in exchange for the Cupertino Shares which they
hold;
(iii) The holding period of Bancorp Shares exchanged for Cupertino
Shares will include the holding period of the Cupertino Shares for which
they are exchanged, assuming the Cupertino Shares are capital assets in
the hands of the holder thereof at the Effective Date; and
(iv) The basis of the Bancorp Shares received in the exchange will be
the same as the basis of the Cupertino Shares for which they are
exchanged, less any basis attributable to fractional shares for which
cash is received.
k. ACCOUNTANT'S COMFORT LETTERS. On or prior to the date of
effectiveness of the Mid-Peninsula Registration Statement, Cupertino shall
have received a comfort letter addressed to Cupertino from KPMG Peat Marwick
LLP, independent public accountants for Mid-Peninsula, in form and substance
satisfactory to Cupertino and its counsel. Cupertino shall also have
received from KPMG Peat Marwick LLP, a comfort letter dated the Effective
Date, in form and substance satisfactory to Cupertino and its counsel, as to
such matters, as of a specified date not more than five (5) business days
prior to the Effective Date, as Cupertino may reasonably request.
l. DISSENTING SHARES. Holders of not more than nine percent (9%) of
the outstanding Cupertino Shares and Bancorp Shares shall have perfected
dissenter's rights pursuant to Chapter 13 of the California General
Corporation Law.
m. UNAUDITED FINANCIALS. Not later than five (5) business days prior
to the Effective Date, Mid-Peninsula shall have furnished Cupertino a copy
of its most recently prepared unaudited month-end consolidated financial
statements, including a balance sheet and statement of income of
Mid-Peninsula.
n. AFFILIATE AGREEMENTS. Cupertino shall have received signed
affiliate agreements on or before the Document Delivery Date, from each
person who, in the opinion of Cupertino's and Mid-Peninsula's counsel, might
be deemed to be an affiliate of Cupertino or Mid-Peninsula under Rule 144 or
145 of the 1933 Act. The agreements will include provisions restricting
certain actions by an affiliate related to Cupertino Shares or Mid-Peninsula
and/or Bancorp Shares, including the sale, purchase, acquisition or transfer
of Cupertino Shares or Mid-Peninsula and/or Bancorp Shares in a manner which
may render pooling-of-interests accounting treatment unavailable in the
Merger.
o. CLOSING DOCUMENTS. Cupertino shall have received such certificates
and other closing documents as counsel for Cupertino shall reasonably
request.
p. CONSENTS. Mid-Peninsula shall have received, or Cupertino shall
have satisfied itself that Mid-Peninsula will receive, all consents of third
parties as may be required including consents of other parties to and
required by material mortgages, notes, leases, franchises, agreements,
licenses and permits applicable to Mid-Peninsula and MPB, in each case in
form and substance reasonably satisfactory to Cupertino, and no such consent
or license or permit shall have been withdrawn or suspended.
A-34
<PAGE>
q. FAIRNESS OPINION. The Board of Directors of Cupertino shall have
received an opinion of Sutro & Co. Incorporated, dated the date of this
Agreement and the date of mailing or a date within three (3) days prior to
the date of mailing the Joint Proxy Statement/Prospectus, to the effect that
the consideration to be received by Cupertino shareholders in the Merger is
fair, from a financial point of view, to Cupertino and its shareholders, and
such opinion shall not have been withdrawn by the Effective Time of the
Merger.
r. ACCOUNTING TREATMENT. Mid-Peninsula shall have received a letter
from KPMG Peat Marwick LLP, satisfactory in form and substance to Cupertino
and its counsel, to the effect that the Merger shall qualify for the
pooling-of-interests method of accounting in accordance with generally
accepted accounting principles and all applicable rules, regulations and
policies of the Commission. There shall have been no determination by any
court, tribunal, regulatory authority or other government agency, that the
Merger fails or will fail to qualify for pooling-of-interests accounting
treatment.
s. SHAREHOLDER AGREEMENTS. Cupertino and Mid-Peninsula shall have
received signed shareholder agreements from members of the Boards of
Directors and the executive officers of Cupertino and Mid-Peninsula on or
before the Document Delivery Date, pursuant to which each such person in
their capacity as a shareholder commits to vote their Cupertino Shares or
Mid-Peninsula Shares in favor of the Merger and the transactions
contemplated thereby and pursuant to this Agreement and the Merger
Agreement, and to recommend to shareholders, subject to the exercise of
fiduciary duties, that they vote in favor of the Merger and the transactions
contemplated thereby and pursuant to this Agreement and the Merger
Agreement.
t. PERFORMANCE TESTS. As of the Determination Date, Closing Date and
the Effective Date, Mid-Peninsula and MPB on a consolidated basis shall have
(i) total shareholders' equity and leverage, tier 1 and total risk-based
capital ratios, respectively, in amounts required to comply with the "well
capitalized" category of applicable FDIC regulations, (ii) total reserves
for losses on outstanding loans to net loans equal to 1.20%, and (iii) total
shareholders' equity of not less than Twenty-Three Million Dollars
($23,000,000).
u. STOCK OPTION AGREEMENT. Cupertino shall have received a signed and
dated stock option agreement from Mid-Peninsula on or before the Document
Delivery Date, granting an option to Cupertino to acquire up to nineteen
percent (19%) of the Mid-Peninsula Shares in the event of a Business
Combination between Mid-Peninsula and any third party.
v. NASDAQ LISTING. Mid-Peninsula shares shall have been listed with
the Nasdaq Stock Market for trading on the Nasdaq National Market System and
Mid-Peninsula shall have taken all necessary action to similarly list
Bancorp Shares under a symbol mutually agreed upon by the parties to be
effective from and after the Effective Time of the Merger.
w. DEBENTURE AGREEMENT. The supplemental debenture agreement to be
delivered pursuant to Section 3.1 of this Agreement shall have been signed
and delivered to Cupertino together with an opinion of Manatt, Phelps &
Phillips, LLP, in form and substance reasonably satisfactory to Cupertino,
Mid-Peninsula and their respective counsel.
9. CLOSING.
a. CLOSING DATE. The closing (the "Closing") shall, unless another
date, time or place is agreed to in writing by Mid-Peninsula and Cupertino,
be held at the offices of Bronson, Bronson & McKinnon LLP, 10 Almaden Blvd.,
Suite 600, San Jose, California at a time mutually agreed upon between the
parties and as soon as practicable following the Determination Date and the
last to occur of (i) the expiration of any waiting periods under applicable
law or regulation, and (ii) the date on which all conditions to the
obligation of either party to consummate the Merger have been satisfied (the
"Closing Date").
A-35
<PAGE>
b. DELIVERY OF DOCUMENTS. At the Closing, the parties shall use their
respective best efforts to deliver or cause to be delivered the opinions,
certificates and other documents required to be delivered by this Agreement.
c. FILINGS. At the Closing, Mid-Peninsula and Cupertino shall instruct
their respective representatives to make or confirm such filings as shall be
required in the opinion of counsel to Mid-Peninsula and Cupertino to give
effect to the Merger.
10. POST-CLOSING MATTERS.
Bancorp will prepare and file with the Commission on the appropriate form as
soon as practicable the results of combined operations of Mid-Peninsula and
Cupertino for the first full calendar month after the Effective Date.
11. EXPENSES.
Each party hereto agrees to comply with generally accepted accounting
principles, without right of reimbursement from the other party and whether or
not the transactions contemplated by this Agreement or the Merger Agreement
shall be consummated, relating to the payment of costs and expenses incurred by
such party incident to the performance of its obligations under this Agreement
and the Merger Agreement, including without limitation, costs incident to the
preparation of the Merger Agreement, this Agreement, the Mid-Peninsula
Registration Statement and Joint Proxy Statement/Prospectus (including the
audited financial statements of the parties contained therein) and incident to
the consummation of the Merger and of the other transactions contemplated herein
and in the Merger Agreement, including the fees and disbursements of counsel,
accountants, consultants and financial advisers employed by such party in
connection therewith. Notwithstanding the foregoing, each party shall pay
one-half of (i) the printing costs of the Registration Statement and the Joint
Proxy Statement/Prospectus, (ii) all fees and costs payable pursuant to state
"blue-sky" securities laws, (iii) fees and costs related to obtaining a tax
opinion, (iv) fees and costs related to obtaining a letter from KPMG Peat
Marwick LLP regarding pooling-of-interests accounting treatment, (v) the fee
required to be paid to the Commission to register the Bancorp Shares, (vi) the
fees and costs related to any amendments to the Mid-Peninsula Stock Option Plan
or for the preparation of a new Mid-Peninsula Stock Option Plan including the
cost of obtaining any permits or approvals of government agencies and regulatory
authorities and applicable filing fees, (vii) the fees related to preparation
and filing of applications with government agencies or regulatory authorities
for approval of the transactions contemplated by the Merger, this Agreement and
the Merger Agreement, and (viii) the fees and costs related to the listing of
the Mid-Peninsula Shares and Bancorp Shares with the Nasdaq Stock Market for
trading on the Nasdaq National Market System. Each party shall bear the costs of
distributing the Joint Proxy Statement/Prospectus and other information relating
to these transactions to its shareholders and of conducting a meeting of its
shareholders.
12. AMENDMENT; TERMINATION.
a. AMENDMENT. This Agreement and the Merger Agreement may be amended
by Mid-Peninsula and Cupertino at any time prior to the Effective Time of
the Merger without the approval of the shareholders of Mid-Peninsula and
shareholders of Cupertino with respect to any of their terms except the
terms relating to the Conversion Ratio or the form or amount of
consideration to be delivered to the Cupertino shareholders in the Merger or
otherwise as required by applicable law.
b. TERMINATION. This Agreement and the Merger Agreement may be
terminated as follows:
(i) By the mutual consent of the Boards of Directors of both
Mid-Peninsula and Cupertino at any time prior to the Effective Time of
the Merger.
A-36
<PAGE>
(ii) By the Boards of Directors of Mid-Peninsula or Cupertino upon
the failure of the shareholders of Mid-Peninsula or Cupertino to give the
requisite approval of this Agreement and the transactions contemplated
hereby including the amendments to the Mid-Peninsula Articles of
Incorporation, Bylaws and 1994 Stock Option Plan.
(iii) By the Boards of Directors of Mid-Peninsula or Cupertino upon
the expiration of thirty (30) days after any government agency or
regulatory authority denies or refuses to grant any approval, consent or
qualification required to be obtained in order to consummate the
transactions contemplated by this Agreement unless, within said thirty
(30) day period after such denial or refusal, Mid-Peninsula and Cupertino
agree to submit the application to the government agency or regulatory
authority that has denied or refused to grant the approval, consent or
qualification requested.
(iv) By the Board of Directors of Mid-Peninsula on or after the
Termination Date, if any of the conditions in Section 7 to which the
obligations of Mid-Peninsula are subject have not been fulfilled.
(v) By the Board of Directors of Mid-Peninsula if a materially
adverse change shall have occurred since March 31, 1996, in the business,
financial condition, results of operations or assets of Cupertino or CNB.
(vi) By the Board of Directors of Mid-Peninsula or Cupertino in the
event that Cupertino, CNB or their affiliates enter into a Business
Combination; provided, that termination based thereon shall not terminate
the Stock Option Agreement signed by Cupertino in accordance with this
Agreement.
(vii) By the Board of Directors of Mid-Peninsula upon the expiration
of twenty (20) days from delivery of written notice by Mid-Peninsula to
Cupertino of Cupertino's breach of or failure to satisfy any covenant or
agreement contained in this Agreement resulting in a material impairment
of the benefit reasonably expected to be derived by Mid-Peninsula from
the performance or satisfaction of such covenant or agreement (provided
that such breach has not been waived by Mid-Peninsula or cured by
Cupertino prior to expiration of such twenty (20) day period).
(viii) By the Board of Directors of Cupertino on or after the
Termination Date, if any of the conditions contained in Section 8 to
which the obligations of Cupertino are subject have not been fulfilled.
(ix) By the Board of Directors of Cupertino if a materially adverse
change shall have occurred since March 31, 1996 in the business,
financial condition, results of operations or assets of Mid-Peninsula or
MPB.
(x) By the Board of Directors of Cupertino and Mid-Peninsula in the
event Mid-Peninsula, MPB or their affiliates enter into a Business
Combination; provided, that termination based thereon shall not terminate
the Stock Option Agreement signed by Mid-Peninsula in accordance with
this Agreement.
(xi) By the Board of Directors of Cupertino upon the expiration of
twenty (20) days from delivery of written notice by Cupertino to
Mid-Peninsula of Mid-Peninsula's breach of or failure to satisfy any
covenant or agreement contained in this Agreement resulting in a material
impairment of the benefit reasonably expected to be derived by Cupertino
from the performance or satisfaction of such covenant or agreement
(provided that such breach has not been waived by Cupertino or cured by
Mid-Peninsula prior to expiration of such twenty (20) day period).
(xii) By the Board of Directors of Mid-Peninsula in the event that
Cupertino shall fail to deliver or cause to be delivered to Mid-Peninsula
on or before the date which is twenty-seven (27) days after the date of
this Agreement (the "Document Delivery Date") (i) the Schedules
A-37
<PAGE>
to be delivered pursuant to Section 4 hereof, in form and substance
satisfactory to Mid-Peninsula and its counsel; (ii) the following signed
documents, in form and substance reasonably acceptable to Mid-Peninsula
and its counsel: (a) the affiliate agreement to be delivered pursuant to
Section 7(n) hereof; (b) the shareholder agreements to be delivered
pursuant to Section 7(s) hereof; and (d) the stock option agreement to be
delivered pursuant to Section 7(u) hereof; and (iii) the form of the
following documents, in form and substance reasonably acceptable to
Mid-Peninsula and its counsel: (a) the officers certificate to be
delivered pursuant to Section 7(e) hereof; (b) the opinion of counsel to
Cupertino to be delivered pursuant to Section 7(f) hereof; and (c) the
legal opinion in connection with the supplemental debenture agreement to
be delivered pursuant to Section 7(x) hereof.
(xiii) By the Board of Directors of Cupertino in the event that
Mid-Peninsula shall fail to deliver or cause to be delivered to Cupertino
on or before the Document Delivery Date (i) the Schedules to be delivered
pursuant to Section 5 hereof, in form and substance satisfactory to
Cupertino and its counsel; (ii) the following signed documents, in form
and substance reasonably acceptable to Cupertino and its counsel: (a) the
affiliate agreement to be delivered pursuant to Section 8(n) hereof; (b)
the shareholder agreements to be delivered pursuant to Section 8(s)
hereof; and (d) the stock option agreement to be delivered pursuant to
Section 8(u) hereof; and (iii) the form of the following documents, in
form and substance reasonably acceptable to Cupertino and its counsel:
(a) the officers certificate to be delivered pursuant to Section 8(e)
hereof; (b) the opinion of counsel to Mid-Peninsula to be delivered
pursuant to Section 8(f) hereof; and (c) the supplemental debenture
agreement to be delivered pursuant to Section 8(x) hereof.
c. TERMINATION DATE. This Agreement shall be terminated if the Closing
shall not have occurred on or before December 31, 1996; provided, however,
that if the only conditions to the Closing which remain unsatisfied at
December 31, 1996 are the receipt of the Government Approvals or the
expiration of any waiting periods under applicable law or regulation, the
Closing Date shall be automatically extended to February 28, 1997, or such
other date as the parties may mutually agree upon (the "Termination Date"),
for the purpose of obtaining such Government Approvals or the expiration of
such waiting periods.
d. NOTICE. The power of termination hereunder may be exercised by
Mid-Peninsula or Cupertino, as the case may be, only by giving written
notice, signed on behalf of such party by its Chairman of the Board or
President, to the other party.
e. EFFECT OF TERMINATION; LIQUIDATED DAMAGES.
(i) If this Agreement is terminated for any reason, the Merger
Agreement shall automatically terminate. Termination of this Agreement
shall not terminate or affect the obligations of the parties to pay
expenses as provided in Section 11, to maintain the confidentiality of
the other party's information obtained pursuant to this Agreement, or the
provisions of this Section 12(e) or applicable provisions of Section 14.
(ii) If Mid-Peninsula or Cupertino terminates this Agreement pursuant
to Section 12(b)(vi), Cupertino shall pay to Mid-Peninsula, on demand,
the sum of Seven Hundred Fifty Thousand Dollars ($750,000). If Cupertino
or Mid-Peninsula terminates this Agreement pursuant to Section 12(b)(x)
Mid-Peninsula shall pay to Cupertino, on demand, the sum of Seven Hundred
Fifty Thousand Dollars ($750,000). In each case, the amount indicated
shall be deemed liquidated damages for expenses incurred and the lost
opportunity cost for time devoted to the transactions contemplated by
this Agreement.
13. INDEMNIFICATION.
a. BY MID-PENINSULA. Mid-Peninsula agrees to defend, indemnify and
hold harmless Cupertino and CNB, their respective officers and directors,
attorneys, accountants, and each person who controls Cupertino and CNB
within the meaning of the 1933 Act from and against
A-38
<PAGE>
any costs, damages, liabilities and expenses of any nature, insofar as such
costs, damages, liabilities and expenses arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained
in the Mid-Peninsula Registration Statement and Joint Proxy
Statement/Prospectus or any amendments or supplements thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that Mid-Peninsula
shall be liable in any such case only to the extent that any such cost,
damage, liability or expense arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made
in said Registration Statement and Joint Proxy Statement/ Prospectus or
amendments or supplements thereto, in reliance upon and in conformity with
information provided by and with respect to Mid-Peninsula used in preparing
the Registration Statement. If and to the extent such agreement to indemnify
may be unenforceable for any reason, Mid-Peninsula shall make the maximum
contribution to the payment and satisfaction of each of the indemnified
liabilities which may be permitted under applicable law.
b. BY CUPERTINO. Cupertino agrees to defend, indemnify and hold
harmless Mid-Peninsula and MPB, their respective officers and directors,
attorneys, accountants, and each person who controls Mid-Peninsula and MPB
within the meaning of the 1933 Act from and against any costs, damages,
liabilities and expenses of any nature, insofar as such costs, damages,
liabilities and expenses arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the
Mid-Peninsula Registration Statement and Joint Proxy Statement/ Prospectus
or any amendments or supplements thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; provided, however, that Cupertino shall be liable in any such
case only to the extent that any such cost, damage, liability or expense
arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in said Registration
Statement and Joint Proxy Statement/Prospectus or amendments or supplements
thereto, in reliance upon and in conformity with information provided by and
with respect to Cupertino used in preparing the Registration Statement and
Joint Proxy Statement/Prospectus. If and to the extent such agreement to
indemnify may be unenforceable for any reason, Cupertino shall make the
maximum contribution to the payment and satisfaction of each of the
indemnified liabilities which may be permitted under applicable law.
c. NOTIFICATION. Promptly after receipt by any party to be indemnified
pursuant to this subarticle (the "Indemnified Party") of notice of (i) any
claim or (ii) the commencement of any action or proceeding, the Indemnified
Party will give the other party (the "Indemnifying Party") written notice of
such claim or the commencement of such action or proceeding. The
Indemnifying Party shall have the right, at its option, to compromise or
defend, by its own counsel, any such matter involving the Indemnified
Party's asserted liability. In the event that the Indemnifying Party shall
undertake to compromise or defend any such asserted liability, it shall
promptly notify the Indemnified Party of its intention to do so, and the
Indemnified Party agrees to cooperate fully with the Indemnifying Party and
its counsel in the compromise of, or defense against, any such asserted
liability. In any event, the Indemnifying Party shall have the right to
participate in the defense of such asserted liability.
A-39
<PAGE>
14. MISCELLANEOUS.
a. NOTICES. Any notice or other communication required or permitted
under this Agreement shall be effective only if it is in writing and
delivered personally, or by Federal Express or similar overnight courier, or
by facsimile or sent by first class United States mail, postage prepaid,
registered or certified mail, addressed as follows:
<TABLE>
<S> <C>
To Mid-Peninsula: To Cupertino:
David L. Kalkbrenner C. Donald Allen
President President
Mid-Peninsula Bancorp Cupertino National Bancorp
420 Cowper Street 20230 Stevens Creek Blvd.
Palo Alto, CA 94301-1504 Cupertino, California 95014
Telephone: (415) 323-5150 Telephone: (408) 996-1144
Telecopier: (415) 323-7421 Telecopier: (408) 996-0657
With a copy to: With a copy to:
Bronson, Bronson & McKinnon LLP Manatt, Phelps & Phillips, LLP
10 Almaden Blvd., Suite 600 11355 W. Olympic Blvd.
San Jose, California 95113 Los Angeles, California 90064
Attn: Glenn T. Dodd Attn: Paul H. Irving
Telephone: (408) 293-0599 William T. Quicksilver
Telecopier: (408) 999-6553 Telephone: (310) 312-4000
Attn: John W. Carr Telecopier: (310) 312-4224
Telephone: (415) 986-4200
Telecopier: (415) 982-1394
</TABLE>
or to such other address as either party may designate by notice to the
other, and shall be deemed to have been given upon receipt.
b. KNOWLEDGE. Whenever the term "knowledge" or "to the best of
knowledge" or words of similar import are used in this Agreement in
connection with a party's representations and warranties, it shall mean the
actual knowledge of a party after due inquiry of a party's directors,
executive officers, senior vice presidents, and any officer(s) in charge of
or having responsibility for any department or division of a party or its
subsidiaries, including, without limitation, operations, credit, trust, SBA,
mortgage, real estate, finance, administration, compliance and audit.
c. BINDING AGREEMENT. This Agreement is binding upon and is for the
benefit of Mid-Peninsula and Cupertino and their respective successors and
permitted assigns. This Agreement is not made for the benefit of any person,
firm, corporation or association not a party hereto, and no other person,
firm, corporation or association shall acquire or have any right under or by
virtue of this Agreement. No party may assign this Agreement or any of its
rights, privileges, duties or obligations hereunder without the prior
written consent of the other party to this Agreement.
d. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. No investigation by
Mid-Peninsula or Cupertino made before or after the date of this Agreement
shall affect the representations and warranties which are contained in this
Agreement and such representations and warranties shall survive such
investigation, provided that, except with respect to covenants and
agreements to be performed in whole or in part subsequent to the Effective
Time of the Merger (as to which the related representations and warranties
shall survive until their performance) which covenants and agreements shall
survive the Effective Time of the Merger, the representations, warranties,
covenants and agreements of Mid-Peninsula and Cupertino contained in this
Agreement shall terminate upon the Effective Time of the Merger.
A-40
<PAGE>
e. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
f. ATTORNEYS' FEES. In any action at law or suit in equity in relation
to this Agreement, the prevailing party in such action or suit shall be
entitled to receive a reasonable sum for its attorneys' fees and all other
reasonable costs and expenses incurred in such action or suit.
g. ENTIRE AGREEMENT; SEVERABILITY. This Agreement and the documents,
certificates, agreements, letters, schedules and exhibits attached or
required to be delivered pursuant hereto set forth the entire agreement and
understandings of the parties in respect of the transactions contemplated
hereby, and supersede all prior agreements, arrangements and understanding
relating to the subject matter hereof, excluding that certain
Confidentiality Agreement between the parties dated May 8, 1996. Each
provision of this Agreement shall be interpreted in a manner to be effective
and valid under applicable law, but if any provision hereof shall be
prohibited or ruled invalid under applicable law, the validity, legality and
enforceability of the remaining provisions shall not, except as otherwise
required by law, be affected or impaired as a result of such prohibition or
ruling.
h. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
i. EFFECT OF RESTATEMENT. The restatement of this Agreement shall not
constitute a waiver of, or otherwise affect, the rights, obligations or
liabilities of the parties hereto as in effect immediately prior to the
restatement of this Agreement (except to the extent that the terms of this
Agreement have been expressly amended from the terms of this Agreement in
effect immediately prior to the date of the restatement of this Agreement).
Except as expressly stated to the contrary herein, all references herein,
and in any documents or agreements executed pursuant hereto, to "the date of
this Agreement," "the date hereof" or similar phrases with reference to this
Agreement shall be deemed to refer to June 5, 1996, and any representations
or warranties made or deemed to be made as of that date shall not be deemed
to be made again at the time of restatement of this Agreement.
A-41
<PAGE>
IN WITNESS WHEREOF, Mid-Peninsula and Cupertino have each caused this Second
Amended and Restated Agreement and Plan of Reorganization and Merger to be
signed by its Chairman of the Board and President as of the day and year first
above written.
MID-PENINSULA BANCORP CUPERTINO NATIONAL BANCORP
By: /s/ DUNCAN L. MATTESON By: /s/ JOHN M. GATTO
---------------------------------- ----------------------------------
Duncan L. Matteson John M. Gatto
CHAIRMAN OF THE BOARD CHAIRMAN OF THE BOARD
By: /s/ DAVID L. KALKBRENNER By: /s/ C. DONALD ALLEN
---------------------------------- ----------------------------------
David L. Kalkbrenner C. Donald Allen
PRESIDENT PRESIDENT
A-42
<PAGE>
EXHIBIT A
MERGER AGREEMENT
THIS MERGER AGREEMENT (the "Merger Agreement") is made and entered into as
of , 1996, by and between MID-PENINSULA BANCORP, a California
corporation ("Mid-Peninsula"), and CUPERTINO NATIONAL BANCORP, a California
corporation ("Cupertino").
RECITALS
A. Mid-Peninsula is a corporation duly organized, validly existing and
doing business in good standing under the laws of the State of California with
authorized capital stock of six million (6,000,000) shares of no par value
common stock of which, on the date hereof, there
are ( ) shares issued and outstanding (individually, a
"Mid-Peninsula Share" and together the "Mid-Peninsula Shares") and four million
(4,000,000) shares of preferred stock of which, on the date hereof, there are no
shares issued and outstanding.
B. Cupertino is a corporation duly organized, validly existing and doing
business in good standing under the laws of the State of California with
authorized capital stock of six million (6,000,000) shares of no par value
common stock of which, on the date hereof, there are ( ) shares
issued and outstanding (individually, a "Cupertino Share" and together the
"Cupertino Shares") and 4,000,000 shares of preferred stock of which, on the
date hereof, there are no shares issued and outstanding.
C. Mid-Peninsula and Cupertino have entered into a Second Amended Agreement
and Plan of Reorganization and Merger, dated August 20, 1996 (the "Agreement"),
which contemplates the merger of Cupertino with and into Mid-Peninsula (the
"Merger") upon and in accordance with the terms and conditions set forth in the
Agreement and this Merger Agreement.
D. The respective Boards of Directors of Mid-Peninsula and Cupertino deem
it desirable and in the best interests of Mid-Peninsula and Cupertino and their
respective shareholders that Cupertino be merged with and into Mid-Peninsula as
provided in the Agreement and this Merger Agreement pursuant to the laws of the
State of California and that Mid-Peninsula change its name to Greater Bay
Bancorp ("Bancorp") which shall be the surviving corporation ("Surviving
Corporation").
E. The respective Boards of Directors of Mid-Peninsula and Cupertino have
adopted resolutions approving this Merger Agreement and the Agreement and have
recommended that the Merger be approved by the shareholders of their respective
corporations.
F. The respective shareholders of each of Mid-Peninsula and Cupertino, at
meetings duly held, have duly approved and adopted this Merger Agreement, the
Agreement and approved the Merger.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and of the mutual covenants
and agreements herein set forth and for the purpose of prescribing the terms and
conditions of the Merger, the parties hereto agree as follows:
II.
THE MERGER
1.1 EFFECT OF MERGER. At the Effective Time of the Merger (as defined in
Article VIII hereof), Cupertino shall be merged with and into Mid-Peninsula,
Mid-Peninsula shall change its name to Greater Bay Bancorp, which shall
thereupon be the Surviving Corporation, and the separate corporate existence of
Cupertino shall cease.
A-43
<PAGE>
1.2 RIGHTS AND DUTIES OF SURVIVING CORPORATION. At and after the Effective
Time of the Merger, all rights, privileges, powers and franchises and all
property and assets of every kind and description of Cupertino shall be vested
in and be held and enjoyed by Bancorp as the Surviving Corporation, without
further act or deed; all the estates and interests of every kind of Cupertino,
including all debts due to it, shall be as effectively the property of Bancorp
as the Surviving Corporation as they were of Cupertino; the title to any real
estate vested by deed or otherwise in Cupertino shall not revert or be in any
way impaired by reason of the Merger; and Bancorp shall be deemed to be the same
entity as each of Cupertino and Mid-Peninsula and shall be subject to all of
their duties and liabilities of every kind and description. All rights of
creditors and liens upon any property of Mid-Peninsula or Cupertino shall be
preserved unimpaired and all debts, liabilities and duties of Mid-Peninsula or
Cupertino shall be the debts, liabilities and duties of Bancorp as the Surviving
Corporation and may be enforced against it to the same extent as if such debts,
liabilities and duties had been incurred or contracted by it.
III.
CONVERSION OF SHARES
2.1 CONVERSION OF SHARES. In and by virtue of the Merger and at the
Effective Time of the Merger, pursuant to this Merger Agreement, each
Mid-Peninsula Share and each Cupertino Share issued and outstanding immediately
prior to the Effective time of the Merger shall, at the Effective Time of the
Merger, be converted as follows:
a. Effect on Mid-Peninsula Shares. At the Effective Time of the Merger,
each Mid-Peninsula Share issued and outstanding immediately prior to the
Effective Time of the Merger shall, on and after the Effective Time of the
Merger, remain issued and outstanding and shall automatically and for all
purposes be deemed to represent one share of the common stock, without par
value, of Bancorp as the Surviving Corporation ("Bancorp Shares").
b. Conversion of Cupertino Shares. At the Effective Time of the Merger,
each Cupertino Share outstanding immediately prior to the Effective Time of
the Merger shall, by virtue of the Merger and without any action on the part
of the holder thereof, be exchanged for and converted into .81522 (the
"Conversion Ratio") of a Bancorp Share. From and after the Effective Time of
the Merger, each holder of Cupertino Shares immediately prior to the
Effective Time of the Merger (other than holders of Dissenting Shares, as
defined below) shall have the right to receive, upon surrender of the
certificates theretofore representing such Cupertino Shares, one or more
certificates representing shares of Bancorp Shares equal to the number of
Cupertino Shares represented by each surrendered certificate multiplied by
the Conversion Ratio.
2.2 FRACTIONAL SHARES. No fractional Bancorp Shares shall be issued in the
Merger. In lieu thereof, each record holder of Cupertino Shares who would
otherwise be entitled to receive a fractional Bancorp Share shall receive,
subject to prior surrender of certificates representing Cupertino Shares, an
amount in cash equal to the product (calculated to the nearest hundredth)
obtained by multiplying the average of the bid and asked prices quoted by each
brokerage firm acting as a market maker of Mid-Peninsula Shares for a
Mid-Peninsula Share for each of the twenty (20) consecutive trading days up to
and including the last business day of the calendar month end immediately prior
to the Closing Date (as defined in the Agreement), by the fraction of a Bancorp
Share to which such holder would otherwise be entitled. No such holder shall be
entitled to dividends, voting rights, interest, or any other rights in respect
of any such fractional share.
A-44
<PAGE>
2.3 EXCHANGE PROCEDURES.
a. At and after the Effective Time of the Merger, Mid-Peninsula will
deliver or cause to be delivered to U. S. Stock Transfer Corporation, which
shall serve as exchange agent (the "Exchange Agent"), such number of blank
certificates representing Bancorp Shares sufficient to issue the number of
Bancorp Shares issuable in the Merger and an amount of cash sufficient for
payment of any fractional shares.
b. As soon as practicable after the Effective Time of the Merger, the
Exchange Agent will send written notice of exchange procedures to each
record holder of certificates representing Cupertino Shares converted
pursuant to Section 2.1(b) of this Merger Agreement.
c. Upon surrender for cancellation to the Exchange Agent of one or more
certificates evidencing Cupertino Shares ("Cupertino Certificates"),
accompanied by a duly executed letter of transmittal in proper form, the
Exchange Agent shall promptly deliver to each holder of such surrendered
Cupertino Certificates one or more new certificates representing the
appropriate number of Bancorp Shares ("Bancorp Certificates") to which such
holder is entitled, together with one or more checks for payment of cash in
lieu of fractional interests to be issued in respect of the Cupertino Shares
so surrendered.
d. Until Cupertino Certificates have been surrendered and exchanged for
Bancorp Certificates as herein provided, each outstanding Cupertino
Certificate shall represent, on and after the Effective Time of the Merger,
the right to receive the number of Bancorp Shares into which the number of
Cupertino Shares shown thereon have been converted. No dividends or other
distributions of any kind which are declared payable to holders of record of
the Bancorp Shares after the Effective Time of the Merger will be paid to
persons otherwise entitled to receive the same until such persons have
surrendered their Cupertino Certificates in exchange for Bancorp
Certificates in the manner herein provided, but upon such surrender, such
dividends or other distributions, from and after the Effective Time of the
Merger, will be paid to such persons in accordance with the terms of such
Bancorp Shares. In no event shall the persons entitled to receive such
dividends or other distributions be entitled to receive interest on such
dividends or other distributions.
e. No transfer taxes shall be payable by any holder of Cupertino Shares
in respect of the issuance of Bancorp Certificates for Bancorp Shares,
except that if any Bancorp Certificate for Bancorp Shares is to be issued in
a name other than that in which the Cupertino Certificate surrendered shall
be been registered, it shall be a condition of such issuance that the person
requesting such issuance shall properly endorse the certificate or
certificates and shall pay to Bancorp any transfer taxes payable by reason
thereof, or of any prior transfer of such surrendered certificate, or
establish to the satisfaction of Bancorp that such taxes have been paid or
are not payable.
f. Any Bancorp Shares delivered to the Exchange Agent and not issued
pursuant hereto at the end of one (1) year from the Effective Time of the
Merger shall be returned to Bancorp, in which event the persons, if any,
entitled thereto shall look only to Bancorp for payment thereof.
g. Notwithstanding anything to the contrary set forth herein, if any
holder of Cupertino Shares shall be unable to surrender his or her Cupertino
Certificates because such certificates have been lost or destroyed, such
holder may deliver in lieu thereof an indemnity bond in form and substance
and with surety satisfactory to Bancorp.
h. The Exchange Agent shall not be entitled to vote or exercise any
rights of ownership with respect to the Bancorp Shares held by it from time
to time hereunder, except that it shall receive and hold all dividends or
other distributions paid or distributed with respect to such Bancorp Shares
for the account of the persons entitled thereto. All dividends or
distributions, and any cash to be paid in lieu of fractional shares, if held
by the Exchange Agent for payment or delivery to the holders of
unsurrendered certificates representing Cupertino Shares and unclaimed at
the end of one (1) year from the Effective Time of the Merger, shall
(together with any
A-45
<PAGE>
interest earned thereon) at such time be paid or redelivered by the Exchange
Agent to Bancorp, and after such time any holder of a certificate
representing Cupertino Shares who has not surrendered such certificate to
the Exchange Agent shall, subject to applicable law, look as a general
creditor only to Bancorp for payment or delivery of such dividends or
distributions or cash, as the case may be.
2.4 DISSENTING SHAREHOLDERS. Notwithstanding the provisions of this
Article III to the contrary, any Cupertino Shares held by persons who have
satisfied the requirements of Chapter 13 of the California General Corporation
Law (the "GCL") and who have not effectively withdrawn or lost their dissenters'
rights under Chapter 13 (such shares being referred to as "Dissenting Shares"),
shall not be converted pursuant to this Merger Agreement, but the holders
thereof shall be entitled only to such rights as are afforded them by Chapter 13
of the GCL. Each dissenting shareholder who is entitled to payment for his or
her Cupertino Shares pursuant to Chapter 13 of the GCL shall receive payment in
an amount determined pursuant to Chapter 13 of the GCL.
IV.
ARTICLES OF INCORPORATION
The Articles of Incorporation of Mid-Peninsula shall be amended effective as
of the Effective Time of the Merger:
a. to change its name to Greater Bay Bancorp, (b) to establish a
super-majority vote requirement of the Board of Directors equal to a
two-thirds vote on certain matters, and (c) to limit the liability of the
directors and provide expanded indemnification rights of agents of the
Surviving Corporation to the maximum extent permitted by law, as set forth
in EXHIBIT 1 attached hereto and incorporated herein by this reference, and,
as so amended, shall be the Articles of Incorporation of Bancorp as the
Surviving Corporation from and after the Effective Time of the Merger until
amended in accordance with its provisions and as provided by law.
V.
BYLAWS
The Bylaws of Mid-Peninsula shall be amended effective as of the Effective
Time of the Merger:
a. to provide for a range in the number of authorized directors of not
less than seven (7) and not more than thirteen (13), with the exact number
of directors fixed at ten (10); and (b) to require a two-thirds (2/3rds)
vote of the Board of Directors of Bancorp to approve certain matters
affecting Bancorp, including (i) a merger, sale of control or sale of
material assets of Bancorp, (ii) acquisitions by Bancorp, (iii) creation of
new business units of Bancorp or its subsidiaries, (iv) material changes in
operating budgets of Bancorp or its subsidiaries, (v) material changes in
the business organization or organizational structure of Bancorp or its
subsidiaries, (vi) termination of any executive officer or senior officer
appointed to the Executive Management Committee of Bancorp, and (vii) any
change in the authorized range of directors; and, as so amended, the Bylaws
of Mid-Peninsula shall, at and after the Effective Time of the Merger, be
the Bylaws of Bancorp as the Surviving Corporation until further amended as
provided by law.
VI.
DIRECTORS
At the Effective Time of the Merger, the Board of Directors of Bancorp as
the Surviving Corporation shall consist of five (5) members appointed by the
Board of Directors of Mid-Peninsula and five (5) members appointed by the Board
of Directors of Cupertino, in each case as designated in the Agreement. Such
persons shall serve as the Directors of the Surviving Corporation until such
time as their successors have been duly elected and qualified.
A-46
<PAGE>
VII.
FURTHER ACTION
The parties shall deliver, or cause to be delivered, such documents or
certificates as may be necessary, in the reasonable opinion of counsel for any
of the parties, to effectuate the transactions set forth in this Merger
Agreement. If, at any time after the Effective Time of the Merger, Bancorp as
the Surviving Corporation or its successors or assigns shall determine that any
further conveyance, assignment or other documents or any further action is
necessary or desirable to further effectuate the transactions set forth herein
or contemplated hereby, the officers and directors of the parties hereto shall
execute and deliver, or cause to be executed and delivered, all such documents
as may be reasonably required to effectuate such transactions.
VIII.
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing, in accordance with Section
1103 of the GCL, of an executed copy of this Merger Agreement and all other
requisite accompanying certificates in the office of the California Secretary of
State. The date and time of such filing with the California Secretary of State
is referred to herein as the "Effective Time of the Merger."
IX.
CONDITIONS TO MERGER
The filing of this Merger Agreement with the California Secretary of State
as provided in Article VIII above is conditioned upon the fulfillment, prior to
such filing, of all the conditions to the Merger set forth in the Agreement.
X.
TERMINATION
This Merger Agreement may, by the mutual consent and action of the Boards of
Directors of Mid-Peninsula and Cupertino, be abandoned at any time before or
after approval thereof by the shareholders of Mid-Peninsula and Cupertino, but
not later than the filing of this Merger Agreement with the California Secretary
of State pursuant to Section 1103 of the GCL. This Merger Agreement shall
automatically be terminated and of no further force and effect if, prior to the
filing of an executed copy hereof with the California Secretary of State as
provided in Article VIII hereof, the Agreement is terminated in accordance with
the terms thereof.
XI.
GENERAL PROVISIONS
10.1 SUCCESSORS AND ASSIGNS. This Merger Agreement shall be binding upon
and enforceable by the parties hereto and their respective successors, assigns
and transferees, but this Merger Agreement may not be assigned by any party
without the written consent of the other parties.
10.2 GOVERNING LAW. This Merger Agreement has been executed in the State
of California, and the laws of the State of California shall govern the validity
and interpretation hereof and the performance by the parties hereto.
10.3 AMENDMENTS. This Merger Agreement, when duly executed and delivered,
may be modified or amended by action of the Board of Directors of Mid-Peninsula
and Cupertino to the extent permitted by law without action by their respective
shareholders. This Merger Agreement may be modified or amended only by an
instrument of equal formality signed by the parties or their duly authorized
agents.
A-47
<PAGE>
10.4 ENTIRE AGREEMENT. This Merger Agreement and the Agreement, together
with all exhibits hereto and thereto and all documents referenced herein and
therein, constitute the entire agreement of Mid-Peninsula and Cupertino, and
supersede any prior written or oral negotiations, discussions, understandings
and agreements between them, concerning the subject matter contained herein and
therein.
10.5 COUNTERPARTS. This Merger Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument, but
all of which together shall constitute but one and the same agreement.
IN WITNESS WHEREOF, Mid-Peninsula and Cupertino, pursuant to the approval
and authority duly given by resolution of their respective Boards of Directors,
have caused this Merger Agreement to be signed by their respective Presidents
and Secretaries on the day and year first above written.
<TABLE>
<CAPTION>
CUPERTINO NATIONAL BANCORP, MID-PENINSULA BANCORP,
<S> <C> <C>
a California corporation a California corporation
By
By
- ----------------------------------------- -----------------------------------------
C. Donald Allen, President David L. Kalkbrenner, President
and Chief Executive Officer and Chief Executive Officer
By
By
- ----------------------------------------- -----------------------------------------
Steven C. Smith, Secretary Warren R. Thoits, Secretary
</TABLE>
A-48
<PAGE>
EXHIBIT 1
AMENDMENT TO ARTICLES OF INCORPORATION OF MID-PENINSULA BANCORP
A-49
<PAGE>
APPENDIX B
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Year ended December 31, 1995.
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 of registrant as specified in its charter)
<TABLE>
<S> <C>
STATE OF CALIFORNIA 94-2952485
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
420 COWPER STREET, PALO ALTO,
CALIFORNIA 94301
(Address of principal executive (Zip code)
offices)
</TABLE>
Registrant's telephone number, including area code (415) 323-5150
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH NAME OF EACH EXCHANGE
CLASS ON WHICH REGISTERED
- ------------------ ---------------------
<S> <C>
Common Stock None
(no par value)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
None
------------------------
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 15, 1996 was $22,465,548.
As of March 15, 1996, the registrant had 1,582,392 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K:
(1) Part III, Items 10 through 13 from registrant's definitive proxy statement
for the 1996 annual meeting of shareholders.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT 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 1995, 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 witch 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.
Regular bank hours are from 9:30 A.M. to 4:00 P.M., Monday through Friday.
The main offices of the Company and the Bank are located at 420 Cowper Street,
Palo Alto, California, telephone number (415) 323-5150. The Bank's other offices
are located at 100 South Ellsworth Avenue, San Mateo, California, telephone
number (415) 375-1555 and 1313 Laurel Street, San Carlos, California, telephone
number (415) 595-4445.
The Bank's commercial lending focus is to provide short-term loans and lines
of credit to professional service firms and local businesses. Commercial clients
include small businesses, light industry manufacturing companies and various
professional service firms. Emphasis is placed on the borrowers earnings
history, capitalization, secondary sources of repayment (such as accounts
receivable) and, in many instances, tertiary sources of repayment (such as
personal guarantees or personal assets). Through community involvement in
Chambers of Commerce, Rotary Clubs, civic organizations and redevelopment
activities, officers of the Bank stay in close contact with the leaders and
decision makers within the communities served by the Bank.
In addition, the Bank offers interim construction loans, generally for
single-family residences and multi-unit projects. Real estate and construction
loans are typically secured by first deeds of trust and guarantees from
principals of the borrower where applicable. The economic viability of the
project and the borrower's credit-worthiness are primary considerations in the
loan underwriting decision. The Bank uses independent local appraisers,
conservative loan-to-value ratios (e.g., generally not to exceed 75% of the
appraised value of the property) and close monitoring of the projects during the
construction phase. In the absence of rapid declines in real estate values,
ultimate collectibility of these secured loans is considered by the Company's
management to be better than the average mix of commercial loans. The Bank
presently does not make long-term fixed or variable rate real estate loans and,
therefore, material sustained increases or decreases in general interest rate
levels have only a short-term effect on the Bank's net yield on real estate
loans.
B-1
<PAGE>
As of December 31, 1995, commercial loans and lines of credit represented
approximately 74% of the Company's total loan portfolio, real estate loans
approximately 19% of the total loan portfolio, and real estate construction
loans approximately 7% of the loan portfolio.
The Bank's deposits are primarily obtained from individuals (including
corporate executives and entrepreneurs), small and medium-size businesses, and
professionals. The Bank's deposits are not received from a single depositor or
group of affiliated depositors the loss of any one of which would have a
material adverse effect on the business of the Bank, nor is a material portion
of the Bank's loans concentrated within a single industry or group of related
industries. As of December 31, 1995, the Bank had approximately $37,077,000 of
noninterest bearing demand deposits, with an average account balance of
approximately $24,000, approximately $11,926,000 in interest bearing demand
deposits with an average account balance of approximately $23,000, and
approximately $146,692,000 in interest bearing time and savings deposits with an
average account balance of approximately $86,000. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the
legal limit thereon, which is currently $100,000 per depositor.
The Bank had fifty-seven (57) full-time employees on December 31, 1995 and
the Company had no employees other than unsalaried officers.
SUPERVISION AND REGULATION
The common stock of the Company is subject to the registration requirements
of the Securities Act of 1933, as amended, and the qualification requirements of
the California Corporate Securities Law of 1968, as amended. The Bank's common
stock, however, is exempt from such requirements. The Company is also subject to
the periodic reporting requirements of Section 15(d) of the Securities Exchange
Act of 1934, as amended, which include, but are not limited to, annual,
quarterly and other current reports with the Securities and Exchange Commission.
The Bank is licensed under the banking laws of the State of California, is a
member of the Federal Reserve System, and its deposits are insured by the FDIC.
Consequently, the Bank is subject to the supervision of, and is regularly
examined by, the California Superintendent of State Banks (the "Superintendent")
and the Board of Governors. Such supervision and regulation include
comprehensive reviews of all major aspects of the Bank's business and condition,
including its capital ratios, allowance for possible loan losses and other
factors. However, no inference should be drawn that such authorities have
approved any such factors. The Company and the Bank are required to file reports
with the Superintendent and the Board of Governors and provide such additional
information as the Superintendent and the Board of Governors may require.
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
registered as such with, and subject to the supervision of, the Board of
Governors. The Company is required to obtain the approval of the Board of
Governors before it may acquire all or substantially all of the assets of any
bank, or ownership or control of the voting shares of any bank if, after giving
effect to such acquisition of shares, the Company would own or control more than
5% of the voting shares of such bank. The Bank Holding Company Act prohibits the
Company from acquiring any voting shares of, or interest in, all or
substantially all of the assets of, a bank located outside the State of
California unless such an acquisition is specifically authorized by the laws of
the state in which such bank is located. Any such interstate acquisition is also
subject to the provisions of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1995 discussed below.
The Company, and any subsidiaries which it may acquire or organize, are
deemed to be "affiliates" of the Bank within the meaning of that term as defined
in the Federal Reserve Act. This means, for example, that there are limitations
(a) on loans by the Bank to affiliates, and (b) on investments by the Bank in
affiliates' stock as collateral for loans to any borrower. The Company and its
subsidiary are also subject to certain restrictions with respect to engaging in
the underwriting, public sale and distribution of securities.
B-2
<PAGE>
In addition, regulations of the Board of Governors promulgated under the
Federal Reserve Act require that reserves be maintained by the Bank in
conjunction with any liability of the Company under any obligation (promissory
note, acknowledgment of advance, banker's acceptance or similar obligation) with
a weighted average maturity of less than seven (7) years to the extent that the
proceeds of such obligations are used for the purpose of supplying funds to the
Bank for use in its banking business, or to maintain the availability of such
funds.
The Company and the Bank are prohibited from engaging in certain tie-in
arrangements in connection with an extension of credit, sale or lease of
property or furnishing of services. Section 106(b) of the Bank Holding Company
Act Amendments of 1970 generally prohibits a bank from tying a product or
service to another product or service offered by the bank, or by any of its
affiliates. A prohibited tie-in arrangement would exist where a bank varies the
consideration for a product or service on the condition that a customer obtain
some additional product or service from the bank or from any of its affiliates,
or where as a condition for providing a customer a product or service, the bank
requires the customer to purchase another product or service from the bank or
from any of its affiliates. These anti-tying restrictions also apply to bank
holding companies and their non-bank subsidiaries as if they were banks. Section
106 contains a "traditional bank product" exception permitting a bank to tie a
product to a traditional bank product offered by the bank itself, but not by any
affiliated bank or non-bank. For example, a bank may offer a discount on a loan
on the condition that a customer maintain a deposit account at that bank,
however, the bank may not offer a discount on a loan on the condition that a
customer maintain a deposit account at an affiliated bank. Effective September
2, 1995, the Board of Governors adopted a rule permitting a bank or a bank
holding company to offer a discount on a traditional bank product, or on
securities brokerage services to a customer on condition that the customer
obtain a traditional bank product from an affiliate. Effective January 23, 1995,
the Board of Governors adopted a rule permitting a bank holding company or its
non-bank subsidiary to offer a discount on its product or service on condition
that a customer obtain any other product or service from that holding company or
from any of its non-bank affiliates. The rule permits bank holding companies and
their non-bank subsidiaries to offer discounts on packaged products when no
affiliated bank is involved in the arrangement (both the tying and tied products
are offered by bank holding companies or their non-bank subsidiaries only), and
both the tying and tied products are separately available for purchase at
competitive prices.
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% of its assets and commitments
to extend credit, weighted by risk, of which at least 4% 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.
Assets, commitments to extend credit, and off-balance sheet items are
categorized according to risk, and certain assets considered to present less
risk than others permit maintenance of capital at less than the 8% ratio. For
example, most home mortgage loans are placed in a 50% risk category and
therefore require maintenance of capital equal to 4% of such loans, while
commercial loans are placed in a 100% risk category and therefore require
maintenance of capital equal to 8% of such loans.
The guidelines establish two categories of qualifying capital: Tier 1
capital comprising core capital elements, and Tier 2 comprising supplementary
capital requirements. At least one-half of the required capital must be
maintained in the form of Tier 1 capital. Tier 1 capital includes common
shareholders' equity and quailing perpetual preferred stock. However, no more
than 25% of the Company's total Tier 1 capital may consist of perpetual
preferred stock. The definition of Tier 1 capital for the Bank is the same,
except that perpetual preferred stock may be included only if it is
noncumulative. Tier 2 capital includes, among other items, limited life (and in
the case of banks, cumulative) preferred stock, mandatory convertible
securities, subordinated debt and a limited amount of reserve for credit losses.
B-3
<PAGE>
The Board of Governors also adopted a 3% 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.
As of December 31, 1995, the Bank and the Company are in compliance with the
risk-based capital and leverage ratios noted above. See Item 7 below for a
listing of the Company's risk-based capital ratios for the years ended December
31, 1995 and 1994.
The Company's ability to pay cash dividends is subject to restrictions set
forth in the California General Corporation Law. Funds for payment of any cash
dividends by the Company would be obtained from its investments as well as
dividends and/or management fees from the Bank. The payment of cash dividends
and/or management fees by the Bank is subject to restrictions set forth in the
California Financial Code, as well as restrictions established by the Board of
Governors and the FDIC. See Item 5 for further information regarding the payment
of cash dividends by the Company and the Bank.
COMPETITION
At December 31, 1995, there were 48 branches of major California banks and
23 regional bank branches in the cities of Palo Alto, San Mateo and San Carlos
and surrounding areas. Additionally, the Bank competes with savings and loan
associations and, to a lesser extent, credit unions, finance companies and other
financial services providers for deposit and loan customers.
Larger banks may have a competitive advantage because of higher lending
limits and major advertising and marketing campaigns. They also perform
services, such as trust services, international banking, discount brokerage and
insurance services which the Bank is not authorized or prepared to offer
currently. The Bank has made arrangements with its correspondent banks and with
others to provide such services for its customers. For borrowers requiring loans
in excess of the Bank's legal lending limits, the Bank has offered, and intends
to offer in the future, such loans on a participating basis with its
correspondent banks and with other independent banks, retaining the portion of
such loans which are within its lending limits. As of December 31, 1995, the
Bank's legal lending limits to a single borrower and such borrowers related
parties were $3,342,000 on an unsecured basis and $5,570,000 on a fully secured
basis based on regulatory capital of $22,280,000.
In order to compete with other financial institutions in its service area,
the Bank relies principally upon local advertising programs; direct personal
contact by officers, directors, employees, and shareholders; and specialized
services such as courier pick-up and delivery of non-cash banking items. The
Bank emphasizes to its customers the advantages of dealing with a locally owned
and community oriented institution, and when customer loan demands exceed the
Bank's legal lending limit, the Bank makes every effort to arrange such
financing through a participating loan program with a correspondent or other
independent bank.
B-4
<PAGE>
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest rate paid by the Bank to obtain its
deposits and its other borrowings and the interest rate received by the Bank on
loans extended to its customers and on securities held in the Bank's portfolio
comprise the major portion of the Bank's earnings.
Commercial banks compete with savings and loan associations, credit unions,
other financial institutions and other entities for funds. For instance, yields
on corporate and government debt securities and other commercial paper affect
the ability of commercial banks to attract and hold deposits. Commercial banks
also compete for loans with savings and loan associations, credit unions,
consumer finance companies, mortgage companies and other lending institutions.
The interest rate differentials of the Bank, and therefore its earnings, are
affected not only by general economic conditions, both domestic and foreign, but
also by the monetary and fiscal policies of the United States as set by statutes
and as implemented by federal agencies, particularly the Federal Reserve Board.
This agency can and does implement national monetary policy, such as seeking to
curb inflation and combat recession, by its open market operations in United
States government securities, adjustments in the amount of interest free
reserves that banks and other financial institutions are required to maintain,
and adjustments to the discount rates applicable to borrowing by banks from the
Federal Reserve Bank. These activities influence the growth of bank loans,
investments and deposits and also affect interest rates charged on loans and
paid on deposits. The nature and timing of any future changes in monetary
policies and their impact on the Bank are not predictable.
California law and regulations of the Superintendent authorize California
licensed banks, subject to applicable limitations and approvals of the
Superintendent to (1) provide real estate appraisal services, management
consulting and advisory services, and electronic data processing services; (2)
engage directly in real property investment or acquire and hold voting stock of
one or more corporations, the primary activities of which are engaging in real
property investment; (3) organize, sponsor, operate or render investment advice
to an investment company or to underwrite, distribute or sell securities in
California; and (4) invest in the capital stock, obligations or other securities
of corporations not acting as insurance companies, insurance agents or insurance
brokers. In November 1988, Proposition 103 was adopted by California voters. The
Superintendent has established certain procedures to be followed by banks
desiring to engage in insurance activities which include filing a report
describing (1) a proposed business plan and information regarding the types of
insurance products intended to be offered; (2) insurance companies with which
the banks intend to conduct business; (3) organization plans; (4) locations at
which activities will be conducted; and (5) proposed operational and compliance
procedures and policies. The California Department of Insurance regulates
application processing, licensing and supervision of insurance activities.
National banks (whether a holding company subsidiary or not) are limited under
applicable provisions of the National Bank Act to acting as an agent for fire,
life or other insurance only in locations with a population of 5,000 or less. In
recent years, banks and bank holding companies have increasingly sought
authorization to expand their product base to include insurance activities. The
Federal Deposit Insurance Corporation Improvement Act of 1991 discussed below,
generally restricts an insured state bank from engaging as a principal in any
activity that is impermissible for a national bank. On January 18, 1995, the
United States Supreme Court unanimously upheld a ruling by the Office of the
Comptroller of the Currency (the "Comptroller") that permitted sale of fixed and
variable annuities by a national bank and confirmed the authority of the
Comptroller to interpret the powers of national banks under the National Bank
Act. The Comptroller determined that annuities are not insurance products, but
rather a type of investment instrument and that the sale of annuities is
incidental to the business of banking. It is not certain what impact the
decision will have upon the continuing effort of banks and bank holding
companies to engage in insurance related activities.
The Caldera, Weggeland and Killea California Interstate Banking and
Branching Act of 1995, effective October 2, 1995, amends the California
Financial Code to, among other matters, regulate the operations of state banks
to eliminate conflicts with and to implement the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 discussed below. The Caldera Act includes
(1) an
B-5
<PAGE>
election to permit early interstate merger transactions; (2) a prohibition
against interstate branching through the acquisition of a branch business unit
located in California without acquisition of the whole business unit of the
California bank; and (3) a prohibition against interstate branching through de
novo establishment of California branch offices. The Caldera Act mandates that
initial entry into California by an out-of-state institution be accomplished by
acquisition of or merger with an existing whole bank which has been in existence
for at least five years.
The State Bank Parity Act, effective January 1, 1996, eliminates certain
existing disparities between California state chartered banks and federally
chartered national banks by authorizing the Superintendent to address such
disparities through a streamlined rulemaking process. The Superintendent has
taken action pursuant to the Parity Act to, among other matters, authorize
previously impermissible share repurchases by state banks, subject to the prior
approval of the Superintendent.
The Competitive Equality Banking Act of 1987 (the "1987 Banking Act") also
has affected the balance of competition among banks and other non-bank financial
institutions. Among other things, the 1987 Banking Act has restricted the growth
and formation of so-called "limited service" or "non-bank" banks (institutions
which accept deposits or make commercial loans, but do not do both). Other key
provisions of the 1987 Banking Act included: (1) the expansion of the FDIC's
authority in arranging supervisory interstate acquisitions and acquisitions of
failing banks; (2) the renewal of emergency acquisition authorities; (3) the
exemption of assessment income of federal banking agencies from budget
restrictions imposed by the Office of Management and Budget and from the budget
balancing requirements of the Gramm-Rudman-Hollings Act; (4) a moratorium (which
ended on March 1, 1988), prohibiting commercial banks from engaging in insurance
or securities activities not approved prior to March 5, 1987; (5) the
application of the Glass-Steagall Act to state-chartered banks, prohibiting
affiliations with companies principally engaged in securities activities; and
(6) new check hold schedules which were implemented on September 1, 1990.
On August 9, 1989, President Bush signed into law the Financial Institutions
Reform Recovery and Enforcement Act of 1989 ("FIRREA"). The FIRREA contains
provisions which among other things: (1) established two separate financial
industry insurance funds, both administered by the FDIC -- the Bank Insurance
Fund and the Savings Association Insurance Fund; (2) abolished the Federal Home
Loan Bank Board and the Federal Savings and Loan Insurance Corporation and
established the Office of Thrift Supervision as an office of the Treasury
Department, with responsibility for examination and supervision of all savings
and loan associations; (3) increased the premiums paid by FDIC-insured
institutions; (4) permitted bank holding companies to acquire healthy savings
and loan associations; (5) enhanced federal banking agencies' enforcement
authority over the operations of all insured depository institutions and
increased the civil and criminal penalties that may be imposed in connection
with violations of laws and regulations; (6) curtailed investments and certain
other activities of state-chartered savings and loan associations; and (7)
increased the capital requirements of savings and loan associations.
On December 19, 1991, President Bush signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"). The FDICIA substantially revises
banking regulations, certain aspects of the Federal Deposit Insurance Act and
establishes a framework for determination of capital adequacy of financial
institutions, among other matters. Under the FDICIA, financial institutions are
placed into five capital adequacy categories as follows: (1) well capitalized,
(2) adequately capitalized, (3) undercapitalized, (4) significantly
undercapitalized, and (5) critically undercapitalized. The FDICIA authorized the
Board of Governors, the Comptroller and FDIC to establish limits below which
financial institutions will be deemed critically undercapitalized, provided that
such limits can not be less than two percent (2%) of the ratio of tangible
equity to total assets or sixty-five percent (65%) of the minimum leverage ratio
established by regulation. Financial institutions classified as undercapitalized
or below are subject to limitations including restrictions related to (i) growth
of assets, (ii) payment of interest on subordinated indebtedness, (iii) capital
distributions, and (iv) payment of management fees to a parent holding company.
B-6
<PAGE>
The FDICIA requires the Board of Governors and FDIC to initiate corrective
action regarding financial institutions which fail to meet minimum capital
requirements. Such action may result in orders to augment capital such as
through sale of voting stock, reduction in total assets, and restrictions
related to correspondent bank deposits. 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 FDIC adopted a regulation pursuant to Section 302(a) of the FDICIA,
effective on November 2, 1992, amending its regulations on insurance assessments
to, among other matters, adopt a recapitalization schedule for the Bank
Insurance Fund and establish a transitional risk-based insurance assessment
system to replace the uniform assessment rate system previously applicable to
insured financial institution members of the Bank Insurance Fund. The regulation
requires that each insured institution be assigned to one of three capital
groups and one of three supervisory subgroups within each capital group, based
upon financial data reported by each institution in it's Report of Income and
Condition, as well as supervisory evaluations by the institution's primary
federal regulatory agency. The three capital groups have the following
characteristics: (1) "Well capitalized" -- consisting of institutions having a
total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater; (2)
"Adequately capitalized" -- consisting of institutions that are not "well
capitalized," but have a total risk-based capital ratio of 8% or greater, a Tier
1 risk-based capital ratio of 4% or greater, and a Tier 1 leverage ratio of 4%
or greater; and (3) "Undercapitalized" -- consisting of institutions that do not
qualify as either "well capitalized" or "adequately capitalized". The three
supervisory subgroups have the following characteristics: (A) Subgroup "A" --
consisting of financially sound institutions with only a few minor weaknesses;
(B) Subgroup "B" -- consisting of institutions that demonstrate deterioration of
the institution and increased risk of loss to the Bank Insurance Fund; and (C)
Subgroup "C" -- consisting of institutions that pose a substantial probability
of loss to the Bank Insurance Fund unless effective corrective action is taken.
The annual assessment rate for each insured institution continued at the
rate of $0.23 per $100 of deposits through year-end December 31, 1992.
Commencing January 1, 1993, the assessment rate was based upon a risk assessment
schedule with rates ranging from $0.23 to $0.31 per $100 of deposits utilizing
the capital group and supervisory subgroup analysis. On June 25, 1993, the FDIC
adopted a permanent risk-based insurance assessment system which retained the
transitional system without substantial modification. In late 1994 and early
1995, the FDIC proposed two significant changes to the deposit insurance
assessment system to (1) redefine the deposit assessment base which has been
defined to equal an institution's total domestic deposits, plus or minus certain
adjustments, but without significantly impacting total industry-wide assessments
(although significant changes in assessments of individual institutions may
occur); and (2) establish a new assessment rate schedule, using the present
group and subgroup categories, but with assessment rates varying from $0.04 to
$0.31 per $100 of deposits, resulting in a spread between the minimum and
maximum rates of $0.27 rather than $0.08. On August 8, 1995, the FDIC voted to
reduce the deposit insurance assessment rates to a range from $0.04 to $0.31 per
$100 of deposits and subsequently, on November 14, 1995, the FDIC voted again to
further reduce the assessment rates to a range from $0 to $0.27 per 100 of
deposits, subject to a minimum $2,000.00 annual assessment for all institutions
regardless of classification within the capital groups and supervisory subgroups
as follows:
<TABLE>
<CAPTION>
SUPERVISORY SUBGROUP
-------------------------------
CAPITAL GROUP A B C
- ------------- --------- --------- ---------
<S> <C> <C> <C>
1 $ 0 $ 0.03 $ 0.17
2 0.03 0.10 0.24
3 0.10 0.24 0.27
</TABLE>
The above assessment rates are effective for the first semiannual assessment
period of 1996. Based upon the above risk-based assessment rate schedule, the
Company's and Bank's current capital
B-7
<PAGE>
ratios, the Bank's current level of deposits, and assuming no change in the
assessment rate applicable to the Bank during 1996, the Company estimates that
its annual noninterest expense attributed to assessments will decrease
substantially.
The Board of Governors and FDIC adopted regulations effective December 19,
1992, implementing a system of prompt corrective action pursuant to Section 38
of the Federal Deposit Insurance Act and Section 131 of the FDICIA. The
regulations establish five capital categories with the following
characteristics: (1) "Well capitalized" -- consisting of institutions with a
total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital
ratio of 6% or greater and a leverage ratio of 5% 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% or greater, a Tier 1
risk-based capital ratio of 4% or greater and a leverage ratio of 4% 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 less than 8%, a Tier 1 risk-based capital ratio of less
than 4%, or a leverage ratio of less than 4%; (4) "Significantly
undercapitalized" -- consisting of institutions with a total risk-based capital
ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3%, or a
leverage ratio of less than 3%; (5) "Critically undercapitalized" -- consisting
of an institution with a ratio of tangible equity to total assets that is equal
to or less than 2%.
The regulations established procedures for classification of financial
institutions within the capital categories, filing and reviewing capital
restoration plans required under the regulations and procedures for issuance of
directives by the appropriate regulatory agency, among other matters. The
regulations impose restrictions upon all institutions to refrain from certain
actions which would cause an institution to be classified within any one of the
three "undercapitalized" categories, such as declaration of dividends or other
capital distributions or payment of management fees, if following the
distribution or payment the institution would be classified within one of the
"undercapitalized" categories. In addition, institutions which are classified in
one of the three "undercapitalized" categories are subject to certain mandatory
and discretionary supervisory actions. Mandatory supervisory actions include (1)
increased monitoring and review by the appropriate federal banking agency; (2)
implementation of a capital restoration plan; (3) total asset growth
restrictions; and (4) limitation upon acquisitions, branch expansion, and new
business activities without prior approval of the appropriate federal banking
agency. Discretionary supervisory actions may include (1) requirements to
augment capital; (2) restrictions upon affiliate transactions; (3) restrictions
upon deposit gathering activities and interest rates paid; (4) replacement of
senior executive officers and directors; (5) restrictions upon activities of the
institution and its affiliates; (6) requiring divestiture or sale of the
institution; and (7) any other supervisory action that the appropriate federal
banking agency determines is necessary to further the purposes of the
regulations. Further, the federal banking agencies may not accept a capital
restoration plan without determining, among other things, that the plan is based
on realistic assumptions and is likely to succeed in restoring the depository
institution's capital. In addition, for a capital restoration plan to be
acceptable, the depository institution's parent holding company must guarantee
that the institution will comply with such capital restoration plan. The
aggregate liability of the parent holding company under the guaranty is limited
to the lesser of (i) an amount equal to 5 percent of the depository
institution's total assets at the time it became undercapitalized, and (ii) the
amount that is necessary (or would have been necessary) to bring the institution
into compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a depository
institution fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." The FDICIA also restricts the solicitation and
acceptance of and interest rates payable on brokered deposits by insured
depository institutions that are not "well capitalized." An "undercapitalized"
institution is not allowed to solicit deposits by offering rates of interest
that are significantly higher than the prevailing rates of interest on insured
deposits in the particular institution's normal market areas or in the market
areas in which such deposits would otherwise be accepted.
B-8
<PAGE>
Any financial institution which is classified as "critically
undercapitalized" must be placed in conservatorship or receivership within 90
days of such determination unless it is also determined that some other course
of action would better serve the purposes of the regulations. Critically
undercapitalized institutions are also prohibited from making (but not accruing)
any payment of principal or interest on subordinated debt without the prior
approval of the FDIC and the FDIC must prohibit a critically undercapitalized
institution from taking certain other actions without its prior approval,
including (1) entering into any material transaction other than in the usual
course of business, including investment expansion, acquisition, sale of assets
or other similar actions; (2) extending credit for any highly leveraged
transaction; (3) amending articles or bylaws unless required to do so to comply
with any law, regulation or order; (4) making any material change in accounting
methods; (5) engaging in certain affiliate transactions; (6) paying excessive
compensation or bonuses; and (7) paying interest on new or renewed liabilities
at rates which would increase the weighted average costs of funds beyond
prevailing rates in the institution's normal market areas.
The capital ratio requirements for the "adequately capitalized" category
generally are the same as the existing minimum risk-based capital ratios
applicable to the Company and the Bank. It is not possible to predict what
effect the prompt corrective action regulation will have upon the Company and
the Bank or the banking industry taken as a whole in the foreseeable future.
Under the FDICIA, the federal banking agencies have adopted regulations
which require institutions to establish and maintain comprehensive written real
estate policies which address certain lending considerations, including
loan-to-value limits, loan administrative policies, portfolio diversification
standards, and documentation, approval and reporting requirements. The FDICIA
further generally prohibits an insured state bank from engaging as a principal
in any activity that is impermissible for a national bank, absent FDIC
determination that the activity would not pose a significant risk to the Bank
Insurance Fund, and that the bank is, and will continue to be, within applicable
capital standards. Similar restrictions apply to subsidiaries of insured state
banks. The Company does not currently intend to engage in any activities which
would be restricted or prohibited under the FDICIA.
As required by the FDICIA, the federal financial institution agencies
solicited comments in September 1993 on a method of incorporating an interest
rate risk component into the current risk-based capital guidelines, with the
goal of ensuring that institutions with high levels of interest rate risk have
sufficient capital to cover their exposures. Interest rate risk is the risk that
changes in market interest rates might adversely affect a bank's financial
condition. Under the proposal, interest rate risk exposures would be quantified
by weighting assets, liabilities and off-balance sheet items by risk factors
which approximate sensitivity to interest rate fluctuations. As proposed,
institutions identified as having an interest rate risk exposure greater than a
defined threshold would be required to allocate additional capital to support
this higher risk. Higher individual capital allocations could be required by the
bank regulators based on supervisory concerns. The agencies adopted a final rule
effective September 1, 1995 which is substantially similar to the proposed rule,
except that the final rule does not establish (1) a measurement framework for
assessing the level of a bank's interest rate exposure; nor (2) a minimum level
of exposure above which a bank will be required to hold additional capital for
interest rate risk if it has significant exposure or a weak interest rate risk
management process. The agencies also solicited comments on and are continuing
their analysis of a proposed policy statement which would establish a framework
to measure and monitor interest rate exposure.
The federal financial institution agencies published a final rule on July
10, 1995 to be effective on August 9, 1995, implementing safety and soundness
standards. The FDICIA added a new Section 39 to the Federal Deposit Insurance
Act which required the agencies to establish safety and soundness standards for
insured financial institutions covering (1) internal controls, information
systems and internal audit systems; (2) loan documentation; (3) credit
underwriting; (4) interest rate exposure; (5) asset growth; (6) compensation,
fees and benefits; (7) asset quality, earnings and stock valuation; and (8)
excessive compensation for executive officers, directors or principal
shareholders which could lead to material financial loss. The agencies issued
the final rule in the form of guidelines only for
B-9
<PAGE>
operational, managerial and compensation standards and reissued for comment
proposed standards related to asset quality and earnings which are less
restrictive than the earlier proposal in November 1993. Unlike the earlier
proposal, the guidelines under the final rule do not apply to depository
institution holding companies and the stock valuation standard was eliminated.
If an agency determines that an institution fails to meet any standard
established by the guidelines, the agency may require the financial institution
to submit to the agency an acceptable plan to achieve compliance with the
standard.
If the agency requires submission of a compliance plan and the institution
fails to timely submit an acceptable plan or to implement an accepted plan, the
agency must require the institution to correct the deficiency. Under the final
rule, an institution must file a compliance plan within 30 days of a request to
do so from the institution's primary federal regulatory agency. The agencies may
elect to initiate enforcement action in certain cases rather than rely on an
existing plan particularly where failure to meet one or more of the standards
could threaten the safe and sound operation of the institution.
The Board of Governors issued final amendments to its risk-based capital
guidelines to be effective December 31, 1995, requiring that net unrealized
holding gains and losses on securities available for sale determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," are not to
be included in the Tier I capital component consisting of common stockholders'
equity. Net unrealized losses on marketable equity securities (equity securities
with a readily determinable fair value), however, will continue to be deducted
from Tier I capital. This rule has the general effect of valuing
available-for-sale securities at amortized cost (based on historical cost)
rather than at fair value (generally at market value) for purposes of
calculating the risk-based and leverage capital ratios.
On December 13, 1995, the Board of Governors issued amendments to its
risk-based capital guidelines regarding concentration of credit risk and risks
of non-traditional activities, which were effective January 17, 1996. As
amended, the risk-based capital guidelines identify concentrations of credit
risk and evaluate an institution's ability to manage such risks and the risk
posed by non-traditional activities as important factors in assessing an
institution's overall capital adequacy.
Since 1986, California has permitted California banks and bank holding
companies to be acquired by banking organizations based in other states on a
"reciprocal" basis (i.e., provided the other state's laws permit California
banking organizations to acquire banking organizations in that state on
substantially the same terms and conditions applicable to local banking
organizations). Some increase in merger and acquisition activity among
California and out-of-state banking organizations has occurred as a result of
this law, as well as increased competition for loans and deposits.
President Clinton signed the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1995 (the "Interstate Banking Act") on September 29, 1995. The
Interstate Banking Act authorizes the Board of Governors to approve interstate
acquisitions of banks or bank branch offices, generally without regard to
conflicting requirements of state law, by adequately capitalized and managed
bank holding companies, after September 29, 1995, and authorizes the other
federal banking agencies to approve similar acquisitions by banks after June 1,
1997, unless prior to that date states enact laws prohibiting such acquisitions.
Such so-called "opt out" measures are pending or have been passed in a number of
states. States also may "opt in" to this authority at an earlier date if they
enact laws specifically permitting such acquisitions. After March 29, 1996, the
Interstate Banking Act authorizes the appropriate federal agency to approve the
consolidation of banks located in different states but operated by the same bank
holding company.
The Interstate Banking Act imposes several limitations on the Board of
Governors' general authority to approve such acquisitions including (1)
preservation of state laws requiring acquisition target banks to have been
chartered for minimum time periods not in excess of five years; (2) precluding
acquisitions which would result in a concentration of deposits greater than 10%
of total United States deposits, or 30% of total deposits in the state in which
the acquired bank or branch office is
B-10
<PAGE>
located, subject to a state's right to either increase or decrease the 30%
threshold and, in the absence of legislation, the right of a state banking
regulatory agency to approve a transaction under certain circumstances; (3)
Board of Governors' assessment of compliance with antitrust and community
reinvestment laws, including a separate community reinvestment act analysis for
each state in which a multi-state banking operation approved under the
Interstate Banking Act exists; and (4) maintenance of state contingency laws
requiring a bank acquisition target to maintain assets available for call by
state-sponsored housing entities established under state law, provided (i) the
state law does not discriminate against out-of-state banks, holding companies or
their subsidiaries, (ii) the state law was in effect at the enactment date of
the Interstate Banking Act, (iii) the FDIC has not determined that compliance
with the state law would result in an unacceptable risk to the deposit insurance
fund, and (iv) compliance with the state law would not place the bank in an
unsafe or unsound condition.
The federal banking agencies are required to adopt regulations effective
June 1, 1997 which prohibit any out-of-state bank from using the interstate
branching authority primarily for the purpose of deposit production. Such
regulations will require the appropriate federal agency of an out-of-state bank
or bank holding company to review such bank's operations in the host state in
order to determine whether it is meeting the credit needs of the host state
communities in which it operates, whenever it determines that such bank's ratio
of loans to deposits in the host state is less than one-half the average of the
total loans to total deposits for banks domiciled in the host state. If the
agency reaches a negative conclusion, it is authorized to restrict the opening
of new branch offices and to order the closure of the host state branch offices
of the out-of-state bank. Before an agency may exercise authority to close such
a branch office or offices, the Interstate Banking Act requires that it notify
the bank and schedule a hearing. Banks which determine to close branches located
in low or moderate income areas acquired under the Interstate Banking Act must
notify their customers how to contact the appropriate federal agency to complain
about the closing. If the agency determines that any such complaint is not
frivolous, it must convene a meeting of concerned organizations and individuals
to explore the feasibility of adequate alternative sources of banking services
for the affected communities.
In October 1994, the federal financial institution regulatory agencies
jointly proposed a comprehensive revision of their regulations implementing the
Community Reinvestment Act ("CRA"), enacted in 1977 to promote lending by
financial institutions to individuals and businesses located in low and moderate
income areas. In May 1995, the proposed CRA regulations were published in final
form effective as of July 1, 1995. The revised regulations included transitional
phase-in provisions which generally require mandatory compliance not later than
July 1, 1997, although earlier voluntary compliance is permissible.
Under the former CRA regulations, compliance was evaluated by an assessment
of the institution's methods for determining, and efforts to meet, the credit
needs of such borrowers. This system was highly criticized by depository
institutions and their trade groups as subjective, inconsistent and burdensome,
and by consumer representatives for its alleged failure to aggressively penalize
poor CRA performance by financial institutions. The revised CRA regulations
emphasize an assessment of actual performance rather than of the procedures
followed by a bank, to evaluate compliance with the CRA. Overall CRA compliance
continues to be rated across a four-point scale from "outstanding" to
"substantial noncompliance," and continues to be a factor in review of
applications to merge, establish new branches or form bank holding companies. In
addition, any bank rated in "substantial non compliance" with the revised CRA
regulations may be subject to enforcement proceedings.
The regulations provide that "small banks," which are defined to include any
independent bank with total assets of less than $250 million, are to be
evaluated by means of a so-called "streamlined assessment method" unless such a
bank elects to be evaluated by one of the other methods provided in the
regulations. The differences between the evaluation methods may be summarized as
follows:
B-11
<PAGE>
(1) The "streamlined assessment method" presumptively applicable to
small banks requires that a bank's CRA compliance be evaluated pursuant to
five "assessment criteria," including its (i) loan-to-deposit ratio (as
adjusted for seasonal variations and other lending-related activities, such
as sales to the secondary market or community development lending); (ii)
percentage of loans and other lending-related activities in the bank's
service area(s); (iii) distribution of loans and other lending-related
activities among borrowers of different income levels, given the demographic
characteristics of its service area(s); (iv) geographic distribution of
loans and other lending-related activities within its service area(s); and
(v) record of response to written complaints, if any, about its CRA
performance.
(2) The "lending, investments and service tests method" is applicable to
all banks larger than $250 million which are not wholesale or limited
purpose banks and do not elect to be evaluated by the "strategic plan
assessment method." Central to this method is the requirement that such
banks collect and report to their primary federal banking regulators
detailed information regarding home mortgage, small business and farm and
community development loans which is then used to evaluate CRA compliance.
At the bank's option, data regarding consumer loans and any other loan
distribution it may choose to provide also may be collected and reported.
Using such data, a bank will be evaluated regarding its (i) lending
performance according to the geographic distribution of its loans, the
characteristics of its borrowers, the number and complexity of its community
development loans, the innovativeness or flexibility of its lending
practices to meet low and moderate income credit needs and, at the bank's
election, lending by affiliates or through consortia or third-parties in
which the bank has an investment interest; (ii) investment performance by
measure of the bank's "qualified investments," that is, the extent to which
the bank's investments, deposits, membership shares in a credit union, or
grants primarily benefit low or moderate income individuals and small
businesses and farms, address affordable housing or other needs not met by
the private market, or assist any minority or women-owned depository
institution by donating, selling on favorable terms or providing on a
rent-free basis any branch of the bank located in a predominantly minority
neighborhood; and (iii) service performance by evaluating the demographic
distribution of the bank's branches and ATMs, its record of opening and
closing them, the availability of alternative retail delivery systems (such
as telephone banking, banking by mail or at work, and mobile facilities) in
low and moderate income geographies and to low and moderate income
individuals, and (given the characteristics of the bank's service areas and
its capacity and constraints) the extent to which the bank provides
"community development services" (services which primarily benefit low and
moderate income individuals or small farms and businesses or address
affordable housing needs not met by the private market) and their
innovativeness and responsiveness.
(3) Wholesale or limited purpose banks which do not make home mortgage,
small farm or business or consumer loans to retail customers may elect,
subject to agency approval of their status, to be evaluated by the
"community development test method," which assesses the number and amount of
the bank's community development loans, qualified investments and community
development services and their innovativeness and complexity.
(4) Any bank may request to be evaluated by the "strategic plan
assessment method" by submitting a strategic plan for review and approval.
Such a plan must involve public participation in its preparation, and
contain measurable goals for meeting low and moderate income credit needs
through lending, investments and provision of services. Such plans generally
would be evaluated by the Board of Governors by measuring strategic plan
goals against standards similar to those which would be applied in
evaluating a bank according to the "lending, investments and service tests
method."
The federal financial institution regulatory agencies jointly issued a final
rule effective as of January 1, 1996 to make certain technical corrections to
the revised CRA regulations. Among other
B-12
<PAGE>
matters, the rule clarifies the transition from the former CRA regulations to
the revised CRA regulations by confirming that when an institution either
voluntarily or mandatorily becomes subject to the performance tests and
standards of the revised regulations, the institution must comply with all of
the requirements of the revised regulations and is no longer subject to the
provisions of the former CRA regulations.
The Bank has a current rating of "outstanding" CRA compliance, and believes
that it would not have received any lower rating if the regulations had been in
effect when the Bank was last examined for CRA compliance on May 2, 1994.
The United States Congress has periodically considered legislation which
could result in further deregulation of banks and other financial institutions.
Such legislation could result in further relaxation or elimination of geographic
restrictions on banks and bank holding companies and increase the level of
direct competition with other financial institutions, including mutual funds,
securities brokerage firms, investment banking firms and other entities. The
effect of such legislation on the Company and the Bank cannot be determined at
this time.
ITEM 2. PROPERTIES
The Company and the Bank have their headquarters located at 420 Cowper
Street, Palo Alto, California. The Bank leases its office at 420 Cowper Street,
Palo Alto, California, 94301, from MPB Associates, a tenant-in-common
arrangement, in which seven (7) directors of the Company hold an approximate 51%
interest. MPB Associates purchased Mid-Peninsula Bank's leased premises in 1990.
The original terms of the lease were unchanged by that acquisition.
The lease, which originally expired in May, 1993, has been extended through
January, 2000. The lease covers a ground floor area of 8,817 net rentable square
feet and a second floor area of 9,217 net rentable square feet. The lease was
modified in September 1995 to include an additional 500 square feet on the first
floor.
The Bank pays an annual rental of $560,000 for the entire leased space.
Additionally, the Bank pays real property taxes, utilities, and building
insurance, to the extent they exceed, on an annual basis, $1.40, $1.60, and
$0.17 per rentable square foot, respectively. The rent is adjusted every twelve
months beginning June 1, 1997 in accordance with the change in the immediately
preceding year over 1992 in the Consumer Price Index for All Urban Consumers,
San Francisco/Oakland Metropolitan Area, All-Items (1967=100) as published by
the U.S. Department of Labor, Bureau of Labor Statistics.
The lease also contains a provision granting the Bank a right of first
refusal to purchase the building during the term of the lease upon the same
terms and conditions that the landlord is willing to accept from a third party.
The Bank subleases a portion of the leased space on the second floor of the
building which it does not currently utilize. Rental income for the year ended
December 31, 1995 was $398,000.
The foregoing description of the lease is qualified by reference to the
lease agreement dated March 11, 1987 attached as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, filed with the
Commission on March 30, 1995.
The Bank also conducts business in leased premises located at 100 South
Ellsworth Avenue, San Mateo, California, and at 1313 Laurel Street, San Carlos,
California.
The San Mateo lease expires on October 31, 1999, and has two renewal options
of five years each. The lease covers 7,859 square feet of rentable space. The
Bank currently pays an annual rental of $110,340 for the entire leased space.
The rent is adjusted upward effective November, 1997 to $125,424 annually. Under
the lease, the Bank also pays monthly operating expenses. The amount of this
payment, currently $5,668, is adjusted upward every twelve months by at least 4%
and no more than 8% in accordance with the change in the immediately preceding
year over 1989 in the Consumer
B-13
<PAGE>
Price Index for Urban Wage Earners and Clerical Workers (1982-84=100) for the
San Francisco/ Oakland/San Jose Metropolitan Area as published by the U.S.
Department of Labor, Bureau of Labor Statistics.
The foregoing description of the lease is qualified by reference to the
lease agreement dated April 24, 1989 attached as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, filed with the
Commission on March 30, 1995.
The San Carlos lease was extended in 1995 to a new expiration date of
October 31, 1998. The lease covers 2,120 square feet of rentable space. The Bank
currently pays an annual rental of $50,604 for the entire leased space. The rent
is adjusted upward every twelve months in accordance with the change in the
immediately preceding year over 1993 in the Consumer Price Index for All Urban
Consumers (1967=100) as published by the U.S. Department of Labor, Bureau of
Labor Statistics.
The foregoing description of the lease is qualified by reference to the
lease agreement dated November 26, 1993 attached as Exhibit 10.7 to the
Company's Annual Report on form 10-K for the year ended December 31, 1994, filed
with the Commission on March 30, 1995.
ITEM 3. LEGAL PROCEEDINGS
There are no material proceedings adverse to the Company or the Bank to
which any director, officer, affiliate of the Company or 5% shareholder of the
Company or the Bank, or any associate of any such director, officer, affiliate
or 5% shareholder of the Company or Bank is a party, and none of the above
persons has a material interest adverse to the Company or the Bank.
Neither the Company nor the Bank is a party to any pending legal or
administrative proceedings (other than ordinary routine litigation incidental to
the Company's or the Bank's business) and no such proceedings are known to be
contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1995.
B-14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
There was limited trading in and no established public trading market for
the Company's common stock. The Company's common stock was not listed on any
exchange nor was it quoted by The NASDAQ Stock Market. It is, however, listed
with the National Quotation Service and on the Over The Counter (OTC) Bulletin
Board. Hoefer & Arnett, Incorporated and Van Kasper & Company act as the primary
market makers and facilitate trades in the Company's common stock. Based on
information provided to the Company from Hoefer & Arnett, the range of high and
low bid quotations for the common stock for the two most recent fiscal years,
restated to reflect all stock splits and stock dividends distributed by the
Company are set forth below. The quotations for the Company reflect quotations
for San Mateo County Bancorp during the first three quarters of 1994. The bid
quotations for the fourth quarter of 1994 through 1995 reflect quotations for
the Company following its change of name to Mid-Peninsula Bancorp.
<TABLE>
<CAPTION>
MID-PENINSULA MID-PENINSULA BANK SAN MATEO COUNTY
BANCORP BANCORP
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
CALENDAR YEAR LOW HIGH LOW HIGH LOW HIGH
- ---------------------------------------- --------- --------- --------- --------- --------- ---------
1994
First Quarter......................... N/A N/A 14.00 15.50 6.00 7.00
Second Quarter........................ N/A N/A 15.00 15.75 10.00 11.00
Third Quarter......................... N/A N/A 14.50 15.25 8.00 11.00
Fourth Quarter........................ 12.50 13.00 N/A N/A N/A N/A
1995
First Quarter......................... 13.00 13.63 N/A N/A N/A N/A
Second Quarter........................ 13.00 15.25 N/A N/A N/A N/A
Third Quarter......................... 15.25 17.00 N/A N/A N/A N/A
Fourth Quarter........................ 15.75 16.88 N/A N/A N/A N/A
</TABLE>
Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The bid price for the Company's Common Stock was $18.00 as of March 15, 1996.
(b) HOLDERS
As of March 15, 1996, there were 571 holders of the Common Stock of the
Company. There are no other classes of common equity outstanding.
(c) DIVIDENDS
The Company's shareholders are entitled to receive dividends when and as
declared by its Board of Directors, out of funds legally available therefor,
subject to the restrictions set forth in the California General Corporation Law
(the "Corporation Law"). The Corporation Law provides that a corporation may
make a distribution to its shareholders if the corporation's retained earnings
equal at least the amount of the proposed distribution. The Corporation Law
further provides that, in the event that sufficient retained earnings are not
available for the proposed distribution, a corporation may nevertheless make a
distribution to its shareholders if it meets two conditions, which generally
stated are as follows: (i) the corporation's assets equal at least 1- 1/4 times
its liabilities; and (H) the corporation's current assets equal at least its
current liabilities or, if the average of the corporation's earnings before
taxes on income and before interest expenses for the two preceding fiscal years
was less than the average of the corporation's interest expenses for such fiscal
years, then the corporation's current assets must equal at least 1- 1/4 times
its current liabilities. Funds for payment of any cash dividends by the Company
would be obtained from its investments as well as dividends and/or management
fees from the Bank. The payment of cash dividends by the Bank was subject to
restrictions set forth in the
B-15
<PAGE>
California Financial Code (the "Financial Code"). The Financial Code provides
that a bank may not make a cash distribution to its shareholders in excess of
the lesser of (a) the bank's retained earnings; or (b) the banks net income for
its last three fiscal years, less the amount of any distributions made by the
bank or by any majority-owned subsidiary of the bank to the shareholders of the
bank during such period. However, a bank may, with the approval of the
Superintendent, make a distribution to its shareholders in an amount not
exceeding the greater of (a) its retained earnings; (b) its net income for its
last fiscal year; or (c) its net income for its current fiscal year. In the
event that the Superintendent determines that the shareholders' equity of a bank
was inadequate or that the making of a distribution by the bank would be unsafe
or unsound, the Superintendent may order the bank to refrain from making a
proposed distribution. In addition to the restrictions on payment of dividends
set forth in the Financial Code, federal law requires the Bank, as a member of
the Federal Reserve System, to obtain the prior approval of the Board of
Governors for the declaration and payment of dividends if the total of all
dividends declared by the Board of Directors of the Bank in any year will exceed
the total of (a) the Bank's net profits (as defined and interpreted by
regulation) for that year; plus (b) the retained net profits (as defined and
interpreted by regulation) for the preceding two years, less any required
transfers to surplus. In addition the Bank may only pay dividends to the extent
that retained net profits (including the portion transferred to surplus) exceed
bad debts (as defined by regulation). Dividends may also be restricted if such
payment would be deemed unsafe or unsound or if after such payment the Bank
would be included in one of the "Undercapitalized" categories for capital
adequacy purposes pursuant to the FDICIA. Additionally, while the Board of
Governors has no general restriction with respect to the payment of cash
dividends by an adequately capitalized bank to its parent holding company, the
Board of Governors might, under certain circumstances, place restrictions on the
ability of a particular bank to pay dividends based upon peer group averages and
the performance and maturity of the particular bank, or object to management
fees on the basis that such fees cannot be supported by the value of the
services rendered or are not the result of an arm's length transaction.
Under these provisions and considering minimum regulatory capital
requirements, the amount available for distribution from the Bank to the Company
was approximately $4,300,000 as of December 31, 1995.
The Company declared a cash dividend in the amount of $.10 per share of its
common stock payable to shareholders of record on December 31, 1995. Previously
the Company declared cash dividends of $0.10 per share of its common stock
payable to shareholders of record on March 31, June 30 and September 30, 1995.
Prior to consummation of the reorganization whereby the Bank became a
wholly-owned subsidiary of the Company, the Bank declared dividends of $.075 per
Bank common share payable to shareholders of record on March 31, June 30 and
September 30, 1994, and December 31, 1994. The Company currently intends to pay
cash dividends in the future subject to the limitations described above and
other factors considered by the Board of Directors at the time including the
earnings of the Company and the Bank.
B-16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table presents certain consolidated financial information
concerning the business of the Company and the Bank. This information should be
read in conjunction with the Consolidated Financial Statements, the notes
thereto, and Management's Discussion and Analysis included in this report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES AND PER SHARE DATA)
OPERATING RESULTS:
Interest income................................. $ 16,940 $ 12,440 $ 10,524 $ 10,310 $ 11,511
Interest expense................................ 6,538 4,233 3,331 3,964 5,592
Net interest income............................. 10,402 8,207 7,193 6,346 5,919
Provision for possible loan losses.............. 275 203 266 230 172
Non-interest income............................. 404 216 424 463 287
Non-interest expense............................ 5,996 5,787 4,936 4,511 4,271
Income before cumulative effect of changes in
accounting principle........................... 2,721 1,201 1,480 1,324 1,080
Net income...................................... 2,721 1,201 1,563 1,382 1,080
BALANCE SHEET (END OF PERIOD):
Total assets.................................... $ 218,735 $ 178,470 $ 166,002 $ 152,642 $ 140,499
Net loans....................................... 123,886 107,128 100,324 99,586 90,844
Deposits........................................ 195,695 159,572 147,560 135,560 124,349
Shareholders' equity............................ 21,440 18,003 17,840 16,445 15,280
FINANCIAL RATIOS:
Allowance for possible loan losses to total
loans.......................................... 1.37% 1.31% 1.38% 1.34% 1.23%
Return on average assets........................ 1.33% 0.67% 0.99% 0.96% 0.85%
Return on average equity........................ 13.80% 6.80% 9.22% 8.87% 7.45%
PER SHARE:
Income before cumulative effect of changes in
accounting principle........................... $ 1.70 $ 0.78 $ 0.99 $ 0.90 $ 0.73
Net income...................................... 1.70 0.78 1.04 0.94 0.73
Dividends declared.............................. .40 0.22 0.16 0.12 0.06
Book value...................................... 13.64 11.82 12.28 11.36 10.55
Average shares outstanding (000)................ 1,540 1,498 1,452 1,448 1,448
</TABLE>
(A) (1) DISTRIBUTION OF ASSETS, LIABILITIES AND EQUITY. INTEREST RATES AND
INTEREST DIFFERENTIAL
Table I in Management's Discussion and Analysis included in this report sets
forth the Company's average balance sheets (based on daily averages) and an
analysis of interest rates and the interest rate differential for each of the
three years in the period ended December 31, 1995 and is hereby incorporated by
reference.
(2) VOLUME/RATE ANALYSIS
Table II in Management's Discussion and Analysis included in this report
sets forth information as to the impact of changes in average rates and average
balances on interest-earning assets and interest-bearing liabilities for the
period from December 31, 1994 to December 31, 1995 and December 31, 1993 to
December 31, 1994 and was hereby incorporated by reference.
B-17
<PAGE>
(b) INVESTMENT PORTFOLIO
(1) The book value of investments as of December 31, 1995 and 1994 is
contained in footnote 4 of the financial statements and December 31, 1993
was set forth as follows:
<TABLE>
<CAPTION>
BOOK VALUE OF INVESTMENTS
<S> <C>
AMORTIZED
DECEMBER 31, 1993 COST
- ---------------------------------------------------------------------- -----------
U.S. Government and agency obligations................................ $11,050,000
State and political subdivision (tax exempt).......................... 5,466,000
U.S. Government and agency mutual funds............................... 21,588,000
Federal Reserve Bank stock............................................ 394,000
-----------
Total investments................................................. $38,498,000
-----------
-----------
</TABLE>
(2) The book value, maturities and weighted average yields of investment
securities as of December 31, 1995 was set forth as follows:
<TABLE>
<CAPTION>
BOOK VALUE OF INVESTMENTS, MATURITIES AND WEIGHTED AVERAGE YIELDS
<S> <C> <C>
AMORTIZED WEIGHTED
DECEMBER 31, 1995 COST AVERAGE YIELD
- ---------------------------------------------------------- ----------- -------------
Due in 1 year............................................. $ 9,487,000 6.153%
Due after 1 year through 5 years.......................... 17,724,000 6.625
Due after 5 years through 10 years........................ 8,944,000 7.913
Due after 10 years........................................ 3,058,000 --
----------- -----
Total Investments..................................... $39,312,000 6.535%
----------- -----
----------- -----
</TABLE>
(3) As of December 31, 1995, the Company held an investment in the
Overland Express Variable Rate Government Fund, having an aggregate book
value and market value of $13,589,000. This mutual fund is invested in U.S.
government guaranteed adjustable rate residential mortgages.
(c) LOAN PORTFOLIO
(1) Table IV in Management Discussion and Analysis included in this
report sets forth the composition of the loan portfolio at December 31,
1995, 1994, 1993, 1992 and 1991.
(2) The following table sets forth the maturity distribution of the loan
portfolio as of December 31, 1995.
<TABLE>
<CAPTION>
MATURITY DISTRIBUTION OF LOAN PORTFOLIO
<S> <C> <C> <C> <C>
OVER ONE
YEAR
ONE YEAR THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- ----------- --------- ---------
(IN THOUSANDS)
Commercial................................. $ 71,666 $ 3,139 $ 316 $ 75,121
Real Estate -- construction................ 6,976 -- -- 6,976
Real Estate -- other....................... 41,605 1,043 374 43,022
--------- ----------- --------- ---------
Total loans............................ $ 120,247 $ 4,182 $ 690 $ 125,119
--------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
Loans maturing beyond one year include approximately $4,872,000 in
fixed-rate loans.
(3) NONPERFORMING LOANS
The Company's current policy was to cease accruing interest when a loan
becomes 90 days past due as to principal or interest, when the full timely
collection of interest or principal becomes uncertain, or when a portion of the
principal balance has been charged off, unless the loan is well secured and in
the process of collection. When a loan was placed on nonaccrual status, the
accrued and
B-18
<PAGE>
uncollected interest receivable is reversed and the loan is accounted for on the
cash or cost recovery method thereafter, until qualifying for return to accrual
status. Generally, a loan may be returned to accrual status when all delinquent
interest and principal become current in accordance with the terms of the loan
agreement or when the loan is both well secured and in process of collection and
the borrower has performed in accordance with the contract terms for a
reasonable period of time.
Management was not aware of any loans, which were accruing and current as of
December 31, 1995, where serious doubt exists as to the ability of the borrower
to comply with the present repayment terms. There were no restructured loans or
restructured debt as defined by SFAS 115 at year end. There are no concentration
of loans other than those set forth in Table IV of Management's Discussion and
Analysis.
(d) SUMMARY OF LOAN LOSS EXPERIENCE
(1) An analysis of the allowance for possible loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year..................... $ 1,426 $ 1,410 $ 1,351 $ 1,135 $ 1,035
----------- ----------- --------- --------- ---------
Loans charged-off:
Commercial................................... 0 (50) (195) (19) 0
Real estate -- other......................... (7) (185) (50) 0 0
----------- ----------- --------- --------- ---------
Total...................................... (7) (235) (245) (19) 0
----------- ----------- --------- --------- ---------
Loan recoveries:
Commercial................................... 22 0 28 (5) 0
Real estate -- other......................... 0 48 10 0 0
----------- ----------- --------- --------- ---------
Total...................................... 22 48 38 5 0
----------- ----------- --------- --------- ---------
Net loans charged-off.......................... (15) 187 207 14 0
Provision for possible loan losses............. 275 203 266 230 100
Balance, end of year........................... $ 1,716 $ 1,426 1,410 1,351 1,135
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Average loans outstanding...................... $ 113,985 $ 102,862 $ 99,174 $ 93,198 $ 99,492
Ratio of net loans charged off to average loans
outstanding................................... 0.01% 0.18% .21% .02% .00%
</TABLE>
Factors used in determination of the allowance for possible loan losses are
discussed in greater detail in the "Risk Elements" section of Management's
Discussion and Analysis included in this report.
(2) In evaluating the adequacy of the allowance for possible loan
losses, the Company attempts to allocate the allowance to specific
categories of loans. Management believes that any breakdown or allocation of
the allowance for possible loan losses into loan categories lends an
appearance of exactness which does not exist in that the allowance was
utilized as a single unallocated allowance available for all loans. Further,
management believes that the breakdown of historical losses in the preceding
table was a reasonable representation of management's expectation of
potential losses in the next full year of operation. However, the allowance
for loan losses should not be interpreted as an indication that charge-offs
will occur or as an indication of future charge-off trends.
(e) DEPOSITS
(1) Table I in Management's Discussion and Analysis included in this
report sets forth the distribution of average deposits for the years ended
December 31, 1995, 1994 and 1993, and was hereby incorporated by reference.
B-19
<PAGE>
(2) The maturities of time certificates of deposit of $100,000 or more
at December 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
MATURITIES OF TIME CERTIFICATES, $100,000 AND OVER
<S> <C>
YEAR ENDED
DECEMBER 31.
1995
---------------
(IN THOUSANDS)
3 months or less.................................................... $ 26,411
Over 3 months through 6 months...................................... 6,566
Over 6 months through 12 months..................................... 2,338
Over 12 months...................................................... 1,367
---------------
Total........................................................... $ 36,682
---------------
---------------
</TABLE>
(f) RETURN ON EQUITY AND ASSETS
(1) The following table sets forth the ratios of net income to average
assets and average shareholders' equity, and average shareholders' equity to
average assets. Also indicated was the Company's dividend payout ratio.
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
Return on average assets...................................... 1.33% 0.67% 0.99%
Return on average shareholders' equity........................ 13.80% 6.80% 9.22%
Average shareholders' equity to average assets................ 9.63% 9.89% 0.73%
Dividend payout ratio......................................... 23.00% 27.89% 14.59%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS ORGANIZATION
Mid-Peninsula Bancorp was 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 transaction was accounted for on a
pooling of interests basis. Other than holding the shares of the Bank, the
Company conducts no other significant business activities, although it was
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 in northern Santa Clara
County and in San Mateo County, offering traditional commercial banking services
to the business and professional communities, with emphasis on private banking
clients, small and mid-size businesses and professionals. To the extent
possible, loans are written on a variable rate basis. Commercial, real estate
and personal loans are offered and are tailored to the individual needs of the
borrower. The Bank's marketing efforts focus on the local communities served for
both loan and deposit generation. The Bank accepts noninterest-bearing and
interest-bearing demand accounts, as well as traditional savings accounts and
time certificates of deposit with competitively priced interest rates.
The following analysis was designed to enhance the readers understanding of
the Company's financial condition and the results of its operations as reported
in the Consolidated Financial Statements included in the 1995 Annual Report to
Shareholders. Reference should be made to those statements and the Selected
Financial Data presented elsewhere in this report for additional detailed
information.
B-20
<PAGE>
OVERVIEW
The Company reported net income of $2,721,000 for the year ended December
31, 1995, representing an increase of $1,520,000 or 127% from 1994 net income of
$1,201,000. Net income reported for 1994 represented a decrease of $362,000 or
23% from 1993 net income of $1,563,000. On a per common and common equivalent
share basis, net income for 1995 was $1.70 compared to $.78 and $1.04 per share
for the preceding two years. The increase in net income in 1995 was primarily
due to a general increase in business matched by stringent cost controls. Net
interest income increased significantly in 1995 over 1994 and in 1994 over 1993.
Non-interest expenses, other than merger-related expenses in 1994, increased
only moderately. Each of these factors was discussed in more detail later in
this analysis.
Common Shareholders' equity increased $3,437,000 during 1995 to $21,440,000.
The Company reported a decrease of $694,000 in unrealized losses on securities
available-for-sale, which was a component of shareholders' equity. The Company
raised $640,000 in common equity as a result of stock options exercised and
related tax benefits and paid $618,000 in cash dividends in 1995. Per share
earnings have been adjusted to reflect the dilutive effect of common stock
equivalents (stock options outstanding but not exercised) calculated on the
treasury stock method.
EARNINGS SUMMARY
NET INTEREST INCOME
Net interest income refers to the difference between the interest paid on
deposits and borrowings and the interest earned on loans and investments. It was
the largest component of the net earnings of a financial institution. The
primary factors to consider in analyzing net interest income are the composition
and volume of earning assets and interest-bearing liabilities, the amount of
noninterest-bearing liabilities and nonaccrual loans, and changes in market
interest rates.
Table I on the following page sets forth average balance sheet information,
interest income and expense, average yields and rates, and the net interest
income and interest margin for the years ended December 31, 1995, 1994 and 1993.
Net interest income for 1995 was $10,402,000, an increase of 27% over net
interest income of $8,207,000 in 1994. The increase in net interest income in
1995 primarily reflects an increase in both the volume of average earning assets
and the rates earned on earning assets. Net interest income reported in 1994
represented an increase of $1,014,000 or 14% over $7,193,000 in 1993.
Total interest income in 1995 was $16,940,000 compared to $12,440,000 and
$10,524,000 in 1994 and 1993, respectively. The increase in 1995 reflects the
general increase in business in 1995 vs. 1994. A majority of the Bank's loans
float with the Bank's base rate which was, on average, 8.83%, 7.14% and 6.00% in
1995, 1994 and 1993, respectively. The increase in total interest income of
$4,500,000 in 1995 over 1994 and $1,916,000 in 1994 over 1993 was also
attributable to an increase in the volume of earning assets and higher,
relatively stable rates in both periods. Average earning assets increased
$26,696,000 or 16% in 1995 and increased $19,387,000 or 13% in 1994.
The increase in interest income was offset by an increase in interest
expense of $2,305,000 or 54% in 1995 over 1994. Interest expense increased
$902,000 or 27% in 1994 over 1993. During 1995, the average rate paid on
interest-bearing deposits was 4.20% compared to 3.13% in 1994 and 2.77% in 1993.
B-21
<PAGE>
TABLE I -- COMPONENTS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------- --------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
--------- --------- ----------- --------- --------- ----------- --------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
ASSETS:
Interest earning:
Loans (1).................. $ 113,985 $ 12,239 10.74% $ 102,862 $ 9,504 9.24% $ 99,174 $ 8,492
Investment securities:
Taxable.................... 44,335 2,667 6.02 38,800 1,824 4.70 25,142 1,234
Non-taxable (2)............ 7,397 688 9.30 5,522 480 8.69 4,760 431
Federal funds sold and
other..................... 27,320 1,580 5.78 19,157 795 4.15 17,878 514
--------- --------- ----- --------- --------- ----- --------- -----------
Total earning assets..... 193,037 17,174 8.90% 166,341 12,603 7.58% 146,954 10,671
--------- --------- ----- --------- --------- ----- --------- -----------
Cash and due from banks...... 7,938 9,923 9,402
Premises and equipment, net.. 930 773 809
Other assets................. 2,940 1,602 869
--------- --------- ---------
Total assets............... $ 204,845 $ 178,639 $ 158,034
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing:
Demand..................... $ 10,668 $ 205 1.92% $ 10,583 $ 214 2.02% $ 8,492 $ 164
Savings and money market... 100,570 4,132 4.11 90,688 2,828 3.12 79,310 2,129
Time deposits more than
100M...................... 36,798 1,823 4.95 26,510 915 3.45 23,967 770
Timed deposits less than
100M...................... 7,457 378 5.07 7,273 276 3.79 8,315 268
--------- --------- ----- --------- --------- ----- --------- -----------
Total interest-bearing
liabilities............... 155,493 6,538 4.20% 135,054 4,233 3.13% 120,084 3,331
--------- --------- ----- --------- --------- ----- --------- -----------
Non-interest bearing demand.. 28,438 24,816 20,380
Other liabilities............ 1,192 1,105 612
Shareholders' equity......... 19,722 17,664 16,958
--------- --------- ---------
Total liabilities and
shareholders' equity...... $ 204,845 $ 178,639 $ 158,034
--------- --------- ---------
--------- --------- ---------
Net interest spread.......... 4.70% 4.44%
Net interest income and
interest margin (3)......... $ 10,636 5.51% $ 8,370 5.03% $ 7,340
<CAPTION>
<S> <C>
AVERAGE
RATE
-----------
ASSETS:
Interest earning:
Loans (1).................. 8.56%
Investment securities:
Taxable.................... 4.91
Non-taxable (2)............ 9.05
Federal funds sold and
other..................... 2.88
---
Total earning assets..... 7.26%
---
Cash and due from banks......
Premises and equipment, net..
Other assets.................
Total assets...............
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Interest-bearing:
Demand..................... 1.93%
Savings and money market... 2.68
Time deposits more than
100M...................... 3.21
Timed deposits less than
100M...................... 3.22
---
Total interest-bearing
liabilities............... 2.77
---
Non-interest bearing demand..
Other liabilities............
Shareholders' equity.........
Total liabilities and
shareholders' equity......
Net interest spread.......... 4.49%
Net interest income and
interest margin (3)......... 4.99%
</TABLE>
- ------------------------
(1) Loan interest includes loan fees of $541,000, $566,000 and $670,000 in 1995,
1994 and 1993, respectively.
(2) Tax exempt interest income includes $234,000, $163,000 and $147,000 in 1995,
1994 and 1993, 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.
B-22
<PAGE>
Table II below sets forth an analysis of changes in net interest income due
to changes in volume and rate. The variances attributed to simultaneous balance
and rate changes have been reflected as rate variances.
TABLE II -- ANALYSIS OF CHANGES IN NET INTEREST INCOME
ATTRIBUTABLE TO VOLUME AND RATE CHANGE
<TABLE>
<CAPTION>
1995 -- 1994 1994 -- 1993
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
INCREASE (DECREASE) IN INTEREST INCOME:
Loans (1)/(2)................................... $ 1,028 $ 1,707 $ 2,735 $ 316 $ 696 $ 1,012
Taxable investments............................. 260 583 843 670 (82) 588
Non-taxable investments (3)..................... 163 45 208 69 (20) 49
Federal funds sold and other.................... 339 446 785 37 246 283
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in interest income...... 1,790 2,781 4,571 1,092 840 1,932
--------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN INTEREST EXPENSE:
Interest bearing demand......................... 2 (11) (9) 40 10 50
Savings and money markets....................... 308 996 1,304 305 394 699
Time certificates, $100,000 and over............ 355 553 908 82 63 145
Other time deposits............................. 7 95 102 (34) 42 8
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in interest expense..... 672 1,633 2,305 393 509 902
--------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest income...... $ 1,118 $ 1,148 $ 2,266 $ 699 $ 331 $ 1,030
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Average balance of nonaccruing loans is immaterial as a percentage of total
loans and, as such, has been included in loans.
(2) Loan fees of $541,000, $566,000 and $670,000 for 1995, 1994 and 1993,
respectively, have been included in the interest income computation.
(3) Tax exempt interest income includes $234,000, $163,000 and $147,000 in 1995,
1994 and 1993, respectively, to adjust to a fully taxable equivalent basis
using the Federal statutory rate of 34%.
NON-INTEREST INCOME
The Company's non-interest income is primarily derived from fees earned by
the Bank for deposit-related services, letters of credit and escrow fees,
safe-deposit box rentals and other miscellaneous fees. Service charges and other
fees declined $52,000 or 12% to $380,000 in 1995 over 1994. Such fees were
$432,000 in 1994 and $338,000 in 1993. The decrease in 1995 was primarily due to
a reduction in the number of accounts serviced. Correspondingly, non-service
charge income was $137,000 in 1995, over $50,000 in 1994 and $14,000 in 1993.
This component of non-interest income includes the income derived from the
insurance policies purchased for the executive officer salary continuation
program. Such income was $94,000 in 1995 and was not in place in 1994 or 1993.
The Bank had investment losses of $113,000 on the sale of available-for-sale
securities in 1995. In 1994, these losses were $266,000, while in 1993 there was
a gain of $72,000 on the sale of investments held for sale.
The Company adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" in 1994. San Mateo and WestCal
adopted the statement in 1993. This statement requires the Company to classify
debt and equity securities, which include substantially all of the Company's
B-23
<PAGE>
investment portfolio, into one of three categories: held-to-maturity, trading or
available-for-sale. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost only if the Company has the
positive intent and ability to hold such securities to maturity. All other
investments may be classified as either trading securities, which are bought and
held principally for the purpose of selling them in the near term and are
carried at market value with a corresponding recognition of the unrealized
holding gain or loss in results of operations, or as available-for-sale
securities, which are all other securities and are carried at market value with
a corresponding recognition of the unrealized holding gain or loss as a net
amount in a separate component of shareholders' equity until realized. As of
December 31, 1995, the Company held investments with a book and market value of
$58,533,000 as available-for-sale securities. The Company held investments with
a carrying value of $857,000 and a market value of $838,000 in the
held-to-maturity portfolio. The Company does not have a trading portfolio.
NON-INTEREST EXPENSE
Non-interest expense reflects the costs of personnel, occupancy, systems,
regulatory expenses, products and services for the Company. The major components
of non-interest expense stated in dollars and as a percent of average earning
assets are as set forth below.
TABLE III -- NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ---------------------- ----------------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits..................... $ 3,442 1.78% $ 2,781 1.67% $ 2,570 1.75%
Occupancy and equipment............................ 992 .51 866 0.52 912 0.62
Merger-related expense............................. -- -- 608 0.37 -- --
Regulatory expense................................. 207 .11 373 0.22 335 0.23
Professional services.............................. 287 .15 265 0.16 221 0.15
Data processing expense............................ 118 .06 245 0.15 165 0.11
Marketing.......................................... 318 .16 178 0.11 185 0.13
Other expense...................................... 632 .33 471 0.28 548 0.37
----------- --- ----------- --- ----------- ---
Total............................................ $ 5,996 3.11% $ 5,787 3.48% $ 4,936 3.36%
----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- ---
Average earning assets............................. $ 193,037 $ 166,341 $ 146,954
</TABLE>
Non-interest expense increased $209,000 or 4% to $5,996,000 in 1995 over
1994 and increased $851,000 or 17% to $5,787,000 in 1994 over 1993. As a
percentage of average earning assets, non-interest expense was 3.11% in 1995
compared to 3.48% in 1994 and 3.36% in 1993.
The $209,000 increase in expenses in 1995 was primarily due to the increase
in staff required by the growth of the Company. The $851,000 increase in
expenses in 1994 was due, in large part, to merger-related costs of $608,000.
These costs were primarily comprised of legal, accounting and investment banking
fees incurred by WestCal and legal and accounting fees incurred by the Bank in
completing the merger.
Salaries and employee benefits increased $661,000 or 24% to $3,442,000 in
1995 over 1994 and increased $211,000 or 8% to $2,781,000 in 1994 over 1993. The
increase in 1995 and 1994 was primarily due to the increase in staff required to
service the growth in earning assets. As a percent of average earning assets,
salaries and benefits were 1.78% in 1995, 1.67% in 1994 and 1.75% in 1993.
Occupancy and equipment expenses increased $126,000 in 1995 compared to a
decrease of $46,000 in 1994. The decrease in 1994 is attributable to an increase
in rental income received on space held for expansion in the Palo Alto office.
The 1995 increase in cost was due to a decrease in rental income as the Bank
grew into the space acquired in 1992.
B-24
<PAGE>
Regulatory expenses decreased $166,000 in 1995 and increased $38,000 in
1994. These expenses are primarily assessment costs for FDIC insurance and the
decrease in 1995 was a result of a reduction in assessment rates, while the
increase 1994 was attributable to an increase in deposit balances that are the
basis for the assessment.
Professional service fees increased $22,000 in 1995 over 1994 and increased
$44,000 in 1994 over 1993. The increase in 1995 was a result of the growth in
the Company while the increase in 1994 was primarily due to increases in legal
and accounting fees attendant to the merger.
Data processing expenses decreased $127,000 in 1995 to $118,000 compared to
an $80,000 increase in 1994. The reduction in expense is due to the elimination
of outside processor expense related to the WestCal National Bank operation.
Marketing expense increased $140,000 to $318,000 in 1995 compared to a
modest decline of $7,000 in the previous year. The additional expense is due to
advertising and marketing in a larger service area following the merger.
Other expenses, including the expenses of O.R.E.O., increased $161,000 in
1995 over 1994 and decreased $77,000 in 1994 over 1993. The 1995 increase was
due to the expansion of business and related market penetration while the
decline in 1994 was attributable to a reduction in expenses related to carrying
other real estate owned.
The Company's effective income tax rate was 40.00% in 1995, 50.60% in 1994
and 38.70% in 1993. The higher effective tax rate of the Company in 1994 was due
to non-deductible merger expenses and an investment loss on securities which was
not deductible for income tax purposes.
BALANCE SHEET ANALYSIS
Total assets of the Company as of December 31, 1995 were $218,735,000
compared to $178,470,000 in 1994 and $166,002,000 in 1993, representing
increases of 23% and 8%, respectively. Based on average balances, total assets
of $204,845,000 in 1995 represent an increase of 15% over 1994. Average total
assets of $178,639,000 in 1994 represent an increase of 13% over 1993 average
total assets of $158,034,000.
EARNING ASSETS
LOAN PORTFOLIO -- The following table summarizes the composition of the loan
portfolio for the past five years.
TABLE IV -- ANALYSIS OF LOANS OUTSTANDING BY TYPE
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial........................................ $ 92,971 $ 76,528 $ 67,974 $ 57,038 $ 54,094
Real estate:
Construction.................................... 8,783 4,608 4,652 10,266 13,438
Other........................................... 24,296 27,835 29,554 33,959 24,735
----------- ----------- ----------- ----------- ---------
Total Loans....................................... 126,050 108,971 102,180 101,263 92,267
Deferred loan fees................................ (448) (417) (446) (326) (288)
Allowance for possible loan losses................ (1,716) (1,426) (1,410) (1,351) (1,135)
----------- ----------- ----------- ----------- ---------
Net Loans......................................... $ 123,886 $ 107,128 $ 100,324 $ 99,586 $ 90,844
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
</TABLE>
Average net loans of $113,985,000 in 1995 increased 11% over the 1994
average of $102,862,000. Average net loans in 1994 represented an increase of 4%
from $99,174,000 in 1993. Average net loans comprised 59% of average earning
assets in 1995 compared to 62% and 67% in 1994 and 1993, respectively.
B-25
<PAGE>
Net loans outstanding as of December 31, 1995 were $123,886,000,
representing an increase over 1994 of $16,758,000 or 16%. The increase in loan
balances as of December 31, 1995 compared to 1994 was primarily an increase in
both commercial loans and construction real estate loans offset by a decline in
other real estate loans. As of December 31, 1994, net loans outstanding were
$107,128,000, an increase of 7% over $100,324,000 at December 31, 1993.
During 1995, the Bank experienced growth in commercial loans to businesses
and professionals. Such loans consist of credit facilities for operating needs,
loans for equipment purchases and working capital and various other business
purposes. Real estate loans declined during the year, reflecting the continued
softness in the real estate markets in Santa Clara and San Mateo counties.
RISK ELEMENTS
The Company assesses and manages credit risk on an ongoing basis through
stringent credit review and approval policies, extensive internal monitoring and
established formal lending policies. Management believes its ability to identify
and assess risk and return characteristics of the Company's loan portfolio is
critical for profitability and growth. Management strives to continue the
historically low level of credit losses by continuing its emphasis on credit
quality in the loan approval process, active credit administration and regular
monitoring. With this in mind, management has designed and implemented a
comprehensive loan review and grading system that functions to continually
assess the credit risk inherent in the loan portfolio. Additionally, management
believes its ability to manage portfolio credit risk is enhanced by lending
personnel's knowledge of the Bank's service area. Each Bank office is staffed
with employees who live in the communities served by the office, and virtually
all of the directors of the Company are active members of the communities served
by the Bank. Further, senior management and the Board of Directors of the
Company and the Bank have experienced minimal turnover since inception of the
Company and the Bank in 1984.
Management believes that its lending policies and underwriting standards
will tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances. The Bank's loan
policies and underwriting standards include, but are not limited to, the
following: 1) maintaining a thorough understanding of the Bank's service area
and limiting investments outside of this area; 2) maintaining a thorough
understanding of borrowers' knowledge and capacity in their fields of expertise;
3) basing real estate construction loan approvals not only on salability of the
project, but also on the borrowers' capacity to support the project financially
in the event it does not sell within the original projected time period and 4)
maintaining conforming and prudent loan to value and loan to cost ratios based
on independent outside appraisals and ongoing inspection and analysis by Bank
construction lending officers.
NONACCRUAL LOANS, LOANS PAST DUE 90 DAYS AND OREO
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. As of December 31, 1995, the Company and Bank had no nonaccrual loans
compared to $424,000 or 0.4% and $182,000 or 0.2% of total loans as of December
31, 1994 and December 31, 1993, respectively.
There were no loans past due 90 days and still accruing interest as of
December 31, 1995, 1994 or 1993.
There was no other real estate owned as of December 31, 1995, 1994 or 1993.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses is based upon management's evaluation
of the adequacy of the existing allowance for possible loan losses. This
allowance is increased by provisions charged to expense and reduced by loan
charge-offs, net of recoveries. Management determines an appropriate provision
based upon the interaction of three primary factors: (1) the loan portfolio
growth in the period, (2) a comprehensive grading and review formula for total
loans outstanding, and (3) actual previous charge-offs. The allowance for
possible loan losses totaled $1,716,000 or 1.37% of total loans
B-26
<PAGE>
as of December 31, 1995, compared to $1,426,000 or 1.31% as of December 31, 1994
and $1,410,000 or 1.39% as of December 31, 1993. It is the policy of management
to maintain the allowance for possible loan losses at a level adequate for known
and future risks inherent in the loan portfolio. Based on information currently
available to analyze loan loss potential, including economic factors, overall
credit quality, historical delinquency and a history of actual charge-offs,
management believes that the loan loss provision and allowance are adequate;
however, no prediction of the ultimate level of loans charged-off in future
years can be made with any certainty. An analysis of the activity in the Bank's
allowance for loan losses is presented in Item 6, Selected Financial Data.
FUNDING SOURCES
Deposits represent the Bank's principal source of funds for investment.
Deposits are primarily core deposits in that they are demand, savings and time
deposits generated from local businesses and individuals. These sources are
considered to be relatively more stable, long-term deposit relationships thereby
enhancing steady growth of our deposit base without major fluctuations in
overall deposit balances. The Bank has never purchased funds through deposit
brokers. Table V presents the composition of the deposit mix for the five years
ended December 31, 1995.
TABLE V -- COMPOSITION OF DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Demand, noninterest-bearing..................... $ 37,077 $ 27,137 $ 25,146 $ 21,034 $ 13,937
Demand, interest-bearing........................ 11,926 10,023 9,878 7,714 7,055
Savings and other time.......................... 110,010 93,478 88,667 82,699 71,712
Time certificates, $100M and over............... 36,682 28,934 23,869 24,113 31,745
----------- ----------- ----------- ----------- -----------
Total deposits................................ $ 195,695 $ 159,572 $ 147,560 $ 135,560 $ 124,349
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Deposits increased $36,123,000 or 23% to $195,695,000 as of December 31,
1995 compared to an increase of $12,012,000 or 8% as of December 31, 1994 over
1993. Average total deposits in 1995 of $183,931,000 showed an increase of
$24,061,000 or 15% over 1994. Interest-bearing demand and savings and other time
deposits increased 10%, on average, and time deposits over $100,000 increased
31% during 1995. This change in the composition of deposit funding reflects a
shift toward the higher rate certificate of deposit accounts, as interest rates
declined in the second half of 1995.
Average non-interest bearing demand deposits increased 15% to $28,438,000 in
1995 compared to an increase of 22% to $24,816,000 in 1994 over 1993.
B-27
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
LIQUIDITY
Liquidity management refers to the Bank's ability to provide funds on an
ongoing basis to meet fluctuations in deposit levels as well as the credit needs
and requirements of its clients. Both assets and liabilities contribute to the
Bank's liquidity position. Federal funds lines, short-term investments and
securities, and loan repayments contribute to liquidity, along with deposit
increases, while loan funding and deposit withdrawals decrease liquidity. The
Bank assesses the likelihood of projected funding requirements by reviewing
historical funding patterns, current and forecasted economic conditions and
individual client funding needs. The Bank maintains lines of credit with its
correspondent banks for up to $19,000,000 available on a short-term basis.
Commitments to fund loans and outstanding standby letters of credit as of
December 31, 1995 were approximately $48,831,000 and $6,816,000, respectively.
Such loans relate primarily to revolving lines of credit and other commercial
loans, and to real estate construction loans. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The Bank manages its liquidity by maintaining a majority of its investment
portfolio in federal funds sold and other liquid investments. Liquidity is
measured by various ratios, the most common being the liquidity ratio of cash,
federal funds sold, and available-for-sale unpledged investment securities,
compared to total deposits. As of December 31, 1995, this ratio was 40.90%
compared to 32.70% as of December 31, 1994. Another key liquidity ratio is the
ratio of loans to deposits, which was 64.18% as of December 31, 1995 and 68.03%
as of December 31, 1994.
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 December 31,
1995, 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 ratio (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 movements 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.
B-28
<PAGE>
TABLE VI -- INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
NEXT DAY AFTER THREE ONE YEAR
THROUGH MONTHS THROUGH AFTER
ASSETS AND LIABILITIES THREE THROUGH FIVE FIVE
WHICH MATURE OR REPRICE IMMEDIATELY MONTHS ONE YEAR YEARS YEARS TOTAL
- --------------------------------------- ----------- ---------- ----------- --------- --------- -----------
(IN THE THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold..................... $ 15,700 $ -- $ -- $ -- $ -- $ 15,700
Investment securities.................. 0 17,527 7,522 22,021 12,750 59,820
Loans.................................. 112,999 1,705 5,542 4,182 691 125,119
----------- ---------- ----------- --------- --------- -----------
Total earning assets................... 128,699 19,232 13,064 26,203 13,441 200,639
----------- ---------- ----------- --------- --------- -----------
Demand, money market and savings....... 115,001 -- -- -- -- 115,001
Time deposits.......................... -- 30,550 12,703 1,315 -- 44,568
----------- ---------- ----------- --------- --------- -----------
Total interest-bearing liabilities..... 115,001 30,550 12,703 1,315 -- 159,569
----------- ---------- ----------- --------- --------- -----------
Interest rate gap...................... $ 13,698 $ (11,318) $ 361 $ 24,888 $ 13,441 $ 41,070
----------- ---------- ----------- --------- ---------
Cumulative interest rate gap........... $ 13,698 $ 2,380 $ 2,741 $ 27,629 $ 41,070
----------- ---------- ----------- --------- ---------
Interest rate gap ratio................ 1.12x (0.63)x 1.03x 19.93x --
----------- ---------- ----------- --------- ---------
Cumulative interest rate gap ratio..... 1.12x 1.02x 1.02x 1.17x 1.26x
----------- ---------- ----------- --------- ---------
</TABLE>
As of December 31, 1995, the Company was considered to be mildly asset
sensitive; measured at the one year mark, that is, its assets reprice more
quickly than do its liabilities, primarily as a result of the significant amount
of variable rate loans and the repricing characteristics of its deposit
accounts. Management has historically maintained a cumulative positive interest
rate sensitivity gap. This historical position provides a hedge against rising
interest rates, but has a detrimental effect during times of interest rate
declines.
CAPITAL RESOURCES
The Company's total shareholders' equity was $21,440,000 as of December 31,
1995 compared to $18,003,000 as of December 31, 1994 and $17,840,000 as of
December 31, 1993.
The Company is subject to regulations issued by the Board of Governors which
require that it maintain a certain level of capital. These regulations impose
two capital standards: a risk-based capital standard and a leverage capital
standard. See Item 1, "Supervision and Regulation."
Under the Board of Governors' risk-based capital guidelines, assets reported
on an institution's balance sheet and certain off-balance sheet items are
assigned to risk categories, each of which has an assigned risk weight. Capital
ratios are calculated by dividing the institution's qualifying capital by its
period-end risk-weighted assets. The applicable regulations establish two
categories of qualifying capital: Tier 1 capital (defined to include common
shareholders' equity and noncumulative perpetual preferred stock) and Tier 2
capital (defined to include limited life (and in the case of banks, cumulative)
preferred stock, mandatory convertible securities, subordinated debt and a
limited amount of reserves for loan and lease losses). Each institution is
required to maintain a risk-based capital ratio (including Tier 1 and Tier 2
capital) of 8%, of which at least half must be Tier 1 capital.
Under the Board of Governors' leverage capital standard an institution is
required to maintain a minimum ratio of Tier 1 capital to the sum of its
quarterly average total assets and quarterly average reserve for loan losses,
less intangibles not included in Tier 1 capital. Period-end assets may be used
in place of quarterly average total assets on a case-by-case basis. A minimum
leverage ratio of 3% is required for institutions which have been determined to
be in the highest of five categories used by regulators to rate financial
institutions and which are not experiencing or anticipating significant growth.
All other organizations are required to maintain leverage ratios of at least 100
to 200 basis points above the 3% minimum.
B-29
<PAGE>
The table below summarizes the various capital ratios for the Company as of
December 31, 1995 and 1994.
TABLE VII -- RISK-BASED CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
RATIOS AMOUNT RATIO AMOUNT RATIO
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C>
Tier 1 Capital.................................................... $ 21,440 14.36% $ 18,003 15.20%
Tier 1 Capital minimum requirement................................ $ 5,971 4.00% $ 4,786 4.00%
----------- ----- ----------- -----
Total Capital..................................................... $ 23,156 15.51% $ 19,429 16.40%
Total Capital minimum requirement................................. $ 11,944 8.00% $ 9,477 8.00%
----------- ----- ----------- -----
Total risk-adjusted assets........................................ $ 149,296 $ 119,644
----------- -----------
LEVERAGE RATIO
Tier 1 Capital to adjusted total assets........................... $ 21,440 9.76% $ 18,003 10.51%
----------- ----- ----------- -----
Quarterly average total assets.................................... $ 219,783 $ 171,267
----------- -----------
</TABLE>
The capital adequacy of the Company depends on a variety of factors,
including interest rates, liquidity, market and operational risks. If, based on
these factors, the Board of Governors determines that the capital of the Company
is not adequate, the Board of Governors may require it to maintain capital in
excess of the levels described above.
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 had been adopted. The Company adopted only the
disclosure requirements 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.
INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on manufacturing, or other commercial concerns, primarily
because a financial institution's assets and liabilities are largely monetary.
In general, inflation primarily affects the Company indirectly through its
effect on the ability of its customers to repay loans, or its impact on market
rates of interest, and thus the ability of the Company to attract loan
customers. Inflation affects the growth of total assets by increasing the level
of loan demand, and potentially adversely affects capital adequacy because loan
growth in inflationary periods can increase at rates higher than the rate that
capital grows through retention of earnings. Interest rates in particular are
significantly affected by inflation, but neither the timing nor the magnitude of
the changes coincides with changes in the Consumer Price Index, which is one of
the indicators used to measure the rate of inflation. Adjustments in interest
rates may be delayed because of the possible imposition of regulatory
restraints. In addition to its effects on interest rates, inflation directly
affects the Company by increasing its operating expenses. Inflation has not had
a material impact on the Company for the three years ended December 31, 1995,
1994 and 1993.
B-30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Reports.............................................................................. 33
Consolidated Balance Sheets, December 31, 1995 and 1994.................................................... 34
Consolidated Statements of Operations for the three years ended December 31, 1995, 1994 and 1993........... 35
Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 1995,
1994 and 1993............................................................................................. 36
Consolidated Statements of Cash Flows for the three years ended December 31, 1995, 1994 and 1993........... 37
Notes to Consolidated Financial Statements................................................................. 38
All schedules have been omitted since the required information is not present in amounts sufficient to require
submission of the schedule or because the information required is included in the Consolidated Financial Statements or
notes thereto.
</TABLE>
B-31
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
B-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mid-Peninsula Bancorp:
We have audited the accompanying consolidated balance sheets of
Mid-Peninsula Bancorp and subsidiary (the Company) as of December 31, 1995 and
1994, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the 1993 consolidated financial statements of San Mateo County
Bancorp, a company acquired by the Company in a business combination accounted
for as a pooling of interests as described in Note 2 to the consolidated
financial statements, which statements reflect total interest income
constituting 23% in the year ended December 31, 1993, of the related
consolidated total. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for San Mateo County Bancorp, is based solely on the report of the
other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Mid-Peninsula Bancorp and
subsidiary as of December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, San Mateo
County Bancorp adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, in 1993. As discussed in
Notes 1 and 3 to the consolidated financial statements, the Company and San
Mateo County Bancorp also adopted the provisions of SFAS No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, in 1994 and 1993,
respectively.
KPMG Peat Marwick LLP
San Francisco, California
January 22, 1996
B-33
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Cash and due from banks (Note 3).............................................. $ 13,304,000 $ 6,996,000
Federal funds sold............................................................ 15,700,000 28,200,000
---------------- ----------------
Cash and cash equivalents................................................... 29,004,000 35,196,000
Investment securities (Note 4):
Available for sale, at fair value........................................... 58,533,000 16,953,000
Held to maturity, at amortized cost (fair value of $838,000 and $15,078,000
as of December 31, 1995 and 1994, respectively)............................ 857,000 15,710,000
Federal Reserve Bank stock.................................................... 430,000 430,000
Loans (Notes 5 and 13)........................................................ 125,602,000 108,554,000
Allowance for possible loan losses (Note 5)................................... (1,716,000) (1,426,000)
---------------- ----------------
Loans, net................................................................ 123,886,000 107,128,000
Premises and equipment, net (Note 6).......................................... 995,000 989,000
Accrued interest receivable and other assets (Notes 9 and 12)................. 5,030,000 2,064,000
---------------- ----------------
$ 218,735,000 $ 178,470,000
---------------- ----------------
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 7)............................................................. $ 195,695,000 $ 159,572,000
Accrued expenses and other liabilities (Notes 9 and 12)....................... 1,600,000 895,000
---------------- ----------------
Total liabilities............................................................. 197,295,000 160,467,000
---------------- ----------------
Shareholders' equity (Notes 4, 12, and 14):
Preferred stock, no par value; 4,000,000 shares authorized and unissued..... -- --
Common stock, no par value; 6,000,000 shares authorized; 1,571,757 and
1,523,432 shares issued and outstanding in 1995 and 1994, respectively..... 15,425,000 14,785,000
Unrealized losses on securities available-for-sale, net..................... (626,000) (1,320,000)
Retained earnings........................................................... 6,641,000 4,538,000
---------------- ----------------
Total shareholders' equity................................................ 21,440,000 18,003,000
---------------- ----------------
Commitments and contingencies (Notes 10 and 12)............................... $ 218,735,000 $ 178,470,000
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
B-34
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans (including fees)......................................... $ 12,239,000 $ 9,504,000 $ 8,492,000
Investments (Note 4)........................................... 4,701,000 2,936,000 2,032,000
-------------- -------------- --------------
Total interest income........................................ 16,940,000 12,440,000 10,524,000
-------------- -------------- --------------
Interest expense:
Savings and other deposits..................................... 4,715,000 3,318,000 2,561,000
Time certificates, $100,000 and over........................... 1,823,000 915,000 770,000
-------------- -------------- --------------
Total interest expense....................................... 6,538,000 4,233,000 3,331,000
-------------- -------------- --------------
Net interest income.......................................... 10,402,000 8,207,000 7,193,000
Provision for possible loan losses (Note 5)...................... (275,000) (203,000) (266,000)
-------------- -------------- --------------
Net interest income after provision for possible loan
losses...................................................... 10,127,000 8,004,000 6,927,000
-------------- -------------- --------------
Noninterest income:
Service charges and other fees................................. 380,000 432,000 338,000
Investment (losses) gains...................................... (113,000) (266,000) 72,000
Other income 137,000 50,000 14,000
-------------- -------------- --------------
Total noninterest income..................................... 404,000 216,000 424,000
-------------- -------------- --------------
Noninterest expense:
Salaries and employee benefits (Note 12)....................... 3,442,000 2,781,000 2,570,000
Occupancy and equipment (Note 6)............................... 992,000 866,000 912,000
Merger-related expenses (Note 12).............................. -- 608,000 --
Expenses for other real estate owned........................... 27,000 64,000 125,000
Other (Note 8)................................................. 1,535,000 1,468,000 1,329,000
-------------- -------------- --------------
Total noninterest expense.................................... 5,996,000 5,787,000 4,936,000
-------------- -------------- --------------
Income before income taxes and cumulative effect of changes
in accounting principle..................................... 4,535,000 2,433,000 2,415,000
Income taxes (Note 9)............................................ 1,814,000 1,232,000 935,000
-------------- -------------- --------------
Income before cumulative effect of changes in accounting
principle................................................... 2,721,000 1,201,000 1,480,000
Cumulative effect of changes in accounting principle............. -- -- 83,000
-------------- -------------- --------------
Net income................................................... $ 2,721,000 $ 1,201,000 $ 1,563,000
-------------- -------------- --------------
-------------- -------------- --------------
Earnings per share from:
Income before cumulative effect of changes in accounting
principle per share........................................... $ 1.70 .78 .99
Cumulative effect of changes in accounting principle per
share......................................................... -- -- .05
-------------- -------------- --------------
-------------- -------------- --------------
Net income per common share.................................. $ 1.70 $ .78 $ 1.04
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
B-35
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
UNREALIZED
UNREALIZED ON LOSSES
COMMON STOCK LOSS ON SECURITIES TOTAL
----------------------------- MARKETABLE AVAILABLE- RETAINED SHAREHOLDERS'
SHARES AMOUNT SECURITIES FOR-SALE EARNINGS EQUITY
------------- -------------- ---------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1992.......................... 1,401,650 $ 13,525,000 $ (48,000) $ -- $ 2,968,000 $ 16,445,000
Options exercised............ 7,023 60,000 -- -- -- 60,000
Stock dividends declared..... 46,992 631,000 -- -- (631,000) --
Cash dividends declared
($0.16 per share)........... -- -- -- -- (228,000) (228,000)
Net income................... -- -- -- -- 1,563,000 1,563,000
Adoption of SFAS No. 115..... -- -- 48,000 (48,000) -- --
------------- -------------- ---------- -------------- ------------- --------------
Balances as of December 31,
1993.......................... 1,455,665 14,216,000 -- (48,000) 3,672,000 17,840,000
Options exercised............ 67,937 571,000 -- -- -- 571,000
Cash dividends declared
($0.22 per share)........... -- -- -- -- (335,000) (335,000)
Adoption of SFAS No. 115..... -- -- -- (1,272,000) -- (1,272,000)
Payment for fractional
shares...................... (170) (2,000) -- -- -- (2,000)
Net income................... -- -- -- -- 1,201,000 1,201,000
------------- -------------- ---------- -------------- ------------- --------------
Balances as of December 31,
1994.......................... 1,523,432 14,785,000 -- (1,320,000) 4,538,000 18,003,000
Tax effect of stock
exercises................... -- 157,000 -- -- -- 157,000
Options exercised, net of
13,636 shares retired in
connection with cashless
exercises................... 48,325 483,000 -- -- -- 483,000
Cash dividends declared
($0.40 per share)........... -- -- -- -- (618,000) (618,000)
Change in unrealized losses
on securities
available-for-sale, net..... -- -- -- 694,000 -- 694,000
Net income................... -- -- -- -- 2,721,000 2,721,000
------------- -------------- ---------- -------------- ------------- --------------
Balances as of December 31,
1995.......................... 1,571,757 $ 15,425,000 $ -- $ (626,000) $ 6,641,000 $ 21,440,000
------------- -------------- ---------- -------------- ------------- --------------
------------- -------------- ---------- -------------- ------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
B-36
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................... $ 2,721,000 $ 1,201,000 $ 1,563,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (gain) realized on investment securities (Note 4)..... 113,000 266,000 (72,000)
Provision for possible loan losses......................... 275,000 203,000 266,000
Depreciation and amortization.............................. 319,000 287,000 315,000
Cumulative effect of accounting changes.................... -- -- (83,000)
Decrease (increase) in interest receivable and other
assets.................................................... 132,000 (1,887,000) (208,000)
Increase (decrease) in deferred loan fees.................. 31,000 (29,000) 120,000
Increase in deferred tax benefit........................... (190,000) (53,000) (136,000)
Increase (decrease) in interest payable and other
liabilities............................................... 705,000 293,000 (38,000)
--------------- -------------- ---------------
Net cash provided by operating activities................ 4,106,000 281,000 1,727,000
--------------- -------------- ---------------
Cash flows from investing activities:
Net increase in short-term investments (Note 4).............. -- -- (4,340,000)
Net decrease in interest earning deposits in other financial
institutions................................................ -- 99,000 670,000
Net (increase) decrease in loans............................. (17,064,000) (6,306,000) 806,000
Purchases of investment securities (Note 4).................. (40,321,000) (4,454,000) (19,655,000)
Sales of investment securities (Note 4)...................... -- 6,734,000 11,685,000
Maturities of investment securities (Note 4) 13,481,000 1,575,000 1,634,000
Additional investment in other real estate owned............. (476,000) (485,000) (1,534,000)
Proceeds from sale of other real estate owned................ 679,000 1,157,000 467,000
Purchase of Federal Reserve Bank stock....................... -- (36,000) (18,000)
Purchase of life insurance policies.......................... (2,260,000) -- --
Capital expenditures......................................... (325,000) (484,000) (132,000)
--------------- -------------- ---------------
Net cash used in investing activities.................. (46,286,000) (2,200,000) (10,417,000)
--------------- -------------- ---------------
Cash flows from financing activities:
Net increase in deposits..................................... 36,123,000 12,012,000 12,000,000
Dividends paid............................................... (618,000) (335,000) (228,000)
Stock options exercised...................................... 483,000 571,000 60,000
Cash paid for fractional shares.............................. -- (2,000) --
--------------- -------------- ---------------
Net cash provided by financing activities.............. 35,988,000 12,246,000 11,832,000
--------------- -------------- ---------------
Net (decrease) increase in cash and cash equivalents........... (6,192,000) 10,327,000 3,142,000
Cash and cash equivalents at beginning of year................. 35,196,000 24,869,000 21,727,000
--------------- -------------- ---------------
Cash and cash equivalents at end of year....................... $ 29,004,000 $ 35,196,000 $ 24,869,000
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
See accompanying notes to consolidated financial statements.
B-37
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994, AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Mid-Peninsula Bancorp (the Company) is a California corporation and bank
holding company that was incorporated on November 14, 1984, as San Mateo County
Bancorp. The name was changed to Mid-Peninsula Bancorp on October 7, 1994, as a
result of the merger between Mid-Peninsula Bank and San Mateo County Bancorp and
its wholly owned subsidiary, WestCal National Bank (Note 2). Mid-Peninsula Bank
(the Bank), a wholly owned subsidiary of the Company, commenced operations on
October 9, 1987. The Bank is a state charted bank providing a full range of
commercial and personal banking services to individuals and the
business/professional community in the Santa Clara and San Mateo counties in
Northern California.
BASIS OF PRESENTATION
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to prevailing practices within the banking
industry.
CONSOLIDATION
The accompanying consolidated 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.
INVESTMENT SECURITIES
Investment securities as of December 31, 1995, consisted of U.S. Treasury
and U.S. government agency obligations, mortgage-backed securities, and U.S.
government and agency mutual funds. The Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, as of January 1, 1994. San
Mateo County Bancorp adopted SFAS No. 115 as of December 31, 1993. The effect of
each adoption was not material. At the time of purchase, under the provisions of
SFAS No. 115, the Company designates securities as "held-to-maturity" or
"available-for-sale," based on its investment objectives, operational needs, and
intent. The Company does not engage in trading activity.
Held-to-maturity securities are recorded at amortized cost, adjusted for
amortization or accretion of premiums or discounts. Available-for-sale
securities are recorded at fair value with unrealized holding gains and losses,
net of the related tax effect, reported as a separate component of shareholders'
equity until realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available-for-sale and held-to-maturity are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold.
The Company's required investment of 3% in Federal Reserve Bank stock is
carried at cost.
LOANS
Loans are stated at the principal amount outstanding. The majority of the
loans have variable interest rates and mature within one year. Interest on loans
is credited to income on a simple interest basis.
B-38
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Nonrefundable loan fees and direct origination costs are deferred and
recognized over the expected life of the related loans as an adjustment to
yield.
Generally, a loan is classified as nonaccrual, the accrual of interest is
discontinued, any accrued and unpaid interest is reversed, and the amortization
of deferred loan fees and costs is discontinued when the payment of principal or
interest is 90 days past due, unless the amount is well secured and in the
process of collection. A loan is categorized as restructured if the original
interest rate on such loan, repayment terms, or both, were restructured due to a
deterioration in the financial condition of the borrower. Nonaccrual and
restructured loans are generally not returned to performing status until the
obligation is brought current, has performed in accordance with the contract
terms for a reasonable period of time, and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
The Company adopted SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN, as amended by SFAS No. 118 (collectively referred to as SFAS No. 114) on
January 1, 1995. SFAS No. 114 requires entities to measure certain impaired
loans based on the present value of future cash flows discounted at the loan's
effective interest rate, or at the loan's market value or the fair value of
collateral if the loan is secured. A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled interest payments. If the measurement of the
impaired loan is less than the recorded investment in the loan, impairment is
recognized by creating or adjusting an existing allocation of the allowance for
loan losses. The adoption of SFAS No. 114 did not have a material effect on the
Company's financial position as there were no loans that met the definition of
impaired.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is an amount that management believes
will be adequate to absorb losses inherent in existing loans, based on
evaluations of collectibility. These evaluations take into consideration such
factors as the composition of the portfolio, overall portfolio quality, loan
concentrations, specific problem loans, and current and anticipated local
economic conditions that may affect the borrowers' ability to repay. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for possible losses on
loans. Such agencies may require the Company to recognize additions to the
allowance based on their judgment of information available to them at the time
of their examination. The allowance for possible loan losses is established
through a provision charged to expense. Loans are charged against the allowance
when management believes that the collectibility of the principal is doubtful.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of property acquired through a
foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. Other
real estate owned is recorded at the lower of the related loan balance or fair
value of the collateral less estimated disposition costs at the date acquired.
Subsequently, other real estate owned is valued at the lower of the amount
recorded at the date acquired or the then current fair value less estimated
disposition costs. Any gains or losses realized upon disposition of the property
are reflected in income. Fair value is based upon current appraisals reduced by
estimated costs to sell. As of December 31, 1995 and 1994, there was no other
real estate owned.
B-39
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
The Company accounts for income taxes under SFAS No. 109. San Mateo County
Bancorp adopted the provisions of SFAS No. 109, ACCOUNTING FOR INCOME TAXES, as
of January 1, 1993. SFAS No. 109 requires accounting for income taxes under the
asset and liability method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The cumulative
effect of adopting SFAS No. 109 to January 1, 1993 for San Mateo County Bancorp
has been shown as a separate item in the accompanying consolidated statements of
operations for the year ended December 31, 1993.
Under SFAS No. 109, deferred tax assets are recognized and measured based on
the likelihood of realization of a tax benefit in future years. Deferred tax
assets are recognized for deductible temporary differences and operating loss
and tax credit carryforwards, and then a valuation allowance is established to
reduce that deferred tax asset if it is "more likely than not" that the related
tax benefits will not be realized.
Management has evaluated the deferred tax asset recognized under SFAS No.
109 and determined that it is "more likely than not" that the related tax
benefits will be realized and, accordingly, has concluded that a valuation
allowance was not required as of December 31, 1995 and 1994.
Deferred income taxes are provided in recognition of temporary differences
between financial statement income and taxable income. The principal differences
result from the depreciation of premises and equipment, the timing for deduction
of state franchise taxes, the use of the cash basis method of accounting for tax
purposes in prior years, and the differences in the provision for credit losses.
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. All years presented include the effect of
stock dividends declared in 1993. The weighted average shares outstanding for
1995, 1994, and 1993 were 1,539,784, 1,498,153, and 1,451,979 shares,
respectively. Weighted average shares outstanding and all per share amounts
included in the consolidated financial statements and notes thereto are based
upon the increased number of shares giving retroactive effect to the merger with
San Mateo County Bancorp at a 1.0617 conversion ratio. Cash dividends declared
per share are calculated using dividends declared divided by weighted average
shares outstanding.
USE OF ESTIMATES
The Company's management of has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent asset and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
B-40
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
In 1995, the Company adopted SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-TERM ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes
indicate that the carrying amount of an asset may not be recoverable. Upon
adoption, the Company identified no long-lived assets or identifiable
intangibles which were impaired.
STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are purchased and sold for one-day periods.
Noncash activities for the years ended December 31, 1995, 1994, and 1993,
were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Real estate acquired through foreclosure................... $ 130,000 $ 672,000 $ --
------------- ------------- -------------
------------- ------------- -------------
Loans to facilitate the sale of other real estate owned.... $ -- $ -- $ 1,500,000
------------- ------------- -------------
------------- ------------- -------------
Loans charged off (recovered), net......................... $ (15,000) $ 187,000 $ 207,000
------------- ------------- -------------
------------- ------------- -------------
Change in unrealized losses on securities
available-for-sale, net................................... $ (694,000) $ 1,272,000 $ --
------------- ------------- -------------
------------- ------------- -------------
Tax effect of stock option exercises....................... $ 157,000 $ -- $ --
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Cash payments during the years ended December 31, 1995, 1994, and 1993,
included the following:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Interest paid.............................................. $ 6,459,000 $ 4,130,000 $ 3,343,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes paid.......................................... $ 1,895,000 $ 1,282,000 $ 1,058,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
RECLASSIFICATIONS
Certain amounts in the accompanying 1994 and 1993 consolidated financial
statements have been reclassified to conform with the presentation of the 1995
consolidated financial statements.
(2) MERGER
On October 7, 1994, San Mateo County Bancorp's wholly owned subsidiary,
WestCal National Bank, was merged with and into the Bank, and San Mateo County
Bancorp became Mid-Peninsula Bancorp. The merger was accounted for as a pooling
of interests. All periods have been restated to reflect the results of the
combination. The accompanying consolidated financial statements reflect the
issuance of 1,058,063 shares of the Company's common stock in exchange for
996,735 shares of the Bank's common stock outstanding as of October 7, 1994,
based upon the exchange ratio of 1.0617 shares of the Company's common stock for
each share of the Bank's common stock.
The total interest income and provision for possible loan losses previously
reported by San Mateo County Bancorp included in the accompanying 1993
consolidated financial statements were $1,673,000 and $52,000, respectively. The
net income reported by San Mateo County Bancorp for 1993 was $225,000.
B-41
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(3) CASH AND DUE FROM BANKS
Cash and due from banks as of December 31, 1995 and 1994, included
approximately $1,028,000 and $750,000, respectively, restricted to meet required
reserve balances.
(4) INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities as of
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agency mutual funds....... $ 16,458,000 $ -- $ (929,000) $ 15,529,000
U.S. government and agency obligations........ 23,705,000 112,000 (22,000) 23,795,000
Mortgage-backed securities.................... 4,131,000 22,000 (58,000) 4,095,000
States and political subdivisions (tax
exempt)...................................... 11,662,000 462,000 (20,000) 12,104,000
Corporate securities.......................... 2,990,000 20,000 -- 3,010,000
-------------- ----------- -------------- --------------
58,946,000 616,000 (1,029,000) 58,533,000
Held-to-maturity:
U.S. government and agency obligations........ 857,000 -- (19,000) 838,000
-------------- ----------- -------------- --------------
$ 59,803,000 $ 616,000 $ (1,048,000) $ 59,371,000
-------------- ----------- -------------- --------------
-------------- ----------- -------------- --------------
</TABLE>
The amortized cost and estimated market value of investment securities as of
December 31, 1994 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AMORTIZED COST GAINS LOSSES MARKET VALUE
-------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government and agency mutual funds........ $ 16,588,000 $ -- $ (1,321,000) $ 15,267,000
U.S. government and agency obligations......... 1,500,000 1,000 (1,000) 1,500,000
Mortgaged-backed securities.................... 183,000 3,000 -- 186,000
-------------- ----------- -------------- --------------
18,271,000 4,000 (1,322,000) 16,953,000
-------------- ----------- -------------- --------------
Held-to-maturity:
U.S. government and agency obligations......... 6,143,000 10,000 (246,000) 5,907,000
States and political subdivisions (tax
exempt)....................................... 5,558,000 59,000 (102,000) 5,515,000
Mortgaged-backed securities.................... 4,009,000 -- (353,000) 3,656,000
-------------- ----------- -------------- --------------
15,710,000 69,000 (701,000) 15,078,000
-------------- ----------- -------------- --------------
$ 33,981,000 $ 73,000 $ (2,023,000) $ 32,031,000
-------------- ----------- -------------- --------------
-------------- ----------- -------------- --------------
</TABLE>
B-42
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(4) INVESTMENT SECURITIES (CONTINUED)
In November 1995, the Financial Accounting Standards Board (FASB) issued a
special report, A GUIDE TO IMPLEMENTATION OF STATEMENT NO. 115, ON ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES -- QUESTIONS AND ANSWERS,
(the Special Report). The Special Report allowed companies to reassess the
appropriateness of the classifications of all securities held and account for
any resulting reclassifications at fair value. Reclassifications from this
one-time reassessment will not call into question the intent of an enterprise to
hold other debt securities to maturity in the future, provided that
reclassification was performed by December 31, 1995.
The Company adopted the reclassification provision in the Special Report
prior to December 31, 1995 and transferred $36,400,000 of held-to-maturity
securities into available-for-sale. The unrealized pretax gain upon transfer was
$512,000 as of December 31, 1995.
The amortized cost and estimated market value of debt obligations in the
investment portfolio as of December 31, 1995 by contractual maturity are shown
below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- --------------
<S> <C> <C>
Available-for-sale:
Due in 1 year........................................................ $ 8,630,000 $ 8,661,000
Due after 1 year through 5 years..................................... 17,724,000 17,926,000
Due after 5 years through 10 years................................... 8,944,000 9,180,000
Due after 10 years................................................... 3,058,000 3,142,000
-------------- --------------
$ 38,356,000 $ 38,909,000
-------------- --------------
-------------- --------------
Held-to-maturity:
Due in 1 year........................................................ $ 857,000 $ 838,000
-------------- --------------
-------------- --------------
</TABLE>
In addition, available-for-sale mortgage-backed securities of approximately
$4,131,000 ($4,095,000 market value) mature incrementally through 2001, and
mutual funds with no stated maturity are $16,459,000 ($15,529,000 market value).
Investment securities having a carrying value of $7,529,000 and $3,023,000
as of December 31, 1995 and 1994, respectively, were pledged for purposes
required or permitted by law.
Investment income for the years ended December 31, 1995, 1994, and 1993, was
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Federal funds sold......................................... $ 1,580,000 $ 795,000 $ 514,000
Short-term investments..................................... -- -- 58,000
Interest bearing deposits in other banks................... -- 1,000 13,000
Available-for-sale securities:
Taxable.................................................. 2,572,000 1,268,000 76,000
Tax exempt............................................... 454,000 -- --
Investments held for sale.................................. -- -- 354,000
Held-to-maturity securities:
Taxable.................................................. 50,000 529,000 710,000
Tax exempt............................................... -- 317,000 284,000
Federal Reserve Bank stock................................. 45,000 26,000 23,000
------------- ------------- -------------
$ 4,701,000 $ 2,936,000 $ 2,032,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
B-43
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(4) INVESTMENT SECURITIES (CONTINUED)
A summary of cash flows from investment securities for the years ended
December 31, 1995, 1994, and 1993, is presented below:
<TABLE>
<CAPTION>
1995 1994 1993
--------------- -------------- ---------------
<S> <C> <C> <C>
Net increase in short-term investments............... $ -- $ -- $ (4,340,000)
--------------- -------------- ---------------
Purchases of investment securities:
Available-for-sale securities...................... (4,864,000) (2,000,000) --
Held-to-maturity securities........................ (35,457,000) (2,454,000) --
Investments held for sale.......................... -- -- (6,551,000)
Investment securities.............................. -- -- (13,104,000)
--------------- -------------- ---------------
(40,321,000) (4,454,000) (19,655,000)
--------------- -------------- ---------------
Sales of investment securities:
Available-for-sale securities...................... -- 6,734,000 --
Investments held for sale.......................... -- -- 11,685,000
--------------- -------------- ---------------
-- 6,734,000 11,685,000
--------------- -------------- ---------------
Maturities of investment securities:
Available-for-sale securities...................... 3,040,000 1,510,000 --
Held-to-maturity securities........................ 10,441,000 65,000 --
Investment securities.............................. -- -- 1,634,000
--------------- -------------- ---------------
13,481,000 1,575,000 1,634,000
--------------- -------------- ---------------
Net cash provided by (used in) investment
securities.................................... $ 26,840,000 $ 3,855,000 $ (10,676,000)
--------------- -------------- ---------------
--------------- -------------- ---------------
</TABLE>
Realized losses and gains on sale of investment securities for the years
ended December 31, 1995, 1994, and 1993, are presented below:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ---------
<S> <C> <C> <C>
Available-for-sale securities -- losses......................... $ (130,000) $ (266,000) $ --
Investments held for sale -- gains.............................. -- -- 72,000
Held-to-maturity securities -- gains............................ 17,000 -- --
------------ ------------ ---------
Investment (losses) gains, net.................................. $ (113,000) $ (266,000) $ 72,000
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
(5) LOANS
Loans as of December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Commercial.......................................................... $ 92,971,000 $ 76,528,000
Real estate -- construction......................................... 8,783,000 4,608,000
Real estate -- other................................................ 24,296,000 27,835,000
Deferred loan fees.................................................. (448,000) (417,000)
---------------- ----------------
125,602,000 108,554,000
Allowance for possible loan losses.................................. (1,716,000) (1,426,000)
---------------- ----------------
Loans, net........................................................ $ 123,886,000 $ 107,128,000
---------------- ----------------
---------------- ----------------
</TABLE>
B-44
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(5) LOANS (CONTINUED)
The following is a summary of the activity in the allowance for possible
loan losses during the years ended December 31, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning of year................................. $ 1,426,000 $ 1,410,000 $ 1,351,000
Provision for possible loan losses......................... 275,000 203,000 266,000
Loans charged off.......................................... (7,000) (235,000) (245,000)
Recoveries................................................. 22,000 48,000 38,000
------------- ------------- -------------
Balance, end of year....................................... $ 1,716,000 $ 1,426,000 $ 1,410,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
There were no restructured loans as of December 31, 1995 and 1994. The
Company had no loans on nonaccrual as of December 31, 1995 and $424,000 in 1994.
The Company had no impaired loans as of December 31, 1995.
As of December 31, 1994, there were no commitments to lend additional funds
to borrowers whose loans were on nonaccrual status. Foregone interest on
nonaccrual and restructured loans for the years ended December 31, 1995 and
1994, was not material.
As of December 31, 1995, virtually all borrowers of the above loans and the
assets collateralizing the Company's loans were located in Northern California.
The Company makes loans to directors and their affiliates in the ordinary
course of business. An analysis of activity with respect to such loans Is as
follows
<TABLE>
<CAPTION>
1995 1994
------------- --------------
<S> <C> <C>
Balance, beginning of year............................................... $ 4,801,000 $ 6,197,000
New loan commitments................................................... 1,414,000 382,000
Repayments of loans.................................................... (779,000) (1,778,000)
------------- --------------
Balance, end of year..................................................... $ 5,436,000 $ 4,801,000
------------- --------------
------------- --------------
Undistributed commitments, end of year................................... $ 432,000 $ 579,000
------------- --------------
------------- --------------
</TABLE>
(6) PREMISES AND EQUIPMENT
The following represents premises and equipment as of December 31:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Leasehold improvements.................................................. $ 760,000 $ 739,000
Furniture and equipment................................................. 1,914,000 1,832,000
-------------- --------------
2,674,000 2,571,000
Accumulated depreciation and amortization............................... (1,679,000) (1,582,000)
-------------- --------------
Premises and equipment, net............................................. $ 995,000 $ 989,000
-------------- --------------
-------------- --------------
</TABLE>
Depreciation and amortization of premises and equipment amounted to
$319,000, $287,000, and $315,000 for the years ended December 31, 1995, 1994,
and 1993, respectively, and have been included in occupancy and equipment
expense in the accompanying consolidated statements of operations.
B-45
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(7) DEPOSITS
Deposits as of December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
AMOUNT INTEREST RATES AMOUNT INTEREST RATES
---------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Demand, noninterest bearing.......... $ 37,077,000 -- 27,137,000 --
Demand, interest bearing............. 11,926,000 2.00% - 2.75% 10,023,000 2.0% - 2.7%
Savings and other time............... 110,010,000 2.00% - 5.85% 93,478,000 2.0% - 5.25%
Time certificates, $100,000 and
over................................ 36,682,000 2.80% - 5.90% 28,934,000 2.4% - 5.5%
---------------- ----------------
Total deposits..................... $ 195,695,000 $ 159,572,000
---------------- ----------------
---------------- ----------------
</TABLE>
Time certificates, $100,000 and over, and their remaining maturities as of
December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
3 months or less....................................................... $ 26,411,000 $ 21,305,000
3 through 6 months..................................................... 6,566,000 4,220,000
6 through 12 months.................................................... 2,338,000 2,109,000
Over 12 months......................................................... 1,367,000 1,300,000
-------------- --------------
$ 36,682,000 $ 28,934,000
-------------- --------------
-------------- --------------
</TABLE>
(8) NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31, 1995, 1994, and
1993 was comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Regulatory fees............................................ $ 207,000 $ 373,000 $ 335,000
Professional services...................................... 287,000 265,000 221,000
Data processing............................................ 118,000 245,000 165,000
Marketing.................................................. 318,000 178,000 185,000
Other...................................................... 605,000 407,000 423,000
------------- ------------- -------------
$ 1,535,000 $ 1,468,000 $ 1,329,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
(9) INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1995, 1994 and 1993, were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 1,441,000 $ 907,000 $ 761,000
State.................................................... 563,000 378,000 310,000
------------- ------------- -------------
2,004,000 1,285,000 1,071,000
------------- ------------- -------------
Deferred:
Federal.................................................. (152,000) (54,000) (95,000)
State.................................................... (38,000) 1,000 (41,000)
------------- ------------- -------------
(190,000) (53,000) (136,000)
------------- ------------- -------------
$ 1,814,000 $ 1,232,000 $ 935,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
B-46
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(9) INCOME TAXES (CONTINUED)
Tax effects of temporary differences that give rise to significant
components of the net deferred tax asset as of December 31, 1995 and 1994, were
as follows:
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Deferred tax asset:
Depreciation and amortization claimed for financial statement purposes in
excess of tax depreciation and amortization............................... $ 72,000 $ 106,000
Book allowance for loan losses and other real estate owned losses in excess
of tax allowance.......................................................... 673,000 577,000
State income taxes......................................................... 191,000 111,000
Book/tax basis difference in life insurance policies and deferred
compensation not deducted for tax......................................... 20,000 --
Other...................................................................... 13,000 1,000
------------ -----------
Total deferred tax asset................................................. 969,000 795,000
------------ -----------
Deferred tax liability:
Cash to accrual adjustment................................................. (32,000) (48,000)
Tax effect of unrealized gains on available-for-sale securities............ (214,000) (2,000)
------------ -----------
Total deferred tax liability............................................. (246,000) (50,000)
------------ -----------
Net deferred tax asset................................................... $ 723,000 $ 745,000
------------ -----------
------------ -----------
</TABLE>
The net deferred tax asset represents recoverable taxes and is included in
other assets in the accompanying consolidated balance sheets.
The effective income tax rate, as a percentage of income before income
taxes, differed from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF PRE TAX INCOME
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal taxes at statutory rate............................................ 34.0% 34.0% 34.0%
State taxes, net of federal income tax benefit............................. 7.6 10.3 7.3
Nondeductible merger expenses.............................................. -- 8.5 --
Nontaxable municipal interest.............................................. (3.0) (4.1) (3.7)
Investment loss on securities.............................................. 1.0 3.7 --
Other...................................................................... .4 (1.8) 1.1
--- --- ---
40.0% 50.6% 38.7%
--- --- ---
--- --- ---
</TABLE>
B-47
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(10) LEASES
The Company has entered into various noncancelable operating lease
arrangements for bank premises. The Company leases its main headquarters in Palo
Alto from a group of investors, which includes seven of the Company's directors.
Future minimum lease commitments as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------------------------------
<S> <C>
1996..................................................................................... $ 721,000
1997..................................................................................... 724,000
1998..................................................................................... 728,000
1999..................................................................................... 665,000
2000..................................................................................... 47,000
-------------
$ 2,885,000
-------------
-------------
</TABLE>
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1995, 1994,
and 1993 was $398,000, $447,000, and $383,000, respectively. Gross rental
expense for the years ended December 31, 1995, 1994, and 1993 was $704,000,
$673,000, and $640,000, respectively.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
In 1995, the Company adopted SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS, which requires that the Company disclose estimated fair
value for its financial instruments. Fair value estimates, methods, and
assumptions are set forth below for the Company's financial instruments.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
ESTIMATED FAIR
CARRYING AMOUNTS VALUE
---------------- ----------------
<S> <C> <C>
Assets:
Cash and cash equivalents......................................... $ 29,004,000 $ 29,004,000
Investment securities............................................. 58,820,000 59,801,000
Net loans......................................................... 123,886,000 125,236,000
Liabilities:
Demand deposits, noninterest bearing.............................. $ 37,077,000 $ 37,077,000
Demand deposits, interest bearing................................. 11,926,000 11,926,000
Savings and money market.......................................... 110,010,000 110,010,000
Time certificates................................................. 36,682,000 36,938,000
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturities
of these instruments.
INVESTMENT SECURITIES
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer term
B-48
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
investments, except certain state and municipal securities, is estimated based
on bid prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of certain state and municipal securities is
not readily available through market sources other than dealer quotations, so
fair value estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms.
The fair value of performing fixed rate loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Company's historical experience
with repayments for each loan classifications, modified, as required, by an
estimate of the effect of current economic and lending conditions. The fair
value of performing variable rate loans is judged to approximate book value for
those loans whose rates reprice in less than 90 days. Rate floors and rate
ceilings are not considered for fair value purposes as the number of loans with
such limitations is not significant.
Fair value for significant non performing loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
DEPOSIT LIABILITIES
The fair value of deposits with no stated maturity, such as noninterest
bearing demand deposits, savings, money market, and checking accounts,
approximates the amount payable on demand. The fair value of certificates of
deposit is judged to approximate book value for those certificates whose
remaining maturities are less than 90 days. For all other certificates,
estimated cash flows are discounted using rates currently offered for deposits
of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The majority of the Company's commitments to extend credit carry current
market interest rates if converted to loans. Because these commitments are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates the
recorded deferred fee amounts and is excluded from the table.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale, at one time, the Company's entire holdings of a particular financial
instrument. Fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
B-49
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 1995, 1994, and 1993
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
(12) EMPLOYEE BENEFITS
STOCK OPTION PLAN
The Bank's employee stock option plan (the Bank Plan) was approved by the
Bank's Board of Directors in July 1987. Under the Bank Plan, 185,230 shares (as
adjusted to reflect the effects of stock dividends) were reserved for the
granting to key employees of incentive stock options and nonqualified stock
options as defined under current tax laws. One quarter of the options granted
became exercisable in each of the four years succeeding the year in which the
options were originally granted. The options were exercisable for periods of up
to six years from the date of grant. Effective October 7, 1994, in conjunction
with the merger, the Bank Plan and the San Mateo County Bancorp (SMCB) Plans
terminated and the shareholders approved the Mid-Peninsula Bancorp 1994 Stock
Option Plan (the New Company Plan). Under the New Company Plan, 236,072 shares
have been reserved for the granting to key employees and nonemployee directors,
incentive stock options, and nonqualified stock options as defined under current
tax laws. Options issued under the New Company Plan may become exercisable
immediately or in cumulative increments over a period of years up to 5 years
from the date of grant. The options may be exercised for periods of up to 10
years from the date of grant. As of October 7, 1994, 70,935 options had been
exercised.
All options outstanding October 7, 1994, under the Bank Plan were assumed by
the New Company Plan and are exercisable for 89,428 shares of the Company's
stock, based upon the exchange ratio of 1.0617 shares of the Company's common
stock for each share of the Bank's common stock, at exercise prices ranging from
$8.14 to $13.42 per option. Each assumed option is vested to the same extent it
was under the Bank Plan. All options outstanding on October 7, 1994 under the
SMCB Plans were assumed by the New Company Plan and are exercisable under the
same terms as the SMCB Plans. Transactions involving stock options are
summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE RANGE
OPTIONS PER OPTION
--------- -----------------
<S> <C> <C>
Outstanding as of December 31, 1992...................................... 160,162 $8.64 - 12.96
Granted in 1993........................................................ 13,650 11.91
Exercised in 1993...................................................... (6,946) 8.64
---------
Outstanding as of December 31, 1993...................................... 166,866 8.64 - 12.96
Granted in 1994........................................................ 11,418 14.25
Expired in 1994........................................................ (30,064) 8.64 - 9.94
Exercised in 1994...................................................... (63,989) 8.64 - 10.43
---------
Outstanding as of October 7, 1994........................................ 84,231 8.64 - 14.25
---------
---------
</TABLE>
B-50
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(12) EMPLOYEE BENEFITS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER OF PRICE RANGE PER
OPTIONS OPTION
--------- -----------------
<S> <C> <C>
Outstanding as of October 7, 1994........................................ -- $ --
Assumed from the Bank Plan............................................. 89,428 8.14 - 13.42
Assumed from the SMCB Plans............................................ 131,530 10.00
Granted in 1994........................................................ 36,000 12.75
---------
Outstanding as of December 31, 1994...................................... 256,958 8.14 - 13.42
Granted in 1995........................................................ 73,000 12.75 - 16.50
Exercised in 1995...................................................... (61,961) 10.00 - 12.21
---------
Outstanding as of December 31, 1995...................................... 267,997 8.14 - 16.50
---------
---------
</TABLE>
As of December 31, 1995, under the New Company Plan, 127,079 shares were
available for grant and 147,567 shares were exercisable.
DEFINED CONTRIBUTION PLAN
During 1989, the Company introduced a 401(k) Savings Plan. All salaried
employees are eligible to contribute up to 15% of their pretax compensation to
the plan through salary deductions under Section 401(k) of the Internal Revenue
Code. The Company makes matching contributions of $0.75 per dollar of employee
contribution up to a maximum of 8% of an employee's pretax compensation. The
related expense charged for the years ended December 31, 1995, 1994, 1993 was
$117,000, $81,000, and $63,000, respectively.
SALARY CONTINUATION PLAN
In May 1995, the Company implemented a salary continuation plan (the Plan)
for a select group of officers. The officers become eligible for benefits under
the Plan if they reach normal retirement age while working for the Company. The
costs of these benefits are accrued over the remaining expected service lives of
the officers covered using the present value method of accounting. Salary
continuation expense was approximately $83,000 in 1995.
The Company has elected to fund its obligations under the plans described
above with life insurance contracts. The Company acquired single premium life
insurance policies with a cash surrender value totaling $2,295,000, which is
included in other assets as of December 31, 1995. The policy is also expected to
cover plan expenses.
(13) COMMITMENTS AND CONTINGENT LIABILITIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk, in excess of the amounts recognized in the
balance sheet. The contract or notional amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance of the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The
B-51
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(13) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
Company controls the credit risk of these transactions through credit approvals,
limits, and monitoring procedures. Management does not anticipate any
significant losses as a result of these transactions.
The following table summarizes these financial instruments as of December
31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Financial instruments whose credit risk is represented by contract
amounts:
Commitments to extend credit......................................... $ 48,831,000 $ 35,451,000
Standby letters of credit............................................ 6,816,000 1,677,000
-------------- --------------
$ 55,647,000 $ 37,128,000
-------------- --------------
-------------- --------------
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Since some
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include cash, marketable securities, accounts
receivable, inventory, property, plant and equipment, income-producing
commercial properties, and residential properties.
Standby letters of credit are written commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
CONCENTRATION OF CREDIT RISK
The Company's lends primarily to borrowers located in the mid-peninsula
region of the San Francisco Bay Area. Although the portfolio is diversified, the
ability of the Company's borrowers to honor their commitments is dependent upon
the economic sector of the region, including the real estate markets of the
mid-peninsula.
The Company adopted SFAS No. 119, DISCLOSURES ABOUT DERIVATIVE FINANCIAL
INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, on December 31, 1994. Under
certain circumstances and as required by law, the Bank will structure variable
rate loans to include embedded interest rate floors and ceilings. Such floors
and ceilings subject the Company to market risk when interest rates change.
B-52
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(14) MID-PENINSULA BANCORP (PARENT COMPANY ONLY)
Following are the financial statements of Mid-Peninsula Bancorp (parent
company only) for the years ended December 31, 1995 and 1994:
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Assets:
Cash................................................................. $ 950,000 $ 365,000
Investment in subsidiary............................................. 20,564,000 17,770,000
Other assets......................................................... 83,000 --
-------------- --------------
$ 21,597,000 $ 18,135,000
-------------- --------------
-------------- --------------
Liabilities and shareholders' equity:
Liabilities.......................................................... $ 157,000 $ 132,000
Common stock......................................................... 15,425,000 14,785,000
Unrealized losses on securities available-for-sale, net.............. (626,000) (1,320,000)
Retained earnings.................................................... 6,641,000 4,538,000
-------------- --------------
$ 21,597,000 $ 18,135,000
-------------- --------------
-------------- --------------
</TABLE>
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Income:
Equity in undistributed net income of subsidiary......... $ 2,100,000 $ 902,000 $ 1,344,000
Dividend from subsidiary................................. 621,000 935,000 228,000
Interest income.......................................... 27,000 7,000 8,000
------------- ------------- -------------
Total income........................................... 2,748,000 1,844,000 1,580,000
------------- ------------- -------------
Expenses:
Merger-related expenses.................................. -- 608,000 --
Other operating expenses................................. 27,000 35,000 17,000
------------- ------------- -------------
Total expenses......................................... 27,000 643,000 17,000
------------- ------------- -------------
Net income............................................. $ 2,721,000 $ 1,201,000 $ 1,563,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
B-53
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(14) MID-PENINSULA BANCORP (PARENT COMPANY ONLY) (CONTINUED)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 2,721,000 $ 1,201,000 $ 1,563,000
Adjustment to reconcile net income to net cash provided
by operating activities:
Equity in undistributed net income of subsidiary..... (2,100,000) (902,000) (1,344,000)
Increase in accounts payable......................... 25,000 132,000 --
-------------- ------------- --------------
Net cash provided by operating activities.......... 646,000 431,000 219,000
-------------- ------------- --------------
Cash flows used in investing activities:
Investment in subsidiary............................... 74,000 (571,000) (84,000)
-------------- ------------- --------------
Cash flows from financing activities:
Proceeds from options exercised........................ 483,000 571,000 60,000
Dividends paid......................................... (618,000) (335,000) (228,000)
Payment for fractional shares.......................... -- (2,000) --
-------------- ------------- --------------
Net cash (used in) provided by financing
activities........................................ (135,000) 234,000 (168,000)
-------------- ------------- --------------
Net increase (decrease) in cash.......................... 585,000 94,000 (33,000)
Cash at beginning of year................................ 365,000 271,000 304,000
-------------- ------------- --------------
Cash at end of year...................................... $ 950,000 $ 365,000 $ 271,000
-------------- ------------- --------------
-------------- ------------- --------------
Noncash financing activities:
Stock dividends declared............................... $ -- $ -- $ 631,000
-------------- ------------- --------------
-------------- ------------- --------------
Dividends from subsidiary.............................. $ 621,000 $ 935,000 $ 228,000
-------------- ------------- --------------
-------------- ------------- --------------
</TABLE>
The ability of the Company to pay dividends will largely depend upon the
dividends paid to it by the Bank. There are legal limitations on the ability of
the Bank to provide funds to the Company in the form of loans, advances, or
dividends.
(15) REGULATORY MATTERS
The Board of Governors of the Federal Reserve System and the Federal Deposit
Insurance Corporation (FDIC) have adopted risk based capital guidelines for
member banks. The minimum guidelines are 8% total capital to risk-weighted
assets and 3% Tier 1 capital to quarterly average assets. As of December 31,
1995, the Bank exceeded the minimum capital ratios required by regulatory
agencies.
Additionally, banking regulations limit the amount of dividends that may be
paid without prior approval of the Bank's regulatory agencies. Such dividends
are limited to the lesser of the Bank's retained earnings or the net income of
the previous two years combined with the current year net income. Retained
earnings against which dividends may be paid without prior approval of the
banking regulators were approximately $4,300,000 as of December 31, 1995,
subject to the minimum capital ratio requirements.
B-54
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1994, AND 1993
(16) PROSPECTIVE ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS No. 123 applies to all transactions in which an entity
acquires goods or services by issuing equity instruments such as common stock,
except for employee stock ownership plans. SFAS No. 123 establishes a new method
of accounting for stock-based compensation arrangements with employees which is
fair value based. SFAS No. 123 encourages (but does not require) employers to
adopt the new method in place of the provisions of Accounting Principles Board
Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Companies may
continue to apply the accounting provisions of APB No. 25 in determining net
income; however, they must apply the disclosure requirements of SFAS No. 123. If
the Company adopts the fair value based method of SFAS No. 123, a higher
compensation cost would result for fixed stock option plans and a different
compensation cost will result for the Company's contingent or variable stock
option plans. The recognition provisions and disclosure requirements of SFAS No.
123 are effective January 1, 1996, but may be applied immediately. The Company
has elected to continue to use current practice under APB No. 25, but is unable
to determine the impact of the required disclosures as it is still reviewing the
requirements of SFAS No. 123.
B-55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 19, 1994, the Company's Board of Directors approved the dismissal
of the firm of Coopers and Lybrand, which had been the independent accountants
for the Company's predecessor, San Mateo County Bancorp, since 1991, and
approved the engagement of KPMG Peat Marwick LLP as the Company's independent
accountants. The dismissal of Coopers and Lybrand was recommended and approved
by the Company's Board of Directors based solely on the fact that KPMG Peat
Marwick LLP represented the Company's wholly-owned subsidiary, Mid-Peninsula
Bank, since 1987, and following the merger of WestCal National Bank, the
wholly-owned subsidiary of San Mateo County Bancorp, with and into Mid-Peninsula
Bank and the change in name of San Mateo County Bancorp to Mid-Peninsula
Bancorp, which merger was effective on October 7, 1994, the Company's Board of
Directors determined that it was in the best interests of the Company to engage
KPMG Peat Marwick LLP based on their experience and knowledge of the operations
and activities of Mid-Peninsula Bank. The reports of Coopers and Lybrand on the
financial statements of the Company's predecessor, San Mateo County Bancorp, did
not contain any adverse opinion or disclaimer of opinion or any qualification as
to an uncertainty, audit scope, or accounting principle. There were no
disagreements between San Mateo County Bancorp or the Company and Coopers and
Lybrand on any matter of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Coopers and Lybrand, would have caused them to make a reference
to the subject matter of the disagreement in their report. No reportable event
as described in Item 304 of Regulation S-K occurred during San Mateo County
Bancorp's two most recent fiscal years and subsequent interim period or
subsequent interim period of the Company as of the date hereof. The Company
reported the foregoing change in its accountants on a Form 8-K dated October 19,
1994, filed with the Securities and Exchange Commission on October 25, 1994. The
Form 8-K included a letter from Coopers and Lybrand as an exhibit thereto in
which Coopers and Lybrand agreed with the above description of the change in
accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
1996 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
1996 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
1996 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 of Form 10-K is incorporated by
reference to the information contained in the Company's Proxy Statement for the
1996 Annual Meeting of Shareholders which will be filed pursuant to Regulation
14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS. Listed and included in Part II, Item 8.
(2) FINANCIAL STATEMENT SCHEDULES. Not Applicable.
B-56
<PAGE>
(3) EXHIBITS.
<TABLE>
<C> <S>
(2.1) Reorganization Agreement and Plan of Merger dated March 31, 1994, by and
between San Mateo County Bancorp, WestCal National Bank and Mid-Peninsula
Bank, incorporated by reference from exhibit 2.1 of registration statement
number 33-79798 on Form S-4, filed with the Commission on June 6, 1994.
(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 number 33-79798 on Form S-4, filed with the
Commission on June 6, 1994.
(4.1) Specimen form of Mid-Peninsula Bancorp stock certificate incorporated by
reference from registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, filed with the Commission on March 30, 1995.
*(10.1) Form of incentive stock option agreement under Mid-Peninsula Bancorp 1994
Stock Option Plan incorporated by reference from exhibit 4.2 to amendment
no. 1 to registration statement number 33-79798 on Form S-4, filed with the
Commission on July 15, 1994.
*(10.2) Form of non-qualified stock option agreement under Mid-Peninsula Bancorp
1994 Stock Option Plan incorporated by reference from exhibit 4.3 to
amendment no. 1 to registration statement number 33-79798 on Form S-4, filed
with the Commission on July 15, 1994.
*(10.3) San Mateo County Bancorp Directors' Stock Option Plan incorporated by
reference from exhibit 10.1 to registration statement number 33-79798 on
Form S-4, filed with the Commission on June 6, 1994.
*(10.4) San Mateo County Bancorp Employee Stock Option Plan incorporated by
reference from exhibit 10.2 to registration statement number 33-79798 on
Form S-4, filed with the Commission on June 6, 1994.
*(10.5) Mid-Peninsula Bancorp 1994 Stock Option Plan incorporated by reference from
exhibit 10.3 to registration statement number 33-79798 on Form S-4, filed
with the Commission on June 6, 1994.
*(10.6) Form of director stock option agreement under San Mateo County Bancorp
Directors' Stock Option Plan incorporated by reference from exhibit 10.4 to
registration statement number 33-79798 on Form S-4, filed with the
Commission on June 6, 1994.
*(10.7) Form of employee incentive stock option agreement under San Mateo County
Bancorp Employee Stock Option Plan incorporated by reference from exhibit
10.5 to registration statement number 33-79798 on Form S-4, filed with the
Commission on June 6, 1994.
(10.8) WestCal Agreement of Lease dated April 24, 1989 related to premises located
at 100 South Ellsworth Avenue, San Mateo, California, incorporated by
reference from exhibit 10.6 to registration statement number 33-79798 on
Form S-4, filed with the Commission on June 6, 1994.
</TABLE>
B-57
<PAGE>
<TABLE>
<C> <S>
(10.9) WestCal Commercial Lease and Deposit Receipt dated November 26, 1993 related
to premises located at 1313 Laurel Street, San Carlos, California,
incorporated by reference from exhibit 10.7 to registration statement number
33-79798 on Form S-4, filed with the Commission on June 6, 1994.
*(10.10) Separation and Release Agreement for William B. Mayer incorporated by
reference from exhibit 10.9 to registration statement number 33-79798 on
Form S-4, filed with the Commission on June 6, 1994.
*(10.11) Separation and Release Agreement for Stanley M. Shaw incorporated by
reference from exhibit 10.10 to registration statement number 33-79798 on
Form S-4, filed with the Commission on June 6, 1994.
*(10.12) Separation and Release Agreement for Leo D. Taylor incorporated by reference
from exhibit 10.11 to registration statement number 33-79798 on Form S-4,
filed with the Commission on June 6, 1994.
(10.13) Mid-Peninsula Bank lease agreement dated March 11, 1987 and associated
documents related to premises located at 420 Cowper Street, Palo Alto,
California, incorporated by reference from exhibit 10.13 to registrant's
Annual Report on Form 10-K for the year ended December 31, 1994, filed with
the Commission on March 30, 1995.
*(10.14) Mid-Peninsula Bank Profit Sharing and Savings Plan dated January 1, 1993,
incorporated by reference from registrant's Annual Report on Form 10-K for
the year ended December 31, 1994, filed with the Commission on March 30,
1995.
*(10.15) David L. Kalkbrenner employment agreement, dated March 3, 1992, incorporated
by reference from registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, filed with the Commission on March 30, 1995.
*(10.16) Form of Mid-Peninsula Bank Indemnification Agreement for directors and
executive officers, incorporated by reference from registrant's Annual
Report on Form 10-K for the year ended December 31, 1994, filed with the
Commission on March 30, 1995.
(10.17) Form of nonstatutory stock option agreement for outside directors under Mid-
Peninsula Bancorp 1994 Stock Option Plan incorporated by reference from
exhibit 4.6 to registration statement number 33-91076 on Form S-8, filed
with the Commission on April 11, 1995.
(10.18) Addendum to lease agreement dated March 11, 1987 for premises located at 420
Cowper Street, Palo Alto, California.
(10.19) Addendum to lease agreement dated November 26, 1993 for premises located at
1313 Laurel Street, San Carlos, California.
*(10.20) Salary continuation agreement entered into with David L. Kalkbrenner dated
April 26, 1995.
*(10.21) Salary continuation agreement entered into with Murray B. Dey dated April
26, 1995.
*(10.22) Salary continuation agreement entered into with Carol H. Rowland dated April
26, 1995.
(10.23) Non-management officer salary continuation agreement entered into with Susan
K. Black dated April 26, 1995.
(10.24) Non-management officer salary continuation agreement entered into with
Kimberly S. Burgess dated April 26, 1995.
</TABLE>
B-58
<PAGE>
<TABLE>
<C> <S>
(10.25) Non-management officer salary continuation agreement entered into with Jonas
H. Stafford dated April 26, 1995.
(10.26) Non-management officer salary continuation agreement entered into with
Charles P. Banovac dated March 21, 1996.
(21.1) The registrant's only subsidiary is its wholly-owned subsidiary,
Mid-Peninsula Bank.
(23.1) Independent Auditors Consent.
(27.1) Financial Data Schedule.
</TABLE>
- ------------------------
*Denotes management contracts, compensatory plans or arrangements.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed in 1995.
An Annual Report for the fiscal year ended December 31, 1995, and Notice of
Annual Meeting and Proxy Statement for the Company's 1996 Annual Meeting will be
mailed to security holders subsequent to the date of filing of this Report.
Copies of said materials will be furnished to the Commission in accordance with
the Commission's Rules and Regulations.
B-59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MID-PENINSULA BANCORP
Date: March 20, 1996 By: /s/ DAVID L. KALKBRENNER
-----------------------------------
David L. Kalkbrenner,
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 20, 1996 By: /s/ CAROL H. ROWLAND
-----------------------------------
Carol H. Rowland,
FIRST VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------- ----------------
<C> <S> <C>
President, Chief
/s/ DAVID L. KALKBRENNER Executive Officer and
- ----------------------------------- Director (Principal March 20, 1996
David L. Kalkbrenner Executive Officer)
/s/ MURRAY B. DEY
- ----------------------------------- Executive Vice President March 20, 1996
Murray B. Dey and Director
- ----------------------------------- Director March , 1996
Lawrence A. Aufmuth
/s/ JOHN F. BLOKKER
- ----------------------------------- Director March 20, 1996
John F. Blokker
/s/ ALLAN F. BROWN
- ----------------------------------- Director March 20, 1996
Allan F. Brown
/s/ OWEN D. CONLEY
- ----------------------------------- Director March 20, 1996
Owen D. Conley
</TABLE>
B-60
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------- ----------------
<C> <S> <C>
/s/ DONALD L. HAMMOND
- ----------------------------------- Director March 20, 1996
Donald L. Hammond
/s/ R. HEWLETT LEE, M.D.
- ----------------------------------- Director March 20, 1996
R. Hewlett Lee, M.D.
/s/ HELEN C. LEONG
- ----------------------------------- Director March 20, 1996
Helen C. Leong
/s/ GEORGE M. MARCUS
- ----------------------------------- Director March 20, 1996
George M. Marcus
/s/ DUNCAN L. MATTESON
- ----------------------------------- Chairman of the Board and March 20, 1996
Duncan L. Matteson Director
/s/ DONALD H. SEILER
- ----------------------------------- Director March 20, 1996
Donald H. Seiler
/s/ WARREN R. THOITS
- ----------------------------------- Director March 20, 1996
Warren R. Thoits
/s/ BRUCE E. VAN ALSTYNE
- ----------------------------------- Director March 20, 1996
Bruce E. Van Alstyne
/s/ EDWIN E. VAN BRONKHORST
- ----------------------------------- Director March 20, 1996
Edwin E. van Bronkhorst
</TABLE>
B-61
<PAGE>
APPENDIX C
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended DECEMBER 31, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ____________ to __________
COMMISSION FILE NUMBER 0-18015
CUPERTINO NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 33-0060898
(State of incorporation) (IRS employer identification number)
</TABLE>
20230 STEVENS CREEK BOULEVARD, CUPERTINO, CA 95014
(Address of principal executive offices)
(408) 996-1144
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
NONE NONE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained herein,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 15,
1996, as reported on the NASDAQ National Market System, was approximately
$17,688,283. Shares of Common Stock held by each officer, director and holder of
5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares of COMMON STOCK, NO PAR VALUE, of registrant
outstanding as of March 15, 1996 was 1,857,105.
------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference into Parts I,
II, III, and IV of this Form 10-K Report: (1) Proxy Statement for registrant's
Annual Meeting of Shareholders to be held May 16, 1996 (Part III), and (2)
registrant's Annual Report to Shareholders for the year ended December 31, 1995
(Parts I, II and IV).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Cupertino National Bancorp (the "Company") is a California corporation and
bank holding company. Cupertino National Bank & Trust ("CNB"), a wholly-owned
subsidiary of the Company, is a national bank conducting a commercial banking
business. The Company was organized in August 1984, and CNB began operations in
May 1985. The Company and CNB have their principal offices at 20230 Stevens
Creek Boulevard, Cupertino CA 95014. The Company's current activities are
principally acting as the holding company for CNB and as the lessee and
sublessor to CNB of the premises on which CNB's headquarters is located.
CNB provides a wide range of commercial banking services to small and
medium-sized businesses, real estate firms, business executives, professionals
and other individuals. Trust services are provided by a separate department of
the Bank to support the trust needs of its clients. CNB's strategy emphasizes
acquiring and developing relationships with clients in the Bank's service area.
Personal service officers are assigned to each borrowing client to provide
continuity to the relationship.
CNB provides commercial loans for working capital and business expansion to
small and medium-sized businesses with annual revenues in the range of $1
million to $35 million. Commercial loans typically include revolving lines of
credit collateralized by inventory, accounts receivable or leasehold
improvements, loans to purchase equipment, and loans for general working capital
purposes, collateralized by equipment. CNB's commercial customers are drawn from
a wide variety of manufacturing, wholesale and service businesses, and are not
concentrated in any one particular industry. Loans to real estate construction
and development companies are primarily for construction of single-family
residences in CNB's primary service area. Such loans typically range between
approximately $200,000 and $3,400,000. Loans to professional and other
individual clients, whose income typically equals or exceeds the median income
for CNB's service area, cover a full range of consumer services, such as
automobile, aircraft, home improvement and home equity loans, and other secured
and unsecured lines of credit, including credit cards.
CNB has a Small Business Administration ("SBA") department which makes loans
to assist smaller clients and those who are starting new businesses in obtaining
financing. The loans are generally 65% to 80% guaranteed by the SBA. In 1994,
CNB was named a Preferred Lender by the SBA. Preferred Lender status is awarded
by the SBA to lenders who have demonstrated superior ability to generate,
underwrite and service loans guaranteed by the SBA, and results in more rapid
turn around of loan applications submitted to the SBA for approval.
In May 1994, CNB opened its Emerging Growth Industries department, which
evolved in 1995 into the Venture Lending group to serve the needs of companies
in their start-up and development phase. This unit was developed to meet the
needs of clients in CNB's service area by allowing them to access a banking
relationship early in their development. The loans to this target group of
clients are generally secured by the accounts receivable, inventory and
equipment of the companies. The financial strength of these companies also tends
to be bolstered by the presence of venture capital investors among the
shareholders.
CNB is a member of the Federal Reserve System and the deposits of the Bank's
clients are insured up to $100,000 by the Federal Deposit Insurance Corporation
("FDIC"). In 1992, CNB became a member of the Federal Home Loan Bank of San
Francisco ("FHLB") in order to enhance its ability to service its loan clients.
This membership allows CNB to enhance its funding sources as the FHLB allows
members to borrow funds by pledging securities and mortgage loans as collateral.
MARKET AREA AND CLIENT BASE
CNB concentrates on providing service to clients in Santa Clara County and
San Mateo County. CNB is headquartered in Cupertino, California which is in the
center of the geographical area which is
C-2
<PAGE>
referred to as "Silicon Valley". The City of Cupertino has a population of
approximately 51,300 and its average annual household income exceeds $97,200.
Among metropolitan areas, Santa Clara County ranks third in California in median
household income.
The commercial base of Santa Clara County is diverse and includes computer
and semiconductor manufacturing, professional services, printing and publishing,
aerospace, defense, real estate construction, and wholesale and retail trade.
CNB has not concentrated on attracting commercial clients from any single
industry, although it has in the past emphasized lending to the residential real
estate construction industry in its service area.
In March 1991, CNB opened its first regional office in downtown San Jose.
This office was established to better serve existing clients of CNB, as well as
to gain new relationships from clients based in the growing financial center in
the southern portion of Santa Clara County. In May 1992, CNB opened a second
regional office in Palo Alto to better serve its clients in Northern Santa Clara
and Southern San Mateo County. CNB intends to open its fourth office in downtown
Palo Alto, in the spring of 1996.
Many of the directors of the Company and CNB, and their affiliates, maintain
deposit and loan relationships with the Bank. See Note 11 of Notes to
Consolidated Financial Statements in the Company's 1995 Annual Report,
incorporated herein by reference, for information regarding loans to affiliates
and other significant related party transactions.
SOURCES OF FUNDS
Most of CNB's deposits are obtained from small and medium-sized businesses,
business executives, professionals and other individuals. At December 31, 1995,
CNB had a total of 7,621 deposit accounts, representing 2,894
non-interest-bearing deposit (checking) accounts with an average balance of
approximately $16,372 each, 3,726 interest-bearing demand, money market demand,
and savings accounts with an average balance of approximately $28,176 each, and
1,001 time deposit accounts with an average balance of approximately $45,267
each. Rates paid on deposits vary among the categories of deposits due to
different terms, the size of the individual deposit, and rates paid by
competitors on similar deposits.
CNB has one deposit relationship with a title company, in which three of the
directors of CNB serve as directors (one CNB director is also the principal
shareholder and chief executive officer of the title company). Deposit balances
from this client in both non-interest-bearing demand accounts and money market
accounts totaled $775,000 on December 31, 1995 and ranged between $7,000 and
$8.5 million during 1995.
LENDING ACTIVITIES
CNB's loan portfolio is centered in commercial lending to small and
medium-sized businesses in the manufacturing and service industries. CNB has
also been an active lender in residential real estate construction.
Approximately 54% of CNB's portfolio was in commercial loans at December 31,
1995 and real estate construction loans represented approximately 15% of total
loans, primarily for residential projects. In addition, 14% of CNB's loans were
real estate term loans, which are primarily secured by commercial properties.
The balance of the portfolio consists of consumer loans. CNB's loan clients are
primarily located in Cupertino, San Jose, Palo Alto and the surrounding
communities in Santa Clara County and San Mateo County.
The majority of loans are collateralized. Generally, real estate loans are
secured by real property, and commercial and other loans are secured CNB
deposits or business and personal assets. Repayment is generally expected from
the sale of the related property for real estate construction loans, and from
the cash flow of the borrower for commercial and other loans.
C-3
<PAGE>
The interest rates charged for the loans made by CNB vary with the degree of
risk, size and maturity of the loans. Rates are generally affected by
competition, associated factors stemming from the client's deposit relationship
with CNB and CNB's cost of funds. A majority of the loans in CNB's portfolio
have a floating rate.
In its commercial loan portfolio, CNB provides personalized financial
services to the diverse commercial and professional businesses in its market
area, but does not concentrate on any particular industry. Commercial loans
consist chiefly of short-term loans (normally with a maturity of under one year)
for working capital. Significant emphasis is placed on the borrower's earnings
history, capitalization, secondary sources of repayment (such as accounts
receivable), and in some instances, third party guarantees or highly liquid
collateral (e.g., time deposits). Commercial loan pricing is generally at a rate
tied to the prime rate (as quoted in the Wall Street Journal) or the Bank's
reference rate.
CNB's Venture Lending Division works with a variety of technology companies,
ranging from multimedia, software and telecommunications providers to
biotechnology and medical advice firms. Venture Lending provides innovative
financing and other financial services tailored to the needs of startup and
growth-stage companies.
While the commercial loan portfolio of CNB is not concentrated in any one
industry, CNB's service area has a concentration of technology companies, and
accordingly, the ability of any of CNB's borrowers to repay loans may be
affected by the performance of this sector of the economy.
CNB's residential real estate construction loan activity has focused on
providing short-term (less than one year maturity) loans to local individuals,
partnerships and corporations in the local residential real estate industry for
the construction of single family residences. During 1992 through 1993, CNB
concentrated its construction loan activity in the market for owner-occupied
custom residences. During 1994, real estate values began to stabilize and CNB
began to cautiously enter the construction loan market for small townhouse and
single family home projects. During 1995, CNB continued to expand its real
estate construction portfolio with the help of the improving real estate market
in northern California, although there can be no assurance that this trend will
continue.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability of
the project and the borrower's credit-worthiness are primary considerations in
the loan underwriting decision. Generally, these loans provide an attractive
yield, but may carry a higher than normal risk of loss or delinquency,
particularly if general real estate values decline or the loan underwriting
process is based upon inaccurate appraisals. CNB utilizes independent local
appraisers and conservative loan-to-value ratios (e.g. loans generally not
exceeding 65% to 75% of the appraised value of the property). CNB monitors
projects during the construction phase through regular construction inspections
and a disbursement program tied to the percentage of completion of each project.
CNB's consumer loan portfolio is divided between installment loans for the
purchase of such items as automobiles and aircraft, and home improvement loans
and equity lines of credit which are often secured by residential real estate.
Installment loans tend to be fixed rate and longer-term (one to five year
maturity), while the equity line type loans are generally floating rate, and are
reviewed for renewal on an annual basis. CNB also has a minimal portfolio of
credit card loans, issued as an additional service to its clients.
LOAN ADMINISTRATION
The loan policy of CNB 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 Directors' Loan Committee oversees the lending activities
of the Bank. This committee consists of three outside directors, the
Chairman/Chief Executive Officer, the Executive Vice President -- Senior Loan
Officer, Senior Vice President -- Venture Lending Division Manager, Senior Vice
President -- Commercial Lending and the Senior Vice President -- Chief Credit
Officer. The officers in this group make up the Officers' Loan Committee.
C-4
<PAGE>
Sole lending authority is granted to officers on a limited basis. Loan
requests exceeding individual officer approval limits are submitted to the
Officers' Loan Committee, and those which exceed its limit are submitted to the
Directors' Loan Committee for final approval. Both of these committees meet on a
regular basis in order to provide timely responses to the Bank's clients.
CNB's credit administration function includes, in addition to internal
reviews, the regular use of an outside loan review firm to review the quality of
the loan portfolio. CNB has an internal asset review committee (IARC) that meets
monthly to review delinquencies, non-performing assets, classified assets and
other pertinent information for the purpose of evaluating credit risk within
CNB's loan portfolio and to recommend general reserve percentages and specific
reserve allocations. The IARC reports to the Board of Directors on a quarterly
basis.
TRUST DEPARTMENT
CNB's Trust Department commenced operations in July 1988 and in 1995, CNB
renewed its focus on the expansion of its trust operations. The Trust Department
offers a full range of fee-based trust services directly to its clients and
administers several types of retirement plans, including corporate pension
plans, 401(k) plans and individual retirement plans, with an emphasis on the
investment management, custodianship and trusteeship of such plans. In addition,
the Trust Department acts as executor, administrator, guardian and/or trustee in
the administration of the estates of individuals. Investment and custodial
services are provided for corporations, individuals and non-profit
organizations. Total assets under management by the Trust Department were
approximately $270 million at December 31, 1995 compared to $157 million at
December 31, 1994 and $118 million at December 31, 1993. The 72% increase in
trust assets is attributable to the addition of several new trust officers and
the new Executive Vice President -- Senior Trust Officer. CNB anticipates this
rapid rise to continue in 1996 as we increase our presence in the Palo Alto
marketplace with a new office scheduled to open in the late spring of 1996.
There can be no assurances that the growth will continue at the rate experienced
in 1995.
MORTGAGE BANKING DIVISION
CNB opened a Mortgage Banking Division in July 1992. The purpose of this
division was to originate residential mortgage loans for sale on the secondary
market. The primary revenue of this division was from the premium received on
the sale of such mortgage loans and their related servicing rights. CNB funded
both loans which were originated directly by a mortgage banking officer and
loans purchased through a network of mortgage brokers. CNB was selling both the
loans and the related servicing rights through a correspondent. During 1993, CNB
was designated as an approved seller/ servicer by the Federal National Mortgage
Association and the Federal Home Loan Corporation, known in the industry as
Fannie Mae and Freddie Mac, respectively. During 1994, the increased upward
pressure on interest rates caused mortgage refinancing and home purchases to
significantly decline. This required CNB in June 1994 to restructure its
mortgage operations and focus all of its efforts on the wholesale mortgage
market. This change reduced the operating costs within the mortgage business
unit; however, the operating results for the last half of 1994 did not return to
acceptable levels of return on investment corresponding to the risks involved.
Based on these factors, CNB determined to close its mortgage operations
effective March 31, 1995. In connection with this action, CNB incurred a
$180,000 after tax charge related to this operation in the first quarter of
1995.
COMPETITION
The banking business in CNB's service area is highly competitive, as it is
throughout California. Many of the major branch banking institutions in
California have one or more offices in CNB's service area. CNB competes in the
marketplace for deposits and loans, principally against these banks, other
independent community banks, savings and loan associations, credit unions and
other financial institutions.
The major advantages that larger branch institutions have over CNB are their
ability to provide wide ranging advertising programs; to allocate their
investment assets in areas of higher yields and demands; and, by virtue of their
greater total capitalization, to utilize substantially higher lending
C-5
<PAGE>
limits than CNB. These banks can also offer certain services, such as
international banking, which are not offered directly by CNB. However, CNB is
able to offer most of these services indirectly, through its correspondent
institutions. Smaller independent banks, including CNB, have found a market
niche by providing specialized services, and by targeting clients whose credit
needs are below levels generally sought by the major branch banks.
CNB defines its service area as the cities of Cupertino, San Jose, Palo
Alto, and the surrounding cities in Santa Clara County and San Mateo County. To
compete with the major financial institutions in its service area, CNB relies
upon customized services and direct personal contacts by its officers, directors
and staff. For clients whose loan demands exceed CNB's legal lending limit, CNB
seeks to arrange such loans on a participation basis with other lenders,
primarily other community banks in the San Francisco Bay Area.
EFFECT OF GOVERNMENTAL POLICIES AND LEGISLATION
Banking is a business in which profitability depends primarily on interest
rate differentials. In general, the difference between the interest rates paid
by CNB on its deposits and its other borrowings and the interest rates received
by CNB on loans extended to its clients and on securities held in its investment
portfolio will be the principal factor affecting CNB's earnings. The interest
rates paid and received by CNB are sensitive to many factors which are beyond
CNB's control, including the influence of domestic and foreign economic
conditions. The earnings and growth of CNB and the Company will also be affected
not only by general economic conditions, including inflation, recession and
unemployment, but also by monetary and fiscal policies of the United States and
federal agencies, particularly the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"). The Federal Reserve Board implements
national monetary policy, such as seeking to curb inflation and/or combat
recession, by its open market operations in United States Government securities,
by its control of the discount rates applicable to borrowing by banks from the
Federal Reserve System and by its establishment of reserve requirements for
financial institutions subject to its regulation. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits, and also affect the interest rates charged on loans and paid on
deposits. Changes in the financial services industry as a result of such
governmental policies and regulations have often contributed to increases in the
cost of funds of banks and other depository institutions and may continue to
affect such cost, and consequently the earnings of such institutions. However,
the degree, timing and full extent of the impact of the laws or of possible
changes to the laws on banking in general, and the business of the Bank in
particular, presently cannot be predicted.
SUPERVISION AND REGULATION
The following information is qualified in its entirety by reference to the
complete statutory and regulatory provisions that are summarized below, which
statutes and regulations are subject to change at any time. Several initiatives
to revise the powers and supervision of financial institutions have been
proposed and it is not possible to determine which, if any, of these changes
will be adopted.
THE BANK HOLDING COMPANY
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"), and is subject to supervision by
the Federal Reserve Board. As a bank holding company, the Company is required to
file with the Federal Reserve Board an annual report and such other additional
information as the Federal Reserve Board may require pursuant to the BHCA. The
Federal Reserve Board may also make examinations of the Company and CNB. Under
the BHCA, bank holding companies may not (subject to certain limited exceptions)
directly or indirectly acquire the ownership or control of substantially all of
the assets or more than 5% of any class of voting shares of any company,
including a bank, without the prior written approval of the Federal Reserve
Board.
In addition, subject to certain exceptions, bank holding companies are
prohibited under the BHCA from engaging in non-banking activities. One principal
exception to this prohibition is for activities found by the Federal Reserve
Board to be so closely related to banking as to be properly
C-6
<PAGE>
incident thereto. For each application to engage in non-banking activities, the
Federal Reserve Board is required to consider whether the performance of such
activities can reasonably be expected to produce benefits to the public such as
greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices.
Subsidiary banks of a bank holding company are subject to restrictions
imposed by the Federal Reserve Act on any extensions of credit to the bank
holding company or any of its subsidiaries, on investments in the stocks or
securities thereof, and on the taking of any such stock or securities as
collateral for loans to any borrowers. Furthermore, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with extensions of credit, the lease or sale of any property or the
furnishing of other banking services.
The Company is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, the Company and its subsidiaries
are subject to examination by, and may be required to file reports with, the
Superintendent of Banks of the State of California (the "Superintendent").
CAPITAL ADEQUACY OF THE COMPANY
The Federal Reserve Board has adopted risk-based capital guidelines for bank
holding companies. Under these guidelines the minimum ratio of total capital to
risk-weighted assets (including certain off-balance-sheet activities) is 8%. At
least half of the total capital is to be composed of common stockholders'
equity, minority interests in the equity accounts of consolidated subsidiaries
and a limited amount of perpetual preferred stock, less disallowed intangibles
including goodwill ("Tier 1 Capital"). The remainder of a bank's allowable
capital may include subordinated debt, other preferred stock and a limited
amount of loan loss reserves ("Tier 2 Capital").
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum Tier 1 Capital leverage ratio (Tier 1 Capital to total assets, less
goodwill) of 3% for bank holding companies that meet certain specified criteria,
including having the highest regulatory rating. All other bank holding companies
are generally required to maintain a minimum Tier 1 Capital leverage ratio of 3%
plus an additional 100 to 200 basis points. The guidelines also provide that
bank holding companies experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets (i.e.
goodwill, core deposit intangibles and purchased mortgage servicing rights).
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "tangible Tier 1 Capital leverage ratio" (deducting all
intangibles) in evaluating proposals for expansion or new activities.
At December 31, 1995, the Company and CNB had total capital and leverage
capital ratios above the minimums required by the Federal Reserve Board.
CNB
CNB, as a national banking association, is subject to the National Bank Act
and to primary supervision, examination and regulation by the Comptroller of the
Currency (the "Comptroller"). The Comptroller regulates the number and locations
of branch offices of a national bank. CNB is also a member of the Federal
Reserve System and is subject to applicable provisions of the Federal Reserve
Act and regulations issued pursuant thereto. Each depositor's accounts with CNB
are insured by the Bank Insurance Fund, which is managed by the FDIC, to the
maximum aggregate amount permitted by law, which is currently $100,000 for all
insured deposits of the depositor. For this protection, CNB pays a semi-annual
assessment and is subject to the rules and regulations of the FDIC pertaining to
deposit insurance and other matters. The Federal Reserve Board requires banks to
maintain non-interest bearing reserves against certain of their transactional
accounts (primarily deposit accounts that may be accessed by writing checks) and
non-personal time deposits.
C-7
<PAGE>
As a creditor and a financial institution, CNB is subject to certain
regulations promulgated by the Federal Reserve Board including, without
limitation, Regulation B (Equal Credit Opportunity Act), Regulation D
(Reserves), Regulation E (Electronic Funds Transfers Act) and Regulation F
(interbank liabilities), Regulation Z (Truth in Lending Act), Regulation CC
(Expedited Funds Availability Act), and Regulation DD (Truth in Savings Act). As
a creditor on loans secured by real property and as an owner of real property,
CNB may be subject to potential liability under various statutes and regulations
applicable to property owners including statutes and regulations relating to the
environmental condition of the property. CNB is also subject to applicable
provisions of California law, insofar as they do not conflict with or are not
preempted by federal banking law. California law exempts banks from the usury
laws.
The supervision, regulation and examination of CNB by the bank regulatory
agencies are generally intended to protect depositors and are not intended to
protect the Company's shareholders.
INTERSTATE BANKING AND BRANCHING
On September 29, 1994, the Reigle/Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") was signed into law. The
Interstate Act effectively permits nationwide banking. The Interstate Act
provides that one year after enactment, adequately capitalized and adequately
managed bank holding companies may acquire banks in any state, even in those
jurisdictions that currently bar acquisitions by out-of-state institutions,
subject to deposit concentration limits. The deposit concentration limits
provide that regulatory approval by the Federal Reserve Board may not be granted
for a proposed interstate acquisition if, after the acquisition, the acquirer on
a consolidated basis would control more than 10% of the total deposits
nationwide or would control more than 30% of deposits in the state where the
acquiring institution is located. The deposit concentration state limit does not
apply for initial acquisitions in a state and in every case, may be waived by
state regulatory authority. Interstate acquisitions are subject to compliance
with the Community Reinvestment Act ("CRA"). States are permitted to impose age
requirements not to exceed five years on target banks for interstate
acquisitions. States are not allowed to opt-out of interstate banking.
Branching between states may be accomplished either by merging separate
banks located in different states into one legal entity, or by establishing de
novo branches in another state. Consolidation of banks is not permitted until
June 1, 1997, provided that the state has not passed legislation "opting-out" of
interstate branching. If a state opts-out prior to June 1, 1997, then banks
located in that state may not participate in interstate branching. A state may
opt-in to interstate branching by bank consolidation or by de novo branching by
passing appropriate legislation earlier than June 1, 1997. Interstate branching
is also subject to a 30% statewide deposit concentration limit on a consolidated
basis, and a 10% nationwide deposit concentration limit. The laws of the host
state regarding community reinvestment, fair lending, consumer protection
(including usury limits) and the establishment of branches shall apply to the
interstate branches.
De novo branching by an out-of-state bank is not permitted unless the host
state expressly permits de novo branching by banks from out-of-state. The
establishment of an initial de novo branch in a state is subject to the same
conditions as apply to the initial acquisition of a bank in the host state other
than deposit concentration limits.
Effective one year after enactment, the Interstate Act permits bank
subsidiaries of a bank holding company to act as agents for affiliated
depository institutions in receiving deposits, renewing time deposits, closing
loans, servicing loans and receiving payments on loans and other obligations. A
bank acting as an agent for an affiliate shall not be considered a branch of the
affiliate. Any agency relationship between affiliates must be on terms that are
consistent with safe and sound banking practices. The authority for an agency
relationship for receiving deposits includes the taking of deposits for an
existing account, but is not meant to include the opening or origination of new
deposit accounts. Subject to certain conditions, insured savings associations
which were affiliated with banks as of June 1, 1994, may act as agents for such
banks. An affiliate bank or savings association may not conduct any activity as
an agent which such institution is prohibited from conducting as a principal.
C-8
<PAGE>
If an interstate bank decides to close a branch located in a low or moderate
income area, it must comply with additional branch closing notice requirements.
The appropriate regulatory agency is authorized to consult with community
organizations to explore options to maintain banking services in the affected
community where the branch is to be closed.
To ensure that interstate branching does not result in taking deposits
without regard to a community's credit needs, the regulatory agencies are
directed to implement regulations prohibiting interstate branches from being
used as "deposit production offices". The regulations to implement its
provisions are due by June 1, 1997. The regulations must include a provision to
the effect that if loans made by an interstate branch are less than fifty
percent of the average of all depository institutions in the state, then the
regulator must review the loan portfolio of the branch. If the regulator
determines that the branch is not meeting the credit needs of the community, it
has the authority to close the branch and to prohibit the bank from opening new
branches in that state.
Effective January 1, 1991, California adopted legislation permitting any
out-of-state bank holding company to acquire an existing California bank if its
state of principal business provides reciprocal rights to California bank
holding companies. The Superintendent has determined that substantial
reciprocity exists between California and a variety of states including Arizona,
Oregon, Washington, and New York. Although these changes have had the impact of
increasing competition among banks and between banks and other financial service
providers, the long-term effects of this increased competition on the Bank and
on the competition which may arise as a result of the Interstate Act or other
regulatory changes, cannot be determined at this time.
CAPITAL ADEQUACY OF THE BANK
In 1989, the Federal Reserve Board, along with the Comptroller and the FDIC,
established an interagency risk-based capital framework that establishes uniform
risk-based capital guidelines for certain banking organizations in the United
States. Under these guidelines, both assets reported on the balance sheet and
certain off-balance sheet items are assigned to certain risk categories. Each
category has an assigned risk weight. Capital ratios are then calculated by
dividing the capital by a weighted (according to risk) sum of the assets and
off-balance sheet items.
On February 28, 1991, the FDIC adopted minimum "leverage ratio" standards
for certain banking organizations. The leverage ratio is a ratio of Tier 1
capital to quarterly average total assets. The minimum required leverage ratio
is 3.0% for banks that meet certain specified criteria, including having the
highest regulatory rating. All other banks are generally required to maintain a
leverage ratio of between 4.0% and 5.0% Tier 1 capital.
At December 31, 1995, CNB had capital ratios, both risk-adjusted and
leverage, which placed it in the "well capitalized" category. For an analysis of
the capital ratios of CNB as of December 31, 1995, see "Management's Discussion
and Analysis of Financial Conditions and Results of Operations -- Capital
Resources" in the 1995 Annual Report to Shareholders, which is incorporated
herein by reference. The Company does not presently expect that compliance with
regulatory capital guidelines will have a material adverse effect on the
business of the Company or CNB. The Company anticipates that if significant
asset growth continues in the future, such growth may necessitate the addition
of capital to comply with regulatory guidelines.
FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") mandated changes that continue to affect the financial institutions
industry. FIRREA substantially revised the regulatory structure of the banking,
savings and financial services industries. Many of these changes directly affect
CNB and the Company. Deposits at commercial banks such as CNB are now insured by
the Bank Insurance Fund ("BIF") of the FDIC.
FIRREA requires the banking regulatory agencies to make written evaluations
after examining a depository institution for compliance with the Community
Reinvestment Act ("CRA"). The CRA evaluations now include a public section,
including the CRA rating agency assigned to CNB, and a
C-9
<PAGE>
confidential section, which is not released to either the public or the
institution, except under limited circumstances. The regulatory guidelines now
require each institution to place the written evaluation in its CRA public file
at its head office and at one designated office in each local community. FIRREA
also revised the rating system for CRA compliance.
FIRREA mandated appraisals by state-certified or state-licensed appraisers
for loans made by financial institutions over certain amounts. Effective
December 31, 1992, an appraisal by a state-certified appraiser is required for
the following types of bank loans secured by real estate: (1) any real estate
loan transaction having a value of $1 million or more, or (2) any
non-residential real estate transaction or complex residential real estate
transaction in the amount of $250,000 or more. In addition, an appraisal by a
state-licensed appraiser is required for any real estate transaction having a
value of more than $100,000. The State of California has established a program
for the licenser and certification of real estate appraisers in order to meet
the requirements of FIRREA.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was signed into law. Among other things, FDICIA
recapitalized the BIF, implemented deposit insurance reform, and imposed new
supervisory standards requiring annual examinations, independent audits, uniform
accounting and management standards and prompt corrective action for problem
institutions. As a result of FDICIA, depository institutions and their
affiliates are subject to federal standards which govern asset growth, interest
rate exposure, executive compensation, and many other areas of depository
institution operations. Only the most highly capitalized and well-managed
institutions are allowed to expand their operations and activities.
Undercapitalized institutions are subject to activity limitations and other
restrictions.
BIF RECAPITALIZATION. FDICIA provides increased funding for the BIF,
primarily by increasing the authority of the FDIC to borrow from the U.S.
Treasury Department. A significant portion of any such borrowing will be repaid
by insurance premiums assessed on BIF members, including CNB, sufficient to
repay any borrowed funds within 15 years and to provide BIF reserves of $1.25
for each $100 of insured deposits. FDICIA also provides authority for special
assessments against insured deposits.
RISK BASED DEPOSIT INSURANCE RATES. On January 1, 1994, a permanent
risk-based deposit premium assessment system became effective under which each
depository institution is placed in one of nine assessment categories based on
certain capital and supervisory measures. The assessment rates under the system
at that time ranged from 0.25 percent to 0.31 percent of domestic deposits
depending on the assessment category into which an insured bank is placed. Once
the BIF reached reserves equal to $1.25 for each $100 of insured deposits the
assessment ratio would decline. Effective July 1995, the BIF attained its level
of required reserves and the assessment ratios under the system were adjusted to
a range of 0.0 percent (a minimum of $500 per quarter is assessed, however) to
0.27 percent.
BROKERED DEPOSITS. Under FDIC regulations governing the receipt of brokered
deposits, a bank cannot accept brokered deposits (which term is defined to mean
deposits with an interest rate which significantly exceeds prevailing rates in
its market) unless (i) it is well capitalized or (ii) it is adequately
capitalized and has received a waiver from the FDIC. Except under certain
conditions, a bank that cannot accept brokered deposits also cannot offer
"pass-through" insurance on certain employee benefit accounts. CNB is considered
to be well capitalized for purposes of this regulation and in 1994 began
accepting limited amounts of brokered deposits to help manage its liquidity
position.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA categorizes banking
institutions as well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. A bank is
subject to corrective action if it is not adequately capitalized. Significantly
and critically undercapitalized banks are subject to extensive federal
regulatory control, including closure. A bank's capital tier depends upon where
its capital levels are in relation to various relevant capital measures, which
include a risk-based capital measure and a leverage capital measure, and upon
C-10
<PAGE>
certain other factors. The federal banking authorities adopted regulations
effective December 19, 1992, which define the capital measures a bank must meet
in order to be considered well capitalized as a ratio of total capital to
risk-weighted assets of not less than 10.0%, a ratio of Tier 1 capital to risk-
weighted assets of not less than 6.0% and a leverage ratio of Tier 1 capital to
average quarterly assets of not less than 5.0%. A bank will be considered
adequately capitalized if it has a ratio of total capital to risk-weighted
assets of not less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets
of not less than 4.0%, and a leverage ratio of Tier 1 capital to average
quarterly assets of not less than 4.0%. The capital levels for the
undercapitalized category are defined as any level under 8.0% for the total
risk-based capital ratio, under 4.0% for the Tier 1 risk-based capital ratio, or
under 4.0% for the Tier 1 leverage ratio. A bank will be considered
significantly undercapitalized if it has a ratio of total capital to
risk-weighted assets that is less than 6.0%, a ratio of Tier 1 capital to
risk-weighted assets that is less than 3.0%, or a Tier 1 leverage ratio that is
less than 3.0%. A bank will be considered critically undercapitalized if it has
a ratio of tangible equity to total assets that is equal to or less than 2.0%.
In addition to FDICIA's capital requirements, a financial institution may be
reclassified and subject to corrective action if it receives a less than
satisfactory rating in its most recent examination for its assets, management,
earnings or liquidity. The Company and CNB were considered "well capitalized" at
December 31, 1995.
FDICIA also requires an insured institution which does not meet any one of
the statutory or regulatory capital requirements applicable to it to submit a
capital restoration plan for improving its capital. In addition, FDICIA
prohibits an insured institution from making a capital distribution if it fails
to meet any capital requirements. FDICIA also contains a number of consumer
banking provisions, including disclosure requirements and substantive
contractual limitations with respect to deposit accounts, and places
restrictions on a bank's dealings with "large customers" if a principal officer
or director of the "large customer" is a member of the bank's audit committee.
REAL ESTATE LENDING. As required by FDICIA, on December 19, 1992, the
federal banking agencies adopted uniform regulations prescribing standards for
real estate lending effective March 19, 1993. The uniform rules require
depository institutions to adopt and maintain comprehensive written real estate
lending policies that are consistent with safe and sound banking practices, as
well as establish loan-to-value limitations on real estate lending by insured
depository institutions. The loan-to-value limits do not apply to loans
guaranteed by the U.S. Government or backed by the full faith and credit of a
state government; loans facilitating the sale of real estate acquired by the
lending institution in the ordinary course of collecting a debt previously
contracted; loans where real estate is taken as additional collateral solely
through an abundance of caution by the lender; loans renewed, refinanced, or
restructured by the original lender to the same borrower, without the
advancement of new funds; or loans originated prior to the effective date of the
regulation. The new regulations also allow lending institutions to make a
limited amount of loans that do not conform to the regulations' loan-to-value
limitations. CNB has amended its real estate lending policies to comply with
this legislation; such amendments are not expected to adversely affect the
Bank's operations or profitability.
STANDARDS FOR SAFETY AND SOUNDNESS. In September of 1992, the FDIC proposed
regulations to require management to establish and maintain an internal control
structure and procedures to ensure compliance with laws and regulations
concerning bank safety and soundness on matters such as loan underwriting and
documentation, asset quality, earnings, internal rate risk exposure and
compensation and other employee benefits. The proposals, among other things,
establish the maximum ratio of classified assets to total capital at 1.0 and the
minimum level of earnings sufficient to absorb losses without impairing capital.
The proposals provide that a bank's earnings are sufficient to absorb losses
without impairing capital if the bank is in compliance with minimum capital
requirements and the bank would, if its net income or loss over the last four
quarters continued over the next four quarters, remain in compliance with
minimum capital requirements. Any institution which failed to comply with these
standards would be required to submit a compliance plan. The failure to submit a
plan or to comply with an approved plan would subject the institution to further
enforcement action. Finally,
C-11
<PAGE>
independent auditors would be required to attest to or report separately on
assertions in management's report, by using audit procedures agreed upon by the
FDIC for determining the extent of compliance with laws and regulations
concerning bank safety and soundness. In anticipation of the adoption by the
FDIC of the proposed regulations, CNB has taken steps to document and establish
additional internal control structures and procedures, as necessary, to ensure
compliance with new requirements imposed by FDICIA and the regulations
thereunder concerning CNB's safety and soundness. CNB's audit committee is
composed entirely of outside directors.
PAYMENT OF DIVIDENDS
There are statutory and regulatory requirements applicable to the payment of
dividends by CNB to the Company and by the Company to its shareholders.
BY THE COMPANY. The Company began paying cash dividends in December 1994.
The Company anticipates continuing to pay cash dividends on a semi-annual basis
to the shareholders of the Company, when and as declared by its Board of
Directors, out of funds legally available therefor, subject to the restrictions
set forth in the California General Corporation Law (the "Corporation Law"). The
amount of the annual dividend is anticipated to generally range between 10% to
25% of estimated annual earnings. The Corporation Law provides that a
corporation may make a distribution to its shareholders if the corporation's
retained earnings equal at least the amount of the proposed distribution. The
Corporation Law further provides that, in the event that sufficient retained
earnings are not available for the proposed distribution, a corporation may
nevertheless make a distribution to its shareholders if it meets the following
two generally stated conditions: (i) the corporation's assets equal at least
1.25 times its liabilities, and (ii) the corporation's current assets equal at
least its current liabilities or, if the average of the corporation's earnings
before taxes on income and interest expense for the two preceding fiscal years
was less than the average of the corporation's interest expense for such fiscal
years, the corporation's current assets must equal at least 1.25 times it
current liabilities. The primary source of funds for payment of dividends by the
Company would be obtained from dividends received from CNB.
BY CNB. The board of directors of a national bank may declare the payment
of dividends from funds legally available therefore, depending upon the
earnings, financial condition and cash needs of the bank and general business
conditions. A national bank may not pay dividends from its capital. All
dividends must be paid out of net profits then on hand, after deducting losses
and bad debts. A national bank is further restricted from declaring a dividend
on its shares of common stock until its surplus fund equals the amount of
capital stock, or, if the surplus fund does not equal the amount of capital
stock, until one-tenth of the bank's net profits of the preceding half year in
the case of quarterly or semiannual dividends, or the preceding two consecutive
half-year periods in the case of an annual dividend, are transferred to the
surplus fund. Furthermore, if the total of all dividends declared by a bank in
any calendar year would exceed the total of its retained net profits of that
year combined with its net profits of the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock, then
the approval of the Comptroller is required for the payment of any dividends.
Guidelines of the Comptroller set forth factors which are to be considered
by a national bank in determining the payment of dividends. A national bank, in
assessing the payment of dividends, is to evaluate the bank's capital position,
its maintenance of an adequate allowance for loan and lease losses, and the need
to revise or develop a comprehensive capital plan, complete with financial
projections, budgets and dividend guidelines. The Comptroller has broad
authority to prohibit a national bank from engaging in banking practices which
it considers to be unsafe and unsound. It is possible, depending upon the
financial condition of the national bank in question and other factors, that the
Comptroller may assert that the payment of dividends or other payments by a bank
is considered an unsafe or unsound banking practice and, therefore, direct the
bank to implement corrective action to address such a practice. Accordingly, the
future payment of cash dividends by CNB
C-12
<PAGE>
to the Company will not only depend upon CNB's earnings during any fiscal
period, but also upon the assessment of CNB's Board of Directors of the capital
requirements of CNB and other factors, including dividend guidelines and the
maintenance of an adequate allowance for loan and lease losses.
POLICY STATEMENT ON ALLOWANCE FOR LOAN LOSSES
In 1993, the Federal banking agencies, through the Federal Financial
Institutions Examination Council, issued a uniform policy statement on the
adequacy of the reserves for loan and lease losses. The policy statement
establishes a benchmark equal to the sum of (a) 100% of assets classified as
uncollectible, (b) 50% of assets classified as doubtful, (c) 15% of assets
classified substandard and (d) estimated credit losses on other assets over the
upcoming 12 months. Federal bank examiners will measure the reasonableness of a
banks' methodology for computing its reserves against this benchmark which is
designed to be neither a floor nor a safe harbor.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The CRA requires banks, as well as other lenders, to identify the
communities served by the bank's offices and to identify the types of credit the
bank is prepared to extend within such communities. The CRA also requires an
assessment of the performance of the bank in meeting the credit needs of its
community and to take such assessment into consideration in reviewing
applications for mergers, acquisitions, and other transactions. An
unsatisfactory CRA rating may be the basis for denying such an application. CNB
is subject to certain fair lending requirements and reporting obligations
involving home mortgage lending operations and CRA activities. In addition to
substantive penalties and corrective measures that may be required for a
violation of certain fair lending laws, the Federal banking agencies may take
compliance with such laws and CRA into account when regulating and supervising
other activities.
On March 8, 1994, the Federal Interagency Task Force on Fair Lending issued
a policy statement, which became effective April 15, 1994, on discrimination in
lending. The policy statement describes the three methods that Federal agencies
will use to prove discrimination: overt evidence of discrimination, evidence of
disparate treatment, and evidence of disparate impact.
In connection with its assessment of CRA performance, the regulators assign
a rating of "outstanding," "satisfactory," needs to improve," or "substantial
noncompliance." The OCC conducts examinations of a bank's CRA performance as
part of its regular examination process.
PENDING LEGISLATION AND REGULATIONS
Certain legislative and regulatory proposals which could affect the Company,
CNB and the banking business in general are pending, or may be introduced,
before the U.S. Congress, the California State Legislature, and Federal and
State government agencies. The U.S. Congress is considering numerous bills that
could reform the banking laws substantially, particularly if the current legal
barriers between commercial banking and investment banking are eliminated, as is
now being proposed.
It is not known to what extent, if any, these proposals will be enacted or
what effect such legislation would have on the structure, regulation, or
competitive relationship of financial institutions. It is likely, however, that
many of these proposals would subject the Company and CNB to increased
regulation, disclosure and reporting requirements and would increase competition
to the Bank and its cost of doing business.
In addition to pending legislative changes, the various banking regulatory
agencies frequently propose rules and regulations to implement and enforce
already existing legislation. FDICIA requires the regulatory agencies to adopt
numerous rules, regulations, standards and guidelines over the next several
years. Some of these regulations have been proposed. With respect to others, the
agencies have solicited comments from the industry on the form the regulations
should take. It cannot be predicted whether or in what form any such legislation
or regulations will be enacted or the effect that such legislation may have on
the business of the Company and CNB.
C-13
<PAGE>
SUBORDINATED DEBENTURE
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. In an identical transaction, CNB
issued subordinated debt to the Company in an equal amount. The notes qualify as
Tier 2 capital of CNB.
COMPETITORS
Commercial banks, in general, have historically been less restricted in the
types of loans they may lawfully make than have been non-bank financial
institutions. However, the Depository Institutions Deregulation and Monetary
Control Act, enacted in 1980, has increased the ability of non-banking
institutions to compete with banks in lending activities. Federally chartered
savings and loan associations may now invest up to 10% of their assets in
commercial corporate, business or agricultural loans, and may offer credit card
services. Federal credit unions have previously been authorized by law to offer
certain types of consumer loans. Additionally, since December 31, 1980, banks
and other financial institutions, nationwide, have been permitted to offer
check-like services, such as negotiable order of withdrawal (NOW) accounts, on
which interest or dividends may be paid under certain circumstances.
SELECTED STATISTICAL INFORMATION
The following tables present selected financial information regarding the
Bank's loans and deposits. This information should be read in conjunction with
the company's Consolidated Financial Statements and the notes thereto and
Management's Discussion and Analysis of Financial condition and Results of
Operations included in the Company's 1995 Annual Report to Shareholders, which
has been incorporated herein by reference.
TABLE I -- LOAN MATURITIES
The following table details the maturity structure of the Bank's Commercial,
SBA, Venture Lending and Real Estate Construction and Land loan portfolio at
December 31, 1995.
<TABLE>
<CAPTION>
COMMERCIAL, SBA REAL ESTATE
AND VENTURE CONSTRUCTION
LENDING AND LAND
--------------- ---------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Loan due in:
One year or less:
Floating Rate................................................................ $ 54,151 $ 23,480
Fixed Rate................................................................... 1,435 409
One to five years:
Floating Rate................................................................ 27,293 --
Fixed Rate................................................................... 5,172 --
After five years:
Floating Rate................................................................ -- --
Fixed Rate................................................................... 501 --
--------------- ---------------
Total.......................................................................... $ 88,552 $ 23,889
--------------- ---------------
--------------- ---------------
</TABLE>
C-14
<PAGE>
TABLE II -- COMPOSITION OF LOANS
The following table details the composition of CNB's gross loan portfolio
at:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1994 1993 1992
-------------------- -------------------- -------------------- --------------------
<CAPTION>
$ % $ % $ % $ %
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial........................ 88.6 54.0 81.7 58.6 77.7 57.7 73.5 56.9
Real estate construction and
Land............................. 23.9 14.5 18.1 13.0 19.1 14.2 23.0 17.8
Real estate term.................. 23.0 14.0 13.1 9.4 12.1 9.0 11.2 8.7
Consumer.......................... 28.7 17.5 21.1 15.1 18.2 13.5 16.6 12.8
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................. 164.2 100.0 134.0 96.1 127.1 94.4 124.3 96.2
--------- --------- --------- --------- --------- --------- --------- ---------
Loans Held For Sale............... -- -- 5.4 3.9 7.6 5.6 4.9 3.8
--------- --------- --------- --------- --------- --------- --------- ---------
Total Loans....................... $ 164.2 100.0 $ 139.4 100.0 $ 134.7 100.0 $ 129.2 100.0
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C>
1991
--------------------
$ %
--------- ---------
<S> <C> <C>
Commercial........................ 60.6 57.8
Real estate construction and
Land............................. 17.0 16.3
Real estate term.................. 9.6 9.2
Consumer.......................... 17.5 16.7
--------- ---------
Total............................. 104.7 100.0
--------- ---------
Loans Held For Sale............... -- --
--------- ---------
Total Loans....................... $ 104.7 100.0
--------- ---------
--------- ---------
</TABLE>
TABLE III -- NON-PERFORMING LOANS
The following table details CNB's non-performing loan portfolio for the last
five years.
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual....................................................... $ 2,513 $ 3,244 $ 997 $ 513 $ 738
Accruing loans past due 90 days or more........................... 830 1,371 1,903 -- 55
Restructured loans................................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Total............................................................. $ 3,343 $ 4,615 $ 2,900 $ 513 $ 793
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Percent of total loans............................................ 2.0% 3.3% 2.2% .4% .8%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
TABLE IV -- ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
CNB's allocation of its allowance for loan losses for the past five years is
detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------- ---------------------- ---------------------- ---------------------- ---------
PERCENT TO PERCENT TO PERCENT TO PERCENT TO
$ TOTAL LOANS $ TOTAL LOANS $ TOTAL LOANS $ TOTAL LOANS $
--------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount of allowance
allocated to:
Commercial........ $ 1,057 0.65 $ 1,834 1.32 $ 1,496 1.11 $ 1,216 0.94 $ 1,018
Real estate
construction and
land............. 153 0.09 180 0.13 308 0.23 263 0.20 184
Real estate
term............. 696 0.43 132 0.09 391 0.29 56 0.05 48
Consumer.......... 273 0.17 273 0.19 10 0.01 190 0.14 217
Loans held for
sale............. -- -- 14 0.01 27 0.02 23 0.02 --
Unallocated....... 504 0.30 485 0.35 15 0.01 -- -- 3
--------- --- --------- --- --------- --- --------- --- ---------
Total........... $ 2,683 1.64 $ 2,918 2.09 $ 2,247 1.67 $ 1,748 1.35 $ 1,470
--------- --- --------- --- --------- --- --------- --- ---------
--------- --- --------- --- --------- --- --------- --- ---------
<CAPTION>
PERCENT TO
TOTAL LOANS
-----------
<S> <C>
Amount of allowance
allocated to:
Commercial........ 0.97
Real estate
construction and
land............. 0.18
Real estate
term............. 0.04
Consumer.......... 0.20
Loans held for
sale............. --
Unallocated....... .01
---
Total........... 1.40
---
---
</TABLE>
C-15
<PAGE>
TABLE V
The following table summarizes the activity in CNB's allowance for loan
losses for the past five years:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses:
Balance at the beginning of period............ $ 2,918 $ 2,247 $ 1,748 $ 1,470 $ 1,301
Charge Offs:
Commercial.................................... (973) (748) (1,069) (520) (23)
Real estate construction...................... -- (123) -- (62) (188)
Real estate term.............................. -- -- -- -- --
Consumer installment.......................... (101) (141) (159) (145) (2)
--------- --------- --------- --------- ---------
Total....................................... (1,074) (1,012) (1,228) (727) (213)
Recoveries:
Commercial.................................... 156 57 -- 4 --
Real estate construction...................... -- -- -- 95 --
Real state term............................... -- -- -- -- --
Consumer installment.......................... 2 6 48 4 --
--------- --------- --------- --------- ---------
Total....................................... 158 63 48 103 --
Net charge-offs................................. (916) (949) (1,180) (624) (213)
--------- --------- --------- --------- ---------
Provision charged to income..................... 681 1,620 1,679 902 382
--------- --------- --------- --------- ---------
Balance at the end of period.................... $ 2,683 $ 2,918 $ 2,247 $ 1,748 $ 1,470
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
TABLE VI -- IMPAIRED LOANS
The following table details the carrying value of CNB's impaired loans, in
accordance with FASB 114, by type of loan as of December 31, 1995:
<TABLE>
<CAPTION>
NET
RECORDED VALUATION CARRYING
AMOUNT ALLOWANCE VALUE
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial....................................................................... $ 851 $ 260 $ 591
Real Estate -- Construction and Land............................................. -- -- --
Real Estate -- Term.............................................................. 1,662 249 1,413
----------- ----- -----------
Total........................................................................ $ 2,513 $ 509 $ 2,004
----------- ----- -----------
----------- ----- -----------
</TABLE>
All the above impaired loans were measured based on the fair value of the
loan's collateral. The allowance for loan losses for all other loans, including
consumer loans which are considered to be small homogenous loans as defined by
FAS 114, is determined based on the methodology discussed in the Company's
Annual Report.
CNB considers a loan impaired when, based on current information and events,
it is probable that CNB will be unable to collect all amounts due according to
the contractual terms of the loan agreement. This policy is generally consistent
with CNB's nonaccrual policy. Loans which are over 90 days contractually
delinquent and loans which have developed inherent problems prior to being 90
days delinquent are considered impaired. An insignificant delay or shortfall in
the amount of payments is not considered an event that, when considered in
isolation, would automatically cause a loan to be considered impaired for
purposes of FAS 114. Examples for insignificant delays or shortfalls may
include, depending on the specific facts and circumstances, those that are
associated with temporary stoppage in operations due to equipment failure or a
natural disaster, or due to tight cash flows during the off-peak season of a
business loan customer. CNB did not recognize interest on impaired loans during
the year ended December 31, 1995.
C-16
<PAGE>
TABLE VII -- MATURITIES OF CERTIFICATES OF DEPOSIT
The following table presents the maturities of CNB's certificates of deposit
over $100,000 as of December 31, 1995.
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C>
Three months or less.............................................................. $ 21,256
Three to six months............................................................... 4,489
Six to twelve months.............................................................. 1,210
Over twelve months................................................................ 149
--------
Total......................................................................... $ 27,104
--------
--------
</TABLE>
For information regarding certain required disclosures of the maturities of
investments, refer to Note 2 in the Company's 1995 Annual Report to Shareholders
which is incorporated herein by reference.
EMPLOYEES
The Company has no salaried employees, since all officers of the Company are
employees of CNB. At December 31, 1995, CNB had 109 full time equivalent
employees. Management believes that its employee relations are good and that the
benefits provided by CNB to its employees are competitive.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this Annual Report on
Form 10-K, certain items herein constitute forward-looking statements, including
without limitation, certain matters discussed under Part I, Item 1, "Business,"
under the headings "Market Area and Client Base," "Trust Department,"
"Supervision and Regulation -- Capital Adequacy of the Bank" and "-- Federal
Deposit Insurance Corporation Improvement Act of 1991 -- Risk Based Deposit
Insurance Rates," Part I, Item 3, "Legal Proceedings," and Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" (incorporated herein by reference). The matters referred to in such
statements involve risks and uncertainties including, but not limited to, the
impact of economic conditions (both generally and more specifically in the
markets the Bank operates), the impact of competition for the Bank's Clients
from other providers of financial services, the impact of government legislation
and regulation (which changes from time to time and over which the Bank has no
control), and other risks detailed in this Report and in the Company's other
filings with the Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Company leases, from an unaffiliated party, approximately 19,000 square
feet of office space, consisting of a portion of the first and second floors of
a two-story building at the intersection of Stevens Creek Boulevard and Torre
Avenue in Cupertino, California. The lease commenced on October 1, 1992, and has
a term of ten years, with two consecutive five-year renewal options. The current
minimum monthly rental payments are approximately $42,000, and are subject to
annual adjustments depending on the percentage increase in the consumer price
index over the prior period. The rent is further subject to adjustment upon
exercise of each renewal option, to an amount equal to the then current market
rental rate for similar properties. At December 31, 1994, the Company subleased
all 19,000 square feet of the leased premises to CNB for an amount equivalent to
the Company's expense related to such premises.
CNB has entered into a lease for 3,900 square feet of office space on the
ground floor of Sixty South Market Street, San Jose, CA, effective August 1,
1993. The lease has a term of five years, with an option to extend for an
additional five years. The monthly rent is approximately $5,200 and is subject
to annual adjustments. The rent is subject to adjustment upon exercise of the
renewal option to an amount equal to the then current market rental rate for
similar space.
Effective March 28, 1994, CNB extended its lease for 5,300 square feet of
office space at 3 Palo Alto Square in Palo Alto, CA, which currently
accommodates its Palo Alto regional banking office, and
C-17
<PAGE>
its Emerging Growth Industries division. The term is for eight years, with a
base rent of $11,125 per month, with scheduled annual increases. The Company has
an option to extend the lease for two additional five-year periods.
On July 13, 1995, CNB entered into an agreement to lease, upon completion,
approximately 6,000 square feet of a new building currently under construction.
The leased space is located at 400 Emerson Street, Palo Alto, CA. This space
will accommodate a new branch office, as well as, the new headquarters for CNB's
Trust Division. The twelve year lease will have a base rent of $16,500 per month
with a rental adjustment schedule which increases the base rent every two years.
The adjustment will be based on a consumer price index but shall not be less
than four percent over the two year period and not greater than ten percent over
the two year period. CNB anticipates occupancy in late Spring, 1996.
The Company believes that its facilities are well maintained and adequate to
meet its current requirements.
ITEM 3. LEGAL PROCEEDINGS
On January 25, 1994, Sumitomo Bank ("Sumitomo") as trustee for the
California Dental Guild Real Estate Mortgage Fund II ("Fund II"), filed suit
against CNB in the Superior Court of the State of California, Santa Clara
County, alleging negligence by CNB and, by amendment of the complaint, one of
its officers, in connection with the administration of a trust account. Sumitomo
brought suit in its capacity as successor trustee for Fund II for monetary
damages of approximately $2.2 million.
In July 1995, CNB entered into an agreement with Sumitomo to settle the
litigation for approximately $1.8 million. The Company believes, based on advice
from counsel, that it is highly probable that insurance coverage for a
significant portion of this settlement is available under its director and
officer liability insurance policy and its professional liability insurance
policy, as well as the errors and omissions policy of the insurance agent which
sold the Company these policies. The Company's insurance company has denied the
Company's claim for coverage under these policies and the Company has initiated
litigation against the insurance company as well as the agent from whom the
Company obtained such policies. However due to the uncertainty associated with
such recovery, the Company has reflected the $1.8 million cost of the legal
settlement in its 1995 earnings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this Item is incorporated by reference to the
section entitled "Stock Activity" on page 22 of the Company's 1995 Annual Report
to Shareholders.
At December 31, 1995, there were approximately 402 holders of record of the
Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference to
the table entitled "Financial Highlights" on page 1 of the Company's 1995 Annual
Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is incorporated herein by reference to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 9 through 22 of the Company's 1995
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference to
the Company's Consolidated Financial Statements and the notes thereto, and the
Independent Auditor's Report thereon, set forth on pages 23 through 41 of the
Company's 1995 Annual Report to Shareholders.
C-18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
The information required to be reported on this item has been previously
reported in a Form 8-K filed on October 20, 1994, which is incorporated herein
by reference.
PART III
Certain information required by Part III is omitted from this Report in that
the Company intends to file its definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information therein is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to
the information relating to the directors of the Company set forth under the
captions "Election of Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
the information relating to executive compensation set forth under captions
"Executive Compensation and Other Matters" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
related to ownership of equity securities as set forth under the caption
"General Information -- Stock Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
the information relating to certain relationships and related transactions set
forth under the caption "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements.
The following Consolidated Financial Statements of Cupertino National
Bancorp and Subsidiary and Independent Accountants' Report are contained
in and incorporated by reference herein to the Company's 1995 Annual
Report to Shareholders:
Consolidated Balance Sheets -- At December 31, 1995 and 1994
Consolidated Statements of Income -- For the years ended December 31,
1995, 1994 and
1993.
Consolidated Statements of Shareholders' Equity -- For the years ended
December 31, 1995,
1994 and 1993.
Consolidated Statements of Cash Flows -- For the years ended December
31, 1995, 1994 and
1993.
Notes to Consolidated Financial Statements.
Independent Accountants' Reports.
C-19
<PAGE>
With the exception of the information incorporated by reference to
the Company's 1995 Annual Report to Shareholders in Parts I, II and IV of
this Form 10-K, the Company's 1995 Annual Report to Shareholders is not
to be deemed filed as part of this Report.
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not
applicable or not required, or because the required information is
included in Management's Discussion and Analysis of Financial Condition
and Results of Operations or in the Consolidated Financial Statements and
Notes thereto contained in the Company's 1995 Annual Report to
Shareholders, which are incorporated herein by reference.
(3) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed as
part of, or are incorporated by reference into, this Report. Exhibit Nos.
10.2, 10.5, 10.7, 10.8, 10.9, 10.10, 101.11, 10.15, 10.13, 10.14 are
management contracts or are compensatory plans or arrangements covering
executive officers or directors of the Company.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the fourth
quarter of fiscal 1995:
<TABLE>
<CAPTION>
DATE OF REPORT ITEMS REPORTED
- -------------------- --------------------------------------------------------------------------------------------
<S> <C>
October 10, 1995.... Pursuant to Item 5, the Company reported entering into a form of Debenture Agreement with
certain of its Officers, Directors and other accredited investors with the meaning of Rule
501 under the Securities Act of 1933, as amended, dated September 27, 1995.
</TABLE>
C-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CUPERTINO NATIONAL BANCORP
By: /s/ C. DONALD ALLEN
-----------------------------------
C. Donald Allen,
DIRECTOR AND CHIEF EXECUTIVE
OFFICER
Dated: March 29, 1996
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints C. Donald Allen and Steven C. Smith or either of
them, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her, and in his or her name,
place and stead, in any and all capacities to sign any and all amendments to
this Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchanges
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue of hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
<C> <S> <C>
/s/ C. DONALD ALLEN Director and Chief Executive
------------------------------------------- Officer (Principal Executive March 29, 1996
C. Donald Allen Officer)
/s/ STEVEN C. SMITH
------------------------------------------- Executive Vice President, Chief March 29, 1996
Steven C. Smith Operating Officer
Senior Vice President Chief
/s/ HEIDI WULFE Financial Officer
------------------------------------------- (Principal Financial and March 29, 1996
Heidi Wulfe Accounting Officer)
/s/ DAVID K. CHUI
------------------------------------------- Director March 29, 1996
David K. Chui
/s/ CARL E. COOKSON
------------------------------------------- Director March 29, 1996
Carl E. Cookson
</TABLE>
C-21
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
/s/ JERRY R. CROWLEY
------------------------------------------- Director March 29, 1996
Jerry R. Crowley
<C> <S> <C>
/s/ JANET M. DECARLI
------------------------------------------- Director March 29, 1996
Janet M. DeCarli
/s/ JOHN M. GATTO
------------------------------------------- Director March 29, 1996
John M. Gatto Chairman of the Board
/s/ WILLIAM H. GUENGERICH
------------------------------------------- Director March 29, 1996
William H. Guengerich
/s/ JAMES E. JACKSON
------------------------------------------- Director March 29, 1996
James E. Jackson
/s/ REX D. LINDSAY
------------------------------------------- Director and Vice Chairman of March 29, 1996
Rex D. Lindsay the Board
/s/ GLEN MCLAUGHLIN
------------------------------------------- Director and March 29, 1996
Glen McLaughlin
/s/ NORMAN MELTZER
------------------------------------------- Director March 29, 1996
Norman Meltzer
/s/ DICK J. RANDALL
------------------------------------------- Director March 29, 1996
Dick J. Randall
/s/ DENNIS S. WHITTAKER
------------------------------------------- Director March 29, 1996
Dennis S. Whittaker
</TABLE>
C-22
<PAGE>
EXHIBIT 13.1
1995 ANNUAL REPORT
[PHOTOGRAPH]
[LOGO]
C
N
B
CUPERTINO NATIONAL
BANCORP
C-23
<PAGE>
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
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1995 1994 1993 1992 1991
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ----------- ----------- -----------
Net interest income......................... 12,939 11,082 10,167 8,884 7,646
Provision for loan losses..................... 681 1,620 1,679 902 382
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
Income before income taxes.................. 470 2,097 1,418 2,960 2,883
Income tax expense............................ 157 734 538 1,197 1,140
----------- ----------- ----------- ----------- -----------
Net Income................................ $ 313 $ 1,363 $ 880 $ 1,763 $ 1,743
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
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
----------- ----------- ----------- ----------- -----------
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%
----------- ----------- ----------- ----------- -----------
</TABLE>
C-24
<PAGE>
- ------------------------
(1) Per share amounts have been restated to reflect stock dividends of 10% in
December1995, and 5% each, in May1994, Juneand December1993 and in Mayand
December1992 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]
C-25
<PAGE>
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
nonperforming 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.
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.
[PHOTOGRAPH]
In the 1950s and 1960s, the Santa Clara Valley was primarily an agricultural
region, filled with rows upon rows of fruit trees.
C-26
<PAGE>
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.
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, CNB'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.
C-27
<PAGE>
Other key accomplishments in 1995 include:
- 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.
- 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.
- Upgrade of our computer system to support the needs of CNB and our clients
into the next millennium.
- 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.
<TABLE>
<S> <C>
/s/ C. DONALD ALLEN /s/ GLEN MCLAUGHLIN
C. Donald Allen Glen McLaughlin
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN
</TABLE>
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
C-28
<PAGE>
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.
C-29
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table displays the components of the Company's interest rate
spread on interest bearing funds and the effective yield for each period.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Average rate for the period:
Interest-earning assets.......................................... 9.61% 8.54% 8.07%
Interest-bearing liabilities..................................... 4.56% 3.30% 2.85%
--- --- ---
Spread on interest-bearing funds................................. 5.05% 5.24% 5.22%
Contribution of interest-free funds.............................. 1.07% 0.92% 0.94%
--- --- ---
Effective yield for the period................................... 6.12% 6.16% 6.16%
</TABLE>
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.
C-30
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST RATE SPREAD ANALYSIS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------------ ------------------------------------ ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE (1) INTEREST YIELD/RATE BALANCE (1) INTEREST YIELD/RATE BALANCE (1) INTEREST
----------- --------- ------------ ----------- --------- ------------ ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2)..................... $ 146,650 $ 16,158 11.02% $ 127,264 $ 12,608 9.91% $ 127,210 $ 11,895
Investment securities, short
term investments and cash
equivalents.................. 64,613 4,135 6.40% 52,664 2,753 5.23% 37,913 1,438
----------- --------- ----- ----------- --------- ----- ----------- ---------
Total interest-earning
assets (3)................. 211,263 20,293 9.61% 179,928 15,361 8.54% 165,123 13,333
Noninterest-earning assets...... 18,640 18,234 18,174
----------- --------- ----- ----------- --------- ----- ----------- ---------
Total assets.................... $ 229,903 $ 20,293 8.83% $ 198,162 $ 15,361 7.75% $ 183,297 $ 13,333
----------- --------- ----- ----------- --------- ----- ----------- ---------
----------- --------- ----- ----------- --------- ----- ----------- ---------
Interest-bearing liabilities:
Deposits:
NOW and MMDA................ $ 96,772 $ 3,868 4.00% $ 75,062 $ 2,192 2.92% $ 66,820 $ 1,755
Savings deposits............ 6,052 202 3.34% 6,885 177 2.57% 6,677 255
Time deposits............... 45,284 2,440 5.39% 40,010 1,528 3.82% 37,494 1,146
----------- --------- ----- ----------- --------- ----- ----------- ---------
Total Deposits............ 148,108 6,510 4.40% 121,957 3,897 3.20% 110,991 3,156
Borrowings...................... 13,334 844 6.33% 7,788 382 4.90% 288 10
----------- --------- ----- ----------- --------- ----- ----------- ---------
Total interest-bearing
liabilities............ 161,442 7,354 4.56% 129,745 4,279 3.30% 111,279 3,166
----------- --------- ----- ----------- --------- ----- ----------- ---------
Noninterest-bearing deposits.... 49,289 50,428 55,685
Other noninterest-bearing
liabilities.................... 846 579 996
Total noninterest-bearing
liabilities.................... 50,135 51,007 56,681
Shareholders' equity............ 18,326 17,410 15,337
----------- --------- ----- ----------- --------- ----- ----------- ---------
Total liabilities and
shareholders' equity... $ 229,903 7,354 3.20% $ 198,162 4,279 2.16% 183,297 3,166
----------- --------- ----- ----------- --------- ----- ----------- ---------
----------- --------- ----- ----------- --------- ----- ----------- ---------
Net interest income;
Interest rate spread (4)...... $ 12,939 5.05% $ 11,082 5.24% $ 10,167
----------- --------- ----- ----------- --------- ----- ----------- ---------
----------- --------- ----- ----------- --------- ----- ----------- ---------
Net earning balance; Net yield
on interest-earning assets
(3)............................ $ 49,821 6.12% $ 50,183 6.16% $ 53,844
----------- --------- ----- ----------- --------- ----- ----------- ---------
----------- --------- ----- ----------- --------- ----- ----------- ---------
<CAPTION>
AVERAGE
YIELD/RATE
------------
<S> <C>
Interest-earning assets:
Loans (2)..................... 9.35%
Investment securities, short
term investments and cash
equivalents.................. 3.79%
-----
Total interest-earning
assets (3)................. 8.07%
Noninterest-earning assets......
-----
Total assets.................... 7.27%
-----
-----
Interest-bearing liabilities:
Deposits:
NOW and MMDA................ 2.63%
Savings deposits............ 3.82%
Time deposits............... 3.06%
-----
Total Deposits............ 2.84%
Borrowings...................... 3.47%
-----
Total interest-bearing
liabilities............ 2.85%
-----
Noninterest-bearing deposits....
Other noninterest-bearing
liabilities....................
Total noninterest-bearing
liabilities....................
Shareholders' equity............
-----
Total liabilities and
shareholders' equity... 1.73%
-----
-----
Net interest income;
Interest rate spread (4)...... 5.22%
-----
-----
Net earning balance; Net yield
on interest-earning assets
(3)............................ 6.16%
-----
-----
</TABLE>
- ------------------------------
(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.
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
C-31
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
COMPARED WITH COMPARED WITH
DECEMBER 31, 1994 DECEMBER 31, 1993
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
------------------------------- -------------------------------
(DOLLARS IN THOUSANDS)(1) VOLUME RATE NET VOLUME RATE NET
- ----------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans....................... $ 2,136 $ 1,414 $ 3,550 $ 5 $ 708 $ 713
Interest income on investment securities,
short-term investments and cash equivalents... 765 617 1,382 771 544 1,315
--------- --------- --------- --------- --------- ---------
Total interest income.......................... 2,901 2,031 4,932 776 1,252 2,028
--------- --------- --------- --------- --------- ---------
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)
--------- --------- --------- --------- --------- ---------
Interest expense on deposits................... (1,124) (1,489) (2,613) (342) (399) (741)
Interest expense on borrowings................. (351) (111) (462) (368) (4) (372)
--------- --------- --------- --------- --------- ---------
Total interest expense......................... (1,475) (1,600) (3,075) (710) (403) (1,113)
--------- --------- --------- --------- --------- ---------
Increase in net interest income................ $ 1,426 431 $ 1,857 $ 66 $ 849 $ 915
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(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
C-32
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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)
--------- --------- ---------
Adjusted net yield (2)......................................................... 5.96% 5.95% 5.87%
--------- --------- ---------
</TABLE>
- ------------------------
(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.
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.
C-33
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 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
C-34
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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.............................................................................. $ 1,902 $ 3,079 $ 3,154
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
C-35
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table represents the major components of operating expenses
for the years ended December 31:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1995 1994 1993
- ------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
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%
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 onetime 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.
C-36
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ ------------------------
(DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT %
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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%
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
</TABLE>
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.
C-37
<PAGE>
CUPERTINO NATIONAL BANCORP
Management's Discussion and
Analysis of Financial Condition
and Results of Operations (Continued)
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.
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 nonaccrual
loans, loans past due 90 days and still accruing, restructured loans, and other
real estate owned at December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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%
</TABLE>
The following table details the Bank's classified assets for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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%
--------- --------- ---------
--------- --------- ---------
</TABLE>
C-38
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
The following table summarizes activity in the allowance for loan losses for
the past three years.
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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
C-39
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------- ------------- --------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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, commitments
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 %
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
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.
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
C-40
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 noninterest
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 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:
C-41
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST SENSITIVITY ANALYSIS
REPRICING PERIODS
<TABLE>
<CAPTION>
TOTAL TOTAL
ONE DAY 7-12 > 1 YEAR > 3 YRS RATE NON- RATE
IMMEDIATE TO 2 DAYS 6 MONTHS MONTHS TO 3 YRS TO 5 YRS > 5 YRS SENSITIVE SENSITIVE
----------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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% -- --
</TABLE>
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.
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.
C-42
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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
riskbased 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
riskbased 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:
<TABLE>
<CAPTION>
TIER 1 TOTAL
RISK-BASED RISK-BASED LEVERAGE
CAPITAL RATIO CAPITAL RATIO RATIO
----------------- --------------- -------------
<S> <C> <C> <C>
Well-capitalized................................................ 6.0% 10.0% 5.0%
Adequately Capitalized.......................................... 4.0% 8.0% 4.0%
</TABLE>
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.
C-43
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The Company's capital ratios are indicated in the following table:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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%
------------- -------------
------------- -------------
</TABLE>
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
C-44
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
paid on interest-bearing liabilities rather than the absolute level of interest
rates. Additionally, there may be some upward pressure on the Company's
operating expenses, such as adjustments in staff expense and occupancy expense,
based upon consumer price 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 forwardlooking
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
valueadded, 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.
C-45
<PAGE>
CUPERTINO NATIONAL BANCORP
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994 1993
-------------------- -------------------- --------------------
QUARTER HIGH LOW HIGH LOW HIGH LOW
- --------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
On May 30, 1995 and December 15, 1995, the Company paid a $.10 per share
dividend to its shareholders.
C-46
<PAGE>
CUPERTINO NATIONAL BANCORP
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements
C-47
<PAGE>
CUPERTINO NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
C-48
<PAGE>
CUPERTINO NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
-------------------------------------------------------------
COMMON STOCK
---------------------- UNREALIZED RETAINED SHAREHOLDERS'
SHARES AMOUNT GAINS EARNINGS EQUITY
----------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
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
----------- --------- ----------- --------- -------------
----------- --------- ----------- --------- -------------
</TABLE>
See notes to consolidated financial statements
C-49
<PAGE>
CUPERTINO NATIONAL BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
C-50
<PAGE>
CUPERTINO NATIONAL BANCORP
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
C-51
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Bank charges fees for originating loans, which are recognized as an adjustment
of the loan yield over the life of the loan by a method approximating the
effective interest method. Direct costs of originating the loan are capitalized
and recognized over the life of the loan as a reduction of the yield.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the statement of operations. Other loan fees and charges
representing service costs for the repayment of loans, for delinquent payments
or for miscellaneous loan services are recognized when collected.
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.
C-52
<PAGE>
CUPERTINO NATIONAL BANCORP
Notes to Consolidated Financial Statements (Continued)
Years Ended December 31, 1995, 1994 and 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
C-53
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 2 -- INVESTMENT SECURITIES
U.S. Government and agency obligations, municipal securities and other
securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,1995
------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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
----------- ----- ----------- ---------
----------- ----- ----------- ---------
</TABLE>
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.
C-54
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 2 -- INVESTMENT SECURITIES (CONTINUED)
The following table shows amortized cost and estimated market value of the
Company's investment securities by year of maturity at December 31, 1995.
<TABLE>
<CAPTION>
1997 THROUGH 2001 THROUGH 2006 AND
1996 2000 2006 THEREAFTER TOTAL
--------- ------------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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%
--------- ------------- ------------- ----------- ---------
--------- ------------- ------------- ----------- ---------
</TABLE>
- ------------------------
(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.
C-55
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 3 -- LOANS
The following is a summary of loans by category as of December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for
the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 nonaccrual
status, loans which have been restructured, and loans which are 90 days past due
but are still accruing interest. Interest income foregone on nonperforming 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.
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
C-56
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 5 -- OTHER REAL ESTATE OWNED
Other real estate owned consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Real estate acquired through foreclosure.......................................................... $ -- $ 375
Allowance for estimated loan losses............................................................... -- --
--------- ---------
Other real estate owned, net...................................................................... $ -- $ 375
--------- ---------
--------- ---------
</TABLE>
The following summarizes other real estate operations, which are included in
operating expenses, for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Income (loss) from:
Real estate operations, net............................................................ $ (18) $ (6) $ 10
Provision for estimated losses......................................................... (17) (42) (231)
--- --- ---------
Other real estate, net................................................................... $ (35) $ (48) $ (221)
--- --- ---------
--- --- ---------
</TABLE>
NOTE 6 -- PREMISIES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are comprised of the
following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
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
--------- ---------
--------- ---------
</TABLE>
C-57
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 7 -- OTHER BORROWINGS
Short term borrowings are detailed as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
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% --
</TABLE>
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).
NOTE 8 -- INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
C-58
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 8 -- INCOME TAXES (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
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
--------- ---------
--------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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)
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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%
--- --- ---
--- --- ---
</TABLE>
C-59
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 9 -- OTHER OPERATING EXPENSES
The major components of other operating expense are as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
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:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING(1)
--------------------------
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- ---------------
<S> <C> <C>
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
--------- ---------------
</TABLE>
- ------------------------
(1) Adjusted for stock dividends in 1995, 1994 and 1993
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.
C-60
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C>
Balance, January 1, 1995................................................ $ 2,987
Additions............................................................... 1,040
Repayments.............................................................. (1,830)
-------
Balance, December 31, 1995.............................................. $ 2,197
-------
-------
</TABLE>
C-61
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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):
<TABLE>
<CAPTION>
1995
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
1996.................................................................... $ 786
1997.................................................................... 863
1998.................................................................... 842
1999.................................................................... 806
2000.................................................................... 814
Thereafter.............................................................. 2,384
-------
Total................................................................... $ 6,495
-------
-------
</TABLE>
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.
C-62
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 12 -- COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
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.
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;
<TABLE>
<CAPTION>
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
PURPOSE PROVISIONS:
ACTUAL ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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%
</TABLE>
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
C-63
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 14 -- RESTRICTIONS ON SUBSIDIARY TRANSACTIONS (CONTINUED)
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.
C-64
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 15 -- PARENT ONLY FINANCIAL STATEMENT
The financial statements of Cupertino National Bancorp (parent company only)
follow:
<TABLE>
<CAPTION>
PARENT COMPANY ONLY BALANCE SHEETS
(DOLLARS IN THOUSANDS) DECEMBER 31, 1995 1994
- ------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
PARENT COMPANY ONLY STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
C-65
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 15 -- PARENT ONLY FINANCIAL STATEMENT (CONTINUED)
<TABLE>
<CAPTION>
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 1993
- -------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
C-66
<PAGE>
CUPERTINO NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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:
<TABLE>
<CAPTION>
1995 1994
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- -----------
</TABLE>
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.
C-67
<PAGE>
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
C-68
<PAGE>
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
C-69
<PAGE>
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
C-70
<PAGE>
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
C-71
<PAGE>
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
C-72
<PAGE>
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
C-73
<PAGE>
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
C-74
<PAGE>
[LOGO]
EQUAL HOUSING LENDER
[LOGO]
CUPERTINO NATIONAL BANK & TRUST
Corporate and Bank Headquarters
20230 Stevens Creek Boulevard
Cupertino, California 95014
Telephone (408) 996-1144
FAX (408) 996-0657
C-75
<PAGE>
APPENDIX D
CALIFORNIA CORPORATIONS CODE, SECTIONS 1300 -- 1304
SECTION 1300. CORPORATE PURCHASE OF DISSENTING SHARES
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of Governors
of the Federal Reserve System, and the notice of meeting of shareholders to
act upon the reorganization summarizes this section and Sections 1301, 1302,
1303 and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares described
in subparagraph (A) or (B) if demands for payment are filed with respect to
5 percent or more of the outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case where
the approval required by Section 1201 is sought by written consent rather
than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SECTION 1301. NOTICE TO DISSENTING SHAREHOLDERS; DEMAND FOR PURCHASE OF SHARES
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires
D-1
<PAGE>
to exercise the shareholder's right under such sections. The statement of price
constitutes an offer by the corporation to purchase at the price stated any
dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SECTION 1302. SHAREHOLDER CERTIFICATES OR NOTICE; TIME LIMIT FOR SUBMISSION
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SECTION 1303. AGREED PRICE; INTEREST; FILING OF AGREEMENTS; TIME FOR PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SECTION 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING OR TO DETERMINE
FAIR MARKET VALUE
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint
D-2
<PAGE>
in the superior court of the proper county praying the court to determine
whether the shares are dissenting shares or the fair market value of the
dissenting shares or both or may intervene in any action pending on such a
complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
D-3
<PAGE>
APPENDIX E
September 23, 1996
Board of Directors
Mid-Peninsula Bancorp
420 Cowper Street
Palo Alto, CA 94301
Dear Sirs and Madam:
Mid-Peninsula Bancorp ("Mid-Peninsula") and Cupertino National Bancorp
("Cupertino") have entered into an Agreement and Plan of Reorganization and
Merger dated as of June 5, 1996 (the "Agreement"), providing for the merger of
Cupertino with and into Mid-Peninsula (the "Merger"). Pursuant to the Agreement,
Mid-Peninsula will change its name to Greater Bay Bancorp and each share of
Cupertino common stock, no par value per share (the "Cupertino Common Stock"),
will be converted into .81522 of a share of Greater Bay Bancorp common stock
(the "Conversion Ratio"), subject to certain adjustments and limitations set
forth in the Agreement. We have assumed, with your consent, that the Merger will
qualify for pooling-of-interests accounting treatment. You have requested our
opinion as to whether the Conversion Ratio pursuant to the Agreement is fair,
from a financial point of view, to the holders of the common stock, no par value
per share (the "Mid-Peninsula Common Stock"), of Mid-Peninsula.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We have acted as financial advisor to the Board of Directors of
Mid-Peninsula in connection with the transaction described above and will
receive a fee for our services. Alex. Brown regularly publishes research reports
regarding the financial services industry and the businesses and securities of
publicly owned companies in that industry.
In connection with this opinion, we have reviewed certain publicly available
financial information concerning Mid-Peninsula and Cupertino and certain
internal financial analyses and other information furnished to us by
Mid-Peninsula and Cupertino. We have also held discussions with members of
senior management of Mid-Peninsula and Cupertino regarding the business and
prospects of their respective financial institutions. In addition, we have (i)
reviewed the reported price and trading activity of the Mid-Peninsula Common
Stock and the Cupertino Common Stock, (ii) compared certain financial and stock
market information of Mid-Peninsula and Cupertino, respectively, with similar
information of certain comparable companies whose securities are publicly
traded, (iii) reviewed the Agreement, (iv) reviewed the financial terms of
certain recent business combinations which we deemed comparable in whole or in
part, (v) reviewed the potential pro forma impact of the Merger on
Mid-Peninsula's financial condition, operating results and per share figures and
(vi) performed such other studies and analyses and considered such other factors
as we deemed appropriate.
E-1
<PAGE>
The Board of Directors
Mid-Peninsula Bancorp
September 23, 1996
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to information relating to the prospects of Mid-Peninsula
and Cupertino (including, without limitation, projected cost savings and revenue
enhancements from the Merger), we have assumed that such information reflects
the best currently available estimates and judgments of the respective
managements of Mid-Peninsula and Cupertino as to the likely future financial
performance of Mid-Peninsula and Cupertino. In addition, we have not made an
independent evaluation or appraisal of the assets or liabilities of
Mid-Peninsula or Cupertino, nor have we been furnished with any such evaluation
or appraisal. Our opinion is based on market, economic and other conditions as
they exist and can be evaluated as of the date of this letter.
Our opinion expressed herein was prepared for the use of the Board of
Directors of the Company and does not constitute a recommendation to the
Company's shareholders as to how they should vote at the shareholders' meeting
in connection with the Merger. We hereby consent, however, to the inclusion of
this opinion as an exhibit to any proxy or registration statement distributed in
connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Conversion Ratio pursuant to the Agreement is fair,
from a financial point of view to the holders of Mid-Peninsula Common Stock.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
By: /s/ JEAN-LUC SERVAT
-----------------------------------
Jean-Luc Servat
MANAGING DIRECTOR
E-2
<PAGE>
APPENDIX F
September 23, 1996
Board of Directors
Cupertino National Bancorp
20230 Stevens Creek Blvd.
Cupertino, California 95014-2244
Members of the Board:
We understand that Cupertino National Bancorp, a California corporation (the
"Company" or "Cupertino") and Mid-Peninsula Bancorp, a California corporation
("Mid-Peninsula"), have entered into an Agreement and Plan of Merger, dated as
of June 5, 1996, as amended (the "Merger Agreement"), pursuant to which, among
other things, Cupertino will merge with and into Mid-Peninsula (the "Merger")
and Mid-Peninsula will change its name to Greater Bay Bancorp ("Bancorp").
Following the Merger, Cupertino's subsidiary, Cupertino National Bank & Trust,
and Mid-Peninsula's subsidiary, Mid-Peninsula Bank, will be wholly-owned
subsidiaries of Bancorp. Pursuant to the Merger, as more fully described in the
Merger Agreement, we understand that (i) each outstanding share of the common
stock, no par value (including the associated common stock purchase rights), of
Cupertino (the "Cupertino Common Stock") will be converted into the right to
receive .81522 (the "Exchange Ratio") of a share of the common stock, no par
value, of Bancorp (the "Bancorp Common Stock").
You have asked for our opinion as investment bankers as to whether the
Exchange Ratio is fair to the Company and its shareholders from a financial
point of view, as of the date hereof.
In connection with our opinion, we have, among other things: (i) reviewed
certain publicly available financial and other data with respect to the Company
and Mid-Peninsula, including the consolidated financial statements for the three
years ended December 31, 1993, December 31, 1994 and December 31, 1995 and
interim periods to June 30, 1996 and certain other relevant financial and
operating data relating to the Company and Mid-Peninsula made available to us
from published sources and from the internal records of the Company and
Mid-Peninsula, (ii) reviewed the Merger Agreement and certain related documents
provided to us by the Company; (iii) reviewed the Joint Proxy
Statement/Prospectus dated the date hereof of the Company and Mid-Peninsula
relating to the proposed Merger (the "Proxy Statement"); (iv) reviewed certain
historical market prices and trading volumes of the Company Common Stock as
reported by the NASDAQ and Mid-Peninsula's stock as reported; (v) compared the
Company and Mid-Peninsula from a financial point of view with certain other
companies which we deemed to be relevant; (vi) considered the financial terms,
to the extent publicly available, of selected comparable business combinations
in the banking industry; (vii) reviewed and discussed with representatives of
the management of the Company and Mid-Peninsula, respectively, certain
information of a business and financial nature regarding the Company and Mid-
Peninsula, furnished to us by them, including financial forecasts and related
assumptions of the Company and Mid-Peninsula, (viii) made inquiries regarding
and discussed the Merger, the Merger Agreement and other matters related thereto
with the Company's counsel; and (ix) performed such other analyses and
examinations as we have deemed appropriate.
In connection with our review, we have not assumed any obligation to verify
independently any of the foregoing information and have relied on all such
information being complete and accurate in all material respects. With respect
to the financial forecasts for the Company and Mid-Peninsula provided to us by
their respective management, we have assumed for purposes of our opinion that
such forecasts have been reasonably prepared on bases reflecting at the time of
preparation the best available estimates and judgments of their respective
management as to the future financial performance of the Company and
Mid-Peninsula and the cost savings and other potential synergies (including the
timing, amount and achievability thereof) anticipated to result from the Merger,
and that they
F-1
<PAGE>
provide a reasonable basis upon which we can form our opinion. We have not
independently verified any assumptions referred to in or implied by the
financial forecasts, all of which each respective management has represented to
be reasonable. We have also assumed that there have been no material changes in
the Company's or Mid-Peninsula's assets, financial condition, results of
operations, business or prospects since the respective dates of their last
financial statements reviewed by us. We have relied on advice of counsel and
independent accountants to the Company as to all legal and financial reporting
matters with respect to the Company and the Merger. We have also assumed that
the Proxy Statement will comply in all material respects with the applicable
provisions of the Securities Act of 1933, as amended (the "Securities Act"), and
the Securities Exchange Act of 1934, as amended, and that the Proxy Statement
and the Merger will comply with all other applicable federal and state statutes,
rules and regulations. Finally, our opinion is based on economic, monetary and
market and other conditions as in effect on, and the information made available
to us as of, the date hereof.
We have further assumed, with your consent, that the Merger will be
consummated in accordance with the terms and provisions of the Merger Agreement,
without any amendments to, and without any waiver by the Company of, any of the
material conditions to its obligations thereunder.
We have acted as fairness opinion provider to the Company in connection with
the Merger and will receive a fee for our services, a significant portion of
which is contingent upon the consummation of the Merger. We have not been asked
to, and we have not solicted the potential interest by any party in any other
business combination with Cupertino, nor have we, in rendering our opinion,
considered the potential effects on shareholder value of any other such business
combination. In the ordinary course of our business, we actively trade the
equity securities of the Company for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities. We have not performed any financial advisory or investment
banking services for Mid-Peninsula in the past.
Based upon the foregoing and in reliance thereon, it is our opinion as
investment bankers that the Exchange Ratio is fair to the Company and its
shareholders from a financial point of view, as of the date hereof.
This opinion is furnished pursuant to our engagement letter dated May 10,
1996. This opinion is addressed to the Board of Directors of the Company and is
not intended to be and shall not be deemed to constitute a recommendation to any
stockholder as to how such stockholder should vote with respect to the Merger.
Except as provided in such engagement letter, this opinion may not be used or
referred to by the Company, or quoted or disclosed to any person in any manner
without our prior written consent. In furnishing this opinion, we do not admit
that we are experts within the meaning of the term "experts" as used in the
Securities Act and the rules and regulations promulgated thereunder, nor do we
admit that this opinion constitutes a report or valuation within the meaning of
Section 11 of the Securities Act.
Very truly yours,
SUTRO & CO. INCORPORATED
F-2
<PAGE>
APPENDIX G
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
<TABLE>
<S> <C>
CALIFORNIA 77-0387041
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
420 COWPER STREET, PALO 94301
ALTO, CA
(Address of principal (Zip Code)
executive offices)
</TABLE>
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.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT JULY 30,
CLASS 1996
- ------------------ ---------------------------------
<S> <C>
Common Stock ..... 1,635,843
</TABLE>
The Index to Exhibits is located at page 22.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
(UNAUDITED) (AUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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 (fair value of $2,412,000 & $838,000 in
1996 and 1995 respectively).................................................. 2,397 857
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
------------- -----------------
------------- -----------------
</TABLE>
G-1
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30 1996 JUNE 30 1995 JUNE 30 1996 JUNE 30 1995
------------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
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
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
G-2
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JUNE 30 JUNE 30
1996 1995
---------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
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
</TABLE>
G-3
<PAGE>
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.
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.
G-4
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
(UNAUDITED)
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.
G-5
<PAGE>
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 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
G-6
<PAGE>
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.
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.
G-7
<PAGE>
REPRICING PERIODS
<TABLE>
<CAPTION>
> 1 YEAR
ONE 2-180 181-365 TO 5 OVER NON-RATE
DAY DAYS DAYS YEARS 5 YEARS SENSITIVE TOTAL
----------- ---------- --------- --------- --------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
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% -- --
</TABLE>
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
G-8
<PAGE>
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%.
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.
G-9
<PAGE>
RISK BASED CAPITAL RATIO
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------ ------------------------
RATIOS AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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
</TABLE>
LEVERAGE CAPITAL RATIO
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
------------------------ ------------------------
RATIOS AMOUNT RATIO AMOUNT RATIO
- ------------------------------------------------------------------ ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Tier 1 capital to adjusted total assets........................... $ 22,784 9.97% $ 21,440 9.76%
Quarterly average total assets.................................... $ 228,568 $ 219,783
</TABLE>
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-
G-10
<PAGE>
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.
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.
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.
G-11
<PAGE>
AVERAGE BALANCE SHEET
MID-PENINSULA BANCORP AND SUBSIDIARY
AVERAGE BALANCE SHEET
THREE MONTHS ENDED JUNE 30
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
---------------------------------------- ----------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE (1) BALANCE INTEREST RATE (1)
----------- -------------- ----------- ----------- -------------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
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 > $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
</TABLE>
- ------------------------
(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
G-12
<PAGE>
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.
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.
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%
G-13
<PAGE>
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.
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)
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- --------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE (1) BALANCE INTEREST RATE (1)
----------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGES)
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 > $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%
------------ ------------
------------ ------------
</TABLE>
- ------------------------
(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
G-14
<PAGE>
(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.
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.
G-15
<PAGE>
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:
<TABLE>
<S> <C>
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
</TABLE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a) (2.1) Amended and Restated Agreement and Plan of Reorganization and Merger 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.
</TABLE>
(b) Form 8-K dated May 22, 1996, filed with the Commission on June 3, 1996.
G-16
<PAGE>
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.
<TABLE>
<S> <C>
MID-PENINSULA BANCORP
July 31, 1996 By: /s/ DAVID L. KALKBRENNER
-----------------------------------------
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)
</TABLE>
G-17
<PAGE>
APPENDIX H
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
</TABLE>
For the transition period from
------------------------ to
------------------------.
Commission file number 0-18015
------------------------
CUPERTINO NATIONAL BANCORP
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
CALIFORNIA 33-0060898
<S> <C>
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
20230 STEVENS CREEK BOULEVARD, 95014
CUPERTINO, CALIFORNIA,
(Address of principal executive offices) (Zip Code)
</TABLE>
(408) 996-1144
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------------------------------------------
--------
Outstanding shares of Common Stock, no par value, as of July 31, 1996:
1,901,352.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
H-1
<PAGE>
CUPERTINO NATIONAL BANCORP
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995..... 3
Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 1996 and 1995.............................................. 4
Consolidated Statements of Cash Flows for the Three Months and Six Months
Ended June 30, 1996 and 1995.............................................. 5
Notes to Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 7
PART II. OTHER INFORMATION
Items 1-3,
Item 5. Not applicable
Item 4. Submission of Matters to a Vote of Security Holders....................... 19
Item 6. Exhibits and Reports on Form 8-K.......................................... 19
Signatures................................................................ 20
Index to Exhibits.........................................................
</TABLE>
H-2
<PAGE>
PART I. FINANCIAL INFORMATION
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and due from banks............................................................... $ 16,419 $ 16,207
Federal funds sold.................................................................... 11,000 12,900
----------- ------------
Cash and cash equivalents......................................................... 27,419 29,107
Investment securities:
Held to maturity (Market value $46,853 at June 30, 1996; $53,001 at December 31,
1995).............................................................................. 47,322 52,571
Available for sale (Cost $1,003 at June 30, 1996; $3,504 at December 31, 1995)...... 1,003 3,509
Other securites..................................................................... 1,002 969
----------- ------------
Total investment securities....................................................... 49,327 57,049
Loans:
Commercial.......................................................................... 96,973 88,646
Real estate-construction and land................................................... 25,744 23,889
Real estate-term.................................................................... 32,131 23,026
Consumer and other.................................................................. 31,542 28,666
Deferred loan fees and discounts.................................................... (915) (851)
----------- ------------
Loans............................................................................. 185,475 163,376
Allowance for loan losses........................................................... (3,043) (2,683)
----------- ------------
Total loans....................................................................... 182,432 160,693
Premises and equipment, net........................................................... 3,232 1,917
Accrued interest receivable and other assets.......................................... 11,986 10,333
----------- ------------
Total assets...................................................................... $ 274,396 $ 259,099
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing......................................................... $ 66,263 $ 58,986
NOW................................................................................. 11,514 10,158
Money Market Demand Accounts........................................................ 124,059 114,021
Savings............................................................................. 8,748 7,995
Other time certificates............................................................. 13,669 17,830
Time certificates, $100 and over.................................................... 25,886 27,104
----------- ------------
Total deposits.................................................................... 250,139 236,094
Accrued interest payable and other liabilities........................................ 1,274 1,333
Subordinated debentures............................................................... 3,000 3,000
----------- ------------
Total liabilities................................................................. 254,413 240,427
Shareholders' equity:
Preferred stock, no par value: 4,000,000 shares authorized; none issued............. -- --
Common stock, no par value: 6,000,000 shares authorized; shares outstanding;
1,900,342 at June 30, 1996 and 1,808,828 at December 31, 1995...................... 18,196 17,680
Retained earnings................................................................... 1,787 992
----------- ------------
Total shareholders' equity........................................................ 19,983 18,672
----------- ------------
Total liabilities and shareholders' equity...................................... $ 274,396 $ 259,099
----------- ------------
----------- ------------
</TABLE>
See notes to consolidated financial statements
H-3
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans..................................................... $ 4,696 $ 4,021 $ 9,212 $ 7,820
Interest on investment securities:
Taxable............................................................. 844 920 1,748 1,837
Non-taxable......................................................... -- 18 -- 36
--------- --------- --------- ---------
Total Investment securities....................................... 844 938 1,748 1,873
Other interest income................................................. 151 108 239 137
--------- --------- --------- ---------
Total interest income............................................. 5,691 5,067 11,199 9,830
INTEREST EXPENSE:
Interest on deposits.................................................. 1,844 1,625 3,748 2,991
Other interest expense................................................ 87 288 191 655
--------- --------- --------- ---------
Total interest expense............................................ 1,931 1,913 3,939 3,646
--------- --------- --------- ---------
Net interest income................................................... 3,760 3,154 7,260 6,184
PROVISION FOR LOAN LOSSES............................................... 265 85 465 516
--------- --------- --------- ---------
Net interest income after provision for loan losses................... 3,495 3,069 6,795 5,668
OTHER INCOME:
Gain on sale of mortgage loans........................................ -- 51 -- 137
Other loan fees....................................................... 34 29 49 48
Trust Fees............................................................ 344 135 653 291
Gain on sale of SBA loans............................................. 123 45 253 150
Depositor service fees................................................ 121 98 219 138
Other................................................................. 185 49 262 137
--------- --------- --------- ---------
Total other income................................................ 807 407 1,436 901
OPERATING EXPENSES:
Compensation and benefits............................................. 1,998 1,600 3,698 3,236
Occupancy and equipment............................................... 489 392 962 788
Legal settlement & costs.............................................. -- 1,700 -- 1,700
Professional services................................................. 248 230 441 435
FDIC insurance and regulatory assessments............................. 21 135 41 260
Client services....................................................... 95 91 215 179
Other real estate, net................................................ 6 (7) 30 34
Other................................................................. 642 459 1,264 896
--------- --------- --------- ---------
Total operating expenses.......................................... 3,499 4,600 6,651 7,528
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAX......................................... 803 (1,124) 1,580 (959)
Income tax expense (benefit).......................................... 289 (470) 593 (411)
--------- --------- --------- ---------
Net income (loss)....................................................... $ 514 $ (654) $ 987 $ (548)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income (loss) per common and common equivalent share................ $ 0.25 $ (0.35) $ 0.49 $ (0.30)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
H-4
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1996 1995
---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net income (loss)...................................................................... $ 987 $ (548)
Reconciliation of net income to net cash from operations:
Provision for loan losses............................................................ 465 516
Depreciation and amortization........................................................ 344 293
Accrued interest receivable and other assets......................................... (1,468) (894)
Accrued interest payable and other liabilities....................................... (60) 1,023
Net change in deferred loan fees and discounts....................................... 64 (247)
Proceeds from sales of loans held for sale........................................... 3,501 16,364
Origination of loans held for sale................................................... (3,501) (10,981)
Other real estate owned, net......................................................... -- 17
---------- ----------
Operating cash flows, net.......................................................... 332 5,543
CASH FLOWS -- INVESTING ACTIVITIES:
Maturities of investment securities:
Held-to-maturity..................................................................... 8,293 6,237
Available-for-sale................................................................... 2,500 --
Purchase of investment securities:
Held-to-maturity..................................................................... (2,994) (2,045)
Available-for-sale................................................................... -- (2,495)
Net change in loans.................................................................... (22,485) (12,400)
Sale of other real estate owned........................................................ -- 358
Purchase of life insurance policies.................................................... -- (2,257)
Purchase of premises and equipment, net................................................ (1,703) (397)
Other, net............................................................................. (5) 5
---------- ----------
Investing cash flows, net........................................................ (16,394) (12,994)
CASH FLOWS -- FINANCING ACTIVITIES:
Net change in noninterest-bearing deposits............................................... 14,045 7,206
Net change in interest-bearing deposits.................................................. -- 21,223
Net change in short-term borrowings...................................................... -- (8,603)
Stock purchased by employees and stock options exercised................................. 516 289
Cash dividends........................................................................... (187) (160)
---------- ----------
Financing cash flows, net.......................................................... 14,374 19,955
---------- ----------
Net increase (decrease) in cash and cash equivalents..................................... (1,688) 12,504
Cash and cash equivalents at beginning of period......................................... 29,107 19,726
---------- ----------
CASH AND CASH EQUIVALNETS AT END OF PERIOD............................................... $ 27,419 $ 32,230
---------- ----------
---------- ----------
CASH FLOWS -- SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on deposits and other borrowings............................................ $ 4,192 $ 3,459
Income taxes......................................................................... 870 175
Non-cash transactions:
Additions to other real estate owned................................................. 217 --
</TABLE>
See notes to consolidated financial statements.
H-5
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Cupertino National Bancorp ("CUNB" or the "Company") and its
subsidiary, Cupertino National Bank & Trust (the "Bank" or "CNB"). These
financial statements reflect, in management's opinion, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of CUNB's financial position and the results of its operations and cash flows
for the periods presented. Certain amounts for prior periods have been
reclassified to conform to current period presentation. The results for the
three months and six months ended June 30, 1996 are not necessarily indicative
of the results expected for any subsequent period or for the entire year ending
December 31, 1996. These financial statements should be read in conjunction with
the financial statements included in the 1995 Annual Report to Shareholders.
2. SHARE AND PER SHARE AMOUNTS
Earnings per common and common equivalent share are calculated based upon
the weighted average number of shares outstanding during the period, plus
equivalent shares representing the effect of dilutive stock options. The number
of shares used to compute earnings per share were 2,013,481 and 1,855,810 for
the three months ended June 30, 1996 and 1995, respectively and 2,007,922 and
1,841,400 for the six months ended June 30, 1996 and 1995, respectively.
H-6
<PAGE>
CUPERTINO NATIONAL BANCORP AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
CUNB reported net income for the second quarter of 1996 of $514,000, or $.25
per common and common equivalent share, compared to a net loss of $654,000, or
$.35 per common and common equivalent share, reported in the second quarter of
last year. The net loss in the 1995 second quarter was due to the settlement of
litigation that was pending against CUNB. Return on average assets and return on
average common equity annualized for the second quarter of 1996 were 0.77% and
10.47%, respectively.
The earnings for the second quarter of 1995 were adversely effected by an
accrual of $1,020,000 (net of tax) for the settlement of trust department
litigation and related costs. The Company believes, based on the advice of
counsel, that it is probable that insurance coverage for a significant portion
of the settlement amount is available under its director and officer insurance
policy and its professional liability insurance policy, as well as the errors
and omissions policy of its insurance agent. The Company's insurance company has
denied the Company's claim for coverage under these policies, and the Company
has initiated litigation against the insurance companies who issued the policies
as well as the agent from whom the Company obtained such policies. Excluding
this charge, second quarter 1995 earnings would have been $366,000.
For the six months ended June 30, 1996, the Company posted net income of
$987,000, or $.49 per common and common equivalent share, compared to a net loss
of $548,000, or $.30 per common and common equivalent share, for the comparable
period in 1995. The annualized return on average assets and return on average
equity for the first six months of 1996 were 0.75% and 10.22%, respectively. Net
income for the first quarter of 1995 included approximately $275,000 in
non-recurring expenses (net of tax) related to the closing of the Bank's
mortgage operations, the costs incurred related to canceled merger discussions,
and severance payments to a former executive officer. Excluding the legal
settlement charge and related costs, as well as the non-recurring charges from
the first quarter, the net income for the six months ended June 30, 1995 would
have been $747,000.
Non-performing assets (including nonaccruing loans, loans 90 days past due
and other real estate owned ("OREO")) totaled $3.5 million at June 30, 1996,
compared to $3.3 million at December 31, 1995 and $3.6 million at June 30, 1995.
The ratio of non-performing assets to total assets was 1.29% at June 30, 1996,
compared to 1.29% at December 31, 1995 and 1.47% at June 30, 1995. The Bank's
portfolio of classified assets increased to $11.3 million, or 4.29% of total
assets at June 30, 1996, from $7.9 million or 3.06% of total assets at December
31, 1995 and $8.7 million or 3.57% of total assets at June 30, 1995. The
increase during the first half of 1996 was primarily due to the classification
of $2.7 million of commercial and technology loans of three borrowers.
The reserve for loan losses was $3.0 million at June 30, 1996, compared with
$2.7 million at December 1, 1995 and $2.5 million at June 30, 1995. The
provision for loan losses was $265,000 for the second quarter of 1996, compared
to $200,000 recorded in the first quarter of 1996, and $85,000 recorded in the
second quarter of 1995. For the first six months of 1996, the provision for loan
losses was $465,000, a decrease of $51,000 from the first half of 1995. Net
charge-offs were $105,000 for the first six months of 1996, compared to $980,000
for the first half of 1995. The ratio of the reserve for loan losses to
non-performing assets was 86.1% at June 30, 1996 compared with 80.3% at December
31, 1995 and 68.3% at June 30, 1995.
Shareholders' equity increased $1.3 million to $20.0 million, or 7.29% of
assets, at June 30, 1996 from $18.7 million, or 7.21% of assets, at December 31,
1995. The increase was due to net earnings, stock purchased by directors and
employees through stock option plans and stock purchased through the Employee
Stock Purchase Plan, and was partially offset by a cash dividend payment of $.10
per common share, totaling $187,000, made to shareholders during the second
quarter of 1996.
H-7
<PAGE>
CUNB's Tier 1 and total risk-based capital ratios were 8.62% and 11.17% at
June 30, 1996, respectively, compared with 9.18% and 11.91% at December 31,
1995, respectively. The leverage ratio declined to 7.52% at June 30, 1996 from
7.78% at December 31, 1995. The decline in capital ratios is due to asset growth
during 1996. At June 30, 1996, CUNB's risk-based capital and leverage ratios, as
well as those of the Bank, exceeded the ratios for a well-capitalized financial
institution as defined in FDICIA under the prompt corrective action guidelines.
The Company will seek to maintain its well capitalized position to ensure
flexibility in its operations.
CUNB's common stock closed at $14.50 per share on June 30, 1996,
representing 138% of the $10.52 book value per common share, compared with
$13.50 per share and 129% of the $10.45 book value per common share at March 31,
1996.
MERGER
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, in a merger of equals, with and into
Mid-Peninsula Bancorp and Mid-Peninsula Bancorp will change it's name to Greater
Bay Bancorp ("GBB"). The merger will result in the formation of the largest
multi-bank holding company based in the San Francisco Peninsula/South Bay
region, and the third-largest publicly traded independent bank holding company
in the San Francisco Bay area, with total assets of approximately $500 million
and equity of over $40 million. Mid-Peninsula Bank ("MPB") and Cupertino
National Bank & Trust ("CNB") will operate as wholly-owned subsidiaries of
Greater Bay Bancorp and will focus on serving the greater Bay area, including
the Peninsula and South Bay markets, through their seven office locations.
The terms of the Agreement provide for Cupertino National Bancorp
shareholders to receive 0.81522 of a share of Mid-Peninsula Bancorp stock for
each share of Cupertino National Bancorp in a tax-free exchange to be accounted
for as a "pooling-of-interests." As part of the Agreement, Mid-Peninsula 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 Cupertino National Bancorp and five from Mid-Peninsula Bancorp, with Duncan
L. Matteson (Chairman of Mid-Peninsula Bancorp) and John M. Gatto (Chairman of
Cupertino National Bancorp) serving as co-Chairman. David L. Kalkbrenner, who
will serve as President and Chief Executive Officer of Greater Bay Bancorp, will
continue as President and Chief Executive Officer of MPB and C. Donald Allen
will remain as Chairman and Chief Executive Officer of CNB. Steven C. Smith, the
Chief Operating Officer of CNB, will serve as Chief Operating Officer and Chief
Financial Officer of GBB. David R. Hood, Executive Vice President and Senior
Loan Officer of CNB, will serve as Executive Vice President and Senior Credit
Officer of GBB.
In connection with the Agreement, Cupertino National Bancorp and
Mid-Peninsula Bancorp have granted each other options to purchase up to 19.0% of
the outstanding shares of each 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.
H-8
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table presents the Company's average balance sheet, net
interest income and interest rates for the quarterly periods presented:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
THREE MONTHS ENDED THREE MONTHS ENDED JUNE 30,
JUNE 30, 1996 MARCH 31, 1996 1995
------------------------------------ ------------------------------------ -----------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE (1) INTEREST RATE BALANCE (1) INTEREST RATE BALANCE (1)
----------- ----------- ---------- ----------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) (4)................. $ 176,030 $ 4,696 10.70% $ 169,650 $ 4,517 10.68% $ 145,249
Investment securities, short
term investments and cash
equivalents.................. 64,660 995 6.17% 62,913 991 6.32% 67,948
----------- ----------- ----- ----------- ----------- ----- -----------
Total interest-earning
assets................... 240,690 5,691 9.48% 232,563 5,508 9.50% 213,197
Noninterest-earning assets...... 27,079 26,259 17,068
----------- ----------- -----------
Total Assets $ 267,769 $ 258,822 $ 230,265
----------- ----------- -----------
----------- ----------- -----------
Interest-bearing liabilities:
Deposits:
NOW and MMDA................ $ 126,485 1,147 3.64% $ 122,248 1,176 3.86% $ 88,998
Savings deposits............ 12,106 115 3.81% 11,720 107 3.66% 4,759
Time deposits............... 44,824 582 5.21% 47,122 622 5.29% 49,188
----------- ----------- ----- ----------- ----------- ----- -----------
Total Deposits............ 183,415 1,844 4.03% 181,090 1,905 4.22% 142,945
Borrowings.................... 3,113 87 11.15% 3,504 103 11.79% 18,414
----------- ----------- ----- ----------- ----------- ----- -----------
Total interest-bearing
liabilities.............. 186,528 1,931 4.15% 184,594 2,008 4.36% 161,359
----------- ----------- ----- ----------- ----------- ----- -----------
Noninterest-bearing deposits.... 60,088 54,092 49,365
Other noninterest-bearing
liabilities.................... 1,456 1,095 1,202
----------- ----------- -----------
Total noninterest-bearing
liabilities.............. 61,544 55,187 50,567
Shareholders' equity............ 19,697 19,041 18,339
----------- ----------- -----------
----------- ----------- -----------
Total liabilities and
shareholders' equity..... $ 267,769 $ 258,822 $ 230,265
----------- ----------- -----------
----------- ----------- -----------
Net interest income; interest
rate spread.................... $ 3,760 5.33% $ 3,500 5.14%
----------- ----- ----------- -----
----------- ----- ----------- -----
Net interest-earning assets; net
yield (3)...................... $ 54,162 6.27% $ 47,969 6.04% $ 51,838
----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- -----------
<CAPTION>
AVERAGE
YIELD/
INTEREST RATE
----------- ----------
<S> <C> <C>
Interest-earning assets:
Loans (2) (4)................. $ 4,021 11.10%
Investment securities, short
term investments and cash
equivalents.................. 1,046 6.17%
----------- -----
Total interest-earning
assets................... 5,067 9.53%
Noninterest-earning assets......
Total Assets
Interest-bearing liabilities:
Deposits:
NOW and MMDA................ 903 4.07%
Savings deposits............ 42 3.54%
Time deposits............... 680 5.54%
----------- -----
Total Deposits............ 1,625 4.56%
Borrowings.................... 288 6.27%
----------- -----
Total interest-bearing
liabilities.............. 1,913 4.76%
----------- -----
Noninterest-bearing deposits....
Other noninterest-bearing
liabilities....................
Total noninterest-bearing
liabilities..............
Shareholders' equity............
Total liabilities and
shareholders' equity.....
Net interest income; interest
rate spread.................... $ 3,154 4.78%
----------- -----
----------- -----
Net interest-earning assets; net
yield (3)...................... 5.93%
-----
-----
</TABLE>
- --------------------------
(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 column.
(3) The net yield on interest-earning assets during the period equals annualized
net interest income divided by average interest-earning assets for the
period.
(4) Loan fees totaling $338, $316 and $209 are included in loan interest income
for the periods ended June 30, 1996, March 31, 1996 and June 30, 1995,
respectively.
H-9
<PAGE>
The following table presents the dollar amount of certain changes in
interest income and expense for each major component of interest-earning assets
and interest-bearing liabilities and the difference attributable to changes in
average rates and volumes for the quarterly periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
COMPARED WITH COMPARED WITH
MARCH 31, 1996 JUNE 30, 1995
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE)
--------------------------------- ---------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans..................................... $ 170 $ 9 $ 179 $ 826 $ (151) $ 675
Interest on investment securities, short-term investments and
cash equivalents............................................ 27 (23) 4 (51) -- (51)
----- --- --------- ----- --------- ---------
Change in total interest income.......................... 197 (14) 183 775 (151) 624
Interest expense on deposits
NOW and MMDA............................................... (39) 68 29 (348) 104 (244)
Savings deposits........................................... (4) (4) (8) (70) (3) (73)
Time deposits.............................................. 30 10 40 58 40 98
----- --- --------- ----- --------- ---------
(13) 74 61 (360) 141 (219)
Interest expense on borrowings............................... 11 5 16 336 (135) 201
----- --- --------- ----- --------- ---------
Change in total interest expense......................... (2) 79 77 (24) 6 (18)
----- --- --------- ----- --------- ---------
Increase (decrease) in net interest income................... $ 195 $ 65 $ 260 $ 751 $ (145) $ 606
----- --- --------- ----- --------- ---------
----- --- --------- ----- --------- ---------
</TABLE>
- ------------------------
(1) In the analysis, the change due to both rate and volume has been allocated
proportionately.
CUNBs net interest income for the second quarter of 1996 was $3.8 million, a
$260,000 increase over the first quarter of 1996, and a $606,000 increase over
the second quarter of 1995. When compared to the first quarter of 1996, average
earning assets increased by $8.1 million, and the net yield on earning assets
increased from 6.04% in the first quarter of 1996 to 6.27% in the second quarter
of 1996. This was primarily due to the combined impacts of an increase in the
volume of interest-earning assets and a decrease in the average rates paid on
interest-bearing liabilities. In addition, a portion of the asset growth during
the second quarter was funded by noninterest-bearing deposits which resulted in
a more favorable effective yield.
Compared to the second quarter of 1995, average earning assets during the
second quarter of 1996 increased by $27.5 million. This was due to increased
loan demand since the previous years second quarter. Average loans in the second
quarter of 1996 increased by $30.8 million, or 21.2%, over the second quarter of
1995. As the Companys average interest-bearing deposits grew $40.5 million and
noninterest-bearing deposits grew by $10.7 million since the 1995 second
quarter, the mix of funding sources shifted away from higher cost short-term
borrowings in the latter half of 1995. This reduced the cost of funds by 61
basis points from the second quarter of 1995.
H-10
<PAGE>
The following tables present the Company's average balance sheet, net
interest income and interest rates for the six-month periods presented, as well
as the analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
----------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE (1) INTEREST RATE BALANCE (1) INTEREST RATE
----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2)(4)............................. $ 174,219 $ 9,212 10.60% $ 143,414 $ 7,820 10.94%
Investment securities, short term
investments and cash equivalents........ 63,786 1,987 6.25% 65,533 2,010 6.15%
----------- --------- ----- ----------- --------- -----
Total interest-earning assets........ 238,005 11,199 9.44% 208,947 9,830 9.43%
Noninterest-earning assets................. 24,919 15,270
----------- -----------
Total Assets............................. $ 262,924 $ 224,217
----------- -----------
----------- -----------
Interest-bearing liabilities:
Deposits:
NOW and MMDA........................... $ 124,366 2,314 3.73% $ 84,665 1,678 3.97%
Savings deposits....................... 11,914 222 3.73% 5,247 90 3.44%
Time deposits.......................... 45,973 1,212 5.29% 45,731 1,223 5.36%
----------- --------- ----- ----------- --------- -----
Total Deposits....................... 182,253 3,748 4.12% 135,643 2,991 4.42%
Borrowings............................... 3,309 191 11.59% 21,433 655 6.13%
----------- --------- ----- ----------- --------- -----
Total interest-bearing liabilities... 185,562 3,939 4.26% 157,076 3,646 4.66%
----------- --------- ----- ----------- --------- -----
Noninterest-bearing deposits............... 57,090 47,722
Other noninterest-bearing liabilities...... 903 1,082
----------- -----------
Total noninterest-bearing
liabilities......................... 57,993 48,804
Shareholders' equity....................... 19,369 18,339
----------- -----------
Total liabilities and shareholders'
equity.............................. $ 262,924 $ 224,219
----------- -----------
----------- -----------
Net interest income; Interest rate
spread.................................... $ 7,260 5.18% $ 6,184 4.78%
--------- ----- --------- -----
--------- ---------
Net interest-earning assets; net yield
(3)....................................... $ 52,443 6.12% $ 51,871 5.94%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Average balances are computed using an average of the daily balances during
the period.
(2) Non-accrual loans are included in the average balance column; however, only
collected interest is included in the interest column.
(3) The net yield on interest-earning assets during the period equals annualized
net interest income divided by average interest-earning assets for the
period.
(4) Loan fees totaling $704 and $395 are included in loan interest income for
the periods ended June 30, 1996 and June 30, 1995, respectively.
H-11
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1996
COMPARED WITH JUNE 30, 1995
FAVORABLE (UNFAVORABLE)
-------------------------------
VOLUME RATE TOTAL
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income on loans............................................................ $ 1,635 $ (243) $ 1,392
Interest on investment securities, short-term investments and cash equivalents...... (55) 32 (23)
--------- --------- ---------
Change in total interest income 1,580 (211) 1,369 Interest expense on deposits
NOW and MMDA...................................................................... (745) 109 (636)
Savings deposits.................................................................. (124) (8) (132)
Time deposits..................................................................... (6) 17 11
--------- --------- ---------
(875) 118 (757)
Interest expense on borrowings...................................................... 795 (331) 464
--------- --------- ---------
Change in total interest expense.................................................... (80) (213) (293)
--------- --------- ---------
Increase (decrease) in net interest income.......................................... $ 1,500 $ (424) $ 1,076
--------- --------- ---------
--------- --------- ---------
</TABLE>
For the six month period ended June 30, 1996, the Company experienced an
increase in net interest income of $1.1 million when compared to the first half
of 1995. This increase was mainly due to the increased volume in the loan
portfolio, the decreased volume in short-term borrowings, and the decreased
average rate paid on deposits, partially offset by reduced yields on loans, the
increased average rate paid on other borrowings, and the increased volume of
interest-bearing deposits. For the first half of 1996, average other borrowings
primarily consisted of $3.0 million of subordinated debt which was issued at
11.5% in the Fall of 1995 and qualifies as Tier 2 regulatory capital. For the
six months ended June 30, 1996, the Company's net interest spread of 5.18%
reflected an increase from 4.78% for the same period in 1995. This was primarily
due to the reduction in the Company's cost of deposits.
The trend of interest rates in the economy has remained flat during 1996;
however, there are indications that inflation may be increasing slightly. An
increase in inflation will put pressure on the Federal Reserve to increase
interest rates. If interest rates rise, CNBs interest rate margin is likely to
increase, thereby increasing net interest income.
The Company provides client services to several of its noninterest-bearing
demand deposit customers. The amount of credit available to clients is based on
a calculation of their average noninterest-bearing deposit balance, adjusted for
float and reserves, multiplied by an earnings credit rate, generally the 90-day
Treasury Bill rate. The credit can be utilized to pay for services including
messenger service, account reconciliation and other similar services. If the
cost of the services provided exceeds the available credit, the customer is
charged for the difference.
H-12
<PAGE>
The impact of this expense on the Company's net interest spread and net
yield on interest earning assets was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Average noninterest-bearing demand deposits........................ $ 60,088 $ 49,365 $ 57,090 $ 47,722
Client Service expense............................................. 95 91 215 161
Client Service cost annualized..................................... 0.63% 0.74% 1.51% 1.35%
Impact on Net Yield
- -------------------------------------------------------------------
Net yield on interest earning assets............................... 6.27 5.93% 6.12% 5.94%
Impact of client services.......................................... (0.15)% (0.17)% (0.17)% (0.16)%
--------- --------- --------- ---------
Adjusted net yield................................................. 6.12% 5.76% 5.95% 5.78%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The negative impact on the net yield on interest-earning assets is caused by
the reduction of net interest income by the cost of client service expenses,
which reduces the yield on interest-earning assets. The cost for client service
expense has been relatively stable, and reflects the Company's efforts in the
management of client service expense.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is measured as the difference between the volumes
of assets and liabilities in the Bank's current portfolio that are subject to
repricing at intervals of (a) one day or immediate, (b) two days to six months,
(c) seven to twelve months, (d) one to three years, (e) three to five years, (f)
over five years and (g) on a cumulative basis. Allocations of assets and
liabilities, including noninterest-bearing sources of funds, to specific periods
are based upon management's assessment of contractual or anticipated repricing
characteristics. The differences between the volumes of assets and liabilities
in these intervals are known as sensitivity gaps. The following table shows
interest sensitivity gaps for different intervals at June 30, 1996:
INTEREST SENSITIVITY ANALYSIS
Repricing Periods
<TABLE>
<CAPTION>
TOTAL
IMMEDIATE 2 DAYS TO 6 7-12 >1 YEAR TO >3 YRS TO TOTAL RATE NON-RATE
ONE DAY MONTHS MONTHS 3 YRS 5 YRS >5 YRS SENSITIVE SENSITIVE
----------- ----------- --------- ----------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks........ $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 16,419
Short term investments......... 11,000 -- -- -- -- -- 11,000 --
Investment securities.......... -- 9,004 -- 11,263 8,022 20,036 48,325 1,002
Loans.......................... 139,769 2,800 2,089 8,471 4,524 25,516 183,169 3,221
Loan loss reserve/unearned
fees.......................... -- -- -- -- -- -- -- (3,958)
Other assets................... -- -- -- -- -- -- -- 15,218
----------- ----------- --------- ----------- --------- --------- ----------- ---------
Total assets............... $ 150,769 $ 11,804 $ 2,089 $ 19,734 $ 12,546 $ 45,552 $ 242,494 $ 31,902
----------- ----------- --------- ----------- --------- --------- ----------- ---------
----------- ----------- --------- ----------- --------- --------- ----------- ---------
Liabilities and Equity:
Deposits
Demand....................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 66,263
NOW, MMDA, and savings....... 144,321 -- -- -- -- -- 144,321 --
Time deposits................ -- 29,310 9,844 380 11 10 39,555 --
Subordinated debt.............. 3,000 -- -- -- -- -- 3,000 --
Other liabilities.............. -- -- -- -- -- -- -- 1,274
Shareholders' equity........... -- -- -- -- -- -- -- 19,983
----------- ----------- --------- ----------- --------- --------- ----------- ---------
Total liabilities and
equity.................... $ 147,321 $ 29,310 $ 9,844 $ 380 $ 11 $ 10 $ 186,876 $ 87,520
----------- ----------- --------- ----------- --------- --------- ----------- ---------
----------- ----------- --------- ----------- --------- --------- ----------- ---------
Gap............................ $ 3,448 $ (17,506) $ (7,755) $ 19,354 $ 12,535 $ 45,542 $ 55,618 $ (55,618)
Cumulative Gap................. $ 3,448 $ (14,058) $ (21,813) $ (2,459) $ 10,076 $ 55,618 $ 55,618 $ --
Cumulative Gap/total assets.... 1.27% (5.16)% (8.01)% (0.90)% 3.70% 20.42% 20.42% 0%
<CAPTION>
TOTAL
---------
<S> <C>
Assets:
Cash and due from banks........ $ 16,419
Short term investments......... 11,000
Investment securities.......... 49,327
Loans.......................... 186,390
Loan loss reserve/unearned
fees.......................... (3,958)
Other assets................... 15,218
---------
Total assets............... $ 274,396
---------
---------
Liabilities and Equity:
Deposits
Demand....................... $ 66,263
NOW, MMDA, and savings....... 144,321
Time deposits................ 39,555
Subordinated debt.............. 3,000
Other liabilities.............. 1,274
Shareholders' equity........... 19,983
---------
Total liabilities and
equity.................... $ 274,396
---------
---------
Gap............................ $ --
Cumulative Gap................. $ --
Cumulative Gap/total assets.... -- %
</TABLE>
H-13
<PAGE>
The management of interest rate sensitivity, or interest rate risk
management, is a function of the repricing characteristics of the Bank's
portfolio of assets and liabilities. These repricing characteristics are subject
to changes in interest rates either at replacement, repricing or maturity during
the life of the instruments. Interest rate risk management focuses on the
maturity structure of assets and liabilities and their repricing characteristics
during periods of changes in market interest rates. Effective interest rate risk
management seeks to ensure that both assets and liabilities respond to changes
in interest rates within an acceptable time frame, thereby reducing the effect
of interest rate movements on net interest income.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing of
both the asset and its supporting liability can remain the same, thus impacting
net interest income. This characteristic is referred to as "basis risk" and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity table above. These prepayments may have significant effects
on the Bank's net interest margin. Because of these factors, the interest
sensitivity gap report may not provide a complete assessment of the Bank's
exposure to changes in interest rates.
NON-INTEREST INCOME
The following table provides details of non-interest income for the previous
five quarters.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1996 1996 1995 1995 1995
----------- ----------- --------------- --------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan fees........................................... $ 34 $ 15 $ 11 $ 51 $ 29
Trust fees.......................................... 344 309 241 178 135
Gain on sale of SBA loans........................... 123 130 153 63 45
Depositor service fees.............................. 121 98 92 92 98
Gain on sale of mortgage loans...................... -- -- -- -- 51
Other............................................... 185 77 54 67 49
----- ----- ----- ----- -----
Total other income.............................. $ 807 $ 629 $ 551 $ 451 $ 407
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
Non-interest income was $807,000 for the second quarter of 1996, an increase
of $178,000 from the first quarter of 1996, and of $400,000 from the second
quarter of 1995. The increase in the 1996 second quarter from the first quarter
of 1996 and from the second quarter of 1995 was primarily due to an increase in
trust fee income and to $95,000 in gains realized on warrants received in
connection with CNBs Venture Lending group. In the past year, the Company has
increased its focus on these two business lines.
The increase of $535,000 in total noninterest income from the first half of
1995 to the first half of 1996 was also due to increased trust fee income and
warrant income.
H-14
<PAGE>
NON-INTEREST EXPENSE
The following table provides details of non-interest expense for the
previous five quarters:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1996 1996 1995 1995 1995
--------- ----------- ------------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation and benefits.......................... $ 1,998 $ 1,700 $ 1,774 $ 1,694 $ 1,600
Occupancy and equipment............................ 489 473 470 430 392
Professional services.............................. 248 193 269 277 230
Legal settlement and costs......................... -- -- -- -- 1,700
FDIC insurance and assessments..................... 21 20 62 22 135
Supplies, telephone and postage.................... 160 130 117 109 108
Data processing.................................... 38 50 42 39 30
Client services.................................... 95 120 81 95 91
Other real estate, net............................. 6 24 -- 1 (7)
Other.............................................. 444 442 366 315 321
--------- ----------- ------------- ------------- ---------
Total operating expenses....................... $ 3,499 $ 3,152 $ 3,181 $ 2,982 $ 4,600
--------- ----------- ------------- ------------- ---------
--------- ----------- ------------- ------------- ---------
</TABLE>
Total non-interest expenses were $3.5 million for the second quarter of
1996, an increase of $347,000 from the first quarter of 1996, and a decrease of
$1.1 million from the second quarter of 1995. The significant decline from the
previous years second quarter, as well as from the first half of 1995, is due to
the $1.7 million legal settlement expense recorded in the second quarter of
1995.
Compensation and benefits expense for the second quarter increased by
$298,000 when compared to the first quarter of 1996, and by $398,000 from the
comparable quarter of 1995. The increase in compensation, occupancy and supplies
expense during the second quarter of 1996 and the first half of 1996, from the
1995 second quarter and the 1995 first half, respectively, is primarily due to
the opening of the new downtown Palo Alto branch office in June 1996. The
decline in FDIC assessment expense of $114,000 from the second quarter of 1995
to the comparable quarter in 1996 reflects the change in assessment rates for
banks insured by the Bank Insurance Fund of the FDIC. Total FDIC insurance and
assessments declined by $219,000 from the first half of 1995 to the first half
of 1996 for the same reason.
INCOME TAX
The provision for income taxes for the second quarter of 1996 of $289,000
reflects an effective tax rate for the quarter of approximately 36%, compared to
a tax benefit recorded for the second quarter of 1995 of $470,000 with an
effective tax rate of 42%. The difference was primarily due to the operating
loss experienced by the Company in the second quarter of 1995 due to the
litigation settlement. CUNB did not require a valuation allowance related to its
deferred tax asset.
H-15
<PAGE>
FINANCIAL CONDITION
CAPITAL RATIOS
The Company's and the Bank's leverage ratio (Tier 1 capital to average
quarterly assets) and total risk-based capital ratios were as follows:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31, 1995
---------------------------------------------- ----------------------------------------------
TIER 1 CAPITAL TO TOTAL CAPITAL TO TIER 1 CAPITAL TO TOTAL CAPITAL TO
AVERAGE RISK-WEIGHTED AVERAGE RISK-WEIGHTED
QUARTERLY ASSETS ASSETS QUARTERLY ASSETS ASSETS
---------------------- ---------------------- ---------------------- ----------------------
BALANCE % BALANCE % BALANCE % BALANCE %
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLAR IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CNB.......................... $ 18,483 6.98% $ 24,341 10.66% $ 17,650 7.36% $ 23,180 11.41%
Well capitalized
requirement................. 13,234 5.00% 22,838 10.00% 11,989 5.00% 20,318 10.00%
--------- --- --------- ----- --------- --- --------- -----
Excess capital............... $ 5,249 1.98% $ 1,503 0.66% $ 5,661 2.36% $ 2,862 1.41%
--------- --- --------- ----- --------- --- --------- -----
--------- --- --------- ----- --------- --- --------- -----
Cupertino National Bancorp... $ 19,923 7.52% $ 25,814 11.17% $ 18,672 7.78% $ 24,213 11.91%
Well capitalized
requirement................. 13,243 5.00% 23,115 10.00% 12,000 5.00% 20,331 10.00%
--------- --- --------- ----- --------- --- --------- -----
Excess capital............... $ 6,680 2.52% $ 2,699 1.17% $ 6,672 2.78% $ 3,882 1.91%
--------- --- --------- ----- --------- --- --------- -----
--------- --- --------- ----- --------- --- --------- -----
</TABLE>
In addition, the Company's and the Bank's Tier 1 risk-based capital ratios
were 8.62% and 8.09% at June 30, 1996, respectively, compared with 9.18% and
8.69%, respectively, at December 31, 1995, and 9.63% and 9.13%, respectively, at
June 30, 1995.
To be considered well capitalized, as defined under the regulatory framework
for prompt corrective action, an institution must have a Tier 1 risk-based
capital ratio of 6% or greater, a total risk-based capital ratio of 10% or
greater and a leverage ratio of 5% or greater. To be considered adequately
capitalized, as defined under the regulatory framework for prompt corrective
action, an institution must have a Tier 1 risk-based capital ratio of 4% or
greater, a total risk-based capital ratio of 8% or greater and a leverage ratio
of 3% or greater. All of the Company's and the Bank's risk-based capital and
leverage ratios exceed the ratios for a well capitalized financial institution
for all periods presented above.
LIQUIDITY
Liquidity is defined as the ability of a company to convert assets into cash
or cash equivalents without significant loss, and to raise additional funds by
increasing liabilities. Liquidity management involves maintaining the Bank's
ability to meet the day-to-day cash flow requirements of the Bank's clients who
either want to withdraw funds or require funds to meet their credit needs.
Through an Asset/Liability Management Committee, the Bank actively monitors its
commitments to fund loans, as well as the composition and maturity schedule of
its loan and deposit portfolios. To manage its liquidity, the Bank maintains $20
million in inter-bank Fed Fund purchase lines, as well as $100 million in
institutional deposit or brokered deposit lines, and $35 million in reverse
repurchase lines.
H-16
<PAGE>
PROVISION AND RESERVE FOR LOAN LOSSES
The following schedule details the activity in the Bank's reserve for loan
losses and related ratios for each of the last five quarters:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1996 1996 1995 1995 1995
--------- ----------- ------------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at beginning of period..... $ 2,907 $ 2,683 $ 2,522 $ 2,454 $ 2,359
Provision charged to operations.................... 265 200 90 75 85
Loans charged off.................................. (165) -- (54) (15) (4)
Loan recoveries.................................... 36 24 125 8 14
--------- ----------- ------------- ------------- ---------
Reserve for loan losses at end of period........... $ 3,043 $ 2,907 $ 2,683 $ 2,522 $ 2,454
--------- ----------- ------------- ------------- ---------
--------- ----------- ------------- ------------- ---------
Ratio of:
Reserve for loan losses to loans................... 1.63% 1.67% 1.64% 1.69% 1.70%
Reserve for loan losses to nonperforming assets.... 86.08% 84.95% 80.26% 85.67% 68.32%
</TABLE>
The provision for loan losses was $265,000 in the second quarter of 1996,
compared to $200,000 in the first quarter of 1996, and to $85,000 in the second
quarter of 1995. The provision for loan losses for the first half of 1996 was
$465,000 compared to $516,000 in the comparable period in 1995.
Management considers changes in the size and character of the loan
portfolio, changes in non-performing and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the loan loss reserve. The reserve for loan losses
was $3.04 million at June 30, 1996, compared with $2.91 million at March 31,
1996, and $2.68 million at December 31, 1995.
The ratio of the reserve for loan losses to total loans was 1.63% at June
30, 1996, compared with 1.64% at December 31, 1995, and 1.70% at June 30, 1995.
The ratio of the reserve for loan losses to total nonperforming assets,
including foreclosed real estate, was 86.08% at June 30, 1996, compared to
80.26% at December 31, 1995 and 68.32% at June 30, 1995.
NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS
PAST DUE 90 DAYS OR MORE AND FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30,
1996 1996 1995 1995 1995
--------- ----------- ------------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accruing loans................................. $ 2,214 $ 2,325 $ 2,513 $ 2,539 $ 2,426
Restructured loans................................. -- -- -- -- --
Accruing loans past due 90 days or more............ 1,104 880 830 405 1,166
--------- ----------- ------------- ------------- ---------
Total nonperforming loans.......................... 3,318 3,205 3,343 2,944 3,592
OREO............................................... 217 217 -- -- --
--------- ----------- ------------- ------------- ---------
Total nonperforming assets......................... $ 3,535 $ 3,422 $ 3,343 $ 2,944 $ 3,592
--------- ----------- ------------- ------------- ---------
--------- ----------- ------------- ------------- ---------
Total nonperforming assets to total assets......... 1.29% 1.34% 1.29% 1.23% 1.47%
</TABLE>
Over the past year, total nonperforming assets have remained relatively
stable with totals of $3.5 million at June 30, 1996, compared with $3.3 million
at December 31, 1995, and $3.6 million at June 30, 1995. Nonperforming loans,
which include non-accruing loans, restructured loans, and accruing loans which
are past due 90 days or more, were $3.3 million at June 30, 1996, compared with
$3.3 million at December 31, 1995, and $3.6 million at June 30, 1995.
H-17
<PAGE>
It is the Bank's policy to discontinue the accrual of interest when the
ability of a borrower to repay principal or interest is in doubt, or when a loan
is past due 90 days or more, except when, in management's judgment, the loan is
well secured and in the process of collection.
The Bank has an active credit administration function which includes, in
addition to internal reviews, the regular use of an outside loan review firm to
review the quality of the loan portfolio. Senior management, and an internal
asset review committee review problem loans on a regular basis.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly
from that exerted on industrial concerns, primarily because its assets and
liabilities consist largely of monetary items. The most direct effect of
inflation on a financial institution is fluctuation in interest rates. However,
net interest income is affected by the spread between interest rates received on
assets and those paid on interest bearing liabilities, rather than the absolute
level of interest rates. Additionally, there may be some upward pressure on the
Companys operating expenses, such as increases in occupancy expenses based on
consumer price indices. In the opinion of management, inflation has not had
material effect on the operating results of the Company.
H-18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 -- ITEM 3, ITEM 5
Not applicable
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on May 16, 1996
and 1,174,865 shares were represented at the meeting in person or by proxy.
(b) The following 13 persons nominated by management were elected as directors
at the meeting:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- -----------
<S> <C> <C>
C. Donald Allen 1,153,260 21,605
David K. Chui 1,153,260 21,605
Carl E. Cookson 1,153,260 21,605
Jerry R. Crowley 1,153,260 21,605
Janet M. DeCarli 1,148,923 25,942
John M. Gatto 1,153,260 21,605
William H. Guengerich 1,153,260 21,605
James E. Jackson 1,153,260 21,605
Rex D. Lindsay 1,153,260 21,605
Glen McLaughlin 1,153,260 21,605
Norman Meltzer 1,153,260 21,605
Dick J. Randall 1,153,260 21,605
Dennis Whittaker 1,153,260 21,605
</TABLE>
(c) A proposal to approve an amendment to the Company's 1989 Non-Qualified Stock
Option Plan to increase the number of shares of the Company's Common Stock
reserved for issuance thereunder by 35,000 shares, was approved by a vote of
896,616 shares in favor, 270,984 shares opposed and 7,265 shares abstaining
or subject to broker non-votes.
(d) A proposal to approve an amendment to the Company's Employee Stock Purchase
Plan to increase the number of shares of the Company's Common Stock reserved
for issuance thereunder by 60,000 shares, was approved by a vote of 937,401
shares in favor, 37,976 shares opposed and 199,488 shares abstaining or
subject to broker non-votes.
(e) A proposal to ratify the appointment of Coopers & Lybrand L.L.P. as the
Company's independent accountants for the current fiscal year was approved
by a vote of 1,171,260 shares in favor, 2,554 shares opposed and 691 shares
abstaining or subject to broker non-votes.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
The Exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Report.
(a) Exhibits -- Listed on Index to Exhibits
(b) Reports on Form 8-K for the quarter covered by this report
The Company filed a Report on Form 8-K on July 12, 1996 reporting, on Item
5. Other Events, the signing of a definitive agreement for a merger of equals of
Registrant with and into Mid-Peninsula Bancorp and that Mid-Peninsula Bancorp
will change its name to Greater Bay Bancorp concurrent with closing of the
merger. The Amended and Restated Agreement and Plan of Reorganization and Merger
dated June 26, 1996 was filed as an exhibit to the Form 8-K and is incorporated
herein by reference.
H-19
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CUPERTINO NATIONAL BANCORP
(Registrant)
By:
__________/s/_STEVEN C. SMITH_________
Steven C. Smith
EXECUTIVE VICE PRESIDENT,
CHIEF OPERATING OFFICER
__________/s/_HEIDI R. WULFE__________
Heidi R. Wulfe
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
Date: August 9, 1996
H-20
<PAGE>
APPENDIX I
GREATER BAY BANCORP 1996 STOCK OPTION PLAN
I-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<C> <C> <S> <C>
1. PURPOSE.................................................................................................. 1
2. DEFINITIONS.............................................................................................. 1
(a) Board of Directors............................................................................ 1
(b) Change in Control............................................................................. 1
(c) Code.......................................................................................... 1
(d) Committee..................................................................................... 1
(e) Company....................................................................................... 1
(f) Employee...................................................................................... 1
(g) Exchange Act.................................................................................. 1
(h) Exercise Price................................................................................ 1
(i) Fair Market Value............................................................................. 2
(j) ISO........................................................................................... 2
(k) Nonstatutory Option........................................................................... 2
(l) Option........................................................................................ 2
(m) Optionee...................................................................................... 2
(n) Plan.......................................................................................... 2
(o) Service....................................................................................... 2
(p) Share......................................................................................... 2
(q) Stock......................................................................................... 2
(r) Stock Option Agreement........................................................................ 2
(s) Subsidiary.................................................................................... 2
(t) Substitute Option............................................................................. 2
(u) Total and Permanent Disability................................................................ 2
3. ADMINISTRATION........................................................................................... 3
(a) Committee Membership.......................................................................... 3
(b) Committee Procedures.......................................................................... 3
(c) Committee Responsibilities.................................................................... 3
4. ELIGIBILITY.............................................................................................. 4
(a) General Rules................................................................................. 4
(b) Ten-Percent Stockholders...................................................................... 4
(c) Attribution Rules............................................................................. 4
(d) Outstanding Stock............................................................................. 4
5. STOCK SUBJECT TO PLAN.................................................................................... 4
(a) Basic Limitation.............................................................................. 4
(b) Additional Shares............................................................................. 4
6. TERMS AND CONDITIONS OF OPTIONS.......................................................................... 4
(a) Stock Option Agreement........................................................................ 4
(b) Number of Shares.............................................................................. 5
(c) Exercise Price................................................................................ 5
(d) Withholding Taxes............................................................................. 5
(e) Exercisability................................................................................ 5
(f) Term.......................................................................................... 5
(g) Transferability............................................................................... 6
(h) No Rights as a Stockholder.................................................................... 6
(i) Modification, Extension and Renewal of Options................................................ 6
(j) Substitute Options............................................................................ 6
7. PAYMENT FOR SHARES....................................................................................... 6
(a) General Rule.................................................................................. 6
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
(b) Surrender of Stock............................................................................ 7
<C> <C> <S> <C>
(c) Exercise/Sale................................................................................. 7
(d) Exercise/Pledge............................................................................... 7
8. ADJUSTMENT OF SHARES..................................................................................... 7
(a) General....................................................................................... 7
(b) Reorganizations............................................................................... 7
(c) Reservation of Rights......................................................................... 7
9. SECURITIES LAWS.......................................................................................... 8
10. NO RETENTION RIGHTS...................................................................................... 8
11. DURATION AND AMENDMENTS.................................................................................. 8
(a) Term of the Plan.............................................................................. 8
(b) Right to Amend or Terminate the Plan.......................................................... 8
(c) Effect of Amendment or Termination............................................................ 8
</TABLE>
I-3
<PAGE>
GREATER BAY BANCORP 1996 STOCK OPTION PLAN
1. PURPOSE.
The purpose of the Plan is to offer selected employees, directors and
consultants an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, by purchasing Shares of the Company's
Common Stock. The Plan provides both for the grant of Nonstatutory Options as
well as ISOs intended to qualify under section 422 of the Code.
2. DEFINITIONS.
(a) "BOARD OF DIRECTORS" shall mean the Board of Directors of the Company,
as constituted from time to time.
(b) "CHANGE IN CONTROL" shall mean the occurrence of either of the following
events:
(i) A change in the composition of the Board of Directors, as a result
of which fewer than one-half of the incumbent directors are directors who
either:
(A) Had been directors of the Company (including prior service as a
director of either Mid-Peninsula Bancorp or Cupertino National Bancorp)
24 months prior to such change; or
(B) Were elected, or nominated for election, to the Board of
Directors with the affirmative votes of at least a majority of the
directors who had been directors of the Company at the Effective Time of
the Merger of Mid-Peninsula Bancorp and Cupertino National Bancorp or 24
months prior to such change (whichever is later) and who were still in
office at the time of the election or nomination; or
(ii) Any "person" (as such term is used in sections 13(d) and 14(d) of
the Exchange Act) by the acquisition or aggregation of securities is or
becomes the beneficial owner, directly or indirectly, of securities of the
Company representing 50 percent or more of the combined voting power of the
Company's then outstanding securities. For purposes of this Paragraph (ii),
the term "person" shall not include an employee benefit plan maintained by
the Company.
(c) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" shall mean a committee of the Board of Directors, as
described in Section 3(a), or in the absence of such a committee, the Board of
Directors.
(e) "COMPANY" shall mean Greater Bay Bancorp, a California corporation,
formerly known as Mid-Peninsula Bancorp, a California corporation.
(f) "EMPLOYEE" shall mean:
(i) Any individual who is a common-law employee of the Company or of a
Subsidiary;
(ii) A member of the Board of Directors; and
(iii) An independent contractor who performs services for the Company or
a Subsidiary and who is not a member of the Board of Directors.
Service as an independent contractor or member of the Board of Directors shall
be considered employment for all purposes of the Plan, except as provided in
Section 4(a).
(g) "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended.
(h) "EXERCISE PRICE" shall mean the amount for which one Share may be
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
I-4
<PAGE>
(i) "FAIR MARKET VALUE" shall mean the market price of Stock, determined by
the Committee as follows:
(i) If Stock was traded over-the-counter on the date in question but was
not traded on the Nasdaq system or the Nasdaq National Market System, then
the Fair Market Value shall be equal to the mean between the last reported
representative bid and asked prices quoted for such date by the principal
automated inter-dealer quotation system on which Stock is quoted or, if
Stock is not quoted on any such system, by the "Pink Sheets" published by
the National Quotation Bureau, Inc.;
(ii) If Stock was traded over-the-counter on the date in question and
was traded on the Nasdaq system or the Nasdaq National Market System, then
the Fair Market Value shall be equal to the last-transaction price quoted
for such date by the Nasdaq system or the Nasdaq National Market System;
(iii) If Stock was traded on a stock exchange on the date in question,
then the Fair Market Value shall be equal to the closing price reported by
the applicable composite-transactions report for such date; and
(iv) If none of the foregoing provisions is applicable, then the Fair
Market Value shall be determined by the Committee in good faith on such
basis as it deems appropriate.
In all cases, the determination of Fair Market Value by the Committee shall be
conclusive and binding on all persons.
(j) "ISO" shall mean an employee incentive stock option described in
Section 422(b) of the Code.
(k) "NONSTATUTORY OPTION" shall mean a stock option not described in
Sections 422(b) or 423(b) of the Code.
(l) "OPTION" shall mean an ISO or Nonstatutory Option granted under the Plan
and entitling the holder to purchase Shares.
(m) "OPTIONEE" shall mean an individual who holds an Option.
(n) "PLAN" shall mean this Greater Bay Bancorp 1996 Stock Option Plan, as it
may be amended from time to time.
(o) "SERVICE" shall mean service as an Employee.
(p) "SHARE" shall mean one share of Stock, as adjusted in accordance with
Section 8 (if applicable).
(q) "STOCK" shall mean the Common Stock of the Company.
(r) "STOCK OPTION AGREEMENT" shall mean the agreement between the Company
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
(s) "SUBSIDIARY" shall mean any corporation, if the Company and/or one or
more other Subsidiaries own not less than 50 percent of the total combined
voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
(t) "SUBSTITUTE OPTION" shall mean an option described in Section 6(j).
(u) "TOTAL AND PERMANENT DISABILITY" shall mean that the Optionee is unable
to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or which has lasted, or can be expected to last, for a continuous period
of not less than one year.
I-5
<PAGE>
3. ADMINISTRATION.
(a) COMMITTEE MEMBERSHIP. The Board of Directors shall have the authority
to administer the Plan but may delegate its administrative powers under the
Plan, in whole or in part, to one or more committees of the Board of Directors.
With respect to the participation of Employees who are subject to Section 16 of
the Exchange Act, the Plan may be administered by a committee composed solely of
two or more members of the Board of Directors who qualify as "nonemployee
directors" as defined in Securities and Exchange Commission Rule 16b-3 under the
Exchange Act. With respect to the participation of Employees who may be
considered "covered employees" under Section 162(m) of the Code, the Plan may be
administered by a committee composed solely of two or more members of the Board
of Directors who qualify as "outside directors" as defined by the Internal
Revenue Service for plans intended to qualify for an exemption under Section
162(m)(4)(C) of the Code. If the committee members meet both such
qualifications, then one committee may administer the Plan both with respect to
Employees who are subject to Section 16 of the Exchange Act or who are
considered to be "covered employees" under Section 162(m) of the Code.
The Board of Directors may appoint a separate committee, consisting of one
or more members of the Board of Directors who do not meet such qualifications.
Such committee may administer the Plan with respect to Employees who are not
officers of the Company or members of the Board of Directors, may grant Options
under the Plan to such Employees and may determine the timing, number of Shares
and other terms of such grants.
(b) COMMITTEE PROCEDURES. The Board of Directors shall designate one of the
members of any Committee appointed under paragraph (a) as chairman. Any such
Committee may hold meetings at such times and places as it shall determine. The
acts of a majority of the Committee members present at meetings at which a
quorum exists, or acts reduced to or approved in writing by all Committee
members, shall be valid acts of the Committee.
(c) COMMITTEE RESPONSIBILITIES. Subject to the provisions of the Plan, any
such Committee shall have full authority and discretion to take the following
actions:
(i) To interpret the Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms relating to
the Plan;
(iii) To authorize any person to execute, on behalf of the Company, any
instrument required to carry out the purposes of the Plan;
(iv) To determine when Options are to be granted under the Plan;
(v) To select the Optionees;
(vi) To determine the number of Shares to be made subject to each Option;
(vii) To prescribe the terms and conditions of each Option, including
(without limitation) the Exercise Price, to determine whether such Option is
to be classified as an ISO or as a Nonstatutory Option, and to specify the
provisions of the Stock Option Agreement relating to such Option;
(viii) To amend any outstanding Stock Option Agreement, subject to
applicable legal restrictions and to the consent of the Optionee who entered
into such agreement;
(ix) To prescribe the consideration for the grant of each Option under
the Plan and to determine the sufficiency of such consideration; and
(x) To take any other actions deemed necessary or advisable for the
administration of the Plan.
I-6
<PAGE>
All decisions, interpretations and other actions of the Committee shall be final
and binding on all Optionees, and all persons deriving their rights from an
Optionee. No member of the Committee shall be liable for any action that he or
she has taken or has failed to take in good faith with respect to the Plan or
any Option.
4. ELIGIBILITY.
(a) GENERAL RULES. Only Employees shall be eligible for designation as
Optionees by the Committee. In addition, only Employees who are common-law
employees of the Company or a Subsidiary shall be eligible for the grant of
ISOs.
(b) TEN-PERCENT STOCKHOLDERS. An Employee who owns more than 10 percent of
the total combined voting power of all classes of outstanding stock of the
Company or any of its Subsidiaries shall not be eligible for the grant of an ISO
unless:
(i) The Exercise Price is at least 110 percent of the Fair Market Value
of a Share on the date of grant; and
(ii) Such ISO by its terms is not exercisable after the expiration of
five years from the date of grant.
(c) ATTRIBUTION RULES. For purposes of Subsection (b) above, in determining
stock ownership, an Employee shall be deemed to own the stock owned, directly or
indirectly, by or for such Employee's brothers, sisters, spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its stockholders, partners or beneficiaries. Stock
with respect to which such Employee holds an option shall not be counted.
(d) OUTSTANDING STOCK. For purposes of Subsection (b) above, "outstanding
stock" shall include all stock actually issued and outstanding immediately after
the grant. "Outstanding stock" shall not include shares authorized for issuance
under outstanding options held by the Employee or by any other person.
5. STOCK SUBJECT TO PLAN.
(a) BASIC LIMITATION. Shares offered under the Plan shall be authorized but
unissued Shares. The aggregate number of Shares which is issued under the Plan
upon exercise of Options shall not exceed 519,896 Shares plus the number of
Shares remaining available for awards under the Company's 1994 Mid-Peninsula
Bancorp Stock Option Plan (the "Prior Plan") as of the effective date of the
merger of Cupertino National Bancorp with and into Mid-Peninsula Bancorp by
which Mid-Peninsula Bancorp will also change its name to Greater Bay Bancorp
(the "Effective Date"). (No additional grants shall be made under the Prior Plan
after the Effective Date, although the Prior Plan will continue to govern
outstanding options previously granted under the Prior Plan.) Nothwithstanding
the foregoing sentence, the aggregate number of Shares which may be issued
pursuant to the exercise of ISOs granted under the Plan shall not exceed
519,896. The number of Shares which are subject to Options outstanding at any
time under the Plan shall not exceed the number of Shares which then remain
available for issuance under the Plan. The Company, during the term of the Plan,
shall at all times reserve and keep available sufficient Shares to satisfy the
requirements of the Plan.
(b) ADDITIONAL SHARES. In the event that any outstanding option granted
under this Plan, including Substitute Options, or the Prior Plan, for any reason
expires or is cancelled or otherwise terminated, the Shares allocable to the
unexercised portion of such option shall become available for the purposes of
this Plan.
6. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall be
evidenced by a Stock Option Agreement executed by the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions
I-7
<PAGE>
which are not inconsistent with the Plan and which the Committee deems
appropriate for inclusion in a Stock Option Agreement. The provisions of the
various Stock Option Agreements entered into under the Plan need not be
identical.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall specify the number
of Shares that are subject to the Option and shall provide for the adjustment of
such number in accordance with Section 8. Options granted to any Optionee in a
single calendar year shall in no event cover more than Shares, subject to
adjustment in accordance with Section 8. The Stock Option Agreement shall also
specify whether the Option is an ISO or a Nonstatutory Option.
(c) EXERCISE PRICE. Each Stock Option Agreement shall specify the Exercise
Price. The Exercise Price of an Option shall not be less than 100 percent of the
Fair Market Value of a Share on the date of grant, except as otherwise provided
in Section 4(b) with respect to ISO's and Section 6(i) with respect to
Substitute Options. The Exercise Price shall be payable in a form described in
Section 7.
(d) WITHHOLDING TAXES. As a condition to the exercise of an Option, the
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that arise in connection with such exercise. The Optionee shall also make such
arrangements as the Committee may require for the satisfaction of any federal,
state, local or foreign withholding tax obligations that may arise in connection
with the disposition of Shares acquired by exercising an Option. The Committee
may permit the Optionee to satisfy all or part of his or her tax obligations
related to the Option by having the Company withhold a portion of any Shares
that otherwise would be issued to him or her or by surrendering any Shares that
previously were acquired by him or her. Such Shares shall be valued at their
Fair Market Value on the date when taxes otherwise would be withheld in cash.
The payment of taxes by assigning Shares to the Company, if permitted by the
Committee, shall be subject to such restrictions as the Committee may impose.
(e) EXERCISABILITY. Each Stock Option Agreement shall specify the date when
all or any installment of the Option is to become exercisable. The vesting of
any Option shall be determined by the Committee at its sole discretion; provided
however, that:
(i) Each Stock Option Agreement shall provide for immediate
exercisability of the entire Option in the event of a Change in Control.
(ii) In the In the event that an Optionee's Service terminates, the
Option shall be exercisable only to the extent the Option was vested as of
the date of such termination, unless otherwise specified in the Optionee's
Stock Option Agreement.
(f) TERM. Each Stock Option Agreement shall specify the term of the Option.
The term of an ISO shall not exceed 10 years from the date of grant, except as
otherwise provided in Section 4(b). Subject to the preceding sentence, the
Committee at its sole discretion shall determine when an Option is to expire. In
the event that the Optionee's Service terminates:
(i) As a result of such Optionee's death or Total and Permanent
Disability, the term of the Option shall expire twelve months (or such other
period specified in the Optionee's Stock Option Agreement) after such death
or Total and Permanent Disability but not later than the original expiration
date specified in the Stock Option Agreement.
(ii) As a result of termination by the Company for cause, the term of
the Option shall expire thirty days after the Company's notice or advice of
such termination is dispatched to Employee, but not later than the original
expiration date specified in the Stock Option Agreement. For purposes of
this Paragraph (ii), "cause" shall mean an act of embezzlement, fraud,
dishonesty, breach of fiduciary duty to the Company, or the deliberate
disregard of rules of the Company which results in loss, damage or injury to
the Company, the unauthorized disclosure of any of the secrets or
confidential information of the Company, the inducement of any client or
customer of the Company to break any contract with the Company, or the
inducement of any principal for whom the Company acts as agent to terminate
such agency relationship, the engagement of any
I-8
<PAGE>
conduct which constitutes unfair competition with the Company, the removal
of Optionee from office by any court or bank regulatory agency, or such
other similar acts which the Committee in its discretion determine to
constitute good cause for termination of Optionee's Service. As used in this
Paragraph (ii), Company includes Subsidiaries of the Company.
(iii) As a result of termination for any reason other than Total and
Permanent Disability, death or cause, the term of the Option shall expire
three months (or such other period specified in the Optionee's Stock Option
Agreement) after such termination, but not later than the original
expiration date specified in the Stock Option Agreement.
(g) TRANSFERABILITY. During an Optionee's lifetime, such Optionee's ISO(s)
shall be exercisable only by him or her and shall not be transferable. An
Optionee's Nonstatutory Options shall also not be transferable during the
Optionee's lifetime, except to the extent otherwise permitted in the Optionee's
Stock Option Agreement. Subject to prior permitted transfers, in the event of an
Optionee's death, such Optionee's Option(s) shall not be transferable other than
by will, by written beneficiary designation or by the laws of descent and
distribution.
(h) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by his or her Option until the date of the issuance of a stock
certificate for such Shares. No adjustments shall be made, except as provided in
Section 8.
(i) MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Within the limitations
of the Plan, the Committee may modify, extend or renew outstanding Options or
may accept the cancellation of outstanding Options (to the extent not previously
exercised) in return for the grant of new Options at the same or a different
price. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Optionee, impair such Optionee's rights or increase
his or her obligations under such Option.
(j) SUBSTITUTE OPTIONS. If the Company at any time should succeed to the
business of another corporation through merger or consolidation, or through the
acquisition of stock or assets of such corporation, Options may be granted under
the Plan in substitution of options previously granted by such corporation to
purchase shares of its stock which options are outstanding at the date of the
succession ("Surrendered Options"). It is specifically intended that this
section of the Plan shall authorize the granting and issuance of Substitute
Options pursuant to the terms of the Amended and Restated Agreement and Plam of
Reorganization by and between Mid-Peninsula Bancorp and Cupertino National
Bancorp dated June 26, 1996. The Committee shall have discretion to determine
the extent to which such Substitute Options shall be granted, the persons to
receive such Substitute Options, the number of Shares to be subject to such
Substitute Options, and the terms and conditions of such Substitute Options
which shall, to the extent permissible within the terms and conditions of the
Plan, be equivalent to the terms and conditions of the Surrendered Options. The
Exercise Price may be determined without regard to Section 6(c); provided
however, that the Exercise Price of each Substitute Option shall be an amount
such that, in the sole and absolute judgment of the Committee (and if the
Substitute Options are to be ISO's, in compliance with Section 424(a) of the
Code), the economic benefit provided by such Substitute Option is not greater
than the economic benefit represented by the Surrendered Option as of the date
of the succession.
7. PAYMENT FOR SHARES.
(a) GENERAL RULE. The entire Exercise Price of Shares issued under the Plan
shall be payable in lawful money of the United States of America at the time
when such Shares are purchased, except as follows:
(i) ISOS. In the case of an ISO granted under the Plan, payment shall
be made only pursuant to the express provisions of the applicable Stock
Option Agreement. However, the Committee (at its sole discretion) may
specify in the Stock Option Agreement that payment may be made pursuant to
Subsections (b), (c) or (d) below.
I-9
<PAGE>
(ii) NONSTATUTORY OPTIONS. In the case of a Nonstatutory Option granted
under the Plan, the Committee (at its sole discretion) may accept payment
pursuant to Subsections (b), (c), or (d) below.
(b) SURRENDER OF STOCK. To the extent that this Subsection (b) is
applicable, payment may be made all or in part with Shares which have already
been owned by the Optionee or his or her representative for more than 6 months
and which are surrendered to the Company in good form for transfer. Such Shares
shall be valued at their Fair Market Value on the date when the new Shares are
purchased under the Plan.
(c) EXERCISE/SALE. To the extent that this Subsection (c) is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to a securities broker approved by the Company to sell
Shares and to deliver all or part of the sales proceeds to the Company in
payment of all or part of the Exercise Price and any withholding taxes.
(d) EXERCISE/PLEDGE. To the extent that this Subsection (d) is applicable,
payment may be made by the delivery (on a form prescribed by the Company) of an
irrevocable direction to pledge Shares to a securities broker or lender approved
by the Company, as security for a loan, and to deliver all or part of the loan
proceeds to the Company in payment of all or part of the Exercise Price and any
withholding taxes.
8. ADJUSTMENT OF SHARES.
(a) GENERAL. In the event of a subdivision of the outstanding Stock, a
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Stock (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spinoff or a similar occurrence, the Committee shall make
appropriate adjustments in one or more of:
(i) The number of Shares available under Section 5 for future grants;
(ii) The limit set forth in Section 6(b);
(iii) The number of Shares covered by each outstanding Option; or
(iv) The Exercise Price under each outstanding Option.
(b) REORGANIZATIONS. In the event that the Company is a party to a merger
or other reorganization, outstanding Options shall be subject to the agreement
of merger or reorganization. Subject to the provisions of Section 6(e)(i), such
agreement may provide, without limitation, for the assumption of outstanding
Options by the surviving corporation or its parent, for their continuation by
the Company (if the Company is a surviving corporation), for payment of a cash
settlement equal to the difference between the amount to be paid for one Share
under such agreement and the Exercise Price, or for the acceleration of their
exercisability followed by the cancellation of Options not exercised, in all
cases without the Optionees' consent. Any cancellation shall not occur until
after such acceleration is effective and Optionees have been notified of such
acceleration and have had reasonable opportunity to exercise their Options.
(c) RESERVATION OF RIGHTS. Except as provided in this Section 8, an
Optionee or Offeree shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class, the payment of any dividend or
any other increase or decrease in the number of shares of stock of any class.
Any issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall not affect, and no
adjustment by reason thereof shall be made with respect to, the number or
Exercise Price of Shares subject to an Option. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company to
make adjustments, reclassifications, reorganizations or changes of its capital
or business structure, to merge or consolidate or to dissolve, liquidate, sell
or transfer all or any part of its business or assets.
I-10
<PAGE>
9. SECURITIES LAWS.
Shares shall not be issued under the Plan unless the issuance and delivery
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on which the Company's
securities may then be listed.
10. NO RETENTION RIGHTS.
Neither the Plan nor any Option shall be deemed to give any individual a
right to remain an employee or consultant of the Company or a Subsidiary. The
Company and its Subsidiaries reserve the right to terminate the service of any
employee or consultant at any time, with or without cause, subject to applicable
laws and a written employment agreement (if any).
11. DURATION AND AMENDMENTS.
(a) TERM OF THE PLAN. The Plan, as set forth herein, shall become effective
as of the Effective Date, provided that the Plan has been approved by the
shareholders of the Company in the manner required by applicable law or
regulation. The Plan, if not extended, shall terminate automatically ten years
after the Effective Date, except that any ISO's granted under the Plan must be
granted by September 18, 2006, ten years after the Plan was adopted by the Board
of Directors. It may be terminated on any earlier date pursuant to Subsection
(b) below.
(b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board of Directors may amend,
suspend or terminate the Plan at any time and for any reason. An amendment of
the Plan shall be subject to the approval of the Company's shareholders only to
the extent required by applicable laws or regulations.
(c) EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued or sold
under the Plan after the termination thereof, except upon exercise of an Option
granted prior to such termination. The termination of the Plan, or any amendment
thereof, shall not affect any Share previously issued or any Option previously
granted under the Plan.
I-11
<PAGE>
APPENDIX J
FORM OF INDEMNIFICATION AGREEMENT
THIS AGREEMENT dated , 199 , for reference purposes, is entered into
between Greater Bay Bancorp , a California corporation ("Bancorp"), and
("Indemnitee"), with reference to the following facts.
RECITALS
A. Bancorp believes that it is essential to its best interests to attract
and retain highly capable persons to serve as directors, and officers of
Bancorp.
B. Indemnitee is or has been selected to be a director and/or officer of
Bancorp.
C. Bancorp and Indemnitee recognize the increased risk of litigation and
other claims being asserted against directors of corporations.
D. In recognition of Indemnitee's need for substantial protection against
personal liability, in order to enhance Indemnitee's continued service to
Bancorp, and in order to induce Indemnitee to continue to provide services to
Bancorp as a director and/or officer, Bancorp wishes to provide in this
Agreement for the indemnification of and the advancement of expenses to
Indemnitee to the fullest extent permitted by law and as set forth in this
Agreement, and. to the extent applicable insurance is maintained, for the
coverage of Indemnitee under Bancorp's policies of directors' and officers'
liability insurance.
IN CONSIDERATION of the foregoing and of Indemnitee's continuing to provide
services to Bancorp directly or, at its request, with another enterprise, the
parties agree as follows:
SECTION 1. DEFINITIONS
(A) BOARD: the Board of Directors of Bancorp
(B) CHANGE IN CONTROL: a state of affairs that shall be deemed to have
occurred if:
(i) any person is or becomes the "beneficial owner" (as that term is
defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), directly or indirectly, of securities representing 20
percent or more of the total voting power of Bancorp's then-outstanding
voting securities; or
(ii) during any period of two consecutive years, individuals who, at the
beginning of such period, constitute the Board together with any new
director whose election by the Board or nomination for election by Bancorp's
shareholders was approved by a vote of at least two thirds of the directors
then in office who either were directors at the beginning of the two-year
period, or whose election or nomination was previously so approved, cease
for any reason to constitute a majority of the Board, provided that, prior
service as a director of Mid-Peninsula Bancorp or Cupertino National
Bancorp, California corporations, shall be counted in the calculation of
such two-year period; or
(iii) the shareholders of Bancorp approve a merger or consolidation of
Bancorp with any other corporation, other than a merger or consolidation
that would result in the voting securities of Bancorp outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) at least 80 percent of the total voting
power represented by the voting securities of Bancorp or such surviving
entity outstanding immediately after such merger or consolidation; or
(iv) the shareholders of Bancorp approve a plan of complete liquidation
of Bancorp, or an agreement for the sale or disposition by Bancorp (whether
in one transaction or a series of transactions) of all or substantially all
of Bancorp's assets.
J-1
<PAGE>
(C) EXPENSES:
(i) Any expense, liability, or loss, including attorneys' fees,
judgments, fines, ERISA excise taxes and penalties, amounts paid or to be
paid in settlement;
(ii) any interest, assessments, or other charges imposed on any of the
items in part (i) of this subsection (c); and
(iii) any federal, state, local, or foreign taxes imposed as a result of
the actual or deemed receipt of any payments under this Agreement paid or
incurred in connection with investigating, defending, being a witness in, or
participating in (including on appeal), or preparing for any of the
foregoing in, any Proceeding relating to any Indemnifiable Event.
(D) INDEMNIFIABLE EVENT: any event or occurrence that takes place either
before or after the execution of this Agreement and that is related to
(i) the fact that Indemnitee is or was a director or an officer of
Bancorp, or while a director or officer is or was serving at the request of
Bancorp as a director, officer, employee, trustee, agent, or fiduciary of
another foreign or domestic corporation, partnership, joint venture,
employee benefit plan, trust or other enterprise, or was a director,
officer, employee or agent of a foreign or domestic corporation that was a
predecessor corporation of Bancorp or another enterprise at the request of
such predecessor corporation, or
(ii) anything done or not done by Indemnitee in any such capacity,
whether or not the basis of the Proceeding is an alleged action in an
official capacity as a director, officer, employee, or agent, or in any
other capacity while serving as a director, officer, employee, or agent of
Bancorp, as described in this subsection(d).
(E) INDEPENDENT COUNSEL: the person or body appointed in connection with
section 3.
(F) PERSON: "person" (as that term is used in sections 13(d) and 14(d) of
the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of Bancorp acting in such capacity, or a
corporation owned directly or indirectly by the shareholders of Bancorp in
substantially the same proportions as their ownership of shares of Bancorp at
the date of this Agreement.
(G) PARTICIPANT: a person who is a party to, or witness or other
participant (including on appeal) in, a Proceeding.
(H) POTENTIAL CHANGE IN CONTROL: a state of affairs that shall be deemed to
exist if:
(i) Bancorp enters into an agreement or arrangement, the consummation of
which would result in the occurrence of a Change in Control; or
(ii) any Person (including Bancorp) announces publicly an intention to
take or to consider taking actions that, if consummated, would constitute a
Change in Control; or
(iii) any Person who is or becomes the beneficial owner, directly or
indirectly, of securities of Bancorp representing 10 percent or more of the
combined voting power of Bancorp's then-outstanding voting securities,
increases his or her beneficial ownership of such securities by 5 percent or
more over the percentage owned by such Person on the date of this Agreement;
or
(iv) the Board adopts a resolution to the effect that, for purposes of
this Agreement, a Potential Change in Control has occurred.
(I) PROCEEDING: any threatened, pending, or completed action, suit, or
proceeding, or any inquiry, hearing, or investigation, whether conducted by
Bancorp or any other party, that Indemnitee in good faith believes might lead to
the institution or any such action, suit, or proceeding, whether civil,
criminal, administrative, investigative, or other.
(J) REVIEWING PARTY: the person or body appointed in accordance with
section 3.
J-2
<PAGE>
(K) VOTING SECURITIES: any securities of Bancorp that have the right to
vote generally in the election of directors.
SECTION 2. AGREEMENT TO INDEMNIFY
(A) GENERAL AGREEMENT. In the event Indemnitee was, is, or becomes a
Participant in, or is threatened to be made a Participant in, a Proceeding by
reason of (or arising in part out of) an Indemnifiable Event, Bancorp shall
indemnify Indemnitee from and against any and all Expenses to the fullest extent
permitted by law, as the same exists or may hereafter be amended or interpreted
(but in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits Bancorp to provide broader
indemnification rights than were permitted prior to that amendment or
interpretation). The parties to this Agreement intend that this Agreement shall
provide for indemnification in excess of that expressly permitted by the
California Corporations Code, including, without limitation, any indemnification
provided by Bancorp's articles of incorporation, its bylaws, a vote of its
shareholders or disinterested directors, or applicable law. Without limiting the
generality of the foregoing, in a Proceeding initiated by a third party, or by
or in the right of Bancorp, the Indemnitee shall be entitled to indemnification
if the Indemnitee acted in a manner he or she did not believe to be contrary to
the best interests of Bancorp. In addition, in any proceeding initiated by or in
the right of Bancorp which is settled with respect to the Indemnitee, Bancorp
shall indemnify the Indemnitee against any and all Expenses if the Indemnitee
met the standards of conduct set forth in the sentence immediately above, and
court approval of such indemnification will not be required.
(B) INITIATION OF PROCEEDING. Notwithstanding anything in this Agreement to
the contrary, Indemnitee shall not be entitled to Indemnification under this
Agreement in connection with any Proceeding initiated by Indemnitee against
Bancorp or any director or officer of Bancorp unless:
(i) Bancorp has joined in or the Board has consented to the initiation
of such Proceeding;
(ii) the Proceeding is one to enforce indemnification rights under
section 5; or
(iii) the Proceeding is instituted after a Change in Control and
Independent Counsel has approved its initiation.
(C) EXPENSE ADVANCES. If so requested by Indemnitee, Bancorp shall, within
ten business days of such request, advance all Expenses to Indemnitee (an
"Expense Advance"). Notwithstanding the foregoing, to the extent that the
Reviewing Party determines that Indemnitee would not be permitted to be so
indemnified under applicable law, Bancorp shall be entitled to be reimbursed by
Indemnitee for all such amounts, and Indemnitee hereby agrees to reimburse
Bancorp promptly for the same. If Indemnitee has commenced legal proceedings in
a court of competent jurisdiction to secure a determination that Indemnitee
should be indemnified under applicable law, as provided in section 4, any
determination made by the Reviewing Party that Indemnitee would not be permitted
to be indemnified under applicable law shall not be binding, and Indemnitee
shall not be required to reimburse Bancorp for any Expense Advance until a final
judicial determination is made with respect thereto and all rights of appeal
therefrom have been exhausted or have lapsed. Indemnitee's obligations to
reimburse Bancorp for Expense Advances shall be unsecured and no interest shall
be charged thereon.
(D) MANDATORY INDEMNIFICATION. Notwithstanding any other provision of this
Agreement, to the extent that Indemnitee has been successful on the merits in
defense of any Proceeding relating in whole or in part to an Indemnifiable Event
or in defense of any issue or matter in such Proceeding, Indemnitee shall be
indemnified against all Expenses incurred in connection with that Proceeding.
(E) PARTIAL INDEMNIFICATION. The Indemnitee also shall be entitled to
indemnification by Bancorp for a portion of Expenses if Indemnitee is not
entitled to full indemnification under any applicable law.
(F) PROHIBITED INDEMNIFICATION. No indemnification under this Agreement
shall be paid by Bancorp on account of any Proceeding (i) in which judgment is
rendered against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee or securities of Bancorp under the
J-3
<PAGE>
provisions of section 16(b) of the Exchange Act, or similar provisions of any
federal, state or local laws, or (ii) if Bancorp is expressly prohibited from
making payments under this Agreement pursuant to any applicable federal or state
statutes, or any rules or regulations adopted by the FDIC or any other federal
or state governmental agency which as the power to regulate Bancorp's business.
SECTION 3. REVIEWING PARTY
Before any Change in Control, the Reviewing Party shall be any appropriate
person or body consisting of a member or members of the Board or any other
person or body appointed by the Board who is not a party to the Proceeding for
which Indemnitee is seeking indemnification; after a Change in Control, the
Reviewing Party shall be the Independent Counsel. On all matters arising after a
Change in Control (other than a Change in Control approved by a majority of the
directors of the Board who were directors immediately before such a Change in
Control) concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement, any other agreement, applicable law, or Bancorp's
articles of incorporation or bylaws now or hereafter in effect relating to
indemnification for Indemnifiable Events, Bancorp shall seek legal advice only
from Independent Counsel selected by Indemnitee and approved by Bancorp (which
approval shall not be unreasonably withheld), and who has not otherwise
performed services for Bancorp or the Indemnitee (other than in connection with
indemnification matters) within the previous five years. The Independent Counsel
shall not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either Bancorp or Indemnitee in an action to determine Indemnitee's rights under
this Agreement. Such counsel, among other things, shall render a written opinion
to Bancorp and Indemnitee on whether and to what extent the Indemnitee should be
permitted to be indemnified under applicable law. Bancorp agrees to pay the
reasonable fees of the Independent Counsel and to indemnify fully such counsel
against any and all Expenses, including attorneys' fees, claims, liabilities,
loss, and damages arising out of or relating to this Agreement or the engagement
of Independent Counsel under this Agreement.
SECTION 4. INDEMNIFICATION PROCESS AND APPEAL
(A) INDEMNIFICATION PAYMENT. Indemnitee shall receive indemnification of
Expenses from Bancorp in accordance with this Agreement as soon as practicable
after Indemnitee has made written demand on Bancorp for indemnification, unless
the Reviewing Party has given a written opinion to Bancorp that Indemnitee is
not entitled to indemnification under this Agreement or applicable law.
(B) SUIT TO ENFORCE RIGHTS. Regardless of any action by the Reviewing
Party, if Indemnitee has not received full indemnification within 30 days after
making a demand in accordance with section 4(a), Indemnitee shall have the right
to enforce its indemnification rights under this Agreement by commencing
litigation in any court in the State of California seeking an initial
determination by the court or challenging any determination by the Reviewing
Party or any aspect thereof. Bancorp hereby consents to service of process and
to appear in any such Proceeding. Any determination by the Reviewing Party not
challenged by the Indemnitee shall be binding on Bancorp and Indemnitee. The
remedy provided for in this section 4 shall be in addition to any other remedies
available to Indemnitee in law or equity.
(C) DEFENSE TO INDEMNIFICATION, BURDEN OF PROOF AND PRESUMPTIONS. It shall
be a defense to any action brought by Indemnitee against Bancorp to enforce this
Agreement (other than an action brought to enforce a claim for Expenses incurred
in defending a Proceeding in advance of its final disposition) that it is not
permissible, under this Agreement or applicable law, for Bancorp to indemnify
Indemnitee for the amount claimed. In connection with any such action or any
determination by the Reviewing Party or otherwise on whether Indemnitee is
entitled to be indemnified under this Agreement, the burden of proving such a
defense or determination shall be on Bancorp. Neither the failure of the
Reviewing Party or Bancorp (including its Board, independent legal counsel, or
its shareholders) to have made a determination before the commencement of such
action by Indemnitee that indemnification is proper under the circumstances
because the Indemnitee has met the standard of conduct set forth in this
Agreement or under applicable law, as the case may be, nor an actual
J-4
<PAGE>
determination by the Reviewing Party or Bank (including its Board, independent
legal counsel, or its shareholders) that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
For purposes of this Agreement, the termination of any claim, action, suite, or
proceeding, by judgment, order settlement (whether with or without court
approval), conviction, or on a plea of nolo contendere, or its equivalent, shall
not create a presumption that Indemnitee did not meet any particular standard of
conduct or have any particular belief or that a court has determined that
indemnification is not permitted by applicable law.
SECTION 5. INDEMNIFICATION FOR EXPENSES INCURRED IN ENFORCING RIGHTS.
Bancorp shall indemnify Indemnitee against any and all Expenses incurred by
the Indemnitee in enforcing his or her rights under this Agreement. If requested
by Indemnitee, Bancorp shall, within ten business days of such request, advance
to Indemnitee such Expenses as are incurred by Indemnitee in connection with any
claim asserted against or action brought by Indemnitee for:
(a) Indemnification of Indemnitee by Bancorp under this Agreement, or
any other agreement, or under applicable law, or Bancorp's articles of
incorporation or bylaws now or hereafter in effect relating to
indemnification for Indemnifiable Events, and/or
(b) recovery under directors' and officers' liability insurance policies
maintained by Bancorp, for amounts paid in settlement if the Independent
Counsel has approved the settlement.
Bancorp shall not settle any Proceeding in any manner that would impose any
penalty or limitation on Indemnitee without Indemnitee's written consent.
Neither Bancorp nor the Indemnitee will unreasonably withhold its consent to any
proposed settlement. Bancorp shall not be liable to indemnify the Indemnitee
under this Agreement with regard to any judicial award if Bancorp was not given
a reasonable and timely opportunity, at its expense, to participate in the
defense of such action; however, Bancorp's liability under this Agreement shall
not be excused if participation in the Proceeding by Bancorp was barred by this
Agreement.
SECTION 6. ESTABLISHMENT OF TRUST
In the event of a Change in Control or a Potential Change in Control,
Bancorp shall, on written request by Indemnitee, create a trust for the benefit
of the Indemnitee ("the Trust") and from time to time on written request of
Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all
Expenses reasonably anticipated at the time of each such request to be incurred
in connection with investigating, preparing for, participating in, and/or
defending any Proceeding relating to an Indemnifiable Event. The amount or
amounts to be deposited in the Trust under the foregoing funding obligation
shall be determined by the Reviewing Party. The terms of the Trust shall provide
that on a Change in Control:
(a) The Trust shall not be revoked or the principal invaded without the
written consent of the Indemnitee.
(b) The Trustee shall advance, within ten business days of a request by
Indemnitee, all Expenses to the Indemnitee (provided that the Indemnitee
hereby agrees to reimburse the Trust under the same circumstances for which
the Indemnitee would be required to reimburse Bancorp under section 2(c) of
this Agreement).
(c) The Trust shall continue to be funded by Bancorp in accordance with
the funding obligation set forth in this section 6.
(d) The Trustee shall promptly pay to the Indemnitee all amounts for
which the Indemnitee shall be entitled to indemnification under this
Agreement or otherwise.
(e) All unexpended funds in the Trust shall revert to Bancorp on a final
determination by the Reviewing Party or a court of competent jurisdiction
that the Indemnitee has been fully indemnified under the terms of this
Agreement.
J-5
<PAGE>
The Trustee shall be chosen by the Indemnitee subject tot he approval of the
Reviewing Party. Nothing in this section 6 shall relieve Bancorp of any of its
obligations under this Agreement. All income earned on the assets held in the
Trust shall be reported as income by Bancorp for federal, state, local and
foreign tax purposes. Bancorp shall pay all costs of establishing and
maintaining the Trust and shall indemnify the Trustee against any and all
Expenses, including attorneys' fees, claims, liabilities, loss, and damages
arising out of or relating to this Agreement or the establishment and
maintenance of the Trust.
SECTION 7. NOTIFICATION AND DEFENSE OF CLAIM
Promptly after receipt by Indemnitee of notice of the commencement of any
Proceeding against Indemnitee for which Indemnitee will seek indemnification
under this Agreement, Indemnitee will notify Bancorp of the commencement
thereof; but the omission to so notify Bancorp will not relieve it from any
liability which it may have to Indemnitee otherwise than under this Agreement.
With respect to any Proceeding as to which Indemnitee so notifies Bancorp:
(a) Bancorp will be entitled to participate in the Proceeding at its own
expense.
(b) Except as otherwise provided below, to the extent that it may wish,
Bancorp jointly with any other indemnifying party similarly notified, will
be entitled, provided it is advancing to Indemnitee all of the costs and
expenses required under this Agreement, to assume the defense of the
Proceeding with counsel satisfactory to Indemnitee. After notice from
Bancorp to Indemnitee of its election to assume the defense of the
Proceeding, Bancorp will not be liable to Indemnitee under this Agreement
for any legal or other expenses subsequently incurred by Indemnitee in
connection such defense other than reasonable costs of investigation or as
otherwise provided below. Indemnitee shall have the right to employ his or
her counsel in such Proceeding, but the fees and expenses of such counsel
incurred after notice from Bancorp of its assumption of such defense shall
be at the expense of Indemnitee unless (i) the employment of counsel by
Indemnitee has been authorized by Bancorp, (ii) Indemnitee shall have
reasonably concluded that there may be a conflict of interest between
Bancorp and Indemnitee in the conduct of the defense of the proceeding or
(iii) Bancorp shall not, in fact, have employed counsel to assume the
defense of the Proceeding, in each of which cases the fees and expenses of
counsel shall be at the expense of Bancorp. Bancorp shall not be entitled to
assume the defense of any Proceeding brought by or on behalf of Bancorp or
as to which Indemnitee shall have made the conclusion provided for in (ii)
above.
(c) Bancorp shall not be liable to indemnify Indemnitee under this
Agreement for any amounts paid in settlement of any Proceeding without
Bancorp's written consent. Bancorp shall not settle any action or claim in
any manner which would impose any obligation or limitation on Indemnitee
without Indemnitee's written consent. Neither Bancorp nor Indemnitee will
unreasonably withhold its/his/her consent to any proposed settlement.
SECTION 8. NONEXCLUSIVITY
The rights of Indemnitee under this Agreement shall be in addition to any
other rights Indemnitee may have under Bancorp's articles of incorporation,
bylaws, applicable law, or otherwise. To the extent that a change in applicable
law (whether by statute or judicial decision) permits greater indemnification by
agreement than would be afforded currently under Bancorp's articles of
incorporation, bylaws, applicable law, or this Agreement, it is the intent of
the parties that Indemnitee enjoy by this Agreement the greater benefits
afforded by such change.
SECTION 9. LIABILITY INSURANCE
To the extent Bancorp maintains an insurance policy or policies providing
directors' and officers' liability insurance, Indemnitee shall be covered by
such policy or policies, in accordance with its or their terms, to the maximum
extent of the coverage available for any Bank director or officer.
J-6
<PAGE>
SECTION 10. PERIOD OF LIMITATIONS
No legal action shall be brought, and no cause of action shall be asserted,
by or on behalf of Bancorp or any affiliate of Bancorp against Indemnitee,
Indemnitee's spouse, heirs, executors, or personal or legal representatives,
after the expiration of two years from the date of accrual of such cause of
action, or such longer period as may be required by state law under the
circumstances. Any claim or cause of action of Bancorp or its affiliate shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such period; provided, that if any shorter period of limitations
is otherwise applicable to any such cause of action, this shorter period shall
govern.
SECTION 11. AMENDMENT OF THIS AGREEMENT
No supplement, modification, or amendment of this Agreement shall be binding
unless executed in writing by both of the parties to it. No waiver of any of the
provisions of this Agreement shall operate was a waiver of any other provisions
of this Agreement (whether or not similar), nor shall such waiver constitute a
continuing waiver. Except as specifically provided in this Agreement, no failure
to exercise or delay in exercising any right or remedy under it shall constitute
a waiver of the right or remedy.
SECTION 12. SUBROGATION
In the event of payment under this Agreement, Bancorp shall be subordinated
to the extent that payment to all of the rights or recovery of Indemnitee, who
shall execute all papers required and shall do everything that may be necessary
to secure such rights, including the execution of any documents necessary to
enable Bancorp effectively to bring suit to enforce such rights.
SECTION 13. NO DUPLICATION OF PAYMENTS
Bancorp shall not be liable under this Agreement to make any payment in
connection with any claim made against Indemnitee to the extent Indemnitee has
otherwise received payment (under any insurance policy, bylaw, or otherwise) of
the amounts otherwise indemnifiable under this Agreement.
SECTION 14. BINDING EFFECT
This Agreement shall be binding on and inure to the benefit of and be
enforceable by the parties to it and their respective successors (including any
direct or indirect successor by purchase, merger, consolidation, or otherwise to
all or substantially all of Bancorp's business or assets or both), assigns,
spouses, heirs, and personal and legal representatives. Bancorp shall require
and cause any successor (whether direct or indirect, by purchase, merger,
consolidation, or otherwise) to all, substantially all, or a substantial part,
of Bancorp's business or assets or both, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that Bancorp would be
required to perform if no such succession had taken place. The indemnification
provided under this Agreement shall continue for Indemnitee for any action taken
or not taken while serving in an indemnified capacity pertaining to an
Indemnifiable Event even though Indemnitee may have ceased to serve in such
capacity at the time of any proceeding.
SECTION 15. SEVERABILITY
If any portion of this Agreement shall be held by a court of competent
jurisdiction to be invalid, void, or otherwise unenforceable, the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitation, each portion of this Agreement containing any
provision held to be invalid, void, or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, void, or unenforceable.
SECTION 16. GOVERNING LAW
This Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of California applicable to contracts made and to be
performed in such State without giving effect to the principles of conflicts of
laws.
J-7
<PAGE>
SECTION 17. NOTICES
All notices, demands, and other communications required or permitted under
this Agreement shall be made in writing and shall be deemed to have been duly
given if delivered by hand against receipt, or mailed, first class postage
prepaid, certified or registered mail; return receipt requested and addressed to
Bancorp at:
420 Cowper Street
Palo Alto, California 94301-1504
Attn: Chairman of the Board
and to Indemnitee at:
____________________________________
___________________, California 9____
Notice of change of address shall be effective only when given in accordance
with this section. All notices complying with this section shall be deemed to
have been received on the date of delivery or on the third business day after
mailing.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Agreement as of the day specified above.
<TABLE>
<S> <C>
GREATER BAY BANCORP INDEMNITEE
By:
Its:
</TABLE>
J-8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
MPB's Articles of Incorporation provide that the liability of the directors
of MPB for monetary damages shall be eliminated to the fullest extent
permissible under California law and that MPB is authorized to provide for the
indemnification of agents (as defined in Section 317 of the California General
Corporation Law) of the corporation in excess of that expressly permitted by
such Section 317 for breach of duty to the corporation and its shareholders to
the fullest extent permissible under California law.
Section 317 sets forth the provisions pertaining to the indemnification of
corporate "agents." For purposes of this law, an agent is any person who is or
was a director, officer, employee or other agent of a corporation, or is or was
serving at the request of the corporation in such capacity with respect to any
other corporation, partnership, joint venture, trust or other enterprise.
Indemnification for expenses, including amounts paid on settling or otherwise
disposing of a threatened or pending action or defending against same can be
made in certain circumstances by action of MPB through: (1) a majority vote of a
quorum of the MPB Board consisting of directors who are not party to the
proceedings; (2) approval of the shareholders, with the shares owned by the
person to be indemnified not being entitled to vote thereon; or (3) such court
in which the proceeding is or was pending upon application by designated
parties. Under certain circumstances, an agent can be indemnified, even when
found liable. Indemnification is mandatory where the agent 's defense is
successful on the merits. The law allows MPB to make advances of expenses for
certain actions upon the receipt of an undertaking that the agent will reimburse
the corporation if the agent is found liable.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to director, officers or persons controlling MPB, pursuant to
the foregoing provisions or otherwise, MPB understands that in the opinion of
the Commission such indemnification is against the public policy as expressed in
the Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by MPB of
expenses incurred or paid by a director, officer or controlling person of MPB in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, MPB will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against a public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
NO. EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
<C> <S>
.1 2 Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996.
Incorporated by reference from Appendix A to the Joint Proxy Statement/Prospectus
4.1 Form of common stock certificate. Incorporated by reference from Exhibit 4.1 of Registrant's
Report on Form 10-K for the year ended December 31, 1994, filed with the Commission on March 30,
1995 (the "1994 10-K")
5.1+ Opinion of Bronson, Bronson & McKinnon LLP
8.1+ Opinion of Bronson, Bronson & McKinnon LLP regarding tax matters
10.1* Form of incentive stock option agreement under Mid-Peninsula Bancorp 1994 Stock Option Plan.
Incorporated by reference from Exhibit 4.2 to Amendment No. 1 to Registration Statement No.
33-79798 on Form S-4, filed with the Commission on July 15, 1994 (the "1994 S-4")
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
10.2* Form of non-qualified stock option agreement under Mid-Peninsula Bancorp 1994 Stock Option Plan.
Incorporated by reference from Exhibit 4.3 to the 1994 S-4
<C> <S>
10.4* Mid-Peninsula Bancorp 1994 Stock Option Plan. Incorporated by reference from Exhibit 10.3 to the
1994 S-4
10.5* WestCal Agreement of Lease dated April 24, 1989 related to premises located at 100 South Ellsworth
Avenue, San Mateo, California. Incorporated by reference from Exhibit 10.6 to the 1994 S-4
10.6 WestCal Commercial Lease and Deposit Receipt dated November 26, 1993 related to premises located
at 1313 Laurel Street, San Carlos, California. Incorporated by reference from Exhibit 10.7 to the
1994 S-4
10.7 Mid-Peninsula Bank lease agreement dated March 11, 1987 and associated documents related to
premises located at 420 Cowper Street, Palo Alto, California. Incorporated by reference from
Exhibit 10.13 to the 1994 10-K
10.8* Mid-Peninsula Bank Profit Sharing and Savings Plan dated January 1, 1993. Incorporated by
reference from Exhibit 10.14 to the 1994 10-K
10.9* David L. Kalkbrenner employment agreement, dated March 3, 1992. Incorporated by reference from
Exhibit 10.15 to the 1994 10-K
10.10* Form of Mid-Peninsula Bank Indemnification Agreement for directors and executive officers.
Incorporated by reference from Exhibit 10.16 to the 1994 10-K
10.11 Form of nonstatutory stock option agreement for outside directors under Mid-Peninsula Bancorp 1994
Stock Option Plan. Incorporated by reference from exhibit 4.6 to Registration Statement No.
33-91076 on Form S-8, filed with the Commission on April 11, 1995
10.12 Addendum to lease agreement dated March 11, 1987 for premises located at 420 Cowper Street, Palo
Alto, California. Incorporated by reference from Exhibit 10.18 of Registrant's Report on Form
10-K for the year ended December 31, 1995, filed with the Commission on March 29, 1996 (the "1995
10-K")
10.13 Addendum to lease agreement dated November 26, 1993 for premises located at 1313 Laurel Street,
San Carlos, California. Incorporated by reference from Exhibit 10.19 of the 1995 10-K
10.14* Salary continuation agreement entered into with David L. Kalkbrenner dated April 26, 1995.
Incorporated by reference from Exhibit 10.20 of the 1995 10-K
10.15* Salary continuation agreement entered into with Murray B. Dey dated April 26, 1995. Incorporated
by reference from Exhibit 10.21 of the 1995 10-K
10.16* Salary continuation agreement entered into with Carol H. Rowland dated April 26, 1995.
Incorporated by reference from Exhibit 10.22 of the 1995 10-K
10.17 Non-management officer salary continuation agreement entered into with Susan K. Black dated April
26, 1995. Incorporated by reference from Exhibit 10.23 of the 1995 10-K
10.18 Non-management officer salary continuation agreement entered into with Kimberly S. Burgess dated
April 26, 1995. Incorporated by reference from Exhibit 10.24 of the 1995 10-K
10.19 Non-management officer salary continuation agreement entered into with Jonas H. Stafford dated
April 26, 1995. Incorporated by reference from Exhibit 10.25 of the 1995 10-K
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. EXHIBIT
- --------- --------------------------------------------------------------------------------------------------
10.20 Non-management officer salary continuation agreement entered into with Charles P. Banovac dated
March 21, 1996. Incorporated by reference from Exhibit 10.26 of the 1995 10-K
<C> <S>
10.21 Shareholder Agreement dated June 26, 1996. Incorporated by reference from Exhibit 10.1 filed with
Registrant's Report on Form 10-Q for the quarterly period ended June 30, 1966, filed with the
Commission on August 2, 1996 (the "Form 10-Q")
10.22 Affiliate Agreement dated June 27, 1996. Incorporated by reference from Exhibit 10.2 filed with
the Form 10-Q
10.23 Alex. Brown Agreement dated May 28, 1996. Incorporated by reference from Exhibit 10.3 filed with
the Form 10-Q
10.24* Bancorp Option Plan. Incorporated by reference from Appendix I
13.1 Form 10-Q (Second Quarter, 1996). Incorporated by reference from Appendix H.
23.1+ Consent of KPMG Peat Marwick LLP
23.2+ Consent of Coopers & Lybrand, L.L.P.
23.3+ Consent of Deloitte & Touche LLP
23.4+ Consent of Counsel
24.1+ Power of Attorney (see signature page)
27.1+ Financial Data Schedule
99.1+ Mid-Peninsula Proxy Card
99.2+ Cupertino Proxy Card
</TABLE>
- ------------------------
(+) Previously filed.
(b) Financial Statement Schedules.
All schedules are omitted because the required information is not applicable
or is included in the Financial Statements of the Registrant and the related
notes.
(c) Not applicable.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
MID-PENINSULA BANCORP
Date: September 18, 1996 By: /s/ DAVID L. KALKBRENNER
----------------------------------
DAVID L. KALKBRENNER, President
and
Chief Executive Officer (Principal
Executive Officer)
Date: September 18, 1996 By: /s/ CAROL H. ROWLAND
----------------------------------
CAROL H. ROWLAND, First Vice
President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David L. Kalkbrenner and Carol R. Rowland, and
each or any one of them, his true and lawful attorney-in-fact and agent, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<C> <S> <C>
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ DAVID L. KALKBRENNER President, Chief
- ----------------------------------- Executive September 18,
David L. Kalkbrenner Officer and Director 1996
/s/ MURRAY B. DEY (*) Executive Vice President
- ----------------------------------- and September 18,
Murray B. Dey Director 1996
/s/ LAWRENCE A. AUFMUTH (*)
- ----------------------------------- Director September 18,
Lawrence A. Aufmuth 1996
/s/ JOHN F. BLOKKER (*)
- ----------------------------------- Director September 18,
John F. Blokker 1996
/s/ ALLAN F. BROWN (*)
- ----------------------------------- Director September 18,
Allan F. Brown 1996
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S> <C>
SIGNATURES TITLE DATE
- ----------------------------------- ------------------------- ----------------
/s/ OWEN D. CONLEY (*)
- ----------------------------------- Director September 18,
Owen D. Conley 1996
/s/ DONALD L. HAMMOND (*)
- ----------------------------------- Director September 18,
Donald L. Hammond 1996
/s/ R. HEWLETT LEE, M.D. (*)
- ----------------------------------- Director September 18,
R. Hewlett Lee, M.D. 1996
/s/ HELEN C. LEONG (*)
- ----------------------------------- Director September 18,
Helen C. Leong 1996
/s/ GEORGE M. MARCUS (*)
- ----------------------------------- Director September 18,
George M. Marcus 1996
/s/ DUNCAN L. MATTESON (*)
- ----------------------------------- Chairman of the Board and September 18,
Duncan L. Matteson Director 1996
/s/ DONALD H. SEILER (*)
- ----------------------------------- Director September 18,
Donald H. Seiler 1996
/s/ WARREN R. THOITS (*)
- ----------------------------------- Director September 18,
Warren R. Thoits 1996
/s/ BRUCE E. VAN ALSTYNE (*)
- ----------------------------------- Director September 18,
Bruce E. Van Alstyne 1996
/s/ EDWIN E. VAN BRONKHORST (*)
- ----------------------------------- Director September 18,
Edwin E. Van Bronkhorst 1996
</TABLE>
(*)Pursuant to power of attorney.
II-5
