<PAGE>
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 September 30, 1996 or
-------------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934
For the transition period from to
------------ --------------
Commission file number 0-25034
-------
MID-PENINSULA BANCORP
----------------------------------------------------
Exact name of registrant as specified in its charter
California 77-0387041
- --------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
420 Cowper Street, Palo Alto, CA 94301
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 323-5150
---------------------
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date.
Class Shares Outstanding at November 7, 1996
- --------------- --------------------------------------
Common Stock 1,670,655
The Index to Exhibits is located at page 21.
Page 1 of 22 Pages
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
Assets: September 30, 1996 December 31, 1995
- ------ ------------------ -----------------
(unaudited) (audited)
<S> <C> <C>
Cash and due from banks $ 11,622 $ 3,304
Federal funds sold 21,000 15,700
Investment Securities:
Available-for-sale, at fair value 53,995 58,533
Held-to-maturity, at amortized cost 6,385 857
(fair value of $ 6,419,000 & $838,000 in 1996
and 1995 respectively)
Federal reserve bank stock 430 430
Loans:
Commercial 115,590 92,971
Real estate - construction 27,173 8,783
Real estate - other 19,806 24,296
Less deferred loan fees (568) (448)
-------- --------
Total loans 162,001 125,602
Less allowance for possible loan losses (2,140) (1,716)
-------- --------
Net loans 159,861 123,886
Premises and equipment, net 981 995
Accrued interest and other assets 5,579 5,030
-------- --------
Total Assets $259,853 $218,735
-------- --------
-------- --------
Liabilities and Shareholders' Equity
- -------------------------------------
Deposits:
Demand, noninterest-bearing $43,045 $37,077
Demand, interest-bearing 11,570 11,926
Savings and money market 131,378 102,124
Time certificates, $100,000 and over 39,127 36,682
Other time certificates 9,017 7,886
-------- --------
Total deposits 234,137 195,695
Accrued interest and other liabilities 1,683 1,600
-------- --------
Total liabilities 235,820 197,295
Shareholders' equity:
Common stock, no par value - 6,000,000 shares
authorized; 1,670,093 and 1,571,757 shares
issued and outstanding in 1996 & 1995, respectively 16,388 15,425
Unrealized loss on securities available-for-sale, net (635) (626)
Retained earnings 8,280 6,641
-------- --------
Total Shareholders' equity 24,033 21,440
-------- --------
Total Liabilities and Shareholders' equity $259,853 $218,735
-------- --------
-------- --------
</TABLE>
Page 2 of 22 Pages
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MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(unaudited)
(in thousands, except share and per share amounts)
<TABLE>
Three Months ended September 30, Nine Months ended September 30,
1996 1995 1996 1995
-------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans (including fees) $ 3,804 $ 3,116 $10,845 $ 9,097
Investment securities 859 856 2,241 2,224
Federal funds sold 463 378 1,172 1,177
------- ------- ------- -------
Total interest income 5,126 4,350 14,258 12,498
Interest expense:
Demand, interest-bearing 53 49 159 157
Savings and money market 1,235 1,061 3,310 3,069
Time certificates, $100,000 and over 556 486 1,569 1,305
Other time certificates 116 98 342 276
------- ------- ------- -------
Total interest expense 1,960 1,694 5,380 4,807
------- ------- ------- -------
Net interest income 3,166 2,656 8,878 7,691
Provision for possible loan losses 207 70 427 225
------- ------- ------- -------
Net interest income after provision for
possible loan losses 2,959 2,586 8,451 7,466
Noninterest income 167 150 543 381
Securities Gains (Losses) (122) 1 (219) 11
Noninterest expenses:
Salaries and employee benefits 1,008 882 2,940 2,563
Occupancy and equipment 295 246 867 713
Other 281 434 889 1,259
------- ------- ------- -------
Total noninterest expense 1,584 1,562 4,696 4,535
------- ------- ------- -------
Income before income taxes 1,420 1,175 4,079 3,323
Income taxes 618 481 1,706 1,328
------- ------- ------- --------
Net income $ 802 $ 694 $2,373 $1,995
------ ------ ------ ------
------ ------ ------ ------
Weighted average common share
equivalents outstanding 1,656,000 1,545,000 1,652,000 1,531,000
Earnings per weighted average share $0.48 $0.44 $1.44 $1.29
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Page 3 of 22 Pages
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
Nine Months Ended
September 30, September 30,
1996 1995
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $2,373 $1,995
Adjustments to reconcile net income to net cash
provided by operating activities -
Loss (gain) on sale of securities (219) (11)
Provision for possible loan losses 427 225
Depreciation and amortization 246 216
Increase in interest receivable (116) (338)
Increase in other assets (558) (480)
Increase(decrease) in deferred tax benefit 58 140
Increase(decrease) in deferred loan fees 120 (58)
Decrease in other liabilities (59) 467
Amortization of Premium - Securities (118) (159)
------ ------
Net cash provided from operating activities 2,154 1,997
------ ------
Cash flows from investing activities:
Net increase in loans (36,595) (8,696)
Purchases of available-for-sale securities (26,609) (5,457)
Purchases of held-to-maturity securities (5,881) (26,794)
Principal payments on available-for-sale securities 31 26
Sales of available-for-sale securities 23,285 -
Maturities/calls of available-for-sale securities 7,996 2,500
Maturities/calls of held-to-maturity securities - 6,099
Additional investment in other real estate owned - -
Purchase of life insurance policy (327) (2,265)
Capital expenditures, net (232) (153)
------ ------
Net cash used by investing activities (38,332) (34,740)
------ ------
Cash Flows from financing activities:
Net increase in deposits 39,724 33,192
Dividends paid (891) (461)
Stock options exercised 963 330
------ ------
Net cash provided by (used) by financing activities 39,796 33,061
------ ------
Net increase in cash and equivalents 3,618 318
Cash and cash equivalents at beginning of period 29,004 35,196
------ ------
Cash and cash equivalents at end of period $32,622 $35,514
------ ------
------ ------
Supplemental disclosures:
Income taxes paid $1,706 $1,360
Interest paid $5,380 $4,727
</TABLE>
Page 4 of 22 Pages
<PAGE>
MID-PENINSULA BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
September 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 September 30, 1996 and
December 31, 1995, and the results of its operations for the quarter
and year-to-date periods ended September 30, 1996 and 1995.
Page 5 of 22 Pages
<PAGE>
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 September 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 September 30, 1996 and 1995
were 1,656,000 and 1,545,000 respectively.
Note 5 RECLASSIFICATIONS
Certain amounts in the accompanying 1995 consolidated condensed
financial statements have been reclassified to conform with the 1996
consolidated condensed financial statements presentation.
Note 6 CASH DIVIDEND
The company paid a quarterly cash dividend of $0.15 per share on
October 11, 1996 to shareholders of record on September 30, 1996.
Page 6 of 22 Pages
<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 $259,853,000 at September 30, 1996, an increase of
$41,118,000 or 19% over total assets of $218,735,000 at December 31, 1995.
From December 31, 1995 to September 30, 1996, total loans increased
$36,399,000 (29%), held-to-maturity securities increased $5,528,000 (645%).
Available-for-sale securities decreased $4,538,000 (8%), federal funds sold
increased $5,300,000 (34%), and cash, premises and other assets had a net
decrease of $1,147,000 (6%). The decrease in available-for-sale securities
was due in part to the increase in total loans outstanding and the increase
of federal funds sold. The increase in total asset size was funded primarily
from a $38,442,000 (20%) increase in deposits, a $2,593,000 (12%) increase in
shareholders' equity, and a $83,000 (5%) increase in other liabilities. The
Bank's loan to deposit ratio increased from 64.18% at December 31, 1995 to
69.19% at September 30, 1996.
LOANS
Total outstanding commercial loans were $115,590,000 at September 30, 1996
compared to $92,971,000 at December 31, 1995, an increase of $22,619,000
(24%). Real estate construction loans increased $18,390,000 (209%) to
$27,173,000 at September 30, 1996 compared to $8,783,000 at December 31,
1995. The increase is due to an increased emphasis in that market during this
quarter. Other real estate loans decreased $4,490,000 (18%) to $19,806,000
at September 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 September 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 September 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 September 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
Page 7 of 22 Pages
<PAGE>
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 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 1.32% at
September 30, 1996 compared to 1.37% at December 31, 1995. The Company provided
an additional $427,000 during the first nine months of 1996 consistent with the
growth in the loan portfolio. There were no loan charge-offs during the period.
The Company evaluates the allowance for possible loan losses based upon an
analysis of specific categories of loans. 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 loan losses at September
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 83% of total deposits at September 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 September 30,
1996, these sources totaled $80,617,000 or 34.43% of total deposits compared to
$80,032,000 or 40.90% at year-end 1995. In the opinion of management, there are
sufficient resources to meet the liquidity needs of the Company at present and
foreseeable future levels.
Page 8 of 22 Pages
<PAGE>
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 September 30,
1996, the interest rate sensitivity gap (i.e., interest rate sensitive assets
less interest rate sensitive liabilities), the cumulative interest rate gap, the
interest rate gap (i.e., interest rate sensitive assets divided by interest rate
sensitive liabilities) and the cumulative interest rate gap ratio. The table
sets forth the time periods during which earning assets and interest-bearing
liabilities will mature or may reprice in accordance with their contractual
terms. However, the table does not necessarily indicate the impact of general
interest rate movement on the net interest margin since the repricing of various
categories of assets and liabilities indicated as repricing within the same
period may in fact reprice at different times within such periods and at
different rates.
REPRICING PERIODS
<TABLE>
<CAPTION>
ONE 2-180 181-365 > 1 YEAR OVER NON-RATE
(Dollars in thousands) DAY DAYS DAYS TO 5 YEARS 5 YEARS SENSITIVE TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
FEDERAL FUNDS SOLD $ 21,000 - - - - 21,000
AVAILABLE-FOR-SALE INV. 9,809 1,002 7,974 27,766 7,444 - 53,995
HELD-TO-MATURITY INV. - 851 - 540 4,994 - 6,385
OTHER INVESTMENTS - - - - 430 - 430
LOANS 134,400 10,527 2,190 7,272 7,612 568 162,569
LOAN LOSS/UNEARNED FEES - - - - - (2,708) (2,708)
CASH AND DUE FROM BANKS - - - - - 11,622 11,622
OTHER ASSETS - - - - - 6,560 6,560
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $165,209 12,380 10,164 35,578 20,480 16,042 259,853
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATE SENSITIVE LIABILITIES AND
EQUITY:
DEPOSITS
DEMAND $ - - - - - 43,045 43,045
INTEREST CHECKING 11,570 - - - - - 11,570
MMDA AND SAVINGS 131,378 - - - - - 131,378
TIME DEPOSITS
> $100 MILLION - 35,578 3,449 100 - - 39,127
< $100 MILLION - 7,403 1,454 160 - 9,017
OTHER LIABILITIES - - - - - 1,683 1,683
SHAREHOLDERS' EQUITY - - - - - 24,033 24,033
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 142,948 42,981 4,903 260 - 68,761 259,853
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
GAP $ 22,261 (30,601) 5,261 35,318 20,480 (52,719) -
CUMULATIVE GAP 22,261 (8,340) (3,079) 32,239 52,719 - -
CUMULATIVE GAP/TOTAL ASSETS 8.57% (3.21%) (1.18%) 12.41% 20.29% - -
</TABLE>
Page 9 of 22 Pages
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CAPITAL RESOURCES
Capital management is a continuous process of providing adequate capital for
current needs and anticipated future growth. Capital serves as a source of funds
for the acquisition of fixed and other assets and protects depositors against
potential losses. As the Company's assets increase, so do its capital
requirements.
The Board of Governors and the FDIC have adopted risk-based capital guidelines
for evaluating the capital adequacy of bank holding companies and banks. The
guidelines are designed to make capital requirements sensitive to differences in
risk profiles among banking organizations, to take into account off-balance
sheet exposures and to aid in making the definition of bank capital uniform
internationally. Under the guidelines, the Company and the Bank are required to
maintain capital equal to at least 8.00% of assets and commitments to extend
credit weighted by risk, of which at least 4.00% must consist primarily of
common equity (including retained earnings) and the remainder may consist of
subordinated debt, cumulative preferred stock or a limited amount of loan loss
reserves.
The Board of Governors also adopted a 3.00% minimum leverage ratio for banking
organizations as a supplement to the risk-weighted capital guidelines. The
leverage ratio is generally calculated using Tier 1 capital (as defined under
risk-based capital guidelines) divided by quarterly average net total assets
(excluding intangible assets and certain other adjustments). The leverage ratio
establishes a limit on the ability of banking organizations, including the
Company and the Bank, to increase assets and liabilities without increasing
capital proportionately.
The Board of Governors emphasized that the leverage ratio constitutes a minimum
requirement for well-run banking organizations having diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and a composite rating of 1 under the regulatory rating
system for banks and 1 under the regulatory rating system for bank holding
companies. Banking organizations experiencing or anticipating significant
growth, as well as those organizations which do not exhibit the characteristics
of a strong well-run banking organization described above, will be required to
maintain minimum capital ranging generally from 100 to 200 basis points in
excess of the leverage ratio. The FDIC adopted a substantially similar leverage
ratio for state non-member banks.
On December 19, 1991, the President signed the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA). The FDICIA, among other matters,
substantially revises banking regulations and establishes a framework for
determination of capital adequacy of financial institutions. Under the FDlCIA,
financial institutions are placed into one of five capital adequacy categories
as follows: (1) Well Capitalized, consisting of institutions with a total
risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio
of 6.00% or greater and a leverage ratio of 5.00% or greater, and the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive; (2) Adequately Capitalized, consisting of
institutions with a total risk-based capital ratio of 8.00% or greater, a Tier 1
risk-based capital ratio of 4.00% or greater and a leverage ratio of 4.00% or
greater, and the institution does not meet the definition of a well capitalized
institution; (3) Undercapitalized, consisting of institutions with a total
risk-based capital ratio of less than 8.00%, a Tier 1 risk-based capital ratio
of less that 4.00% or a leverage ratio of less than 4.00%; (4) Significantly
Undercapitalized, consisting of institutions with a total risk-based capital
ratio of less than 6.00%, a Tier 1 risk-based capital ratio of less than 3.00%
or a
Page 10 of 22 Pages
<PAGE>
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 September 30, 1996 and December 31, 1995. As indicated in the
table, the Company's capital ratios significantly exceeded the minimum capital
levels required by current federal regulations.
Risk Based Capital Ratio
(unaudited)
September 30, 1996 December 31, 1995
------------------ ------------------
Ratios (dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
Tier 1 capital $ 24,033 11.69% $ 21,440 14.36%
Tier 1 capital minimum requirement $ 8,237 4.00% $5,971 4.00%
Total capital $ 26,173 12.73% $ 23,156 15.51%
Total capital minimum requirement $ 16,475 8.00% $ 11,944 8.00%
Total risk based assets $205,941 $149,296
Leverage Capital Ratio
(unaudited)
September 30, 1996 December 31, 1995
------------------ ------------------
Ratios (dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------
Tier 1 capital to adjusted total assets $ 24,033 10.05% $ 21,440 9.76%
Quarterly average total assets $239,159 $219,783
Page 11 of 22 Pages
<PAGE>
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 a Second Amended and
Restated Agreement and Plan of Reorganization and Merger dated August 20, 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 listed its shares on the Nasdaq National Market, and, concurrent
with closing, will be renamed Greater Bay Bancorp. Following the merger, the
shareholders of Mid-Peninsula Bancorp will own approximately 51% of the combined
company and the shareholders of Cupertino National Bancorp will own
approximately 49% of the combined company, giving effect to all outstanding
options.
Greater Bay Bancorp's new Board of directors will consist of five directors from
Mid-Peninsula Bancorp and five from Cupertino National Bancorp, with Duncan L.
Matteson (Chairman of Mid-Peninsula Bancorp) and John M. Gatto (Chairman of
Cupertino National Bancorp) serving as co-Chairmen. David L. Kalkbrenner, who
will serve as President and Chief Executive Officer of Greater Bay Bancorp, will
continue as President and Chief Executive Officer of Mid-Peninsula Bank, and C.
Donald Allen will remain as Chairman and Chief Executive Officer of Cupertino
National Bank & Trust. Steven C. Smith, the Chief Operating Officer of
Cupertino National Bancorp, will serve as Chief Operating Officer and Chief
Financial Officer of Greater Bay Bancorp.
In connection with the Agreement, Mid-Peninsula Bancorp and Cupertino National
Bancorp have granted each other options to purchase up to 19.0% of the
outstanding shares of each other's common stock under certain circumstances in
the event the transaction is terminated. The merger is expected to be completed
in the fourth quarter of 1996, subject to shareholder and regulatory approvals.
In a special shareholder meeting on October 30, 1996, shareholders' approved the
merger of Mid-Peninsula Bank and Cupertino National Bank. With granted approval
from the Federal Reserve, the merger is expected to close before December 31,
1996.
Page 12 of 22 Pages
<PAGE>
RESULTS OF OPERATIONS
Three months Ended September 30, 1996
Compared with the
Three months Ended September 30, 1995
Net income of $802,000 for the three months ended September 30, 1996 increased
$108,000 or 16% compared to the $694,000 earned for the same period ended
September 30, 1995. The increase in net income for the period was primarily due
to an increase in net interest income that was offset somewhat by 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 September 30, 1996 was $3,166,000, compared to
$2,656,000 for the same period ended September 30, 1995, an increase of $510,000
or 19%. 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 September 30, 1996, the Company had $245,010,000 of average
interest-earning assets compared to $198,631,000 for the same period ended
September 30, 1995, an increase of $46,379,000 or 23%. The Company's yield on
interest-earning assets for the three months ended September 30, 1996 decreased
to 8.55% compared to 8.89% 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 $776,000 or 18% for the three months ended September
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 September 30, 1996
were $235,151,000, a $44,013,000 or 23% increase compared to the quarter ended
September 30, 1995. The Company's average cost of funds for the period ended
September 30, 1996 was 4.06% which yielded a net spread of 4.49%. This compares
to an average cost of funds of 4.16% and a net spread of 4.73% for the
comparable 1995 period. Interest expense of $1,960,000 for the three months
ended September 30, 1996 was $266,000 or 16% more than the comparable 1995
period. Net interest income for the period ended September 30, 1996 increased
$510,000 or 19% to $3,166,000 and resulted from increased levels of earning
assets.
Page 13 of 22 Pages
<PAGE>
The following table presents, for the periods indicated, the Company's total
dollar amount of interest income, on a tax equivalent basis, from average
interest-earning assets and the resultant yields, as well as the interest
expense of average interest-bearing liabilities and the resultant costs,
expressed both in dollars and rates. The table also sets forth the net interest
income and the net average earning balances for the periods indicated.
AVERAGE BALANCE SHEET
MID-PENINSULA BANCORP AND SUBSIDIARY
Average Balance Sheet
Three Months ended September 30
(unaudited)
<TABLE>
<CAPTION>
(in thousands, except percentages) 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate(1) Balance Interest Rate(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans $151,903 $3,804(2) 10.02% $115,841 $3,116(2) 10.76%
Taxable investments 42,389 698 6.59% 47,046 727 6.18%
Non-taxable investments 14,816 272 7.34% 9,125 195 8.55%
Fed funds sold and other 35,902 463 5.16% 26,619 378 5.68%
-------- -------- -------- -------- --------- -----
Total earning assets 245,010 $5,237 8.55% 198,631 $4,416 8.89%
---------
Cash and due from banks 10,781 8,099
Premises and equipment, net 868 938
Other assets(3) 3,615 3,899
-------- --------
Total assets $260,274 $211,567
-------- --------
-------- --------
Liabilities and Shareholders' Equity:
Deposits:
Demand with interest $11,200 $ 53 1.89% $10,470 $ 49 1.87%
Savings and money market 129,600 1,235 3.81% 106,255 1,061 3.99%
Time deposits >$100,000 43,252 556 5.14% 38,689 486 5.02%
Other time deposits 9.164 116 5.06% 7,447 98 5.26%
-------- -------- -------- -------- --------- -----
Total interest-bearing deposits 193,216 1,960 4.06% 162,861 1,694 4.16%
-------- ---------
Non-interest deposits 41,935 28,277
Other liabilities 1,713 1,015
-------- --------
Total liabilities 236,863 192,153
Shareholders' equity 23,410 19,414
-------- --------
Total liabilities and equity $260,274 $211,567
-------- --------
-------- --------
Net interest spread 4.49% 4.73%
Net interest income
and margin $3,277 5.35% $2,722 5.48%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized.
(2) Loan interest income includes fee income of $139,000 and $140,000 for the
quarters ended September 30, 1996 and 1995, respectively.
(3) Includes the average allowances for loan losses of $1,980,000 and
$1,528,000 and average deferred loan fees of $487,000 and $346,000 for the
quarters ended September 30, 1996 and 1995, respectively.
The Company provided $207,000 to the allowance for possible loan losses for the
three months ended September 30, 1996 compared to $70,000 for the comparable
period in 1995. This increase to the allowance for possible loan losses was
principally due to an increase of $14,000,000 in the loan portfolio during the
quarter.
There were no loan charge-offs for the three months ended September 30, 1996,
compared to net recoveries of $22,000 in the three month period ending September
30, 1995.
Page 14 of 22 Pages
<PAGE>
Non-interest income was $167,000 during the period ending September 30, 1996
compared to $150,000 during the comparable period in 1995 due primarily to
increase in deposit-related service charges.
Salaries and benefits expense for the three months ended September 30, 1996
was $1,008,000, a $126,000 or 14% 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 $576,000 for the
period ended September 30, 1996 compared to $680,000 for the same period in
1995, a $104,000 or 15% decrease due primarily to the decrease in regulatory
fees.
Applicable income taxes of $618,000 for the three months ended September 30,
1996 were $137,000 or 28% higher than for the comparable 1995 period. The
Company's effective tax rate for the three months ending September 30, 1996 was
44% compared to 41% for the comparable period in 1995.
Page 15 of 22 Pages
<PAGE>
RESULTS OF OPERATIONS
Nine months Ended September 30, 1996
Compared with the
Nine months Ended September 30, 1995
Net income of $2,373,000 for the nine months ended September 30, 1996 increased
$378,000 or 19% as compared to the $1,995,000 earned for the same period ended
September 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 nine months ended September 30, 1996 was $8,878,000,
compared to $7,691,000 for the same period ended September 30, 1995, an increase
of $1,187,000 or 15%. Net interest income depends primarily on the volume of
interest-earning assets and interest-bearing liabilities in relation to the net
interest spread (the difference between the yield earned on the Company's
interest-earning assets and the interest rate paid on the Company's
interest-bearing liabilities) as well as the relative balances of
interest-earning assets and interest-bearing liabilities. The smaller the level
of interest-earning assets when compared to the level of interest-bearing
liabilities, the greater the interest rate spread must be in order to achieve
positive net interest income. For the nine months ended September 30, 1996, the
Company had $224,728,000 of average interest-earning assets compared to
$189,078,000 for the same period ended September 30, 1995, an increase of
$35,650,000 or 19%. The Company's yield on interest-earning assets for the nine
months ended September 30, 1996 decreased to 8.61% compared to 8.93% 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 $1,760,000
or 14% for the nine months ended September 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 nine months ended September 30, 1996
were $215,008,000, a $34,789,000 or 19% increase compared to the period ended
September 30, 1995. The Company's average cost of funds for the period ended
September 30, 1996 was 4.05% which yielded a net spread of 4.56%. This compares
to an average cost of funds of 4.20% and a net spread of 4.73% for the
comparable 1995 period. Interest expense of $5,380,000 for the nine months ended
September 30, 1996 was $573,000 or 12% more than the comparable 1995 period.
Net interest income for the period ended September 30, 1996 increased $1,187,000
or 15% to $8,878,000 and resulted from increased levels of earning assets.
Page 16 of 22 Pages
<PAGE>
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
Nine Months ended September 30
(unaudited)
<TABLE>
<CAPTION>
(in thousands, except percentages) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Interest Rate(1) Balance Interest Rate(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans $142,373 $10,845(2) 10.16% $112,718 $9,097(2) 10.76%
Taxable investments 39,076 1,732 5.91% 41,624 1,912 6.12%
Non-taxable investments 12,965 771 7.93% 7,436 472 8.46%
Fed funds sold and other 30,314 1,172 5.15% 27,300 1,177 5.75%
-------- -------- ----- -------- ------- ------
Total earning assets 224,728 $14,520 8.61% 189,078 $12,658 8.93%
-------
Cash and due from banks 10,149 7,682
Premises and equipment, net 895 929
Other assets(3) 3,387 2,301
-------- --------
Total assets $239,159 $199,990
-------- --------
-------- --------
Liabilities and Shareholders' Equity:
Deposits:
Demand with interest $11,358 $ 159 1.87% $ 10,698 $ 157 1.96%
Savings and money market 116,518 3,310 3.79% 99,197 3,069 4.13%
Time deposits > $100,000 40,380 1,569 5.18% 35,418 1,305 4.91%
Other time deposits 8,892 342 5.13% 7,392 276 4.98%
-------- -------- ----- -------- ------- ------
Total interest-bearing deposits 177,148 5,380 4.05% 152,705 4,807 4.20%
-------- -------
Non-interest deposits 37,860 27,514
Other liabilities 1,590 1,027
-------- --------
Total liabilities 216,598 181,246
Shareholders' equity 22,561 18,744
-------- --------
Total liabilities and equity $239,159 $199,990
-------- --------
-------- --------
Net interest spread 4.56% 4.73%
Net interest income
and margin $9,140 5.42% $7,851 5.54%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized.
(2) Loan interest income includes fee income of $520,000 and $443,000 for
nine months ended September 30, 1996 and 1995, respectively.
(3) Includes the average allowances for loan losses of $1,873,000 and
$1,528,000 and average deferred loan fees of $478,000 and $350,000 for the
nine months ended September 30, 1996 and 1995, respectively.
The Company provided $427,000 to the allowance for possible loan losses for the
nine months ended September 31, 1996 compared to $225,000 for the comparable
period in 1995. This addition to the allowance recognizes the increased size in
the loan portfolio.
Net charge-offs were $3,000 for the nine months ended September 30, 1996,
compared to $22,000 in net recoveries in the nine month period ending September
30, 1995.
Page 17 of 22 Pages
<PAGE>
Non-interest income was $543,000 during the period ending September 30, 1996
compared to $381,000 during the comparable period in 1995 due primarily to an
increase in deposit-related service charges.
Salaries and benefits expense for the nine months ended September 30, 1996 was
$2,940,000, a $377,000 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 $1,756,000 for the
period ended September 30, 1996 compared to $1,972,000 for the same period in
1995, a $216,000 or 11% decrease due primarily to decrease in regulatory
expense.
Applicable income taxes of $1,706,000 for the nine months ended September 30,
1996 were $378,000 or 28% higher than for the comparable 1995 period. The
Company's effective tax rate for the nine months ending September 30, 1996 was
42% compared to 40% for the comparable period in 1995.
Page 18 of 22 Pages
<PAGE>
PART 11-OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a vote of Security Holders
None
Item 5 - Other Materially Important Events
None
Item 6 - Exhibits and Reports on Form 8-K
None
Page 19 of 22 Pages
<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 duly authorized.
MID-PENINSULA BANCORP
November 7, 1996 By: /s/ David L. Kalkbrenner
-----------------------------
David L. Kalkbrenner
President and
Chief Executive Officer
(Principal Executive Officer)
November 7, 1996
By: /s/ Carol H. Rowland
-----------------------------
Carol H. Rowland
First Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 20 of 22 Pages
<PAGE>
EXHIBIT INDEX
SEQUENTIAL
PAGE
EXHIBIT NO: DESCRIPTION NUMBER
- ----------- ----------- ------
27.1 Financial Data Schedule 22
Page 21 of 22 Pages
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 11,622
<INT-BEARING-DEPOSITS> 191,092
<FED-FUNDS-SOLD> 21,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,995
<INVESTMENTS-CARRYING> 6,385
<INVESTMENTS-MARKET> 6,385
<LOANS> 162,001
<ALLOWANCE> 2,140
<TOTAL-ASSETS> 259,853
<DEPOSITS> 234,137
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,683
<LONG-TERM> 0
0
0
<COMMON> 16,388
<OTHER-SE> 7,645
<TOTAL-LIABILITIES-AND-EQUITY> 24,033
<INTEREST-LOAN> 10,845
<INTEREST-INVEST> 2,241
<INTEREST-OTHER> 1,172
<INTEREST-TOTAL> 14,258
<INTEREST-DEPOSIT> 5,380
<INTEREST-EXPENSE> 5,380
<INTEREST-INCOME-NET> 8,878
<LOAN-LOSSES> 427
<SECURITIES-GAINS> (219)
<EXPENSE-OTHER> 4,696
<INCOME-PRETAX> 4,079
<INCOME-PRE-EXTRAORDINARY> 4,079
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,373
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 8.61
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,716
<CHARGE-OFFS> 3
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,140
<ALLOWANCE-DOMESTIC> 2,140
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
