-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F++z+FLNBjRxJdHqKjFrdqHabB7HEHNTuCbTxpf/DP+DLr5ait4mWVsERE7dI5n1 OXXOCceAXFQLkfPuhOeeuQ== 0001012870-96-000257.txt : 19960814 0001012870-96-000257.hdr.sgml : 19960814 ACCESSION NUMBER: 0001012870-96-000257 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CUPERTINO NATIONAL BANCORP CENTRAL INDEX KEY: 0000757790 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 330060898 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18015 FILM NUMBER: 96611441 BUSINESS ADDRESS: STREET 1: 20230 STEVENS CREEK BLVD CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4089961144 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (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 For the transition period from ________________ to ________________ . Commission file number 0-18015 CUPERTINO NATIONAL BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 33-0060898 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 20230 STEVENS CREEK BOULEVARD, CUPERTINO, CALIFORNIA, 95014 (Address of principal executive offices) (Zip Code) (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. This report contains a total of 19 pages. 1 of 19 CUPERTINO NATIONAL BANCORP INDEX PART I. FINANCIAL INFORMATION 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........ 17 Item 6. Exhibits and Reports on Form 8-K........................... 18 Signatures................................................. 18 Index to Exhibits.......................................... 19 2 of 19 PART I. FINANCIAL INFORMATION CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited....dollars in thousands)
June 30, December 31, 1996 1995 ------------------------ ASSETS 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; 47,322 52,571 $53,001 at December 31, 1995) 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 ======== ========
See notes to consolidated financial statements 3 of 19 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited....dollars in thousands, except per share data)
Quarter Ended Six Months Ended June 30, June 30, -------------------- -------------------- 1996 1995 1996 1995 -------------------- -------------------- 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) ====== ====== ======= ======
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 4 of 19 CUPERTINO NATIONAL BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited....dollars in thousands)
Six Months Ended June 30, ------------------- 1996 1995 -------- -------- 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 --
See notes to consolidated financial statements. - -------------------------------------------------------------------------------- 5 of 19 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. 6 of 19 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 31, 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. 7 of 19 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. 8 of 19 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:
Three Months Ended Three Months Ended Three Months Ended June 30, 1996 March 31, 1996 June 30, 1995 ------------------------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance (1) Interest Rate Balance (1) Interest Rate Balance (1) Interest Rate -------------------------------------------------------------------------------------------------------- (Dollars In thousands) - ---------------------- Interest-earning assets: Loans (2) (4) $ 176,030 $ 4,696 10.70% $ 169,650 $ 4,517 10.68% $ 145,249 $ 4,021 11.10% Investment securities, short term investments and cash equivalents 64,660 995 6.17% 62,913 991 6.32% 67,948 1,046 6.17% ---------- ------- ------- --------- ------- ------ -------- ------- ------- Total interest-earning assets 240,690 5,691 9.48% 232,563 5,508 9.50% 213,197 5,067 9.53% 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% $ 88,998 903 4.07% Savings deposits 12,106 115 3.81% 11,720 107 3.66% 4,759 42 3.54% Time deposits 44,824 582 5.21% 47,122 622 5.29% 49,188 680 5.54% --------- ------- ------- --------- --------- ------ -------- ------- ------- Total Deposits 183,415 1,844 4.03% 181,090 1,905 4.22% 142,945 1,625 4.56% Borrowings 3,113 87 11.15% 3,504 103 11.79% 18,414 288 6.27% --------- ------- ------- --------- --------- ------ -------- ------- ------- Total interest-bearing liabilities 186,528 1,931 4.15% 184,594 2,008 4.36% 161,359 1,913 4.76% --------- ------- ------- --------- --------- ------ -------- ------- ------- 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% $ 3,154 4.78% ======= ======= ========= ====== ======= ======= Net interest-earning assets; net yield (3) $ 54,162 6.27% $ 47,969 6.04% $ 51,838 5.93% ========= ======= ========= ====== ========= =======
(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. 9 of 19 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:
Three months ended June 30, 1996 Three months ended June 30, 1996 compared with March 31, 1996 compared with June 30, 1995 favorable (unfavorable) favorable (unfavorable) ----------------------- ----------------------- (Dollars in thousands) Volume Rate Total Volume Rate Total - ---------------------- ---- ---- ---- ----- ----- ----- 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 ==== ==== ==== ===== ===== =====
(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. 10 of 19 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:
Six Months Ended Six Months Ended June 30, 1996 June 30, 1995 --------------------------------------- ----------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate - ---------------------- --------------------------------------- ----------------------------------------- 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% ======== ====== ======== ======
(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.
Six months ended June 30, 1996 compared with June 30, 1995 favorable (unfavorable) ----------------------------------------------- (Dollars in thousands) Volume Rate Total - ---------------------- -------------- --------- --------- 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 ============== ======== =======
11 of 19 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 Companys 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 Companys 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. The impact of this expense on the Companys net interest spread and net yield on interest earning assets was as follows:
Three Months Ended June 30, Six Months Ended June 30, 1996 1995 1996 1995 --------------------------- ------------------------- 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% ======== ======= ======== ========
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 Companys 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: 12 of 19
INTEREST SENSITIVITY ANALYSIS Repricing Periods Total Immediate 2 Days To 7-12 >1 Year >3 Yrs Total Rate Non-rate (Dollars in thousands) One Day 6 Months Months to 3 Yrs to 5 Yrs >5 Yrs Sensitive Sensitive Total ----------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ - $ - $ - $ - $ - $ - $ - $ 16,419 $ 16,419 Short term investments 11,000 - - - - - 11,000 - 11,000 Investment securities - 9,004 - 11,263 8,022 20,036 48,325 1,002 49,327 Loans 139,769 2,800 2,089 8,471 4,524 25,516 183,169 3,221 186,390 Loan loss reserve/unearned fees - - - - - - - (3,958) (3,958) Other assets - - - - - - - 15,218 15,218 -------- --------- --------- -------- ------- ------- -------- --------- -------- Total assets $150,769 $ 11,804 $ 2,089 $ 19,734 $12,546 $45,552 $242,494 $ 31,902 $274,396 ======== ========= ========= ======== ======= ======= ======== ========= ======== Liabilities and Equity: Deposits Demand $ - $ - $ - $ - $ - $ - $ - $ 66,263 $ 66,263 NOW, MMDA, and savings 144,321 - - - - - 144,321 - 144,321 Time deposits - 29,310 9,844 380 11 10 39,555 - 39,555 Subordinated debt 3,000 - - - - - 3,000 - 3,000 Other liabilities - - - - - - - 1,274 1,274 Shareholders' equity - - - - - - - 19,983 19,983 -------- --------- --------- -------- ------- ------- -------- --------- -------- Total liabilities and equity $147,321 $ 29,310 $ 9,844 $ 380 $ 11 $ 10 $186,876 $ 87,520 $274,396 ======== ========= ========= ======== ======= ======= ======== ========= ======== 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% - - -----------------------------------------------------------------------------------------------------------------------------------
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. 13 of 19 NON-INTEREST INCOME The following table provides details of non-interest income for the previous five quarters.
Quarter Ended ---------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 1996 1996 1995 1995 1995 ------------ ----------- -------------- --------------- -------- 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 ===== ===== ===== ===== =====
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. NON-INTEREST EXPENSE The following table provides details of non-interest expense for the previous five quarters:
Quarter Ended ------------------------------------------------------------------------ June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 1996 1996 1995 1995 1995 -------------- ----------- ------------- -------------- --------- 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 ====== ====== ====== ====== ======
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. 14 of 19 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. 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:
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) - --------------------- 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% ==========================================================================================
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. 15 of 19 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:
Quarter ended -------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 1996 1996 1995 1995 1995 - ---------------------- -------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------------------------------------
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
Quarter ended -------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 1996 1996 1995 1995 1995 - ---------------------- -------------------------------------------------------------------------- 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% - ------------------------------------------------------------------------------------------------------------------
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 16 of 19 $3.3 million at June 30, 1996, compared with $3.3 million at December 31, 1995, and $3.6 million at June 30, 1995. 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. 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:
For Withheld --- -------- 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
(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 17 of 19 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. 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 18 of 19 INDEX TO EXHIBITS NUMBER EXHIBIT ------ ------- 2.1 Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996 (filed as Exhibit 2.1 of Registrant's report on Form 8-K dated July 12, 1996 and incorporated herein by reference). 10.1 Cupertino Shareholder Agreement and Mid Peninsula Shareholder Agreement, each dated as of June 26, 1996, pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. 10.2 Form of Cupertino Affiliate Agreement and Mid-Peninsula Affiliate Agreement with directors and certain officers, pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. 10.3 Stock Option Agreement pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. 10.4 Letter agreement, dated as of May 10, 1996, regarding the rendering of a fairness opinion and Indemnity Agreement, dated as of May 10, 1996, pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996, between Cupertino and Sutro & Co. Incorporated. 10.5 Letter agreement, dated as of June 5, 1996, regarding the providing of financial advisory services pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996, between Cupertino and Hovde Financial, Inc. 27 Financial Data Schedule _____ 19 of 19 EX-10.1 2 CUPERTINO SHAREHOLDER AGREEMENT EXHIBIT 10.1 CUPERTINO SHAREHOLDER AGREEMENT This Shareholder Agreement ("Agreement") is made and entered into on June 26, 1996, by and between Mid-Peninsula Bancorp ("Mid-Peninsula") and each of the other persons executing this Agreement (each such person is referred to individually as a "Cupertino Shareholder" and collectively referred to as the "Cupertino Shareholders"), with reference to the following facts: A. Mid-Peninsula and Cupertino National Bancorp ("Cupertino") have entered into that certain Agreement and plan of Reorganization and Merger ("Reorganization Agreement"), dated as of June 5, 1996, pursuant to which Cupertino will merge with and into Mid-Peninsula (the "Merger"), Mid-Peninsula will change its name to Greater Bay Bancorp ("Bancorp") and Mid-Peninsula will pay consideration to Cupertino shareholders in the form of Bancorp common stock. B. Each of the Cupertion Shareholders is also a director or executive officer of Cupertino. C. In order to induce Mid-Peninsula to enter into the Reorganization Agreement, the Cupertino Shareholders desire to enter into this Agreement solely in their capacity as Shareholders. NOW, THEREFORE, in consideration of the promises and of the respective representations, warranties and covenants, agreements and conditions contained herein and in the Reorganization Agreement, the parties hereto agree as follows: 1. Agreements of Cupertino Shareholders. ------------------------------------ 1.1 Agreement to Vote. At any meeting of shareholders of Cupertino or ----------------- in connection with any solicitation of the written consent of the Cupertino Shareholders to approve the Reorganization Agreement and the transactions contemplated thereby, each of the Cupertino Shareholders shall vote or cause to be voted all shares of common stock of Cupertino ("Cupertino Share" or "Cupertino Shares") owned by each such Cupertino Shareholder, and any other Cupertino Shares hereafter acquired by each such Cupertino Shareholder, in favor of, and to approve, the principal terms of the Merger and any other matter contemplated by the Reorganization Agreement which requires the approval of the Cupertino Shareholders. 1.2 Agreement to Recommend. Unless the Board of Directors of Cupertino ---------------------- shall have determined that they have a fiduciary duty to the Cupertino Shareholders to recommend that the Cupertino Shareholders not vote in favor of approval of the transactions contemplated by the Reorganization Agreement, each Cupertino Shareholder shall recommend to the Cupertino Shareholders to vote in favor of, and to approve, the principal terms of the Merger and any other matter contemplated by the Reorganization Agreement. 1.3 Restrictions on Dispositions. Each Cupertino Shareholder agrees ---------------------------- that he will not pledge or otherwise encumber, nor sell, assign or otherwise dispose of, any Cupertino Shares currently owned or acquired by such Cupertino Shareholder after the date of this Agreement, except (i) with the prior written consent of Mid-Peninsula (which shall not be unreasonably withheld); (ii) pursuant to the Reorganization Agreement; or (iii) by a bona fide pledge to secure a loan made on a full-recourse basis. 1.4 Negotiations with Other Parties. Each Cupertino Shareholder agrees ------------------------------- that he will not, directly or indirectly, solicit or encourage any inquiries, discussions or proposals from, or enter into, or continue any discussions, negotiations or agreements relating to, or vote in favor of any proposal or transactions for disposition of all or part of the business or assets of Cupertino or any subsidiary thereof, or the acquisition of all or part of Cupertino's or any subsidiary of Cupertino's voting securities or any business combination with any person other than Mid-Peninsula or any wholly-owned subsidiary of Mid-Peninsula, unless, upon advice of counsel, the Board of Directors of Cupertino shall have determined that any duty to refrain from any act pursuant to this Section 1.4 is inconsistent with the continuing fiduciary duty of the Board of Directors to the Cupertino Shareholders. 2. Representations and Warranties of Cupertino Shareholders. -------------------------------------------------------- Each of the Cupertino Shareholders severally and not jointly, represents and warrants to and agrees with Mid-Peninsula solely with respect to himself or herself, as follows: 2.1 Capacity. Each such Cupertino Shareholder has all the requisite -------- capacity and authority to enter into and perform such Cupertino Shareholder's obligations under this Agreement. 2.2 Binding Agreement. This Agreement constitutes the valid and legally ----------------- binding obligation of each such Cupertino Shareholder. 2.3 Non-Contravention. The execution and delivery of this Agreement by ----------------- each such Cupertino Shareholder does not, and the performance by such Cupertino Shareholder's obligations hereunder and the consummation by such Cupertino Shareholder of the transactions contemplated hereby will not, violate or conflict with or constitute a default under any agreement, instrument, contract or other obligation or any order, arbitration award, judgment or decree to which such Cupertino Shareholder is a party or by which such Cupertino Shareholder is bound, or any statute, rule or regulation to which such Cupertino Shareholder or any of 2 such Cupertino Shareholder's property is subject. 2.4 Ownership of Shares. Schedule 1 hereto correctly sets forth the ------------------- number of Cupertino Shares owned by each Cupertino Shareholder, or with respect to which each Cupertino Shareholder has good title to all of the Cupertino Shares indicated as owned by such Cupertino Shareholder in the capacity set forth on Schedule 1 as of the date indicated on such Schedule 1, and such Cupertino Shares are so owned free and clear of any liens, security interest, charges or other encumbrances, except as set forth in such Schedule 1. 3. Termination. ----------- 3.1 Termination Date. This Agreement shall terminate and be of no further ---------------- force and effect immediately upon the earlier of: (a) consummation of the Merger; or (b) termination of the Reorganization Agreement in accordance with the terms thereof. 3.2 Effect of Termination. Upon the termination of this Agreement in --------------------- accordance with Section 3.1 hereof, the respective obligations of the parties hereto shall immediately become void and have no further force or effect. 4. Specific Performance. The parties hereto recognize and agree that monetary -------------------- damages will not compensate adequately the parties hereto for nonperformance. Accordingly, each party agrees that his obligations shall be enforceable by court order requiring specific performance. 5. Miscellaneous. ------------- 5.1 Expenses. Each party hereto shall pay its own costs and expenses, -------- including, but not limited to, those of its attorneys and accountants, in connection with this Agreement and transactions covered and contemplated hereby. 5.2 Notices. All notices, demands or other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if delivered in person, by telex, telecopy, facsimile transmission, or by United States mail, certified or registered, with return receipt requested, or otherwise actually delivered as follows: 3 (a) If to a Cupertino Shareholder: Cupertino National Bancorp 20230 Stevens Creek Boulevard Cupertino, CA 95014 Attention: C. Donald Allen, President Telephone: (408) 996-1144 Telecopier: (408) 996-0657 With copies to: Manatt, Phelps & Phillips 11355 W. Olympic Boulevard Los Angeles, CA 90064 Attention: Paul H. Irving William T. Quicksilver Telephone: (310) 312-4000 Telecopier: (310) 312-4224 (b) If to Mid-Peninsula Bancorp: Mid-Peninsula Bancorp 420 Cowper Street Palo Alto, CA 94301-1504 Attention: David L. Kalkbrenner, President Telephone: (408) 323-5150 Telecopier: (408) 323-7421 With copies to: Bronson, Bronson & McKinnon 10 Almaden Blvd., Suite 600 San Jose, CA 95113-2237 Attention: Glenn T. Dodd Telephone: (408) 293-0599 Telecopier: (408) 999-6553 Attention: John W. Carr Telephone: (415) 986-4200 Telecopier: (415) 982-1394 The persons or address to which mailings or deliveries shall be made may change from time to time by notice given pursuant to the provisions of this Section 5.2. Any notice, demand or other communication given pursuant to the provisions of this Section 5.2 shall be deemed to have been given on the date delivered or three days following the date mailed, as the case may be. 5.3 Successors and Assigns. All terms and provisions of this Agreement ---------------------- shall be binding upon and inure to the benefit of the parties hereto and their respective transferees, successors and assigns; provided, however, that, except as otherwise contemplated herein, this Agreement and all rights, privileges, 4 duties and obligations of the parties hereto may not be assigned or delegated by any party hereto without the prior written consent of the other parties to this Agreement and any purported assignment in violation of this Section 5.3 shall be null and void. 5.4 Third Party Beneficiaries. Each party hereto intends that this ------------------------- Agreement shall not benefit, or create any right or cause of action in or on behalf of, any person other than the parties hereto. As used in this Agreement, the term party or parties shall refer only to Mid-Peninsula and the Cupertino Shareholders, or any of them. 5.5 Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which taken together shall constitute one instrument. 5.6 Governing Law. This Agreement is made and entered into in the State ------------- of California and the laws of that state shall govern the validity and interpretation hereof and the performance of the parties hereto of their respective duties and obligations hereunder. 5.7 Captions. The captions contained in this Agreement are for -------- convenience of reference only and do not form a part of this Agreement. 5.8 Waiver and Modification. No waiver of any term, provision or ----------------------- condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision or condition of this Agreement. This Agreement may be modified or amended only by an instrument of equal formality signed by the parties or their duly authorized agents. 5.9 Attorneys' Fees. In the event any of the parties to this Agreement --------------- brings an action or suit against any other party by reason of any breach of any covenant, agreement, representation, warranty or other provision hereof, or any breach of any duty or obligation created hereunder by such other party, the prevailing party in whose favor final judgment is entered shall be entitled to have and recover of and from the losing party all reasonable costs and expenses incurred or sustained by such prevailing party in connection with such suit or action, including without limitation, legal fees and court costs (whether or not taxable as such). 5.10 Entire Agreement. The making, execution and delivery of this ---------------- Agreement by the parties hereto have been encouraged by no representations, statements, warranties or agreements other than those herein expressed. This Agreement embodies the entire understanding of the parties and there are no further or other 5 agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof, unless expressly referred to by reference herein. 5.11 Severability. Whenever possible, each provision of this Agreement and ------------ every related document shall be interpreted in such manner as to be valid under applicable law. However, if any provision of any of the foregoing shall be invalid or prohibited under said applicable law, it shall be construed, interpreted and limited to effectuate its purposes to the maximum legally permissible extent. If it cannot be so construed and interpreted so as to be valid under such law, such provision shall be ineffective to the extent of such invalidity or prohibition without invalidating the remainder of such provision or the remaining provisions of this Agreement, and this Agreement shall be construed to the maximum extent possible to carry out its terms without such invalid or unenforceable provision or portion thereof. 5.12 Several Obligations. All duties and obligations of each party to this ------------------- Agreement shall be several and not joint. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. MID-PENINSULA BANCORP By: /s/ David L. Kalbrenner -------------------------------- David L. Kalbrenner, President CUPERTINO SHAREHOLDERS: /s/ Dennis S. Whittaker /s/ C. Donald Allen - ----------------------------- ----------------------------- Dennis S. Whittaker C. Donald Allen /s/ Steven C. Smith /s/ Heidi R. Wulfe - ----------------------------- ----------------------------- Steven C. Smith Heidi R. Wulfe /s/ David K. Chui /s/ Carl F. Cookson - ----------------------------- ----------------------------- David K. Chui Carl F. Cookson /s/ Jerry R. Crowley /s/ Janet M. DeCarli - ----------------------------- ----------------------------- Jerry R. Crowley Janet M. DeCarli /s/ John M. Gatto /s/ William H. Guengerich - ----------------------------- ----------------------------- John M. Gatto William H. Guengerich /s/ James E. Jackson /s/ Rex D. Lindsay - ----------------------------- ----------------------------- James E. Jackson Rex D. Lindsay 6 /s/ Glen McLaughlin /s/ Norman Meltzer - ----------------------------- ----------------------------- Glen McLaughlin Norman Meltzer /s/ Dick J. Randall - ----------------------------- Dick J. Randall 7 Stock Ownership for Directors & Executive Officers - -------------------------------------------------------------------------------- Name and Address of Number Beneficial Owners of Shares ----------------- --------- Dick J. Randall (1)............................................ 131,491 20230 Stevens Creek Boulevard Cupertino, CA 95014 C. Donald Allen (2)............................................ 68,058 David K. Chui (3).............................................. 26,931 Carl E. Cookson (4)............................................ 26,682 Jerry R. Crowley (5)........................................... 33,862 Janet M. DeCarli (6)........................................... 26,218 John M. Gatto (7).............................................. 36,009 William H. Guengerich (8)...................................... 25,460 James E. Jackson (9)........................................... 58,777 Rex D. Lindsay (10)............................................ 64,296 Glen McLaughlin (11)........................................... 55,649 Norman Meltzer (12)............................................ 21,424 Dennis S. Whittaker (13)....................................... 20,333 Steven C. Smith (14)........................................... 36,993 Kenneth D. Brenner (15)........................................ 22,495 David Hood (16)................................................ 24,413 Hall Palmer (17)............................................... 27,206 Heidi Wulfe (18)............................................... 5,300 All Directors and Executive Officers as a Group (18 persons) (19)............................................ 708,597 The numbers reported include immediate vesting upon change of control as well as ESPP purchase for 6/30/96. These calculations do not include 401(k) purchase/ company match for 6/30/96 as this information is not yet available. 8 MID-PENINSULA SHAREHOLDER AGREEMENT This Shareholder Agreement ("Agreement") is made and entered into on June 26, 1996, by and between Cupertino National Bancorp ("Cupertino") and each of the other persons executing this Agreement (each such person is referred to individually as a "Cupertino Shareholder" and collectively referred to as the "Cupertino Shareholders"), with reference to the following facts: A. Mid-Peninsula Bancorp ("Mid-Peninsula") and Cupertino have entered into that certain agreement and plan of Reorganization and Merger ("Reorganization Agreement"), dated as of June 5, 1996, pursuant to which Cupertino will merge with and into Mid-Peninsula (the "Merger"), Mid-Peninsula will change its name to Greater Bay Bancorp ("Bancorp") and Mid-Peninsula will pay consideration to Cupertino shareholders in the form of Bancorp common stock. B. Each of the Mid-Penisula Shareholders is also a director or executive officer of Mid-Peninsula. C. In order to induce Cupertino to enter into the Reorganization Agreement, the Mid-Peninsula Shareholders desire to enter into this Agreement solely in their capacity as Mid-Penisula Shareholders. NOW, THEREFORE, in consideration of the promises and of the respective representations, warranties and covenants, agreements and conditions contained herein and in the Reorganization Agreement, the parties hereto agree as follows: 1. Agreements of Mid-Peninsula Shareholders. ---------------------------------------- 1.1 Agreement to Vote. At any meeting of shareholders of Mid-Peninsula or ----------------- in connection with any solicitation of the written consent of the Mid-Peninsula Shareholders to approve the Reorganization Agreement and the transactions contemplated thereby, each of the Mid-Peninsula Shareholders shall vote or cause to be voted all shares of common stock of a Mid-Peninsula ("Mid-Peninsula Share" or "Mid-Peninsula Shares") owned by each such Mid-Peninsula Shareholder, and any other Mid-Peninsula Shares hereafter acquired by each such Mid-Peninsula Shareholder, in favor of, and to approve, the principal terms of the Merger and any other matter contemplated by the Reorganization Agreement which requires the approval of the Mid-Peninsula Shareholders. 1.2 Agreement to Recommend. Unless the Board of Directors of Mid-Peninsula shall have determined that they have a fiduciary duty to the Mid-Peninsula Shareholders to recommend that the Mid-Peninsula Shareholders not vote in favor of approval of the transactions contemplated by the Reorganization Agreement, each Mid-Peninsula Shareholder shall recommend to the Mid-Peninsula Shareholders to vote in favor of, and to approve, the principal terms of the Merger and any other matter contemplated by the 9 Reorganization Agreement. 1.3 Restrictions on Dispositions. Each Mid-Peninsula Shareholder agrees ---------------------------- that he will not pledge or otherwise encumber, nor sell, assign or otherwise dispose of, any Mid-Peninsula Shares currently owned or acquired by such Mid- Peninsula Shareholder after the date of this Agreement, except (i) with the prior written consent of Cupertino (which shall not be unreasonably withheld); (ii) pursuant to the Reorganization Agreement; or (iii) by a bona fide pledge to secure a loan made on a full-recourse basis. 1.4 Negotiations with Other Parties. Each Mid-Peninsula Shareholder agrees ------------------------------- that he will not, directly or indirectly, solicit or encourage any inquiries, discussions or proposals from, or enter into, or continue any discussions, negotiations or agreements relating to, or vote in favor of any proposal or transactions for disposition of all or part of the business or assets of Mid- Peninsula or any subsidiary thereof, or the acquisition of all or part of Mid- Peninsula's or any subsidiary of Mid-Peninsula's voting securities or any business combination with any person other than Cupertino or any wholly-owned subsidiary of Cupertino, unless, upon advice of counsel, the Board of Directors of Mid-Peninsula shall have determined that any duty to refrain from any act pursuant to this Section 1.4 is inconsistent with the continuing fiduciary duty of the Board of Directors to the Mid-Peninsula Shareholders. 2. Representations and Warranties of Mid-Peninsula Shareholders. ------------------------------------------------------------ Each of the Mid-Peninsula Shareholders severally and not jointly, represents and warrants to and agrees with Cupertino solely with respect to himself or herself, as follows: 2.1 Capacity. Each such Mid-Peninsula Shareholder has all the requisite -------- capacity and authority to enter into and perform such Mid-Peninsula Shareholder's obligations under this Agreement. 2.2 Binding Agreement. This Agreement constitutes the valid and legally ----------------- binding obligation of each such Mid-Peninsula Shareholder. 2.3 Non-Contravention. The execution and delivery of this Agreement by ----------------- each such Mid-Peninsula Shareholder does not, and the performance by such Mid- Peninsula Shareholder's obligations hereunder and the consummation by such Mid- Peninsula Shareholder of the transactions contemplated hereby will not, violate or conflict with or constitute a default under any agreement, instrument, contract or other obligation or any order, arbitration award, judgment or decree to which such Mid-Peninsula Shareholder is a party or by which such Mid- Peninsula Shareholder is bound, or any statute, rule or regulation to which such Mid-Peninsula Shareholder or any of 10 such Mid-Peninsula Shareholder's property is subject. 2.4 Ownership of Shares. Schedule 1 hereto correctly sets forth the ------------------- number of Mid-Peninsula Shares owned by each Mid-Peninsula Shareholder, or with respect to which each Mid-Peninsula Shareholder has good title to all of the Mid-Peninsula Shares indicated as owned by such Mid-Peninsula Shareholder in the capacity set forth on Schedule 1 as of the date indicated on such Schedule 1, and such Mid-Peninsula Shares are so owned free and clear of any liens, security interest, charges or other encumbrances, except as set forth in such Schedule 1. 3. Termination. ----------- 3.1 Termination Date. This Agreement shall terminate and be of no further ---------------- force and effect immediately upon the earlier of: (a) consummation of the Merger; or (b) termination of the Reorganization Agreement in accordance with the terms thereof. 3.2 Effect of Termination. Upon the termination of this Agreement in --------------------- accordance with Section 3.1 hereof, the respective obligations of the parties hereto shall immediately become void and have no further force or effect. 4. Specific Performance. The parties hereto recognize and agree that monetary -------------------- damages will not compensate adequately the parties hereto for nonperformance. Accordingly, each party agrees that his obligations shall be enforceable by court order requiring specific performance. 5. Miscellaneous. ------------- 5.1 Expenses. Each party hereto shall pay its own costs and expenses, -------- including, but not limited to, those of its attorneys and accountants, in connection with this Agreement and transactions covered and contemplated hereby. 5.2 Notices. All notices, demands or other communications hereunder shall ------- be in writing and shall be deemed to have been duly given if delivered in person, by telex, telecopy, facsimile transmission, or by United States mail, certified or registered, with return receipt requested, or otherwise actually delivered as follows: 11 (a) If to Mid-Peninsula Bancorp: Mid-Peninsula Bancorp 420 Cowper Street Palo Alto, CA 94301-1504 Attention: David L. Kalkbrenner, President Telephone: (408) 323-5150 Telecopier: (408) 323-7421 With copies to: Bronson, Bronson & McKinnon 10 Almaden Blvd., Suite 600 San Jose, CA 95113-2237 Attention: Glenn T. Dodd Telephone: (408) 293-0599 Telecopier: (408) 999-6553 Attention: John W. Carr Telephone: (415) 986-4200 Telecopier: (415) 982-1394 (b) If to a Cupertino Shareholder: Cupertino National Bancorp 20230 Stevens Creek Boulevard Cupertino, CA 95014 Attention: C. Donald Allen, President Telephone: (408) 996-1144 Telecopier: (408) 996-0657 With copies to: Manatt, Phelps & Phillips 11355 W. Olympic Boulevard Los Angeles, CA 90064 Attention: Paul H. Irving William T. Quicksilver Telephone: (310) 312-4000 Telecopier: (310) 312-4224 The persons or address to which mailings or deliveries shall be made may change from time to time by notice given pursuant to the provisions of this Section 5.2. Any notice, demand or other communication given pursuant to the provisions of this Section 5.2 shall be deemed to have been given on the date delivered or three days following the date mailed, as the case may be. 5.3 Successors and Assigns. All terms and provisions of this Agreement ---------------------- shall be binding upon and inure to the benefit of the parties hereto and their respective transferees, successors and assigns; provided, however, that, except as otherwise contemplated herein, this Agreement and all rights, privileges, 12 duties and obligations of the parties hereto may not be assigned or delegated by any party hereto without the prior written consent of the other parties to this Agreement and any purported assignment in violation of this Section 5.3 shall be null and void. 5.4 Third Party Beneficiaries. Each party hereto intends that this ------------------------- Agreement shall not benefit, or create any right or cause of action in or on behalf of, any person other than the parties hereto. As used in this Agreement, the term party or parties shall refer only to Mid-Peninsula and the Cupertino Shareholders, or any of them. 5.5 Counterparts. This Agreement may be executed in one or more ------------ counterparts, all of which taken together shall constitute one instrument. 5.6 Governing Law. This Agreement is made and entered into in the State ------------- of California and the laws of that state shall govern the validity and interpretation hereof and the performance of the parties hereto of their respective duties and obligations hereunder. 5.7 Captions. The captions contained in this Agreement are for -------- convenience of reference only and do not form a part of this Agreement. 5.8 Waiver and Modification. No waiver of any term, provision or ----------------------- condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision or condition of this Agreement. This Agreement may be modified or amended only by an instrument of equal formality signed by the parties or their duly authorized agents. 5.9 Attorneys' Fees. In the event any of the parties to this Agreement --------------- brings an action or suit against any other party by reason of any breach of any covenant, agreement, representation, warranty or other provision hereof, or any breach of any duty or obligation created hereunder by such other party, the prevailing party in whose favor final judgment is entered shall be entitled to have and recover of and from the losing party all reasonable costs and expenses incurred or sustained by such prevailing party in connection with such suit or action, including without limitation, legal fees and court costs (whether or not taxable as such). 5.10 Entire Agreement. The making, execution and delivery of this ---------------- Agreement by the parties hereto have been encouraged by no representations, statements, warranties or agreements other than those herein expressed. This Agreement embodies the entire understanding of the parties and there are no further or other 13 agreements or understandings, written or oral, in effect between the parties relating to the subject matter hereof, unless expressly referred to by reference herein. 5.11 Severability. Whenever possible, each provision of this Agreement and ------------ every related document shall be interpreted in such manner as to be valid under applicable law. However, if any provision of any of the foregoing shall be invalid or prohibited under said applicable law, it shall be construed, interpreted and limited to effectuate its purposes to the maximum legally permissible extent. If it cannot be so construed and interpreted so as to be valid under such law, such provision shall be ineffective to the extent of such invalidity or prohibition without invalidating the remainder of such provision or the remaining provisions of this Agreement, and this Agreement shall be construed to the maximum extent possible to carry out its terms without such invalid or unenforceable provision or portion thereof. 5.12 Several Obligations. All duties and obligations of each party to this ------------------- Agreement shall be several and not joint. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. CUPERTINO BANCORP By: /s/ C. Donald Allen -------------------------------- C. Donald Allen, President MID-PENINSULA SHAREHOLDERS: /s/ Duncan L. Matteson /s/ Owen D. Conley - ----------------------------- ----------------------------- Duncan L. Matteson Owen D. Conley /s/ Edwin E. van Bronkhorst /s/ Donald L. Hammond - ----------------------------- ----------------------------- Edwin E. van Bronkhorst Donald L. Hammond /s/ Warren R. Thoits /s/ R. Hewlett Lee, M.D. - ----------------------------- ----------------------------- Warren R. Thoits R. Hewlett Lee, M.D. /s/ David L. Kalkbrenner /s/ Helen C. Leong - ----------------------------- ----------------------------- David L. Kalkbrenner Helen C. Leong /s/ Murray B. Dey /s/ George M. Marcus - ----------------------------- ----------------------------- Murray B. Dey George M. Marcus /s/ Lawrence A. Aufmuth /s/ Donald H. Seiler - ----------------------------- ----------------------------- Lawrence A. Aufmuth Donald H. Seiler /s/ John F. Blokker /s/ Bruce E. Van Alstyne - ----------------------------- ----------------------------- John F. Blokker Bruce E. Van Alstyne /s/ Allan F. Brown /s/ Carol H. Rowland - ----------------------------- ----------------------------- Allan F. Brown Carol H. Rowland 14 SCHEDULE 1 - -------------------------------------------------------------------------------- Mid-Peninsula Number Shareholders of Shares Encumbrances ----------------- --------- ------------ - ---------------------------------------------------------------- Lawrence A. Aufmuth.............................................. 8,134 None John F. Blokker.................................................. 26,580 None Allan F. Brown................................................... 26,580 None Owen D. Conley................................................... 25,780 None Murray B. Dey.................................................... 29,983 None Donald L. Hammond................................................ 26,580 None David L. Kalkbrenner............................................. 38,946 None R. Hewlett Lee, M.D.............................................. 8,178 None Helen C. Leong................................................... 26,580 None George M. Marcus................................................. 32,724 None Duncan L. Matteson............................................... 41,750 None Carol H. Rowland................................................. 30,173 None Donald H. Seiler................................................. 26,580 None Warren R. Thoits................................................. 29,065 None Bruce E. Van Alstyne............................................. 22,000 None Edwin E. van Bronkhorst.......................................... 27,330 None
15 EX-10.2 3 AFFILIATE AGREEMENT EXHIBIT 10.2 CUPERTINO AFFILIATE AGREEMENT I, the undersigned, have been advised that as of the date hereof I may be deemed to be (but I do not hereby admit to being) an affiliate of Cupertino National Bancorp ("Cupertino") for purposes of Rule 145 promulgated by the SEC under the Securities Act ("Rule 145"). The following undertaking is given pursuant to and in compliance with that certain Agreement and Plan of Reorganization and Merger between Mid-Peninsula Bancorp ("Mid-Peninsula") and Cupertino, dated as of June 5, 1996 (the "Reorganization Agreement"), which provides for the merger of Cupertino with and into Mid-Peninsula (the "Merger") and Mid-Peninsula will change its name to Greater Bay Bancorp ("Bancorp"). Capitalized terms used herein and not defined herein shall have the meanings given to them in the Reorganization Agreement. I understand that Mid-Peninsula is relying on the performance of the covenants contained herein to insure that they obtain the desired pooling-of- interests accounting treatment as a result of the Merger and to avoid any appearance of improper manipulation of Mid-Peninsula's stock price or insider trading in the period prior to the Merger. I hereby agree that during the period beginning on October 15, 1996 (or such later date as Mid-Peninsula may notify me in writing), and ending on the date on which the Effective Time of the Merger occurs, which in either event shall not exceed thirty (30) days prior to the Effective Time of the Merger, I will not offer to sell or purchase, sell, transfer, purchase or acquire, publicly or privately, any shares of Mid-Peninsula common stock ("Mid-Peninsula Share" or "Mid-Peninsula Shares") or Cupertino common stock ("Cupertino Share" or "Cupertino Shares"), or cause any other person to do any of the above, except as a result of the conversion in the Merger of any Cupertino Shares or options to purchase Cupertino Shares held by me. I hereby also agree that during the period beginning on the date on which the Effective Time of the Merger occurs and ending on the date of release and publication to the general public of financial results covering at least thirty (30) days of post-merger combined operations of Mid-Peninsula and Cupertino, I will not offer, sell or transfer, publicly or privately, any Mid-Peninsula Shares or Bancorp Shares, and that I will not during such period commit or agree to sell or transfer any of such Mid-Peninsula Shares or Bancorp Shares after such period. I hereby also agree that at no time will I offer, sell or transfer, publicly or privately, any Bancorp Shares acquired by me in the Merger, whether in exchange for Cupertino Shares or for or upon exercise of options to purchase such Cupertino Shares, except: (i) Pursuant to a then current effective registration under the Securities Act of 1933, as amended (the "1933 Act"); or (ii) Pursuant to the provisions of Rule 145(d) under the 1933 Act; or (iii) If counsel representing me, satisfactory to Mid-Peninsula, shall have advised Mid-Peninsula in a written opinion letter in form and substance satisfactory to Mid-Peninsula and its counsel and upon which Mid- Peninsula and its counsel may rely, that no registration under the 1933 Act would be required in connection with the proposed sale, transfer or other disposition. I agree and confirm that: (i) the Bancorp Shares to be acquired by me upon consummation of the Merger (such Bancorp Shares being sometimes referred to for purposes of this Agreement as "Acquired Shares") will not be acquired with a view to the sale or distribution thereof except as permitted by Rule 145; (ii) the certificate representing the Acquired Shares or any substitutions therefor, may be subject to stop transfer instructions which confirm that such securities representing Bancorp Shares have been issued or transferred to the registered holder as a result of a transaction to which Rule 145 under the Securities Act of 1933, as amended (the "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 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 Act. It is understood and agreed that any stop transfer instructions shall be removed if the undersigned shall have delivered to Mid-Peninsula a written opinion letter in form and substance satisfactory to Mid-Peninsula and its counsel and upon which Mid-Peninsula and its counsel may rely, from counsel satisfactory to Mid-Peninsula, that no registration under the 1933 Act would be required in connection with the proposed sale, transfer or other disposition. Date: Signed: /s/ ------------------------------ ------------------------------ MID-PENINSULA AFFILIATE AGREEMENT I, the undersigned, have been advised that as of the date hereof I may be deemed to be (but I do not hereby admit to being) an affiliate of Mid-Peninsula Bancorp ("Mid-Peninsula") for purposes of Rule 145 promulgated by the SEC under the Securities Act ("Rule 145"). The following undertaking is given pursuant to and in compliance with that certain Agreement and Plan of Reorganization and Merger between Mid-Peninsula and Cupertino National Bancorp ("Cupertino") dated as of June 5, 1996 (the "Reorganization Agreement"), which provides for the merger of Cupertino with and into Mid-Peninsula (the "Merger") and Mid-Peninsula will change its name to Greater Bay Bancorp ("Bancorp"). Capitalized terms used herein and not defined herein shall have the meanings given to them in the Reorganization Agreement. I understand that Mid-Peninsula is relying on the performance of the covenants contained herein to insure that they obtain the desired pooling-of- interests accounting treatment as a result of the Merger and to avoid any appearance of improper manipulation of Mid-Peninsula's stock price or insider trading in the period prior to the Merger. I hereby agree that during the period beginning on October 15, 1996, (or such later date as Mid-Peninsula may notify me in writing), and ending on the date on which the Effective Time of the Merger occurs, which in either event shall not exceed thirty (30) days prior to the Effective Time of the Merger, I will not offer to sell or purchase, sell, transfer, purchase or acquire, publicly or privately, any Mid-Peninsula common stock ("Mid-Peninsula Share" or "Mid-Peninsula Shares"), or cause any other person to do any of the above, except my exercise of any stock option pursuant to Mid-Peninsula's stock option plans. I hereby also agree that during the period beginning on the date on which the Effective Time of the Merger occurs and ending on the date of release and publication to the general public of financial results covering at least thirty (30) days of post-merger combined operations of Mid-Peninsula and Cupertino, I will not offer, sell or transfer, publicly or privately, any Mid-Peninsula Shares or Bancorp Shares, and that I will not during such period commit or agree to sell any of such Mid-Peninsula Shares or Bancorp Shares after such period. Date: /s/ ------------------------- ------------------------- EX-10.3 4 STOCK OPTION AGREEMENT EXHIBIT 10.3 THE TRANSFER OF THIS AGREEMENT SUBJECT TO CERTAIN PROVISIONS CONTAINED HEREIN AND TO RESALE RESTRICTIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS STOCK OPTION AGREEMENT This Stock Option Agreement, dated as of June 25, 1996 (the "Agreement"), is made by and between Cupertino National Bancorp, a California corporation ("Issuer"), and Mid-Peninsula Bancorp, a California corporation ("Grantee"). WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of Reorganization and Merger dated June 5, 1996 (the "Reorganization Agreement"), providing for, among other things, the merger of Issuer with and into Grantee (the "Merger"), with Grantee concurrently changing its name to Greater Bay Bancorp and being the surviving corporation; and WHEREAS, as a condition and inducement to Grantee's execution of the Reorganization Agreement, and in consideration of the grant of the option granted pursuant to the Stock Option Agreement, dated the date hereof, between Issuer as grantee and Grantee as issuer (the "Reciprocal Option"), Issuer has agreed to grant to Grantee the Option (as defined below). NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth herein and in the Reorganization Agreement, and intending to be legally bound hereby, Issuer and Grantee agree as follows: 1. Defined Terms. Capitalized terms which are used but not defined ------------- herein shall have the meanings ascribed to such terms in the Reorganization Agreement. As used in this Agreement, the following terms shall have the meanings indicated: (a) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (b) "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. (c) "Holder" means Grantee and, to the extent Grantee has assigned its rights and obligations under this Agreement as permitted herein, any subsidiary of Grantee, but only to the extent such entity is the holder of rights afforded by this Agreement at the time such rights are exercised or otherwise asserted. (d) "Person" shall have the meaning specified in Sections 3(a)(9) and 13(d)(3) of the Exchange Act and the rules and regulations thereunder. (e) "Securities Act" means the Securities Act of 1933, as amended. 2. Grant of Option. Subject to the terms and conditions set forth --------------- herein, Issuer hereby grants to Grantee an irrevocable option (the "Option") to purchase up to 361,065 shares (the "Option Shares") of Common Stock, no par value ("Issuer Common Stock"), of Issuer at a purchase price per Option Share of Fourteen and 80/100 Dollars ($14.80) (the "Purchase Price"). The Purchase Price and the number of Option Shares that may be received upon the exercise of the Option are subject to adjustment as set forth below. 3. Exercise of Option. ------------------ (a) The Holder may exercise the Option, in whole or in part, at any time and from time to time following the occurrence of a Purchase Event (as defined below); provided that the Option shall terminate and be of no further force and effect upon the earliest to occur of: (i) the Effective Time of the Merger; or (ii) 12 months after the first occurrence of a Purchase Event; or (iii) 18 months after the termination of the Reorganization Agreement on or following the occurrence of a Preliminary Purchase Event (as defined below); or (iv) termination of the Reorganization Agreement in accordance with the terms thereof prior to the occurrence of a Purchase Event or a Preliminary Purchase Event; or (v) the date on which the Reciprocal Option shall have become exercisable, in whole or in part, in accordance with its terms. Notwithstanding anything to the contrary contained herein, (A) the Option may not be exercised at any time when Grantee shall be in breach of any of its covenants or agreements contained in the Reorganization Agreement such that Issuer shall be entitled (without regard to any grace period provided therein) to terminate the Reorganization Agreement pursuant to Section 12b(xi) thereof, whether or not Issuer shall have so terminated the Reorganization Agreement; (B) this Agreement and the Option shall terminate automatically upon the termination of the Reorganization Agreement by Issuer pursuant to Section 12b(xi) thereof; and (C) any purchase of shares upon exercise of the Option shall be subject to compliance with applicable law, including, without limitation, the Bank Holding Company Act of 1956, as amended. 2 (b) As used herein, a "Purchase Event" means any of the following events: (i) The Board of Directors of Issuer shall have approved, or recommended to the Issuer's shareholders that they approve, a proposal received by Issuer from a person (other than Grantee or any subsidiary of Grantee) to effect an Acquisition Transaction (as defined below), Tender Offer (as defined below) or Exchange Offer (as defined below); or (ii) Issuer, without having received Grantee's prior written consent, shall have entered into an agreement with any person (other than Grantee or any subsidiary of Grantee) to effect an Acquisition Transaction; or (iii) any person (other than Grantee or any subsidiary of Grantee) 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 fifteen percent (15%) or more of the then outstanding shares of Issuer Common Stock. As used herein, the term "Acquisition Transaction" shall mean (A) a merger, consolidation or similar transaction involving Issuer or any of its subsidiaries (other than internal mergers, reorganizations, consolidations or dissolutions involving only Issuer and/or existing subsidiaries and other than a merger, consolidation or similar transaction in which the common shareholders of Issuer immediately prior thereto in the aggregate own at least seventy-five percent (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 fifteen (15%) or more of the consolidated assets or deposit liabilities of Issuer 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 Issuer or its subsidiaries, of securities representing fifteen percent (15%) or more of the voting power of Issuer or any of its subsidiaries. (c) As used herein, a "Preliminary Purchase Event" means any of the following events: (i) any person (other than Grantee or any subsidiary of Grantee) 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, ten percent (10%) or more of the then outstanding shares of Issuer Common Stock; or 3 (ii) any person (other than Grantee or any subsidiary of Grantee) shall have commenced (as such term is defined in Rule 14d-2 under the Exchange Act), 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 Issuer Common Stock such that, upon consummation of such offer, such person would own or control ten percent (10%) or more of the then outstanding shares of Issuer Common Stock (such an offer being referred to herein as a "Tender Offer" or an "Exchange Offer", respectively); or (iii) Issuer, without having received Grantee's prior written consent, shall have entered into an agreement with any person (other than Grantee or any subsidiary of Grantee) with respect to, or the Board of Directors of Issuer shall have recommended that the shareholders of Issuer approve or accept, a purchase or other acquisition (including by way of merger, consolidation, share exchange or any similar transaction), other than by Issuer or its subsidiaries, representing ten percent (10%) or more of the voting power of Issuer or any of its subsidiaries; or (iv) any person (other than Grantee or any subsidiary of Grantee) shall have filed an application or notice with the Federal Reserve Board or other federal or state regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction; or (v) the holders of Issuer Common Stock shall not have approved the Reorganization Agreement at the meeting of such shareholders held for the purpose of voting on the Reorganization Agreement, such meeting shall not have been held or shall have been canceled prior to termination of the Reorganization Agreement, or Issuer's Board of Directors shall have withdrawn or modified in a manner adverse to Grantee the recommendation of Issuer's Board of Directors with respect to the Reorganization Agreement, in each case after it shall have been publicly announced that any person (other than Grantee or any subsidiary of Grantee) shall have (A) made or disclosed an intention to make a proposal to engage in an Acquisition Transaction or (B) commenced a Tender Offer or filed a registration statement under the Securities Act with respect to an Exchange Offer. (d) Issuer shall notify Grantee promptly in writing of the occurrence of any Purchase Event or Preliminary Purchase Event; provided, however, such notice shall not be a condition to the right of the Holder to exercise the Option. (e) In the event Holder wishes to exercise the Option, it shall send to Issuer a written notice (dated the date on which it is sent to Issuer, which date is referred to as the "Notice Date") specifying (i) the total number of Option Shares it intends to purchase pursuant to such exercise and (ii) a date not earlier than three (3) business days nor later than fifteen (15) business days from the Notice Date for the closing (the "Closing") of such purchase (the "Closing Date"). The Closing shall be held at the Issuer's principal office or at such other place as Issuer and Holder may agree. If prior notification to or approval of the Federal Reserve Board or any other regulatory authority is required as a condition precedent 4 to such purchase, then (A) Holder shall promptly file and process the required notice or application for approval; (B) Issuer shall cooperate with Holder in the filing of the required notice or application for approval and the obtaining of any such approval; and (C) the Closing Date shall be subject to extension for such period of time, not to exceed six (6) months, as may be necessary to permit the Holder to submit such filing to, and, if necessary, to obtain such approval from, the Federal Reserve Board or other applicable regulatory authority; provided, however, that the notice of Option exercise and such governmental filing must be made, and the Notice Date must be, no later than the date on which the Option would otherwise terminate. Any exercise of the Option shall be deemed to have occurred on the Notice Date. 4. Payment and Delivery of Certificates. ------------------------------------ (a) On each Closing Date, Holder shall (i) pay to Issuer, in immediately available funds by wire transfer to a bank account designated by Issuer, an amount equal to the Purchase Price multiplied by the number of Option Shares to be purchased on such Closing Date and (ii) present and surrender this Agreement to the Issuer at the address of the Issuer specified in Section 11(g) hereof. (b) At each Closing, simultaneously with the delivery of immediately available funds and surrender of this Agreement as provided in Section 4(a), (i) Issuer shall deliver to Holder (A) a certificate or certificates representing the Option Shares to be purchased at such Closing, which Option Shares shall be free and clear of all liens, claims, charges and encumbrances of any kind whatsoever, and (B) if the Option is exercised in part only, an executed new agreement with the same terms as this Agreement evidencing the right to purchase the balance of the shares of Issuer Common Stock purchasable hereunder; and (ii) Holder shall deliver to Issuer a letter agreeing that Holder shall not offer to sell or otherwise dispose of such Option Shares in violation of the provisions of this Agreement or applicable state and federal securities laws. (c) Certificates for the Option Shares delivered at each Closing shall be endorsed with a restrictive legend which shall read substantially as follows: THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR QUALIFIED OR REGISTERED UNDER THE SECURITIES LAWS OF ANY STATE. THEY MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND UNTIL THEY HAVE BEEN QUALIFIED OR REGISTERED UNDER APPLICABLE STATE SECURITIES LAWS, UNLESS THE ISSUER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES, REASONABLY SATISFACTORY TO THE ISSUER, STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THE 5 SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO RESALE RESTRICTIONS ARISING UNDER THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF JUNE 5, 1996, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICE OF THE SECRETARY OF THE ISSUER. It is understood and agreed that the above legend shall be removed by delivery of substitute certificate(s) without such legend if Holder shall have delivered to Issuer a copy of a letter from the staff of the SEC, or an opinion of counsel in form and substance reasonably satisfactory to Issuer and its counsel, to the effect that such legend is not required for purposes of the Securities Act or applicable state securities laws. 5. Representations and Warranties of Issuer. Issuer hereby represents ---------------------------------------- and warrants to Grantee as follows: (a) Due Authorization. Issuer has all requisite corporate power and ----------------- authority to enter into this Agreement and, subject to any approvals referred to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Issuer. This Agreement has been duly executed and delivered by Issuer. (b) Authorized Stock. Issuer has taken all necessary corporate action ---------------- to authorize and reserve and to permit it to issue, and, at all times from the date hereof until the obligation to deliver Issuer Common Stock upon the exercise of the Option terminates, will have reserved for issuance, upon exercise of the Option, shares of Issuer Common Stock necessary for Holder to exercise the Option, and Issuer will take all necessary corporate action to authorize and reserve for issuance all additional shares of Issuer Common Stock or other securities which may be issued pursuant to Section 7 upon exercise of the Option. The shares of Issuer Common Stock to be issued upon due exercise of the Option, including all additional shares of Issuer Common Stock or other securities which may be issuable pursuant to Section 7, upon issuance pursuant hereto, shall be duly and validly issued, fully paid and nonassessable, and shall be delivered free and clear of all liens, claims, charges and encumbrances of any kind or nature whatsoever, including any preemptive rights of any stockholder of Issuer. 6. Representations and Warranties of Grantee. Grantee hereby ----------------------------------------- represents and warrants to Issuer that: (a) Due Authorization. Grantee has all requisite corporate power and ----------------- authority to enter into this Agreement and, subject to any approvals or consents referred to herein, to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly 6 authorized by all necessary corporate action on the part of Grantee. This Agreement has been duly executed and delivered by Grantee. (b) Purchase Not for Distribution. This Option is not being, and any ----------------------------- Option Shares or other securities acquired by Grantee upon exercise of the Option will not be, acquired with a view to the public distribution thereof and will not be transferred or otherwise disposed of except in a transaction registered or exempt from registration under the Securities Act and applicable state securities laws. 7. Adjustment Upon Changes in Capitalization, etc. ----------------------------------------------- (a) In the event of any change in Issuer Common Stock by reason of a stock dividend, stock split, split-up, recapitalization, combination, exchange of shares or similar transaction, the type and number of shares or securities subject to the Option, and the Purchase Price therefor, shall be adjusted appropriately, and proper provision shall be made in the documentation pertaining to such transaction so that Holder shall receive, upon exercise of the Option, the number and class of shares or other securities or property that Holder would have received in respect of Issuer Common Stock if the Option had been exercised immediately prior to such event, or the record date therefor, as applicable. If any additional shares of Issuer Common Stock are issued after the date of this Agreement (whether upon exercise of stock options or otherwise but excluding any issuance pursuant to an event described in the first sentence of this Section 7(a)), the number of shares of Issuer Common Stock subject to the Option shall be adjusted so that, after such issuance, such number of shares, together with any shares of Issuer Common Stock previously issued pursuant hereto, equals nineteen percent (19%) of the number of shares of Issuer Common Stock then issued and outstanding, without giving effect to any shares subject to or issued pursuant to the Option (with any fractional share being rounded up to the next full share). Issuer agrees that in no event shall the number of shares of Issuer Common Stock issued after the date of this Agreement pursuant to the preceding sentence, together with the number of shares of Issuer Common Stock subject to the Option, adjusted as aforesaid, exceed the number of available authorized but unissued and unreserved shares of Issuer Common Stock. (b) In the event that Issuer shall, prior to the occurrence of an event set forth in Section 3(a) terminating the Holder's right to exercise the Option, enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or one of its subsidiaries, and shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or one of its subsidiaries, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Issuer Common Stock shall be changed into or exchanged for stock or other securities of Issuer or any other person or cash or any other property or the outstanding shares of Issuer Common Stock immediately prior to such merger shall after such merger represent less than fifty percent (50%) of the outstanding shares and share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its consolidated assets or deposit liabilities to any person other than 7 Grantee or one of its subsidiaries, then, and in each such case, the agreement governing such transaction shall make proper provisions so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of Grantee, of either (A) the Acquiring Corporation (as defined below), or (B) any person that controls the Acquiring Corporation, (such person being referred to as the "Substitute Option Issuer"). (c) The Substitute Option shall have the same terms as the Option, provided that if the terms of the Substitute Option cannot, for legal reasons, be the same as the Option, such terms shall be as similar as possible and in no event less advantageous to Grantee. The Substitute Option Issuer shall also enter into an agreement with the then holder or holders of the Substitute Option in substantially the same form as this Agreement (after giving effect for such purposes to the provisions of this Agreement), which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of the Substitute Common Stock (as is hereinafter defined) as is equal to the Assigned Value (as is hereinafter defined) multiplied by the number of shares of the Issuer Common Stock for which the Option was theretofore exercisable, divided by the Average Price (as is hereinafter defined). The exercise price of the Substitute Option per share of the Substitute Common Stock (the "Substitute Purchase Price") shall then be equal to the Purchase Price multiplied by a fraction in which the numerator is the number of shares of the Issuer Common Stock for which the Option was theretofore exercisable and the denominator is the number of shares of the Substitute Common Stock for which the Substitute Option is exercisable. (e) As used herein, the following terms have the meanings indicated: (i) "Acquiring Corporation" shall mean (A) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (B) Issuer in a merger in which Issuer is the continuing or surviving person, and (C) the transferee of all or any substantial part of the Issuer's assets (or the assets of its subsidiaries). (ii) "Substitute Common Stock" shall mean the common stock issued by the Substitute Option Issuer upon exercise of the Substitute Option. (iii) "Assigned Value" shall mean the highest of (A) the price per share of the Issuer Common Stock at which a Tender Offer or Exchange Offer therefor has been made by any person (other than Grantee or a subsidiary of Grantee), (B) the price per share of the Issuer Common Stock to be paid by any person (other than Grantee or a subsidiary of Grantee) pursuant to an agreement with Issuer, and (C) the highest closing price per share of Issuer Common Stock as quoted on the principal trading market or securities exchange on which such shares are traded as reported by a recognized source within the six-month period immediately preceding the effective date of the agreement governing the transaction described in Section 7(b) which gave rise to the Substitute Option; provided, - -------- 8 however, that in the event of a sale of less than all of Issuer's consolidated - ------- assets or deposit liabilities, the Assigned Value 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 Issuer as determined by a nationally recognized investment banking firm selected by the Holder (or by a majority in interest of the Holders if there shall be more than one Holder (a "Holder Majority")) and reasonably acceptable to Issuer, divided by the number of shares of the Issuer Common Stock outstanding at the time of such sale. In the event that an exchange offer is made for the Issuer Common Stock or an agreement is entered into for a merger or consolidation involving consideration other than cash, the value of the securities or other property issuable or deliverable in exchange for the Issuer Common Stock shall be determined by a nationally recognized investment banking firm by Holder (or a Holder Majority) and reasonably acceptable to Issuer. (iv) "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the effective date of the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of the Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if Issuer is the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by Issuer, the person merging into Issuer or by any company which controls or is controlled by such merging person, as Holder may elect. (f) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than nineteen percent (19%) of the aggregate of the shares of the Substitute Common Stock outstanding prior to exercise of the Substitute Option (with any fractional share being rounded up to the next full share). (g) Issuer shall not enter into any transaction described in subsection (b) of this Section 7 unless the Acquiring Corporation and any person that controls the Acquiring Corporation assume in writing all the obligations of Issuer hereunder and take all other actions that may be necessary so that the provisions of this Section 7 are given full force and effect (including, without limitation, any action that may be necessary so that the shares of Substitute Common Stock are in no way distinguishable from or have lesser economic value than other shares of common stock issued by the Substitute Option Issuer). (h) At the written request of Holder delivered to the Substitute Option Issuer prior to the occurrence of an event set forth in Section 3(a) above terminating the Substitute Option, the Substitute Option Issuer shall repurchase from Holder (i) the Substitute Option and/or (ii) all Substitute Common Stock theretofore purchased by Holder pursuant hereto with respect to which Holder then has beneficial ownership. The date on which Holder exercises its rights under this Section 7(h) is referred to as the "Substitute Option Request Date." Such repurchase shall be at an aggregate price (the "Substitute Option Repurchase Consideration") equal to the sum of (A) the excess, if any, of (1) the Highest Closing Price (as defined below) for each share of Substitute Common Stock over (2) the Substitute 9 Purchase Price per share of Substitute Common Stock, multiplied by the number of shares of Substitute Common Stock for which the Substitute Option may then be exercised and as to which Holder has exercised its repurchase right hereunder, plus (B) the Highest Closing Price for each share of Substitute Common Stock multiplied by the number of shares of Substitute Common Stock acquired by Holder upon exercise of the Option or Substitute Option and as to which Holder has exercised its repurchase right hereunder. The term "Highest Closing Price" shall mean the highest bid price per share of Substitute Common Stock as quoted by the brokerage firms acting as market makers for the Substitute Common Stock prior to the listing of the Substitute Common Stock on any national securities exchange and thereafter as reported by the principal trading market or securities exchange on which such shares are traded, during the sixty (60) business days preceding the Substitute Option Request Date. (i) The provisions of Sections 8(b), 8(c), 9 and 10 shall apply, with appropriate adjustments, to any securities for which the Option becomes exercisable pursuant to this Section 7 and as applicable, references in such sections to "Issuer", "Option", "Purchase Price", "Issuer Common Stock", "Repurchase Consideration", and "Request Date" shall be deemed to be references to "Substitute Option Issuer", "Substitute Option", "Substitute Purchase Price", "Substitute Common Stock", "Substitute Option Repurchase Consideration", and "Substitute Option Request Date", respectively. 8. Repurchase at the Option of Grantee. ----------------------------------- (a) At any time after the first occurrence of a Repurchase Event (as defined in Section 8(e) below), at the written request of Holder delivered to Issuer prior to the occurrence of an event set forth in Section 3(a) above terminating the Option, Issuer shall repurchase from Holder (i) the Option and (ii) all Option Shares theretofore purchased by Holder pursuant hereto with respect to which Holder then has beneficial ownership. The date on which Holder exercises its rights under this Section 8 is referred to as the "Request Date." Such repurchase shall be at an aggregate price (the "Repurchase Consideration") equal to the sum of: (i) the aggregate Purchase Price paid by Holder for any Option Shares acquired pursuant to the Option with respect to which 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 (subject to adjustment pursuant to Section 7(a)), 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 (subject to adjustment pursuant to Section 7(a)) paid (or, in the case of Option Shares with respect to which the Option has been exercised but the Closing Date has not occurred, payable) by Holder for each Option Share with respect to which the Option has been 10 exercised and with respect to which Holder then has beneficial ownership, multiplied by the number of such shares. (b) If Holder exercises its rights under this Section 8, Issuer shall, within ten (10) business days after the Request Date, pay the Repurchase Consideration to Holder in immediately available funds, and Holder shall surrender to Issuer the Option and the certificates evidencing the Option Shares purchased thereunder with respect to which Holder then has beneficial ownership and has designated to be repurchased, and Holder shall warrant that it has sole record and beneficial ownership of such shares and that the same are then free and clear of all liens, claims, charges and encumbrances of any kind whatsoever. (c) Notwithstanding the provisions hereof to the contrary, to the extent that Issuer is prohibited under applicable law, regulation or administrative policy from repurchasing all or any portion of the Option or Option Shares, then (i) Issuer shall promptly give notice of such fact to Holder; (ii) Issuer shall, from time to time subject to the last sentence of this Section 8(c), deliver to Holder that portion of the Repurchase Consideration that it is not then so prohibited from paying; (iii) at Holder's request, Issuer shall promptly file any required notice or application for approval and expeditiously process the same. After Holder's receipt of such notice from Issuer, Issuer shall not be in breach of its repurchase obligation hereunder to the extent it is or remains, despite reasonable efforts to obtain any required approvals, legally prohibited from repurchasing the Option or Option Shares. Holder shall have the right (A) to revoke its request for repurchase with respect to the portion of the Option or Option Shares that Issuer is prohibited from repurchasing, (B) to require Issuer to deliver to Holder the Option and/or Option Shares Issuer is prohibited from repurchasing, and (C) to exercise the Option as to the number of Option Shares for which the Option was exercisable at the Request Date less the number of such Option Shares in respect of which the Repurchase Consideration has been lawfully paid. Notwithstanding anything herein to the contrary, Issuer shall not be obligated to repurchase all or any part of the Option or Option Shares pursuant to more than one written request from Holder, except that Issuer shall be obligated to repurchase, pursuant to more than one written request, any Option or Option Shares in the event that Holder (1) has revoked its request for repurchase in accordance with the provisions of this Section 8 prior to the occurrence of an event set forth in Section 3(a) terminating the Holder's right to exercise the Option and (2) has delivered, prior to such event, a new written notice requesting a repurchase. If an event set forth in Section 3(a) terminating the Holder's right to exercise the Option occurs prior to, or is scheduled to occur within, sixty (60) days after the date of the notice by Issuer described in clause 8(c)(i) above, then, notwithstanding the occurrence of such terminating event, Holder shall have the right to receive the Repurchase Consideration to the extent Issuer is or becomes, within a sixty (60) day period from the date of such notice by Issuer, legally permitted to repurchase. Except as set forth in the preceding sentence, Holder's repurchase rights under this Agreement shall terminate concurrently with the termination of Holder's right to exercise the Option, pursuant to Section 3(a). 11 (d) For purposes of this Agreement, the "Applicable Price" means the highest of (i) the highest price per share of Issuer Common Stock paid for any such share by the person or groups described in Section 8(e)(i), (ii) the price per share of Issuer Common Stock received by holders of Issuer 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), or (iii) the highest closing price per share of Issuer Common Stock as quoted on the principal trading market or securities exchange on which such shares are traded as reported by a recognized source during the sixty (60) business days preceding the Request Date; provided, however, that in the event of a sale of less than all of Issuer'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 Issuer as determined by a nationally recognized investment banking firm selected by Holder (or the Holder Majority) and reasonably acceptable to Issuer, divided by the number of shares of the Issuer 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 (i) or (ii) 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 Holder (or the Holder Majority) and reasonably acceptable to Issuer, which determination shall be conclusive for all purposes of this Agreement. (e) As used herein, a "Repurchase Event" shall occur if (i) any person (other than Grantee or any subsidiary of Grantee) 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, fifty percent (50%) or more of the then outstanding shares of Issuer Common Stock or (ii) any of the transactions described in Section 7(b)(i), 7(b)(ii) or 7(b)(iii) shall be consummated. 9. Listing. If Issuer Common Stock or any other securities to be ------- acquired upon exercise of the Option are not then authorized for quotation on the NASDAQ Stock Market National Market System or any securities exchange, Issuer, upon the request of Holder, will promptly file an application to authorize for quotation the shares of Issuer Common Stock or other securities to be acquired upon exercise of the Option on the NASDAQ Stock Market National Market System or such other securities exchange and will use its best efforts to obtain approval of such listing as soon as practicable. 10. Division of Option. This Agreement (and the Option granted hereby) ------------------ are exchangeable, without expense, at the option of Holder, upon presentation and surrender of this Agreement at the principal office of Issuer for other agreements providing for other options of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Issuer Common Stock purchasable hereunder. The terms "other agreements" and "other options" as used in the preceding sentence mean any other agreements and related options for which this Agreement (and the Option granted hereby) may be 12 exchanged. Upon receipt by Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute an additional contractual obligation on the part of Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated shall at any time be enforceable by anyone. 11. Miscellaneous. ------------- (a) Expenses. Except as otherwise provided in Section 9, each of the -------- parties hereto and any Holder shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including, without limitation, fees and expenses of its own financial consultants, investment bankers, accountants and counsel. (b) Waiver and Amendment. Any provision of this Agreement may be -------------------- waived at any time by the party that is entitled to the benefits of such provision. This Agreement may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the parties hereto. (c) Entire Agreement; No Third-Party Beneficiary. This Agreement, -------------------------------------------- together with the Reorganization Agreement and the other documents and instruments referred to herein and therein (i) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. (d) Severability. If any term, provision, covenant or restriction of ------------ this Agreement is held by a court or a federal or state regulatory authority of competent jurisdiction to be invalid, void or unenforceable, such invalid, void or unenforceable term, provision, covenant or restriction shall, if it is so susceptible, be deemed modified to the minimum extent necessary to render the same valid and enforceable and, in all events, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Without limiting the foregoing, if for any reason such court or regulatory authority determines that Holder may not legally acquire, or Issuer may not legally repurchase, the full number of shares of Issuer Common Stock as provided in Sections 3 and 8 (as adjusted pursuant to Section 7), it is the express intention of Issuer to allow Holder to acquire or to require Issuer to repurchase the maximum number of shares as may be legally permissible without any amendment or modification hereof. 13 (e) Governing Law. This Agreement shall be governed and construed in ------------- accordance with the laws of the State of California without regard to any applicable conflicts of law rules. (f) Descriptive Headings. The descriptive headings contained herein -------------------- are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. (g) Notices. All notices, requests, claims, demands and other ------- communications under this Agreement shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by personal delivery, by telecopy (provided that copy is concurrently sent by first class U.S. mail, postage prepaid), or by mail (registered or certified mail, postage prepaid, return receipt requested) to the parties as follows: If to Issuer: Cupertino National Bancorp 20230 Stevens Creek Boulevard Cupertino, CA 95014 Attn: C. Donald Allen, President Fax No.: 408-996-2465 If to Grantee: Mid-Peninsula Bancorp 420 Cowper Street Palo Alto, CA 94301-1504 Attn: David L. Kalkbrenner, President Fax No.: 415-323-7421 or to such other address as a party may have furnished to the others in writing in accordance with this paragraph, except that notices of change of address shall only be effective upon receipt. Any notice, demand or other communication given pursuant to the provisions of this Section 11(g) shall be deemed to have been given on the date actually delivered or on the third day following the date mailed, whichever first occurs. (h) Counterparts. This Agreement and any amendments hereto may be ------------ executed in two counterparts, each of which shall be considered one and the same agreement and shall become effective when both counterparts have been signed, it being understood that both parties need not sign the same counterpart. (i) Assignment. Neither this Agreement nor any of the rights, ---------- interests or obligations hereunder or under the Option shall be assigned by any of the parties hereto without the prior written consent of the other party, except that Grantee may assign this Agreement to a wholly-owned subsidiary of Grantee upon compliance with applicable laws. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties and their respective successors and permitted assigns. 14 (j) Further Assurances. In the event of any exercise of the Option by ------------------ Holder, Issuer and Holder shall execute and deliver all other documents and instruments and take all other action that may be reasonably necessary in order to consummate the transactions provided for by such exercise. (k) Specific Performance. The parties hereto agree that this -------------------- Agreement may be enforced by either party through specific performance, injunctive relief and other equitable relief. Both parties further agree to waive any requirement for the securing or posting of any bond in connection with the obtaining of any such equitable relief and that this provision is without prejudice to any other rights that the parties hereto may have for any failure to perform this Agreement. IN WITNESS WHEREOF, Issuer and Grantee have caused this Stock Option Agreement to be signed by their respective officers thereunto duly authorized, all as of the day and year first written above. CUPERTINO NATIONAL BANCORP MID-PENINSULA BANCORP By /s/ C. Donald Allen By /s/ David L. Kalkbrenner -------------------------------- -------------------------------- C. Donald Allen David L. Kalkbrenner President President 15 EX-10.4 5 LETTER AGREEMENT MAY 10, 1996 EXHIBIT 10.4 ------------ CONFIDENTIAL ------------ [LETTERHEAD OF SUTRO & CO.] Investment Professionals Since 1858 May 10, 1996 The Board of Directors Cupertino National Bancorp 20230 Stevens Creek Boulevard Cupertino, California 95104 Gentlemen: 1. This letter is to confirm our understanding that Cupertino National Bancorp ("Cupertino" or the "Company"), through its Board of Directors, has engaged Sutro & Co. Incorporated ("Sutro") to render an opinion (the "Opinion") to the Company and its Board of Directors as to the fairness, from a financial point of view, of the consideration to be received by the Company and its shareholders in connection with the proposed merger (the "Transaction") between Cupertino and Mid-Peninsula Bancorp ("Mid-Peninsula"). The nature and scope of our assignment as well as the scope, form and substance of our Opinion shall be such as we consider appropriate and shall include the following: (i) review and analyze certain financial statements and other financial information relating to Cupertino and Mid-Peninsula; (ii) review and analyze certain operating data concerning Cupertino and Mid-Peninsula prepared by the management of each bank; (iii) review and analyze certain financial forecasts and projections for Cupertino and Mid-Peninsula prepared by management of each bank; (iv) discuss the past and current operations and financial condition and the prospects of Cupertino and Mid-Peninsula with management; (v) compare certain financial data of Cupertino and Mid-Peninsula with that of various other comparable companies whose securities are publicly traded; and (vi) review the financial terms, to the extent publicly available, of certain comparable transactions. 2. The management of the Company will furnish Sutro with such data, material and information regarding the business and financial condition of the Company and Mid-Peninsula (the "Information") as Sutro reasonably believes necessary to complete the Opinion. The Company recognizes and confirms that in rendering the Opinion described herein, Sutro (i) will be relying primarily on the Information and on information available from generally recognized public sources, without independent verification; and, (ii) does not assume responsibility for the accuracy or completeness of the Information and such other information. 3. Sutro agrees to keep any non-public Information confidential so long as it remains non-public, unless disclosure, in the written opinion of Sutro's counsel to be delivered to the Company prior to such disclosure, is required by law and Sutro will not use such information, except in connection with the assignment herein contemplated. 1 4. The Opinion rendered by Sutro pursuant to this letter may be included in any communication by Cupertino to its respective shareholders, provided that Sutro has a prior opportunity to review and approve any disclosure relating to the Opinion. In addition, Sutro may not be otherwise publicly referred to in connection with the proposed Transaction or the Opinion without Sutro's prior written approval, which will not be unreasonably withheld. Other than as aforesaid, any advice rendered by us in connection with this engagement and any material furnished by Sutro to Cupertino and/or the Board of Directors may not be disclosed publicly in any manner without Sutro's written approval and will be treated by Cupertino and Sutro as confidential. Subject to the foregoing, Sutrohereby consents to the use of the Opinion in a proxy statement in connection with the Transaction or other documents disseminated to the Company's shareholders in conjunction with the Transaction. 5. As compensation for the Opinion to be provided pursuant to this letter agreement, the Company, agrees to pay Sutro the following fees: a) A non-refundable retainer of $25,000 payable promptly following the Bank's execution of this letter agreement, plus; b) A fee of $37,500, payable promptly upon the execution of a definitive agreement to effect a Transaction, plus; c) An additional fee of $37,500, payable promptly upon a mailing of a proxy statement to the Company' shareholders concerning the Transaction, plus; d) An additional fee of $75,000, payable promptly upon closing of the Transaction. 6. In addition to any fees that may be payable to Sutro hereunder and regardless of whether any transaction contemplated herein is proposed or consummated, the Company hereby agrees, from time to time upon request to reimburse Sutro for all reasonable fees and disbursements of Sutro's counsel and all of Sutro's reasonable travel and other incidental out-of-pocket expenses incurred prior to any termination of this agreement, in connection with any actual or proposed transaction or otherwise arising out of Sutro's engagement hereunder. Such expenses shall not exceed $15,000 for Sutro's counsel and $25,000 for Sutro's other incidental expenses without prior written approval of the Company, which approval shall not be unreasonably withheld. 7. Sutro and the Company have entered into a separate letter agreement, dated the date hereof, providing for the indemnification of Sutro by the Company in connection with Sutro's engagement hereunder. This letter agreement and the Indemnification Agreement constitute the entire agreement between us, and it may not be modified except in writing signed by all parties hereto. This letter agreement and the Indemnification Agreement constitute the entire agreement between us and supersede and take precedence over all prior agreements or understandings whether oral or written, between Sutro and the Company with respect to the engagement described herein and may only be modified by written agreement which is signed by both parties. This letter agreement and the Indemnification Agreement shall be governed by and construed in accordance with the laws of the State of California. Should suit be brought to enforce this letter agreement or the Indemnification Agreement, the prevailing party shall be entitled to recover from the other reimbursement for reasonable attorney's fees. 8. Sutro's engagement hereunder may be terminated by either the Company or Sutro at any time, with or without cause, upon 30 days prior written advice to that effect to the other party; provided, however, that: --------- ------- (i) if such notice is provided by Sutro, Sutro will be entitled to its fees earned to the date the notice is provided; and 2 (ii) if such notice is provided by the Company, Sutro will be entitled to its fees earned to date and, in the event that at any time prior to the expiration of one year after such termination a Transaction is consummated, the remainder of its fees. The provisions of this Section 8 and Sections 6 and 9 hereof and the letter agreement referred to in Section 7 hereof shall survive any such termination. 9. The Company expressly acknowledges that, except as otherwise indicated herein, all opinions and advice (written or oral) given by Sutro to the Company in connection with Sutro's engagement are intended solely for the benefit and use of the Company (including management, directors and attorneys) in considering the transaction to which they relate and the Company agrees that no such opinion or advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose. Neither party shall make any public references to the other, without the prior written consent of such party, which consent shall not be unreasonably withheld. 10. The Company expressly acknowledge that Sutro has been retained solely as an advisor to the Company, and not as an advisor to or agent of any other person, and that the Company's engagement of Sutro is not intended to confer rights upon any persons not a party hereto (including shareholders, employees or creditors of the Company) as against Sutro or its affiliates or their respective directors, officers, agents and employees. 11. Sutro will render such other financial advisory and investment banking services as may from time to time be agreed upon by Sutro and the Company. In the event that the Company requests Sutro to provide such services, Cupertino and Sutro shall enter into a supplemental agreement providing for such compensation as is reasonable and customary within the industry for such services, and such supplemental agreement will be subject to the terms of the Indemnification Agreement. If this letter accurately sets forth our mutual understanding, please sign this letter and the attached Indemnification Agreement, date and return the enclosed copies. Very truly yours, SUTRO & CO. INCORPORATED By: /s/ Scott E. Wendelin --------------------------- Scott E. Wendelin Managing Director Accepted and Agreed to as of the date written above: CUPERTINO NATIONAL BANCORP BOARD OF DIRECTORS By: /s/ John M. Gatto --------------------------- John M. Gatto Chairman of the Board 3 May 10, 1996 CONFIDENTIAL ------------ Sutro & Co. Incorporated 11150 Santa Monica Boulevard, Suite 1500 Los Angeles, CA 90025 Gentlemen: In consideration of Sutro's agreement to act on behalf of Cupertino National Bancorp (the "Company" or "Cupertino"), in connection with the possible combination, joint venture or other business combination with certain target Companies or the possible purchase by the Company of all or a significant portion of the assets or more than 10% of the equity securities of one of the targets, pursuant to the engagement letter of even date herewith, we hereby agree to indemnify and hold harmless Sutro, its affiliates, the respective partners, directors, officers, agents and employees of Sutro and its affiliates and each person, if any, controlling Sutro or any of its affiliates within the meaning of either Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934, (Sutro and each such other person are hereinafter referred to as an "Indemnified Person"), from and against any such losses, claims, damages, expenses and liabilities (or actions in respect thereof), joint or several, as they may be incurred (including all legal fees and other expenses incurred in connection with investigating, preparing, defending, paying, settling or compromising any claim, action, suit, proceeding, loss, damage, expense or liability, whether or not in connection with an action in which any Indemnified Person is a named party) to which any of them may become subject (including in settlement of any action, suit or proceeding, if such settlement is effected with the Company's consent, which consent shall not be unreasonably withheld), and which are related to or arise out of Sutro's engagement, the transaction contemplated by such engagement or any Indemnified Person's role in connection therewith, including, but not limited to, any losses, claims, damages, expenses and liabilities (or actions in respect thereof) arising out of, based upon or caused by any untrue statement or alleged untrue statement of a material fact contained in the offering memorandum, or any amendment or supplement thereto, or in any other document of the Company, or arising out of, based upon or caused by any omission or alleged omission to state in any of them a material fact required to be stated therein or necessary to make the statements in any of them not misleading. The Company will not, however, be responsible under the foregoing provisions with respect to any loss, claim, damage, expense or liability to the extent that a court having jurisdiction shall have determined by a final judgment (not subject to further appeal) that such loss, claim, damage, expense or liability resulted from actions taken or omitted to be taken by Sutro due to its gross negligence or willful misconduct. If the indemnity referred to above should be, for any reason whatsoever, unenforceable, unavailable to or otherwise insufficient to hold harmless Sutro and each Indemnified Person in connection with the transaction, each Indemnified Person shall be entitled to receive from the Company, and the Company shall pay, contributions for such losses, claims, damages, liabilities and expenses (or actions in respect thereof) so that each Indemnified Person ultimately bears only a portion of such losses, claims, damages, liabilities, expenses and actions as is appropriate (i) to reflect the relative benefits received by Sutro on the one hand and the Company on the other hand in connection with the transaction or (ii) if the allocation on that basis is not permitted by applicable law, to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of Sutro and the Company in connection with the actions or omissions to act which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations; provided, however, that in no event shall the aggregate contribution of all Indemnified Persons to all losses, claims, damages, liabilities, expenses and actions exceed the amount of the fee actually received by Sutro pursuant to the engagement letter. The respective relative benefits received by Sutro and the Company in connection with the transaction shall be deemed to be in the same proportion as the aggregate fee paid to Sutro in connection with the transaction bears to the total consideration of the transaction. The relative fault of Sutro and the Company shall be determined by reference to, among other 4 things, whether the actions or omissions to act were by Sutro or the Company and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action or omission to act. The indemnity, contribution and expense payment obligations of the Company referred to above shall be in addition to any liability which the Company may otherwise have and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of any Indemnified Person and the Company. The Company also agrees that the Indemnified Persons shall have no liability to the Company or any person asserting claims on behalf of or in right of the Company for or in connection with any matter referred to in this letter except to the extent that any such liability results from the gross negligence or willful misconduct of Sutro in performing the services that are the subject of this letter and in no event shall such liability exceed the amount of fees actually received by Sutro hereunder. Very truly yours, CUPERTINO NATIONAL BANCORP By: /s/ John M. Gatto ------------------------- John M. Gatto Chairman of the Board Accepted and Agreed to as of the date written above: SUTRO & CO. INCORPORATED By: /s/ Scott E. Wendelin ------------------------- Scott E. Wendelin Managing Director 5 EX-10.5 6 LETTER AGREEMENT JUNE 5, 1996 EXHIBIT 10.5 HOVDE FINANCIAL, INC. INVESTMENT BANKERS & FINANCIAL ADVISORS June 5, 1996 Board of Directors Cupertino National Bancorp 20230 Stevens Creek Boulevard Cupertino, CA 95014 Gentlemen: This letter confirms an agreement under which Hovde Financial, Inc. ("Hovde") shall serve as a financial advisor to Cupertino National Bancorp (the "Company") in connection with the merger of the Company with Mid-Peninsula Bancorp or a subsidiary thereof ("Mid-Pen"). This confirmation is made pursuant to the following terms and conditions: 1. Financial Advisory Services. As the Company's financial advisor, --------------------------- Hovde shall conduct as in-depth review of the contemplated Transaction (as defined below) with Mid-Pen and advise the Board of Directors of the Company regarding post-merger cost savings opportunities and revenue enhancements which can be effected in connection with the contemplated Transaction with Mid-Pen. Hovde will consult with and advise the Board concerning the content and presentation of various materials to the shareholders of the Company, including Mid-Pen's Registration Statement on Form S-4, relating to the Transaction. The Company agrees that it will make available to Hovde all relevant information, whether or not publicly available, which Hovde requests, and will make the Company's management personnel reasonable available to Hovde to discuss the operations and prospects of the Company. Hovde will treat all non-public information as confidential. The Company acknowledges that Hovde will rely upon the accuracy and completeness of all information received from the Company, its officers, directors, accountants and legal counsel. 2. Fees. Throughout the term of Hovde's engagement by the Company ---- hereunder, the Company agrees to pay Hovde, as compensation for all services to be performed by Hovde hereunder, the following: (a) Concurrently with the execution hereof, the Company shall pay Hovde the sum of $30,000 as a non-refundable retainer (to be applied to any "Completion Fee"" due to Hovde as provided below). (b) Upon execution of a definitive agreement under which the Company is to merge with Mid-Pen (the "Definitive Agreement"), the Company shall pay Hovde a non-refundable fee (the "Definitive Agreement Fee") equal to twenty five percent (25%) of the Completion Fee ( as defined in the following paragraph). The Definitive Agreement will be deemed to be executed upon the execution or delivery, as the case may be, of all schedules and ancillary agreements called for in the Definitive Agreement and the satisfaction or waiver thereof of the conditions related thereto within 20 days from the date of the Definitive Agreement. The Definitive Agreement Fee will be applied to any Completion Fee due to Hovde as provided below. [LETTERHEAD OF HOVDE FINANCIAL, INC.] Cupertino National Bancorp June 5, 1996 Page Two (c) In the event that a Transaction is consummated, the Company agrees to pay Hovde a fee (the "Completion Fee") equal to $125,000. The Completion Fee shall be due and payable upon consummation of the Transaction. For purposes of this letter agreement, "Transaction" is defined as (i) a merger, consolidation or reorganization, tax-free or otherwise, involving the Company and Mid-Pen, (ii) any transaction resulting in the direct or indirect transfer to Mid-Pen, an affiliate thereof, or a newly-formed entity of all or substantially all of the assets of and/or securities issued by the Company or an affiliate thereof, or (iii) any transaction resulting in the direct or indirect transfer to the Company, an affiliate thereof, or a newly-formed entity of all or substantially all of the assets of and/or securities issued by Mid-Pen or an affiliate thereof. 3. Expenses. In addition to any fees that may be payable to Hovde -------- hereunder, the Company hereby agrees from time to time upon Hovde's written request, to reimburse Hovde for all reasonable travel, legal and other out-of- pocket expenses incurred in performing the services hereunder; provided, however, that such expenses shall not exceed $5,000 in the aggregate without the Company's prior written consent. Such expenses shall be reimbursed to Hovde within 30 days of the Company's receipt of a written request therefore. 4. Indemnification and Contribution. The Company agrees to indemnify -------------------------------- Hovde (including its affiliated entities and its officers, directors, agents, employees and controlling persons) to the full extent provided by law against any claims, losses and expenses as incurred (including expenses of investigation and preparation and reasonable fees and disbursements of Hovde's and such persons' counsel) arising our of any Transaction or Hovde's engagement hereunder. However, such indemnification and contribution shall not apply to any claim, loss or expense which arises from Hovde's negligence or willful misconduct in performing its services hereunder. If such indemnification were for any reason not to be available with respect to any matter (other than by reason of the provision in the immediately preceding sentence), the Company and Hovde agree to contribute to the settlement, loss, liability or expense for which indemnification or reimbursement is not available in such proportion so as to reflect the relative benefits to the Company, on the one hand, and to Hovde, on the other hand, the relevant fault of each of the Company and Hovde, and any other relevant equitable considerations. It is agreed that the appropriate measure of the relative benefits shall be determined on the basis of the proportion that Hovde's fees payable hereunder bears to the Purchase Price payable, in each case, in the actual or a proposed Transaction. Both Hovde and the Company agree that any suit or other action necessary to enforce the obligations of this letter agreement shall be instituted in the courts of the State of California, and that the substantially non-prevailing party, its successors or assigns shall pay to the substantially prevailing party, its successors or assigns, any counsel or attorneys' fees incurred as a result of the institution of such suit or action. The indemnity and contribution provided herein shall remain operative and in full force and effect regardless of any termination or expiration of this letter agreement or Hovde's engagement hereunder or the completion of any Transaction. Cupertino National Bancorp June 5, 1996 Page Three 5. Term of Agreement. This letter agreement shall commence upon the ----------------- Company's execution hereof and will remain in effect for six (6) full calendar months, and thereafter shall be automatically extended monthly until terminated by either party, unless earlier terminated upon 30 days' written notice from one party to the other party. Should a Transaction involving the Company and Mid-Pen occur within 18 months from the termination date of this letter agreement, the Company shall pay Hovde the fees set forth in Section 2. Moreover, the termination of this letter agreement will not relieve the Company of its obligation to reimburse Hovde for its expenses as set forth in Section 3. In the event Hovde must file a lawsuit to collect any outstanding fees, out-of-pocket expenses, or other expenses due from the Company, the Company agrees to pay all reasonable costs and attorneys' fees for such action. Any and all fees, out-of- pocket expenses or other expenses due from the Company to Hovde hereunder shall be paid within 30 days after the Company's receipt of an invoice regarding same; in the event such payments are not made within such 30-day period, all overdue amounts outstanding shall accrue interest thereon at a rate of one and one-half percent (1 1/2%) per month. 6. Entire Agreement. This letter agreement contains the entire agreement ---------------- between the parties hereto with respect to the subject matter hereof, and all prior negotiations, agreements and understandings are merged herein. This letter agreement may not be modified or rescinded except pursuant to a written instrument signed by the party against whom enforcement is sought. 7. Severability. If any provisions of this letter agreement shall be ------------ determined by any court of competent jurisdiction to be invalid and unenforceable to any extent, the remainder of this letter agreement, other than those provisions which have been so determined invalid or unenforceable to any such extent, shall not be affected thereby, and each provision hereof shall be valid and shall be enforced to the fullest extent permitted by law. 8. Governing Law. The laws of the State of California shall govern the ------------- validity, performance and enforcement of this letter agreement. Cupertino National Bancorp June 5, 1996 Page Four If the foregoing correctly sets forth our mutual understanding, please indicate the Company's acceptance hereof by signing and returning the original copy of this letter agreement, together with a check in the amount of $30,000 payable to Hovde Financial, Inc. to the undersigned. Sincerely, HOVDE FINANCIAL, INC. By: /s/ Eugene S. Weil ----------------------------- Eugene S. Weil Vice President Accepted and Agreed to this 6th day of June, 1996 CUPERTINO NATIONAL BANCORP By: /s/ John Gatto ---------------------- John Gatto Chairman EX-27 7 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS 6-MOS DEC-31-1996 DEC-31-1996 APR-01-1996 JAN-01-1996 JUN-30-1996 JUN-30-1996 16,419 0 0 0 11,000 0 0 0 1,003 0 48,324 0 46,853 0 185,475 0 3,043 0 274,396 0 250,139 0 0 0 1,274 0 3,000 0 0 0 0 0 18,196 0 1,787 0 274,396 0 4,696 9,212 844 1,748 151 239 5,691 11,199 1,844 3,748 1,931 3,939 3,760 7,260 265 465 0 9 3,499 6,651 803 1,580 0 0 0 0 0 0 514 987 .25 .49 .25 .49 6.27 6.12 2,214 2,214 1,104 1,104 0 0 11,300 11,300 2,907 2,683 165 165 36 60 3,043 3,043 3,043 3,043 0 0 0 0
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