-----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, Biw69/ex1PURkqSy1OrBBDz/Db1Fa4MvGQA74nTds8JAZxvwXcFp0JZEDd90patz XlPE2eGRrxGqK7Dt5Sb6Gg== 0000912057-96-016442.txt : 19960808 0000912057-96-016442.hdr.sgml : 19960808 ACCESSION NUMBER: 0000912057-96-016442 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960807 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MID PENINSULA BANCORP CENTRAL INDEX KEY: 0000775473 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942952485 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25034 FILM NUMBER: 96604875 BUSINESS ADDRESS: STREET 1: 420 COWPER STREET CITY: PALO ALTO STATE: CA ZIP: 94306-1504 BUSINESS PHONE: 4153751555 MAIL ADDRESS: STREET 2: 420 COWPER ST CITY: PALO ALTO STATE: CA ZIP: 943011504 FORMER COMPANY: FORMER CONFORMED NAME: SAN MATEO COUNTY BANCORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X Quarterly report pursuant to Section 13 or 15 (d) of the Securities - --------- Exchange Act of 1934 For the Quarterly period ended June 30, 1996 or ------------------------------ - --------- Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------ ------------ Commission file number 0-25034 ------------------------------------ MID-PENINSULA BANCORP ---------------------------------------------------- Exact name of registrant as specified in its charter California 77-0387041 - -------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 420 Cowper Street, Palo Alto, CA 94301 --------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 323-5150 ----------------- None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Shares Outstanding at July 30, 1996 ------------ ----------------------------------- Common Stock 1,635,843 The Index to Exhibits is located at page 22. Page 1 of 69 Pages PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Balance Sheets (Dollars in thousands)
Assets: June 30, 1996 December 31, 1995 - ------ ------------- ----------------- (unaudited) (audited) Cash and due from banks $ 12,024 $ 13,304 Federal funds sold 36,400 15,700 Investment Securities: Available-for-sale, at fair value 47,855 58,533 Held-to-maturity, at amortized cost 2,397 857 (fair value of $2,412,000 & $838,000 in 1996 and 1995 respectively) Federal reserve bank stock 430 430 Loans: Commercial 107,107 92,971 Real estate - construction 15,117 8,783 Real estate - other 26,197 24,296 Less deferred loan fees (454) (448) -------- -------- Total loans 147,967 125,602 Less allowance for possible loan losses (1,933) (1,716) -------- -------- Net loans 146,034 123,886 Premises and equipment, net 1,026 995 Accrued interest and other assets 5,246 5,030 -------- -------- Total Assets $251,412 $218,735 -------- -------- -------- -------- Liabilities and Shareholders' Equity - ------------------------------------ Deposits: Demand, noninterest-bearing $ 41,764 $ 37,077 Demand, interest-bearing 10,214 11,926 Savings and money market 117,090 102,124 Time certificates, $100,000 and over 49,079 36,682 Other time certificates 8,987 7,886 -------- -------- Total deposits 227,134 195,695 Accrued interest and other liabilities 1,480 1,600 -------- -------- Total liabilities 228,614 197,295 Shareholders' equity: Common stock, no par value - 6,000,000 shares authorized; 1,628,343 and 1,571,757 shares issued and outstanding in 1996 & 1995, respectively 15,966 15,425 Unrealized loss on securities available-for-sale, net (897) (626) Retained earnings 7,729 6,641 -------- -------- Total Shareholders' equity 22,798 21,440 -------- -------- Total Liabilities and Shareholders' equity $251,412 $218,735 -------- -------- -------- --------
Page 2 of 69 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Statements of Income (unaudited) (in thousands, except share and per share amounts)
Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 1996 1995 1996 1995 ---------- ---------- ---------- ---------- Interest income: Loans (including fees) $ 3,622 $ 3,081 $ 7,041 $ 5,981 Investment securities 630 813 1,382 1,359 Federal funds sold 424 351 709 799 ---------- ---------- ---------- ---------- Total interest income 4,676 4,245 9,132 8,139 Interest expense: Demand, interest-bearing 54 56 106 108 Savings and money market 1,048 1,023 2,075 1,999 Time certificates, $100,000 and over 540 460 1,013 819 Other time certificates 114 92 226 178 ---------- ---------- ---------- ---------- Total interest expense 1,756 1,631 3,420 3,104 ---------- ---------- ---------- ---------- Net interest income 2,920 2,614 5,712 5,035 Provision for possible loan losses 100 80 220 155 ---------- ---------- ---------- ---------- Net interest income after provision for possible loan losses 2,820 2,534 5,492 4,880 Noninterest income 97 147 279 242 Noninterest expenses: Salaries and employee benefits 978 854 1,932 1,681 Occupancy and equipment 288 241 572 467 Other 307 456 608 826 ---------- ---------- ---------- ---------- Total noninterest expense 1,573 1,551 3,112 2,974 ---------- ---------- ---------- ---------- Income before income taxes 1,344 1,130 2,659 2,148 Income taxes 550 453 1,088 847 ---------- ---------- ---------- ---------- Net income $ 794 $ 677 $ 1,571 $ 1,301 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted average common share Equivalents outstanding 1,620,865 1,540,762 1,629,992 1,537,216 Earnings per weighted average share $0.49 $0.44 $0.96 $0.85 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Page 3 of 69 Pages
MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Statements of Cash Flows (unaudited) (in thousands) Six Months Ended June 30 June 30 1996 1995 ------- ------- Cash flows from operating activities: Net income $ 1,571 $ 1,301 Adjustments to reconcile net income to net cash provided by operating activities - Loss (gain) on sale of securities 97 (3) Provision for possible loan losses 220 155 Depreciation and amortization 160 142 Increase in interest receivable 93 (114) Increase in other assets (293) (205) Increase(decrease) in deferred tax benefit 58 140 Increase(decrease) in deferred loan fees 6 (108) Decrease in other liabilities (120) (235) Amortization of Premium - Securities (88) (78) ------- ------- Net cash provided from operating activities 1,704 995 ------- ------- Cash flows from investing activities: Net increase in loans (22,368) (5,897) Purchases of available-for-sale securities (11,414) 1,447 Purchases of held-to-maturity securities (1,540) (25,482) Principal payments on available-for-sale securities 25 26 Sales of available-for-sale securities 5,490 - Maturities/calls of available-for-sale securities 16,045 - Maturities/calls of held-to-maturity securities - 1,000 Additional investment in other real estate owned - (476) Purchase of life insurance policy (297) (2,235) Capital expenditures, net (191) (97) ------- ------- Net cash used by investing activities (14,250) (31,714) ------- ------- Cash Flows from financing activities: Net increase in deposits 31,526 20,814 Dividends paid (640) (306) Stock options exercised 1,080 21 ------- ------- Net cash provided by (used) by financing activities 31,966 20,529 ------- ------- Net increase in cash and equivalents 19,420 (10,190) Cash and cash equivalents at beginning of period 29,004 35,196 ------- ------- Cash and cash equivalents at end of period $48,424 $25,006 ------- ------- ------- ------- Supplemental disclosures: Income taxes paid $ 760 $ 1,135 Interest paid $ 3,420 $ 3,130
Page 4 of 69 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Notes to Consolidated Condensed Financial Statements June 30, 1996 (unaudited) Note 1 DESCRIPTION OF BUSINESS Mid-Peninsula Bancorp is a California corporation organized in 1984 under the name San Mateo County Bancorp ("San Mateo") to act as the bank holding company of San Mateo County National Bank which subsequently changed its name to WestCal National Bank ("WestCal") in 1991. In 1994, WestCal was merged with and into Mid-Peninsula Bank, a California state licensed bank organized in 1987 (the "Bank") in a transaction in which the Bank survived and became the wholly-owned subsidiary of San Mateo, and San Mateo concurrently changed its name to Mid-Peninsula Bancorp (the "Company"). The headquarters of the Company and the Bank is located in Palo Alto, California and the Bank conducts its banking business through its offices in Palo Alto, San Mateo and San Carlos, California. Other than holding the shares of the Bank, the Company conducts no significant activities, although it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the "Board of Governors"), the Company's principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The Bank engages in general commercial banking emphasizing small and medium-sized businesses, and professionals located in its market area in and adjacent to the San Francisco Peninsula from Los Altos and Mountain View on the South to Daly City on the North and offers a full range of commercial banking services, including the acceptance of demand, savings and time deposits, and the making of commercial loans, including short-term loans for businesses and professionals, personal loans, and real estate secured loans, which generally do not include long-term mortgage loans. The Bank offers traveler's checks, safe deposit boxes, notary public, customer courier and other customary bank services. The Bank is a member of the STAR System ATM network and, through this system, offers ATM access at numerous locations. Note 2 BASIS OF PRESENTATION In the opinion of the Company, the unaudited condensed consolidated financial statements, prepared on the accrual basis of accounting, contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company and subsidiary at June 30, 1996 and December 31, 1995, and the results of its operations for the quarter and year-to-date periods ended June 30, 1996 and 1995. Page 5 of 69 Pages Certain information and footnote disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The results of operations for the quarter and year-to-date periods ended June 30, 1996 are not necessarily indicative of the operating results for the full year ending December 31, 1996. Note 3 CONSOLIDATION The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiary, Mid-Peninsula Bank. All material intercompany accounts and transactions have been eliminated in consolidation. Note 4 PER SHARE DATA Earnings per common share are calculated by dividing net income by the weighted average shares of common stock outstanding during the year plus the effect, when dilutive, of stock options. The weighted average shares outstanding for the quarters ended June 30, 1996 and 1995 were 1,620,865 and 1,524,806 respectively. Note 5 RECLASSIFICATIONS Certain amounts in the accompanying 1995 consolidated condensed financial statements have been reclassified to conform with the 1996 consolidated condensed financial statements presentation. Note 6 CASH DIVIDEND The company paid a quarterly cash dividend of $0.15 per share on July 12, 1996 to shareholders of record on June 28, 1996. Page 6 of 69 Pages ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations MID-PENINSULA BANCORP AND SUBSIDIARY OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS Total assets were $251,412,000 at June 30, 1996, an increase of $32,677,000 or 15% over total assets of $218,735,000 at December 31, 1995. From December 31, 1995 to June 30, 1996, total loans increased $22,365,000 (18%), held-to-maturity securities increased $1,540,000 (180%), available-for-sale securities decreased $10,678,000 (18%), federal funds sold increased $20,700,000 (132%), while cash, premises and other assets had a net decrease of $1,033,000 (5%). The substantial decrease in investment securities was due in part to the increase in total loans and the increase of federal funds sold. The increase in asset size was funded primarily from a $31,439,000 (16%) increase in deposits, a $1,358,000 (6%) increase in shareholders' equity, offset by a $120,000 (8%) decrease in other liabilities. The Bank's loan to deposit ratio increased from 64.18% at December 31, 1995 to 65.15% at June 30, 1996. LOANS Total outstanding commercial loans were $107,107,000 at June 30, 1996 compared to $92,971,000 at December 31, 1995, an increase of $14,136,000 (15%). Real estate construction loans increased $6,334,000 (72%) to $15,117,000 at June 30, 1996 compared to $8,783,000 at December 31, 1995, while other real estate loans increased $1,901,000 (8%) to $26,197,000 at June 30, 1996 compared to $24,296,000 at December 31, 1995. The Company lends primarily to small and medium-sized businesses within its market area which is the San Francisco Peninsula limited by Mountain View to the south and Daly City to the north. The majority of the Company's loan portfolio consists of unsecured loans and real estate loans to small to medium sized businesses. The Company follows the policy of discontinuing the accrual of interest income and reversing any accrued and unpaid interest when the payment of principal or interest is 90 days past due, unless the loan is both well-secured and in the process of collection. Management generally places loans on nonaccrual status when they become 90 days past due, unless the loan is well secured and in the process of collection. Loans are charged off when, in the opinion of management, collection appears unlikely. At June 30, 1996, the Company had no non-accrual loans, the same as at December 31, 1995. The Company had no loans that were 90 or more days past due at the close of either period. The ratio of non-performing loans to total loans was 0.00% at June 30, 1996, the same as at December 31, 1995. The Company had no troubled debt or restructured loans, potential problem loans or loan concentrations at June 30, 1996 and December 31, 1995. Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, additions were made to the Company's allowance for possible loan losses. As an integral part of this process, the allowance for possible loan losses is subject to review and possible adjustment as a result of regulatory examinations conducted by governmental agencies and through management assessments of risk. The Company's Page 7 of 69 Pages entire allowance is a valuation allocation; that is, it has been created by direct charges against operations through the provision for possible loan losses, modified by loan charge-offs and loan recoveries. The provision for possible loan losses charged against operations is based upon the actual net loan losses incurred plus an amount for other factors, which in management's judgment deserve recognition in estimating possible loan losses. The Company evaluates the adequacy of its allowance for possible loan losses on an ongoing basis. Periodically, the Company has contracted with outsiders to perform an independent loan review. Both internal and external evaluations take into account the following: specific loan conditions as determined by management, the historical relationship between charge-offs and the level of the allowance, the estimated future loss in all significant loans, known deterioration in concentrations of credit, certain classes of loans or pledged collateral, historical loss experience based on volume and types of loans, the results of any independent review or evaluation of the loan portfolio quality conducted by or at the direction of Company management or by the bank regulatory agencies, trends in delinquencies and non-accruals, lending policies and procedures including those for charge-off, collection and recovery, national and local economic conditions and their effect on specific local industries, and the experience, ability and depth of lending management and staff. These factors are essentially judgmental and may not be reduced to a mathematical formula. The ratio of the allowance for possible loan losses to total loans was 1.31% at June 30, 1996 compared to 1.37% at December 31, 1995. The Company provided an additional $220,000 during the first half of 1996 as an additional hedge against possible loan losses in a larger loan portfolio. There were $3,000 in charge-offs during the period. The Company evaluates the allowance for possible loan losses based upon an analysis of specific categories of loans. The adequacy of the allowance is determinable only on an approximate basis since estimates as to the magnitude and timing of loan losses are not predictable because of the impact of external events. Management then considers the adequacy of the allowance for possible loan losses in relation to the total loan portfolio. Management believes that the allowance for credit losses at June 30, 1996 is adequate, based on information currently available. However, no prediction of the ultimate level of loan charge-offs in future periods can be made with any certainty. LIQUIDITY MANAGEMENT Liquidity represents the ability of the Company to meet the requirements of customer borrowing needs as well as fluctuations in deposit flows. Core deposits, which include demand, interest-bearing demand, savings, money market, and time certificates of deposit under $100,000, provide a relatively stable funding base. Core deposits represented 78% of total deposits at June 30, 1996 compared to 81% of total deposits at year-end 1995. The Company's principal sources of asset liquidity are cash and due from banks, federal funds sold, and unpledged available-for-sale investment securities. At June 30, 1996, these sources totaled $90,279,000 or 39.75% of total deposits compared to $80,032,000 or 40.90% at year-end 1995. In the opinion of management, there are sufficient resources to meet the liquidity needs of the Company at present and foreseeable future levels. Page 8 of 69 Pages INTEREST RATE SENSITIVITY The Company defines interest rate sensitivity as the measure of the relationship between market interest rates and net interest income due to repricing characteristics of assets, liabilities and off-balance sheet instruments. Generally, if assets and liabilities do not reprice at the same time and in equal volumes, the potential for exposure to interest rate fluctuations exists. In order to maximize the net yield on earning assets and maintain the interest rate spread during periods of fluctuating interest rates, management monitors the repricing period of interest earning assets as compared with interest bearing liabilities. The difference between the amount of assets and liabilities that reprice in any given time period is referred to as the interest rate sensitivity gap. While the Company attempts to manage its exposure to interest rate sensitivity, due to its size and direct competition from the major banks, it must offer products which are competitive in the market place, even if they are less than optimum with respect to the Bank's interest rate exposure. The following table sets forth the distribution of repricing opportunities of the Bank's earning assets and interest bearing liabilities as of June 30, 1996, the interest rate sensitivity gap (i.e., interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate gap, the interest rate gap (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative interest rate gap ratio. The table sets forth the time periods during which earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movement on the net interest margin since the repricing of various categories of assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such periods and at different rates. REPRICING PERIODS
ONE 2-180 181-365 > 1 YEAR OVER NON-RATE (Dollars in thousands) DAY DAYS DAYS TO 5 YEARS 5 YEARS SENSITIVE TOTAL - ----------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: FEDERAL FUNDS SOLD $ 36,400 - - - - 36,400 AVAILABLE-FOR-SALE INV. 12,118 2,043 5,837 19,213 8,644 - 47,855 HELD-TO-MATURITY INV. - - 853 541 1,003 - 2,397 OTHER INVESTMENTS - - - - 430 - 430 LOANS 130,092 6,310 2,731 8,137 184 967 148,421 LOAN LOSS/UNEARNED FEES - - - - - (2,387) (2,387) CASH AND DUE FROM BANKS - - - - - 12,024 12,024 OTHER ASSETS - - - - - 6,272 6,272 - ----------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $178,610 8,353 9,421 27,891 10,261 16,876 251,412 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE LIABILITIES AND EQUITY: DEPOSITS DEMAND $ - - - - - 41,764 41,764 INTEREST CHECKING 10,214 - - - - - 10,214 MMDA AND SAVINGS 117,090 - - - - - 117,090 TIME DEPOSITS > $100 MILLION - 42,290 6,689 100 - - 49,079 < $100 MILLION - 6,438 2,302 247 - - 8,987 OTHER LIABILITIES - - - - - 1,480 1,480 SHAREHOLDERS' EQUITY - - - - - 22,798 22,798 - ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $127,304 48,728 8,991 347 - 66,042 251,412 - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- GAP $ 51,306 (40,375) 430 27,544 10,261 (49,166) - CUMULATIVE GAP 51,306 10,931 11,361 38,905 49,166 - - CUMULATIVE GAP/TOTAL ASSETS 20.41% 4.35% 4.52% 15.47% 19.56% - -
Page 9 of 69 Pages CAPITAL RESOURCES Capital management is a continuous process of providing adequate capital for current needs and anticipated future growth. Capital serves as a source of funds for the acquisition of fixed and other assets and protects depositors against potential losses. As the Company's assets increase, so do its capital requirements. The Board of Governors and the FDIC have adopted risk-based capital guidelines for evaluating the capital adequacy of bank holding companies and banks. The guidelines are designed to make capital requirements sensitive to differences in risk profiles among banking organizations, to take into account off-balance sheet exposures and to aid in making the definition of bank capital uniform internationally. Under the guidelines, the Company and the Bank are required to maintain capital equal to at least 8.00% of assets and commitments to extend credit weighted by risk, of which at least 4.00% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock or a limited amount of loan loss reserves. The Board of Governors also adopted a 3.00% minimum leverage ratio for banking organizations as a supplement to the risk-weighted capital guidelines. The leverage ratio is generally calculated using Tier 1 capital (as defined under risk-based capital guidelines) divided by quarterly average net total assets (excluding intangible assets and certain other adjustments). The leverage ratio establishes a limit on the ability of banking organizations, including the Company and the Bank, to increase assets and liabilities without increasing capital proportionately. The Board of Governors emphasized that the leverage ratio constitutes a minimum requirement for well-run banking organizations having diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and a composite rating of 1 under the regulatory rating system for banks and 1 under the regulatory rating system for bank holding companies. Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not exhibit the characteristics of a strong well-run banking organization described above, will be required to maintain minimum capital ranging generally from 100 to 200 basis points in excess of the leverage ratio. The FDIC adopted a substantially similar leverage ratio for state non-member banks. On December 19, 1991, the President signed the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The FDICIA, among other matters, substantially revises banking regulations and establishes a framework for determination of capital adequacy of financial institutions. Under the FDlCIA, financial institutions are placed into one of five capital adequacy categories as follows: (1) Well Capitalized, consisting of institutions with a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 6.00% or greater and a leverage ratio of 5.00% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive; (2) Adequately Capitalized, consisting of institutions with a total risk-based capital ratio of 8.00% or greater, a Tier 1 risk-based capital ratio of 4.00% or greater and a leverage ratio of 4.00% or greater, and the institution does not meet the definition of a well capitalized institution; (3) Undercapitalized, consisting of institutions with a total risk-based capital ratio of less than 8.00%, a Tier 1 risk-based capital ratio of less that 4.00% or a leverage ratio of less than 4.00%; (4) Significantly Undercapitalized, consisting of institutions with a total risk-based capital ratio of less than 6.00%, a Tier 1 risk-based capital ratio of less than 3.00% or a Page 10 of 69 Pages leverage ratio of less than 3.00%; (5) Critically Undercapitalized, consisting of an institution with a ratio off tangible equity to total assets that is equal to or less than 2.00%. Financial institutions classified as undercapitalized or below are subject to various limitations including, among other matters, certain supervisory actions by bank regulatory authorities and restrictions related to (i) growth of assets, (ii) payment of interest on subordinated indebtedness, (iii) payment of dividends or other capital distribution, and (iv) payment of management fees to a parent holding company. The FDICIA requires the bank regulatory authorities to initiate corrective action regarding financial institutions which fail to meet minimum capital requirements. Such action may result in orders to, among other matters, augment capital and reduce total assets. Critically undercapitalized financial institutions may also be subject to appointment of a receiver or conservator unless the financial institution submits an adequate capitalization plan. The following table sets forth the Company's risk-weighted and leverage capital ratios as of June 30, 1996 and December 31, 1995. As indicated in the table, the Company's capital ratios significantly exceeded the minimum capital levels required by current federal regulations. Risk Based Capital Ratio (unaudited) June 30, 1996 December 31, 1995 --------------- ----------------- Ratios (dollars in thousands) Amount Ratio Amount Ratio - ----------------------------------------------------------------------------- Tier 1 capital $ 22,784 12.15% $ 21,440 14.36% Tier 1 capital minimum requirement $ 7,499 4.00% $ 5,971 4.00% Total capital $ 24,717 13.18% $ 23,156 15.51% Total capital minimum requirement $ 14,999 8.00% $ 11,944 8.00% Total risk based assets $187,492 $149,296 Leverage Capital Ratio (unaudited) June 30, 1996 December 31, 1995 --------------- ----------------- Ratios (dollars in thousands) Amount Ratio Amount Ratio - ----------------------------------------------------------------------------- Tier 1 capital to adjusted total assets $ 22,784 9.97% $ 21,440 9.76% Quarterly average total assets $228,568 $219,783 Page 11 of 69 Pages INFLATION The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company indirectly through its effect on market rates of interest, and thus the ability of the Bank to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects the Company's capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which the Company may generate in the future. In addition to its effects on interest rates, inflation directly affects the Company by increasing the Company's operating expenses. The effect of inflation upon the Company's results of operations was not material for the periods covered by this report. MERGER Mid-Peninsula Bancorp and Cupertino National Bancorp signed an Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996 (the "Agreement"), whereby Cupertino National Bancorp will merge with and into Mid-Peninsula Bancorp and Mid-Peninsula Bancorp will change its name to Greater Bay Bancorp. Mid-Peninsula Bank and Cupertino National Bank & Trust will operate as wholly-owned subsidiaries of Greater Bay Bancorp and will focus on serving the greater Bay area, including the Peninsula and South Bay markets, through their seven office locations. The terms of the Agreement provide for Cupertino National Bancorp shareholders to receive .81522 of a share of Mid-Peninsula Bancorp common stock for each share of Cupertino National Bancorp common stock in a tax-free exchange to be accounted for as a "pooling-of-interests." As part of the Agreement, Mid-Peninsula will list its shares on the Nasdaq National Market, and, concurrent with closing, will be renamed Greater Bay Bancorp. Following the merger, the shareholders of Mid-Peninsula Bancorp will own approximately 51% of the combined company and the shareholders of Cupertino National Bancorp will own approximately 49% of the combined company, giving effect to all outstanding options. Greater Bay Bancorp's new Board of directors will consist of five directors from Mid-Peninsula Bancorp and five from Cupertino National Bancorp, with Duncan L. Matteson (Chairman of Mid-Peninsula Bancorp) and John M. Gatto (Chairman of Cupertino National Bancorp) serving as co-Chairmen. David L. Kalkbrenner, who will serve as President and Chief Executive Officer of Greater Bay Bancorp, will continue as President and Chief Executive Officer of Mid-Peninsula Bank, and C. Donald Allen will remain as Chairman and Chief Executive Officer of Cupertino National Bank & Trust. Steven C. Smith, the Chief Operating Officer of Cupertino National Bancorp, will serve as Chief Operating Officer and Chief Financial Officer of Greater Bay Bancorp. In connection with the Agreement, Mid-Peninsula Bancorp and Cupertino National Bancorp have granted each other options to purchase up to 19.0% of the outstanding shares of each other's common stock under certain circumstances in the event the transaction is terminated. The merger is expected to be completed in the fourth quarter of 1996, subject to shareholder and regulatory approvals. Page 12 of 69 Pages RESULTS OF OPERATIONS Three months Ended June 30, 1996 Compared with the Three months Ended June 30, 1995 Net income of $794,000 for the three months ended June 30, 1996 increased $117,000 or 17% as compared to the $677,000 earned for the same period ended June 30, 1995. The increase in net income for the period was primarily due to an increase in net interest income that was higher than the increases noted in the provision for possible loan losses and operating expenses aided by an increase in non-interest income. Net interest income for June 30, 1996 was $2,920,000, compared to $2,614,000 for the same period ended June 30, 1995, an increase of $306,000 or 12%. Net interest income depends primarily on the volume of interest-earning assets and interest-bearing liabilities in relation to the net interest spread (the difference between the yield earned on the Company's interest-earning assets and the interest rate paid on the Company's interest-bearing liabilities) as well as the relative balances of interest-earning assets and interest-bearing liabilities. The smaller the level of interest-earning assets when compared to the level of interest-bearing liabilities, the greater the interest rate spread must be in order to achieve positive net interest income. For the three months ended June 30, 1996, the Company had $221,874,000 of average interest-earning assets compared to $189,217,000 for the same period ended June 30, 1995, an increase of $32,657,000 or 17%. The Company's yield on interest-earning assets for the three months ended June 30, 1996 decreased to 8.56% compared to 8.97% during the comparable period in 1995. The decrease in earnings yield reflects the highly competitive nature of the Bank's market as well as declines in interest rates in the Federal funds and securities markets. Interest income increased $431,000 or 10% for the three months ended June 30, 1996 compared to the same 1995 period due to the increase in average interest-earning assets offset by the decline in earning asset yields. Average deposits for the Company for the three months ended June 30, 1996 were $211,649,000, a $31,404,000 or 17% increase compared to the quarter ended June 30, 1995. The Company's average cost of funds for the period ended June 30, 1996 was 3.32% which yielded a net spread of 4.51%. This compares to an average cost of funds of 3.62% and a net spread of 4.74% for the comparable 1995 period. Interest expense of $1,756,000 for the three months ended June 30, 1996 was $125,000 or 8% more than the comparable 1995 period. Net interest income for the period ended June 30, 1996 increased $306,000 or 12% to $2,920,000 and resulted from increased levels of earning assets at higher earning asset yields and deposits at moderately increased levels of interest-bearing expense rates. Page 13 of 69 Pages The following table presents, for the periods indicated, the Company's total dollar amount of interest income, on a tax equivalent basis, from average interest-earning assets and the resultant yields, as well as the interest expense of average interest-bearing liabilities and the resultant costs, expressed both in dollars and rates. The table also sets forth the net interest income and the net average earning balances for the periods indicated. AVERAGE BALANCE SHEET MID-PENINSULA BANCORP AND SUBSIDIARY Average Balance Sheet Three Months ended June 30 (unaudited)
(in thousands, except percentages) 1996 1995 - ----------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Rate(1) Balance Interest Rate (1) - ------------------------------------------------------------------------------------------ Assets: Loans $143,125 $3,622(2) 10.12% $112,767 $3,081(2) 10.93% Taxable investments 34,105 493 5.78% 45,405 709 6.25% Non-taxable investments 11,915 208 6.98% 7,589 104 5.48% Fed funds sold and other 32,729 424 5.18% 23,456 351 5.99% -------- ------- ------ --------- ------- ------ Total earning assets 221,874 $4,747 8.56% 189,217 $4,245 8.97% Cash and due from banks 10,103 7,412 Premises and equipment, net 899 931 Other assets (3) 3,254 2,455 -------- -------- Total assets $236,130 $200,015 -------- -------- -------- -------- Liabilities and Shareholders' Equity: Deposits: Demand with interest $ 11,711 $ 54 1.84% $ 11,588 $ 56 1.93% Savings and money market 111,093 1,048 3.77% 97,835 1,023 4.18% Time deposits GREATER THAN $100,000 41,717 540 5.18% 37,241 460 4.94% Other time deposits 8,922 114 5.11% 7,270 92 5.06% -------- ------- ------ --------- ------- ------ Total interest-bearing deposits 173,443 1,756 3.32% 153,934 1,631 3.62% ------- ------- Non-interest deposits 38,206 26,311 Other liabilities 2,031 1,145 -------- -------- Total liabilities 213,680 181,390 Shareholders' equity 22,450 18,625 -------- -------- Total liabilities and equity $236,130 $200,015 -------- -------- -------- -------- Net interest spread 4.51% 4.73% Net interest income and margin $2,991 5.39% $2,614 5.53% - -----------------------------------------------------------------------------------------
(1) Annualized (2) Loan interest income includes fee income of $187,000 and $156,000 for the quarters ended June 30, 1996 and 1995, respectively (3) Includes the average allowances for loan losses of $1,875,000 and $1,536,000 and average deferred loan fees of $428,000 and $341,000 for the quarters ended June 30, 1996 and 1995, respectively The Company provided $100,000 to the allowance for possible loan losses for the three months ended June 30, 1996 compared to $80,000 for the comparable period in 1995. This modest addition to the allowance recognizes the improvement of the local economy, resulting in a lower level of classified loans and charge-offs. Net charge-offs were $3,000 for the three months ended June 30, 1996 , compared to net recoveries of $2,000 in the three month period ending June 30, 1995. Page 14 of 69 Pages Non-interest income was $97,000 during the period ending June 30, 1996 compared to $147,000 during the comparable period in 1995 due primarily to an investment loss. Salaries and benefits expense for the three months ended June 30, 1996 was $978,000, a $124,000 or 15% increase over the comparable period in 1995. This increase includes normal cost of living increases and selective additions to staff to take advantage of a larger, more complex market area and service organization. Other non-interest expenses including occupancy expense were $595,000 for the period ended June 30, 1996 compared to $697,000 for the same period in 1995, a $102,000 or 15% decrease due primarily to decreased FDIC insurance premiums. Applicable income taxes of $550,000 for the three months ended June 30, 1996 were $97,000 or 21% higher than for the comparable 1995 period. The Company's effective tax rate for the three months ending June 30, 1996 was 41% compared to 40% for the comparable period in 1995. Page 15 of 69 Pages RESULTS OF OPERATIONS Six months Ended June 30, 1996 Compared with the Six months Ended June 30, 1995 Net income of $1,571,000 for the six months ended June 30, 1996 increased $270,000 or 21% as compared to the $1,301,000 earned for the same period ended June 30, 1995. The increase in net income for the period was primarily due to an increase in net interest income that was higher than the increases noted in the provision for possible loan losses and operating expenses aided by an increase in non-interest income. Net interest income for the six months ended June 30, 1996 was $5,712,000, compared to $5,035,000 for the same period ended June 30, 1995, an increase of $677,000 or 13%. Net interest income depends primarily on the volume of interest-earning assets and interest-bearing liabilities in relation to the net interest spread (the difference between the yield earned on the Company's interest-earning assets and the interest rate paid on the Company's interest-bearing liabilities) as well as the relative balances of interest-earning assets and interest-bearing liabilities. The smaller the level of interest-earning assets when compared to the level of interest-bearing liabilities, the greater the interest rate spread must be in order to achieve positive net interest income. For the six months ended June 30, 1996, the Company had $214,574,000 of average interest-earning assets compared to $184,192,000 for the same period ended June 30, 1995, an increase of $30,382,000 or 16%. The Company's yield on interest-earning assets for the six months ended June 30, 1996 decreased to 8.65% compared to 8.84% during the comparable period in 1995. The decrease in earnings yield reflects the highly competitive nature of the Bank's market as well as declines in interest rates in the Federal funds and securities markets. Interest income increased $993,000 or 12% for the six months ended June 30, 1996 compared to the same 1995 period due to the increase in interest earning assets offset by the decline in earning asset yields. Average deposits for the Company for the six months ended June 30, 1996 were $204,318,000, a $29,649,000 or 17% increase compared to the period ended June 30, 1995. The Company's average cost of funds for the period ended June 30, 1996 was 3.35% which yielded a net spread of 4.59%. This compares to an average cost of funds of 3.55% and a net spread of 4.63% for the comparable 1995 period. Interest expense of $3,420,000 for the six months ended June 30, 1996 was $316,000 or 10% more than the comparable 1995 period. Net interest income for the period ended June 30, 1996 increased $677,000 or 13% to $5,712,000 and resulted from increased levels of earning assets at higher earning asset yields and deposits at moderately increased levels of interest-bearing expense rates. Page 16 of 69 Pages The following table presents, for the periods indicated, the Company's total dollar amount of interest income, on a tax equivalent basis, from average interest-earning assets and the resultant yields, as well as the interest expense of average interest-bearing liabilities and the resultant costs, expressed both in dollars and rates. The table also sets forth the net interest income and the net average earning balances for the periods indicated. AVERAGE BALANCE SHEET MID-PENINSULA BANCORP AND SUBSIDIARY Average Balance Sheet Six Months ended June 30 (unaudited)
(in thousands, except percentages) 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Rate (1) Balance Interest Rate (1) - ------------------------------------------------------------------------------------------------------------------------- Assets: Loans $137,555 $7,041(2) 10.24% $111,100 $5,981(2) 10.77% Taxable investments 36,646 1,088 5.94% 38,868 1,176 6.05% Non-taxable investments 12,003 445 7.41% 6,578 183 5.56% Fed funds sold and other 28,370 709 5.00% 27,646 799 5.78% -------- ------ ------ ------- ----- ------ Total earning assets 214,574 $9,283 8.65% 184,192 $8,139 8.84% Cash and due from banks 9,830 7,470 Premises and equipment, net 909 924 Other assets(3) 3,255 1,522 -------- ------- Total assets $228,568 $194,108 -------- -------- -------- -------- Liabilities and Shareholders' Equity: Deposits: Demand with interest $11,438 $ 106 1.85% $ 10,814 $ 108 2.00% Savings and money market 109,397 2,075 3.79% 95,609 1,999 4.18% Time deposits GREATER THAN $100,000 38,930 1,013 5.20% 33,755 819 4.85% Other time deposits 8,753 226 5.16% 7,365 178 4.83% ------- ------- ------ -------- ------- Total interest-bearing deposits 168,518 3,420 4.06% 147,543 3,104 4.21% ------- ------- Non-interest deposits 35,800 27,126 Other liabilities 2,106 1,033 ------- -------- Total liabilities 206,424 175,702 Shareholders' equity 22,144 18,406 ------- -------- Total liabilities and equity $228,568 $194,108 -------- -------- -------- -------- Net interest spread 4.59% 4.63% Net interest income and margin $5,863 5.46% $ 5,035 5.47% - -------------------------------------------------------------------------------------------------------------------------
(1) Annualized (2) Loan interest income includes fee income of $381,000 and $303,000 for six months ended June 30, 1996 and 1995, respectively (3) Includes the average allowances for loan losses of $1,819,000 and $1,484,000 and average deferred loan fees of $466,000 and $365,000 for the six months ended June 30, 1996 and 1995, respectively The Company provided $220,000 to the allowance for possible loan losses for the six months ended June 30, 1996 compared to $155,000 for the comparable period in 1995. This modest addition to the allowance recognizes the improvement of the local economy, resulting in a lower level of classified loans and charge-offs. Net charge-offs were $3,000 for the six months ended June 30, 1996, compared to $3,000 net recoveries in the six month period ending June 30, 1995. Page 17 of 69 Pages Non-interest income was $279,000 during the period ending June 30, 1996 compared to $242,000 during the comparable period in 1995 due primarily to an increase in service charge income. Salaries and benefits expense for the six months ended June 30, 1996 was $1,932,000, a $251,000 or 15% increase over the comparable period in 1995. This increase includes normal cost of living increases and selective additions to staff to take advantage of a larger, more complex market area and service organization. Other non-interest expenses including occupancy expense were $1,180,000 for the period ended June 30, 1996 compared to $1,293,000 for the same period in 1995 a $113,000 or 9% decrease due primarily to decreased regulatory expense. Applicable income taxes of $1,088,000 for the six months ended June 30, 1996 were $241,000 or 28% higher than for the comparable 1995 period. The Company's effective tax rate for the six months ending June 30, 1996 was 41% compared to 39% for the comparable period in 1995. Page 18 of 69 Pages PART II-OTHER INFORMATION Item 4 - Submission of Matters to a vote of Security Holders The annual meeting of the Shareholders of Mid-Peninsula Bancorp was held on May 22, 1996 at 5:00 p.m. in the lobby of Mid-Peninsula Bank. There were 1,258,538 shares equaling 79% of the outstanding shares represented at the meeting. The following 15 incumbent Directors were reelected as Directors, in each case by vote of a majority of the votes cast in the election of directors and there were no nominees in opposition: Lawrence A. Aufmuth Helen C. Leong John F Blokker George M. Marcus Allan F. Brown Duncan L. Matteson Owen D. Conley Donald H. Seiler Murray B. Dey Warren R. Thoits Donald L Hammond Bruce E. Van Alstyne David L. Kalkbrenner Edwin E. van Bronkhorst R. Hewlett Lee Page 19 of 69 Pages Item 6 - Exhibits and Reports on Form 8-K (a) (2.1) Amended and Restated Agreement and Plan of Reorganization andMerger dated June 26, 1996, incorporated by reference from Exhibit 2.1 of Registrant's report on Form 8-K filed with the Commission on July 12, 1996. (3.1) Articles of Incorporation, as amended, incorporated by reference from Exhibit 3.1 of Registrant's annual Report on Form 10-K for the year ended December 31, 1994, filed with the Commission on March 30, 1995. (3.2) Bylaws, as amended, incorporated by reference from Exhibit 3.2 to Registration Statement No. 33-79798 on Form S-4, filed with the Commission on June 6, 1994. (10.1) Shareholder Agreement pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. (10.2) Form of Affiliate Agreement pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. (10.3) Stock Option Agreements pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. (10.4) Alex Brown & Sons, Inc. Agreement dated May 28, 1996. (27.1) Financial Data Schedule (99.1) Press Release dated June 19, 1996, incorporated by reference from Exhibit 99.1 of Registrant's report on Form 8-K, filed with the Commission on July 12, 1996. (b) Form 8-K dated May 22, 1996, filed with the Commission on June 3, 1996. Page 20 of 69 Pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto authorized. MID-PENINSULA BANCORP July 31, 1996 By: /s/ DAVID L. KALKBRENNER ----------------------------- President and Chief Executive Officer (Principal Executive Officer) July 31, 1996 By: /s/ CAROL H. ROWLAND ----------------------------- Carol H. Rowland First Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 21 of 69 Pages EXHIBIT INDEX SEQUENTIAL PAGE EXHIBIT NO: DESCRIPTION NUMBER - ----------- ----------- ---------- 10.1 Shareholder Agreement dated pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. 23 - 28 10.2 Form of Affiliate Agreement pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. Agreement and Plan of Reorganization and Merger dated June 26, 1996. 29 10.3 Stock Option Agreements pursuant to Amended and Restated Agreement and Plan of Reorganization and Merger dated June 26, 1996. 30 - 59 10.4 Alex Brown and Sons, Inc Agreement dated May 28, 1996. 60 - 68 27.1 Financial Data Schedule 69 Page 22 of 69 Pages EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 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 "Mid-Peninsula Shareholder" and collectively referred to as the "Mid-Peninsula 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-Peninsula 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-Peninsula 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 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 Mid-Peninsula common stock ("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 Page 23 of 69 Pages terms of the Merger and any other matter contemplated by the 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, 2 Page 24 of 69 Pages 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 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: 3 Page 25 of 69 Pages (a) If to Mid-Peninsula Bancorporation: 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, duties and obligations of the parties hereto may not be assigned or delegated by any party hereto without the prior written 4 Page 26 of 69 Pages 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 Cupertino and the Mid-Peninsula 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 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 Page 27 of 69 Pages 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:___________________________ C. Donald Allen, President MID-PENINSULA SHAREHOLDERS /s/ Duncan L. Matteson ________________________________ __________________________________ Duncan L. Matteson Owen D. Conley /s/ Donald L. Hammond ________________________________ __________________________________ Edwin E. van Bronkhorst Donald L. Hammond /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 ________________________________ __________________________________ Murray B. Dey George M. Marcus /s/ Lawrence A. Aufmuth ________________________________ __________________________________ Lawrence A. Aufmuth Donald H. Seiler ________________________________ __________________________________ John F. Blokker Bruce E. Van Alstyne /s/ Allan F. Brown /s/ Carol H. Rowland ________________________________ __________________________________ Allan F. Brown Carol H. Rowland 6 Page 28 of 69 Pages EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 FORM OF 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 Cupertino common stock ("Cupertino Share" or "Cupertino 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: ____________________ _________________________________ Page 29 of 69 Pages EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 THE TRANSFER OF THIS AGREEMENT IS 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 Mid-Peninsula Bancorp, a California corporation ("Issuer"), and Cupertino National 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 Grantee with and into Issuer (the "Merger"), with Issuer 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. Page 30 of 69 Pages (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 307,504 shares (the "Option Shares") of Common Stock, no par value ("Issuer Common Stock"), of Issuer at a purchase price per Option Share of Twenty and 45/100ths Dollars ($20.45) (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(vii) 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(vii) 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 Page 31 of 69 Pages (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 Page 32 of 69 Pages (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 Page 33 of 69 Pages 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 Page 34 of 69 Pages 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 Page 35 of 69 Pages 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 Page 36 of 69 Pages 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 bid price per share of Issuer Common Stock as quoted by the brokerage firms acting as market makers for Issuer's Common Stock prior to the listing of Issuer's Common Stock on the NASDAQ National Market System and thereafter, on the NASDAQ Stock Market or other principal trading market or securities exchange on which such shares are traded as reported by a 8 Page 37 of 69 Pages 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, 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 determined as described above prior to and following the listing of Issuer's common stock on the NASDAQ National Market System 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 9 Page 38 of 69 Pages 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 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 Page 39 of 69 Pages 10 (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 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 11 Page 40 of 69 Pages terminate concurrently with the termination of Holder's right to exercise the Option, pursuant to Section 3(a). (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 bid price per share of Issuer Common Stock as quoted by the brokerage firms acting as market makers for Issuer's Common Stock prior to the listing of Issuer's Common Stock on the NASDAQ National Market System and thereafter on the NASDAQ Stock Market or other 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 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 12 Page 41 of 69 Pages 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 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 13 Page 42 of 69 Pages to repurchase the maximum number of shares as may be legally permissible without any amendment or modification hereof. (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. 14 Page 43 of 69 Pages 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. (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-------------------- By------------------------------- C. Donald Allen David L. Kalkbrenner President President 15 Page 44 of 69 Pages THE TRANSFER OF THIS AGREEMENT IS 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. Page 45 of 69 Pages (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 Page 46 of 69 Pages (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 Page 47 of 69 Pages (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 Page 48 of 69 Pages 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 Page 49 of 69 Pages 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 Page 50 of 69 Pages 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 Page 51 of 69 Pages 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 Page 52 of 69 Pages 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 Page 53 of 69 Pages 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 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 Page 54 of 69 Pages 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 Page 55 of 69 Pages (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 Page 56 of 69 Pages 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 Page 57 of 69 Pages (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 Page 58 of 69 Pages (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-------------------- By----------------------------- C. Donald Allen David L. Kalkbrenner President President 15 Page 59 of 69 Pages EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 [LETTERHEAD] PERSONAL AND CONFIDENTIAL May 28, 1996 Mid-Peninsula Bancorp 420 Cowper Street Palo Alto, CA 94301 Attention: Mr. David L. Kalkbrenner President & Chief Executive Officer Dear David: 1. This letter is to confirm our understanding that Mid-Peninsula Bancorp ("Mid-Peninsula" or the "Company") or any successor corporation has retained Alex. Brown & Sons Incorporated ("Alex. Brown") to act as Mid-Peninsula's financial advisor and to assist Mid-Peninsula in assessing the impact of, and the opportunities created by, the changing environment among financial institutions. In this capacity, Alex. Brown will provide financial advice to you as you deem necessary and analyze alternative strategies, including acquisitions, mergers or other forms of business combinations involving Mid-Peninsula. Specifically, Alex. Brown will render the following general advisory services to the Company: - Evaluation and complete financial analysis of acquisition opportunities including, but not limited to, acquisitions of commercial banks, thrift institutions, individual branches and non-depository institutions. - Development of an acquisition strategy for Mid-Peninsula, including assistance on such matters as the development of approach tactics to each target institution, valuation, pro forma financial modeling and analysis, negotiations, reviewing the financing alternatives for each transaction and assistance in the handling of investor relations. - A full review of Mid-Peninsula's takeover defense posture, including an analysis of the Company's existing defensive measures and recommendation of additional actions if required. A detailed review of the overall merger and acquisition Page 60 of 69 Pages Mid-Peninsula Bancorp May 28, 1996 Page 2 environment would also be presented with a particular emphasis on (i) the strategies of the active acquirers within Mid-Peninsula's trade area (ii) unsolicited offers for control; and (iii) the actions undertaken unilaterally by shareholders to disrupt the implementation of corporate strategy. - Active takeover defense assistance and strategic advice to Mid- Peninsula in the event of an unsolicited offer for control or accumulation of stock by an individual shareholder or shareholders acting as a group. - A detailed review of Mid-Peninsula. This would cover the following: - Historical financial performance evaluated against a relevant peer group of independent bank institutions; - Analysis of Mid-Peninsula's projections and their impact on shareholder value; - Identification and analysis of the Company's shareholders; and - Review and analysis of the historical trading patterns of the common stock. - Any additional financial analyses or advice as requested from time to time by Mid-Peninsula. - Presentations to the Board of Directors of the Company on any of the topics listed above as requested by management. 2. For serving in the above capacity, Alex. Brown would receive a $25,000 retainer and be reimbursed for its out-of-pocket expenses applicable to the undertaking, including reasonable legal fees if appropriate. 3. When requested by Mid-Peninsula, Alex. Brown would provide financial and strategic analysis of and advice with respect to specific transactions which, if consummated, would result in Mid-Peninsula acquiring, being acquired by or otherwise combining with another entity. Specifically, with respect to any particular transaction, Alex. Brown would as requested: (a) Render financial and strategic advice as it bears upon the valuation of any potential transaction; (b) Advise you as to the most appropriate form, consistent with law, accounting and business practice, for a proposed transaction; Page 61 of 69 Pages Mid-Peninsula Bancorp May 28, 1996 Page 3 (c) Act as your agent and financial advisor in the negotiating process, working with you and your legal counsel and accountants. As your agent, Alex. Brown will engage in discussions on your behalf with other entities or their representatives only when authorized by you to do so; and (d) Render our opinion as to the fairness, from a financial point of view, of the terms of a transaction to Mid-Peninsula shareholders. 4. Our fee for assisting you in connection with specific transactions would be agreed between us in the context of a particular transaction. Among the factors to be considered would be: (a) The scope and nature of our involvement; (b) The complexity of the transaction; (c) Whether we are requested to render a fairness opinion; and (d) Customary investment banking fees for transactions of comparable size. In addition, we understand that we may be asked to provide our opinions and advice on smaller transactions that Mid-Peninsula may from time to time consider; such advice will be provided at no additional fee. 5. INDEMNIFICATION AND CONTRIBUTION. In consideration of our services as the Company's financial advisor hereunder, the Company agrees to indemnify and hold harmless Alex. Brown and each of its directors, officers, agents, employees and controlling persons (within the meaning of the Securities Act of 1933, as amended) to the extent and as provided in Addendum A attached hereto and incorporated herein by reference. The provisions of this paragraph and Addendum A incorporated herein by reference shall be effective as of the date hereof, and shall continue in full force and effect until the termination of this agreement and, thereafter, shall survive the termination of Alex. Brown's engagement under this agreement and shall be binding upon any successors or assigns of the Company. 6. This agreement shall have an initial term extending until December 31, 1997, unless terminated prior thereto by the Company. Thereafter, this agreement shall renew automatically from year-to-year upon the same terms and conditions set forth herein until terminated in writing by either Alex. Brown or Mid-Peninsula. Page 62 of 69 Pages Mid-Peninsula Bancorp May 28, 1996 Page 4 If the foregoing letter correctly sets forth the terms of Alex. Brown's engagement, please sign and return to us the enclosed duplicate hereof. Very Truly Yours, ALEX. BROWN & SONS INCORPORATED By: /s/ Jean-Luc Servat ---------------------------------- Jean-Luc Servat Managing Director Accepted and Agreed: MID-PENINSULA BANCORP By: /s/ David L. Kalkbrenner ----------------------------------- David L. Kalkbrenner President & Chief Executive Officer Page 63 of 69 Pages ADDENDUM A In connection with our engagement described in the foregoing letter dated May 28, 1996, (the "Letter") to which this Addendum A is attached, the Company (as defined in the Letter) agrees to indemnify and hold harmless Alex. Brown & Sons Incorporated ("Alex. Brown") and each of its directors, officers, agents, employees and controlling persons (within the meaning of the Securities Act of 1933, as amended) from and against any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) (collectively "Liabilities") related to or arising out of this engagement, and will reimburse Alex. Brown and each other person indemnified hereunder for all reasonable legal and other expenses as incurred in connection with defending any such Liabilities, whether or not Alex. Brown or any of its directors, officers, agents, employees and controlling persons is a named party thereto; provided, however, that the Company will not be liable in any such case (except cases arising out of the use of information provided by the Company with knowledge of its falsity) for Liabilities that a court of competent jurisdiction shall have found in a final judgment to have arisen primarily from the gross negligence, willful misconduct or bad faith of Alex. Brown or the party claiming a right to indemnification. In case any proceeding shall be instituted involving any person in respect of whom indemnity may be sought, such person (the "indemnified party") shall promptly notify the Company and the Company, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the Company may designate in such proceeding and shall pay, as they are incurred, the fees and expenses of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense, except that the Company shall pay as incurred the reasonable fees and expenses of counsel retained by the indemnified party in the event that (i) the Company and the indemnified party shall have mutually agreed to the retention of such counsel or, (ii) the named parties to any such proceeding (including any impleaded parties) include both the Company and the indemnified party and representation of both parties by the same counsel would be inappropriate, in the reasonable opinion of the indemnified party, due to actual or potential differing interests between them. The Company shall not be liable for any settlement of any action or proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Company agrees to indemnify the indemnified parties to the extent set forth in this Addendum A. In addition, the Company will not, without the prior written consent of Alex. Brown, which shall not be unreasonably withheld, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not Alex. Brown or any indemnified party is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of Alex. Brown and each other indemnified party hereunder from all liability arising out of such claim, action, suit or proceeding. Page 64 of 69 Pages In the event that a party is not entitled to indemnification hereunder because a court of competent jurisdiction has found the relevant Liability has arisen primarily from the gross negligence, willful misconduct or bad faith of Alex. Brown or such party, then Alex. Brown or such party shall reimburse to the Company all sums previously advanced hereunder. In the event a claim for indemnification under this Addendum A is determined to be unenforceable by a final judgment of a court of competent jurisdiction, then the Company shall contribute to the aggregate losses, claims, damages or liabilities to which Alex. Brown or its officers, directors, agents, employees or controlling persons may be subject in such amount as is appropriate to reflect the relative benefits received by each of the Company and the parties seeking contribution on the one hand, and the relative faults of the Company and the party seeking contribution on the other, as well as any other relevant equitable considerations. This indemnification shall apply to the original engagement as set forth in the Letter and any modification of the original engagement and the indemnification provided herein shall survive termination of our engagement and shall be binding upon any successors or assigns of the Company. Acknowledged and Agreed: MID-PENINSULA BANCORP By: /s/ David L. Kalkbrenner ------------------------------- Date: May 28, 1996 -------------------------------- JLS:cd Page 65 of 69 Pages [LETTERHEAD] May 28, 1996 ADDENDUM B This Addendum B reflects qualifications relating to Sections 3(d) and 4 of the engagement agreement between Alex. Brown & Sons Incorporated ("Alex. Brown") and Mid-Peninsula Bancorp ("Mid-Peninsula" or the "Company") dated May 28, 1996. This Addendum B is to confirm our understanding of the basis upon which Alex. Brown is being engaged to provide investment banking advice and services to Mid-Peninsula in connection with the proposed merger of equals (the "Transaction") by and between the Company and Cupertino National Bancorp ("Cupertino"). 1. Alex. Brown will be engaged, as your sole and exclusive financial advisor, to perform the following functions: (a) Analyze, with the Company's management and Board of Directors, the terms of any definitive acquisition agreement (the "Agreement") entered into by and between the Company and Cupertino. (b) Render our opinion (the "Opinion") as to the fairness, from a financial point of view to the Company's shareholders, of the Conversion Ratio (as defined in the Agreement) on the date of the execution of the Agreement, update such opinion as required at or near the time of distribution of proxy materials by the Company and bring-down such opinion as required at or near the time of closing of the Transaction. The nature and scope of the investigation which we would conduct in order to be able to render our opinion will be such as we would consider appropriate, and such opinion will be subject to customary assumptions and qualifications. Our opinion will be in written form. Such opinion shall be solely for the use of the Board of Directors in considering the Agreement and for inclusion in the Company's proxy materials relating to the proposed Transaction. We understand and expect that the Company will use such Opinion in connection with the proxy statement to be mailed to the Company's shareholders seeking approval for the Transaction. The Company may not Page 66 of 69 Pages Mid-Peninsula Bancorp May 22, 1996 Page 2 otherwise publish or refer to such opinion (either in its entirety or through excerpts or summaries) or disclose the existence of our engagement hereunder or describe or characterize the advice provided by us to the Company without the prior written approval of Alex. Brown, which approval shall not be unreasonably withheld, or except as aforesaid or as otherwise required by applicable law. 2. In consideration of our services as your financial advisor as described in Section 1 of this Addendum B, the Company agrees to compensate Alex. Brown as follows: (a) Upon delivery the Opinion, Alex. Brown will be paid a non-refundable fee of $200,000, against which will be credited the $25,000 retainer fee previously paid in accordance with Section 2 of the Engagement Agreement. Payment of this $175,000 shall be made in two installments: $75,000 upon the rendering of the Opinion to the Board of Directors of the Company and $100,000 upon inclusion of the Opinion in the Proxy Statement to shareholders of the Company. (b) In addition to the fee described above, the Company agrees to reimburse Alex. Brown for all reasonable out-of-pocket expenses, including fees and reimbursements of legal counsel, incurred by Alex. Brown in carrying out its duties under this Addendum B. Fees and reimbursements of legal counsel shall not exceed $2,000 without prior approval of the Company. 3. In consideration of our services as the Company's financial advisor under this Addendum B and under the Engagement Agreement, the Company agrees to indemnify and hold harmless Alex. Brown and each of its directors, officers, agents, employees and controlling persons (within the meaning of the Securities Act of 1933, as amended) to the extent and as provided in Addendum A attached to the Engagement Agreement and incorporated herein by reference. In addition, neither Alex. Brown nor any indemnified person shall have any liability to the Company related to or arising from the engagement described in this Addendum B, except for liability for losses, claims, damages or expenses incurred by the Company which are determined by a court of competent jurisdiction in a final judgment to have arisen primarily from Alex. Brown's gross negligence, willful misconduct or bad faith. The provisions of this Section 3 and Addendum A incorporated herein by reference shall survive the termination of Alex. Brown's engagement under this Addendum B and shall be binding upon any successors or assigns of the Company. Page 67 of 69 Pages Mid-Peninsula Bancorp May 22, 1996 Page 3 4. In the event of consummation of the Transaction, Alex. Brown shall have the right to disclose its participation in such Transaction, including, without limitation, the placement of "tombstone" advertisements in financial and other newspapers and journals, provided that Alex. Brown will submit a copy of any such advertisements to the Company for its approval, which approval shall not be unreasonably withheld or delayed. If the foregoing letter is in accordance with your understanding of the terms of our engagement, please sign and return to us the enclosed duplicate hereof. Very truly yours, ALEX. BROWN & SONS INCORPORATED By: /s/ Jean-Luc Servat ---------------------------------- Jean-Luc Servat Managing Director Accepted and Agreed: MID-PENINSULA BANCORP By: /s/ David L. Kalkbrenner ----------------------------------- David L. Kalkbrenner President & Chief Executive Officer Date: May 28, 1996 ---------------------------------- Page 68 of 69 Pages EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 12,024 185,370 36,400 0 47,855 2,397 2,397 147,967 1,933 251,412 227,134 0 1,480 0 0 0 15,966 6,832 22,798 7,041 1,382 709 9,132 3,420 3,420 5,712 220 (97) 3,112 2,659 2,659 0 0 1,571 .99 .49 8.65 0 0 0 0 1,716 3 0 1,933 1,933 0 0
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