-----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, W03MXBw0KJxrBKRRLjd34llLYQH4ao6+FAo+9DHu9ibxn3hV9cQcGarhxQecgXMK gsFwltW2hw4EM4XcjH/otA== 0000912057-95-009935.txt : 19951121 0000912057-95-009935.hdr.sgml : 19951121 ACCESSION NUMBER: 0000912057-95-009935 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MID PENINSULA BANCORP CENTRAL INDEX KEY: 0000775473 STANDARD INDUSTRIAL CLASSIFICATION: 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: 95592119 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 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /x/ Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarterly period ended September 30, 1995 or ------------------------ / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission file number 0-25034 --------------------------------------------- MID-PENINSULA BANCORP ---------------------------------------------------- Exact 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 September 30. 1995 - - - ------------ ---------------------------------------- Common Stock 1,556,557 Page 1 of 18 Pages Exhibit Index @ Page 17 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Balance Sheets (in thousands)
Assets: September 30, 1995 December 31, 1994 - - - ----------------------------------------- ------------------ ----------------- (unaudited) (audited) Cash and due from banks $ 8,514 $ 6,996 Federal funds sold 27,000 28,200 Investment Securities: Available-for-sale, at fair value 20,114 16,953 Held-to-maturity, at amortized cost 36,405 15,710 (fair value of $36,770 & $15,078) Federal reserve bank stock 430 430 Loans: Commercial 87,701 76,528 Real estate - construction 8,880 4,608 Real estate - other 21,049 27,835 Less deferred loan fees (359) (417) --------- --------- Total loans 117,271 108,554 Less allowance for possible loan losses (1,672) (1,426) --------- --------- Net loans 115,599 107,128 Premises and equipment, net 926 989 Accrued interest and other assets 5,224 2,064 --------- --------- Total Assets $214,212 $178,470 --------- --------- --------- --------- Liabilities and Shareholders' Equity - - - ------------------------------------ Deposits: Demand, noninterest-bearing $ 28,366 $ 27,137 Demand, interest-bearing 8,615 10,023 Savings and money market 106,971 85,310 Time certificates, $100,000 and over 41,415 28,934 Other time certificates 7,397 8,168 --------- --------- Total deposits 192,764 159,572 Accrued interest and other liabilities 1,362 895 --------- --------- Total liabilities 194,126 160,467 Shareholders' equity: Common stock, no par value - 6,000,000 shares authorized; 1,556,557 and 1,523,432 shares issued and outstanding in 1995 & 1994, respectively 15,115 14,785 Unrealized loss on securities available-for-sale, net (1,101) (1,320) Retained earnings 6,072 4,538 --------- --------- Total Shareholders' equity 20,086 18,003 --------- --------- Total Liabilities and Shareholders' equity $214,212 $178,470 --------- --------- --------- ---------
See Notes to Consolidated Condensed Financial Statements Page 2 of 18 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Statements of Income (unaudited) (in thousands, except share and per share amounts)
Three Months Ended Nine Months Ended September 30 September 30 September 30 September 30 1995 1994 1995 1994 --------------------------- ------------------------- Interest income: Loans (including fees) $ 3,116 $ 2,472 $ 9,097 $ 6,796 Investment securities 856 631 2,224 1,668 Federal funds sold 378 163 1,177 425 -------- --------- --------- --------- Total interest income 4,350 3,266 12,498 8,889 Interest expense: Demand, interest-bearing 49 53 157 152 Savings and money market 1,061 727 3,069 1,983 Time certificates, $100,000 and over 486 263 1,305 643 Other time certificates 98 63 276 161 -------- --------- --------- --------- Total interest expense 1,694 1,106 4,807 2,939 -------- --------- --------- --------- Net interest income 2,656 2,160 7,691 5,950 Provision for possible loan losses 70 (22) 225 203 -------- ---------- --------- --------- Net interest income after provision for possible loan losses 2,586 2,182 7,466 5,747 Noninterest income 151 (218) 392 22 Noninterest expenses: Salaries and employee benefits 882 746 2,563 2,088 Occupancy and equipment 246 216 713 626 Other 434 404 1,259 1,112 -------- --------- --------- --------- Total noninterest expense 1,562 1,366 4,535 3,826 -------- --------- --------- --------- Income before income taxes 1,175 598 3,323 1,943 Income taxes 481 387 1,328 859 -------- --------- --------- --------- Net income $ 694 $ 211 $ 1,995 $ 1,084 -------- --------- --------- --------- -------- --------- --------- --------- Weighted average common shares outstanding 1,545,000 1,520,000 1,531,000 1,501,000 Earnings per weighted average share $ 0.44 $ 0.14 $ 1.29 $ 0.71 -------- --------- --------- --------- -------- --------- --------- ---------
See Notes to Consolidated Condensed Financial Statements Page 3 of 18 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Statements of Cash Flows (unaudited) (in thousands)
Nine Months Ended September 30 September 30 1995 1994 -------------------------------- Cash flows from operating activities: Net Income $ 1,995 $ 1,084 Adjustments to reconcile net income to net cash provided by operating activities - Loss (gain) on sale of called securities (11) 350 Provision for possible loan losses 225 203 Depreciation and amortization 216 105 Increase in interest receivable (338) (128) Increase in other assets (2,822) (1,118) Decrease in other liabilities 467 514 -------- -------- Net cash provided from operating activities (268) 1,010 -------- -------- Cash flows from investing activities: Net increase in loans (8,696) (5,053) Purchases of available-for-sale securities (5,457) (20,505) Purchases of held-to-maturity securities (26,794) 0 Principal payments on available-for-sale securities 26 139 Maturities of available-for-sale securities 2,500 16,886 Maturities/calls of held-to-maturity securities 6,099 138 Additional investment in other real estate owned 0 0 Purchase of Federal Reserve Bank stock 0 (36) Capital (purchase) and sales (153) 5 -------- -------- Net cash used by investing activities (32,475) (8,426) -------- -------- Cash Flows from financing activities: Net increase in deposits 33,192 13,919 Dividends paid (461) (222) Stock options exercised 330 572 -------- -------- Net cash provided by (used) by financing activities 33,061 14,269 -------- -------- Net increase in cash and equivalents 318 6,853 Cash and cash equivalents at beginning of period 35,196 24,869 -------- -------- Cash and cash equivalents at end of period $35,514 $31,722 -------- -------- -------- -------- Supplemental disclosures: Income taxes paid $ 1,360 $ 574 Interest paid $ 4,727 $ 2,883
See Notes to Consolidated Condensed Financial Statements Page 4 of 18 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Notes to Consolidated Condensed Financial Statements September 30, 1995 (unaudited) Note 1 - BASIS OF PRESENTATION The consolidated financial statements of Mid-Peninsula Bancorp (the "Company") include its subsidiary, Mid-Peninsula Bank (the "Bank"). All material intercompany transactions and balances are eliminated in consolidation. Certain amounts in the accompanying 1994 consolidated condensed financial statements have been reclassified to conform with the 1995 consolidated condensed financial statements presentation. In the opinion of the Company, the unaudited consolidated financial statements, prepared on the accrual basis of accounting, contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company and subsidiary at September 30, 1995 and December 31, 1994, and the results of its operations for the three month and nine month periods ended September 30, 1995 and 1994. Certain information and footnote disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted. These interim financial statements should be read in conjunction with the Company's 1994 Annual Report to Shareholders and Consolidated Financial Statements and Notes thereto. The results of operations for the periods ended September 30, 1995 are not necessarily indicative of the operating results for the full year ending December 31, 1995. Note 2 - PER SHARE DATA Earnings per common share are calculated on a fully dilutive basis by dividing net income by the weighted average shares of common stock outstanding during the period plus shares issuable assuming exercise of all employee stock options. The weighted average shares outstanding for the quarters ended September 30, 1995 and 1994 were 1,545,000 and 1,520,000, respectively, and for the nine months ended September 30, 1995 and 1994, were 1,531,000 and 1,501,000, respectively. Weighted average shares outstanding and all per share amounts included in the consolidated condensed financial statements and notes thereto are based upon the increased number of shares giving retroactive effect to the merger transaction among San Mateo County Bancorp, Mid-Peninsula Bank and WestCal National Bank at a 1.0617 conversion ratio. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General - - - ------- 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, Page 5 of 18 Pages 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. OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS Total assets were $214,212,000 at September 30, 1995, an increase of $35,742,000 or 20.03% over total assets of $178,470,000 at December 31, 1994. From December 31, 1994 to September 30, 1995, total loans increased $8,717,000 (8.03%), held-to-maturity securities increased $20,695,000 (131.73%), available- for-sale securities increased $3,161,000 (18.65%), federal funds sold declined $1,200,000 (4.26%), while cash, premises and other assets had a net increase of $4,615,000 (45.92%). The substantial increase in investment securities was due in part to the modest increase in total loans and the Company's desire to stabilize the overall level of federal funds sold. The increase in asset size was funded primarily from a $33,192,000 (20.80%) increase in deposits, a $467,000,000 (52.18%) increase in other liabilities, and a $2,083,000 (11.57%) increase in shareholders' equity. The Bank's loan to deposit ratio declined from 67.1% at December 31, 1994 to 60.0% at September 30, 1995. LOANS Total outstanding commercial loans were $87,701,000 at September 30, 1995 compared to $76,528,000 at December 31, 1994, an increase of $11,173,000 (14.60%). Real estate construction loans increased $4,272,000 (92.71%) to $8,880,000 at September 30, 1995 compared to $4,608,000 at December 31, 1994, while other real estate loans declined $6,786,000 (24.38%) to $21,049,000 at September 30, 1995 compared to $27,835,000 at December 31, 1994. The Company lends primarily to small to 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 Company follows the policy of discounting 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. At September 30, 1995, the Company had $222,000 in non-accrual loans compared to $424,000 at December 31, 1994. As of September 30, 1995, and at December 31, 1994, the Company had no other real estate owned. The Company had a small loan of under one thousand dollars that was 90 or more days past due at September 30, 1995. There were no loans 90 or more days past due at December 31, 1994. The ratio of non-performing assets to total assets was 0.10% at September 30, 1995 compared to 0.23% at December 31, 1994. The Company does not have any troubled debt restructured loans. The Company does not currently expect to sustain losses from any of the non-performing loans in excess of that specifically provided for in the allowance for possible loan losses. Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, additions were made to the Company's allowance for possible loan losses. As an integral part of this process, the allowance for possible loan losses is subject to review and possible adjustment as a result of regulatory examinations conducted by governmental agencies and through management assessments of risk. The Company's entire allowance Page 6 of 18 Pages 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 1.43% at September 30, 1995 compared to 1.31% at December 31, 1994. The Company provided $75,000 during the first quarter; $80,000 during the second quarter; and $70,000 during the third quarter of 1995 as an additional hedge against possible loan losses in a larger loan portfolio. There were no charge-offs during each of the first three quarters and recoveries of $21,000 during the third quarter. 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 possible losses at September 30, 1995 is adequate, based on information currently available. However, no prediction of the ultimate level of loan charge-offs in future years can be made with any certainty. OTHER ASSETS AND ACCRUED INTEREST Other assets increased $3,160,000 from December 31, 1994 to September 30, 1995, due primarily to the implementation of a salary continuation plan for the Bank's executive officers in May 1995. The officers become eligible for benefits under the plan if they reach normal retirement age while working for the Bank. The costs of these benefits are accrued over the remaining expected service lives of the officers covered using the present value method of accounting. Salary continuation expense was approximately $31,200 in the quarter ended September 30, 1995. The Bank has elected to fund its obligations under the plan described above with life insurance contracts. The Bank acquired single premium life insurance policies with cash surrender values totaling $2,275,000, which are included in other assets at September 30, 1995. The policies are also expected to cover plan expenses. 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 78.5% of total deposits at September 30, 1995 compared to 81.8% of total deposits at year-end 1994. The Company's principal sources of asset liquidity are cash and due from banks, federal funds sold, available-for-sale securities and federal funds lines with its correspondent banks. At September 30, 1995 these sources totaled $71,628,000 or 37.2% of total deposits compared to $61,149,000 or 38.3% at year-end 1994. In the opinion of management, there are sufficient resources to meet the liquidity needs of the Company at present and foreseeable future levels. Page 7 of 18 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 8.0% of its assets and commitments to extend credit, weighted by risk, of which at least 4.0% must consist primarily of common equity (including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock, or a limited amount of loan loss reserves. Assets, commitments to extend credit, and off-balance sheet items are categorized according to risk, and certain assets considered to present less risk than others permit maintenance of capital at less than the 8% ratio. The guidelines establish two categories of qualifying capital: Tier 1 capital comprising core capital elements, and Tier II comprising supplementary capital requirements. At least one-half of the required capital must be maintained in the form of Tier 1 capital. Tier 1 capital includes common shareholders' equity and qualifying perpetual preferred stock. However, no more than 25% of the Company's total Tier 1 capital may consist of perpetual preferred stock. The definition of Tier 1 capital for the Bank is the same, except that perpetual preferred stock may be included only if it is noncumulative. Tier 2 capital includes, among other items, limited life (and in the case of banks, cumulative) preferred stock, mandatory convertible securities, subordinated debt and a limited amount of reserve for credit losses. The risk-based capital guidelines establish minimum supervisory guidelines and standards. They do not evaluate all factors affecting an organization's financial condition. Factors which are not evaluated include (1) overall interest rate exposure; (2) liquidity, funding and market risks; (3) quality and level of earnings; (4) investment portfolio concentrations; (5) quality of loans and investments; (6) the effectiveness of loan and investment policies; and (7) management's overall ability to monitor and control other financial and operating risks. The capital adequacy assessment of federal bank regulators will, however, continue to include analysis of the foregoing considerations and, in particular, the level and severity of problem and classified assets. The Board of Governors also adopted a 3.0% 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 Board of Governors emphasized that the leverage ratio constitutes a minimum requirement for well-run banking organizations having diversified risk. 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 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. The following table sets forth the Company's and Bank's risk-weighted and leverage capital ratios as of September 30, 1995 and December 31, 1994. As indicated in the table, the Company's and the Bank's capital ratios significantly exceeded the minimum capital levels required by current federal regulations. Management believes that the Company and the Bank will continue to meet their respective minimum capital requirements in the foreseeable future. Page 8 of 18 Pages RISK BASED CAPITAL RATIO (unaudited)
MID-PENINSULA BANCORP September 30, 1995 December 31, 1994 ------------------ ----------------- Ratios (dollars in thousands) Amount Ratio Amount Ratio - - - -------------------------------------------------------------------------------------------------- Tier 1 capital $ 20,086 14.41% $ 18,003 15.05% Tier 1 capital minimum requirement $5,574 4.00% $ 4,786 4.00% Total capital $ 21,758 15.61% $ 19,429 16.24% Total capital minimum requirement $ 11,147 8.00% $ 9,572 8.00% Total risk based assets $ 139,342 $119,644 MID-PENINSULA BANK September 30, 1995 December 31, 1994 ------------------ ----------------- Ratios (dollars in thousands) Amount Ratio Amount Ratio - - - --------------------------------------------------------------------------------------------------- Tier 1 capital $ 19,523 14.07% $ 17,770 14.88% Tier 1 capital minimum requirement $ 5,551 4.00% $ 4,776 4.00% Total capital $ 21,195 15.27% $ 19,196 16.08% Total capital minimum requirement $ 11,102 8.00% $ 9,553 8.00% Total risk based assets $138,779 $119,411 Leverage Capital Ratio (unaudited) MID-PENINSULA BANCORP September 30, 1995 December 31, 1994 ------------------ ----------------- Ratios (dollars in thousands) Amount Ratio Amount Ratio - - - --------------------------------------------------------------------------------------------------- Tier 1 capital to adjusted total assets $ 20,086 9.47% $ 18,003 10.51% Quarterly average total assets $212,130 $171,267 MID-PENINSULA BANK September 30, 1995 December 31, 1994 ------------------ ----------------- Ratios (dollars in thousands) Amount Ratio Amount Ratio - - - --------------------------------------------------------------------------------------------------- Tier 1 capital to adjusted total assets $ 19,523 9.23% $ 17,770 10.39% Quarterly average total assets $211,567 $171,034
RESULTS OF OPERATIONS - THIRD QUARTER 1995 AND 1994 Net income for the third quarter of 1995 was $694,000 or $.44 per share compared to $211,000 or $.14 per share for the comparable period in 1994. The following discussion highlights changes in certain items in the consolidated condensed statements of income. Page 9 of 18 Pages NET INTEREST INCOME Net interest income, the difference between interest earned on loans and investments and interest paid on deposits, is the principal component of the Bank's earnings. The components of net interest income are as follows:
MID-PENINSULA BANCORP AND SUBSIDIARY Average Balance Sheet Three Months ended September 30 (unaudited) (in thousands, except percentages) 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------ Average Average Average Average Balance Interest Rate(1) Balance Interest Rate(1) - - - ------------------------------------------------------------------------------------------------------------------ Assets: Loans $115,841 $3,116(2) 10.76% $103,561 $2,472(2) 9.55% Taxable investments 47,046 727 6.18% 44,960 550 4.89% Non-taxable investments 9,125 129 5.65% 5,609 81 5.78% Fed funds sold and other 26,619 378 5.68% 14,905 163 4.37% -------- ------ ------ -------- ------ ----- Total earning assets 198,631 $4,350 8.76% 169,035 $3,266 7.73% ------ Cash and due from banks 8,099 9,765 Premises and equipment, net 938 625 Other assets (3) 3,899 1,207 -------- ------- Total assets $211,567 $180,637 -------- ------- -------- ------- Liabilities and Shareholders' Equity Demand with interest $10,470 $ 49 1.87% $ 10,316 $ 53 2.06% Savings and money market 106,255 1,061 3.99% 92,428 727 3.15% Time deposits > $100,000 38,689 486 5.02% 27,785 263 3.79% Other time deposits 7,447 98 5.26% 6,898 63 3.65% -------- ------- ------ -------- ------ ----- Total interest bearing 162,861 1,694 4.16% 137,427 1,106 3.22% ------- ------ Non-interest deposits 28,277 23,785 Other liabilities 1,015 859 -------- ------ Total liabilities 192,153 162,071 Shareholders' equity 19,414 18,561 -------- ------- Total liabilities and equity $211,567 $180,632 -------- ------- -------- ------- Net interest spread 4.60% 4.51% Net interest income $2,656 5.35% $2,160 5.11% and margin - - - ------------------------------------------------------------------------------------------------------------------
1 Annualized 2 Loan interest income includes fee income of $140,000 and $128,000 for the quarters ended September 30, 1995 and 1994, respectively 3 Includes the average allowances for loan losses of $1,528,000 and $1,442,000 and average deferred loan fees of $346,000 and $389,000 for the quarters ended September 30, 1995 and 1994, respectively Net interest income for the quarter ended September 30, 1995 was $2,656,000, representing an improvement of $496,000 or 22.96% over $2,160,000 for the comparable period in 1994. As a percentage of average earning assets, interest margin for the third quarter of 1995 improved to 5.35% from 5.11% in the same period one year earlier. The increase in net interest margin is primarily due to an increase in interest income. Interest income recognized in the quarter ended September 30, 1995 was $4,350,000 representing an increase of $1,084,000 or 33.2% over $3,266,000 for the third quarter of 1994. The increase in interest income was primarily due to increases in the value of average earning assets. Earning assets averaged $198,631,000 in the quarter ended September 30, 1995 compared to $169,035,000 in the same period in 1994, representing an increase of $29,596,000 or 17.5%. The increase in average earning assets included increases in average loan, investment and Federal funds sold balances of $12,280,000, $5,602,000 and $11,714,000 or 11.9%, 11.1% and 7.9%, respectively. Loan fees recognized during the third quarter of 1995 were $140,000 compared to $128,000 one year earlier, as a result of the increase in average loans outstanding. Page 10 of 18 Pages Partially offsetting the increase in taxable equivalent interest income was an increase in the cost of liabilities funding the growth in average earning assets. Interest expense for the three months ended September 30, 1995 was $1,694,000 and represented an increase of $588,000 or 53.2% over $1,106,000 for the third quarter of 1994. During the three months ended September 30, 1995, the average rate paid by the Bank on interest-bearing liabilities was 4.2% compared to 3.2% for the same period in 1994. In addition to the increase in rates, interest expense was impacted by an increase in the volume of average interest-bearing liabilities. Average interest-bearing liabilities were $162,861,000 in the quarter ended September 30, 1995 compared to $137,427,000 for the same period in 1994, an increase of $25,434,000 or 18.5%. The increase in average noninterest-bearing demand deposits also contributed to the improvement in net interest income during the quarter. Average noninterest- bearing demand deposits were $28,277,000 for the quarter ended September 30, 1995 compared to $23,785,000 for the same quarter in 1994. PROVISION FOR POSSIBLE LOAN LOSSES The provision for possible loan losses is based upon management's evaluation of the adequacy of the existing allowance for possible loan losses in relation to total loans and the inherent risk in the loan portfolio. Management's evaluation takes into consideration such factors as changes in the composition of the portfolio, overall portfolio quality, loan concentrations, specific problem loans and current and anticipated economic conditions that may affect borrowers' ability to repay. In the third quarter of 1995, the Bank increased its provision for possible loan losses through a charge to earnings of $70,000. The provision compares to a credit adjustment of $22,000 for the same period in 1994. The modest addition in loan loss provision for the quarter is primarily attributed to the ongoing low level of classified and nonperforming loans. NONINTEREST INCOME AND EXPENSE Noninterest income consists primarily of service charges on deposit accounts, fees for miscellaneous services and securities gains and losses. Total noninterest income was $151,000 for the third quarter of 1995 as compared to a loss of $218,000 for the third quarter of 1994. Growth in other income primarily resulted from increases in deposit-related service charges reflecting an increase in the number of deposit accounts served by the Bank and exclusive of the one-time loss of $350,000 due to the dissolution of the Community Asset Management Fund in which the Bank and numerous other banks in California and other states had invested funds. Noninterest expense increased $196,000 or 14.3% to $1,562,000 in the quarter ended September 30, 1995 from $1,366,000 in the same period one year earlier. As a percentage of average earning assets, other expenses, on an annualized basis, declined to 3.1% in the third quarter of 1995 from 3.2% in the third quarter of 1994. Increases in noninterest expense are attributed primarily to increases in salary and benefit expense and other operating expense. Salary and benefits expense was $882,000 in the quarter ended September 30, 1995 compared to $746,000 in the same period one year earlier. The increase in salary and benefits expense is primarily due to increased staff as a result of increased level of business. Occupancy and equipment expense was $246,000 in the quarter ended September 30, 1995, compared to $216,000 in the same period one year earlier. The increased expense reflects the costs to equip, remodel, repair and refurbish the San Mateo and San Carlos facilities. Page 11 of 18 Pages The Company also experienced an increase in other operating expenses to $434,000 in the quarter ended September 30, 1995 from $404,000 during the quarter ended June 30, 1994. The increase reflects a general increase in activity and outside services. RESULTS OF OPERATIONS - FIRST NINE MONTHS 1995 AND 1994 Net income for the first nine months of 1995 was $1,995,000 or $1.29 per share compared to $1,084,000 or $.71 per share for the comparable period in 1994. The following discussion highlights changes in certain items in the consolidated condensed statements of income. NET INTEREST INCOME Net interest income, the difference between interest earned on loans and investments and interest paid on deposits, is the principal component of the Bank's earnings. The components of net interest income are as follows:
MID-PENINSULA BANCORP AND SUBSIDIARY Average Balance Sheet Nine months ended September 30 (unaudited) (in thousands, except percentages) 1995 1994 - - - ------------------------------------------------------------------------------------------------------------------------ Average Average Average Average Balance Interest Rate(2) Balance Interest Rate(2) - - - ------------------------------------------------------------------------------------------------------------------------ ASSETS: Loans $112,718 $9,097(2) 10.76% $101,667 $6,796(2) 8.91% Taxable investments 41,624 1,912 6.12% 41,503 1,431 4.60% Non-taxable investments 7,436 312 5.59% 5,509 237 5.74% Fed funds sold and other 27,300 1,177 5.75% 14,948 425 3.79% ------- ------ ------- ------ ----- Total earning assets 189,078 12,498 8.81% 163,627 8,889 7.24% ------- ------ Cash and due from banks 7,682 9,986 Premises and equipment, net 929 675 Other assets(3) 2,301 640 ------- ------- Total assets $199,990 $174,928 -------- -------- -------- -------- Liabilities & Shareholders' Equity Demand with interest $ 10,698 157 1.96% $ 10,181 152 1.99% Savings and money market 99,197 3,069 4.13% 90,075 1,983 2.94% Time deposits > $100,000 35,418 1,305 4.91% 25,289 643 3.39% Other time deposits 7,392 276 4.98% 6,580 161 3.26% ------- ----- ----- -------- ------ ----- Total interest bearing 152,705 4,807 4.20% 132,125 2,939 2.97% ----- ------ Non-interest deposits 27,514 23,857 ------- Other liabilities 1,027 756 ------- ------- Total liabilities 181,246 156,738 Shareholders' equity 18,744 18,190 ------- ------- Total liabilities and equity $199,990 $174,928 ------- -------- ------- -------- Net interest spread 4.62% 4.28% Net interest income and margin $7,691 5.42% $5,950 4.85% ------ ------ ------ ------
1 Annualized 2 Loan interest income includes fee income of $443,000 and $430,000 for the period ended September 30, 1995 and 1994, respectively 3 Includes the average allowances for loan losses of $1,528,000 and $1,413,000 and average deferred loan fees of $350,000 and $387,000 for the period ended September 30, 1995 and 1994, respectively Net interest income for the nine months ended September 30, 1995 was $7,691,000, representing an improvement of $1,741,000 or 29.3% over $5,950,000 for the comparable period in 1994. As a percentage of average earning assets, net interest margin for the first nine months of 1995 improved to Page 12 of 18 Pages 5.4%o from 4.9% in the same period one year earlier. The increase in net interest margin is primarily due to an increase in interest income. Interest income for the nine months ended September 30, 1995 was $12,498,000 representing an increase of $3,609,000 or 40.1% over $8,889,000 for the first nine months of 1994. The increase in interest income was primarily due to increases in the value of average earning assets. Earning assets averaged $189,078,000 in the nine months ended September 30, 1995 compared to $163,627,000 in the same period in 1994, representing an increase of $25,451,000 or 15.6%. The increase in average earning assets included increases in average loan, investment, Federal funds sold balances of $11,051,000, $2,048,000 and $12,352,000 or 10.9%, 4.4% and 82.6%, respectively. Loan fees recognized during the first nine months of 1995 were $443,000 compared to $430,000 one year earlier. Partially offsetting the increase in taxable equivalent interest income was an increase in the cost of liabilities funding the growth in average earning assets. Interest expense for the nine months ended September 30, 1995 was $4,807,000 and represented an increase of $1,868,000 or 63.6% over $2,939,000 for the first nine months of 1994. During the nine months ended September 30, 1995, the average rate paid by the Bank on interest-bearing liabilities was 4.2% compared to 3.0% for the same period in 1994. In addition to the increase in rates, interest expense was impacted by an increase in the volume of average interest-bearing liabilities. Average interest-bearing liabilities were $152,705,000 in the nine months ended September 30, 1995 compared to $132,125,000 for the same period in 1994, an increase of $20,580,000 or 15.6%. The increase in average noninterest-bearing demand deposits also contributed to the improvement in net interest margin during the first half. Average noninterest-bearing demand deposits were $27,514,000 for the nine months ended September 30, 1995 compared to $23,857,000 for the same period in 1994. PROVISION FOR POSSIBLE LOAN LOSSES The provision for possible loan losses is based upon management's evaluation of the adequacy of the existing allowance for possible loan losses in relation to total loans and the inherent risk in the loan portfolio. Management's evaluation takes into consideration such factors as changes in the composition of the portfolio, overall portfolio quality, loan concentrations, specific problem loans and current and anticipated economic conditions that may affect the borrowers' ability to repay. The Bank's loans are virtually all made within its defined market area of San Mateo and northern Santa Clara counties. Real estate construction loans represented 7.6% of total loans at September 30, 1995, the majority of which are for the construction of single family properties. In addition, 17.9% of the Bank's loans were other real estate loans. These loans were primarily made to Bank depositors secured by commercial and residential properties. Commercial loans comprise 74.5% of total loans at September 30, 1995. In the first nine months of 1995, the Bank increased its provision for possible loan losses through a charge to earnings of $255,000. This compares to $203,000 for the same period in 1994. The modest change in loan loss provision for the nine months is primarily attributed to the ongoing low level of classified and nonperforming loans. At September 30, 1995, the allowance for possible loan losses was $1,672,000 or 1.43% of total loans compared to $1,426,000 or 1.31% at December 31, 1994. Management believes that the allowance for possible loan losses is maintained at an adequate level for known and anticipated future risks inherent in the loan portfolio; however, the Company's loan portfolio, particularly the real estate related segments, may be adversely affected if California's economic conditions and Santa Clara and San Mateo Counties real estate markets weaken. In that event, the level of nonperforming loans, the provision for possible loan losses and the level of the allowance for possible loan losses could increase. Page 13 of 18 Pages NONINTEREST INCOME AND EXPENSE Noninterest income consists primarily of service charges on deposit accounts, fees for miscellaneous services and gains and losses on securities. Noninterest income was $392,000 for the first nine months of 1995 as compared to $22,000 for the same period in 1994. Growth in noninterest income primarily resulted from increases in deposit-related service charges reflecting an increase in the number of deposit accounts served by the Bank and exclusive of the one-time securities loss of $350,000 due to the dissolution of the Community Asset Management Fund in which the Bank and numerous other banks in California and other states had invested funds. Noninterest expense increased $709,000 or 18.5% to $4,535,000 in the nine months ended September 30, 1995 from $3,826,000 in the same period one year earlier. As a percentage of average earning assets, noninterest expense, on an annualized basis, increased to 3.2% in the first nine months of 1995 from 3.1% in the same period in 1994. Increases in noninterest expense are attributed primarily to increases in salary and benefits expense and other operating expense. Salary and benefits expense was $2,563,000 in the nine months ended September 30, 1995 compared to $2,088,000 in the same period one year earlier. The increase in salary and benefits expense is primarily due to increased staff to service the increased level of business. Occupancy and equipment expense was $713,000 in the period ended September 30, 1995, compared to $626,000 in the same period one year earlier. The increased expense reflects the costs to equip, remodel, repair and refurbish the San Mateo and San Carols facilities. The Company also experienced an increase in other operating expenses to $1,259,000 in the nine months ended September 30, 1995 from $1,112,000 during the same period ended September 30, 1994. The increase reflects a general increase in activity and outside services. 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. Page 14 of 18 Pages PART II - OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) (3) Exhibits (27.1) Financial Data Schedule Page 15 of 18 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 November 7, 1995 By: /s/David L. Kalkbrenner -------------------- ------------------------- Date David L. Kalkbrenner President and Chief Executive Officer (Principal Executive Officer) November 7, 1995 By: /s/Carol H. Rowland -------------------- ------------------------ Date Carol H. Rowland First Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 16 of 18 Pages EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE NUMBER - - - -------- ----------- ----------- 27.1 Financial Data Schedule 18
Page 17 of 18 Pages EX-27 2 EXHIBIT 27
9 3-MOS DEC-31-1995 JUL-01-1995 SEP-30-1995 8,514 164,398 27,000 0 20,114 36,405 36,769 117,271 1,672 214,212 192,764 0 1,362 0 15,115 0 0 4,971 20,086 9,097 2,224 1,177 12,498 4,807 4,807 7,691 225 11 4,535 3,323 3,323 0 0 1,995 1.30 1.29 8.81 222 1 0 0 1,426 0 21 1,672 1,672 0 0
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