-----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, Hx1+xelhAbYJjdX0Yh8LgQxYKIAUM49uvp3Rl65RAwuik4iCBpag6B8R372CEH3V 5fKfGJc2hjvYLkmQ52hOGg== 0000912057-96-025598.txt : 19961113 0000912057-96-025598.hdr.sgml : 19961113 ACCESSION NUMBER: 0000912057-96-025598 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 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: 96658856 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, 1996 or ------------------- Transition report pursuant to Section 13 or 15(d) of the Securities - ------ Exchange Act of 1934 For the transition period from to ------------ -------------- Commission file number 0-25034 ------- MID-PENINSULA BANCORP ---------------------------------------------------- Exact name of registrant as specified in its charter California 77-0387041 - --------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 420 Cowper Street, Palo Alto, CA 94301 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 323-5150 --------------------- None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Shares Outstanding at November 7, 1996 - --------------- -------------------------------------- Common Stock 1,670,655 The Index to Exhibits is located at page 21. Page 1 of 22 Pages PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS
MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Balance Sheets (Dollars in thousands) Assets: September 30, 1996 December 31, 1995 - ------ ------------------ ----------------- (unaudited) (audited) Cash and due from banks $ 11,622 $ 3,304 Federal funds sold 21,000 15,700 Investment Securities: Available-for-sale, at fair value 53,995 58,533 Held-to-maturity, at amortized cost 6,385 857 (fair value of $ 6,419,000 & $838,000 in 1996 and 1995 respectively) Federal reserve bank stock 430 430 Loans: Commercial 115,590 92,971 Real estate - construction 27,173 8,783 Real estate - other 19,806 24,296 Less deferred loan fees (568) (448) -------- -------- Total loans 162,001 125,602 Less allowance for possible loan losses (2,140) (1,716) -------- -------- Net loans 159,861 123,886 Premises and equipment, net 981 995 Accrued interest and other assets 5,579 5,030 -------- -------- Total Assets $259,853 $218,735 -------- -------- -------- -------- Liabilities and Shareholders' Equity - ------------------------------------- Deposits: Demand, noninterest-bearing $43,045 $37,077 Demand, interest-bearing 11,570 11,926 Savings and money market 131,378 102,124 Time certificates, $100,000 and over 39,127 36,682 Other time certificates 9,017 7,886 -------- -------- Total deposits 234,137 195,695 Accrued interest and other liabilities 1,683 1,600 -------- -------- Total liabilities 235,820 197,295 Shareholders' equity: Common stock, no par value - 6,000,000 shares authorized; 1,670,093 and 1,571,757 shares issued and outstanding in 1996 & 1995, respectively 16,388 15,425 Unrealized loss on securities available-for-sale, net (635) (626) Retained earnings 8,280 6,641 -------- -------- Total Shareholders' equity 24,033 21,440 -------- -------- Total Liabilities and Shareholders' equity $259,853 $218,735 -------- -------- -------- --------
Page 2 of 22 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Statements of Income (unaudited) (in thousands, except share and per share amounts) Three Months ended September 30, Nine Months ended September 30, 1996 1995 1996 1995 -------------------------------- ------------------------------- Interest income: Loans (including fees) $ 3,804 $ 3,116 $10,845 $ 9,097 Investment securities 859 856 2,241 2,224 Federal funds sold 463 378 1,172 1,177 ------- ------- ------- ------- Total interest income 5,126 4,350 14,258 12,498 Interest expense: Demand, interest-bearing 53 49 159 157 Savings and money market 1,235 1,061 3,310 3,069 Time certificates, $100,000 and over 556 486 1,569 1,305 Other time certificates 116 98 342 276 ------- ------- ------- ------- Total interest expense 1,960 1,694 5,380 4,807 ------- ------- ------- ------- Net interest income 3,166 2,656 8,878 7,691 Provision for possible loan losses 207 70 427 225 ------- ------- ------- ------- Net interest income after provision for possible loan losses 2,959 2,586 8,451 7,466 Noninterest income 167 150 543 381 Securities Gains (Losses) (122) 1 (219) 11 Noninterest expenses: Salaries and employee benefits 1,008 882 2,940 2,563 Occupancy and equipment 295 246 867 713 Other 281 434 889 1,259 ------- ------- ------- ------- Total noninterest expense 1,584 1,562 4,696 4,535 ------- ------- ------- ------- Income before income taxes 1,420 1,175 4,079 3,323 Income taxes 618 481 1,706 1,328 ------- ------- ------- -------- Net income $ 802 $ 694 $2,373 $1,995 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average common share equivalents outstanding 1,656,000 1,545,000 1,652,000 1,531,000 Earnings per weighted average share $0.48 $0.44 $1.44 $1.29 ----- ----- ----- ----- ----- ----- ----- -----
Page 3 of 22 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Consolidated Condensed Statements of Cash Flows (unaudited) (in thousands) Nine Months Ended September 30, September 30, 1996 1995 ---------------------------------------- Cash flows from operating activities: Net income $2,373 $1,995 Adjustments to reconcile net income to net cash provided by operating activities - Loss (gain) on sale of securities (219) (11) Provision for possible loan losses 427 225 Depreciation and amortization 246 216 Increase in interest receivable (116) (338) Increase in other assets (558) (480) Increase(decrease) in deferred tax benefit 58 140 Increase(decrease) in deferred loan fees 120 (58) Decrease in other liabilities (59) 467 Amortization of Premium - Securities (118) (159) ------ ------ Net cash provided from operating activities 2,154 1,997 ------ ------ Cash flows from investing activities: Net increase in loans (36,595) (8,696) Purchases of available-for-sale securities (26,609) (5,457) Purchases of held-to-maturity securities (5,881) (26,794) Principal payments on available-for-sale securities 31 26 Sales of available-for-sale securities 23,285 - Maturities/calls of available-for-sale securities 7,996 2,500 Maturities/calls of held-to-maturity securities - 6,099 Additional investment in other real estate owned - - Purchase of life insurance policy (327) (2,265) Capital expenditures, net (232) (153) ------ ------ Net cash used by investing activities (38,332) (34,740) ------ ------ Cash Flows from financing activities: Net increase in deposits 39,724 33,192 Dividends paid (891) (461) Stock options exercised 963 330 ------ ------ Net cash provided by (used) by financing activities 39,796 33,061 ------ ------ Net increase in cash and equivalents 3,618 318 Cash and cash equivalents at beginning of period 29,004 35,196 ------ ------ Cash and cash equivalents at end of period $32,622 $35,514 ------ ------ ------ ------ Supplemental disclosures: Income taxes paid $1,706 $1,360 Interest paid $5,380 $4,727
Page 4 of 22 Pages MID-PENINSULA BANCORP AND SUBSIDIARY Notes to Consolidated Condensed Financial Statements September 30, 1996 (unaudited) Note 1 DESCRIPTION OF BUSINESS Mid-Peninsula Bancorp is a California corporation organized in 1984 under the name San Mateo County Bancorp ("San Mateo") to act as the bank holding company of San Mateo County National Bank which subsequently changed its name to WestCal National Bank ("WestCal") in 1991. In 1994, WestCal was merged with and into Mid-Peninsula Bank, a California state licensed bank organized in 1987 (the "Bank") in a transaction in which the Bank survived and became the wholly-owned subsidiary of San Mateo, and San Mateo concurrently changed its name to Mid-Peninsula Bancorp (the "Company"). The headquarters of the Company and the Bank is located in Palo Alto, California and the Bank conducts its banking business through its offices in Palo Alto, San Mateo and San Carlos, California. Other than holding the shares of the Bank, the Company conducts no significant activities, although it is authorized, with the prior approval of the Board of Governors of the Federal Reserve System (the "Board of Governors"), the Company's principal regulator, to engage in a variety of activities which are deemed closely related to the business of banking. The Bank engages in general commercial banking emphasizing small and medium-sized businesses, and professionals located in its market area in and adjacent to the San Francisco Peninsula from Los Altos and Mountain View on the South to Daly City on the North and offers a full range of commercial banking services, including the acceptance of demand, savings and time deposits, and the making of commercial loans, including short-term loans for businesses and professionals, personal loans, and real estate secured loans, which generally do not include long-term mortgage loans. The Bank offers traveler's checks, safe deposit boxes, notary public, customer courier and other customary bank services. The Bank is a member of the STAR System ATM network and, through this system, offers ATM access at numerous locations. Note 2 BASIS OF PRESENTATION In the opinion of the Company, the unaudited condensed consolidated financial statements, prepared on the accrual basis of accounting, contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company and subsidiary at September 30, 1996 and December 31, 1995, and the results of its operations for the quarter and year-to-date periods ended September 30, 1996 and 1995. Page 5 of 22 Pages Certain information and footnote disclosures normally presented in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The results of operations for the quarter and year-to-date periods ended September 30, 1996 are not necessarily indicative of the operating results for the full year ending December 31, 1996. Note 3 CONSOLIDATION The accompanying consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiary, Mid-Peninsula Bank. All material intercompany accounts and transactions have been eliminated in consolidation. Note 4 PER SHARE DATA Earnings per common share are calculated by dividing net income by the weighted average shares of common stock outstanding during the year plus the effect, when dilutive, of stock options. The weighted average shares outstanding for the quarters ended September 30, 1996 and 1995 were 1,656,000 and 1,545,000 respectively. Note 5 RECLASSIFICATIONS Certain amounts in the accompanying 1995 consolidated condensed financial statements have been reclassified to conform with the 1996 consolidated condensed financial statements presentation. Note 6 CASH DIVIDEND The company paid a quarterly cash dividend of $0.15 per share on October 11, 1996 to shareholders of record on September 30, 1996. Page 6 of 22 Pages ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations MID-PENINSULA BANCORP AND SUBSIDIARY OVERVIEW OF CHANGES IN THE FINANCIAL STATEMENTS Total assets were $259,853,000 at September 30, 1996, an increase of $41,118,000 or 19% over total assets of $218,735,000 at December 31, 1995. From December 31, 1995 to September 30, 1996, total loans increased $36,399,000 (29%), held-to-maturity securities increased $5,528,000 (645%). Available-for-sale securities decreased $4,538,000 (8%), federal funds sold increased $5,300,000 (34%), and cash, premises and other assets had a net decrease of $1,147,000 (6%). The decrease in available-for-sale securities was due in part to the increase in total loans outstanding and the increase of federal funds sold. The increase in total asset size was funded primarily from a $38,442,000 (20%) increase in deposits, a $2,593,000 (12%) increase in shareholders' equity, and a $83,000 (5%) increase in other liabilities. The Bank's loan to deposit ratio increased from 64.18% at December 31, 1995 to 69.19% at September 30, 1996. LOANS Total outstanding commercial loans were $115,590,000 at September 30, 1996 compared to $92,971,000 at December 31, 1995, an increase of $22,619,000 (24%). Real estate construction loans increased $18,390,000 (209%) to $27,173,000 at September 30, 1996 compared to $8,783,000 at December 31, 1995. The increase is due to an increased emphasis in that market during this quarter. Other real estate loans decreased $4,490,000 (18%) to $19,806,000 at September 30, 1996 compared to $24,296,000 at December 31, 1995. The Company lends primarily to small and medium-sized businesses within its market area which is the San Francisco Peninsula limited by Mountain View to the south and Daly City to the north. The majority of the Company's loan portfolio consists of unsecured loans and real estate loans to small to medium sized businesses. The Company follows the policy of discontinuing the accrual of interest income and reversing any accrued and unpaid interest when the payment of principal or interest is 90 days past due, unless the loan is both well-secured and in the process of collection. Management generally places loans on nonaccrual status when they become 90 days past due, unless the loan is well secured and in the process of collection. Loans are charged off when, in the opinion of management, collection appears unlikely. At September 30, 1996, the Company had no non-accrual loans, the same as at December 31, 1995. The Company had no loans that were 90 or more days past due at the close of either period. The ratio of non-performing loans to total loans was 0.00% at September 30, 1996, the same as at December 31, 1995. The Company had no troubled debt or restructured loans, potential problem loans or loan concentrations at September 30, 1996 and December 31, 1995. Inherent in the lending function is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan extended and the creditworthiness of the borrower. To reflect the estimated risks of loss associated with its loan portfolio, additions were made to the Company's allowance for possible loan losses. As an integral part of this process, the allowance for possible loan losses is subject to review and possible adjustment as a result of regulatory examinations Page 7 of 22 Pages conducted by governmental agencies and through management assessments of risk. The Company's entire allowance is a valuation allocation; that is, it has been created by direct charges against operations through the provision for possible loan losses, modified by loan charge-offs and loan recoveries. The provision for possible loan losses charged against operations is based upon the actual net loan losses incurred plus an amount for other factors, which in management's judgment deserve recognition in estimating possible loan losses. The Company evaluates the adequacy of its allowance for possible loan losses on an ongoing basis. Periodically, the Company has contracted with outsiders to perform an independent loan review. Both internal and external evaluations take into account the following: specific loan conditions as determined by management, the historical relationship between charge-offs and the level of the allowance, the estimated future loss in all significant loans, known deterioration in concentrations of credit, certain classes of loans or pledged collateral, historical loss experience based on volume and types of loans, the results of any independent review or evaluation of the loan portfolio quality conducted by or at the direction of Company management or by the bank regulatory agencies, trends in delinquencies and non-accruals, lending policies and procedures including those for charge-off, collection and recovery, national and local economic conditions and their effect on specific local industries, and the experience, ability and depth of lending management and staff. These factors are essentially judgmental and may not be reduced to a mathematical formula. The ratio of the allowance for possible loan losses to total loans was 1.32% at September 30, 1996 compared to 1.37% at December 31, 1995. The Company provided an additional $427,000 during the first nine months of 1996 consistent with the growth in the loan portfolio. There were no loan charge-offs during the period. The Company evaluates the allowance for possible loan losses based upon an analysis of specific categories of loans. Management then considers the adequacy of the allowance for possible loan losses in relation to the total loan portfolio. Management believes that the allowance for loan losses at September 30, 1996 is adequate, based on information currently available. However, no prediction of the ultimate level of loan charge-offs in future periods can be made with any certainty. LIQUIDITY MANAGEMENT Liquidity represents the ability of the Company to meet the requirements of customer borrowing needs as well as fluctuations in deposit flows. Core deposits, which include demand, interest-bearing demand, savings, money market, and time certificates of deposit under $100,000, provide a relatively stable funding base. Core deposits represented 83% of total deposits at September 30, 1996 compared to 81% of total deposits at year-end 1995. The Company's principal sources of asset liquidity are cash and due from banks, federal funds sold, and unpledged available-for-sale investment securities. At September 30, 1996, these sources totaled $80,617,000 or 34.43% of total deposits compared to $80,032,000 or 40.90% at year-end 1995. In the opinion of management, there are sufficient resources to meet the liquidity needs of the Company at present and foreseeable future levels. Page 8 of 22 Pages INTEREST RATE SENSITIVITY The Company defines interest rate sensitivity as the measure of the relationship between market interest rates and net interest income due to repricing characteristics of assets, liabilities and off-balance sheet instruments. Generally, if assets and liabilities do not reprice at the same time and in equal volumes, the potential for exposure to interest rate fluctuations exists. In order to maximize the net yield on earning assets and maintain the interest rate spread during periods of fluctuating interest rates, management monitors the repricing period of interest earning assets as compared with interest bearing liabilities. The difference between the amount of assets and liabilities that reprice in any given time period is referred to as the interest rate sensitivity gap. While the Company attempts to manage its exposure to interest rate sensitivity, due to its size and direct competition from the major banks, it must offer products which are competitive in the market place, even if they are less than optimum with respect to the Bank's interest rate exposure. The following table sets forth the distribution of repricing opportunities of the Bank's earning assets and interest bearing liabilities as of September 30, 1996, the interest rate sensitivity gap (i.e., interest rate sensitive assets less interest rate sensitive liabilities), the cumulative interest rate gap, the interest rate gap (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative interest rate gap ratio. The table sets forth the time periods during which earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movement on the net interest margin since the repricing of various categories of assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such periods and at different rates. REPRICING PERIODS
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 $ 21,000 - - - - 21,000 AVAILABLE-FOR-SALE INV. 9,809 1,002 7,974 27,766 7,444 - 53,995 HELD-TO-MATURITY INV. - 851 - 540 4,994 - 6,385 OTHER INVESTMENTS - - - - 430 - 430 LOANS 134,400 10,527 2,190 7,272 7,612 568 162,569 LOAN LOSS/UNEARNED FEES - - - - - (2,708) (2,708) CASH AND DUE FROM BANKS - - - - - 11,622 11,622 OTHER ASSETS - - - - - 6,560 6,560 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $165,209 12,380 10,164 35,578 20,480 16,042 259,853 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE LIABILITIES AND EQUITY: DEPOSITS DEMAND $ - - - - - 43,045 43,045 INTEREST CHECKING 11,570 - - - - - 11,570 MMDA AND SAVINGS 131,378 - - - - - 131,378 TIME DEPOSITS > $100 MILLION - 35,578 3,449 100 - - 39,127 < $100 MILLION - 7,403 1,454 160 - 9,017 OTHER LIABILITIES - - - - - 1,683 1,683 SHAREHOLDERS' EQUITY - - - - - 24,033 24,033 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND EQUITY $ 142,948 42,981 4,903 260 - 68,761 259,853 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- GAP $ 22,261 (30,601) 5,261 35,318 20,480 (52,719) - CUMULATIVE GAP 22,261 (8,340) (3,079) 32,239 52,719 - - CUMULATIVE GAP/TOTAL ASSETS 8.57% (3.21%) (1.18%) 12.41% 20.29% - -
Page 9 of 22 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 22 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 September 30, 1996 and December 31, 1995. As indicated in the table, the Company's capital ratios significantly exceeded the minimum capital levels required by current federal regulations. Risk Based Capital Ratio (unaudited) September 30, 1996 December 31, 1995 ------------------ ------------------ Ratios (dollars in thousands) Amount Ratio Amount Ratio - -------------------------------------------------------------------------------- Tier 1 capital $ 24,033 11.69% $ 21,440 14.36% Tier 1 capital minimum requirement $ 8,237 4.00% $5,971 4.00% Total capital $ 26,173 12.73% $ 23,156 15.51% Total capital minimum requirement $ 16,475 8.00% $ 11,944 8.00% Total risk based assets $205,941 $149,296 Leverage Capital Ratio (unaudited) September 30, 1996 December 31, 1995 ------------------ ------------------ Ratios (dollars in thousands) Amount Ratio Amount Ratio - -------------------------------------------------------------------------------- Tier 1 capital to adjusted total assets $ 24,033 10.05% $ 21,440 9.76% Quarterly average total assets $239,159 $219,783 Page 11 of 22 Pages INFLATION The impact of inflation on a financial institution differs significantly from that exerted on manufacturing, or other commercial concerns, primarily because its assets and liabilities are largely monetary. In general, inflation primarily affects the Company indirectly through its effect on market rates of interest, and thus the ability of the Bank to attract loan customers. Inflation affects the growth of total assets by increasing the level of loan demand, and potentially adversely affects the Company's capital adequacy because loan growth in inflationary periods can increase at rates higher than the rate that capital grows through retention of earnings which the Company may generate in the future. In addition to its effects on interest rates, inflation directly affects the Company by increasing the Company's operating expenses. The effect of inflation upon the Company's results of operations was not material for the periods covered by this report. MERGER Mid-Peninsula Bancorp and Cupertino National Bancorp signed a Second Amended and Restated Agreement and Plan of Reorganization and Merger dated August 20, 1996 (the "Agreement"), whereby Cupertino National Bancorp will merge with and into Mid-Peninsula Bancorp and Mid-Peninsula Bancorp will change its name to Greater Bay Bancorp. Mid-Peninsula Bank and Cupertino National Bank & Trust will operate as wholly-owned subsidiaries of Greater Bay Bancorp and will focus on serving the greater Bay area, including the Peninsula and South Bay markets, through their seven office locations. The terms of the Agreement provide for Cupertino National Bancorp shareholders to receive .81522 of a share of Mid-Peninsula Bancorp common stock for each share of Cupertino National Bancorp common stock in a tax-free exchange to be accounted for as a "pooling-of-interests." As part of the Agreement, Mid-Peninsula listed its shares on the Nasdaq National Market, and, concurrent with closing, will be renamed Greater Bay Bancorp. Following the merger, the shareholders of Mid-Peninsula Bancorp will own approximately 51% of the combined company and the shareholders of Cupertino National Bancorp will own approximately 49% of the combined company, giving effect to all outstanding options. Greater Bay Bancorp's new Board of directors will consist of five directors from Mid-Peninsula Bancorp and five from Cupertino National Bancorp, with Duncan L. Matteson (Chairman of Mid-Peninsula Bancorp) and John M. Gatto (Chairman of Cupertino National Bancorp) serving as co-Chairmen. David L. Kalkbrenner, who will serve as President and Chief Executive Officer of Greater Bay Bancorp, will continue as President and Chief Executive Officer of Mid-Peninsula Bank, and C. Donald Allen will remain as Chairman and Chief Executive Officer of Cupertino National Bank & Trust. Steven C. Smith, the Chief Operating Officer of Cupertino National Bancorp, will serve as Chief Operating Officer and Chief Financial Officer of Greater Bay Bancorp. In connection with the Agreement, Mid-Peninsula Bancorp and Cupertino National Bancorp have granted each other options to purchase up to 19.0% of the outstanding shares of each other's common stock under certain circumstances in the event the transaction is terminated. The merger is expected to be completed in the fourth quarter of 1996, subject to shareholder and regulatory approvals. In a special shareholder meeting on October 30, 1996, shareholders' approved the merger of Mid-Peninsula Bank and Cupertino National Bank. With granted approval from the Federal Reserve, the merger is expected to close before December 31, 1996. Page 12 of 22 Pages RESULTS OF OPERATIONS Three months Ended September 30, 1996 Compared with the Three months Ended September 30, 1995 Net income of $802,000 for the three months ended September 30, 1996 increased $108,000 or 16% compared to the $694,000 earned for the same period ended September 30, 1995. The increase in net income for the period was primarily due to an increase in net interest income that was offset somewhat by the increases noted in the provision for possible loan losses and operating expenses aided by an increase in non-interest income. Net interest income for September 30, 1996 was $3,166,000, compared to $2,656,000 for the same period ended September 30, 1995, an increase of $510,000 or 19%. Net interest income depends primarily on the volume of interest-earning assets and interest-bearing liabilities in relation to the net interest spread (the difference between the yield earned on the Company's interest-earning assets and the interest rate paid on the Company's interest-bearing liabilities) as well as the relative balances of interest-earning assets and interest-bearing liabilities. The smaller the level of interest-earning assets when compared to the level of interest-bearing liabilities, the greater the interest rate spread must be in order to achieve positive net interest income. For the three months ended September 30, 1996, the Company had $245,010,000 of average interest-earning assets compared to $198,631,000 for the same period ended September 30, 1995, an increase of $46,379,000 or 23%. The Company's yield on interest-earning assets for the three months ended September 30, 1996 decreased to 8.55% compared to 8.89% during the comparable period in 1995. The decrease in earnings yield reflects the highly competitive nature of the Bank's market as well as declines in interest rates in the Federal funds and securities markets. Interest income increased $776,000 or 18% for the three months ended September 30, 1996 compared to the same 1995 period due to the increase in average interest-earning assets offset by the decline in earning asset yields. Average deposits for the Company for the three months ended September 30, 1996 were $235,151,000, a $44,013,000 or 23% increase compared to the quarter ended September 30, 1995. The Company's average cost of funds for the period ended September 30, 1996 was 4.06% which yielded a net spread of 4.49%. This compares to an average cost of funds of 4.16% and a net spread of 4.73% for the comparable 1995 period. Interest expense of $1,960,000 for the three months ended September 30, 1996 was $266,000 or 16% more than the comparable 1995 period. Net interest income for the period ended September 30, 1996 increased $510,000 or 19% to $3,166,000 and resulted from increased levels of earning assets. Page 13 of 22 Pages The following table presents, for the periods indicated, the Company's total dollar amount of interest income, on a tax equivalent basis, from average interest-earning assets and the resultant yields, as well as the interest expense of average interest-bearing liabilities and the resultant costs, expressed both in dollars and rates. The table also sets forth the net interest income and the net average earning balances for the periods indicated. AVERAGE BALANCE SHEET MID-PENINSULA BANCORP AND SUBSIDIARY Average Balance Sheet Three Months ended September 30 (unaudited)
(in thousands, except percentages) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Rate(1) Balance Interest Rate(1) - ----------------------------------------------------------------------------------------------------------------------------------- Assets: Loans $151,903 $3,804(2) 10.02% $115,841 $3,116(2) 10.76% Taxable investments 42,389 698 6.59% 47,046 727 6.18% Non-taxable investments 14,816 272 7.34% 9,125 195 8.55% Fed funds sold and other 35,902 463 5.16% 26,619 378 5.68% -------- -------- -------- -------- --------- ----- Total earning assets 245,010 $5,237 8.55% 198,631 $4,416 8.89% --------- Cash and due from banks 10,781 8,099 Premises and equipment, net 868 938 Other assets(3) 3,615 3,899 -------- -------- Total assets $260,274 $211,567 -------- -------- -------- -------- Liabilities and Shareholders' Equity: Deposits: Demand with interest $11,200 $ 53 1.89% $10,470 $ 49 1.87% Savings and money market 129,600 1,235 3.81% 106,255 1,061 3.99% Time deposits >$100,000 43,252 556 5.14% 38,689 486 5.02% Other time deposits 9.164 116 5.06% 7,447 98 5.26% -------- -------- -------- -------- --------- ----- Total interest-bearing deposits 193,216 1,960 4.06% 162,861 1,694 4.16% -------- --------- Non-interest deposits 41,935 28,277 Other liabilities 1,713 1,015 -------- -------- Total liabilities 236,863 192,153 Shareholders' equity 23,410 19,414 -------- -------- Total liabilities and equity $260,274 $211,567 -------- -------- -------- -------- Net interest spread 4.49% 4.73% Net interest income and margin $3,277 5.35% $2,722 5.48% - -----------------------------------------------------------------------------------------------------------------------------------
(1) Annualized. (2) Loan interest income includes fee income of $139,000 and $140,000 for the quarters ended September 30, 1996 and 1995, respectively. (3) Includes the average allowances for loan losses of $1,980,000 and $1,528,000 and average deferred loan fees of $487,000 and $346,000 for the quarters ended September 30, 1996 and 1995, respectively. The Company provided $207,000 to the allowance for possible loan losses for the three months ended September 30, 1996 compared to $70,000 for the comparable period in 1995. This increase to the allowance for possible loan losses was principally due to an increase of $14,000,000 in the loan portfolio during the quarter. There were no loan charge-offs for the three months ended September 30, 1996, compared to net recoveries of $22,000 in the three month period ending September 30, 1995. Page 14 of 22 Pages Non-interest income was $167,000 during the period ending September 30, 1996 compared to $150,000 during the comparable period in 1995 due primarily to increase in deposit-related service charges. Salaries and benefits expense for the three months ended September 30, 1996 was $1,008,000, a $126,000 or 14% increase over the comparable period in 1995. This increase includes normal cost of living increases and selective additions to staff to take advantage of a larger, more complex market area and service organization. Other non-interest expenses including occupancy expense were $576,000 for the period ended September 30, 1996 compared to $680,000 for the same period in 1995, a $104,000 or 15% decrease due primarily to the decrease in regulatory fees. Applicable income taxes of $618,000 for the three months ended September 30, 1996 were $137,000 or 28% higher than for the comparable 1995 period. The Company's effective tax rate for the three months ending September 30, 1996 was 44% compared to 41% for the comparable period in 1995. Page 15 of 22 Pages RESULTS OF OPERATIONS Nine months Ended September 30, 1996 Compared with the Nine months Ended September 30, 1995 Net income of $2,373,000 for the nine months ended September 30, 1996 increased $378,000 or 19% as compared to the $1,995,000 earned for the same period ended September 30, 1995. The increase in net income for the period was primarily due to an increase in net interest income that was higher than the increases noted in the provision for possible loan losses and operating expenses aided by an increase in non-interest income. Net interest income for the nine months ended September 30, 1996 was $8,878,000, compared to $7,691,000 for the same period ended September 30, 1995, an increase of $1,187,000 or 15%. Net interest income depends primarily on the volume of interest-earning assets and interest-bearing liabilities in relation to the net interest spread (the difference between the yield earned on the Company's interest-earning assets and the interest rate paid on the Company's interest-bearing liabilities) as well as the relative balances of interest-earning assets and interest-bearing liabilities. The smaller the level of interest-earning assets when compared to the level of interest-bearing liabilities, the greater the interest rate spread must be in order to achieve positive net interest income. For the nine months ended September 30, 1996, the Company had $224,728,000 of average interest-earning assets compared to $189,078,000 for the same period ended September 30, 1995, an increase of $35,650,000 or 19%. The Company's yield on interest-earning assets for the nine months ended September 30, 1996 decreased to 8.61% compared to 8.93% during the comparable period in 1995. The decrease in earnings yield reflects the highly competitive nature of the Bank's market as well as declines in interest rates in the Federal funds and securities markets. Interest income increased $1,760,000 or 14% for the nine months ended September 30, 1996 compared to the same 1995 period due to the increase in interest earning assets offset by the decline in earning asset yields. Average deposits for the Company for the nine months ended September 30, 1996 were $215,008,000, a $34,789,000 or 19% increase compared to the period ended September 30, 1995. The Company's average cost of funds for the period ended September 30, 1996 was 4.05% which yielded a net spread of 4.56%. This compares to an average cost of funds of 4.20% and a net spread of 4.73% for the comparable 1995 period. Interest expense of $5,380,000 for the nine months ended September 30, 1996 was $573,000 or 12% more than the comparable 1995 period. Net interest income for the period ended September 30, 1996 increased $1,187,000 or 15% to $8,878,000 and resulted from increased levels of earning assets. Page 16 of 22 Pages The following table presents, for the periods indicated, the Company's total dollar amount of interest income, on a tax equivalent basis, from average interest-earning assets and the resultant yields, as well as the interest expense of average interest-bearing liabilities and the resultant costs, expressed both in dollars and rates. The table also sets forth the net interest income and the net average earning balances for the periods indicated. AVERAGE BALANCE SHEET MID-PENINSULA BANCORP AND SUBSIDIARY Average Balance Sheet Nine Months ended September 30 (unaudited)
(in thousands, except percentages) 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Balance Interest Rate(1) Balance Interest Rate(1) - -------------------------------------------------------------------------------------------------------------------------------- Assets: Loans $142,373 $10,845(2) 10.16% $112,718 $9,097(2) 10.76% Taxable investments 39,076 1,732 5.91% 41,624 1,912 6.12% Non-taxable investments 12,965 771 7.93% 7,436 472 8.46% Fed funds sold and other 30,314 1,172 5.15% 27,300 1,177 5.75% -------- -------- ----- -------- ------- ------ Total earning assets 224,728 $14,520 8.61% 189,078 $12,658 8.93% ------- Cash and due from banks 10,149 7,682 Premises and equipment, net 895 929 Other assets(3) 3,387 2,301 -------- -------- Total assets $239,159 $199,990 -------- -------- -------- -------- Liabilities and Shareholders' Equity: Deposits: Demand with interest $11,358 $ 159 1.87% $ 10,698 $ 157 1.96% Savings and money market 116,518 3,310 3.79% 99,197 3,069 4.13% Time deposits > $100,000 40,380 1,569 5.18% 35,418 1,305 4.91% Other time deposits 8,892 342 5.13% 7,392 276 4.98% -------- -------- ----- -------- ------- ------ Total interest-bearing deposits 177,148 5,380 4.05% 152,705 4,807 4.20% -------- ------- Non-interest deposits 37,860 27,514 Other liabilities 1,590 1,027 -------- -------- Total liabilities 216,598 181,246 Shareholders' equity 22,561 18,744 -------- -------- Total liabilities and equity $239,159 $199,990 -------- -------- -------- -------- Net interest spread 4.56% 4.73% Net interest income and margin $9,140 5.42% $7,851 5.54% - --------------------------------------------------------------------------------------------------------------------------------
(1) Annualized. (2) Loan interest income includes fee income of $520,000 and $443,000 for nine months ended September 30, 1996 and 1995, respectively. (3) Includes the average allowances for loan losses of $1,873,000 and $1,528,000 and average deferred loan fees of $478,000 and $350,000 for the nine months ended September 30, 1996 and 1995, respectively. The Company provided $427,000 to the allowance for possible loan losses for the nine months ended September 31, 1996 compared to $225,000 for the comparable period in 1995. This addition to the allowance recognizes the increased size in the loan portfolio. Net charge-offs were $3,000 for the nine months ended September 30, 1996, compared to $22,000 in net recoveries in the nine month period ending September 30, 1995. Page 17 of 22 Pages Non-interest income was $543,000 during the period ending September 30, 1996 compared to $381,000 during the comparable period in 1995 due primarily to an increase in deposit-related service charges. Salaries and benefits expense for the nine months ended September 30, 1996 was $2,940,000, a $377,000 or 15% increase over the comparable period in 1995. This increase includes normal cost of living increases and selective additions to staff to take advantage of a larger, more complex market area and service organization. Other non-interest expenses including occupancy expense were $1,756,000 for the period ended September 30, 1996 compared to $1,972,000 for the same period in 1995, a $216,000 or 11% decrease due primarily to decrease in regulatory expense. Applicable income taxes of $1,706,000 for the nine months ended September 30, 1996 were $378,000 or 28% higher than for the comparable 1995 period. The Company's effective tax rate for the nine months ending September 30, 1996 was 42% compared to 40% for the comparable period in 1995. Page 18 of 22 Pages PART 11-OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matters to a vote of Security Holders None Item 5 - Other Materially Important Events None Item 6 - Exhibits and Reports on Form 8-K None Page 19 of 22 Pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MID-PENINSULA BANCORP November 7, 1996 By: /s/ David L. Kalkbrenner ----------------------------- David L. Kalkbrenner President and Chief Executive Officer (Principal Executive Officer) November 7, 1996 By: /s/ Carol H. Rowland ----------------------------- Carol H. Rowland First Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Page 20 of 22 Pages EXHIBIT INDEX SEQUENTIAL PAGE EXHIBIT NO: DESCRIPTION NUMBER - ----------- ----------- ------ 27.1 Financial Data Schedule 22 Page 21 of 22 Pages EX-27 2 EXHIBIT 27
9 1,000 9-MOS SEP-30-1996 SEP-30-1996 11,622 191,092 21,000 0 53,995 6,385 6,385 162,001 2,140 259,853 234,137 0 1,683 0 0 0 16,388 7,645 24,033 10,845 2,241 1,172 14,258 5,380 5,380 8,878 427 (219) 4,696 4,079 4,079 0 0 2,373 1.44 1.44 8.61 0 0 0 0 1,716 3 0 2,140 2,140 0 0
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