<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________ .
Commission file number 0-25034
GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0387041
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2860 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices) (Zip Code)
(415) 813-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] No
--- ---
Outstanding shares of Common Stock, no par value, as of May 9, 1997: 3,327,144
This report contains a total of 16 pages.
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GREATER BAY BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets as of
March 31, 1997 and December 31, 1996.................. 3
Consolidated Statements of Income
for the Three Months Ended
March 31, 1997 and 1996............................... 4
Consolidated Statements of Cash Flows
for the Three Months Ended
March 31, 1997 and 1996............................... 5
Notes to Interim Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................... 16
Signatures............................................ 16
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS March 31, December 31,
(dollars in thousands) 1997 1996
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 27,700 $ 39,896
Federal funds sold 41,300 14,000
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 69,000 53,896
Investment securities
Held to maturity (Market value $51,342 at March 31, 1997; 51,409 56,964
$58,745 at December 31, 1996)
Available for sale (Cost $37,562 at March 31, 1997;
$46,987 at December 31, 1996) 37,704 47,105
Other securities 1,545 1,451
- -----------------------------------------------------------------------------------------------------------------------
Total investment securities 90,658 105,520
Loans:
Commercial 266,036 257,042
Real estate-construction and land 93,677 78,278
Real estate-term 92,955 72,802
Consumer and other 38,662 42,702
Deferred loan fees and discounts (2,126) (1,952)
- -----------------------------------------------------------------------------------------------------------------------
Total Loans 489,204 448,872
Allowance for loan losses (9,066) (7,312)
- -----------------------------------------------------------------------------------------------------------------------
Net loans 480,138 441,560
Premises and equipment, net 3,754 3,831
Accrued interest receivable and other assets 21,526 17,237
- -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $665,076 $622,044
=======================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $114,587 $139,941
NOW 14,142 26,936
Money Market Demand Accounts 259,421 271,748
Savings 59,754 13,599
Other time certificates 45,327 38,889
Time certificates, $100 and over 85,823 68,170
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 579,054 559,283
Accrued interest payable and other liabilities 15,738 15,079
Subordinated debentures 3,000 3,000
Company obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely junior subordinated debentures 20,000 -
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 617,792 577,362
Shareholders' equity:
Preferred stock, no par value: 4,000,000 shares authorized; none issued - -
Common stock, no par value: 6,000,000 shares
authorized; shares outstanding: 3,301,209 at March 31, 1997
and 3,238,887 at December 31, 1996 35,679 34,884
Unrealized gain (loss) on available-for-sale securities, net of taxes 138 71
Retained earnings 11,467 9,727
- -----------------------------------------------------------------------------------------------------------------------
Total shareholder's equity 47,284 44,682
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $665,076 $622,044
=======================================================================================================================
See notes to consolidated financial statements
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Three Months Ended
March 31,
- -----------------------------------------------------------------------------------------------------------------------
1997 1996
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Interest on loans $11,253 $7,936
Interest on investment securities:
Taxable 1,284 1,499
Non-taxable 188 156
- -----------------------------------------------------------------------------------------------------------------------
Total Investment securities 1,472 1,655
Other interest income 356 373
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 13,081 9,964
INTEREST EXPENSE:
Interest on deposits 4,523 3,569
Other interest expense 292 103
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 4,815 3,672
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 8,266 6,292
PROVISION FOR LOAN LOSSES 1,948 320
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,318 5,972
OTHER INCOME:
Other loan fees 6 15
Trust Fees 454 309
Gain on sale of SBA loans 158 130
Depositor service fees 263 208
Investment gains (losses) (51) 13
Other 131 136
- -----------------------------------------------------------------------------------------------------------------------
Total other income 961 811
OPERATING EXPENSES:
Compensation and benefits 3,697 2,794
Occupancy and equipment 1,062 757
Professional services 350 272
FDIC insurance and regulatory assessments 41 27
Data Processing 65 81
Marketing 232 164
Client services 82 120
Other real estate, net 2 24
Other 607 452
- -----------------------------------------------------------------------------------------------------------------------
6,138 4,691
Legal settlement recovery (1,700) -
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,438 4,691
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 2,841 2,092
Income tax expense 1,102 842
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,739 $1,250
Net income per common and
common equivalent share $ 0.50 $ 0.39
- -----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three Months Ended
March 31,
---------------------------------------
1997 1996
(unaudited)
-------------- --------------
<S> <C> <C>
CASH FLOWS--OPERATING ACTIVITIES:
Net income $ 1,739 $ 1,250
Reconciliation of net income to net cash from operations:
Provision for loan losses 1,948 320
Depreciation and amortization 341 246
Accrued interest receivable and other assets (4,289) 75
Accrued interest payable and other liabilities 659 (370)
Net change in deferred loan fees and discounts 174 14
Proceeds from sales of loans held for sale - 2,515
Origination of loans held for sale - (2,515)
Loss(gain) on sale of securities 51 (13)
Net unrealized (gain) loss on securities (67) -
-------------- --------------
Operating cash flows, net 556 1,522
CASH FLOWS--INVESTING ACTIVITIES:
Maturities of investment securities:
Held-to-maturity 6,268 2,330
Available-for-sale 12,043 3,741
Purchase of investment securities:
Held-to-maturity (745) (2,019)
Available-for-sale (4,530) (322)
Net change in loans (40,500) (22,014)
Sale of AFS Securities 1,950 9,000
Principal payments on AFS Securities 7 16
Purchase of life insurance policies - (235)
Purchase of premises and equipment, net (315) (429)
Other, net - (48)
-------------- --------------
Investing cash flows, net (25,822) (9,980)
CASH FLOWS--FINANCING ACTIVITIES:
Net change in deposits 19,771 9,251
Net change in short-term borrowings (197) -
Proceeds from issuance of Trust Preferred Securities 20,000 -
Stock purchased by employees and stock options exercised 796 435
Cash dividends - (157)
-------------- --------------
Financing cash flows, net 40,370 9,529
-------------- --------------
Net increase in cash and cash equivalents 15,104 1,071
Cash and cash equivalents at beginning of period 53,896 58,111
-------------- --------------
Cash and cash equivalents at end of period $ 69,000 $ 59,182
============== ==============
CASH FLOWS--SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on deposits and other borrowings $ 4,844 $ 3,687
Income taxes - 597
Non-cash transactions:
Additions to other real estate owned 137 217
See notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
Greater Bay Bancorp (referred to as the "Company" when such reference includes
Greater Bay Bancorp and its subsidiaries, collectively, or "Greater Bay" when
referring only to the parent company) is a California corporation and bank
holding company that was incorporated on November 14, 1984 as San Mateo County
Bancorp. The name was changed to Mid-Peninsula Bancorp on October 7, 1994 as a
result of the merger between Mid-Peninsula Bancorp and Cupertino National
Bancorp. Upon consummation of the merger with Cupertino National Bancorp, the
Company became a multi-bank holding company with wholly owned bank subsidiaries,
Mid-Peninsula Bank ("MPB") and Cupertino National Bank & Trust ("CNB"),
collectively the "Banks". MPB commenced operations in October 1987 and is a
state chartered bank regulated by the Federal Reserve Bank (FRB) and the
California State Banking Department. CNB commenced operations in May 1985 and is
a national banking association regulated by the Office of the Comptroller of
Currency (OCC). The merger was accounted for as a pooling of interests.
Accordingly, all of the financial information for the Company for the periods
prior to the merger have been restated to reflect the pooling of interests as if
it occurred at the beginning of the earliest reporting period presented. The
accompanying unaudited consolidated financial statements include the accounts of
the Company. These financial statements reflect, in management's opinion, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the Company's financial position and the results of its
operations and cash flows for the periods presented. Certain amounts for prior
periods have been reclassified to conform to current period presentation. The
results for the three months ended March 31, 1997 are not necessarily indicative
of the results expected for any subsequent quarter or for the entire year ending
December 31, 1997. These financial statements should be read in conjunction with
the financial statements included in the 1996 Annual Report to Shareholders.
2. COMPANY OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF GBB CAPITAL I
On March 30, 1997, GBB Capital I (the "Trust"), a Delaware business trust
wholly-owned by Greater Bay completed a public offering of 800,000 shares of
9.75% cumulative trust preferred securities ("TPS"). The Trust used the proceeds
from the offering to purchase a like amount of 9.75% Junior Subordinated
Deferrable Interest Debentures (the "Debentures") of Greater Bay. The Debentures
are the sole assets of the Trust and are eliminated along with the related
income statement effects, in the consolidated financial statements. Greater Bay
invested approximately 58.5% of the proceeds in CNB and MPB to increase their
capital levels to support future growth. The remaining proceeds will be used for
general corporate purposes.
The TPS accrue and pay distributions quarterly at an annual rate of 9.75% of the
liquidation amount of $25 per TPS. Greater Bay has fully and unconditionally
guaranteed all of the obligations of the Trust.
The TPS are mandatory redeemable, in whole or in part, upon repayment of the
Debentures at the stated maturity or their earlier redemption. The Debentures
are redeemable prior to maturity (April 1, 2027) at the option of Greater Bay,
on or after April, 2002, in whole at any time or in part from time to time.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Ratios" for discussion of Tier I Capital.
6 of 16
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3. SHARE AND PER SHARE AMOUNTS
Earnings per common and common equivalent shares are calculated based upon the
weighted average number of shares outstanding during the period, plus equivalent
shares representing the effect of dilutive stock options. The number of shares
used to compute earnings per share were 3,525,609 and 3,215,616 for the three
months ended March 31, 1997 and 1996, respectively.
4. EARNINGS PER SHARE
Earnings per share are based on the weighted average shares of common stock
outstanding plus common equivalent shares using the treasury stock method. The
treasury stock method calculation assumes all dilutive common stock equivalent
are exercised and the funds generated by the exercise are used to buy back
outstanding common stock at the average market price during the reporting
period, for primary earnings per share, or at the end of period market price if
higher, for fully diluted earnings per share.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earning Per Share" (SFAS 128"). SFAS
128 is designed to improve the earnings per share ("EPS") information provided
in the financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements, and increasing the
comparability of EPS data on an international basis. SFAS 128 is effective for
financial statements issued for periods ending December 31, 1997, including
interim periods. The Company will implement SFAS 128 in its December 31, 1997
financial statements. The Company believes the impact of SFAS will not have a
material effect on its earnings per share calculation.
5. CASH DIVIDEND
The company paid a quarterly cash dividend of $.15 per share on April 21, 1997
to shareholders of record on April 7, 1997.
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GREATER BAY BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company reported net income for the first quarter of 1997 of $1.7 million or
$0.50 per common and common equivalent share, compared to net income of $1.3
million or $0.39 per common and common equivalent share, reported in the first
quarter of last year. Return on average assets annualized for the first quarters
of 1997 and 1996 were 1.10% and 1.03% respectively, while annualized return on
average common equity was 15.34% for the first quarter of 1997, compared with
12.30% for the first quarter of 1996.
Included in the first quarter of 1997 is a $1.7 million ($1.0 million net of
tax) recovery from the Company's insurance coverage related to the $1.7 million
($1.0 million net of tax) legal settlement charge that occurred in the second
quarter of 1995. The first quarter of 1997 also includes a provision for loan
losses of $1.95 million compared to $320,000 for the corresponding period in
1996. The higher provision in 1997 was due to the substantial increase in loans
outstanding and the corresponding increase in non-seasoned loans. The first
quarter of 1997 also includes $410,000 in nonrecurring charges. Excluding the
insurance recovery, higher loan loss provision and nonrecurring charges, net
core earnings for the first quarter of 1997 would have been $1.75 million.
Non performing assets (including nonaccrual loans, loans 90 days past due and
still accruing and other real estate owned ("OREO")) totaled $4.4 million at
March 31, 1997, an increase of $1.12 million from December 31, 1996, and an
increase of $828,000 from March 31, 1996. The ratio of nonperforming assets to
loans plus foreclosed properties was .90% at March 31, 1997, up from .73% at
December 31, 1996 and down from 1.15% at March 31, 1996. Classified assets
totaled $11.4 million, or 1.71% of total assets, at March 31, 1997, compared to
$9.4 million or 1.51% of total assets at December 31, 1996 and $12 million or
2.46% of total assets at March 31, 1996.
The reserve for loan losses was $9.1 million at March 31, 1997, compared with
$7.3 million at December 31, 1996 and $4.7 million at March 31, 1996. The
provision for loan losses was $1.95 million for the first quarter of 1997,
compared to $320,000 recorded in the first quarter of 1996 (see discussion
below). Net charge-offs were $207,000 for the first quarter of 1997 and there
were no charge-offs for the first quarter of 1996. The ratio of the reserve for
loan losses to nonperforming assets was 207% at March 31, 1997, compared with
224% at December 31, 1996 and 133% at March 31, 1996.
The loan loss provision for each year is dependent on many factors, including
loan growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. Specific allocations are made for loans
where the probability of a loss can be defined and reasonably determined, while
the balance of the provision for loan losses is based on historical data,
delinquency trends, economic conditions in the Company's market area and
industry averages. Annual fluctuations in the provision for loan losses result
from management's assessment of the adequacy of the allowance for loan losses.
Shareholders' equity increased $2.6 million to $47.3 million, or 7.11% of
assets, at March 31, 1997, from $44.7 million or 7.18% of assets at December 31,
1996. The increase was primarily due to net earnings and stock purchased by
directors and employees through stock option and stock purchase plans.
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The Company's Tier 1 and total risk-based capital ratios were 12.36% and 14.17%
at March 31, 1997, respectively, compared with 8.75% and 10.54% at December 31,
1996, respectively. The leverage ratio increased to 10.45% at March 31, 1997,
from 7.27% at December 31, 1996. At March 31, 1997, the Company's risk-based
capital and leverage ratios, as well as those of the Banks, exceeded the ratios
for a well-capitalized financial institution as defined in FDICIA under the
prompt corrective action regulations. The Company will seek to maintain its well
capitalized position to ensure flexibility in its operations.
GBB's common stock closed at $27.25 per share on March 31, 1997, representing
approximately 194% of the $14.02 book value per common share, compared with
$24.38 per share and 177% of the $13.80 book value per common share at December
31, 1996.
RESULTS OF OPERATIONS
NET INTEREST INCOME
The following table presents the Company's average balance sheet, net interest
income and the resultant yields for the quarterly periods presented:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Three Months Ended
March 31, 1997 December 31, 1996 March 31, 1996
----------------------------- ------------------------------ ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) (4) $469,038 $11,253 9.73% $416,435 $10,807 10.32% $301,636 $ 7,936 10.58%
Taxable investments 86,961 1,284 5.91% 94,825 1,556 6.56% 99,875 1,499 6.00%
Non-taxable investments (5) 11,128 252 9.04% 13,714 243 7.09% 12,091 209 6.91%
Federal funds sold 27,650 356 5.22% 44,719 585 5.20% 26,236 373 5.72%
-------- -------- ----- -------- ------- -------- --------- -------- --------
Total interest-earning assets 594,777 13,145 8.79% 569,693 13,191 9.21% 439,838 10,017 9.16%
Noninterest-earning assets 48,783 42,714 39,996
-------- -------- ---------
Total Assets $643,560 $612,407 $479,834
======== ======== =========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $286,124 2,977 4.22% $313,772 2,901 3.68% $237,323 2,236 3.79%
Savings deposits 36,676 174 1.93% 13,840 146 4.19% 16,103 138 3.45%
Time deposits 119,105 1,372 4.67% 108,523 1,423 5.22% 91,850 1,207 5.29%
-------- --------- ---- -------- ------- -------- --------- -------- --------
Total Deposits 441,905 4,523 4.15% 436,135 4,470 4.08% 345,276 3,581 4.17%
Borrowings 24,901 292 4.76% 10,817 198 7.27% 3,504 103 11.82%
-------- --------- ---- -------- ------- -------- --------- -------- --------
Total interest-bearing
liabilities 466,806 4,815 4.18% 446,952 4,668 4.15% 348,780 3,684 4.25%
-------- --------- ---- -------- ------- -------- --------- -------- --------
Noninterest-bearing deposits 127,264 115,802 87,486
Other noninterest-bearing liabilities 3,507 4,239 2,655
-------- ---------
Total noninterest-bearing liabilities 130,771 120,041 90,141
-------- -------- ---------
Shareholders' equity 45,983 45,414 40,913
-------- -------- ---------
Total liabilities and
shareholders' equity $643,560 $612,407 $479,834
======== ======== =========
Net interest income; Interest rate
spread $ 8,330 4.61% $ 8,523 5.06% $ 6,333 4.91%
======== ==== ======= ===== ======= =====
Net yield (3) $127,971 5.68% $122,741 5.95% $ 91,058 5.79%
======== ==== ======== ===== ========= =====
</TABLE>
(1) Average balances are computed using an average of the daily balances during
the period.
(2) Non-accrual loans are included in the average balance column; however, only
collected interest is included in the interest column.
(3) The net yield on noninterest-earning assets during the period equals net
interest income divided by average interest-earning assets for the period.
(4) Loan fees totaling $497,000, $616,000 and $510,000 are included in loan
interest income for the periods ended March 31, 1997, December 31, 1996 and
March 31, 1996, respectively.
(5) Tax exempt interest income includes $64,000, $83,000 and $53,000 for the
three month periods ending March 31, 1997, December 31, 1996, and March 31,
1996, respectively, to adjust to a fully taxable equivalent basis using the
Federal statutory rate of 34%.
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The following table presents the dollar amount of certain changes in interest
income and interest expense for each major component of interest-earning assets
and interest-bearing liabilities and the difference attributable to changes in
average rates and volumes for the quarterly periods indicated:
<TABLE>
<CAPTION>
Three months ended March 31, 1997 Three months ended March 31, 1997
compared with December 31, 1996 compared with March 31, 1996
favorable (unfavorable) favorable (unfavorable)
------------------------------------- ----------------------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
-------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income on loans $ 1,161 $ (715) $ 446 $ 4,025 $ (708) $ 3,317
Taxable investments (123) (149) (272) (192) (23) (215)
Non taxable investments (50) 59 9 (19) 60 43
Federal funds sold (231) 2 (229) 19 (36) (17)
-------- ------- -------- ------- ------- -------
Change in total interest income 757 (803) (46) 3,833 (707) 3,128
Interest expense on deposits
NOW and MMDA (29) 368 76 478 263 741
Savings deposits 141 (113) 28 118 (82) 36
Time deposits 119 (170) (51) 323 (158) 165
-------- ------- -------- ------- ------- -------
(32) 85 53 919 23 942
Interest expense on borrowings 182 (88) 94 252 (63) 189
-------- ------- -------- ------- ------- --------
Change in total interest expense 150 (3) 147 1,171 (40) 1,131
-------- ------- -------- ------- ------- --------
Increase (decrease) in net interest income $ 607 $ (800) $ (193) $ 2,662 $ (667) $ 1,997
======== ======= ======== ======= ======= ========
</TABLE>
(1) In the analysis, the change due to both the rate and volume have been
allocated proportionately.
The Company's net interest income for the first quarter of 1997 was $8.3
million, a $193,000 decrease over the fourth quarter of 1996. When compared to
the fourth quarter of 1996, average earning assets increased by $25.1 million,
while the net yield on average earning assets decreased from 5.95% in the fourth
quarter of 1996 to 5.68% in the first quarter of 1997. This was mainly due to an
increase in the average rates paid on interest-bearing liabilities.
Compared to the first quarter of 1996, average earning assets during the first
quarter of 1997 increased by $154.9 million. Average loans in the first quarter
of 1997 increased by $167.4 million, 55.9% over the first quarter of 1996. This
was due to increased loan demand compared to the previous year's first quarter.
The Company's average interest-bearing deposits grew $96.6 million and
non-interest bearing deposits grew by $39.7 million compared to the first
quarter of 1996.
The Company provides client services to several of its noninterest-bearing
demand deposit customers. The amount of credit available to clients is based on
a calculation of their average noninterest-bearing deposit balance, adjusted for
float and reserves, multiplied by an earnings credit rate, generally the average
of the month's 90 day T-Bill rate. The credit can be utilized to pay for
services including messenger service, account reconciliation and other similar
services. If the cost of the services provided exceeds the available credit, the
customer is charged for the difference.
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The impact of this expense on the Company's net interest spread and net yield on
interest-earning assets was as follows:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
March 31, December 31, March 31,
(Dollars in thousands) 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average noninterest-bearing demand deposits $126,980 $115,802 $87,486
Client Service expense 82 90 120
Client Service cost annualized 0.26% 0.31% 0.55%
Impact on Net Yield
- -------------------
Yield on interest-earning assets 5.68% 5.95% 5.79%
Impact of client services (0.10) (0.11) (0.15)
------ ------ ------
Adjusted net yield (1) 5.58% 5.84% 5.64%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Noninterest-bearing liabilities are included in cost of funds calculation
to determine adjusted spread.
The negative impact on the net yield on interest earning assets is caused by
off-setting net interest income by the cost of client service expenses, which
reduces the yield on interest-earning assets. The cost for client service
expense has decreased in 1997 due to decreased volume of activity in services to
noninterest-bearing demand deposit clients.
INTEREST RATE SENSITIVITY
Interest rate risk sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. Interest rate risk management
focuses on the maturity structure of assets and liabilities and their repricing
characteristics during periods of changes in market interest rates. Effective
interest rate risk management seeks to ensure that both assets and liabilities
respond to changes in interest rates within an acceptable time frame, thereby
minimizing the effect of interest rate movements on net interest income.
Interest rate sensitivity is measured as the difference between the volumes of
assets and liabilities in the Company's current portfolio that are subject to
repricing at various time horizons: one day or immediate, two days to six
months, seven to twelve months, one to three years, three to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps. The following table shows interest sensitivity gaps for
different intervals as of March 31, 1997.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY
ANALYSIS
Repricing Periods
More than More than More Total
Immediate 2 Days To Months 1 Year 3 Yrs than Total Rate Non-rate
(Dollars in thousands) One Day 6 Months 7-12 to 3 Yrs to 5 Yrs 5 Yrs Sensitive Sensitive Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ - $ - $ - $ - $ - $ - $ - $ 27,700 $ 27,700
Short term investments 41,300 - - - - - 41,300 - 41,300
Investment securities 195 5,504 5,986 8,556 30,016 38,856 89,113 1,545 90,658
Loans 383,767 9,684 10,373 15,370 8,086 59,500 486,780 4,550 491,330
Loan loss/unearned fees - - - - - - - (11,192) (11,192)
Other assets - - - - - - - 25,280 25,280
-------- -------- --------- ------- ------- -------- -------- --------- --------
Total assets $425,262 $ 15,188 $ 16,359 $23,926 $38,102 $ 98,356 $617,193 $ 47,883 $665,076
======== ======== ========= ======= ======= ======== ======== ========= ========
Liabilities and Equity:
Deposits
Demand $ - $ - $ - $ - $ - $ - $ - $ 114,586 $114,586
NOW, MMDA, and savings 333,317 - - - - - 333,317 - 333,317
Time deposits - 116,229 13,793 788 281 60 131,151 - 131,151
Subordinated debt 3,000 - - - - - - 3,000 3,000
Trust preferred securities - - - - - - - 20,000 20,000
Other liabilities 11,803 - - - - - 11,803 3,935 15,738
Shareholders' equity - - - - - - - 47,284 47,284
-------- --------- --------- ------ ------- -------- -------- --------- --------
Total liabilities and equity $348,120 $ 116,229 $ 13,793 $ 788 $20,281 $ 60 $499,271 $188,805 $665,076
======== ========= ========= ====== ======= ======== ======== ========= ========
Gap $ 77,142 $(101,041) $ 2,566 $23,138 $37,821 $ 98,296 $140,922 $(140,922) $ (0)
Cumulative Gap $ 77,142 $ (23,899) $ (18,333) $ 4,805 $42,626 $140,922 $ 60,535 $ (80,387) $(80,387)
Cumulative Gap/total assets 28.33% (8.78)% (6.73)% 1.76% 15.65% 51.75% 22.23% (30)% (0)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11 of 16
<PAGE>
NON-INTEREST INCOME
The following table provides details of non-interest income for the previous
five quarters:
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1997 1996 1996 1996 1996
------------------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Loan fees $ 6 $ 24 $ 59 $ 34 $ 15
Trust fees 454 397 375 344 309
Gain on sale of SBA loans 158 144 122 123 130
Depositor service fees 263 265 275 277 208
Investment gains (losses) (51) (44) (122) (110) 13
Other 131 158 163 236 136
------------------ ----------------- ----------------- ----------------- -----------------
Total other income $961 $944 $ 872 $ 904 $811
================== ================= ================= ================= =================
</TABLE>
Non-interest income was $961,000 for the first quarter of 1997, an increase of
$17,000 from the fourth quarter of 1996, and an increase of $150,000 from the
first quarter of 1996. The increase in the 1997 quarter from the fourth quarter
of 1996 and from the third quarter of 1996 was primarily due to an increase in
trust fee income and SBA fees resulting from increased activity.
NON-INTEREST EXPENSE
The following table provides details of non-interest expense for the previous
five quarters:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1997 1996 1996 1996 1996
------------ ----------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $3,697 $3,269 $2,982 $2,976 $2,794
Occupancy and equipment 1,062 1,021 846 777 757
Professional services 350 457 264 296 272
Marketing 232 252 184 153 164
Director fees 51 59 57 62 45
FDIC insurance and assessments 41 26 22 27 27
Supplies, telephone and postage 240 187 209 208 183
Client services 82 90 105 95 120
Other real estate, net 2 - 5 6 24
Other 381 658 654 472 305
------------ ----------------- ----------------- -------------- --------------
6,138 6,019 5,328 5,072 4,691
Legal settlement recovery (1,700) - - - -
------------ ----------------- ----------------- -------------- --------------
Total operating expenses $4,438 $6,019 $5,328 $5,072 $4,691
============ ================= ================= ============== ==============
</TABLE>
Non-interest expenses, excluding legal settlement recovery, were $6.1 million
for the first quarter of 1997, an increase of $119,000 from the fourth quarter
of 1996, and an increase of $1.45 million from the first quarter of 1996.
The increase in non-interest expenses are mainly attributable to the significant
growth that has occurred from the first quarter of 1996 to the first quarter of
1997 and the corresponding increase in employees.
The legal settlement recovery is attributed to the $1.70 million ($1.0 million
net of tax) recovery from the Company's insurance coverage related to the $1.70
million ($1.0 million net of tax) legal settlement charge that occurred in the
second quarter of 1995.
12 of 16
<PAGE>
INCOME TAXES
The provision for income taxes for the first quarter of 1997 of $1.1 million
reflects an effective tax rate for the quarter of approximately 39%, compared to
a tax provision recorded for the first quarter of 1996 of $842,000 with an
effective tax rate of 40%.
FINANCIAL CONDITION
CAPITAL RATIOS
The Company's and the Bank's total risk-based capital and leverage ratios were
as follows:
<TABLE>
<CAPTION>
March 31, 1997
-----------------------------------------------------------------------
Tier 1 Capital to Tier 1 Capital to Total 1 Capital to
Average Risk-weighted Risk-weighted
Quarterly Assets Assets Assets
---------------------- -------------------- -----------------------
Balance % Balance % Balance %
<S> <C> <C> <C> <C> <C> <C>
(Dollar in thousands)
Greater Bay Bancorp $67,281 10.45% $67,281 12.36% $77,113 14.17%
Well capitalized requirement $32,178 5.00% $32,659 6.00% $54,432 10.00%
------- ----- ------- ------ ------- ------
Excess capital $35,103 5.45% $34,622 6.36% $22,681 4.17%
======= ====== ======= ====== ======= ======
Mid-Peninsula Bank $28,544 9.64% $28,544 11.61% $31,344 12.75%
Well capitalized requirement $14,810 5.00% $14,754 6.00% $24,590 10.00%
------- ----- ------- ------ ------- ------
Excess capital $13,734 4.64% $13,790 5.61% $ 6,754 2.75%
======= ====== ======= ====== ======= ======
Cupertino National Bank $29,296 8.44% $29,296 9.83% $36,055 12.09%
Well capitalized requirement $17,357 5.00% $17,889 6.00% $29,815 10.00%
------- ----- ------- ------ ------- ------
Excess capital $11,939 3.44% $11,407 3.83% $ 6,240 2.09%
======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------
Tier 1 Capital to Tier 1 Capital to Total 1 Capital to
Average Risk-weighted Risk-weighted
Quarterly Assets Assets Assets
---------------------- -------------------- -----------------------
Balance % Balance % Balance %
<S> <C> <C> <C> <C> <C> <C>
(Dollar in thousands)
Greater Bay Bancorp $44,530 7.27% $44,530 8.75% $53,638 10.54%
Well capitalized requirement $30,620 5.00% $30,540 6.00% $50,901 10.00%
------- ----- ------- ------ ------- ------
Excess capital $13,910 2.27% $13,990 2.75% $ 2,738 0.54%
======= ====== ======= ====== ======= ======
Mid-Peninsula Bank $22,810 8.23% $22,810 9.94% $25,415 11.07%
Well capitalized requirement $13,853 5.00% $13,769 6.00% $22,949 10.00%
------- ----- ------- ------ ------- ------
Excess capital $ 8,957 3.23% $ 9,041 3.94% $ 2,466 1.07%
======= ====== ======= ====== ======= ======
Cupertino National Bank $21,515 6.42% $21,515 7.70% $28,022 10.03%
Well capitalized requirement $16,765 5.00% $16,759 6.00% $27,932 10.00%
------- ----- ------- ------ ------- ------
Excess capital $ 4,750 1.42% $ 4,756 1.70% $ 90 0.03%
======= ====== ======= ====== ======= ======
</TABLE>
The Company and its Subsidiaries seek to maintain capital ratios at levels that
will maintain their status as a well-capitalized financial institution.
On October 21, 1996, the Federal Reserve announced that certain qualifying
amounts of cumulative preferred securities having the characteristics of the
Trust Preferred Securities could be included as Tier 1 capital. Accordingly, the
Company's Tier 1 and total risk-based capital ratios include the $20 million
Trust Preferred Securities.
LIQUIDITY AND CASH FLOW
The objective of liquidity management is to maintain each Bank's ability to meet
the day-to-day cash flow requirements of its clients who either wish to withdraw
funds or require funds to meet their credit needs. The Company must manage its
liquidity position to allow the banks to meet the needs of their clients, while
maintaining an appropriate balance between assets and liabilities to meet the
return on investment requirements of its shareholders. The Company monitors the
sources and uses of funds on a daily basis to maintain an acceptable liquidity
position. In addition to liquidity from core deposits and repayments and
maturities of loans and investments, the Banks utilize brokered deposit lines,
sell securities under agreements to repurchase and borrow overnight federal
funds. The Company maintains $50 million in inter-bank Fed Fund purchase lines,
as well as $221 million in institutional deposit or brokered deposit lines, and
$40 million in reverse repurchase lines. All sources combined provide a solid
liquidity base for growth. As of March 31, 1997, the Company had $19.6 million
in institutional deposits outstanding and no outstanding federal funds
purchased.
13 of 16
<PAGE>
PROVISION AND RESERVE FOR LOAN LOSSES
The following schedule details the activity in the Company's reserve for loan
losses and related ratios for each of the last five quarters:
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1997 1996 1996 1996 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for loan losses at
beginning of period $ 7,312 $ 5,591 $ 4,976 $ 4,743 $ 4,399
Provision charged to operations 1,948 1,545 606 365 320
Loans charged off (207) (56) (74) (168) -
Loan recoveries 13 232 83 36 24
------- ------- ------- ------- -------
Reserve for loan losses at
end of period $ 9,066 $ 7,312 $ 5,591 $ 4,976 $ 4,743
======= ======= ======= ======= =======
Ratio of:
Reserve for loan losses to loans 1.85% 1.63% 1.45% 1.49% 1.53%
Reserve for loan losses to
nonperforming assets 206.61% 224.02% 177.89% 131.40% 133.23%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses was $1.95 million in the first quarter of 1997, an
increase of $403,000 from the $1.55 million in the fourth quarter of 1996, and a
significant increase from the $320,000 in the first quarter of 1996.
Management considers changes in the size and character of the loan portfolio,
changes in nonperforming and past due loans, historical loan loss experience,
and the existing and prospective economic conditions when determining the
adequacy of the loan loss reserve. The reserve for loan losses was $9.1 million
at March 31, 1997, compared with $4.7 million at March 31, 1996.
The ratio of the reserve for loan losses to total loans was 1.85% at March 31,
1997, compared with 1.63% at December 31, 1996, and 1.53% at March 31, 1996. The
ratio of the reserve for loan losses to total nonperforming assets, including
foreclosed real estate, was 206.6% at March 31, 1997, compared to 224.0% at
December 31, 1996 and 133.2% at March 31, 1996.
NON-ACCRUING LOANS, RESTRUCTURED LOANS, ACCRUING LOANS PAST DUE 90 DAYS OR MORE
AND FORECLOSED PROPERTIES
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1997 1996 1996 1996 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans $3,166 $1,875 $2,457 $2,214 $2,325
Restructuring loans - - - - -
Accruing loans past due 90 days or more 933 1,237 686 1,356 1,018
------ ------ ------ ------- ------
Total nonperforming loans 4,099 3,112 3,143 3,570 3,343
OREO 289 152 - 217 217
------ ------ ------ ------- ------
Total nonperforming assets $4,388 $3,264 $3,143 $3,787 $3,560
====== ====== ====== ====== ======
Total nonperforming assets to total assets 0.66% 0.52% 0.54% 0.72% 0.73%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
14 of 16
<PAGE>
Total nonperforming assets were $4.4 million at March 31, 1997, compared with
$3.3 million at December 31, 1996, and $3.6 million at March 31, 1996.
Nonperforming loans, which includes non-accruing loans, restructured loans, and
accruing loans which are past due 90 days or more, were $4.1 million at March
31, 1997, compared with $3.1 million at December 31, 1996, and $3.3 million at
March 31, 1996.
Accruing loans past due 90 days or more, which are well secured and in the
process of collection, were $933,000 at March 31, 1997, compared with $1.2
million at December 31, 1996, and $1.0 million at March 31, 1996. It is the
Company's policy to discontinue the accrual of interest when the ability of a
borrower to repay principal or interest is in doubt, or when a loan is past due
90 days or more, except when, in management's judgment, the loan is well secured
and in the process of collection.
Total classified assets increased to $11.4 million at March 31, 1997, from $9.4
million at December 31, 1996. The $2.0 million increase is primarily due to an
increase in classified technology loans. The Company has focused strategically
on technology loans through the Venture Lending department, and the volume of
this type of loan has increased significantly. As of March 31, 1997, the Company
had three foreclosed properties for $289,000, compared with $152,000 at December
31, 1996, and $217,000 at March 31, 1996.
The Company has an active credit administration function which includes, in
addition to internal reviews, the regular use of an outside loan review firm to
review the quality of the loan portfolio. Senior management and an internal
asset review committee review problem loans on a regular basis.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly from
that exerted on industrial concerns, primarily because its assets and
liabilities consist largely of monetary items. The most direct effect of
inflation on a financial institution is fluctuation in interest rates. However,
net interest income is affected by the spread between interest rates received on
assets and those paid on interest bearing liabilities, rather than the absolute
level of interest rates. Additionally, there may be some upward pressure on the
Company's operating expenses, such as increases in occupancy expenses based on
consumer price indices. In the opinion of management, inflation has not had a
material effect on the operating results of the Company.
15 of 16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Report.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K for the quarter covered by this report - On March 7,
1997, the Company filed a form 8-K covering the announcement that (a) the merger
between Cupertino National Bancorp and Mid-Peninsula Bancorp was consummated,
(b) Mid-Peninsula, as the surviving corporation changed its name to Greater Bay
Bancorp, and (c) Cupertino National Bancorp's corporate existence ceased.
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREATER BAY BANCORP
(REGISTRANT)
BY:
/S/ STEVEN C. SMITH
- --------------------------------
STEVEN C. SMITH
EXECUTIVE VICE PRESIDENT,
CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER
DATE: May 14, 1997
16 of 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 27,700
<INT-BEARING-DEPOSITS> 464,467
<FED-FUNDS-SOLD> 41,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,249
<INVESTMENTS-CARRYING> 51,409
<INVESTMENTS-MARKET> 51,342
<LOANS> 489,204
<ALLOWANCE> 9,066
<TOTAL-ASSETS> 665,076
<DEPOSITS> 579,054
<SHORT-TERM> 0
<LIABILITIES-OTHER> 15,738
<LONG-TERM> 23,000
35,679
0
<COMMON> 0
<OTHER-SE> 11,605
<TOTAL-LIABILITIES-AND-EQUITY> 665,076
<INTEREST-LOAN> 11,253
<INTEREST-INVEST> 1,472
<INTEREST-OTHER> 356
<INTEREST-TOTAL> 13,081
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 4,815
<INTEREST-INCOME-NET> 8,266
<LOAN-LOSSES> 1,948
<SECURITIES-GAINS> (51)
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 2,841
<INCOME-PRE-EXTRAORDINARY> 2,841
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,739
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
<YIELD-ACTUAL> 5.68
<LOANS-NON> 3,166
<LOANS-PAST> 933
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,312
<CHARGE-OFFS> 207
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 9,066
<ALLOWANCE-DOMESTIC> 9,066
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,126
</TABLE>
