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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 1997:
3,328,450
This report contains a total of 24 pages.
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GREATER BAY BANCORP
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996.................... 3
Consolidated Statements of Income
for the Three Months and Six Months Ended
June 30, 1997 and 1996................................. 4
Consolidated Statements of Cash Flows
for the Three Months and Six Months Ended
June 30, 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....................... 23
Signatures............................................. 24
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
GREATER BAY BANCORP AND SUBSIDIARIES June 30, December 31,
CONSOLIDATED BALANCE SHEETS 1997 1996
-----------------------
(Dollars in thousands) (Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks ..................................................... $ 33,428 $ 39,896
Federal funds sold .......................................................... 42,200 14,000
--------- ---------
Cash and cash equivalents .............................................. 75,628 53,896
Investment securities:
Held to maturity (Market value $48,072 at June 30, 1997;
$57,294 at December 31, 1996) ...................................... 47,111 56,965
Available for sale (Amortized cost $53,977 at June 30, 1997;
$46,987 at December 31, 1996) ..................................... 54,169 47,104
Other securities ....................................................... 2,115 1,451
--------- ---------
Total investment securities ....................................... 103,395 105,520
Loans:
Commercial ............................................................. 282,159 257,042
Real estate-construction ............................................... 100,422 78,278
Real estate-other ...................................................... 99,509 72,802
Consumer and other ..................................................... 44,908 42,702
Deferred loan fees and discounts ....................................... (2,257) (1,952)
--------- ---------
Total Loans ............................................................ 524,741 448,872
Allowance for loan losses .............................................. (10,895) (7,312)
--------- ---------
Net Loans .............................................................. 513,846 441,560
Premises and equipment, net ................................................. 4,799 4,688
Accrued interest receivable and other assets ................................ 21,383 16,380
--------- ---------
TOTAL ASSETS ................................................................ $ 719,051 $ 622,044
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing ............................................ $ 135,797 $ 139,940
NOW .................................................................... 31,272 26,936
Money Market Demand Accounts ........................................... 287,427 271,749
Savings ................................................................ 46,997 13,599
Other time certificates ................................................ 36,110 38,889
Time certificates, $100 and over ....................................... 102,134 68,170
--------- ---------
Total deposits .................................................... 639,737 559,283
Accrued interest payable and other liabilities .............................. 7,818 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 ........................................................... 670,555 577,362
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: 3,328,450 at June 30, 1997
and 3,238,887 at December 31, 1996 ................................. 35,957 34,884
Unrealized gain on available-for-sale securities, net of taxes ......... 112 71
Retained earnings ...................................................... 12,427 9,727
--------- ---------
Total shareholders' equity .................................................. 48,496 44,682
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................. $ 719,051 $ 622,044
========= =========
See notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------
</TABLE>
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GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------------
1997 1996 1997 1996
---------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Interest on loans ....................... $ 13,051 $ 8,318 $ 24,304 $ 16,253
Interest on investment securities:
Taxable .............................. 1,425 1,336 2,709 2,836
Non-taxable .......................... 197 138 385 294
-------- -------- -------- --------
Total investment securities .......... 1,622 1,474 3,094 3,130
Other interest income ................... 714 575 1,070 948
-------- -------- -------- --------
Total interest income ............... 15,387 10,367 28,468 20,331
Interest expense:
Interest on deposits .................... 5,322 3,600 9,846 7,168
Other interest expense .................. 764 87 1,056 191
-------- -------- -------- --------
Total interest expense .............. 6,086 3,687 10,902 7,359
-------- -------- -------- --------
Net interest income ............. 9,301 6,680 17,566 12,972
Provision for loan losses ............... 2,130 365 4,078 685
-------- -------- -------- --------
Net interest income after provision
for loan losses ..................... 7,171 6,315 13,488 12,287
Other income:
Trust fees .............................. 481 344 935 653
Gain on sale of SBA loans ............... 181 123 339 253
Depositor service fees .................. 180 277 443 506
Other loan fees ......................... 16 34 22 49
Investment gains (losses) ............... 2 (110) (49) (97)
Other ................................... 254 236 385 351
-------- -------- -------- --------
Sub-total other income ............. 1,114 904 2,075 1,715
Warrant income .......................... 1,115 -- 1,115 --
-------- -------- -------- --------
Total other income ................. 2,229 904 3,190 1,715
Operating expenses:
Compensation and benefits ............... 3,632 2,976 7,329 5,630
Occupancy and equipment ................. 1,040 777 2,102 1,534
Professional services ................... 362 334 712 606
Marketing ............................... 232 187 464 349
Client services ......................... 72 95 154 215
FDIC insurance and regulatory assessments 60 27 101 54
Data Processing ......................... 53 65 118 146
Other real estate, net .................. 3 6 5 30
Other ................................... 815 605 1,421 1,199
-------- -------- -------- --------
Sub-total operating expenses ........ 6,269 5,072 12,406 9,763
Legal settlement recovery ............... -- -- (1,700) --
-------- -------- -------- --------
Total operating expenses ............ 6,269 5,072 10,706 9,763
-------- -------- -------- --------
Income before income tax expense ............ 3,131 2,147 5,972 4,239
Income tax expense ...................... 1,180 839 2,282 1,681
-------- -------- -------- --------
Net income ................................. $ 1,951 $ 1,308 $ 3,690 $ 2,558
======== ======== ======== ========
Net income per common and
common equivalent share ................ $ 0.55 $ 0.40 $ 1.05 $ 0.78
======== ======== ======== ========
See notes to consolidated financial statement.
- ---------------------------------------------------------------------------------------------------
</TABLE>
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GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Operating Activities:
Net income .................................................. $ 3,690 $ 2,558
Reconciliation of net income to net cash from operations:
Provision for loan losses ............................. 4,078 685
Depreciation and amortization ......................... 429 416
Accrued interest receivable and other assets .......... (3,224) (1,462)
Accrued interest payable and other liabilities ........ 4,739 (180)
Net change in deferred loan fees ...................... 350 70
Stock dividends on other securities ................... (24) (48)
Accrued deferred income taxes ......................... (1,639) (148)
Loss on sale of securities ............................ 49 97
-------- --------
Cash provided by operating activities ............. 8,448 1,988
Investing Activities:
Maturities and principle reductions on investment securities:
Held-to-maturity ...................................... 12,379 8,293
Available-for-sale .................................... 25,009 18,570
Purchase of investment securities:
Held-to-maturity ...................................... (2,472) (4,534)
Available-for-sale .................................... (34,554) (11,366)
Net change in loans ......................................... (76,887) 44,858
Sale of available-for-sale securities ....................... 1,948 5,490
Purchase of life insurance policies ......................... -- (297)
Purchase of premises and equipment, net ..................... (676) (1,894)
-------- --------
Cash used in investing activities ..................... (75,253) 30,596
Financing Activities:
Net change in deposits ...................................... 80,454 45,571
Net change in short-term borrowings ......................... (12,000) --
Proceeds from issuance of Trust Preferred Securities ........ 20,000 --
Stock purchased by employees and stock options exercised .... 1,077 1,596
Cash dividends .............................................. (994) (827)
-------- --------
Cash provided by financing activities .................. 88,537 46,340
-------- --------
Net increase in cash and cash equivalents ....................... 21,732 17,732
Cash and cash equivalents at beginning of period ................ 53,896 58,111
-------- --------
Cash and cash equivalents at end of period ...................... $ 75,628 $ 75,843
======== ========
Cash Flows--Supplemental Disclosures:
Cash paid during the period for:
Interest on deposits and other borrowings ............... $ 5,621 $ 7,612
Income taxes ............................................ 3,300 1,630
Non-cash transactions:
Additions to other real estate owned .................... 173 217
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------
</TABLE>
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GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 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 San Mateo County Bancorp and Mid-Peninsula Bancorp.
Subsequently, the name was changed to Greater Bay Bancorp on November 27, 1996,
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 mergers were 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 of operations for the quarter and year-to-date periods ended June 30,
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. CONSOLIDATION AND BASIS OF PRESENTATION
The consolidation financial statements include the accounts of GBB and its
wholly-owned subsidiaries, CNB and MPB. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior years' consolidation financial statements to conform to the
1996 presentation. The accounting and reporting policies of the Company conform
to generally accepted accounting principles and to prevailing practices within
the banking industry.
3. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities at the date of the
financial statements and the reported amounts of certain revenues and expenses
during the reporting period. Actual results could differ from those estimates.
4. 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
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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 share. 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 Resources" for discussion of Tier I Capital.
5. 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 3,555,992 and 3,262,295 for the three
months ended June 30, 1997 and 1996, respectively. The number of shares used to
compute earnings per share were 3,526,140 and 3,267,000 for the six months ended
June 30, 1997 and 1996, respectively.
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 after December 15, 1997,
including interim periods. Earlier application is not permitted. The Company
will implement SFAS 128 in its December 31, 1997 financial statements. The
Company believes the impact of SFAS 128 will not have a material effect on its
earnings per share calculation.
6. 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 and a quarterly cash dividend of $.15
per share on July 15, 1997 to shareholders of record on June 30, 1997.
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GREATER BAY BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company was formed as a result of a merger between Cupertino National
Bancorp, the holding company for CNB, and Mid-Peninsula Bancorp, the holding
company for MPB. The merger, which has been accounted for as a pooling of
interests, was consummated in late November 1996. All of the financial
information of the Company for the periods prior to the merger has been restated
as if it occurred at the beginning of the earliest reporting periods presented.
The following discussion and analysis is intended to provide greater details of
the results of operations and financial condition of the Company. The following
discussion should be read in conjunction with the information in the Company's
consolidated financial statements and notes thereto and other financial data
included elsewhere herein. Certain statements under this caption constitute
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, and as such, may involve risks and uncertainties. The Company's
actual results, performance and achievements may differ materially from the
results, performance and achievements expressed or implied in such forward-
looking statements Factors that might cause such a difference include, but are
not limited to, economic conditions, competition in the geographic and business
areas in which the Company conducts its operations, fluctuations in interest
rates, credit quality and governmental regulation.
OVERVIEW
The Company reported net income for the second quarter of 1997 of $1.95 million
or $0.55 per common and common equivalent share, compared to net income of $1.3
million or $0.40 per common and common equivalent share, reported in the second
quarter of last year. Return on average assets annualized for the second
quarters of 1997 and 1996 were 1.11% and 1.04% respectively, while the
annualized return on average common equity was 16.30% for the second quarter of
1997, compared with 12.48% for the second quarter of 1996.
The earnings for the second quarter of 1997 includes $1.1 million in warrant
income resulting from the exercise of warrants and sale of the underlying shares
of common stock in two of the clients of the Banks. The Company occasionally
receives warrants to acquire common stock from companies that are in the start-
up or development phase. The timing and amount of income derived from the
exercise and sale of client warrants typically depend upon factors beyond the
control of the Company, and cannot be predicted with any degree of accuracy and
are likely to vary materially from period to period.
For the six months ended June 30, 1997, the Company reported net income of $3.7
million, or $1.05 per common and common equivalent share, compared to net
income of $2.6 million, or $0.78 per common and common equivalent share for the
comparable period in 1996. The annualized return on average assets and return
on average equity for the first six months of 1997 were 1.12% and 15.64%,
respectively.
Non performing assets (including nonaccrual loans, loans 90 days past due and
still accruing and other real estate owned ("OREO")) totaled $3.5 million at
June 30, 1997, an increase of $233,000 from December 31, 1996, and a decrease of
$290,000 from June 30, 1996. The ratio of nonperforming assets to loans plus
foreclosed properties was .67% at June 30, 1997, down from .73% at December 31,
1996 and down from 1.14% at June 30, 1996.
The reserve for loan losses was $10.9 million at June 30, 1997, compared with
$7.3 million at December 31, 1996 and $5.0 million at June 30, 1996. The
provision for loan losses was $2.1 million for the second quarter of
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1997, compared to $365,000 recorded in the second quarter of 1996 (see
discussion below). Net charge-offs were $306,000 for the second quarter of 1997
and $168,000 for the second quarter of 1996. The ratio of the reserve for loan
losses to nonperforming assets was 312% at June 30, 1997, compared with 224% at
December 31, 1996 and 131% at June 30, 1996. The ratio of the reserve for loan
losses to total loans was 2.08% at June 30, 1997 compared with 1.63% at December
31, 1996 and 1.49% at June 30, 1996.
The provision for loan losses 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 $3.8 million to $48.5 million, or 6.74% of
assets, at June 30, 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 and
partially offset by the first quarter cash dividend payment of $.15 per common
share that was declared on March 17, 1997 to shareholders of record as of April
7, 1997, totaling $495,000, and the second quarter cash dividend of $.15 per
common share that was declared on June 18, 1997 to shareholders of record as of
June 30, 1997, totaling $499,000.
The Company's Tier 1 and total risk-based capital ratios were 11.69% and 13.46%
at June 30, 1997, respectively, compared with 8.75% and 10.54% at December 31,
1996, respectively. The leverage ratio increased to 9.74% at June 30, 1997,
from 7.27% at December 31, 1996. At June 30, 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 $30.75 per share on June 30, 1997, representing
approximately 211% of the $14.57 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.
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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
June 30, 1997 March 31, 1997
--------------------------------- ---------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) (3) $ 505,225 $ 13,051 10.36% $ 462,595 $ 11,253 9.87%
Taxable investments 89,505 1,429 6.38% 78,609 1,284 6.53%
Non-taxable investments (4) 15,133 269 7.10% 14,650 252 6.87%
Federal funds sold 52,311 709 5.44% 27,713 356 5.21%
---------- -------- ------- ---------- -------- -------
Total interest-earning assets 662,264 15,458 9.36% 583,567 13,145 8.79%
Noninterest-earning assets 40,124 41,185
---------- ----------
Total Assets $ 702,388 $ 624,752
========== ==========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $ 315,232 $ 3,032 3.86% $ 318,716 $ 2,977 3.79%
Savings deposits 36,576 362 3.97% 18,270 174 3.87%
Time deposits 141,003 1,928 5.48% 107,811 1,372 5.16%
---------- -------- ------- ---------- -------- -------
Total Deposits 492,817 5,322 4.36% 444,797 4,523 4.12%
Borrowings: 32,567 764 9.41% 17,731 292 6.68%
---------- -------- ------- ---------- -------- -------
Total interest-bearing liabilities 525,378 6,086 4.68% 462,528 4,815 4.22%
---------- -------- ------- ---------- -------- -------
Noninterest-bearing deposits 123,695 113,816
Other noninterest-bearing liabilities 5,306 2,731
---------- ----------
Total noninterest-bearing liabilities 129,001 116,547
Shareholders' equity 48,009 45,677
---------- ----------
Total liabilities and
shareholders' equity $ 702,388 $ 624,752
========== ==========
Net interest income; interest rate spread $ 9,372 4.69% $ 8,330 4.57%
======== ======= ======== =======
Net interest-earning assets; net yield (5) $ 136,886 5.68% $ 121,039 5.79%
========== ======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1996
---------------------------------
Average
Average Yield/
(Dollars in thousands) Balance(1) Interest Rate
---------- -------- -------
<S> <C> <C> <C>
Interest-earning assets:
Loans (2) (3) $ 319,155 $ 8,318 10.48%
Taxable investments 87,178 1,337 6.13%
Non-taxable investments (4) 11,915 208 6.98%
Federal funds sold 44,316 575 5.22%
---------- -------- -------
Total interest-earning assets 462,564 10,438 9.08%
Noninterest-earning assets 41,335
----------
Total Assets $ 503,899
==========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $ 245,320 $ 2,222 3.64%
Savings deposits 16,075 142 3.55%
Time deposits 95,463 1,236 5.21%
---------- -------- -------
Total Deposits 356,858 3,600 4.06%
Borrowings: 3,113 87 11.24%
---------- -------- -------
Total interest-bearing liabilities 359,971 3,687 4.12%
---------- -------- -------
Noninterest-bearing deposits 98,294
Other noninterest-bearing liabilities 3,487
----------
Total noninterest-bearing liabilities 101,781
Shareholders' equity 42,147
----------
Total liabilities and
shareholders' equity $ 503,899
==========
Net interest income; interest rate spread $ 102,593 $ 6,751 4.96%
========== ======== =======
Net interest-earning assets; net yield (5) 5.87%
=======
</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) Loan fees totaling $694,000, $497,000 and $575,000 are included in loan
interest income for the periods ended June 30, 1997, March 31, 1997 and June
30, 1996, respectively.
(4) Tax exempt interest income includes $71,000, $64,000 and $71,000 for the 3
month periods ending June 30, 1997, March 31, 1997, and June 30, 1996
respectively, to adjust to a fully taxable equivalent basis using the
Federal statutory rate of 34%.
(5) The net yield on interest-earning assets during the period equals net
interest income divided by average interest-earning assets for the period.
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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 June 30, 1997 Three months ended June 30, 1997
compared with March 31, 1997 compared with June 30, 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 $ 1,164 $ 634 $ 1,798 $ 4,831 $ (98) $ 4,733
Taxable investments 175 (30) 145 38 54 92
Non taxable investments 9 8 17 57 4 61
Federal funds sold 337 16 353 108 25 133
--------- --------- ---------- --------- --------- ---------
Changes in total interest income 1,685 628 2,313 5,034 (15) 5,019
Interest expense on deposits
NOW and MMDA (21) 76 55 671 139 810
Savings deposits 183 5 188 201 19 220
Time deposits 462 94 556 623 69 692
--------- --------- ---------- --------- --------- ---------
624 175 799 1,495 227 1,722
Interest expense on borrowings 317 155 472 693 (16) 677
--------- --------- ---------- --------- --------- ---------
Change in total interest expense 941 330 1,271 2,188 211 2,399
--------- --------- ---------- --------- --------- ---------
Increase (decrease) in net
interest income $ 744 $ 299 $ 1,042 $ 2,846 $ (226) $ 2,620
========= ========= ========== ========= ========= =========
</TABLE>
In the analysis, the change due to both the rate and volume have been allocated
proportionately.
The Company's net interest income for the second quarter of 1997 was $9.4
million, a $1.0 million increase over the first quarter of 1997 and a $2.6
million increase over the second quarter of 1996. When compared to the first
quarter of 1997, average earning assets increased by $78.6 million, while the
net yield on average earning assets decreased from 5.79% in the first quarter of
1997 to 5.68% in the second quarter of 1997. The increase in net interest
income was primarily due to an increase in the volume of interest-earning
assets.
Compared to the second quarter of 1996, average earning assets during the second
quarter of 1997 increased by $193.9 million. Average loans in the second
quarter of 1997 increased by $186.1 million, or 58.3% over the second quarter
of 1996, which was also the primary reason average interest-earning assets
increased. The Company's average interest-bearing deposits grew $136 million and
non-interest bearing deposits grew by $25.4 million compared to the second
quarter of 1996.
11 of 24
<PAGE>
The following tables present the Company's average balance sheet, net interest
income and interest rates for the six-month periods presented, as well as the
analysis of variances due to rate and volume:
<TABLE>
<CAPTION> Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
-------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate
------------ -------- -------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) (3) $484,615 $ 24,304 10.11% $311,774 $ 16,253 10.48%
Taxable investments 83,453 2,713 6.50% 91,440 2,836 6.20%
Non-taxable investments (4) 14,896 515 6.92% 12,003 445 7.41%
Federal funds sold 39,934 1,065 5.38% 37,362 948 5.10%
-------- -------- ----- -------- -------- ------
Total interest-earning assets 622,898 28,597 9.26% 452,579 20,482 9.10%
Noninterest-earning assets 44,109 38,913
-------- --------
Total Assets $667,007 $491,492
======== ========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $318,909 $ 6,010 3.80% $241,022 $ 4,437 3.70%
Savings deposits 27,467 536 3.94% 16,093 280 3.50%
Time deposits 124,480 3,300 5.35% 93,656 2,451 5.26%
-------- -------- ----- -------- -------- ------
Total Deposits 470,856 9,846 4.22% 350,771 7,168 4.11%
Borrowings 25,685 1,056 8.29% 3,309 191 11.61%
-------- -------- ----- -------- -------- ------
Total interest-bearing liabilities 496,541 10,902 4.43% 354,080 7,359 4.18%
-------- --------
Noninterest-bearing deposits 118,656 92,890
Other noninterest-bearing liabilities 4,240 3,009
-------- --------
Total noninterest-bearing liabilites 122,896 95,899
Shareholders' equity 47,570 41,513
-------- --------
Total liabilities and
shareholders' equity $667,007 491,492
======== ========
Net interest income; Interest rate spread $ 17,696 4.83% $ 13,123 4.92%
======== ===== ======== ======
Net interest-earning assets; net yield (5) $126,357 5.73% $ 98,499 5.83%
======== ===== ======== ======
</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) Loan fees totaling $1,191,000 and $1,085,000 are included in loan interest
income for the periods ended June 30, 1997 and June 30, 1996, respectively.
(4) Tax exempt interest income includes $130,000 and $151,000 for the 6 month
periods ending June 30 1997 and June 30, 1996 respectively, to adjust to a
fully taxable equivalent basis using the Federal statutory rate of 34%.
(5) The net yield on interest-earning assets during the period equals net
interest income divided by average interest-earning assets for the period.
12 of 24
<PAGE>
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 six months periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30, 1997
compared with June 30, 1996
favorable (unfavorable)
------------------------------------
(Dollars in thousands) Volume Rate Total
---------- -------- ---------
<S> <C> <C> <C>
Interest income on loans $ 8,654 $ (603) $ 8,051
Taxable investments (256) 133 (123)
Non taxable investments 102 (32) 70
Federal funds sold 66 51 117
---------- -------- ---------
Change in total interest income 8,566 (451) 8,115
Interest expense on deposits
NOW and MMDA 1,454 119 1,573
Savings deposits 218 38 256
Time deposits 810 39 849
---------- -------- ---------
2,482 196 2,677
Interest expense on borrowings 935 (70) 865
---------- -------- ---------
Change in total interest expense 3,417 126 3,542
---------- -------- ---------
Increase (decrease) in net interest income $ 5,149 $ (577) $ 4,573
========== ======== =========
</TABLE>
13 of 24
<PAGE>
For the six month period ended June 30, 1997, the Company experienced an
increase in net interest income of $4.6 million when compared to the first half
of 1996. This increase was mainly due to the increased volume in the loan
portfolio, partially offset by reduced yields on loans, and the increased
volume of interest-bearing deposits. For the first half of 1997, average other
borrowings primarily consisted of $3.0 million of subordinated debt which was
issued at 11.5% in the Fall of 1996 and $20.0 million Trust Preferred Securities
which was issued at 9.75% in the first quarter of 1997. The Trust Preferred
Securities qualify for Tier I capital, and the subordinated debt qualifies for
Tier II Capital. For the six months ended June 30, 1997, the Company's net
interest spread of 4.83% reflected a decrease from 4.92% for the same period in
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.
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 June 30, Six Months Ended June 30,
(Dollars in thousands) 1997 1996 1997 1996
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Average noninterest-bearing demand deposits $123,695 $98,294 $118,656 $92,890
Client Service expense 72 95 154 215
Client Service cost annualized 0.23% 0.38% 0.26% 0.47%
Impact on Net Yield
- -------------------
Net yield on interest-earning assets 5.68% 5.87% 5.73% 5.83%
Impact of client services -0.04% -0.15% -0.05% -0.10%
-------- ------- -------- -------
Adjusted net yield (1) 5.63% 5.72% 5.68% 5.74%
======== ======= ======== =======
</TABLE>
(1) Noninterest-bearing liabilities are included in the 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 RISK MANAGEMENT
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, six 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.
14 of 24
<PAGE>
The following table shows interest sensitivity gaps for different intervals as
of June 30, 1997:
INTEREST SENSITIVITY ANALYSIS
Repricing Periods
<TABLE>
<CAPTION>
Immediate 2 Days To > 6 months >1 Year > 3 Yrs Total Rate
(Dollars in thousands) One Day 6 Months to 1 year to 3 Yrs to 5 Yrs > 5 Yrs Sensitive
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ -- $ -- $ -- $ -- $ -- $ -- $ --
Short term investments 42,200 -- -- 42,200
Investment securities -- 14,574 8,296 8,558 36,334 33,515 101,277
Loans 421,667 9,397 7,414 12,843 12,291 57,909 521,521
Loan loss/unearned fees -- -- -- -- -- -- --
Other assets -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 463,867 $ 23,971 $ 15,710 $ 21,401 48,625 $ 91,424 $ 664,998
========= ========= ========= ========= ========= ========= =========
Liabilities and Equity:
Deposits
Demand $ -- $ -- $ -- $ -- $ -- $ -- $ --
NOW, MMDA, and savings 365,696 -- -- -- -- -- 365,696
Time Deposits -- 123,043 13,885 971 165 182 138,246
Subordinated debt (1) -- -- -- -- -- -- --
Trust preferred securities (2) -- -- -- -- -- -- --
Other liabilities 2,969 -- -- -- -- -- 2,969
Shareholders' equity -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total liabilities and equity $ 368,665 $ 123,043 $ 13,885 $ 971 $ 165 $ 182 $ 506,911
========= ========= ========= ========= ========= ========= =========
Gap $ 95,202 $ (99,072) $ 1,825 $ 20,430 $ 48,460 $ 91,242 $ 158,087
Cumulative Gap $ 95,202 $ (3,870) $ (2,045) $ 18,385 $ 66,845 $ 158,087 $ 158,087
Cumulative Gap/total assets 13.24% -0.54% -0.28% 2.56% 9.30% 21.99% 21.99%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Total
Non-rate
(Dollars in thousands) Sensitive Total
-----------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 33,428 $ 33,428
Short term investments -- 42,200
Investment securities 2,118 103,395
Loans 5,477 526,998
Loan loss/unearned fees (13,152) (13,152)
Other assets 26,182 26,182
--------- ---------
Total assets $ 54,053 $ 719,051
========= =========
Liabilities and Equity:
Deposits
Demand $ 135,795 $ 135,795
NOW, MMDA, and savings -- 365,696
Time Deposits -- 138,244
Subordinated debt (1) 3,000 3,000
Trust preferred securities (2) 20,000 20,000
Other liabilities 4,849 7,818
Shareholders' equity 48,496 48,496
--------- ---------
Total liabilities and equity $ 212,142 $ 719,053
========= =========
Gap $(158,089) $ --
Cumulative Gap $ -- $ --
Cumulative Gap/total assets 0.00% --
- ---------------------------------------------------------
</TABLE>
(1) On or after October 1, 1998, the Company, at its option, may redeem any or
all of the Debentures, in whole or in part.
(2) On or after April 1, 2002, the Company, at its option, may redeem any or all
of the Trust Preferred Securities, in whole or in part.
The foregoing table demonstrates that the Company had a negative cumulative one
year gap of $2.0 million of total assets or .28%, at June 30, 1997. In theory,
this would indicate that at June 30, 1997, $2.0 million more in liabilities than
assets would reprice if there was a change in interest rates over the next 360
days. If interest rates were to increase, the negative gap would tend to
result in a lower net interest margin. However, changes in the mix of earning
assets or supporting liabilities can either increase or decrease the net margin
without affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary significantly
while the timing of repricing of both the asset and its supporting liability can
remain the same, thus impacting net interest income. This characteristic is
referred to as a basis risk and, generally, relates to the repricing
characteristics of short-term funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in prepayment
levels of assets and liabilities which are not reflected in the interest
sensitivity analysis table. These prepayments may have significant effects on
the Company's net interest margin. Because of these factors, an interest
sensitivity gap report may not provide a complete assessment of the Company's
exposure to changes in interest rates.
15 of 24
<PAGE>
NON-INTEREST INCOME
The following table provides details of non-interest income for the quarters
presented:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 1997 1997 1996 1996 1996
---------- --------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Trust fees $ 481 $ 454 $ 397 $ 375 $ 344
Gain on sale of SBA loans 181 158 144 122 123
Depositor service fees 180 263 265 275 277
Loan fees 16 6 24 59 34
Investment gains (losses) 2 (51) (44) (122) (110)
Other 254 131 158 163 236
---------- --------- ------------ ------------- --------
Sub-total other income 1,114 961 944 872 904
Warrant income 1,115 - - - -
---------- --------- ------------ ------------- --------
Total other income $2,229 $ 961 $ 944 $ 872 $ 904
========== ========= ============ ============= ========
</TABLE>
Non-interest income was $2.2 million for the second quarter of 1997, an increase
of $1.3 million from the first quarter of 1997, and an increase of $1.3 million
from the second quarter of 1996. The increase in the 1997 second quarter from
the first quarter of 1997 and from the second quarter of 1996 was primarily due
to warrant income and an increase in trust fee income.
Non-interest income was $3.2 million for the six month period ended June 30,
1997, an increase of $1.4 million from the same period in 1996. The
increase was primarily due to warrant income and an increase in trust fee
income.
16 of 24
<PAGE>
NON-INTEREST EXPENSE
The following table provides details of non-interest expense for the quarters
presented:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------
June 30, March 31, December 3, September 30, June 30,
(Dollars in thousands) 1997 1997 1996 1996 1996
--------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $ 3,632 $ 3,697 $ 3,269 $ 2,982 $ 2,976
Occupancy and equipment 1,040 1,062 1,021 846 777
Professional services 362 350 457 264 334
Supplies, telephone and postage 267 240 187 209 208
Marketing 232 232 252 184 187
Client services 72 82 90 105 95
FDIC insurance and assessments 60 41 26 22 27
Director fees 53 51 59 57 62
Other real estate, net 3 2 -- 5 6
Other 548 381 658 654 400
------- ------- ------- ------- -------
Sub-total operating expenses 6,269 6,138 6,019 5,328 5,072
Legal settlement recovery -- (1,700) -- -- --
------- ------- ------- ------- -------
Total operating expenses $ 6,269 $ 4,438 $ 6,019 $ 5,328 $ 5,072
======= ======= ======= ======= =======
</TABLE>
Non-interest expenses were $6.3 million for the second quarter of 1997, an
increase of $131,000, excluding the legal settlement recovery from the first
quarter of 1997, and an increase of $1.2 million from the second quarter of
1996.
Non-interest expenses, exclusive of the legal settlement recovery were $12.4
million and $9.8 million for the six month periods ended June 30, 1997 and 1996,
respectively.
The increase in non-interest expenses are mainly attributable to the significant
growth that has occurred from the second quarter of 1996 to the second quarter
of 1997 and the corresponding increase in employees and the related increase in
occupancy expense.
The legal settlement recovery is attributed to the $1.70 million recovery from
the Company's insurance coverage related to the $1.70 million legal settlement
charge that occurred in the second quarter of 1995.
INCOME TAXES
The provision for income taxes for the second quarter of 1997 of $1.2 million
reflects an effective tax rate for the quarter of approximately 38%, compared to
a tax provision recorded for the second quarter of 1996 of $839,000 with an
effective tax rate of 39%.
The provision for income taxes for the six month period ended June 30, 1997 was
$2.3 million, as compared to $1.7 million for the six month period ended June
30, 1996. Those provisions reflect effective tax rates of 38% and 40%,
respectively.
17 of 24
<PAGE>
FINANCIAL CONDITION
Total assets increased 15.6% to $719.0 million at June 30, 1997 compared to $622
million at December 31, 1996. The increases were primarily due to increases in
the Company's loan portfolio funded by growth in deposits.
LOANS
Total gross loans increased 16.9% to $527.0 million at June 30, 1997 compared to
$450.8 million at December 31, 1996. The increases in loan volume due to an
improving economy in the Company's market areas coupled with the business
development efforts by the Company's relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in the Company's
market areas that are dependent on the technology and real estate industries and
their supporting companies. Thus, the Company's borrowers could be adversely
impacted by a downturn in these sectors of the economy which could reduce the
demand for loans and adversely impact the borrowers' abilities to repay their
loans.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The following schedule details the activity in the Company's allowance for loan
losses and related ratios for each of the quarters:
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in millions) 1997 1997 1996 1996 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of period $ 9,066 $ 7,312 $ 5,591 $ 4,976 $ 4,743
Provision for loan losses 2,130 1,948 1,545 606 365
Loans charged off (306) (207) (56) (74) (168)
Loan recoveries 5 13 232 83 36
-------- -------- -------- -------- --------
Allowance for loan losses at
end of period $ 10,895 $ 9,066 $ 7,312 $ 5,591 $ 4,976
======== ======== ======== ======== ========
Ratio of:
Allowance for loan losses to loan 2.08% 1.85% 1.63% 1.45% 1.49%
Allowance for loan losses to
nonperforming assets 312% 207% 224% 178% 131%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses was $2.1 million in the second quarter of 1997, an
increase of $182,000 from the $2.0 million in the first quarter of 1997, and a
$1.8 million increase from the $365,000 in the second quarter of 1996.
The provision for loan losses was $4.1 million for the six month period ended
June 30, 1997, as compared to $685,000 for the same period in 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 $10.9 million
at June 30, 1997, compared with $9.1 million at March 31, 1997, and $7.3 million
at December 31, 1996. During the first two quarters in 1997, the Company has
increased the provision and allowance for loan losses to reflect the
18 of 24
<PAGE>
emergence of certain risk factors within its loan portfolio. The principal
risk factor is the lack of seasoning within the Company's loan portfolio due
to the dramatic growth in the size of the loan portfolio. Total gross loans
have increased from $290.2 million to $527.0 million, or 81.6% in the 18 month
period ended June 30, 1997.
The ratio of the reserve for loan losses to total loans was 2.08% at June 30,
1997, compared with 1.63% at December 31, 1996, and 1.49% at June 30, 1996.
The ratio of the allowance for loan losses to total nonperforming assets,
including foreclosed real estate, was 312% at June 30, 1997, compared to 224% at
December 31, 1996 and 131% at June 30, 1996.
NONPERFORMING ASSETS
The following table provides the Company's nonperforming assets for the quarters
presented:
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in millions) 1997 1997 1996 1996 1996
-------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
Non-accruing loans $3,170 $3,166 1,875 $2,457 $2,214
Restructuring loans -- -- -- -- --
Accruing loans past due 90 days or more 3 933 1,237 686 1,356
-------- --------- ------------ ------------ ---------
Total nonperforming loans 3,172 4,099 3,112 3,143 3,570
OREO 325 289 152 -- 217
-------- --------- ------------ ------------ ---------
Total nonperforming assets $3,498 $4,388 $3,264 $3,143 $3,787
======== ========= ============ ============ =========
Total nonperforming assets to total assets 0.49% 0.66% 0.52% 0.54% 0.72%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Total nonperforming assets, which includes nonperforming loans (see below) and
OREO, was $3.5 million at June 30, 1997, compared with $3.3 million at December
31, 1996, and $3.8 million at June 30, 1996. Nonperforming loans, which
includes non-accrual loans, restructured loans, and accrual loans which are past
due 90 days or more, were $3.2 million at June 30, 1997, compared with $3.1
million at December 31, 1996, and $3.6 million at June 30, 1996.
Accruing loans past due 90 days or more, which are well secured and in the
process of collection, were $3,000 at June 30, 1997, compared with $1.2 million
at December 31, 1996, and $1.4 million at June 30, 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 $13.8 million at June 30, 1997, from $9.4
million at December 31, 1996. The $4.4 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 June 30, 1997, the Company had four foreclosed properties for $325,000
compared with $152,000 at December 31, 1996, and $217,000 at June 30, 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.
19 of 24
<PAGE>
DEPOSITS
The Company emphasizes developing total client relationships with its customers
in order to increase its core deposit base. Deposits reached $639.7 million at
June 30, 1997, an increase of 14.3% compared to deposits of $559.3 million at
December 31, 1996.
Total average interest-bearing deposits increased 34.2% to $470.9 million for
the six month period ended June 30, 1997, compared to an average of $350.8
million for the same period in 1996. The increase in deposits was due to the
continued marketing efforts directed at commercial business clients in the
Company's market areas, coupled with an increase in deposits related to the
activities of the Greater Bay Trust Company and the Venture Lending Group.
Non-interest-bearing deposits were $135.8 million at June 30, 1997, compared to
$139.9 million at December 31, 1996. As its regional offices expand, the
Company anticipates this funding source to increase.
CAPITAL RESOURCES
A banking organization's total qualifying capital includes two components, core
capital (Tier I capital) and supplementary capital (Tier II capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, and minority
interests, less goodwill. Supplementary capital includes the allowance for loan
losses (subject to certain limitations), other perpetual preferred stock,
certain other capital instruments, and term subordinated debt. The Company's
major capital components are shareholders' equity in core capital, and the
allowance for loan losses and subordinated debt in supplementary capital.
The Company's and the Bank's total risk-based capital and leverage ratios were
as follows at the dates indicated:
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital to Total Capital to
to Average Risk-weighted Risk-weighted
Quarterly Assets Assets Assets
------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent
<S> <C> <C> <C> <C> <C> <C>
(Dollar in thousands)
Greater Bay Bancorp $ 68,384 9.74% $ 68,384 11.69% $ 78,740 13.46%
Well capitalized requirement $ 35,119 5.00% $ 35,202 6.00% $ 58,670 10.00%
------------------------------------------------------------------------------
Excess capital $ 33,265 4.74% $ 33,182 5.66% $ 20,070 3.42%
==============================================================================
Mid-Peninsula Bank $ 29,140 8.98% $ 29,140 11.59% $ 32,285 12.84%
Well capitalized requirement $ 16,228 5.00% $ 15,089 6.00% $ 25,149 10.00%
------------------------------------------------------------------------------
Excess capital $ 12,912 3.98% $ 14,051 5.59% $ 7,136 2.84%
==============================================================================
Cupertino National Bank $ 29,660 7.93% $ 29,660 8.90% $ 36,872 11.06%
Well capitalized requirement $ 18,709 5.00% $ 20,010 6.00% $ 33,350 10.00%
------------------------------------------------------------------------------
Excess capital $ 10,951 2.93% $ 9,650 2.90% $ 3,522 1.06%
==============================================================================
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------
Tier 1 Capital Tier 1 Capital to Total Capital to
to Average Risk-weighted Risk-weighted
Quarterly Assets Assets Assets
------------------------------------------------------------------------------
Balance Percent Balance Percent Balance Percent
<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% $ 16,769 6.00% $ 27,932 10.00%
------------------------------------------------------------------------------
Excess capital $ 4,750 1.42% $ 4,756 1.70% $ 90 0.03%
==============================================================================
</TABLE>
The Company and the Banks 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 I capital. Accordingly,
the Company's Tier I and total risk-based capital ratios include the $20 million
Trust Preferred Securities.
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<PAGE>
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 $233 million in institutional deposit or brokered deposit lines, and
$40 million in reverse repurchase lines. As of June 30, 1997, the Company had
$17.1 million in institutional deposits outstanding and no outstanding federal
funds purchased.
Greater Bay is a company separate and apart from the Banks. It must provide for
its own liquidity. Substantially all of Greater Bay's revenues are obtained
from interest received and dividends declared and paid by the Banks. There are
statutory and regulatory provisions that could limit the ability of the Banks to
pay dividends to Greater Bay. Management believes that such restrictions will
not have an impact on the ability of Greater Bay to meet its ongoing cash
obligations. As of June 30, 1997, the Company did not have any material
commitments for capital expenditures.
Net cash provided by operating activities, primarily representing net interest
income, totaled $8.4 million for the six months ended June 30, 1997, as
compared to $2.0 million for the same period in 1996. Cash used for investing
activities totaled $75.0 million for the six months ended June 30, 1997, as
compared to $30.6 million for the same period in 1996. The funds used for
investing activities primarily represent increases in loans and investment for
each year reported.
For the period ended June 30, 1997 net cash provided by financing activities was
$88.5 million. Historically, the primary financing activity of the Company has
been deposits and short-term borrowings. Deposits increased $80.4 million for
the period ended June 30, 1997 and short-term borrowing decreased $12.0 million
for the same period. Net proceeds from trust preferred securities issued in 1997
provided an additional $20.0 million. For the period ended June 30, 1996, net
cash provided by financing activities was $46.3 million. Deposits increased
$45.6 million, while short-term borrowings were unchanged.
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.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - ITEM 3, ITEM 5
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. Solicitation for Written Consents
The solicitation of written consents of the shareholders of record as of March
27, 1997 to approve certain proposals to amend the Company's Articles of
Incorporation and Bylaws were mailed to the shareholders on or about April 15,
1997. On May 12, the following results were announced:
(a) A proposal to amend the Company's Articles of Incorporation to eliminate
cumulative voting in the election of directors, was approved with
1,796,217 shares consenting, 78,535 shares opposed and 6,437 shares
abstaining.
(b) A proposal to amend the Company's Bylaws to provide for the
classification of the Company's Board of Directors for the purpose of
the election of directors, was approved with 1,799,138 shares
consenting, 64,270 shares opposed and 17,781 shares abstaining.
2. Annual Meeting of Shareholders
(a) The Annual Meeting of Shareholders of the Company was held on June 18,
1997 and 2,308,103 shares were represented at the meeting in person or
by proxy.
(b) The following 10 persons nominated by management were elected as
directors at the meeting:
Class I - Term expiring 1998
James E. Jackson
Duncan L. Matteson
Edwin E. van Bronkhorst
Class II - Term expiring 1999
John M. Gatto
Dick J. Randall
Donald H. Seiler
Class III - Term expiring 2000
David L. Kalkbrenner
Rex D. Lindsay
Glen McLaughlin
Warren R. Thoits
(c) A proposal to approve an amendment to the Company's Employee Stock
Purchase Plan to increase the number of shares of the Company's common
stock reserved for issuance thereunder by 100,000 shares, was approved
by a vote of 2,066,069 shares in favor, 79,873 shares opposed and 22,689
shares abstaining and subject to broker non-votes.
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<PAGE>
(d) A proposal to ratify the appointment of Coopers & Lybrand L.L.P. as the
Company's independent accountants for the current fiscal year was
approved by a vote of 2,281,193 shares in favor, 18,537 shares opposed
and 8,373 shares abstaining or subject to broker non-votes.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
The Exhibits listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this Report.
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K for the quarter covered by this report
On June 5, 1997, the Company filed a form 8-K reporting that (a)
effective May 12, 1997 a majority of the outstanding shares of common
stock approved by written consent proposals to amend the Company's
Articles of Incorporation to eliminate cumulative voting in the election
of directors, and (ii) amend the Company's Bylaws to provide for the
classification of the Company's Board of Directors for purposes of the
election of directors, and (b) the Company, through its wholly-owned
subsidiary, GBB Capital I, consummated a $20 million offering of 9.75%
cumulative trust preferred securities. GBB Capital I invested the
proceeds of the Offering in 9.75% Junior Subordinated Deferrable
Interest Debentures issued by the Company.
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<PAGE>
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: July 30, 1997
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