<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 September 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 October 21, 1997:
3,338,083
This report contains a total of 23 pages.
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GREATER BAY BANCORP
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Interim Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996.................. 3
Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1997 and 1996............................... 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk N/A
</TABLE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................... 22
Signatures................................................ 23
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Item 1. Interim Consolidated Financial Statements
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 39,803 $ 39,896
Federal funds sold 37,300 14,000
-------- --------
Cash and cash equivalents 77,103 53,896
Investment securities:
Held to maturity (Market value $43,584
at September 30, 1997; $57,294 at
December 31, 1996) 42,965 56,965
Available for sale (Amortized cost
$87,456 at September 30, 1997; $46,987
at December 31, 1996) 87,465 47,104
Other securities 2,130 1,451
-------- --------
Total investment securities 132,560 105,520
Loans:
Commercial 282,990 257,042
Real estate-construction 105,772 78,278
Real estate-other 120,177 72,802
Consumer and other 46,635 42,702
Deferred loan fees and discounts (2,538) (1,952)
-------- --------
Total loans 553,036 448,872
Allowance for loan losses (11,802) (7,312)
-------- --------
Net loans 541,234 441,560
Premises and equipment, net 4,652 4,688
Accrued interest receivable and other assets 22,048 16,380
-------- --------
TOTAL ASSETS $777,597 $622,044
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $151,152 $139,940
NOW 33,855 26,936
Money Market Demand Accounts 321,246 271,749
Savings 50,596 13,599
Other time certificates 20,309 38,889
Time certificates, $100 and over 120,974 68,170
-------- --------
Total deposits 698,132 559,283
Accrued interest payable and other liabilities 5,449 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 726,581 577,362
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:
3,337,757 at September 30, 1997 and
3,238,887 at December 31, 1996 36,181 34,884
Unrealized gain on available-for-sale
securities, net of taxes 5 71
Retained earnings 14,830 9,727
-------- --------
Total shareholders' equity 51,016 44,682
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $777,597 $622,044
======== ========
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
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GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share
data)
<TABLE>
<CAPTION>
Three Months Nine Months Ended
Ended
September 30, September 30,
-------------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
(unaudited) (unaudited) (unaudited) (unaudited)
INTREST INCOME:
<S> <C> <C> <C> <C>
Interest on loans $14,149 $ 9,218 $38,453 $25,471
Interest on investment
securities:
Taxable 1,415 1,638 4,124 4,420
Non-taxable 203 161 588 509
------- ------- ------- -------
Total investment securities 1,618 1,799 4,712 4,929
Other interest income 957 560 2,027 1,508
------- ------- ------- -------
Total interest income 16,724 11,577 45,192 31,908
INTEREST EXPENSE:
Interest on deposits 5,785 4,092 15,630 11,260
Other interest expense 584 92 1,640 283
------- ------ ------- -------
Total interest expense 6,369 4,184 17,270 11,543
------- ------ ------- -------
Net interest income 10,355 7,393 27,922 20,365
Provision for loan losses 1,209 606 5,287 1,291
------- ------ ------- -------
Net interest income after
provision
for loan losses 9,146 6,787 22,635 19,074
OTHER INCOME:
Trust fees 550 375 1,485 1,028
Gain on sale of SBA loans 216 122 555 375
Depositor service fees 326 275 871 781
Other loan fees 47 59 69 108
Investment gains (losses) 5 (122) (44) (219)
Other 136 163 419 514
------- ------ ------- -------
Sub-total other income 1,280 872 3,355 2,587
Warrant income 47 - 1,162 -
------- ------ ------- -------
Total other income 1,327 872 4,517 2,587
OPERATING EXPENSES:
Compensation and benefits 3,829 2,982 11,158 8,612
Occupancy and equipment 1,085 846 3,187 2,381
Professional services 383 288 1,095 894
Marketing 260 247 724 596
Client services 72 105 226 320
FDIC insurance and regulatory
assessments 55 22 156 75
Data Processing 61 68 179 214
Other real estate, net 1 5 6 35
Other 736 765 2,158 1,964
------- ------ ------- -------
Sub-total operating expenses 6,482 5,328 18,889 15,091
Legal settlement recovery - - (1,700) -
------- ------ ------- -------
Total operating expenses 6,482 5,328 17,189 15,091
------- ----- ------- -------
Income before income tax expense 3,991 2,331 9,963 6,570
Income tax expense 1,584 968 3,866 2,649
------- ------ ------- -------
Net income $ 2,407 $ 1,363 $ 6,097 $ 3,921
======= ====== ======= =======
Net income per common and
common equivalent share $ 0.66 $ 0.41 $ 1.68 $ 1.19
======= ======= ======= =======
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>
Nine Months ended
September 30,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,097 $ 3,921
Reconciliation of net income
to net cash from operations:
Provision for loan losses 5,287 1,291
Depreciation and amortization 904 462
Accrued interest receivable
and other assets (3,980) (1,089)
Accrued interest payable and
other liabilities 2,370 (399)
Net change in deferred loan
fees 586 454
Stock dividends on other
securities (52) -
Accrued deferred income taxes (1,700) 58
Loss on sale of securities 44 (219)
--------- ---------
Cash provided by operating
activities 9,556 4,479
INVESTING ACTIVITIES:
Maturities and principal
reductions on investment securities:
Held-to-maturity 16,379 16,620
Available-for-sale 32,624 10,527
Purchase of investment
securities:
Held-to-maturity (2,472) (25,790)
Available-for-sale (75,450) (26,609)
Net change in loans (105,493) (98,219)
Sale of available-for-sale
securities 1,948 23,285
Purchase of life insurance
policies - (327)
Purchase of premises and
equipment, net (1,037) (1,812)
--------- ---------
Cash used in investing activities (133,272) (102,077)
FINANCING ACTIVITIES:
Net change in deposits 138,849 98,532
Net change in short-term
borrowings (12,000) -
Proceeds from issurance of
Trust Preferred Securities 20,000 -
Stock purchased by employees
and stock options exercised 1,798 1,595
Cash dividends (1,495) (1,078)
--------- ---------
Cash provided by financing
activities 147,152 99,049
--------- ---------
Net increase in cash and cash
equivalents 23,436 1,203
Cash and cash equivalents at
beginning of period 53,896 58,111
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 77,332 $ 59,314
========= =========
CASH FLOWS--SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on deposits and
other borrowings $ 5,894 $ 11,602
Income taxes 5,560 2,631
Non-cash transactions:
Additions to other real
estate owned 173 -
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
</TABLE>
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GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 September
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 consolidated 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' consolidated 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
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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 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 3,644,952 and 3,339,566 for the three
months ended September 30, 1997 and 1996, respectively. The number of shares
used to compute earnings per share were 3,628,081 and 3,305,807 for the nine
months ended September 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 declared a cash dividend of $.15 per share to shareholders of
record on September 30, 1997 payable on October 15, 1997. 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.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure. This statement establishes standards for disclosing
information about an entity's capital structure. The Company intends to comply
with the disclosure requirements of this statement which is effective for
periods ending after December 15, 1997.
On June 30, 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position, and is effective for financial statements issued for fiscal years
beginning after December 15, 1997. The impact of adopting SFAS No. 130 has not
yet been determined.
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GREATER BAY BANCORP AND SUBSIDIARIES
ITEM 2. 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 third quarter of 1997 of $2.4 million or
$0.66 per common and common equivalent share, compared to net income of $1.4
million, or $0.41 per common and common equivalent share, reported in the third
quarter of last year. Return on average assets annualized for the third
quarters of 1997 and 1996 were 1.25% and .98%, respectively, while the
annualized return on average common equity was 19.56% for the third quarter of
1997, compared with 12.35% for the third quarter of 1996.
The earnings for the third quarter of 1997 includes $47,000 in warrant income
resulting from the exercise of warrants and the 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 nine months ended September 30, 1997, the Company reported net income of
$6.1 million, or $1.68 per common and common equivalent share, compared to net
income of $3.9 million, or $1.19 per common and common equivalent shares for
the comparable period in 1996. The annualized return on average assets and
return on average equity for the first nine months of 1997 were 1.16% and
16.81%, respectively compared to an annualized return of average assets of 1.02%
and return on average equity of 12.45% for the first nine months of 1996,
respectively.
Non performing assets (including nonaccrual loans, loans 90 days past due and
still accruing and other real estate owned ("OREO")) totaled $3.4 million at
September 30, 1997, an increase of $130,000 from December 31, 1996, and an
increase of $251,000 from September 30, 1996. The ratio of nonperforming
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assets to total assets was .44% at September 30, 1997, down from .52% at
December 31, 1996 and down from .54% at September 30, 1996.
The allowance for loan losses was $11.8 million at September 30, 1997, compared
with $7.3 million at December 31, 1996 and $5.6 million at September 30, 1996.
The provision for loan losses was $1.2 million for the third quarter of 1997,
compared to $606,000 recorded in the third quarter of 1996 (see discussion
below). Net charge-offs were $309,000 for the third quarter of 1997 and $74,000
for the third quarter of 1996. The ratio of the allowance for loan losses to
nonperforming loans was 348% at September 30, 1997, compared with 224% at
December 31, 1996 and 178% at September 30, 1996. The ratio of the allowance
for loan losses to total loans was 2.13% at September 30, 1997, compared with
1.63% at December 31, 1996 and 1.45% at September 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 $6.3 million to $51.0 million, or 6.56% of
assets, at September 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 cash dividend payments of $.15 per common share in
the first and second quarters and the third quarter cash dividend of $.15 per
common share that was declared on September 5, 1997 to shareholders of record as
of September 30, 1997.
The Company's Tier 1 and total risk-based capital ratios were 11.21% and 12.94%
at September 30, 1997, respectively, compared with 8.75% and 10.54% at December
31, 1996, respectively. The leverage ratio increased to 9.28% at September 30,
1997 from 7.27% at December 31, 1996. At September 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.
Greater Bay's common stock closed at $42.875 per share on September 30, 1997,
representing approximately 280% of the $15.28 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.
PROPOSED MERGER
Greater Bay, GBB Acquisition Corp., a California corporation and wholly-owned
subsidiary of GBB ("Newco"), and Peninsula Bank of Commerce ("PBC") entered into
a Plan of Reorganization and Merger dated September 5, 1997 (the "Agreement").
The merger, would result in the formation of the largest multi-bank holding
company based in the San Francisco Peninsula/South Bay region, and the third-
largest publicly traded independent bank holding company in the San Francisco
Bay area, with total assets of approximately $867 million and equity of over $84
million. MPB, CNB and PBC which is subject to among other things, the receipt
of necessary shareholder and regulatory approval, would operate as wholly-owned
subsidiaries of Greater Bay and would focus on serving the greater Bay area,
including the South San Francisco, Northern Peninsula and South Bay markets,
through their nine office locations.
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The terms of the Agreement provide for PBC shareholders to receive a number of
shares of Greater Bay common stock determined based on the Average Closing
Price, of Greater Bay common stock (as defined in the Agreement) during the 15
trading days preceding the effective time of the merger. If the Average Closing
Price is greater than $36.67, a number of shares of Greater Bay common stock
equal to the quotient obtained by dividing (A) $44.00 plus the product of .3333
times the difference between the Average Closing Price and $26.67, by (B) the
Average Closing Price. For example, if the Average Closing Price is $42.875,
which was the closing price on September 30, 1997, each shareholder of PBC
common stock would receive 1.0745 shares of Greater Bay common stock. The
merger would be accounted for as a "pooling of interests". Using the
conversion ratio, following the merger the shareholders of PBC would own
approximately 17.8% of the combined company, giving effect to all outstanding
options.
In connection with the Agreement, PBC has granted Greater Bay an option to
purchase up to 19.9% of the outstanding shares of PBC's common stock under
certain circumstances in the event the transaction if terminated.
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
September 30, 1997 June 30, 1997 September 30, 1996
----------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/ Average
(Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate Balance (1)
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) (3) $540,626 $14,149 10.38% $505,225 $13,051 10.36% $358,528
Taxable investments 89,949 1,472 6.55% 89,595 1,429 6.38% 99,251
Non-taxable investments (4) 14,879 274 7.36% 15,133 269 7.10% 14,816
Federal funds sold 69,025 900 5.17% 52,311 709 5.44% 43,247
Total interest-earning -------- ------- -------- -------- ------- ------ --------
assets 714,479 16,795 9.33% 662,264 15,458 9.36% 515,842
Noninterest-earning assets 50,361 40,124 41,453
-------- -------- --------
Total assets $764,840 $702,388 $557,295
======== ======== ========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $352,278 $ 3,291 3.71% $315,232 $ 3,032 3.86% $285,402
Savings deposits 56,753 740 5.17% 36,576 362 3.97% 12,801
Time deposits 137,874 1,753 5.04% 141,003 1,928 5.48% 102,572
-------- ------- ----- -------- ------- ----- --------
Total deposits 546,905 5,784 4.20% 492,811 5,322 4.33% 400,775
Borrowings 23,380 584 9.91% 32,567 764 9.41% 3,422
-------- ------- ------ ------- -------- ----- --------
Total interest-bearing
liabilities 570,285 6,368 4.43% 525,378 6,086 4.65% 404,197
-------- ------- ------ -------- ------- ----- --------
Noninterest-bearing deposits 136,858 123,695 106,423
Other noninterest-bearing
liabilities 8,898 5,306 2,775
-------- ------- --------
Total noninterest-bearing
liabilites 145,756 129,001 109,198
Shareholders' equity 48,799 48,009 43,900
-------- -------- --------
Total liabilities and
shareholders' equity $764,840 $702,388 $557,295
======== ========= ========
Net interest income;
interest rate spread $10,427 4.90% $ 9,372 4.72%
======= ===== ======= =====
Net interest-earning assets;
net yield (5) $144,194 5.79% $136,886 5.68% $111,645
======== ===== ======== ===== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1996
----------------------------
Average
Yield/
(Dollars in thousands) Interest Rate
----------------------------
<S> <C> <C>
Interest-earning assets:
Loans (2) (3) $ 9,218 10.23%
Taxable investments 1,638 6.60%
Non-taxable investments (4) 272 7.34%
Federal funds sold 560 5.15%
Total interest-earning ------- ------
assets 11,688 9.01%
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Deposits:
NOW and MMDA $ 2,650 3.69%
Savings deposits 105 3.26%
Time deposits 1,337 5.19%
------- -----
Total deposits 4,092 4.06%
Borrowings 92 10.70%
------- ------
Total interest-bearing
liabilities 4,184 4.12%
------- ------
Noninterest-bearing deposits
Other noninterest-bearing
liabilities
Total noninterest-bearing
liabilites
Shareholders' equity
Total liabilities and
shareholders' equity
Net interest income;
interest rate spread $ 7,504 4.90%
======= ======
Net interest-earning assets;
net yield (5) 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) Loan fees totaling $778,000, $694,000 and $505,000 are included in loan
interest income for the periods ended September 30, 1997, June 30, 1997 and
September 30, 1996, respectively.
(4) Tax exempt interest income includes $71,000, $71,000 and $111,000 for the 3
month periods ending September 30 1997, June 30, 1997, and September 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.
10 of 23
<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 quarterly periods indicated. Changes due to
both the ratio an volume have been allocated proportionately.
<TABLE>
<CAPTION>
Three months ended September 30, 1997 Three months ended September 30, 1997
compared with June 30, 1997 compared with September 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 $1,066 $ 32 $1,098 $4,788 $143 $4,931
Taxable investments 6 37 43 (152) (14) (166)
Non taxable investments (5) 10 5 3 (1) 2
Federal funds sold 226 (35) 191 337 3 340
------ ----- ------ ------ ----- ------
Change in total interest income 1,293 44 1,337 4,976 131 5,107
Interest expense on deposits
NOW and MMDA 374 (115) 259 632 9 641
Savings deposits 244 134 378 541 94 635
Time deposits (38) (137) (175) 454 (38) 416
------ ----- ------ ------ ----- ------
580 (118) 462 1,627 65 1,692
Interest expense on borrowing (221) 41 (180) 500 (8) 492
------ ----- ------ ------ ----- ------
Change in total interest
expense 359 (77) 282 2,127 57 2,184
------ ----- ------ ------ ----- ------
Increase (decrease) in net
interest income $ 934 $ 121 $1,055 $2,849 $ 74 $2,923
====== ===== ====== ====== ==== ======
</TABLE>
The Company's net interest income for the third quarter of 1997 was $10.4
million, a $1.1 million increase over the second quarter of 1997, and a $3.0
million increase over the third quarter of 1996. When compared to the second
quarter of 1997, average earning assets increased by $52.2 million, while the
net yield on average earning assets increased from 5.68% in the second quarter
of 1997 to 5.79% in the third 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 third quarter of 1996, average earning assets during the third
quarter of 1997 increased by $198.6 million. Average loans in the third quarter
of 1997 increased by $182.1 million, or 51%, over the third quarter of 1996,
which was also the principal reason average interest-earning assets increased.
The Company's average interest-bearing deposits grew $146.1 million and non-
interest bearing deposits grew by $30.4 million, compared to the third quarter
of 1996.
11 of 23
<PAGE>
The following tables present the Company's average balance sheet, net interest
income and interest rates for the nine-month periods presented, as well as the
analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 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) $503,470 $38,453 10.21% $327,474 $25,471 10.39%
Taxable investments 85,281 4,185 6.54% 94,566 4,423 6.24%
Non-taxable investments (4) 14,891 789 7.07% 12,965 771 7.93%
Federal funds sold 49,739 1,966 5.28% 38,753 1,505 5.19%
-------- ------- ------- -------- -------- --------
Total interest-earning assets 653,381 45,393 9.29% 473,758 32,170 9.07%
Noninterest-earning assets 47,034 39,408
-------- --------
Total assets $700,415 $513,166
======== ========
Interest-bearing liabilities:
Deposits:
NOW and MMDA $329,486 $ 9,223 3.74% 256,262 $ 7,096 3.70%
Savings deposits 37,335 1,354 4.85% 14,986 385 3.43%
Time deposits 129,651 5,053 5.21% 96,649 3,779 5.22%
--------- ------- ------ ------- ------- -------
Total deposits 496,471 15,630 4.21% 367,897 11,260 4.09%
Borrowings 25,263 1,640 8.68% 3,347 283 11.29%
--------- ------- ------ -------- ------- ------
Total interest-bearing 521,734 17,270 4.43% 371,244 11,543 4.15%
liabilities
Noninterest-bearing deposits 124,686 97,434
Other noninterest-bearing
liabilities 5,512 2,408
--------- ---------
Total noninterest-bearing
liabilites 130,198 99,842
Shareholders' equity 48,483 42,080
--------- ---------
Total liabilities and
shareholders' equity 700,415 513,166
========= =========
Net interest income; interest
rate spread $28,123 4.86% $20,627 4.92%
======= ===== ======= =====
Net interest-earning assets;
net yield (5) $131,647 5.75 $102,514 5.82%
======== ==== ======== =====
</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 $1,969,000 and $1,548,000 are included in loan interest
income for the periods ended September 30, 1997 and September 30, 1996,
respectively.
(4) Tax exempt interest income includes $201,000 and $262,000 for the nine month
periods ending September 30, 1997 and September 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 23
<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. Changes due to
both the ratio an volume have been allocated proportionately.
<TABLE>
<CAPTION>
Nine months ended September 30, 1997
compared with September 30, 1996
favorable (unfavorable)
------------------------------------------
(Dollars in thousands) Volume Rate Total
------ ---- -------
<S> <C> <C> <C>
Interest income on loans $13,426 $(444) $12,982
Taxable investments (449) 211 (238)
Non taxable investments 108 (90) 18
Federal funds sold 433 28 461
------- ----- -------
Change in total interest
income 13,518 (295) 13,223
Interest expense on deposits
NOW and MMDA 2,043 84 2,127
Savings deposits 759 210 969
Time deposits 1,283 (9) 1,274
------- ----- -------
4,085 285 4,370
Interest expense on
borrowings 1,437 (80) 1,357
------- ----- -------
Change in total interest
expense 5,522 205 5,727
-------- ------ --------
Increase (decrease) in net
interest income $ 7,996 $(500) $ 7,496
======= ===== =======
</TABLE>
For the nine month period ended September 30, 1997, the Company experienced an
increase in net interest income of $7.5 million, compared to the first nine
months 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 nine months ended September 30,
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 of 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 nine months ended
September 30, 1997, the Company's net interest spread of 5.75% reflected a
decrease from 5.82% for the same period in 1996. The decrease is primarily
attributable to the 9.75% Trust Preferred Securities.
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 a
percentage of 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.
13 of 23
<PAGE>
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 September 30, Nine Months Ended September 30,
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Average noninterest-bearing demand deposits $136,858 $106,423 $124,686 $97,434
Client Service expense 72 105 226 320
Client Service cost annualized 0.21% 0.39% 0.24% 0.44%
Impact on Net Yield
- -------------------
Net yield on interest-earning assets 5.79% 5.79% 5.75% 5.82%
Impact of client services -0.04% -0.08% -0.05% -0.09%
-------- ------- ------- -------
Adjusted net yield (1) 5.75% 5.71% 5.71% 5.73%
======== ======= ======= =======
</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 in relationship to total deposits.
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 23
<PAGE>
The following table shows interest sensitivity gaps for different intervals as
of September 30, 1997:
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
Repricing Periods
More Than More Than More Than Total
Immediate 2 Days To 6 months 1 Year 3 Yrs More Than Total Rate Non-rate
(Dollars in thousands) One Day 6 Months to 1 year to 3 Yrs to 5 Yrs 5 Yrs Sensitive Sensitive Total
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ - $ - $ - $ - $ - $ - $ - $ 39,803 $ 39,803
Short term investments 37,300 - - - - - 37,300 - 37,300
Investment securities - 6,273 6,370 21,710 4,957 93,250 132,560 - 132,560
Loans 447,498 9,347 4,774 20,223 11,405 62,329 555,576 - 555,576
Loan loss/unearned fees - - - - - - - (14,340) (14,340)
Other assets - - - - - - - 26,698 26,698
-------- --------- -------- ------- ------- -------- -------- --------- --------
Total assets $484,798 $ 15,620 $ 11,144 $41,933 $16,362 $155,579 $725,436 $ 52,161 $777,597
======== ========= ======== ======= ======= ======== ======== ========= ========
Liabilities and Equity:
Deposits
Demand $ - $ - $ - $ - $ - $ - $ - $ 151,152 $151,152
NOW, MMDA, and savings 405,697 - - - - - 405,697 - 405,697
Time deposits - 126,404 13,456 1,071 167 185 141,283 - 141,283
Subordinated debt (1) - - - - - 3,000 3,000 - 3,000
Trust preferred securities (2) - - - - - - 20,000 - 20,000
Other liabilities - - - - - - - 5,449 5,449
Shareholders' equity - - - - - - - 51,016 51,016
-------- --------- -------- ------- ------- -------- -------- --------- --------
Total liabilities and
equity $405,697 $ 126,404 $ 13,456 $ 1,071 $ 167 $ 23,185 $569,980 $ 207,617 $777,597
======== ========= ======== ======= ======= ======== ======== ========= ========
Gap $ 79,101 $(110,784) $ (2,312) $40,862 $16,195 $132,394 $155,456 $(155,456) $ -
Cumulative Gap $ 79,101 $ (31,683) $(33,995) $ 6,867 $23,062 $155,456 $310,912 $ - $ -
Cumulative Gap/total
assets 10.17% -4.07% -4.37% 0.88% 2.97% 19.99% 39.98% 0% -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) On or after October 1, 1998, the Company, at its option, may redeem any or
all of the Subordinated Debt, 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 $34.0 million of total assets, or 4.37%, at September 30, 1997. In
theory, this would indicate that at September 30, 1997, $34.0 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 23
<PAGE>
OTHER INCOME
The following table provides details of other income for the quarters
presented:
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1997 1997 1997 1996 1996
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $ 550 $ 481 $ 454 $ 397 $ 375
Gain on sale of SBA loans 216 181 158 144 122
Depositor service fees 326 282 263 265 275
Loan fees 47 16 6 24 59
Investment gains (losses) 5 2 (51) (44) (122)
Other 136 152 131 158 163
----------------------------------------------------------------------------
Sub-total other income 1,280 1,114 961 944 872
Warrant income 47 1,115 - - -
----------------------------------------------------------------------------
Total other income $1,327 $2,229 $ 961 $ 944 $ 872
============================================================================
</TABLE>
Other income was $1.3 million for the third quarter of 1997, a decrease of
$902,000 from the second quarter of 1997, and an increase of $455,000 from the
third quarter of 1996. The decrease in the 1997 third quarter from the second
quarter of 1997 was primarily due to warrant income resulting from the exercise
of warrants and the 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.
Other income was $4.5 million for the nine month period ended September 30,
1997, an increase of $1.9 million from the same period same period in 1996.
The increase was primarily due to warrant income (see above), an increase in
trust fee income related to the increase in trust assets under management,
deposit service fees due to increasing deposit balances, gain on SBA sales and
investment gains(losses) due to the sale of securities in 1996 at a loss.
16 of 23
<PAGE>
OPERATING EXPENSE
The following table provides details of operating expense for the quarters
presented:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1997 1997 1997 1996 1996
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $3,829 $3,632 $ 3,697 $3,269 $2,982
Occupancy and equipment 1,085 1,040 1,062 1,021 846
Professional services 383 362 350 457 288
Supplies, telephone and postage 254 267 240 187 209
Marketing 260 232 232 252 247
Client services 72 72 82 90 105
FDIC insurance and assessments 55 60 41 26 22
Director fees 53 53 51 59 57
Other real estate, net 1 3 2 - 5
Other 490 548 379 658 567
---------------------------------------------------------------------------
Sub-total operating expenses 6,482 6,269 6,136 6,019 5,328
Legal settlement recovery - - (1,700) - -
---------------------------------------------------------------------------
Total operating expenses $6,482 $6,269 $ 4,436 $6,019 $5,328
===========================================================================
</TABLE>
Operating expenses were $6.5 million for the third quarter of 1997, an increase
of $213,000, from the second quarter of 1997, and an increase of $1.2 million
from the third quarter of 1996.
Operating expenses, exclusive of the legal settlement recovery were $18.9
million and $15.1 million for the nine month periods ended September 30, 1997
and 1996, respectively.
The increase in operating expenses are mainly attributable to the significant
growth that has occurred from the third quarter of 1996 to the third 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 third quarter of 1997 of $1.6 million
reflects an effective tax rate for the quarter of approximately 40%, compared to
a tax provision recorded for the third quarter of 1996 of $968,000 with an
effective tax rate of 42%.
The provision for income taxes for the nine month period ended September 30,
1997 was $3.9 million, as compared to $2.6 million for the nine month period
ended September 30, 1996. Those provisions reflect effective tax rates of 39%
and 40%, respectively.
FINANCIAL CONDITION
Total assets increased 25% to $777.6 million at September 30, 1997, compared to
$622.0 million at December 31, 1996. The increase was primarily due to increase
in the Company's loan portfolio funded by growth in deposits.
17 of 23
<PAGE>
LOANS
Total gross loans increased 23% to $553.0 million at September 30, 1997,
compared to $448.9 million at December 31, 1996. The increase in loan volume
was 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
--------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in millions) 1997 1997 1997 1996 1996
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses at
beginning of period $10,895 $ 9,066 $7,312 $5,591 $4,976
Provision for loan losses 1,209 2,130 1,948 1,545 606
Loans charged off (309) (306) (207) (56) (74)
Loan recoveries 7 5 13 232 83
------- ------- ------ ------ ------
Allowance for loan losses at
end of period $11,802 $10,895 $9,066 $7,312 $5,591
======= ======= ====== ====== ======
Ratio of:
Allowance for loan losses to total loans 2.13% 1.97% 1.85% 1.63% 1.45%
Allowance for loan losses to
nonperforming loans 348% 311% 207% 224% 178%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The provision for loan losses was $1.2 million in the third quarter of 1997, a
decrease of $921,000 from the $2.1 million in the second quarter of 1997, and a
$603,000 increase from the $606,000 in the third quarter of 1996.
The provision for loan losses was $5.3 million for the nine month period ended
September 30, 1997, as compared to $1.3 million 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 allowance for loan losses was $11.8
million at September 30, 1997, compared with $10.9 million at June 30, 1997, and
$9.1 million at March 31, 1997. During the first three quarters in 1997, the
Company has increased the provision and allowance for loan losses to reflect the
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 $555.6 million, or 91.2% in the 21 month period
ended September 30, 1997.
18 of 23
<PAGE>
The ratio of the allowance for loan losses to total loans was 2.13% at September
30, 1997, compared with 1.63% at December 31, 1996, and 1.45% at September 30,
1996. The ratio of the allowance for loan losses to total nonperforming loans,
including foreclosed real estate, was 401% at September 30, 1997, compared to
224% at December 31, 1996 and 178% at September 30, 1996.
NONPERFORMING ASSETS
The following table provides the Company's nonperforming assets for the quarters
presented:
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in millions) 1997 1997 1997 1996 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $2,889 $3,170 $3,166 $1,875 $2,457
Restructured loans - - - - -
Accruing loans past due 90 days or more 409 3 933 1,237 686
------ ------ ------ ------ ------
Total nonperforming loans 3,298 3,173 4,099 3,112 3,143
OREO 96 325 289 152 -
------ ------ ------ ------ ------
Total nonperforming assets $3,394 $3,498 $4,388 $3,264 $3,143
====== ====== ====== ====== ======
Total nonperforming assets to total
assets 0.44% 0.45% 0.66% 0.52% 0.54%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Total nonperforming assets, which includes nonperforming loans (see below) and
OREO, was $3.4 million at September 30, 1997, compared with $3.3 million at
December 31, 1996, and $3.1 million at September 30, 1996. Nonperforming loans,
which includes non-accrual loans, restructured loans, and accrual loans which
are past due 90 days or more, were $3.3 million at September 30, 1997, compared
with $3.1 million at December 31, 1996, and $3.1 million at September 30, 1996.
Accruing loans past due 90 days or more, which are well secured and in the
process of collection, were $409,000 at September 30, 1997, compared with $1.2
million at December 31, 1996, and $686,000 at September 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 $13.6 million at September 30, 1997, from
$9.4 million at December 31, 1996. The $4.2 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 September 30, 1997, the Company had one foreclosed property for $96,000,
compared with $152,000 at December 31, 1996, and none at September 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.
DEPOSITS
The Company emphasizes developing total client relationships with its customers
in order to increase its core deposit base. Deposits reached $698.1 million at
September 30, 1997, an increase of 25%, compared to deposits of $559.3 million
at December 31, 1996.
19 of 23
<PAGE>
Total average interest-bearing deposits increased 35% to $496.5 million for the
nine month period ended September 30, 1997, compared to an average of $367.9
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 Banking Group.
Non-interest-bearing deposits were $151.2 million at September 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, Trust
Preferred Securities, 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>
September 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
(Dollar in thousands)
<S> <C> <C> <C> <C> <C> <C>
GREATER BAY BANCORP $71,012 9.28% $71,012 11.21% $81,978 12.94%
Well capitalized requirement $38,242 5.00% $38,008 6.00% $63,346 10.00%
Excess capital $32,770 4.28% $33,004 5.21% $18,632 2.94%
MID-PENINSULA BANK $30,136 8.73% $30,136 11.11% $33,532 12.36%
Well capitalized requirement $17,252 5.00% $16,280 6.00% $27,133 10.00%
Excess capital $12,884 3.73% $13,856 5.11% $ 6,399 2.36%
CUPERTINO NATIONAL BANK $30,566 7.45% $30,566 8.30% $38,215 10.37%
Well capitalized requirement $20,522 5.00% $22,106 6.00% $36,843 10.00%
Excess capital $10,044 2.45% $ 8,460 2.30% $ 1,372 0.37%
<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
(Dollar in thousands)
<S> <C> <C> <C> <C> <C> <C>
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 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.
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
20 of 23
<PAGE>
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 $50.0 million in inter-bank Fed Fund purchase lines, as well as $233.0
million in institutional deposit or brokered deposit lines, and $240.0 million
in reverse repurchase lines. As of September 30, 1997, the Company had no
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 September 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 $9.6 million for the nine months ended September 30, 1997,
compared to $4.5 million for the same period in 1996. Cash used for investing
activities totaled $133.5 million for the nine months ended September 30, 1997,
as compared to $102 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 September 30, 1997 net cash provided by financing
activities was $147.0 million. Historically, the primary financing activity of
the Company has been deposits and short-term borrowings. Deposits increased
$138.8 million for the period ended September 30, 1997 and short-term borrowings
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 September 30, 1996, net cash provided by financing activities was $99.0
million. Deposits increased $98.5 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
21 of 23
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 - ITEM 3, ITEM 5
Not applicable
ITEM 4 - None
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 September 12, 1997, the Company filed a form 8-K reporting that (a)
pursuant to an Agreement and Plan of Reorganization by and among Greater
Bay Bancorp ("GBB"), GBB Acquisition Corp., a wholly-owned subsidiary of
GBB ("Newco") and Peninsula Bank of Commerce ("PBC") dated September 5,
1997, GBB will acquire PBC via the merger of Newco with and into PBC, with
PBC the surviving entity which will continue to operate as a banking
subsidiary of GBB. Each share of PBC common stock, no par value, will be
converted into the right to receive approximately 1.2 shares of GBB common
stock, no par value.
In connection with the Reorganization Agreement, PBC and GBB entered into a
Stock Option Agreement dated September 5, 1997, pursuant to which PBC
granted GBB an option, exercisable upon the occurrence of certain events,
to purchase up to 19.9% of the issued and outstanding shares of PBC common
stock.
22 of 23
<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: October, 1997
23 of 23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 39,803
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 37,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 87,465
<INVESTMENTS-CARRYING> 42,965
<INVESTMENTS-MARKET> 43,584
<LOANS> 541,234
<ALLOWANCE> (11,802)
<TOTAL-ASSETS> 777,597
<DEPOSITS> 698,132
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,449
<LONG-TERM> 23,000
0
0
<COMMON> 36,181
<OTHER-SE> 14,835
<TOTAL-LIABILITIES-AND-EQUITY> 777,597
<INTEREST-LOAN> 38,453
<INTEREST-INVEST> 4,712
<INTEREST-OTHER> 2,027
<INTEREST-TOTAL> 45,192
<INTEREST-DEPOSIT> 15,630
<INTEREST-EXPENSE> 17,270
<INTEREST-INCOME-NET> 27,922
<LOAN-LOSSES> 5,287
<SECURITIES-GAINS> (44)
<EXPENSE-OTHER> 17,189
<INCOME-PRETAX> 9,963
<INCOME-PRE-EXTRAORDINARY> 9,963
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,097
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68
<YIELD-ACTUAL> 9.29
<LOANS-NON> 2,389
<LOANS-PAST> 457
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,066
<CHARGE-OFFS> 822
<RECOVERIES> 25
<ALLOWANCE-CLOSE> 11,802
<ALLOWANCE-DOMESTIC> 11,802
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
