<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, 1998
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)
(650) 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 30, 1998:
9,596,331
This report contains a total of 38 pages.
<PAGE>
GREATER BAY BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 1998 and December 31,
1997..................................................... 3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 1998 and
1997..................................................... 4
Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months Ended
September 30, 1998 and
1997..................................................... 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997............ 6
Notes to Consolidated Financial
Statements............................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of
Operations............................................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 36
Signatures............................................... 37
2
<PAGE>
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Dollars in thousands) (unaudited) 1997*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 55,399 $ 53,167
Federal funds sold 79,300 75,000
Other short term securities 91,412 103,549
-----------------------------
Cash and cash equivalents 226,111 231,716
Investment securities:
Available for sale (amortized cost $313,741 and $166,169 at
September 30, 1998 and December 31, 1997, respectively) 310,218 166,413
Held to maturity (market value $90,030 and $45,246 at
September 30, 1998 and December 31, 1997, respectively) 88,914 44,461
Other securities 4,792 2,253
-----------------------------
Investment securities 403,924 213,127
Loans:
Commercial 388,094 362,747
Real estate construction and land 153,378 112,514
Real estate term 245,340 196,217
Consumer and other 75,673 82,914
Deferred loan fees and discounts (2,966) (2,765)
-----------------------------
Total loans, net of deferred fees 859,519 751,627
Allowance for loan losses (19,861) (16,394)
-----------------------------
Total loans, net 839,658 735,233
Property, premises and equipment 10,650 8,498
Interest receivable and other assets 55,040 29,091
-----------------------------
Total assets $ 1,535,383 $ 1,217,665
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 237,596 $ 219,495
MMDA, NOW and savings 802,220 627,475
Time certificates, $100,000 and over 198,286 183,147
Other time certificates 49,830 41,031
-----------------------------
Total deposits 1,287,932 1,071,148
Other borrowings 89,735 32,355
Subordinated debt 3,000 3,000
Other liabilities 15,764 14,623
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary trust holding solely junior subordinated debentures 50,000 20,000
-----------------------------
Total liabilities 1,446,431 1,141,126
-----------------------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized;
none issued - -
Common stock, no par value: 24,000,000 shares authorized;
9,584,634 and 9,303,930 shares issued and outstanding as of
September 30, 1998 and December 31, 1997, respectively** 55,548 52,268
Accumulated other comprehensive income 1,779 223
Retained earnings 31,625 24,048
-----------------------------
Total shareholders' equity 88,952 76,539
-----------------------------
Total liabilities and shareholders' equity $ 1,535,383 $ 1,217,665
=============================
</TABLE>
*Restated to reflect the merger with Pacific Rim Bancorporation and Pacific
Business Funding Corporation on a pooling of interests basis.
**Restated to reflect 2-for-1 stock split declared for shareholders of record
as of April 30, 1998.
See notes to consolidated financial statements.
3
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------------
(Dollars in thousands, except per share amounts) (unaudited) 1998 1997* 1998 1997*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $21,199 $ 18,458 $ 61,429 $ 50,350
Interest on investment securities:
Taxable 5,382 3,008 12,234 9,220
Tax - exempt 611 286 1,407 823
------- ------- -------- -------
Total interest on investment securities 5,993 3,294 13,641 10,043
Other interest income 2,669 1,272 7,869 3,071
------- ------- -------- -------
Total interest income 29,861 23,024 82,939 63,464
------- ------- -------- -------
INTEREST EXPENSE
Interest on deposits 10,968 7,939 29,221 22,489
Interest on long term borrowings 1,873 654 4,490 1,481
Interest on other borrowings 112 252 1,266 499
------- ------- -------- -------
Total interest expense 12,953 8,845 34,977 24,469
------- ------- -------- -------
Net interest income 16,908 14,179 47,962 38,995
Provision for loan losses 1,791 1,284 4,134 5,677
------- ------- -------- -------
Net interest income after provision for loan losses 15,117 12,895 43,828 33,318
------- ------- -------- -------
OTHER INCOME
Trust fees 642 550 1,809 1,485
Service charges and other fees 361 433 1,130 1,207
Gain on sale of SBA loans 290 216 755 559
Gain (loss) on investments, net 4 5 54 (32)
Warrant income 134 34 631 1,148
Other income 230 327 380 967
------- ------- -------- -------
Total other income 1,661 1,565 4,759 5,334
OPERATING EXPENSES
Compensation and benefits 5,753 5,137 16,974 15,038
Occupancy and equipment 1,542 1,391 4,472 4,036
Telephone, postage and supplies 429 342 1,268 1,013
Legal and other professional fees 403 526 1,165 1,476
Contribution to the GBB Foundation 192 - 893 -
Marketing and promotion 368 344 853 896
Directors' fees 133 104 426 373
Client services 122 111 404 285
Insurance 87 - 262 -
FDIC insurance and regulatory assessments 88 70 254 210
Other real estate owned 43 (10) 81 89
Legal settlement recovery - - - (1,700)
Other 723 476 2,046 1,661
------- ------- -------- -------
Total operating expenses, excluding merger costs 9,883 8,491 29,098 23,377
Merger costs 537 - 2,511 -
------- ------- -------- -------
Total operating expenses 10,420 8,491 31,609 23,377
------- ------- -------- -------
Income before provision for income taxes 6,358 5,969 16,978 15,275
Provision for income taxes 1,964 2,147 5,383 5,453
------- ------- -------- -------
Net income $ 4,394 $ 3,822 $ 11,595 $ 9,822
======= ======= ======== =======
Net income per share - basic** $ 0.46 $ 0.41 $ 1.23 $ 1.06
======= ======= ======== =======
Net income per share - diluted** $ 0.43 $ 0.38 $ 1.14 $ 1.00
======= ======= ======== =======
</TABLE>
* Restated on an historical basis to reflect the merger with Peninsula Bank of
Commerce, Pacific Rim Bancorportion and Pacific Business Funding Corporation
on a pooling of interests basis.
** Restated to reflect 2-for-1 stock split declared for shareholders of
record as of April 30, 1998.
See notes to consolidated financial statements.
4
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(Dollars in thousands) (unaudited) 1998 1997* 1998 1997*
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 4,394 $ 3,822 $ 11,595 $ 9,822
Other comprehensive income:
Unrealized holding gains (losses) arising during period (net of taxes of
$1,112 and $(39) for the three months ended September 30, 1998 and 1997,
and $1,066 and $13 for the nine months ended September 30, 1998 and 1997,
respectively) 1,591 (56) 1,524 19
Reclassification adjustment for gains (losses)
included in net income (net of taxes of $2 and $2 for the three months
ended 1998 and 1997, and $22 and $(12) for the nine month ended 1998
and 1997, respectively) 2 3 32 (18)
------------------ ------------------
Other comprehensive income (losses) 1,593 (53) 1,556 1
------------------ ------------------
Comprehensive income $ 5,987 $ 3,769 $ 13,151 $ 9,823
================== ==================
</TABLE>
* Restated on an historical basis to reflect the merger with Peninsula Bank of
Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation
on a pooling of interests basis.
See notes to consolidated financial statements.
5
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
(Dollars in thousands) (unaudited) 1998 1997*
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net income $ 11,595 $ 9,822
Reconcilement of net income to net cash from operations:
Provision for loan losses 4,134 5,677
Depreciation and amortization 999 1,038
Deferred income taxes (1,427) (1,876)
(Gain) loss on sale of investment, net - 58
Changes in:
Accrued interest receivable and other assets (2,496) (4,456)
Accrued interest payable and other liabilities 1,141 1,426
Deferred loan fees and discounts, net 201 518
----------------------------
Operating cash flows, net 14,147 12,207
----------------------------
CASH FLOWS - INVESTING ACTIVITIES
Maturities and partial paydowns on of investment securities:
Held to maturity 26,816 22,682
Available for sale 217,402 44,719
Purchase of investment securities:
Held to maturity (70,986) (2,472)
Available for sale (522,298) (93,215)
Other securities (2,539) (559)
Proceeds from sale of available for sale securities 162,872 10,948
Loans, net (108,770) (130,743)
Purchase of property, premises and equipment (3,691) (1,129)
Purchase of insurance policies (21,985) -
----------------------------
Investing cash flows, net (323,179) (149,769)
----------------------------
CASH FLOWS - FINANCING ACTIVITIES
Net change in deposits 216,784 149,301
Net change in other borrowings - short-term (12,620) (7,175)
Proceeds on other borrowings - long term 70,000 (500)
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures issued 30,000 20,000
Proceeds from sale of stock 3,281 1,875
Cash dividends (4,018) (2,050)
----------------------------
Financing cash flows, net 303,427 161,451
----------------------------
Net change in cash and cash equivalents (5,605) 23,890
Cash and cash equivalents at beginning of period 231,716 191,600
----------------------------
Cash and cash equivalents at end of period $ 226,111 $ 215,490
============================
CASH FLOWS - SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 33,801 $ 24,615
============================
Income taxes $ 7,320 $ 6,825
============================
Non-cash transactions:
Additions to other real estate owned $ 105 $ 469
============================
</TABLE>
*Restated on an historical basis to reflect the merger with Peninsula Bank of
Commerce, Pacific Rim Corporation and Pacific Business Funding Corporation on a
pooling of interests basis.
See notes to consolidated financial statements.
6
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The results of operations for the quarter ended September 30, 1998 are not
necessarily indicative of the results expected for any subsequent quarter or for
the entire year ended December 31, 1998. The financial statements should be
read in conjunction with the consolidated financial statements, and the notes
thereto, included in the 1997 annual report to shareholders.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Greater Bay
Bancorp ("Greater Bay" on a parent-only basis and the "Company" on a
consolidated basis) and its wholly owned subsidiaries, Cupertino National Bank,
Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank, Peninsula Bank of
Commerce ("PBC"), GBB Capital I and GBB Capital II. All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the current presentation. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
the prevailing practices within the banking industry.
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 and disclosure of
contingent 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.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). This
statement requires companies to classify items of other comprehensive income by
their nature in the financial statement and display the accumulated other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. As of September 30, 1998
and December 31, 1997, the only component of accumulated other comprehensive
income was unrealized gains on securities available for sale. The changes to
the balances of accumulated other comprehensive income are as follows:
Accumulated
Other Comprehensive
(Dollars in thousands) Income
- ------------------------------------------------------------------
Balance - as of December 31, 1997 $ 223
Current period change 1,556
-------
Balance - as of September 30, 1998 $ 1,779
=======
Per Share Data
Net income per share is stated in accordance with Statement of Financial
Accounting Standards No. 128 Earnings per Share. Basic net income per share is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding during the year. Diluted net income
per share is computed by dividing diluted net income available to common
shareholders by the weighted average number of common shares and common
equivalent shares outstanding including dilutive stock options. The computation
of common stock equivalent shares is based on the weighted average market price
of the Company's common stock throughout the period. All periods presented
include the effect of the 2-for-1 stock split declared on March 24, 1998 and
effective for shareholders of record on April 30, 1998 (see Note 4).
7
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
three and nine month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the three months ended For the three months ended
September 30, 1998 September 30, 1997
-------------------------------------- --------------------------------------
Average Average Per
Income Shares* Per Share Income Shares* Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 4,394 $ 3,822
Basic net income per share:
Income available to common shareholders 4,394 9,525,000 $ 0.46 3,822 9,220,000 $ 0.41
Effect of dilutive securities:
Stock options - 698,000 - - 723,000 -
----------------------------------- -----------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 4,394 10,223,000 $ 0.43 $ 3,822 9,943,000 $ 0.38
=================================== ===================================
<CAPTION>
For the nine months ended For the nine months ended
September 30, 1998 September 30, 1997
-------------------------------------- --------------------------------------
Average Average Per
Income Shares* Per Share Income Shares* Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 11,595 $ 9,822
Basic net income per share:
Income available to common shareholders 11,595 9,448,000 $ 1.23 9,822 9,181,000 $ 1.06
Effect of dilutive securities:
Stock options - 756,000 - - 609,000 -
----------------------------------- -----------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 11,595 10,204,000 $ 1.14 $ 9,822 9,790,000 $ 1.00
=================================== ===================================
</TABLE>
* Restated to reflect 2-for-1 stock split declared for shareholders of record as
of April 30, 1998.
Options to purchase 60,000 and 23,000 shares that were considered
anti-dilutive whereby the options' exercise price was greater than the average
market price of the common shares, during the quarter ended and year to date
September 30, 1998, respectively, were excluded from this computation.
Weighted average shares outstanding and all per share amounts included
in the consolidated financial statements and notes thereto are based upon the
increased number of shares giving retroactive effect to the 1997 merger with PBC
and the 1998 mergers with Pacific Rim Bancorporation ("PRB"), the former parent
of Golden Gate, and Pacific Business Funding Corporation ("PBFC").
Recent Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards, Employers' Disclosures about
Pensions and Other Postretirement Benefits ("SFAS No. 132"). This statement
standardizes the disclosure requirements for pensions and other postretirement
benefits and presents them in one footnote; requires that additional information
be disclosed regarding changes in the benefit obligation and fair values of plan
assets; eliminates certain disclosures that are no longer considered useful,
including general descriptions of the plan and permits the aggregation of
information about certain plans. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 132 is not expected
to have a significant impact on the Company.
8
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
On June 15, 1998, FASB issued Statement of Financial Accounting
Standards, Accounting for Derivative Instruments and Hedging Activities ("SFAS
No. 133"). SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999. The Company intends to adopt SFAS No. 133 in the
fourth quarter of 1998. SFAS No. 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. The adoption of SFAS
No. 133 is not expected to have a significant impact on the Company .
NOTE 2 -- MERGERS
On August 31, 1998, PBFC, an asset-based specialty finance company merged with
and into the Company. Upon consumation of the merger, the outstanding shares of
PBFC were converted into an aggregate of 298,000 shares of the Company's stock.
The stock was issued to former PBFC shareholders, in a tax-free exchange
accounted for as a pooling-of-interests.
9
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
The following table sets forth the composition of the operations of
the Company and PBFC for the six months ended June 30, 1998, prior to the
consummation of the merger on August 31, 1998:
As of
(Dollars in thousands) June 30, 1998
- ---------------------------------------------------------------
Net interest income:
Greater Bay Bancorp $ 30,077
Pacific Business Funding Corporation 1,154
--------
Combined $ 31,231
========
Provision for loan losses:
Greater Bay Bancorp $ 2,243
Pacific Business Funding Corporation 100
-------
Combined $ 2,343
=======
Net income:
Greater Bay Bancorp $ 6,628
Pacific Business Funding Corporation* 344
-------
Combined $ 6,972
=======
* Shown on a proforma basis to reflect taxes for PBFC which would have been
incurred had PBFC been a C-Corporation.
On May 8, 1998, PRB, the former holding company of Golden Gate, merged
with and into the Company. Upon consumation of the merger, the outstanding
shares of PRB were converted into an aggregate of 950,748 shares (as adjusted to
reflect the stock split) of the Company's stock. The stock was issued to former
PRB's sole shareholder, the Leo K. W. Lum PRB Revocable Trust (the "Trust"), in
a tax-free exchange accounted for as a pooling-of-interest. The securities
issued in the merger were sold in a private transaction pursuant to an
applicable exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act").
10
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
The following table sets forth the composition of the operations of
the Company and PRB, on a consolidated basis with Golden Gate, for the three
months ended March 31, 1998, prior to the consummation of the merger on May 8,
1998:
As of
(Dollars in thousands) March 31, 1998
- -------------------------------------------------------------------
Net interest income:
Greater Bay Bancorp $ 13,366
Pacific Rim Bancorporation 1,285
--------
Combined $ 14,651
========
Provision for loan losses:
Greater Bay Bancorp $ 866
Pacific Rim Bancorporation 70
--------
Combined $ 936
========
Net income:
Greater Bay Bancorp $ 3,646
Pacific Rim Bancorporation 60
--------
Combined $ 3,706
========
There were no significant transactions between the Company and PRB
prior to the merger. All intercompany transactions have been eliminated.
11
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
NOTE 3 -- COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF AFFILIATE TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
On August 12, 1998, the Company completed an offering of Cumulative Trust
Preferred Securities Series A ("TPS II - Series A") in an aggregate amount of
$30 million through GBB Capital II, a wholly owned trust affiliate of the
Company formed for the purpose of the offering. The securities issued in the
offering were sold in a private transaction pursuant to an applicable exemption
form registration under the Securities Act. In October 1998, the Company through
GBB Capital II, commenced an offer to exchange its TPS II - Series A for a like
amount of its registered Cumulative Trust Preferred Securities Series B ("TPS
II - Series B"). The exchange offer was conducted in accordance with the terms
of the initial issuance of the TPS II - Series A. The exchange offer is
scheduled to expire at 5:00 p.m., Eastern Standard Time, on November 23, 1998,
unless extended.
The securities have an offering price (liquidation amount) of $1,000 per
security and will receive distributions at a variable rate of interest,
initially at 7.1875%. The interest rate will reset quarterly, equal to 3-month
LIBOR plus 150 basis points, and interest will be cumulative and payable
quarterly. As part of this transaction, the Company negotiated an interest rate
swap to fix the cost of the offering at 7.55% for 10 years.
The TPS II - Series A and B accrue and pay distributions quarterly
beginning December 15, 1998 at a floating rate equal to the 3-month LIBOR plus
150 basis points on the liquidation amount of $1,000 per share TPS II - Series A
and B. The expense for those distributions will be included in interest on long
term borrowings. Greater Bay has fully and unconditionally guaranteed all of the
obligations of GBB Capital II. The net proceeds from the sale of the TPS II -
Series A and B have been invested by GBB Capital II in Junior Subordinated
Debentures (the "Debentures") of Greater Bay.
The TPS II - Series A and B are mandatorily redeemable, in whole or in
part, upon repayment of the Debentures at their stated maturity of September 15,
2028 or their earlier redemption. The Debentures are redeemable prior to
maturity at the option of the Company, on or after September 15, 2008, in whole
at any time or in part from time to time.
Greater Bay invested approximately $15 million of the net proceeds in the
Company's subsidiary banks to increase their capital levels. The Company intends
to use the remaining net proceeds for general corporate purposes. Under
applicable regulatory guidelines, Greater Bay expects that a certain portion of
the TPS II - Series A and B will qualify as Tier I Capital, and the remaining
portion will qualify as Tier 2 capital.
12
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
NOTE 4 -- BORROWINGS
The Company's borrowings are detailed as follows:
September 30, December 31,
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Other borrowings:
Short term borrowings:
Securities sold under agreements
to repurchase $ 17,150 $ 19,480
Other short term notes payable 135 2,675
Advances under credit line - 7,750
-------- --------
Total short term borrowings 17,285 29,905
-------- --------
Long term borrowings:
Securities sold under agreements
to repurchase 50,000 -
FHLB advances 20,000 -
Promissory notes 2,450 2,450
-------- --------
Total other long term borrowings 72,450 2,450
-------- --------
Total other borrowings $ 89,735 $ 32,355
======== ========
Subordinated notes, due September 15, 2005 $ 3,000 $ 3,000
-------- --------
Total subordinated debt $ 3,000 $ 3,000
======== ========
During the nine month period ended September 30, 1998 and the twelve month
period ended December 31, 1997, the average balance of securities sold under
short term agreements to repurchase was $15,337,000 and $5,278,000,
respectively, and the average interest rates during those periods were 5.35% and
5.71%, respectively. Securities sold under short term agreements to repurchase
generally mature within 90 days of dates of purchase.
During the nine month period ended September 30, 1998 and the twelve month
period ended December 31, 1997, the average balance of federal funds purchased
was $681,000 and $1,523,000, respectively, and the average interest rates during
those periods were 5.53% and 5.32%, respectively.
The Company has sold securities under long term agreements to repurchase
which mature in the year 2003 and have an average interest rate of 5.21%. The
counterparties to these agreements have put options which give them the right to
demand early repayment. As of September 30, 1998, $40.0 million of these
borrowings are subject to early repayment beginning in 1999 and $10.0 million
are subject to early repayment beginning in 2000.
The FHLB advances will mature in the year 2003 and have an average interest
rate of 5.13%. The advances are collateralized by securities pledged to the
FHLB. Under the terms of the advances, the FHLB has a put option which gives it
the right to demand early repayment beginning in 1999.
The promissory notes, which bear an interest rate of 13.76% and will mature
April 15, 2000, were offered to PBFC's officers along with other accredited
investors within the definition of Rule 501 under the Securities Act of 1933, as
amended. The notes are redeemable by the Company at any time.
The subordinated notes, which will mature on September 15, 2005, were
offered to members of Cupertino National Bank's Board of Directors and bank
officers along with other accredited investors within the definition of Rule 501
under the Securities Act of 1933, as amended. The notes bear an interest rate of
11.5%. The notes are redeemable by the Company any time after September 30, 1998
at a premium ranging from 0% to 5%. The notes qualify as Tier 2 capital for the
Company.
13
<PAGE>
Notes To Consolidated Financial Statements
As of September 30, 1998 and 1997 and for the
Three and Nine Months Ended September 30, 1998 and 1997
NOTE 5 -- STOCK SPLIT
On March 24, 1998 the Company announced a 2-for-1 stock split of its common
stock. This split was effective for shareholders of record as of April 30, 1998
with a payment date of May 15, 1998. All share and per share information has
been retroactively restated to reflect this split.
NOTE 6 -- CASH DIVIDEND
The Company declared a cash dividend of $0.095 cents per share payable on
October 15, 1998 to shareholders of record as of September 30, 1998.
14
<PAGE>
Item 2--Management's Discussion and Analysis of Financial Condition
And Results of Operations
OVERVIEW
Greater Bay Bancorp ("Greater Bay," on a parent-only basis, and the "Company,"
on a consolidated basis) was formed as the result of the merger in November 1996
between Cupertino National Bancorp, the former holding company for Cupertino
National Bank ("CNB"), and Mid-Peninsula Bancorp, the former holding company for
Mid-Peninsula Bank ("MPB"). In December 1997, the Company completed a merger
with Peninsula Bank of Commerce ("PBC"), whereby PBC joined CNB and MPB as the
third wholly owned banking subsidiary of Greater Bay. In May 1998, the Company
completed a merger with Pacific Rim Bancorporation ("PRB"), the holding company
for Golden Gate Bank ("Golden Gate"), whereby Golden Gate joined CNB, MPB and
PBC as the fourth wholly owned banking subsidiary of Greater Bay. In August
1998, the Company completed a merger with Pacific Business Funding Corporation
("PBFC"). All mergers were accounted for as pooling of interests. All of the
financial information for the Company for the periods prior to the mergers has
been restated to reflect the pooling of interests, as if they occurred at the
beginning of the earliest reporting period presented. The financial information
includes the results of the Company's operating divisions, Greater Bay Bank
Santa Clara Valley Commercial Banking Group, Greater Bay Corporate Finance
Group, Greater Bay International Banking Division, Greater Bay Trust Company,
Pacific Business Funding and Venture Banking Group.
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
under "Financial Highlights" and the Company's consolidated financial data
included in the Company's 1997 Annual Report to Shareholders. Certain
statements under this caption constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed 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, fluctuation in interest rates, credit quality and government
regulation.
RESULTS OF OPERATIONS
The Company reported net income of $4.9 million (excluding merger costs, net of
taxes) for the third quarter of 1998, compared with net income of $3.8 million,
for the third quarter of 1997. Diluted net income per share was $0.47 (excluding
merger costs, net of taxes) and $0.38 for the quarters ended September 30, 1998
and 1997, respectively. The Company reported net income, including merger costs
of $4.4 million, and diluted net income per share of $0.43 for the quarter ended
September 30, 1998. The annualized return on average assets and return on
average shareholders' equity excluding merger costs net of tax was 1.27% and
21.79% for the third quarter of 1998, compared with 1.41% and 19.54%,
respectively, for the comparable prior year period.
The earnings for the third quarter of 1997 include $134,000 in warrant
income. 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.
Net income totaled $13.3 million, (excluding merger costs, net of taxes)
for the nine months ended September 30, 1998, versus $9.8 million for the
respective 1997 period. Diluted net income per share was $1.30 (excluding merger
costs, net of taxes) and $1.00 for the nine months ended 1998 and 1997,
respectively. For the nine months of 1998, the annualized return on average
assets, excluding merger costs, was 1.30% and the return on average
shareholders' equity was 21.74% versus 1.29% and 17.85%, respectively, for the
comparable prior year period. The Company's net income, including merger costs,
was $11.6 million and its diluted net income per share was $1.14 for the year to
date September 30, 1998.
The increase in 1998 net income was the result of significant loan and
deposit growth, which resulted in increased net interest income, and increases
in trust fees, depositors' service fees and other fee income. Operating expense
increases required to service and support the Company's growth partially offset
the increase in revenues.
15
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
During the first quarter of 1998, Greater Bay established the Greater Bay
Bancorp Foundation (the "Foundation"). The Foundation was formed to provide a
vehicle through which the Company, its officers and directors can provide
support to the communities in which the Company does business. The Foundation
focuses its support on initiatives related to education, health and economic
growth. To support the Foundation, the Company contributed appreciated
warrants, which had an unrealized gain of $192,000 and $701,000 in the third and
first quarter of 1998, respectively. The contribution of the warrants triggered
recognition of warrant income of $893,000 ($631,000 net of related employee
incentives). Concurrently, the Company recorded $893,000 of expense for the
contribution to the GBB Foundation. For income tax purposes, the Company is not
required to recognize the warrant income, however it is allowed to deduct the
fair market value of the contributed warrants. As a result, the Company
recognized a tax benefit of $385,000 from this transaction.
In the first quarter of 1998, the Company recorded a $484,000 write down on
equity securities in accordance with APB 18.
The provision for loan losses was $4.1 million for the nine months ended
September 30, 1998 and $5.7 million for the same period ended September 30,
1997. For the quarter ended September 30, 1998, the Company's provision for
loan losses was $1.8 million, as compared to $1.3 million for the preceding
quarter and $1.3 million for the quarter ended September 30, 1997. The ratio of
loan loss reserve to total loans was 2.31% at September 30, 1998 compared to
2.18% at December 31, 1997 and 2.09% at September 30, 1997.
Net Interest Income
Net interest income for the third quarter of 1998 was $16.9 million, a $1.0
million increase over the second quarter of 1998 and a $2.8 million increase
over the third quarter of 1997. The increase from the third quarter of 1997 to
the third quarter of 1998 was primarily due to the $382.5 million, or 38.0%
increase in average interest-earning assets which is partially offset by a 54
basis point decrease in the Company's yield on interest-earning assets from
9.06% in the third quarter of 1997 to 8.52% in the third quarter of 1998. Net
interest income increased 19.2% in the quarter ended September 30, 1998 from the
same quarter in 1997 despite the 64 basis point decrease in the Company's
interest rate spread. The Company's interest rate spread was affected by a
higher percentage of interest-earning assets in Investment Securities during the
third quarter of 1998 compared to the same quarter in 1997. The interest rate
spread for these periods was further reduced by the low spread earned on PBC's
Special Deposit (discussed in Note 7 to the Financial Statements contained in
the Company's Annual Report to Shareholders). The average investment and
deposit balances related to the Special Deposit during these periods were $88.7
million and $91.5 million, respectively, on which the Company earned spreads of
approximately 1.50%. Excluding PBC's Special Deposit, the interest rate spread
would have been 4.27% and 5.02% for the third quarter of 1998 and 1997,
respectively.
16
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
The following table presents, for the quarterly periods indicated,
condensed average balance sheet information for the Company, together with
interest income and yields earned on average interest-earning assets and
interest expense and rates paid on average interest-bearing liabilities.
Average balances are average daily balances:
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998
----------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 95,787 $ 1,396 5.78%
Other short term investments 90,974 1,273 5.55%
Investment securities:
Taxable 328,811 5,382 6.49%
Tax-exempt (1) 50,555 611 4.79%
Loans (2), (3) 824,356 21,199 10.20%
--------------------------
Total interest-earning assets 1,390,483 29,861 8.52%
Noninterest-earning assets 128,106
--------------------------
Total assets $ 1,518,589 29,861
============== -----------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 809,352 7,645 3.75%
Time deposits, over $100,000 204,859 2,698 5.23%
Other time deposits 48,478 625 5.11%
--------------------------
Total interest-bearing deposits 1,062,689 10,968 4.09%
Other borrowings 72,692 1,112 6.07%
Subordinated debt 3,000 87 11.51%
TPS 37,428 786 8.33%
--------------------------
Total interest-bearing liabilities 1,175,809 12,953 4.37%
Noninterest bearing deposits 233,392
Other noninterest-bearing liabilities 23,990
Shareholders' equity 85,398
--------------------------
Total shareholders' equity and liabilities $ 1,518,589 12,953
============== -----------
Net interest income $ 16,908
========
Interest rate spread 4.15%
Contribution of interest free funds 0.67%
Net yield on interest-earning assets (4) 4.82%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1998
----------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 102,223 $ 1,403 5.51%
Other short term investments 97,823 1,383 5.67%
Investment securities:
Taxable 238,025 3,636 6.13%
Tax-exempt (1) 37,872 480 5.08%
Loans (2), (3) 765,019 20,608 10.80%
-------------------------
Total interest-earning assets 1,240,962 27,510 8.89%
Noninterest-earning assets 135,022
-------------------------
Total assets $ 1,375,984 27,510
============== -----------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 735,456 6,826 3.72%
Time deposits, over $100,000 154,721 2,072 5.37%
Other time deposits 47,365 603 5.11%
-------------------------
Total interest-bearing deposits 937,542 9,501 4.06%
Other borrowings 97,870 1,517 6.22%
Subordinated debt 3,000 87 11.60%
TPS 20,000 487 9.77%
-------------------------
Total interest-bearing liabilities 1,058,412 11,592 4.39%
Noninterest bearing deposits 217,839
Other noninterest-bearing liabilities 20,193
Shareholders' equity 79,540
-------------------------
Total shareholders' equity and liabilities $ 1,375,984 11,592
============== -----------
Net interest income $ 15,918
========
Interest rate spread 4.50%
Contribution of interest free funds 0.65%
Net yield on interest-earning assets (4) 5.14%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1997
----------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Rate
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 93,420 $ 1,239 5.26%
Other short term investments 96,314 1,198 4.93%
Investment securities:
Taxable 115,705 1,843 6.32%
Tax-exempt (1) 21,783 286 5.21%
Loans (2), (3) 680,724 18,458 10.76%
--------------------------
Total interest-earning assets 1,007,946 23,024 9.06%
Noninterest-earning assets 63,840
--------------------------
Total assets $ 1,071,786 23,024
============== -----------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 596,712 $ 5,502 3.66%
Time deposits, over $100,000 132,343 1,693 5.08%
Other time deposits 57,488 744 5.13%
--------------------------
Total interest-bearing deposits 786,543 7,939 4.00%
Other borrowings 11,235 337 11.90%
Subordinated debt 3,000 87 11.51%
TPS 20,000 482 9.56%
--------------------------
Total interest-bearing liabilities 820,778 8,845 4.28%
Noninterest bearing deposits 165,265
Other noninterest-bearing liabilities 13,409
Shareholders' equity 72,334
--------------------------
Total shareholders' equity and liabilities $ 1,071,786 8,845
============== -----------
Net interest income $ 14,179
=========
Interest rate spread 4.79%
Contribution of interest free funds 0.79%
Net yield on interest-earning assets (4) 5.58%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are
6.91%, 7.35% and 7.56% for the quarters ended September 30, 1998, June 30, 1998
and September 30, 1997, respectively, using the federal statuary rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $690,000, $871,000 and $1,014,000
for the quarters ended September 30, 1998, June 30, 1998 and September 30,
1997, respectively.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
17
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset in loans and investments, compared to the
volume of interest-bearing liabilities represented by deposits and borrowings,
combined with the spread, produces the changes in the net interest income
between periods. The table below sets forth, for the periods indicated, a
summary of the changes in average asset and liability balances (volume) and
changes in average interest rates (rate):
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998
Compared with June 30, 1998
favorable / (unfavorable)
(Dollars in thousands)(1) Volume Rate Net
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ (82) $ 75 $ (7)
Other short term investments (85) (25) (110)
Investment securities:
Taxable 1,509 237 1,746
Tax-exempt 159 (28) 131
Loans 1,681 (1,090) 591
-----------------------------
Total interest income 3,182 (831) 2,351
-----------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (768) (51) (819)
Time deposits over $100,000 (682) 56 (626)
Other time deposits (20) (2) (22)
-----------------------------
Total interest-bearing deposits (1,470) 3 (1,467)
Other borrowings 371 34 405
Subordinated debt - - -
TPS (378) 79 (299)
-----------------------------
Total interest expense (1,477) 116 (1,361)
-----------------------------
Net increase (decrease) in net interest income $1,705 $ (715) $ 990
=============================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998
Compared with September 30, 1997
favorable / (unfavorable)
(Dollars in thousands)(1) Volume Rate Net
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 32 $ 125 $ 157
Other short term investments (68) 143 75
Investment securities:
Taxable 3,487 52 3,539
Tax-exempt 349 (24) 325
Loans 3,717 (976) 2,741
------------------------------
Total interest income 7,517 (680) 6,837
------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (2,005) (138) (2,143)
Time deposits over $100,000 (954) (51) (1,005)
Other time deposits 116 3 119
------------------------------
Total interest-bearing deposits (2,843) (186) (3,029)
Other borrowings (1,012) 237 (775)
Subordinated debt - - -
TPS (372) 68 (304)
------------------------------
Total interest expense (4,227) 119 (4,108)
------------------------------
Net increase (decrease) in net interest income $ 3,290 $ (561) $ 2,729
==============================
</TABLE>
(1) Changes in interest income and expense which are not attributable
specifically to either volume or rate, are allocated proportionately
between both variances. Nonaccrual loans are excluded in average loans.
THE QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
-------------------------------------------------------------------
Interest income in the third quarter ended September 30, 1998 increased
29.7% to $29.8 million from $23.0 million in the same period in 1997. This was
primarily due to the $7.5 million favorable volume variance which resulted from
a $382.5 million, or 38.0%, increase in average interest-earning assets over the
comparable prior year. Average loans increased $143.7 million, or 21.1%, to
$824.4 million for the third quarter of 1998 as compared to $680.7 million for
the third quarter of 1997.
The average yield on interest-earning assets decreased 54 basis points to
8.52% in the third quarter of 1998 from 9.06% in the same period of 1997
primarily due to the decrease on the yields on loans. Average yields on loans
decreased 56 basis points to 10.20% in the three months ended September 30, 1998
from 10.76% for the same period in 1997.
Interest expense in the third quarter of 1998 increased 46.4% to $12.9
million from $8.8 million for the same period in 1997. This increase was due to
greater volumes of interest-bearing liabilities offset by slightly lower
interest rates paid on interest-bearing liabilities. Average interest-bearing
liabilities increased 43.3% to $1.2 billion in the third quarter of 1998 from
$820.8 million in the same period for 1997 due to the efforts of the Company's
relationship managers in generating core deposits from their client
relationships, deposits derived from the activities of the Greater Bay Trust
Company and the Venture Banking Group, both divisions of CNB, and increases in
other borrowings.
18
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
During the third quarter of 1998, average noninterest-bearing deposits
increased to $233.4 million from $165.3 million in the same period in 1997.
Average noninterest-bearing deposits comprised 18.0% of total deposits for the
third quarter of 1998, compared to 17.4% for the same period in 1997.
THE QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO JUNE 30, 1998
--------------------------------------------------------------
Interest income increased 8.6% to $29.8 million for the third quarter of
1998, as compared to $27.5 million for the previous quarter. Average interest-
earning assets increased 12.0% in the third quarter of 1998 from $1.2 billion
for the previous quarter. The increase in interest income for the third quarter
of 1998, as compared to the prior quarter, was primarily the result of an
increase in the average balances of loans which increased $59.3 million and
investments which grew $96.6 million from the prior quarter. The impact of
increases in average balances on loans was offset by a decrease in the yield
earned on those assets. The yield on the higher volume of average interest-
earning assets declined 37 basis points to 8.52% in the third quarter of 1998
from 8.89% in the second quarter of 1998, primarily as a result of decreases in
market rates of interest and the purchase of investments with shorter
maturities.
Interest expense in the third quarter of 1998 increased 11.7% to $12.9
million from $11.5 million in the prior quarter. The increase is primarily the
result of increased average deposits, which rose to $1.1 billion for the third
quarter of 1998, as compared to $937.5 million for the prior quarter. As a
result of the changes in the liability mix, the average rate paid on average
interest-bearing liabilities decreased 2 basis points to 4.37% in the third
quarter of 1998 from 4.39% in the prior quarter. Corresponding to the growth in
average interest-earning assets, average interest-bearing liabilities increased
11.1% to $1.2 billion in the third quarter of 1998 from $1.1 billion for the
second quarter of 1998.
As a result of the foregoing, the Company's interest rate spread declined
to 4.15% in the third quarter of 1998 compared to 4.50% in the prior quarter and
the net yield on interest-earning assets declined to 4.82% from 5.14%.
19
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
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
September 30, 1998
------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Rate
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 91,478 $ 3,728 5.45%
Other short term investments 100,192 4,141 5.53%
Investment securities:
Taxable 262,400 12,234 6.23%
Tax-exempt (1) 37,033 1,407 5.08%
Loans (2), (3) 788,743 61,429 10.41%
Total interest-earning assets 1,279,846 82,939 8.66%
Noninterest-earning assets 89,627
------------------------
Total assets $ 1,369,473 82,939
============= ----------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 733,809 20,426 3.72%
Time deposits, over $100,000 178,266 6,963 5.22%
Other time deposits 47,392 1,832 5.17%
------------------------
Total interest-bearing deposits 959,467 29,221 4.07%
Other borrowings 73,959 3,736 6.75%
Subordinated debt 3,000 259 11.54%
TPS 25,495 1,761 9.23%
------------------------
Total interest-bearing liabilities 1,061,921 34,977 4.40%
Noninterest bearing deposits 210,158
Other noninterest-bearing liabilities 15,804
Shareholders' equity 81,590
------------------------
Total shareholders' equity and liabilities $ 1,369,473 34,977
============= ----------
Net interest income $ 47,962
========
Interest rate spread 4.26%
Contribution of interest free funds 0.75%
Net yield on interest-earning assets (4) 5.01%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
---------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Rate
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 74,253 $ 2,952 5.32%
Other short term investments 97,675 3,783 5.18%
Investment securities:
Taxable 118,766 5,557 6.26%
Tax-exempt (1) 21,419 823 5.14%
Loans (2), (3) 628,139 50,350 10.72%
------------------------
Total interest-earning assets 940,253 63,464 9.02%
Noninterest-earning assets 135,397
------------------------
Total assets $ 1,075,650 63,464
============= ----------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 556,597 15,421 3.70%
Time deposits, over $100,000 116,500 4,471 5.13%
Other time deposits 64,105 2,597 5.42%
------------------------
Total interest-bearing deposits 737,202 22,489 4.08%
Other borrowings 22,263 751 4.51%
Subordinated debt 3,000 259 11.54%
TPS 13,480 970 9.62%
------------------------
Total interest-bearing liabilities 775,945 24,469 4.22%
Noninterest bearing deposits 154,642
Other noninterest-bearing liabilities 10,400
Shareholders' equity 134,663
------------------------
Total shareholders' equity and liabilities $ 1,075,650 24,469
============= ----------
Net interest income $ 38,995
========
Interest rate spread 4.81%
Contribution of interest free funds 0.74%
Net yield on interest-earning assets (4) 5.54%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.21%
and 7.29% at September 30, 1998 and September 30, 1997, respectively, using the
federal statuary rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $2,431,000, and $2,633,000 for the
nine months ended September 30, 1998 and September 30, 1997, respectively.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the interest
expense on interest-bearing liabilities, divided by (b) average interest-earning
assets for the period.
20
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
Compared with September 30, 1997
favorable / (unfavorable)
(Dollars in thousands)(1) Volume Rate Net
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 700 $ 76 $ 776
Other short term investments 99 259 358
Investment securities:
Taxable 6,697 (20) 6,677
Tax-exempt 593 (9) 584
Loans 12,547 (1,468) 11,079
-------- -------- --------
Total interest income 20,636 (1,162) 19,474
-------- -------- --------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (4,932) (73) (5,005)
Time deposits over $100,000 (2,411) (81) (2,492)
Other time deposits 651 114 765
-------- -------- --------
Total interest-bearing deposits (6,692) (40) (6,732)
Other borrowings (2,458) (527) (2,985)
Subordinated debt - - -
TPS (831) 40 (791)
-------- -------- --------
Total interest expense (9,981) (527) (10,508)
-------- -------- --------
Net increase (decrease) in net interest income $ 10,655 $ (1,689) $ 8,966
======== ======== ========
</TABLE>
(1) Changes in interest income and expense which are not attributable
specifically to either volume or rate, are allocated proportionately
between both variances. Nonaccrual loans are excluded from average loans.
THE YEAR TO DATE SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997
------------------------------------------------------------------
Net interest income totaled $48.0 million for the nine months of 1998, an
increase of $9.0 million, or 23.0%, from the $39.0 million total for the nine
months of 1997. The increase in net interest income was attributable to a $19.5
million, or 30.7%, increase in interest income, offset by a $10.5 million, or
42.9%, increase in interest expense over the comparable prior year end. The
$19.5 million increase in interest income for the nine months of 1998, as
compared to the nine months of 1997, was primarily due to a $20.6 million
favorable volume variance and a $1.2 million unfavorable rate variance. The
favorable volume variance was attributable to growth in average interest-earning
assets, which increased $339.6 million, or 36.1%, from the prior year comparable
period. The increase was offset by a decrease in the yield on average interest-
earning assets of approximately 36 basis points for the nine months of 1998, as
compared to the respective prior year period.
Total interest expense for the nine months of 1998 increased $10.5 million
from the nine months of 1997. This increase was primarily due to an unfavorable
volume variance of $10.0 million which resulted from a $286.0 million, or 36.9%,
increase in average interest-bearing liabilities for the nine months of 1998
over the comparable prior year period.
For the nine months ended September 30, 1998, the Company's net interest
spread of 4.26% reflected a decrease from 4.81%, as compared to the respective
prior year.
21
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Certain client service expenses were incurred by the Company with respect
to its noninterest-bearing liabilities. These expenses include messenger
services, check supplies and other related items and are included in operating
expenses. Had they been included, the impact of these expenses on the Company's
net yield on interest-earning assets would have been as follows for each of the
periods presented.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Average noninterest bearing demand deposits $ 233,392 $ 165,265
Client service expenses 122 83
Client service expenses, annualized 0.21% 0.20%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 4.82% 5.58%
Impact of client service expense (0.03)% (0.03)%
--------------------------------
Adjusted net yield on interest-earning assets (1) 4.79% 5.55%
================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
(Dollars in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Average noninterest bearing demand deposits $ 210,158 $ 154,642
Client service expenses 404 268
Client service expenses, annualized 0.26% 0.23%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 5.01% 5.54%
Impact of client service expense (0.04)% (0.04)%
--------------------------------
Adjusted net yield on interest-earning assets (1) 4.97% 5.50%
--------------------------------
</TABLE>
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield of spread.
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets.
Provision for Loan Losses
The provision for loan losses creates an allowance for future loan losses. The
loan loss provision for each year is dependent on many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. The Company performs a regular
assessment of the risk inherent in its loan portfolio, as well as a detailed
review of each asset determined to have identified weaknesses. Based on this
analysis, which includes reviewing historical loss trends, current economic
conditions, industry concentrations and specific reviews of assets classified
with identified weaknesses, the Company makes a provision for potential loan
losses. Specific allocations are made for loans where the probability of a loss
can be defined and reasonably determined, while the balance of the provisions
for loan losses are 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, and ultimate loan
losses may vary from current estimates.
The provision for loan losses was $1.8 million in the third quarter of
1998, an increase of $444,000 from the $1.3 million in the second quarter of
1998, and a $507,000 increase from the $1.3 million in the third quarter of
1997. Nonperforming loans, comprised of nonaccrual loans, accruing loans past
due 90 days or more, and restructured loans were $3.3 million at September 30,
1998, compared with $4.2 million at December 31, 1997, and $6.6 million at
September 30, 1997. Simultaneously, the Company's ratio of loan loss reserve to
total loans was 2.31% at September 30, 1998 compared to 2.18% at December 31,
1997 and 2.09% at September 30, 1997.
For further information on nonperforming and classified loans and the
allowance for loan losses, see - "Nonperforming and Classified Assets" herein.
22
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Other Income
Total other income was $1.7 million for the third quarter of 1998, an increase
of $90,000 from the second quarter of 1998, and an increase of $96,000 from the
third quarter of 1997. The following table sets forth information by category
of other income for the periods indicated.
<TABLE>
<CAPTION>
At and for the quarters ended
September 30, June 30, March 31, December 31, September 30,
---------------------------------------------------------------------------
(Dollars in thousands) 1998 1998 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $ 642 $ 617 $ 550 $ 603 $ 550
Service charges and other fees 361 349 420 394 433
Gain on sale of SBA loans 290 221 244 269 216
Gain (loss) on investments, net 4 42 8 25 5
Other 230 342 (193) 268 327
--------------------------------------------------------------------------
1,527 1,571 1,029 1,559 1,531
Warrant income 134 - 497 14 34
--------------------------------------------------------------------------
Total $ 1,661 $ 1,571 $ 1,526 $ 1,573 $ 1,565
==========================================================================
</TABLE>
Operating Expenses
The following table represents the major components of operating expenses for
the periods indicated:
<TABLE>
<CAPTION>
At and for the periods ended
September 30, June 30, March 31,
----------------------------------------
(Dollars in thousands) 1998 1998 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits $ 5,753 $ 5,689 $ 5,532
Occupancy and equipment 1,542 1,514 1,416
Legal and other professional fees 403 386 376
Telephone, postage and supplies 429 392 447
Contribution to GBB Foundation 192 - 701
Marketing and promotion 368 335 150
Directors' fees 133 142 151
Client services 122 116 166
FDIC insurance and regulatory assessments 88 77 89
Expenses on other real estate owned 43 15 23
Other 810 814 684
----------------------------------------
Total operating expenses, excluding merger costs $ 9,883 $ 9,480 $ 9,735
Merger costs 537 1,974 -
----------------------------------------
Total operating expenses $ 10,420 $ 11,454 $ 9,735
========================================
Efficiency ratio 56.12% 65.49% 58.45%
Efficiency ratio, before merger costs 53.22% 54.21% 58.45%
Total operating expenses to average assets* 2.72% 3.34% 3.18%
Total operating expenses to average assets, before
merger costs* 2.58% 2.76% 3.18%
</TABLE>
<TABLE>
<CAPTION>
At and for the periods ended
December 31, September 30,
-------------------------------------
(Dollars in thousands) 1997 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Compensation and benefits $ 5,449 $ 5,137
Occupancy and equipment 1,357 1,391
Legal and other professional fees 417 526
Telephone, postage and supplies 362 342
Contribution to GBB Foundation - -
Marketing and promotion 335 344
Directors' fees 119 104
Client services 80 111
FDIC insurance and regulatory assessments 73 70
Expenses on other real estate owned 25 (10)
Other 1,348 476
------------------------
Total operating expenses, excluding merger costs $ 9,565 $ 8,491
Merger costs 3,333 -
------------------------
Total operating expenses $ 12,898 $ 8,491
========================
Efficiency ratio 76.73% 53.93%
Efficiency ratio, before merger costs 56.90% 53.93%
Total operating expenses to average assets* 4.50% 3.14%
Total operating expenses to average assets, before
merger costs* 3.34% 3.14%
</TABLE>
*Annualized
Operating expenses totaled $9.9 million for the third quarter of 1998, an
increase of $403,000 from the second quarter of 1998, and an increase of $1.4
million from the third quarter of 1997. The ratio of operating expenses to
average assets at September 30, 1998 and 1997 was 2.72% and 3.14%, respectively.
The efficiency ratio is computed by dividing total operating expenses by
net interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same volume of
income while a decrease would indicate a more efficient allocation of resources.
The Company's efficiency ratio for the third quarter of 1998 was 56.12%,
compared to 53.93%
23
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
for the same period in 1997. Excluding merger costs, the Company's efficiency
ratios were 53.22% and 53.93% for quarters ended September 30, 1998 and 1997,
respectively.
Compensation and benefits expenses increased in the three months ended
September 30, 1998 to $5.8 million compared to $5.7 million at June 30, 1998 and
$5.1 million at September 30, 1997. The increase in compensation and benefits
is due primarily to the additions in personnel made to accommodate the growth of
the Company.
Income Taxes
The Company's effective income tax rate for the quarter ended September 30, 1998
was 30.89%, compared to 35.97% for the same period in 1997. The effective rate
in 1998 was lower than the statutory rate due to tax-exempt income on municipal
securities, the tax benefit of the donation of appreciated warrants to the
Foundation and the utilization of PRB's NOL carry-forward.
The effective income tax rate for the nine month period ended September 30,
1998 was 31.71%, as compared to 34.67% for the nine month period ended September
30, 1997.
FINANCIAL CONDITION
Total assets increased 26.1% to $1.5 billion at September 30, 1998, compared to
$1.2 billion at December 31, 1997. The increases in 1998 were primarily due to
increases in the Company's investment and loan portfolio funded by long term
borrowings as well as growth in deposits. Included in total assets at September
30, 1998 and December 31, 1997 were the invested proceeds of a Special Deposit
of $89.2 million and $88.1 million, respectively. This deposit was received in
late 1996 and management anticipates that a significant portion of this deposit
may be withdrawn at some point in 1998.
Loans
Total loans, net of deferred fees, increased 19.2%, on an annualized basis, to
$859.5 million at September 30, 1998, compared to $751.6 million at December 31,
1997. The increases in loan volumes in 1998 were primarily due to the strong
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 a market area that
is dependent on the technology and real estate industries and supporting service
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, while
also decreasing the Company's net interest margin.
The following table presents the composition of the Company's loan
portfolio at the dates indicated:
24
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------------------------------------
(Dollars in thousands) Amount % Amount %
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 388,094 46.4% $ 362,747 49.3%
Real estate construction and land 153,378 18.3 112,514 15.3
Real estate term 245,340 29.2 196,217 26.7
Consumer and other 75,673 8.9 82,914 11.3
------------------------------------------------
Total loans, gross 862,485 102.8 754,392 102.6
Deferred fees and discounts, net (2,966) -0.4 (2,765) -0.4
------------------------------------------------
Total loans, net of deferred fees 859,519 102.4 751,627 102.2
Allowance for loan losses (19,861) -2.4 (16,394) -2.2
------------------------------------------------
Total loans $ 839,658 100.0% $ 735,233 100.0%
================================================
</TABLE>
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90 days
past due, unless they are well secured and in the process of collection. When a
loan is placed on nonaccrual status, any interest previously accrued but not
collected is generally reversed from income. Loans are charged-off when
management determines that collection has become unlikely. Restructured loans
are those where the Company have granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
The following table sets forth information regarding nonperforming assets
at the dates indicated:
<TABLE>
<CAPTION>
At and for the periods ended
September 30, June 30, March 31,
---------------------------------------
(Dollars in thousands) 1998 1998 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $ 2,919 $ 3,758 $ 3,152
Accruing loans past due 90 days or more - 75 108
Restructured loans 377 531 903
-------------------------------------
Total nonperforming loans 3,296 4,364 4,163
Other real estate owned 905 1,001 1,001
-------------------------------------
Total nonperforming assets $ 4,201 $ 5,365 $ 5,164
=====================================
Nonperforming assets to total loans
and other real estate owned 0.50% 0.63% 0.67%
</TABLE>
<TABLE>
<CAPTION>
At and for the periods ended
December 31, September 30,
--------------------------
(Dollars in thousands) 1997 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans
Nonaccrual loans $ 2,971 $ 4,565
Accruing loans past due 90 days or more 158 575
Restructured loans 1,062 1,453
--------------------------
Total nonperforming loans 4,191 6,593
Other real estate owned 1,303 1,069
--------------------------
Total nonperforming assets $ 5,494 $ 7,662
==========================
Nonperforming assets to total loans
and other real estate owned 0.75% 1.11%
</TABLE>
At September 30, 1998, the Company had $2.9 million in nonaccrual loans.
Interest income forgone on nonperforming loans outstanding totaled $86,000 and
$110,000 for the quarter ended September 30, 1998 and 1997, respectively.
Interest income recognized for the quarter on nonperforming loans at September
30, 1998 and September 30, 1997 was $7,000 and $11,000, respectively.
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings through a provision for
losses on foreclosed property in the period in which they are identified. At
September 30, 1998, OREO consisted of six properties acquired through
foreclosure with a carrying value of $905,000.
The policy of the Company is to review each loan in the portfolio to
identify problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more
defined weakness and are characterized by the distinct possibility that the
Banks will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard
25
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
loans, with the additional characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently existing facts, conditions and
values questionable; and there is a high possibility of loss of some portion of
the principal balance. A loan classified "loss" is considered uncollectible and
its continuance as an asset is not warranted.
The following table sets forth the classified assets at the dates
indicated:
<TABLE>
<CAPTION>
At and for the periods ended
September 30, June 30, March 31, December 31, September 30,
---------------------------------------------------------------------------
(Dollars in thousands) 1998 1998 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Substandard $ 12,807 $ 9,068 $ 9,138 $ 15,723 $ 17,119
Doubtful 1,129 1,041 1,092 1,377 714
Loss - - 47 49 272
Other real estate owned 905 1,001 1001 1,303 1,069
---------------------------------------------------------------------------
Classified assets $ 14,841 $ 11,110 $ 11,278 $ 18,452 $ 19,174
===========================================================================
Classified assets to total loans
and other real estate owned 1.72% 1.29% 1.44% 2.45% 2.72%
Allowance for loan losses to total
classified assets 133.82% 161.88% 146.88% 88.85% 76.63%
</TABLE>
With the exception of these classified loans, management was not aware of
any loans as of September 30, 1998 where the known credit problems of the
borrower would cause management to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms and which would
result in such loans being included as nonperforming or classified assets at
some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full impact
such an environment may have on the Company's loan portfolio. Accordingly, there
can be no assurance that other loans will not become 90 days or more past due,
be placed on nonaccrual, become restructured loans, or other real estate owned
in the future.
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, the officer's loan
committee and the director's loan committee review credit quality issues on a
regular basis.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan losses
based on management's evaluation of risk inherent in the Company's loan
portfolio and economic conditions in the Company's market areas. See -
"Provision for Loan Losses" herein. The allowance is increased by provisions
charged against earnings and reduced by net loan charge-offs. Loans are
charged-off when they are deemed to be uncollectible; recoveries are generally
recorded only when cash payments are received.
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the periods indicated:
26
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
<TABLE>
<CAPTION>
At and for the periods ended
September 30, June 30, March 31,
------------------------------------------------
(Dollars in thousands) 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Period end loans outstanding $ 859,519 $ 819,736 $ 782,948
Average loans outstanding $ 824,256 $ 794,786 $ 752,381
Allowance for loan losses:
Balance at beginning of period $ 17,985 $ 16,565 $ 16,394
Charge-offs:
Commercial (13) - (734)
Real estate construction and land - (4) -
Real estate term - - (2)
Consumer and other (27) (14) (119)
------------------------------------------------
Total charge-offs (40) (18) (855)
------------------------------------------------
Recoveries:
Commercial 13 19 22
Real estate construction and land - - -
Real estate term - - -
Consumer and other - 1 9
------------------------------------------------
Total recoveries 13 20 31
------------------------------------------------
Net charge-offs (27) 2 (824)
Provision charged to income (1) 1,903 1,418 995
------------------------------------------------
Balance at end of period $ 19,861 $ 17,985 $ 16,565
================================================
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.02% 0.01% 0.61%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.20% 0.30% 0.61%
Allowance as a percentage of average loans outstanding 2.41% 2.26% 2.20%
Allowance as a percentage of period end loans outstanding 2.31% 2.19% 2.12%
Allowance as a percentage of non-performing loans 602.58% 412.11% 397.92%
</TABLE>
<TABLE>
<CAPTION>
At and for the periods ended
December 31, September 30,
---------------------------
(Dollars in thousands) 1997 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Period end loans outstanding $ 751,627 $ 703,295
Average loans outstanding $ 714,594 $ 674,733
Allowance for loan losses:
Balance at beginning of period $ 14,694 13,824
Charge-offs:
Commercial (533) (303)
Real estate construction and land - -
Real estate term (50) (62)
Consumer and other (234) (62)
---------------------------
Total charge-offs (817) (427)
---------------------------
Recoveries:
Commercial 7 7
Real estate construction and land - -
Real estate term - -
Consumer and other 1 5
---------------------------
Total recoveries 8 12
---------------------------
Net charge-offs (809) (415)
Provision charged to income (1) 2,509 1,285
---------------------------
Balance at end of period $ 16,394 $ 14,694
---------------------------
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.26% 0.20%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.26% 0.26%
Allowance as a percentage of average loans outstanding 2.29% 2.18%
Allowance as a percentage of period end loans outstanding 2.18% 2.09%
Allowance as a percentage of non-performing loans 391.17% 222.87%
</TABLE>
(1) Includes $113,000 in the third quarter of 1998, $70,000 in the second
quarter of 1998 and $1.4 million in the fourth quarter of 1997 to conform
practices for the Company's reserve methodologies, which is included in mergers
and related nonrecurring costs.
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 allowance for loan losses. Although management
believes that the allowance for loan losses is adequate to provide for both
potential losses and estimated inherent losses in the portfolio, future
provisions will be subject to continuing evaluations of the inherent risk in the
portfolio and if the economy declines or asset quality deteriorates, additional
provisions could be required.
Liquidity and Cash Flow
The objective of liquidity management is to maintain the Company'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 its credit needs. The Company must
manage its liquidity position to meet the needs of its clients while maintaining
an appropriate balance between assets and liabilities to meet the return on
investment expectations 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 Company utilizes brokered deposit lines, sells
securities under agreements to repurchase and borrows overnight federal funds.
In the first quarter of 1997, the Company issued $20.0 million in TPS to enhance
its regulatory capital base, while also providing added liquidity.
On August 12, 1998, the Company completed a second offering of TPS in an
aggregate amount of $30.0 million through GBB Capital II, a trust affiliate of
the Company formed for the purpose of the offering. The securities issued in
the offering were sold in a private transaction pursuant to an applicable
exemption from registration under the Securities Act. In October 1998, the
Company through GBB Capital II commenced an offer to exchange its $30.0 million
in TPS for a like amount of its registered TPS. The exchange offer is scheduled
to expire at 5:00 p.m. Eastern Standard Time on November 23, 1998.
27
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Greater Bay invested $15.0 million of the net proceeds in the Company's
subsidiary banks to increase their capital levels. The Company intends to use
the remaining net proceeds for general corporate purposes. Under applicable
regulatory guidelines, $29.0 million of the TPS qualifies as Tier 1 capital,
and the remaining portion qualifies as Tier 2 capital. As the Company's
shareholders' equity increases, the amount of the additional TPS that will count
as Tier 1 capital will increase.
Net cash provided by operating activities, consisting primarily of net
interest income, totaled $14.0 million for the nine months ended September 30,
1998 and $12.2 for the same period in 1997. Cash used for investing activities
totaled $323.2 million for the nine months ended September 30, 1998 and $149.8
million for the same period in 1997. The funds used for investing activities
primarily represent increases for loans and investments for each year reported.
For the nine months ended September 30, 1998, net cash provided by
financing activities was $303.4 million. Historically, the primary financing
activity of the Company has been deposits and borrowings. Deposits increased
$216.8 million for the nine months ended September 30, 1998 and other borrowings
increased $57.4 million for the same period. During the period there were also
proceeds from the issuance of TPS of $30.0 million. For the nine months ended
September 30, 1997, net cash provided by financing activities was $161.5
million. Deposits increased $149.3 million, while other borrowings decreased
$7.7 million. During that period there were also proceeds from the issuance of
TPS of $20.0 million.
Greater Bay is a company separate and apart from its subsidiary banks. It
must provide for its own liquidity. Substantially all of Greater Bay's revenues
are obtained from management fees, interest received and dividends declared and
paid by the banks. As of September 30, 1998, Greater Bay did not have any
material commitments for capital expenditures. There are statutory and
regulatory provisions that could limit the ability of the Banks to pay dividends
to Greater Bay. Management of Greater Bay believes that such restrictions will
not have an impact on the ability of Greater Bay to meet its ongoing cash
obligations.
Capital Resources
Shareholders' equity at September 30, 1998 increased to $88.9 million from $76.5
million at December 31, 1997. During the first three quarters of 1998 and the
twelve months ended December 31, 1997, Greater Bay paid aggregate cash dividends
of $0.285 and $0.30 per share, respectively, as adjusted for the 2-for-1 stock
split effective April 30, 1998. In 1997, prior to the completion of its merger
with the Company, PBC declared a cash dividend of $3.20 per share. PBFC, was an
S-Corporpation prior to its merger with the Company. As an S-Corporation, PBFC
was required to distribute a significant portion of its income to its
shareholders. Under these requirements, PBFC made distributions of $964,000 and
$208,000 through the date of the merger in 1998 and in 1997, respectively.
The Company has provided a substantial portion of its capital requirements
through the retention of earnings. In the second quarter of 1998 and first
quarter of 1997, the Company increased its capital base by issuing $30.0 and
$20.0 million of TPS, which, subject to certain limitations, qualify as Tier 1
capital, respectively.
The Company's equity to asset ratio at September 30, 1998 and December 31,
1997 was 5.79% and 6.29%, respectively.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
stock and minority interests, less goodwill. Supplementary capital includes the
allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities, certain other capital instruments,
and term subordinated debt. The Company's major capital components are
shareholders' equity trust preferred securities in core capital, and the
allowance for loan losses and subordinated debt in supplementary capital.
At September 30, 1998, the minimum risk-based capital requirements to be
considered adequately capitalized are 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-
28
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
adjusted) for the preceding quarter. The minimum leverage ratio is 3.0%,
although certain banking organizations are expected to exceed that amount by
1.0% or more, depending on their circumstances.
The Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company at September 30,
1998 and the requirements to qualify for well capitalized and adequately
capitalized status under these regulations are as follows:
29
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
<TABLE>
<CAPTION>
To Be Well Capitalize
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of September 30, 1998 ------------------------- ---------------------- ---------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------ ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 154,648 14.60% $ 84,759 8.00% N/A
Cupertino National Bank 56,595 11.41 39,677 8.00 $ 49,596 10.00%
Golden Gate Bank 9,910 12.48 6,352 8.00 7,940 10.00
Mid-Peninsula Bank 45,560 13.16 27,700 8.00 34,625 10.00
Peninsula Bank of Commerce 17,300 12.67 10,924 8.00 13,655 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 115,951 10.94% $ 42,380 4.00% N/A
Cupertino National Bank 46,820 9.44 19,838 4.00 $ 29,758 6.00%
Golden Gate Bank 8,916 11.23 3,176 4.00 4,764 6.00
Mid-Peninsula Bank 40,417 11.67 13,850 4.00 20,775 6.00
Peninsula Bank of Commerce 15,558 11.39 5,462 4.00 8,193 6.00
Tier 1 Capital (To Average Quarterly Assets):
Greater Bay Bancorp $ 115,951 7.78% $ 59,585 4.00% N/A
Cupertino National Bank 46,820 7.51 24,928 4.00 31,161 5.00%
Golden Gate Bank 8,916 6.49 5,492 4.00 6,865 5.00
Mid-Peninsula Bank 40,417 7.78 15,388 3.00 25,646 5.00
Peninsula Bank of Commerce 15,558 6.78 9,178 4.00 11,472 5.00
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
As of December 31, 1997 ------------------------- ---------------------- ---------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------ ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 109,614 12.31% $ 69,710 8.00% N/A
Cupertino National Bank 40,201 10.03 32,118 8.00 $ 40,147 10.00%
Golden Gate Bank 9,408 12.79 5,882 8.00 7,353 10.00
Mid-Peninsula Bank 34,727 11.88 23,416 8.00 29,269 10.00
Peninsula Bank of Commerce 15,252 14.33 8,525 8.00 10,657 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 95,709 10.72% $ 34,855 4.00% N/A
Cupertino National Bank 32,126 8.02 16,059 4.00 $ 24,088 6.00%
Golden Gate Bank 8,523 11.59 2,941 4.00 4,412 6.00
Mid-Peninsula Bank 31,064 10.63 11,708 4.00 17,562 6.00
Peninsula Bank of Commerce 13,917 13.08 4,263 4.00 6,394 6.00
Tier 1 Capital (To Average Annual Assets):
Greater Bay Bancorp $ 95,709 8.50% $ 41,113 4.00% N/A
Cupertino National Bank 32,126 7.08 18,189 4.00 $ 22,737 5.00%
Golden Gate Bank 8,523 9.51 3,652 4.00 4,565 5.00
Mid-Peninsula Bank 31,064 8.54 10,935 3.00 18,225 5.00
Peninsula Bank of Commerce 13,917 6.65 8,401 4.00 10,501 5.00
</TABLE>
At September 30, 1998, the Company's risk-based capital ratios were 10.94% for
Tier 1 risk-based capital and 14.60% for total risk-based capital, compared to
10.72% and 12.31% respectively, as of December 31, 1997. The Company's leverage
ratio was 7.78% at September 30, 1998, compared to 8.50% at December 31, 1997.
These ratios all exceeded the well-capitalized guidelines shown above.
In addition, at September 30, 1998, each of the subsidiary banks had levels
of capital which exceeded the well-capitalized guidelines. For additional
information on the capital levels and capital ratios
30
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
of the Company and each of the banks, see Note 13 of Notes to Consolidated
Financial Statements included in the Consolidated Financial Statements contained
in the Company's 1997 Annual Report to Shareholders.
The Company anticipates that the economic and business conditions in its
market areas will continue to expand in 1998, resulting in continued growth in
earnings and deposits. To support this continuing growth or future acquisition
opportunities, it may be necessary for the Company to raise additional capital
through the sale of either debt or equity securities in order for the Company
and each of the banks to remain well-capitalized under applicable regulations.
Quantitative and Qualitative Disclosures About Market Risk
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and an adequate loan
loss reserve (see - "Allowance for Loan Losses" herein).
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in the market value of portfolio equity ("MVPE") and net interest income
under various interest rate scenarios. The ALCO attempts to manage the various
components of the Company's balance sheet to minimize the impact of sudden and
sustained changes in interest rates on MVPE and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in MVPE in the event of hypothetical changes in interest rates
and interest liabilities. If potential changes to MVPE and net interest income
resulting from hypothetical interest rate swings are not within the limits
established by the Board, the Board may direct management to adjust its asset
and liability mix to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, lengthen the effective
maturities of certain interest-earning assets, and shorten the effective
maturities of certain interest-bearing liabilities. The Company has focused its
investment activities on securities with generally medium-term (5 years to 7
years) maturities or average lives. The Company has utilized short-term
borrowings and deposit marketing programs to adjust the term to repricing of its
liabilities.
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in MVPE of its cash flows from
assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates. MVPE represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items. This
analysis assesses the risk of loss in market rate sensitive instruments in the
event of sudden and sustained increases and decreases in market interest rates
of 100 basis points. All market rate sensitive instruments presented in this
table are classified as either held to maturity or available for sale. The
Company has no trading securities. The following table presents the Company's
projected change in MVPE for the these rate shock levels as of September 30,
1998:
(Dollars in thousands) Projected Change
Change in ----------------------------
Interest Rates MVPE Dollars Percentage
- --------------------------------------------------------------------------------
100 basis point rise $ 119,985 $ (14,989) -11.1%
Base scenario 134,974 - -
100 basis point decline 147,327 12,353 9.2%
The preceding table indicates that, at September 30, 1998, in the event of
a sudden and sustained increase or decrease in prevailing market interest rates,
the Company's MVPE would be expected to decrease. However, the foregoing
analysis does not attribute additional value to the Company's
31
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
noninterest-bearing deposit balances, which have a significantly higher market
value during periods of increasing interest rates.
MVPE is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided by
independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of MVPE. Actual values may differ from those projections
presented should market conditions vary from assumptions used in the calculation
of the MVPE. Certain assets, such as adjustable-rate loans, which represent one
of the Company's loan products, have features which restrict changes in interest
rates on a short-term basis and over the life of the assets. In addition, the
proportion of adjustable-rate loans in the Company's portfolio could decrease in
future periods if market interest rates remain at or decrease below current
levels due to refinance activity. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in the MVPE. Finally, the ability of many borrowers to repay
their adjustable-rate mortgage loans may decrease in the event of significant
interest rate increases.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. Interest rate risk
management focuses on the maturity structure of assets and liabilities and their
repricing characteristics during periods of changes in market interest rates.
Effective interest rate risk management seeks to ensure that both assets and
liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Company's current portfolio that are
subject to repricing at various time horizons: one day or immediate, two days to
six months, seven to twelve months, one to three years, four to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps.
32
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
The following table shows interest sensivity gaps for different intervals
as of September 30, 1998.
<TABLE>
<CAPTION>
Immediate 2 Days To 7 Months to 1 Year to 4 Years to More than Total Rate Non-Rate
(Dollars in thousands) or One Day 6 Months 12 Months 3 Years 5 Years 5 Years Sensitive Sensitive Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 919 $ - $ - $ - $ - $ - $ 919 $ 54,480 $ 55,399
Short term investments 79,300 - - - - - 79,300 - 79,300
Investment securities 99,320 131,839 38,247 88,019 32,519 105,392 495,336 - 495,336
Loans 542,034 192,635 29,023 49,854 17,043 31,896 862,485 - 862,485
Loan losses/unearned - - - - - - - (22,827) (22,827)
fees
Other assets - - - - - - - 65,690 65,690
-------------------------------------------------------------------------------------------------------------
Total assets $ 721,573 $ 324,474 $ 67,270 $ 137,873 $ 49,562 $137,288 $1,438,04 $ 97,343 $1,535,383
-------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Deposits:
DDA $ - $ - $ - $ - $ - $ - $ - $ 237,596 $ 237,596
NOW, MMDA, and
savings 802,220 - - - - - 802,220 - 802,220
Time deposits - 205,578 34,689 6,994 855 - 248,116 - 248,116
Other borrowings - 17,285 60,000 10,000 - 2,450 89,735 - 89,735
Subordinated debt - - - - - 3,000 3,000 - 3,000
Trust preferred security - - - - - 50,000 50,000 - 50,000
Other liabilities - - - - - - - 15,764 15,764
Shareholders' equity - - - - - - - 88,952 88,952
--------------------------------------------------------------------------------------------------------
Total liabilities and
equity $ 802,220 $ 222,863 $ 94,689 $ 16,994 $ 855 $ 55,450 $1,193,071 $ 342,312 $1,535,383
--------------------------------------------------------------------------------------------------------
Gap $ (80,647) $ 101,611 (27,419) $ 120,879 $ 48,707 $ 81,838 $ 244,969 $(244,969) -
Cumulative Gap $ (80,647) $ 20,964 $ (6,455) $ 114,424 $163,131 $244,969 $ 244,969 - -
Cumulative Gap/total
assets -5.25% 1.37% -0.42% 7.45% 10.62% 15.95% 15.95% - -
</TABLE>
The foregoing table indicates that the Company had a one year negative gap
of $27.4 million, or 0.42% of total assets, at September 30, 1998. In theory,
this would indicate that at September 30, 1998, $27.4 million more in
liabilities than assets would reprice if there was a change in interest rates
over the next 365 days. Thus, if interest rates were to increase, the 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
interest 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 basis risk and, generally, relates to the
repricing characteristics of short-term funding sources such as certificates of
deposit.
The impact of fluctuations in interest rates on the Company's projected
twelve month net interest income and net income has been evaluated through an
interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing rate
environments. As of September 30, 1998, the analysis indicates that the
Company's net interest income would increase a maximum of 9.2% if rates rose 200
basis points immediately and would decrease a maximum of 10.2% if rates declined
200 basis points immediately. In addition, the results indicate that
notwithstanding the Company's gap position, which would indicate that the net
interest margin increases when rates rise, the Company's net interest margin
increases during rising rate periods due to the basis risk imbedded in the
Company's interest-bearing liabilities.
In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that, would impact this analysis. These factors
would include but not be limited to management and ALCOs actions to mitigate the
impact to the Company and the impact of the Company's credit risk profile
during periods of significant interest rate movements. 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 and others, an interest sensitivity gap report
may not provide a complete assessment of the Company's exposure to changes in
interest rates.
33
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Year 2000 Compliance
State of Readiness
Greater Bay is working to resolve the potential impact of the year 2000 on the
ability of Greater Bay's computerized information systems to accurately process
information that may be date-sensitive. Any of Greater Bay's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. Greater Bay utilizes a number ofcomputer
programs across its entire operation.
Specifically, Greater Bay has undertaken a major project to ensure that
its internal operating systems will be fully capable of processing year 2000
transactions. This project is overseen by the Greater Bay Year 2000 Project
Team (the "Year 2000 Project Team"), which reports monthly progress to the
Company's Board of Directors.
The initial phase of the project was to assess and identify all internal
business processes requiring modification and to develop comprehensive
renovation plans as needed. This phase was largely completed in mid-1998. The
second phase, expected to be accomplished by the end of 1998, will be to execute
those renovation plans and begin testing systems by simulating year 2000 data
conditions. Testing and implementation is planned to be completed during the
first half of 1999.
Greater Bay has commenced the testing phase of the year 2000 project and is
completing the tasks involving the testing of its essential information
technology ("IT") systems. As part of this phase, Greater Bay is working with
external vendors to test and certify their systems as year 2000 compliant. The
testing phase also includes implementation of a new release of deposit and
lending software by the end of 1998. In addition, Greater Bay plans to test
targeted non-IT systems, such as facilities, vaults, security services and other
building related services, by the end of 1998.
Greater Bay relies upon third-party software vendors and service providers
for substantially all of its electronic data processing and does not operate any
proprietary programs which are critical to the Company's operations. Thus, the
focus of Greater Bay is to monitor the progress of its primary software
providers towards compliance with year 2000 issues and prepare to test actual
data of Greater Bay in simulated processing of future sensitive dates.
As well as evaluating its own internal operating systems, Greater Bay has
also initiated discussions with its major customers and suppliers as to their
ability to meet year 2000 requirements. The Year 2000 Project Team previously
has identified and sought information from significant third party suppliers
regarding their year 2000 compliance. Suppliers providing system
interdependencies also have been identified, and testing with such suppliers
also will occur during this phase of the project. The Year 2000 Project Team
continues to work with all targeted suppliers to determine their year 2000
status. As of this time, the Year 2000 Project Team has not identified any
significant issues with the identified suppliers.
Greater Bay also has identified customers who have a material relationship
with the Company and requested such customers to complete a year 2000 survey,
which will be used by Greater Bay to assess the overall risk to the Company
resulting from such customers' year 2000 compliance.
Costs to Address the Year 2000 Issue
Greater Bay has budgeted anticipated expenditures of $300,000 to $500,000 in
1998 and 1999 to ensure that its systems are ready for processing information in
the year 2000. Greater Bay estimates that it has incurred out-of-pocket expenses
of approximately $40,000 to date this year in connection with year 2000 issues,
which expenses may reach approximately $150,000 by the end of 1998. In addition,
the Company has incurred certain costs relating to reallocation of internal
resources to address year 2000 issues. The Company expects that the cost of
remedial action for its noncompliant year 2000 IT systems will not be material.
Greater Bay has not completed its assessment of the year 2000 issue, but
currently believes that costs of addressing it will not have a material adverse
impact on Greater Bay's financial position. However, if Greater Bay and third
parties upon which it relies are unable to address this issue in a timely
manner, it could result in a material financial risk to Greater Bay. In order
to assure that this does not occur, Greater Bay plans to devote all resources
required to resolve any significant year 2000 issues in a timely manner.
Risks Presented by the Year 2000 Issue
As Greater Bay continues to assess the year 2000 issue, it may identify systems
that present a year 2000 risk. In addition, if any third-party software vendors
and service providers upon who the Company relies fail to appropriately address
their year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and operating results.
Should Greater Bay and/or its significant suppliers fail to timely
identify, address and correct material year 2000 issues, such failure could have
a material adverse impact on the Company's ability to operate. The range of
adverse impacts may include the requirement to pay significant overtime to
manually process certain transactions and added costs to process certain banking
activity through a centralized administrative function. In addition, if
corrections made by such suppliers to address year 2000 issues are incompatible
with Greater Bay's systems, the year 2000 issue could have a material adverse
impact on the Company's operations.
Despite Greater Bay's activities in regards to the year 2000 issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations
and business prospects.
Contingency Plans
The Year 2000 Project Team currently is in the process of developing contingency
plans for year 2000 readiness. The Company has engaged a third party company,
which specializes in developing contingency plans for financial institutions for
year 2000, to assist Greater Bay in analyzing the impact of year 2000 on its
business. This business impact analysis is expected to be completed by the third
quarter of 1998 and Greater Bay's contingency plans for year 2000 readiness
currently are scheduled to be complete by the end of 1998. There can be no
assurance, however, that such contingency plans will be successful.
Common Stock Price and Dividend History
The Company's stock is traded on the Nasdaq National Market ("Nasdaq") under the
symbol "GBBK". The Company's common stock was listed on Nasdaq on September 9,
1996. Prior to September 9, 1996, the Company's common stock was not listed
on any exchange nor was it quoted by Nasdaq. It was, however, listed with the
National Quotation Service and on the Over The Counter Bulletin Board. Based on
information provided to the Company from Hoefer & Arnett, the range of high and
low bid quotations for the Common Stock for the first three quarters of 1996 are
set forth below. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Quotations subsequent to September 30, 1996 reflect the high and low sales
prices for the Company's common stock as reported by Nasdaq. Hoefer & Arnett,
Incorporated, BT Alex. Brown, Keefe Bruyette & Woods, Incorporated, Sandler
O'Neill & Partners and Van Kasper & Company act as the primary market makers and
facilitate trades in the Company's common stock.
34
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Cash dividends
For the period indicated(1) High Low declared (2)
- --------------------------------------------------------------------------
1998
Third Quarter $ 39.00 $ 23.38 $ 0.095
Second Quarter 36.00 28.88 0.095
First Quarter 31.38 24.13 0.095
1997
Fourth Quarter $ 26.75 $ 21.00 $ 0.075
Third Quarter 22.25 15.94 0.075
Second Quarter 15.75 12.44 0.075
First Quarter 13.82 11.88 0.075
1996
Fourth Quarter $ 12.19 $ 10.57 $ 0.055
Third Quarter 10.50 9.00 0.055
Second Quarter 11.07 8.88 0.055
First Quarter 9.38 8.25 0.055
(1) Restated to reflect the 2-for-1 stock split declared for shareholders of
record as of April 30, 1998.
(2) Includes only those dividends declared by Greater Bay, and excludes
those dividends paid by Cupertino National Bancorp prior to the 1996
merger and by PBC prior to the 1997 merger. In 1996, Cupertino National
Bancorp declared and paid dividends of $0.10 to its shareholders. PBC
declared dividends of $3.20 and $1.35 per share, in 1997 and 1996,
respectively, to its shareholders. On a consolidated basis, the Company
has declared dividends of $0.52 and $0.30 per share in 1997 and 1996,
respectively.
The Company estimates it has approximately 2,200 shareholders as of September
30, 1998.
35
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -- NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -- NOT APPLICABLE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- NOT APPLICABLE
ITEM 5. OTHER INFORMATION -- NOT APPLICABLE
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
EXHIBIT
NO. EXHIBITS
------- --------
11 Statement re Computation of Earnings Per Share.
27 Financial Data Schedule.
99 Press Release issued on October 23, 1998.
- --------
(b) Reports on Form 8-K for the quarter covered by this report.
During the quarter ended September 30, 1998, the Company filed the
following reports on Form 8-K: (1) report dated July 16, 1998 filing second
quarter earnings release; (2) report dated August 28, 1998 reporting completion
of offering of Cumulative Trust Preferred Securities; and (3) report dated
September 29, 1998 filing consolidated financial statements, which were restated
on a historical basis to give retroactive effect to the Company's merger with
PRB.
36
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS 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: NOVEMBER 13, 1998
37
<PAGE>
Exhibit 11
Greater Bay Bancorp Form 10-Q
Statements Re Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars and shares in thousands, except per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Income available to common shareholders $ 4,394 $ 3,822 $ 11,595 $ 9,822
Weighted average common shares outstanding 9,525,000 9,220,000 9,448,000 9,181,000
-------------------------------------- -----------------------------
Basic earnings per share $ 0.46 $ 0.41 $ 1.23 $ 1.06
====================================== =============================
Diluted Earnings Per Share:
Income available to common shareholders $ 4,394 $ 3,822 $ 11,595 $ 9,822
Weighted average common shares outstanding 9,525,000 9,220,000 9,448,000 9,181,000
Effect of dilutive securities 698,000 723,000 756,000 609,000
-------------------------------------- -----------------------------
Weighted average common and common
equivalent shares outstanding 10,223,000 9,943,000 10,204,000 9,790,000
-------------------------------------- -----------------------------
Diluted earnings per share $ 0.43 $ 0.36 $ 1.14 $ 1.00
====================================== =============================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 49,888 38,930
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 32,400 45,400
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 70,924 79,749
<INVESTMENTS-CARRYING> 63,176 59,876
<INVESTMENTS-MARKET> 63,535 60,537
<LOANS> 564,175 393,378
<ALLOWANCE> (10,136) (6,683)
<TOTAL-ASSETS> 919,924 659,623
<DEPOSITS> 821,133 584,353
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 28,957 11,776
<LONG-TERM> 3,000 3,000
0 0
0 0
<COMMON> 50,075 48,159
<OTHER-SE> 16,759 12,336
<TOTAL-LIABILITIES-AND-EQUITY> 919,924 659,623
<INTEREST-LOAN> 50,172 41,813
<INTEREST-INVEST> 9,528 8,160
<INTEREST-OTHER> 3,183 3,087
<INTEREST-TOTAL> 62,883 53,060
<INTEREST-DEPOSIT> 21,220 17,743
<INTEREST-EXPENSE> 22,379 18,916
<INTEREST-INCOME-NET> 40,504 34,099
<LOAN-LOSSES> 2,594 1,219
<SECURITIES-GAINS> (255) (106)
<EXPENSE-OTHER> 29,416 28,097
<INCOME-PRETAX> 13,117 7,826
<INCOME-PRE-EXTRAORDINARY> 13,117 7,826
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,348 4,956
<EPS-PRIMARY> 1.33 1.24
<EPS-DILUTED> 1.26 1.18
<YIELD-ACTUAL> 5.19 5.47
<LOANS-NON> 4,616 4,833
<LOANS-PAST> 1,237 830
<LOANS-TROUBLED> 1,828 1,530
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 6,683 6,960
<CHARGE-OFFS> (586) (1,847)
<RECOVERIES> 645 351
<ALLOWANCE-CLOSE> 10,136 6,683
<ALLOWANCE-DOMESTIC> 10,136 6,683
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<PAGE>
EXHIBIT 99
FOR IMMEDIATE RELEASE FOR INFORMATION CONTACT
- --------------------- -----------------------
DAVID L. KALKBRENNER, PRESIDENT & CEO
GREATER BAY BANCORP (650) 614-5767
STEVEN C. SMITH, EVP, COO & CFO
OCTOBER 23, 1998 GREATER BAY BANCORP (650) 813-8222
GREATER BAY BANCORP ANNOUNCES EXCHANGE
OFFER FOR FLOATING RATE SECURITIES, SERIES A
PALO ALTO, CA; October 23, 1998. -- Greater Bay Bancorp (Nasdaq:GBBK)
announced today the commencement of an offer to exchange its $30 million
aggregate principal amount of Floating Rate Capital Securities Series A
outstanding for a like amount of its registered Floating Rate Capital
Securities Series B. The exchange offer is being conducted in accordance with
the terms of the initial issuance of the Series A securities on August 12,
1998, and is being made upon the terms and conditions set forth in a Prospectus
and in a related Letter of Transmittal which are being provided to holders of
record of the Series A securities.
The exchange offer is not conditioned on any amount of the Series A
securities being exchanged. The exchange offer is scheduled to expire at 5:00
p.m., Eastern Time, on November 23, 1998, unless extended.
This documents may contain forward-looking statements that are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. For a discussion of factors that could cause
actual results to differ, please see Greater Bay Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1997, and particularly the
discussion of risk factors within that document.
"WE INVEST IN RELATIONSHIPS"
