<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 June 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 July 31, 1998:
9,201,531
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
June 30, 1998 and December 31, 1997.......................... 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1998 and 1997....................................... 4
Consolidated Statements of Comprehensive Income
for the Three Months and Six Months Ended
June 30, 1998 and 1997....................................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 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.......................... 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 35
Signatures................................................... 38
2
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
1998 December 31,
(Dollars in thousands) (unaudited) 1997*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 69,239 $ 53,000
Federal funds sold 126,200 75,000
Other short term securities 90,320 103,549
---------- ----------
Cash and cash equivalents 285,759 231,549
Investment securities:
Available for sale (amortized cost $302,985 and $166,169
at June 30, 1998 and December 31, 1997, respectively) 303,358 166,548
Held to maturity (market value $35,147 and $45,246 at
June 30, 1998 and December 31, 1997, respectively) 34,440 44,461
Other securities 3,317 2,118
----------- ----------
Investment securities 341,115 213,127
Loans:
Commercial 357,758 345,742
Real estate construction and land 139,850 112,514
Real estate term 227,652 196,217
Consumer and other 81,750 82,914
Deferred loan fees and discounts (2,446) (2,765)
--------- ----------
Total loans, net of deferred fees 804,564 734,622
Allowance for loan losses (17,584) (16,093)
---------- ----------
Total loans, net 786,980 718,529
Property, premises and equipment 10,095 8,475
Interest receivable and other assets 46,918 28,639
--------- ----------
Total assets $1,470,867 $1,200,319
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 263,121 $ 219,495
MMDA, NOW and savings 809,594 627,475
Time certificates, $100,000 and over 180,891 183,147
Other time certificates 31,009 41,031
---------- ----------
Total deposits 1,284,615 1,071,148
Other borrowings 70,000 19,480
Subordinated debt 3,000 3,000
Other liabilities 10,919 10,433
Company obligated mandatorily redeemable cumulative
trust preferred securities of subsidiary trust holding
solely junior subordinated debentures 20,000 20,000
---------- ----------
Total liabilities 1,388,534 1,124,061
---------- ----------
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; 9,189,961 and 9,006,930 shares issued and
outstanding as of June 30, 1998 and December 31, 1997,
respectively** 54,247 52,218
Accumulated other comprehensive income 186 223
Retained earnings 27,900 23,817
---------- ----------
Total shareholders' equity 82,333 76,258
---------- ----------
Total liabilities andshareholders' equity $1,470,867 $1,200,319
========== ==========
</TABLE>
* Restated to reflect the merger with Pacific Rim
Bancorporation 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 June 30, Six Months Ended June 30,
--------------------------- --------------------------
(Dollars in thousands, except per share amounts) (unaudited) 1998 1997* 1998 1997*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $19,753 $16,293 $38,415 $30,644
Interest on investment securities:
Taxable 3,636 1,924 6,926 3,728
Tax - exempt 480 274 794 537
--------------------------- --------------------------
Total interest on investment securities 4,116 2,198 7,720 4,265
Other interest income 2,786 2,419 5,252 4,282
--------------------------- --------------------------
Total interest income 26,655 20,910 51,387 39,191
--------------------------- --------------------------
INTEREST EXPENSE
Interest on deposits 9,501 7,517 18,260 14,080
Interest on long term borrowings 1,446 572 2,419 173
Interest on other borrowings 281 192 631 883
--------------------------- --------------------------
Total interest expense 11,228 8,281 21,310 15,136
--------------------------- --------------------------
Net interest income 15,427 12,629 30,077 24,055
Provision for loan losses 1,307 2,275 2,243 4,268
--------------------------- --------------------------
Net interest income after provision for loan 14,120 10,354 27,834 19,787
losses --------------------------- --------------------------
OTHER INCOME
Trust fees 727 481 1,277 935
Service charges and other fees 349 400 769 678
Gain on sale of SBA loans 221 181 465 347
Gain (loss) on investments, net (8) 8 - (35)
Warrant income - 1,114 497 1,115
Other income 309 296 31 554
--------------------------- --------------------------
Total other income 1,598 2,480 3,039 3,594
OPERATING EXPENSES
Compensation and benefits 5,548 4,727 10,799 9,574
Occupancy and equipment 1,514 1,295 2,885 2,610
Legal and other professional fees 485 500 867 942
Telephone, postage and supplies 381 342 811 657
Contribution to GBB Foundation - - 701 -
Marketing and promotion 329 272 449 543
Directors' fees 142 122 281 268
Client services 116 79 267 185
Insurance 95 84 175 153
FDIC insurance and regulatory assessments 77 83 166 140
Other real estate owned (8) 71 16 99
Legal settlement recovery - - - (1,700)
Other 471 534 1,289 792
--------------------------- --------------------------
Total operating expenses, excluding merger costs 9,150 8,109 18,706 14,263
Merger costs 2,125 - 2,125 -
--------------------------- --------------------------
Total operating expenses 11,275 8,109 20,831 14,263
--------------------------- --------------------------
Income before provision for income taxes 4,443 4,725 10,042 9,118
Provision for income taxes 1,520 1,714 3,414 3,303
--------------------------- --------------------------
Net income $ 2,923 $ 3,011 $ 6,628 $ 5,815
=========================== ==========================
Net income per share - basic** $ 0.32 $ 0.34 $ 0.73 $ 0.65
=========================== ==========================
Net income per share - diluted** $ 0.29 $ 0.32 $ 0.67 $ 0.61
=========================== ==========================
</TABLE>
* Restated on an historical basis to reflect the merger with Peninsula Bank of
Commerce and Pacific Rim Bancorportion 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
(Dollars in thousands) (unaudited) 1998 1997* 1998 1997*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $2,923 $3,011 $6,628 $5,815
Other comprehensive income:
Unrealized holding gains (losses) arising during period (net
of taxes of $(96) and $76 for the three months ended
June 30, 1998 and 1997, and $(26) and $50 for the
six months ended June 30, 1998 and 1997, respectively) (137) 109 (37) 72
Reclassification adjustment for gains (losses)
included in net income (net of taxes of $(3) and
$3 for the three months ended 1998 and 1997,
and $0 and $(14) for the six month ended 1998
and 1997, respectively) (5) 5 - (21)
----------------------------- --------------------------
Other comprehensive income (losses) (142) 114 (37) 51
----------------------------- --------------------------
Comprehensive income $2,781 $3,125 $6,591 $5,868
============================= ==========================
</TABLE>
* Restated on an historical basis to reflect the merger with Peninsula Bank of
Commerce and Pacific Rim Bancorporation 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>
Six Months Ended June 30,
--------------------------------------
(Dollars in thousands) (unaudited) 1998 1997*
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
Net income $ 6,628 $ 5,815
Reconcilement of net income to net cash from operations:
Provision for loan losses 2,243 4,268
Depreciation and amortization 1,084 966
Deferred income taxes (614) (2,757)
(Gain) loss on sale of investment, net - 35
Changes in:
Accrued interest receivable and other assets 593 (4,561)
Accrued interest payable and other liabilities (381) 505
Deferred loan fees and discounts, net (319) 211
----------------------------
Operating cash flows, net 9,234 4,482
----------------------------
CASH FLOWS - INVESTING ACTIVITIES
Maturities and partial paydowns on of investment securities:
Held to maturity 10,022 4,671
Available for sale 27,418 26,117
Purchase of investment securities:
Held to maturity - (2,472)
Available for sale (176,152) (34,554)
Other securities (1,199) (664)
Proceeds from sale of available for sale securities 11,803 1,950
Loans, net (70,450) (82,812)
Purchase of property, premises and equipment (2,567) (1,235)
Purchase of insurance policies (18,122) -
----------------------------
Investing cash flows, net (219,247) (88,999)
----------------------------
CASH FLOWS - FINANCING ACTIVITIES
Net change in deposits 213,467 83,605
Net change in other borrowings - short-term (19,480) (9,031)
Proceeds on other borrowings - long term 70,000 -
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures issued - 20,000
Proceeds from sale of stock 1,514 1,557
Cash dividends (1,278) (994)
----------------------------
Financing cash flows, net 264,223 95,137
----------------------------
Net change in cash and cash equivalents 54,210 10,620
Cash and cash equivalents at beginning of period 231,549 191,871
----------------------------
Cash and cash equivalents at end of period $ 285,759 $202,491
============================
CASH FLOWS - SUPPLEMENTAL DISCLOSURES
Cash paid during the period for:
Interest $ 25,560 $ 14,386
============================
Income taxes $ 1,820 $ 3,300
============================
Non-cash transactions:
Additions to other real estate owned $ 105 $ 173
============================
</TABLE>
*Restated on an historical basis to reflect the merger with Peninsula Bank of
Commerce and Pacific Rim Corporation on a pooling of interests basis.
See notes to consolidated financial statements.
6
<PAGE>
Notes To Consolidated Financial Statements
As of June 30, 1998 and 1997 and for the
Three and Six Months Ended June 30, 1998 and 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The results of operations for the quarter ended June 30, 1998 are not
necessarily indicative of the results expected for any subsequent quarter or for
the entire year ended December 31, 1997. 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 Bancorp" 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
and GBB Capital I. 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 SFAS 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 a statement of
financial position. As of June 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 is as follows:
<TABLE>
<CAPTION>
Accumulated
Other Comprehensive
(Dollars in thousands) Income
- -----------------------------------------------------------
<S> <C>
Balance - as of December 31, 1997 $ 223
Current period charge (37)
---------
Balance - as of June 30, 1998 186
=========
</TABLE>
Per Share Data
Net income per share is stated in accordance with SFAS 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 years 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 June 30, 1998 and 1997 and for the
Three and Six Months Ended June 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 six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
For the three months ended June 30, 1998 For the three months ended June 30, 1997
-------------------------------------------------------------------------------------
Average Average
Income Shares* Per Share Income Shares* Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $2,923 $3,011
Basic net income per share:
Income available to common shareholders 2,923 9,163,034 $0.32 3,011 8,895,548 $0.34
Effect of dilutive securities:
Stock options - 793,774 - - 589,124 -
-------------------------------------- ---------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $2,923 9,956,808 $0.29 $3,011 9,484,672 $0.32
====================================== =======================================
For the six months ended June 30, 1998 For the six months ended June 30, 1997
-------------------------------------- ---------------------------------------
Average Average
Income Shares* Per Share Income Shares* Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------ ---------------------------------------
Net income $6,628 $5,815
Basic net income per share:
Income available to common shareholders 6,628 9,106,015 $0.73 5,815 8,923,764 $0.65
Effect of dilutive securities:
Stock options - 818,143 - - 670,715 -
-------------------------------------- ---------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $6,628 9,924,158 $0.67 $5,815 9,594,479 $0.61
====================================== =======================================
</TABLE>
* Restated to reflect 2-for-1 stock split declared for shareholders of record as
of April 30, 1998.
Options to purchase 713 shares that were considered anti-dilutive whereby
the options' exercise price was greater than the average market price of the
common shares, during the periods ended June 30,1998 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 merger with Golden Gate.
Recent Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefit. 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 not
expected to have a significant impact on the Company.
On June 15, 1998, FASB issued Statement of Financial Accounting Standard
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"). SFAS No. 133 establishes a new model for accounting for derivatives and
hedging activities and supersedes and amends a number of existing standards.
SFAS No. 133 standardizes the accounting for derivative instruments by requiring
that
8
<PAGE>
Notes To Consolidated Financial Statements
As of June 30, 1998 and 1997 and for the
Three and Six Months Ended June 30, 1998 and 1997
for fiscal years beginning after June 15, 1999, but earlier application is
permitted as of the beginning of any fiscal quarter subsequent to June 15, 1998.
Upon the Statement's initial application, all derivatives are required to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. The impact on the Company of adopting
SFAS No. 133 is not expected to be material.
NOTE 2 -- MERGERS
On August 4, 1998, Greater Bay entered into an agreement to acquire Pacific
Business Funding Corporation ("PBFC"), an asset-based speciality finance
company. The acquisition is structured as a merger transaction in which Greater
Bay will acquire PBFC as a wholly owned subsidiary, in consideration of the
issuance of approximately 264,000 shares of Greater Bay common stock to the
shareholders of PBFC. PBFC had total assets of approximately $14.9 million as
of May 31, 1998. It is anticipated that the transaction will be accounted for
as a pooling-of-interest. The transaction is expected to close on or before
August 31, 1998.
9
<PAGE>
Notes to Consolidated Financial Statements
As of June 30, 1998 and 1997 and for the
Three and Six Months Ended June 30, 1998 and 1997
The following table sets forth the combined financial position and
results of operations of the Company and PBPC as of and for the six months ended
June 30, 1998;
<TABLE>
<CAPTION> As of
(Dollars in thousands) June 30, 1998
- ------------------------------------------------------
<S> <C>
Assets:
Greater Bay Bancorp $1,470,867
Pacific Business Funding Corporation 15,583
----------
Combined $1,486,480
==========
Liabilities:
Greater Bay Bancorp $1,388,534
Pacific Business Funding Corporation 15,503
----------
Combined $1,404,037
==========
Shareholders' equity:
Greater Bay Bancorp $ 82,333
Pacific Business Funding Corporation 90
----------
Combined $ 82,423
==========
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
==========
</TABLE>
*Shown on a proforma basis to reflect taxes for PBFC which would have been
incurred had PBFC been a C Corp.
On May 8, 1998, Pacific Rim Bancorporation ("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 aggregated 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 June 30, 1998 and 1997 and for the
Three and Six Months Ended June 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:
<TABLE>
<CAPTION>
As of
(Dollars in thousands) March 31, 1998
- ------------------------------------------------------------------------
<S> <C>
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
=======
</TABLE>
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 June 30, 1998 and 1997 and for the
Three and Six Months Ended June 30, 1998 and 1997
NOTE 3 -- BORROWINGS
The Company's borrowings are detailed as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Other borrowings:
Short term borrowings:
Securities sold under agreements
to repurchase (short term) $ - $19,480
------- -------
Total short term borrowings - 19,480
------- -------
Other long term borrowings:
Securities sold under agreements
to repurchase (long term) 50,000 -
FHLB advances 20,000 -
------- -------
Total other long term borrowings 70,000 -
------- -------
Total other borrowings $70,000 $19,480
======= =======
Subordinated notes, due September
15, 2005 $ 3,000 $ 3,000
------- -------
Total subordinated debt $ 3,000 $ 3,000
======= =======
</TABLE>
During the six month period ended June 30, 1998 and the twelve month period
ended December 31, 1997, the average balance of securities sold under short term
agreements to repurchase were $11,673,000 and $5,278,000, respectively, and the
average interest rates during those periods were 5.65% and 5.71%, respectively.
Securities sold under short term agreements to repurchase generally mature
within 90 days of dates of purchase.
During the six month period ended June 30, 1998 and the twelve month period
ended December 31, 1997, the average balance of federal funds purchases was
$885,000 and $1,523,000, respectively, and the average interest rates during
those periods were 5.45% and 5.32%, respectively. These purchases were primarily
between the Banks.
The Company has sold securities under long term agreements to repurchase
which mature in the year 2003. The counterparties to these agreements have put
options which give them the right to demand early repayment. As of June 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. 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 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.
12
<PAGE>
Notes To Consolidated Financial Statements
As of June 30, 1998 and 1997 and for the
Three and Six Months Ended June 30, 1998 and 1997
NOTE 4 -- 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 5 -- CASH DIVIDEND
The Company declared a cash dividend of 9.5 cents per share payable on July 15,
1998 to shareholders of record as of June 30, 1998.
NOTE 6 -- SUBSEQUENT EVENTS
On August 12, 1998, the Company completed an offering of Cumulative Trust
Preferred Securities ("TPS") in an aggregate amount of $30 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 form registration under the
Securities Act and have not been registered under the Securities Act. The
securities may not be offered or sold in the United States absent registration
or an applicable exemption from registration requirements. 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, will be cumulative and will be 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 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. 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 the GBB Capital II.
The TPS 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
form time to time.
All of the proceeds from the sale of the TPS have been invested by GBB
Capital II in Junior Subordinated Debentures of the Company. Greater Bay
intends to invest approximately $10 million of the net proceeds in one or more
of 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 will qualify as Tier I Capital, and the remaining portion will qualify
as Tier 2 capital.
13
<PAGE>
Item 2 -- Management's Discussion and Analysis of Results of Operations
And Financial Condition
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 holding company for Cupertino National
Bank ("CNB"), and Mid-Peninsula Bancorp, the 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, PBC as the forth
wholly owned banking subsidiary of Greater Bay. 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 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 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 $4.2 million, (excluding merger costs, net of
taxes) for the second quarter of 1998, compared with net income of $3.0 million,
for the second quarter of 1997. Diluted net income per share was $0.43,
(excluding merger costs, net of taxes) and $0.32 for the quarters ended June 30,
1998 and 1997, respectively. The Company reported net income, including merger
costs of $2.9 million and diluted net income per share of $0.29 for the quarter
ended June 30, 1998. The annualized return on average assets and return on
average shareholders' equity excluding merger costs and net of tax was 1.25% and
21.62% for the second quarter of 1998, compared with 1.18% and 16.63%,
respectively, for the same period in 1997.
The earnings for the second quarter of 1997 includes $1.1 million in
warrant income that was recorded in May and June 1997 resulting from the
exercise of warrants and sale of the underlying shares of common stock in two of
the clients of one of the Banks. The Company occasionally receives warrants to
acquire common stock from companies that are in the start-up or development
phase. The timing and amount of income derived from the exercise and sale of
client warrants typically depend upon factors beyond the control of the Company,
and cannot be predicted with any degree of accuracy and are likely to vary
materially from period to period.
Net income totaled $7.9 million, (excluding merger costs, net of taxes) for
the six months ended June 30, 1998, versus $5.8 million for the respective 1997
period. Diluted net income per share was $0.80, (excluding merger costs, net of
taxes) and $0.61 for the six months ended 1998 and 1997, respectively. For the
first six months of 1998, the annualized return on average assets, excluding
merger costs, was 1.24% and the return on average shareholders' equity was
20.29% versus 1.19% and 16.72%, respectively, for the comparable prior year
period. The Company's net income, including merger costs, were $6.6 million and
its diluted net income per share was $0.67 for the year to date June 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.
During the first quarter of 1998 Greater Bay's Board of Directors
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 it does
business.
14
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
The Foundation will focus its support on initiatives related to education,
health and economic growth. To fund the Foundation, the Company contributed
appreciated warrants, which had an unrealized gain of $701,000. The Company
recorded a contribution deduction for the fair market value of the warrants
contributed and also recorded warrant income of $701,000 ($498,000 net of
related employee incentives). 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 $288,000.
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 $1.4 million for the six months ended
June 30, 1998 and $2.3 million for the same period June 30, 1997. For the
quarter ended June 30, 1998, the Company's provision for loan losses was $1.3
million, as compared to $936,000 for the preceding quarter and $2.3 million for
the quarter ended June 30, 1997. The loan loss reserve to total loans was 2.19%
at June 30, 1998 compared to 2.19% at December 31, 1997 and 2.09% at June 30,
1997.
Net Interest Income
Net interest income for the second quarter of 1998 was $15.4 million, a $777,000
increase over the first quarter of 1998 and a $2.8 million increase over the
second quarter of 1997. The increase from the second quarter of 1997 to the
second quarter of 1998 was primarily due to the $318.5 million, or 33.7%
increase in average interest-earning assets which is partially offset by a 42
basis point decrease in the Company's interest rate spread from 4.58% in the
second quarter of 1997 to 4.16% in the second quarter of 1998. The interest
rate spread for these periods was 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 $89.5
million and $98.2 million, respectively, on which the Company earned spreads of
approximately 2.25%. Excluding PBC's Special Deposit, the interest rate spread
would have been 4.29% and 4.81% for the second quarter of 1998 and 1997,
respectively. The Company's interest rate spread was affected by a higher
percentage of interest-earning assets in Federal Funds sold and Investment
Securities during the second quarter of 1998 compared to the same quarter in
1997. Net interest income increased 22.16% in the quarter ended June 30, 1998
from the same quarter in 1997 despite the 38 basis point decrease in the
Company's interest rate spread.
15
<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 Three Months Ended
June 30, 1998 March 31, 1998
--------------------------------- --------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 102,223 $ 1,403 5.51% $ 76,878 $ 1,026 5.41%
Other short term investments 97,823 1,383 5.67% 106,970 1,440 5.46%
Investment securities:
Taxable 240,850 3,636 6.06% 200,915 3,290 6.64%
Tax-exempt (1) 35,047 480 5.49% 25,217 314 5.05%
Loans (2), (3) 749,474 19,753 10.57% 738,009 18,662 10.26%
----------------------- ------------------------
Total interest-earning assets 1,225,417 26,655 8.72% 1,147,989 24,732 8.74%
Noninterest-earning assets 133,985 74,593 70,343
----------------------- ------------------------
Total assets $1,359,402 26,655 $1,222,582 24,732
=========== ---------- =========== -----------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 735,456 6,826 3.72% $ 660,630 5,964 3.66%
Time deposits, over $100,000 154,721 2,072 5.37% 169,969 2,192 5.23%
Other time deposits 47,365 603 5.11% 46,311 603 5.28%
----------------------- ------------------------
Total interest-bearing 937,542 9,501 4.06% 876,910 8,759 4.05%
deposits
Other borrowings 85,111 1,153 5.43% 56,004 749 5.42%
Subordinated debt 3,000 87 11.60% 3,000 86 11.63%
TPS 20,000 487 9.77% 20,000 488 9.90%
----------------------- ------------------------
Total interest-bearing 1,045,653 11,228 4.31% 955,914 10,082 4.28%
liabilities
Noninterest bearing deposits 217,839 180,483
Other noninterest-bearing liabilities 16,430 8,933
Shareholders' equity 79,480 77,252
----------------------- ------------------------
Total shareholders' equity $1,359,402 11,228 $1,222,582 10,082
and liabilities
=========== ---------- =========== -----------
Net interest income $15,427 $14,650
=========== ============
Interest rate spread 4.41% 4.46%
Contribution of interest free funds 0.64% 0.72%
Net yield on interest-earning assets (4) 5.05% 5.18%
<CAPTION>
Three Months Ended
June 30, 1997
--------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Rate
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 79,311 $ 1,073 5.43%
Other short term investments 99,132 1,346 5.45%
Investment securities:
Taxable 120,773 1,924 6.39%
Tax-exempt (1) 21,517 274 5.12%
Loans (2), (3) 623,557 16,293 10.48%
-------------------------
Total interest-earning assets 944,290 20,910 8.88%
Noninterest-earning assets 70,343
-------------------------
Total assets $1,014,633 20,910
=========== ------------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 548,333 $ 4,919 3.60%
Time deposits, over $100,000 116,260 1,499 5.17%
Other time deposits 74,782 1,099 5.90%
-------------------------
Total interest-bearing
deposits 739,375 7,517 4.08%
Other borrowings 9,567 192 8.05%
Subordinated debt 3,000 86 11.50%
TPS 20,000 486 9.75%
-------------------------
Total interest-bearing
liabilities 771,942 8,281 4.30%
Noninterest bearing deposits 163,285
Other noninterest-bearing liabilities 7,572
Shareholders' equity 71,834
-------------------------
Total shareholders' equity
and liabilities $1,014,633 8,281
=========== ------------
Net interest income $12,629
===========
Interest rate spread 4.58%
Contribution of interest free funds 0.78%
Net yield on interest-earning assets (4) 5.36%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 8.29%,
7.56% and 7.71% for the quarters ended June 30, 1998, March 31, 1998 and June
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 $871,000, $918,000 and $896,000 for
the quarters ended June 30, 1998, March 31, 1998 and June 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.
16
<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 dollars 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 period. 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 June 30, 1998 Three Months Ended June 30, 1998
Compared with March 31, 1998 Compared with June 30, 1997
favorable/(unfavorable) favorable/(unfavorable)
(Dollars in thousands)(1) Volume Rate Net Volume Rate Net
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 396 $ (19) $ 377 $ 335 $ (5) $ 330
Other short term investments (130) 73 (57) (19) 56 37
Investment securities:
Taxable 724 (378) 346 1,921 (209) 1,712
Tax-exempt 151 15 166 194 12 206
Loans 1,512 (421) 1,091 4,396 (936) 3,460
------- ----- ------- ------- ------- -------
Total interest income 2,653 (730) 1,923 6,827 (1,082) 5,745
------- ----- ------- ------- ------- -------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (815) (47) (862) (1,585) (322) (1,907)
Time deposits over $100,000 202 (82) 120 (470) (103) (573)
Other time deposits (18) 18 - 328 168 496
Total interest-bearing deposits
Other borrowings (429) 25 (404) (921) (40) (961)
Subordinated debt - (1) (1) - (1) (1)
TPS - 1 1 - (1) (1)
------- ----- ------- ------- ------- -------
Total interest expense (1,060) (86) (1,146) (2,648) (299) (2,947)
------- ----- ------- ------- ------- -------
Net increase (decrease) in net interest income $ 1,593 $(816) $ 777 $ 4,179 $(1,381) $ 2,798
======= ===== ======= ======= ======= =======
</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 JUNE 30, 1998 COMPARED TO JUNE 30, 1997
---------------------------------------------------------
Interest income in the second quarter ended June 30, 1998 increased
27.5% to $26.7 million from $20.9 million in the same period in 1997. This was
primarily due to the $6.8 million favorable volume variance which resulted from
a $318.5 million or 33.7% increase in average interest-earning assets over the
comparable prior year. Average loans increased $163.3 million, or 26.2% to
$786.8 million for the second quarter of 1998 as compared to $623.6 million in
the second quarter of 1997.
The average yield on interest-earning assets decreased 16 basis points
to 8.72% in the second quarter of 1998 from 8.88% in the same period of 1997
primarily due to the decrease on the yields on loans. Average yields on loans
increased 9 basis points to 10.57% in the three months ended June 30, 1998 from
10.48% for the same period in 1997.
Interest expense in the second quarter of 1998 increased 35.6% to
$11.2 million from $8.3 million for the same period in 1997. This increase was
due to greater volumes of interest-bearing liabilities coupled with slightly
higher interest rates paid on interest-bearing liabilities. Average interest-
bearing liabilities increased 35.5% to $1.0 billion in the second quarter of
1998 from $771.9 million in the same period for 1997 due to the efforts of the
Banks' 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 and increases in other borrowings.
During the second quarter of 1998, average noninterest-bearing
deposits increased to $217.8 million from $163.3 million in the same period in
1997. Average noninterest-bearing deposits comprised 18.9% of total deposits for
the second quarter of 1998, compared to 18.1% for the same period in 1997.
17
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
THE QUARTER ENDED JUNE 30, 1998 COMPARED TO MARCH 31, 1998
----------------------------------------------------------
Interest income increased 8.0% to $26.7 million for the second quarter of
1998, as compared to $24.7 million for the previous quarter. Average interest-
earning assets increased 10.0% in the second quarter of 1998 from $1.1 billion
for the previous quarter. The increase in interest income for the second
quarter of 1998, as compared to the prior quarter, was primarily the result of
an increase in the loans which increased $48.8 million and investments which
grew $49.8 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 2
basis points to 8.72% in the second quarter of 1998 from 8.74% in the first
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 second quarter of 1998 increased 11.4% to $11.2
million from $10.1 million in the prior quarter. The increase is primarily the
result of increased average other borrowings, which rose to $85.1 million for
the second quarter of 1998, as compared to $56.0 million for the prior quarter.
As a result of the changes in the liability mix, the average rate paid on
average interest-bearing liabilities increased 3 basis points to 4.31% in the
second quarter of 1998 from 4.28% in the prior quarter. Corresponding to the
growth in average interest-earning assets, average interest-bearing liabilities
increased 10.5% to $1.0 billion in the second quarter of 1998 from $955.9
million for the first quarter of 1998.
As a result of the foregoing, the Company's interest rate spread declined
to 4.41% in the second quarter of 1998 compared to 4.46% in the prior quarter
and the net yield on interest-earning assets declined to 5.05% from 5.18%.
18
<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 six month periods presented, as well
as the analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1998 June 30, 1997
---------------- ----------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 89,621 $ 2,429 5.47% $ 64,509 $ 1,717 5.37%
Other short term investments 102,271 2,823 5.57% 98,305 2,565 5.26%
Investment securities:
Taxable 220,993 6,926 6.32% 115,180 3,728 6.53%
Tax-exempt (1) 30,159 794 5.31% 21,233 537 5.10%
Loans (2), (3) 762,549 38,415 10.16% 601,945 30,644 10.27%
------------------------ ----------------------
Total interest-earning assets 1,205,593 51,387 8.60% 901,172 39,191 8.77%
Noninterest-earning assets 85,779 60,506
------------------------ ----------------------
Total assets $1,291,372 51,387 $961,678 39,191
========== ------- ======== -------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 698,250 12,790 3.69% $536,059 9,415 3.54%
Time deposits, over $100,000 162,303 4,264 5.30% 110,228 2,836 5.19%
Other time deposits 46,841 1,206 5.19% 65,683 1,829 5.61%
------------------------ ----------------------
Total interest-bearing deposits 907,394 18,260 4.06% 711,970 14,080 3.99%
Other borrowings 70,638 1,902 5.43% 12,429 395 6.40%
Subordinated debt 3,000 173 11.63% 3,000 173 11.66%
TPS 20,000 975 9.83% 10,256 488 9.60%
------------------------ ----------------------
Total interest-bearing liabilities 1,001,032 21,310 4.29% 737,655 15,136 4.14%
Noninterest bearing deposits 199,264 146,817
Other noninterest-bearing liabilities 12,129 6,923
Shareholders' equity 78,947 70,283
------------------------ ----------------------
Total shareholders' equity and
liabilities $1,291,372 21,310 $961,678 15,136
========== ------- ======== -------
Net interest income $30,077 $24,055
======= =======
Interest rate spread 4.30% 4.63%
Contribution of interest free funds 0.73% 0.75%
Net yield on interest-earning assets (4) 5.03% 5.38%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 8.00% and
7.67% at June 30, 1998 and June 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 $1,740,000, and $1,546,000 for the six
months ended June 30, 1998 and June 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.
19
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
<TABLE>
<CAPTION>
Six Months Ended June 30, 1998
Compared with June 30, 1997
favorable / (unfavorable)
(Dollars in thousands)(1) Volume Rate Net
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 680 $ 32 $ 712
Other short term investments 448 (190) 258
Investment securities:
Taxable 3,314 (116) 3,198
Tax-exempt 234 23 257
Loans 8,263 (492) 7,771
-------------------------------------------
Total interest income 12,939 (743) 12,196
-------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (2,885) (490) (3,375)
Time deposits over $100,000 (1,267) (161) (1,428)
Other time deposits 493 128 622
-------------------------------------------
Total interest-bearing deposits (3,659) (522) (4,181)
Other borrowings (1,460) (47) (1,507)
Subordinated debt - - -
TPS (487) - (487)
-------------------------------------------
Total interest expense (5,606) (569) (6,175)
-------------------------------------------
Net increase (decrease) in net interest income $ 7,332 $(1,312) $ 6,022
===========================================
</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 JUNE 30, 1998 COMPARED TO JUNE 30, 1997
--------------------------------------------------------
Net interest income totaled $30.1 million for the first six months of 1998,
an increase of $6.0 million, or 24.9%, from the $24.1 million total for the
first six months of 1997. The increase in net interest income was attributable
to a $12.2 million, or 31.1%, increase in interest income, offset by a $6.2
million, or 40.8%, increase in interest expense over the comparable prior year
end. The $12.2 million increase in interest income for the first half of 1998,
as compared to the first half of 1997, was primarily due to a $12.9 million
favorable volume variance, slightly offset by a $742,000 unfavorable rate
variance. The favorable volume variance was attributable to growth in average
interest-earning assets, which increased $304.4 million, or 33.8%, from the
prior year comparable period. The increase was partially offset by a decrease
in the yield on average interest-earning assets of approximately 17 basis points
for the first six months of 1998, as compared to the respective prior year
period.
Total interest expense for the first half of 1998 increased $6.2 million
from the first half of 1997. This increase was primarily due to an unfavorable
volume variance of $5.2 million which resulted from a $263.0 million, or 35.7%,
increase in average interest-bearing liabilities for the first six months of
1998 over the comparable prior year period.
For the six months ended June 30, 1998, the Company's net interest spread
of 4.30% reflected a decrease from 4.63% for the same period in 1997.
20
<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 Six Months Ended
Ended June 30, June 30,
--------------------------------- -----------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average noninterest bearing demand deposits $217,839 $163,285 $199,264 $146,817
Client service expenses 116 79 267 185
Client service expenses, annualized 0.21% 0.19% 0.27% 0.25%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 5.05% 5.36% 5.03% 5.38%
Impact of client service expense (0.04)% (0.03)% (0.04)% (0.04)%
------------------------------------------------------------------------
Adjusted net yield on interest-earning assets (1) 5.01% 5.33% 4.99% 5.34%
------------------------------------------------------------------------
</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 in 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 $1.3 million in the second quarter
of 1998, an increase of $371,000 from the $936,000 in the first quarter of 1998,
and a $970,000 decrease from the $2.2 million in the second quarter of 1997.
Nonperforming loans, comprised of nonaccrual loans, accruing loans past due 90
days or more, and restructured loans were $4.4 million at June 30, 1998,
compared with $4.2 million at December 31, 1997, and $7.6 million at June 30,
1997. Simultaneously, the Company's ratio of loan loss reserve to total loans
was 2.19% at June 30, 1998 compared to 2.19% at December 31, 1997 and 2.09% at
June 30, 1997.
For further information on nonperforming and classified loans and the
allowance for loan losses, see - "Nonperforming and Classified Assets" herein.
21
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Other Income
Total other income was $1.6 million for the second quarter of 1998, an increase
of $157,000 from the first quarter of 1998, and a decrease of $882,000 from the
second 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
June 30, March 31, December 31, September 30, June 30,
------------------------------------------------------------------
(Dollars in thousands) 1998 1998 1997 1997 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $ 727 $ 550 $ 603 $ 550 $ 481
Service charges and other fees 349 420 394 433 400
Gain on sale of SBA loans 221 244 269 216 181
Gain (loss) on investments, net (8) 8 25 5 8
Other 309 (278) 167 240 296
------ ---- ----- ------ -----
1,598 944 1,458 1,444 1,366
Warrant income - 497 14 34 1,114
------ ------ ------ ------ ------
Total $1,598 $1,441 $1,472 $1,478 $2,480
====== ====== ====== ====== ======
</TABLE>
The increase in other income for the second quarter of 1998 from the first
quarter was primarily the result of a $484,000 writedown on equity securities in
accordance with APB 18, which was recorded during the first quarter of 1998 and
is included in other income. The Company also realized a $177,000 increase in
trust fees. The increase in trust fees was due to significant growth in assets
under management by Greater Bay Trust Company as trust assets increased to
$636.4 million at the end of the second quarter of 1998, compared to $486.7
million at June 30, 1997. These increases to other income from the quarter ended
June 30 as compared to the prior quarter were partially offset by $497,000 in
warrant income recognized in the first quarter discussed above.
22
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Operating Expenses
The following table represents the major components of operating expenses for
the periods indicated:
<TABLE>
<CAPTION>
At and for the periods ended
June 30, March 31, December 31, September 30, June 30,
---------------------------------------------------------------------------------
(Dollars in thousands) 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $ 5,548 $5,251 $ 5,268 $4,951 $4,727
Occupancy and equipment 1,514 1,371 1,342 1,376 1,295
Legal and other professional fees 485 382 392 506 500
Telephone, postage and supplies 381 439 350 335 342
Contribution to GBB Foundation - 701 - - -
Marketing and promotion 329 116 326 335 272
Directors' fees 142 142 119 104 122
Client services 116 151 80 111 79
FDIC insurance and regulatory
assessments 77 89 73 70 83
Expenses on other real estate owned (8) 24 25 (10) 71
Other 566 890 1,332 467 618
-----------------------------------------------------------------------------
Total operating expenses,
excluding merger costs) $ 9,150 $9,556 $ 9,307 $8,245 $8,109
Merger costs 2,125 - 3,333 - -
-----------------------------------------------------------------------------
Total operating expenses $11,275 $9,556 $12,640 $8,245 $8,109
=============================================================================
Efficiency ratio 66.23% 59.39% 78.10% 54.04% 53.67%
Efficiency ratio, before merger costs 53.75% 59.39% 57.51% 54.04% 53.67%
Total operating expenses to average
assets* 3.33% 3.17% 4.43% 3.09% 3.21%
Total operating expenses to average
assets, before merger costs* 2.70% 3.17% 3.26% 3.09% 3.21%
</TABLE>
*Annualized
Operating expenses totaled $11.3 million for the second quarter of 1998, an
increase of $1.7 million from the first quarter of 1998, and an increase of $3.1
million from the second quarter of 1997. The ratio of operating expenses to
average assets at June 30, 1998 and 1997 was 3.33% and 3.21%, respectively. The
increase in operating expenses for the quarter ended June 30, 1998 as compared
to the prior quarter is primarily due to the $2,125,000 in cost incurred related
to the PRB merger. This increase from the prior quarter is partially offset by
nonrecurring costs for the first quarter of 1998 represented by a $701,000
donation to the GBB Foundation, as previously discussed.
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 second quarter of 1998 was 66.23%,
compared to 53.67% for the same period in 1997. Excluding merger costs, the
Company's efficiency ratios were 53.75% and 53.67% for quarters ended June 30,
1998 and 1997, respectively.
Compensation and benefits expenses increased in the three months ended
June 30, 1998 to $5.5 million compared to $5.3 million at March 31, 1998 and
$4.7 million at June 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 June 30, 1998 was
34.2%, compared to 36.3% for the same period in 1997. The effective rate in
1997 was lower than the statutory rate due to tax-exempt income on municipal
securities.
The effective income tax rate for the six month period ended June 30,
1998 was 34.0%, as compared to 36.2% for the six month period ended June 30,
1997.
23
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
FINANCIAL CONDITION
Total assets increased 22.7% to $1.5 billion at June 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 June 30,
1998 and December 31, 1997 were the invested proceeds of a Special Deposit of
$89.5 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 9.6% to $804.6 million at June 30,
1998, compared to $734.6 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:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------------------------------------
(Dollars in thousands) Amount % Amount %
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $357,758 45.5% $345,742 48.1%
Real estate construction and land 139,850 17.8 112,514 15.7
Real estate term 227,652 28.9 196,217 27.3
Consumer and other 81,750 10.3 82,914 11.5
----------------------------------------------
Total loans, gross 807,010 102.5 737,387 102.6
Deferred fees and discounts, net (2,446) -0.3 (2,765) -0.4
----------------------------------------------
Total loans, net of deferred fees 804,564 102.2 734,622 102.2
Allowance for loan losses (17,584) -2.2 (16,093) -2.2
----------------------------------------------
Total loans $786,980 100.0% $718,529 100.0%
==============================================
</TABLE>
Nonperforming and Classified Assets
Management generally places loans on nonaccrual 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 Banks 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.
24
<PAGE>
<TABLE>
<CAPTION>
Management's Discussion and Analysis of Results of Operations And Financial
Condition
The following table sets forth information regarding nonperforming assets
at the dates indicated:
At and for the periods ended
June 30, March 31, December 31, September 30, June 30,
-----------------------------------------------------------------------------
(Dollars in thousands) 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $ 3,758 $ 3,152 $ 2,971 $ 4,565 $ 5,783
Accruing loans past due 90 days or more 75 108 158 575 147
Restructured loans 531 903 1,062 1,453 1,705
-----------------------------------------------------------------------------
Total nonperforming Loans 4,364 4,163 4,191 6,593 7,635
Other real estate owned 730 1,001 1,303 1,069 1,402
-----------------------------------------------------------------------------
Total nonperforming assets $ 5,094 $ 5,164 $ 5,494 $ 7,662 $ 9,037
=============================================================================
Nonperforming assets to total loans
and other real estate owned 0.63% 0.67% 0.75% 1.11% 1.39%
</TABLE>
At June 30, 1998, the Company had $3.8 million in nonaccrual loans.
Interest income forgone on nonperforming loans outstanding at period and totaled
$81,000 and $96,000 for the quarter ended June 30, 1998 and 1997, respectively.
Interest income recognized for the quarter on nonperforming loans at June 30,
1998 and June 30, 1997 was $62,000 and $19,000, 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 on going 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
June 30, 1998, OREO consisted of six properties acquired through foreclosure
with a carrying value of $730,000.
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," 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 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
June 30, March 31, December 31, September 30, June 30,
-------------------------------------------------------------------------------
(Dollars in thousands) 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Substandard $ 9,068 $ 9,138 $15,723 $17,119 $17,214
Doubtful 1,041 1,092 1,377 714 2,068
Loss - 47 49 272 231
Other real estate owned 730 1001 1,303 1,069 1,402
-------------------------------------------------------------------------------
Classified assets $10,839 $11,278 $18,452 $19,174 $20,915
=============================================================================
Classified assets to total loans and other real 1.35% 1.47% 2.51% 2.78% 3.21%
estate owned
Allowance for loan losses to total classified assets 162.23% 143.69% 87.22% 75.27% 64.95%
</TABLE>
With the exception of these classified loans, management was not aware of
any loans as of June 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
25
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
would result in such loans being included in nonperforming or classified asset
tables 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 assurances 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.
Allowances 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
allowances for loan losses at the dates and for the periods indicated:
<TABLE>
<CAPTION>
At and for the periods ended
June 30, March 31, December 31, September 30, June 30,
-----------------------------------------------------------------------
(Dollars in thousands) 1998 1998 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period end loans outstanding $804,565 $766,269 $734,622 $688,537 $650,890
Average loans outstanding $782,665 $741,079 $711,521 $668,856 $630,188
Allowance for loan losses:
Balance at beginning of period $ 16,205 $ 16,093 $ 14,433 $ 13,584 $ 11,634
Charge-offs:
Commercial - (734) (464) (263) (301)
Real estate construction and land (4) - - - -
Real estate term - (2) (50) (62) (14)
Consumer and other (14) (119) (234) (62) (39)
----------------------------------------------------------------------
Total charge-offs (18) (855) (748) (387) (354)
----------------------------------------------------------------------
Recoveries:
Commercial 19 22 7 7 5
Real estate construction and land - - - - -
Real estate term - - - - 22
Consumer and other 1 9 1 5 2
----------------------------------------------------------------------
Total recoveries 20 31 8 12 29
----------------------------------------------------------------------
Net charge-offs 2 (824) (740) (376) (325)
Provision charged to income (1) 1,377 936 2,400 1,224 2,275
----------------------------------------------------------------------
Balance at end of period $ 17,585 $ 16,205 $ 16,093 $ 14,432 $ 13,584
----------------------------------------------------------------------
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.00% 0.45% 0.42% 0.23% 0.23%
Year to date net charge-offs to average loans
outstanding during the period, annualized 0.22% 0.45% 0.24% 0.18% 0.17%
Allowance as a percentage of average loans outstanding 2.25% 2.19% 2.26% 2.16% 2.16%
Allowance as a percentage of period end loans
outstanding 2.19% 2.11% 2.19% 2.10% 2.09%
Allowance as a percentage of non-performing loans 402.93% 389.26% 383.99% 218.90% 177.92%
</TABLE>
(1) Includes $70,000 in the second quarter of 1998 and $1.4 million in the
fourth quarter of 1997 to conform practices for the Bank'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
26
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Liquidity and Cash Flow
The objective of liquidity management is to maintain each Bank's ability to meet
the day-to-day cash flow requirements of its clients who either wish to withdraw
funds or require funds to meet their credit needs. The Company must manage its
liquidity position to allow the Banks to meet the needs of their clients while
maintaining an appropriate balance between assets and liabilities to meet the
return on investment 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 Banks utilize brokered deposit lines,
sell securities under agreements to repurchase and borrow 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 and have not been
registered under the Securities Act.
Greater Bay intends to invest approximately $10.0 million of the net
proceeds in one or more of 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 initially only a portion, approximately $7.3 million, of the TPS
will qualify as Tier 1 capital, and the remaining portion will qualify as Tier 2
capital. However, as the Company's shareholder's equity increases, the amount of
the additional TPS that will count as Tier 1 capital will increase.
Net cash provided by operating activities, consisting of primarily net
interest income, totaled $9.3 million for the six months ended June 30, 1998 and
$4.5 for the same period in 1997. Cash used for investing activities totaled
$218.5 million for the six months ended June 30, 1998 and $89.0 million in the
same period in 1997. The funds used for investing activities primarily
represent increases in loans and investment for each year reported.
For the six months ended June 30, 1998, net cash provided by financing
activities was $264.2 million. Historically, the primary financing activity of
the Company has been deposits and borrowings. Deposits increased $213.5 million
for the six months ended June 30, 1998 and other borrowings increased $50.5
million for the same period. For the six months ended June 30, 1997, net cash
provided by financing activities was $95.1 million. Deposits increased $83.6
million, while other borrowings decreased $9.0 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 the 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. 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. As of June 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.
Capital Resources
Shareholders' equity at June 30, 1998 increased to $82.3 million from $76.3
million at December 31, 1997. During the second quarter of 1998 and the twelve
months ended December 31, 1997, Greater Bay paid aggregate cash dividends of
$0.095 and $0.30 per share, 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.
The Company has provided a substantial portion of its capital requirements
through the retention of earnings. In the first quarter of 1997, the Company
increased its capital base by issuing $20.0 million of TPS, which, subject to
certain limitations, qualify as Tier 1 capital.
The Company's equity to asset ratio at June 30, 1998 and December 31, 1997
was 5.6% and 6.4%, 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
27
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
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 June 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-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.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, 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 June 30, 1998
and the requirements to qualify for well capitalized and adequately capitalized
status under these regulations are as follows:
28
<PAGE>
Management's Discussion and Analysis of Results of Operations And Financial
Conditions
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
As of June 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 $117,545 11.79% $79,770 8.00% N/A
Cupertino National Bank 45,206 10.35 34,939 8.00 $43,674 10.00%
Golden Gate Bank 9,736 12.87 6,050 8.00 7,562 10.00
Mid-Peninsula Bank 37,419 10.77 27,803 8.00 34,754 10.00
Peninsula Bank of Commerce 16,439 13.31 9,882 8.00 12,353 10.00
Tier 1 Capital (To Risk Weighted Assets):
GREATER BAY BANCORP $101,935 10.22% $39,885 4.00% N/A
Cupertino National Bank 36,690 8.40 17,470 4.00 $26,204 6.00%
Golden Gate Bank 8,790 11.62 3,025 4.00 4,537 6.00
Mid-Peninsula Bank 33,071 9.52 13,902 4.00 20,852 6.00
Peninsula Bank of Commerce 14,893 12.06 4,941 4.00 7,412 6.00
Tier 1 Capital (To Average Quarterly Assets):
GREATER BAY BANCORP $101,935 7.50% $54,376 4.00% N/A
Cupertino National Bank 36,690 6.77 21,675 4.00 $27,093 5.00%
Golden Gate Bank 8,790 6.99 5,029 4.00 6,286 5.00
Mid-Peninsula Bank 33,071 7.11 13,962 3.00 23,270 5.00
Peninsula Bank of Commerce 14,893 6.94 8,585 4.00 10,731 5.00
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
As of June 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 $109,614 12.58% $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 10.98% $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 9.31% $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 June 30, 1998, the company's risk-based capital ratios were 10.22% for
Tier 1 risk-based capital and 11.79% for total risk-based capital, compared to
10.90% and 12.49 respectively, as of December 31, 1997. The Company's leverage
ratio was 7.50% at June 30, 1998, compared to 8.48% at December 31, 1997. These
ratios all exceeded the well-capitalized guidelines shown above.
In addition, at June 30, 1998, each of the Banks had levels of capital which
exceeded the well-capitalized guidelines. For additional information on the
capital levels and capital ratios of the Company
29
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
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 June 30, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands) Projected Change
Change in ----------------------------------
Interest Rates MVPE Dollars Percentage
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
100 basis point rise $101,745 $ 8,068 8.60 %
Base scenario 93,678 - -
100 basis point decline 85,610 (8,068) (8.60)%
</TABLE>
The preceding table indicates that, at June 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 noninterest-
bearing deposit balances, which have a significantly higher market value during
periods of increasing interest rates.
30
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
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
rate on 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.
31
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
The following table shows interest sensitivity gaps for different intervals
as of June 30, 1998.
<TABLE>
<CAPTION>
Immediate 2 Days To 7 Months to 1 Year 4 Years
(Dollars in thousands) or One Day 6 Months 12 Months to 3 Years to 5 Years
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ - $ - $ - $ - $ -
Short term investments 126,452 90,068 - - -
Investment securities 243 86,355 17,085 57,890 38,354
Loans 636,421 33,824 24,904 64,573 24,535
Loan losses/unearned fees - - - - -
Other assets - - - - -
------------------------------------------------------------------------
Total assets $763,116 $210,247 $ 41,989 $122,463 $ 62,889
------------------------------------------------------------------------
LIABILITIES AND EQUITY
Deposits:
DDA $ - $ - $ - $ - $ -
NOW, MMDA, and savings 809,594 - - - -
Time deposits - 171,618 31,269 8,202 811
Other borrowings - - 50,000 20,000 -
Subordinated debt - - - - -
Trust preferred securities - - - - -
Other liabilities - - - - -
Shareholders' equity - - - - -
------------------------------------------------------------------------
Total liabilities and equity $809,594 $171,618 $ 81,269 $ 28,202 $ 811
------------------------------------------------------------------------
Gap $(46,478) $ 38,629 $(39,280) $ 94,261 $ 62,078
Cumulative Gap $(46,478) $ (7,849) $(47,129) $ 47,132 $109,210
Cumulative Gap/total assets -3.16% -0.53% -3.20% 3.20% 7.42%
<CAPTION>
More than Total Rate Non-Rate
(Dollars in thousands) 5 Years Sensitive Sensitive Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ - $ - $ 69,239 $ 69,239
Short term investments - 216,520 - 216,520
Investment securities 137,872 337,799 3,316 341,115
Loans 22,753 807,010 - 807,010
Loan losses/unearned fees - - (20,030) (20,030)
Other assets - - 57,013 57,013
----------------------------------------------------------
Total assets $160,625 $1,361,329 $ 109,538 $1,470,867
----------------------------------------------------------
LIABILITIES AND EQUITY
Deposits:
DDA $ - $ - $ 263,121 $ 263,121
NOW, MMDA, and savings - 809,594 - 809,594
Time deposits - 211,900 - 211,900
Other borrowings - 70,000 - 70,000
Subordinated debt 3,000 3,000 - 3,000
Trust preferred securities 20,000 20,000 - 20,000
Other liabilities - - 10,919 10,919
Shareholders' equity - - 82,333 82,333
----------------------------------------------------------
Total liabilities and equity $ 23,000 $1,114,494 $ 356,373 $1,470,867
----------------------------------------------------------
Gap $137,625 $ 246,835 $(246,835) -
Cumulative Gap $246,835 $ 246,835 $ - -
Cumulative Gap/total assets 16.78% 16.78% - -
</TABLE>
The foregoing table indicates that the Company had a one year negative gap
of $47.1 million, or 3.2% of total assets, at June 30, 1998. In theory, this
would indicate that at June 30, 1998, $47.1 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 a 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
next 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 June 30, 1998, the analysis indicates that the Company's net
interest income would increase a maximum of 18.5% if rates rose 200 basis points
immediately and would decrease a maximum of 18.5% 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 action 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.
32
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
Year 2000 Compliance
Greater Bay is working to resolve the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately process
information that may be date-sensitive. Any of the Company's programs that
recognize a date using "00" as the year 1900 rater than the year 2000 could
result in errors or system failures. Greater Bay utilizes a number of computer
programs across its entire operation. The Company has not completed its
assessment, but currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position. However, if
the Company 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 the
Company. 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.
Specifically the Company has undertaken a major project to ensure that its
internal operating systems will be fully capable of processing Year 2000
transactions. 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 late 1997. 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.
The primary cost of the project has been and will continue to be the
reallocation of internal resources, and therefore does not represent incremental
expense to the Company. The Company 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. The Company 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 the Company is to monitor the
progress of its primary software providers towards compliance with Year 2000
issues and prepare to test actual data of the Company in simulated processing of
future sensitive dates.
As well as evaluating its own internal operating systems, the Company has
also inquired with its major customers and suppliers as to their ability to meet
Year 2000 requirements.
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. Hoefer &
Arnett, Incorporated and Van Kasper & Company acted as the primary market makers
and facilitated trades in the Company's common stock. 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.
33
<PAGE>
Management's Discussion and Analysis of Results of Operations
And Financial Condition
<TABLE>
<CAPTION>
Cash dividends
For the period indicated(1) High Low declared (2)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Second Quarter $33.26 $32.33 $0.095
First Quarter 25.59 24.95 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 $0.075
Third Quarter 10.50 9.00 0.075
Second Quarter 11.07 8.88 0.075
First Quarter 9.38 8.25 0.075
</TABLE>
(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.
34
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 -- NOT APPLICABLE
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 8, 1998, PRB, the former holding company of Golden Gate, merged with and
into the Company. Upon consummation 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-interests. The securities issued in the
merger were sold in a private transaction pursuant to an applicable exemption
from registration under the Securities Act.
ITEM 3 -- NOT APPLICABLE
ITEM 4 -- NONE
ITEM 5 -- 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. EXHIBIT
- ------- -------
2 Agreement and plan of reorganization by and among Greater Bay Bancorp,
Pacific Rim Bancorporation and the Leo K.W. Lum PRB Revocable Trust dated
February 24, 1998.+++
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended.+++
3.2 Bylaws of Greater Bay Bancorp, as amended. +++
4.1 Junior Subordinated Indenture dated as of March 31, 1997 between Greater
Bay Bancorp and Wilmington Trust Company, as Trustee. ++
4.2 Officers' Certificate and Company Order, dated March 31, 1997.++
4.3 (Reserved.)
4.4 Certificate of Trust of GBB Capital I.+
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.+
35
<PAGE>
4.6 Amended and Restated Trust Agreement of GBB Capital I, among Greater Bay
Bancorp, Wilmington Trust Company and the Administrative Trustees named
therein dated as of March 31, 1997.++
4.7 Trust Preferred Certificate of GBB Capital I.++
4.8 Common Securities Certificate of GBB Capital I.++
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust
Company, dated as of March 31, 1997.++
4.10 Agreement as to Expenses and Liabilities, dated as of March 31, 1997.++
4.11 Form of Subordinated Debentures; incorporated herein by reference from
Exhibit 1 of Cupertino National Bancorp's Form 8-K (File No. 0-18015),
filed with the Commission on October 25, 1995.
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated as
of November 22, 1996.+
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp. +
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.++
10.1 Employment Agreement with David L. Kalkbrenner, dated March 3, 1992;
incorporated herein by reference from Exhibit 10.15 to Mid-Peninsula
Bancorp's Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 0-25034), filed with the Commission on March 30, 1995.*
10.1.1 Amendment No. 1 to Employment Agreement with David L. Kalkbrenner, dated
March 27, 1998.*
10.2 Employment, Severance and Retirement Benefits Agreement with Steven C.
Smith dated July 31, 1995.*+
10.2.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with Steven C. Smith, dated March 27, 1998.*+++
10.3 Employment, Severance and Retirement Benefits Agreement with David R.
Hood dated July 31, 1995.*+
10.3.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with David R. Hood, dated March 27, 1998.*
10.4 Greater Bay Bancorp 1996 Stock Option Plan, as amended; incorporated
herein by reference from Exhibit 99.1 to Greater Bay Bancorp's
Registration Statement on Form S-8 (Registration No. 333-47747), filed
with the Commission on March 11, 1998.*
10.5 Greater Bay Bancorp 401(k) Profit Sharing Plan.*+++
10.6 Greater Bay Bancorp Employee Stock Purchase Plan; incorporated herein by
reference from Greater Bay Bancorp's Proxy Statement for Annual Meeting
of Shareholders (File No. 000-25034), filed with the Commission on May
13, 1997.*
10.6.1 Amendment to Greater Bay Bancorp Employee Stock Purchase Plan. *+++
10.7 Greater Bay Bancorp Change of Control Pay Plan I. *+++
10.8 Greater Bay Bancorp Change of Control Pay Plan II. *+++
10.9 Greater Bay Bancorp Termination and Layoff Plan I. *+++
10.10 Greater Bay Bancorp Termination and Layoff Plan II. *+++
10.11 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan. *+++
10.12 Form of Indemnification Agreement between Greater Bay Bancorp and with
directors and certain executive officers. +
11 Statements re Computation of Earnings Per Share.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
- --------
* Represents executive compensation plans and arrangements of Greater Bay
Bancorp.
+ Incorporated by reference from Greater Bay Bancorp's Registration
Statement on Form S-1 (Registration No. 33-22783) filed with the
Commission on March 5, 1997.
++ Incorporated by reference from Greater Bay Bancorp's current report on
Form 8-K (File No. 000-25034) dated June 5, 1997.
36
<PAGE>
+++Incorporated by reference form Greater Bay Bancorp's current report on
Form 10-K (File No. 000-25034) dated March 31, 1998.
- ----
(b) Reports on Form 8-K for the quarter covered by this report.
On May 20, 1998, the Company filed a Form 8-K reporting the completion of
the merger of Greater Bay Bancorp, Pacific Rim Bancorporation and its wholly
owned subsidiary, Golden Gate Bank.
37
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREATER BAY BANCORP
(Registrant)
By:
/s/ Steven C. Smith
- -------------------
Steven C. Smith
Executive Vice President, Chief Operating Officer and
Chief Financial Officer
Date: August 14, 1998
38
<PAGE>
EXHIBIT 11
Greater Bay Bancorp Form 10-Q
Exhibit 11 - Statements Re Computation of Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 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 $ 2,923 $ 3,011 $ 6,628 $ 5,815
Weighted average common shares outstanding 9,163,934 8,895,548 9,106,015 8,923,764
-------------------------- --------------------------
Basic earnings per share $ 0.32 $ 0.34 $ 0.73 $ 0.65
========================== ==========================
Diluted Earnings Per Share:
Income available to common shareholders $ 2,923 $ 3,011 $ 6,628 $ 5,815
Weighted average common shares outstanding 9,163,934 8,895,548 9,106,015 8,923,764
Effect of dilutive securities 793,774 589,124 818,143 670,715
-------------------------- --------------------------
Weighted average common and common
equivalent shares outstanding 9,956,505 9,484,672 9,924,158 9,594,479
-------------------------- --------------------------
Diluted earnings per share $ 0.29 $ 0.32 $ 0.67 $ 0.61
========================== ==========================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 MAR-31-1998
<CASH> 69,239 70,749
<INT-BEARING-DEPOSITS> 0 378
<FED-FUNDS-SOLD> 126,200 78,100
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 303,358 309,565
<INVESTMENTS-CARRYING> 34,440 38,055
<INVESTMENTS-MARKET> 35,147 38,852
<LOANS> 786,980 750,064
<ALLOWANCE> (17,584) (16,205)
<TOTAL-ASSETS> 1,470,867 1,304,562
<DEPOSITS> 1,284,615 1,106,431
<SHORT-TERM> 0 11,900
<LIABILITIES-OTHER> 80,919 22,967
<LONG-TERM> 23,000 83,000
0 0
0 0
<COMMON> 54,247 52,916
<OTHER-SE> 28,086 27,348
<TOTAL-LIABILITIES-AND-EQUITY> 1,470,867 1,304,562
<INTEREST-LOAN> 19,753 18,554
<INTEREST-INVEST> 4,116 4,831
<INTEREST-OTHER> 2,786 1,347
<INTEREST-TOTAL> 26,655 24,732
<INTEREST-DEPOSIT> 9,501 8,759
<INTEREST-EXPENSE> 11,228 10,082
<INTEREST-INCOME-NET> 15,427 14,650
<LOAN-LOSSES> 1,307 936
<SECURITIES-GAINS> (8) 8
<EXPENSE-OTHER> 9,150 9,556
<INCOME-PRETAX> 6,568 5,599
<INCOME-PRE-EXTRAORDINARY> 6,568 5,599
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,923 3,705
<EPS-PRIMARY> 0.32 0.41
<EPS-DILUTED> 0.29 0.37
<YIELD-ACTUAL> 4.61 4.98
<LOANS-NON> 3,758 3,152
<LOANS-PAST> 75 108
<LOANS-TROUBLED> 531 903
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 16,205 16,098
<CHARGE-OFFS> (18) (856)
<RECOVERIES> 20 31
<ALLOWANCE-CLOSE> 17,585 16,205
<ALLOWANCE-DOMESTIC> 17,585 16,205
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 APR-01-1997 JUL-01-1997 OCT-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 36,128 44,058 49,436 53,000
<INT-BEARING-DEPOSITS> 0 0 0 0
<FED-FUNDS-SOLD> 62,300 64,300 57,800 75,000
<TRADING-ASSETS> 0 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 149,220 165,296 77,422 172,096
<INVESTMENTS-CARRYING> 59,239 47,111 42,966 44,461
<INVESTMENTS-MARKET> 59,191 48,072 42,600 35,147
<LOANS> 598,539 637,306 674,104 718,529
<ALLOWANCE> (11,619) (13,584) (14,433) (16,093)
<TOTAL-ASSETS> 959,032 1,014,314 1,077,718 1,200,319
<DEPOSITS> 849,342 908,533 970,433 1,071,148
<SHORT-TERM> 11,803 2,969 0 9,930
<LIABILITIES-OTHER> 5,988 7,128 7,869 10,433
<LONG-TERM> 23,000 23,000 23,000 32,550
0 0 0 0
0 0 0 0
<COMMON> 51,010 43,957 44,181 52,218
<OTHER-SE> 28,727 19,250 32,235 24,040
<TOTAL-LIABILITIES-AND-EQUITY> 959,032 1,014,314 1,077,718 1,200,319
<INTEREST-LOAN> 14,350 16,293 17,270 17,306
<INTEREST-INVEST> 3,267 2,198 3,445 4,942
<INTEREST-OTHER> 662 2,417 1,589 1,718
<INTEREST-TOTAL> 18,279 20,910 22,304 23,966
<INTEREST-DEPOSIT> 6,538 7,517 7,940 8,624
<INTEREST-EXPENSE> 6,830 8,281 8,524 9,254
<INTEREST-INCOME-NET> 11,449 12,629 13,780 14,712
<LOAN-LOSSES> 1,993 2,275 1,224 1,000
<SECURITIES-GAINS> 0 8 5 25
<EXPENSE-OTHER> 6,204 8,109 8,245 12,640
<INCOME-PRETAX> 4,486 4,725 5,789 2,544
<INCOME-PRE-EXTRAORDINARY> 4,486 4,725 5,789 2,544
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 2,897 3,011 3,643 1,558
<EPS-PRIMARY> 0.59 0.34 0.41 0.43
<EPS-DILUTED> 0.56 0.32 0.38 0.39
<YIELD-ACTUAL> 5.27 5.46 6.31 6.11
<LOANS-NON> 4,500 5,786 4,565 2,971
<LOANS-PAST> 967 147 575 158
<LOANS-TROUBLED> 1,845 1,705 1,453 1,062
<LOANS-PROBLEM> 0 0 0 0
<ALLOWANCE-OPEN> 9,883 11,634 13,584 14,433
<CHARGE-OFFS> (271) (354) (386) (748)
<RECOVERIES> 14 29 12 8
<ALLOWANCE-CLOSE> 11,619 13,584 14,433 16,098
<ALLOWANCE-DOMESTIC> 11,619 13,584 14,433 16,098
<ALLOWANCE-FOREIGN> 0 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 53,000 49,959 38,602
<INT-BEARING-DEPOSITS> 0 0 0
<FED-FUNDS-SOLD> 75,000 32,400 45,400
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 272,215 84,023 93,818
<INVESTMENTS-CARRYING> 44,461 63,176 61,275
<INVESTMENTS-MARKET> 45,246 63,535 61,717
<LOANS> 718,529 554,796 394,994
<ALLOWANCE> (16,093) (9,883) (6,603)
<TOTAL-ASSETS> 1,200,319 897,671 652,124
<DEPOSITS> 1,071,148 821,366 584,355
<SHORT-TERM> 0 0 0
<LIABILITIES-OTHER> 10,432 6,489 5,866
<LONG-TERM> 42,480 3,000 3,000
0 0 0
0 0 0
<COMMON> 52,218 50,025 48,109
<OTHER-SE> 24,040 16,141 12,884
<TOTAL-LIABILITIES-AND-EQUITY> 1,200,319 897,671 652,124
<INTEREST-LOAN> 66,608 47,648 40,311
<INTEREST-INVEST> 14,541 9,528 8,160
<INTEREST-OTHER> 3,951 3,183 3,087
<INTEREST-TOTAL> 85,099 60,364 51,543
<INTEREST-DEPOSIT> 30,649 21,224 17,748
<INTEREST-EXPENSE> 32,882 21,705 18,594
<INTEREST-INCOME-NET> 52,217 38,659 32,949
<LOAN-LOSSES> 6,492 2,306 1,160
<SECURITIES-GAINS> (5) (255) (113)
<EXPENSE-OTHER> 35,228 31,405 27,263
<INCOME-PRETAX> 18,454 10,643 9,020
<INCOME-PRE-EXTRAORDINARY> 17,979 10,316 8,589
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 10,823 6,343 5,571
<EPS-PRIMARY> 2.20 1.33 1.24
<EPS-DILUTED> 2.05 1.26 1.18
<YIELD-ACTUAL> 4.69 5.19 5.47
<LOANS-NON> 2,971 4,616 4,833
<LOANS-PAST> 158 1,237 830
<LOANS-TROUBLED> 1,062 1,828 1,530
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 9,883 6,603 6,938
<CHARGE-OFFS> (1,692) (471) (1,846)
<RECOVERIES> 60 645 351
<ALLOWANCE-CLOSE> 16,093 9,883 6,603
<ALLOWANCE-DOMESTIC> 16,093 9,883 6,603
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
