<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, 1999
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 August 11, 1999:
11,276,554
<PAGE>
GREATER BAY BANCORP
INDEX
Part I. Financial Information
<TABLE>
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998.......................... 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 1999 and 1998....................................... 4
Consolidated Statements of Comprehensive Income
for the Three Months and Six Months Ended
June 30, 1999 and 1998....................................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998...................... 6
Notes to Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 33
Part II. Other Information
Item 1. Legal Proceeding............................................. 39
Item 2. Changes in Securities and Use of Proceeds.................... 39
Item 3. Default Upon Senior Securities............................... 39
Item 4. Submission of Matters to a Vote of Securities Holders........ 39
Item 5. Other Information............................................ 39
Item 6. Exhibits and Reports on Form 8-K............................. 40
Signatures................................................... 41
</TABLE>
2
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Dollars in thousands) (unaudited) 1998*
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 90,246 $ 69,583
Federal funds sold 152,200 62,800
Other short term securities 67,998 77,576
----------------------------------
Cash and cash equivalents 310,444 209,959
Investment securities:
Available for sale, at fair value 284,800 257,258
Held to maturity, at amortized cost (fair value: $92,790 and $94,890 at
June 30, 1999 and December 31, 1998, respectively) 94,975 94,209
Other securities 6,469 6,044
----------------------------------
Investment securities 386,244 357,511
Loans:
Commercial 646,483 483,668
Real estate construction and land 256,253 215,274
Real estate term 353,871 332,478
Consumer and other 99,988 88,458
Deferred loan fees and discounts (5,133) (3,896)
----------------------------------
Total loans, net of deferred fees 1,351,462 1,115,982
Allowance for loan losses (26,086) (23,379)
----------------------------------
Total loans, net 1,325,376 1,092,603
Property, premises and equipment 14,709 11,380
Interest receivable and other assets 76,839 66,736
----------------------------------
Total assets $ 2,113,612 $ 1,738,189
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 324,019 $ 302,006
MMDA, NOW and savings 1,124,354 922,581
Time certificates, $100,000 and over 320,286 190,312
Other time certificates 61,998 64,048
----------------------------------
Total deposits 1,830,657 1,478,947
Other borrowings 90,435 75,085
Subordinated debt - 3,000
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary trust holding solely junior subordinated debentures 50,000 50,000
Other liabilities 27,397 24,116
----------------------------------
Total liabilities 1,998,489 1,631,148
----------------------------------
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;
11,247,791 and 11,011,462 shares issued and outstanding as of
June 30, 1999 and December 31, 1998, respectively 65,827 63,079
Accumulated other comprehensive loss (1,702) (98)
Retained earnings 50,998 44,060
----------------------------------
Total shareholders' equity 115,123 107,041
----------------------------------
Total liabilities and shareholders' equity $ 2,113,612 $ 1,738,189
==================================
</TABLE>
* Restated on an historical basis to reflect the merger with Bay Area Bancshares
("BA Bancshares") on a pooling of interests basis.
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) 1999 1998* 1999 1998*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 30,238 $ 23,197 $ 57,714 $ 44,841
Interest on investment securities:
Taxable 5,143 3,838 9,740 7,422
Tax - exempt 765 494 1,511 822
--------------------------- -------------------------
Total interest on investment securities 5,908 4,332 11,251 8,244
Other interest income 2,897 2,944 4,539 5,563
--------------------------- -------------------------
Total interest income 39,043 30,473 73,504 58,648
--------------------------- -------------------------
INTEREST EXPENSE
Interest on deposits 13,771 10,394 25,567 19,950
Interest on long term borrowings 2,227 1,764 4,246 2,654
Interest on other borrowings 183 345 289 1,154
--------------------------- -------------------------
Total interest expense 16,181 12,503 30,102 23,758
--------------------------- -------------------------
Net interest income 22,862 17,970 43,402 34,890
Provision for loan losses 1,636 1,377 2,557 2,413
--------------------------- -------------------------
Net interest income after provision
for loan losses 21,226 16,593 40,845 32,477
--------------------------- -------------------------
OTHER INCOME
Trust fees 727 617 1,448 1,167
ATM network revenue 501 479 1,028 862
Loan and international banking fees 458 190 767 336
Service charges and other fees 393 411 812 959
Gain on sale of SBA loans 298 221 582 465
Gain on sale of investments, net - 42 - 50
Other income 410 225 703 (30)
--------------------------- -------------------------
Total, recurring 2,787 2,185 5,340 3,809
Warrant income 226 - 230 497
--------------------------- -------------------------
Total other income 3,013 2,185 5,570 4,306
--------------------------- -------------------------
OPERATING EXPENSES
Compensation and benefits 7,726 6,363 14,895 12,460
Occupancy and equipment 2,436 1,778 4,791 3,416
Telephone, postage and supplies 580 435 1,173 932
Legal and other professional fees 496 553 1,071 1,094
Marketing and promotion 410 385 817 550
Client services 244 136 505 293
FDIC insurance and regulatory assessments 103 83 203 180
Insurance 119 162 176 211
Other real estate owned 15 (8) 36 15
Other 1,270 939 2,423 2,299
--------------------------- -------------------------
Total, recurring 13,399 10,826 26,090 21,450
--------------------------- -------------------------
Merger and other related nonrecurring costs,
net of tax 3,965 1,974 3,965 1,974
Contribution to the GBB Foundation 323 - 323 701
--------------------------- -------------------------
Total operating expenses 17,687 12,800 30,378 24,125
Income before provision for income --------------------------- -------------------------
taxes and extraordinary items 6,552 5,978 16,037 12,658
Provision for income taxes 2,588 2,132 6,283 4,358
--------------------------- -------------------------
Net income before extraordinary items 3,964 3,846 9,754 $ 8,300
Extraordinary items - - (88) -
--------------------------- -------------------------
Net income $ 3,964 $ 3,846 $ 9,666 $ 8,300
=========================== =========================
Net income per share - basic $ 0.35 $ 0.35 $ 0.87 $ 0.75
=========================== =========================
Net income per share - diluted $ 0.34 $ 0.33 $ 0.82 $ 0.71
=========================== =========================
</TABLE>
*Restated on an historical basis to reflect the merger with Pacific Rim
Bancorporation ("PRB"), Pacific Business Funding Corporation ("PBFC) and BA
Bancshares on a pooling of interest basis.
See notes to consolidated financijal 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) 1999 1998* 1999 1998*
- -------------------------------------------------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C>
Net income $ 3,964 $ 3,846 $ 9,666 $ 8,300
----------------------- -------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes
of $(1,909) and $(96) for the three months ended June 30, (2,730) (137) (3,125) (35)
1999 and 1998, and $(2,185) and $(24) for the six months
ended June 30, 1999 and 1997, respectively)
Less: reclassification adjustment for gains included in
net income (net of taxes of $0 and $3 for the three
months ended June 30, 1999 and 1998, and $0 and $0 for - 5 - -
the six months ended June 30, 1999 and 1998, respectively)
----------------------- -------------------------
Net change (2,730) (142) (3,125) (35)
Cash flow hedge:
Net derivative gains arising during period (net of taxes of
$415 and $0 for the three months ended June 30, 1999 and 594 - 1,432 -
and 1998, and $1,001 and $0 for the six months ended
June 30, 1999 and 1998, respectively)
Less: reclassification adjustment for swap settlements
included in net income (net of taxes of $(32) and $0 for the
three months ended June 30, 1999 and 1998, and (46) - (89) -
$(63) and $0 for the six months ended June 30, 1999 and
1998, respectively
----------------------- -------------------------
Net change 640 - 1,521 -
Other comprehensive loss (2,090) (142) (1,604) (35)
----------------------- -------------------------
Comprehensive income $ 1,874 $ 3,704 $ 8,062 $ 8,265
======================= =========================
</TABLE>
* Restated on an historical basis to reflect the merger with PRB, PBFC and BA
Bancshares 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) 1999 1998*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows - operating activities
Net income $ 9,666 $ 8,300
Reconcilement of net income to net cash from operations:
Provision for loan losses 2,557 2,413
Depreciation and amortization 1,487 1,380
Deferred income taxes (1,114) (614)
(Gain) loss on sale of investments, net - (50)
Changes in: -
Accrued interest receivable and other assets (3,437) 1,213
Accrued interest payable and other liabilities 5,866 (1,533)
Deferred loan fees and discounts, net 1,237 (361)
--------- ---------
Operating cash flows, net 16,262 10,748
--------- ---------
Cash flows - investing activities
Maturities and partial paydowns on of investment securities:
Held to maturity 7,829 12,822
Available for sale 29,383 27,418
Purchase of investment securities: -
Held to maturity (8,629) -
Available for sale (84,463) (177,318)
Other securities (425) (1,199)
Proceeds from sale of available for sale securities 22,295 11,803
Loans, net (236,567) (84,529)
Proceeds from sale of other real estate owned 345 -
Purchase of property, premises and equipment (4,849) (2,632)
Purchase of insurance policies (4,776) (18,122)
--------- ---------
Investing cash flows, net (279,857) (231,757)
--------- ---------
Cash flows - financing activities
Net change in deposits 351,710 229,379
Net change in other borrowings - short term 15,350 (19,580)
Proceeds from other borrowings - long term - 70,000
Principal repayment - long term borrowings (3,000) -
Proceeds from sale of common stock 2,748 1,543
Cash dividends (2,728) (2,238)
--------- ---------
Financing cash flows, net 364,080 279,104
--------- ---------
Net change in cash and cash equivalents 100,485 58,095
Cash and cash equivalents at beginning of period 209,959 250,513
========= =========
Cash and cash equivalents at end of period $ 310,444 $ 308,608
========= =========
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 29,675 $ 26,258
Income taxes $ 7,550 $ 1,833
Non-cash transactions:
Additions to other real estate owned $ - $ 105
</TABLE>
* Restated on an historical basis to reflect the merger with PRB, PBFC and BA
Bancshares on a pooling of interests basis.
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 1999 and December 31, 1998 and for the
Three and Six Months Ended June 30, 1999 And 1998
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The results of operations for the three and six months ended June 30, 1999
are not necessarily indicative of the results expected for any subsequent
quarter or for the entire year ended December 31, 1999. The financial
statements should be read in conjunction with the consolidated financial
statements, and the notes thereto, included in the Annual Report on Form 10-K
for the year-end December 31, 1998 and the supplemental consolidated financial
statements included in the Annual Report on Form 8-K dated July 1, 1999.
Consolidation and Basis Of Presentation
The supplemental consolidated financial statements include the accounts of
Greater Bay Bancorp ("Greater Bay" on a parent-only basis, and the "Company" on
a consolidated basis) and its wholly owned subsidiaries, Mid-Peninsula Bank
("MPB"), Cupertino National Bank ("CNB"), Peninsula Bank of Commerce ("PBC"),
Golden Gate Bank ("Golden Gate"), Bay Area Bank ("BAB"), GBB Capital I and GBB
Capital II and its operating divisions Greater Bay Bank Santa Clara Valley
Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay Bank
Contra Costa Banking Office, Greater Bay International Banking Division, Greater
Bay Trust Company, Pacific Business Funding and Venture Banking Group. All
significant intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the current presentation. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
the prevailing practices within the banking industry.
Use Of Estimates In The Preparation Of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This statement
requires companies to classify items of other comprehensive income by their
nature in the financial statements and display the accumulated other
comprehensive income separately from retained earnings in the equity section of
the balance sheet. The changes to the balances of accumulated other
comprehensive income are as follows:
<TABLE>
<CAPTION>
Unrealized Gains Accumulated
(Losses) Cash Flow Other Comprehensive
(Dollars in thousands) on Securities Hedges Income (Loss)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - as of December 31, 1998 $ 579 $ (677) $ (98)
Current period change (3,125) 1,521 (1,604)
-------------------------------------------------------
Balance - as of June 30, 1999 $ (2,546) $ 844 $ (1,702)
=======================================================
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1999 and 1998 and for the
Three and Six Months Ended June 30, 1999 and 1998
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 by the
weighted average number of common shares outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares plus common equivalent shares outstanding including
dilutive stock options. All years presented include the effect of the 2-for-1
stock split effective as of April 30, 1998.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
three months and six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
For the three months ended June 30, 1999
------------------------------------------ ---------------------------------------
Average Average
Income Shares Per Share Income Shares
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator)
- ------------------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Net income $ 3,964 $ 3,846
Basic net income per share:
Income available to common shareholders 3,964 11,193,000 $ 0.35 3,846 10,859,000
Effect of dilutive securities:
Stock options - 605,000 - - 794,000
----------------------------------------- -----------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 3,964 11,798,000 $ 0.34 $ 3,846 11,653,000
----------------------------------------- -----------------------------
<CAPTION>
For the three months ended June 30, 1998
----------------------------------------------
Per Share
Amount
----------------------
<S> <C>
Net income
Basic net income per share:
Income available to common shareholders $ 0.35
Effect of dilutive securities:
Stock options -
---------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 0.33
---------
</TABLE>
<TABLE>
<CAPTION>
For the six months ended June 30, 1999
-------------------------------------------------- ---------------
Average
Income Shares Per Share Income
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator)
- -------------------------------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 9,666 $ 8,300
Basic net income per share:
Income available to common shareholders 9,666 11,133,000 $ 0.87 8,300
Effect of dilutive securities:
Stock options - 614,000 - -
------------------------------------------------- -------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 9,666 11,747,000 $ 0.82 $ 8,300
------------------------------------------------- ------------
<CAPTION>
For the six months ended June 30, 1998
-------------------------------------------
Average
Shares Per Share
(Denominator) Amount
-------------------------------------------
<S> <C> <C>
Net income
Basic net income per share:
Income available to common shareholders 11,087,000 $ 0.75
Effect of dilutive securities:
Stock options 588,000 -
-------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions 11,675,000 $ 0.71
--------------------------------------------
</TABLE>
There were options to purchase 477,437 shares and 477,245 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the three months and six
months ended June 30, 1999. There were no options that were considered anti-
dilutive during the three months and six months ended June 30, 1998.
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 mergers with PRB,
PBFC and BA Bancshares at a total of 950,748, 298,000 and 1,399,321 shares,
respectively.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1999 and 1998 and for the
Three and Six Months Ended June 30, 1999 and 1998
Segment Information
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information.
NOTE 2-MERGERS
On May 21, 1999, Bay Area Bancshares ("BA Bancshares"), the former holding
company of BAB, merged with and into the Company. Pursuant to terms of the
merger agreement, the Company issued approximately 1,393,000 shares of its
common stock in exchange for the outstanding common stock of BA Bancshares at an
exchange ratio of 1.38682 of the Company's common stock for each share of BA
Bancshares's common stock. The merger was accounted for as a pooling-of-
interests.
In all mergers, certain reclassifications were made to conform to the
Company's financial presentation. The results of operations previously reported
by the separate enterprises for the periods before the merger was consummated
and that are included in the current combined amounts presented in the
accompanying consolidated financial statements are summarized below.
The following table sets forth the composition of the operations of the
Company and BA Bancshares for the period indicated.
<TABLE>
<CAPTION>
As of
(Dollars in thousands) June 30, 1999
-----------------------------------------------------------------
<S> <C>
Net interest income:
Greater Bay Bancorp $ 18,360
Bay Commercial Services 3,180
------------
Combined $ 20,540
============
Provision for loan losses:
Greater Bay Bancorp $ 861
Bay Commercial Services 60
------------
Combined $ 921
============
Net income:
Greater Bay Bancorp $ 5,058
Bay Commercial Services 644
------------
Combined $ 5,702
============
</TABLE>
There were no significant transactions between the Company and BAB prior to
the merger. All intercompany transactions have been eliminated.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1999 and 1998 and for the
Three and Six Months Ended June 30, 1999 and 1998
On April 30, 1999 the Company and Bay Commercial Services, the parent of
Bay Bank of Commerce, signed a definitive agreement for a merger between the two
companies. The agreement provides for Bay Commercial Services shareholders to
receive approximately 945,000 shares of Greater Bay stock subject to the
approval of Bay Commercial Services shareholders and certain adjustments based
on movements in the Company's stock price, in a tax-free exchange to be
accounted for as a pooling-of-interests. Following the transaction, the
shareholders of Bay Commercial Services will own approximately 7.8% of the
combined company. The transaction is expected to be completed in the fourth
quarter of 1999 subject to regulatory approvals. Bay Bank of Commerce has
banking offices in San Leandro, San Ramon and Hayward, California.
The following table sets forth the pro-forma composition of the operations
of the Company and Bay Bank of Commerce for the period indicated.
<TABLE>
<CAPTION>
As of
(Dollars in thousands) March 31, 1999
----------------------------------------------------------------
<S> <C>
Net interest income:
Greater Bay Bancorp $ 43,402
Bay Area Bancshares 3,613
-------------
Combined $ 47,015
=============
Provision for loan losses:
Greater Bay Bancorp $ 2,557
Bay Area Bancshares 101
-------------
Combined $ 2,658
=============
Net income:
Greater Bay Bancorp $ 9,666
Bay Area Bancshares 667
-------------
Combined $ 10,333
=============
</TABLE>
There were no significant transactions between the Company and Bay Bank of
Commerce prior to the merger. All intercompany transactions have been
eliminated.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1999 and 1998 and for the
Three and Six Months Ended June 30, 1999 and 1998
NOTE 3--BORROWINGS
Other borrowings are detailed as follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Other borrowings:
Short term borrowings:
Short term notes payable $ 135 $ 135
Securities sold under agreements
to repurchase 17,800 -
FHLB advances 500 500
-------------------------
Total short term borrowings 18,435 635
-------------------------
Long term borrowings:
Securities sold under agreements
to repurchase 50,000 50,000
FHLB advances 22,000 22,000
Promissory notes - 2,450
--------------------------
Total other long term borrowings 72,000 74,450
--------------------------
Total other borrowings $ 90,435 $ 75,085
==========================
Subordinated notes, due September 15, 2005 $ - $ 3,000
==========================
Total subordinated debt $ - $ 3,000
==========================
</TABLE>
During the six month period ended June 30, 1999 and the twelve month period
ended December 31, 1998, the average balance of securities sold under short term
agreements to repurchase were $10.6 million and $10.1 million, respectively, and
the average interest rates during those periods were 4.87% and 5.73%,
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, 1999 and the twelve month period
ended December 31, 1998, the average balance of federal funds purchased was
$53,000 and $293,000, respectively, and the average interest rates during those
periods were 4.58% and 5.53%, respectively. There were no such balances
outstanding at June 30, 1999 or December 31, 1998. The maximum amount
outstanding at any month end was $0 and $0 for the six and twelve month
periods ended June 30, 1999 and December 31, 1998, respectively.
The short-term FHLB advances have an average interest rate of 6.04%. The
advances are collateralized by securities pledged to the FHLB.
The Company has sold securities under long term agreements to repurchase
which mature in the year 2003 and have an average interest rate of 5.21%. The
counterparties to these agreements have put options which give them the right to
demand early repayment. As of December 31, 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 long term FHLB advances will mature in the year 2003 and have an
average interest rate of 5.17%. The advances are collateralized by loans and
securities pledged to the FHLB. Under the terms of the advances, the FHLB has a
put option on $20.0 million of the advances which gives it the right to demand
early repayment beginning in 1999.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1999 and 1998 and for the
Three and Six Months Ended June 30, 1999 and 1998
The promissory notes, which bear an interest rate of 13.76% and will mature
April 15, 2000, were offered to PBFC's officers along with other accredited
investors within the definition of Rule 501 under the Securities Act of 1933, as
amended. These notes were redeemed by the Company in January 1999.
On March 15, 1999 the Company redeemed the $3.0 million in subordinated
debt issued in 1995. The Company paid a premium of $150,000 ($88,000 net of
tax) on the payoff of the debt. The premium was recorded, net of taxes, as an
extraordinary item in March 1999.
NOTE 4--ACTIVIY OF BUSINESS SEGMENTS
In 1998 the Company adopted SFAS No. 131. The prior year's segment
information has been restated to present the Company's two reportable segments,
community banking and trust operations.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes
intersegment revenue, as well as charges allocating all corporate-headquarters
costs to each of its operating segments. The Company evaluates the performances
of its segments and allocates resources to them based on net interest income,
other income, net income before income taxes, total assets and deposits.
The Company is organized primarily along community banking and trust
divisions. Eleven of the divisions have been aggregated into the "community
banking" segment. Community banking provides a range of commercial banking
services to small and medium-sized businesses, real estate developers, property
managers, business executives, professional and other individuals. The trust
division has been shown as the "trust operations" segment. The Company's
business is conducted principally in the U.S.; foreign operations are not
material.
The following table shows each segment's key operating results and
financial position for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Six months ended 1999 Six months ended 1998
----------------------------------------- -------------------------------------
(Dollars in thousands) Community Banking Trust Operations Community Banking Trust Operations
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net interest income (1) $ 45,071 $ 140 $ 35,223 $ 450
Other income 4,030 1,455 3,037 1,264
Operating expenses, excluding merger
and other related nonrecurring costs 26,081 1,482 21,665 1,238
Net income before income taxes (1) 12,706 113 9,164 476
Total assets 2,096,562 - 1,610,983 -
Deposits 1,773,736 56,921 1,352,655 55,298
Assets under management - 659,414 - 608,564
</TABLE>
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 1999 and 1998 and for the
Three and Six Months Ended June 30, 1999 and 1998
A reconciliation of total segment net interest income and other income
combined, net income before income taxes, and total assets to the consolidated
numbers in each of these categories for the six months ended June 30, 1999 and
1998 is presented below.
<TABLE>
<CAPTION>
As of and for the As of and for the
Six Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net interest income and other income
Total segment net interest income and other income $ 50,696 $ 39,974
Parent company net interest income and other income (1,724) (778)
-------------------- --------------------
Consolidated net interest income and other income $ 48,972 $ 39,196
==================== ====================
Net income before taxes
Total segment net income before income taxes $ 12,819 $ 9,640
Parent company net interest before income taxes (574) (26)
-------------------- --------------------
Consolidated net income before income taxes $ 12,245 $ 9,614
==================== ====================
Total assets
Total segment assets $ 2,096,562 $ 1,610,983
Parent company assets 17,050 14,716
-------------------- --------------------
Consolidated total assets $ 2,113,612 $ 1,625,699
==================== ====================
</TABLE>
NOTE 5--CASH DIVIDEND
The Company declared a cash dividend of $0.12 cents per share payable on
July 15, 1999 to shareholders of record as of June 30, 1999.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the
"Company", on a consolidated basis) was formed as the result of the merger in
November 1996 between Cupertino National Bancorp, the former holding company for
Cupertino National Bank ("CNB"), and Mid-Peninsula Bancorp, the former holding
company for Mid-Peninsula Bank ("MPB"). In December 1997 the Company completed a
merger with Peninsula Bank of Commerce ("PBC"), whereby PBC became 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 became the fourth
wholly owned banking subsidiary of Greater Bay. In August 1998, the Company
completed a merger with Pacific Business Funding Corporation ("PBFC"), which now
operates as an operating division of CNB and conducts business under the name
Pacific Business Funding. In May 1999, the Company completed a merger with Bay
Area Bancshares ("BA Bancshares"), the holding company of Bay Area Bank ("BAB"),
whereby BAB became the fifth wholly owned banking subsidiary of Greater Bay. All
mergers were accounted for as a 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. CNB, MPB, PBC, Golden Gate
and BAB are referred to collectively herein as the "Banks." The financial
information includes the results of the Company's operating divisions, Greater
Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate
Finance Group, Greater Bay Bank Contra Costa Banking Office, Greater Bay
International Banking Division, Greater Bay Trust Company, Pacific Business
Funding and Venture Banking Group.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the Company's
consolidated financial data included elsewhere in this document. Certain
statements under this caption constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include but are not limited to economic conditions,
competition in the geographic and business areas in which the Company conducts
its operations, fluctuation in interest rates, credit quality, year 2000
readiness, and government regulation.
RESULTS OF OPERATIONS
The Company's operating results included merger and other related expenses
of $4.0 million ($2.5 million net of tax) and extraordinary items of $150,000
($88,000 net of tax) related to the early retirement of $3.0 million of
subordinated debt of the Company for the six months ended June 30, 1999. The
Company's operating results included merger and other related expenses of $2.0
million ($1.3 million net of tax) for the six months ended June 30, 1998. The
following table summarizes net income, net income per share and key financial
ratios inclusive of and exclusive of merger and other related costs and
extraordinary items for the three and six months ended June 30, 1999:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
----------------------------------------- ---------------------------------------------
Including merger Excluding merger Including merger Excluding merger
and other and other and other and other
related nonrecurring related nonrecurring related nonrecurring related nonrecurring
costs and extraordinary costs and extraordinary costs and extraordinary costs and extraordinary
(Dollars in thousands,
except per share amounts) items items items items
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Income $ 3,964 $ 6,455 $ 9,666 $ 12,245
Net Income per share:
Basic $ 0.35 $ 0.58 $ 0.87 $ 1.10
Diluted $ 0.34 $ 0.55 $ 0.82 $ 1.04
Return on average assets 0.77% 1.26% 1.01% 1.28%
Return on average shareholders'
equity 13.51% 21.99% 17.08% 21.64%
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company reported net income of $6.5 million (excluding merger and other
related nonrecurring costs and extraordinary items, net of taxes) for the second
quarter of 1999, a 25.10% increase over the second quarter of 1998 net income of
$5.2 million. Basic net income per share (excluding merger and other related
nonrecurring costs and extraordinary items, net of taxes) was $0.58 for the
second quarter of 1999, as compared to $0.48 for the second quarter of 1998.
Diluted net income per share (excluding merger and other related nonrecurring
costs and extraordinary items, net of taxes) was $0.55 and $0.44 for the second
quarter of 1999 and 1998, respectively.
The return on average assets and return on average shareholders' equity
(excluding merger and other related nonrecurring costs and extraordinary items,
net of taxes) were 1.26% and 21.99%, respectively, for the second quarter of
1999, compared with 1.37% and 22.18% for the second quarter in 1998,
respectively.
The Company reported net income including merger and other related
nonrecurring costs and extraordinary items, net of tax, of $4.0 million and
basic and diluted net income per share of $0.35 and $0.34, respectively, for the
quarter ended June 30, 1999. The Company reported net income including merger
and other related nonrecurring costs and extraordinary items, net of tax, of
$3.8 million and basic and diluted net income per share of $0.35 and $0.33,
respectively, for the quarter ended June 30, 1998.
Net income totaled $12.2 million (excluding merger and other related
nonrecurring costs and extraordinary items, net of taxes) for the six months
ended June 30, 1999, versus $9.6 million for the respective 1998 period. Basic
net income per share (excluding merger and other related nonrecurring costs and
extraordinary items, net of taxes) was $1.10 and $0.87 for the six months ended
June 30, 1999 and 1998, respectively. Diluted net income per share (excluding
merger and other related nonrecurring costs and extraordinary items, net of
taxes) was $1.04 and $0.82 for the six months ended June 30, 1999 and 1998,
respectively.
The return on average assets and return on average shareholders' equity
(excluding merger and other related nonrecurring costs and extraordinary items,
net of taxes) were 1.28% and 21.64%, respectively, for the six months ended June
30, 1999, compared with 1.35% and 21.17% for the six months ended 1998,
respectively.
The Company reported net income, including merger and other related
nonrecurring costs and extraordinary items, of $9.7 million and basic and
diluted net income per share of $0.87 and $0.82, respectively, for the six
months ended June 30, 1999. The Company reported net income, including merger
and other related nonrecurring costs and extraordinary items, of $8.3 million
and basic and diluted net income per share of $0.75 and $0.71, respectively, for
the six months ended June 30, 1998.
The increase in first six months of 1999 net income as compared to the same
period in 1998 was principally the result of significant growth in loans and
deposits. This growth, partially offset by a decline in interest rate spreads,
resulted in an $8.5 million increase in net interest income. Operating expenses
increased by $4.6 million, excluding the contribution to the Greater Bay Bancorp
Foundation (the "Foundation") discussed below. Operating expense increases
reflect additional efforts required to service and support the Company's growth.
Net income for the six months ended June 30, 1999 and 1998 included
$230,000 and $497,000, respectively, in warrant income resulting from the
warrants received from clients of the Banks. During 1999 and 1998, the Company
donated appreciated warrants to the Foundation. The contribution of the warrants
triggered recognition of warrant income of $230,000, net of related employee
incentives, and a donation expense of $323,000 in 1999. The contribution of the
warrants triggered recognition of warrant income of $497,000, net of related
employee incentives, and a donation expense of $701,000 in 1998. The Company
recognized a tax benefit of $133,000 and $288,000 from these transactions in
1999 and 1998, respectively.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The 1999 increase in other income principally relates to a $269,000
increase in loan and international banking fees, a $110,000 increase in trust
fees and a $76,000 increase in gain on sale of investments and a 1998 write-down
on equity securities in accordance with APB 18 of $484,000.
Net Interest Income
Net interest income for the second quarter of 1999 was $22.9 million, a
$2.3 million increase over the first quarter of 1999 and a $4.9 million increase
over the second quarter of 1998. The increase from the second quarter of 1998
to the second quarter of 1999 was primarily due to the $516.9 million, or 37.1%
increase in average interest-earning assets which is partially offset by a 58
basis points decrease in the Company's yield on interest-earning assets from
8.78% in the second quarter of 1998 to 8.20% in the second quarter of 1999. Net
interest income increased 27.2% in the quarter ended June 30, 1999 from the same
quarter in 1998 despite a 37 basis point decrease in the Company's net yield on
interest-earning assets. The Company's interest rate spread was adversely
impacted by a higher percentage of interest-earning assets in loans during the
second quarter of 1999 compared to the same quarter in 1998. The increase from
the first quarter of 1999 to the second quarter of 1999 was primarily due to the
$232.9 million, or 55.7% (annualized) increase in average interest-earning
assets which is partially offset by a 13 basis points decrease in the Company's
yield on interest-earning assets from 8.33% in the first quarter of 1999 to
8.20% in the second quarter of 1999. Net interest income increased by 11.3% in
the quarter ended June 30, 1999 from the first quarter of 1999 despite the 17
basis points decrease in the Company's net yield on interest earning assets.
The Company's interest rate spread was adversely impacted by a higher percentage
of interest-earning assets in Fed Funds sold and other short term investments
during the second quarter of 1999 compared to the first quarter in 1999.
The interest rate spread for the quarters ended June 30, 1999, March
31,1999 and June 30, 1998, were further reduced by the low spread earned on
PBC's Special Deposits (discussed in Note 7 to the Financial Statements
contained in the Company's Annual Report to Shareholders). As of June 30,
1999, PBC held $122.4 million in two demand deposits accounts (the "Special
Deposits"). The Special Deposits represent the proposed settlement of class
action lawsuits not involving the Company. Due to the uncertainty of the time
the Special Deposits will remain with PBC, management has invested a significant
portion of the funds from this deposit in agency securities with maturities of
less than 90 days. The average deposit balances related to the Special Deposits
were $130.9 million, $89.9 million and $98.2 million for quarters ended June 30,
1999, March 31, 1999 and June 30, 1998, respectively, on which the Company
earned a spread of approximately 1.76%. Excluding PBC's Special Deposits, the
net yield on interest earning assets would have been 5.01%, 5.14% and 5.37% for
the quarters ended June 30, 1999, March 31, 1999 and June 30, 1998,
respectively. Excluding the Special Deposits, the approximate interest rate
spread would have been 4.29%, 4.42% and 3.80% for the quarters ended June 30,
1999, March 31, 1999 and June 30, 1998, respectively. The purchase of bank-
owned life insurance ("BOLI") also reduced the Company's net interest spread
since the earnings of BOLI are included in other income while the cost of
funding BOLI is included in interest expense.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table presents, for the quarters 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, 1999 March 31, 1999
------------------------ ------------------------
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 $ 164,431 $ 2,027 4.94% $ 66,932 $ 783 4.74%
Other short term investments 60,530 870 5.76% 68,743 859 5.07%
Investment securities:
Taxable 311,004 5,143 6.63% 291,269 4,597 6.40%
Tax-exempt (1) 63,018 765 4.87% 62,720 746 4.82%
Loans (2), (3) 1,310,819 30,238 9.25% 1,187,214 27,476 9.39%
----------- -------- ----------- --------
Total interest-earning assets 1,909,803 39,043 8.20% 1,676,878 34,461 8.33%
Noninterest-earning assets 142,509 142,000
----------- -------- ----------- --------
Total assets $ 2,052,312 39,043 $ 1,818,878 34,461
=========== -------- =========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 1,084,448 $ 9,323 3.45% $ 931,181 $ 7,782 3.39%
Time deposits, over $100,000 315,736 3,708 4.71% 276,887 3,228 4.73%
Other time deposits 63,067 740 4.71% 63,735 786 5.00%
----------- -------- ----------- --------
Total interest-bearing deposits 1,463,251 13,771 3.77% 1,271,803 11,796 3.76%
Other borrowings 88,752 1,472 6.65% 73,496 1,054 5.82%
Subordinated debt 18 - 0.00% 2,443 71 11.79%
Trust Preferred Securities 50,000 937 7.52% 50,000 1,000 8.11%
----------- -------- ----------- --------
Total interest-bearing liabilities 1,602,021 16,180 4.05% 1,397,742 13,921 4.04%
Noninterest bearing deposits 308,174 285,766
Other noninterest-bearing liabilities 24,404 24,857
Shareholders' equity 117,713 110,513
----------- -------- ----------- --------
Total shareholders' equity and liabilities $ 2,052,312 16,180 $ 1,818,878 13,921
=========== -------- =========== ========
Net interest income $ 22,863 $ 20,540
======== ========
Interest rate spread 4.15% 4.30%
Contribution of interest free funds 0.65% 0.87%
Net yield on interest-earning assets (4) 4.80% 4.97%
<CAPTION>
Three Months Ended
June 30, 1998
------------------------
Average
Average Yield/
(Dollars in thousands) Balance Interest Rate
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold $ 113,102 $ 1,530 5.43%
Other short term investments 102,069 1,107 4.35%
Investment securities:
Taxable 239,472 3,840 6.43%
Tax-exempt (1) 36,162 492 5.46%
Loans (2), (3) 902,069 23,504 10.45%
----------- --------
Total interest-earning assets 1,392,874 30,473 8.78%
Noninterest-earning assets 117,480
----------- --------
Total assets $ 1,510,355 30,473
=========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $ 644,597 $ 7,022 4.37%
Time deposits, over $100,000 181,210 2,379 5.27%
Other time deposits 58,436 751 5.15%
----------- --------
Total interest-bearing deposits 884,242 10,152 4.61%
Other borrowings 96,673 2,001 8.30%
Subordinated debt 3,000 50 6.68%
Trust Preferred Securities 20,000 300 6.02%
----------- --------
Total interest-bearing liabilities 1,003,915 12,503 5.00%
Noninterest bearing deposits 258,953
Other noninterest-bearing liabilities 154,161
Shareholders' equity 93,326
----------- --------
Total shareholders' equity and liabilities $ 1,510,355 12,503
=========== --------
Net interest income $ 17,970
========
Interest rate spread 3.78%
Contribution of interest free funds 1.39%
Net yield on interest-earning assets (4) 5.17%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.05%,
6.98% and 7.93%for the quarters ended June 30, 1999, March 31, 1999 and June
30, 1998, respectively, using the federal statuary rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $1,204,000, $1,104,000 and $1,318,000
for the quarters ended June 30, 1999, March 31, 1999, and June 30, 1998,
respectively.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 periods. The table below sets forth, for the quarters 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, 1999 Three Months Ended June 30, 1999
Compared with March 31, 1999 Compared with June 30, 1998
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 $ 1,209 $ 35 $ 1,244 $ 643 $ (146) $ 497
Other short term investments (106) 117 11 (532) 295 (237)
Investment securities:
Taxable 356 190 546 1,179 124 1,303
Tax-exempt 6 13 19 331 (58) 273
Loans 3,125 (363) 2,762 9,676 (2,942) 6,734
--------------------------------- ------------------------------
Total interest income 4,590 (8) 4,582 11,297 (2,727) 8,570
--------------------------------- ------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (1,394) (147) (1,541) (4,020) 1,719 (2,301)
Time deposits over $100,000 (491) 11 (480) (1,603) 274 (1,329)
Other time deposits 7 39 46 (57) 68 11
--------------------------------- ------------------------------
Total interest-bearing deposits (1,879) (97) (1,975) (5,680) 2,061 (3,619)
Other borrowings (247) (171) (418) 154 375 529
Subordinated debt 36 35 71 25 25 50
Trust preferred securities - 63 63 (546) (91) (637)
--------------------------------- ------------------------------
Total interest expense (2,090) (170) (2,259) (6,047) 2,370 (3,677)
--------------------------------- ------------------------------
Net increase (decrease) in net interest income $ 2,499 $ (177) $ 2,323 $ 5,251 $ (358) $ 4,893
================================= ==============================
</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, 1999 Compared to June 30, 1998
---------------------------------------------------------
Interest income in the second quarter ended June 30, 1999 increased 28.1%
to $39.0 million from $30.5 million in the same period in 1998. This was
primarily due to the $11.3 million favorable volume variance which resulted from
a $516.9 million, or 37.1% increase in average interest-earning assets over the
comparable prior year. Average loans increased $408.8 million, or 45.3%, to 1.3
billion for the second quarter of 1999 as compared to $902.1 million for the
second quarter of 1998.
The average yield on interest-earning assets decreased 58 basis points to
8.20% in the second quarter of 1999 from 8.78% in the same period of 1998
primarily due to the decrease on the yields on loans. Average yields on loans
decreased 120 basis points to 9.25% in the three months ended June 30, 1999 from
10.45% for the same period in 1998.
Interest expense in the second quarter of 1999 increased 29.4% to $16.2
million from $12.5 million for the same period in 1998. This increase was due
to an increase in average interest-bearing liabilities offset by lower interest
rates paid on interest-bearing liabilities. Average interest-bearing liabilities
increased 59.6% to $1.6 billion in the second quarter of 1999 from $1.0 billion
in the same period for 1998 due to the efforts of the Company's relationship
managers in generating core deposits from their client relationships, deposits
derived from the activities of the Greater Bay Trust Company and the Venture
Banking Group, both divisions of CNB, and increases in other borrowings.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
During the second quarter of 1999, average noninterest-bearing deposits
increased to $308.2 million from $259.0 million in the same period in 1998.
Average noninterest-bearing deposits comprised 16.1% of total deposits for the
second quarter in 1999, compared to 20.5% for the same period in 1998.
The Quarter Ended June 30, 1999, compared to March 31, 1999
-----------------------------------------------------------
Interest income increased 13.3% to $39.0 million for the second quarter of
1999, as compared to $34.5 million for the previous quarter. Average interest-
earning assets increased 53.3% (annualized) in the second quarter of 1999 from
$1.7 billion for the previous quarter. The increase in interest income for the
second quarter of 1999, as compared to the prior quarter, was primarily the
result of an increase in the average balances of loans which increased $123.6
million and fed funds sold which grew $97.5 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 13 basis points to 8.20% in the second quarter
of 1999 from 8.33% in the first quarter of 1999, 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 1999 increased 16.2% to $16.2
million from $13.9 million in the prior quarter. The increase is primarily the
result of increased interest-bearing liabilities, which rose to $1.6 billion for
the second quarter of 1999, as compared to $1.4 billion for the prior quarter.
As a result of the changes in the liability mix, the average rate paid on
average interest-bearing liabilities increased 1 basis point to 4.05% in the
second quarter of 1999 from 4.04% in the prior quarter. Corresponding to the
growth in average interest-earning assets, average interest-bearing liabilities
increased 14.6% to $1.6 billion in the second quarter of 1999 from $1.4 billion
for the first quarter of 1999.
As a result of the foregoing, the Company's interest rate spread declined
to 4.15% in the second quarter of 1999 compared to 4.30% in the prior quarter
and the net yield on interest-earning assets declined to 4.80% from 4.97%.
Net interest income for the six months ended June 30, 1999 was $43.4
million, an $8.5 million increase over the six months ended June 30, 1998. The
increase was primarily due to the $459.8 million, or 34.5%, increase in average
interest-earning assets. This was partially offset by a 60 basis points decrease
in the Company's yield on interest-earning assets from 8.86% to 8.26% for the
six months ended June 30, 1999 and June 30,1998, respectively. The Company's
interest rate spread was positively impacted by a higher percentage of interest-
earning assets in loans during the six months and June 30, 1999 compared to the
same period in 1998.
The interest rate spread for the six months ended June 30, 1999 and 1998
was further reduced by the spread earned on PBC's Special Deposits (discussed in
Note 7 to the Financial Statements contained in the Company's Annual Report to
Shareholders). The average deposit balances related to the Special Deposits
were $110.5 million, and $94.9 million for the six months ended June 30, 1999
and 1998, respectively, on which the Company earned a spread of approximately
1.76%. Excluding PBC's Special Deposits, the net yield on interest earning
assets would have been 5.08% and 5.48% for the six months ended June 30, 1999
and 1998, respectively. Excluding the Special Deposits, the interest rate
spread would have been 4.36% and 4.28% for the six months ended June 30, 1999
and 1998, respectively.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following tables present the Company's average balance sheet, net
interest income and interest income and interest rate for the six months
presented, as well as the analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 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 $ 115,951 $ 2,810 4.89% $ 100,319 $ 2,691 5.41%
Other short term investments 64,614 1,729 5.40% 102,271 2,872 5.66%
Investment securities:
Taxable 301,191 9,740 6.52% 229,536 7,424 6.52%
Tax-exempt (1) 62,870 1,511 4.85% 31,220 820 5.30%
Loans (2), (3) 1,249,358 57,714 9.32% 870,863 44,841 10.38%
--------------- ------------ ------------ ---------
Total interest-earning assets 1,793,984 73,504 8.26% 1,334,209 58,648 8.86%
Noninterest-earning assets 142,256 103,294
--------------- ------------ ------------ ---------
Total assets $1,936,240 73,504 $1,437,503 58,648
=============== ------------ ============ ---------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and savings $1,008,238 $ 17,105 3.42% $ 682,658 13,587 4.01%
Time deposits, over $100,000 296,419 6,936 4.72% 186,757 4,865 5.25%
Other time deposits 63,399 1,526 4.85% 57,853 1,498 5.22%
--------------- ------------ ------------ ---------
Total interest-bearing deposits 1,368,056 25,567 3.77% 927,268 19,950 4.34%
Other borrowings 81,166 2,526 6.28% 76,948 2,884 7.56%
Subordinated debt 1,224 71 11.70% 3,000 136 9.14%
Trust Preferred Securities 50,000 1,937 7.81% 20,000 788 7.95%
--------------- ------------ ------------ ---------
Total interest-bearing liabilities 1,500,446 30,101 4.05% 1,027,216 23,758 4.66%
Noninterest bearing deposits 297,032 232,900
Other noninterest-bearing liabilities 24,629 85,803
Shareholders' equity 114,133 91,584
--------------- ------------ ------------ ---------
Total shareholders' equity and liabilities $1,936,240 30,101 $1,437,503 23,758
=============== ------------ ============ ---------
Net interest income $ 43,403 $ 34,890
============ =========
Interest rate spread 4.22% 4.20%
Contribution of interest free funds 0.66% 1.06%
Net yield on interest-earning assets (4) 4.88% 5.27%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.03% and
7.69% for the six months ended June 30, 1999 and June 30, 1998 respectively,
using the federal statuary rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $2,310,000 and $2,355,000 for the six
months ended June 30, 1999 and June 30, 1998, respectively.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the interest
expense on interest-bearing liabilities, divided by (b) average interest-
earning assets for the period.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
Compared with June 30, 1998
favorable / (unfavorable)
(Dollars in thousands)(1) Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 422 $ (303) $ 119
Other short term investments (0) (1,143) (1,143)
Investment securities:
Taxable 2,330 (14) 2,316
Tax-exempt 836 (145) 691
Loans 19,596 (6,723) 12,873
---------------------------------------
Total interest income 23,184 (8,328) 14,856
---------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (6,516) 2,998 (3,518)
Time deposits over $100,000 (2,872) 801 (2,071)
Other time deposits (144) 116 (28)
---------------------------------------
Total interest-bearing deposits (9,534) 3,917 (5,617)
Other borrowings (159) 517 358
Subordinated debt (0) 65 65
TPS (1,188) 39 (1,149)
---------------------------------------
Total interest expense (10,881) 4,538 (6,343)
---------------------------------------
Net increase (decrease) in net interest income $ 12,304 $ (3,791) $ 8,513
=======================================
</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 SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------------------------------------------------
Interest income increased $14.9 million to $73.5 million for the six months
ended June 30, 1999, as compared to $58.6 million for the six months ended June
30, 1998. Average interest-earning assets increased $34.5% in the six months
ended June 30, 1999 from $1.3 billion for the six months ended June 30, 1998.
The increase in interest income for the six months ended June 30, 1999 as
compared to the six months ended June 30, 1998 was primarily the result of an
increase in the average balance of loans which increased $378.5 million. The
impact of increase in the average balance on loans was offset by a decrease in
the yield earned on those assets. The yields on the higher volume of average
interest-earning assets declined 60 basis points to 8.26% in the six months
ended June 30, 1999 from 8.86% in the six months ended June 30, 1998, primarily
as a result of decreases in market rates of interest and the purchase of
investments with shorter maturities.
Interest expenses in the six months ended June 30, 1999 increased 26.69% to
$30.7 million from $23.8 million in the six months ended June 30, 1998. The
increase was primarily the result of increased interest-bearing liabilities
which rose to $1.5 billion for the six months ended June 30, 1999, as compared
to $1.0 billion for the comparable prior year period. As a result of the
changes in the liability mix, the average rate paid on average interest-bearing
liabilities decreased 61 basis points to 4.05% in the six months ended June 30,
1999 from 4.66% in the six months ended June 30, 1998. Corresponding to the
growth in average interest-earning assets, average interest-bearing liabilities
increased 46.1% to $1.5 billion in the six months ended June 30, 1999 from $1.0
billion for the six months ended June 30, 1998.
As a result of the foregoing, the Company's interest rate spread increased
to 4.22% in the six months ended June 30, 1999 compared to 4.20% in the six
months ended June 30, 1998 and the net yield on interest-earning assets declined
to 4.88% from 5.27%.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 in interest expense, the impact of these
expenses on the Company's net yield on interest-earning assets would have been
as follows for each of the quarters presented.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- -------------------------------
(Dollars in thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Average noninterest bearing demand deposits $ 308,174 $ 258,953 $ 297,032 $ 232,900
Client service expenses 244 136 505 293
Client service expenses, annualized 0.32% 0.21% 0.34% 0.25%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 4.80% 5.17% 4.88% 5.27%
Impact of client service expense (0.05)% (0.04)% (0.04)% (0.04)%
------------------------------- -------------------------------
Adjusted net yield on interest-earning assets (1) 4.75% 5.14% 4.84% 5.23%
------------------------------- -------------------------------
</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. The cost for client service
expense reflects the Company's efforts to control its interest expense.
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 monthly
assessment of the risk inherent in its loan portfolio, as well as a detailed
review of each asset determined to have identified weaknesses. Based on this
analysis, which includes reviewing historical loss trends, current economic
conditions, industry concentrations and specific reviews of assets classified
with identified weaknesses, the Company makes a provision for loan losses.
Specific allocations are made for loans where the probability of a loss can be
defined and reasonably determined. The balance of the provision for loan losses
is based on historical data, delinquency trends, economic conditions in the
Company's market area and industry averages. Annual fluctuations in the
provision for loan losses result from management's assessment of the adequacy of
the allowance for loan losses, and ultimate loan losses may vary from current
estimates.
The provision for loan losses for the second quarter of 1999 was $1.6
million, compared to $1.4 million for the second quarter of 1998. Although loans
outstanding have increased substantially, nonperforming loans, comprised of
nonaccrual loans, restructured loans, and accruing loans past due 90 days or
more, declined from $4.5 million, or 0.49% of loans outstanding, at June 30,
1998, to $3.9 million or 0.29% of loans outstanding at June 30, 1999.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For further information on nonperforming and classified loans and the
allowance for loan losses, see--"Nonperforming and Classified Assets" herein.
OTHER INCOME
Total other income increased to $3.0 million for the second quarter of 1999
compared to $2.2 million for the second quarter of 1998. The following table
sets forth information by category of other income for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
June 30, March 31, December 31, September 30, June 30,
---------------------------------------------------------------------------
(Dollars in thousands) 1999 1999 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Trust fees $ 727 $ 721 $ 664 $ 642 $ 617
ATM network revenue 501 527 498 518 479
Loan and international banking fees 458 309 176 165 190
Service charges and other fees 393 419 426 431 411
Gain on sale of SBA loans 298 284 282 290 221
Gain on sale of investments, net - - 320 4 42
Other 410 293 421 129 225
---------------------------------------------------------------------------
Total, recurring 2,787 2,553 2,787 2,179 2,185
Warrant income 226 4 314 134 -
---------------------------------------------------------------------------
Total $ 3,013 $ 2,557 $ 3,101 $ 2,313 $ 2,185
---------------------------------------------------------------------------
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The increase in other income for the second quarter of 1999 as compared to
the same period in 1998 was primarily the result of a $268,000 increase in loan
and international banking fees, a $110,000 increase in trust fees, a $77,000
increase in the gain on sale of SBA loans and a $22,000 increase in ATM network
revenue. The increase in trust fees was due to significant growth in assets
under management by Greater Bay Trust Company. Trust assets increased to $659.4
million at June 30, 1999, compared to $608.6 million at June 30, 1998. The
increase in the gain on sale of SBA loans was due to an increase in the
origination and subsequent sale of SBA loans.
Other income for the second quarter of 1999 and the second quarter of 1998
included warrant income of $226,000 and $0, respectively, net of related
employee incentives. Warrant income for the six months ended June 30, 1999 and
June 30, 1998 was $230,000 and $497,000, respectively, net of related employee
incentives. 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.
OPERATING EXPENSES
The following table sets forth the major components of operating expenses
for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
June 30, March 31, December 31, September 30, June 30,
-------------------------------------------------------------------
(Dollars in thousands) 1999 1999 1998 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $ 7,726 $ 7,169 $ 6,537 $ 6,587 $ 6,363
Occupancy and equipment 2,436 2,355 1,908 1,852 1,778
Telephone, postage and supplies 580 593 578 474 435
Professional services and legal costs 496 575 689 537 553
Marketing and promotion 410 407 876 409 385
Client services 244 261 142 128 136
Directors' fees 178 165 192 175 184
FDIC insurance and regulatory assessments 103 100 92 93 83
Expenses on other real estate owned 15 21 (6) 43 (8)
Other 1,211 1,045 1,307 1,032 917
-------------------------------------------------------------------
Total operating expenses, excluding nonrecurring costs 13,722 12,691 12,763 11,522 10,826
Merger costs 3,965 - - 537 1,974
Contribution to GBB Foundation 323 - 448 192 -
-------------------------------------------------------------------
Total operating expenses $ 17,687 $ 12,691 $ 12,763 $ 12,059 $ 12,800
-------------------------------------------------------------------
Efficiency ratio, excluding trust 67.52% 53.65% 55.38% 55.64% 63.35%
Efficiency ratio, excluding trust and nonrecurring costs 50.41% 53.65% 53.35% 52.07% 53.10%
Total operating expenses to average assets* 3.46% 2.83% 2.99% 2.94% 3.44%
Total operating expenses to average assets, before
nonrecurring costs* 2.68% 2.83% 2.99% 2.81% 2.91%
</TABLE>
*Annualized
Operating expenses totaled $17.7 million for the second quarter of 1999,
compared to $12.8 million for the second quarter of 1998. The ratio of operating
expenses to average assets was 3.46% for the second quarter of 1999 and 3.44%
for the second quarter of 1998.
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
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
(or greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio, excluding trust and
nonrecurring costs, for the second quarter of 1999 was 50.41%, compared to
53.10% for the second quarter of 1998.
As indicated by the improvements in the efficiency ratio and ratio of total
operating expenses to average assets, the Company has been able to achieve
increasing economies of scale. For the second quarter of 1999, average assets
increased 35.9% from the second quarter of 1998, while operating expenses,
excluding nonrecurring cost, increased only 23.8%.
Compensation and benefits expenses increased for the second quarter of 1999
to $7.7 million, compared to $6.4 million for the second quarter of 1998. The
increase in compensation and benefits is due primarily to the addition of
personnel in the first quarter of 1999 to accommodate the growth of the Company.
The increase in occupancy and equipment; telephone, postage, and supplies;
marketing and promotion; and client service expense was related to the growth in
the Company's loans, deposits and assets.
INCOME TAXES
The Company's effective income tax rate for the second quarter of 1999 was
38.6%, compared to 35.1% in the second quarter of 1998. The effective rates were
lower than the statutory rate of 41.2% due to tax-exempt income on municipal
securities, state enterprise zone credits and the preferential tax treatment of
the donation of appreciated warrants to the Foundation. These were partially
offset by the impact of merger and other related nonrecurring costs.
FINANCIAL CONDITION
Total assets increased 43.6%, on an annualized basis to $2.1 billion at
June 30, 1999, compared to $1.7 billion at December 31, 1998. The increase in
the second quarter of 1999 was primarily due to increases in the Company's loan
portfolio funded by growth in deposits.
LOANS
Total gross loans increased 42.6%, on an annualized basis, to $1.4 billion
at June 30, 1999, compared to $1.1 billion at December 31, 1998. The increases
in the loan volume during the first six months of 1999 was primarily due to an
improving economy in the Company's market areas coupled with the business
development efforts of 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. This could, in turn, reduce the
demand for loans and adversely impact the borrowers' abilities to repay their
loans, while also decreasing the Company's net interest margin.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table presents the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------------------------------------------
(Dollars in thousands) Amount % Amount %
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 646,483 48.8% $ 483,668 44.3%
Real estate construction and land 256,253 19.2 215,274 19.7
Real estate term 353,871 26.7 332,478 30.4
Consumer and other 99,988 7.5 88,458 8.1
-------------------------------------------------
Total loans, gross 1,356,595 102.5 1,119,878 102.5
Deferred fees and discounts, net (5,133) -0.4 (3,896) -0.4
-------------------------------------------------
Total loans, net of deferred fees 1,351,462 102.0 1,115,982 102.1
Allowance for loan losses (26,086) -2.0 (23,379) -2.1
-------------------------------------------------
Total loans, net $ 1,325,376 100.0% $ 1,092,603 100.0%
=================================================
</TABLE>
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued but
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the 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.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information regarding nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
----------------------------------------------------------------
(Dollars in thousands) 1999 1999 1998 1998 1998
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $3,375 $2,992 $2,003 $3,061 $3,903
Accruing loans past due 90 days or more - - - - 75
Restructured loans 565 482 327 377 531
----------------------------------------------------------------
Total nonperforming loans 3,940 3,474 2,330 3,438 4,509
Other real estate owned 595 620 966 905 1,001
----------------------------------------------------------------
Total nonperforming assets $4,535 $4,094 $3,296 $4,343 $5,510
================================================================
Nonperforming assets to total loans
and other real estate owned 0.34% 0.33% 0.30% 0.45% 0.60%
</TABLE>
At June 30, 1999, the Company had $3.4 million in nonaccrual loans.
Interest income foregone on nonaccrual loans outstanding totaled $59,000 and
$85,000 for the three months ended June 30, 1999 and 1998, respectively.
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings through a provision for
losses on foreclosed property in the period in which they are identified. At
June 30, 1999, OREO acquired through foreclosure had a carrying value of
$595,000, compared to $966,000 at December 31, 1998.
The Company had $565,000 and $327,000 of restructured loans as of June 30,
1999 and December 31, 1998, respectively. There were no principal reduction
concessions allowed on restructured loans during the second quarter of 1999 or
1998. Interest income from restructured loans totaled $14,000 and $14,000 for
the three months ended June 30, 1999 and 1998, respectively. Foregone interest
income, which totaled $0 and $0 for the three months ended June 30, 1999 and
1998, respectively, would have been recorded as interest income if the loans had
accrued interest in accordance with their original terms prior to the
restructurings.
The policy of the Company is to review each loan in the portfolio to
identify problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more defined
weaknesses 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
as "loss" is considered uncollectible and its continuance as an asset is not
warranted.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth the classified assets at the dates
indicated.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
-----------------------------------------------------------------------
(Dollars in thousands) 1999 1999 1998 1998 1998
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Substandard $22,207 $15,284 $12,515 $12,949 $ 9,213
Doubtful 1,132 1,019 1,188 1,266 1,041
Loss - - - - -
Other real estate owned 595 620 966 905 1,001
-----------------------------------------------------------------------
Classified assets $23,934 $16,923 $14,669 $15,120 $11,255
=======================================================================
Classified assets to total loans and other real 1.77% 1.34% 1.31% 1.57% 1.22%
estate owned
Allowance for loan losses to total classified assets 108.99% 142.09% 159.38% 144.59% 175.55%
</TABLE>
With the exception of these classified assets, management was not aware of
any loans outstanding as of June 30, 1999 where the known credit problems of the
borrower would cause management to have serious doubts as to the ability of such
borrowers to comply with their present loan repayment terms and which would
result in such loans being included 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
that such an environment may have on the Company's loan portfolio. Accordingly,
there can be no assurance that other loans will not become 90 days or more past
due, be placed on nonaccrual, become restructured loans, or other real estate
owned in the future.
In the second quarter of 1999, the Company classified four loans as
substandard even though they were performing. It is the Company's policy to be
proactive in its loan grading system. These loans are considered to be well
collateralized with no loss expectation.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio and economic conditions in the Company's market areas. See "Provision
for Loan Losses" herein. The allowance is increased by provisions charged
against earnings and reduced by net loan charge-offs. Loans are charged-off when
they are deemed to be uncollectible; recoveries are generally recorded only when
cash payments are received.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
June 30, March 31, December 31, September 30, June 30,
---------------------------------------------------------------------
(Dollars in thousands) 1999 1999 1998 1998 1998
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Period end loans outstanding $1,351,462 $1,258,925 $1,115,982 $962,203 $921,767
Average loans outstanding $1,318,899 $1,184,161 $1,012,950 $929,687 $892,054
Allowance for loan losses:
Balance at beginning of period $ 24,046 $ 23,379 $ 21,862 $ 19,758 $ 18,297
Charge-offs:
Commercial (200) (224) (53) (52) -
Real estate construction and land - - - - (4)
Real estate term - - - - -
Consumer and other (42) (64) (455) (27) (14)
---------------------------------------------------------------------
Total charge-offs (242) (288) (508) (79) (18)
---------------------------------------------------------------------
Recoveries:
Commercial 195 21 38 156 31
Real estate construction and land - - - - -
Real estate term - - - - -
Consumer and other 4 13 46 33 1
---------------------------------------------------------------------
Total recoveries 199 34 84 189 32
---------------------------------------------------------------------
Net charge-offs (43) (254) (424) 110 14
Provision charged to income (1) 2,083 921 1,941 1,994 1,447
---------------------------------------------------------------------
Balance at end of period $ 26,086 $ 24,046 $ 23,379 $ 21,862 $ 19,758
=====================================================================
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.01% 0.09% 0.17% -0.05% -0.01%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.01% 0.09% 0.04% -0.02% 0.00%
Allowance as a percentage of average loans outstanding 1.98% 2.03% 2.31% 2.35% 2.21%
Allowance as a percentage of period end loans outstanding 1.93% 1.91% 2.09% 2.27% 2.14%
Allowance as a percentage of non-performing loans 662.08% 692.17% 1003.39% 635.89% 438.19%
</TABLE>
_______________________
(1) Includes $447,000 in second quarter of 1999, $113,000 in the third quarter
of 1998 and $70,000 in the second quarter of 1998 to conform practices to the
Company's reserve methodologies, which is included in mergers and related
nonrecurring costs.
Management considers changes in the size and character of the loan
portfolio, changes in nonperforming and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the allowance for loan losses. Although management
believes that the allowance for loan losses is adequate to provide for both
potential losses and estimated inherent losses in the portfolio, future
provisions will be subject to continuing evaluations of the inherent risk in the
portfolio and if the economy declines or asset quality deteriorates, additional
provisions could be required.
At June 30, 1999, the allowance for credit losses was $26.1 million,
consisting of a $21.8 million allocated allowance and a $4.3 million unallocated
allowance. The unallocated allowance is composed of two elements. The first
element consists of an amount up to 20% of the allocated allowance which
recognizes the model and estimation risk associated with the allocated
allowances. The second element is based upon management's evaluation of various
conditions, the effects of which are not directly measured in determining the
allocated allowance. The evaluation of the inherent loss regarding these
conditions involves a higher degree of uncertainty because they are not
identified with specific problem credits or portfolio segments. The conditions
evaluated in connection with the unallocated allowance include the following
conditions that existed at June 30, 1999:
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
. Specific industry conditions within portfolio segments, particularly
involving the high technology sector and the impact of foreign economic
forces upon that sector;
. Seasoning of the loan portfolio and growth in loan volumes;
. The strength and duration of the current business cycle and existing
general economic and business conditions affecting our key lending
areas;
. Credit quality trends, including trends in nonperforming loans expected
to result from changes in existing conditions; and
. The results of bank regulatory examinations and the findings of our
internal credit examiners.
The Officers' Loan Committee reviews these conditions quarterly in
discussion with our senior relationship managers. If any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management's estimate of the effect of this condition
may be reflected as an allocated allowance applicable to this credit or
portfolio segment. Where any of these conditions is not evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the probable loss concerning this
condition is reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts. Our methodology includes
several features that are intended to reduce the differences between estimated
and actual losses. The historical loss analysis, which reviews the losses over
1, 3 and 5 year periods, and evaluations of the current business cycle and
economic conditions are used to establish the loan loss factors for problem
graded loans which are designed to be self-correcting by taking into account our
recent loss experience. Similarly, by basing the pass graded loan loss factors
on historical loss experience, the methodology is designed to take our recent
loss experience into account. Loan loss factors are adjusted quarterly based
upon the level of net charge-offs expected by management in the next twelve
months. Furthermore, our methodology permits adjustments to any loss factor used
in the computation of the formula allowance in the event that, in management's
judgement, significant factors that affect the collectibility of the portfolio
as the evaluation date are not reflected in the loss factors. By assessing the
probable estimated losses inherent in the loan portfolio on a quarterly basis,
we are able to adjust specific and inherent loss estimates based upon any more
recent information that has become available.
The Company recorded provisions in 1999 to bring the allowance for credit
losses to a level deemed appropriate by management based upon management's
application of the loan loss allowance methodology discussed above. In
particular, in the assessment as of June 30, 1999, management focused on factors
affecting elements of the high technology sector and the impact of foreign
economic forces upon that sector, including seasoning of the loan portfolio
coupled with growth in loan volumes and the strength and duration of the current
business cycle coupled with existing general economic and business conditions
affecting our key lending areas.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 1997, the Company issued $20.0 million in Trust
Preferred Securities ("TPS") to enhance its regulatory capital base, while also
providing added liquidity. In 1998, the Company completed a second offering of
TPS in an aggregate amount of $30.0 million. Greater Bay invested $15.0 million
of the net proceeds in the Banks to increase their capital level. The Company
intends to use the remaining net proceeds for general corporate purposes or to
provide additional capital to the Banks, as it is needed. Under applicable
regulatory guidelines, $37.7 million of the TPS qualifies as Tier I capital, and
the remaining portion qualifies as Tier 2 capital. As the Company's
shareholders' equity increases, the amount of the additional TPS that will count
as Tier I capital will increase.
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 on its investments and dividends
declared and paid by the Banks. There are statutory and regulatory provisions
that could limit the ability of the Banks to pay dividends to Greater Bay. At
June 30, 1999, the Banks had approximately $35.8 million in the aggregate
available to be paid as dividends to Greater Bay. Management of Greater Bay
believes that such restrictions will not have an impact on the ability of
Greater Bay to meet its ongoing cash obligations. As of June 30, 1999, Greater
Bay did not have any material commitments for capital expenditures.
Net cash provided by operating activities, consisting primarily of net
income and increases in interest payable and other liabilities, totaled $16.3
million and $10.7 million for the six months ended June 30, 1999 and 1998,
respectively. Cash used for investing activities totaled $279.9 million and
$231.8 million for the six months ended June 30, 1999 and 1998, respectively.
The funds used for investing activities primarily represent increases in loans
and investment securities for each year reported.
For the six months ended June 30, 1999 net cash provided by financing
activities was $364.0 million, compared to $279.1 million for the six months
ended June 30, 1999. Historically, the primary financing activity of the Company
has been through deposits. For the six months ended June 30, 1999 and 1998,
deposit gathering activities generated cash of $351.7 million and $229.4
million, respectively. This represents a total of 96.6% and 82.2% of the
financing cash flows for the six months ended June 30, 1999 and 1998,
respectively.
Capital Resources
Shareholders' equity at June 30, 1999 increased to $115.1 million from
$107.0 million at December 31, 1998. Greater Bay paid dividends of $0.12 and
$0.39 per share during the six months ended June 30, 1999 and the twelve months
ended December 31, 1998, respectively. In 1998, PBFC made a distribution of
$227,000 to its shareholders.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company has provided a substantial portion of its capital requirements
through the retention of earnings. The Company supplemented its capital base by
issuing $30.0 million of TPS in 1998 and $20.0 million of TPS in 1997, which,
subject to certain limitations, qualify as Tier 1 capital.
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
securities 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 and TPS in core capital, and the allowance for loan losses
and subordinated debt in supplementary capital.
At June 30, 1999, the minimum risk-based capital requirements to be
considered adequately capitalized were 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.
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, 1999
and the two highest levels recognized under these regulations are as follows.
These ratios all exceeded the well-capitalized guidelines shown below.
<TABLE>
<CAPTION>
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
----- ------------- -------------
<S> <C> <C> <C>
Company 7.58% 9.48% 11.41%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
</TABLE>
In addition, at June 30, 1999, each of the Banks had levels of capital that
exceeded the well-capitalized guidelines.
The Company anticipates that the economic and business conditions in its
market areas will continue to expand in 1999, 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.
32
<PAGE>
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 net portfolio values ("NPV") 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 NPV 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 NPV in the event of hypothetical changes in interest rates
and interest liabilities. If potential changes to NPV 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 (7 years to 10
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 NPV 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. NPV 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. The following table presents the Company's projected change
in NPV for these rate shock levels as of June 30, 1999. 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.
<TABLE>
<CAPTION>
(Dollars in thousands)
Change in Projected Change
------------------------
Interest Rates MVPE Dollars Percentage
----------------------------------------------------------------
<S> <C> <C> <C>
100 basis point rise $ 129,928 $ (10,298) (7.3)%
Base scenario 140,226 - -
100 basis point decline 143,963 3,737 2.7%
</TABLE>
The preceding table indicates that at June 30, 1999, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
NPV would be expected to increase.
NPV 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.
33
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Computation of forecasted effects of hypothetical interest rate changes is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit 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 NPV. Actual values may differ from those projections
presented should market conditions vary from assumptions used in the calculation
of the NPV. 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 a short-term basis and over the life of the assets. In addition, the
proportion of adjustable-rate loans in the Company's portfolio could decrease in
future periods if market interest rates remain at or decrease below current
levels due to refinancing 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 NPV. 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.
The following table shows interest sensitivity gaps for different intervals
as of June 30, 1999.
<TABLE>
<CAPTION>
Immediate or 2 Days to 6 7 Months to 1 Year to 3 4 Years to More than
One Day Months 12 Months Years 5 Years 5 Years
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets (Dollars in thousands)
Cash and Due $ - $ - $ - $ - $ - $ -
Federal Funds Sold 152,200 - - - - -
Investment Securities - 102,167 23,344 83,399 36,904 201,959
Loans 742,282 353,218 28,571 58,543 42,398 131,583
Allowance for Loan Losses/Unearned Fees - - - - - -
Other Assets - - - - - -
----------------------------------------------------------------------------------
Total Assets $ 894,482 $ 455,385 $ 51,915 $ 141,942 $ 79,302 $ 333,542
==================================================================================
Liabilities and Equity
Deposits $ 1,124,354 $ 322,193 $ 49,230 $ 10,282 $ 552 $ 27
Other Borrowings - 18,435 - - 72,000 -
Trust Preferred Securities - - - - - 50,000
Other Liabilities - - - - - -
Shareholders Equity - - - - - -
----------------------------------------------------------------------------------
Total Liab/Equity $ 1,124,354 $ 340,628 $ 49,230 $ 10,282 $ 72,552 $ 50,027
==================================================================================
Gap $ (229,872) $ 114,757 $ 2,685 $ 131,660 $ 6,750 $ 283,515
Cumulative Gap $ (229,872) $(115,115) $ (112,430) $ 19,230 $ 25,980 $ 309,495
Cumulative Gap/Total Assets -10.9% -5.4% -5.3% 0.9% 1.2% 14.6%
<CAPTION>
Total Rate Non-Rate
Sensitive Sensitive Total
-----------------------------------------
<S> <C> <C> <C>
Assets
Cash and Due $ - $ 90,246 $ 90,246
Federal Funds Sold 152,200 - 152,200
Investment Securities 447,773 6,469 454,242
Loans 1,356,595 - 1,356,595
Allowance for Loan Losses/Unearned Fees - (31,219) (31,219)
Other Assets - 91,548 91,548
-----------------------------------------
Total Assets $ 1,956,568 $ 157,044 $ 2,113,612
=========================================
Liabilities and Equity
Deposits $ 1,506,638 $ 324,019 $ 1,830,657
Other Borrowings 90,435 - 90,435
Trust Preferred Securities 50,000 - 50,000
Other Liabilities - 27,397 27,397
Shareholders Equity - 115,123 115,123
=========================================
Total Liab/Equity $ 1,647,073 $ 466,539 $ 2,113,612
=========================================
Gap
Cumulative Gap $ 309,495 $(309,495) $ -
Cumulative Gap/Total Assets $ 618,990 $ - $ -
29.3% - -
</TABLE>
34
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The foregoing table indicates that the Company had a one year gap of $(112)
million, or (5.3)% of total assets, at June 30, 1999. In theory, this would
indicate that at June 30, 1999, $112 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
higher net interest margin. Conversely, if interest rates decreased, the gap may
result in decreases net interest margin. However, changes in the mix of earning
assets or supporting liabilities can either increase or decrease the net
interest margin without affecting interest rate sensitivity. In addition, the
interest rate spread between an asset and its supporting liability can vary
significantly while the timing of repricing of both the asset and its supporting
liability can remain the same, thus impacting net interest income. This
characteristic is referred to as basis risk and, generally, relates to the
repricing characteristics of short-term funding sources such as certificates of
deposit.
The impact of fluctuations in interest rates on the Company's projected
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, 1999, the analysis indicates that the Company's net
interest income would increase a maximum of 10.7% if rates rose 200 basis points
immediately and would decrease a maximum of 12.89% 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. The Company has revised the assumptions used in performing
this analysis following a detailed review of its ALCO pricing history. As a
result, the anticipated impact of interest rate changes on the Company's net
interest income has increased since December 31, 1998.
While the overall 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 management's and ALCO's actions to mitigate the impact to the Company
and the impact of the Company's credit risk profile during periods of
significant interest rate movements.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors and
others, an interest sensitivity gap report may not provide a complete assessment
of the Company's exposure to changes in interest rates.
Year 2000 Compliance
State of Readiness
The Company has undertaken a major project to ensure that its internal
operating systems will be fully capable of processing year 2000 transactions.
This project is overseen by the Greater Bay Year 2000 Project Team (the "Year
2000 Project Team"), which reports monthly progress to the Company's Board of
Directors.
The Company is determining 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 rather than the year 2000 could
result in errors or system failures. The Company utilizes a number of computer
programs across its entire operation.
35
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The initial phase of the project was to assess and identify all internal
business processes requiring modification and to develop comprehensive
renovation plans as needed. This phase was largely completed in mid-1998. The
second phase was to execute those renovation plans and begin testing systems by
simulating year 2000 data conditions. This phase was largely completed in 1998.
Testing and implementation is planned to be completed during the first half of
1999.
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 initiated discussions with its major customers and suppliers as to their
ability to meet year 2000 requirements. The Year 2000 Project Team previously
has identified and sought information from significant third party suppliers
regarding their year 2000 compliance. Suppliers providing system
interdependencies also have been identified, and testing with such suppliers
also will occur during this phase of the project. The Year 2000 Project Team
continues to work with all targeted suppliers to determine their year 2000
status. As of this time, the Year 2000 Project Team has not identified any
significant issues with the identified suppliers.
The Company also has identified customers who have a material relationship
with the Company and requested such customers to complete a year 2000 survey,
which will be used by the Company to assess the overall risk to the Company
resulting from such customers' year 2000 compliance.
Costs to Address the Year 2000 Issue
The Company has budgeted an anticipated total expenditure of $300,000 in
1999 to ensure that its systems are ready for processing information in the year
2000. The Company estimates that it has incurred out-of-pocket expenses of
approximately $178,000 and $146,000 in the six months ended June 30, 1999 and
the year ended December 31, 1998 in connection with year 2000 issues. In
addition, the Company has incurred certain costs relating to reallocation of
internal resources to address year 2000 issues. The Company expects that the
cost of remedial action for its noncompliant year 2000 systems will not be
material.
Greater Bay completed the Awareness and Assessment Phases, as defined by
the FFIEC, for its computer systems and bank facilities in 1998 and continues to
update its assessment as needed. The Company has identified its mission-
critical systems, assessed the state of Year 2000 compliance of those systems
and implemented a plan to repair or replace non-compliant systems. The Company
currently believes that costs of addressing Year 2000 issues 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, the Company plans to devote all
resources required to resolve any significant year 2000 issues in a timely
manner.
36
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Risks Presented by the Year 2000 Issue
As the Company continues to assess the year 2000 issue, it may identify
systems that present a year 2000 risk. In addition, if any third-party software
vendors and service providers upon whom the Company relies fail to appropriately
address their year 2000 issues, such failure could have a material adverse
effect on the Company's business, financial condition and operating results.
Should the Company and/or its significant suppliers fail to timely
identify, address and correct material year 2000 issues, such failure could have
a material adverse impact on the Company's ability to operate. The range of
adverse impacts may include the requirement to pay significant overtime to
manually process certain transactions and added costs to process certain banking
activity through a centralized administrative function. In addition, if
corrections made by such suppliers to address year 2000 issues are incompatible
with the Company's systems, the year 2000 issue could have a material adverse
impact on the Company's operations.
Despite the Company's activities in regards to the year 2000 issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations
and business prospects.
Contingency Plans
The Year 2000 Project Team completed the development of contingency plans
for year 2000 readiness. The Company engaged a third party consultant, which
specializes in developing contingency plans for financial institutions for year
2000, to assist the Company in analyzing the impact of year 2000 on its
business. This business impact analysis was completed in 1998 and the Company's
contingency plans for year 2000 readiness are complete. There can be no
assurance, however, that such contingency plans will be successful.
Recent Events
On April 30, 1999 the Company and Bay Commercial Services, the parent of
Bay Bank of Commerce, signed a definitive agreement for a merger between the two
companies. The agreement provides for Bay Commercial Services shareholders to
receive approximately 945,000 shares of Greater Bay stock subject to the
approval of Bay Commercial Services shareholders and certain adjustments based
on movements in the Company's stock price, in a tax-free exchange to be
accounted for as a pooling-of-interests. Following the transaction, the
shareholders of Bay Commercial Services will own approximately 7.8% of the
combined company. The transaction is expected to be completed in the fourth
quarter of 1999 subject to regulatory approvals. As of June 30, 1999, Bay
Commercial Services had $151.0 million in assets, $136.7 million in deposits,
and $12.9 million in shareholders' equity. Bay Bank of Commerce has banking
offices in San Leandro, San Ramon and Hayward, California. The combined Company,
on a pro-forma basis after giving effect to the merger of Bay Commercial
Services, would have had total assets of approximately $2.3 billion and equity
of over $128.0 million at June 30, 1999.
The transaction is anticipated to be accretive to the Company's core
earnings (excluding one-time merger costs) in 1999 based on anticipated
reductions in operating expenses and revenue enhancements resulting from an
expanded product line, increased lending capacity and an increased market
awareness that can be utilized by Bay Commercial Services. Management believes
that significant opportunities exist to enhance the spectrum of financial
services offered to both existing and future clients of Bay Commercial Services
while also increasing market penetration in the East Bay market areas.
37
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
Recent Accounting Developments
In April 1999, the Financial Accounting Standards Board ("FASB") reached
tentative conclusions on the future of the pooling-of-interests method of
accounting for business combinations. These tentative decisions include the
decision that the pooling-of-interests method of accounting will no longer be an
acceptable method to account for business combinations between independent
parties and that there should be a single method of accounting for all business
combinations, and that method is the purchase method.
The FASB agreed that the purchase method should be applied prospectively to
business combination transactions that are initiated after the final standard is
issued. The FASB has indicated that it expects an exposure draft to be issued
during the third quarter of 1999 and expects a final standard will be issued and
become effective in the fourth quarter of 2000.
A portion of the Company's business strategy is to pursue acquisition
opportunities so as to expand its market presence and maintain growth levels. A
change in the accounting for business combinations could have a negative impact
on the Company's ability to realize those business strategies.
38
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings -- Not applicable
ITEM 2. Changes in Securities and Use of Proceeds - Not applicable
ITEM 3. Defaults Upon Senior Securities -- Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of stockholders on May 25,
1999.
(b) The following directors were elected at the annual meeting to serve
for a three-year term:
George R. Corey
John M. Gatto
Dick J. Randall
Donald H. Seiler
The following directors continued in office after the annual
meeting:
James E. Jackson
David L. Kalkbrenner
Stanley A. Kangas
Rex D. Lindsay
Leo K.W. Lum
Glen McLaughlin
George M. Marcus
Duncan L. Matteson
Rebecca Q. Morgan
Warren R. Thoits
(c) At the annual meeting, stockholders voted on (1) the election of
the Company's Class II directors; and (2) the ratification of the
appointment of PricewaterhouseCoopers L.L.P. as the Company's independent
public accountants for the fiscal year ending December 31, 1999. The
results of the voting were as follows:
<TABLE>
<CAPTION>
Votes Broker
Matter Votes For Against Withheld Abstentions Non-Votes
- ----------------------- --------------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Election of Directors
George R. Corey 7,915,389 - 77,049 - -
John M. Gatto 7,916,389 - 76,049 - -
Dick J. Randall 7,900,349 - 92,089 - -
Donald H. Seiler 7,914,369 - 78,069 - -
Independent Public
Accountants 7,957,005 22,715 - 12,718 -
</TABLE>
(d) Not applicable.
ITEM 5. Other Information -- Not applicable
39
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
The Exhibits listed below are filed or incorporated by reference as part of this
Report.
(a) Exhibits
EXHIBIT
NO. EXHIBITS
------- --------
2 Agreement and Plan of Recognition, dated April 30, 1999, between
Greater Bay Bancorp and Bay Commercial Services (incorporated by
reference to Exhibit 2 from Registrant's Current Report on Form 8-K
dated May 4, 1999).
11 Statement re Computation of Earnings Per Share.
27 Financial Data Schedule.
- --------
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, the Registrant filed the following
Current Reports on Form 8-K: (1) Form 8-K dated May 6, 1999 (reporting
signing of merger agreement with Bay Commercial Services); and (2) Form 8-K
dated June 7, 1999 (reporting closing of merger with Bay Area Bancshares).
40
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREATER BAY BANCORP
(Registrant)
By:
/s/ Steven C. Smith
- -------------------
Steven C. Smith
Executive Vice President, Chief Administrative Officer and
Chief Financial Officer
Date: August 12, 1999
41
<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) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Income available to common shareholders $ 3,964 $ 3,846 $ 9,666 $ 8,300
Weighted average common shares outstanding 11,193,000 10,859,000 11,133,000 11,087,000
--------------------------- ---------------------------------
Basic earnings per share $ 0.35 $ 0.35 $ 0.87 $ 0.75
=========================== =================================
Diluted Earnings Per Share:
Income available to common shareholders $ 3,964 $ 3,846 $ 9,666 $ 8,300
Weighted average common shares outstanding 11,193,000 10,859,000 11,133,000 11,087,000
Effect of dilutive securities 605,000 794,000 614,000 588,000
--------------------------- ---------------------------------
Weighted average common and common
equivalent shares outstanding 11,798,000 11,653,000 11,747,000 11,675,000
--------------------------- ---------------------------------
Diluted earnings per share $ 0.34 $ 0.33 $ 0.82 $ 0.71
=========================== =================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 90,246
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 152,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 284,800
<INVESTMENTS-CARRYING> 94,975
<INVESTMENTS-MARKET> 92,790
<LOANS> 1,325,376
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<LONG-TERM> 50,000
0
0
<COMMON> 65,827
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<INTEREST-DEPOSIT> 13,771
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<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 4.80
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<ALLOWANCE-DOMESTIC> 26,086
<ALLOWANCE-FOREIGN> 0
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</TABLE>
