<PAGE>
Exhibit 99.1
SELECTED FINANCIAL INFORMATION
The following table represents the selected financial information at and for the
five years ended December 31, 1999:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1999* 1998* 1997* 1996* 1995*
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Interest income $ 241,704 $ 192,444 $ 154,991 $ 120,223 $ 104,337
Interest expense 89,973 71,804 54,062 39,445 33,715
--------------------------------------------------------------
Net interest income 151,731 120,640 100,929 80,778 70,622
Provision for loan losses 13,739 8,059 8,791 4,760 2,771
--------------------------------------------------------------
Net interest income after
provision for loan losses 137,992 112,581 92,138 76,018 67,851
Other income 27,276 19,810 17,133 15,997 12,401
Nonrecurring - warrant income 14,508 945 1,162 92 -
--------------------------------------------------------------
Total other income 41,784 20,755 18,295 16,089 12,401
Operating expenses 94,718 80,560 69,515 63,079 59,462
Other expenses - nonrecurring 12,160 1,341 - - -
--------------------------------------------------------------
Total operating expenses 106,878 81,901 69,515 63,079 59,462
--------------------------------------------------------------
Income before income tax expense & merger
and other related nonrecurring costs 72,898 51,435 40,918 29,028 20,790
Income tax expense 24,444 18,092 14,917 10,529 7,613
--------------------------------------------------------------
Income before merger and other related
nonrecurring costs and extraordinary
items 48,454 33,343 26,001 18,499 13,177
Merger and other related
nonrecurring costs, net of tax (6,486) (1,674) (2,282) (1,991) -
--------------------------------------------------------------
Net income before extraordinary items 41,968 31,669 23,719 16,508 13,177
Extraordinary items (88) - - - -
--------------------------------------------------------------
Net income $ 41,880 $ 31,669 $ 23,719 $ 16,508 $ 13,177
==============================================================
Per Share Data (1)
Income per share (before merger,
nonrecurring and extraordinary items)
Basic $ 2.40 $ 1.86 $ 1.43 $ 1.11 $ 0.91
Diluted 2.27 1.74 1.34 1.06 0.87
Net income per share
Basic $ 2.29 $ 1.79 $ 1.38 $ 0.99 $ 0.82
Diluted 2.17 1.67 1.30 0.94 0.79
Cash dividends per share (2) $ 0.48 $ 0.38 $ 0.30 $ 0.22 $ 0.20
Book value per common share 12.53 10.46 9.12 8.15 7.55
Shares outstanding at year end 18,989,511 17,871,980 17,566,409 16,728,765 16,266,106
Average common shares outstanding 18,304,000 17,739,000 17,175,000 16,598,000 16,035,000
Average common and common
equivalent shares outstanding 19,298,000 18,981,000 18,301,000 17,528,000 16,726,000
Performance Ratios
Return on average assets (before merger,
nonrecurring and extraordinary items) 1.40% 1.38% 1.35% 1.16% 1.18%
Return on average common shareholders'
equity (before merger nonrecurring
and extraordinary items) 21.44% 19.17% 16.35% 12.97% 12.95%
Return on average assets 1.34% 1.32% 1.30% 0.95% 1.00%
Return on average common
shareholders' equity 20.46% 18.39% 15.83% 10.69% 10.52%
Net interest margin (3) 5.26% 5.45% 5.92% 6.05% 6.98%
Balance Sheet Data - At Period End
Assets $ 3,542,030 $ 2,670,686 $ 2,084,217 $ 1,662,313 $ 1,324,368
Loans, net 2,298,111 1,640,311 1,274,408 1,013,217 772,112
Investment securities 694,950 599,794 415,584 308,855 314,358
Deposits 3,100,697 2,307,582 1,812,058 1,459,764 1,157,549
Subordinated debt - 3,000 3,000 3,000 3,000
Trust Preferred Securities 49,000 49,000 20,000 0 -
Common shareholders' equity 238,002 186,883 160,252 136,346 122,738
Asset Quality Ratios
Nonperforming assets to
total loans and OREO 0.29% 0.35% 0.59% 1.33% 1.57%
Nonperforming assets to total assets 0.19% 0.22% 0.37% 0.83% 0.93%
Allowance for loan losses to total loans 1.98% 1.89% 1.95% 1.70% 1.66%
Allowance for loan losses to
non-performing assets 673.30% 543.67% 332.11% 127.54% 105.30%
Net charge-offs to average loans 0.09% 0.13% 0.20% 0.12% 0.30%
Regulatory Capital Ratios
Leverage Ratio 8.24% 8.18% 8.94% 8.55% 9.42%
Tier 1 Capital 9.70% 10.75% 11.39% 10.98% 12.84%
Total Capital 11.04% 12.69% 12.77% 12.34% 14.28%
</TABLE>
*Restated on a historical basis to reflect the mergers between Greater Bay
Bancorp and CNB, MPB, PBC, PRB (the parent of Golden Gate), PBFC, BA Bancshares
(the parent of BAB), BCS (the parent of BBC), MD Bancshares (the parent of MDNB)
Coast Bancorp (the parent of CCB) and BSC on a pooling- of- interests basis.
(1) Restated to reflect 2 -for - 1 stock split effective as of April 30, 1998.
(2) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the completion of
their mergers with Greater Bay.
(3) Net interest margin for 1999, 1998 and 1997 includes the lower spread earned
on the PBC Special Deposit (see Note 7 to the Financial Statements for
details). Excluding the PBC Special Deposit, net interest margin would have
been 5.49%, 5.72%, 6.21% and 6.34% for 1999, 1998, 1997 and 1996,
respectively.
A-1
<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) is a bank holding company operating Bank of
Santa Clara ("BSC"), Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast
Commercial Bank ("CCB"), Cupertino National Bank ("CNB"), Golden Gate Bank
("Golden Gate"), Mid-Peninsula Bank ("MPB") Mt. Diablo National Bank ("MDNB")
and Peninsula Bank of Commerce ("PBC"). The Company also owns GBB Capital I and
GBB Capital II, which are Delaware statutory business trusts, which were formed
for the exclusive purpose of issuing and selling Cumulative Trust Preferred
Securities ("TPS"). Greater Bay also includes the operating divisions: Greater
Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank
Santa Clara Valley Commercial Banking Group, Greater Bay Bank SBA Lending Group,
Greater Bay Corporate Finance Group, Greater Bay International Banking Division,
Greater Bay Trust Company, Pacific Business Funding and the Venture Banking
Group. The Company provides a wide range of commercial banking services to small
and medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. The Company operates throughout
Silicon Valley, the San Francisco Peninsula and the East Bay Region, with 33
offices located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont,
Hayward, Lafayette, Millbrae, Milpitas, Palo Alto, Pleasanton, Redwood City, San
Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz,
Scotts Valley, Sunnyvale, Walnut Creek and Watsonville. At December 31, 1999,
the Company had total assets of $3.5 billion, total net loans of $2.3 billion
and total deposits of $3.1 billion.
All of the Company's mergers were accounted for as a pooling-of-interests
and, accordingly, all of the financial information for the Company for the
periods prior to the mergers has been restated as if the mergers had occurred at
the beginning of the earliest reporting period presented.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Selected Financial Information" and 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 and government regulation.
RESULTS OF OPERATIONS
The Company's operating results included merger, nonrecurring and
extraordinary items of $8.1 million ($2.0 million net of tax), $3.1 million
($1.4 million net of tax) and $884,000 ($788,000 net of tax) in 1999, 1998 and
1997, respectively. The following table summarizes net income, net income per
share and key financial ratios before and after merger, nonrecurring and
extraordinary items for the years presented.
<TABLE>
<CAPTION>
Before merger, nonrecurring After merger, nonrecurring
and extraordinary items and extraordinary items
------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1997 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $43,891 $33,026 $24,507 $41,880 $31,669 $23,719
Net income per share:
Basic $ 2.40 $ 1.86 $ 1.43 $ 2.29 $ 1.79 $ 1.38
Diluted $ 2.27 $ 1.74 $ 1.34 $ 2.17 $ 1.67 $ 1.30
Return on average assets 1.40% 1.38% 1.35% 1.34% 1.32% 1.30%
Return on average shareholders' equity 21.44% 19.17% 16.35% 20.46% 18.39% 15.83%
</TABLE>
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company reported net income of $41.9 million in 1999, a 32.2% increase
over 1998 net income of $31.7 million. The net income in 1998 was a 33.5%
increase over 1997 income of $23.7 million. Basic net income per share was $2.29
for 1999, as compared to $1.79 for 1998 and $1.38 for 1997. Diluted net income
per share was $2.17, $1.67 and $1.30 for 1999, 1998 and 1997, respectively. The
return on average assets and return on average shareholders' equity were 1.34%
and 20.46% in 1999, compared with 1.32% and 18.39% in 1998 and 1.30% and 15.83%
in 1997, respectively.
The 32.2% increase in 1999 net income as compared to 1998 was the result of
significant growth in loans, investments, trust assets and deposits. In 1999,
net interest income, excluding Cumulative Trust Preferred Securities issued
("capital securities"), increased 26.3% as compared to 1998. This increase was
primarily due to a 30.3% increase in average interest-earning assets in 1999
compared to the prior year. The impact on income of the increase in average
interest-earning assets was partially offset by the decline the net yield earned
on interest-earning assets to 5.26% in 1999 as compared to 5.45% in 1998 (see "-
Net Interest Income" for additional information on the increase in net interest
income). The increases in loans, trust assets and deposits also contributed to
the 28.7% increase in trust fees, loan and international banking fees, service
charges and other fees. Other income includes $4.0 million in appreciation
recognized on the conversion of equity securities received in the settlement of
a loan into a publicly traded equity security. Increases in operating expenses
were required to service and support the Company's growth. As a result,
increases in revenue were partially offset in 1999 by a 17.6% increase in
recurring operating expenses, as compared to 1998.
Net income in 1999 included nonrecurring expenses, net of nonrecurring income
and taxes, of $2.0 million, an increase of $654,000 compared to 1998. In 1999,
merger and related nonrecurring costs were $6.5 million, an increase of $4.8
million from 1998. Warrant income, net of related expenses and taxes, was $5.8
million in 1999, an increase of $5.3 million compared to 1998. In 1999, the
Company donated $7.8 million in appreciated securities to the Greater Bay
Bancorp Foundation (the "Foundation"). This resulted in $1.2 million in
donation expense, net of a tax benefit derived on the transaction, which is a
$1.0 million increase compared to 1998.
The 33.5% increase in 1998 net income as compared to 1997 was the result of
significant growth in loans, investments, trust assets and deposits. In 1998,
net interest income, excluding capital securities, increased 20.6% as compared
to 1997. This increase was primarily due to a 29.8% increase in average
interest-earning assets in 1998 compared to the prior year. The impact on
income of the increase in average interest-earning assets was partially offset
by the decline the net yield earned on interest-earning assets to 5.45% in 1998
as compared to 5.92% in 1997 (see "- Net Interest Income" for additional
information on the increase in net interest income). The increases in loans,
trust assets and deposits also contributed to the 5.1% increase in trust fees,
loan and international banking fees, service charges and other fees. Increases
in operating expenses were required to service and support the Company's growth.
As a result, increases in revenue were partially offset in 1998 by a 13.1%
increase in recurring operating expenses, as compared to 1997.
Net income in 1998 included nonrecurring expenses, net of nonrecurring income
and taxes, of $1.4 million, an increase of $569,000 compared to 1997. In 1998,
merger and related nonrecurring costs were $1.7 million, a decrease of $608,000
from 1997. Warrant income, net of related expenses and taxes, was $554,000 in
1998, a decrease of $155,000 compared to 1997. In 1998, the Company donated
$1.3 million in appreciated securities to the Greater Bay Bancorp Foundation.
This resulted in $237,000 in donation expense, net of a tax benefit derived on
the transaction. There was no such donation in 1997. In 1997, the Company had
nonrecurring income of $1.0 million, net of taxes, related to payment from an
insurance carrier of a litigation settlement charge taken in 1995.
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
NET INTEREST INCOME
Net interest income, excluding capital securities, increased 26.3% to
$155.9 million in 1999 from $123.5 million in 1998. This increase was primarily
due to the $670.7 million, or 30.3%, increase in average interest-earning assets
which was partially offset by a 19 basis point decrease in the Company's net
yield on interest-earning assets. Net interest income, excluding capital
securities, increased 20.6% in 1998 from $102.4 million in 1997. This increase
was primarily due to the $507.4 million, or 29.8%, increase in average interest-
earning assets, which was partially offset by the 47 basis point decrease in the
Company's net yield on interest-earning assets. The capital securities were
Trust Preferred Securities issued in 1999 and 1998 which cost 8.57% and 9.02% in
1999 and 1998, respectively. Including the capital securities, net interest
income increased 25.8% to $151.7 million in 1999, and 19.5% to $120.6 million in
1998. The capital securities were issued primarily as a source of capital and
not as a source of liquidity.
The following table presents, for the years 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>
Years Ended December 31,
------------------------------------------------------------
1999
------------------------------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance (1) Interest Rate
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 201,124 $ 10,401 5.17%
Other short term securities 70,847 3,830 5.41%
Investment securities:
Taxable 508,694 33,937 6.67%
Tax-exempt (2) 116,383 5,866 5.04%
Loans (3) 1,985,922 187,670 9.45%
---------- --------
Total interest-earning
assets 2,882,970 241,704 8.38%
Noninterest-earning assets 242,434
----------- --------
Total assets $3,125,404 241,704
=========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,548,625 51,861 3.35%
Time deposits, over $100,000 454,334 21,411 4.71%
Other time deposits 151,797 7,166 4.72%
---------- --------
Total interest-bearing deposits 2,154,756 80,438 3.73%
Other borrowings 93,742 5,266 5.62%
Subordinated debt 607 68 11.20%
---------- --------
Total interest-bearing liabilities 2,249,105 85,772 3.81%
Trust Preferred Securities 49,000 4,201 8.57%
---------- --------
Total interest-bearing liabilities and
capital securities 2,298,105 89,973 3.92%
Noninterest-bearing deposits 586,911
Other noninterest-bearing liabilities 35,682
Shareholders' equity 204,706
---------- --------
Total shareholders' equity and liabilities $3,125,404 $ 89,973
========== --------
Net interest income $151,731
========
Including capital securities:
Interest rate spread 4.47%
Contribution of interest free funds 0.79%
----
Net yield on interest-earnings assets(4) 5.26%
Excluding capital securities:
Interest rate spread 4.57%
Contribution of interest free funds 0.84%
----
Net yield on interest-earnings assets(4) 5.41%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1998
---------------------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance (1) Interest Rate
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 153,455 $ 8,194 5.34%
Other short term securities 97,229 5,480 5.64%
Investment securities:
Taxable 448,765 27,729 6.18%
Tax-exempt (2) 89,832 4,643 5.17%
Loans (3) 1,422,980 146,398 10.29%
---------- --------
Total interest-earning
assets 2,212,261 192,444 8.70%
Noninterest-earning assets 187,724
----------- --------
Total assets $ 2,399,985 192,444
=========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 1,132,704 38,584 3.41%
Time deposits, over $100,000 320,916 16,177 5.04%
Other time deposits 154,899 7,623 4.92%
----------- --------
Total interest-bearing deposits 1,608,519 62,384 3.88%
Other borrowings 100,148 6,251 6.24%
Subordinated debt 3,000 345 11.50%
---------- --------
Total interest-bearing liabilities 1,711,667 68,980 4.03%
Trust Preferred Securities 31,293 2,824 9.02%
---------- --------
Total interest-bearing liabilities and
capital securities 1,742,960 71,804 4.12%
Noninterest-bearing deposits 461,211
Other noninterest-bearing liabilities 23,565
Shareholders' equity 172,249
----------- --------
Total shareholders' equity and liabilities $2,399,985 $ 71,804
========== --------
Net interest income $120,640
========
Including capital securities:
Interest rate spread 4.58%
Contribution of interest free funds 0.87%
----
Net yield on interest-earnings assets(4) 5.45%
Excluding capital securities:
Interest rate spread 4.67%
Contribution of interest free funds 0.91%
----
Net yield on interest-earnings assets(4) 5.58%
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1997
---------------------------------------------------
Average
Average Yield/
(Dollars in thousands) Balance (1) Interest Rate
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 121,526 $ 6,556 5.39%
Other short term securities 97,955 5,307 5.42%
Investment securities:
Taxable 276,369 17,940 6.49%
Tax-exempt (2) 54,724 3,074 5.62%
Loans (3) 1,154,324 122,114 10.58%
---------- --------
Total interest-earning
assets 1,704,898 154,991 9.09%
Noninterest-earning assets 115,990
---------- --------
Total assets $1,820,888 154,991
========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 882,097 29,820 3.38%
Time deposits, over $100,000 209,008 11,503 5.50%
Other time deposits 134,017 7,649 5.71%
---------- --------
Total interest-bearing deposits 1,225,122 48,972 4.00%
Other borrowings 46,830 3,282 7.01%
Subordinated debt 3,000 345 11.50%
---------- --------
Total interest-bearing liabilities 1,274,952 52,599 4.13%
Trust Preferred Securities 15,000 1,463 9.75%
---------- --------
Total interest-bearing liabilities and
capital securities 1,289,952 54,062 4.19%
Noninterest-bearing deposits 357,912
Other noninterest-bearing liabilities 23,161
Shareholders' equity 149,863
---------- --------
Total shareholders' equity and liabilities $1,820,888 $ 54,062
========== --------
Net interest income $100,929
========
Including capital securities:
Interest rate spread 4.90%
Contribution of interest free funds 1.02%
----
Net yield on interest-earnings assets(4) 5.92%
Excluding capital securities:
Interest rate spread 4.97%
Contribution of interest free funds 1.04%
----
Net yield on interest-earnings assets(4) 6.01%
</TABLE>
(1) Nonaccrual loans are excluded from the average balance and only collected
interest on nonaccrual loans is included in the interest column.
(2) Tax equivalent yields earned on the tax exempt securities are 7.36%, 7.54%
and 7.40% for the years ended December 31, 1999, 1998 and 1997,
respectively, using the federal statutory rate of 34%.
(3) Loan fees totaling $7.1 million, $6.5 million and $6.4 million are included
in loan interest income for 1999, 1998 and 1997, respectively.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
A-4
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
Compared with December 31, 1998
favorable / (unfavorable)
(Dollars in thousands)(1) Volume Rate Net
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 2,473 $ (266) $ 2,207
Other short term investments (1,434) (216) (1,650)
Investment securities:
Taxable 3,888 2,320 6,208
Tax-exempt 1,341 (118) 1,223
Loans 54,004 (12,732) 41,272
--------------------------------------
Total interest income 60,271 (11,011) 49,260
--------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (13,939) 662 (13,277)
Time deposits over $100,000 (6,347) 1,113 (5,234)
Other time deposits 151 306 457
--------------------------------------
Total interest-bearing deposits (20,136) 2,082 (18,054)
Other borrowings 384 601 985
Subordinated debt 268 9 277
TPS (1,525) 148 (1,377)
--------------------------------------
Total interest expense (21,007) 2,838 (18,169)
--------------------------------------
Net increase (decrease) in net interest income $ 39,265 $ (8,174) $ 31,091
======================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
Compared with December 31, 1997
favorable / (unfavorable)
(Dollars in thousands)(1) Volume Rate Net
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 1,706 $ (68) $ 1,638
Other short term investments (40) 213 173
Investment securities:
Taxable 10,691 (902) 9,789
Tax-exempt 1,832 (263) 1,569
Loans 39,500 (2,047) 37,453
--------------------------------------
Total interest income 53,690 (3,068) 50,622
--------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (8,535) (229) (8,764)
Time deposits over $100,000 (5,711) 1,037 (4,674)
Other time deposits (1,105) 1,131 26
--------------------------------------
Total interest-bearing deposits (15,351) 1,939 (13,412)
Other borrowings (3,364) 395 (2,969)
Subordinated debt - - -
TPS (1,478) 117 (1,361)
--------------------------------------
Total interest expense (20,194) 2,452 (17,742)
--------------------------------------
Net increase (decrease) in net interest income $ 33,496 $ (616) $ 32,880
======================================
</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 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 years indicated, a
summary of the changes in average asset and liability balances (volume) and
changes in average interest rates (rate).
Interest income in 1999 increased 25.8% to $151.7 million from $120.6
million in 1998. This was primarily due to the significant increase in loans,
the Company's highest yielding interest-earning asset, and investment
securities. Loan volume increases were the result of the continuing economic
improvement in the Company's market areas, as well as the addition of
experienced relationship managers and significant business development efforts
by the Company's relationship managers. The increase was partially offset by a
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $670.7 million, or 30.3%, to $2.9 billion in
1999, compared to $2.2 billion in 1998. Of this total increase, average loans
increased $562.9 million, or 39.6%, to $2.0 billion in 1999 from $1.4 billion in
1998. Investment securities, Federal funds sold and other short-term securities,
increased 13.7% to $897.0 million in 1999 from $789.3 million in 1998.
The average yield on interest-earning assets declined 32 basis points to
8.38% in 1999 from 8.70% in 1998 primarily due to a decline in the average yield
on loans which was caused by increased competition and the impact of the
Company's focus on slightly larger client credits that generally result in
improved client financial controls, but also result in tighter pricing. Loans
represented approximately 68.9% of total interest-earning assets in 1999
compared to 64.3% in 1998. The average yield on loans declined 84 basis points
to 9.45% in 1999 from 10.29% in 1998.
Interest expense, excluding capital securities, in 1999 increased 24.3% to
$85.8 million from $69.0 million in 1998. This increase was due to greater
volumes of interest-bearing liabilities coupled with slightly higher interest
rates paid on interest-bearing liabilities. Average interest-bearing liabilities
increased 31.4% to $2.2 billion in 1999 from $1.7 billion in 1998 due primarily
to the efforts of the Banks' relationship managers in generating core deposits
from their client relationships and the deposits derived from the activities of
the Greater Bay Trust Company and the Venture Banking Group.
A-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
During 1999, average noninterest-bearing deposits increased to $586.9
million from $461.2 million in 1998. However, due to the larger increase in
interest-bearing deposits, noninterest-bearing deposits decreased to 21.4% of
total deposits at year-end 1999, compared to 22.3% at year-end 1998.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.57% in 1999 from 4.67% in 1998, and the net
yield on interest-earning assets declined in 1999 to 5.41% from 5.58% in 1998.
Interest income increased 24.2% to $192.4 million in 1998 from $155.0
million in 1997, as a result of the increase in average interest-earning assets
offset by a decline in the yields earned. Average interest-earning assets
increased 29.8% to $2.2 billion in 1998 from $1.7 billion in 1997 principally as
a result of increase in loans. The yield on the higher volume of average
interest-earning assets declined 39 basis points to 8.70% in 1998 from 9.09% in
1997, primarily as a result of increased competition for loans.
Interest expense, excluding capital securities, in 1998 increased 31.2% to
$69.0 million from $52.6 million in 1997 primarily as a result of the increase
in the volume of interest-bearing liabilities and in the rates paid on interest-
bearing liabilities. Corresponding to the growth in average interest-earning
assets, average interest-bearing liabilities increased 34.3% to $1.7 billion in
1998 from $1.3 billion in 1997.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.67% in 1998 from 4.97% in 1997 and the net
yield on interest-earning assets declined to 5.58% in 1998 from 6.01% in 1997.
The Company's net yield on interest-earning assets was reduced by the
Special Deposit. The average deposit balances related to the Special Deposit
during 1999, 1998 and 1997 were $99.0 million, $90.0 million and $95.0 million,
respectively, on which the Company earned a spread of 3.1%, 2.25% and 2.5%,
respectively. Excluding the Special Deposit, the 1999, 1998, 1997 net yield on
interest-earning assets, excluding capital securities, would have been 5.49%,
5.72% and 6.21% 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.
A-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company incurred certain client service expenses with respect to its
noninterest-bearing liabilities. These expenses include courier and armored car
services, check supplies and other related items that are included in operating
expenses. If these expenses had been included in interest expense, the Company's
net yield on interest-earning assets would have been as follows for each of the
years presented.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
(Dollars in thousands) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average noninterest bearing demand deposits $ 586,911 $ 461,211 $ 357,912
Client service expenses 3,226 2,520 1,873
Client service expenses, as a percentage of average noninterest
bearing demand deposits 0.55% 0.55% 0.52%
IMPACT ON NET YIELD ON INTEREST-EARNING
ASSETS (EXCLUDING CAPITAL SECURITIES):
Net yield on interest-earning assets 5.41% 5.58% 6.01%
Impact of client service expense (0.11)% (0.11)% (0.11)%
----------------------------------------------
Adjusted net yield on interest-earning assets 5.30% 5.47% 5.90%
==============================================
</TABLE>
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 manage its interest expense.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon 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. Periodic fluctuations in the provision
for loan losses result from management's assessment of the adequacy of the
allowance for loan losses; however, actual loan losses may vary from current
estimates.
Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for a
description of the systematic methodology employed by the Company in determining
an adequate allowance for loan losses.
The provision for loan losses in 1999 was $13.7 million, compared to $8.1
million in 1998 and $8.8 million in 1997. In addition, in connection with the
mergers, the Company made an additional provision for loan losses of $2.7
million, $183,000 and $1.4 million in 1999, 1998 and 1997, respectively, to
conform to the Company's allowance methodology. Although loans outstanding have
increased substantially, nonperforming loans, comprised of nonaccrual loans,
restructured loans, and accruing loans past due 90 days or more have remained
relatively low, totaling $6.6 million, or 0.28% of loans outstanding, at
December 31, 1999, from $4.9 million, or 0.29% of loans outstanding, at December
31, 1998 and $6.1 million, or 0.46% of loans outstanding, at December 31, 1997.
For further information on nonperforming and classified loans and the
allowance for loan losses, see " - Nonperforming and Classified Assets" herein.
A-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
OTHER INCOME
Total other income increased to $41.8 million in 1999, compared to $20.8
million in 1998 and $18.3 million in 1997. The following table sets forth
information by category of other income for the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
(Dollars in thousands) 1999 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service charges and other fees $ 6,931 $ 5,869 $ 5,812
Loan and international banking fees 4,015 2,487 2,442
Trust fees 2,990 2,473 2,049
ATM network revenue 2,986 2,771 2,795
Gain on sale of SBA loans 2,058 3,490 2,189
Gain (loss) on investments, net 49 421 (13)
Other income 8,247 2,299 1,859
-----------------------------------
Total, recurring 27,276 19,810 17,133
Warrant income 14,508 945 1,162
-----------------------------------
Total $41,784 $ 20,755 $ 18,295
===================================
</TABLE>
The increase in other income in 1999 as compared to 1998 was a result of
$1.5 million increase in loan and international banking fees, a $1.1 million
increase in service charges and other fees, and a $517,000 increase in trust
fees. These increases were a result of significant growth in total loans, total
deposits and trust assets. Other income includes $4.0 million in appreciation
recognized on the conversion of equity securities received in the settlement of
a loan into a publicly traded equity security. As discussed further below, the
warrant income resulted from the sale of stock acquired from clients in
connection with financing activities.
The increase in other income in 1998 as compared to 1997 was primarily the
result of a $1.3 million increase in the gain on sale of Small Business
Administration ("SBA") loans and a $424,000 increase in trust fees. The increase
in trust fees was due to significant growth in assets under management by
Greater Bay Trust Company. Trust assets increased to $649.3 million at December
31, 1998, compared to $577.7 million at December 31, 1997. 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 in 1999, 1998 and 1997 included warrant income of $14.5
million, $945,000 and $1.2 million, net of related employee incentives of $7.3
million, $396,000 and $500,000, respectively. At December 31, 1999, the Company
held approximately 100 warrant positions. 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.
A-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
OPERATING EXPENSES
The following table sets forth the major components of operating expenses for
the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
(Dollars in thousands) 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits $ 53,295 $ 44,645 $ 39,365
Occupancy and equipment 16,523 12,469 11,075
Client service expenses 3,226 2,520 1,873
Legal and other professional fees 3,132 3,211 3,315
FDIC insurance and regulatory assessments 622 553 504
Expenses on other real estate owned 13 157 211
Other 17,907 17,005 14,872
----------------------------------------
Total operating expenses excluding
nonrecurring costs 94,718 80,560 71,215
Contribution to the GBB Foundation and related expenses 12,160 1,341 -
Mergers and other related nonrecurring costs 10,331 2,661 3,333
Recovery of legal settlement - - (1,700)
----------------------------------------
Total operating expenses $117,209 $ 84,562 $ 72,848
========================================
Efficiency ratio 60.57% 59.81% 61.10%
Efficiency ratio (before merger, nonrecurring
and extraordinary items) 52.91% 57.36% 60.32%
Total operating expenses to average assets 3.75% 3.52% 4.00%
Total operating expenses to average assets (before
merger, nonrecurring and extraordinary items) 3.03% 3.36% 3.91%
</TABLE>
A-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses totaled $117.2 million for 1999, compared to $84.6
million for 1998 and $72.8 million for 1997. The ratio of operating expenses to
average assets was 3.75% in 1999, 3.52% in 1998, and 4.00% in 1997. Total
operating expenses include merger and other related nonrecurring costs and
contributions to the Foundation and related expenses.
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
(or greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio before merger,
nonrecurring and extraordinary items for 1999 was 52.95%, compared to 57.36% in
1998 and 60.32% in 1997.
During 1998, Greater Bay established the Foundation. The Foundation was
formed to provide a vehicle through which the Company, its officers and
directors can provide support to the communities in which the Company does
business. The Foundation focuses its support on initiatives related to
education, health and economic growth. To support the Foundation, the Company
contributed appreciated securities which had an unrealized gain of $7.8 million
in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4 million in
compensation and other expenses in connection with these appreciated securities.
The Company recorded expense of $12.2 million in 1999 and $1.3 million in 1998
which is included in operating expenses.
As indicated by the improvements in the efficiency ratio, the Company has
been able to achieve increasing economies of scale. In 1999, average assets
increased 30.2% from 1998, while operating expenses, excluding merger, and other
nonrecurring items, increased only 17.6%. From 1997 to 1998, average assets
increased 31.8%, while operating expenses, excluding merger and nonrecurring
costs increased only 13.1%.
Compensation and benefits expenses increased in 1999 to $53.3 million,
compared to $44.6 million in 1998 and $39.4 million in 1997. The increase in
compensation and benefits is due primarily to the additions in personnel made in
1999 and 1998 to accommodate the growth of the Company.
The increase in occupancy and equipment, client service expense, Federal
Deposit Insurance Corporation ("FDIC") insurance and regulatory assessments and
other operating expenses was related to the growth in the Company's loans,
deposits and trust assets.
INCOME TAXES
The Company's effective income tax rate for 1999 was 32.9%, compared to
35.1% in 1998 and 36.9% in 1997. The effective rates were lower than the
statutory rate of 42% due to the donation of appreciated securities to the
Foundation, state enterprise zone tax credits and tax-exempt income on municipal
securities. The reductions were partially offset by the impact of nondeductible
merger and other related nonrecurring costs. In 1998, the Company was able to
further reduce its effective tax rate through the recognition of certain net
operating losses acquired in its merger with PRB.
A-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FINANCIAL CONDITION
Total assets increased 32.6% to $3.5 billion at December 31, 1999, compared
to $2.7 billion at December 31, 1998. Total assets increased 28.1% in 1998 from
$2.1 billion at December 31, 1997. The increases in 1999 and 1998 were primarily
due to increases in the Company's loan portfolio funded by growth in deposits.
LOANS
Total gross loans increased 40.0% to $2.4 billion at December 31, 1999,
compared to $1.7 billion at December 31, 1998. Total gross loans increased 28.5%
in 1998 from $1.3 billion at year-end 1997. The increases in loan volumes in
1999 and 1998 were primarily due to a strong economy in the Company's market
areas coupled with the business development efforts by the Company's
relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in a market area that
is dependent on the technology and real estate industries and supporting service
companies. Thus, a downturn in these sectors of the economy could adversely
impact the Company's borrowers. 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.
The following table presents the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 900,943 39.2% $ 630,259 38.4% $ 516,636 40.5%
Term Real Estate - Commercial 696,707 30.3 515,685 31.4 374,435 29.4
-----------------------------------------------------------------------------
Total Commercial 1,597,650 69.5 1,145,944 69.8 891,071 69.9
Real estate construction and land 466,577 20.3 291,169 17.8 199,605 15.7
Real estate other 133,256 5.8 104,232 6.4 80,827 6.3
Consumer and other 159,679 6.9 142,183 8.7 139,094 10.9
-----------------------------------------------------------------------------
Total loans, gross 2,357,162 102.6 1,683,528 102.6 1,310,597 102.8
Deferred fees and discounts, net (12,599) (0.5) (11,548) (0.7) (10,892) (0.9)
-----------------------------------------------------------------------------
Total loans, net of deferred fees 2,344,563 102.0 1,671,980 101.9 1,299,705 101.9
Allowance for loan losses (46,451) (2.0) (31,669) (1.9) (25,297) (1.9)
-----------------------------------------------------------------------------
Total loans, net $2,298,112 100.0% $1,640,311 100.0% $1,274,408 100.0%
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------
1996 1995
-----------------------------------------------
(Dollars in thousands) Amount % Amount %
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 430,335 42.5% $ 330,042 42.7%
Term Real Estate - Commercial 285,010 28.1 228,806 29.6
-----------------------------------------------
Total Commercial 715,345 70.6 558,848 72.3
Real estate construction and land 148,262 14.6 86,113 11.2
Real estate other 65,620 6.5 56,795 7.4
Consumer and other 111,744 11.0 92,415 12.0
-----------------------------------------------
Total loans, gross 1,040,971 102.8 794,171 102.8
Deferred fees and discounts, net (10,250) (1.0) (9,054) (1.2)
-----------------------------------------------
Total loans,
net of deferred fees 1,030,721 101.8 785,117 101.6
Allowance for loan losses (17,504) (1.8) (13,005) (1.6)
-----------------------------------------------
Total loans, net $1,013,217 100.0% $ 772,112 100.0%
===============================================
</TABLE>
A-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table presents the maturity distribution of the Company's
commercial, real estate construction and land, term real estate - commercial and
real estate other portfolios and the sensitivity of such loans to changes in
interest rates at December 31, 1999.
<TABLE>
<CAPTION>
Term Real estate
real estate- construction Real estate
(Dollars in thousands) Commercial commercial and land other
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans maturing in:
One year or less:
Fixed rate $174,248 $ 22,855 $ 2,192 $ 7,550
Variable rate 419,961 69,193 368,696 26,993
One to five years:
Fixed rate 62,612 54,494 2,214 1,893
Variable rate 144,687 75,955 48,193 33,488
After five years:
Fixed rate 32,326 285,441 3,722 9,318
Variable rate 67,109 188,769 21,560 54,014
--------------------------------------------------------
Total $900,943 $696,707 $446,577 $133,256
========================================================
</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 and
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.
The following table sets forth information regarding nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $5,682 $3,819 $4,292 $ 7,042 $ 6,204
Accruing loans past due 90 days or more 139 244 251 2,651 957
Restructured loans 807 796 1,533 1,828 1,530
------------------------------------------------------------
Total nonperforming loans 6,628 4,859 6,076 11,521 8,691
Other real estate owned 271 966 1,541 2,224 3,660
------------------------------------------------------------
Total nonperforming assets $6,899 $5,825 $7,617 $13,745 $12,351
============================================================
Nonperforming assets to total loans
and other real estate owned 0.29% 0.35% 0.59% 1.33% 1.57%
Nonperforming assets to total assets 0.19% 0.22% 0.37% 0.83% 0.93%
</TABLE>
At December 31, 1999, the Company had $5.7 million in nonaccrual loans.
Interest income foregone on nonperforming loans totaled $535,000, $254,000 and
$655,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
A-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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
December 31, 1999, OREO acquired through foreclosure had a carrying value of
$271,000 compared to $966,000 at December 31, 1998.
The Company had $807,000 and $796,000 of restructured loans as of December
31, 1999 and 1998, respectively. There were no principal reduction concessions
allowed on restructured loans during 1999 and 1998. Interest income from
restructured loans totaled $45,000, $16,000, and $82,000 for the years ended
December 31, 1999, 1998, and 1997. Foregone interest income, which totaled $0,
$11,000 and $10,000 for the years ended December 31, 1999, 1998 and 1997
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 Company has three classifications for problem loans: "substandard",
"doubtful" and "loss". Substandard loans have one or more defined weakness and
are characterized by the distinct possibility that the Banks will sustain some
loss if the deficiencies are not corrected. Doubtful loans have the weaknesses
of substandard 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.
A-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth the classified loans and other real estate
owned at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------
(Dollars in thousands) 1999 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Substandard $30,282 $ 17,465 $ 20,251
Doubtful 1,850 1,376 2,153
Loss 2 - 49
Other real estate owned 271 966 1,541
-----------------------------------
Classified assets $32,405 $ 19,807 $ 23,994
===================================
Classified to total loans and other real
estate owned 1.38% 1.18% 1.85%
Allowance for loan losses to total classified assets 143.35% 159.89% 105.43%
</TABLE>
With the exception of these classified loans, management was not aware of any
loans outstanding as of December 31, 1999 where the known credit problems of the
borrower would cause management to have 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.
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. The allowance is increased by provisions charged against current
earnings and reduced by net charge-offs. Loans are charged off when they are
deemed to be uncollectible; recoveries are generally recorded only when cash
payments are received.
A-14
<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 years indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Period end loans outstanding $2,357,162 $1,683,528 $1,310,597 $1,040,971 $794,171
Average loans outstanding 1,990,988 $1,426,658 $1,159,834 $ 886,275 $735,358
Allowance for loan losses:
Balance at beginning of period $ 31,669 $ 25,297 $ 17,531 $ 13,005 $ 12,457
Charge-offs:
Commercial (2,751) (2,061) (2,053) (1,362) (2,047)
Term Real Estate - Commercial - (48) (54) (84) (25)
------------------------------------------------------------------------
Total Commercial (2,751) (2,109) (2,107) (1,446) (2,072)
Real estate construction and land - (7) (243) (127) (410)
Real estate other - - - - (49)
Consumer and other (496) (376) (402) (481) (729)
------------------------------------------------------------------------
Total charge-offs (3,247) (2,492) (2,752) (2,054) (3,260)
------------------------------------------------------------------------
Recoveries:
Commercial 1,169 526 269 512 772
Term Real Estate - Commercial 1 11 6 27 -
------------------------------------------------------------------------
Total Commercial 1,170 537 275 539 772
Real estate construction and land 7 - 6 328 19
Real estate other 7 - - - -
Consumer and other 361 85 95 153 246
------------------------------------------------------------------------
Total recoveries 1,545 622 376 1,020 1,037
------------------------------------------------------------------------
Net charge-offs (1,702) (1,870) (2,376) (1,034) (2.223)
Provision charged to income (1) 16,484 8,242 10,142 5,560 2,771
------------------------------------------------------------------------
Balance at end of period $ 46,451 $ 31,669 $ 25,297 $ 17,531 $ 13,005
========================================================================
Net charge-offs to average loans outstanding
during the period 0.09% 0.13% 0.20% 0.12% 0.30%
Allowance as a percentage of average loans outstanding 2.33% 2.22% 2.18% 1.98% 1.77%
Allowance as a percentage of period end loans outstanding 1.98% 1.89% 1.95% 1.70% 1.66%
Allowance as a percentage of non-performing loans 700.83% 651.76% 416.34% 152.17% 149.64%
</TABLE>
----------------
(1) Includes $2.7 million, $183,000, $1.4 million and $800,000 in 1999, 1998,
1997 and 1996, respectively, to conform to the practices of acquired
entities to the Company's reserve methodologies, which are included in
merger and related nonrecurring costs.
The Company employs a systematic methodology for determining its allowance
for loan losses, which includes a monthly review process and monthly adjustment
of the allowance. The Company's process includes a periodic loan by loan review
for loans that are individually evaluated for impairment as well as detailed
reviews of other loans (either individually or in pools). This includes an
assessment of known problem loans, potential problem loans, and other loans that
exhibit indicators of deterioration.
The Company's methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan losses
that management believes is appropriate at each reporting date. Quantitative
factors include the Company's historical loss experience, delinquency and
charge-off trends, collateral values, changes in non-performing loans, and other
factors. Quantitative factors also incorporate known information about
individual loans including borrowers' sensitivity to interest rate movements and
borrowers' sensitivity to quantifiable external factors including commodity and
finished goods prices as well as acts of nature (earthquakes, fires, etc.) that
occur in a particular period.
Qualitative factors include the general economic environment in the
Company's marketplace, and in particular, the state of the technology industries
based in the Silicon Valley and other key industries in the San Francisco Bay
Area. Size and complexity of individual credits in relation to lending
officers' background and experience levels, loan structure, extent and nature of
waivers of existing loan policies and pace of portfolio growth are other
qualitative factors that are considered in the Company's methodology.
A-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's methodology is, and has been consistently followed. However,
as the Company adds new products, increases in complexity, and expands its
geographic coverage, the Company will enhance its methodology to keep pace with
the size and complexity of the loan portfolio. In this regard, the Company has
periodically engaged outside firms to independently assess the Company's
methodology, and on an ongoing basis the Company engages outside firms to
perform independent credit reviews of its loan portfolio. Management believes
that the Company's systematic methodology continues to be appropriate given the
Company's size and level of complexity.
While this methodology utilizes historical and other objective information,
the establishment of the allowance for loan losses and the classification of
loans, is to some extent, based on the judgment and experience of management.
In general, management feels that the allowance for loan losses is adequate as
of December 31, 1999. However, future changes in circumstances, economic
conditions or other factors could cause management to increase or decrease the
allowance for loan losses as necessary.
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories at the dates indicated. The
allocation presented should not be interpreted as an indication that charges to
the allowance for loan losses will be incurred in these amounts or proportions,
or that the portion of the allowance allocated to each loan category represents
the total amounts available for charge-offs that may occur within these
categories. The unallocated portion of the allowance for loan losses and the
total allowance is applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------
% of Category % of Category % of Category
to Gross to Gross to Gross
(Dollars in thousands) Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $15,874 38.22% $11,809 37.44% $ 8,958 39.42%
Term real estate - commercial 7,589 29.56% 3,601 30.63% 2,794 28.57%
----------------------------------------------------------------------------------
Total commercial 23,463 67.78% 15,410 68.07% 11,752 67.99%
Real estate construction and land 4,467 19.79% 3,327 17.30% 2,129 15.23%
Real estate term 2,094 5.65% 1,506 6.19% 1,221 6.17%
Consumer and other 3,837 6.77% 2,696 8.45% 1,907 10.61%
----------------------------------------------------------------------------------
Total allocated 33,861 22,939 17,009
Unallocated 12,590 8,730 8,288
----------------------------------------------------------------------------------
Total $46,451 100.00% $31,669 100.00% $25,297 100.00%
==================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------
1996 1995
-------------------------------------------------------
% of Category % of Category
to Gross to Gross
(Dollars in thousands) Amount Loans Amount Loans
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ 7,472 41.34% $ 5,028 41.56%
Term real estate - commercial 2,053 27.38% 1,709 28.81%
-------------------------------------------------------
Total commercial 9,525 68.72% 6,737 70.37%
Real estate construction and land 2,211 14.24% 1,460 10.84%
Real estate term 665 6.30% 1,109 7.15%
Consumer and other 1,948 10.73% 1,490 11.64%
-------------------------------------------------------
Total allocated 14,349 10,796
Unallocated 3,182 2,209
-------------------------------------------------------
Total $17,531 100.00% $13,005 100.00%
=======================================================
</TABLE>
At December 31, 1999, the allowance for loan losses was $46.5 million,
consisting of a $33.9 million allocated allowance and a $12.6 million
unallocated allowance. The unallocated allowance recognizes the model and
estimation risk associated with the allocated allowances, and 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 at the balance sheet date:
. The strength and duration of the current business cycle and existing general
economic and business conditions affecting our key lending areas; economic
and business conditions affecting our key lending portfolios;
. Seasoning of the loan portfolio, growth in loan volumes and changes in loan
terms; and
. The results of bank regulatory examinations.
A-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
INVESTMENT SECURITIES
The Company's investment portfolio is managed to meet the Company's
liquidity needs through proceeds from scheduled maturities and is utilized for
pledging requirements for deposits of state and political subdivisions and
securities sold under repurchase agreements. The portfolio is comprised of U.S.
Treasury securities, U.S. government agency securities, mortgage-backed
securities, obligations of states and political subdivisions, corporate debt
instruments and a modest amount of equity securities, including Federal Reserve
Bank stock and Federal Home Loan Bank stock. The Company does not include
Federal Funds sold and certain other short-term securities as investment
securities. These other investments are included in cash and cash equivalents.
Investment securities classified as available for sale are recorded at fair
value, while investment securities classified as held to maturity are recorded
at cost. Unrealized gains or losses on available for sale securities, net of the
deferred tax effect, are reported as increases or decreases in shareholders'
equity.
The amortized cost and estimated fair value of investment securities at
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1999 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 19,087 $ - $ (249) $ 18,838
U.S. agency notes 28,849 6 (886) 27,969
Mortgage-backed securities 247,223 95 (8,053) 239,265
Tax-exempt securities 55,690 83 (3,395) 52,378
Corporate securities 114,819 - (11,979) 102,840
---------------------------------------------------------
Total securities available for sale 465,668 184 (24,562) 441,290
---------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,498 - - 1,498
U.S. agency notes 58,489 9 (1,750) 56,748
Mortgage-backed securities 59,524 28 (2,018) 57,534
Tax-exempt securities 72,624 435 (2,835) 70,224
Corporate securities 37,607 15 (1,232) 36,390
---------------------------------------------------------
Total securities held to maturity 229,742 487 (7,835) 222,394
---------------------------------------------------------
Other securities 15,775 8,143 - 23,918
---------------------------------------------------------
Total investment securities $711,185 $8,814 $(32,397) $667,602
=========================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1998 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 24,665 $ 82 $ (27) $ 24,720
U.S. agency notes 48,213 47 (8) 48,252
Mortgage-backed securities 222,359 1,793 (147) 224,005
Tax-exempt securities 52,581 1,006 - 53,587
Corporate securities 68,774 110 (1,121) 67,763
---------------------------------------------------------
Total securities available for sale 416,592 3,038 (1,303) 418,327
---------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 3,762 28 (2) 3,788
U.S. agency notes 46,527 152 (93) 46,586
Mortgage-backed securities 37,967 174 (207) 37,934
Tax-exempt securities 57,575 1,860 (15) 59,420
Corporate securities 27,546 260 (34) 27,773
---------------------------------------------------------
Total securities held to maturity 173,377 2,474 (351) 175,501
---------------------------------------------------------
Other securities 8,090 - - 8,090
---------------------------------------------------------
Total investment securities $598,059 $5,512 $ (1,654) $601,918
=========================================================
</TABLE>
A-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The declines in fair value of the Company's investment portfolio are a result
of the increase in overall interest rates which occurred throughout 1999.
The maturities of investment securities at December 31, 1999 and 1998 are
as follows. Other securities are comprised of equity investments and have no
stated maturity and therefore are excluded from this table.
<TABLE>
<CAPTION>
2001 2005
Through Through 2010 and
(Dollars in thousands) 2000 2004 2009 Thereafter Total
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 5,125 $ 13,962 $ - $ - $ 19,087
U.S. agency notes (1) 1,254 17,812 9,782 - 28,848
Mortgage-backed securities (2) 1,268 6,882 6,993 232,080 247,223
Tax-exempt securities 891 7,775 8,933 38,091 55,690
Corporate securities 996 - - 113,823 114,819
-----------------------------------------------------------------------
Total securities available for sale 9,534 46,431 25,708 383,994 465,667
-----------------------------------------------------------------------
Fair value $ 9,483 $ 46,365 $24,966 $360,476 $441,290
-----------------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,498 - - - 1,498
U.S. agency notes (1) 3,009 40,992 14,488 - 58,489
Mortgage-backed securities (2) 75 2,082 9,082 48,285 59,524
Tax-exempt securities 3,150 12,226 19,443 37,804 72,623
Corporate securities 5,484 17,305 11,769 3,050 37,608
-----------------------------------------------------------------------
Total securities held to maturity 13,216 72,605 54,782 89,139 229,742
-----------------------------------------------------------------------
Fair value 13,228 71,337 53,339 84,490 222,394
-----------------------------------------------------------------------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $22,750 $119,036 $80,490 $473,133 $695,409
=======================================================================
Total fair value $22,711 $117,702 $78,305 $444,966 $663,684
=======================================================================
Weighted average yield-total portfolio 5.32% 5.74% 6.34% 7.18% 6.78%
</TABLE>
(1) Certain notes issued by U.S. agencies may be called, without penalty, at
the discretion of the issuer. This may cause the actual maturities to
differ significantly from the contractual maturity dates.
(2) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
For additional information concerning the investments portfolio, see Note 3
of Notes to Supplemental Consolidated Financial Statements.
DEPOSITS
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached $3.1
billion at December 31, 1999, an increase of 34.4% compared to deposits of $2.3
billion at December 31, 1998. In 1998, deposits increased 27.3% from $1.8
billion at December 31, 1997. The increase in deposits was primarily due to the
continued marketing efforts directed at commercial business clients in the
Company's market areas, coupled with an increase in deposits related to the new
business development activities of the Greater Bay Trust Company and the Venture
Banking Group.
A-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
PBC held deposits from a single customer (the "Special Deposit") of $111.1
million and $89.6 million at December 31, 1999 and 1998, respectively. The
Special Deposit represents the proposed settlement of a class action lawsuit not
involving the Company. Due to the uncertainty of the time the Special Deposit
will remain with PBC, management has invested a significant portion of the
proceeds from this deposit in agency securities with maturities of less than 90
days. As previously discussed, the interest rate spread on the Special Deposit
was approximately 3.10% and 2.25% for December 31, 1999 and 1998, which resulted
in a decrease in overall interest rate spreads.
The Company's noninterest-bearing demand deposit accounts increased 27.3%
to $586.9 million at December 31, 1999, compared to $357.9 million a year
earlier.
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts reached $1.5 billion at year-end 1999, an
increase of 36.7% from $1.1 billion at December 31, 1998. MMDA, NOW and
savings accounts were 56.0% of total deposits at December 31, 1999, as compared
to 54.7% at December 31, 1998.
Time certificates of deposit totaled $606.1 million, or 22.1% of total
deposits, at December 31, 1999, compared to $495.8 million, or 23.0% of total
deposits, at December 31, 1998.
As of December 31, 1999, the Company had $19.3 million in brokered deposits
outstanding. There were no such deposits as of December 31, 1998.
For additional information concerning deposits, see Note 7 of Notes to
Supplemental Consolidated Financial Statements.
OTHER BORROWINGS
At December 31, 1999 other borrowings consisted of Federal Funds purchased
and securities sold under agreements to repurchase, Federal Home Loan Bank
advances, and advances under credit lines. Note 9 of the Notes to the
Supplemental Consolidated Financial Statements provides the amounts outstanding,
the short and long term classification, other borrowings outstanding during the
year and the general terms of these borrowings.
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, sells securities under agreements to repurchase and borrows
overnight Federal Funds.
A-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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
December 31, 1999, the Banks had approximately $74.1 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 December 31, 1999,
Greater Bay did not have any material commitments for capital expenditures.
Net cash provided by operating activities, consisting primarily of net
income, totaled $55.5 million for 1999, $35.7 million for 1998 and $28.3 million
for 1997. Cash used for investing activities totaled $803.3 million in 1999,
$593.0 million in 1998 and $378.8 million in 1997. The funds used for investing
activities primarily represent increases in loans and investment securities for
each year reported.
For the year ended December 31, 1999, net cash provided by financing
activities was $814.5 million, compared to $547.7 million in 1998 and $392.4
million in 1997. Historically, the primary financing activity of the Company has
been through deposits. In 1999, 1998 and 1997, deposit gathering activities
generated cash of $793.1 million, $495.5 million and $352.3 million,
respectively. This represents a total of 97.4%, 90.5% and 89.8% of the
financing cash flows for 1999, 1998 and 1997, respectively. The 1999 increase
in financing activities other than deposits are a result of proceeds from the
sale of stock of $26.5 million, the Company entering into $70.0 million in long-
term low cost repurchase agreements in 1998, and the issuance of TPS of $30.0
million and $20.0 million in 1998 and 1997, respectively, which were issued
principally to provide capital to the Company (see " - Capital Resources",
below).
CAPITAL RESOURCES
Shareholders' equity at December 31, 1999 increased to $238.0 million from
$186.9 million at December 31, 1998 and from $160.3 million at December 31,
1997. Greater Bay paid dividends of $0.48, $0.38 and $0.30 per share in
December 31, 1999, 1998 and 1997, respectively, excluding dividends paid by
subsidiaries prior to the completion of their mergers.
In 1999 the Company issued 535,000 shares of common stock in a private
placement. The proceeds from the offering were $19.0 million, net of issuance
costs. Greater Bay intends to use the net proceeds from the offering for general
corporate purposes.
In 1997, the Company issued $20.0 million in 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.
Under applicable regulatory guidelines, the TPS qualifies as Tier I capital up
to a maximum of 25% of Tier I capital. Any additional portion of TPS would
qualify as Tier 2 capital. As of December 31, 1999, all outstanding TPS
qualified as Tier I capital. As the Company's shareholders' equity increases,
the amount of Tier I capital that can be comprised of TPS will increase.
In 2000, the Company completed two additional offerings of TPS in an
aggregate amount of $50.5 million. The Company also issued 324,324 shares of
common stock in a private placement. The proceeds from the offering were $12.0
million, net of issuance costs. For additional information on these capital
transactions, see Note 23 of Notes to Supplemental Consolidated Financial
Statements.
A-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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
in supplementary capital.
At December 31, 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. The minimum leverage
ratio is 3.0%, although certain banking organizations are expected to exceed
that amount by 1.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company at December 31,
1999 and the two highest levels recognized under these regulations are as
follows:
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
---------------------------------------------------------------------
Company 8.24% 9.70% 11.04%
Well-capitalized 5.00% 6.00% 10.00%
Adequately
capitalized 4.00% 4.00% 8.00%
The Company's leverage ratio was 8.24% at December 31, 1999, compared to
8.18% at December 31, 1998. At December 31, 1999, the Company's risk-based
capital ratios were 9.70% for Tier 1 risk-based capital and 10.75% for total
risk-based capital, compared to 11.04% and 12.69%, respectively, as of December
31, 1998.
In addition, at December 31, 1999, each of the Banks, with the exception of
MDNB, had levels of capital that exceeded the well-capitalized guidelines. For
additional information on the capital levels and capital ratios of the Company
and each of the Banks, see Note 17 of Notes to the Supplemental Consolidated
Financial Statements.
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 its allowance for
loan losses see "--Allowance for Loan Losses" herein.
A-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 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 net portfolio value 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 net portfolio value in the event of hypothetical changes in
interest rates and interest liabilities. If potential changes to net portfolio
value 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 (8 years to 12
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. In addition, the Company has utilized an interest rate swap to
manage the interest rate risk of the TPS II securities. This interest rate swap
is not an "ineffective hedge" and is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in net portfolio value 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. Net portfolio value
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 net portfolio value for these rate
shock levels as of December 31, 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.
Change in Projected Change
Interest Rates Net Portfolio -----------------------------
(Dollars in thousands) (1) Value Dollars Percentage
---------------------------------------------------------------------------
100 basis point rise $ 365,830 $ 7,770 2.2%
Base scenario 358,020 - 0.0%
100 basis point decline 350,469 (7,591) -2.1%
(1) Evaluation excludes MD Bancshares, Coast Bancorp and BSC. See further
discussion below.
The preceding table indicates that at December 31, 1999, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
net portfolio value would be expected to decrease. However, the foregoing
analysis does not attribute additional value to the Company's noninterest-
bearing deposit balances, which have a significantly higher market value during
periods of increasing interest rates.
Net portfolio value is calculated based on the net present value of
estimated cash flows utilizing market prepayment assumptions and market rates of
interest provided by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
A-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Certain shortcomings are inherent in the method of analysis presented in
the computation of net portfolio value. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of the net portfolio value. 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 net portfolio value.
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 December 31, 1999:
<TABLE>
<CAPTION>
Total
Immediate 2 Days To 7 Months to 1 Year 4 Years More than Total Rate Non-Rate
(Dollars in thousands) or One Day 6 Months 12 Months to 3 Years to 5 Years 5 Years Sensitive Sensitive Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash and due from banks 794 $ - $ - $ - $ - $ - 794 $ 136,336 $ 137,130
Short term investments 245,807 - - - - - 245,807 - $ 245,807
Investment securities 80,483 80,544 34,422 143,952 57,872 273,758 671,031 - 671,031
Other securities - - - - - - - 23,918 23,918
Loans 1,247,386 604,043 40,250 136,089 111,276 218,118 2,357,162 - 2,357,162
Loan losses/unearned fees - - - - - - - (59,050) (59,050)
Other assets - - - - - - - 166,032 166,032
-------------------------------------------------------------------------------------------------------
Total assets $1,574,470 $684,587 $ 74,672 $ 280,041 $ 169,148 $ 491,876 $3,274,794 $ 267,236 $3,542,030
=======================================================================================================
Other borrowings - 63,600 - - 37,000 - 100,600 - 100,600
Trust preferred securities - - - - - 49,000 49,000 - 49,000
Other liabilities - - - - - - - 53,730 53,730
Shareholders' equity - - - - - - - 238,003 238,003
-------------------------------------------------------------------------------------------------------
Total liabilities and equity $1,708,430 $634,948 $ 96,037 $ 31,453 $ 39,534 $ 49,035 $2,559,437 $ 982,593 $ 3,542,030
=======================================================================================================
Gap $ (133,960) $ 49,639 $ (21,365) $ 248,588 $ 129,614 $ 442,841 $ 715,357 $(715,357) -
Cumulative Gap $ (133,960) $(84,321) $(105,686) $ 142,902 $ 272,516 $ 715,357 $ 715,357 $ - -
Cumulative Gap/total assets -3.78% -2.38% -2.98% 4.03% 7.69% 20.20% 20.20% - -
</TABLE>
The foregoing table indicates that the Company had a one year gap of
$(105.7) million, or (2.98)% of total assets, at December 31, 1999. In theory,
this would indicate that at December 31, 1999, $105.7 million more in
liabilities than assets would reprice if there were a change in interest rates
over the next 365 days. Thus, if interest rates were to increase, the gap would
tend to result in a lower net interest margin. However, changes in the mix of
earning assets or supporting liabilities can either increase or decrease the net
interest margin without affecting interest rate sensitivity. In addition, the
interest rate spread between an asset and its supporting liability can vary
significantly while the timing of repricing of both the asset and its supporting
liability can remain the same, thus impacting net interest income. This
characteristic is referred to as a basis risk and, generally, relates to the
repricing characteristics of short-term funding sources such as certificates of
deposit.
A-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 December 31, 1999, the analysis indicates that the Company's
net interest income would increase a maximum of 14.1% (excluding MD Bancshares,
Coast Bancorp and BSC) if rates rose 200 basis points immediately and would
decrease a maximum of 13.6%, (excluding MD Bancshares, Coast Bancorp and BSC) if
rates declined 200 basis points immediately. In addition, the results indicate
that notwithstanding the Company's gap position, which would indicate that the
net interest margin increases when rates rise, the Company's net interest margin
increases during rising rate periods due to the basis risk imbedded in the
Company's interest- bearing liabilities.
In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that would impact this analysis. These factors would
include 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.
The above quantified evaluations exclude the impact of MD Bancshares, Coast
Bancorp and BSC because those institutions had not been converted to risk
management system as to net portfolio value and interest rate shock simulation
analysis at December 31, 1999. The Company has performed a preliminary analysis
of MD Bancshares', Coast Bancorp's and BSC's risk profile and has determined
that their exposure to interest rate risk is equal to or lower than that of the
Company as a whole.
YEAR 2000 STATE OF READINESS
The Company's mission critical systems successfully responded to the
century date change. Accordingly, the Company's core banking systems, including
the application software for its deposit, loan and trust computer systems, as
well as the electronic funds transfers system with the Federal Reserve, were
fully operational and accurately processing customer information and
transactions. The Company will continue to monitor its systems and those of its
major vendors, suppliers and clients over the coming months.
RECENT EVENTS
On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former
holding company of MDNB, merged with and into Greater Bay. Upon consummation of
the merger, the outstanding shares of MD Bancshares were converted into an
aggregate of 1,395,499 shares of Greater Bay's stock. The stock was issued to MD
Bancshares' shareholders in a tax-free exchange. The transaction was accounted
for as a pooling-of-interests. The financial information presented herein has
been restated to reflect the merger with MD Bancshares on a pooling-of-interests
basis. As of December 31, 1999, MD Bancshares had $221.1 million in assets,
$205.5 million in deposits and $12.8 million in shareholders' equity. MDNB has
offices located in Danville, Pleasanton and Lafayette, California.
A-24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On May 18, 2000, Greater Bay and Coast Bancorp, the former holding company
of CCB, were merged with and into Greater Bay. Upon consummation of the merger,
the outstanding shares of Coast Bancorp were converted into an aggregate of
approximately 3,070,000 shares of Greater Bay's stock. The stock was issued to
Coast Bancorp's shareholders in a tax-free exchange. The transaction was
accounted for as a pooling-of-interests. The financial information presented
herein has been restated to reflect the merger with Coast Bancorp on a pooling-
of-interests basis. As of December 31, 1999, Coast Bancorp had $370.0 million in
assets, $300.6 million in deposits and $33.0 million in shareholders' equity.
CCB's offices are located in Aptos, Capitola, Santa Cruz, Scotts Valley and
Watsonville, California.
On July 21, 2000, Greater Bay and BSC, was merged with and into Greater
Bay. Upon consummation of the merger, the outstanding shares of BSC were
converted into an aggregate of approximately 2,001,000 shares of Greater Bay's
stock. The stock was issued to BSC's shareholders in a tax-free exchange. The
transaction was accounted for as a pooling-of-interests. The financial
information presented herein has been restated to reflect the merger with BSC on
a pooling-of-interests basis. As of December 31, 1999, BSC had $326.9 million in
assets, $293.7 million in deposits and $31.4 million in shareholders' equity.
BSC has offices in Milpitas, San Jose, Santa Clara and Sunnyvale, California.
On March 21, 2000, Greater Bay, Bank of Petaluma ("BOP") and DKSS Corp.
signed a definitive agreement for a merger between BOP and DKSS, as a result of
which BOP will become a wholly owned subsidiary of Greater Bay. The agreement
provides for BOP shareholders to receive approximately 990,000 shares of Greater
Bay stock subject to 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. The transaction is expected to be completed in the fourth quarter of
2000 subject to BOP's shareholders and regulatory approvals. As of and for the
year ended December 31, 1999, BOP had $8.6 million in net interest income, $2.3
million in net income, $194.7 million in assets, $162.2 million in deposits and
$14.9 million in shareholder's equity.
Assuming the acquisition of BOP had been completed at December 31, 1999,
Greater Bay would have had proforma assets of $3.9 billion, deposits of $3.4
billion and $269.0 million of shareholders' equity on a pooled basis.
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
issued an exposure draft 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.
A-25
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------
(Dollars in thousands) 1999* 1998*
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 137,130 $ 126,217
Federal funds sold 216,300 112,020
Other short term securities 29,507 77,960
-------------------------------------
Cash and cash equivalents 382,937 316,197
Investment securities:
Available for sale, at fair value 441,290 418,327
Held to maturity, at amortized cost (fair value 1999: $222,394
1998: $175,501) 229,742 173,377
Other securities 23,918 8,090
-------------------------------------
Investment securities 694,950 599,794
Total loans:
Commercial 900,943 630,259
Term real estate - commercial 696,707 515,685
-------------------------------------
Total commercial 1,597,650 1,145,944
Real estate construction and land 466,577 291,169
Real estate other 133,256 104,232
Consumer and other 159,679 142,183
Deferred loan fees and discounts (12,599) (11,548)
-------------------------------------
Total loans, net of deferred fees 2,344,563 1,671,980
Allowance for loan losses (46,451) (31,669)
-------------------------------------
Total loans, net 2,298,112 1,640,311
Property, premises and equipment 35,958 31,354
Interest receivable and other assets 130,073 83,030
-------------------------------------
Total assets $ 3,542,030 $ 2,670,686
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 3,100,697 $ 2,307,582
Other borrowings 100,600 93,845
Subordinated debt - 3,000
Other liabilities 53,731 30,376
-------------------------------------
Total liabilities 3,255,028 2,434,803
-------------------------------------
Company obligated mandatorily redeemable cumulative trust
preferred securities of subsidiary trusts holding solely junior
subordinated debentures 49,000 49,000
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;
18,989,511 and 17,871,980 shares issued and outstanding as
of December 31, 1999 and 1998, respectively 139,754 113,165
Accumulated other comprehensive (loss) (8,055) 349
Retained earnings 106,303 73,369
-------------------------------------
Total shareholders' equity 238,002 186,883
-------------------------------------
Total liabilities and shareholders' equity $ 3,542,030 $ 2,670,686
=====================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
A-26
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
(Dollars in thousands, except per share amounts) 1999* 1998* 1997*
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 187,670 $ 146,398 $ 122,114
Interest on investment securities:
Taxable 33,937 27,729 17,940
Tax - exempt 5,866 4,643 3,074
--------------------------------------------------
Total interest on investment securities 39,803 32,372 21,014
Other interest income 14,231 13,674 11,863
--------------------------------------------------
Total interest income 241,704 192,444 154,991
--------------------------------------------------
INTEREST EXPENSE
Interest on deposits 80,438 62,384 48,972
Interest on long term borrowings 4,269 3,169 1,808
Interest on other borrowings 5,266 6,251 3,282
--------------------------------------------------
Total interest expense 89,973 71,804 54,062
--------------------------------------------------
Net interest income 151,731 120,640 100,929
Provision for loan losses 13,739 8,059 8,791
--------------------------------------------------
Net interest income after provision for loan losses 137,992 112,581 92,138
--------------------------------------------------
OTHER INCOME
Service charges and other fees 6,931 5,869 5,812
Loan and international banking fees 4,015 2,487 2,442
Trust fees 2,990 2,473 2,049
ATM network revenue 2,986 2,771 2,795
Gain on sale of SBA loans 2,058 3,490 2,189
Gain (loss) on investments, net 49 421 (13)
Warrant income, net 14,508 945 1,162
Other income 8,247 2,299 1,859
--------------------------------------------------
Total 41,784 20,755 18,295
--------------------------------------------------
OPERATING EXPENSES
Compensation and benefits 53,295 44,645 39,365
Occupancy and equipment 16,523 12,469 11,075
Contribution to the GBB Foundation and related expenses, net 12,160 1,341 -
Merger and other related nonrecurring costs 10,331 2,661 3,333
Recovery of legal settlement - - (1,700)
Other expenses 24,900 23,446 20,775
--------------------------------------------------
Total operating expenses 117,209 84,562 72,848
--------------------------------------------------
Net income before provision for income taxes and
extraordinary items 62,567 48,774 37,585
Provision for income taxes 20,599 17,105 13,866
--------------------------------------------------
Net income before extraordinary items 41,968 31,669 23,719
Extraordinary items (88) - -
--------------------------------------------------
Net income $ 41,880 $ 31,669 $ 23,719
==================================================
Net income per share - basic** $ 2.29 $ 1.79 $ 1.38
==================================================
Net income per share - diluted** $ 2.17 $ 1.67 $ 1.30
==================================================
</TABLE>
* Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
**Restated to reflect 2-for-1 stock split declared for shareholders of record
at April 30, 1998.
See notes to supplemental consolidated financial statements.
A-27
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
(Dollars in thousands) 1999* 1998* 1997*
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 41,880 $ 31,669 $ 23,719
-----------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (net of taxes
of $(7,381), $255, and $613 for the years ended December 31,
1999, 1998 and 1997, respectively) (10,614) (132) 893
Less: reclassification adjustment for gains (losses) included in
net income (net of taxes of $20, $173 and $(5) for the
years ended December 31, 1999, 1998 and 1997,
respectively) 29 248 (8)
-----------------------------------------
Net change (10,585) 116 885
Cash flow hedge:
Cumulative transition effect of adopting SFAS No. 133
(net of taxes of $(744)) as of October 1, 1998 - (1,063) -
Change in market value of hedge during the period
(net of taxes of $1,092 and $294 for the years ended December 31,
1999 and 1998, respectively) 2,325 418 -
Less: reclassification adjustment for swap settlements
in net income (net of taxes of $(60) and $(23) for the years ended
December 31, 1999 and 1998, respectively) (144) (32) -
-----------------------------------------
Net change 2,181 (677) -
Other comprehensive income (loss) (8,404) (561) 885
-----------------------------------------
Comprehensive income $ 33,476 $ 31,108 $ 24,604
=========================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
A-28
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Accumulated Other Total
For the years ended December 31, 1999, 1998 and 1997 -------------------------- Comprehensive Retained Shareholders'
(Dollars in thousands, except per share amounts) Shares** Amount Income (Loss) Earnings Equity
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Greater Bay Bancorp, prior to pooling 6,477,774 $ 34,884 $ 71 $ 9,727 $ 44,682
Shares issued to Peninsula Bank of Commerce
shareholders 1,295,216 7,141 - - 7,141
Peninsula Bank of Commerce retained earnings prior to
pooling - - (53) 6,186 6,133
Shares issued to Pacific Rim Bancorporation
shareholders 950,748 8,000 - - 8,000
Pacific Rim Bancorporation retained earnings prior to
pooling - - (108) 879 771
Shares issued to Pacific Business Funding Corporation
shareholders 298,000 51 - - 51
Pacific Business Funding Corporation retained earnings prior to
pooling - - - 59 59
Shares issued to Bay Area Bancorp shareholders 1,164,427 4,143 - - 4,143
Bay Area Bancorp retained earnings prior to pooling - - (5) 5,143 5,138
Shares issued to Bay Commercial Services shareholders 735,723 3,662 - - 3,662
Bay Commercial Services rentained earnings prior to pooling - - (15) 5,771 5,756
Shares issued to Mt.Diablo Bancshares shareholders 857,871 5,939 - - 5,939
Mt. Diablo Bancshares rentained earnings prior to pooling - - 5 (403) (398)
Shares issued to Coast Bancorp shareholders 2,800,964 11,041 - - 11,041
Coast Bancorp retained earnings prior to pooling - - 130 12,022 12,152
Shares issued to Bank of Santa Clara shareholders 1,662,456 10,330 - - 10,330
Bank of Santa Clara retained earnings prior to pooling - - - 11,749 11,749
--------------------------------------------------------------------
Balance, December 31, 1996, restated to reflect pooling 16,243,179 85,191 25 51,133 136,349
Net income - - - 23,719 23,719
Other comprehensive income, net of taxes - - 885 - 885
Stock offering by Mt. Diablo Bancshares 285,960 2,555 - - 2,555
Stock options exercised, including related tax benefit 485,940 3,359 - (160) 3,199
Stock issued in Employee Stock Purchase Plan 30,332 347 - - 347
401(k) employee stock purchase 36,152 531 - - 531
Stock repurchase by Bay Area Bancshares and Coast Bancorp (7,612) (119) - (100) (219)
Stock dividend by Bank of Santa Clara 103,572 2,752 - (2,752) -
Pacific Business Funding Corporation distribution - - - (208) (208)
Cash dividend $0.38 per share*** - - - (6,906) (6,906)
--------------------------------------------------------------------
Balance, December 31, 1997* 17,177,323 94,616 910 64,726 160,252
Net income - - - 31,671 31,671
Other comprehensive loss, net of taxes - - (561) - (561)
Stock options exercised, including related tax benefit 323,839 4,542 - (32) 4,510
Stock issued in Employee Stock Purchase Plan 29,670 656 - - 656
401(k) employee stock purchase 36,483 1,060 - - 1,060
Stock repurchase by Bay Area Bancshares, Bay Commercial
Services and Coast Bancorp (84,984) (604) - (2,190) (2,794)
Pacific Business Funding Corporation distribution - - - (1,163) (1,163)
Stock dividend by Coast Bancorp and Bank of Santa Clara 386,988 12,822 (12,822) -
Stock issued in Dividend Reinvestment Plan 2,661 73 - - 73
Cash dividend $0.35 per share*** - - - (6,821) (6,821)
--------------------------------------------------------------------
Balance, December 31, 1998* 17,871,980 113,165 349 73,369 186,883
Net income - - - 41,880 41,880
Other comprehensive loss, net of taxes - - (8,404) - (8,404)
Stock options exercised, including related tax benefit 489,541 5,009 - (59) 4,950
Stock issued in Employee Stock Purchase Plan 41,651 1,031 - - 1,031
401(k) employee stock purchase 38,005 1,205 - - 1,205
Stock issued in Dividend Reinvestment Plan 13,334 383 - - 383
Pacific Business Funding Corporation distribution - - - (40) (40)
Stock issued through private placement 535,000 18,961 - - 18,961
Cash dividend $0.46 per share*** - - - (8,847) (8,847)
--------------------------------------------------------------------
Balance, December 31, 1999* 18,989,511 $139,754 $ (8,055) $106,303 $238,002
====================================================================
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
** Restated to reflect 2-for-1 stock split declared for shareholders of
record at April 30, 1998.
*** Excluding dividends paid by Greater Bays subsidiaries prior to the
completion of their mergers with Greater Bay, Greater Bay paid dividends of
$0.48, $0.38 and $0.30 per share in December 31, 1999, 1998 and 1997,
respectively.
</TABLE>
A-29
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
(Dollars in thousands) 1999* 1998* 1997*
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows - operating activities
Net income $ 41,880 $ 31,669 $ 23,719
Reconcilement of net income to net cash from operations:
Provision for loan losses 16,484 8,242 10,142
Depreciation and amortization 6,362 3,958 3,313
Deferred income taxes (7,022) (2,993) (4,478)
(Gain) loss on sale of investments, net (49) (421) 13
Gain on sale of building (535) - -
Proceeds from loan sales 74,420 82,869 48,255
Origination of loans held for sale (74,514) (84,432) (52,827)
Changes in:
Accrued interest receivable and other assets (31,560) (13,312) (7,281)
Accrued interest payable and other liabilities 25,554 7,534 5,252
Deferred loan fees and discounts, net 4,505 2,551 2,224
--------------- ---------------- ----------------
Operating cash flows, net 55,525 35,665 28,332
--------------- ---------------- ----------------
Cash flows - investing activities
Maturities and partial paydowns on investment securities:
Held to maturity 93,248 89,893 43,260
Available for sale 85,518 574,340 104,969
Purchase of investment securities:
Held to maturity (126,506) (132,669) (26,910)
Available for sale (188,412) (960,007) (249,753)
Other securities (14,143) (3,756) (284)
Proceeds from sale of available for sale securities 37,964 244,301 22,438
Loans, net (675,949) (377,140) (262,166)
Purchase of property, premises and equipment (8,454) (6,344) (9,823)
Sale of banking building 2,637 - -
Investment in other real estate owned - 1,817 (500)
Purchase of insurance policies (9,206) (23,480) -
--------------- ---------------- ----------------
Investing cash flows, net (803,303) (593,045) (378,769)
--------------- ---------------- ----------------
Cash flows - financing activities
Net change in deposits 793,114 495,524 352,294
Net change in other borrowings - short term 5,515 (41,105) 18,293
Proceeds from other borrowings - long term 2,015 70,000 3,025
Principal repayment - long term borrowings (3,775) (2,265) (865)
Proceeds from company obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely junior
subordinated debentures - 30,000 20,000
Proceeds from sale of common stock 26,495 4,993 6,659
Repurchase of common stock - (2,651) (130)
Cash dividends (8,846) (6,821) (6,907)
--------------- ---------------- ----------------
Financing cash flows, net 814,518 547,675 392,369
--------------- ---------------- ----------------
Net change in cash and cash equivalents 66,740 (9,705) 41,932
Cash and cash equivalents at beginning of period 316,197 325,902 283,970
--------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 382,937 $ 316,197 $ 325,902
=============== ================ ================
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 95,904 $ 68,684 $ 53,292
=============== ================ ================
Income taxes $ 18,011 $ 19,498 $ 19,009
=============== ================ ================
Non-cash transactions:
Additions to other real estate owned $ - $ 450 $ 1,723
=============== ================ ================
Transfer of appreciated securities to Greater Bay
Bancorp Foundation $ 560 $ 1,341 $ -
=============== ================ ================
*Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
</TABLE>
A-30
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the
"Company" on a consolidated basis) is a bank holding company operating Bank of
Santa Clara ("BSC"), Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast
Commercial Bank ("CCB"), Cupertino National Bank ("CNB"), Golden Gate Bank
("Golden Gate"), Mt. Diablo National Bank ("MDNB"), Mid-Peninsula Bank ("MPB")
and Peninsula Bank of Commerce ("PBC"). The Company also owns GBB Capital I and
GBB Capital II, both of which are Delaware statutory business trusts, which were
formed for the exclusive purpose of issuing and selling Cumulative Trust
Preferred Securities ("TPS"). Greater Bay also includes the operating
divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont
Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater
Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay
International Banking Division, Greater Bay Trust Company, Pacific Business
Funding and the Venture Banking Group. The Company provides a wide range of
commercial banking services to small and medium-sized businesses, real estate
developers, property managers, business executives, professionals and other
individuals. The Company operates throughout Silicon Valley, the San Francisco
Peninsula and the East Bay Region, with 33 offices located in Aptos, Blackhawk,
Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Milpitas,
Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Leandro, San
Mateo, San Ramon, Santa Clara, Santa Cruz, Scotts Valley, Sunnyvale, Walnut
Creek, and Watsonville.
All of the Company's mergers were accounted for as a pooling-of-interests
and, accordingly, all of the financial information for the Company for the
periods prior to the mergers had been restated as if the mergers had occurred at
the beginning of the earliest reporting period presented.
CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Greater Bay and
its wholly owned subsidiaries, BSC, BAB, BBC, CCB, CNB, Golden Gate, MDNB, MPB,
PBC, GBB Capital I and GBB Capital II and its operating divisions. All
significant intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the 1999 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.
A-31
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, Federal Funds sold and agency securities
with original maturities of less than ninety days. Generally, Federal Funds are
sold for one-day periods. As discussed in Note 7, PBC holds $111.1 million in
one demand deposit account whose funds are comprised of proceeds from a lawsuit
settlement. Due to the uncertainty of the time this special deposit (the
"Special Deposit") will remain with PBC, management has invested a significant
portion of the proceeds in agency securities with maturities of less than 90
days. These securities have been classified as cash and equivalents. BSC, BAB,
BBC, CCB, CNB, Golden Gate, MDNB, MPB and PBC are required by the Federal
Reserve System to maintain noninterest-earning cash reserves against certain of
their deposit accounts. At December 31, 1999, the required combined reserves
totaled approximately $4.5 million.
INVESTMENT SECURITIES
The Company classifies its investment securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Investment securities classified as
held to maturity are reported at amortized cost; available for sale securities
are reported at fair value with net unrealized gains and losses reported (net of
taxes) as a component of shareholders' equity. The Company does not have any
trading securities.
A decline in the fair value of any available for sale or held to maturity
security below cost that is deemed other than temporary, results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method. Dividend
and interest income is recognized when earned. Realized gains and losses for
securities classified as available for sale and held to maturity are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
Required investments in Federal Reserve Bank and Federal Home Loan Bank stocks
for the Banks are classified as other securities and are recorded at cost.
A-32
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
LOANS
Loans held for investment are carried at amortized cost. The Company's loan
portfolio consists primarily of commercial and real estate loans generally
collateralized by first and second deeds of trust on real estate as well as
business assets and personal property.
Interest income is accrued on the outstanding loan balances using the
simple interest method. Loans are generally placed on nonaccrual status when the
borrowers are past due 90 days and when full payment of principal or interest is
not expected. At the time a loan is placed on nonaccrual status, any interest
income previously accrued but not collected is generally reversed and
amortization of deferred loan fees is discontinued. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
The Company charges loan origination and commitment fees. Net loan origination
fees and costs are deferred and amortized to interest income over the life of
the loan, using the effective interest method. Loan commitment fees are
amortized to interest income over the commitment period.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the consolidated statements of operations. Other loan fees and
charges representing service costs for the repayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when earned.
SALE AND SERVICING OF SMALL BUSINESS ADMINISTRATION ("SBA") LOANS
The Company originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Company generally
sells the guaranteed portion of the majority of the loans to an investor and
retains the unguaranteed portion and servicing rights in its own portfolio.
Funding for the SBA programs depend on annual appropriations by the U.S.
Congress.
Gains on these sales are earned through the sale of the guaranteed portion of
the loan for an amount in excess of the adjusted carrying value of the portion
of the loan sold. The Company allocates the carrying value of such loans between
the portion sold, the portion retained and a value assigned to the right to
service the loan. The difference between the adjusted carrying value of the
portion retained and the face amount of the portion retained is amortized to
interest income over the life of the related loan using a method which
approximates the interest method.
ALLOWANCE FOR LOAN LOSSES
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), on January 1,
1995. Under these standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Under these standards, any
allowance on impaired loans is generally based on one of three methods. It
requires that impaired loans be measured at either, 1) the present value of
expected cash flows at the loan's effective interest rate, 2) the loan's
observable market price, or 3) the fair value of the collateral of the loan. In
general, these statements are not applicable to large groups of smaller-balance
loans that are collectively evaluated for impairment such as credit cards,
residential mortgage, consumer installment loans and certain small business
loans. Income recognition on impaired loans conforms to the method the Company
uses for income recognition on nonaccrual loans.
A-33
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The allowance for loan losses is maintained at a level deemed appropriate
by management to adequately provide for known losses in the loan portfolio. The
allowance is based upon a number of factors, including prevailing and
anticipated economic trends, industry experience, estimated collateral values,
management's assessment of credit risk inherent in the portfolio, delinquency
trends, historical loss experience, specific problem loans and other relevant
factors.
Additions to the allowance, in the form of provisions, are reflected in
current operating results, while charge-offs to the allowance are made when a
loss is determined to have occurred. Because the allowance for loan losses is
based on estimates, ultimate losses may vary from the current estimates.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") consists of properties acquired through
foreclosure and is stated at the lower of carrying value or fair value less
estimated costs to sell. Development and improvement costs relating to the OREO
are capitalized. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to current earnings with a provision
for losses on foreclosed property in the period in which they are identified.
The resulting allowance for OREO losses is decreased when the property is sold.
Operating expenses of such properties, net of related income, are included in
other expenses. Gains and losses on the disposition of OREO are included in
other income.
PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets, which is determined by asset
classification, as follows:
Buildings 40 years
Building improvements 10 years
Furniture and fixtures 7 years
Automobiles 5 years
Computer equipment 2 - 5 years
Other equipment 2 - 7 years
Amortization of leasehold improvements is computed on a straight-line basis
over the shorter of the lease term or the estimated useful lives of the asset,
which is generally 10 years.
INCOME TAXES
Deferred incomes taxes reflect the estimated future tax effects of temporary
differences between the amount of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws and regulations.
A-34
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
DERIVATIVES AND HEDGING ACTIVITIES
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), effective October 1, 1998. In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a net-of-tax cumulative-effect-type adjustment of $1.1 million in accumulated
other comprehensive income to recognize at fair value all derivatives that are
designated as cash-flow hedging instruments. There were no net gains or losses
on derivatives that had been previously deferred or gains and losses on
derivatives that were previously deferred as adjustments to the carrying amount
of hedged items.
All derivatives are recognized on the balance sheet at their fair value.
On the date the derivative contract is entered into, the Company designates the
derivative as a hedge of a forecasted transaction or a hedge of the variability
of cash flows to be received or paid related to a recognized asset or liability
("cash flow" hedge). Changes in the fair value of a derivative that is highly
effective as, and that is designated and qualifies as, a cash-flow hedge are
recorded in other comprehensive income, until earnings are affected by the
variability of cash flows (e.g., when periodic settlements on a variable-rate
asset or liability are recorded in earnings).
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash-flow hedges to specific
liabilities on the balance sheet. The Company also formally assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge
or that it has ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively when (1) it is determined that the derivative is
no longer effective in offsetting changes in the cash flows of a hedged item;
(2) the derivative expires or is sold, terminated, or exercised; or (3)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate. In these situations where hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet, with changes in its fair value recognized in current-period earnings.
All gains or losses that were accumulated in other comprehensive income will be
recognized immediately in earnings upon the discontinuance of hedge accounting.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted 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>
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income (Loss)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - December 31, 1997 $ 910 $ - $ 910
Other comprehensive income 1998 116 (677) (561)
----------------------------------------------------
Balance - December 31, 1998 1,026 (677) 349
Other comprehensive income 1999 (10,585) 2,181 (8,404)
----------------------------------------------------
Balance - December 31, 1999 $ (9,559) $ 1,504 $ (8,055)
====================================================
</TABLE>
A-35
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
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-MERGER
COMPLETED MERGERS
On July 21, 2000, BSC merged with and into Greater Bay. Upon consummation
of the merger, the outstanding shares of BSC were converted into an aggregate of
2,001,000 shares of Greater Bay's stock. The transaction was accounted for as a
pooling-of-interests. The financial information presented herein has been
restated to reflect the merger with BSC on a pooling-of-interests basis.
On May 18, 2000, Coast Bancorp, the holding company of CCB, was merged with
and into Greater Bay. Upon consummation of the merger, the outstanding shares
of Coast Bancorp were converted into an aggregate of approximately 3,070,000
shares of Greater Bay's stock. The transaction was accounted for as a pooling-
of-interests. The financial information presented herein has been restated to
reflect the merger with Coast Bancorp on a pooling-of-interests basis.
On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former
holding company of Mt. Diablo National Bank ("MDNB"), merged with and into
Greater Bay. Upon consummation of the merger, the outstanding shares of MD
Bancshares were converted into an aggregate of 1,395,499 shares of Greater Bay's
stock. The transaction was accounted for as a pooling-of-interests. The
financial information presented herein has been restated to reflect the merger
with MD Bancshares on a pooling-of-interests basis.
On October 15, 1999, Bay Commercial Services ("BCS"), the parent of Bay
Bank of Commerce, merged with and into Greater Bay. Upon consummation of the
merger, the outstanding shares of BCS were converted into an aggregate of
907,240 shares of Greater Bay's stock. The stock was issued to former BCS
shareholders, in a tax-free exchange accounted for as a pooling-of-interests.
On May 21, 1999, Bay Area Bancshares ("BA Bancshares"), the former holding
company of Bay Area Bank, merged with and into Greater Bay. Upon consummation
of the merger, the outstanding shares of BAB were converted into an aggregate of
1,399,321 shares of Greater Bay's stock. The stock was issued to former BA
Bancshares shareholders, in a tax-free exchange accounted for as a pooling-of-
interests.
On August 31, 1998, Pacific Business Funding Corporation ("PBFC"), an
asset-based specialty finance company, merged with a subsidiary of Greater Bay.
Upon consummation of the merger, the outstanding shares of PBFC were converted
into an aggregate of 298,000 shares of Greater Bay's stock. The stock was
issued to former PBFC shareholders, in a tax-free exchange accounted for as a
pooling-of-interests.
On May 8, 1998, Pacific Rim Bancorporation ("PRB"), the former holding
company of Golden Gate, merged with and into a subsidiary of Greater Bay. Upon
consummation of the merger, the outstanding shares of PRB were converted into an
aggregate of 950,748 shares of Greater Bay's stock. The stock was issued to
former PRB's sole shareholder in a tax-free exchange accounted for as a pooling-
of-interests.
A-36
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
On December 23, 1997, PBC merged with a subsidiary of Greater Bay. Upon
consummation of the merger, the outstanding shares of PBC were converted into an
aggregate of 1,328,000 shares (as adjusted to reflect the 2-for-1 stock split)
of Greater Bay's stock. The stock was issued to former PBC shareholders, in a
tax-free exchange accounted for as a pooling-of-interests.
PENDING MERGERS (UNAUDITED)
On March 21, 2000, Greater Bay, Bank of Petaluma ("BOP") and DKSS Corp.
signed a definitive agreement for a merger between BOP and DKSS, as a result of
which BOP will become a wholly owned subsidiary of Greater Bay. The agreement
provides for BOP shareholders to receive approximately 990,000 shares of Greater
Bay stock subject to 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. The transaction is expected to be completed in the fourth quarter of
2000 subject to BOP's shareholders and regulatory approvals. As of and for the
year ended December 31, 1999, BOP had $8.6 million in net interest income, $2.3
million in net income, $194.7 million in assets, $162.2 million in deposits and
$14.9 million in shareholder's equity.
A-37
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table sets forth the separate results of operations for
Greater Bay, BA Bancshares, BCS, PBFC, PRB, MD Bancshares, Coast Bancorp and
BSC for the periods indicated:
Year Ended
December 31, Net Interest Income Net Income
------------ ------------------- ----------
(Dollars in thousands)
1999
----
Greater Bay $ 103,732 $ 27,711
MD Bancshares 10,009 2,827
Coast Bancorp 20,028 6,939
BSC 17,962 4,403
----------- -----------
Combined $ 151,731 $ 41,880
=========== ===========
1998
----
Greater Bay $ 65,448 $ 16,578
BA Bancshares 8,170 2,365
BCS 6,107 1,215
----------- -----------
Subtotal 79,725 20,158
MD Bancshares 7,363 1,396
Coast Bancorp 17,363 6,161
BSC 16,189 3,954
----------- -----------
Combined $ 120,640 $ 31,669
=========== ===========
1997
----
Greater Bay $ 47,776 $ 10,013
PRB 4,750 996
PBFC 1,942 610
BA Bancshares 6,781 1,805
BCS 5,389 1,062
----------- -----------
Subtotal 66,638 14,486
MD Bancshares 4,295 714
Coast Bancorp 15,183 5,155
BSC 14,813 3,364
----------- -----------
Combined $ 100,929 $ 23,719
=========== ===========
Assuming the acquisitions of MD Bancshares, Coast Bancorp, BSC and BOP had
been completed at December 31, 1999, Greater Bay would have had, on a pooled
basis, 1999 proforma net interest income of $162.4 million and net income, on a
pooled basis, of $44.1 million.
A-38
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
In all mergers, certain reclassifications were made to conform to the
Companies' 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.
<TABLE>
<CAPTION>
Bank of Santa Clara Coast Bancorp MD Bancshares BCS
Twelve months ended Twelve months ended Twelve months ended Nine months ended
(Dollars in thousands) December 31, 1999 December 31, 1999 December 31, 1999 September 30, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Interest Income:
Greater Bay Bancorp $ 133,769 $ 113,741 $ 103,732 $ 68,498
Acquired Entity 17,962 20,028 10,009 2,007
---------------- ---------------- ---------------- -------------
Combined $ 151,731 $ 133,769 $ 113,741 $ 70,505
================ ================ ================ =============
Net Income:
Greater Bay Bancorp $ 37,477 $ 30,538 $ 27,711 $ 17,033
Acquired Entity 4,403 6,939 2,827 486
---------------- ---------------- ---------------- -------------
Combined $ 41,880 $ 37,477 $ 30,538 $ 17,519
================ ================ ================ =============
BA Bancshares PBFC PRB PBC
Three months ended Six months ended Three months ended Nine months ended
March 31, 1999 June 30, 1998 March 31, 1998 September 30, 1997
------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income:
Greater Bay Bancorp $ 18,360 $ 30,077 $ 13,366 $ 27,922
Acquired Entity 2,180 1,154 1,285 6,851
---------------- ---------------- ---------------- ------------
Combined $ 20,540 $ 31,231 $ 14,651 $ 34,773
================ ================ ================ ============
Net Income:
Greater Bay Bancorp $ 5,058 $ 6,628 $ 3,646 $ 6,097
Acquired Entity 644 344 60 2,573
---------------- ---------------- ---------------- ------------
Combined $ 5,702 $ 6,972 $ 3,706 $ 8,670
================ ================ ================ ============
There were no significant transactions between the Company and any of the acquired entities prior to the mergers. All
intercompany transactions have been eliminated.
</TABLE>
A-39
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 3-INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities is
summarized below:
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1999 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 19,087 $ - $ (249) $ 18,838
U.S. agency notes 28,849 6 (886) 27,969
Mortgage-backed securities 247,223 95 (8,053) 239,265
Tax-exempt securities 55,690 83 (3,395) 52,378
Corporate securities 114,819 - (11,979) 102,840
------------------------------------------------------------------------
Total securities available for sale 465,668 184 (24,562) 441,290
------------------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,498 - - 1,498
U.S. agency notes 58,489 9 (1,750) 56,748
Mortgage-backed securities 59,524 28 (2,018) 57,534
Tax-exempt securities 72,624 435 (2,835) 70,224
Corporate securities 37,607 15 (1,232) 36,390
Total securities held to maturity ------------------------------------------------------------------------
229,742 487 (7,835) 222,394
------------------------------------------------------------------------
Other securities 15,775 8,143 - 23,918
------------------------------------------------------------------------
Total investment securities $711,185 $8,814 $(32,397) $687,602
========================================================================
Gross Gross
As of December 31, 1998 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 24,665 $ 82 $ (27) $ 24,720
U.S. agency notes 48,213 47 (8) 48,252
Mortgage-backed securities 222,359 1,793 (147) 224,005
Tax-exempt securities 55,581 1,006 - 53,587
Corporate securities 68,774 110 (1,121) 67,763
------------------------------------------------------------------------
Total securities available for sale 416,592 3,038 (1,303) 418,327
------------------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 3,762 28 (2) 3,788
U.S. agency notes 46,527 152 (93) 46,586
Mortgage-backed securities 37,967 174 (207) 37,934
Tax-exempt securities 57,575 1,860 (15) 59,420
Corporate securities 27,546 260 (34) 27,773
Total securities held to maturity ------------------------------------------------------------------------
173,377 2,474 (351) 175,501
------------------------------------------------------------------------
Other securities 8,090 - - 8,090
------------------------------------------------------------------------
Total investment securities $598,059 $5,512 $ (1,654) $601,918
========================================================================
</TABLE>
A-40
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table shows amortized cost and estimated fair value of the
Company's investment securities by year of maturity as of December 31, 1999.
<TABLE>
<CAPTION>
2001 2005
Through Through 2010 and
(Dollars in thousands) 2000 2004 2009 Thereafter Total
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 5,125 $ 13,962 $ - $ - $ 19,087
U.S. agency notes (1) 1,254 17,812 9,782 - 28,848
Mortgage-backed securities (2) 1,268 6,882 6,993 232,080 247,223
Tax-exempt securities 891 7,775 8,933 38,091 55,690
Corporate securities 996 - - 113,823 114,819
--------------------------------------------------------------------------------
Total securities available for sale 9,534 46,431 25,708 383,994 465,667
--------------------------------------------------------------------------------
Fair value $ 9,483 $ 46,365 $ 24,966 $ 360,476 $ 441,290
--------------------------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,498 - - - 1,498
U.S. agency notes (1) 3,009 40,992 14,488 - 58,489
Mortgage-backed securities (2) 75 2,082 9,082 48,285 59,524
Tax-exempt securities 3,150 12,226 19,443 37,804 72,623
Corporate securities 5,484 17,305 11,769 3,050 37,608
--------------------------------------------------------------------------------
Total securities held to maturity 13,216 72,605 54,782 89,139 229,742
--------------------------------------------------------------------------------
Fair value 13,228 71,337 53,339 84,490 222,394
--------------------------------------------------------------------------------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $ 22,750 $ 119,036 $ 80,490 $ 473,133 $ 695,409
================================================================================
Total fair value $ 22,711 $ 117,702 $ 78,305 $ 444,966 $ 663,684
================================================================================
Weighted average yield-total portfolio 5.32% 5.74% 6.34% 7.18% 6.78%
(1) Certain notes issued by U.S. agencies may be called, without penalty, at the discretion of the
issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates.
(2) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed
securities may differ due to principal prepayments.
</TABLE>
Investment securities with a carrying value of $308.1 million and
$187.2 million were pledged to secure deposits, borrowings and for other
purposes as required by law or contract at December 31, 1999 and 1998,
respectively.
Other securities includes unsold shares received through the exercise of
warrant received from clients, equity securities received in settlement of loans
and, investments in the FRB and the FHLB required in order to maintain
membership and support activity levels.
A-41
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Proceeds and realized losses and gains on sales of investment securities
for the years ended December 31, 1999, 1998 and 1997 are presented below:
(Dollars in thousands) 1999 1998 1997
---------------------------------------------------------------------------
Proceeds from sale of
available for sale securities (1) $37,964 $244,301 $22,438
Available for sale
securities-gains (losses) (2) $ 49 $ 421 $ (13)
(1) Proceeds from the sale of available for sale securities excludes
$15.3 million related to the sale of equity securities classified as
available for sale which were acquired through the execution of a warrant
received from clients.
(2) Warrant income includes additional gains of $21.2 million related to equity
securities classified as available for sale which were acquired through the
execution of warrants received from clients.
NOTE 4--LOANS AND ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for
the years ended December 31, 1999, 1998 and 1997:
(Dollars in thousands) 1999 1998 1997
---------------------------------------------------------------------------
Balance, January 1 $31,669 $25,297 $17,531
Provision for loan losses (1) 16,484 8,242 10,142
Loan charge-offs (3,247) (2,492) (2,752)
Recoveries 1,545 622 376
-------------------------------------
Balance, December 31 $46,451 $31,669 $25,297
=====================================
(1) Includes $2.7 million and $183,000, and $1.4 million of charges in 1999,
1998 and 1997, respectively, to conform the practices of acquired entities
to the Company's reserve methodologies, which are included in merger and
related nonrecurring costs.
A-42
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The following table sets forth nonperforming loans as of December 31, 1999,
1998 and 1997. Nonperforming loans are defined as loans which are on nonaccrual
status, loans which have been restructured, and loans which are 90 days past due
but are still accruing interest. Interest income foregone on nonperforming loans
totaled $535,000, $254,000, and $655,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Interest income recognized on the nonperforming
loans approximated $537,000, $407,000, and $247,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
(Dollars in thousands) 1999 1998 1997
---------------------------------------------------------------------------
Nonaccrual loans $5,682 $3,819 $4,292
Accruing loans past due
90 days or more 139 244 251
Restructured loans 807 796 1,533
-------------------------------------
Total nonperforming loans $6,628 $4,859 $6,076
=====================================
At December 31, 1999 and 1998, the recorded investment in loans, for which
impairment has been recognized in accordance with SFAS No. 114 and No. 118, was
approximately $8.0 million and $5.1 million, respectively, with corresponding
valuation allowances of $1.2 million and $1.0 million respectively. For the
years ended December 31, 1999 and 1998, the average recorded investment in
impaired loans was approximately $2.3 million and $4.2 million, respectively.
The Company did not recognize interest income on impaired loans during the
twelve months ended December 31, 1999, 1998 and 1997.
The Company had $807,000 and $796,000 of restructured loans as of December
31, 1999 and 1998, respectively. There were no principal reduction concessions
allowed on restructured loans during 1999 and 1998. Interest income from
restructured loans totaled $45,000, $16,000 and $82,000 for the years ended
December 31, 1999, 1998 and 1997. Foregone interest income, which totaled $0,
$11,000 and $10,000 for the years ended December 31, 1999, 1998 and 1997 would
have been recorded as interest income if the loans had accrued interest in
accordance with their original terms prior to the restructurings.
A-43
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 5--OTHER REAL ESTATE OWNED
At December 31, 1999 and 1998, other real estate owned ("OREO") consisted
of properties acquired through foreclosure with a carrying value of $271,000 and
$966,000, respectively. These balances are included in interest receivable and
other assets in the accompanying consolidated balance sheets. There was no
allowance for estimated losses.
The following summarizes OREO operations, which are included in operating
expenses, for the years ended December 31, 1999, 1998 and 1997.
(Dollars in thousands) 1999 1998 1997
-----------------------------------------------------------------------------
Real estate operations, net $ 50 $ 24 $ 281
(Gain) loss on sale of other real estate owned (37) 133 (124)
Provision for estimated losses - - 54
-------------------------
Net loss from other real
estate operations $ 13 $157 $211
=========================
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment at December 31, 1999 and 1998 are composed
of the following:
(Dollars in thousands) 1999 1998
----------------------------------------------------------------------
Furniture and equipment $ 31,274 $ 28,098
Leasehold improvements 15,065 10,461
Buildings and premises 11,754 11,795
Land 2,987 3,534
Automobiles 740 732
----------------------
Total 61,820 54,620
Accumulated depreciation
and amortization (25,862) (23,266)
-----------------------
Premises and equipment, net $ 35,958 $ 31,354
=======================
Depreciation and amortization amounted to $5.7 million, $4.1 million and
$3.7 million for the years ended December 31, 1999, 1998 and 1997, respectively,
and have been included in occupancy and equipment expense in the accompanying
consolidated statements of operations.
During 1999, the Company sold bank premises with a carrying value of
$2,637,000 for $4,978,000 in a sale-lease back transaction. The Company
recognized a pre-tax gain of $535,000 on the transaction. Gains of $1,806,000
have been deferred and will be recognized over the 10 year and 5 year terms of
the Company's leases.
A-44
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 7--DEPOSITS
Deposits as of December 31, 1999 and 1998 are as follows:
(Dollards in thousands) 1999 1998
-----------------------------------------------------------------------------
Demand, noninterest-bearing $ 690,860 $ 536,844
MMDA, NOW and Savings 1,737,002 1,290,527
Time certificates, $100,000 and over 527,766 316,583
Other time certificates 145,069 163,628
--------------------------
Total deposits $ 3,100,697 $ 2,307,582
==========================
The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 1999.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------------------
Seven to One to More
Three months Four to six twelve three than
(Dollars in thousands) or less months months years three years Total
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Time deposits, $100,000 and over $ 398,405 $ 76,774 $ 43,574 $ 8,463 $ 550 $ 527,766
Other time deposits 64,589 38,845 29,243 11,751 641 145,069
-------------------------------------------------------------------------------
Total $ 464,994 $ 115,619 $ 72,817 $ 20,214 $ 1,191 $ 672,835
===============================================================================
</TABLE>
At December 31, 1999 and 1998, the Company held $111.1 million and $89.6
million, respectively from a single depositor on which the Company earned a
spread of 3.1% and 2.25%, respectively. Due to the uncertainty of the time the
deposit will remain outstanding, management has invested a significant portion
in agency securities with maturities of less than 90 days.
NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
GBB Capital I and GBB Capital II (the "Trusts") are Delaware business
trusts wholly-owned by Greater Bay and were formed for the purpose of issuing
Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts Holding Solely Junior Subordinated Debentures ("TPS"). The TPS are
individually described below. Interest on the TPS are payable quarterly and is
deferrable, at the option of the Company, for up to five years. Following the
issuance of each TPS, the Trusts used the proceeds from the TPS offerings to
purchase a like amount of Junior Subordinated Deferrable Interest Debentures
(the "Debentures") of Greater Bay. The Debentures bear the same terms and
interest rates as the related TPS. The Debentures are the sole assets of the
Trusts and are eliminated, along with the related income statement effects, in
the consolidated financial statements. Greater Bay has fully and unconditionally
guaranteed all of the obligations of the Trusts. Under applicable regulatory
guidelines, a portion of the TPS will qualify as Tier I capital, and the
remaining portion will qualify as Tier II capital.
A-45
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
On March 30, 1997, GBB Capital I completed a public offering of 800,000
shares of 9.75% Cumulative Trust Preferred Securities ("TPS I") in an aggregate
amount of $20 million. The TPS I accrue interest at an annual rate of 9.75% on
the $20 million liquidation amount of $25 per share of TPS I. The TPS I are
mandatorily redeemable, in whole or in part, upon repayment of the Debentures at
their stated maturity of April 1, 2027 or their earlier redemption. The
Debentures are redeemable prior to maturity at the option of the Company, on or
after April 1, 2002, in whole at any time or in part from time to time.
On August 12, 1998, GBB Capital II completed an offering of 30,000 shares
of Floating Rate Trust Preferred Securities, Series A ("the Series A
Securities") in an aggregate amount of $30 million. The Series A Securities
issued in the offering were sold in a private transaction pursuant to an
applicable exemption from registration under the Securities Act. In November
1998, the Company, through GBB Capital II, completed an offer to exchange the
Series A Securities for a like amount of its registered Floating Rate Trust
Preferred Securities, Series B ("TPS II"). The exchange offer was conducted in
accordance with the terms of the initial issuance of the Series A Securities.
The TPS II accrue interest at a variable rate of interest, initially at 7.1875%,
on the liquidation amount of $1,000 per share of TPS II. The interest rate
resets quarterly and is equal to 3-month LIBOR plus 150 basis points. As part of
this transaction, the Company concurrently entered into an interest rate swap to
fix the cost of the offering at 7.55% for 10 years (see note 10). The TPS II are
mandatorily redeemable, in whole or in part, upon repayment of the Debentures at
their stated maturity of September 15, 2028 or their earlier redemption. The
Debentures are redeemable prior to maturity at the option of the Company, on or
after September 15, 2008, in whole at any time or in part from time to time.
The total amount of TPS outstanding at December 31, 1999 and 1998 was $49
million and the dividends paid on TPS was $4.3 million, $2.8 million and
$1.5 million in 1999, 1998 and 1997, respectively.
A-46
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 9--BORROWINGS
Other borrowings are detailed as follows:
(Dollars in thousands) 1999 1998
-------------------------------------------------------------------------------
Other borrowings:
Short term borrowings:
Securities sold under agreements
to repurchase $ 55,100 $ 7,135
Other short term notes payable 1,500 1,760
Advances under credit lines 7,000 500
------------------------
Total short term borrowings 63,600 9,395
------------------------
Long term borrowings:
Securities sold under agreements
to repurchase 10,000 50,000
FHLB advances 27,000 32,000
Promissory notes - 2,450
------------------------
Total other long term borrowings 37,000 84,450
------------------------
Total other borrowings $100,600 $93,845
========================
Subordinated notes $ - $ 3,000
------------------------
Total subordinated debt $ - $ 3,000
========================
During the years ended December 31, 1999 and 1998, the average balance of
securities sold under short term agreements to repurchase was $21.1 million and
$22.1 million, respectively, and the average interest rates during those periods
were 5.57% and 5.46%, respectively. Securities sold under short term agreements
to repurchase generally mature within 90 days of dates of purchase.
During the years ended December 31, 1999 and 1998, the average balance of
federal funds purchased was $220,000 and $719,000, respectively, and the average
interest rates during those periods were 5.38% and 5.55%, respectively. There
were no such balances outstanding at December 31, 1999 or 1998.
The Company has sold securities under long term agreements to repurchase
which mature in the year 2003 and have an average interest rate of 5.32%. The
counterparties to these agreements have put options which give them the right to
demand early repayment.
The FHLB advances will mature in the year 2003 and have an average interest
rate of 5.47%. The advances are collateralized by securities pledged to the
FHLB. Under the terms of the advances, the FHLB has a put option which gives it
the right to demand early repayment beginning in 1999.
$1.3 million of the short term notes payable outstanding at December 31,
1998, which bore an interest rate of 13.76% and provided for maturity on April
15, 2000, were issued to PBFC's officers along with other accredited investors
within the definition of Rule 501 under the Securities Act of 1933, as amended.
The Company redeemed these notes in January 1999.
A-47
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 pay off of the debt. The premium was recorded, net of taxes, as an
extraordinary item in March 1999.
NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company currently uses a single interest-rate swap to convert its
floating-rate debt (the TPS II) to fixed rates. This swap was entered into
concurrently with the issuance of the debt being hedged. This swap is accounted
for as a cash flow hedge under SFAS No. 133. This swap possesses a term equal
to the non-callable term of the debt, with a fixed pay rate and a receive rate
indexed to rates paid on the debt and a notional amount equal to the amount of
the debt being hedged. As the specific terms and notional amount of the swap
exactly match those of the debt being hedged the Company meets the "no
ineffectiveness" criteria of SFAS No. 133. As such the swap is assumed to be
100% effective and all changes in the fair value of the hedge are recorded in
other comprehensive income with no impact on the income statement for any
ineffective portion. As of December 31, 1999, the unrealized gain on the cash
flow hedge was $1,528,000, net of income taxes, which was included in the
balance of accumulated other comprehensive income. The floating rate TPS II
combined with the cash flow hedge created a synthetic fixed rate debt
instrument. The unrealized gain on the cash flow hedge approximated the
unrealized gain the Company would have incurred if it had issued a fixed rate
debt instrument. Under current accounting practices, as required by SFAS No.
133, the Company was required to record the unrealized gain on the synthetic
fixed rate debt instrument, but it would not have been required to record an
unrealized gain if it had issued fixed rate debt.
The notional amount of the swap is $30.0 million with a term of 10 years
expiring on September 15, 2008. The Company intends to use the swap as a hedge
of the related debt for 10 years. The periodic settlement date of the swap
results in the reclassifying as earnings the gains or losses that are reported
in accumulated comprehensive income. For the year ended December 31, 1997, the
Company did not have any derivative instruments.
The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with high-quality counterparties that
are reviewed periodically by the Company's credit committee.
NOTE 11--INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 1999, 1998 and 1997:
(Dollars in thousands) 1999 1998 1997
-----------------------------------------------------------------------------
Current:
Federal $21,602 $14,708 $13,679
State 7,161 5,324 4,499
-----------------------------------
Total current 28,763 20,032 18,178
-----------------------------------
Deferred:
Federal (6,415) (2,249) (3,398)
State (1,749) (678) (914)
-----------------------------------
Total deferred (8,164) (2,927) (4,312)
-----------------------------------
Total expense $20,599 $17,105 $13,866
===================================
A-48
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that gave rise to significant portions of the deferred tax
assets and liabilities at December 31, 1999, 1998 and 1997 are as follows:
Years Ended December 31,
-----------------------
(Dollars in thousands) 1999 1998
-----------------------------------------------------------------
Allowance for loan losses $15,222 $10,559
State income taxes 4,338 2,856
Deferred compensation 2,242 1,570
Unrealized (gains) losses on securities 9,357 (218)
Accumulated depreciation 576 275
Net operating losses 14 159
Purchase allocation adjustments 8 22
Other 167 (493)
-----------------------
Net deferred tax asset $31,924 $14,730
=======================
Management believes that the Company will fully realize its total deferred
income tax assets as of December 31, 1999 based upon the Company's recoverable
taxes from prior carryback years, and its current level of operating income.
At December 31, 1999, the Company had a federal tax net operating loss
carryforward of approximately $40,000 expiring in the beginning of the year
2010.
Under provisions of the United States income tax laws these loss carryovers
are subject to limitation due to the acquisition of Pacific Rim Bancorporation
in 1998. Management does not believe that these limitations will prevent the
realization of the benefit of the loss carryovers during the carryover periods.
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(Dollars in thousands) 1999 1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
California franchise tax
expense, net of federal
income tax benefit 5.6% 6.1% 6.4%
------------------------------------
40.6% 41.1% 41.4%
Tax exempt income -2.7% -2.9% -2.8%
Contribution of appreciated securities -4.4% -1.0% 0.0%
Nondeductible merger
costs 0.2% 0.7% 1.3%
GBB tax rate for Cal. franchise tax -0.8% -2.8% -3.0%
------------------------------------
Effective income tax rate 32.9% 35.1% 36.9%
====================================
</TABLE>
A-49
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 12--OTHER INCOME AND OPERATING EXPENSES
Other income in 1999, 1998 and 1997 included warrant income of $14.5
million, $945,000 and $1.2 million net of related employee incentives of $7.3
million, $396,000 and $500,000, respectively. 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. Occupancy costs for the years ended
December 31, 1999, 1998 and 1997 were $9.7 million, $8.1 million and $7.6
million, respectively.
Merger and other related nonrecurring costs for the years ended December
31, 1999, 1998 and 1997 were comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial advisory and professional fees $ 1,627 $ 1,101 $ 1,083
Charges to conform accounting practices 2,745 183 1,350
Other costs 5,959 1,377 900
-----------------------------------
Total $ 10,331 $ 2,661 $ 3,333
===================================
</TABLE>
Other costs include severance and other compensation expenses, charges for
the write-off of assets retired as a result of the merger, and other expenses
including printing costs and filing fees.
A-50
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Other expenses for the years ended December 31, 1999, 1998 and 1997 were
comprised of the following:
Dollars in thousands 1999 1998 1997
-----------------------------------------------------------------------------
Telephone, postage and supplies $ 4,104 $ 3,617 $ 2,870
Legal and other professional fees 3,132 3,211 3,315
Marketing and promotion 3,256 3,015 2,863
Client services 3,226 2,520 1,873
Data processing 2,394 1,724 1,339
Directors fees 1,096 1,318 1,276
Insurance 907 841 757
FDIC insurance and regulatory
assessments 622 553 504
Other real estate owned 13 157 211
Other 6,150 6,490 5,767
---------------------------------------
$24,900 $23,446 $20,775
=======================================
To support the Greater Bay Bancorp Foundation (the "Foundation"), the
Company contributed appreciated securities, which had an unrealized gain of $7.8
million in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4
million in compensation and other expenses in connection with these appreciated
securities. The Company recorded $12.2 million in 1999 and $1.3 million in 1998
of expense for the contribution to the Foundation, which is included in
operating expenses.
In July 1995, the Company settled a lawsuit of $1.0 million, net of tax.
The Company recovered those losses through insurance coverage for this
settlement in 1997. However, due to the uncertainty associated with the
recovery, the Company reflected the settlement expense as a charge to 1995
earnings, and the associated recovery in 1997 as a recovery to earnings.
NOTE 13--EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
On November 19, 1997, the Company's shareholders approved an amendment of the
Greater Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan"), to increase by
912,652 the number of shares of Greater Bay stock issuable under the Bancorp
Plan. This was done to accommodate the increased number of eligible employees as
a result of the merger with PBC.
Under the terms of the respective mergers, all stock option plans of BSC,
BAB, BBC and MDNB were terminated at the time of merger and all outstanding
options from these plans were assumed by the Bancorp Plan. The CCB Stock Option
Plan was assumed by the company. Outstanding options from the BSC plan of
235,920 (converted at a ratio of 0.8499), options outstanding from the CCB plan
of 189,798 (converted at a ratio of 0.6338), options outstanding from the MDNB
plan of 72,714 (converted at a ratio of 0.9532), outstanding options from the
BAB plan of 29,834 shares (converted at a ratio of 1.38682) and outstanding
options from the BBC plan of 108,318 shares (converted at a ratio of 0.6833)
were assumed by the Bancorp Plan.
Options issued under the Bancorp Plan may be granted to employees and
nonemployee directors and may be either incentive or nonqualified stock options
as defined under current tax laws. The exercise price of each option must equal
the market price of the Company's stock on the date of grant. The term of an
option may not exceed 10 years and generally vests over a five year period.
A-51
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
At December 31, 1999 the total authorized shares issuable under the Bancorp
Plan was approximately 2,279,000 shares and the number of shares available for
future grants was approximately 110,000 shares.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions
of SFAS No. 123, the Company is encouraged, but not required, to measure
compensation costs related to its employee stock compensation plans under the
fair value method. If the Company elects not to recognize compensation expense
under this method, it is required to disclose the pro forma net income and net
income per share effects based on the SFAS No. 123 fair value methodology. The
Company implemented the requirements of SFAS No. 123 in 1997 and has elected to
adopt the disclosure provisions of this statement.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in its accounting for stock options. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation for the Company's stock option plan been determined consistent with
SFAS No. 123, the Company's net income per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 41,880 $ 31,669 $23,719
Pro Forma $ 38,544 $ 29,459 $22,688
Basic net income per share:
As reported $ 2.29 $ 1.79 $ 1.38
Pro Forma $ 2.11 $ 1.66 $ 1.32
Diluted net income per share:
As reported $ 2.17 $ 1.67 $ 1.30
Pro Forma $ 2.00 $ 1.55 $ 1.24
</TABLE>
A-52
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1999, 1998 and 1997, respectively; dividend yield of
1.5%, 1.75% and 1.8%; expected volatility of 29.69%, 39.84% and 22.9%; risk free
rates of 6.29%, 4.54% and 6.3%. The weighted average expected life is 5 years.
No adjustments have been made for forfeitures. The actual value, if any, that
the option holder will realize from these options will depend solely on the
increase in the stock price over the option price when the options are
exercised.
A summary of the Company's stock options as of December 31, 1999, 1998, and
1997 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,534 $ 17.59 2,074 $ 11.39 1,713 $ 7.36
Granted 788 35.64 784 30.28 653 18.87
Exercised (305) 10.19 (290) 7.57 (258) 5.85
Forfeited (76) 25.25 (34) 16.82 (32) 8.14
----------------------------------------------------------------------------------------
Outstanding at end of year 2,941 22.99 2,534 17.59 2,076 11.15
========================================================================================
Options exercisable at year-end 1,234 12.78 1,151 9.14 1,150 7.50
========================================================================================
Weighted average fair value of options
granted during the year $ 11.90 $ 11.19 $ 6.43
======= ======= ======
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999 (as adjusted for the 2-for-1 stock split).
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------- -----------------------------------
Number Number
Exercise Outstanding Weighted Average Weighted Average Exercisable Weighted Average
Price Range (000's) Exercise Price Remaining Life (years) (000's) Exercise Price
----------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.06 - $ 5.25 118 $ 3.93 3.11 107 $ 4.31
$ 5.30 - $ 9.38 646 7.26 4.82 516 7.03
$10.22 - $17.58 389 13.10 6.78 330 12.30
$21.47 - $29.50 606 24.63 6.68 190 24.54
$29.58 - $35.03 590 33.24 8.18 90 33.58
$35.88 - $40.81 592 38.50 9.96 1 39.50
</TABLE>
401(K) SAVINGS PLAN
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary (up to 15%) as a
contribution to the plan. The Company matches the employees' contributions at a
rate set by the Board of Directors (currently 62.5% of the first 8% of deferral
of an individual's total compensation). The matching contribution vests ratably
over the first four years of employment.
For the years ended December 31, 1999, 1998 and 1997, the Company contributed
$1.3 million, $987,000 and $782,000, respectively to the 401(k) plan.
A-53
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
EMPLOYEE STOCK PURCHASE PLAN
The Company has established an Employee Stock Purchase Plan, as amended,
under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 15% of their compensation toward the purchase of
the Company's stock for an aggregate total of 461,869 shares. Under the plan the
purchase price is 85% of the lower of the fair value at the beginning or end of
each three month offering period. During 1999, employees purchased 41,651 shares
of common stock for an aggregate purchase price of $1,031,000 compared to the
purchase of 29,670 shares of common stock for an aggregate purchase price of
$656,000 in 1998 and 30,320 shares of common stock for an aggregate purchase
price of $347,000 in 1997. There were 262,993 shares remaining in the plan
available for purchase by employees at December 31, 1999.
All share amounts have been restated to reflect the 2-for-1 stock split
declared to shareholders of record as of April 30, 1998.
SUPPLEMENTAL EMPLOYEE COMPENSATION BENEFITS AGREEMENTS
The Company has entered into supplemental employee compensation benefits
agreements with certain executive and senior officers. Under these agreements,
the Company is generally obligated to provide for each such employee or their
beneficiaries, during their life for a period of up to 15 to 20 years after the
employee's disability or retirement, benefits as defined in each specific
agreement. The agreement also provides for a death benefit for the employee.
The estimated present value of future benefits to be paid is being accrued over
the vesting period of the participants. The related accumulated accrued
liability of at December 31, 1999 and 1998 is approximately $3.0 million and
$2.2 million, respectively. The actuarial assumptions used for determining the
present value of the projected benefit obligation include a 7% discount rate.
Expenses accrued for this plan for the years December 31, 1999, 1998 and 1997
totaled $800,000, $540,000 and $503,000, respectively. Depending on the
agreement, the Company and the employees are beneficiaries of life insurance
policies that have been purchased as a method of financing the benefits under
the agreements. At December 31, 1999 and 1998, the Company's cash surrender
value of these policies was approximately $43.8 million and $32.0 million,
respectively and is included in other assets. The income recognized on these
policies was $1.4 million, $870,000 and $325,000 in 1999, 1998 and 1997,
respectively, and is included in other income.
DEFERRED COMPENSATION PLAN
Effective November 19, 1997, the Company adopted the Greater Bay Bancorp 1997
Elective Deferral Compensation Plan (the "Deferred Plan") that allows eligible
officers and directors of the Company to defer a portion of their bonuses,
director fees and other compensation. The deferred compensation will earn
interest calculated annually based on a short-term interest reference rate. All
participants are fully vested at all times in their contributions to the
Deferred Plan. At December 31, 1999 and 1998, $1.9 million and $834,000,
respectively, of deferred compensation under this plan is included in other
liabilities in the accompanying consolidated balance sheets.
Additionally, under deferred compensation agreements that were established at
CCB and PBC prior to its merger with the Company, there was approximately
$814,000 and $1.1 million of deferred compensation which is included in other
liabilities at December 31, 1999 and 1998, respectively.
A-54
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CHANGE IN CONTROL
In the event of a change in control, the supplemental employee compensation
benefits agreements with certain executive and senior officers may require the
Company to make certain payments under those agreements. The Company also has
plans in place which would require certain payments be made to any employee
whose employment is terminated pursuant to a change in control. These potential
liabilities are currently not recognized in the accompanying consolidated
financial statements.
NOTE 14--RELATED PARTY TRANSACTIONS
The Company has, and expects to have in the future, banking transactions in
the ordinary course of business with directors, executive officers and their
affiliates. These transactions are entered into under terms and conditions
equal to those entered into in arms length transactions and are made subject to
approval by the Directors' Loan Committee and the Board of Directors of the Bank
extending the credit. An analysis of total loans to related parties for the
years ended December 31, 1999 and 1998 is shown below:
(Dollars in thousands) 1999 1998
--------------------------------------------------------
Balance, January 1 $ 44,703 $20,458
Additions 27,038 42,761
Repayments (47,340) (18,517)
------------------------
Balance, December 31 $ 24,401 $44,702
=======================
Undisbursed commitments, at
year end $ 9,129 $ 7,302
=======================
NOTE 15 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under all noncancelable operating leases as of
December 31, 1999 are below:
(Dollars in thousands)
Years Ended December 31,
--------------------------------------
2000 $ 5,447
2001 5,693
2002 4,664
2003 2,626
2004 2,232
Thereafter 10,803
---------
Total $ 31,465
=========
A-55
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1999, 1998,
and 1997 was $1.3 million, $1.2 million, and $1.2 million, respectively. Gross
rental expense for the years ended December 31, 1999, 1998, and 1997 was $6.6
million, $5.2 million, and $4.8 million, respectively.
OTHER COMMITMENTS AND CONTINGENCIES
The Company occasionally receives warrants to acquire common stock from
borrowers that are in the start-up or development phase as consideration for
provided financing. As of December 31, 1999, the Company had a portion of its
warrants and common stock of these clients in escrow with an approximate fair
value of $2.8 million. These equity securities are being held in escrow for the
Company's benefit pending resolution of certain contingencies. Although
realization is not assured, Management believes it is more likely than not that
this amount will be realized. The amount considered realizable could be reduced
if stock prices of the companies fall.
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. Commitments to fund loans were $914.8 million and $707.1 million and
letters of credit were $57.9 million and $27.7 million, at December 31, 1999 and
1998, respectively. The Company's exposure to credit loss is limited to amounts
funded or drawn; however, at December 31, 1999, no losses are anticipated as a
result of these commitments.
Loan commitments which have fixed expiration dates and require the payment
of a fee are typically contingent upon the borrower meeting certain financial
and other covenants. Approximately $250.2 million of these commitments relate to
real estate construction and land loans and are expected to fund within the next
12 months. However, the remainder relates primarily to revolving lines of credit
or other commercial loans, and many of these commitments are expected to expire
without being drawn upon, therefore the total commitments do not necessarily
represent future cash requirements. The Banks evaluate each potential borrower
and the necessary collateral on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities, or business
assets.
Stand-by letters of credit are conditional commitments written by the Banks
to guarantee the performance of a client to a third party. These guarantees are
issued primarily related to purchases of inventory by the Banks' commercial
clients, and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients, and the Banks accordingly use
evaluation and collateral requirements similar to those for loan commitments.
In the ordinary course of business there are various assertions, claims and
legal proceedings pending against the Company. Management is of the opinion that
the ultimate resolution of these proceedings will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
NOTE 16 - SHAREHOLDERS' RIGHTS PLAN
In 1998 Greater Bay adopted a shareholder rights plan designed to maximize
the long-term value of the Company and to protect the Company's shareholders
from improper takeover tactics and takeover bids that are not fair to all
shareholders.
A-56
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
In accordance with the plan, preferred share purchase rights were distributed
as a dividend at the rate of one right for each common share held of record as
of the close of business on November 28, 1998. The rights, which are not
immediately exercisable, entitle the holders to purchase one one-hundredth of a
share of Series A Preferred Stock at a price of $145.00 upon the occurrence of
certain triggering events. In the event of an acquisition not approved by the
Board, each right enables its holder (other than the acquirer) to purchase the
Preferred Stock at 50% of the market price. Further, in the event the Company
is acquired in an unwanted merger or business combination, each right enables
the holder to purchase shares of the acquiring entity at a similar discount.
Under certain circumstances, the rights may be exchanged for common shares of
the Company. The Board may, in its sole discretion, redeem the rights at any
time prior to any of the triggering events.
The rights can be exercised and separate rights certificates distributed only
if any of the following events occur: acquisition by a person of 10% or more of
the Company's common share; a tender offer for 10% or more of the Company's
common shares; or ownership of 10% or more of the Company's common shares by a
shareholder whose actions are likely to have a material adverse impact on the
Company or shareholder interests. The rights will initially trade automatically
with the common shares. The rights are not deemed by the Board of Directors to
be presently exercisable.
NOTE 17--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Banks' assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Banks'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum capital amounts and ratios (as defined in
the regulations) and are set forth in the table below. At December 31, 1999 and
1998 the Company and the Banks met all capital adequacy requirements to which
they are subject.
A-57
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Under the FDICIA prompt corrective action provisions applicable to banks, the
most recent notification from the FDIC or OCC categorized each of the Banks,
with the exception of MDNB, as well-capitalized. To be categorized as well-
capitalized, the institution must maintain a total risk-based capital ratio as
set forth in the following table and not be subject to a capital directive
order. There are no conditions or events since that notification that
management believes have changed the risk-based capital category of any of the
Banks. The Company and the Banks' actual 1999 and 1998 capital amounts and
ratios are as follows:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1999 Actual Adequacy Purposes Action Provisions
------------------------------ ------------------- -------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------- ------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 325,554 11.04% $ 235,909 8.00% N/A
Bay Area Bank 15,104 10.50 11,511 8.00 $ 14,398 10.00%
Bay Bank of Commerce 12,004 10.12 9,484 8.00 11,856 10.00
Bank of Santa Clara 33,672 11.91 22,618 8.00 28,272 10.00
Coast Commercial Bank 37,426 13.80 21,771 8.00 27,213 10.00
Cupertino National Bank 97,081 11.03 70,398 8.00 87,997 10.00
Golden Gate Bank 14,645 10.19 11,494 8.00 14,368 10.00
Mid-Peninsula Bank 65,923 10.02 52,656 8.00 65,820 10.00
Peninsula Bank of Commerce 22,458 10.86 16,544 8.00 20,680 10.00
Mt. Diablo National Bank 15,192 8.20 14,823 8.00 18,529 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 286,132 9.70% $ 117,993 4.00% N/A
Bay Area Bank 13,285 9.23 5,756 4.00 $ 8,634 6.00%
Bay Bank of Commerce 10,507 8.86 4,742 4.00 7,113 6.00
Bank of Santa Clara 31,368 11.09 11,314 4.00 16,971 6.00
Coast Commercial Bank 34,020 12.50 10,885 4.00 16,328 6.00
Cupertino National Bank 82,337 9.36 35,199 4.00 52,798 6.00
Golden Gate Bank 12,846 8.94 5,747 4.00 8,621 6.00
Mid-Peninsula Bank 57,692 8.77 26,328 4.00 39,492 6.00
Peninsula Bank of Commerce 19,859 9.60 8,272 4.00 12,408 6.00
Mt. Diablo National Bank 12,875 6.95 7,411 4.00 11,117 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 286,132 8.24% $ 138,899 4.00% N/A
Bay Area Bank 13,285 7.80 6,815 4.00 $ 8,519 5.00%
Bay Bank of Commerce 10,507 7.12 5,900 4.00 7,375 5.00
Bank of Santa Clara 31,368 9.29 12,782 4.00 15,977 5.00
Coast Commercial Bank 34,020 9.40 14,538 4.00 18,172 5.00
Cupertino National Bank 82,337 8.05 40,896 4.00 51,120 5.00
Golden Gate Bank 12,846 6.55 7,844 4.00 9,805 5.00
Mid-Peninsula Bank 57,692 7.47 30,883 3.00 38,604 5.00
Peninsula Bank of Commerce 19,859 7.32 10,847 4.00 13,559 5.00
Mt. Diablo National Bank 12,875 7.76 7,828 4.00 9,785 5.00
To Be Well Capitalized
For Capital Under Prompt Corrective
As of December 31, 1998 Actual Adequacy Purposes Action Provisions
------------------------------ ------------------- --------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------- ------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 261,943 12.69% $ 165,133 8.00% N/A
Bay Area Bank 15,800 13.77 9,179 8.00 $ 11,474 10.00%
Bay Bank of Commerce 11,817 9.50 9,976 8.00 12,470 10.00
Bank of Santa Clara 29,698 11.95 19,882 8.00 24,852 10.00
Coast Commercial Bank 31,198 14.80 16,856 8.00 21,069 10.00
Cupertino National Bank 59,224 10.12 46,822 8.00 58,527 10.00
Golden Gate Bank 10,194 11.01 7,406 8.00 9,257 10.00
Mid-Peninsula Bank 47,111 11.51 32,747 8.00 40,963 10.00
Peninsula Bank of Commerce 18,256 12.37 11,809 8.00 14,761 10.00
Mt. Diablo National Bank 11,716 9.00 10,416 8.00 13,021 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 221,847 10.75% $ 82,548 4.00% N/A
Bay Area Bank 14,365 12.52 4,590 4.00 $ 6,885 6.00%
Bay Bank of Commerce 10,837 8.70 4,988 4.00 7,482 6.00
Bank of Santa Clara 27,860 11.21 9,941 4.00 14,912 6.00
Coast Commercial Bank 28,549 13.60 8,248 4.00 12,642 6.00
Cupertino National Bank 48,845 8.35 23,411 4.00 35,116 6.00
Golden Gate Bank 9,036 9.76 3,703 4.00 5,554 6.00
Mid-Peninsula Bank 41,990 10.26 16,373 4.00 24,560 6.00
Peninsula Bank of Commerce 16,408 11.12 5,904 4.00 8,857 6.00
Mt. Diablo National Bank 10,115 7.77 5,208 4.00 7,812 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 221,847 8.18% $ 108,483 4.00% N/A
Bay Area Bank 14,365 10.34 4,590 4.00 $ 6,948 5.00%
Bay Bank of Commerce 10,837 7.90 5,520 4.00 6,901 5.00
Bank of Santa Clara 27,860 9.26 12,035 4.00 15,043 5.00
Coast Commercial Bank 28,549 9.10 12,574 4.00 15,717 5.00
Cupertino National Bank 48,845 7.47 26,138 4.00 32,673 5.00
Golden Gate Bank 9,036 9.30 5,243 4.00 6,554 5.00
Mid-Peninsula Bank 41,990 8.54 15,927 3.00 26,544 5.00
Peninsula Bank of Commerce 16,408 6.65 9,759 4.00 12,198 5.00
Mt. Diablo National Bank 10,115 6.08 6,658 4.00 8,323 5.00
</TABLE>
A-58
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 18--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
Total dividends which may be declared by the Banks without receiving prior
approval from regulatory authorities are limited to the lesser of the Banks'
retained earnings or the net income of the Banks for the latest three fiscal
years, less dividends previously declared during that period.
The Banks are subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In particular,
the Banks are prohibited from lending to Greater Bay unless the loans are
secured by specified types of collateral. Such secured loans and other advances
from the Banks are limited to 10% of the Banks' shareholders' equity, or a
maximum of $74.1 million at December 31, 1999. No such advances were made during
1999 or exist as of December 31, 1999.
A-59
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 19-EARNINGS PER SHARE
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
years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the year ended December 31, 1999
-------------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 41,880
Basic net income per share:
Income available to common shareholders 41,880 18,304,000 $ 2.29
Effect of dilutive securities:
Stock options - 994,000 -
-------------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 41,880 19,298,000 $ 2.17
=================================================
For the year ended December 31, 1998
-------------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------
Net income $ 31,669
Basic net income per share:
Income available to common shareholders 31,669 17,739,000 $ 1.79
Effect of dilutive securities:
Stock options - 1,242,000 -
-------------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 31,669 18,981,000 $ 1.67
=================================================
For the year ended December 31, 1997
-------------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------
Net income $ 23,719
Basic net income per share:
Income available to common shareholders 23,719 17,175,000 $ 1.38
Effect of dilutive securities:
Stock options - 1,126,000 -
-------------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 23,719 18,301,000 $ 1.30
=================================================
</TABLE>
A-60
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
There were options to purchase 517,000 shares and 89,000 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the years ended December
31, 1999 and 1998, respectively. There were no options that were considered
anti-dilutive during the year ended December 31, 1997.
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 2000 mergers with BSC at a
0.8499 conversion ratio, Coast Bancorp at a 0.6338 conversion ratio and MD
Bancshares at a 0.9532 conversion ratio, 1999 mergers with BCS at a 0.6833
conversion ratio and BA Bancshares at a 1.38682 conversion ratio, the 1998
mergers with PRB and PBFC at a total of 950,748 and 298,000 shares,
respectively, and the 1997 merger with PBC at a 0.96550 conversion ratio.
NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The financial statements of Greater Bay Bancorp (parent company only) are
presented below:
PARENT COMPANY ONLY--BALANCE SHEETS
December 31,
(Dollars in thousands) 1999 1998
--------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 2,837 $ 7,703
Investment in subsidiaries 268,289 209,583
Other investments 16,143 17,936
Subordinated debentures
issued by subsidiary - 3,000
Other assets 17,689 9,811
--------------------------
Total assets $304,958 $248,033
==========================
Liabilities and
shareholders' equity:
Subordinated debt 58,547 54,547
Other liabilities 8,410 6,603
--------------------------
Total liabilities 66,957 61,150
Shareholders' equity:
Common stock 139,753 113,165
Accumulated other comprehensive income (8,055) 349
Retained earnings 106,303 73,369
--------------------------
Total shareholders' equity 238,001 186,883
--------------------------
Total liabilities and
shareholders' equity $304,958 $248,033
==========================
A-61
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
PARENT COMPANY ONLY-STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands) 1999 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 521 $ 1,073 $ 485
Cash dividend from subsidiaries 1,580 3,015 1,413
Other income - 71 501
---------------------------------
Total 2,101 4,159 2,399
---------------------------------
Expenses:
Interest expense 4,382 3,195 1,458
Salaries 17,138 8,952 5,978
Occupancy and equipment 3,821 2,031 1,218
Merger expenses 3,283 1,877 712
Other expenses 5,804 3,596 2,041
Less: rentals and fees received
from Banks (27,653) (15,866) (10,201)
---------------------------------
Total 6,775 3,785 1,206
---------------------------------
Income (loss) before taxes and equity
in undistributed net income of subsidiaries (4,674) 374 1,193
Income tax benefit (2,685) (1,668) (270)
---------------------------------
Income (loss) before equity in undistributed
net income of subsidiaries (1,989) 2,042 1,463
---------------------------------
Equity in undistributed net income of
subsidiaries 43,869 29,627 22,256
---------------------------------
Net income $41,880 $31,669 $23,719
=================================
</TABLE>
A-62
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
(Dollars in thousands) 1999 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows-operating activities
Net income $ 41,880 $ 31,671 $ 23,719
Reconciliation of net income
to net cash from operations:
Equity in undistributed net
income of subsidiaries (43,869) (29,603) (22,256)
Net change in other assets (9,791) (4,598) (1,984)
Net change in other liabilities 4,420 2,140 2,442
--------------------------------------
Operating cash flow, net (7,360) (390) 1,921
--------------------------------------
Cash flows-investing activities
Purchases of available for sale
securities (20,825) (84,130) (8,293)
Proceeds from sale and maturities
of available for sale securities 20,980 71,939 3,136
Proceeds from sale of OREO - 407 -
Dividends from subsidiaries 4,166 3,449 3,617
Capital contribution to
the subsidiaries (27,218) (17,500) (13,818)
--------------------------------------
Investing cash flows, net (22,897) (25,835) (15,358)
--------------------------------------
Cash flows-financing activities
Net change in other borrowings - short term 7,000 - -
Repurchase of common stock - (2,651) (130)
Proceeds from private placement of stock 18,954 - -
Proceeds from issuance of
subordinated debt - 30,000 20,618
Stock issued in dividend reinvestment plan 171 - -
Proceeds from exercise
of stock options and employees
stock purchases 6,888 5,661 2,985
Payment of cash dividends (7,622) (7,193) (5,660)
--------------------------------------
Financing cash flows, net 25,391 25,817 17,813
--------------------------------------
Net increase in cash and
cash equivalents (4,866) (408) 4,376
Cash and cash equivalents
at the beginning of the year 7,703 8,111 3,735
Cash and cash equivalents -------------------------------------
at end of the year $ 2,837 $ 7,703 $ 8,111
======================================
</TABLE>
A-63
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 21--FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments. The estimated fair value of financial
instruments of the Company as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------- ----------------------------------
Carrying Carrying
(Dollars in thousands) Amount Fair Value Amount Fair Value
----------------------------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 137,130 $ 137,130 $ 126,217 $ 126,217
Short term investments and Fed Funds Sold 245,807 245,807 189,980 189,980
Investment securities 694,950 667,061 599,794 601,918
Loans, net 2,298,112 2,282,800 1,640,311 1,640,326
Accrued interest receivable 21,186 21,186 13,970 13,970
Financial liabilities:
Deposits:
Demand, noninterest-bearing 690,860 690,860 536,844 536,844
MMDA, NOW and Savings 1,737,002 1,737,001 1,290,526 1,290,526
Time certificates, $100,000 and over 527,766 521,802 316,583 322,637
Other time certificates 145,069 146,287 163,628 177,456
Other borrowings 100,600 99,790 93,845 95,475
Subordinated debt - - 3,000 2,999
Company obligated mandatory redeemable
preferred securities of subsidiary trust holding
solely junior subordinated debentures 49,000 48,468 49,000 47,829
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
CASH AND CASH EQUIVALENTS
The carrying value reported in the balance sheet for cash and cash equivalents
approximates fair value.
INVESTMENT SECURITIES
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer term investments, except certain state and
municipal securities, is estimated based on quoted market prices or bid
quotations from securities dealers.
A-64
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. The fair value of performing fixed rate loans is
calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate
risk inherent in the loan. The fair value of performing variable rate loans is
judged to approximate book value for those loans whose rates reprice in less
than 90 days. Rate floors and rate ceilings are not considered for fair value
purposes as the number of loans with such limitations is not significant.
Fair value for significant nonperforming loans is based on recent
external appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows, and discount rates
are judgmentally determined using available market information and specific
borrower information.
DEPOSIT LIABILITIES AND BORROWINGS
The fair value for all deposits without fixed maturities and short
term borrowings is considered to be equal to the carrying value. The fair value
for fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities. The fair value of core
deposits does not reflect the market core deposits premium of approximately
10%-12%. Additionally, the fair value of deposits does not include the benefit
that results from the low cost of funding provided by the Company's deposits as
compared to the cost of borrowing funds in the market.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The majority of the Company's commitments to extend credit carry
current market interest rate if converted to loans. Because these commitments
are generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates the
recorded deferred fee amounts and is excluded from the table.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale, at one time, the Company's entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic condition, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have significant effect on
fair value estimates and have been considered in many of the estimates.
A-65
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 22--ACTIVITY 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. Intersegment revenue is
recorded at prevailing market terms and rates and is not significant to the
results of the segments. This revenue is eliminated in consolidation. 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. Ten 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 GBB
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 segments key operating results and financial
position for the years ended or as of December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- -----------------------
Community Trust Community Trust Community Trust
(Dollars in thousands) banking operations banking operations banking operations
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 117,265 $ 369 $ 87,657 $ 859 $ 70,984 $ 141
Other income 15,791 3,007 7,866 2,488 6,622 2,092
Operating expenses 35,908 2,863 36,372 2,429 36,429 1,966
Net income before income taxes (1) 96,725 121 58,361 918 40,714 267
Total assets 2,811,728 - 2,012,297 - 1,544,921 -
Deposits 2,448,555 57,831 1,690,768 67,539 1,308,326 66,321
Assets under management - 697,435 - 649,336 - 577,746
</TABLE>
---------------
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
A-66
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 years ended December 31, 1999, 1998
and 1997 is presented below.
<TABLE>
<CAPTION>
As of and for Year Ended
December 31,
(Dollars in thousands) 1999 1998 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income and other income
Total segment net interest income and other income $ 136,432 $ 98,870 $ 79,839
Parent company net interest income and other income (3,893) (1,357) 309
----------------------------------------------
Consolidated net interest income and other income $ 132,539 $ 97,513 $ 80,148
==============================================
Net income before taxes
Total segment net income before income taxes $ 96,846 $ 59,279 $ 40,981
Parent company net income before income taxes (32,393) (17,664) (9,486)
----------------------------------------------
Consolidated net income before income taxes $ 64,453 $ 41,615 $ 31,495
==============================================
Total assets
Total segment assets $2,811,728 $2,012,297 $1,544,921
Parent company segment assets 34,360 36,920 15,333
----------------------------------------------
Consolidated total assets $2,846,088 $2,049,217 $1,560,254
==============================================
</TABLE>
NOTE 23--SUBSEQUENT EVENTS
On March 23, 2000, we completed an offering of 10.875% capital
securities in an aggregate amount of $9.5 million through GBB Capital III, a
wholly owned trust subsidiary formed for the purpose of the offering. On May
18, 2000, we completed an additional offering of 10.75% capital securities in an
aggregate amount of $41.0 million through GBB Capital IV, a wholly owned trust
subsidiary formed for the purpose of the offering. The securities issued in the
offering were sold in a private transaction pursuant to an applicable exemption
from registration under the Securities Act. As a result of the transaction, we
have $100.5 million in capital securities outstanding.
On March 23, 2000, we also consummated the sale of 324,324 shares of
our common stock in a private transaction pursuant to a Securities Purchase
Agreement dated as of March 22, 2000, between us and certain investors
identified therein. The shares were sold at a purchase price of $37.00 per
share, or approximately $12.0 million, net of issuance costs. On April 26, 2000,
we filed a registration statement to register the shares for resale.
NOTE 24--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the summary results for the stated eight
quarters:
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31,
-------------------------------------------------------------------------------------------
(Dollars in thousands, except
per share data) 1999 1998 1999 1998 1999 1998 1999 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 53,543 $ 51,057 $ 48,939 $ 50,520 $ 44,445 $ 46,810 $ 40,744 $ 44,056
Net interest income 37,012 32,228 35,573 31,076 33,979 29,242 31,428 28,095
Provision for loan losses 6,308 2,351 3,902 2,437 2,141 1,882 1,388 1,389
Other income 23,398 6,026 7,449 5,164 5,484 5,160 5,452 4,405
Other expenses 43,749 22,204 24,129 20,901 27,222 21,454 22,109 20,002
Income before taxes 16,662 13,699 18,893 12,902 12,241 11,066 14,771 11,109
Net income 13,563 9,036 11,788 8,361 7,591 6,960 8,938 7,315
Net income per share:
Basic $ 0.73 $ 0.51 $ 0.64 $ 0.47 $ 0.42 $ 0.39 $ 0.50 $ 0.41
Diluted $ 0.69 $ 0.47 $ 0.61 $ 0.44 $ 0.40 $ 0.37 $ 0.47 $ 0.39
</TABLE>
A-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Greater Bay Bancorp:
We have audited the accompanying supplemental consolidated balance sheets of
Greater Bay Bancorp and its subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related supplemental consolidated statements of operations,
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the mergers of Greater Bay Bancorp and Coast Bancorp as of May 18, 2000 and
Greater Bay Bancorp and Bank of Santa Clara on July 21, 2000, which have been
accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. Accounting principles generally
accepted in the United States proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Greater Bay Bancorp
and subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Greater Bay Bancorp and its subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
July 25, 2000
A-68
