<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 amuonts) 1999* 1998* 1997* 1996* 1995*
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Interest income $ 255,377 $ 205,189 $ 165,783 $ 129,559 $ 112,115
Interest expense 95,018 76,742 58,310 43,044 36,658
-------------------------------------------------------------------
Net interest income 160,359 128,447 107,473 86,515 75,457
Provision for loan losses 14,039 8,279 9,131 5,095 3,084
-------------------------------------------------------------------
Net interest income after provision for loan
losses 146,320 120,168 98,342 81,420 72,373
Other income 28,471 20,996 18,179 16,972 13,342
Nonrecurring - warrant income 14,508 945 1,162 92 -
-------------------------------------------------------------------
Total other income 42,979 21,941 19,341 17,064 13,342
Operating expenses 100,913 86,205 76,264 67,948 61,521
Other expenses - nonrecurring 12,160 1,341 (1,700) - 2,135
-------------------------------------------------------------------
Total operating expenses 113,073 87,546 74,564 67,948 63,656
-------------------------------------------------------------------
Income before income tax expense & merger and other
related nonrecurring costs 76,226 54,563 43,120 30,536 22,059
Income tax expense 25,468 19,105 15,643 10,963 7,894
-------------------------------------------------------------------
Income before merger and other related nonrecurring
costs and extraordinary items 50,758 35,458 27,476 19,573 14,165
Merger and other related nonrecurring costs, net of tax (6,486) (1,674) (2,282) (1,991) -
-------------------------------------------------------------------
Net income before extraordinary items 44,272 33,784 25,194 17,582 14,165
Extraordinary items (88) - - - -
-------------------------------------------------------------------
Net income $ 44,184 $ 33,784 $ 25,194 $ 17,582 $ 14,165
===================================================================
Per Share Data (1)
Income per share (before merger, nonrecurring and
extraordinary items)
Basic $ 1.21 $ 0.95 $ 0.73 $ 0.57 $ 0.46
Diluted 1.15 0.89 0.68 0.53 0.45
Net income per share
Basic $ 1.16 $ 0.91 $ 0.70 $ 0.51 $ 0.42
Diluted 1.10 0.85 0.66 0.48 0.41
Cash dividends per share (2) $ 0.24 $ 0.19 $ 0.15 $ 0.11 $ 0.10
Book value per common share 6.38 5.37 4.78 4.30 4.00
Shares outstanding at year end 39,635,048 37,342,950 35,886,162 33,865,656 32,857,882
Average common shares outstanding 38,245,000 37,049,000 35,835,000 34,634,000 33,421,000
Average common and common equivalent shares outstanding 40,304,000 39,639,000 38,198,000 36,599,000 34,802,000
Performance Ratios
Return on average assets (before merger, nonrecurring
and extraordinary items) 1.39% 1.37% 1.33% 1.26% 1.25%
Return on average common shareholders' equity (before
merger nonrecurring and extraordinary items) 21.08% 19.02% 16.24% 14.13% 13.35%
Return on average assets 1.33% 1.32% 1.29% 1.13% 1.14%
Return on average common shareholders' equity 20.16% 18.29% 15.75% 12.69% 12.20%
Net interest margin (3) 5.25% 5.44% 5.88% 6.11% 6.75%
Balance Sheet Data - At Period End
Assets $3,736,729 $2,857,246 $2,235,907 $1,791,754 $1,436,234
Loans, net 2,416,423 1,740,158 1,358,514 1,089,477 829,017
Investment securities 750,516 667,531 464,703 345,107 356,361
Deposits 3,262,888 2,463,484 1,935,405 1,570,087 1,248,687
Subordinated debt - 3,000 3,000 3,000 3,000
Trust Preferred Securities 49,000 49,000 20,000 - -
Common shareholders' equity 252,895 200,697 171,465 145,722 131,322
Asset Quality Ratios
Nonperforming assets to total loans and OREO 0.28% 0.34% 0.56% 1.25% 1.49%
Nonperforming assets to total assets 0.19% 0.21% 0.35% 0.78% 0.88%
Allowance for loan losses to total loans 1.94% 1.85% 1.91% 1.66% 1.63%
Allowance for loan losses to non-
performing assets 690.23% 550.02% 341.80% 133.91% 110.27%
Net charge-offs to average loans 0.09% 0.13% 0.20% 0.14% 0.32%
Regulatory Capital Ratios
Leverage Ratio 8.24% 8.13% 8.82% 8.42% 9.24%
Tier 1 Capital 9.75% 10.70% 11.31% 10.89% 12.69%
Total Capital 11.07% 12.59% 12.67% 12.24% 14.06%
</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), BSC and BOP on a pooling-
of-interests basis.
(1) Restated to reflect 2 - for - 1 stock split effective as of April 30,1998
and the 2 - for - 1 stock split effective as of October 4, 2000.
(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, 1997 and 1996 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 5.46%, 5.49%, 6.14% and 6.32% 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
Petaluma ("BOP"), 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 37 offices located in Aptos,
Blackhawk, Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae,
Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City,
San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa
Cruz, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. At
December 31, 1999, the Company had total assets of $3.7 billion, total net loans
of $2.4 billion and total deposits of $3.3 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 $ 46,195 $ 35,141 $ 25,983 $ 44,184 $ 33,784 $ 25,194
Net income per share:
Basic $ 1.21 $ 0.95 $ 0.73 $ 1.16 $ 0.91 $ 0.70
Diluted $ 1.15 $ 0.89 $ 0.68 $ 1.10 $ 0.85 $ 0.66
Return on average assets 1.39% 1.37% 1.33% 1.33% 1.32% 1.29%
Return on average shareholders' equity 21.08% 19.02% 16.24% 20.16% 18.29% 15.75%
</TABLE>
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company reported net income of $44.2 million in 1999, a 30.8% increase
over 1998 net income of $33.8 million. The net income in 1998 was a 34.1%
increase over 1997 income of $25.2 million. Basic net income per share was $1.21
for 1999, as compared to $0.91 for 1998 and $0.70 for 1997. Diluted net income
per share was $1.10, $0.85 and $0.66 for 1999, 1998 and 1997, respectively. The
return on average assets and return on average shareholders' equity were 1.33%
and 20.16% in 1999, compared with 1.32% and 18.29% in 1998 and 1.29% and 15.75%
in 1997, respectively.
The 30.8% 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 25.4% as compared to 1998. This increase was
primarily due to a 29.3% 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 5.39% in 1999 as compared to 5.56% 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 25.3% 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 17.1% 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 34.1% 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 20.5% as compared
to 1997. This increase was primarily due to a 29.2% 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 5.56% in 1998
as compared to 5.96% 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 6.9% 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 15.6%
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 25.4% to
$164.6 million in 1999 from $131.3 million in 1998. This increase was primarily
due to the $692.9 million, or 29.3%, increase in average interest-earning assets
which was partially offset by a 17 basis point decrease in the Company's net
yield on interest-earning assets. Net interest income, excluding capital
securities, increased 20.5% in 1998 from $108.9 million in 1997. This increase
was primarily due to the $533.3 million, or 29.2%, increase in average interest-
earning assets, which was partially offset by the 40 basis point decrease in the
Company's net yield on interest-earning assets. The capital securities were
Trust Preferred Securities issued in 1998 and 1997 which cost 8.57% and 9.02% in
1999 and 1998, respectively. Including the capital securities, net interest
income increased 24.8% to $160.4 million in 1999, and 19.5% to $128.4 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 1998
------------------------------------- -------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate
--------------------------------------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 203,554 $ 10,518 5.17% $ 156,649 $ 8,367 5.34%
Other short term securities 70,847 3,830 5.41% 97,229 5,480 5.64%
Investment securities:
Taxable 559,077 37,000 6.62% 494,019 30,709 6.22%
Tax-exempt (2) 129,971 6,549 5.04% 98,728 5,090 5.16%
Loans (3) 2,092,024 197,480 9.44% 1,515,965 155,543 10.26%
---------- -------- ---------- --------
Total interest-earning
assets 3,055,473 255,377 8.36% 2,362,590 205,189 8.68%
Noninterest-earning assets 258,584 203,022
---------- -------- ---------- --------
Total assets $3,314,057 255,377 $2,565,612 205,189
========== -------- ========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,650,227 55,292 3.35% $1,223,414 41,980 3.43%
Time deposits, over $100,000 461,085 21,677 4.70% 326,242 16,436 5.04%
Other time deposits 166,446 7,873 4.73% 168,606 8,342 4.95%
---------- -------- ---------- --------
Total interest-bearing
deposits 2,277,758 84,842 3.72% 1,718,262 66,758 3.89%
Other borrowings 109,872 5,907 5.38% 114,063 6,815 5.97%
Subordinated debt 607 68 11.20% 3,000 345 11.50%
---------- -------- ---------- --------
Total interest-bearing
liabilities 2,388,237 90,817 3.80% 1,835,325 73,918 4.03%
Trust Preferred Securities 49,000 4,201 8.57% 31,293 2,824 9.02%
---------- -------- ---------- --------
Total interest-bearing
liabilities and capital
securities 2,437,237 95,018 3.90% 1,866,618 76,742 4.11%
Noninterest-bearing deposits 620,555 489,520
Other noninterest-bearing liabilities 37,090 24,729
Shareholders' equity 219,175 184,745
---------- -------- ---------- --------
Total shareholders' equity and
liabilities $3,314,057 $ 95,018 $2,565,612 $ 76,742
========== -------- ========== --------
Net interest income $160,359 $128,447
======== ========
Including capital securities:
-----------------------------
Interest rate spread 4.46% 4.57%
Contribution of interest free funds 0.79% 0.86%
----- -----
Net yield on interest-earnings assets(4) 5.25% 5.44%
Excluding capital securities:
-----------------------------
Interest rate spread 4.56% 4.66%
Contribution of interest free funds 0.83% 0.90%
----- -----
Net yield on interest-earnings assets(4) 5.39% 5.56%
</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 $ 122,992 $ 6,633 5.39%
Other short term securities 97,955 5,307 5.42%
Investment securities:
Taxable 318,702 20,823 6.53%
Tax-exempt (2) 57,426 3,210 5.59%
Loans (3) 1,232,223 129,810 10.53%
---------- --------
Total interest-earning
assets 1,829,298 165,783 9.06%
Noninterest-earning assets 130,652
---------- --------
Total assets $1,959,950 165,783
========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 951,949 32,476 3.41%
Time deposits, over $100,000 212,768 11,811 5.55%
Other time deposits 149,581 8,366 5.59%
---------- --------
Total interest-bearing
deposits 1,314,298 52,653 4.01%
Other borrowings 60,615 3,849 6.35%
Subordinated debt 3,000 345 11.50%
---------- --------
Total interest-bearing
liabilities 1,377,913 56,847 4.13%
Trust Preferred Securities 15,000 1,463 9.75%
---------- --------
Total interest-bearing
liabilities and capital
securities 1,392,913 58,310 4.19%
Noninterest-bearing deposits 382,989
Other noninterest-bearing liabilities 24,087
Shareholders' equity 159,961
---------- --------
Total shareholders' equity and
liabilities $1,959,950 $ 58,310
========== --------
Net interest income $107,473
========
Including capital securities:
-----------------------------
Interest rate spread 4.88%
Contribution of interest free funds 1.00%
-----
Net yield on interest-earnings assets(4) 5.88%
Excluding capital securities:
-----------------------------
Interest rate spread 4.94%
Contribution of interest free funds 1.02%
-----
Net yield on interest-earnings assets(4) 5.96%
</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 7.42%, 7.58%
and 7.42% for the years ended December 31, 1999, 1998 and 1997,
respectively, using the federal statutory rate of 34%.
(3) Loan fees totaling $7.5 million, $6.8 million and $6.7 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>
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 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).
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1999
Compared with December 31, 1998 Compared with December 31, 1998
favorable/(unfavorable) favorable/(unfavorable)
(Dollars in thousands)(1) Volume Rate Net Volume Rate Net
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
INTEREST-EARNING ASSETS
Federal funds sold $ 2,432 $ (281) $ 2,151 $ 1,798 $ (64) $ 1,734
Other short term investments (1,434) (216) (1,650) (40) 213 173
Investment securities:
Taxable 4,219 2,072 6,291 10,943 (1,057) 9,886
Tax-exempt 1,577 (118) 1,459 2,147 (267) 1,880
Loans 55,200 (13,263) 41,937 29,192 (3,459) 25,733
------------------------------------- --------------------------------------
Total interest income 61,994 (11,806) 50,188 44,042 (4,636) 39,406
------------------------------------- --------------------------------------
INTEREST EXPENSE ON
INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (14,322) 1,010 (13,312) (9,314) (190) (9,504)
Time deposits over $100,000 (6,403) 1,162 (5,241) (5,803) 1,178 (4,625)
Other time deposits 106 363 469 (1,000) 1,024 24
------------------------------------- -------------------------------------------
Total interest-bearing deposits (20,620) 2,536 (18,084) (16,117) 2,012 (14,105)
Other borrowings 244 664 908 (3,206) 240 (2,966)
Subordinated debt 268 9 277 - - -
TPS (1,525) 148 (1,377) (1,478) 117 (1,361)
------------------------------------- -------------------------------------------
Total interest expense (21,632) 3,356 (18,276) (20,802) 2,370 (18,432)
------------------------------------- -------------------------------------------
Net increase (decrease)
in net interest income $ 40,363 $ (8,451) $ 31,912 $ 23,240 $ (2,266) $ 20,974
===================================== ===========================================
</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.
Interest income in 1999 increased 24.5% to $255.4 million from $205.2
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 $692.9 million, or 29.3%, to $3.1 billion in
1999, compared to $2.4 billion in 1998. Average loans increased $576.1 million,
or 38.0%, to $2.1 billion in 1999 from $1.5 billion in 1998. Average investment
securities, Federal funds sold and other short-term securities, increased 13.8%
to $963.4 million in 1999 from $846.6 million in 1998.
The average yield on interest-earning assets declined 32 basis points to
8.36% in 1999 from 8.68% 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 68.5% of total interest-earning assets in 1999
compared to 64.2% in 1998. The average yield on loans declined 82 basis points
to 9.44% in 1999 from 10.26% in 1998.
Interest expense, excluding capital securities, in 1999 increased 22.9% to
$90.8 million from $73.9 million in 1998. This increase was due to greater
volumes of interest-bearing liabilities offset by lower interest rates paid on
interest-bearing liabilities. Average interest-bearing liabilities, excluding
capital securities, increased 30.1% to $2.4 billion in 1999 from $1.8 billion
in 1998. The increase was 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 $620.6
million from $489.5 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 22.2% at year-end 1998.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.56% in 1999 from 4.66% in 1998, and the net
yield on interest-earning assets declined in 1999 to 5.39% from 5.56% in 1998.
Interest income increased 23.8% to $205.2 million in 1998 from $165.8
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 29.2% to $2.4 billion in 1998 from $1.8 billion in 1997 principally as
a result of increase in loans. The yield on the higher volume of average
interest-earning assets declined 38 basis points to 8.68% in 1998 from 9.06% in
1997, primarily as a result of increased competition for loans.
Interest expense, excluding capital securities, in 1998 increased 30.0% to
$73.9 million from $56.8 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, excluding capital securities,
increased 33.2% to $1.8 billion in 1998 from $1.4 billion in 1997.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.66% in 1998 from 4.94% in 1997 and the net
yield on interest-earning assets declined to 5.56% in 1998 from 5.96% 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 5.46%,
5.69% and 6.14% 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 $ 620,555 $ 489,520 $ 382,989
Client service expenses 3,226 2,520 1,873
Client service expenses, as a percentage of average
noninterest bearing demand deposits 0.52% 0.51% 0.49%
IMPACT ON NET YIELD ON INTEREST-EARNING
ASSETS (EXCLUDING CAPITAL SECURITIES):
Net yield on interest-earning assets 5.39% 5.56% 5.96%
Impact of client service expense (0.11)% (0.11)% (0.11)%
----------------------------------------------
Adjusted net yield on interest-earning assets 5.28% 5.45% 5.85%
==============================================
</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 $14.0 million, compared to $8.3
million in 1998 and $9.1 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 $6.7 million, or 0.27% of loans outstanding, at
December 31, 1999, from $5.1 million, or 0.28% of loans outstanding, at December
31, 1998 and $6.2 million, or 0.45% 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 $43.0 million in 1999, compared to $21.9
million in 1998 and $19.3 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 $ 7,931 $ 6,906 $ 6,642
Loan and international banking fees 4,275 2,752 2,654
Trust fees 2,990 2,473 2,049
ATM network revenue 2,682 2,440 2,607
Gain on sale of SBA loans 2,058 3,490 2,189
Gain (loss) on investments, net 87 473 (87)
Other income 8,448 2,462 2,125
-----------------------------------------
Total, recurring 28,471 20,996 18,179
Warrant income 14,508 945 1,162
-----------------------------------------
Total $ 42,979 $ 21,941 $ 19,341
=========================================
</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 $1.0 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 $ 56,488 $ 47,617 $ 41,923
Occupancy and equipment 17,545 13,386 11,989
Client service expenses 3,226 2,520 1,873
Legal and other professional fees 3,371 3,416 3,456
FDIC insurance and regulatory assessments 622 553 504
Expenses on other real estate owned 13 157 211
Other 19,648 18,556 16,308
-----------------------------------------------
Total operating expenses excluding
nonrecurring costs 100,913 86,205 76,264
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 $ 123,404 $ 90,207 $ 77,897
===============================================
Efficiency ratio 60.69% 59.98% 61.43%
Efficiency ratio (before merger, nonrecurring
and extraordinary items) 53.44% 57.68% 60.69%
Total operating expenses to average assets 3.72% 3.52% 3.97%
Total operating expenses to average assets (before
merger, nonrecurring and extraordinary items) 3.04% 3.36% 3.89%
</TABLE>
A-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses totaled $123.4 million for 1999, compared to $90.2
million for 1998 and $77.9 million for 1997. The ratio of operating expenses to
average assets was 3.72% in 1999, 3.52% in 1998, and 3.97% 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 53.44%, compared to 57.68% in
1998 and 60.69% 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 29.2% from 1998, while operating expenses, excluding merger, and other
nonrecurring items, increased only 17.1%. From 1997 to 1998, average assets
increased 30.9%, while operating expenses, excluding merger and nonrecurring
costs increased only 13.0%.
Compensation and benefits expenses increased in 1999 to $56.5 million,
compared to $47.6 million in 1998 and $41.9 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 32.8%, compared to
34.9% in 1998 and 36.7% 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 30.8% to $3.7 billion at December 31, 1999, compared
to $2.9 billion at December 31, 1998. Total assets increased 27.8% in 1998 from
$2.2 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 38.8% to $2.5 billion at December 31, 1999,
compared to $1.8 billion at December 31, 1998. Total gross loans increased 27.9%
in 1998 from $1.4 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 1996 1995
------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount % Amount % Amount %
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 926,075 38.3% $ 657,300 37.8% $ 547,083 40.3% $ 462,894 42.5% $ 345,353 41.7%
Term Real Estate - Commercial 764,034 31.6 562,388 32.3 412,412 30.4 313,203 28.7 249,411 30.1
------------------------------------------------------------------------------------------------
Total Commercial 1,690,109 69.9 1,219,688 70.1 959,495 70.7 776,097 71.2 594,764 71.8
Real estate construction and land 479,163 19.9 301,641 17.3 206,448 15.2 152,607 14.0 87,841 10.5
Real estate other 140,852 5.8 114,553 6.6 83,404 6.1 68,434 6.3 67,714 8.2
Consumer and other 167,257 6.9 149,287 8.6 146,930 10.8 121,478 11.2 101,931 12.3
------------------------------------------------------------------------------------------------
Total loans, gross 2,477,381 102.5 1,785,169 102.6 1,396,277 102.8 1,118,616 102.7 852,250 102.8
Deferred fees and discounts, net (12,911) (0.5) (11,916) (0.7) (11,157) (0.8) (10,567) (1.0) (9,328) (1.1)
------------------------------------------------------------------------------------------------
Total loans, net of
deferred fees 2,464,470 102.0 1,773,253 101.9 1,385,120 102.0 1,108,049 101.7 842,922 101.7
Allowance for loan losses (48,047) (2.0) (33,095) (1.9) (26,606) (2.0) (18,572) (1.7) (13,905) (1.7)
------------------------------------------------------------------------------------------------
Total loans, net $2,416,423 100.0% $1,740,158 100.0% $1,358,514 100.0% $1,089,477 100.0% $ 829,017 100.0%
================================================================================================
</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 $ 174,657 $ 23,913 $ 22,856 $ 7,568
Variable rate 432,058 70,471 380,054 29,240
One to five years:
Fixed rate 70,360 58,085 2,214 2,378
Variable rate 147,381 77,158 48,582 35,385
After five years:
Fixed rate 32,628 294,173 3,722 10,024
Variable rate 68,991 240,234 21,735 56,257
---------------------------------------------------------------
Total $ 926,075 $ 764,034 $ 479,163 $ 140,852
===============================================================
</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 $ 5,744 $ 4,011 $ 4,437 $ 7,186 $ 6,383
Accruing loans past due 90 days or more 139 244 273 2,651 1,037
Restructured loans 807 796 1,533 1,828 1,530
-------------------------------------------------------------------------
Total nonperforming loans 6,690 5,051 6,243 11,665 8,950
Other real estate owned 271 966 1,541 2,224 3,660
-------------------------------------------------------------------------
Total nonperforming assets $ 6,961 $ 6,017 $ 7,784 $ 13,889 $ 12,610
=========================================================================
Nonperforming assets to total loans
and other real estate owned 0.28% 0.34% 0.56% 1.25% 1.49%
Nonperforming assets to total assets 0.19% 0.21% 0.35% 0.78% 0.88%
</TABLE>
At December 31, 1999 and 1998, the Company had $5.7 million and $4.0
million in nonaccrual loans, respectively. 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 $ 30,725 $ 18,834 $ 21,322
Doubtful 1,850 1,376 2,165
Loss 2 - 49
Other real estate owned 271 966 1,541
-------------------------------------------
Classified loans and other real estate owned $ 32,848 $ 21,176 $ 25,077
===========================================
Classified to total loans and other real
estate owned 1.33% 1.19% 1.81%
Allowance for loan losses to total classified 146.27% 156.29% 106.10%
loans and other real estate owned
</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> <C> <C>
Period end loans outstanding $ 2,477,381 $ 1,785,169 $ 1,396,277 $ 1,118,616 $ 852,250
Average loans outstanding $ 2,097,090 $ 1,519,643 $ 1,237,733 $ 886,275 $ 735,358
Allowance for loan losses:
Balance at beginning of period $ 33,095 $ 26,606 $ 18,599 $ 13,905 $ 13,149
Charge-offs:
Commercial (2,880) (2,155) (2,136) (1,483) (2,146)
Term Real Estate - Commercial (12) (51) (59) (85) (25)
---------------------------------------------------------------------------
Total Commercial (2,892) (2,206) (2,195) (1,568) (2,171)
Real estate construction and land - (7) (243) (127) (410)
Real estate other - - - - (49)
Consumer and other (501) (397) (428) (540) (790)
---------------------------------------------------------------------------
Total charge-offs (3,393) (2,610) (2,866) (2,235) (3,420)
---------------------------------------------------------------------------
Recoveries:
Commercial 1,182 540 278 523 781
Term Real Estate - Commercial 1 11 6 27 -
---------------------------------------------------------------------------
Total Commercial 1,183 551 284 550 781
Real estate construction and land 7 - 6 328 19
Real estate other 7 - - - -
Consumer and other 364 86 101 156 292
---------------------------------------------------------------------------
Total recoveries 1,561 637 391 1,034 1,092
---------------------------------------------------------------------------
Net charge-offs (1,832) (1,973) (2,475) (1,201) (2,328)
Provision charged to income (1) 16,784 8,462 10,482 5,895 3,084
---------------------------------------------------------------------------
Balance at end of period $ 48,047 $ 33,095 $ 26,606 $ 18,599 $ 13,905
===========================================================================
Net charge-offs to average loans outstanding
during the period 0.09% 0.13% 0.20% 0.14% 0.32%
Allowance as a percentage of average loans
outstanding 2.29% 2.18% 2.15% 2.10% 1.89%
Allowance as a percentage of period end
loans outstanding 1.94% 1.85% 1.91% 1.66% 1.63%
Allowance as a percentage of
non-performing loans 718.19% 655.22% 426.17% 159.44% 155.36%
</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 Company's reserve
methodologies which are included in mergers 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 1996 1995
--------------------------------------------------------------------------------------------
% of Category % of Category % of Category % of Category % of Category
to Gross to Gross to Gross to Gross to Gross
(Dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $16,419 37.38% $12,341 36.82% $9,422 39.18% $7,927 41.38% $5,376 40.52%
Term real estate - commerci 7,850 30.84% 3,763 31.50% 2,939 29.54% 2,178 28.00% 1,827 29.27%
-----------------------------------------------------------------------------------------
Total commercial 24,269 68.22% 16,104 68.32% 12,361 68.72% 10,105 69.38% 7,203 69.79%
Real estate construction and land 4,620 19.34% 3,477 16.90% 2,239 14.79% 2,346 13.64% 1,561 10.31%
Real estate term 2,166 5.69% 1,574 6.42% 1,284 5.97% 706 6.12% 1,186 7.95%
Consumer and other 3,969 6.75% 2,817 8.36% 2,006 10.52% 2,067 10.86% 1,593 11.96%
-----------------------------------------------------------------------------------------
Total allocated 35,024 23,972 17,890 15,224 11,543
Unallocated 13,023 9,123 8,716 3,375 2,362
-----------------------------------------------------------------------------------------
Total $48,047 100.00% $33,095 100.00% $26,606 100.00% $18,599 100.00% $13,905 100.00%
=========================================================================================
</TABLE>
At December 31, 1999, the allowance for loan losses was $48.0 million,
consisting of a $35.0 million allocated allowance and a $13.0 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 $ 19,240 $ - $ (253) $ 18,987
U.S. agency notes 58,540 10 (1,808) 56,742
Mortgage-backed securities 249,038 95 (8,130) 241,003
Tax-exempt securities 65,646 85 (3,947) 61,784
Taxable municipal securities 3,754 1 (122) 3,633
Corporate securities 119,481 - (12,182) 107,299
---------------------------------------------------------------
Total securities available for sale 515,699 191 (26,442) 489,448
---------------------------------------------------------------
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 61,004 28 (2,048) 58,984
Tax-exempt securities 77,869 438 (3,173) 75,134
Corporate securities 37,608 15 (1,233) 36,390
---------------------------------------------------------------
Total securities held to maturity 236,468 490 (8,204) 228,754
---------------------------------------------------------------
Other securities 16,457 8,143 - 24,600
---------------------------------------------------------------
Total investment securities $ 768,624 $ 8,824 $ (34,646) $ 742,802
===============================================================
<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 $ 29,161 $ 139 $ - $ 29,300
U.S. agency notes 79,350 238 (76) 79,512
Mortgage-backed securities 226,257 1,799 (157) 227,899
Tax-exempt securities 57,809 1,219 - 59,028
Taxable municipal securities 6,434 187 (13) 6,608
Corporate securities 73,980 116 (1,164) 72,932
---------------------------------------------------------------
Total securities available for sale 472,991 3,698 (1,410) 475,279
---------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 3,762 28 (2) 3,788
U.S. agency notes 49,519 166 (92) 49,593
Mortgage-backed securities 40,055 189 (206) 40,038
Tax-exempt securities 62,805 1,953 (15) 64,743
Corporate securities 27,547 260 (34) 27,773
---------------------------------------------------------------
Total securities held to maturity 183,688 2,596 (349) 185,935
---------------------------------------------------------------
Other securities 8,564 - - 8,564
---------------------------------------------------------------
Total investment securities $ 665,243 $ 6,294 $ (1,760) $ 669,778
===============================================================
</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 $ 14,115 $ - $ - $ 19,240
U.S. agency notes (1) 1,756 43,503 13,281 - 58,540
Mortgage-backed securities (2) 1,268 6,882 7,796 233,092 249,038
Tax-exempt securities 891 7,775 11,113 45,867 65,646
Taxable municipal securities - 3,495 259 - 3,754
Corporate securities 996 3,650 1,012 113,823 119,481
--------------------------------------------------------------------------------
Total securities available for sale 10,036 79,420 33,461 392,782 515,699
--------------------------------------------------------------------------------
Fair value $ 9,989 $ 78,338 $ 32,421 $ 368,698 $ 489,448
--------------------------------------------------------------------------------
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 49,765 61,004
Tax-exempt securities 3,150 12,226 19,443 43,050 77,869
Corporate securities 5,484 17,305 11,769 3,050 37,608
--------------------------------------------------------------------------------
Total securities held to maturity 13,216 72,605 54,782 95,865 236,468
--------------------------------------------------------------------------------
Fair value 13,228 71,337 53,339 90,850 228,754
--------------------------------------------------------------------------------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $ 23,252 $ 152,025 $ 88,243 $ 488,647 $ 752,167
================================================================================
Total fair value $ 23,217 $ 149,675 $ 85,760 $ 459,548 $ 718,200
================================================================================
Weighted average yield-total portfolio 5.34% 5.78% 6.37% 7.18% 6.74%
</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 $3.3
billion at December 31, 1999, an increase of 32.5% compared to deposits of $2.5
billion at December 31, 1998. In 1998, deposits increased 27.3% from $1.9
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 26.9%
to $727.6 million at December 31, 1999, compared to $573.6 million a year
earlier.
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts reached $1.8 billion at year-end 1999, an
increase of 32.5% from $1.4 billion at December 31, 1998. MMDA, NOW and
savings accounts were 56.4% of total deposits at December 31, 1999, as compared
to 56.4% at December 31, 1998.
Time certificates of deposit totaled $696.4 million, or 21.3% of total
deposits, at December 31, 1999, compared to $501.7 million, or 20.4% 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 $78.6 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 $58.7 million for 1999, $38.8 million for 1998 and $30.5 million
for 1997. Cash used for investing activities totaled $812.6 million in 1999,
$626.9 million in 1998 and $400.2 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 $821.8 million, compared to $579.5 million in 1998 and $412.8
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 $799.4 million, $528.1 million and $365.3 million,
respectively. This represents a total of 97.3%, 91.1% and 88.5% 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 $26.8 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 $252.9 million from
$200.7 million at December 31, 1998 and from $171.5 million at December 31,
1997. Greater Bay paid dividends of $0.24, $0.19 and $0.15 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, in a private placement, 1,070,000 shares of
common stock (as restated for the 2-for-1 stock split effective on October 4,
2000). 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 648,648 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 the 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.
<TABLE>
<CAPTION>
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
---------------------------------------------------------------------
<S> <C> <C> <C>
Company 8.24% 9.75% 11.07%
Well-capitalized 5.00% 6.00% 10.00%
Adequately
capitalized 4.00% 4.00% 8.00%
</TABLE>
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:
The Company's leverage ratio was 8.24% at December 31, 1999, compared to
8.13% at December 31, 1998. At December 31, 1999, the Company's risk-based
capital ratios were 9.75% for Tier 1 risk-based capital and 11.07% for total
risk-based capital, compared to 10.70% and 12.59%, 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.
<TABLE>
<CAPTION>
Change in Projected Change
Interest Rates Net Portfolio -----------------------------
(Dollars in thousands) (1) Value Dollars Percentage
---------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
(1) Evaluation excludes MD Bancshares, Coast Bancorp, BSC and BOP. 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>
Immediate 2 Days To 7 Months to 1 Year 4 Years More than
(Dollars in thousands) or One Day 6 Months 12 Months to 3 Years to 5 Years 5 Years
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 794 $ 296 $ - $ - $ - $ -
Short term investments 249,107 - - - -
Investment securities 80,483 81,050 34,422 165,295 73,277 291,388
Other securities - - - - - -
Loans 1,293,396 604,150 51,759 145,981 148,958 233,138
Loan losses/unearned fees - - - - - -
Other assets - - - - - -
----------------------------------------------------------------------------------------------
Total assets $1,623,780 $ 685,496 $ 86,181 $311,276 $222,235 $524,526
==============================================================================================
Liabilities and Equity:
Deposits $1,810,296 $ 582,266 $ 106,247 $ 33,781 $ 2,650 $ 35
Other borrowings 13,452 63,600 3,000 - 37,000 -
Trust preferred securities - - - - - 49,000
Other liabilities - - - - - -
Shareholders' equity - - - - - -
----------------------------------------------------------------------------------------------
Total liabilities and equity $1,823,748 $ 645,866 $ 109,247 $ 33,781 $ 39,650 $ 49,035
==============================================================================================
Gap $ (199,968) $ 39,630 $ (23,066) $277,495 $182,585 $475,491
Cumulative Gap $ (199,968) $(160,338) $(183,404) $ 94,091 $276,676 $752,167
Cumulative Gap/total assets -5.35% -4.29% -4.91% 2.52% 7.40% 20.13%
</TABLE>
<TABLE>
<CAPTION>
Total
Total Rate Non-Rate
(Dollars in thousands) Sensitive Sensitive Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets:
Cash and due from banks $ 794 $ 146,131 $ 146,925
Short term investments 249,403 - 249,403
Investment securities 725,915 - 725,915
Other securities - 24,600 24,600
Loans 2,477,382 - 2,477,382
Loan losses/unearned fees - (60,958) (60,958)
Other assets - 173,462 173,462
--------------------------------------------------
Total assets $3,453,494 $ 283,235 $3,736,729
==================================================
Liabilities and Equity:
Deposits $2,535,275 $ 727,613 $3,262,888
Other borrowings 117,052 - 117,052
Trust preferred securities 49,000 - 49,000
Other liabilities - 54,893 54,893
Shareholders' equity - 252,896 252,896
--------------------------------------------------
Total liabilities and equity $2,701,327 $1,035,402 $3,736,729
==================================================
Gap $ 752,167 $ (752,167) -
Cumulative Gap $ 752,167 $ - -
Cumulative Gap/total assets 20.13% - -
</TABLE>
The foregoing table indicates that the Company had a one year gap of
$(183.4) million, or (4.91)% of total assets, at December 31, 1999. In theory,
this would indicate that at December 31, 1999, $183.4 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, BSC and BOP) if rates rose 200 basis points immediately and would
decrease a maximum of 13.6%, (excluding MD Bancshares, Coast Bancorp, BSC and
BOP) 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, BSC and BOP 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 2,790,998 shares of Greater Bay's stock (as restated for the 2-for-
1 stock split effective as of October 4, 2000). 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 6,140,000 shares of Greater Bay's stock (as restated for the
2-for-1 stock split effective as of October 4, 2000). 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 4,002,000 shares of Greater Bay's
stock (as restated for the 2-for-1 stock split effective as of October 4, 2000).
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 October 13, 2000, BOP was merged with and into DKSS Corp., as a result
of which BOP became a wholly owned subsidiary of Greater Bay. Upon consummation
of the merger, the outstanding shares of BOP were converted into an aggregate of
approximately 1,667,000 shares of Greater Bay's stock (as restated for the
2-for-1 stock split effective as of October 4, 2000). The stock was issued to
BOP'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 BOP on a pooling-of-interests basis. 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.
On August 8, 2000 Greater Bay and The Matsco Companies Inc. ("Matsco")
signed a definite agreement for a stock purchase agreement between Greater Bay
and Matsco, a financial services company headquartered in Emeryville, California
which specializes in financial services for dental and veterinary markets.
Greater Bay Bancorp will pay the Matsco shareholders $6.5 million in cash and up
to an additional $6.0 million in an earn-out arrangement over a 5 year period.
The acquisition is subject to regulatory approval and is expected to close in
the fourth quarter of this year.
Assuming the acquisition of Matsco 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.
Recent Accounting Developments
New Accounting Pronouncement -- In September 2000, the FASB issued Statement
----------------------------
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The new Statement replaces Statement 125, issued
in June 1996. It revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of Statement 125's provisions without
reconsideration.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. Disclosures about securitizations and collateral
accepted need not be reported for periods ending on or before December 15, 2000,
for which financial statements are presented for comparative purposes. This
Statement is to be applied prospectively with certain exceptions.
Implementation of FASB Statement No. 140 is not expected to have a material
effect on the Company's financial position or results of operations.
Business Combinations -- In September 1999, the Financial Accounting Standards
---------------------
Board ("FASB") issued an Exposure Draft of a proposed Statement, Business
Combinations and Intangible Assets. The Board is currently redeliberating the
provisions in that proposed Statement. The FASB is in the process of researching
and discussing the various alternatives proposed by constituents about the best
method of accounting for goodwill. The FASB expects to discuss the accounting
for goodwill and other issues related to the purchase method at public meetings
through November 2000. The FASB will redeliberate the related issue of whether
to retain the pooling method, but not until it has reached a set of tentative
decisions with respect to the accounting for goodwill. The FASB will not make a
final decision about the Exposure Draft or consider whether to issue a final
standard until it has addressed all of the substantive issues raised by
constituents, including Members of Congress, and has considered the entire set
of tentative decisions reached during its redeliberations. While the FASB
currently estimates that it will be able to complete its redeliberations in
January 2001, that estimate may not be met depending on the progress of its
redeliberations. The FASB has no "deadline" for completing the project; however,
they currently expect to issue a final Statement near the end of the first
quarter of 2001.
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 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 $ 147,222 $ 138,484
Federal funds sold 219,600 112,020
Other short term securities 29,507 77,960
-------------------------------------
Cash and cash equivalents 396,329 328,464
Investment securities:
Available for sale, at fair value 489,448 475,279
Held to maturity, at amortized cost (fair value 1999: $228,754
1998: $185,935) 236,468 183,688
Other securities 24,600 8,564
-------------------------------------
Investment securities 750,516 667,531
Total loans:
Commercial 926,075 657,300
Term real estate - commercial 764,034 562,388
-------------------------------------
Total commercial 1,690,109 1,219,688
Real estate construction and land 479,163 301,641
Real estate other 140,852 114,553
Consumer and other 167,257 149,287
Deferred loan fees and discounts (12,911) (11,916)
-------------------------------------
Total loans, net of deferred fees 2,464,470 1,773,253
Allowance for loan losses (48,047) (33,095)
-------------------------------------
Total loans, net 2,416,423 1,740,158
Property, premises and equipment, net 37,597 33,156
Interest receivable and other assets 135,864 87,937
-------------------------------------
Total assets $ 3,736,729 $ 2,857,246
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 3,262,888 $ 2,463,484
Other borrowings 117,052 109,423
Subordinated debt - 3,000
Other liabilities 54,894 31,642
-------------------------------------
Total liabilities 3,434,834 2,607,549
-------------------------------------
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**: 80,000,000 shares authorized;
39,635,048 and 37,342,950 shares issued and outstanding as
of December 31, 1999 and 1998, respectively 148,611 121,646
Accumulated other comprehensive income (loss) (9,158) 674
Retained earnings 113,442 78,377
-------------------------------------
Total shareholders' equity 252,895 200,697
-------------------------------------
Total liabilities and shareholders' equity $ 3,736,729 $ 2,857,246
=====================================
</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.
** Restated to reflect 2 - for - 1 stock split declared for shareholders
effective on October 4, 2000.
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 $ 197,480 $ 155,543 $ 129,810
Interest on investment securities:
Taxable 37,000 30,709 20,823
Tax - exempt 6,549 5,090 3,210
--------------------------------------------------
Total interest on investment securities 43,549 35,799 24,033
Other interest income 14,348 13,847 11,940
--------------------------------------------------
Total interest income 255,377 205,189 165,783
--------------------------------------------------
INTEREST EXPENSE
Interest on deposits 84,842 66,758 52,653
Interest on long term borrowings 4,269 3,169 1,808
Interest on other borrowings 5,907 6,815 3,849
--------------------------------------------------
Total interest expense 95,018 76,742 58,310
--------------------------------------------------
Net interest income 160,359 128,447 107,473
Provision for loan losses 14,039 8,279 9,131
--------------------------------------------------
Net interest income after provision for loan losses 146,320 120,168 98,342
--------------------------------------------------
OTHER INCOME
Service charges and other fees 7,931 6,906 6,642
Loan and international banking fees 4,275 2,752 2,654
Trust fees 2,990 2,473 2,049
ATM network revenue 2,682 2,440 2,607
Gain on sale of SBA loans 2,058 3,490 2,189
Gain (loss) on investments, net 87 473 (87)
Warrant income, net 14,508 945 1,162
Other income 8,448 2,462 2,125
--------------------------------------------------
Total 42,979 21,941 19,341
--------------------------------------------------
OPERATING EXPENSES
Compensation and benefits 56,488 47,617 41,923
Occupancy and equipment 17,545 13,386 11,989
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 26,880 25,202 22,352
--------------------------------------------------
Total operating expenses 123,404 90,207 77,897
--------------------------------------------------
Net income before provision for income taxes and
extraordinary items 65,895 51,902 39,786
Provision for income taxes 21,623 18,118 14,592
--------------------------------------------------
Net income before extraordinary items 44,272 33,784 25,194
Extraordinary items (88) - -
--------------------------------------------------
Net income $ 44,184 $ 33,784 $ 25,194
==================================================
Net income per share - basic** $ 1.16 $ 0.91 $ 0.70
==================================================
Net income per share - diluted** $ 1.10 $ 0.85 $ 0.66
==================================================
</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 effective on April 30, 1998 and 2 -
for - 1 stock split effective on October 4, 2000.
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 $ 44,184 $ 33,784 $ 25,195
------------------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (net of
taxes of $(8,364), $282, and $796 for the years ended December
31, 1999, 1998 and 1997, respectively) (12,064) (152) 1,240
Less: reclassification adjustment for gains (losses) included in
net income (net of taxes of $36, $195 and $(36) for the
years ended December 31, 1999, 1998 and 1997, respectively) 51 278 (51)
------------------------------------------------
Net change (12,013) (126) 1,189
------------------------------------------------
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) (9,832) (551) 1,189
------------------------------------------------
Comprehensive income $ 34,352 $ 33,233 $ 26,384
================================================
</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>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended December 31,
1999, 1998 and 1997 Common Stock Accumulated Other Total
(Dollars in thousands, --------------------------------- Comprehensive Retained Shareholders'
except per share amounts) Shares** Amount Income (Loss) Earnings Equity
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Greater Bay Bancorp,
prior to pooling 12,955,548 $ 34,884 $ 71 $ 9,727 $ 44,682
Shares issued to
Peninsula Bank of
Commerce shareholders 2,590,432 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 1,901,496 8,000 - - 8,000
Pacific Rim Bancorporation
retained earnings
prior to pooling - - (108) 879 771
Shares issued to Pacific
Business Funding
Corporation shareholders 596,000 51 - - 51
Pacific Business Funding
Corporation retained
earnings prior to
pooling - - - 59 59
Shares issued to Bay Area
Bancorp shareholders 2,328,854 4,143 - - 4,143
Bay Area Bancorp retained
earnings prior to pooling - - (5) 5,143 5,138
Shares issued to Bay
Commercial Services
shareholders 1,471,446 3,662 - - 3,662
Bay Commercial Services
retained earnings prior
to pooling - - (15) 5,771 5,756
Shares issued to Mt.Diablo
Bancshares shareholders 1,715,742 5,939 - - 5,939
Mt. Diablo Bancshares
retained earnings prior
to pooling - - 5 (403) (398)
Shares issued to Coast
Bancorp shareholders 5,601,927 11,041 - - 11,041
Coast Bancorp retained
earnings prior to pooling - - 130 12,022 12,152
Shares issued to Bank of
Santa Clara shareholders 3,324,912 10,330 - - 10,330
Bank of Santa Clara
retained earnings prior
to pooling - - - 11,749 11,749
Shares issued to Bank of
Petaluma shareholders 1,379,299 6,532 196 - 6,728
Bank of Petaluma retained
earnings prior to pooling - - - 2,648 2,648
-------------------------------------------------------------------------------------------
Balance, December 31,
1996, restated to
reflect pooling 33,865,656 91,723 221 53,781 145,725
Net income - - - 25,194 25,194
Other comprehensive income,
net of taxes - - 1,004 - 1,004
Stock offering by Mt.
Diablo Bancshares 571,960 2,555 - - 2,555
Stock options exercised,
including related tax
benefit 1,051,557 3,732 - 59 3,571
Stock issued in Employee
Stock Purchase Plan 60,664 347 - - 347
401(k) employee stock
purchase 72,304 531 - - 531
Stock repurchase by Bay
Area Bancshares and
Coast Bancorp (15,223) (119) - (100) (219)
Stock dividend by Bank of
Santa Clara and Bank of
Petaluma 279,284 3,701 - (3,707) (6)
Pacific Business Funding
Corporation distribution - - - (208) (208)
Cash dividend $0.20 per share*** - - - (7,031) (7,031)
-------------------------------------------------------------------------------------------
Balance, December 31, 1997* 35,886,162 102,470 1,225 67,770 171,465
Net income - - - 33,784 33,784
Other comprehensive loss,
net of taxes - - (551) - (551)
Stock options exercised,
including related tax benefit 715,153 5,169 - (29) 5,140
Stock issued in Employee Stock
Purchase Plan 59,340 656 - - 656
401(k) employee stock purchase 72,966 1,060 - - 1,060
Stock repurchase by Bay Area
Bancshares, Bay Commercial
Services and Coast Bancorp (169,968) (604) - (2,190) (2,794)
Pacific Business Funding
Corporation distribution - - - (1,163) (1,163)
Stock dividend by Coast Bancorp
and Bank of Santa Clara 773,975 12,822 0 (12,822) _
Stock issued in Dividend
Reinvestment Plan 5,322 73 - - 73
Cash dividend $0.19 per share*** - - - (6,973) (6,973)
-------------------------------------------------------------------------------------------
Balance, December 31, 1998* 37,342,950 121,646 674 78,377 200,697
Net income - - - 44,184 44,184
Other comprehensive loss, net
of taxes - - (9,832) - (9,832)
Stock options exercised, including
related tax benefit 1,036,118 5,385 - (59) 5,326
Stock issued in Employee
Stock Purchase Plan 83,302 1,031 - - 1,031
401(k) employee stock purchase 76,010 1,205 - - 1,205
Stock issued in Dividend
Reinvestment Plan 26,668 383 - - 383
Pacific Business Funding
Corporation distribution - - - (40) (40)
Stock issued through private
placement 1,070,000 18,961 - - 18,961
Cash dividend $0.24 per share*** - - - (9,020) (9,020)
-------------------------------------------------------------------------------------------
Balance, December 31, 1999* 39,635,048 $ 148,611 $ (9,158) $ 113,442 $ 252,895
===========================================================================================
</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 effective on April 30, 1998 and 2 -
for - 1 stock split declared effective on October 4, 2000.
*** Excluding dividends paid by Greater Bays subsidiaries prior to the
completion of their mergers with Greater Bay, Greater Bay paid dividends of
$0.24, $0.19 and $0.15 per share for the years ended December 31, 1999, 1998
and 1997, respectively.
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 $ 44,184 $ 33,784 $ 25,194
Reconcilement of net income to net cash from operations:
Provision for loan losses 16,784 8,462 10,482
Depreciation and amortization 6,726 4,286 3,680
Deferred income taxes (7,022) (2,993) (4,478)
(Gain) loss on sale of investments, net (87) (473) 87
Gain on sale of building (535) - -
Proceeds from loan sales 74,420 82,870 48,256
Origination of loans held for sale (74,514) (84,432) (52,827)
Changes in:
Accrued interest receivable and other assets (31,203) (13,694) (7,538)
Accrued interest payable and other liabilities 25,452 8,378 5,463
Deferred loan fees and discounts, net 4,505 2,551 2,224
--------------- ---------------- ----------------
Operating cash flows, net 58,710 38,739 30,543
--------------- ---------------- ----------------
Cash flows - investing activities
Maturities and partial paydowns on investment securities:
Held to maturity 96,842 43,260 43,260
Available for sale 96,753 107,855 105,137
Purchase of investment securities:
Held to maturity (126,506) (37,232) (26,910)
Available for sale (201,272) (277,145) (280,421)
Other securities (13,664) (207) (607)
Proceeds from sale of available for sale securities 53,471 261,812 41,493
Loans, net (702,985) (741,748) (271,644)
Purchase of property, premises and equipment (8,687) (10,000) (9,978)
Sale of banking building 2,637 - -
Investment in other real estate owned - (500) (500)
Purchase of insurance policies (9,206) - -
--------------- ---------------- ----------------
Investing cash flows, net (812,617) (626,905) (400,170)
--------------- ---------------- ----------------
Cash flows - financing activities
Net change in deposits 799,403 528,078 365,318
Net change in other borrowings - short term 6,389 (41,951) 25,547
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 26,759 5,305 6,955
Repurchase of common stock - (2,651) (130)
Cash dividends (9,019) (6,973) (7,037)
--------------- ---------------- ----------------
Financing cash flows, net 821,772 579,543 412,813
--------------- ---------------- ----------------
Net change in cash and cash equivalents 67,865 (8,623) 43,186
Cash and cash equivalents at beginning of period 328,464 337,087 293,901
--------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 396,329 $ 328,464 $ 337,087
=============== ================ ================
Cash flows - supplemental disclosures Cash paid during the period for:
Interest $ 100,944 $ 69,174 $ 57,453
=============== ================ ================
Income taxes $ 19,146 $ 20,194 $ 19,706
=============== ================ ================
Non-cash transactions:
Additions to other real estate owned $ - $ 450 $ 1,723
=============== ================ ================
Transfer of appreciated securities to Greater Bay
Bancorp Foundation $ 560 $ 1,341 $ -
=============== ================ ================
</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-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 Petaluma
("BOP"), 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 37 offices located in Aptos, Blackhawk,
Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Milpitas,
Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San
Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz,
Scotts Valley, Sunnyvale, Valley Ford, 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, BOP, 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. BOP, 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.
A - 35
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
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:
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income (Loss)
--------------------------------------------------------------------------------
Balance - December 31, 1997 $ 1,225 $ - $ 1,225
Other comprehensive income 1998 126 (677) (551)
--------------------------------------------------------------------------------
Balance - December 31, 1998 1,351 (677) 674
Other comprehensive income 1999 (12,013) 2,181 (9,832)
--------------------------------------------------------------------------------
Balance - December 31, 1999 $ (10,662) $ 1,504 $ (9,158)
================================================================================
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 (as adjusted to reflect the 2-for-1 stock splits effective on
April 30, 1998 and October 4, 2000)
On October 13, 2000, BOP merged with and into DKSS Corp., as a result of
which, BOP became a wholly owned subsidiary of Greater Bay. Upon consummation of
the merger, the outstanding shares of BOP were converted into an aggregate of
approximately 1,667,000 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 BOP on a pooling-of-
interests basis.
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
4,002,000 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 6,140,000 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.
A - 36
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
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 2,790,998 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
1,814,480 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
2,798,642 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 596,000 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 1,901,496 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.
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 2,656,000 shares 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 August 8, 2000, Greater Bay and The Matsco Companies Inc. ("Matsco")
signed a definitive agreement for a stock purchase agreement between Greater Bay
and Matsco, a financial services company headquartered in Emeryville, California
which specializes in financial services for the dental and veterinary markets.
Greater Bay Bancorp will pay the Matsco shareholders $6.5 million in cash and up
to an additional $6.0 million in an earn-out arrangement over a 5 year period.
The acquisition is subject to regulatory approval and is expected to close in
the fourth quarter of this year.
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, BSC
and BOP for the periods indicated:
Year ended
December 31,
Net Interest Income Net Income
1999 (Dollars in thousands)
Greater Bay $103,732 $ 27,711
MD Bancshares 10,009 2,827
Coast Bancorp 20,028 6,939
BSC 17,962 4,403
BOP 8,628 2,304
-------- --------
Combined $160,359 $ 44,184
======== ========
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
BOP 7,807 2,115
-------- --------
Combined $128,447 $ 33,784
======== ========
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
BOP 6,544 1,475
-------- --------
Combined $107,473 $ 25,194
======== ========
Assuming the acquisition of Matsco had been completed at December 31, 1999,
Greater Bay would have had 1999 proforma net interest income of $166.7 million
and proforma net income of $44.2 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 Petaluma Bank of Santa Clara Coast Bancorp
Twelve months ended Twelve months ended Twelve months ended
(Dollars in thousands) December 31, 1999 December 31,1999 December 31,1999
---------------------------- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income:
Greater Bay Bancorp $ 151,731 $ 133,769 $ 113,741
Acquired Entity 8,628 17,962 20,028
----------------------- ---------------------- -----------------------
Combined $ 160,359 $ 151,731 $ 133,769
======================= ====================== =======================
Net Income:
Greater Bay Bancorp $ 41,880 $ 37,477 $ 30,538
Acquired Entity 2,304 4,403 6,939
----------------------- ---------------------- -----------------------
Combined $ 44,184 $ 41,880 $ 37,477
======================= ====================== =======================
</TABLE>
<TABLE>
<CAPTION>
MD Bancshares BCS BA Bancshares
Twelve months ended Nine months ended Three months ended
December 31,1999 September 30, 1999 March 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income:
Greater Bay Bancorp $ 103,732 $ 68,498 $ 18,360
Acquired Entity 10,009 2,007 2,180
----------------------- ---------------------- -----------------------
Combined $ 113,741 $ 70,505 $ 20,540
======================= ====================== =======================
Net Income:
Greater Bay Bancorp $ 27,711 $ 17,033 $ 5,058
Acquired Entity 2,827 486 644
----------------------- ---------------------- -----------------------
Combined $ 30,538 $ 17,519 $ 5,702
======================= ====================== =======================
</TABLE>
<TABLE>
<CAPTION>
PBFC PRB PBC
Six months ended Three months ended Nine months ended
June 30, 1998 March 31, 1998 September 30, 1997
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income:
Greater Bay Bancorp $ 30,077 $ 13,366 $ 27,922
Acquired Entity 1,154 1,285 6,851
----------------------- ---------------------- -----------------------
Combined $ 31,231 $ 14,651 $ 34,773
======================= ====================== =======================
Net Income:
Greater Bay Bancorp $ 6,628 $ 3,646 $ 6,097
Acquired Entity 344 60 2,573
----------------------- ---------------------- -----------------------
Combined $ 6,972 $ 3,706 $ 8,670
======================= ====================== =======================
</TABLE>
There were no significant transactions between the Company and any of the
acquired entities prior to the mergers. All intercompany transactions have been
eliminated.
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 $ 19,240 $ - $ (253) $ 18,987
U.S. agency notes 58,540 10 (1,808) 56,742
Mortgage-backed securities 249,038 95 (8,130) 241,003
Tax-exempt securities 65,646 85 (3,947) 61,784
Taxable municipal securities 3,754 1 (122) 3,633
Corporate securities 119,481 - (12,182) 107,299
--------------------------------------------------------------
Total securities available for sale 515,699 191 (26,442) 489,448
--------------------------------------------------------------
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 61,004 28 (2,048) 58,984
Tax-exempt securities 77,869 438 (3,173) 75,134
Corporate securities 37,608 15 (1,233) 36,390
--------------------------------------------------------------
Total securities held to maturity 236,468 490 (8,204) 228,754
--------------------------------------------------------------
Other securities 16,457 8,143 - 24,600
--------------------------------------------------------------
Total investment securities $ 768,624 $ 8,824 $ (34,646) $ 742,802
==============================================================
</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 $ 29,161 $ 139 $ - $ 29,300
U.S. agency notes 79,350 238 (76) 79,512
Mortgage-backed securities 226,257 1,799 (157) 227,899
Tax-exempt securities 57,809 1,219 - 59,028
Taxable municipal securities 6,434 187 (13) 6,608
Corporate securities 73,980 116 (1,164) 72,932
--------------------------------------------------------------
Total securities available for sale 472,991 3,698 (1,410) 475,279
--------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 3,762 28 (2) 3,788
U.S. agency notes 49,519 166 (92) 49,593
Mortgage-backed securities 40,055 189 (206) 40,038
Tax-exempt securities 62,805 1,953 (15) 64,743
Corporate securities 27,547 260 (34) 27,773
--------------------------------------------------------------
Total securities held to maturity 183,688 2,596 (349) 185,935
--------------------------------------------------------------
Other securities 8,564 - - 8,564
--------------------------------------------------------------
Total investment securities $ 665,243 $ 6,294 $ (1,760) $ 669,778
==============================================================
</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 $ 14,115 $ - $ - $ 19,240
U.S. agency notes (1) 1,756 43,503 13,281 - 58,540
Mortgage-backed securities (2) 1,268 6,882 7,796 233,092 249,038
Tax-exempt securities 891 7,775 11,113 45,867 65,646
Taxable municipal securities - 3,495 259 - 3,754
Corporate securities 996 3,650 1,012 113,823 119,481
------------------------------------------------------------------------------
Total securities available for sale 10,036 79,420 33,461 392,782 515,699
------------------------------------------------------------------------------
Fair value $ 9,989 $ 78,338 $ 32,421 $ 368,698 $ 489,448
------------------------------------------------------------------------------
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 49,765 61,004
Tax-exempt securities 3,150 12,226 19,443 43,050 77,869
Corporate securities 5,484 17,305 11,769 3,050 37,608
------------------------------------------------------------------------------
Total securities held to maturity 13,216 72,605 54,782 95,865 236,468
------------------------------------------------------------------------------
Fair value 13,228 71,337 53,339 90,850 228,754
------------------------------------------------------------------------------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $ 23,252 $ 152,025 $ 88,243 $ 488,647 $ 752,167
==============================================================================
Total fair value $ 23,217 $ 149,675 $ 85,760 $ 459,548 $ 718,200
==============================================================================
Weighted average yield-total portfolio 5.34% 5.78% 6.37% 7.18% 6.74%
</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.
Investment securities with a carrying value of $339.4 million and $212.4
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) $ 53,471 $ 261,812 $ 41,493
Available for sale
securities-gains (losses) (2) $ 87 $ 473 $ (87)
(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 $ 33,095 $ 26,606 $ 18,599
Provision for loan losses (1) 16,784 8,462 10,482
Loan charge-offs (3,393) (2,610) (2,866)
Recoveries 1,561 637 391
-------------------------------------
Balance, December 31 $ 48,047 $ 33,095 $ 26,606
=====================================
(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 mergers 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 $ 5,744 $ 4,011 $ 4,437
Accruing loans past due
90 days or more 139 244 273
Restructured loans 807 796 1,533
-------------------------------------
Total nonperforming loans $ 6,690 $ 5,051 $ 6,243
=====================================
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.
<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
-----------------------------------------------------------------------
Land $ 3,508 $ 4,055
Buildings and premises 12,047 12,088
Furniture and equipment 33,353 29,998
Leasehold improvements 15,751 11,147
Automobiles 740 732
---------------------------
Total 65,399 58,020
Accumulated depreciation
and amortization (27,802) (24,864)
---------------------------
Premises and equipment, net $ 37,597 $ 33,156
===========================
Depreciation and amortization amounted to $6.1 million, $4.4 million and
$4.1 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:
(Dollars in thousands) 1999 1998
-----------------------------------------------------------------------------
Demand, noninterest-bearing $ 727,613 $ 573,552
MMDA, NOW and Savings 1,838,868 1,388,260
Time certificates, $100,000 and over 534,662 324,517
Other time certificates 161,745 177,155
----------------------------------
Total deposits $ 3,262,888 $ 2,463,484
==================================
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> <C>
Time deposits, $100,000 and over $ 403,016 $ 77,646 $ 44,446 $ 8,904 $ 650 $ 534,691
Other time deposits 70,895 43,078 33,476 13,639 657 161,716
------------------------------------------------------------------------------------------
Total $ 473,911 $ 120,724 $ 77,922 $ 22,543 $ 1,307 $ 696,407
==========================================================================================
</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 $29 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 $ 68,552 $ 18,513
Other short term notes payable 1,500 1,760
FHLB advances 3,000 3,000
Advances under credit lines 7,000 1,700
------------------------------
Total short term borrowings 80,052 24,973
------------------------------
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 $ 117,052 $ 109,423
==============================
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 $32.8 million and
$32.7 million, respectively, and the average interest rates during those periods
were 4.73% and 4.77%, 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 $1.5 million and $993,000, respectively, and the
average interest rates during those periods were 5.25% and 5.53%, respectively.
There were $1.2 million in federal fund purchases outstanding at December 31,
1998. There was no such balance outstanding at December 31, 1999.
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 $ 22,399 $ 15,571 $ 14,244
State 7,513 5,606 4,733
--------------------------------------
Total current 29,912 21,177 18,977
--------------------------------------
Deferred:
Federal (6,515) (2,346) (3,459)
State (1,774) (713) (926)
--------------------------------------
Total deferred (8,289) (3,059) (4,385)
--------------------------------------
Total expense $ 21,623 $ 18,118 $ 14,592
======================================
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 $ 15,804 $ 11,065
State income taxes 4,458 2,952
Deferred compensation 2,438 1,726
Unrealized (gains) losses on securities 10,128 (445)
Accumulated depreciation 576 275
Net operating losses 14 159
Purchase allocation adjustments 8 22
Other 322 (280)
---------------------------
Net deferred tax asset $ 33,748 $ 15,474
===========================
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:
Years Ended December 31,
--------------------------------
(Dollars in thousands) 1999 1998 1997
--------------------------------------------------------------------------------
Statutory federal tax rate 35.0% 35.0% 35.0%
California franchise tax
expense, net of federal
income tax benefit 5.6% 6.2% 6.4%
--------------------------------
40.6% 41.2% 41.4%
Tax exempt income -2.8% -3.0% -2.7%
Contribution of appreciated securities -4.3% -1.0% 0.0%
Nondeductible merger
costs 0.2% 0.6% 1.3%
Other, net -0.9% -2.9% -3.3%
--------------------------------
Effective income tax rate 32.8% 34.9% 36.7%
================================
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 $10.7 million, $9.0 million and $8.5
million, respectively.
Merger and other related nonrecurring costs for the years ended December
31, 1999, 1998 and 1997 were comprised of the following:
(Dollars in thousands) 1999 1998 1997
--------------------------------------------------------------------------------
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
==================================
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 $ 4,500 $ 3,992 $ 3,174
Legal and other professional fees 3,371 3,416 3,456
Marketing and promotion 3,492 3,279 3,038
Client services 3,226 2,520 1,873
Data processing 2,665 1,959 1,529
Directors fees 1,226 1,432 1,398
Insurance 952 889 800
FDIC insurance and regulatory
assessments 622 553 504
Other real estate owned 13 157 211
Other 6,813 7,005 6,369
------------------------------------
$ 26,880 $ 25,202 $ 22,352
====================================
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
(All share amounts have been restated to reflect the 2-for-1 stock split
declared to shareholders of record as of April 30, 1998 and the 2-for-1 stock
split declared to shareholders of record as of October 4, 2000).
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 1,825,304 the number of shares of Greater Bay stock issuable under the
Bancorp Plan. On May 17, 2000, the Company's shareholders approved an additional
amendment to the Bancorp Plan to increase by 2,500,000, the number of shares
issuable by the Bancorp Plan. These were done to accommodate the increased
number of eligible employees as a result of the mergers.
Under the terms of the respective mergers, all stock option plans of BOP,
BSC, BAB and BBC 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 and the MDNB Stock Option Plan were assumed by the company. Options
outstanding from the BOP plan of 239,880 (converted at a ratio of 0.5731),
outstanding options from the BSC plan of 471,840 (converted at a ratio of
0.8499), options outstanding from the CCB plan of 379,596 (converted at a ratio
of 0.6338), options outstanding from the MDNB plan of 145,428 (converted at a
ratio of 0.9532), outstanding options from the BAB plan of 59,668 shares
(converted at a ratio of 1.38682) and outstanding options from the BBC plan of
216,636 shares (converted at a ratio of 0.6833) were assumed by the Bancorp
Plan.
A-51
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
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.
At December 31, 1999 the total authorized shares issuable under the Bancorp
Plan was approximately 4,558,000 shares and the number of shares available for
future grants was approximately 220,000 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 $ 44,184 $ 33,784 $ 25,195
Pro forma $ 40,835 $ 31,316 $ 24,164
Basic net income per share:
As reported $ 1.16 $ 0.91 $ 0.70
Pro forma $ 1.07 $ 0.85 $ 0.67
Diluted net income per share:
As reported $ 1.10 $ 0.85 $ 0.66
Pro forma $ 1.01 $ 0.79 $ 0.63
</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 5,360 $ 9.04 4,379 $ 5.71 3,684 $ 3.72
Granted 1,582 17.81 1,697 15.65 1,364 9.45
Exercised (667) 5.06 (648) 3.85 (599) 3.01
Forfeited (153) 12.59 (67) 8.41 (67) 4.11
----------------------------------------------------------------------------------------
Outstanding at end of year 6,122 11.65 5,361 9.04 4,382 5.59
========================================================================================
Options exercisable at year-end 2,671 7.12 2,534 4.71 2,443 3.82
========================================================================================
Weighted average fair value of options
granted during the year $ 5.94 $ 5.42 $ 3.20
================== ============= ==================
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999.
<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>
$1.53 - $4.69 1,575 $ 3.42 4.61 1,293 $ 3.33
$5.11 - $8.79 779 6.55 6.78 661 6.15
$9.87 - $14.75 1,274 12.22 6.75 408 12.10
$14.78 - $17.52 1,180 16.62 8.18 180 16.79
$17.94 - $21.93 1,314 19.51 9.82 128 21.89
</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, $1.1 million and $844,000, 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 923,738 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 83,302 shares
of common stock for an aggregate purchase price of $1,031,000 compared to the
purchase of 59,340 shares of common stock for an aggregate purchase price of
$656,000 in 1998 and 60,640 shares of common stock for an aggregate purchase
price of $347,000 in 1997. There were 525,986 shares remaining in the plan
available for purchase by employees at December 31, 1999.
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 $3.5 million and $2.6 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 $896,000,
$602,000 and $557,000, 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 $45.4 million and $33.5 million, respectively and is included
in other assets. The income recognized on these policies was $1.5 million,
$953,000 and $406,000 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 BOP, CCB and PBC prior to its merger with the Company, there was
approximately $1.1 million and $1.3 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 $ 46,866 $ 21,431
Additions 27,883 45,019
Repayments (48,639) (19,585)
----------------------------
Balance, December 31 $ 26,110 $ 46,865
============================
Undisbursed commitments,
at year end $ 11,113 $ 8,430
============================
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 $ 5,694
2001 5,938
2002 4,860
2003 2,650
2004 2,232
Thereafter 10,803
-------------
Total $ 32,177
=============
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 $6.9
million, $5.4 million, and $5.0 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 $948.8 million and $742.7 million and
letters of credit were $58.4 million and $28.2 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 $265.1 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, 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 $ 343,091 11.07% $ 247,943 8.00% N/A
Bank of Petaluma 17,537 11.70 11,991 8.00 $ 17,537 10.00%
Bank of Santa Clara 33,672 11.91 22,618 8.00 28,272 10.00
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
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
Mt. Diablo National Bank 15,192 8.20 14,823 8.00 18,529 10.00
Peninsula Bank of Commerce 22,458 10.86 16,544 8.00 20,680 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 302,073 9.75% $ 123,927 4.00% N/A
Bank of Petaluma 15,941 10.64 5,993 4.00 $ 15,941 6.00%
Bank of Santa Clara 31,368 11.09 11,314 4.00 16,971 6.00
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
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
Mt. Diablo National Bank 12,875 6.95 7,411 4.00 11,117 6.00
Peninsula Bank of Commerce 19,859 9.60 8,272 4.00 12,408 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 302,073 8.24% $ 146,637 4.00% N/A
Bank of Petaluma 15,941 8.29 7,692 4.00 $ 15,941 5.00%
Bank of Santa Clara 31,368 9.29 12,782 4.00 15,977 5.00
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
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
Mt. Diablo National Bank 12,875 7.76 7,828 4.00 9,785 5.00
Peninsula Bank of Commerce 19,859 7.32 10,847 4.00 13,559 5.00
</TABLE>
<TABLE>
<CAPTION>
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 $ 276,666 12.59% $ 175,800 8.00% N/A
Bank of Petaluma 14,723 11.01 10,698 8.00 $ 14,723 10.00%
Bank of Santa Clara 29,698 11.95 19,882 8.00 24,852 10.00
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
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
Mt. Diablo National Bank 11,716 9.00 10,416 8.00 13,021 10.00
Peninsula Bank of Commerce 18,256 12.37 11,809 8.00 14,761 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 235,144 10.70% $ 87,904 4.00% N/A
Bank of Petaluma 13,297 9.94 5,351 4.00 $ 13,297 6.00%
Bank of Santa Clara 27,860 11.21 9,941 4.00 14,912 6.00
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
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
Mt. Diablo National Bank 10,115 7.77 5,208 4.00 7,812 6.00
Peninsula Bank of Commerce 16,408 11.12 5,904 4.00 8,857 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 235,144 8.13% $ 115,692 4.00% N/A
Bank of Petaluma 13,297 7.36 7,227 4.00 $ 13,297 5.00%
Bank of Santa Clara 27,860 9.26 12,035 4.00 15,043 5.00
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
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
Mt. Diablo National Bank 10,115 6.08 6,658 4.00 8,323 5.00
Peninsula Bank of Commerce 16,408 6.65 9,759 4.00 12,198 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 $75.6 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 and the 2-for-1 stock split effective
on October 4, 2000.
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 $ 44,184
Basic net income per share:
Income available to common shareholders 44,184 38,245,000 $ 1.16
Effect of dilutive securities:
Stock options - 2,059,000
-------------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 44,184 40,304,000 $ 1.10
=================================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1998
-------------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 33,784
Basic net income per share:
Income available to common shareholders 33,784 37,049,000 $ 0.91
Effect of dilutive securities:
Stock options - 2,590,000
-------------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 33,784 39,639,000 $ 0.85
=================================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
-------------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 25,194
Basic net income per share:
Income available to common shareholders 25,194 35,835,000 $ 0.70
Effect of dilutive securities:
Stock options - 2,363,000
-------------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 25,194 38,198,000 $ 0.66
=================================================
</TABLE>
A-60
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
There were options to purchase 1,037,000 shares and 304,000 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
BOP at a 0.5731 conversion ratio, 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
1,901,496 and 596,000 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 282,079 223,722
Other investments 16,143 17,936
Subordinated debentures
issued by subsidiary - 3,000
Other assets 18,773 9,811
---------------------------------
Total assets $ 319,832 $ 262,172
=================================
Liabilities and
shareholders' equity:
Subordinated debt 58,547 54,547
Other liabilities 8,410 6,928
---------------------------------
Total liabilities 66,957 61,475
Shareholders' equity:
Common stock 148,611 121,646
Accumulated other comprehensive income (9,158) 674
Retained earnings 113,422 78,377
---------------------------------
Total shareholders' equity 252,875 200,697
---------------------------------
Total liabilities and
shareholders' equity $ 319,832 $ 262,172
=================================
A-61
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
PARENT COMPANY ONLY-STATEMENTS OF OPERATIONS
Years Ended December 31,
(Dollars in thousands) 1999 1998 1997
--------------------------------------------------------------------------------
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 46,173 31,742 23,732
---------------------------------
Net income $ 44,184 $ 33,784 $ 25,195
=================================
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 $ 44,184 $ 33,784 $ 25,194
Reconciliation of net income
to net cash from operations:
Equity in undistributed net
income of subsidiaries (46,173) (31,716) (23,731)
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 $ 147,222 $ 147,222 $ 138,484 $ 149,554
Short term investments and Fed Funds Sold 249,107 249,107 189,980 178,910
Investment securities 750,516 722,262 667,531 669,777
Loans, net 2,416,423 2,396,640 1,740,158 1,735,073
Accrued interest receivable 24,130 24,130 17,033 17,033
Financial liabilities:
Deposits:
Demand, noninterest-bearing 727,613 756,604 573,552 599,360
MMDA, NOW and Savings 1,838,868 1,809,877 1,388,260 1,362,451
Time certificates, $100,000 and over 534,662 528,735 324,517 330,710
Other time certificates 161,745 162,963 177,155 190,983
Other borrowings 117,052 116,242 109,423 108,053
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 $ 156,097 $ 369 $ 128,945 $ 859 $ 107,023 $ 141
Other income 39,972 3,007 19,453 2,488 17,249 2,092
Operating expenses 149,042 2,863 104,085 2,429 85,726 1,966
Net income before income taxes (1) 98,167 121 68,648 918 49,006 267
Total assets 3,702,369 - 3,820,326 - 2,220,574 -
Deposits 3,205,057 57,831 2,395,945 67,539 1,869,084 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 $ 207,231 $ 151,745 $ 126,505
Parent company net interest income and other income (3,893) (1,357) 309
----------------------------------------------------
Consolidated net interest income and other income $ 203,338 $ 150,388 $ 126,814
====================================================
Net income before taxes
Total segment net income before income taxes $ 98,288 $ 69,566 $ 49,273
Parent company net income before income taxes (32,393) (17,664) (9,486)
----------------------------------------------------
Consolidated net income before income taxes $ 65,895 $ 51,902 $ 39,787
====================================================
Total assets
Total segment assets $ 3,702,369 $ 2,820,326 $ 2,220,574
Parent company segment assets 34,360 36,920 15,333
----------------------------------------------------
Consolidated total assets $ 3,736,729 $ 2,857,246 $ 2,235,907
====================================================
</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 648,648 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 $18.50 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.
A-67
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
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 $ 73,124 $ 54,413 $ 66,160 $ 53,916 $ 60,934 $ 49,893 $ 55,159 $ 46,966
Net interest income 45,490 20,079 41,670 20,743 38,257 18,788 34,942 17,130
Provision for loan losses 6,608 2,406 3,902 2,492 2,141 1,937 1,388 1,444
Other income 23,725 6,331 7,705 5,448 5,780 5,452 5,769 4,710
Other expenses 34,938 23,657 25,701 22,369 28,784 22,831 23,650 21,350
Income before taxes 18,390 14,602 19,697 13,761 13,037 11,789 14,771 11,752
Net income 14,240 9,697 12,337 8,919 8,124 7,434 9,483 7,737
Net income per share:
Basic $ 0.36 $ 0.26 $ 0.32 $ 0.24 $ 0.21 $ 0.20 $ 0.27 $ 0.21
Diluted $ 0.35 $ 0.24 $ 0.30 $ 0.22 $ 0.20 $ 0.19 $ 0.25 $ 0.20
</TABLE>
A-68
<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 of America. 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 merger of Greater Bay Bancorp and Bank of Petaluma on October 13, 2000,
which has 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 of America.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
October 17, 2000
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