<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
---
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number 0-25034
GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)
California 77-0387041
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2860 West Bayshore Road, Palo Alto, California 94303
(Address of principal executive offices) (Zip Code)
(650) 813-8200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Outstanding shares of Common Stock, no par value, as of July 27, 2000:
19,892,665
<PAGE>
GREATER BAY BANCORP
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999...................... 3
Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 2000 and 1999..................................................................... 4
Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended
June 30, 2000 and 1999..................................................................... 5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999...... 6
Notes to Consolidated Financial Statements................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 32
Part II. Other Information
Item 1. Legal Proceeding............................................................................. 36
Item 2. Changes in Securities and Use of Proceeds.................................................... 36
Item 3. Default Upon Senior Securities............................................................... 36
Item 4. Submission of Matters to a Vote of Securities Holders........................................ 36
Item 5. Other Information............................................................................ 37
Item 6. Exhibits and Reports on Form 8-K............................................................. 37
Signature.................................................................................. 38
</TABLE>
2
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Dollars in thousands) (unaudited) 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 197,425 $ 125,886
Federal funds sold 58,000 216,300
Other short term securities 55 29,507
------------------------------
Cash and cash equivalents 255,480 371,693
Investment securities:
Available for sale, at fair value 483,090 441,290
Held to maturity, at amortized cost (fair value
$359,875 and $136,481 at June 30, 2000 and
December 31, 1999, respectively) 366,272 141,725
Other securities 20,052 23,918
------------------------------
Investment securities 869,414 606,933
Loans:
Commercial 1,037,383 845,424
Term real estate-commercial 679,457 595,214
------------------------------
Total commercial 1,716,840 1,440,638
Real estate construction and land 497,823 459,633
Real estate-other 119,904 123,346
Consumer and other 140,311 116,476
Deferred loan fees and discounts (12,459) (10,604)
------------------------------
Total loans, net of deferred fees 2,462,419 2,129,489
Allowance for loan losses (54,020) (44,147)
------------------------------
Total loans, net 2,408,399 2,085,342
Property, premises and equipment 23,262 25,872
Interest receivable and other assets 150,537 125,256
------------------------------
Total assets $ 3,707,092 $3,215,096
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 689,912 $ 598,428
MMDA, NOW and savings 1,813,152 1,628,127
Time certificates, $100,000 and over 575,338 474,884
Other time certificates 101,404 105,560
------------------------------
Total deposits 3,179,806 2,806,999
Other borrowings 133,500 100,600
Other liabilities 56,990 51,863
------------------------------
Total liabilities 3,370,296 2,959,462
------------------------------
Company obligated mandatorily redeemable cumulative
trust preferred securities of subsidiary trust
holding solely junior subordinated debentures 99,500 49,000
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized;
none issued - -
Common stock, no par value: 40,000,000 shares authorized;
17,820,348 and 17,019,474 shares issued and outstanding
as of June 30, 2000 and December 31, 1999, respectively 135,596 122,152
Accumulated other comprehensive loss (14,722) (8,055)
Retained earnings 116,422 92,537
------------------------------
Total shareholders' equity 237,296 206,634
------------------------------
Total liabilities and shareholders' equity $ 3,707,092 $3,215,096
==============================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
(Dollars in thousands, except per share amounts) (unaudited) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 60,052 $ 40,065 $ 113,432 $ 76,435
Interest on investment securities:
Taxable 11,219 7,321 21,205 13,702
Tax - exempt 1,789 1,085 3,337 2,152
----------------------------- ------------------------------
Total interest on investment securities 13,008 8,406 24,542 15,854
Other interest income 3,178 3,231 7,699 5,581
----------------------------- ------------------------------
Total interest income 76,238 51,702 145,673 97,870
----------------------------- ------------------------------
INTEREST EXPENSE
Interest on deposits 25,855 17,335 50,658 32,634
Interest on Trust Preferred Securities 1,783 919 2,841 1,955
Interest on other borrowings 1,469 1,680 3,127 2,907
----------------------------- ------------------------------
Total interest expense 29,107 19,934 56,626 37,496
----------------------------- ------------------------------
Net interest income 47,131 31,768 89,047 60,374
Provision for loan losses 7,982 1,916 13,296 3,079
----------------------------- ------------------------------
Net interest income after provision for loan losses 39,149 29,852 75,751 57,295
----------------------------- ------------------------------
OTHER INCOME
Loan and international banking fees 1,927 697 3,103 1,370
Service charges and other fees 1,148 1,202 2,331 2,416
Trust fees 905 727 1,829 1,448
Gain on sale of SBA loans 675 446 1,294 1,259
ATM network revenue 584 613 1,154 1,258
Gain (loss) on sale of investments, net 58 (9) 57 52
Warrant income, net 740 226 9,349 230
Other income 1,289 628 4,220 1,091
----------------------------- ------------------------------
Total other income 7,326 4,530 23,337 9,124
----------------------------- ------------------------------
OPERATING EXPENSES
Compensation and benefits 12,320 10,896 25,155 21,417
Occupancy and equipment 4,386 3,403 8,922 7,012
Legal and other professional fees 999 729 1,919 1,388
Telephone, postage and supplies 925 852 1,789 1,697
Marketing and promotion 792 597 1,478 1,164
Client services 490 478 1,029 1,087
FDIC insurance and regulatory assessments 210 146 450 285
Directors fees 157 217 284 467
Other real estate owned 41 15 51 36
Contribution to GBB Foundation and
related expenses, net - 323 - 323
Merger and other related nonrecurring costs 10,203 3,965 14,084 3,965
Other 1,986 2,074 3,981 3,491
----------------------------- ------------------------------
Total operating expenses 32,509 23,695 59,142 42,332
----------------------------- ------------------------------
Income before provision for income taxes and
extraordinary items 13,966 10,687 39,946 24,087
Provision for income taxes 5,624 4,125 16,096 9,405
----------------------------- ------------------------------
Net income before extraordinary items 8,342 6,562 23,850 14,682
Extraordinary items - - - (88)
----------------------------- ------------------------------
Net income $ 8,342 $ 6,562 $ 23,850 $ 14,594
============================= ==============================
Net income per share - basic $ 0.47 $ 0.40 $ 1.36 $ 0.90
============================= ==============================
Net income per share - diluted $ 0.45 $ 0.38 $ 1.30 $ 0.85
============================= ===============================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ------------------------------
(Dollars in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Net income $ 8,342 $ 6,562 $ 23,850 $ 14,594
------------------------------- -----------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period (net
of taxes of $(3,660) and $(2,945) for the three
months ended June 30, 2000 and 1999, and
$(4,820) and $(3,458) for the six months ended
June 30, 2000 and 1999, respectively) (5,234) (4,212) (6,893) (4,946)
less: reclassification adjustment for gains
included in net income 34 (5) 34 31
------------------------------- -----------------------------
Net change (5,200) (4,217) (6,859) (4,915)
------------------------------- -----------------------------
Cash flow hedges:
Net derivative gains arising during period (net
of taxes of $(45) and $480 for the three
months ended June 30, 2000 and 1999, and
$129 and $1,126 for the six months ended
June 30, 2000 and 1999, respectively) (64) 686 185 1,610
Less: reclassification adjustment for expenses
included in income (net of taxes of $5
and $(46) for the three months ended June
30, 2000 and 1999, and $7 and $(89)
for the six months ended June 30, 2000 and
1999, respectively) 5 (46) 7 (89)
------------------------------- -----------------------------
Net change (59) 640 192 1,521
------------------------------- -----------------------------
Other comprehensive loss (5,259) (3,577) (6,667) (3,394)
------------------------------- -----------------------------
Comprehensive income $ 3,083 $ 2,985 $ 17,183 $ 11,200
=============================== =============================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30,
(Dollars in thousands) (unaudited) 2000 1999
--------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows - operating activities
Net income $ 23,850 $ 14,594
Reconcilement of net income to net cash from operations:
Provision for loan losses 13,296 2,878
Depreciation and amortization 3,183 1,294
Deferred income taxes (4,063) (1,379)
Loss on sale of investments, net - (52)
Changes in:
Accrued interest receivable and other assets (13,121) (3,893)
Accrued interest payable and other liabilities (4,801) 6,002
Deferred loan fees and discounts, net 1,855 2,496
------- ---------
Operating cash flows, net 29,801 21,673
------- ---------
Cash flows - investing activities
Maturities and partial paydowns on of investment securities:
Held to maturity 12,549 7,889
Available for sale 15,206 119,038
Other securities 3,866 -
Purchase of investment securities:
Held to maturity (237,148) (8,629)
Available for sale (67,572) (184,349)
Other securities - (498)
Proceeds from sale of available for sale securities - 36,895
Loans, net (338,208) (285,527)
Sale of bank building 5,502 0
Purchase of property, premises and equipment 42 (5,619)
Proceeds from sale of other real estate owned (5,766) 345
Purchase of insurance policies (4,555) (4,776)
------- ---------
Investing cash flows, net (616,084) (325,231)
------- ---------
Cash flows - financing activities
Net change in deposits 372,807 365,209
Net change in other borrowings - short term 32,900 18,290
Principal repayment - long term borrowings - (3,000)
Company obligated mandatorially redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures issued 50,500 -
Proceeds from sale of common stock 17,611 4,040
Cash dividends (3,748) (3,971)
------- ---------
Financing cash flows, net 470,070 380,568
------- ---------
Net change in cash and cash equivalents (116,213) 77,010
Cash and cash equivalents at beginning of period 371,693 295,917
------- ---------
Cash and cash equivalents at end of period $ 255,480 $ 372,927
======= =========
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 56,997 $ 36,117
Income taxes $ 11,772 $ 9,315
Non-cash transactions:
Tax benefit of exercise of nonqualified stock options $ - $ 345
Transfer of appreciated securities to Greater Bay
Bancorp Foundation $ 7,200 $ -
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2000 and December 31, 1999 and for the
Three Months and Six Months Ended June 30, 2000 and 1999
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of June 30, 2000, and the
Consolidated Statements of Operations, Comprehensive Income and Cash Flows for
the three months and six months ended June 30, 2000 and June 30, 1999 have been
prepared by Greater Bay Bancorp and are not audited. The results of operations
for the quarter and six months ended June 30, 2000 are not necessarily
indicative of the results expected for any subsequent quarter or for the entire
year ended December 31, 2000. The Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements for the year
ended December 31, 1999 included in the Current Report on Form 8-K filed as of
May 18, 2000.
Consolidation and Basis of Presentation
The unaudited financial information presented was prepared on the same
basis as the audited financial statements for the year ended December 31, 1999
included in the Current Report on Form 8-K filed as of May 18, 2000. The
consolidated financial statements include the accounts of Greater Bay Bancorp
("Greater Bay" on a parent-only basis, and the "Company" on a consolidated
basis) and its wholly owned subsidiaries, 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"), Peninsula Bank of Commerce ("PBC"), GBB Capital
I, GBB Capital II, GBB Capital III and GBB Capital IV and its operating
divisions. On July 21, 2000, the Bank of Santa Clara ("BSC") was merged with and
into Greater Bay. On July 24, 2000 the Company filed a Current Report on Form 8-
K containing Supplemental Consolidated Financial Statements which accounted for
the merger on a pooling-of-interests basis. The financial statements contained
herein have not been restated to include BSC. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior periods consolidated financial statements to conform to the
current presentation. In the opinion of management such unaudited financial
statements reflect all adjustments necessary for fair statement of the results
of operations and balances for the interim period presented. 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.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2000 and December 31, 1999 and for the
Three Months and Six Months Ended June 30, 2000 and 1999
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" requires the Company to classify items of other
comprehensive income by their nature in the financial statements and display the
accumulated other comprehensive income separately from retained earnings in the
equity section of the balance sheet. The changes to the balances of accumulated
other comprehensive income are as follows:
<TABLE>
<CAPTION>
Accumulated Accumulated
Unrealized other Unrealized Other
gains on Cash flow comprehensive gains on Cash flow comprehensive
(Dollars in thousands) securities hedges income (Dollars in thousands) securities hedges income
-------------------------------------------------------------------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 $ (9,559) $ 1,504 $ (8,055) Balance - March 31, 2000 $ (11,218) $ 1,755 $ (9,463)
Current period change (6,859) 192 (6,667) Current period change (5,200) (59) (5,259)
------------------------------------- ------------------------------------
Balance - June 30, 2000 $ (16,418) $ 1,696 $ (14,722) Balance - June 30, 2000 $ (16,418) $ 1,696 $ (14,722)
===================================== ====================================
Accumulated Accumulated
Unrealized other Unrealized Other
gains on Cash flow comprehensive gains on Cash flow comprehensive
(Dollars in thousands) securities hedges income (Dollars in thousands) securities hedges income
-------------------------------------------------------------------- --------------------------------------------------------------
Balance - December 31, 1998 $ 1,026 $ (677) $ 349 Balance - March 31, 1999 $ 328 $ 204 $ 532
Current period change (4,915) 1,521 (3,394) Current period change (4,217) 640 (3,577)
------------------------------------- ------------------------------------
Balance - June 30, 1999 $ (3,889) $ 844 $ (3,045) Balance - June 30, 1999 $ (3,889) $ 844 $ (3,045)
===================================== ====================================
</TABLE>
Segment Information
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information.
NOTE 2--MERGERS
On May 18, 2000, Greater Bay completed its merger with Coast Bancorp,
the holding company for Coast Commercial Bank, Santa Cruz, California. Each
Coast Bancorp shareholder received 0.6338 shares of Greater Bay stock for each
share of Coast Bancorp in a tax-free exchange. The merger was accounted for as a
pooling of interests. As a result of the merger, Coast Commercial Bank operates
as a wholly owned subsidiary of Greater Bay.
On March 21, 2000, Greater Bay, Bank of Petaluma ("BOP") and DKSS Corp.
signed a definitive agreement for a merger between BOP and DKSS, as a result of
which BOP will become a wholly owned subsidiary of Greater Bay. The agreement
provides for BOP shareholders to receive approximately 990,000 shares of Greater
Bay stock subject to certain adjustments based on changes in the Company's stock
price in a tax-free exchange to be accounted for as a pooling-of-interests. The
transaction is expected to be completed in the fourth quarter of 2000, subject
to BOP shareholders' and regulatory approvals. As of and for the six months
ended June 30, 2000, BOP had $4.6 million in net interest income, $1.3 million
in net income, $212.8 million in assets, $172.7 million in deposits and $16.4
million in shareholders' equity.
On July 21, 2000, Bank of Santa Clara ("BSC") merged with and into GBB
Merger Corp., as a result of which BSC became a wholly owned subsidiary of
Greater Bay. Upon consummation of the merger, the outstanding shares of BSC were
converted into an aggregate of approximately 2,001,000 shares of Greater Bay's
stock. The transaction was accounted for as a pooling-of-interests. The
financial information presented herein has not been restated to reflect the
merger with BSC on a pooling-of-interests basis. As of and for the six months
ended June 30, 2000, BSC had $10.2 million in net interest income, $2.6 million
in net income, $399.2 million in assets, $364.0 million in deposits and $33.0
million in shareholders' equity.
Assuming the acquisitions of BSC and BOP had been completed at June 30,
2000, the Company would have had on a pooled basis, proforma net interest income
of $103.8 million and proforma net income of $27.7 million.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2000 and December 31, 1999 and for the
Three Months and Six Months Ended June 30, 2000 and 1999
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.
For the three months ended
(Dollars in thousands) March 31, 2000
---------------------------------------------------------
Net interest income:
Greater Bay Bancorp $ 36,378
Coast Bancorp 5,538
------------
Combined $ 41,916
============
Net income:
Greater Bay Bancorp $ 13,473
Coast Bancorp 2,035
------------
Combined $ 15,508
============
There are no significant transactions between the Company and Coast
Bancorp. All intercompany transactions have been eliminated.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2000 and December 31, 1999 and for the
Three Months and Six Months Ended June 30, 2000 and 1999
NOTE 3--BORROWINGS
Other borrowings are detailed as follows:
June 30, December 31,
(Dollars in thousands) 2000 1999
---------------------------------------------------------------------------
Other borrowings:
Short term borrowings:
FHLB advances $ 80,000 $ -
Securities sold under agreements
to repurchase 40,000 55,100
Short term notes payable 1,500 1,500
Advances under credit lines - 7,000
-------------------------
Total short term borrowings 121,500 63,600
-------------------------
Long term borrowings:
Securities sold under agreements
to repurchase - 10,000
FHLB advances 12,000 27,000
-------------------------
Total other long term borrowings 12,000 37,000
-------------------------
Total other borrowings $ 133,500 $ 100,600
=========================
During the six month period ended June 30, 2000, the average balance of
short term Federal Home Loan Bank ("FHLB") advances were $13.3 million and the
average interest rates during that period was 6.29%. There were no such
borrowings outstanding during the year ended December 31, 1999. Short term FHLB
advances generally mature within 90 days.
During the six month period ended June 30, 2000 and the twelve month
period ended December 31, 1999, the average balance of securities sold under
short term agreements to repurchase were $17.0 million and $21.1 million,
respectively, and the average interest rates during those periods were 5.97% and
5.57%, respectively. Securities sold under short term agreements to repurchase
generally mature within 90 days of dates of purchase.
During the six month period ended June 30, 2000 and the twelve month
period ended December 31, 1999, the average balance of advances under credit
lines were $16.7 million and $614,000 respectively, and the average interest
rates during those periods were 6.35% and 6.26% respectively. Advances under
credit lines generally require repayment within one year.
During the six month period ended June 30, 2000 and the twelve month
period ended December 31, 1999, the average balance of federal funds purchased
was $4.2 million and $719,000, respectively, and the average interest rates
during those periods were 5.77% and 5.38%, respectively. Federal funds purchased
generally mature in one business day. There were no such balances outstanding at
June 30, 2000 or December 31, 1999.
FHLB advances in the amount of $10.0 million will mature in 2002. The
remaining FHLB advances of $2.0 million will mature in the year 2003. Under the
terms of the advances, the FHLB has a put option which gives it the right to
demand early repayment. The FHLB advances bear a weighted average interest rate
of 5.73% at June 30, 2000 and December 31, 1999. The advances are collateralized
by loans and securities pledged to the FHLB.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2000 and December 31, 1999 and for the
Three Months and Six Months Ended June 30, 2000 and 1999
NOTE 4--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.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
three and six months ended June 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended June 30, 2000 For the three months ended June 30, 1999
---------------------------------------- ----------------------------------------
Average Average
Income shares Per share Income shares Per share
(Dollars in thousands, except per share amounts) (numerator) (denominator) amount (numerator) (denominator) amount
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 8,342 $ 6,562
Basic net income per share:
Income available to common shareholders 8,342 17,788,000 $ 0.47 6,562 16,261,000 $ 0.40
Effect of dilutive securities:
Stock options - 715,000 - - 916,000 -
---------------------------------------- ----------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 8,342 18,503,000 $ 0.45 $ 6,562 17,177,000 $ 0.38
======================================== ========================================
<CAPTION>
For the six months ended June 30, 2000 For the six months ended June 30, 1999
---------------------------------------- ----------------------------------------
Average Average
Income shares Per share Income shares Per share
(Dollars in thousands, except per share amounts) (numerator) (denominator) amount (numerator) (denominator) amount
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 23,850 $ 14,594
Basic net income per share:
Income available to common shareholders 23,850 17,566,000 $ 1.36 14,594 16,163,000 $ 0.90
Effect of dilutive securities:
Stock options - 773,000 - - 948,000 -
---------------------------------------- ----------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 23,850 18,339,000 $ 1.30 $ 14,594 17,111,000 $ 0.85
======================================== ========================================
</TABLE>
There were options to purchase 0 and 533,674 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the three months ended
June 30, 2000 and 1999, respectively. There were options to purchase 2,156 and
477,245 shares that were considered anti-dilutive whereby the options' exercise
price was greater than the average market price of the common shares, during the
six months ended June 30, 2000 and 1999, respectively.
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
Coast Bancorp at a 0.6338 conversion ratio and Mt. Diablo Bancshares ("MD
Bancshares") at a 0.9532 conversion ratio and the 1999 mergers with Bay
Commercial Services ("BCS") at a 0.6833 conversion ratio and Bay Area Bancshares
("BA Bancshares") at a 1.38682 conversion ratio.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2000 and December 31, 1999 and for the
Three Months and Six Months Ended June 30, 2000 and 1999
NOTE 5--ACTIVIY OF BUSINESS SEGMENTS
The Company adopted SFAS No. 131. The accounting policies of the
segments are the same as those described in the "Summary of Significant
Accounting Policies." Segment data includes intersegment revenue, as well as
charges allocating all corporate-headquarters costs to each of its operating
segments. The Company evaluates the performances of its segments and allocates
resources to them based on net interest income, other income, net income before
income taxes, total assets and deposits.
The Company is organized primarily along community banking and trust
divisions. Fourteen of the divisions have been aggregated into the "community
banking" segment. Community banking provides a range of commercial banking
services to small and medium-sized businesses, real estate developers, property
managers, business executives, professional and other individuals. The trust
division has been shown as the "trust operations" segment. The Company's
business is conducted principally in the U.S.; foreign operations are not
material.
The following table shows each segment's key operating results and
financial position for the six months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
----------------------------- -----------------------------
Community Trust Community Trust
(Dollars in thousands) Banking Operations Banking Operations
------------------------------------------------------------------------ -----------------------------
<S> <C> <C> <C> <C>
Net interest income $ 90,277 $ 300 $ 61,743 $ 140
Other income
21,229 1,761 5,987 1,455
Operating expenses, excluding merger and
other related nonrecurring costs 46,434 1,348 37,983 1,482
Net income before income taxes (1) 51,869 620 27,120 113
Total assets 3,629,732 - 2,725,554 -
Deposits 3,115,772 64,034 2,366,205 56,921
Assets under management - 795,042 - 659,414
</TABLE>
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2000 and December 31, 1999 and for the
Three Months and Six Months Ended June 30, 2000 and 1999
A reconciliation of total segment net interest income and other income
combined, net income before income taxes, and total assets to the consolidated
numbers in each of these categories for the six months ended June 30, 2000 and
1999 is presented below.
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
Net interest income and other income
Total segment net interest income and other income $ 113,567 $ 69,325
Parent company net interest income and other income (1,183) (173)
----------- -----------
Consolidated net interest income and other income $ 112,384 $ 69,498
=========== ===========
Net income before taxes, merger
related nonrecurring costs and extraordinary items
Total segment net income before taxes $ 52,489 $ 27,233
Parent company net income before taxes 1,541 819
Consolidated net income before taxes, ----------- -----------
merger and other related costs and
extraordinary items $ 54,030 $ 28,052
=========== ===========
Total assets
Total segment assets $ 3,629,732 $ 2,725,554
Parent company assets 77,360 61,364
----------- -----------
Consolidated total assets $ 3,707,092 $ 2,786,918
=========== ===========
</TABLE>
NOTE 6--CASH DIVIDEND
The Company declared a cash dividend of $0.15 cents per share payable
on July 15, 2000 to shareholders of record as of June 30, 2000.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay is a bank holding company operating BAB, BBC, CCB, CNB, Golden
Gate, MPB, MDNB, and PBC. The Company also owns and operates GBB Capital I, GBB
Capital II, GBB Capital III, and GBB Capital IV 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 following 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, San
Francisco, the San Francisco Peninsula, the East Bay Region, and the Coastal
Region with 27 offices located in Aptos, Blackhawk, Capitola, Cupertino,
Danville, Fremont, Hayward, Lafayette, Millbrae, Palo Alto, Pleasanton, Redwood
City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara,
Santa Cruz, Scotts Valley, Walnut Creek and Watsonville.
On July 21, 2000 Greater Bay completed its merger with BSC. The financial
information included in this report does not include the results of BSC.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the
Company. The following discussion should be read in conjunction with the
Company's consolidated financial data included elsewhere in this document.
Certain statements under this caption constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, which involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in such forward-
looking statements. Factors that might cause such a difference include but
are not limited to economic conditions, competition in the geographic and
business areas in which the Company conducts its operations, fluctuation in
interest rates, credit quality and government regulation.
RESULTS OF OPERATIONS
The following table summarizes income, income per share and key financial
ratios using the company's core earnings, income including technology gains, and
net income for the three month and six month periods presented:
<TABLE>
<CAPTION>
Core earnings Income including Net income
(before merger, nonrecurring technology gains and before (after merger, nonrecurring
and extraordinary items) merger and extraordinary items and extraordinary items)
---------------------------- ------------------------------ -----------------------------
Three Three Three Three Three Three
months ended months ended months ended months ended months ended months ended
(Dollars in thousands, except per share June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------------------- ------------------------------ -----------------------------
amounts)
<S> <C> <C> <C> <C> <C> <C>
Income $ 14,636 $ 8,977 $ 15,086 $ 9,054 $ 8,342 $ 6,562
Income per share:
Basic $ 0.82 $ 0.55 $ 0.84 $ 0.56 $ 0.46 $ 0.40
Diluted $ 0.79 $ 0.52 $ 0.81 $ 0.53 $ 0.45 $ 0.38
Return on average assets 1.62% 1.33% 1.67% 1.34% 0.92% 0.97%
Return on average shareholders' equity 24.86% 20.44% 25.63% 20.61% 14.17% 14.94%
<CAPTION>
Core earnings Income including Net income
(before merger, nonrecurring technology gains and before (after merger, nonrecurring
and extraordinary items) merger and extraordinary items and extraordinary items)
---------------------------- ------------------------------ -----------------------------
Six Six Six Six Six Six
months ended months ended months ended months ended months ended months ended
(Dollars in thousands, except per share June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
---------------------------- ------------------------------ -----------------------------
amounts)
<S> <C> <C> <C> <C> <C> <C>
Income $ 27,514 $ 17,095 $ 32,983 $ 17,174 $ 23,850 $ 14,594
Income per share:
Basic $ 1.57 $ 1.06 $ 1.88 $ 1.06 $ 1.36 $ 0.90
Diluted $ 1.51 $ 1.00 $ 1.81 $ 1.00 $ 1.30 $ 0.85
Return on average assets 1.56% 1.34% 1.87% 1.34% 1.35% 1.14%
Return on average shareholders' equity 24.07% 20.29% 28.86% 20.38% 20.87% 17.32%
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net income for the second quarter of 2000 increased 27.1% to $8.3
million, or $0.45 per diluted share, compared to net income of $6.6 million, or
$0.38 per diluted share, for the second quarter of 1999. The second quarter 2000
results included nonrecurring warrant income of $740,000 ($450,000, net of
taxes) compared to $226,000 ($77,000, net of taxes and other related expenses)
during the second quarter of 1999. In addition, the second quarter of 2000
included merger and other related nonrecurring costs of $10.2 million ($6.7
million, net of taxes) compared to $4.0 million ($2.5 million, net of taxes) in
the second quarter of 1999.
Net income, including technology gains and before nonrecurring merger
related expenses and extraordinary items, increased 66.6% to $15.1 million, or
$0.81 per diluted share, for the second quarter of 2000, compared to $9.1
million, or $0.53 per diluted share, in the second quarter of 1999.
The Company's core earnings, which is its net income, excluding
nonrecurring warrant income, merger and other related nonrecurring costs and
extraordinary items, for the second quarter of 2000 increased 63.0% to $14.6
million, or $0.79 per diluted share, compared to $9.0 million, or $0.52 per
diluted share, in the second quarter of 1999. Based on its core earnings for the
second quarter of 2000, the Company's return on average shareholders' equity was
24.86% and its return on average assets was 1.62%. During the second quarter of
1999, the Company's core earnings resulted in a return on average shareholders'
equity of 20.44% and a return on average assets of 1.33%.
The 63.0% increase in core earnings during the second quarter of 2000 as
compared to 1999 was the result of significant growth in loans, investments and
trust assets. For the second quarter of 2000, net interest income increased
48.4% as compared to the second quarter of 1999. This increase was primarily due
to a 34.4% increase in average interest-earning assets for the second quarter of
2000 as compared to the second quarter of 1999. The increases in loans, trust
assets and deposits also contributed to the 51.6% increase in loan and
international banking fees, service charges and other fees, and trust fees.
Increases in operating expenses were required to service and support the
Company's growth. As a result, increases in revenue were partially offset for
the second quarter of 2000 by a 14.9% increase in recurring operating expenses,
as compared to the second quarter of 1999.
Net income for the six months ended June 30, 2000 increased 63.4% to
$23.8 million, or $1.30 per diluted share, compared to net income of $14.6
million, or $0.85 per diluted share, for the six months ended June 30, 1999. The
six months ended June 30, 2000 results included nonrecurring warrant income of
$9.3 millions ($5.5 million, net of taxes) compared to $230,000 ($79,000 net of
taxes and other related expenses) during the six months ended June 30, 1999. In
addition, the six months ended June 30, 2000 included merger and other related
nonrecurring cost of $14.1 million ($9.1 million, net of taxes) compared to $4.0
($2.5 million, net of taxes) in the six months ended June 30, 1999.
Net income, including technology gains and before nonrecurring merger
related expenses and extraordinary items, increased 92.1% to $33.0 million, or
$1.81 per diluted share, for the six months ended June 30, 2000, compared to
$17.2 million, or $1.00 per diluted share, in the six months ended June 30,
1999.
The Company's core earnings, for the six months ended June 30, 2000
increased 60.9% to $27.5 million, or $1.51 per diluted share, compared to
$17.1 million, or $1.00 per diluted share, in the six months ended June 30,
1999. Based on its core earnings for the six months ended June 30, 2000, the
Company's return on average shareholders' equity was 24.07% and its return on
average assets was 1.56%. During the six months ended June 30, 1999, the
Company's core earnings resulted in a return on average shareholders' equity of
20.29% and a return on average assets of 1.34%.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The 60.9% increase in core earnings in the six months ended June 30, 2000
as compared to 1999 was the result of significant growth in loans, investments,
and trust assets. For the six months ended June 30, 2000, net interest income
increased 47.5% as compared to the six months ended June 30, 1999. This
increase was primarily due to a 37.5% increase in average interest-earning
assets for the six months ended June 30, 2000 as compared to the six months
ended June 30, 1999. The increases in loans, trust assets and deposits also
contributed to the 38.8% increase in loan and international banking fees,
service charges and other fees, and trust fees. Other income includes $2.1
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 for
the six months ended June 30, 2000 by a 18.4% increase in recurring operating
expenses, as compared to the six months ended June 30, 1999.
Net Interest Income-Quarterly
The following table presents, for the quarters indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average daily
balances.
<TABLE>
<CAPTION>
Three months ended Three months ended Three months ended
June 30, 2000 March 31, 2000 June 30, 1999
----------------------------------- --------------------------------- ------------------------------
Average Average Average
Average yield/ Average yield/ Average yield/
(Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 197,501 $ 2,946 6.00% $ 275,679 $ 4,053 5.91% $ 192,243 $ 2,355 4.91%
Other short term securities 17,021 232 5.48% 30,583 468 6.15% 61,280 876 5.73%
Investment securities:
Taxable 652,285 11,219 6.92% 567,025 9,986 7.08% 451,522 7,321 6.50%
Tax-exempt (1) 132,939 1,789 5.41% 117,549 1,548 5.30% 91,786 1,085 4.74%
Loans (2), (3) 2,381,626 60,052 10.14% 2,207,501 53,380 9.73% 1,719,484 40,065 9.35%
---------- -------- ---------- ------- ---------- --------
Total interest-earning assets
assets 3,381,372 76,238 9.07% 3,198,337 69,435 8.73% 2,516,315 51,702 8.24%
Noninterest-earning assets 260,658 244,957 192,672
---------- -------- ---------- ------- ---------- --------
Total assets $3,642,030 76,238 $3,443,294 69,435 $2,708,987 51,702
========== -------- ========== ------- ========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,871,750 17,425 3.74% $1,771,550 17,263 3.92% $1,360,085 11,145 3.29%
Time deposits, over $100,000 535,339 7,299 5.48% 491,645 6,203 5.07% 402,737 4,710 4.69%
Other time deposits 102,014 1,131 4.46% 104,186 1,337 5.16% 125,583 1,480 4.73%
---------- -------- ---------- ------- ---------- --------
Total interest-bearing
deposits 2,509,103 25,855 4.14% 2,367,381 24,803 4.21% 1,888,405 17,335 3.68%
Other borrowings 89,992 1,469 6.57% 107,512 1,658 6.20% 103,792 1,680 6.49%
Subordinated debt - - - - - -
---------- -------- ---------- ------- ---------- --------
Total interest-bearing
liabilities 2,599,095 27,324 4.23% 2,474,893 26,461 4.30% 1,992,197 19,015 3.83%
Trust Preferred Securities 78,324 1,783 9.16% 49,940 1,058 8.52% 49,000 919 7.52%
---------- -------- ---------- ------- ---------- --------
Total interest-bearing
liabilities and capital
securities 2,677,419 29,107 4.37% 2,524,833 27,519 4.38% 2,041,197 19,934 3.92%
Noninterest-bearing deposits 676,424 635,374 462,560
Other noninterest-bearing
liabilities 51,409 60,163 29,061
Shareholders' equity 236,778 222,924 176,169
---------- -------- ---------- ------- ---------- --------
Total shareholders' equity
and liabilities $3,642,030 29,107 $3,443,294 27,519 $2,708,987 19,934
========== -------- ========== ------- ========== --------
Net interest income $ 47,131 $41,916 $ 31,768
======== ======= ========
Including capital securities:
-----------------------------
Interest rate spread 4.70% 4.35% 4.32%
Contribution of interest free funds 0.89% 0.91% 0.74%
------ ------ ------
Net yield on interest-earnings
assets(4) 5.61% 5.26% 5.06%
Excluding capital securities:
-----------------------------
Interest rate spread 4.84% 4.43% 4.41%
Contribution of interest free funds 0.98% 0.97% 0.80%
------ ------ ------
Net yield on interest-earnings assets(4) 5.82% 5.40% 5.21%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.98%,
7.71% and 6.95% for the quarters ended June 30, 2000, March 31, 2000 and
June 30, 1999, respectively, using the federal statuary rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $1,706,000, $1,739,000 and $1,822,000
for the quarters ended June 30, 2000, March 31, 2000 and June 30, 1999,
respectively.
(4) Equals (a) the difference between interest income on interest-earning assets
and the interest expense on interest-bearing liabilities and capital
securities, divided by (b) average interest-earning assets
for the period.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net interest income, excluding interest expense on the Trust Preferred
Securities issued by the Company ("capital securities"), for the second quarter
of 2000 was $48.9 million, a $5.9 million increase over the first quarter of
2000 and a $16.2 million increase over the second quarter of 1999. The increase
from the second quarter of 1999 to the second quarter of 2000 was primarily due
to the $865.1 million, or 34.4% increase in average interest-earning assets. The
increase in net interest income was further enhanced by a 61 basis points
increase in the Company's net yield on interest-earning assets, excluding
capital securities, from 5.21% in the second quarter of 1999 to 5.82% in the
second quarter of 2000. The increase from the first quarter of 2000 to the
second quarter of 2000 was due to the $183.0 million, or 5.7% increase in
average interest-earning assets and a 42 basis points increase in the Company's
net yield on interest-earning assets, excluding capital securities, from 5.40%
in the first quarter of 2000 to 5.82% in the second quarter of 2000.
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods. The table below sets forth, for the quarters indicated,
a summary of the changes in interest income and interest expense due to average
asset and liability balances (volume) and due to changes in average interest
rates (rate). Changes in interest income and expense which are not attributable
specifically to either volume or rate, are allocated proportionately between
both variances. Nonaccrual loans are excluded from average loans. The impact of
capital securities is not included in this table.
<TABLE>
<CAPTION>
Three months ended June 30, 2000 Three months ended June 30, 2000
compared with March 31, 2000 compared with June 30, 1999
favorable (unfavorable) favorable (unfavorable)
------------------------------------------- -----------------------------------------
(Dollars in thousands) Volume Rate Net Volume Rate Net
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ (1,506) $ 399 $ (1,107) $ 65 $ 526 $ 591
Other short term investments (190) (46) (236) (608) (36) (644)
Investment securities:
Taxable 2,693 (1,460) 1,233 3,410 488 3,898
Tax-exempt 207 34 241 536 168 704
Loans 4,328 2,344 6,672 16,370 3,617 19,987
------------------------------------------- ---------------------------------------
Total interest income 5,532 1,271 6,803 19,774 4,762 24,536
------------------------------------------- ---------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (3,556) 3,394 (162) (4,584) (1,696) (6,280)
Time deposits over $100,000 (575) (521) (1,096) (1,711) (878) (2,589)
Other time deposits 27 179 206 269 80 349
------------------------------------------- ---------------------------------------
Total interest-bearing deposits (4,104) 3,052 (1,052) (6,027) (2,493) (8,520)
Other borrowings 713 (524) 189 335 (124) 211
------------------------------------------- ---------------------------------------
Total interest expense (3,391) 2,528 (863) (5,693) (2,616) (8,309)
------------------------------------------- ---------------------------------------
Net increase (decrease) in
net interest income $ 2,141 $ 3,799 $ 5,940 $14,081 $ 2,146 $ 16,227
=========================================== =======================================
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Quarter Ended June 30, 2000 Compared to June 30, 1999
---------------------------------------------------------
Interest income in the second quarter of June 30, 2000 increased 47.5%
to $76.2 million from $51.7 million in the same period in 1999. This was
primarily due to the $19.8 million favorable volume variance which resulted from
a $865.1 million, or 34.4%, increase in average interest-earning assets over the
comparable prior year. The average yield on interest-earning assets increased 83
basis points to 9.07% in the second quarter of 2000 from 8.24% in the same
period of 1999 primarily due to the increase on the yields on loans. Average
yields on loans increased 79 basis points to 10.14% in the quarter ended June
30, 2000 from 9.35% for the same period in 1999, primarily as a result of
increases in market rates of interest.
Interest expense, excluding capital securities, in the second quarter
of 2000 increased 43.7% to $27.3 million from $19.0 million for the same period
in 1999. The increase is the result of increased interest-bearing liabilities,
which rose to $2.6 billion for the second quarter of 2000, as compared to $2.0
billion for the quarter ended June 30, 1999, and a 40 basis point increase in
the cost of funds which increased to 4.23% in the second quarter of 2000.
During the second quarter of 2000, average noninterest-bearing deposits
increased to $676.4 million from $462.6 million in the same period in 1999.
Average noninterest-bearing deposits comprised 21.2% of total deposits for the
second quarter in 2000, compared to 19.7% for the same period in 1999.
As a result of the foregoing, the Company's interest rate spread
excluding capital securities was 4.84% in the second quarter of 2000 compared to
4.41% in the same quarter one year earlier and the net yield on interest-earning
assets increased to 5.82% from 5.21%.
The Quarter Ended June 30, 2000 Compared to March 31, 2000
----------------------------------------------------------
Interest income increased 9.8% to $76.2 million for the second quarter
of 2000, as compared to $69.4 million for the previous quarter. This was
primarily due to the $5.5 million favorable volume variance which resulted from
a $183.0 million, or 5.7%, increase in average interest-earning assets over the
prior quarter. The average yield on interest-earning assets increased 34 basis
points to 9.07% in the second quarter of 2000 from 8.73% in the previous quarter
primarily due to the increase on the yields on loans. Average yields on loans
increased 41 basis points to 10.14% in the quarter ended June 30, 2000 from
9.73% for the quarter ended March 31, 2000, primarily as a result of increases
in market rates of interest.
Interest expense, excluding capital securities, in the second quarter
of 2000 increased 3.3% to $27.3 million from $26.5 million in the prior quarter.
The increase is the result of increased interest-bearing liabilities, which rose
to $2.6 billion for the second quarter of 2000, as compared to $2.5 billion for
the prior quarter. This increase was slightly offset by a 7 basis point decrease
in the cost of funds which dropped to 4.23% in the second quarter of 2000.
During the second quarter of 2000, average noninterest-bearing deposits
increased to $676.4 million from $635.4 million in the first quarter of 2000.
Average noninterest-bearing deposits comprised 21.2% of total deposits for the
second quarter in 2000 which is unchanged from the prior quarter.
As a result of the foregoing, the Company's interest rate spread
excluding capital securities was 4.84% in the second quarter of 2000 compared to
4.43% in the prior quarter and the net yield on interest-earning assets
increased to 5.82% from 5.40%.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following tables present the Company's average balance sheet, net
interest income and interest income and interest rate for the six months
presented, as well as the analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
--------------------------------------- --------------------------------------
Average Average
Average yield/ Average yield/
(Dollars in thousands) balance Interest rate balance Interest rate
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 236,590 $ 6,999 5.95% $ 151,823 $ 3,643 4.84%
Other short term securities 23,802 700 5.91% 65,364 1,938 5.98%
Investment securities:
Taxable 609,655 21,205 6.99% 435,819 13,702 6.34%
Tax-exempt (1) 125,244 3,337 5.36% 91,815 2,152 4.73%
Loans (2), (3) 2,294,564 113,432 9.94% 1,642,636 76,435 9.38%
---------- -------- ---------- --------
Total interest-earning assets 3,289,855 145,673 8.90% 2,387,457 97,870 8.27%
Noninterest-earning assets 252,807 190,965
---------- -------- ---------- --------
Total assets $3,542,662 145,673 8.27% $2,578,422 97,870
========== -------- ========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,821,650 34,688 3.83% $1,279,056 20,895 3.29%
Time deposits, over $100,000 513,492 13,502 5.29% 380,936 8,825 4.67%
Other time deposits 103,100 2,468 4.81% 126,878 2,914 4.63%
---------- -------- ---------- --------
Total interest-bearing deposits 2,438,242 50,658 4.18% 1,786,870 32,634 3.68%
Other borrowings 98,752 3,127 6.37% 95,081 2,836 6.01%
Subordinated debt - - 1,215 71 11.78%
---------- -------- ---------- --------
Total interest-bearing liabilities 2,536,994 53,785 4.26% 1,883,166 35,541 3.81%
Trust Preferred Securities 64,132 2,841 8.91% 49,000 1,955 8.05%
---------- -------- ---------- --------
Total interest-bearing liabilities
and capital securities 2,601,126 56,626 4.38% 1,932,166 37,496 3.91%
Noninterest-bearing deposits 655,899 446,160
Other noninterest-bearing liabilities 55,786 30,191
Shareholders' equity 229,851 169,905
---------- -------- ---------- --------
Total shareholders' equity and
liabilities $3,542,662 56,626 $2,578,422 37,496
========== -------- ========== --------
Net interest income $ 89,047 $ 60,374
======== ========
Including capital securities:
----------------------------
Interest rate spread 4.53% 4.35%
Contribution of interest free funds 0.92% 0.75%
----- -----
Net yield on interest-earnings assets(4) 5.44% 5.10%
Excluding capital securities:
----------------------------
Interest rate spread 4.64% 4.46%
Contribution of interest free funds 0.98% 0.80%
----- -----
Net yield on interest-earnings assets(4) 5.62% 5.26%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.73% and
6.91% for the periods ended June 30, 2000 and June 30, 1999, respectively,
using the federal statuary rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $3,445,000 and $3,509,000 for the
periods ended June 30, 2000 and June 30, 1999, respectively.
(4) Equals (a) the difference between interest income on interest-earning assets
and the interest expense on interest-bearing liabilities and capital
securities, divided by (b) average interest-earning assets for the period.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Interest Income - Year to Date
Net interest income, excluding capital securities, for the six months ended
June 30, 2000 was $91.9 million, a $29.6 million increase over the six months
ended June 30, 1999. The increase was due to the $902.4 million, or 37.8%,
increase in average interest-earning assets. The increase in net interest income
was further enhanced by a 34 basis points increase in the Company's net yield on
interest-earning assets, excluding capital securities, from 5.26% in the six
months ended June 30, 1999 to 5.62% in the six months ended June 30, 2000.
The table below sets forth, for the six months indicated, a summary of the
changes in interest income and interest expense due to average asset and
liability balances (volume) and due to changes in average interest rates (rate).
Changes in interest income and expense which are not attributable specifically
to either volume or rate, are allocated proportionately between both variances.
Nonaccrual loans are excluded from average loans. The impact of capital
securities is not included in this table.
<TABLE>
<CAPTION>
Six months ended June 30, 2000
Compared with June 30, 1999
favorable (unfavorable)
-------------------------------------------------------------
(Dollars in thousands) Volume Rate Net
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 2,389 $ 967 $ 3,356
Other short term investments (1,213) (25) (1,238)
Investment securities:
Taxable 5,997 1,506 7,503
Tax-exempt 873 312 1,185
Loans 32,383 4,614 36,997
-------------------------------------------------------------
Total interest income 40,429 7,374 47,803
-------------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (10,029) (3,764) (13,793)
Time deposits over $100,000 (3,414) (1,263) (4,677)
Other time deposits 733 (287) 446
-------------------------------------------------------------
Total interest-bearing deposits (12,711) (5,313) (18,024)
Other borrowings (119) (172) (291)
Subordinated debt 36 35 71
-------------------------------------------------------------
Total interest expense (12,794) (5,450) (18,244)
-------------------------------------------------------------
Net increase (decrease) in net interest income $ 27,634 $ 1,925 $ 29,559
=============================================================
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED
The Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
-----------------------------------------------------------------------------
Interest income in the six months ended June 30, 2000 increased 48.8% to
$145.7 million from $97.9 million in the same period in 1999. This was primarily
due to the $40.4 million favorable volume variance which resulted from a $902.4
million, or 37.8%, increase in average interest-earning assets over the
comparable prior year. The average yield on interest-earning assets increased
63 basis points to 8.90% in the six months ended June 30, 2000 from 8.27% in the
same period of 1999 primarily due to the increase on the yields on loans.
Average yields on loans increased 56 basis points to 9.94% in the six months
ended June 30, 2000 from 9.38% for the same period in 1999, primarily as a
result of increases in market rates of interest.
Interest expense, excluding capital securities, in the six months ended
June 30, 2000 increased 51.3% to $53.8 million from $35.5 million for the same
period in 1999. The increase is the result of increased average interest-bearing
liabilities, which rose to $2.5 billion for the six months ended June 30, 2000,
as compared to $1.9 billion for the same period in 1999, and a 45 basis point
increase in the cost of funds which increased to 4.26% in the six months ended
June 30, 2000.
As a result of the foregoing, the Company's interest rate spread excluding
capital securities was 4.64% in the six months ended June 30, 2000 compared to
4.46% in the same period one year earlier and the net yield on interest-earning
assets increased to 5.62% from 5.26%.
Certain client service expenses were incurred by the Company 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. Had they been included in interest expense, the impact of
these expenses on the Company's net yield on interest-earning assets would have
been as follows for each of the periods presented.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------ ------------------------------
(Dollars in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average noninterest bearing demand deposits $ 676,424 $ 462,560 $ 655,899 $ 446,160
Client service expenses 490 478 1,029 1,087
Client service expenses, annualized 0.32% 0.41% 0.32% 0.49%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS
(EXCLUDING CAPITAL SECURITIES):
Net yield on interest-earning assets 5.82% 5.21% 5.60% 5.26%
Impact of client service expense (0.06)% (0.08)% (0.05)% (0.09)%
----------------------------- -----------------------------
Adjusted net yield on interest-earning assets (1) 5.76% 5.13% 5.55% 5.17%
============================= =============================
</TABLE>
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield of spread.
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to manage its interest expense.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 methodology the Company uses in determining an adequate
allowance for loan losses.
The provision for loan losses for the second quarter of 2000 was $8.0
million, compared to $1.9 million for the second quarter of 1999. In addition,
in connection with the Coast Bancorp merger and the Bay Area Bancshares merger,
the Company made an additional provision for loan losses of $1.5 million and
$400,000 in the second quarter of 2000 and 1999, respectively to conform to the
Company's allowance methodology.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Other Income
Total other income increased to $7.3 million for the second quarter of 2000
compared to $4.5 million for the second quarter of 1999. The following table
sets forth information by category of other income for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
--------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2000 2000 1999 1999 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan and international banking fees $ 1,927 $ 1,176 1,208 946 697
Service charges and other fees 1,148 1,183 1,542 1,235 1,202
Trust fees 905 924 774 768 727
Gain on sale of SBA loans 675 619 114 656 446
ATM network revenue 584 570 635 789 613
Gain (loss) on sale of investments, net 58 (1) (19) - (9)
Other 1,289 2,931 3,905 2,021 628
--------------------------------------------------------------------------
Total, recurring 6,586 7,402 8,159 6,415 4,304
Warrant income 740 8,609 14,278 - 226
--------------------------------------------------------------------------
Total $ 7,326 $ 16,011 $ 22,437 $ 6,415 $4,530
==========================================================================
</TABLE>
For the second quarter of 2000 as compared to the same period in 1999, the
increase in other income was a result of $1.3 million increase in loan and
international banking fees, a $229,000 increase in gain on sale of SBA loans and
a $178,000 increase in trust fees. These increases were a result of significant
growth in total loans, total deposits and trust assets. Other income for the
first quarter of 2000 and the fourth quarter of 1999 includes $2.1 million and
$3.1 million in appreciation recognized on equity securities received in the
settlement of a loan. As discussed further below, the warrant income resulted
from the sale of stock acquired from clients in connection with financing
activities.
Other income for the second quarter of 2000 and the second quarter of 1999
included warrant income of $740,000 million and $226,000, respectively, net of
related employee incentives. The Company holds in excess of 100 warrant
positions. The Company has historically obtained rights to acquire stock, in the
form of warrants, in certain clients as part of negotiated credit facilities.
The Company may not be able to realize gains from these equity instruments in
future periods due to fluctuations in the market prices of the underlying common
stock of these companies. The timing and amount of income, if any, from the
disposition of client warrants typically depend upon factors beyond our control,
including the general condition of the public equity markets, levels of mergers
and acquisitions activity, and legal and contractual restrictions on our ability
to sell the underlying securities. Therefore, future gains cannot be predicted
with any degree of accuracy and are likely to vary materially from period to
period. In addition, a significant portion of the income the Company realizes
from the disposition of client warrants may be offset by expenses related to our
efforts to build an infrastructure sufficient to support our present and future
business activities, as well as expenses incurred in evaluating and pursuing new
business opportunities, or by increases to the provision for loan losses.
23
<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 quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
-------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2000 2000 1999 1999 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $ 12,320 $ 12,835 $ 12,620 $ 11,423 $ 10,896
Occupancy and equipment 4,386 4,536 3,946 3,668 3,403
Legal and other professional fees 999 920 572 835 729
Telephone, postage and supplies 925 864 492 892 852
Marketing and promotion 792 686 539 574 597
Client services 490 539 431 529 478
FDIC insurance and regulatory assessments 210 240 137 196 146
Directors' fees 157 127 269 216 217
Expenses on other real estate owned 41 10 (53) 30 15
Other 1,986 1,995 2,973 2,091 2,074
-------------------------------------------------------------------------
Total operating expenses, excluding merger costs
and contribution to the GBB Foundation 22,306 22,752 21,926 29,454 19,407
Contribution to the GBB Foundation and related
expense, net - - 11,837 - 323
Merger and other related nonrecurring costs 10,203 3,881 6,367 - 3,965
-------------------------------------------------------------------------
Total operating expenses $ 32,509 $ 26,633 $ 40,130 $ 20,454 $ 23,695
=========================================================================
Efficiency ratio 59.70% 45.98% 65.85% 49.52% 65.28%
Efficiency ratio, before merger, nonrecurring and
extraordinary items 41.53% 46.13% 46.99% 49.52% 53.80%
Total operating expenses to average assets* 3.59% 3.11% 5.01% 2.83% 3.51%
Total operating expenses to average assets,
before nonrecurring costs* 2.46% 2.66% 2.74% 2.83% 2.87%
</TABLE>
*Annualized
Operating expenses totaled $32.5 million for the second quarter of 2000,
compared to $23.7 million for the second quarter of 1999. Operating expenses
included merger and other related nonrecurring costs and contributions to the
Greater Bay Bancorp Foundation of $10.2 million and $4.3 million for the second
quarter of 2000 and 1999, respectively. Excluding these nonrecurring items,
operating expenses were $22.3 million and $19.4 million for those periods. The
ratio of operating expenses to average assets, before nonrecurring items was
2.46% for the second quarter of 2000 and 2.87% for the second quarter of 1999.
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, excluding nonrecurring
items, for the second quarter of 2000 was 41.53%, compared to 53.80% for the
second quarter of 1999.
As indicated by the improvements in the efficiency ratio and ratio of total
operating expenses to average assets, the Company has been able to achieve
increasing economies of scale. For the second quarter of 2000, average assets
increased 34.4% from the second quarter of 1999, while operating expenses,
excluding nonrecurring costs, increased only 14.9%. The Company believes that it
may not be able to sustain the low efficiency ratio that it achieved in the
second quarter of 2000. The Company believes that in the future the efficiency
ratio will stabilize at approximately 45%.
Compensation and benefits expenses increased for the second quarter of 2000
to $12.3 million, compared to $10.9 million for the second quarter of 1999. The
increase in compensation and benefits is due primarily to the addition of
personnel to accommodate the growth of the Company.
The increase in occupancy and equipment; telephone, postage, and supplies;
marketing and promotion; and client service expense was related to the Company's
growth.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Income Taxes
The Company's effective income tax rate for the second quarter of 2000
was 40.3%, compared to 38.6% in the second quarter of 1999. The effective rates
were lower than the statutory rate of 42.0% due to tax-exempt income on
municipal securities and state enterprise zone credits. The reductions were
partially offset by the impact of merger and other related nonrecurring costs.
The Company's effective income tax rate for the six months ended June
30, 2000 was 40.3%, compared to 39.0% in the six months ended June 30, 1999. The
effective rates were lower than the statutory rate of 42.0% due to tax-exempt
income on municipal securities, state enterprise zone credits and the tax
treatment of the donation of appreciated warrants to the Greater Bay Bancorp
Foundation. The reductions were partially offset by the impact of merger and
other related nonrecurring costs.
FINANCIAL CONDITION
Total assets increased 15.3% (30.8% annualized) to $3.7 billion at
June 30, 2000, compared to $3.2 billion at December 31, 1999. The increase in
the six months ended June 30, 2000 was primarily due to increases in the
Company's loan portfolio funded by growth in deposits.
Loans
Total gross loans increased 15.6% (31.5% annualized) to $2.4 billion at
June 30, 2000, compared to $2.1 billion at December 31, 1999. The increase in
the loan volume during the first six months of 2000 was primarily due to the
continued strength of the economy in the Company's market areas coupled with the
business development efforts of the Company's relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in a market area that
is dependent on the technology and real estate industries and supporting service
companies. Thus, the Company's borrowers could be adversely impacted by a
downturn in these sectors of the economy. This could, in turn, reduce the demand
for loans and adversely impact the borrowers' abilities to repay their loans,
while also decreasing the Company's net interest margin.
The following table presents the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 1,037,383 43.1% $ 845,424 40.5% $ 745,404 42.7%
Term real estate - commercial 679,457 28.2 595,214 28.5 465,617 26.6
------------------------------------------------------------------------
Total commercial 1,716,840 71.3 1,440,638 69.0 1,211,021 69.3
Real estate construction and land 497,823 20.7 459,633 22.0 346,882 19.9
Real estate term - other 119,904 5.0 123,346 5.9 116,873 6.7
Consumer and other 140,311 5.8 116,476 5.6 114,611 6.6
------------------------------------------------------------------------
Total loans, gross 2,474,878 102.8 2,140,093 102.5 1,789,387 102.5
Deferred fees and discounts, net (12,459) (0.5) (10,604) (0.5) (9,039) (0.5)
------------------------------------------------------------------------
Total loans, net of deferred fees 2,462,419 102.3 2,129,489 102.0 1,780,348 102.0
Allowance for loan losses (54,020) (2.3) (44,147) (2.0) (33,016) (2.0)
------------------------------------------------------------------------
Total loans, net $ 2,408,399 100.0% $2,085,342 100.0% $1,747,332 100.0%
========================================================================
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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>
At and for the three month periods ended
--------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2000 2000 1999 1999 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $ 8,715 $ 6,203 $ 5,516 $ 7,864 $ 5,578
Accruing loans past due 90 days or more - 10 51 353 209
Restructured loans 407 743 807 1,492 1,034
--------------------------------------------------------------------------------
Total nonperforming loans 9,122 6,956 6,374 9,709 6,821
Other real estate owned 229 271 271 515 595
--------------------------------------------------------------------------------
Total nonperforming assets $ 9,351 $ 7,227 $ 6,645 $ 10,224 $ 7,416
================================================================================
Nonperforming assets to total loans
and other real estate owned 0.38% 0.31% 0.31% 0.53% 0.41%
Nonperforming assets to total assets 0.25% 0.20% 0.21% 0.34% 0.27%
</TABLE>
At June 30, 2000 and December 31, 1999, the Company had $8.7 million
and $5.5 million in nonaccrual loans respectively. Interest income foregone on
nonaccrual loans outstanding totaled $125,000 and $101,000 for the three months
ended June 30, 2000 and 1999, respectively.
The Company records OREO at the lower of carrying value or fair value
less estimated costs to sell. Estimated losses that result from the ongoing
periodic valuation of these properties are charged to earnings through a
provision for losses on foreclosed property in the period in which they are
identified. OREO acquired through foreclosure had a carrying value of $229,000
and $271,000 at June 30, 2000 and December 31, 2000 respectively.
The Company had $407,000 and $807,000 of restructured loans as of June
30, 2000 and December 31, 2000, respectively. There were no principal reduction
concessions allowed on restructured loans during the second quarter of 2000 or
1999. Interest income from restructured loans totaled $9,000 and $14,000 for
the six months ended June 30, 2000 and 1999, respectively. Foregone interest
income, which totaled $1,000 and $0 for the six months ended June 30, 2000 and
1999, respectively, would have been recorded as interest income if the loans had
accrued interest in accordance with their original terms prior to the
restructurings.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company has three classifications for problem loans: "substandard,"
"doubtful" and "loss." Substandard loans have one or more defined weaknesses and
are characterized by the distinct possibility that the Banks will sustain some
loss if the deficiencies are not corrected. Doubtful loans have the weaknesses
of substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable; and there is a high possibility of loss of
some portion of the principal balance. A loan classified as "loss" is considered
uncollectable and its continuance as an asset is not warranted.
The following table sets forth the classified assets at the dates
indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
-------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2000 2000 1999 1999 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Substandard $ 22,955 $ 27,536 $ 28,679 $ 29,299 $ 26,613
Doubtful 7,633 4,925 1,850 2,316 1,579
Loss - - - - -
Other real estate owned 229 271 271 515 595
-------------------------------------------------------------------------------
Classified assets $ 30,817 $ 32,732 $ 30,800 $ 32,130 $ 28,787
===============================================================================
Classified assets to total loans
and other real estate owned 1.25% 1.42% 1.44% 1.65% 1.61%
Allowance for loan losses to total
classified assets 175.29% 148.63% 143.33% 114.21% 114.69%
</TABLE>
With the exception of these classified assets, management was not aware
of any loans outstanding as of June 30, 2000 where the known credit problems of
the borrower would cause management to have serious doubts as to the ability of
such borrowers to comply with their present loan repayment terms and which would
result in such loans being included in nonperforming or classified asset tables
at some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full impact
that such an environment may have on the Company's loan portfolio. Accordingly,
there can be no assurance that other loans will not become 90 days or more past
due, be placed on nonaccrual, become restructured loans, or other real estate
owned in the future.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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
earnings and reduced by net loan charge-offs. Loans are charged-off when they
are deemed to be uncollectable; recoveries are generally recorded only when cash
payments are received.
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the quarters indicated.
<TABLE>
<CAPTION>
At and for the three month periods ended
-------------------------------------------------------------
June 30, March 31, December 31,
(Dollars in thousands) 2000 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Period end loans outstanding, net of deferred fees $ 2,462,419 $ 2,295,673 $ 2,129,489
Average loans outstanding $ 2,349,364 $ 2,213,386 $ 2,024,479
Allowance for loan losses:
Balance at beginning of period $ 48,650 $ 44,147 $ 36,696
Charge-offs:
Commercial (4,223) (1,694) (1,289)
Real estate construction and land - - -
Real estate term - - -
Consumer and other (119) (97) (75)
-------------------------------------------------------------
Total charge-offs (4,342) (1,791) (1,364)
-------------------------------------------------------------
Recoveries:
Commercial 223 127 -
Real estate construction and land - - -
Real estate term - - 7
Consumer and other 3 3 277
-------------------------------------------------------------
Total recoveries 226 130 284
-------------------------------------------------------------
Net charge-offs (4,116) (1,661) (1,080)
Provision charged to income (1) 9,486 6,164 8,531
-------------------------------------------------------------
Balance at end of period $ 54,020 $ 48,650 $ 44,147
=============================================================
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.69% 0.30% 0.21%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.49% 0.30% 0.07%
Allowance as a percentage of average loans outstanding 2.30% 2.20% 2.18%
Allowance as a percentage of period end loans outstanding 2.19% 2.12% 2.07%
Allowance as a percentage of non-performing loans 592.19% 699.40% 692.61%
<CAPTION>
September 30, June 30,
(Dollars in thousands) 1999 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Period end loans outstanding $ 1,936,517 $ 1,780,349
Average loans outstanding $ 1,872,490 $ 1,729,590
Allowance for loan losses:
Balance at beginning of period $ 33,016 $ 30,748
Charge-offs:
Commercial (812) (288)
Real estate construction and land - -
Real estate term - -
Consumer and other (106) (46)
-----------------------------------------------
Total charge-offs (918) (334)
-----------------------------------------------
Recoveries:
Commercial 796 231
Real estate construction and land 4 3
Real estate term - -
Consumer and other 46 5
-----------------------------------------------
Total recoveries 846 239
-----------------------------------------------
Net charge-offs (72) (95)
Provision charged to income (1) 3,752 2,363
-----------------------------------------------
Balance at end of period $ 36,696 $ 33,016
===============================================
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.02% 0.02%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.03% 0.04%
Allowance as a percentage of average loans outstanding 1.96% 1.91%
Allowance as a percentage of period end loans outstanding 1.89% 1.85%
Allowance as a percentage of non-performing loans 377.96% 484.03%
</TABLE>
-----------------------
(1) Includes $1.5 million in the second quarter of 2000, $860,000 in the first
quarter of 2000, $2.3 million in the fourth quarter of 1999 and $400,000 in
the second quarter of 1999 to conform practices of acquired entities 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.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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 intends to 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. Management believes that the allowance for loan losses
is adequate as of June 30, 2000. However, future changes in circumstances,
economic conditions or other factors could cause management to increase or
decrease the allowance for loan losses as necessary.
At June 30, 2000, the allowance for loan losses was $54.0 million,
consisting of a $37.3 million allocated allowance and a $16.7 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.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Liquidity and Cash Flow
The objective of liquidity management is to maintain each Bank's
ability to meet the day-to-day cash flow requirements of its clients who either
wish to withdraw funds or require funds to meet their credit needs. The Company
must manage its liquidity position to allow the Banks to meet the needs of their
clients while maintaining an appropriate balance between assets and liabilities
to meet the return on investment expectations of its shareholders. The Company
monitors the sources and uses of funds on a daily basis to maintain an
acceptable liquidity position. In addition to liquidity from core deposits and
repayments and maturities of loans and investments, the Banks utilize brokered
deposit lines, sell securities under agreements to repurchase and borrow
overnight federal funds.
Greater Bay is a company separate and apart from the Banks. It must
provide for its own liquidity. Substantially all of Greater Bay's revenues are
obtained from management fees, interest received on its investments and
dividends declared and paid by the Banks. There are statutory and regulatory
provisions that could limit the ability of the Banks to pay dividends to Greater
Bay. At June 30, 2000, the Banks had approximately $83.6 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 June 30,
2000, Greater Bay did not have any material commitments for capital
expenditures.
Net cash provided by operating activities, consisting primarily of net
income, totaled $29.8 million and $21.9 million for the six months ended June
30, 2000 and 1999, respectively. Cash used for investing activities totaled
$616.1 million and $325.2 million for the six months ended June 30, 2000 and
1999, respectivley. The funds used for investing activities primarily represent
increases in loans and investment securities for each period reported.
For the six months ended June 30, 2000 net cash provided by financing
activities was $470.1 million, compared to $380.6 million for the six months
ended June 30, 2000. Historically, the primary financing activity of the Company
has been through deposits. For the six months ended June 30, 2000 and 1999,
deposit gathering activities generated cash of $372.8 million and $365.2
million, respectively. This represents a total of 79.8% and 96.0% of the
financing cash flows for the six months ended June 30, 2000 and 1999,
respectively. The Company has supplemented its financing activities through the
issuance of Trust Preferred Securities and common stock. See "Capital Resources"
for further discussion below.
Capital Resources
Shareholders' equity at June 30, 2000 increased to $237.3 million from
$206.6 million at December 31, 1999. Greater Bay paid dividends of $0.30 and
$0.48 per share during the six months ended June 30, 2000 and the twelve months
ended December 31, 1999, respectively, excluding dividends paid by subsidiaries
prior to the completion of their mergers.
In the first quarter of 2000 and the fourth quarter of 1999 the Company
issued 324,324 and 535,000 shares of common stock in a private placement,
respectively. The proceeds from the offering were $11.5 million and $19.0
million, respectively, net of issuance costs. Greater Bay used a portion of the
net proceeds from the offering to supplement the capital of the Banks and
intends to use the remainder for general corporate purposes.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On March 23, 2000, the Company 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 19,
2000, the Company 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. Under applicable
regulatory guidelines, the TPS qualifies as Tier 1 capital up to a maximum of
25% of Tier I capital. Any additional portion of TPS would qualify as Tier 2
capital. As of June 30, 2000, $83.9 million of the 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.
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 June 30, 2000, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act
of 1991, the Federal Reserve, the OCC and the FDIC have adopted regulations
setting forth a five-tier system for measuring the capital adequacy of the
financial institutions they supervise. The capital levels of the Company at June
30, 2000 and the two highest levels recognized under these regulations are as
follows. These ratios all exceeded the well-capitalized guidelines shown below.
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
----- ------------- -------------
Company 9.21% 10.93% 12.78%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
In addition, at June 30, 2000, each of the Banks had levels of capital
that exceeded the well-capitalized guidelines.
31
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial performance is impacted by, among other
factors, interest rate risk and credit risk. The Company utilizes no derivatives
to mitigate its credit risk, relying instead on loan review and an adequate loan
loss reserve (see "--Allowance for Loan Losses" herein).
Interest rate risk is the risk of loss in value due to changes in
interest rates. This risk is addressed by the Company's Asset Liability
Management Committee ("ALCO"), which includes senior management representatives.
The ALCO monitors and considers methods of managing interest rate risk by
monitoring changes in net portfolio values 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 March 31, 2000. All market rate sensitive instruments
presented in this table are classified as either held to maturity or available
for sale. The Company has no trading securities.
Change in Projected change
(Dollars in thousands) ------------------------
interest rates Net porfolio value Dollars Percentage
----------------------------------------------------------------------
100 basis point rise $ 595,600 $ 1,167 0.20%
Base scenario 594,433 - -
100 basis point decline 591,759 2,674 -0.45%
32
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The preceding table indicates that at June 30, 2000, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
net portfolio value would be expected to increase. 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 deposit decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the computation of 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.
33
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The following table shows interest sensitivity gaps for different
intervals as of June 30, 2000.
<TABLE>
<CAPTION>
Immediate or 2 Days to 6 7 Months to 12 1 Year to 3 4 Years to 5
(Dollars in thousands) One Day Months Months Years Years
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due $ 3,760 $ - $ - $ - $ -
Federal funds sold and
other short term investments 58,055 - - - -
Investment securities 12,237 21,729 19,732 147,458 105,244
Loans 1,068,343 828,252 79,099 187,709 135,682
Allowance for loan losses/
unearned fees - - - - -
Other assets - - - - -
------------------------------------------------------------------------
Total Assets $ 1,142,395 $ 849,981 $ 98,831 $ 335,167 $ 240,926
========================================================================
Liabilities and equity:
Deposits $ 1,814,523 $ 585,622 $ 75,357 $ 11,889 $ 1,331
Other borrowings - 126,755 5,745 500 1,500
Trust Preferred Securities - - - - -
Other liabilities - - - - -
Shareholders equity - - - - -
------------------------------------------------------------------------
Total Liabilities/equity $ 1,814,523 $ 712,377 $ 81,102 $ 12,389 $ 2,831
========================================================================
Gap $ (672,128) $ 137,604 $ 17,729 $ 322,778 $ 238,095
Cumulative gap $ (672,128) $ (534,524) $ (516,795) $ (194,017) $( 44,078)
Cumulative gap/total assets -18.1% -14.4% -13.9% -5.2% -1.2%
<CAPTION>
More than 5 Total Rate Non-Rate
(Dollars in thousands) Years Sensitive Sensitive Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due $ - $ 3,760 $ 193,665 $ 197,425
Federal funds sold and
other short term investments - 58,055 - 58,055
Investment securities 563,014 869,414 - 869,414
Loans 163,334 2,462,419 - 2,462,419
Allowance for loan losses/
unearned fees - - (54,020) (54,020)
Other assets - - 173,799 173,799
--------------------------------------------------------
Total Assets $ 726,348 $ 3,393,648 $ 313,444 $3,707,092
========================================================
Liabilities and equity:
Deposits $ 172 $ 2,489,894 $ 689,912 $3,179,806
Other borrowings - 133,500 - 133,500
Trust Preferred Securities 99,500 99,500 - 99,500
Other liabilities - - 56,990 56,990
Shareholders equity - - 237,296 237,296
--------------------------------------------------------
Total Liabilities/equity $ 99,672 $ 2,722,894 $ 984,198 $3,707,092
========================================================
Gap $ 626,676 $ (670,754) $ (670,754) $ -
Cumulative gap $ (670,754) $ (670,754) $ - $ -
Cumulative gap/total assets -18.1% 18.1% 0.0% 0.0%
</TABLE>
The foregoing table indicates that the Company had a one year gap of
$(516.8) million or 13.9% assets, at June 30, 2000. In theory, this would
indicate that at June 30, 2000, $(516.8) million more in liabilities than assets
would reprice if there was a change in interest rates over the next year. Thus,
if interest rates were to increase, the gap would tend to result in a higher net
interest margin. Conversely, if interest rates decreased, the gap may result in
decreases net interest margin. However, changes in the mix of earning assets or
supporting liabilities can either increase or decrease the net interest margin
without affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary significantly
while the timing of repricing of both the asset and its supporting liability can
remain the same, thus impacting net interest income. This characteristic is
referred to as basis risk and, generally, relates to the repricing
characteristics of short-term funding sources such as certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected
next twelve month net interest income and net income has been evaluated through
an interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing rate
environments. As of June 30, 2000, the analysis indicates that the Company's net
interest income would increase a maximum of 10.2% if rates rose 200 basis points
immediately and would decrease a maximum of (10.3)% 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.
34
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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.
Recent Accounting Developments
In April 1999, the Financial Accounting Standards Board ("FASB")
reached tentative conclusions on the future of the pooling-of-interests method
of accounting for business combinations. These tentative conclusions include the
decision that the pooling-of-interests method of accounting will no longer be an
acceptable method to account for business combinations between independent
parties and that there should be a single method of accounting for all business
combinations, and that method is the purchase method. The FASB agreed that the
purchase method should be applied prospectively to business combination
transactions that are initiated after the final standard is issued. The FASB
issued an exposure draft during the third quarter of 1999 and expects that a
final standard may be issued and become effective in 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 the accounting for business combinations could have a negative impact
on the Company's ability to realize those business strategies.
35
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings -- Not applicable
ITEM 2. Changes in Securities and Use of Proceeds - Not applicable
ITEM 3. Defaults Upon Senior Securities -- Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its annual meeting of shareholders on May 17,
2000.
(b) The following directors were elected at the annual meeting to
serve for a three-year term:
David L. Kalkbrenner
Rex D. Lindsay
Glen McLaughlin
Warren R. Thoits
The following directors continued in office after the annual meeting:
George R. Corey
John M. Gatto
John J. Hounslow
James E. Jackson
Stanley A. Kangas
George M. Marcus
Duncan L. Matteson
Rebecca Q. Morgan
Dick J. Randall
Donald H. Seiler
(c) At the annual meeting, shareholders voted on (1) the election of
the Company's Class III directors; (2) the merger of Coast Bancorp
with and into the Company; (3) the amendment of the Company's 1996
Stock Option Plan, as amended, to increase by 2,500,000 the number
of shares reserved for issuance under the plan; (4) the amendment
of the Company's Articles of Incorporation to increase the number
of authorized shares of common stock from 24,000,000 to
40,000,000; and (5) the ratification of the selection of
PricewaterhouseCoopers LLP as the Company's independent public
accountants for the fiscal year ending December 31, 2000. The
results of the voting were as follows:
<TABLE>
<CAPTION>
Votes Broker
Matter Votes For Against Withheld Abstentions Non-Votes
<S> <C> <C> <C> <C> <C>
Election of Directors
David L. Kalkbrenner 11,291,363 -- 258,563 -- --
Rex D. Lindsay 10,757,940 -- 791,986 -- --
Glen McLaughlin 11,414,894 -- 135,032 -- --
Warren R. Thoits 11,462,607 -- 87,319 -- --
Merger with Coast 8,808,327 755,842 -- 49,453 1,936,303
Option Plan Amendment 7,195,916 2,162,870 -- 254,836 1,936,303
Articles Amendment 10,307,237 1,119,820 -- 122,868 --
Independent Public 11,378,625 147,679 -- 23,622 --
Accountants
</TABLE>
(d) Not applicable.
36
<PAGE>
ITEM 5. Other Information -- Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
The Exhibits listed below are filed or incorporated by reference as part of this
Report.
(a) Exhibits
EXHIBIT
NO. EXHIBITS
------- --------
3.1 Certificate of Amendment of Articles of Incorporation
4.31 Amended and Restated Declaration of Trust of GBB Capital IV dated as of
May 19, 2000
4.32 Indenture, dated as of May 19, 2000, between Greater Bay Bancorp and
Wilmington Trust Company, as trustee
4.33 Common Securities Guarantee Agreement, dated as of May 19, 2000,
between Greater Bay Bancorp and Wilmington Trust Company, as trustee
4.34 Capital Securities Guarantee Agreement, dated as of May 19, 2000,
between Greater Bay Bancorp and Wilmington Trust Company, as trustee
4.35 Liquidated Damages Agreement, dated as of May 16, 2000, by and among
GBB Capital IV, Greater Bay Bancorp and Sandler O'Neill and Partners,
L.P.
4.36 Registration Rights Agreement, dated as of May 16, 2000, by and among
GBB Capital IV, Greater Bay Bancorp and Sandler O'Neill and Partners,
L.P.
27 Financial Data Schedule.
--------
(b) Reports on Form 8-K
During the quarter ended June 30, 2000, the Registrant filed the
following Current Reports on Form 8-K: (1) Form 8-K dated April 6, 2000
(containing pro-forma financial information related to the pending mergers with
Coast Bancorp, Bank of Santa Clara and Bank of Petaluma); (2) Form 8-K dated
April 20, 2000 (reporting first quarter earnings) ;(3) Form 8-K dated May 18,
2000 (reporting the completion of the merger with Coast Bancorp and containing
selected pro-forma financial information); (4) Form 8-K dated May 18, 2000
(containing supplemental consolidated financial statements reflecting the merger
with Coast Bancorp).
37
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
GREATER BAY BANCORP
(Registrant)
By:
/s/ Steven C. Smith
-------------------
Steven C. Smith
Executive Vice President, Chief Administrative Officer and
Chief Financial Officer
Date: August 1, 2000
38
