<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 September 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 October 9, 2000:
40,021,804
<PAGE>
GREATER BAY BANCORP
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1999..................................................... 3
Consolidated Statements of Operations
for the Three Months and Nine Months Ended
September 30, 2000 and 1999.................................................................. 4
Consolidated Statements of Comprehensive Income
for the Three Months and Nine Months Ended
September 30, 2000 and 1999.................................................................. 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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...................................................................................... 36
Item 6. Exhibits and Reports on Form 8-K....................................................................... 36
Signatures............................................................................................. 37
</TABLE>
2
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Dollars in thousands) (unaudited) 1999*
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 232,171 $ 137,130
Federal funds sold 34,000 216,300
Other short term securities 34,937 29,507
---------------------------
Cash and cash equivalents 301,108 382,937
Investment securities:
Available for sale, at fair value 477,101 441,290
Held to maturity, at amortized cost (fair value $448,315 and $222,394 at
September 30, 2000 and December 31, 1999, respectively) 448,237 229,742
Other securities 18,514 23,918
---------------------------
Investment securities 943,852 694,950
Loans:
Commercial 1,225,279 900,943
Term real estate-commercial 819,210 696,707
---------------------------
Total commercial 2,044,489 1,597,650
Real estate construction and land 572,740 466,577
Real estate-other 171,134 133,256
Consumer and other 192,230 159,679
Deferred loan fees and discounts (13,339) (12,599)
---------------------------
Total loans, net of deferred fees 2,967,254 2,344,563
Allowance for loan losses (65,699) (46,451)
---------------------------
Total loans, net 2,901,555 2,298,112
Property, premises and equipment, net 35,348 35,958
Interest receivable and other assets 154,554 130,073
---------------------------
Total assets $ 4,336,417 $ 3,542,030
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 856,454 $ 690,860
MMDA, NOW and savings 2,024,733 1,737,002
Time certificates, $100,000 and over 727,257 527,766
Other time certificates 140,777 145,069
---------------------------
Total deposits 3,749,221 3,100,697
Other borrowings 118,392 100,600
Other liabilities 86,439 53,731
---------------------------
Total liabilities 3,954,052 3,255,028
---------------------------
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**: 80,000,000 shares authorized;
39,980,528 and 37,979,022 shares issued and outstanding
as of September 30, 2000 and December 31, 1999, respectively 157,210 139,754
Accumulated other comprehensive loss (13,181) (8,055)
Retained earnings 138,836 106,303
---------------------------
Total shareholders' equity 282,865 238,002
---------------------------
Total liabilities and shareholders' equity $ 4,336,417 $ 3,542,030
===========================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
**Restated to reflect 2-for-1 stock split effective on October 4, 2000.
See notes to consolidated financial statements.
3
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
(Dollars in thousands, except per share amounts) (unaudited) 2000 1999* 2000 1999*
------------------------------------------------------------------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 71,760 $ 48,939 $ 196,626 $ 134,128
Interest on investment securities:
Taxable 14,381 9,090 37,656 24,628
Tax - exempt 1,995 1,508 5,851 4,285
-------------------------------- --------------------------------
Total interest on investment securities 16,376 10,598 43,507 28,913
Other interest income 4,505 3,166 12,350 9,067
-------------------------------- --------------------------------
Total interest income 92,641 62,703 252,483 172,108
-------------------------------- --------------------------------
INTEREST EXPENSE
Interest on deposits 33,429 21,052 88,000 56,659
Interest on Trust Preferred Securities 2,585 1,021 5,426 2,976
Interest on other borrowings 1,856 1,155 5,044 4,062
-------------------------------- --------------------------------
Total interest expense 37,870 23,228 98,470 63,697
-------------------------------- --------------------------------
Net interest income 54,771 39,475 154,013 108,411
Provision for loan losses 7,739 3,902 21,485 7,431
-------------------------------- --------------------------------
Net interest income after provision for loan losses 47,032 35,573 132,528 100,980
-------------------------------- --------------------------------
OTHER INCOME
Loan and international banking fees 2,497 946 5,600 2,316
Service charges and other fees 2,038 2,071 6,016 5,993
Trust fees 822 768 2,496 2,216
Gain on sale of SBA loans 429 656 1,878 1,915
ATM network revenue 799 789 2,093 2,047
Gain (loss) on sale of investments, net 3 - 60 52
Warrant income, net 2,767 - 12,116 230
Other income 1,185 2,219 5,599 3,616
-------------------------------- --------------------------------
Total other income 10,540 7,449 35,858 18,385
-------------------------------- --------------------------------
OPERATING EXPENSES
Compensation and benefits 14,954 13,416 44,339 38,659
Occupancy and equipment 5,318 4,167 15,229 12,156
Legal and other professional fees 1,245 894 3,291 2,392
Telephone, postage and supplies 944 1,069 3,067 3,096
Marketing and promotion 846 751 2,702 2,245
Client services 477 825 1,518 2,462
FDIC insurance and regulatory assessments 361 196 834 481
Directors' fees 253 275 631 852
Other real estate owned - 30 51 66
Contribution to GBB Foundation and related expenses, net - - - 323
Merger and other related nonrecurring costs 11,412 - 25,496 3,965
Other 2,028 2,506 7,405 6,763
-------------------------------- --------------------------------
Total operating expenses 37,838 24,129 104,563 73,460
-------------------------------- --------------------------------
Income before provision for income taxes and
extraordinary items 19,734 18,893 63,823 45,905
Provision for income taxes 7,589 7,105 25,215 17,500
-------------------------------- --------------------------------
Net income before extraordinary items 12,145 11,788 38,608 28,405
Extraordinary items - - - (88)
-------------------------------- --------------------------------
Net income $ 12,145 $ 11,788 $ 38,608 $ 28,317
================================ ================================
Net income per share - basic** $ 0.31 $ 0.32 $ 0.98 $ 0.78
================================ ================================
Net income per share - diluted** $ 0.29 $ 0.30 $ 0.94 $ 0.74
================================ ================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
**Restated to reflect 2-for-1 stock split effective on October 4, 2000.
See notes to supplemental consolidated financial statements.
4
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
--------------------------------- -------------------------------
(Dollars in thousands) 2000 1999* 2000 1999*
----------------------------------------------------------------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net income $ 12,145 $ 11,788 $ 38,608 $ 28,317
--------------------------------- -------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period (net
of taxes of $2,195 and $(2,432) for the three
months ended September 30, 2000 and 1999, and
$(3,362) and $(6,595) for the nine months ended
September 30, 2000 and 1999, respectively) 3,139 (3,478) (4,808) (9,432)
less: reclassification adjustment for gains
included in net income 2 35 31
--------------------------------- -------------------------------
Net change 3,141 (3,478) (4,773) (9,401)
--------------------------------- -------------------------------
Cash flow hedges:
Net derivative gains arising during period (net
of taxes of $(398) and $27 for the three
months ended September 30, 2000 and 1999, and
$(269) and $1,152 for the nine months ended
September 30, 2000 and 1999, respectively) (569) 38 (384) 1,648
Less: reclassification adjustment for expenses
included in income (net of taxes of $16 and
$(26) for the three months ended September 30,
2000 and 1999, and $21 and $(89) for the nine
months ended September 30, 2000 and 1999,
respectively) 24 (38) 31 (127)
--------------------------------- -------------------------------
Net change (545) - (353) 1,521
--------------------------------- -------------------------------
Other comprehensive loss 2,596 (3,478) (5,126) (7,880)
--------------------------------- -------------------------------
Comprehensive income $ 14,741 $ 8,310 $ 33,482 $ 20,437
================================= ===============================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
5
<PAGE>
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended September 30,
(Dollars in thousands) (unaudited) 2000 1999
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows - operating activities
Net income $ 38,608 $ 28,317
Reconcilement of net income to net cash from operations:
Provision for loan losses 27,767 7,878
Depreciation and amortization 6,095 3,136
Deferred income taxes (7,921) (3,083)
Gain on sale of investments, net (60) (52)
Changes in:
Accrued interest receivable and other assets (38,812) (10,909)
Accrued interest payable and other liabilities 32,108 11,733
Deferred loan fees and discounts, net 740 3,779
--------- ---------
Operating cash flows, net 58,525 40,799
--------- ---------
Cash flows - investing activities
Maturities and partial paydowns on of investment securities:
Held to maturity 22,262 15,631
Available for sale 1,750 135,516
Other securities 5,404 3,587
Purchase of investment securities:
Held to maturity (241,012) (38,327)
Available for sale (10,987) (193,891)
Proceeds from sale of available for sale securities - 24,783
Loans, net (631,950) (459,853)
Sale of bank building 5,502 -
Purchase of property, premises and equipment (10,331) (5,797)
Proceeds from sale of other real estate owned - 451
Purchase of insurance policies (9,189) (647)
--------- ---------
Investing cash flows, net (868,551) (518,547)
--------- ---------
Cash flows - financing activities
Net change in deposits 648,524 582,048
Net change in other borrowings - short term 17,792 (10,145)
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 17,798 5,593
Cash dividends (6,417) (5,769)
--------- ---------
Financing cash flows, net 728,197 568,727
--------- ---------
Net change in cash and cash equivalents (81,829) 90,979
Cash and cash equivalents at beginning of period 382,937 316,197
--------- ---------
Cash and cash equivalents at end of period $301,108 $407,176
========= =========
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 98,601 $ 59,543
Income taxes $ 18,272 $ 14,053
Non-cash transactions:
Tax benefit of exercise of nonqualified stock options $ - $ 345
Transfer of appreciated securities to Greater Bay
Bancorp Foundation $ 7,200 $ -
Additions to other real estate owned $ 124 $ -
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2000 and December 31, 1999 and for the
Three Months and Nine Months Ended September 30, 2000 and 1999
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of September 30, 2000, and the
Consolidated Statements of Operations, Comprehensive Income and Cash Flows for
the three months and nine months ended September 30, 2000 and September 30, 1999
have been prepared by Greater Bay Bancorp and are not audited. The results of
operations for the quarter and nine months ended September 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 Supplemental Consolidated Financial
Statements for the year ended December 31, 1999 included in the Current Report
on Form 8-K filed on July 26, 2000.
Consolidation and Basis of Presentation
The unaudited financial information presented was prepared on the same
basis as the supplemental consolidated audited financial statements for the year
ended December 31, 1999 included in the Current Report on Form 8-K filed on July
26, 2000. The supplemental consolidated financial statements include the
accounts of Greater Bay Bancorp ("Greater Bay" on a parent-only basis, and the
"Company" on a consolidated basis) and its wholly owned subsidiaries, Bank of
Santa Clara ("BSC"), Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast
Commercial Bank ("CCB"), Cupertino National Bank ("CNB"), Golden Gate Bank
("Golden Gate"), Mid-Peninsula Bank ("MPB"), Mt. Diablo National Bank ("MDNB"),
Peninsula Bank of Commerce ("PBC"), GBB Capital I, GBB Capital II, GBB Capital
III and GBB Capital IV and its operating divisions. 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 a 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 September 30, 2000
and December 31, 1999 and for the Three Months and Nine Months Ended September
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>
Unrealized Accumulated Unrealized Accumulated
(losses) other (losses) other
gains on Cash flow comprehensive gains on Cash flow comprehensive
(Dollars in thousands) securities hedges loss (Dollars in thousands) securities hedges loss
------------------------------------------------------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1999 $ (9,559) $ 1,504 $ (8,055) Balance - June 31, 2000 $(17,473) $ 1,696 $ (15,777)
Current period change (4,773) (353) (5,126) Current period change 3,141 (545) 2,596
--------------------------------- ----------------------------------
Balance - September 30, 2000 $(14,332) $ 1,151 $(13,181) Balance - September 30, 2000 $(14,332) 1,151 $ (13,181)
================================= ==================================
<CAPTION>
Unrealized Accumulated Unrealized Accumulated
(losses) other (losses) other
gains on Cash flow comprehensive gains on Cash flow comprehensive
(Dollars in thousands) securities hedges loss (Dollars in thousands) securities hedges loss
------------------------------------------------------------------ ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998 $ 1,351 $ (677) $ 674 Balance - June 31, 1999 $ (4,572) $ 844 $ (3,728)
Current period change (9,401) 1,521 (7,880) Current period change (3,478) - (3,478)
--------------------------------- ---------------------------------------------------------------
Balance - September 30, 1999 $ (8,050) $ 844 $ (7,206) Balance - September 30, 1999 $ (8,050) $ 844 $ (7,206)
================================= =================================
</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 July 21, 2000, GBB Merger Corp. merged with and into BSC, 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 4,002,000 shares of Greater Bay's stock. The transaction was
accounted for as a pooling-of-interests. The financial information presented
herein has been restated to reflect the merger with BSC on a pooling-of-
interests basis.
On May 18, 2000, Greater Bay completed its merger with Coast Bancorp, the
holding company for CCB. As a result of the merger, CCB operates as a wholly
owned subsidiary of Greater Bay. Upon consumption of the merger, the outstanding
shares of Coast Bancorp were converted into an aggregate amount of approximately
6,140,000 shares of Greater Bay's stock. The merger was accounted for as a
pooling of interests. The financial information presented herein has been
restated to reflect the merger with Coast Bancorp on a pooling-of-interests
basis.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of September 30, 2000 and December 31, 1999 and for the
Three Months and Nine Months Ended September 30, 2000 and 1999
On October 13, 2000, Bank of Petaluma ("BOP") merged with and into and DKSS
Corp., as a result of which BOP became a wholly owned subsidiary of Greater Bay.
Upon consumption of the merger, the outstanding shares of BOP were converted
into an aggregate of approximately 1,667,000 shares of Greater Bay stock,
restated for the stock split effective October 4, 2000. The transaction was
accounted for as a pooling-of-interests. The financial information presented
herein has not been restated to reflect the merger with BOP on a pooling-of-
interests basis. As of and for the nine months ended September 30, 2000, BOP had
$7.7 million in net interest income, $2.0 million in net income, $211.4 million
in assets, $175.9 million in deposits and $17.4 million in shareholders' equity.
Assuming the acquisition of BOP had been completed at September 30, 2000,
the Company would have had on a pooled basis, proforma net interest income of
$161.7 million and proforma net income of $40.6 million.
On August 8, 2000, Greater Bay and The Matsco Companies Inc. ("Matsco")
signed a definitive agreement for a stock purchase agreement between Greater Bay
and Matsco, a financial services company headquartered in Emeryville, California
which specializes in financial services for the dental and veterinary markets.
Greater Bay Bancorp will pay the Matsco shareholders $6.5 million in cash and up
to an additional $6.0 million in an earn-out arrangement over a 5- year period.
The acquisition is subject to regulatory approval and is expected to close in
the fourth quarter of 2000.
The results of operations previously reported by the separate entities 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.
Coast Bancorp Bank of Santa Clara
For the three months ended For the six months ended
(Dollars in thousands) March 31, 2000 June 30, 2000
-------------------------------------------------------------------------
Net interest income:
Greater Bay Bancorp $ 36,378 $ 47,131
Acquired entity 5,538 5,237
--------- --------
Combined $ 41,916 $ 52,368
========= ========
Net income:
Greater Bay Bancorp $ 13,473 $ 8,342
Acquired entity 2,035 1,392
--------- -------
Combined $ 15,508 $ 9,734
========= =======
There are no significant transactions between the Company and BSC or
Coast Bancorp. All intercompany transactions have been eliminated.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of September 30, 2000 and December 31, 1999 and for the
Three Months and Nine Months Ended September 30, 2000 and 1999
NOTE 3--BORROWINGS
Other borrowings are detailed as follows:
September 30, December 31,
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------
Other borrowings:
Short term borrowings:
Fed funds purchased $ 22,000 $ -
FHLB advances 83,000 -
Securities sold under agreements
to repurchase - 55,100
Short term notes payable 1,500 1,500
Advances under credit lines - 7,000
-------- --------
Total short term borrowings 106,500 63,600
-------- --------
Long term borrowings:
Securities sold under agreements
to repurchase - 10,000
FHLB advances 11,892 27,000
-------- --------
Total other long term borrowings 11,892 37,000
-------- --------
Total other borrowings $118,392 $100,600
======== ========
During the nine month period ended September 30, 2000, the average balance
of short term Federal Home Loan Bank ("FHLB") advances were $15.5 million and
the average interest rates during that period was 6.41%. There were no such
borrowings outstanding during the year ended December 31, 1999. Short term FHLB
advances generally mature within 90 days.
During the nine month period ended September 30, 2000 and the twelve month
period ended December 31, 1999, the average balance of securities sold under
short term agreements to repurchase were $12.0 million and $21.1 million,
respectively, and the average interest rates during those periods were 5.73% and
5.57%, respectively. Securities sold under short term agreements to repurchase
generally mature within 90 days of dates of purchase.
During the nine month period ended September 30, 2000 and the twelve month
period ended December 31, 1999, the average balance of advances under credit
lines were $11.1 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 nine month period ended September 30, 2000 and the twelve month
period ended December 31, 1999, the average balance of federal funds purchased
was $8.0 million and $719,000, respectively, and the average interest rates
during those periods were 6.41% and 5.38%, respectively. Federal funds purchased
generally mature in one business day. There were no such balances outstanding at
September 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 September 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 September 30, 2000 and December 31, 1999 and for the
Three Months and Nine Months Ended September 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. All periods presented include the effect of the 2-for-1
stock split effective on October 4, 2000.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
three and nine months ended September 2000 and 1999.
<TABLE>
<CAPTION>
For the three months ended For the three months ended
September 30, 2000 September 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 $ 12,145 $ 11,788
Basic net income per share:
Income available to common shareholders 12,145 39,781,000 $ 0.31 11,788 36,708,000 $ 0.32
Effect of dilutive securities:
Stock options - 2,114,000 - 1,972,000
---------------------------------------- -------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 12,145 41,895,000 $ 0.29 $ 11,788 38,680,000 $ 0.30
======================================== =====================================
<CAPTION>
For the nine months ended For the nine months ended
September 30, 2000 September 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 $ 38,608 28,317
Basic net income per share:
Income available to common shareholders 38,608 39,336,000 $ 0.98 28,317 36,415,000 $ 0.78
Effect of dilutive securities:
Stock options - 1,897,000 - - 1,932,000
---------------------------------------- -------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 38,608 41,233,000 $ 0.94 $ 28,317 38,347,000 $ 0.74
======================================== =====================================
</TABLE>
There were options to purchase 1,000 and 122,000 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the three months ended
September 30, 2000 and 1999, respectively. There were options to purchase 14,000
and 478,000 shares that were considered anti-dilutive whereby the options'
exercise price was greater than the average market price of the common shares,
during the nine months ended September 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
BSC at a 0.8499 conversion ratio, 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. The
foregoing ratios do not include the effect of the 2-for-1 stock split effective
on October 4, 2000.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of September 30, 2000 and December 31, 1999 and for the
Three Months and Nine Months Ended September 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 nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
--------------------- -----------------------
Community Trust Community Trust
(Dollars in thousands Banking Operation Banking Operations
---------------------------------------------------- -----------------------
<S> <C> <C> <C> <C>
Net interest income $ 159,717 $ 474 $ 110,885 $ 259
Other income 32,736 2,689 16,158 2,227
Operating expenses,
excluding merger and other
related nonrecurring cost 80,865 2,165 64,970 2,213
Net income before income
taxes (1) 87,103 998 50,018 273
Total assets 4,259,992 - 3,302,548 -
Deposits 3,688,537 60,684 2,880,960 58,476
Assets under management - 838,659 - 652,054
</TABLE>
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of September 30, 2000 and December 31, 1999 and for the
Three Months and Nine Months Ended September 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 nine months ended September 30, 2000
and 1999 is presented below.
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net interest income and other income
Total segment net interest income and other income $ 195,616 $ 129,529
Parent company net interest income and other income (5,745) (2,733)
----------- ----------
Consolidated net interest income and other income $ 189,871 $ 126,796
=========== ==========
Net income before taxes, merger
related nonrecurring costs and extraordinary items
Total segment net income before taxes $ 88,101 $ 50,291
Parent company net income before taxes 1,218 (421)
Consolidated net income before taxes,
merger and other related costs and
----------- ----------
extraordinary items $ 89,319 $ 49,870
=========== ==========
Total assets
Total segment assets $ 4,259,992 $3,302,548
Parent company assets 76,425 16,478
----------- ----------
Consolidated total assets $ 4,336,417 $3,319,026
=========== ==========
</TABLE>
NOTE 6--CASH DIVIDEND
The Company declared a cash dividend of $0.10 cents per share (as restated
for the 2-for-1 stock split effective on October 4, 2000) payable on October 16,
2000 to shareholders of record as of September 29, 2000.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay is a bank holding company operating BSC, 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 33 offices located in Aptos, Blackhawk, Capitola,
Cupertino, Danville, Fremont, Hayward, Lafayette, Milpitas, Millbrae, Palo Alto,
Pleasanton, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San
Ramon, Santa Clara, Santa Cruz, Scotts Valley, Sunnyvale, Walnut Creek and
Watsonville.
On October 13, 2000, Greater Bay completed its merger with BOP. The
financial information included in this report does not include BOP.
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 and other footnotes included in the Current Report on Form 8-K filed
on June 26, 2000.
RESULTS OF OPERATIONS
The following table summarizes income, income per share and key financial
ratios using the Company's core earnings, income including non recurring warrant
income, and net income for the three month and nine month periods presented.
Core earnings include the Company's income and exclude non recurring warrant
income, merger and other related nonrecurring cost and extraordinary items.
<TABLE>
<CAPTION>
Core earnings Income including nonrecurring Net income
(before merger, nonrecurring warrant income and before (after merger, nonrecurring
and extraordinary items) merger and extraordinary items and extraordinary items)
------------------------------- ------------------------------ -----------------------------
Three Three Three Three Three
months ended months ended months ended months ended months ended months ended
(Dollars in thousands, except per September 30, September 30, September 30, September 30, September 30, September 30,
share amounts) 2000 1999 2000 1999 2000 1999
------------------------------- ------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Income $ 17,579 $ 11,788 $ 19,182 $ 11,788 $ 12,145 $ 11,788
Income per share:
Basic $ 0.44 $ 0.32 $ 0.48 $ 0.32 $ 0.31 $ 0.32
Diluted $ 0.42 $ 0.30 $ 0.46 $ 0.30 $ 0.29 $ 0.30
Return on average assets 1.62% 1.46% 1.77% 1.46% 1.12% 1.46%
Return on average shareholders' equity 24.56% 22.70% 26.80% 22.70% 16.97% 22.70%
<CAPTION>
Core earnings Income including nonrecurring Net income
(before merger, nonrecurring warrant income and before (after merger, nonrecurring
and extraordinary items) merger and extraordinary items and extraordinary items)
------------------------------- -------------------------------- ------------------------------
Nine Nine Nine Nine Nine Nine
months ended months ended months ended months ended months ended months ended
(Dollars in thousands, except per September 30, September 30, September 30, September 30, September 30, September 30,
share amounts) 2000 1999 2000 1999 2000 1999
------------------------------- -------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income $ 47,706 $ 30,818 $ 54,778 $ 30,897 $ 38,608 $ 28,317
Income per share:
Basic $ 1.21 $ 0.85 $ 1.39 $ 0.85 $ 0.98 $ 0.78
Diluted $ 1.16 $ 0.80 $ 1.33 $ 0.81 $ 0.94 $ 0.74
Return on average assets 1.58% 1.38% 1.81% 1.38% 1.28% 1.27%
Return on average shareholders' equity 23.65% 20.54% 27.15% 20.59% 19.14% 18.87%
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net income for the third quarter of 2000 increased 3.0% to $12.1 million,
or $0.29 per diluted share, compared to net income of $11.8 million, or $0.30
per diluted share, for the third quarter of 1999. The third quarter 2000 results
included nonrecurring warrant income of $2.8 million ($1.6 million, net of
taxes) compared to $0 during the third quarter of 1999. In addition, the third
quarter of 2000 included merger and other related nonrecurring costs of $11.4
million ($7.0 million, net of taxes) compared to $0 in the third quarter of
1999.
Income, including nonrecurring warrant income and before nonrecurring
merger related expenses and extraordinary items, increased 62.7% to $19.2
million, or $0.46 per diluted share, for the third quarter of 2000, compared to
$11.8 million, or $0.30 per diluted share, in the third quarter of 1999.
The Company's core earnings for the third quarter of 2000 increased 49.1%
to $17.6 million, or $0.42 per diluted share, compared to $11.8 million, or
$0.30 per diluted share, in the third quarter of 1999. Based on its core
earnings for the third quarter of 2000, the Company's return on average
shareholders' equity was 24.56% and its return on average assets was 1.62%.
During the third quarter of 1999, the Company's core earnings resulted in a
return on average shareholders' equity of 22.70% and a return on average assets
of 1.46%.
The 49.1% increase in core earnings during the third quarter of 2000 as
compared to 1999 was the result of significant growth in loans and investments.
For the third quarter of 2000, net interest income increased 38.7% as compared
to the third quarter of 1999. This increase was primarily due to a 45.0%
increase in average interest-earning assets for the third quarter of 2000 as
compared to the third quarter of 1999. The increases in loans, trust assets and
deposits also contributed to the 41.5% 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 third quarter of
2000 by a 9.5% increase in recurring operating expenses, as compared to the
third quarter of 1999.
Net income for the nine months ended September 30, 2000 increased 36.3% to
$38.6 million, or $0.94 per diluted share, compared to net income of $28.3
million, or $0.74 per diluted share, for the nine months ended September 30,
1999. The nine months ended September 30, 2000 results included nonrecurring
warrant income of $12.1 million ($7.1 million, net of taxes) compared to
$230,000 ($135,000 net of taxes and other related expenses) during the nine
months ended September 30, 1999. In addition, the nine months ended September
30, 2000 included merger and other related nonrecurring cost of $25.5 million
($16.2 million, net of taxes) compared to $4.0 million ($2.5 million, net of
taxes) in the nine months ended September 30, 1999.
Income, including nonrecurring warrant income and before nonrecurring
merger related expenses and extraordinary items, increased 77.3% to $54.8
million, or $1.33 per diluted share, for the nine months ended September 30,
2000, compared to $30.9 million, or $0.81 per diluted share, in the nine months
ended September 30, 1999.
The Company's core earnings for the nine months ended September 30, 2000,
increased 54.8% to $47.7 million, or $1.16 per diluted share, compared to $30.8
million, or $0.80 per diluted share, in the nine months ended September 30,
1999. Based on its core earnings for the nine months ended September 30, 2000,
the Company's return on average shareholders' equity was 23.65% and its return
on average assets was 1.58%. During the nine months ended September 30, 1999,
the Company's core earnings resulted in a return on average shareholders' equity
of 20.54% and a return on average assets of 1.38%.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The 54.8% increase in core earnings in the nine months ended September 30,
2000 as compared to 1999 was the result of significant growth in loans,
investments and trust assets. For the nine months ended September 30, 2000, net
interest income increased 42.1% as compared to the nine months ended September
30, 1999. This increase was primarily due to a 36.1% increase in average
interest-earning assets for the nine months ended September 30, 2000 as compared
to the nine months ended September 30, 1999. The increases in loans, trust
assets and deposits also contributed to the 34.1% increase in loan and
international banking fees, service charges and other fees, and trust fees.
Other income includes $18.1 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 nine months ended September 30, 2000 by a 13.8% increase in
recurring operating expenses, as compared to the nine months ended September 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
September 30, 2000 June 30, 2000 September 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 $ 182,517 $ 4,106 8.95% $ 206,513 $ 3,092 6.02% $ 180,135 $ 2,221 4.89%
Other short term securities 26,649 399 5.96% 17,021 232 5.48% 61,523 945 6.09%
Investment securities:
Taxable 786,518 14,381 7.27% 717,028 12,236 6.86% 528,685 9,090 6.82%
Tax-exempt (1) 162,927 1,995 4.87% 152,018 2,042 5.40% 121,371 1,508 4.93%
Loans (2) (3) 2,840,850 71,760 10.05% 2,702,429 66,034 9.83% 1,866,831 48,939 10.40%
--------- ------- ---------- ------- ---------- -------
Total interest-earning assets 3,999,461 92,641 9.21% 3,795,009 83,636 8.86% 2,758,545 62,703 9.02%
Noninterest-earning assets 321,279 216,751 435,854
---------- ------- ---------- ------- ---------- -------
Total assets $4,320,740 92,641 $4,011,760 83,636 $3,194,399 62,703
========== ------- =========== ------- ========== -------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,963,073 21,573 4.37% $1,980,577 18,024 3.66% $1,600,822 14,000 3.47%
Time deposits, over $100,000 676,528 9,508 5.59% 609,263 8,271 5.46% 475,544 5,340 4.46%
Other time deposits 141,066 2,348 6.62% 141,777 1,660 4.71% 163,777 1,712 4.15%
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits 2,780,667 33,429 4.78% 2,731,617 27,955 4.12% 2,240,143 21,052 3.73%
Other borrowings 115,295 1,856 6.40% 93,952 1,530 6.55% 74,175 1,155 6.18%
---------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities 2,895,962 35,285 4.85% 2,825,569 29,485 4.20% 2,314,318 22,207 3.81%
Trust Preferred Securities 99,500 2,585 10.34% 78,324 1,783 9.16% 49,000 1,021 8.27%
---------- ------- ---------- ------- ---------- ------- ----
Total interest-bearing
liabilities and capital
securities 2,995,462 37,870 5.03% 2,903,893 31,268 4.33% 2,363,318 23,228 3.90%
Noninterest-bearing deposits 817,864 785,716 591,469
Other noninterest-bearing liabilities 222,634 53,093 33,548
Shareholders' equity 284,780 269,058 206,064
---------- ------- ---------- ------- ---------- -------
Total shareholders' equity and
liabilities $4,320,740 37,870 $4,011,760 31,268 $3,194,399 23,228
=========== ------- ========== ------- ========== -------
Net interest income $54,771 $52,368 $39,475
======= ======= =======
Including capital securities:
----------------------------
Interest rate spread 4.19% 4.53% 5.12%
Contribution of interest free funds 1.26% 1.02% 0.56%
----- ---- ----
Net yield on interest-earnings assets(4) 5.45% 5.55% 5.68%
Excluding capital securities:
----------------------------
Interest rate spread 4.37% 4.67% 5.21%
Contribution of interest free funds 1.34% 1.07% 0.61%
---- ---- ----
Net yield on interest-earnings assets(4) 5.71% 5.74% 5.82%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.21%,
7.94% and 7.21% for the quarters ended September 30, 2000, June 30, 2000 and
September 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 $1,296,000, $1,974,000 and $1,938,000
for the quarters ended September 30, 2000, June 30, 2000 and September 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 third quarter
of 2000 was $57.4 million, a $3.2 million increase over the second quarter of
2000 and a $16.8 million increase over the third quarter of 1999. The increase
from the third quarter of 1999 to the third quarter of 2000 was primarily due to
the $1.2 billion, or 45.0% increase in average interest-earning assets. The
increase in net interest income was slightly offset by a 5 basis points decrease
in the Company's net yield on interest-earning assets, excluding capital
securities, from 5.82% in the third quarter of 1999 to 5.71% in the third
quarter of 2000. The increase from the second quarter of 2000 to the third
quarter of 2000 was due to the $204.5 million, or 5.4% increase in average
interest-earning assets and a 3 basis points increase in the Company's net yield
on interest-earning assets, excluding capital securities, from 5.74% in the
second quarter of 2000 to 5.71% in the third 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 September 30, 2000 Three months ended September 30, 2000
compared with June 30, 2000 compared with June 30, 2000
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 $ (2,137) $ 3,151 $ 1,014 $ 30 $ 1,855 $ 1,885
Other short term investments 145 22 167 (526) (20) (546)
Investment securities:
Taxable 1,327 818 2,145 4,658 633 5,291
Tax-exempt 662 (709) (47) 608 (121) 487
Loans 3,977 1,749 5,726 33,756 (10,935) 22,821
------------------------------------- -------------------------------------
Total interest income 3,974 5,031 9,005 38,527 (8,589) 29,938
-------------------------------------- -------------------------------------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES
Deposits:
MMDA, NOW and savings 1,071 (4,620) (3,549) (3,524) (4,049) (7,573)
Time deposits over $100,000 (1,017) (220) (1,237) (2,600) (1,568) (4,168)
Other time deposits 58 (746) (688) 1,408 (2,044) (636)
------------------------------------- -------------------------------------
Total interest-bearing
deposits 111 (5,585) (5,474) (4,716) (7,661) (12,377)
Other borrowings (547) 221 (326) (658) (43) (701)
------------------------------------- -------------------------------------
Total interest expense (435) (5,365) (5,800) (5,375) (7,703) (13,078)
------------------------------------- -------------------------------------
Net increase in net
income $ 3,539 $ (334) $ 3,205 $ 33,152 $ (16,292) $ 16,860
===================================== =====================================
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Quarter Ended September 30, 2000 Compared to September 30, 1999
-------------------------------------------------------------------
Interest income for the third quarter ended September 30, 2000
increased 47.7% to $92.6 million from $62.7 million in the same period in 1999.
This was primarily due to the $33.2 million favorable volume variance which
resulted from a $1.2 billion, or 45.0%, increase in average interest-earning
assets over the comparable prior year period. The average yield on interest-
earning assets increased 19 basis points to 9.21% in the third quarter of 2000
from 9.02% in the same period of 1999 primarily due to the increase on the
yields on loans. Average yields on loans decreased 35 basis points to 10.05% in
the quarter ended September 30, 2000 from 10.40% for the same period in 1999,
primarily as a result of decreases in market rates of interest.
Interest expense, excluding capital securities, in the third quarter of
2000 increased 58.9% to $35.3 million from $22.2 million for the same period in
1999. The increase is the result of increased interest-bearing liabilities,
which rose to $2.9 billion for the third quarter of 2000, as compared to $2.3
billion for the quarter ended September 30, 1999, and a 104 basis point increase
in the cost of funds which increased to 4.85% in the third quarter of 2000.
During the third quarter of 2000, average noninterest-bearing deposits
increased to $817.9 million from $591.5 million in the same period in 1999.
Average noninterest-bearing deposits comprised 22.7% of total deposits for the
third quarter in 2000, compared to 20.9% for the same period in 1999.
As a result of the foregoing, the Company's interest rate spread,
excluding capital securities, was 4.37% in the third quarter of 2000 compared to
5.21% in the same quarter one year earlier and the net yield on interest-earning
assets decreased to 5.71% from 5.82%.
The Quarter Ended September 30, 2000 Compared to June 30, 2000
--------------------------------------------------------------
Interest income increased 10.8% to $92.6 million for the third quarter
of 2000, as compared to $83.6 million for the previous quarter. This was
primarily due to the $3.5 million favorable volume variance which resulted from
a $204.5 million, or 5.4%, increase in average interest-earning assets over the
prior quarter. The average yield on interest-earning assets increased 35 basis
points to 9.21% in the third quarter of 2000 from 8.86% in the previous quarter
primarily due to the increase on the yields on loans. Average yields on loans
increased 22 basis points to 10.05% in the quarter ended September 30, 2000 from
9.83% for the quarter ended June 30, 2000, primarily as a result of increases in
market rates of interest.
Interest expense, excluding capital securities, in the third quarter of
2000 increased 19.7% to $35.3 million from $29.5 million in the prior quarter.
The increase is the result of increased interest-bearing liabilities, which rose
to $2.9 billion for the third quarter of 2000, as compared to $2.8 billion for
the prior quarter and a 65 basis point increase in the cost of funds which
increased to 4.85% in the third quarter of 2000.
During the third quarter of 2000, average noninterest-bearing deposits
increased to $817.9 million from $785.7 million in the second quarter of 2000.
Average noninterest-bearing deposits comprised 22.7% of total deposits for the
third quarter in 2000 as compared to 22.3% from the prior quarter.
As a result of the foregoing, the Company's interest rate spread,
excluding capital securities, was 4.37% in the third quarter of 2000 compared to
4.67% in the prior quarter and the net yield on interest-earning assets
increased to 5.71% from 5.74%.
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 nine months
presented, as well as the analysis of variances due to rate and volume:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 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 $ 221,427 $ 11,251 6.79% $ 170,395 $ 6,101 4.79%
Other short term securities 24,758 1,099 5.93% 64,324 2,966 6.16%
Investment securities:
Taxable 712,790 37,656 7.06% 505,473 24,628 6.51%
Tax-exempt (1) 150,856 5,851 5.18% 116,945 4,285 4.90%
Loans (2) (3) 2,652,754 196,626 9.90% 1,906,615 134,128 9.41%
----------- --------- ------------ ---------
Total interest-earning assets 3,762,585 252,483 8.96% 2,763,752 172,108 8.33%
Noninterest-earning assets 274,983 225,761
----------- --------- ------------ ---------
Total assets $ 4,037,568 252,483 $ 2,989,513 172,108
=========== --------- ============ ---------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 1,941,654 58,020 3.99% $ 1,461,004 36,854 3.37%
Time deposits, over $100,000 610,480 24,341 5.33% 441,982 14,722 4.45%
Other time deposits 142,089 5,639 5.30% 165,268 5,083 4.11%
----------- --------- ------------ ---------
Total interest-bearing deposits 2,694,223 88,000 4.36% 2,068,254 56,659 3.66%
Other borrowings 108,312 5,044 6.22% 88,036 3,994 6.07%
Subordinated debt - - 806 68 11.28%
------------ --------- ------------ ---------
Total interest-bearing liabilities 2,802,535 93,044 4.43% 2,157,096 60,721 3.76%
Trust Preferred Securities 76,007 5,426 9.54% 49,000 2,976 8.12%
------------ --------- ------------ ---------
Total interest-bearing liabilities and
capital securities 2,878,542 98,470 4.57% 2,206,096 63,697 3.86%
Noninterest-bearing deposits 779,536 551,954
Other noninterest-bearing liabilities 110,000 30,849
Shareholders' equity 269,490 200,614
------------ --------- ------------ ---------
Total shareholders' equity and
liabilities $ 4,037,568 98,470 $ 2,989,513 63,697
------------ --------- ------------ ---------
Net interest income $ 154,013 $ 108,411
========= =========
Including capital securities:
----------------------------
Interest rate spread 4.39% 4.47%
Contribution of interest free funds 1.07% 0.78%
---- ----
Net yield on interest-earnings assets(4) 5.47% 5.24%
Excluding capital securities:
----------------------------
Interest rate spread 4.53% 4.56%
Contribution of interest free funds 1.13% 0.83%
---- ----
Net yield on interest-earnings assets(4) 5.66% 5.39%
</TABLE>
(1) The tax equivalent yields earned on the tax exempt securities are 7.07% and
7.15% for the periods ended September 30, 2000 and September 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 $5,280,000 and $5,782,000 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.
19
<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 nine months
ended September 30, 2000 was $159.4 million, a $48.1 million increase over the
nine months ended September 30, 1999. The increase was due to the $998.8
million, or 36.1%, increase in average interest-earning assets. The increase in
net interest income was further enhanced by a 27 basis points increase in the
Company's net yield on interest-earning assets, excluding capital securities,
from 5.39% in the nine months ended September 30, 1999 to 5.66% in the nine
months ended September 30, 2000.
The table below sets forth, for the nine 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>
Nine months ended September 30,
2000 compared with September 30, 1999
favorable (unfavorable)
--------------------------------------
(Dollars in thousands) Volume Rate Net
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 2,150 $ 3,000 $ 5,150
Other short term investments (1,758) (109) (1,867)
Investment securities:
Taxable 10,829 2,199 13,028
Tax-exempt 1,307 259 1,566
Loans 55,086 7,412 62,498
--------------------------------------
Total interest income 67,614 12,761 80,375
--------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (13,587) (7,579) (21,166)
Time deposits over $100,000 (6,354) (3,265) (9,619)
Other time deposits 1,102 (1,658) (556)
--------------------------------------
Total interest-bearing deposits (18,840) (12,501) (31,341)
Other borrowings (945) (105) (1,050)
Subordinated debt 34 34 68
--------------------------------------
Total interest expense (19,751) (12,572) (32,323)
--------------------------------------
Net increase in net interest income $ 47,863 $ 189 $ 48,052
======================================
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
--------------------------------------------------------------------------------
30, 1999
--------
Interest income for the nine months ended September 30, 2000 increased
46.7% to $252.5 million from $172.1 million in the same period in 1999. This was
primarily due to the $47.9 million favorable volume variance which resulted from
a $998.8 million, or 36.1%, increase in average interest-earning assets over the
comparable prior year. The average yield on interest-earning assets increased 63
basis points to 8.96% in the nine months ended September 30, 2000 from 8.33% in
the same period of 1999 primarily due to the increase on the yields on loans.
Average yields on loans increased 49 basis points to 9.90% in the nine months
ended September 30, 2000 from 9.41% for the same period in 1999, primarily as a
result of increases in market rates of interest.
Interest expense, excluding capital securities, in the nine months ended
September 30, 2000 increased 53.2% to $93.0 million from $60.7 million for the
same period in 1999. The increase is the result of increased average interest-
bearing liabilities, which rose to $2.8 billion for the nine months ended
September 30, 2000, as compared to $2.2 billion for the same period in 1999, and
a 67 basis point increase in the cost of funds which increased to 4.43% in the
nine months ended September 30, 2000.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, was 4.53% in the nine months ended September 30, 2000
compared to 4.56% in the same period one year earlier and the net yield on
interest-earning assets increased to 5.66% from 5.39%.
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 September 30, Nine months ended September 30,
---------------------------------- ----------------------------------
(Dollars in thousands) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average noninterest bearing demand deposits $ 817,864 $ 591,469 $ 779,536 $ 551,954
Client service expenses 477 825 1,518 2,462
Client service expenses, annualized 0.23% 0.56% 0.39% 0.90%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS
(EXCLUDING CAPITAL SECURITIES):
Net yield on interest-earning assets 5.77% 5.82% 5.66% 5.39%
Impact of client service expense (0.05)% (0.06)% (0.05)% (0.14)%
-------------------------------- ----------------------------------
Adjusted net yield on interest-earning assets (1) 5.72% 5.77% 5.61% 5.25%
================================ ==================================
</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 third quarter of 2000 was $7.7
million, compared to $3.9 million for the third quarter of 1999. In addition, in
connection with the Bank of Santa Clara merger, the Company made an additional
provision for loan losses of $3.9 million in the third quarter of 2000 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 $10.5 million for the third quarter of
2000 compared to $7.4 million for the third 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
-----------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 2000 2000 2000 1999 1999
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loan and international banking fees $ 2,497 $ 1,927 $ 1,176 $ 1,699 $ 946
Service charges and other fees 2,038 2,005 1,973 1,242 2,071
Trust fees 822 905 924 774 768
Gain on sale of SBA loans 429 675 619 143 656
ATM network revenue 799 584 570 635 789
Gain (loss) on sale of investments, net 3 58 (1) (3) -
Other 1,185 1,456 3,098 4,630 2,219
-----------------------------------------------------------------
Total, recurring 7,773 7,610 8,359 9,120 7,449
Nonrecurring warrant income 2,767 740 8,609 14,278 -
-----------------------------------------------------------------
Total $ 10,540 $ 8,350 $ 16,968 $ 23,398 $ 7,449
=================================================================
</TABLE>
For the third quarter of 2000 as compared to the same period in 1999,
the increase in other income was a result of a $1.6 million increase in loan and
international banking fees and a $54,000 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
nonrecurring warrant income resulted from the sale of stock acquired from
clients in connection with financing activities.
Other income for the third quarter of 2000 and the third quarter of
1999 included nonrecurring warrant income of $2.8 million and $0, respectively,
net of related employee incentives. The Company holds in excess of 130 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
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 2000 2000 2000 1999 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $ 14,954 $ 14,422 $ 14,963 $ 14,636 $ 13,416
Occupancy and equipment 5,318 4,880 5,031 4,367 4,167
Legal and other professional fees 1,245 1,068 978 740 894
Telephone, postage and supplies 944 1,086 1,037 1,008 1,069
Marketing and promotion 846 997 859 1,011 751
Client services 477 765 828 764 825
FDIC insurance and regulatory assessments 361 233 240 244 196
Directors' fees 253 193 185 141 275
Expenses on other real estate owned - 41 10 (53) 30
Other 2,028 2,426 2,399 2,688 2,506
-------------------------------------------------------------------
Total operating expenses, excluding merger costs
and contribution to the GBB Foundation 26,426 26,111 26,530 25,546 24,129
Contribution to the GBB Foundation and related
expense, net - - - 11,837 -
Merger and other related nonrecurring costs 11,412 10,203 3,881 6,367 -
-------------------------------------------------------------------
Total operating expenses $ 37,838 $ 36,314 $ 30,411 $ 43,750 $ 24,129
===================================================================
Efficiency ratio 57.94% 59.81% 47.63% 65.57% 51.42%
Efficiency ratio, before merger, nonrecurring and
extraordinary items 42.25% 43.53% 48.03% 48.71% 51.42%
Total operating expenses to average assets* 3.48% 3.64% 3.23% 4.87% 3.00%
Total operating expenses to average assets,
before nonrecurring items* 2.43% 2.62% 2.82% 2.85% 3.00%
</TABLE>
*Annualized
Operating expenses totaled $37.8 million for the third quarter of 2000,
compared to $24.1 million for the third quarter of 1999. Operating expenses
included merger and other related nonrecurring costs of $11.4 million and $0 for
the third quarter of 2000 and 1999, respectively. Excluding these nonrecurring
items, operating expenses were $26.2 million and $24.1 million for these
periods. The ratio of operating expenses to average assets, before nonrecurring
items, was 2.43% for the third quarter of 2000 and 3.00% for the third 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 third quarter of 2000 was 41.85%, compared to 51.42% for the
third 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 third quarter of 2000, average assets
increased 35.3% from the third quarter of 1999, while operating expenses,
excluding nonrecurring costs, increased only 8.5%. The Company believes that it
may not be able to sustain the low efficiency ratio that it achieved in the
third 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 third quarter of
2000 to $15.0 million, compared to $13.4 million for the third 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 third quarter of 2000
was 38.5%, compared to 37.6% in the third 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 nine months ended
September 30, 2000 was 39.5%, compared to 38.1% in the nine months ended
September 30, 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.
FINANCIAL CONDITION
Total assets increased 22.4% (29.9% annualized) to $4.3 billion at
September 30, 2000, compared to $3.5 billion at December 31, 1999. The increase
in the nine months ended September 30, 2000 was primarily due to increases in
the Company's loan portfolio funded by growth in deposits.
Loans
Total gross loans increased 26.5% (35.3% annualized) to $3.0 billion at
September 30, 2000, compared to $2.4 billion at December 31, 1999. The increase
in the loan volume during the first nine 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>
September 30, December 31, September 30,
2000 1999 1999
-----------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $1,225,279 42.2% $ 900,943 39.2% $ 843,834 40.2%
Term real estate - commercial 819,210 28.2 696,707 30.3 640,819 30.5
-----------------------------------------------------------------------------------
Total commercial 2,044,489 70.4 1,597,650 69.5 1,484,653 70.7
Real estate construction and land 572,740 19.7 466,577 20.3 391,946 18.7
Real estate term - other 171,134 5.9 133,256 5.8 120,577 5.7
Consumer and other 192,230 6.6 159,679 6.9 155,492 7.4
-----------------------------------------------------------------------------------
Total loans, gross 2,980,593 102.6 2,357,162 102.5 2,152,668 102.5
Deferred fees and discounts, net (13,339) (0.5) (12,599) (0.5) (12,611) (0.6)
-----------------------------------------------------------------------------------
Total loans, net of deferred fees 2,967,254 102.1 2,344,563 102.0 2,140,057 101.9
Allowance for loan losses (65,699) (2.1) (46,451) (2.0) (39,007) (1.9)
-----------------------------------------------------------------------------------
Total loans, net $2,901,555 100.0% $2,298,112 100.0% $2,101,050 100.0%
===================================================================================
</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
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 2000 2000 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $ 14,877 $ 8,720 $ 6,266 $ 5,682 $ 7,928
Accruing loans past due 90 days or more 636 706 37 139 406
Restructured loans 420 420 743 807 1,492
-------------------------------------------------------------------
Total nonperforming loans 15,933 9,846 7,046 6,628 9,826
Other real estate owned 395 229 271 271 515
-------------------------------------------------------------------
Total nonperforming assets $ 16,328 $ 10,075 $ 7,317 $ 6,899 $ 10,341
===================================================================
Nonperforming assets to total loans
and other real estate owned 0.55% 0.37% 0.29% 0.29% 0.48%
Nonperforming assets to total assets 0.38% 0.25% 0.18% 0.19% 0.31%
</TABLE>
At September 30, 2000 and December 31, 1999, the Company had $14.9
million and $5.7 million in nonaccrual loans respectively. Interest income
foregone on nonaccrual loans outstanding totaled $320,000 and $131,000 for the
three months ended September 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 $395,000
and $271,000 at September 30, 2000 and December 31, 1999 respectively.
The Company had $420,000 and $807,000 of restructured loans as of
September 30, 2000 and December 31, 1999, respectively. There were no principal
reduction concessions allowed on restructured loans during the third quarter of
2000 or 1999. Interest income from restructured loans totaled $12,000 and
$26,000 for the nine months ended September 30, 2000 and 1999, respectively.
Foregone interest income, which totaled $0 and $0 for the nine months ended
September 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
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 2000 2000 2000 1999 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Substandard $ 44,635 $ 24,049 $ 29,115 $ 30,282 $ 31,240
Doubtful 3,756 7,633 4,925 1,850 2,316
Loss - - 4 2 10
Other real estate owned 395 229 271 271 515
-------------------------------------------------------------------
Classified assets $ 48,786 $ 31,911 $ 34,315 $ 32,405 $ 34,081
===================================================================
Classified assets to total loans and other real 1.64% 1.17% 1.36% 1.37% 1.58%
estate owned
Allowance for loan losses to total classified asset 134.67% 177.90% 149.05% 143.35% 114.45%
</TABLE>
With the exception of these classified assets, management was not aware
of any loans outstanding as of September 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
assets 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
-----------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 2000 2000 2000 1999 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period end loans outstanding $ 2,980,593 $ 2,728,248 $ 2,518,306 $2,357,162 $ 2,152,668
Average loans outstanding $ 2,851,130 $ 2,635,797 $ 2,439,421 $2,217,490 $ 2,066,962
Allowance for loan losses:
Balance at beginning of period $ 56,769 $ 51,148 $ 46,451 $ 39,007 $ 35,207
Charge-offs:
Commercial (2,779) (4,223) (1,729) (1,289) (812)
Real estate construction and land - - - - -
Real estate term - - - - -
Consumer and other (21) (137) (121) (178) (175)
-----------------------------------------------------------------
Total charge-offs (2,800) (4,360) (1,850) (1,467) (987)
------------------------------------------------------------------
Recoveries:
Commercial 7 223 127 - 796
Real estate construction and land - - - - -
Real estate term and other - - - 7 4
Consumer and other 56 47 31 298 85
-----------------------------------------------------------------
Total recoveries 63 270 158 305 885
-----------------------------------------------------------------
Net charge-offs (2,737) (4,090) (1,692) (1,162) (102)
Provision charged to income (1) 11,667 9,711 6,389 8,606 3,902
-----------------------------------------------------------------
Balance at end of period $ 65,699 $ 56,769 $ 51,148 $ 46,451 $ 39,007
=================================================================
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.38% 0.62% 0.28% 0.21% 0.02%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.40% 0.44% 0.28% 0.06% 0.02%
Allowance as a percentage of average loans outstanding 2.30% 2.15% 2.10% 2.09% 1.89%
Allowance as a percentage of period end loans outstanding 2.20% 2.08% 2.03% 1.97% 1.81%
Allowance as a percentage of non-performing loans 397.60% 576.57% 725.92% 700.83% 396.98%
</TABLE>
-----------------------
(1) Includes $3.9 million in the third quarter of 2000, $1.5 million in the
second quarter of 2000, $860,000 in the first quarter of 2000 and $2.3
million in the fourth quarter of 1999 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 September 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 September 30, 2000, the allowance for loan losses was $65.7
million, consisting of a $37.2 million allocated allowance and a $28.5 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 sell securities
under agreements to repurchase and borrow overnight federal funds and, to a
lesser extent utilize brokered deposit lines.
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 September 30, 2000, the Banks had approximately $90.7 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 September 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 $58.5 million and $40.8 million for the nine months ended
September 30, 2000 and 1999, respectively. Cash used for investing activities
totaled $868.6 million and $518.5 million for the nine months ended September
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 nine months ended September 30, 2000 net cash provided by
financing activities was $728.2 million, compared to $568.7 million for the nine
months ended September 30, 1999. Historically, the primary financing activity of
the Company has been through deposits. For the nine months ended September 30,
2000 and 1999, deposit gathering activities generated cash of $648.5 million and
$582.0 million, respectively. This represents a total of 89.1% and 102.3% of the
financing cash flows for the nine months ended September 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 September 30, 2000 increased to $282.9 million
from $238.0 million at December 31, 1999. Greater Bay paid dividends of $0.25
and $0.24 per share (as restated for the 2-for-1 stock split declared for
shareholders of record at October 4, 2000) during the nine months ended
September 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 in a private placement 648,648 and 1,070,000 shares of common stock (as
restated for the 2-for-1 stock split effective on October 4, 2000),
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 September 30, 2000, $98.7 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 September 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
September 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 9.13% 10.80% 12.11%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
In addition, at September 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 consists of 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, the Board Asset Liability Committee
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 September 30, 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.
<TABLE>
<CAPTION>
Change in interest rates Projected change
--------------------------
(Dollars in thousands) (1) Net portfolio value Dollars Percentage
-----------------------------------------------------------------------------
<S> <C> <C> <C>
100 basis point rise $769,898 $(5,630) (0.73)%
Base scenario 775,528 - -
100 basis point decline 766,558 (8,970) (1.16)%
</TABLE>
32
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The preceding table indicates that at September 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
nine 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 September 30, 2000.
<TABLE>
<CAPTION>
Immediate or 2 Days to 7 Months to 1 Year to 4 Years to More than Total Rate
(Dollars in thousands) One Day 6 Months 12 Months 3 Years 5 years 5 Years Sensitive
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due $ 4,272 $ - $ - $ - $ - $ - $ 4,272
Federal funds sold and
other short term investments 34,000 - - - - - 34,000
Investment securities 50,995 23,024 20,920 160,773 113,770 609,307 978,789
Loans 1,271,525 991,223 97,115 230,834 165,820 212,205 2,968,722
Allowance for loan losses/
unearned fees - - - - - - -
Other assets - - - - - - -
-------------------------------------------------------------------------------------------
Total Assets $ 1,360,792 $1,014,247 $ 118,035 $ 391,607 $ 279,590 $ 821,513 $3,985,784
===========================================================================================
Liabilities and equity:
Deposits $ 2,027,519 $ 749,179 $ 98,314 $ 15,769 $ 1,762 $ 224 $2,892,767
Other borrowings 22,000 94,392 - 2,000 - - 118,392
Trust Preferred Securities - - - - - 99,500 99,500
Other liabilities - - - - - - -
Shareholders equity - - - - - - -
-------------------------------------------------------------------------------------------
Total Liabilities/equity $ 2,049,519 $ 843,571 $ 98,314 $ 17,769 $ 1,762 $ 99,724 $3,110,659
===========================================================================================
Gap $ (688,727) $ 170,676 $ 19,721 $ 373,838 $277,828 $ 721,788 $ 875,124
Cumulative gap $ (688,727) $ (518,051) $(498,330) $(124,492) $153,336 $ 875,124 $ 875,124
Cumulative gap/total assets -15.9% -11.9% -11.5% -2.9% 3.5% 20.2% 20.2%
<CAPTION>
Non-Rate
(Dollars in thousands) Sensitive Total
-----------------------------------------------------------------------
Assets:
Cash and due $ 227,899 $ 232,171
Federal funds sold and
other short term invest - 34,000
Investment securities - 978,789
Loans 11,871 2,980,593
Allowance for loan losses/
unearned fees (79,038) (79,038)
Other assets 189,902 189,902
------------------------------------
Total Assets $ 350,634 $4,336,417
====================================
Liabilities and equity:
Deposits $ 856,454 $3,749,221
Other borrowings - 118,392
Trust Preferred Securities - 99,500
Other liabilities 85,793 86,439
Shareholders equity 282,865 282,865
------------------------------------
Total Liabilities/equity $1,225,112 $4,336,417
====================================
Gap $ (874,478) $ -
Cumulative gap - $ -
Cumulative gap/total assets $ 0.0% 0.0%
</TABLE>
The foregoing table indicates that the Company had a negative one year
gap of $498.3 million, or 11.5% of total assets, at September 30, 2000. In
theory, this would indicate that at September 30, 2000, $498.3 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 lower net interest margin. Conversely, if interest rates
decreased, the gap may result in increased 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 September 30, 2000, the analysis indicates that the
Company's net interest income would increase a maximum of 7.94% if rates rose
200 basis points immediately and would decrease a maximum of 7.69% 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
decreases 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
New Accounting Pronouncement -In September 2000, the FASB issued Statement 140,
----------------------------
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. The new Statement replaces Statement 125, issued in June 1996.
It revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of Statement 125's provisions without reconsideration.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. This Statement
is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. Disclosures about securitizations and
collateral accepted need not be reported for periods ending on or before
December 15, 2000, for which financial statements are presented for comparative
purposes. This Statement is to be applied prospectively with certain
exceptions.
Implementation of FASB Statement No. 140 is not expected to have a material
effect on the Company's financial position or results of operations.
Business Combinations - In September 1999, the Financial Accounting Standards
---------------------
Board ("FASB") issued an Exposure Draft of a proposed Statement, Business
Combinations and Intangible Assets. The Board is currently redeliberating the
provisions in that proposed Statement. The FASB is in the process of researching
and discussing the various alternatives proposed by constituents about the best
method of accounting for goodwill. The FASB expects to discuss the accounting
for goodwill and other issues related to the purchase method at public meetings
through November 2000. The FASB will redeliberate the related issue of whether
to retain the pooling method, but not until it has reached a set of tentative
decisions with respect to the accounting for goodwill. The FASB will not make a
final decision about the Exposure Draft or consider whether to issue a final
standard until it has addressed all of the substantive issues raised by
constituents, including Members of Congress, and has considered the entire set
of tentative decisions reached during its redeliberations. While the FASB
currently estimates that it will be able to complete its redeliberations in
January 2001, that estimate may not be met depending on the progress of its
redeliberations. The FASB has no "deadline" for completing the project; however,
they currently expect to issue a final Statement near the end of the first
quarter of 2001.
A portion of the Company's business strategy is to pursue acquisition
opportunities so as to expand its market presence and maintain growth levels. A
change in accounting for business combinations could have a negative impact on
the Company's ability to realize those business strategies.
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 -- Not applicable
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
27 Financial Data Schedule.
--------
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, the Registrant filed the
following Current Reports on Form 8-K: (1) Form 8-K filed July 13, 2000
(reporting first quarter earnings and the company's second quarter cash
dividend); (2) Form 8-K filed July 24, 2000 (reporting the completion of the
merger with the Bank of Santa Clara); (3) Form 8-K filed July 26, 2000
(containing supplementary consolidated financial statements reflecting the
merger with the Bank of Santa Clara); (4) Form 8-K filed August 7, 2000
(containing additional supplemental consolidated financial statements reflecting
the merger with the Bank of Santa Clara); (5) Form 8-K filed August 10, 2000
(reporting the stock purchase agreement by and among Greater Bay and The Matsco
Companies Inc., and their shareholders; (6) Form 8-K filed September 21, 2000
(reporting the company's third quarter cash dividend and a 2-for-1 split of the
company's stock).
36
<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: October 17, 2000
37
