<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): January 31, 2000
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.)
COMMISSION FILE NUMBER: 0-25034
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)
<PAGE>
ITEM 5. OTHER ITEMS.
On January 31, 2000, Greater Bay Bancorp (the "Registrant") completed a
merger with Mt. Diablo Bancshares ("MD Bancshares"), the holding company of Mt.
Diablo National Bank ("MDNB"), which was accounted for as a pooling-of-
interests. Shareholders of MD Bancshares received 0.9532 shares of the
Registrant's Common Stock for each outstanding share of MD Bancshares Common
Stock. A total of 1,395,499 shares were issued in the transaction.
The supplemental consolidated financial statements filed herewith have been
prepared accounting for the merger using the pooling-of-interests method of
accounting. Upon publication of the Company's financial statements for a period
which includes January 31, 2000 these supplemental consolidated financial
statements will become the historical financial statements of the Registrant.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Reference is made to the Exhibit Index on page 3 of this document.
1
<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)
Dated: January 31, 2000 By: /s/ Steven C. Smith
-------------------
Steven C. Smith
Executive Vice President, Chief
Administrative Officer and Chief
Financial Officer
2
<PAGE>
EXHIBIT INDEX
Exhibits.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Restated Financial Data Schedules for the years ended December 31, 1999
and 1998 (included in electronic filing through EDGAR)
27.2 Restated Financial Data Schedules for the year ended December 31, 1997
(included in electronic filing through EDGAR)
27.3 Restated Financial Data Schedules for quarters ended December 31, 1999 and
September 30, 1999 (included in electronic filing through EDGAR)
27.4 Restated Financial Data Schedules for quarters ended June 30, 1999 and
March 31, 1999 (included in electronic filing through EDGAR)
27.5 Restated Financial Data Schedules for quarters ended December 31, 1998 and
September 30, 1998 (included in electronic filing through EDGAR)
27.6 Restated Financial Data Schedules for quarters ended June 30, 1998 and
March 31, 1998 (included in electronic filing through EDGAR)
99.1 Supplemental Consolidated Financial Statements and Supplementary Data
(restated to include MD Bancshares and MDNB)
For the Years Ended December 31, 1999, 1998 and 1997:
Selected Financial Data
Management's Discussion and Analysis
Supplemental Consolidated Balance Sheets as of December 31, 1999 and 1998
Supplemental Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Supplemental Consolidated Statements of Comprehensive Income for the Years
December 31, 1999, 1998 and 1997
Supplemental Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
Notes to Supplemental Consolidated Financial Statements
Report of Independent Accountants
4
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-30913, 333-67677, 333-30915, 333-16967 and
333-477475) and Form S-3 (Nos. 333-61679 and 333-70025) of Greater Bay Bancorp
of our report dated January 31, 2000 relating to the supplemental consolidated
financial statements, which appears in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 31, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 107,591 89,759
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 200,550 71,200
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 332,133 313,870
<INVESTMENTS-CARRYING> 141,725 102,108
<INVESTMENTS-MARKET> 136,481 103,028
<LOANS> 1,921,177 1,325,383
<ALLOWANCE> (40,421) (25,960)
<TOTAL-ASSETS> 2,846,088 2,049,217
<DEPOSITS> 2,506,386 1,758,307
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 47,007 25,655
<LONG-TERM> 50,000 50,000
0 0
0 0
<COMMON> 100,690 75,303
<OTHER-SE> 72,905 53,523
<TOTAL-LIABILITIES-AND-EQUITY> 2,846,088 2,049,217
<INTEREST-LOAN> 149,883 111,361
<INTEREST-INVEST> 27,675 22,740
<INTEREST-OTHER> 12,740 11,805
<INTEREST-TOTAL> 190,298 145,906
<INTEREST-DEPOSIT> 68,049 50,563
<INTEREST-EXPENSE> 76,557 58,818
<INTEREST-INCOME-NET> 113,741 87,088
<LOAN-LOSSES> 13,064 7,159
<SECURITIES-GAINS> (19) 374
<EXPENSE-OTHER> 88,543 59,066
<INCOME-PRETAX> 45,440 32,233
<INCOME-PRE-EXTRAORDINARY> 45,440 32,233
<EXTRAORDINARY> (88) 0
<CHANGES> 0 0
<NET-INCOME> 31,538 21,554
<EPS-BASIC> 2.29 1.65
<EPS-DILUTED> 2.15 1.53
<YIELD-ACTUAL> 4.98 5.17
<LOANS-NON> 4,418 2,118
<LOANS-PAST> 51 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> (25,960) (19,954)
<CHARGE-OFFS> (2,654) (1,823)
<RECOVERIES> 1,306 487
<ALLOWANCE-CLOSE> (40,421) (25,960)
<ALLOWANCE-DOMESTIC> (40,421) (25,960)
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 90,914
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 82,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 202,373
<INVESTMENTS-CARRYING> 66,872
<INVESTMENTS-MARKET> 61,628
<LOANS> 963,602
<ALLOWANCE> (19,954)
<TOTAL-ASSETS> 1,560,254
<DEPOSITS> 1,374,647
<SHORT-TERM> 0
<LIABILITIES-OTHER> 58,000
<LONG-TERM> 20,000
0
0
<COMMON> 69,908
<OTHER-SE> 37,699
<TOTAL-LIABILITIES-AND-EQUITY> 1,560,254
<INTEREST-LOAN> 91,138
<INTEREST-INVEST> 12,028
<INTEREST-OTHER> 10,292
<INTEREST-TOTAL> 113,458
<INTEREST-DEPOSIT> 38,981
<INTEREST-EXPENSE> 42,525
<INTEREST-INCOME-NET> 70,933
<LOAN-LOSSES> 7,541
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 49,823
<INCOME-PRETAX> 23,946
<INCOME-PRE-EXTRAORDINARY> 23,946
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,194
<EPS-BASIC> 1.24
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 5.69
<LOANS-NON> 4,026
<LOANS-PAST> 158
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (13,150)
<CHARGE-OFFS> (2,217)
<RECOVERIES> 129
<ALLOWANCE-CLOSE> (19,954)
<ALLOWANCE-DOMESTIC> (19,954)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> OCT-01-1999 JUL-01-1999
<PERIOD-END> DEC-31-1999 SEP-30-1999
<CASH> 107,591 121,742
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 200,550 197,100
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 333,393 323,859
<INVESTMENTS-CARRYING> 167,278 152,475
<INVESTMENTS-MARKET> 161,545 146,845
<LOANS> 1,883,143 1,712,676
<ALLOWANCE> (35,649) (33,026)
<TOTAL-ASSETS> 2,845,489 2,641,350
<DEPOSITS> 2,506,386 2,359,483
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 115,509 86,260
<LONG-TERM> 50,000 50,000
0 0
0 0
<COMMON> 100,689 80,506
<OTHER-SE> 73,193 65,328
<TOTAL-LIABILITIES-AND-EQUITY> 2,845,489 2,641,350
<INTEREST-LOAN> 43,138 39,078
<INTEREST-INVEST> 7,968 7,246
<INTEREST-OTHER> 4,461 3,101
<INTEREST-TOTAL> 55,568 49,425
<INTEREST-DEPOSIT> 20,429 17,963
<INTEREST-EXPENSE> 21,154 18,567
<INTEREST-INCOME-NET> 33,054 29,596
<LOAN-LOSSES> 6,232 3,752
<SECURITIES-GAINS> (23) 4
<EXPENSE-OTHER> 27,224 16,990
<INCOME-PRETAX> 17,912 14,016
<INCOME-PRE-EXTRAORDINARY> 17,912 14,016
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,304 8,784
<EPS-BASIC> 0.76 0.65
<EPS-DILUTED> 0.71 0.46
<YIELD-ACTUAL> 4.94 4.92
<LOANS-NON> 4,418 6,028
<LOANS-PAST> 51 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> (33,028) (29,187)
<CHARGE-OFFS> (1,406) (682)
<RECOVERIES> 282 812
<ALLOWANCE-CLOSE> (40,421) (33,028)
<ALLOWANCE-DOMESTIC> (40,421) (33,028)
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 MAR-31-1999
<CASH> 114,398 98,553
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 166,150 124,400
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 331,237 317,853
<INVESTMENTS-CARRYING> 129,746 130,609
<INVESTMENTS-MARKET> 124,423 125,441
<LOANS> 1,573,159 1,458,905
<ALLOWANCE> (29,187) (26,866)
<TOTAL-ASSETS> 2,464,151 2,270,263
<DEPOSITS> 2,155,985 1,983,760
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 118,870 100,475
<LONG-TERM> 50,000 50,000
0 0
0 0
<COMMON> 79,221 77,005
<OTHER-SE> 60,255 58,978
<TOTAL-LIABILITIES-AND-EQUITY> 2,464,151 2,270,263
<INTEREST-LOAN> 35,430 32,237
<INTEREST-INVEST> 6,525 5,936
<INTEREST-OTHER> 3,200 1,978
<INTEREST-TOTAL> 45,155 40,149
<INTEREST-DEPOSIT> 15,868 13,788
<INTEREST-EXPENSE> 17,094 14,804
<INTEREST-INCOME-NET> 21,652 24,220
<LOAN-LOSSES> 1,917 1,163
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 16,525 15,473
<INCOME-PRETAX> 12,097 10,476
<INCOME-PRE-EXTRAORDINARY> 12,097 10,746
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,973 6,476
<EPS-BASIC> 0.38 0.49
<EPS-DILUTED> 0.46 0.47
<YIELD-ACTUAL> 4.81 4.96
<LOANS-NON> 3,487 3,104
<LOANS-PAST> 199 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> (26,866) (25,960)
<CHARGE-OFFS> (243) (296)
<RECOVERIES> 201 38
<ALLOWANCE-CLOSE> (29,187) (26,866)
<ALLOWANCE-DOMESTIC> (29,187) (26,866)
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-01-1998 JUL-01-1998
<PERIOD-END> DEC-31-1998 SEP-30-1998
<CASH> 89,759 89,458
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 71,200 117,500
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 314,290 356,194
<INVESTMENTS-CARRYING> 126,717 135,919
<INVESTMENTS-MARKET> 121,627 130,828
<LOANS> 1,325,383 1,133,049
<ALLOWANCE> (25,960) (24,230)
<TOTAL-ASSETS> 2,049,217 1,979,096
<DEPOSITS> 1,758,307 1,689,435
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 112,084 115,939
<LONG-TERM> 50,000 50,000
0 0
0 0
<COMMON> 75,293 73,549
<OTHER-SE> 53,442 50,020
<TOTAL-LIABILITIES-AND-EQUITY> 2,049,217 1,979,096
<INTEREST-LOAN> 29,764 28,633
<INTEREST-INVEST> 6,144 6,544
<INTEREST-OTHER> 2,958 3,352
<INTEREST-TOTAL> 38,865 38,529
<INTEREST-DEPOSIT> 13,154 13,981
<INTEREST-EXPENSE> 14,381 14,861
<INTEREST-INCOME-NET> 23,343 22,519
<LOAN-LOSSES> 2,126 2,212
<SECURITIES-GAINS> 336 14
<EXPENSE-OTHER> 15,359 13,815
<INCOME-PRETAX> 9,571 8,547
<INCOME-PRE-EXTRAORDINARY> 9,571 8,547
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,529 5,706
<EPS-BASIC> 0.51 0.44
<EPS-DILUTED> 0.47 0.47
<YIELD-ACTUAL> 4.91 4.89
<LOANS-NON> 2,118 3,284
<LOANS-PAST> 0 18
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> (24,230) (21,784)
<CHARGE-OFFS> (510) (83)
<RECOVERIES> 129 206
<ALLOWANCE-CLOSE> (25,960) (24,230)
<ALLOWANCE-DOMESTIC> (25,960) (24,230)
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 MAR-31-1998
<CASH> 106,844 103,095
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 157,100 106,700
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 340,603 225,199
<INVESTMENTS-CARRYING> 69,146 74,254
<INVESTMENTS-MARKET> 63,914 68,999
<LOANS> 1,094,180 1,031,830
<ALLOWANCE> (21,784) (20,219)
<TOTAL-ASSETS> 1,894,129 1,688,652
<DEPOSITS> 1,653,444 1,436,409
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 105,295 120,052
<LONG-TERM> 20,000 20,000
0 0
0 0
<COMMON> 71,235 67,670
<OTHER-SE> 44,144 44,532
<TOTAL-LIABILITIES-AND-EQUITY> 1,894,129 1,688,652
<INTEREST-LOAN> 27,203 25,409
<INTEREST-INVEST> 4,788 4,435
<INTEREST-OTHER> 3,349 2,802
<INTEREST-TOTAL> 35,340 32,646
<INTEREST-DEPOSIT> 12,236 11,201
<INTEREST-EXPENSE> 13,375 12,047
<INTEREST-INCOME-NET> 20,973 19,728
<LOAN-LOSSES> 1,657 1,176
<SECURITIES-GAINS> 42 8
<EXPENSE-OTHER> 15,229 13,708
<INCOME-PRETAX> 6,923 7,329
<INCOME-PRE-EXTRAORDINARY> 6,923 7,329
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,614 4,867
<EPS-BASIC> 0.35 0.39
<EPS-DILUTED> 0.47 0.47
<YIELD-ACTUAL> 4.88 4.87
<LOANS-NON> 4,228 3,819
<LOANS-PAST> 85 407
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> (20,219) (19,954)
<CHARGE-OFFS> (193) (1,031)
<RECOVERIES> 32 120
<ALLOWANCE-CLOSE> (21,784) (20,219)
<ALLOWANCE-DOMESTIC> (21,784) (20,219)
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
SELECTED FINANCIAL INFORMATION
The following table represents the selected financial information at and
for the five years ended December 31, 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1997 1996 1995
Statement of Operations Data -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income $ 190,298 $ 145,906 $ 113,458 $ 83,179 $ 71,253
Interest expense 76,557 58,818 42,525 29,047 24,946
-------------------------------------------------------------------------
Net Interest Income 113,741 87,088 70,933 54,132 46,307
Provision for loan losses 13,064 7,159 7,541 3,210 1,396
-------------------------------------------------------------------------
Net Interest Income after provision for loan losses 100,677 79,929 63,392 50,922 44,911
Other Income 18,798 10,425 9,215 8,577 6,369
Nonrecurring - warrant income 14,508 945 1,162 92 --
-------------------------------------------------------------------------
Total other income 33,306 11,370 10,377 8,669 6,369
Operating expenses 67,052 55,064 46,490 41,973 39,729
Other expenses - nonrecurring 12,160 1,341 -- -- --
-------------------------------------------------------------------------
Total operating expenses 79,212 56,405 46,490 41,973 39,729
-------------------------------------------------------------------------
Income before income tax expense & merger
and other related nonrecurring costs 54,771 34,894 27,279 17,618 11,551
Income tax expense 17,659 11,666 9,798 6,278 4,259
-------------------------------------------------------------------------
Income before merger and other related non-
recurring costs and extraordinary Items 37,112 23,228 17,481 11,340 7,292
Merger and other related nonrecurring costs,
net of tax (6,486) (1,674) (2,282) (1,991) --
-------------------------------------------------------------------------
Net income before extraordinary Items 30,626 21,554 15,199 9,349 7,292
Extraordinary Items (88) -- -- -- --
-------------------------------------------------------------------------
Net Income $ 30,538 $ 21,554 $ 15,199 $ 9,349 $ 7,292
=========================================================================
Per Share Data (1)
Income per share (before merger, nonrecurring,
and extraordinary items)
Basic $ 2.45 $ 1.75 $ 1.30 $ 0.96 $ 0.77
Diluted 2.30 1.63 1.23 0.92 0.74
Net Income per share
Basic $ 2.29 $ 1.65 $ 1.24 $ 0.79 $ 0.65
Diluted 2.15 1.53 1.17 0.76 0.62
Cash dividends per share (2) $ 0.48 $ 0.38 $ 0.30 $ 0.22 $ 0.20
Book value per common share $ 12.43 $ 9.99 $ 8.57 $ 7.73 $ 7.24
Shares outstanding at year end 13,964,065 12,900,934 12,554,799 11,779,759 11,379,000
Average common shares outstanding 13,310,000 13,091,000 12,252,000 11,761,000 11,239,000
Average common and common equivalent shares
outstanding 14,189,000 14,047,000 13,028,000 12,348,000 11,718,000
Performance Ratios
Return on average assets (before merger,
nonrecurring and extraordinary items) 1.32% 1.26% 1.19% 1.16% 1.18%
Return on average common shareholders' equity
(before merger, nonrecurring and extraordinary items) 22.81% 19.51% 15.81% 12.97% 12.45%
Return on average assets 1.24% 1.18% 1.13% 0.95% 1.00%
Return on average common shareholders' equity 21.40% 18.36% 15.03% 10.69% 10.52%
Net interest margin(3) 4.98% 5.17% 5.69% 6.05% 6.98%
Balance Sheet Data - At Period End
Assets $ 2,846,088 $ 2,049,217 $ 1,560,254 $ 1,176,087 $ 889,952
Loans, net 1,880,756 1,299,423 961,179 741,238 531,965
Investment securities 495,169 422,565 271,498 171,890 180,393
Deposits 2,506,386 1,758,307 1,374,047 1,047,815 787,173
Subordinated debt - 3,000 3,000 3,000 3,000
Trust Preferred Securities 50,000 50,000 20,000 - -
Common shareholders' equity 173,595 128,826 107,606 91,074 82,393
Asset Quality Ratios
Nonperforming assets to total loans and OREO 0.29% 0.29% 0.73% 1.52% 1.94%
Nonperforming assets to total assets 0.19% 0.19% 0.46% 0.98% 1.19%
Allowance for loan losses to total loans 2.10% 1.96% 2.03% 1.74% 1.74%
Allowance for loan losses to nonperforming assets 728.70% 669.07% 279.23% 114.43% 89.23%
Net charge-offs to average loans 0.08% 0.12% 0.24% 0.05% 0.26%
Regulatory Capital Ratios
Leverage Ratio 7.85% 7.93% 8.68% 8.40% 9.89%
Tier 1 Capital 9.14% 9.85% 10.78% 10.32% 12.62%
Total Capital 10.55% 11.99% 12.21% 11.84% 14.22%
</TABLE>
*Restated on a historical basis to reflect the mergers between Greater Bay
Bancorp and CNB, PBC, PRB (the parent of Golden Gate) PBFC, BA Bancshares (the
Parent of BAB) and BCS (the parent of BBC) on a pooling of interest trusts.
(1) Restated to reflect 2 -for- 1 stock split as of April 30, 1998.
(2) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the combination of
their mergers with Greater Bay.
(3) Net interest margin for 1999, 1998 and 1997 includes the lower spread
earned on the PBC Special Deposits (See Note 7 to the Financial Statements
for details). Excluding the PBC Special Deposit, net interest margin would
have been 5.26%, 5.52%, 6.08% and 6.31% for 1999, 1998, 1997 and 1996,
respectively.
A-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the
"Company", on a consolidated basis) is a bank holding company operating Bay Area
Bank ("BAB"), Bay Bank of Commerce ("BBC"), Cupertino National Bank ("CNB"),
Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB") Mt. Diablo
National Bank ("MDNB") and Peninsula Bank of Commerce ("PBC"). The Company
also owns GBB Capital I and GBB Capital II, both of which are Delaware
business trusts, formed for the exclusive purpose of issuing and selling
Cumulative Trust Preferred Securities ("TPS"). Greater Bay also includes the
operating divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank
Fremont Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group,
Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group,
Greater Bay International Banking Division, Greater Bay Trust Company, Pacific
Business Funding and the Venture Banking Group. The Company provides a wide
range of commercial banking services to small and medium-sized businesses,
real estate developers, property managers, business executives, professionals
and other individuals. The Company operates throughout Silicon Valley, the San
Francisco Peninsula and the East Bay Region, with 22 offices located in
Blackhawk, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Palo
Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Leandro, San
Mateo, San Ramon, Santa Clara and Walnut Creek. At December 31, 1999, the
Company had total assets of $2.8 billion, total net loans of $1.9 billion and
total deposits of $2.5 billion.
All of the Company's mergers were accounted for as a pooling-of-interests
and, accordingly, all of the financial information for the Company for the
periods prior to the mergers has been restated as if the mergers had occurred at
the beginning of the earliest reporting period presented.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Selected Financial Information" and the Company's consolidated financial data
included elsewhere in this document. Certain statements under this caption
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in such
forward-looking statements. Factors that might cause such a difference include
but are not limited to economic conditions, competition in the geographic and
business areas in which the Company conducts its operations, fluctuation in
interest rates, credit quality and government regulation.
RESULTS OF OPERATIONS
The Company's operating results included merger, nonrecurring and
extraordinary items of $7.9 million ($2.0 million net of tax), $3.1 million
($1.4 million net of tax) and $884,000 ($378,000 net of tax) in 1999, 1998 and
1997, respectively. The following table summarizes net income, net income per
share and key financial ratios before and after merger, nonrecurring and
extraordinary items for the years presented.
<TABLE>
<CAPTION>
Before merger, nonrecurring and extraordinary items After merger, nonrecurring and extraordinary items
(Dollars in thousands, --------------------------------------------------- --------------------------------------------------
except per share amounts) 1999 1998 1997 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 32,549 $ 22,911 $ 15,987 $ 30,538 $ 21,554 $ 15,199
Net income per share:
Basic $ 2.45 $ 1.75 $ 1.30 $ 2.29 $ 1.65 $ 1.24
Diluted $ 2.30 $ 1.63 $ 1.23 $ 2.15 $ 1.53 $ 1.17
Return on average assets 1.32% 1.26% 1.19% 1.24% 1.18% 1.13%
Return on average shareholders' equity 22.81% 19.51% 15.81% 21.40% 18.36% 15.03%
</TABLE>
The Company reported net income of $30.5 million in 1999, a 41.2% increase
over 1998 net income of $21.6 million. The net income in 1998 was a 41.8%
increase over 1997 income of $15.2 million. Basic net income per share was $2.29
for 1999, as compared to $1.65 for 1998 and $1.24 for 1997. Diluted net income
per share was $2.15, $1.53 and $1.17 for 1999, 1998 and 1997, respectively. The
return on average assets and return on average shareholders' equity were 1.24%
and 21.40% in 1999, compared with 1.18% and 18.36% in 1998 and 1.13% and 15.03%
in 1997, respectively.
A-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The 41.2% increase in 1999 net income as compared to 1998 was the result of
significant growth in loans, investments, trust assets and deposits. In 1999,
net interest income increased 30.6% as compared to 1998. This increase was
primarily due to a 35.7% increase in average interest-earning assets in 1999
compared to the prior year. The impact on income of the increase in average
interest-earning assets was partially offset by the decline the net yield earned
on interest-earning assets to 5.15% in 1999 as compared to 5.34% in 1998 (see "-
Net Interest Income" for additional information on the increase in net interest
income). The increases in loans, trust assets and deposits also contributed to
the 45.6% increase in trust fees, loan and international banking fees, service
charges and other fees. Other income includes $4.0 million in appreciation
recognized on the conversion of equity securities received in the settlement of
a loan into a publicly traded equity security. Increases in operating expenses
were required to service and support the Company's growth. As a result,
increases in revenue were partially offset in 1999 by a 21.8% increase in
recurring operating expenses, as compared to 1998.
Net income in 1999 included nonrecurring expenses, net of nonrecurring income
and taxes, of $2.0 million, an increase of $654,000 compared to 1998. In 1999,
merger and related nonrecurring costs were $6.5 million, an increase of $4.8
million from 1998. Warrant income, net of related expenses and taxes, was $5.8
million in 1999, an increase of $5.3 million compared to 1998. In 1999, the
Company donated $7.8 million in appreciated securities to the Greater Bay
Bancorp Foundation. This resulted in $1.2 million in donation expense, net of a
tax benefit derived on the transaction, which is a $1.0 million increase
compared to 1998.
The 41.8% increase in 1998 net income as compared to 1997 was the result of
significant growth in loans, investments, trust assets and deposits. In 1998,
net interest income increased 22.8% as compared to 1997. This increase was
primarily due to a 35.0% increase in average interest-earning assets in 1998
compared to the prior year. The impact on income of the increase in average
interest-earning assets was partially offset by the decline the net yield earned
on interest-earning assets to 5.34% in 1998 as compared to 5.81% in 1997 (see "-
Net Interest Income" for additional information on the increase in net interest
income). The increases in loans, trust assets and deposits also contributed to
the 6.1% increase in trust fees, loan and international banking fees, service
charges and other fees. Increases in operating expenses were required to service
and support the Company's growth. As a result, increases in revenue were
partially offset in 1998 by a 14.3% increase in recurring operating expenses, as
compared to 1997.
Net income in 1998 included nonrecurring expenses, net of nonrecurring income
and taxes, of $1.4 million, an increase of $569,000 compared to 1997. In 1998,
merger and related nonrecurring costs were $1.7 million, a decrease of $608,000
from 1997. Warrant income, net of related expenses and taxes, was $554,000 in
1998, a decrease of $155,000 compared to 1997. In 1998, the Company donated
$1.3 million in appreciated securities to the Greater Bay Bancorp Foundation.
This resulted in $237,000 in donation expense, net of a tax benefit derived on
the transaction. There was no such donation in 1997. In 1997, the Company had
nonrecurring income of $1.0 million, net of taxes, related to payment from an
insurance carrier of a litigation settlement charge taken in 1995.
A-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Interest Income
Net interest income, excluding capital securities, increased 31.2% to
$118.0 million in 1999 from $89.9 million in 1998. This increase was primarily
due to the $601.7 million, or 35.7%, increase in average interest-earning assets
which was partially offset by a 34 basis point decrease in the Company's net
yield on interest-earning assets. Net interest income, excluding capital
securities, increased 21.3% in 1998 from $69.5 million in 1997. This increase
was primarily due to the $436.8 million, or 35.0%, increase in average interest-
earning assets, which was partially offset by the 43 basis point decrease in the
Company's net yield on interest-earning assets. The capital securities were
Trust Preferred Securities issued in 1997 and 1998 which cost 8.54% and 9.00% in
1999 and 1998, respectively. Including capital securities, net interest income
increased 30.6% to $113.7 million in 1999 and 22.8% to $87.1 million in 1998.
The capital securities were issued primarily as a source of capital and not as a
source of liquidity.
The following table presents, for the years indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average daily
balances.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1999 1998
-------------------------------------------------------- -----------------
Average
Average Yield/ Average
(Dollars in thousands) Balance (1) Interest Rate Balance (1)
- -------------------------------------------------
- ------------------------------------------------------------ ---------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 170,371 $ 8,884 5.21% $ 117,604
Other short term securities 71,282 3,856 5.41% 97,264
Investment securities:
Taxable 352,521 23,779 6.75% 333,616
Tax-exempt (3) 79,217 3,896 4.92% 51,455
Loans (2) 1,611,818 149,883 9.30% 1,083,540
---------- ---------- ----------
Total interest-earning
assets 2,285,209 190,298 8.33% 1,683,479
Noninterest-earning assets 186,415 141,045
---------- ----------
Total assets $2,471,624 190,298
---------- ----------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,283,450 45,867 3.57% $ 907,994
Time deposits, over $100,000 366,203 17,380 4.75% 241,604
Other time deposits 101,058 4,801 4.75% 108,682
---------- ---------- ----------
Total interest-bearing deposits 1,750,711 68,048 3.89% 1,258,280
Other borrowings 72,994 4,170 5.71% 78,228
Subordinated debt 607 68 11.20% 3,000
---------- ---------- ----------
Total interest-bearing liabilities 1,824,312 72,286 3.96% 1,339,508
Trust Preferred Securities 50,000 4,271 8.54% 31,671
----------
Total interest-bearing liabilities and
capital securities 1,874,312 76,557 4.08% 1,371,179
Noninterest-bearing deposits 424,315 316,935
Other noninterest-bearing liabilities 30,314 18,984
Shareholders' equity 142,683 117,426
---------- ---------- ----------
Total liabilities and
shareholders' equity $2,471,624 $ 76,557 $1,834,524
---------- ---------- ----------
Net interest income $ 113,741
Including capital securities:
- -----------------------------
Interest rate spread 4.24%
Contribution of interest free funds 0.73%
Net yield on interest-earnings assets(4) 4.98%
Excluding capital securities:
- -----------------------------
Interest rate spread 4.37%
Contribution of interest free funds 0.78%
Net yield on interest-earnings assets(4) 5.15%
<CAPTION>
----------------------------------------------------------------------
1998 1997
----------------------------------------------------------------------
Average Average
Yield/ Average Yield/
Interest Rate Balance (1) Interest Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Fed funds sold $ 6,331 5.38% $ 93,012 $ 5,006 5.38%
Other short term securities 5,473 5.63% 97,586 5,198 5.33%
Investment securities:
Taxable 20,178 6.05% 167,630 11,047 6.59%
Tax-exempt (3) 2,562 4.98% 24,189 1,070 4.42%
Loans (2) 111,362 10.28% 864,275 91,138 10.55%
---------- ---------- ----------
Total interest-earning 145,906 8.67% $1,246,692 113,459 9.10%
assets 94,912
Noninterest-earning assets ---------- ----------
145,906 $1,341,604 113,459
Total assets ---------- ==========
33,165 3.65% $ 679,601 24,919 3.67%
12,351 5.11% 168,027 8,527 5.07%
INTEREST-BEARING LIABILITIES: 5,046 4.64% 111,558 5,534 4.96%
Deposits: ---------- ---------- ----------
MMDA, NOW and Savings 50,562 4.02% 959,186 38,980 4.06%
Time deposits, over $100,000 5,060 6.47% 19,371 1,738 8.97%
Other time deposits 345 11.50% 3,000 345 11.50%
---------- ---------- ----------
Total interest-bearing deposits 55,967 4.18% 981,557 41,063 4.18%
Other borrowings 2,850 9.00% 15,000 1,463 9.75%
Subordinated debt ---------- ---------- ----------
58,817 4.29% 996,557 42,526 4.27%
Total interest-bearing liabilities 230,807
Trust Preferred Securities 13,131
101,109
Total interest-bearing liabilities and ----------
capital securities $ 58,817 $1,341,604 $ 42,526
Noninterest-bearing deposits ---------- ==========
Other noninterest-bearing liabilities $ 87,089 $ 70,933
Shareholders' equity ========== ===========
Total liabilities and
shareholders' equity
Net interest income
Including capital securities:
- -----------------------------
Interest rate spread 4.38% 4.83%
Contribution of interest free funds 0.80% 0.86%
Net yield on interest-earnings assets(4) 5.17% 5.69%
Excluding capital securities:
- -----------------------------
Interest rate spread 4.49% 4.92%
Contribution of interest free funds 0.85% 0.89%
Net yield on interest-earnings assets(4) 5.34% 5.81%
(1) Nonaccrual loans are excluded from the average balance and only collected interest on accrual loans is included in the interest
column.
(2) Loan fees totaling $4.7 million, $4.3 million and $4.3 million are included in loan interest income for 1999,
1998 and 1997, respectively.
(3) Tax equivelent yeilds earned on the tax exempt securities are 7.17%, 7.23% and 6.38% for the years ended December 31,
1999, 1998 and 1997, respectively, using the federal statutory rate of 34%.
(4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-
earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets
for the period.
</TABLE>
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods. The table below sets forth, for the years indicated, a
summary of the changes in average asset and liability balances (volume) and
changes in average interest rates (rate).
A-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
Compared with December 31, 1998 Compared with December 31, 1997
favorable (unfavorable) favorable (unfavorable)
--------------------------------- -----------------------------------------
(Dollars in thousands) (1) (2) Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fed funds sold $ 2,731 $ (178) $ 2,553 $ 1,270 $ 55 $ 1,325
Other short term securities (1,429) (188) (1,617) (19) 294 275
Investment securities:
Taxable 1,245 2,356 3,601 9,660 (529) 9,131
Tax-exempt 1,352 (18) 1,334 1,298 194 1,492
Loans 49,186 (10,665) 38,521 21,641 (1,417) 20,224
-------- -------- -------- -------- -------- --------
Total interest-earning assets 53,085 (8,693) 44,392 33,850 (1,403) 32,447
-------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Deposits:
MMDA, NOW and Savings 12,985 (283) 12,702 7,330 916 8,246
Time deposits, over $100,000 5,744 (715) 5,029 3,309 515 3,824
Other time deposits (373) 128 (245) (151) (337) (488)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 18,356 (870) 17,486 10,488 1,094 11,582
Other borrowings (322) (568) (890) 3,193 129 3,322
Subordinated debt (276) (1) (277) -- -- --
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 17,758 (1,439) 16,319 13,681 1,223 14,904
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income $ 35,327 $ (7,254) $ 28,073 $ 20,169 $ (2,626) $ 17,543
======== ======== ======== ======== ======== ========
</TABLE>
(1) The change in interest income and expense not attributable to specific
volume and rate changes has been allocated proportionately between the
volume and rate changes.
(2) Excludes the impact of capital securities.
Interest income in 1999 increased 30.4% to $190.3 million from $145.9
million in 1998. This was primarily due to the significant increase in loans,
the Company's highest yielding interest-earning asset, and investment
securities. Loan volume increases were the result of the continuing economic
improvement in the Company's market areas, as well as the addition of
experienced relationship managers and significant business development efforts
by the Company's relationship managers. The increase was partially offset by a
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $601.7 million, or 35.7%, to $2.3 billion in
1999, compared to $1.7 billion in 1998. Of this total increase, average loans
increased $528.3 million, or 48.8%, to $1.6 billion in 1999 from $1.1 billion in
1998. Investment securities, Federal funds sold and other short-term securities,
increased 12.2% to $673.4 million in 1999 from $600.0 million in 1998.
The average yield on interest-earning assets declined 34 basis points to
8.33% in 1999 from 8.67% in 1998 primarily due to a decline in the average yield
on loans which was caused by increased competition and the impact of the
Company's focus on slightly larger client credits that result generally in
improved client financial controls, but also result in tighter pricing. Loans
represented approximately 70.5% of total interest-earning assets in 1999
compared to 64.4% in 1998. The average yield on loans declined 98 basis points
to 9.30% in 1999 from 10.28% in 1998.
Interest expense, excluding capital securities, in 1999 increased 29.2% to
$72.3 million from $56.0 million in 1998. This increase was due to greater
volumes of interest-bearing liabilities coupled with slightly higher interest
rates paid on interest-bearing liabilities. Average interest-bearing liabilities
increased 36.2% to $1.8 billion in 1999 from $1.3 billion in 1998 due primarily
to the efforts of the Banks' relationship managers in generating core deposits
from their client relationships and the deposits derived from the activities of
the Greater Bay Trust Company and the Venture Banking Group.
A-5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
During 1999, average noninterest-bearing deposits increased to $424.3
million from $316.9 million in 1998. However, due to the larger increase in
interest-bearing deposits, noninterest-bearing deposits decreased to 18.9% of
total deposits at year-end 1999, compared to 19.1% at year-end 1998.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.35% in 1999 from 4.49% in 1998, and the net
yield on interest-earning assets declined in 1999 to 5.15% from 5.34% in 1998.
Interest income increased 28.6% to $145.9 million in 1998 from $113.5
million in 1997, as a result of the increase in average interest-earning assets
offset by a decline in the yields earned. Average interest-earning assets
increased 35.0% to $1.7 billion in 1998 from $1.2 billion in 1997 principally as
a result of increase in loans. The yield on the higher volume of average
interest-earning assets declined 43 basis points to 8.67% in 1998 from 9.10% in
1997, primarily as a result of increased competition for loans.
Interest expense, excluding capital securities, in 1998 increased 36.3% to
$56.0 million from $41.1 million in 1997 primarily as a result of the increase
in the volume of interest-bearing liabilities and in the rates paid on interest-
bearing liabilities. Corresponding to the growth in average interest-earning
assets, average interest-bearing liabilities increased 34.0% to $1.3 billion in
1998 from $981.6 million in 1997.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, declined to 4.49% in 1998 from 4.92% in 1997 and the net
yield on interest-earning assets declined to 5.34% in 1998 from 5.81% in 1997.
The Company's net yield on interest-earning assets was reduced by the Special
Deposit. The average deposit balances related to the Special Deposit during
1999, 1998 and 1997 were $99.0 million, $90.0 million and $95.0 million,
respectively, on which the Company earned a spread of 3.1%, 2.25% and 2.5%,
respectively. Excluding the Special Deposit, the 1999, 1998, 1997 net yield on
interest-earning assets, excluding capital securities, would have been 5.06%,
5.34% and 5.95% respectively. The purchase of bank-owned life insurance
("BOLI") also reduced the Company's net interest spread since the earnings of
BOLI are included in other income, while the cost of funding BOLI is included in
interest expense.
The Company incurred certain client service expenses with respect to its
noninterest-bearing liabilities. These expenses include messenger services,
check supplies and other related items that are included in operating expenses.
If these expenses had they been included in interest expense, the Company's net
yield on interest-earning assets would have been as follows for each of the
years presented.
A-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
<TABLE>
---------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average noninterest bearing demand deposits $ 424,315 $ 316,935 $ 230,807
Client service expenses 1,394 806 625
Client service expenses, as a percentage of average noninterest
bearing demand deposits 0.33% 0.25% 0.27%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 5.15% 5.34% 5.81%
Impact of client service expense (0.06)% (0.05)% (0.05)%
---------------------------------------------
Adjusted net yield on interest-earning assets 5.09% 5.29% 5.76%
=============================================
</TABLE>
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to manage its client service expenses.
Provision for Loan Losses
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. Periodic fluctuations in the provision
for loan losses result from management's assessment of the adequacy of the
allowance for loan losses; however, actual loan losses may vary from current
estimates.
Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for a
description of the systematic methodology employed by the Company in determining
an adequate allowance for loan losses.
The provision for loan losses in 1999 was $13.1 million, compared to $7.2
million in 1998 and $7.5 million in 1997. In addition, in connection with the
mergers, the Company made an additional provision for loan losses of $2.7
million, $183,000 and $1.4 million in 1999, 1998 and 1997, respectively, to
conform to the Company's allowance methodology. Although loans outstanding have
increased substantially, nonperforming loans, comprised of nonaccrual loans,
restructured loans, and accruing loans past due 90 days or more have remained
relatively low, totaling $5.3 million, or 0.27% of loans outstanding, at
December 31, 1999, from $2.9 million, or 0.22% of loans outstanding, at December
31, 1998 and $5.7 million, or 0.58% of loans outstanding, at December 31, 1997.
For further information on nonperforming and classified loans and the
allowance for loan losses, see - "Nonperforming and Classified Assets" herein.
A-7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Other Income
Total other income increased to $33.3 million in 1999, compared to $11.4
million in 1998 and $10.4 million in 1997. The following table sets forth
information by category of other income for the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust fees $ 2,990 $ 2,473 $ 2,049
Service charges and other fees 3,079 2,338 2,312
Loan and international banking fees 2,833 1,303 1,404
ATM network revenue 2,110 1,966 2,057
Gain on sale of SBA loans 1,010 1,125 940
Gain (loss) on investments, net (19) 374 (8)
Other income 6,795 846 461
------------------------------------------
Total, recurring 18,798 10,425 9,215
Warrant income 14,508 945 1,162
------------------------------------------
Total $ 33,306 $ 11,370 $ 10,377
==========================================
</TABLE>
The increase in other income in 1999 was a result of $1.5 million increase
in loan and international banking fees, a $741,000 increase in service charges
and other fees, and a $517,000 increase in trust fees. These increases were a
result of significant growth in total loans, total deposits and trust assets.
Other income includes $4.0 million in appreciation recognized on the conversion
of equity securities received in the settlement of a loan into a publicly traded
equity security. As discussed further below, the warrant income resulted from
the sale of stock acquired from clients in connection with financing activities.
The increase in other income in 1998 was primarily the result of a $424,000
increase in trust fees, and a $185,000 increase in the gain on sale of Small
Business Administration ("SBA") loans. The increase in trust fees was due to
significant growth in assets under management by Greater Bay Trust Company.
Trust assets increased to $649.3 million at December 31, 1998, compared to
$577.7 million at December 31, 1997. The increase in the gain on sale of SBA
loans was due to an increase in the origination and subsequent sale of SBA
loans.
Other income in 1999, 1998 and 1997 included warrant income of $14.5
million, $945,000 and $1.2 million, net of related employee incentives of $7.3
million, $396,000 and $500,000, respectively. The Company occasionally receives
warrants to acquire common stock from companies that are in the start-up or
development phase. The company holds approximately 100 warrant positions. The
timing and amount of income derived from the exercise and sale of client
warrants typically depend upon factors beyond the control of the Company, and
cannot be predicted with any degree of accuracy and are likely to vary
materially from period to period.
In November 1999, the voters of San Francisco adopted an ordinance which
prohibits financial institutions in San Francisco from imposing surcharges of
any kind to non-customers who access automated teller machines ("ATM") to
conduct electronic transactions, including cash withdrawals and fund transfers.
Other cities in California have either adopted or are considering similar
proposals. The Company estimates that approximately $230,000 of ATM network
revenue during 1999 was derived from such type of surcharges in the City and
County of San Francisco. While the implementation of this ordinance has been
delayed through legal challenges and this amount is not material, the successful
adoption of similar laws in other areas where the Company operates ATMs could
cause a more substantial reduction in ATM network revenue in the future.
A-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating Expenses
The following table sets forth the major components of operating expenses
for the years indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation and benefits $ 38,070 $ 31,022 $ 27,187
Occupancy and equipment 12,203 8,600 7,283
Professional services and legal costs 2,418 2,616 2,663
Client service expenses 1,374 806 625
FDIC insurance and regulatory assessments 591 450 398
Expenses on other real estate owned 13 76 177
Other 12,383 11,494 9,857
---------------------------------------------
Total operating expenses excluding
nonrecurring costs 67,052 55,064 48,190
Contribution to the GBB Foundation and related expenses 12,160 1,341 -
Mergers and other related nonrecurring costs 10,331 2,661 3,333
Recovery of legal settlement - - (1,700)
----------------------------------------------
Total operating expenses $ 89,543 $ 59,066 $ 49,823
==============================================
Efficiency ratio 66.05% 64.91% 64.64%
Efficiency ratio (before merger, nonrecurring
and extraordinary items) 55.39% 61.12% 63.48%
Total operating expenses to average assets 3.62% 3.24% 3.71%
Total operating expenses to average assets (before
merger, nonrecurring and extraordinary items) 2.71% 3.02% 3.59%
</TABLE>
A-9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses totaled $89.5 million for 1999, compared to $59.1
million for 1998 and $49.8 million for 1997. The ratio of operating expenses to
average assets was 3.62% in 1999, 3.24% in 1998, and 3.71% in 1997. Total
operating expenses include merger and other related nonrecurring costs and
contributions to the Greater Bay Bancorp Foundation (the "Foundation") and
related expenses. Excluding these items, operating expense to average assets
would have been 2.71% in 1999, 3.02% in 1998 and 3.59% in 1997.
The efficiency ratio is computed by dividing total operating expenses by
net interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio before merger,
nonrecurring and extraordinary items for 1999 was 50.52%, compared to 56.34% in
1998 and 60.02% in 1997.
During 1998, Greater Bay established the Foundation. The Foundation was
formed to provide a vehicle through which the Company, its officers and
directors can provide support to the communities in which the Company does
business. The Foundation focuses its support on initiatives related to
education, health and economic growth. To support the Foundation, the Company
contributed appreciated securities, which had an unrealized gain of $7.8 million
in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4 million in
compensation and other expenses in connection with these appreciated securities.
The Company recorded expense of $12.2 million in 1999 and $1.3 million in 1998
which is included in operating expenses.
As indicated by the improvements in the efficiency ratio, the Company has
been able to achieve increasing economies of scale. In 1999, average assets
increased 35% from 1998, while operating expenses, excluding merger and
nonrecurring cost, increased only 21%. From 1997 to 1998, average assets
increased 33%, while operating expenses, excluding merger and nonrecurring costs
increased only 14%.
Compensation and benefits expenses increased in 1999 to $38.0 million,
compared to $31.0 million in 1998 and $27.2 million in 1997. The increase in
compensation and benefits is due primarily to the additions in personnel made in
1999 and 1998 to accommodate the growth of the Company.
The increase in occupancy and equipment, client service expense, Federal
Deposit Insurance Corporation ("FDIC") insurance and regulatory assessments and
other operating expenses was related to the growth in the Company's loans,
deposits and trust assets.
Income Taxes
The Company's effective income tax rate for 1999 was 31.1%, compared to
33.1% in 1998 and 36.5% in 1997. The effective rates were lower than the
statutory rate of 42% due to the donation of appreciated securities to the
Foundation, state enterprise zone tax credits and tax-exempt income on municipal
securities. The reductions were partially offset by the impact of nondeductible
merger and other related nonrecurring costs. In 1998, the Company was able to
further reduce its effective tax rate through the recognition of certain net
operating losses acquired in its merger with PRB.
FINANCIAL CONDITION
Total assets increased 38.9% to $2.8 billion at December 31, 1999, compared
to $2.0 billion at December 31, 1998. Total assets increased 31.3% in 1998 from
$1.6 billion at December 31, 1997. The increases in 1999 and 1998 were primarily
due to increases in the Company's loan portfolio funded by growth in deposits.
A-10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Loans
Total gross loans increased 45.0% to $1.9 billion at December 31, 1999,
compared to $1.3 billion at December 31, 1998. Total gross loans increased 35.0%
in 1998 from $985.2 million at year-end 1997. The increases in loan volumes in
1999 and 1998 were primarily due to an improving economy in the Company's market
areas coupled with the business development efforts by the Company's
relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in a market area that
is dependent on the technology and real estate industries and supporting service
companies. Thus, a downturn in these sectors of the economy could adversely
impact the Company's borrowers. This could, in turn, reduce the demand for
loans and adversely impact the borrowers' abilities to repay their loans, while
also decreasing the Company's net interest margin.
The following table presents the composition of the Company's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 810,399 43.1% $ 536,204 41.3% $ 420,058 43.7%
Term Real Estate - Commercial 484,076 25.7 353,929 27.2 245,200 25.5
----------------------------------------------------------------------------------
Total Commercial 1,294,475 68.8 890,133 68.5 665,258 69.2
Real estate construction and land 417,326 22.2 265,026 20.4 169,395 17.6
Real estate other 92,688 4.9 74,265 5.8 51,765 5.4
Consumer and other 123,528 6.6 100,599 7.7 98,829 10.3
----------------------------------------------------------------------------------
Total loans, gross 1,928,017 102.5 1,330,023 102.4 985,247 102.5
Deferred fees and discounts, net (6,840) (0.4) (4,640) (0.4) (4,114) (0.4)
----------------------------------------------------------------------------------
Total loans, net of deferred fees 1,921,177 102.1 1,325,383 102.0 981,133 102.1
Allowance for loan losses (40,421) (2.1) (25,960) (2.0) (19,954) (2.1)
----------------------------------------------------------------------------------
Total loans, net $ 1,880,756 100.0% $ 1,299,423 100.0% $ 961,179 100.0%
==================================================================================
<CAPTION>
----------------------------------------------------
1996 1995
----------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands) Amount % Amount %
- ------------------------------------------------------------------------------------------------------
Commercial $ 349,419 47.1% $ 259,607 48.5%
Term Real Estate - Commercial 181,681 24.5 138,215 25.8
----------------------------------------------------
Total Commercial 531,100 71.7 397,822 74.3
Real estate construction and land 124,155 16.7 70,712 13.2
Real estate other 37,466 5.1 29,260 5.5
Consumer and other 65,420 8.8 49,758 9.3
----------------------------------------------------
Total loans, gross 758,141 102.3 547,552 102.3
Deferred fees and discounts, net (3,726) (0.5) (3,103) (0.5)
----------------------------------------------------
Total loans, net of deferred fees 754,415 101.8 544,449 101.8
Allowance for loan losses (13,177) (1.8) (9,484) (1.8)
----------------------------------------------------
Total loans, net $ 741,238 100.0% $ 534,965 100.0%
====================================================
</TABLE>
A-11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table presents the maturity distribution of the Company's (1)
commercial, (2) real estate construction and land, (3) term real estate -
commercial and (4) real estate other portfolios and the sensitivity of such
loans to changes in interest rates at December 31, 1999.
<TABLE>
<CAPTION>
Term Real estate
real estate- construction Real estate
(Dollars in thousands) Commercial commercial and land other
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans maturing in:
One year or less:
Fixed rate $170,721 $ 21,651 $ 20,233 $ 7,428
Variable rate 372,010 66,303 323,035 21,201
One to five years:
Fixed rate 57,240 22,048 1,352 1,344
Variable rate 132,511 66,955 47,424 26,910
After five years:
Fixed rate 25,304 207,831 3,722 7,337
Variable rate 52,613 99,288 21,560 28,468
-----------------------------------------------------------
Total $810,399 $484,076 $417,326 $ 92,688
===========================================================
</TABLE>
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued but
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Banks have granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
The following table sets forth information regarding nonperforming assets
at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonperforming loans
Nonaccrual loans $ 4,418 $ 2,118 $ 4,026 $ 6,293 $ 5,316
Accruing loans past due 90 days or more 51 -- 158 1,698 954
Restructured loans 807 796 1,533 1,828 1,530
------------------------------------------------
Total nonperforming loans 5,276 2,914 5,717 9,819 7,800
Other real estate owned 271 966 1,429 1,673 2,830
------------------------------------------------
Total nonperforming assets $ 5,547 $ 3,880 $ 7,146 $11,492 $10,630
================================================
Nonperforming assets to total loans
and other real estate owned 0.29% 0.29% 0.73% 1.52% 1.94%
Nonperforming assets to total assets 0.19% 0.19% 0.46% 0.98% 1.19%
</TABLE>
At December 31, 1999, the Company had $4.4 million in nonaccrual loans.
Interest income foregone on nonperforming loans totaled $236,000, $126,000 and
$584,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
A-12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings through a provision for
losses on foreclosed property in the period in which they are identified. At
December 31, 1999, OREO acquired through foreclosure had a carrying value of
$271,000 compared to $966,000 at December 31, 1998.
The Company had $807,000 and $796,000 of restructured loans as of December
31, 1999 and 1998, respectively. There were no principal reduction concessions
allowed on restructured loans during 1999 and 1998. Interest income from
restructured loans totaled $45,000 and $16,000 for the years ended December 31,
1999 and 1998. Foregone interest income, which totaled $0 and $11,000 for the
years ended December 31, 1999 and 1998, respectively, would have been recorded
as interest income if the loans had accrued interest in accordance with their
original terms prior to the restructurings.
The Company has three classifications for problem loans: "substandard",
"doubtful" and "loss". Substandard loans have one or more defined weakness and
are characterized by the distinct possibility that the Banks will sustain some
loss if the deficiencies are not corrected. Doubtful loans have the weaknesses
of substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable; and there is a high possibility of loss of
some portion of the principal balance. A loan classified as "loss" is considered
uncollectible and its continuance as an asset is not warranted.
A-13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth the classified loans and other real estate
owned at the dates indicated.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Substandard $ 23,431 $ 13,608 $ 16,871
Doubtful 1,850 1,188 1,894
Loss - - 49
Other real estate owned 271 966 1,429
----------------------------------------
Classified assets $ 25,552 $ 15,762 $ 20,243
========================================
Classified to total loans and other real
estate owned 1.33% 1.19% 2.06%
Allowance for loan losses to total classified 158.19% 164.70% 98.57%
</TABLE>
With the exception of these classified loans, management was not aware of
any loans outstanding as of December 31, 1999 where the known credit problems of
the borrower would cause management to have serious doubts as to the ability of
such borrowers to comply with their present loan repayment terms and which would
result in such loans being included in nonperforming or classified asset tables
at some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full impact
that such an environment may have on the Company's loan portfolio. Accordingly,
there can be no assurance that other loans will not become 90 days or more past
due, be placed on nonaccrual, become restructured loans, or other real estate
owned in the future.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio. The allowance is increased by provisions charged against current
earnings and reduced by net charge-offs. Loans are charged off when they are
deemed to be uncollectible; recoveries are generally recorded only when cash
payments are received.
A-14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the years indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period end loans outstanding $ 1,928,017 $ 1,330,023 $ 985,247 $ 758,141 $ 547,552
Average loans outstanding 1,609,973 $ 1,083,540 $ 864,275 $ 629,147 505,073
Allowance for loan losses:
Balance at beginning of period $ 25,960 $ 19,954 $ 13,150 $ 9,485 $ 9,423
Charge-offs:
Commercial (2,359) (1,572) (1,688) (728) (1,191)
Term Real Estate - Commercial -- (48) (54) (84) (25)
-------------------------------------------------------------------------
Total Commercial (2,359) (1,620) (1,742) (812) (1,216)
Real estate construction and land -- (7) (243) (127) (410)
Real estate other -- -- -- -- (49)
Consumer and other (295) (196) (232) (202) (490)
-------------------------------------------------------------------------
Total charge-offs (2,654) (1,823) (2,217) (1,141) (2,165)
-------------------------------------------------------------------------
Recoveries:
Commercial 909 441 113 390 659
Term Real Estate - Commercial -- 11 1 27 --
-------------------------------------------------------------------------
Total Commercial 909 452 114 417 659
Real estate construction and land -- -- -- 283 3
Real estate other 56 -- -- -- --
Consumer and other 341 35 15 96 169
-------------------------------------------------------------------------
Total recoveries 1,306 487 129 796 831
-------------------------------------------------------------------------
Net charge-offs (1,348) (1,336) (2,088) (345) (1,334)
Provision charged to income (1) 15,809 7,342 8,892 4,010 1,396
-------------------------------------------------------------------------
Balance at end of period $ 40,421 $ 25,960 $ 19,954 $ 13,150 $ 9,485
=========================================================================
Net charge-offs to average loans outstanding
during the period 0.08% 0.12% 0.24% 0.05% 0.26%
Allowance as a percentage of average loans outstanding 2.51% 2.40% 2.31% 2.09% 1.88%
Allowance as a percentage of period end loans outstanding 2.10% 1.96% 2.03% 1.74% 1.74%
Allowance as a percentage of non-performing loans 66.13% 890.87% 349.03% 133.92% 121.60%
</TABLE>
(1) Includes $2.7 million, $183,000, $1.4 million and $800,000 in 1999, 1998,
1997 and 1996, respectively, to conform to the Companys' allowance
methodology. These amounts are included in mergers and related nonrecurring
costs.
The Company employs a systematic methodology for determining its allowance
for loan losses, which includes a monthly review process and monthly adjustment
of the allowance. The Company's process includes a periodic loan by loan review
for loans that are individually evaluated for impairment as well as detailed
reviews of other loans (either individually or in pools). This includes an
assessment of known problem loans, potential problem loans, and other loans that
exhibit indicators of deterioration.
The Company's methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan losses
that management believes is appropriate at each reporting date. Quantitative
factors include the Company's historical loss experience, delinquency and
charge-off trends, collateral values, changes in non-performing loans, and other
factors. Quantitative factors also incorporate known information about
individual loans including borrowers' sensitivity to interest rate movements and
borrowers' sensitivity to quantifiable external factors including commodity and
finished goods prices as well as acts of nature (earthquakes, fires, etc.) that
occur in a particular period.
Qualitative factors include the general economic environment in the
Company's marketplace, and in particular, the state of the technology industries
based in the Silicon Valley and other key industries in the San Francisco Bay
Area. Size and complexity of individual credits in relation to lending
officers' background and experience levels, loan structure, extent and nature of
waivers of existing loan policies and pace of portfolio growth are other
qualitative factors that are considered in the Company's methodology.
A-15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's methodology is, and has been consistently followed. However,
as the Company adds new products, increases in complexity, and expands its
geographic coverage, the Company will enhance its methodology to keep pace with
the size and complexity of the loan portfolio. In this regard, the Company has
periodically engaged outside firms to independently assess the Company's
methodology, and on an ongoing basis the Company engages outside firms to
perform independent credit reviews of its loan portfolio. Management believes
that the Company's systematic methodology continues to be appropriate given the
Company's size and level of complexity.
While this methodology utilizes historical and other objective information,
the establishment of the allowance for loan losses and the classification of
loans, is to some extent, based on the judgment and experience of management.
In general, management feels that the allowance for loan losses is adequate as
of December 31, 1999. However, future changes in circumstances, economic
conditions or other factors could cause management to increase or decrease the
allowance for loan losses as necessary.
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories at the dates indicated. The
allocation presented should not be interpreted as an indication that charges to
the allowance for loan losses will be incurred in these amounts or proportions,
or that the portion of the allowance allocated to each loan category represents
the total amounts available for charge-offs that may occur within these
categories. The unallocated portion of the allowance for loan losses and the
total allowance is applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1999 1998 1997 1996
------------------------------------------------------------------------------------
% of Category % of Category % of Category
to Gross to Gross to Gross
(Dollars in thousands) Amount Loans Amount Loans Amount Loans Amount
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 14,295 42.03% $ 10,012 40.32% $ 6,941 42.63% $ 4,967
Term Real Estate - Commercial 5,963 25.11 2,009 26.61 1,598 24.89 1,253
------------------------------------------------------------------------------------
Total Commercial 20,258 67.14 12,021 66.93 8,539 67.52 6,220
Real estate construction and land 3,764 21.65 2,855 19.93 1,667 17.19 1,976
Real estate term 712 4.81 411 5.58 327 5.25 414
Consumer and other 3,097 6.41 1,943 7.56 1,133 10.03 1,358
------------------------------------------------------------------------------------
Total allocated 27,831 17,230 11,666 9,968
Unallocated 12,590 8,730 8,288 3,182
------------------------------------------------------------------------------------
Total $ 40,421 100.00% $ 25,960 100.00% $ 19,954 100.00% $ 13,150
========================================================================================
<CAPTION>
----------------------------------------------
1996 1995
----------------------------------------------
% of Category % of Category
to Gross to Gross
(Dollars in thousands) Loans Amount Loans
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cmmercial 46.09% $ 3,455 47.41%
Term Real Estate - Commercial 23.96 1,271 25.24
---------------------------------------------
Total Commercial 70.05 4,728 72.65
Real estate construction and land 16.38 1,231 12.91
Real estate term 4.94 332 5.34
Consumer and other 8.63 987 9.09
----------------------------------------------
Total allocated 7,276
Unallocated 2,209
---------------------------------------------
Total 100.00% $ 9,485 100.00%
=============================================
</TABLE>
At December 31, 1999, the allowance for loan losses was $40.4 million,
consisting of a $27.8 million allocated allowance and a $12.6 million
unallocated allowance. The unallocated allowance recognizes the model and
estimation risk associated with the allocated allowances, and management's
evaluation of various conditions, the effects of which are not directly measured
in determining the allocated allowance. The evaluation of the inherent loss
regarding these conditions involves a higher degree of uncertainty because they
are not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the
following at the balance sheet date:
. The strength and duration of the current business cycle and existing general
economic and business conditions affecting our key lending areas; economic and
business conditions affecting our key lending portfolios;
. Seasoning of the loan portfolio, growth in loan volumes and changes in loan
terms; and
. The results of bank regulatory examinations.
A-16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Investment Securities
The Company's investment portfolio is managed to meet the Company's
liquidity needs through proceeds from scheduled maturities and is utilized for
pledging requirements for deposits of state and political subdivisions and
securities sold under repurchase agreements. The portfolio is comprised of U.S.
Treasury securities, U.S. government agency securities, mortgage-backed
securities, obligations of states and political subdivisions and a modest amount
of equity securities, including Federal Reserve Bank stock and Federal Home Loan
Bank stock. The Company does not include Federal Funds sold and certain other
short-term securities as investment securities. These other investments are
included in cash and cash equivalents. Investment securities classified as
available for sale are recorded at fair value, while investment securities
classified as held to maturity are recorded at cost. Unrealized gains or losses,
net of the deferred tax effect, are reported as increases or decreases in
shareholders' equity for available for sale securities.
The amortized cost and estimated fair value of investment securities at
December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1999 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 11,675 $ - $ (90) $ 11,585
U.S. agency notes 28,848 6 (886) 27,969
Mortgage-backed securities 168,733 1 (4,946) 163,787
Tax-exempt securities 40,622 53 (2,413) 38,263
Corporate securities 101,469 - (10,940) 90,529
----------------------------------------------------------
Total securities available for sale 351,347 60 (19,275) 332,133
----------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 - - 500
U.S. agency notes 29,482 - (667) 28,815
Mortgage-backed securities 59,524 28 (2,018) 57,534
Tax-exempt securities 52,219 123 (2,710) 49,632
-----------------------------------------------------------
Total securities held to maturity 141,725 151 (5,395) 136,481
-----------------------------------------------------------
Other securities 13,168 8,143 - 21,311
-----------------------------------------------------------
Total investment securities $ 506,240 $ 8,354 $ (24,670) $ 489,925
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1998 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 17,573 $ 55 $ - $ 17,628
U.S. agency notes 37,213 47 (8) 37,252
Mortgage-backed securities 164,578 1,081 (81) 165,578
Tax-exempt securities 38,124 664 - 38,788
Corporate securities 55,168 60 (604) 54,624
-----------------------------------------------------------
Total securities available for sale 312,656 1,907 (693) 313,870
-----------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,764 2 (2) 1,764
U.S. agency notes 28,495 22 (58) 28,459
Mortgage-backed securities 37,967 174 (207) 37,934
Tax-exempt securities 33,882 1,004 (15) 34,871
-----------------------------------------------------------
Total securities held to maturity 102,108 1,202 (282) 103,028
-----------------------------------------------------------
Other securities 6,587 - - 6,587
-----------------------------------------------------------
Total investment securities $ 421,351 $ 3,109 $ (975) $ 423,485
===========================================================
</TABLE>
A-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The declines in fair value of the Company's investment portfolio are a
result of the increase in overall interest rates which occurred throughout 1999.
The maturities of investment securities at December 31, 1999 and 1998 is as
follows. Other securities are comprised of equity investments and have no stated
maturity and therefore are excluded from this table.
<TABLE>
<CAPTION>
2001 2005
Through Through 2010 and
(Dollars in thousands) 2000 2004 2009 Thereafter Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 5,125 $ 6,550 $ -- $ -- $ 11,675
U.S. agency notes (1) 1,254 17,812 9,782 -- 28,848
Mortgage-backed securities (2) 1,023 6,882 5,734 155,094 168,733
Tax-exempt securities 891 7,243 5,114 27,374 40,622
Corporate securities 996 -- -- 100,473 101,469
-------- -------- -------- -------- --------
Total securities available for sale 9,289 38,487 20,630 282,941 351,347
-------- -------- -------- -------- --------
Fair value $ 9,238 $ 38,580 $ 19,888 $264,427 $332,133
-------- -------- -------- -------- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 -- -- -- 500
U.S. agency notes (1) 2,000 23,993 3,490 -- 29,483
Mortgage-backed securities (2) 75 2,082 9,082 48,285 59,524
Tax-exempt securities 996 3,130 11,670 36,423 52,217
-------- -------- -------- -------- --------
Total securities held to maturity 3,571 29,205 24,242 84,707 141,725
-------- -------- -------- -------- --------
Fair value 3,564 28,616 24,024 80,277 136,481
-------- -------- -------- -------- --------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $ 12,860 $ 67,692 $ 44,872 $367,648 $493,072
-------- -------- -------- -------- --------
Total fair value $ 12,802 $ 67,196 $ 43,912 $344,704 $468,614
-------- -------- -------- -------- --------
Weighted average yield-total portfolio 5.55% 5.98% 6.71% 7.35% 7.05%
</TABLE>
(1) Certain notes issued by U.S. Agencies may be called, without penalty, at
the discretion of the issuer. This may cause the actual maturities to
differ significantly from the contractual maturity dates.
(2) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
For additional information concerning the investments portfolio, see Note 3
of Notes to Consolidated Financial Statements.
Deposits
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached
$2.5 billion at December 31, 1999, an increase of 42.5% compared to deposits of
$1.8 billion at December 31, 1998. In 1998, deposits increased 28.5% from $1.4
billion at December 31, 1997. The increase in deposits was primarily due to the
continued marketing efforts directed at commercial business clients in the
Company's market areas, coupled with an increase in deposits related to the new
business development activities of the Greater Bay Trust Company and the Venture
Banking Group.
A-18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
PBC held deposits from a single customer (the "Special Deposit") of $111.1
million and $89.6 million at December 31, 1999 and 1998, respectively. The
Special Deposit represents the proposed settlement of a class action lawsuit not
involving the Company. Due to the uncertainty of the time the Special Deposit
will remain with PBC, management has invested a significant portion of the
proceeds from this deposit in agency securities with maturities of less than 90
days. As previously discussed, the interest rate spread on the Special Deposit
was approximately 3.10% and 2.25% for December 31, 1999 and 1998, which resulted
in a decrease in overall interest rate spreads.
The Company's noninterest-bearing demand deposit accounts increased 35.5%
to $514.5 million at December 31, 1999, compared to $379.7 million a year
earlier.
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts reached $1.5 billion at year-end 1999, an
increase of 42.1% from $1.0 billion at December 31, 1998. MMDA, NOW and savings
accounts were 58.4% of total deposits at December 31, 1999, as compared to 58.6%
at December 31, 1998.
Time certificates of deposit totaled $528.4 million, or 21.1% of total
deposits, at December 31, 1999, compared to $348.8 million, or 19.8% of total
deposits, at December 31, 1998. Note 7 of the Notes to the Consolidated
Financial Statements presents the maturity distribution of time certificates of
deposits at December 31, 1999.
As of December 31, 1999, the Company had $19.3 million in brokered deposits
outstanding. There were no such deposits as of December 31, 1998.
For additional information concerning deposits, see Note 7 of Notes to
Consolidated Financial Statements.
Other Borrowings
At December 31, 1999 other borrowings consisted of Federal Funds purchased
and securities sold under agreements to repurchase, Federal Home Loan Bank
advances, and advances under credit lines. Note 9 of the Notes to the
Consolidated Financial Statements provides the amounts outstanding, the short
and long term classification, other borrowings outstanding during the year and
the general terms of these borrowings .
Liquidity and Cash Flow
The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients while maintaining an appropriate balance between assets and liabilities
to meet the return on investment expectations of its shareholders. The Company
monitors the sources and uses of funds on a daily basis to maintain an
acceptable liquidity position. In addition to liquidity from core deposits and
repayments and maturities of loans and investments, the Banks utilize brokered
deposit lines, sells securities under agreements to repurchase and borrows
overnight Federal Funds.
A-19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are obtained
from management fees, interest received on its investments and dividends
declared and paid by the Banks. There are statutory and regulatory provisions
that could limit the ability of the Banks to pay dividends to Greater Bay. At
December 31, 1999, the Banks had approximately $51.1 million in the aggregate
available to be paid as dividends to Greater Bay. Management of Greater Bay
believes that such restrictions will not have an impact on the ability of
Greater Bay to meet its ongoing cash obligations. As of December 31, 1999,
Greater Bay did not have any material commitments for capital expenditures.
Net cash provided by operating activities, consisting primarily of net
income, totaled $44.9 million for 1999, $23.8 million for 1998 and $22.6 million
for 1997. Cash used for investing activities totaled $695.8 million in 1999,
$521.3 million in 1998 and $329.9 million in 1997. The funds used for investing
activities primarily represent increases in loans and investment securities for
each year reported.
For the year ended December 31, 1999, net cash provided by financing
activities was $750.1 million, compared to $459.8 million in 1998 and $363.2
million in 1997. Historically, the primary financing activity of the Company has
been through deposits. In 1999, 1998 and 1997, deposit gathering activities
generated cash of $748.1 million, $383.7 million and $326.8 million,
respectively. This represents a total of 99.7%, 83.44% and 90.0% of the
financing cash flows for 1999, 1998 and 1997, respectively. The 1999 increase
in financing activities other than deposits are a result of proceeds from the
sale of stock of $25.4 million, the Company entering into $70.0 million in
long-term low cost repurchase agreements in 1998, and the issuance of TPS of
$30.0 million and $20.0 million in 1998 and 1997, respectively, which were
issued principally to provide capital to the Company (see Capital Resources -
below).
Capital Resources
Shareholders' equity at December 31, 1999 increased to $173.6 million from
$128.8 million at December 31, 1998 and from $107.6 million at December 31,
1997. Greater Bay paid dividends of $0.48, $0.38 and $0.30 per share in
December 31, 1999, 1998 and 1997, respectively, excluding dividends paid by
subsidiaries prior to the completion of their mergers.
In 1999 the Company issued 535,000 shares of common stock in a private
placement. The proceeds from the offering were $19.0 million, net of issuance
costs. Greater Bay intends to use the net proceeds from the offering for general
corporate purposes.
In 1997, the Company issued $20.0 million in TPS to enhance its regulatory
capital base, while also providing added liquidity. In 1998, the Company
completed a second offering of TPS in an aggregate amount of $30.0 million.
Under applicable regulatory guidelines, the TPS qualifies as Tier I capital up
to a maximum of 25% of Tier I capital. Any additional portion of TPS would
qualify as Tier 2 capital. As of December 31, 1999, all outstanding TPS
qualified as Tier I capital. As the Company's shareholders' equity increases,
the amount of Tier I capital that can be comprised of TPS will increase.
The Company is committed to remaining well-capitalized as defined by
regulatory guidelines. If deposit and loan growth continues at current levels,
it is anticipated the Company will need to raise additional capital to remain
well-capitalized in 2000. The Company is evaluating an additional issuance of
TPS as well as other alternatives to meet this anticipated increase in required
capital. We anticipate that we will be able to leverage any further issuance of
TPS and therefore we do not anticipate that the raising of additional TPS would
be dilutive to future net income per share. However, the impact of raising any
additional capital on net income per share will depend on the type of capital
raised, the terms of the capital, the time period required to invest the capital
funds into earning-assets and the type of assets funded.
A-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
A banking organization's total qualifying capital includes two components:
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities and minority interests, less goodwill. Supplementary capital includes
the allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities, certain other capital instruments
and term subordinated debt. The Company's major capital components are
shareholders' equity and TPS in core capital, and the allowance for loan losses
and subordinated debt in supplementary capital.
At December 31, 1999, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter. The minimum leverage
ratio is 3.0%, although certain banking organizations are expected to exceed
that amount by 1.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company at December 31,
1999 and the two highest levels recognized under these regulations are as
follows:
<TABLE>
<CAPTION>
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Company 7.85% 9.14% 10.55%
Well-capitalized 5.00% 6.00% 10.00%
Adequately
capitalized 4.00% 4.00% 8.00%
</TABLE>
The Company's leverage ratio was 7.85% at December 31, 1999, compared to
7.93% at December 31, 1998. At December 31, 1999, the Company's risk-based
capital ratios were 9.14% for Tier 1 risk-based capital and 10.55% for total
risk-based capital, compared to 9.85% and 11.99%, respectively, as of December
31, 1998.
In addition, at December 31, 1999, each of the Banks, with the exception of
MDNB, had levels of capital that exceeded the well-capitalized guidelines. For
additional information on the capital levels and capital ratios of the Company
and each of the Banks, see Note 17 of Notes to Consolidated Financial
Statements.
A-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Quantitative and Qualitative Disclosures about Market Risk
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and its allowance for
loan losses see "--Allowance for Loan Losses" herein.
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, or ALCO which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in net portfolio values and net interest income under various interest
rate scenarios. The ALCO attempts to manage the various components of the
Company's balance sheet to minimize the impact of sudden and sustained changes
in interest rates on net portfolio value and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in net portfolio value in the event of hypothetical changes in
interest rates and interest liabilities. If potential changes to net portfolio
value and net interest income resulting from hypothetical interest rate swings
are not within the limits established by the Board, the Board may direct
management to adjust its asset and liability mix to bring interest rate risk
within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, lengthen the effective
maturities of certain interest-earning assets, and shorten the effective
maturities of certain interest-bearing liabilities. The Company has focused its
investment activities on securities with generally medium-term (8 years to 12
years) maturities or average lives. The Company has utilized short-term
borrowings and deposit marketing programs to adjust the term to repricing of its
liabilities. In addition, the Company has utilized an interest rate swap to
manage the interest rate risk of the TPS II securities. This interest rate swap
is not an "ineffective hedge" and is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in net portfolio value of its
cash flows from assets, liabilities and off-balance sheet items in the event of
a range of assumed changes in market interest rates. Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for off-
balance sheet items. This analysis assesses the risk of loss in market rate
sensitive instruments in the event of sudden and sustained increases and
decreases in market interest rates of 100 basis points. The following table
presents the Company's projected change in net portfolio value for these rate
shock levels as of December 31, 1999. All market rate sensitive instruments
presented in this table are classified as either held to maturity or available
for sale. The Company has no trading securities.
<TABLE>
<CAPTION>
Change in Projected Change
Interest Rates Net Portfolio ---------------------------
(Dollars in thousands) (1) Value Dollars Percentage
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
100 basis point rise $ 365,830 $ 7,770 2.2%
Base scenario 358,020 - 0.0%
100 basis point decline 350,469 (7,591) -2.1%
</TABLE>
(1) Evaluation excludes MDNB. See further discussion below.
The preceding table indicates that at December 31, 1999, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
net portfolio value would be expected to decrease. However, the foregoing
analysis does not attribute additional value to the Company's noninterest-
bearing deposit balances, which have a significantly higher market value during
periods of increasing interest rates.
Net portfolio value is calculated based on the net present value of
estimated cash flows utilizing market prepayment assumptions and market rates of
interest provided by independent broker quotations and other public sources.
A-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Computation of forecasted effects of hypothetical interest rate changes is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of net portfolio value. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of the net portfolio value. Certain assets, such as adjustable-rate
loans, which represent one of the Company's loan products, have features which
restrict changes in interest rate on a short-term basis and over the life of the
assets. In addition, the proportion of adjustable-rate loans in the Company's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinancing activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the net portfolio value.
Finally, the ability of many borrowers to repay their adjustable-rate mortgage
loans may decrease in the event of significant interest rate increases.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and liabilities
and their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both assets
and liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Company's current portfolio that are
subject to repricing at various time horizons: one day or immediate, two days to
six months, seven to twelve months, one to three years, four to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps.
The following table shows interest sensitivity gaps for different intervals
as of December 31, 1999:
<TABLE>
<CAPTION>
Immediate 2 Days To 7 Months to 1 Year 4 Years
(Dollars in thousands) or One Day 6 Months 12 Months to 3 Years to 5 Years
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Cash and due from banks $ 10,394 $ -- $ -- $ -- $ --
Short term investments 191,700 -- -- -- --
Investment securities -- 72,696 27,049 110,162 56,115
Other securities -- -- -- -- --
Loans 1,029,335 511,099 39,254 130,450 91,958
Loan losses/unearned fees -- -- -- -- --
Other assets -- -- -- -- --
---------------------------------------------------------------------------
Total assets $ 1,231,429 $ 583,795 $ 66,303 $ 240,612 $ 148,073
---------------------------------------------------------------------------
Liabilities and Equity
Deposits $ 1,484,692 $ 418,793 $ 78,037 $ 9,618 $ 734
Other borrowings -- 47,100 -- -- 22,000
Subordinated debt -- -- -- -- --
Trust preferred securities -- -- -- -- --
Other liabilities -- -- -- -- --
Shareholders' equity -- -- -- -- --
---------------------------------------------------------------------------
Total liabilities and equity $ 1,484,692 $ 465,893 $ 78,037 $ 9,618 $ 22,734
---------------------------------------------------------------------------
Gap $ (253,263) $ 117,902 $ (11,734) $ 230,994 $ 125,339
Cumulative Gap $ (253,263) $ (135,361) $ (147,095) $ 83,899 $ 209,238
Cumulative Gap/total assets -8.90% -4.76% -5.17% 2.95% 7.35%
</TABLE>
<TABLE>
<CAPTION>
More than Total Rate Non-Rate
(Dollars in thousands) 5 Years Sensitive Sensitive Total
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ -- $ 10,394 $ 106,797 $ 117,191
Short term investments -- 191,700 -- 191,700
Investment securities 238,113 504,135 -- 504,135
Other securities -- -- 20,540 20,540
Loans 125,763 1,927,859 -- 1,927,859
Loan losses/unearned fees -- -- (47,102) (47,102)
Other assets -- -- 131,765 131,765
--------------------------------------------------------
Total assets $ 363,876 $ 2,634,088 $ 212,000 $ 2,846,088
--------------------------------------------------------
Liabilities and Equity
Deposits $ 30 $ 1,991,904 $ 514,482 $ 2,506,386
Other borrowings -- 69,100 -- 69,100
Subordinated debt -- -- -- --
Trust preferred securities
Other liabilities 50,000 50,000 -- 50,000
Shareholders' equity -- -- 47,007 47,007
-- -- 173,595 173,595
--------------------------------------------------------
Total liabilities and equity $ 50,030 $ 2,111,004 $ 735,084 $ 2,846,088
--------------------------------------------------------
Gap $ 313,846 $ 523,084 $ (523,084) --
Cumulative Gap $ 523,084 $ 523,084 $ -- --
Cumulative Gap/total assets 18.38% 18.38% -- --
</TABLE>
A-23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The foregoing table indicates that the Company had a one year gap of
$(147.1) million, or (5.17%) of total assets, at December 31, 1999. In theory,
this would indicate that at December 31, 1999, $147.1 million more in
liabilities than assets would reprice if there were a change in interest rates
over the next 365 days. Thus, if interest rates were to increase, the gap
would tend to result in a lower net interest margin. However, changes in the
mix of earning assets or supporting liabilities can either increase or
decrease the net interest margin without affecting interest rate sensitivity.
In addition, the interest rate spread between an asset and its supporting
liability can vary significantly while the timing of repricing of both the
asset and its supporting liability can remain the same, thus impacting net
interest income. This characteristic is referred to as a basis risk and,
generally, relates to the repricing characteristics of short-term funding
sources such as certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected
next twelve month net interest income and net income has been evaluated through
an interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing rate
environments. As of December 31, 1999, the analysis indicates that the Company's
net interest income would increase a maximum of 14.1% (excluding MDNB) if rates
rose 200 basis points immediately and would decrease a maximum of 13.6%,
(excluding MDNB) if rates declined 200 basis points immediately. In addition,
the results indicate that notwithstanding the Company's gap position, which
would indicate that the net interest margin increases when rates rise, the
Company's net interest margin increases during rising rate periods due to the
basis risk imbedded in the Company's interest- bearing liabilities.
In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that would impact this analysis. These factors would
include management's and ALCO's actions to mitigate the impact to the Company
and the impact of the Company's credit risk profile during periods of
significant interest rate movements.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors and
others, an interest sensitivity gap report may not provide a complete assessment
of the Company's exposure to changes in interest rates.
The above quantified evaluations exclude the impact of MDNB because that
institution had not been converted to risk management system as to net portfolio
value and interest rate stock simulation analysis at December 31, 1999. The
Company has performed a preliminary analysis of MDNB's risk profile and has
determined that MDNB's exposure to interest rate risk is equal to or lower than
that of the Company as a whole.
Year 2000 State of Readiness
The Company's mission critical systems successfully responded to the
century date change. Accordingly, the Company's core banking systems, including
the application software for its deposit, loan and trust computer systems, as
well as the electronic funds transfers system with the Federal Reserve, were
fully operational and accurately processing customer information and
transactions. The Company will continue to monitor its systems and those of its
major vendors, suppliers and clients over the coming months.
A-24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Recent Events
On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former
holding company of Mt. Diablo National Bank ("MDNB"), merged with and into
Greater Bay. Upon consummation of the merger, the outstanding shares of MD
Bancshares were converted into an aggregate of 1,395,499 shares of Greater Bay's
stock. The stock was issued to MD Bancshares' shareholders in a tax-free
exchange. The transaction was accounted for as a pooling-of-interests. The
financial information presented herein has been restated to reflect the merger
with MD Bancshares on a pooling-of-interests basis. As of December 31, 1999, MD
Bancshares had $220.5 million in assets, $205.5 million in deposits and $12.8
million in shareholders' equity. MDNB has offices located in Danville,
Pleasanton and Lafayette, California.
On December 14, 1999, Greater Bay and Coast Bancorp, the holding company of
Coast Commercial Bank ("CCB"), a California state chartered bank, signed a
definitive agreement for a merger between the two companies. The agreement
provides for Coast Bancorp shareholders to receive approximately 3,105,000
shares of Greater Bay stock, subject to certain adjustments based on movements
in Greater Bay's stock price, in a tax-free exchange to be accounted for as a
pooling-of-interests. The transaction is expected to be completed in the second
quarter of 2000, subject to regulatory and shareholder approvals. As of December
31, 1999, Coast Bancorp had $370.0 million in assets, $300.6 million in deposits
and $33.0 million in shareholders' equity. CCB's offices are located in Aptos,
Capitola, Santa Cruz, Scotts Valley and Watsonville, California.
On January 26, 2000, the Company, Bank of Santa Clara ("BSC") and GBB
Merger Corp. signed a definitive agreement for a merger between BSC and GBB
Merger Corp., as a result of which BSC will become a wholly owned subsidiary of
Greater Bay. The agreement provides for BSC shareholders to receive
approximately 2,017,000 shares of Greater Bay stock subject to certain
adjustments based on movements in Greater Bay's stock price in a tax-free
exchange to be accounted for as a pooling-of-interests. The transaction is
expected to be completed in the second quarter of 2000 subject to regulatory and
shareholder approvals. As of December 31, 1999 BSC had $326.9 million in assets,
$293.7 million in deposits and $31.4 million in shareholders equity. BSC has
offices in Milpitas, San Jose, Santa Clara and Sunnyvale, California.
Assuming the acquisitions of MD Bancshares, Coast Bancorp and BSC had been
completed at December 31, 1999, Greater Bay would have had proforma assets of
$3.5 billion, deposits of $3.1 billion and $238.0 million of shareholders'
equity on a pooled basis.
Recent Accounting Developments
In April 1999, the Financial Accounting Standards Board ("FASB") reached
tentative conclusions on the future of the pooling-of-interests method of
accounting for business combinations. These tentative decisions include the
decision that the pooling-of-interests method of accounting will no longer be an
acceptable method to account for business combinations between independent
parties and that there should be a single method of accounting for all business
combinations, and that method is the purchase method. The FASB agreed that the
purchase method should be applied prospectively to business combination
transactions that are initiated after the final standard is issued. The FASB has
issued an exposure draft during the third quarter of 1999 and expects a final
standard will be issued and become effective in the fourth quarter of 2000. A
portion of the Company's business strategy is to pursue acquisition
opportunities so as to expand its market presence and maintain growth levels. A
change in the accounting for business combinations could have a negative impact
on the Company's ability to realize those business strategies.
A-25
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------------------
(Dollars in thousands) 1999* 1998*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 107,591 $ 89,759
Federal funds sold 200,550 71,200
Other short term securities 30,257 78,326
----------------------------------
Cash and cash equivalents 338,398 239,285
Investment securities:
Available for sale, at fair value 332,133 313,870
Held to maturity, at amortized cost (fair value 1999: $136,481
1998: $103,028) 141,725 102,108
Other securities 21,311 6,587
----------------------------------
Investment securities 495,169 422,565
Total loans:
Commercial 810,399 536,204
Term real estate - commercial 484,076 353,929
----------------------------------
Total commercial 1,294,475 890,133
Real estate construction and land 417,326 265,026
Real estate other 92,688 74,265
Consumer and other 123,528 100,599
Deferred loan fees and discounts (6,840) (4,640)
----------------------------------
Total loans, net of deferred fees 1,921,177 1,325,383
Allowance for loan losses (40,421) (25,960)
----------------------------------
Total loans, net 1,880,756 1,299,423
Property, premises and equipment 23,878 18,174
Interest receivable and other assets 107,887 69,770
----------------------------------
Total assets $ 2,846,088 $ 2,049,217
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $ 2,506,386 $ 1,758,307
Other borrowings 69,100 83,429
Subordinated debt - 3,000
Other liabilities 47,007 25,655
----------------------------------------
Total liabilities 2,622,493 1,870,391
----------------------------------------
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary trusts holding solely junior subordinated debentures 50,000 50,000
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized;
none issued - -
Common stock, no par value: 24,000,000 shares authorized;
13,964,065 and 12,900,934 shares issued and outstanding as of
December 31, 1999 and 1998, respectively 100,690 75,303
Accumulated other comprehensive (loss) (5,036) 32
Retained earnings 77,941 53,491
----------------------------------------
Total shareholders' equity 173,595 128,826
----------------------------------------
Total liabilities and shareholders' equity $ 2,846,088 $ 2,049,217
========================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
A-26
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------
(Dollars in thousands, except per share amounts) 1999* 1998* 1997*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest on loans $ 149,883 $ 111,361 $ 91,138
Interest on investment securities:
Taxable 23,789 20,185 10,670
Tax - exempt 3,886 2,555 1,358
-------------------------------------
Total interest on investment securities 27,675 22,740 12,028
Other interest income 12,740 11,805 10,292
-------------------------------------
Total interest income 190,298 145,906 113,458
INTEREST EXPENSE
Interest on deposits 68,049 50,563 38,981
Interest on long term borrowings 7,714 6,752 2,165
Interest on other borrowings 794 1,503 1,379
-------------------------------------
Total interest expense 76,557 58,818 42,525
-------------------------------------
Net interest income 113,741 87,088 70,933
Provision for loan losses 13,064 7,159 7,541
-------------------------------------
Net interest income after provision for loan losses 100,677 79,929 63,392
-------------------------------------
OTHER INCOME
Trust fees 2,990 2,473 2,049
Loan and international banking fees 2,833 1,303 1,404
Service charges and other fees 3,079 2,338 2,312
ATM network revenue 2,110 1,966 2,057
Gain on sale of SBA loans 1,010 1,125 940
Gain (loss) on investments, net (19) 374 (8)
Warrant income, net 14,508 945 1,162
Other income 6,795 846 461
-------------------------------------
Total 33,306 11,370 10,377
-------------------------------------
OPERATING EXPENSES
Compensation and benefits 38,070 31,022 27,187
Occupancy and equipment 12,203 8,600 7,283
Contribution to the GBB Foundation and related expenses, net 12,160 1,341 -
Merger and other related nonrecurring costs 10,331 2,661 3,333
Recovery of legal settlement - - (1,700)
Other expenses 16,779 15,442 13,720
-------------------------------------
Total operating expenses 89,543 59,066 49,823
-------------------------------------
Net income before provision for income taxes and
extraordinary items 44,440 32,233 23,946
Provision for income taxes 13,814 10,679 8,747
-------------------------------------
Net income before extraordinary items 30,626 21,554 15,199
Extraordinary items (88) - -
------------------------------------
Net income $ 30,538 $ 21,554 $ 15,199
====================================
Net income per share - basic** $ 2.29 $ 1.65 $ 1.24
====================================
Net income per share - diluted** $ 2.15 $ 1.53 $ 1.17
====================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
**Restated to reflect 2-for-1 stock split declared for shareholders of record at
April 30, 1998.
See notes to supplemental consolidated financial statements.
A-27
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
-----------------------------------------------
(Dollars in thousands) 1999* 1998* 1997*
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 30,538 $ 21,554 $ 15,199
-----------------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (net of taxes
of $(11,348), $194, and $247 for the years ended December 31,
1999, 1998 and 1997, respectively) (15,653) 272 327
Less: reclassification adjustment for gains (losses) included in
net income (net of taxes of $6,085, $154 and $(3) for the
years ended December 31, 1999, 1998 and 1997,
respectively) 8,404 220 (5)
-----------------------------------------------
Net change (7,249) 492 322
Cash flow hedge:
Cumulative transition effect of adopting SFAS No. 133
(net of taxes of $(744)) as of October 1, 1998 - (1,063) -
Change in market value of hedge during the period
(net of taxes of $1,092 and $294 for the year ended December 31,
1999 and 1998, respectively) 2,325 418 -
Less: reclassification adjustment for swap settlements
in net income (net of taxes of $(60) and $(23) for the year ended
December 31, 1999 and 1998, respectively) (144) (32) -
-----------------------------------------------
Net change 2,181 (677) -
Other comprehensive income (loss) (5,068) (185) 322
-----------------------------------------------
Comprehensive income $ 25,470 $ 21,369 $ 15,521
===============================================
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
A-28
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Accumulated Other
For the years ended December 31, 1999, 1998 and 1997 ----------------------------- Comprehensive Retained
(Dollars in thousands, except per share amounts) Shares** Amount Income (Loss) Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Greater Bay Bancorp, prior to pooling 6,477,774 $ 34,884 $ 71 $ 9,727
Shares issued to Peninsula Bank of Commerce
shareholders 1,295,216 7,141 -- --
Peninsula Bank of Commerce retained earnings prior to
pooling -- -- (53) 6,186
Shares issued to Pacific Rim Bancorporation
shareholders 950,748 8,000 -- --
Pacific Rim Bancorporation retained earnings prior to
pooling -- -- (108) 879
Shares issued to Pacific Business Funding Corporation
shareholders 298,000 51 -- --
Pacific Business Funding Corporation retained earnings prior to
pooling -- -- -- 59
Shares issued to Bay Area Bancorp shareholders 1,164,427 4,143 -- --
Bay Area Bancorp retained earnings prior to pooling -- -- (5) 5,143
Shares issued to Bay Commercial Services shareholders 735,723 3,662 -- --
Bay Commercial Services retained earnings prior to pooling -- -- (15) 5,771
Shares issued to Mt.Diablo Bancshares shareholders 857,871 5,939 -- --
Mt. Diablo Bancshares retained earnings prior to pooling -- -- 5 (403)
------------------------------------------------------------------
Balance, December 31, 1996, restated to reflect pooling 11,779,759 63,820 (105) 27,362
Net income -- -- -- 15,199
Other comprehensive income, net of taxes -- -- 322 --
Stock offering by Mt. Diablo Bancshares 285,960 2,555 -- --
Stock options exercised, including related tax benefit 422,602 2,744 -- --
Stock issued in Employee Stock Purchase Plan 30,320 347 -- --
401(k) employee stock purchase 36,152 531 -- --
Stock repurchase 6 (89) -- --
Pacific Business Funding Corporation distribution -- -- -- (208)
Cash dividend $0.43 per share*** -- -- -- (4,871)
------------------------------------------------------------
Balance, December 31, 1997* 12,554,799 69,908 217 37,482
Net income -- -- -- 21,554
Other comprehensive loss, net of taxes -- -- (185) --
Stock options exercised, including related tax benefit 283,396 3,822 -- --
Stock issued in Employee Stock Purchase Plan 29,670 656 -- --
401(k) employee stock purchase 36,483 1,060 -- --
Stock repurchase (3,414) (143) -- --
Pacific Business Funding Corporation distribution -- -- -- (1,163)
Cash dividend $0.37 per share*** -- -- -- (4,382)
------------------------------------------------------------
Balance, December 31, 1998* 12,900,934 75,303 32 53,491
Net income -- -- -- 30,538
Other comprehensive loss, net of taxes -- -- (5,068) --
Stock options exercised, including related tax benefit 443,426 4,025 -- --
Stock issued in Employee Stock Purchase Plan 41,651 1,031 -- --
401(k) employee stock purchase 38,005 1,205 -- --
Stock issued in Dividend Reinvestment Plan 5,049 171 -- --
Pacific Business Funding Corporation distribution -- -- -- (40)
Stock issued through private placement 535,000 18,961 -- --
BAB Merger -- (6) -- --
Cash dividend $0.50 per share*** -- -- -- (6,048)
------------------------------------------------------------
Balance, December 31, 1999* $ 13,964,065 $ 100,690 $ (5,036) $ 77,941
</TABLE>
<TABLE>
<CAPTION>
Total
For the years ended December 31, 1999, 1998 and 1997 Shareholders'
(Dollars in thousands, except per share amounts) Equity
- ---------------------------------------------------------------------------------
<S> <C>
Greater Bay Bancorp, prior to pooling $ 44,682
Shares issued to Peninsula Bank of Commerce 7,141
shareholders 6,133
Peninsula Bank of Commerce retained earnings prior to 8,000
pooling 771
Shares issued to Pacific Rim Bancorporation 51
shareholders 59
Pacific Rim Bancorporation retained earnings prior to 4,143
pooling 5,138
Shares issued to Pacific Business Funding Corporation 3,662
shareholders 5,756
Pacific Business Funding Corporation retained earnings prior 5,939
pooling (398)
Shares issued to Bay Area Bancorp shareholders ------------
Bay Area Bancorp retained earnings prior to pooling 91,077
Shares issued to Bay Commercial Services shareholders 15,199
Bay Commercial Services retained earnings prior to pooling 322
Shares issued to Mt.Diablo Bancshares shareholders 2,555
2,744
Mt. Diablo Bancshares retained earnings prior to pooling 347
531
(89)
Balance, December 31, 1996, restated to reflect pooling (208)
(4,871)
Net income ------------
Other comprehensive income, net of taxes 107,607
Stock offering by Mt. Diablo Bancshares 21,554
Stock options exercised, including related tax benefit (185)
Stock issued in Employee Stock Purchase Plan 3,822
401(k) employee stock purchase 656
Stock repurchase 1,060
Pacific Business Funding Corporation distribution (143)
Cash dividend $0.43 per share*** (1,163)
(4,382)
------------
Balance, December 31, 1997* 128,826
30,538
Net income (5,068)
Other comprehensive loss, net of taxes 4,025
Stock options exercised, including related tax benefit 1,031
Stock issued in Employee Stock Purchase Plan 1,205
401(k) employee stock purchase 171
Stock repurchase (40)
Pacific Business Funding Corporation distribution 18,961
Cash dividend $0.37 per share*** (6)
(6,048)
------------
Balance, December 31, 1998* $ 173,595
============
</TABLE>
*Restated on a historical basis to reflect the merger described in notes 1 and
2 on a pooling of interests basis.
** Restated to reflect 2-for-1 stock split declared for shareholders of record
at April 30, 1998.
*** Excluding dividends paid by Greater Bays subsidiaries prior to the
completion of their mergers with Greater Bay, in 1999, Bay Area Bancshares
declared dividends of $0.11 per share. In 1998, Bay Area Bancshares declared
dividends of $0.41 per share, Bay Commercial services declared dividends of
$0.40 per share and Pacific Business Funding Corporation made a distribution of
$1.2 million to its shareholders. In 1997, Bay Area Bancshares declared
dividends of $0.37 per share, Bay Commercial Services declared dividends of
$0.30 per share, Peninsula Bank of Commerce declared an annual dividend of $3.20
per share, Pacific Rim Bancorporation made a distribution of $208,000 to its
shareholders.
See notes to supplemental consolidated financial statements.
A-29
<PAGE>
<TABLE>
<CAPTION>
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------------------------
(Dollars in thousands) 1999* 1998* 1997*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows - operating activities
Net income $ 30,538 $ 21,554 $ 15,199
Reconcilement of net income to net cash from operations:
Provision for loan losses 15,809 7,342 8,892
Depreciation and amortization 5,787 2,882 2,398
Deferred income taxes (7,568) (3,523) (4,125)
(Gain) loss on sale of investments, net 18 (400) 8
(Gain) on sale of building (535) - -
Changes in: -
Accrued interest receivable and other assets (24,915) (10,889) (5,975)
Accrued interest payable and other liabilities 23,551 6,290 5,811
Deferred loan fees and discounts, net 2,200 526 441
--------- --------- --------
Operating cash flows, net 44,885 23,782 22,649
--------- --------- --------
Cash flows - investing activities
Maturities and partial paydowns on investment securities:
Held to maturity 78,770 66,495 31,475
Available for sale 57,982 553,060 89,678
Purchase of investment securities:
Held to maturity (95,041) (101,436) (25,765)
Available for sale (136,177) (870,525) (210,297)
Other securities (14,527) (3,760) (682)
Proceeds from sale of available for sale securities 25,366 203,898 15,595
Loans, net (598,024) (343,386) (225,104)
Purchase of property, premises and equipment (7,637) (3,423) (4,348)
Sale of banking building 2,668 - -
Investment in other real estate owned - 1,303 (500)
Purchase of insurance policies (9,206) (23,480) -
--------- --------- --------
Investing cash flows, net (695,826) (521,254) (329,948)
--------- --------- --------
Cash flows - financing activities
Net change in deposits 748,078 383,660 326,832
Net change in other borrowings - short term (15,569) (21,451) 12,831
Proceeds from other borrowings - long term 2,015 70,000 3,025
Principal repayment - long term borrowings (3,775) (2,265) (865)
Proceeds from company obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely junior
subordinated debentures - 30,000 20,000
Proceeds from sale of common stock 25,351 4,232 6,106
Exercise of common stock options 2 - 98
Stock split/cash paid in-lieu - - -
Cash dividends (6,048) (4,382) (4,871)
--------- --------- --------
Financing cash flows, net 750,054 459,794 363,156
--------- --------- --------
Net change in cash and cash equivalents 99,113 (37,678) 55,857
Cash and cash equivalents at beginning of period 239,285 276,963 221,106
--------- --------- ---------
Cash and cash equivalents at end of period $ 338,398 $ 239,285 $ 276,963
========= ========= =========
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 82,421 $ 55,828 $ 42,055
========= ========= =========
Income taxes $ 11,944 $ 13,285 $ 13,544
========= ========= =========
Non-cash transactions:
Additions to other real estate owned $ - $ 450 $ 1,723
========= ========= =========
Transfer of appreciated securities to Greater Bay
Bancorp Foundation $ 1560 $ 1,341 $ -
========= ========= =========
</TABLE>
*Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to consolidated supplemental financial statements.
A-30
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the
"Company" on a consolidated basis) is a bank holding company operating Bay Area
Bank ("BAB"), Bay Bank of Commerce ("BBC"), Cupertino National Bank ("CNB"),
Golden Gate Bank ("Golden Gate"), Mt. Diablo National Bank ("MDNB"), Mid-
Peninsula Bank ("MPB") and Peninsula Bank of Commerce ("PBC"). The Company also
owns GBB Capital I and GBB Capital II, both of which are Delaware statutory
business trusts, which were formed for the exclusive purpose of issuing and
selling Cumulative Trust Preferred Securities ("TPS"). Greater Bay also includes
the operating divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank
Fremont Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group,
Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater
Bay International Banking Division, Greater Bay Trust Company, Pacific Business
Funding and the Venture Banking Group. The Company provides a wide range of
commercial banking services to small and medium-sized businesses, real estate
developers, property managers, business executives, professionals and other
individuals. The Company operates throughout Silicon Valley, the San Francisco
Peninsula and the East Bay Region, with 22 offices located in Blackhawk,
Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Palo Alto,
Pleasanton, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San
Ramon, Santa Clara and Walnut Creek.
All of the company's mergers were accounted for as a pooling-of-interests
and, accordingly, all of the financial information for the Company for the
periods prior to the mergers had been restated as if the mergers had occurred at
the beginning of the earliest reporting period presented.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Greater Bay
and its wholly owned subsidiaries, BAB, BBC, CNB, Golden Gate, MDNB, MPB, PBC,
GBB Capital I and GBB Capital II and its operating divisions. All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior years' consolidated financial
statements to conform to the 1999 presentation. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
the prevailing practices within the banking industry.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
A-31
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, Federal Funds sold and agency securities
with original maturities of less than ninety days. Generally, Federal Funds are
sold for one-day periods. As discussed in Note 7, PBC holds $111.1 million in
one demand deposit account whose funds are comprised of proceeds from a lawsuit
settlement. Due to the uncertainty of the time this special deposit (the
"Special Deposit") will remain with PBC, management has invested a significant
portion of the proceeds in agency securities with maturities of less than 90
days. These securities have been classified as cash and equivalents. BAB, BBC,
CNB, Golden Gate, MDNB, MPB and PBC are required by the Federal Reserve System
to maintain noninterest-earning cash reserves against certain of their deposit
accounts. At December 31, 1999, the required combined reserves totaled
approximately $3.0 million.
Investment Securities
The Company classifies its investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Investment securities
classified as held to maturity are reported at amortized cost; available for
sale securities are reported at fair value with net unrealized gains and losses
reported (net of taxes) as a component of shareholders' equity. The Company
does not have any trading securities.
A decline in the fair value of any available for sale or held to maturity
security below cost that is deemed other than temporary, results in a charge to
earnings and the corresponding establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest method.
Dividend and interest income is recognized when earned. Realized gains and
losses for securities classified as available for sale and held to maturity are
included in earnings and are derived using the specific identification method
for determining the cost of securities sold.
Required investments in Federal Reserve Bank and Federal Home Loan Bank
stocks for the Banks are recorded at cost.
A-32
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Loans
Loans held for investment are carried at amortized cost. The Company's loan
portfolio consists primarily of commercial and real estate loans generally
collateralized by first and second deeds of trust on real estate as well as
business assets and personal property.
Interest income is accrued on the outstanding loan balances using the
simple interest method. Loans are generally placed on nonaccrual status when the
borrowers are past due 90 days and when full payment of principal or interest is
not expected. At the time a loan is placed on nonaccrual status, any interest
income previously accrued but not collected is generally reversed and
amortization of deferred loan fees is discontinued. Interest accruals are
resumed on such loans only when they are brought fully current with respect to
interest and principal and when, in the judgment of management, the loans are
estimated to be fully collectible as to both principal and interest.
The Company charges loan origination and commitment fees. Net loan
origination fees and costs are deferred and amortized to interest income over
the life of the loan, using the effective interest method. Loan commitment fees
are amortized to interest income over the commitment period.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the consolidated statements of operations. Other loan fees and
charges representing service costs for the repayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when earned.
Sale and Servicing of Small Business Administration ("SBA") Loans
The Company originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Company generally
sells the guaranteed portion of the majority of the loans to an investor and
retains the unguaranteed portion and servicing rights in its own portfolio.
Funding for the SBA programs depend on annual appropriations by the U.S.
Congress.
Gains on these sales are earned through the sale of the guaranteed portion
of the loan for an amount in excess of the adjusted carrying value of the
portion of the loan sold. The Company allocates the carrying value of such loans
between the portion sold, the portion retained and a value assigned to the right
to service the loan. The difference between the adjusted carrying value of the
portion retained and the face amount of the portion retained is amortized to
interest income over the life of the related loan using a method which
approximates the interest method.
Allowance for Loan Losses
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), on January
1, 1995. Under these standards, a loan is considered impaired, based on current
information and events, if it is probable that the Company will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Under these standards, any
allowance on impaired loans is generally based on one of three methods. It
requires that impaired loans be measured at either, 1) the present value of
expected cash flows at the loan's effective interest rate, 2) the loan's
observable market price, or 3) the fair value of the collateral of the loan. In
general, these statements are not applicable to large groups of smaller-balance
loans that are collectively evaluated for impairment such as credit cards,
residential mortgage, consumer installment loans and certain small business
loans. Income recognition on impaired loans conforms to the method the Company
uses for income recognition on nonaccrual loans.
A-33
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The allowance for loan losses is maintained at a level deemed appropriate
by management to adequately provide for known losses in the loan portfolio. The
allowance is based upon a number of factors, including prevailing and
anticipated economic trends, industry experience, estimated collateral values,
management's assessment of credit risk inherent in the portfolio, delinquency
trends, historical loss experience, specific problem loans and other relevant
factors.
Additions to the allowance, in the form of provisions, are reflected in
current operating results, while charge-offs to the allowance are made when a
loss is determined to have occurred. Because the allowance for loan losses is
based on estimates, ultimate losses may vary from the current estimates.
Other Real Estate Owned
Other real estate owned ("OREO") consists of properties acquired through
foreclosure and is stated at the lower of carrying value or fair value less
estimated costs to sell. Development and improvement costs relating to the OREO
are capitalized. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to current earnings with a provision
for losses on foreclosed property in the period in which they are identified.
The resulting allowance for OREO losses is decreased when the property is sold.
Operating expenses of such properties, net of related income, are included in
other expenses. Gains and losses on the disposition of OREO are included in
other income.
Property, Premises and Equipment
Property, premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on a straight-line basis
over the estimated useful lives of the assets, which is determined by asset
classification, as follows:
Buildings 40 years
Building improvements 10 years
Furniture and fixtures 7 years
Automobiles 5 years
Computer equipment 2 - 5 years
Other equipment 2 - 7 years
Amortization of leasehold improvements is computed on a straight-line basis
over the shorter of the lease term or the estimated useful lives of the asset,
which is generally 10 years.
Income Taxes
Deferred incomes taxes reflect the estimated future tax effects of
temporary differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
A-34
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Derivatives and Hedging Activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), effective October 1, 1998. In
accordance with the transition provisions of SFAS No. 133, the Company recorded
a net-of-tax cumulative-effect-type adjustment of $1.1 million in accumulated
other comprehensive income to recognize at fair value all derivatives that are
designated as cash-flow hedging instruments. There were no net gains or losses
on derivatives that had been previously deferred or gains and losses on
derivatives that were previously deferred as adjustments to the carrying amount
of hedged items.
All derivatives are recognized on the balance sheet at their fair value.
On the date the derivative contract is entered into, the Company designates the
derivative as a hedge of a forecasted transaction or a hedge of the variability
of cash flows to be received or paid related to a recognized asset or liability
("cash flow" hedge). Changes in the fair value of a derivative that is highly
effective as, and that is designated and qualifies as, a cash-flow hedge are
recorded in other comprehensive income, until earnings are affected by the
variability of cash flows (e.g., when periodic settlements on a variable-rate
asset or liability are recorded in earnings).
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as cash-flow hedges to specific
liabilities on the balance sheet. The Company also formally assesses, both at
the hedge's inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items.
When it is determined that a derivative is not highly effective as a hedge
or that it has ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively when (1) it is determined that the derivative is
no longer effective in offsetting changes in the cash flows of a hedged item;
(2) the derivative expires or is sold, terminated, or exercised; or (3)
management determines that designation of the derivative as a hedge instrument
is no longer appropriate. In these situations where hedge accounting is
discontinued, the derivative will be carried at its fair value on the balance
sheet, with changes in its fair value recognized in current-period earnings.
All gains or losses that were accumulated in other comprehensive income will be
recognized immediately in earnings upon the discontinuance of hedge accounting.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires companies to classify items of
other comprehensive income by their nature in the financial statements and
display the accumulated other comprehensive income separately from retained
earnings in the equity section of the balance sheet. The changes to the
balances of accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - December 31, 1997 $ 217 $ - $ 217
Other comprehensive income 1998 492 (677) (185)
-------------------------------------------------
Balance - December 31, 1998 709 (677) 32
Other comprehensive income 1999 (7,249) 2,181 (5,068)
-------------------------------------------------
Balance - December 31, 1999 $ (6,540) $ 1,504 $ (5,036)
=================================================
</TABLE>
A-35
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Segment Information
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information.
NOTE 2-MERGERS
Completed Mergers
On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former
holding company of Mt. Diablo National Bank ("MDNB"), merged with and into
Greater Bay. Upon consummation of the merger, the outstanding shares of MD
Bancshares were converted into an aggregate of 1,395,499 shares of Greater Bay's
stock. The stock was issued to MD Bancshares' shareholders in a tax-free
exchange. The transaction was accounted for as a pooling-of-interests. The
financial information presented herein has been restated to reflect the merger
with MD Bancshares on a pooling-of-interests basis.
On October 15, 1999, Bay Commercial Services ("BCS"), the parent of Bay
Bank of Commerce, merged with and into Greater Bay. Upon consummation of the
merger, the outstanding shares of BCS were converted into an aggregate of
907,240 shares of Greater Bay's stock. The stock was issued to former BCS
shareholders, in a tax-free exchange accounted for as a pooling-of-interests.
On May 21, 1999, Bay Area Bancshares ("BA Bancshares"), the former holding
company of Bay Area Bank, merged with and into Greater Bay. Upon consummation
of the merger, the outstanding shares of BAB were converted into an aggregate of
1,399,321 shares of Greater Bay's stock. The stock was issued to former BA
Bancshares shareholders, in a tax-free exchange accounted for as a pooling-of-
interests.
On August 31, 1998, Pacific Business Funding Corporation ("PBFC"), an
asset-based specialty finance company, merged with a subsidiary of Greater Bay.
Upon consummation of the merger, the outstanding shares of PBFC were converted
into an aggregate of 298,000 shares of Greater Bay's stock. The stock was issued
to former PBFC shareholders, in a tax-free exchange accounted for as a pooling-
of-interests.
On May 8, 1998, Pacific Rim Bancorporation ("PRB"), the former holding
company of Golden Gate, merged with and into Greater Bay. Upon consummation of
the merger, the outstanding shares of PRB were converted into an aggregate of
950,748 shares of Greater Bay's stock. The stock was issued to former PRB's sole
shareholder in a tax-free exchange accounted for as a pooling-of-interests.
On December 23, 1997, PBC merged with a subsidiary of Greater Bay. Upon
consummation of the merger, the outstanding shares of PBC were converted into an
aggregate of 1,328,000 shares (as adjusted to reflect the 2-for-1 stock split)
of Greater Bay's stock. The stock was issued to former PBC shareholders, in a
tax-free exchange accounted for as a pooling-of-interests.
A-36
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Pending Mergers (unaudited)
On December 14, 1999, Greater Bay and Coast Bancorp, the holding company of
Coast Commercial Bank ("CCB"), a California state chartered bank, signed a
definitive agreement for a merger between the two companies. The agreement
provides for Coast Bancorp shareholders to receive approximately 3,105,000
shares of Greater Bay stock subject to certain adjustments based on movements
in Greater Bay's stock price, in a tax-free exchange to be accounted for as a
pooling-of-interests. The transaction is expected to be completed in the second
quarter of 2000 subject to regulatory and shareholder approvals. As of and for
the year ended December 31, 1999, Coast Bancorp had $17.2 million in net
interest income, $4.4 million in net income, $370.0 million in assets, $300.6
million in deposits and $33.0 million in shareholders' equity.
On January 26, 2000, Greater Bay, Bank of Santa Clara ("BSC") and GBB
Merger Corp. signed a definitive agreement for a merger between BSC and GBB
Merger Corp., as a result of which BSC will become a wholly owned subsidiary of
Greater Bay. The agreement provides for BSC shareholders to receive
approximately 2,017,000 shares of Greater Bay stock subject to certain
adjustments based on movements in Greater Bay's stock price in a tax-free
exchange to be accounted for as a pooling-of-interests. The transaction is
expected to be completed in the second quarter of 2000 subject to regulatory and
shareholder approvals. As of and for the year ended December 31, 1999, BSC had
$20.0 million in net interest income, $6.9 million in net income, $326.9 million
in assets, $293.7 million in deposits and $31.4 million in shareholders' equity.
A-37
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth the separate results of operations for
Greater Bay, BA Bancshares, BCS, PBFC, PRB and MD Bancshares for the periods
indicated:
<TABLE>
<CAPTION>
Year ended
December 31, Net Interest Income Net Income
- ------------ ------------------- ----------
(Dollars in thousands)
<S> <C> <C>
1999
----
Greater Bay $ 103,732 $ 27,711
MD Bancshares 10,009 2,827
--------- --------
Combined $ 113,741 $ 30,538
========= ========
1998
----
Greater Bay $ 65,448 $ 16,578
BA Bancshares 8,170 2,365
Bay Commercial Services 6,107 1,215
--------- --------
Subtotal 79,725 20,158
MD Bancshares 7,363 1,396
--------- --------
Combined $ 87,088 $ 21,554
========= ========
1997
----
Greater Bay $ 47,776 $ 10,013
PRB 4,750 996
PBFC 1,942 610
BA Bancshares 6,781 1,805
Bay Commercial Services 5,389 1,062
--------- --------
Subtotal 66,638 14,486
MD Bancshares 4,295 714
--------- --------
Combined $ 70,933 $ 15,200
========= ========
</TABLE>
Assuming the acquisitions of MD Bancshares, Coast Bancorp and BSC had been
completed at December 31, 1999, Greater Bay would have had, on a pooled basis,
1999 proforma net interest income of $150.9 million net income, on a pooled
basis of $41.8 million.
In all mergers, certain reclassifications were made to conform to the
Company's financial presentation. The results of operations previously reported
by the separate enterprises for the periods before the merger was consummated
and that are included in the current combined amounts presented in the
accompanying consolidated financial statements are summarized below.
A-38
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth the composition of the operations of the
Company and BCS, BA Bancshares, PBFC, PBC, PRB and MD Bancshares for the periods
indicated.
<TABLE>
<CAPTION>
MD Bancshares BCS BA Bancshares PBFC
Twelve months ended Nine months ended Three months ended Six months ended
(Dollars in thousands) December 31,1999 September 30, 1999 March 31, 1999 June 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Interest Income:
Greater Bay Bancorp $ 103,732 $ 68,498 $ 18,360 $ 30,077
Acquired Entity 10,009 2,007 2,180 1,154
--------- -------- -------- --------
Combined $ 113,741 $ 70,505 $ 20,540 $ 31,231
--------- -------- -------- --------
Net Income:
Greater Bay Bancorp $ 27,711 $ 17,033 $ 5,058 $ 6,628
Acquired Entity 2,827 486 644 344
-------- ------- -------- --------
Combined $ 30,538 $ 17,519 $ 5,702 $ 6,972
-------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
PRB PBC
Three months ended Nine months ended
March 31, 1998 September 30, 1997
-------------------------------------------
<S> <C> <C>
Net Interest Income:
Greater Bay Bancorp $ 13,366 $ 27,922
Acquired Entity 1,285 6,851
-------- --------
Combined $ 14,651 $ 34,773
-------- --------
Net Income:
Greater Bay Bancorp $ 3,646 $ 6,097
Acquired Entity 60 2,573
-------- --------
Combined $ 3,706 $ 8,670
-------- --------
</TABLE>
There were no significant transactions between the Company and any of the
acquired entities prior to the mergers. All intercompany transactions have been
eliminated.
A-39
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 3-INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities is
summarized below:
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1999 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 11,675 $ - $ (90) 11,585
U.S. agency notes 28,848 6 (886) 27,969
Mortgage-backed securities 168,733 1 (4,946) 163,787
Tax-exempt securities 40,622 53 (2,413) 38,263
Corporate securities 101,469 - (10,940) 90,529
------------------------------------------------------
Total securities available for sale 351,347 60 (19,275) 332,133
------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 - - 500
U.S. agency notes 29,482 - (667) 28,815
Mortgage-backed securities 59,524 28 (2,018) 57,534
Tax-exempt securities 52,219 123 (2,710) 49,632
------------------------------------------------------
Total securities held to maturity 141,725 151 (5,395) 136,481
------------------------------------------------------
Other securities 13,168 8,143 - 21,311
------------------------------------------------------
Total investment securities $ 506,240 $ 8,354 $ (24,670) $ 489,925
======================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
As of December 31, 1998 Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 17,573 $ 55 $ - $ 17,628
U.S. agency notes 37,213 47 (8) 37,252
Mortgage-backed securities 164,578 1,081 (81) 165,578
Tax-exempt securities 38,124 664 - 38,788
Corporate securities 55,168 60 (604) 54,624
-------------------------------------------------------
Total securities available for sale 312,656 1,907 (693) 313,870
-------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 1,764 2 (2) 1,764
U.S. agency notes 28,495 22 (58) 28,459
Mortgage-backed securities 37,967 174 (207) 37,934
Tax-exempt securities 33,882 1,004 (15) 34,871
-------------------------------------------------------
Total securities held to maturity 102,108 1,202 (282) 103,028
-------------------------------------------------------
Other securities 6,587 - - 6,587
-------------------------------------------------------
Total investment securities $ 421,351 $ 3,109 $ (975) $ 423,485
=======================================================
</TABLE>
A-40
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The following table shows amortized cost and estimated fair value of the
Company's investment securities by year of maturity as of December 31, 1999.
<TABLE>
<CAPTION>
2001 2005
Through Through 2010 and
(Dollars in thousands) (1) 2000 2004 2009 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations $ 5,125 $ 6,550 $ - $ - $ 11,675
U.S. agency notes (2) 1,254 17,812 9,782 - 28,848
Mortgage-backed securities (3) 1,023 6,882 5,734 155,094 168,733
Tax-exempt securities 891 7,243 5,114 27,374 40,622
Corporate securities 996 - - 100,473 101,469
----------------------------------------------------------------------
Total securities available for sale 9,289 38,487 20,630 282,941 351,347
----------------------------------------------------------------------
Fair value $ 9,238 $ 38,580 $ 19,888 $ 264,427 $ 332,133
----------------------------------------------------------------------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations 500 - - - 500
U.S. agency notes (2) 2,000 23,993 3,490 - 29,483
Mortgage-backed securities (3) 75 2,082 9,082 48,285 59,524
Tax-exempt securities 996 3,130 11,670 36,422 52,218
----------------------------------------------------------------------
Total securities held to maturity 3,571 29,205 24,242 84,707 141,725
----------------------------------------------------------------------
Fair value 3,564 28,616 24,024 80,277 136,481
----------------------------------------------------------------------
COMBINED INVESTMENT SECURITIES PORTFOLIO:
Total investment securities $ 12,860 $ 67,692 $ 44,872 $ 367,648 $ 493,072
----------------------------------------------------------------------
Total fair value $ 12,802 $ 67,196 $ 43,912 $ 344,704 $ 468,614
----------------------------------------------------------------------
Weighted average yield-total portfolio 0.00% 0.00% 0.00% 0.00% 0.00%
(1) Other securities are comprised of equity investments and have no stated maturity and therefore are
excluded from this table.
(2) Certain notes issued by U.S. Agencies may be called, without penalty, at the discretion of the
issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates.
(3) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed
securities may differ due to principal prepayments.
</TABLE>
A-41
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Investment securities with a carrying value of $227.8 million and $131.7
million were pledged to secure deposits, borrowings and for other purposes as
required by law or contract at December 31, 1999 and 1998, respectively.
Other securities includes unsold shares received through the exercise of
warrant received from clients, equity securities received in settlement of loans
and, investments in the FRB and the FHLB are required in order to maintain
membership and support activity levels.
Proceeds and realized losses and gains on sales of investment securities
for the years ended December 31, 1999, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sale of
available for sale
securities (1) $ 25,366 $ 203,898 $ 15,595
Available for sale
securities-gains (losses) (2) $ (18) $ 400 $ (8)
</TABLE>
(1) Proceeds from the sale of available excludes $15.3 million related to the
sale of equity securities classified for sale securities as available for
sale which were acquired through the execution of a warrant received from
clients.
(2) Warrant income includes additional gains of $21.2 million related to equity
securities classified as available for sale which were acquired through the
execution of warrants received from clients.
NOTE 4--LOANS AND ALLOWANCE FOR LOAN LOSSES
The following summarizes the activity in the allowance for loan losses for
the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 25,960 $ 19,954 $ 13,150
Provision for loan losses (1) 15,809 7,342 8,892
Loan charge-offs (2,654) (1,823) (2,217)
Recoveries 1,306 487 129
------------------------------------
Balance, December 31 $ 40,421 $ 25,960 $ 19,954
====================================
</TABLE>
(1) Includes $2.7 million and $183,000, and $1.4 million of charges in 1999,
1998 and 1997, respectively, to conform accounting practices for the Banks'
reserve methodologies and is included in merger and related nonrecurring
costs in the consolidated statements of operations
A-42
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The following table sets forth nonperforming loans as of December 31, 1999,
1998 and 1997. Nonperforming loans are defined as loans which are on nonaccrual
status, loans which have been restructured, and loans which are 90 days past due
but are still accruing interest. Interest income foregone on nonperforming loans
totaled $236,000, $126,000, and $584,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Interest income recognized on the nonperforming
loans approximated $291,000, $80,000, and $206,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonaccrual loans $ 4,418 $ 2,118 $ 4,026
Accruing loans past due
90 days or more 51 - 158
Restructured loans 807 796 1,533
-----------------------------------
Total nonperforming loans $ 5,276 $ 2,914 $ 5,717
===================================
</TABLE>
At December 31, 1999 and 1998, the recorded investment in loans, for which
impairment has been recognized in accordance with SFAS No. 114 and No. 118, was
approximately $1.4 million and $2.5 million, respectively, with corresponding
valuation allowances of $365,000 and $802,000 respectively. For the years ended
December 31, 1999 and 1998, the average recorded investment in impaired loans
was approximately $1.0 million and $ 4.2 million, respectively.
The Company did not recognize interest income on impaired loans during the
twelve months ended December 31, 1999, 1998 and 1997.
The Company had $807,000 and $796,000 of restructured loans as of December
31, 1999 and 1998, respectively. There were no principal reduction concessions
allowed on restructured loans during 1999 and 1998. Interest income from
restructured loans totaled $45,000, $16,000 and $82,000 for the years ended
December 31, 1999, 1998 and 1997. Foregone interest income, which totaled $0,
$11,000 and $10,000 for the years ended December 31, 1999, 1998 and 1997 would
have been recorded as interest income if the loans had accrued interest in
accordance with their original terms prior to the restructurings.
A-43
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 5--OTHER REAL ESTATE OWNED
At December 31, 1999 and 1998, other real estate owned ("OREO") consisted
of properties acquired through foreclosure with a carrying value of $271,000 and
$966,000 million, respectively. These balances are included in interest
receivable and other assets in the accompanying consolidated balance sheets.
There was no allowance for estimated losses.
The following summarizes OREO operations, which are included in operating
expenses, for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real estate operations, net $ 50 $ 77 $ 247
Gain on sale of other real estate owned (37) (1) (124)
Provision for estimated losses - - 54
-----------------------------
Net loss from other real
estate operations $ 13 $ 76 $ 177
=============================
</TABLE>
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment at December 31, 1999 and 1998 are composed
of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,754 $ 2,301
Buildings and premises 4,860 4,901
Leasehold improvements 11,263 6,643
Furniture and equipment 19,888 16,416
Automobiles 306 339
---------------------
Total 38,071 30,600
Accumulated depreciation
and amortization (14,193) (12,426)
---------------------
Premises and equipment, net $ 23,878 $ 18,174
=====================
</TABLE>
Depreciation and amortization amounted to $4.1 million, $2.6 million and
$2.4 million for the years ended December 31, 1999, 1998 and 1997, respectively,
and have been included in occupancy and equipment expense in the accompanying
consolidated statements of operations.
During 1999, the Company sold bank premises with a carrying value of
$2,637,000 for $4,978,000 in a sale-leaseback transaction. The Company
recognized a pre-tax gain of $535,000 on the transaction. Gains of $1,806,000
have been deferred and will be recognized over the 10 year and 5 year terms of
the Company's leases.
A-44
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 7--DEPOSITS
Deposits as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Demand, noninterest-bearing $ 514,482 $ 379,743
MMDA, NOW and Savings 1,463,517 1,029,762
Time certificates, $100,000 and over 434,540 234,323
Other time certificates 93,847 114,479
-----------------------------
Total deposits $ 2,506,386 $ 1,758,307
=============================
</TABLE>
The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 1999.
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------
Seven to One to More
Three months Four to six twelve three than
(Dollars in thousands) or less months months years three years Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Time deposits, $100,000 and over $ 334,501 $ 65,199 $ 29,573 $ 5,017 $ 250 $ 434,540
Other time deposits 46,744 27,650 13,016 6,255 182 93,847
----------------------------------------------------------------------------------
Total $ 381,245 $ 92,849 $ 42,589 $ 11,272 $ 432 $ 528,387
==================================================================================
</TABLE>
At December 31, 1999 and 1998, the Company held $111.1 million and $ 89.6
million, respectively from a single depositor on which the Company earned a
spread of 3.1% and 2.25%, respectively. Due to the uncertainty of the time the
deposit will remain outstanding, management has invested a significant portion
in agency securities with maturities of less than 90 days.
NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
GBB Capital I and GBB Capital II (the "Trusts") are Delaware business
trusts wholly-owned by Greater Bay and were formed for the purpose of issuing
Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts Holding Solely Junior Subordinated Debentures ("TPS"). The TPS are
individually described below. Interest on the TPS are payable quarterly and is
deferrable, at the option of the Company, for up to five years. Following the
issuance of each TPS, the Trusts used the proceeds from the TPS offerings to
purchase a like amount of Junior Subordinated Deferrable Interest Debentures
(the "Debentures") of Greater Bay. The Debentures bear the same terms and
interest rates as the related TPS. The Debentures are the sole assets of the
Trusts and are eliminated, along with the related income statement effects, in
the consolidated financial statements. Greater Bay has fully and unconditionally
guaranteed all of the obligations of the Trusts. Under applicable regulatory
guidelines, a portion of the TPS will qualify as Tier I capital, and the
remaining portion will qualify as Tier II capital.
A-45
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
On March 30, 1997, GBB Capital I completed a public offering of 800,000
shares of 9.75% Cumulative Trust Preferred Securities ("TPS I") in an aggregate
amount of $20 million. The TPS I accrue interest at an annual rate of 9.75% on
the $20 million liquidation amount of $25 per share of TPS I. The TPS I are
mandatorily redeemable, in whole or in part, upon repayment of the Debentures at
their stated maturity of April 1, 2027 or their earlier redemption. The
Debentures are redeemable prior to maturity at the option of the Company, on or
after April 1, 2002, in whole at any time or in part from time to time.
On August 12, 1998, GBB Capital II completed an offering of 30,000 shares
of Floating Rate Trust Preferred Securities, Series A ("the Series A
Securities") in an aggregate amount of $30 million. The Series A Securities
issued in the offering were sold in a private transaction pursuant to an
applicable exemption from registration under the Securities Act. In November
1998, the Company, through GBB Capital II, completed an offer to exchange the
Series A Securities for a like amount of its registered Floating Rate Trust
Preferred Securities, Series B ("TPS II"). The exchange offer was conducted in
accordance with the terms of the initial issuance of the Series A Securities.
The TPS II accrue interest at a variable rate of interest, initially at 7.1875%,
on the liquidation amount of $1,000 per share of TPS II. The interest rate
resets quarterly and is equal to 3-month LIBOR plus 150 basis points. As part of
this transaction, the Company concurrently entered into an interest rate swap to
fix the cost of the offering at 7.55% for 10 years (see note 10). The TPS II
are mandatorily redeemable, in whole or in part, upon repayment of the
Debentures at their stated maturity of September 15, 2028 or their earlier
redemption. The Debentures are redeemable prior to maturity at the option of
the Company, on or after September 15, 2008, in whole at any time or in part
from time to time.
The total amount of TPS outstanding at December 31, 1999 and 1998 was $50
million and the dividends paid on TPS was $4.3 million, $2.8 million and $1.5
million in 1999, 1998 and 1997, respectively.
A-46
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 9--BORROWINGS
Other borrowings are detailed as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Other borrowings:
Short term borrowings:
Securities sold under agreements
to repurchase $ 40,100 $ 7,135
Other short term notes payable - 1,344
Advances under credit lines 7,000 500
---------------------
Total short term borrowings 47,100 8,979
---------------------
Long term borrowings:
Securities sold under agreements
to repurchase 10,000 50,000
FHLB advances 12,000 22,000
Promissory notes - 2,450
---------------------
Total other long term borrowings 22,000 74,450
---------------------
Total other borrowings $ 69,100 $ 83,429
=====================
Subordinated notes $ - $ 3,000
---------------------
Total subordinated debt $ - $ 3,000
=====================
</TABLE>
During the years ended December 31, 1999 and 1998, the average balance of
securities sold under short term agreements to repurchase was $14,772,192 and
$10,129,332, respectively, and the average interest rates during those periods
were 5.64% and 5.17%, respectively. Securities sold under short term agreements
to repurchase generally mature within 90 days of dates of purchase.
During the years ended December 31, 1999 and 1998, the average balance of
federal funds purchased was $186,302 and $428,554, respectively, and the average
interest rates during those periods were 5.29% and 5.35%, respectively. There
were no such balances outstanding at December 31, 1999 or 1998.
The Company has sold securities under long term agreements to repurchase
which mature in the year 2003 and have an average interest rate of 5.32%. The
counterparties to these agreements have put options which give them the right to
demand early repayment. As of December 31, 1999, $10.0 million of these
borrowings are subject to early repayment beginning in 2000.
The FHLB advances will mature in the year 2003 and have an average
interest rate of 5.47%. The advances are collateralized by securities pledged
to the FHLB. Under the terms of the advances, the FHLB has a put option which
gives it the right to demand early repayment beginning in 1999.
The short term notes payable, which bore an interest rate of 13.76% and
provided for maturity on April 15, 2000, were issued to PBFC's officers along
with other accredited investors within the definition of Rule 501 under the
Securities Act of 1933, as amended. The Company redeemed these notes in January
1999.
A-47
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
On March 15, 1999 the Company redeemed the $3.0 million in subordinated
debt issued in 1995. The Company paid a premium of $150,000 ($88,000 net of
tax) on the pay off of the debt. The premium was recorded, net of taxes, as an
extraordinary item in March 1999.
NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company currently uses a single interest-rate swap to convert its
floating-rate debt (the TPS II) to fixed rates. This swap was entered into
concurrently with the issuance of the debt being hedged. This swap is accounted
for as a cash flow hedge under SFAS No. 133. This swap possesses a term equal
to the non-callable term of the debt, with a fixed pay rate and a receive rate
indexed to rates paid on the debt and a notional amount equal to the amount of
the debt being hedged. As the specific terms and notional amount of the swap
exactly match those of the debt being hedged the Company meets the "no
ineffectiveness" criteria of SFAS No. 133. As such the swap is assumed to be
100% effective and all changes in the fair value of the hedge are recorded in
other comprehensive income with no impact on the income statement for any
ineffective portion. As of December 31, 1999, the unrealized gain on the cash
flow hedge was $1,528,000, net of income taxes, which was included in the
balance of accumulated other comprehensive income. The floating rate TPS II
combined with the cash flow hedge created a synthetic fixed rate debt
instrument. The unrealized gain on the cash flow hedge approximated the
unrealized gain the Company would have incurred if it had issued a fixed rate
debt instrument. Under current accounting practices, as required by SFAS No.
133, the Company was required to record the unrealized gain on the synthetic
fixed rate debt instrument, but it would not have been required to record an
unrealized gain if it had issued fixed rate debt.
The notional amount of the swap is $30.0 million with a term of 10 years
expiring on September 15, 2008. The Company intends to use the swap as a hedge
of the related debt for 10 years. The periodic settlement date of the swap
results in the reclassifying as earnings the gains or losses that are reported
in accumulated comprehensive income. For the year ended December 31, 1997, the
Company did not have any derivative instruments.
The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with high-quality counterparties that
are reviewed periodically by the Company's credit committee.
NOTE 11--INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 16,211 $ 10,560 $ 9,803
State 5,171 3,642 3,069
------------------------------------
Total current 21,382 14,202 12,872
------------------------------------
Deferred:
Federal (5,952) (2,807) (3,045)
State (1,616) (716) (1,091)
Reduction of tax due to utilization of NOL - - 11
------------------------------------
Total deferred (7,568) (3,523) (4,125)
------------------------------------
Total expense $ 13,814 $ 10,679 $ 8,747
====================================
</TABLE>
A-48
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that gave rise to significant portions of the deferred tax
assets and liabilities at December 31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
(Dollars in thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 13,107 $ 8,595
State income taxes 3,904 2,467
Deferred compensation 2,218 1,762
Unrealized losses on securities 7,246 4
Accumulated depreciation 191 (33)
Net operating losses 14 159
Purchase allocation adjustments 8 22
Other (53) (616)
-------------------------
Net deferred tax asset $ 26,635 $ 12,360
=========================
</TABLE>
Management believes that the Company will fully realize its total deferred
income tax assets as of December 31, 1999 based upon the Company's recoverable
taxes from prior carryback years, and its current level of operating income.
At December 31, 1999, the Company had a federal tax net operating loss
carryforward of approximately $40,000 expiring in the beginning of the year
2010.
Under provisions of the United States income tax laws these loss carryovers
are subject to limitation due to the acquisition of Pacific Rim Bancorporation
in 1998. Management does not believe that these limitations will prevent the
realization of the benefit of the loss carryovers during the carryover periods.
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31, 1999, 1998
and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35.0% 35.0% 35.0%
California franchise tax
expense, net of federal
income tax benefit 5.1% 5.9% 6.0%
--------------------------------------
40.1% 40.9% 41.0%
Tax exempt income -2.3% -2.3% -1.9%
Contribution of appreciated securities -6.2% -1.5% 0.0%
Nondeductible merger
costs 0.3% 1.0% 2.1%
Other, net -0.8% -5.0% -4.7%
--------------------------------------
Effective income tax rate 31.1% 33.1% 36.5%
======================================
</TABLE>
A-49
<PAGE>
NOTE 12--OTHER INCOME AND OPERATING EXPENSES
Other income in 1999, 1998 and 1997 included warrant income of $14.5
million, $945,000 and $1.2 million net of related employee incentives of $7.3
million, $396,000 and $500,000, respectively. The Company occasionally receives
warrants to acquire common stock from companies that are in the start-up or
development phase. The timing and amount of income derived from the exercise
and sale of client warrants typically depend upon factors beyond the control of
the Company, and cannot be predicted with any degree of accuracy and are likely
to vary materially from period to period. Occupancy costs for the years ended
December 31, 1999, 1998 and 1997 were $6.7 million, $5.5 million and $5.1
million, respectively.
Merger and other related nonrecurring costs for the years ended December
31, 1999, 1998 and 1997 were comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial advisory and professional fees $ 1,627 $ 1,101 $ 1,083
Charges to conform accounting practices 2,745 183 1,350
Other costs 5,959 1,377 900
---------------------------------------
Total $ 10,331 $ 2,661 $ 3,333
=======================================
</TABLE>
Other costs include severance and other compensation expenses, charges
for the write-off of assets retired as a result of the merger, and other
expenses including printing costs and filing fees.
A-50
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Other expenses for the years ended December 31, 1999, 1998 and 1997 were
comprised of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Telephone, postage and supplies $ 2,515 $ 2,192 $ 1,785
Legal and other professional fees 2,418 2,616 2,663
Marketing and promotion 1,771 1,439 1,507
Client services 1,374 806 625
Data processing 1,137 665 685
Directors fees 792 888 969
Insurance 491 402 375
FDIC insurance and regulatory
assessments 557 450 398
Other real estate owned 13 76 177
Other 5,711 5,908 4,536
---------------------------------------
$ 16,779 $ 15,442 $ 13,720
=======================================
</TABLE>
To support the Greater Bay Bancorp Foundation (the "Foundation"), the
Company contributed appreciated securities, which had an unrealized gain of $7.8
million in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4
million in compensation and other expenses in connection with these appreciated
securities. The Company recorded $12.2 million in 1999 and $1.3 million in 1998
of expense for the contribution to the Foundation, which is included in
operating expenses.
In July 1995, the Company settled a lawsuit of $1.1 million, net of tax.
The Company recovered those losses through insurance coverage for this
settlement in 1997. However, due to the uncertainty associated with the
recovery, the Company reflected the settlement expense as a charge to 1995
earnings, and the associated recovery in 1997 as a recovery to earnings.
NOTE 13--EMPLOYEE BENEFIT PLANS
Stock Option Plan
On November 19, 1997, the Company's shareholders approved an amendment of
the Greater Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan"), to increase
by 912,652 the number of shares of Greater Bay stock issuable under the Bancorp
Plan. This was done to accommodate the increased number of eligible employees as
a result of the merger with PBC.
Under the terms of the respective mergers, all stock option plans of MDNB,
BAB and BBC were terminated at the time of merger and all outstanding options
from these plans were assumed by the Bancorp Plan. Outstanding options from the
MDNB plan of 72,714 converted at a ratio of 0.9532, outstanding options from the
BAB plan of 29,834 (converted at a ratio of 1.38682) and outstanding options
from the BBC Plan of 108,318 (converted at a ratio of 0.6833) were assumed by
the Bancorp Plan.
Options issued under the Bancorp Plan may be granted to employees and
nonemployee directors and may be either incentive or nonqualified stock options
as defined under current tax laws. The exercise price of each option must equal
the market price of the Company's stock on the date of grant. The term of an
option may not exceed 10 years and generally vests over a five year period.
A-51
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
At December 31, 1999 the total authorized shares issuable under the Bancorp
Plan was approximately 2,279,000 shares and the number of shares available for
future grants was approximately 110,000 shares.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the
provisions of SFAS No. 123, the Company is encouraged, but not required, to
measure compensation costs related to its employee stock compensation plans
under the fair value method. If the Company elects not to recognize compensation
expense under this method, it is required to disclose the pro forma net income
and net income per share effects based on the SFAS No. 123 fair value
methodology. The Company implemented the requirements of SFAS No. 123 in 1997
and has elected to adopt the disclosure provisions of this statement.
At December 31, 1999, the Company had one stock option plan, which is
described above. The Company applies Accounting Principles Board ("APB") Opinion
No. 25 and related interpretations in accounting the Bancorp Plan. Accordingly,
no compensation cost has been recognized for its stock option plan. Had
compensation for the Company's stock option plan been determined consistent with
SFAS No. 123, the Company's net income per share would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
(Dollars in thousands, except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported $30,538 $21,554 $15,199
Pro forma $28,048 $19,883 $14,495
Basic net income per share
As reported $ 2.29 $ 1.65 $ 1.24
Pro forma $ 2.11 $ 1.52 $ 1.17
Diluted net income per share
As reported $ 2.15 $ 1.53 $ 1.17
Pro forma $ 1.98 $ 1.41 $ 1.11
</TABLE>
A-52
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1999, 1998 and 1997, respectively; dividend yield of
1.5%, 1.75% and 1.8%; expected volatility of 29.69%, 39.84% and 22.9%; risk free
rates of 6.29%, 4.54% and 6.3%. The weighted average expected life is 5 years.
No adjustments have been made for forfeitures. The actual value, if any, that
the option holder will realize from these options will depend solely on the
increase in the stock price over the option price when the options are
exercised.
A summary of the Company's stock option plan as of December 31, 1999, 1998,
and 1997 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,137 $ 16.92 1,793 $ 10.81 1,514 $ 7.09
Granted 672 37.65 626 30.50 502 18.65
Exercised (259) 8.87 (250) 7.15 (194) 5.07
Forfeited (71) 25.12 (32) 16.38 (29) 7.76
-----------------------------------------------------------------------------------------
Outstanding at end of year 2,479 23.14 2,137 16.92 1,793 10.86
-----------------------------------------------------------------------------------------
Options exercisable at year-end 1,085 12.02 1,052 8.59 1,063 7.21
-----------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $ 12.22 $ 11.96 $ 6.27
------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999 (as adjusted for the 2-for-1 stock split).
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------------------
Number
Exercise Outstanding Weighted Average Weighted Average
Price Range (000's) Exercise Price Remaining Life (years)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$3.06 - $5.25 118 $ 3.93 3.11
$5.30 - $9.38 608 7.29 4.86
$10.88 - $17.31 264 13.07 7.28
$21.13 - $29.50 358 25.30 8.17
$29.56 - $35.03 504 33.49 8.96
$35.88 - $40.81 592 38.50 9.96
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
- -------------------------------------------
Number
Exercisable Weighted Average
(000's) Exercise Price
- -------------------------------------------
<S> <C>
107 $ 4.31
513 7.03
258 12.17
115 24.88
90 33.58
1 39.50
</TABLE>
401(k) Savings Plan
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary (up to 15%) as a
contribution to the plan. The Company matches the employees' contributions at a
rate set by the Board of Directors (currently 62.5% of the first 8% of deferral
of an individual's total compensation). The matching contribution vests ratably
over the first four years of employment.
For the years ended December 31, 1999, 1998 and 1997, the Company
contributed $1,111,000, $849,000 and $699,000, respectively to the 401(k) plan.
A-53
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Employee Stock Purchase Plan
The Company has established an Employee Stock Purchase Plan, as amended,
under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 15% of their compensation toward the purchase of
the Company's stock for an aggregate total of 267,868 shares. Under the plan
the purchase price is 85% of the lower of the fair value at the beginning or
end of each three month offering period. During 1999, employees purchased
41,651 shares of common stock for an aggregate purchase price of $1,031,000
compared to the purchase of 29,670 shares of common stock for an aggregate
purchase price of $656,000 in 1998 and 30,320 shares of common stock for an
aggregate purchase price of $347,000 in 1997. There were 62,995 shares
remaining in the plan available for purchase by employees at December 31,
1999.
All share amounts have been restated to reflect the 2-for-1 stock split
declared to shareholders of record as of April 30, 1998.
Supplemental Employee Compensation Benefits Agreements
The Company has entered into supplemental employee compensation benefits
agreements with certain executive and senior officers. Under these agreements,
the Company is generally obligated to provide for each such employee or their
beneficiaries, during their life for a period of up to 15 to 20 years after the
employee's disability or retirement, benefits as defined in each specific
agreement. The agreement also provides for a death benefit for the employee. The
estimated present value of future benefits to be paid is being accrued over the
vesting period of the participants. The related accumulated accrued liability of
at December 31, 1999 and 1998 is approximately $3.0 million and $2.2 million,
respectively. The actuarial assumptions used for determining the present value
of the projected benefit obligation include a 7% discount rate. Expenses accrued
for this plan for the years December 31, 1999, 1998 and 1997 totaled $800,000,
$540,000 and $503,000, respectively. Depending on the agreement, the Company and
the employees are beneficiaries of life insurance policies that have been
purchased as a method of financing the benefits under the agreements. At
December 31, 1999 and 1998, the Company's cash surrender value of these policies
was approximately $43.8 million and $32.0 million, respectively and is included
in other assets. The income recognized on these policies was $1.4 million,
$870,000 and $325,000 in 1999, 1998 and 1997, respectively, and is included in
other income.
Deferred Compensation Plan
Effective November 19, 1997, the Company adopted the Greater Bay Bancorp
1997 Elective Deferral Compensation Plan (the "Deferred Plan") that allows
eligible officers and directors of the Company to defer a portion of their
bonuses, director fees and other compensation. The deferred compensation will
earn interest calculated annually based on a short-term interest reference rate.
All participants are fully vested at all times in their contributions to the
Deferred Plan. At December 31, 1999 and 1998, $1.9 million and $834,000,
respectively, of deferred compensation under this plan is included in other
liabilities in the accompanying consolidated balance sheets.
Additionally, under deferred compensation agreements that were established
at PBC prior to its merger with the Company, there was approximately $814,000
and $1.1 million of deferred compensation which is included in other liabilities
at December 31, 1999 and 1998, respectively.
Change in Control
In the event of a change in control, the supplemental employee compensation
benefits agreements with certain executive and senior officers may require the
Company to make certain payments under those agreements. The Company also has
plans in place which would require certain payments be made to any employee
whose employment is terminated pursuant to a change in control. These potential
liabilities are currently not recognized in the accompanying consolidated
financial statements.
A-54
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 14--RELATED PARTY TRANSACTIONS
The Company has, and expects to have in the future, banking transactions in
the ordinary course of business with directors, executive officers and their
affiliates. These transactions are entered into under terms and conditions
equal to those entered into in arms length transactions and are made subject to
approval by the Directors' Loan Committee and the Board of Directors of the Bank
extending the credit. An analysis of total loans to related parties for the
years ended December 31, 1999 and 1998 is shown below:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $ 42,084 $ 17,972
Additions 21,140 38,184
Repayments (40,807) (14,072)
----------------------
Balance, December 31 $ 22,417 $ 42,084
======================
Undisbursed commitments,
at year end $ 9,129 $ 7,302
======================
</TABLE>
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under all noncancelable operating leases as of
December 31, 1999 are below:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years Ended December 31,
- ----------------------------------------------------------------
<S> <C>
2000 $ 4,205
2001 4,708
2002 4,001
2003 2,319
2004 1,994
Thereafter 9,756
--------
Total $ 26,983
========
</TABLE>
A-55
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1999, 1998,
and 1997 was $821,000, $923,000, and $1.1 million, respectively. Gross rental
expense for the years ended December 31, 1999, 1998, and 1997 was $5.0 million,
$3.8 million, and $3.5 million, respectively.
Other Commitments and Contingencies
The Company occasionally receives warrants to acquire common stock from
borrowers that are in the start-up or development phase as consideration for
provided financing. As of December 31, 1999, the Company had a portion of its
warrants and common stock of these clients in escrow with an approximate fair
value of $2.8 million. These equity securities are being held in escrow for the
Company's benefit pending resolution of certain contingencies. Although
realization is not assured, Management believes it is more likely than not that
this amount will be realized. The amount considered realizable could be reduced
if stock prices of the companies fall.
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. Commitments to fund loans were $797.7 million and $607.2 million and
letters of credit were $50.9 million and $19.9 million, at December 31, 1999 and
1998, respectively. The Company's exposure to credit loss is limited to amounts
funded or drawn; however, at December 31, 1999, no losses are anticipated as a
result of these commitments.
Loan commitments which have fixed expiration dates and require the payment
of a fee are typically contingent upon the borrower meeting certain financial
and other covenants. Approximately $201.5 million of these commitments relate to
real estate construction and land loans and are expected to fund within the next
12 months. However, the remainder relates primarily to revolving lines of credit
or other commercial loans, and many of these commitments are expected to expire
without being drawn upon, therefore the total commitments do not necessarily
represent future cash requirements. The Banks evaluate each potential borrower
and the necessary collateral on an individual basis. Collateral varies, but may
include real property, bank deposits, debt or equity securities, or business
assets.
Stand-by letters of credit are conditional commitments written by the Banks
to guarantee the performance of a client to a third party. These guarantees are
issued primarily related to purchases of inventory by the Banks' commercial
clients, and are typically short-term in nature. Credit risk is similar to that
involved in extending loan commitments to clients, and the Banks accordingly use
evaluation and collateral requirements similar to those for loan commitments.
In the ordinary course of business there are various assertions, claims and
legal proceedings pending against the Company. Management is of the opinion that
the ultimate resolution of these proceedings will not have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
NOTE 16 - SHAREHOLDERS' RIGHTS PLAN
In 1998 Greater Bay adopted a shareholder rights plan designed to maximize
the long-term value of the Company and to protect the Company's shareholders
from improper takeover tactics and takeover bids that are not fair to all
shareholders.
A-56
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
In accordance with the plan, preferred share purchase rights were
distributed as a dividend at the rate of one right for each common share held of
record as of the close of business on November 28, 1998. The rights, which are
not immediately exercisable, entitle the holders to purchase one one-hundredth
of a share of Series A Preferred Stock at a price of $145.00 upon the occurrence
of certain triggering events. In the event of an acquisition not approved by
the Board, each right enables its holder (other than the acquirer) to purchase
the Preferred Stock at 50% of the market price. Further, in the event the
Company is acquired in an unwanted merger or business combination, each right
enables the holder to purchase shares of the acquiring entity at a similar
discount. Under certain circumstances, the rights may be exchanged for common
shares of the Company. The Board may, in its sole discretion, redeem the rights
at any time prior to any of the triggering events.
The rights can be exercised and separate rights certificates distributed
only if any of the following events occur: acquisition by a person of 10% or
more of the Company's common share; a tender offer for 10% or more of the
Company's common shares; or ownership of 10% or more of the Company's common
shares by a shareholder whose actions are likely to have a material adverse
impact on the Company or shareholder interests. The rights will initially trade
automatically with the common shares. The rights are not deemed by the Board of
Directors to be presently exercisable.
NOTE 17 - REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and regulatory framework for prompt corrective
action, the Banks must meet specific capital guidelines that involve
quantitative measures of the Banks' assets, liabilities and certain off-balance
sheet items as calculated under regulatory accounting practices. The Banks'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum capital amounts and ratios (as defined in
the regulations) and are set forth in the table below. At December 31, 1999 and
1998 the Company and the Banks met all capital adequacy requirements to which
they are subject.
A-57
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Under the FDICIA prompt corrective action provisions applicable to banks,
the most recent notification from the FDIC or OCC categorized each of the Banks,
with the exception of MDNB, as well-capitalized. To be categorized as well-
capitalized, the institution must maintain a total risk-based capital ratio as
set forth in the following table and not be subject to a capital directive
order. There are no conditions or events since that notification that
management believes have changed the risk-based capital category of any of the
Banks. The Company and the Banks' actual 1999 and 1998 capital amounts and
ratios are as follows:
<TABLE>
<CAPTION>
For Capital
As of December 31, 1999 Actual Adequacy Purposes
------------------- ------------------
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 252,481 10.55% $ 191,424 8.00%
Bay Area Bank 15,104 10.50 11,511 8.00
Bay Bank of Commerce 12,004 10.12 9,484 8.00
Cupertino National Bank 97,081 11.03 70,398 8.00
Golden Gate Bank 14,645 10.19 11,494 8.00
Mid-Peninsula Bank 65,923 10.02 52,656 8.00
Peninsula Bank of Commerce 22,458 10.86 16,544 8.00
Mt. Diablo National Bank 15,192 8.20 14,823 8.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 218,777 9.14% $ 95,712 4.00%
Bay Area Bank 13,285 9.23 5,756 4.00
Bay Bank of Commerce 10,507 8.86 4,742 4.00
Cupertino National Bank 82,337 9.36 35,199 4.00
Golden Gate Bank 12,846 8.94 5,747 4.00
Mid-Peninsula Bank 57,692 8.77 26,328 4.00
Peninsula Bank of Commerce 19,859 9.60 8,272 4.00
Mt. Diablo National Bank 12,875 6.95 7,411 4.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 218,777 7.85% $ 111,528 4.00%
Bay Area Bank 13,285 7.80 6,815 4.00
Bay Bank of Commerce 10,507 7.12 5,900 4.00
Cupertino National Bank 82,337 8.05 40,896 4.00
Golden Gate Bank 12,846 6.55 7,844 4.00
Peninsula Bank of Commerce 19,859 7.32 10,847 4.00
Mt. Diablo National Bank 12,875 7.76 7,828 4.00
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
-------------------------
Amount Ratio
-------------------------
<S> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp N/A
Bay Area Bank $ 14,398 10.00
Bay Bank of Commerce 11,856 10.00%
Cupertino National Bank 87,997 10.00
Golden Gate Bank 14,368 10.00
Mid-Peninsula Bank 65,820 10.00
Peninsula Bank of Commerce 20,680 10.00
Mt. Diablo National Bank 18,529 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp N/A
Bay Area Bank $ 8,634 6.00%
Bay Bank of Commerce 7,113 6.00
Cupertino National Bank 52,798 6.00
Golden Gate Bank 8,621 6.00
Mid-Peninsula Bank 39,492 6.00
Peninsula Bank of Commerce 12,408 6.00
Mt. Diablo National Bank 11,117 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp N/A
Bay Area Bank $ 8,519 5.00%
Bay Bank of Commerce 7,375 5.00
Cupertino National Bank 51,120 5.00
Golden Gate Bank 9,805 5.00
Mid-Peninsula Bank 38,604 5.00
Peninsula Bank of Commerce 13,559 5.00
Mt. Diablo National Bank 9,785 5.00
</TABLE>
<TABLE>
<CAPTION>
For Capital
As of December 31, 1998 Actual Adequacy Purposes
(Dollars in thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 199,441 11.99% $ 129,217 8.00%
Bay Area Bank 15,800 13.77 9,179 8.00
Bay Bank of Commerce 11,817 9.50 9,976 8.00
Cupertino National Bank 59,224 10.12 46,822 8.00
Golden Gate Bank 10,194 11.01 7,406 8.00
Mid-Peninsula Bank 47,111 11.51 32,747 8.00
Peninsula Bank of Commerce 18,256 12.37 11,809 8.00
Mt. Diablo National Bank 11,716 9.00 10,416 8.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $ 163,832 9.85% $ 64,608 4.00%
Bay Area Bank 14,365 12.52 4,590 4.00
Cupertino National Bank 48,845 8.35 23,411 4.00
Golden Gate Bank 9,036 9.76 3,703 4.00
Mid-Peninsula Bank 41,990 10.26 16,373 4.00
Peninsula Bank of Commerce 16,408 11.12 5,904 4.00
Mt. Diablo National Bank 10,115 7.77 5,208 4.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $ 163,832 7.93% $ 79,785 4.00%
Bay Area Bank 14,365 10.34 4,590 4.00
Bay Bank of Commerce 10,837 7.90 5,520 4.00
Cupertino National Bank 48,845 7.47 26,138 4.00
Golden Gate Bank 9,036 9.30 5,243 4.00
Mid-Peninsula Bank 41,990 8.54 15,927 3.00
Peninsula Bank of Commerce 16,408 6.65 9,759 4.00
Mt. Diablo National Bank 10,115 6.08 6,658 4.00
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalize
Under Prompt Corrective
Action Provisions
-----------------------
Amount Ratio
-----------------------
<S> <C> <C>
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp N/A
Bay Area Bank $ 11,474 10.00%
Bay Bank of Commerce 12,470 10.00
Cupertino National Bank 58,527 10.00
Golden Gate Bank 9,257 10.00
Mid-Peninsula Bank 40,963 10.00
Peninsula Bank of Commerce 14,761 10.00
Mt. Diablo National Bank 13,021 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp N/A
Bay Area Bank $ 6,885 6.00%
Bay Bank of Commerce 7,482 6.00
Cupertino National Bank 35,116 6.00
Golden Gate Bank 5,554 6.00
Mid-Peninsula Bank 24,560 6.00
Peninsula Bank of Commerce 8,857 6.00
Mt. Diablo National Bank 7,812 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp N/A
Bay Area Bank $ 6,948 5.00%
Bay Bank of Commerce 6,901 5.00
Cupertino National Bank 32,673 5.00
Golden Gate Bank 6,554 5.00
Mid-Peninsula Bank 26,544 5.00
Peninsula Bank of Commerce 12,198 5.00
Mt. Diablo National Bank 8,323 5.00
</TABLE>
A-58
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 18 - RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
Total dividends which may be declared by the Banks without receiving prior
approval from regulatory authorities are limited to the lesser of the Banks'
retained earnings or the net income of the Banks for the latest three fiscal
years, less dividends previously declared during that period.
The Banks are subject to certain restrictions under the Federal Reserve
Act, including restrictions on the extension of credit to affiliates. In
particular, the Banks are prohibited from lending to Greater Bay unless the
loans are secured by specified types of collateral. Such secured loans and other
advances from the Banks are limited to 10% of the Banks' shareholders' equity,
or a maximum of $20.5 million at December 31, 1999. No such advances were made
during 1999 or exist as of December 31, 1999.
A-59
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 19 - EARNINGS PER SHARE
Per Share Data
Net income per share is stated in accordance with SFAS No. 128 "Earnings
per Share". Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares plus common equivalent shares outstanding including
dilutive stock options. All years presented include the effect of the 2-for-1
stock split effective as of April 30, 1998.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the year ended December 31, 1999
--------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 30,538
Basic net income per share:
Income available to common shareholders 30,538 13,310,000 $ 2.29
Effect of dilutive securities:
Stock options - 879,000 -
-------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 30,538 14,189,000 $ 2.15
===========================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1998
--------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 21,554
Basic net income per share:
Income available to common shareholders 21,554 13,091,000 $ 1.65
Effect of dilutive securities:
Stock options - 956,000 -
-------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 21,554 14,047,000 $ 1.53
===========================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
--------------------------------------------
Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 15,199
Basic net income per share:
Income available to common shareholders 15,199 12,252,000 $ 1.24
Effect of dilutive securities:
Stock options - 776,000 -
-------------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 15,199 13,028,000 $ 1.17
===========================================
</TABLE>
A-60
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
There were options to purchase 517,000 shares and 89,000 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the years ended December
31, 1999 and 1998, respectively. There were no options that were considered
anti-dilutive during the year ended December 31, 1997.
Weighted average shares outstanding and all per share amounts included in
the consolidated financial statements and notes thereto are based upon the
increased number of shares giving retroactive effect to the 2000 merger with
MDNB at a 0.9532 conversion ratio, 1999 mergers with BCS at a 0.6833 conversion
ratio and BA Bancshares at a 1.38682 conversion ratio, the 1998 mergers with PRB
and PBFC at a total of 950,748 and 298,000 shares, respectively, and the 1997
merger with PBC at a 0.96550 conversion ratio.
NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
The financial statements of Greater Bay Bancorp (parent company only) are
presented below:
PARENT COMPANY ONLY--BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 1,599 $ 6,408
Investment in subsidiaries 205,849 152,857
Other investments 16,043 18,056
Subordinated debentures
issued by subsidiary - 3,000
Other assets 17,038 9,630
-----------------------
Total assets $ 240,529 $ 189,951
========================
Liabilities and
shareholders' equity:
Subordinated debt 58,547 54,547
Other liabilities 8,387 6,578
-----------------------
Total liabilities 66,934 61,125
Shareholders' equity:
Common stock 100,690 75,303
Accumulated other comprehensive income (5,036) 32
Retained earnings 77,941 53,491
-----------------------
Total shareholders' equity 173,595 128,826
-----------------------
Total liabilities and
shareholders' equity $ 240,529 $ 189,951
=======================
</TABLE>
A-61
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
PARENT COMPANY ONLY-INCOME STATEMENTS
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Interest income $ 489 $ 1,021 $ 400
Cash dividend from subsidiaries - 675 365
Other income - 71 501
--------------------------------
Total 489 1,767 1,266
--------------------------------
Expenses:
Interest expense 4,382 3,195 1,458
Salaries 15,684 8,908 5,978
Occupancy and equipment 3,820 2,031 1,218
Merger expenses 3,283 1,877 712
Other expenses 5,713 3,491 1,887
Less: rentals and fees received
from Banks (26,201) (15,866) (10,201)
--------------------------------
Total 6,681 3,636 1,052
--------------------------------
Income (loss) before taxes and equity
in undistributed net income of subsidiaries (6,192) (1,869) 214
Income tax benefit (2,663) (1,634) (249)
--------------------------------
Income (loss) before equity in undistributed
net income of subsidiaries (3,529) (235) 463
--------------------------------
Equity in undistributed net income of
subsidiaries 34,067 21,789 14,022
--------------------------------
Net income $ 30,538 $21,554 $14,485
================================
</TABLE>
A-62
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows-operating activities
Net income $ 30,538 $ 21,554 $ 14,485
Reconciliation of net income
to net cash from operations:
Equity in undistributed net
income of subsidiaries (34,067) (21,789) (14,022)
Net change in other assets (9,101) (4,584) (1,944)
Net change in other liabilities 4,422 2,140 2,442
-------------------------------------
Operating cash flow, net (8,208) (2,679) 961
-------------------------------------
Cash flows-investing activities
Purchases of available for sale
securities (20,825) (84,130) (8,293)
Proceeds from sale and maturities
of available for sale securities 20,980 71,939 3,156
Proceeds from sale of OREO - 407 -
Dividends from subsidiaries 4,166 3,449 3,617
Capital contribution to
the subsidiaries (27,218) (17,500) (13,818)
-------------------------------------
Investing cash flows, net (22,897) (25,835) (15,338)
-------------------------------------
Cash flows-financing activities
Net change in other borrowings - short term 7,000 - -
Proceeds from private placement of stock 18,954 - -
Proceeds from issuance of
subordinated debt - 30,000 20,618
Stock issued in dividend reinvestment plan 171 - -
Proceeds from exercise
of stock options and employees
stock purchases 6,259 5,323 2,985
Payment of cash dividends (6,088) (5,869) (4,643)
-------------------------------------
Financing cash flows, net 26,296 29,454 18,960
-------------------------------------
Net increase in cash and
cash equivalents (4,809) 940 4,563
Cash and cash equivalents
at the beginning of the year 6,408 5,468 905
Cash and cash equivalents ------------------------------------
at end of the year $ 1,599 $ 6,408 $ 5,468
====================================
</TABLE>
A-63
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
NOTE 21--FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments. The estimated fair value of financial
instruments of the Company as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Carrying Carrying
(Dollars in thousands) Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 107,591 $ 107,591 $ 89,759 $ 89,759
Short term investments 230,807 230,807 149,526 149,526
Investment securities 495,169 469,384 422,565 423,485
Loans, net 1,880,756 1,865,041 1,299,423 1,300,889
Accrued interest receivable 1,428 1,428 1,072 1,072
Financial liabilities:
Deposits:
Demand, noninterest-bearing 514,482 514,482 379,743 379,743
MMDA, NOW and Savings 1,463,517 1,463,517 1,029,762 1,029,762
Time certificates, $100,000 and over 434,540 430,460 234,323 246,562
Other time certificates 93,847 93,100 114,479 222,044
Other borrowings 69,100 68,409 83,429 85,000
Subordinated debt - - 3,000 2,999
Company obligated mandatory redeemable
preferred securities of subsidiary trust holding
solely junior subordinated debentures 50,000 49,468 50,000 48,829
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Cash Equivalents
The carrying value reported in the balance sheet for cash and cash
equivalents approximates fair value.
Investment Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer term investments, except certain state and
municipal securities, is estimated based on quoted market prices or bid
quotations from securities dealers.
A-64
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing fixed rate loans is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan. The fair value of performing variable rate loans is judged to
approximate book value for those loans whose rates reprice in less than 90 days.
Rate floors and rate ceilings are not considered for fair value purposes as the
number of loans with such limitations is not significant.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
Deposit Liabilities and Borrowings
The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities. The fair value of core
deposits does not reflect the market core deposits premium of approximately 10%-
12%. Additionally, the fair value of deposits does not include the benefit that
results from the low cost of funding provided by the Company's deposits as
compared to the cost of borrowing funds in the market.
Commitments to Extend Credit and Standby Letters of Credit
The majority of the Company's commitments to extend credit carry current
market interest rate if converted to loans. Because these commitments are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates the
recorded deferred fee amounts and is excluded from the table.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale, at one time, the Company's entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic condition, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have significant effect on
fair value estimates and have been considered in many of the estimates.
NOTE 22--ACTIVITY OF BUSINESS SEGMENTS
In 1998 the Company adopted SFAS No. 131. The prior year's segment
information has been restated to present the Company's two reportable segments,
community banking and trust operations.
A-65
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes
intersegment revenue, as well as charges allocating all corporate-headquarters
costs to each of its operating segments. Intersegment revenue is recorded at
prevailing market terms and rates and is not significant to the results of the
segments. This revenue is eliminated in consolidation. The Company evaluates
the performances of its segments and allocates resources to them based on net
interest income, other income, net income before income taxes, total assets and
deposits.
The Company is organized primarily along community banking and trust
divisions. Ten of the divisions have been aggregated into the "community
banking" segment. Community banking provides a range of commercial banking
services to small and medium-sized businesses, real estate developers, property
managers, business executives, professional and other individuals. The GBB
Trust division has been shown as the "trust operations" segment. The Company's
business is conducted principally in the U.S.; foreign operations are not
material.
The following table shows each segments key operating results and financial
position for the years ended or as of December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------ ------------------------
Community Trust Community Trust Community Trust
(Dollars in thousands) banking operations banking operations banking operations
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net interest income $ 117,265 $ 369 $ 87,657 $ 859 $ 70,984 $ 141
Other income 15,791 3,007 7,866 2,488 6,622 2,092
Operating expenses 35,908 2,863 36,372 2,429 36,429 1,966
Net income before income taxes (1) 96,725 121 58,361 918 40,714 267
Total assets 2,811,728 -- 2,012,297 -- 1,544,921 --
Deposits 2,448,555 57,831 1,690,768 67,539 1,308,326 66,321
Assets under management -- 697,435 -- 649,336 -- 577,746
</TABLE>
(1) Includes intercompany earnings alloaction charge which is eliminated in
consolidation
A-66
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Years Ended December 31, 1999, 1998 and 1997
A reconciliation of total segment net interest income and other income
combined, net income before income taxes, and total assets to the consolidated
numbers in each of these categories for the years ended December 31, 1999, 1998
and 1997 is presented below.
<TABLE>
<CAPTION>
As of and for Year Ended
December 31,
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income and other income
Total segment net interest income and other income $ 136,432 $ 98,870 $ 79,839
Parent company net interest income and other income (3,893) (1,357) 309
-----------------------------------------
Consolidated net interest income and other income $ 132,539 $ 97,513 $ 80,148
=========================================
Net income before taxes
Total segment net income before income taxes $ 96,846 $ 59,279 $ 40,981
Parent company net income before income taxes (32,393) (17,664) (9,486)
-----------------------------------------
Consolidated net income before income taxes $ 64,453 $ 41,615 $ 31,495
=========================================
Total assets
Total segment assets $2,811,728 $2,012,297 $1,544,921
Parent company segment assets 34,360 36,920 15,333
-----------------------------------------
Consolidated total assets $2,846,088 $2,049,217 $1,560,254
=========================================
</TABLE>
NOTE 22--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the summary results for the stated eight
quarters:
<TABLE>
<CAPTION>
December 31, September 30, June 30, March 31,
(Dollars in thousands, except per share data(1) --------------- ----------------- ------------------ --------------------
1999 1998 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $51,259 $35,859 $45,536 $35,522 $41,644 $32,787 $36,911 $30,504
Net interest income 30,105 21,278 29,969 20,661 24,551 19,418 22,107 18,457
Provision for loan losses 6,013 1,986 3,578 1,912 1,697 1,437 961 1,046
Other income 21,069 3,490 4,433 2,630 3,391 2,642 2,934 2,359
Other expenses 28,569 14,195 15,394 13,451 15,199 14,162 14,157 12,711
Income before taxes 16,592 8,587 12,430 7,928 11,046 6,451 9,923 7,066
Net income 9,524 5,959 7,853 5,342 4,347 4,152 5,987 4,708
Net income per share:
Basic $ 0.77 $ 0.51 $ 0.64 $ 0.45 $ 0.38 $ 0.36 $ 0.50 $ 0.41
Diluted $ 0.73 $ 0.47 $ 0.61 $ 0.42 $ 0.34 $ 0.33 $ 0.48 $ 0.38
</TABLE>
* Quarterly amounts have been restated on a historical basis to reflect the
mergers with BA Bancshares, Bay Commercial Services and MD Bancshares on a
pooling of interests basis.
A-67
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Greater Bay Bancorp:
We have audited the accompanying supplemental consolidated balance sheets of
Greater Bay Bancorp and its subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related supplemental consolidated statements of operations,
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of Greater Bay Bancorp and Mt. Diablo Bancshares on January 31, 2000,
which has been accounted for as a pooling of interests as described in Note 2 to
the supplemental consolidated financial statements. Accounting principles
generally accepted in the United States proscribe giving effect to a consummated
business combination accounted for by the pooling of interests method in
financial statements that do not include the date of consummation. These
financial statements do not extend through the date of consummation; however,
they will become the historical consolidated financial statements of Greater Bay
Bancorp and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Greater Bay Bancorp and its subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 31, 2000
A-68
