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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to .
Commission File No. 0-25034
GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)
California 77-0387041
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
2860 West Bayshore Road, Palo Alto, California 94303
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (650) 813-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
9.75% Cumulative Trust Preferred Securities of GBB Capital I
Guarantee of Greater Bay Bancorp with respect to the
9.75% Cumulative Trust Preferred Securities of GBB Capital I
Preferred Share Purchase Rights
(Title of classes)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Common Stock held by non-affiliates, based
upon the closing sale price of the Common Stock on January 23, 2001, as
reported on the Nasdaq National Market System, was approximately
$1,500,550,000. Shares of Common Stock held by each officer, director and
holder of 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. Such determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of January 23, 2001, 42,204,295 shares of the Registrant's Common Stock
were outstanding.
Document Incorporated By Reference: Part of Form 10K Into Which Incorporated:
----------------------------------- -----------------------------------------
Definitive Proxy Statement for Annual Meeting Part III
of Shareholders to be filed within 120 days
of the fiscal year ended December 31, 2000
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ANNUAL REPORT ON FORM 10-K
PART I
Discussions of certain matters contained in this Annual Report on Form 10-K
may constitute forward-looking statements within the meaning of the Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and as
such, may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in
which Greater Bay Bancorp (referred to as the "Company" or "we" when such
reference includes Greater Bay Bancorp and its subsidiaries, collectively,
"Greater Bay" when referring only to the parent company and "the Banks" when
referring only to Greater Bay's banking subsidiaries, Bay Area Bank, Bank of
Petaluma, Bank of Santa Clara, Bay Bank of Commerce, Coast Commercial Bank,
Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo
National Bank and Peninsula Bank of Commerce) operates, projections of future
performance, perceived opportunities in the market and statements regarding
the Company's mission and vision. The Company's actual results, performance
and achievements may differ materially from the results, performance and
achievements expressed or implied in such forward-looking statements. For a
discussion of some of the factors that might cause such a difference, see
"Item 1. Business--Factors That May Affect Future Results of Operations".
ITEM 1. BUSINESS.
Greater Bay Bancorp
Greater Bay is a bank holding company with 10 bank subsidiaries: Bank of
Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast
Commercial Bank, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula
Bank, Mt. Diablo National Bank and Peninsula Bank of Commerce.
GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV, which are
Delaware statutory business trusts formed for the exclusive purpose of issuing
and selling trust preferred securities, are also subsidiaries of the Company.
The Company also owns Matsco Lease Finance, Inc. II and Matsco Lease
Finance, Inc. III, which are special purpose corporations formed for the
exclusive purpose of securitizing leases and issuing lease-backed notes.
The Company also operates through the following 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, Matsco, 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 the San Francisco Bay Area including Silicon Valley, San Francisco
and the San Francisco Peninsula, the East Bay, Santa Cruz and Sonoma County,
with 37 full service banking offices located in Aptos, Blackhawk, Capitola,
Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Milpitas, Palo
Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco,
San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz, Scotts
Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville.
At December 31, 2000, the Company had total assets of $5.1 billion, total
loans, net, of $3.5 billion and total deposits of $4.2 billion.
1
History
Greater Bay became a multi-bank holding company as the result of the
November 1996 merger of Cupertino National Bancorp and Mid-Peninsula Bancorp.
Mid-Peninsula Bancorp was incorporated in 1984 under the name San Mateo County
Bancorp as the bank holding company of WestCal National Bank. In 1994, WestCal
National Bank was merged with Mid-Peninsula Bank, which commenced operations
in October 1987. Concurrently San Mateo County Bancorp changed its name to
Mid-Peninsula Bancorp. The name was then changed to Greater Bay Bancorp as a
result of the 1996 merger. On consummation of the November 1996 merger between
Cupertino National Bancorp and Mid-Peninsula Bancorp, we changed our name to
Greater Bay Bancorp and Cupertino National Bank became a wholly-owned
subsidiary. Cupertino National Bank commenced operations in May 1985.
Greater Bay has continued to expand its presence within its market area by
affiliating with other quality banking organizations, and select niche
financial services companies. In addition the Company has been successful in
opening key regional bank locations to respond to market and client demands,
while also selectively opening key new businesses that expand the Company's
product offerings.
The following provides a chronological listing of mergers that the Company
has completed since November 27, 1996:
Year
Former bank holding commenced
Date of merger Entity company operations
-------------- ------ ------------------- ----------
December 23, 1997 Peninsula Bank of Commerce none 1981
May 8, 1998 Golden Gate Bank Pacific Rim Bancorporation 1976
August 31, 1998 Pacific Business Funding Corporation(1) n/a 1995
May 21, 1999 Bay Area Bank Bay Area Bancshares 1979
October 15, 1999 Bay Bank of Commerce Bay Commercial Services 1981
January 31, 2000 Mt. Diablo National Bank Mt. Diablo Bancshares 1993
May 18, 2000 Coast Commercial Bank Coast Bancorp 1982
July 21, 2000 Bank of Santa Clara none 1973
October 13, 2000 Bank of Petaluma none 1987
November 30, 2000 The Matsco Companies, Inc.(2) n/a 1983
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(1) Operates as a division of Cupertino National Bank and conducts business
under the name Pacific Business Funding.
(2) Operates as a division of Cupertino National Bank and conducts business
under the name Matsco.
With the exception of the merger with The Matsco Companies, Inc., all of
these mergers were accounted for as a pooling-of-interests and, accordingly,
all of the financial information of 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 merger with The Matsco Companies,
Inc. was accounted for using the purchase accounting method and accordingly
The Matsco Companies, Inc.'s results of operations have been included in the
consolidated financial statements since the date of acquisition.
Company Goals
The Company strives to achieve seven primary goals. These goals include:
. Developing a greater banking presence throughout the San Francisco Bay
Area and other selected markets, primarily in Northern California, by
increasing the number of banking offices available to clients;
. Reaching a critical mass in the Company's market areas to meet the
competitive challenges of the banking and financial services industries;
. Maximizing the utilization of capital by increasing the float and
marketability of its common stock and, by virtue of its larger size,
obtaining access to lower cost capital;
2
. Realizing operating efficiencies through the acquisition of banking and
financial services companies under a holding company umbrella;
. Generating increased loan and fee income as a result of the higher
lending limits available to the combined entity;
. Leveraging marketing expense to improve the return on the combined
entity's marketing investment; and
. Enabling banking and financial services subsidiaries to cross-sell
services.
Super Community Banking Philosophy
In order to meet the demands of the increasingly competitive banking and
financial services industries, we have adopted a business philosophy referred
to as the "Super Community Banking Philosophy". Our Super Community Banking
Philosophy is based on our belief that banking clients value doing business
with locally managed institutions that can provide a full service commercial
banking relationship through an understanding of the clients' financial needs
and the flexibility to deliver customized solutions through our menu of
products and services. We also believe that banks who affiliate with Greater
Bay and implement our Super Community Banking Philosophy are better able to
build successful client relationships as the holding company provides cost
effective administrative support services while promoting bank autonomy and
flexibility in serving client needs.
To implement this philosophy, we operate each of our banking subsidiaries by
retaining their independent names and separate Boards of Directors. Our
banking subsidiaries have established strong reputations and client followings
in their market areas through attention to client service and an understanding
of client needs.
In an effort to capitalize on the identities and reputations of the Banks,
the Company currently intends to continue to market its services under each
Bank's name, primarily through each Bank's relationship managers. The primary
focus for the Banks' relationship managers is to cultivate and nurture their
client relationships. Relationship managers are assigned to each borrowing
client to provide continuity in the relationship. This emphasis on
personalized relationships requires that all of the relationship managers
maintain close ties to the communities in which they serve, so they are able
to capitalize on their efforts through expanded business opportunities for the
Banks.
While client service decisions and day-to-day operations are maintained at
the Banks, Greater Bay offers the advantages of affiliation with a multi-bank
holding company by providing expanded client support services, such as
increased client lending capacity, business cash management and international
trade finance services. In addition, Greater Bay provides centralized
administrative functions, including support in credit policy formulation and
review, investment management, data processing, accounting, loan servicing and
other specialized support functions. All of these centralized services are
designed to enhance the ability of the relationship manager to expand their
client relationship base.
Corporate Growth Strategy
The Company's primary goal is to become the preeminent independent financial
services company in Northern California. The Company's primary business
strategy is to focus on increasing its market share within the communities it
serves through continued internal growth. The Company also pursues
opportunities to expand its market share through select acquisitions that
management believes complement the Company's businesses. Management pursues
acquisition opportunities in contiguous and infill market areas. Consistent
with the Company's operating philosophy and growth strategy, Greater Bay
regularly evaluates opportunities to acquire banks and other financial
services companies that complement the Company's existing business, expand its
market coverage and share and enhance its client product offerings.
3
Greater Bay Bancorp's Family of Companies
The following provides a summary of all of the affiliated banks and
operating divisions of the Company.
Banks
Bank of Petaluma
Bank of Petaluma presently has four full service regional offices. At
December 31, 2000, Bank of Petaluma had total assets of $214.9 million, total
net loans of $122.7 million and total deposits of $180.2 million.
Bank of Santa Clara
Bank of Santa Clara presently has eight full service regional offices. At
December 31, 2000, Bank of Santa Clara had total assets of $416.9 million,
total net loans of $258.2 million and total deposits of $376.8 million.
Bay Area Bank
Bay Area Bank presently has one full service regional office. At December
31, 2000, Bay Area Bank had total assets of $207.4 million, total net loans of
$154.0 million and total deposits of $166.8 million.
Bay Bank of Commerce
Bay Bank of Commerce presently has three full service regional offices. At
December 31, 2000, Bay Bank of Commerce had total assets of $163.8 million,
total net loans of $123.2 million and total deposits of $133.7 million.
Coast Commercial Bank
Coast Commercial Bank presently has six full service regional offices. At
December 31, 2000, Coast Commercial Bank had total assets of $440.3 million,
total net loans of $217.2 million and total deposits of $315.9 million.
Cupertino National Bank
Cupertino National Bank presently has seven locations, including five full
service regional offices. At December 31, 2000, Cupertino National Bank had
total assets of $1.7 billion, total net loans of $1.3 billion and total
deposits of $1.3 billion.
Golden Gate Bank
Golden Gate Bank presently has one full service regional office. On December
31, 2000, Golden Gate Bank had total assets of $272.6 million, total net loans
of $173.4 million and total deposits of $225.4 million.
Mid-Peninsula Bank
Mid-Peninsula Bank presently has four full service regional offices. On
December 31, 2000, Mid-Peninsula Bank had total assets of $1.1 billion, total
net loans of $748.1 million and total deposits of $914.5 million.
Mt. Diablo National Bank
Mt. Diablo National Bank presently has four full service regional offices.
At December 31, 2000, Mt. Diablo National Bank had total assets of $333.4
million, total net loans of $182.1 million and total deposits of
$273.0 million.
4
Peninsula Bank of Commerce
Peninsula Bank of Commerce presently has one full service regional office.
On December 31, 2000, Peninsula Bank of Commerce had total assets of $296.3
million, total net loans of $210.3 million and total deposits of $259.8
million.
Operating Divisions
Greater Bay Bank Contra Costa Region and Greater Bay Bank Fremont Region
The Company believes that the East Bay has a tremendous potential for
growth. In order to establish a presence in the East Bay market, the Company
formed the Contra Costa and Fremont regional offices. Each of these offices
offers a full line of business banking services.
Greater Bay Bank Santa Clara Valley Commercial Banking Group
Greater Bay Bank Santa Clara Valley Commercial Banking Group offers a full
line of business banking services, catering to the needs of small to medium-
sized businesses, professional firms and the executives who own and operate
their business. The services include a full range of deposit accounts, cash
management and credit facilities custom-tailored to meet the specific needs of
its clients.
Greater Bay Bank SBA Lending Group
The Greater Bay Bank SBA Lending Group provides loans to smaller businesses
on which the Small Business Administration ("SBA") generally provides
guarantees between 65% to 80% of the principal loan amount. The SBA has named
both Coast Commercial Bank and Cupertino National Bank as Preferred Lenders.
The SBA awards Preferred Lender status to lenders who have demonstrated
superior ability to generate, underwrite and service loans that the SBA
guarantees. This status results in more rapid turnaround of loan applications
submitted to the SBA for approval. The group is able to utilize this status to
provide this same level of service to clients of all of the Banks.
Greater Bay Corporate Finance Group
Greater Bay Corporate Finance Group primarily focuses on originating loans
to companies that have revenues in excess of $20 million and financing
requirements in the range of $5 million to $250 million. Greater Bay Corporate
Finance Group primarily participates in direct sourced transactions as the
lead agent. Greater Bay Corporate Finance Group has also participated in
syndicated loan transactions.
Greater Bay Trust Company
Greater Bay Trust Company provides trust services to support the trust needs
of the Banks' business and personal clients. These services include, but are
not limited to, custodial, investment management, estate planning resources
and employee benefit plan services.
International Banking Division
International Banking Division provides a wide range of financial services
to support the international banking needs of the Banks' clients, including
identifying certain risks of conducting business abroad and providing
international letters of credit, documentary collections and other trade
finance services. In 2000, the Export-Import Bank of the United States
increased International Banking Division's delegated authority status from the
"Medium" level to the "High" level to provide foreign receivable financing to
local exporters. The Export-Import Bank allows "High" level delegated
authority lenders to approve working capital loans up to $5.0 million per
exporter, and to approve an aggregate total of up to $75 million in loans.
5
Matsco
Matsco is engaged in providing financial services, primarily loans and
leases, to the dental and veterinary health professions. At December 31, 2000
approximately 87% of Matsco's outstanding loans and leases was to dental
businesses, while the remaining was to veterinarians.
Pacific Business Funding
Pacific Business Funding is an asset-based lending and factoring division
that provides alternative funding and support programs designed to enhance the
Company's small business banking services.
Venture Banking Group
Venture Banking Group serves the needs of companies in their start-up and
development phase, allowing them to access a banking relationship early in
their development. The loans to this target group of clients are generally
secured by the accounts receivable, inventory and equipment of the companies.
The financial strength of these companies also tends to be bolstered by the
presence of venture capital investors among their shareholders.
Banking Services
The Company provides a wide range of commercial banking and financial
services to small and medium-sized businesses, real estate developers and
property managers, business executives, professionals and other individuals.
The Banks offer a wide range of deposit products, including the normal range
of personal and business checking and savings accounts, time deposits and
individual retirement accounts. The Banks also offer a wide range of
specialized services designed to attract and service the needs of clients and
include cash management and international trade finance services for business
clients, traveler's checks, safe deposit and MasterCard and Visa merchant
deposit services.
The Banks also engage in the full complement of lending activities,
including commercial, real estate and consumer loans. The Banks provide
commercial loans for working capital and business expansion to small and
medium-sized businesses with annual revenues generally in the range of $1.0
million to $100.0 million with a primary focus on business clients with
borrowing needs between $2.0 million and $10.0 million. The Banks' commercial
clients are drawn from a wide variety of manufacturing, technology, real
estate, wholesale and service businesses. The Banks provide interim real
estate construction loans primarily in the Banks' service areas for single-
family residences, which typically range between approximately $500,000 and
$1.0 million, multi-unit projects, which typically range between approximately
$1.5 million and $4.0 million and commercial real estate, primarily owner-
occupied, which typically range between $1.5 million to $7.5 million. The
Banks also provide medium term commercial real estate loans or credits,
typically ranging between $1.0 million and $10.0 million for the financing of
commercial or industrial buildings where the owners either use the properties
for business purposes or derive income from tenants.
Market Area
The Banks concentrate on marketing their services to small and medium-sized
businesses, professionals and individuals in Alameda, Contra Costa, Santa
Clara, San Francisco, San Mateo, Santa Cruz, and Sonoma Counties.
. Bank of Petaluma's primary base of operations is in Petaluma, California
and extends through Sonoma County. Sonoma Country has a population of
approximately 450,000.
. Bank of Santa Clara's primary base of operations is in Santa Clara,
California, which is located in the geographic area referred to as
"Silicon Valley". Bank of Santa Clara's operation extends throughout
Santa Clara County. Santa Clara County has a population of approximately
1,737,000.
6
. Bay Area Bank's primary base of operations is in Redwood City,
California and includes central San Mateo County. San Mateo county has a
population of approximately 730,000.
. Bay Bank of Commerce's primary base of operations is San Leandro,
California and extends through Alameda and Southern Contra Costa
counties. Alameda County and Contra Costa County have populations of
approximately 1,454,000 and 930,000, respectively.
. Coast Commercial Bank's primary base of operations is in Santa Cruz,
California and extends through Santa Cruz County. Santa Cruz County has
a population of approximately 255,000.
. Cupertino National Bank's primary base of operations is in Cupertino,
California, which is in the center of the geographic area referred to as
"Silicon Valley". Cupertino National Bank's operations extend throughout
Santa Clara County.
. Golden Gate Bank's primary base of operations is centered in the City
and County of San Francisco. San Francisco County has a population of
approximately 801,000.
. Mt. Diablo National Bank's primary base of operations is Danville,
California and extends through Contra Costa and northern Alameda
Counties.
. Mid-Peninsula Bank's primary base of operations is centered in Palo
Alto, California and extends north through San Mateo County. Mid-
Peninsula Bank has formed operating divisions located in Alameda and
Contra Costa Counties.
. Peninsula Bank of Commerce's primary base of operations is centered in
Millbrae, California, and includes northern San Mateo County and extends
into San Francisco County.
The commercial base of Alameda, Contra Costa, Santa Cruz, Santa Clara, Santa
Cruz, San Francisco, San Mateo and Sonoma Counties is diverse and includes
computer and semiconductor manufacturing, professional services,
biotechnology, printing and publishing, aerospace, defense and real estate
construction, as well as wholesale and retail trade. As a result of its
geographic concentration, the Company's results depend largely upon economic
conditions in these areas. While the economy in the Company's market areas has
exhibited positive economic and employment trends, there is no assurance that
such trends will continue. A deterioration in economic conditions could have a
material adverse impact on the quality of the Company's loan portfolio and the
demand for its products and services, and accordingly its results of
operations. See "Item 1. Business--Factors That May Affect Future Results of
Operations."
Matsco markets its dental and veterinarian financing services nationally
through its main office in Emeryville, California and marketing
representatives located in ten states. At December 31, 2000, approximately
$180 million in outstanding loans and leases originated by Matsco are with
borrowers located outside of the State of California. Those loans and leases
are distributed throughout the United States, with the largest volume having
been originated in Florida, where Matsco has outstanding balances totaling
approximately $14 million.
Similarly, the Greater Bay Corporate Finance Group participates in loan
transactions which are originated nationally. At December 31, 2000,
approximately $70 million in outstanding loans in which Greater Bay Corporate
Finance Group has participated are with borrowers located outside of the State
of California.
Our other operating divisions primarily conduct business in the San
Francisco Bay Area.
7
Lending Activities
Underwriting and Credit Administration
The lending activities of each of the Banks is guided by the basic lending
policies established by its Board of Directors. Each loan must meet minimum
underwriting criteria established in the Bank's lending policy. Lending
authority is granted to officers of each Bank on a limited basis. Loan
requests which exceed individual officer approval limits are approved on a
pooled-authority basis up to a maximum limit for each Bank. Loan requests
exceeding these limits are submitted to the Company's Officers' Loan
Committee, which consists of the President and Chief Executive Officer of
Greater Bay, the Executive Vice President and Chief Lending Officer of Greater
Bay, the Executive Vice President and Chief Credit Officer of Mid-Peninsula
Bank and the Senior Vice President and Chief Credit Officer of Greater Bay.
All members of the Officers' Loan Committee are also officers of the
individual Banks. Loan requests which exceed the limits of the Company's
Officers' Loan Committee are submitted to the Directors' Loan Committee. The
Directors' Loan Committee consists of at least one outside director of each of
the Banks. Each of these committees meets on a regular basis in order to
provide timely responses to the Banks' clients.
The Company's credit administration function includes an internal review and
the regular use of an outside loan review firm. In addition, the Company's
Officers' Loan Committee, Chief Administrative Officer/Chief Financial Officer
and Controller review information at least once a month related to
delinquencies, nonperforming assets, classified assets and other pertinent
information to evaluate credit risk within each Bank's loan portfolio and to
review the Company's allowance for loan losses.
Loan Portfolio
The composition of the Company's gross loan portfolio at December 31, 2000
was as follows:
. approximately 43.2% were commercial loans, including 26.8% which were
commercial real estate term loans;
. approximately 19.1% were in real estate construction and land loans,
which are split evenly between commercial properties and residential
projects;
. approximately 4.9% were other real estate term loans, primarily secured
by residential real estate; and
. the balance of the portfolio consists of leases and consumer loans.
The interest rates the Banks charge vary with the degree of risk, size and
maturity of the loans. In addition, competition from other financial services
companies and analyses of the client's deposit relationship with the Bank and
the Bank's cost of funds impact the interest rate charged on loans.
Commercial Loans. In their commercial loan portfolios, the Banks provide
personalized financial services to the diverse commercial and professional
businesses in their market areas. Commercial loans, including those made by
the Venture Banking Group, consist primarily of short-term loans (normally
with a maturity of under one year) to support business operations. The Banks
focus on businesses with annual revenues generally between $1.0 million and
$100.0 million with borrowing needs generally between $2.0 million and $10.0
million. The Banks' commercial clients are drawn from a wide variety of
manufacturing, technology, real estate, wholesale and service businesses.
Commercial loans also include those loans made by the Greater Bay Corporate
Finance Group.
Commercial loans typically include revolving lines of credit collateralized
by inventory, accounts receivable and equipment. Emphasis is placed on the
borrower's earnings history, capitalization, secondary sources of repayment,
and in some instances, third party guarantees or highly liquid collateral
(such as time deposits and investment securities). Commercial loan pricing is
generally at a rate tied to the prime rate, as quoted in the Wall Street
Journal, or the Banks' reference rates.
8
The Venture Banking Group provides innovative lending products and other
financial services, tailored to the needs of start-up and development-stage
companies. The Venture Banking Group's typical clients include technology
companies, ranging from multimedia, software and telecommunications providers
to bio-technology and medical device firms. Borrowings are generally secured
by minimum cash balances, accounts receivable, intellectual property rights,
inventory and equipment of the companies. Because these companies are in the
start-up or development phase, many of them will not generate any revenues for
several years. The Company often receives warrants from these companies as
part of the compensation for its services. As of December 31, 2000, the
Venture Banking Group had loans outstanding to start-up and development phase
companies of approximately $95.5 million.
The Greater Bay Corporate Finance Group specializes in providing commercial
loans to small and medium sized, non-investment grade middle market companies.
Credit facilities are designed to supplement the borrower's ongoing working
capital needs, assist with the purchase of fixed assets or aid in the
financing of strategic acquisitions. Loan facilities are typically
collateralized by a first priority security interest in all of the borrower's
assets and are generally structured based on the value of the borrower's
assets or the company's historical cash flow. The Greater Bay Corporate
Finance Group primarily sources its own relationships and to a lesser extend
participates in syndicated loan transaction lead by other financial
institutions serving the Greater Bay Corporate Finance Group's identified
market niche.
The Company participates in many SBA programs and, through the Greater Bay
Bank SBA Lending Group, is a "preferred lender". Preferred lender status is
granted to a lender which has made a certain number of SBA loans and which, in
the opinion of the SBA, has staff who are qualified and experienced in this
area. As a preferred lender, the Company has the authority to authorize, on
behalf of the SBA, the SBA guaranty on loans under the 7A program. This can
represent a substantial savings to the customer. The Company utilizes both the
504 program, which is focused toward longer-term financing of buildings, and
other long-term assets, and the 7A program which is primarily used for
financing of the equipment, inventory and working capital needs of eligible
businesses generally over a three- to seven-year term. The Company's
collateral position in the SBA loans is enhanced by the SBA guaranty in the
case of 7A loans, and by lower loan-to-value ratios under the 504 program. The
Company generally sells the guaranteed portion of its SBA loans in the
secondary market.
Real Estate Construction and Land Loans. The Banks' real estate construction
loan activity focuses on providing short-term (generally less than one year
maturity) loans to individuals and developers with whom the Banks have
established relationships for the construction primarily of single family
residences in the Banks' market areas. Real estate construction loans for
single family residences typically range between approximately $500,000 and
$1.0 million, and for multi-unit projects typically range between
approximately $1.5 million and $5.0 million.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability
of the project and the borrower's credit-worthiness are primary considerations
in the loan underwriting decision. Generally, these loans provide an
attractive yield, but may carry a higher than normal risk of loss or
delinquency, particularly if general real estate values decline. The Banks
utilize approved independent local appraisers and loan-to-value ratios which
generally do not exceed 65% to 75% of the appraised value of the property. The
Banks monitor projects during the construction phase through regular
construction inspections and a disbursement program tied to the percentage of
completion of each project.
The Banks also occasionally make land loans to borrowers who intend to
construct a single family residence on the lot generally within twelve months.
In addition, the Banks also make commercial real estate construction loans to
high net worth clients with adequate liquidity for construction of office and
warehouse properties. Such loans are typically secured by first deeds of trust
and require guarantees of the borrower.
9
Real Estate Term Loans. The Banks provide medium-term commercial real estate
loans secured by commercial or industrial buildings where the owner either
uses the property for business purposes or derives income from tenants. The
Company's loan policies require the principal balance of the loan, generally
between $400,000 and $15.0 million, to be no more than 70% of the stabilized
appraised value of the underlying real estate collateral. The loans, which are
typically secured by first deeds of trust only, generally have terms of no
more than seven to ten years and are amortized over 20-25 years. Most of these
loans have rates tied to the prime rate, with many adjusting whenever the
prime rate changes; the remaining loans adjust every two or three years
depending on the term of the loan.
Consumer and Other Loans. The Banks' consumer and other loan portfolio is
divided between installment loans secured by automobiles and aircraft, and
home improvement loans and lines of credit which are often secured by
residential real estate. Installment loans tend to be fixed rate and longer-
term (one-to-five year maturity), while the equity lines of credit and home
improvement loans are generally floating rate and are reviewed for renewal on
an annual basis. The Banks also have a minimal portfolio of credit card loans,
issued as an additional service to its clients.
Deposits
The Banks obtain deposits primarily from small and medium-sized businesses,
business executives, professionals and other individuals. Each of the Banks
offers the usual and customary range of depository products that commercial
banks provide to customers. The Banks' deposits are not received from a single
depositor or group of affiliated depositors, the loss of any one of which
would have a material adverse effect on the business of the Company or any of
the Banks. Rates paid on deposits vary among the categories of deposits due to
different terms, the size of the individual deposit, and rates paid by
competitors on similar deposits.
Cupertino National Bank has two business units that provide significant
support to its deposit base. The Greater Bay Trust Company has approximately
7.2% of its trust assets under management in liquid funds that are retained in
Cupertino National Bank money market demand accounts. At December 31, 2000,
these funds totaled $55.5 million. The Venture Banking Group is another source
of deposits as most of the start-up phase companies have significant liquidity
that is deposited in Cupertino National Bank as part of the banking
relationship. At December 31, 2000, clients of the Venture Banking Group had
$482.3 million in deposits at Cupertino National Bank. See "Item 1. Business--
Factors That May Affect Future Results of Operations" for additional
discussion regarding business risks related to the Company's deposits.
Trust Services
The Greater Bay Trust Company, which is a division of Cupertino National
Bank, offers a full range of fee-based trust services directly to its clients
and administers several types of retirement plans, including corporate pension
plans, 401(k) plans and individual retirement plans, with an emphasis on the
investment management, custodianship and trusteeship of such plans. In
addition, the Greater Bay Trust Company acts as executor, administrator,
guardian and/or trustee in the administration of the estates of individuals.
Investment and custodial services are provided for corporations, individuals
and nonprofit organizations. Total assets under management by the Greater Bay
Trust Company were $773.8 million at December 31, 2000, compared to $697.4
million at December 31, 1999 and $649.3 million at December 31, 1998.
10
Competition
The banking and financial services industry in California generally, and in
the Banks' market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial services providers. The Banks compete for
loans, deposits, and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the Banks. In
addition, recent federal legislation may have the effect of further increasing
the pace of consolidation within the financial services industry. See "Item 1.
Business--Supervision and Regulation--Financial Services Modernization
Legislation."
In order to compete with the other financial services providers, the Banks
principally rely upon local promotional activities, personal relationships
established by officers, directors, and employees with their customers, and
specialized services tailored to meet the needs of the communities served. In
those instances where the Banks are unable to accommodate a customer's needs,
the Banks may arrange for those services to be provided by their
correspondents. The Banks have 37 offices located in Alameda, Contra Costa,
San Francisco, San Mateo, Santa Clara, Santa Cruz and Sonoma counties in
California.
As of June 30, 1999, the latest date for which the FDIC branch data is
available, the deposits of the Banks represented 4.4% of the deposits for all
financial service companies in San Mateo County, 4.8% of all deposits in Santa
Clara County, 11.0% of all deposits in Santa Cruz County and 2.2% of all
deposits in Sonoma County. The deposits of the Banks represent less than 1% of
the deposits for all financial service companies in Alameda, Contra Costa and
San Francisco Counties. The total deposits of the Banks represents 2.0% of the
deposits for all financial service companies in the San Francisco Bay Area,
which includes Marin, Napa and Solano Counties in addition to the above seven
counties.
Economic Conditions, Government Policies, Legislation, and Regulation
The Company's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between
the interest rates paid by the Banks on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates received by the Banks on
their interest-earning assets, such as loans extended to their clients and
securities held in their investment portfolios, comprise the major portion of
the Company's earnings. These rates are highly sensitive to many factors that
are beyond the control of Greater Bay and the Banks, such as inflation,
recession and unemployment, and the impact which future changes in domestic
and foreign economic conditions might have on Greater Bay and the Banks cannot
be predicted.
The Company's business is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). The Federal Reserve implements national monetary policies
(with objectives such as curbing inflation and combating recession) through
its open-market operations in U.S. Government securities by adjusting the
required level of reserves for depository institutions subject to its reserve
requirements, and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the
Federal Reserve in these areas influence the growth of bank loans,
investments, and deposits and also affect interest rates earned on interest-
earning assets and paid on interest-bearing liabilities. The nature and impact
on Greater Bay and the Banks of any future changes in monetary and fiscal
policies cannot be fully predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies, and other financial institutions and financial services providers
are frequently made in the U.S. Congress, in the state legislatures, and
before various regulatory agencies. See "Item 1. Business--Supervision and
Regulation."
11
Supervision and Regulation
General
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the
protection of depositors and the deposit insurance fund and not for the
benefit of shareholders of Greater Bay. Set forth below is a summary
description of the material laws and regulations which relate to the
operations of Greater Bay and the Banks. The description is qualified in its
entirety by reference to the applicable laws and regulations.
Greater Bay
Greater Bay, as a registered bank holding company, is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Greater
Bay is required to file with the Federal Reserve periodic reports and such
additional information as the Federal Reserve may require pursuant to the
BHCA. The Federal Reserve may conduct examinations of Greater Bay and its
subsidiaries.
The Federal Reserve may require that Greater Bay terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, Greater Bay must file
written notice and obtain approval from the Federal Reserve prior to
purchasing or redeeming its equity securities.
Further, Greater Bay is required by the Federal Reserve to maintain certain
levels of capital. See "--Capital Standards."
Greater Bay is required to obtain the prior approval of the Federal Reserve
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve is also required for
the merger or consolidation of Greater Bay and another bank holding company.
Greater Bay is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
furnishing services to its subsidiaries. However, Greater Bay, subject to the
prior approval of the Federal Reserve, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve's policy that in serving as a source of
strength to its subsidiary banks, a bank holding company should stand ready to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve to be an unsafe and
unsound banking practice or a violation of the Federal Reserve's regulations
or both.
Greater Bay is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, Greater Bay and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California Department of Financial Institutions.
12
Greater Bay's securities are registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, Greater Bay is subject to the information, proxy
solicitation, insider trading, and other requirements and restrictions of the
Exchange Act.
The Banks
The Company has two national banking subsidiaries and eight bank
subsidiaries which are California chartered banks and members of the Federal
Reserve. The national banks are subject to primary supervision, examination,
and regulation by the Office of the Comptroller of the Currency (the
"Comptroller") and are also subject to regulations of the Federal Deposit
Insurance Corporation ("FDIC") and the Federal Reserve. The state chartered
banks are subject to primary supervision, periodic examination, and regulation
by the California Commissioner of Financial Institutions (the "Commissioner")
and the Federal Reserve and are also subject to regulations of the FDIC.
If, as a result of an examination of a bank, the Comptroller or the Federal
Reserve should determine that the financial condition, capital resources,
asset quality, earnings prospects, management, liquidity, or other aspects of
the bank's operations are unsatisfactory or that the bank or its management is
violating or has violated any law or regulation, various remedies are
available to these regulatory agencies. Such remedies include the power to
enjoin "unsafe or unsound" practices, to require affirmative action to correct
any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in
capital, to restrict the growth of the bank, to assess civil monetary
penalties, to remove officers and directors, and ultimately to terminate the
bank's deposit insurance, which for a California chartered bank would result
in a revocation of the bank's charter. The Commissioner has many of the same
remedial powers.
Various requirements and restrictions under the laws of California and the
United States affect the operations of the Banks. State and federal statutes
and regulations relate to many aspects of the Banks' operations, including
reserves against deposits, ownership of deposit accounts, interest rates
payable on deposits, loans, investments, mergers and acquisitions, borrowings,
dividends, locations of branch offices, capital requirements, and disclosure
of obligations to depositors and borrows. Further, the Banks are required to
maintain certain levels of capital. See "--Capital Standards."
Financial Services Modernization Legislation
General. On November 12, 1999, President Clinton signed into law the Gramm-
Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act: Section 20, which restricted the affiliation of
Federal Reserve Member Banks with firms "engaged principally" in specified
securities activities; and Section 32, which restricts officer, director, or
employee interlocks between a member bank and any company or person "primarily
engaged" in specified securities activities. In addition, the Financial
Services Modernization Act also contains provisions that expressly preempt any
state law restricting the establishment of financial affiliations, primarily
related to insurance. The general effect of the law is to establish a
comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms, and other financial service providers
by revising and expanding the BHCA framework to permit a holding company
system to engage in a full range of financial activities through a new entity
known as a Financial Holding Company
The law also:
. broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies, and their financial
subsidiaries;
. provides an enhanced framework for protecting the privacy of consumer
information;
. adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;
13
. modifies the laws governing the implementation of the Community
Reinvestment Act; and
. addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial
institutions.
Greater Bay and the Banks do not believe that the Financial Services
Modernization Act will have a material adverse effect on our operations in the
near-term. However, to the extent that it permits banks, securities firms, and
insurance companies to affiliate, the financial services industry may
experience further consolidation. The Financial Services Modernization Act is
intended to grant to community banks certain powers as a matter of right that
larger institutions have accumulated on an ad hoc basis. Nevertheless, this
act may have the result of increasing the amount of competition that Greater
Bay and the Banks face from larger institutions and other types of companies
offering financial products, many of which may have substantially more
financial resources than Greater Bay and the Banks.
Financial Holding Companies. Bank holding companies that elect to become a
financial holding company may affiliate with securities firms and insurance
companies and engage in other activities that are financial in nature or are
incidental or complementary to activities that are financial in nature.
Greater Bay has not yet elected to become a financial holding company.
"Financial in nature" activities include:
. securities underwriting;
. dealing and market making;
. sponsoring mutual funds and investment companies;
. insurance underwriting and agency;
. merchant banking; and
. activities that the Federal Reserve, in consultation with the Secretary
of the Treasury, determines from time to time to be so closely related
to banking or managing or controlling banks as to be a proper incident
thereto.
A bank holding company must meet three requirements before becoming a
financial holding company:
. all of the bank holding company's depository institution subsidiaries
must be well capitalized, well managed and, except in limited
circumstances, in compliance with the Community Reinvestment Act; and
. the bank holding company must file with the Federal Reserve a
declaration of its election to become a financial holding company,
including a certification that its depository institution subsidiaries
meet the prior two criteria.
Failure to comply with the financial holding company requirements could lead
to divestiture of subsidiary banks or require all activities of the company to
conform to those permissible for a bank holding company. No Federal Reserve
approval is required for a financial holding company to acquire a company
(other than a bank holding company, bank or savings association) engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve. In December 2000,
the Federal Reserve approved an interim rule defining the three categories of
activities financial in nature or incidental to a financial activity:
. lending, exchanging, transferring, investing for others, or safeguarding
financial assets other than money or securities;
. providing any devise or other instrumentality for transferring money or
other financial assets; or
. arranging, effecting or facilitating financial transactions for the
account of third parties.
14
The interim rule also establishes a mechanism through which financial holding
companies or other interested parties may request that the Federal Reserve
find that a particular activity falls within one of these three categories.
For example, the Federal Reserve has recently issued a proposed rule that
would grant financial holding companies the right to act as real estate
brokers and managers.
A bank holding company that is not also a financial holding company is
limited to engaging in banking and such other activities as determined by the
Federal Reserve to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
Privacy. Under the Financial Services Modernization Act, federal banking
regulators are required to adopt rules that will limit the ability of banks
and other financial institutions to disclose non-public information about
consumers to nonaffiliated third parties. These limitations will require
disclosure of privacy policies to consumers and, in some circumstances, will
allow consumers to prevent disclosure of certain personal information to a
nonaffiliated third party. Federal banking regulators issued final rules on
May 10, 2000. Pursuant to the rules, financial institutions must provide:
. initial notices to customers about their privacy policies, describing
the conditions under which they may disclose nonpublic personal
information to nonaffiliated third parties and affiliates;
. annual notices of their privacy policies to current customers; and
. a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
The rules were effective November 13, 2000, but compliance is optional until
July 1, 2001. These privacy provisions will affect how consumer information is
transmitted through diversified financial companies and conveyed to outside
vendors. It is not possible at this time to assess the impact of the privacy
provisions on the Company's financial condition or results of operations.
Consumer Protection Rules--Sale of Insurance. In December 2000 pursuant to
the requirements of the Financial Services Modernization Act, the federal bank
and thrift regulatory agencies adopted consumer protection rules for the sale
of insurance products by depository institutions. The rule is effective on
April 1, 2001. The final rule applies to any depository institution or any
person selling, soliciting, advertising, or offering insurance products or
annuities to a consumer at an office of the institution or on behalf of the
institution. The regulation requires oral and written disclosure before the
completion of the sale of an insurance product or annuity that such product:
. is not a deposit or other obligation of, or guaranteed by, the
depository institution or its affiliate;
. is not insured by the FDIC or any other agency of the United States, the
depository institution or its affiliates; and
. has certain risks of investment, including the possible loss of value.
The depository institution may not condition an extension of credit on the
consumer's purchase of an insurance product or annuity from the depository
institution or from any of its affiliates, or on the consumer's agreement not
to obtain, or a prohibition on the consumer from obtaining, an insurance
product or annuity from an unaffiliated entity. Furthermore, to the extent
practicable, a depository institution must keep insurance and annuity sales
activities physically segregated from the areas where retail deposits are
routinely accepted from the general public. Finally, the rule addresses cross
marketing and referral fees.
15
Safeguarding Confidential Customer Information. In January 2000, the banking
agencies adopted guidelines requiring financial institutions to establish an
information security program to:
. identify and assess the risks that may threaten customer information;
. develop a written plan containing policies and procedures to manage and
control these risks;
. implement and test the plan; and
. adjust the plan on a continuing basis to account for changes in
technology, the sensitivity of customer information and internal or
external threats to information security.
Each institution may implement a security program appropriate to its size
and complexity and the nature and scope of its operations. The guidelines are
effective July 1, 2001.
Dividends and Other Transfers of Funds
Dividends from the Banks constitute the principal source of income to
Greater Bay. Greater Bay is a legal entity separate and distinct from the
Banks. The Banks are subject to various statutory and regulatory restrictions
on their ability to pay dividends to Greater Bay. Under such restrictions, the
amount available for payment of dividends to Greater Bay by the Banks totaled
$96.0 million at December 31, 2000. In addition, the California Department of
Financial Institutions and the Federal Reserve have the authority to prohibit
the Banks from paying dividends, depending upon the Banks' financial
condition, if such payment is deemed to constitute an unsafe or unsound
practice.
The bank regulatory agencies also have authority to prohibit the Banks from
engaging in activities that, in the opinion of the applicable bank regulatory
authority, constitute unsafe or unsound practices in conducting its business.
It is possible, depending upon the financial condition of the bank in question
and other factors, that the applicable bank regulatory authority could assert
that the payment of dividends or other payments might, under some
circumstances, be such an unsafe or unsound practice. Further, the FDIC, the
Comptroller and the Federal Reserve have established guidelines with respect
to the maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set forth in
such guidelines and the restrictions that are or may be imposed under the
prompt corrective action provisions of federal law could limit the amount of
dividends which the Banks or Greater Bay may pay. An insured depository
institution is prohibited from paying management fees to any controlling
persons or, with certain limited exceptions, making capital distributions if
after such transaction the institution would be undercapitalized. See "--
Prompt Corrective Regulatory Action and Other Enforcement Mechanisms" and "--
Capital Standards" for a discussion of these additional restrictions on
capital distributions.
The Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Greater Bay or other affiliates, the purchase of, or investments
in, stock or other securities thereof, the taking of such securities as
collateral for loans, and the purchase of assets of Greater Bay or other
affiliates. Such restrictions prevent Greater Bay and such other affiliates
from borrowing from the Banks unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by the Banks to or in Greater Bay or to or in any other affiliate are limited,
individually, to 10.0% of the respective bank's capital and surplus (as
defined by federal regulations), and such secured loans and investments are
limited, in the aggregate, to 20% of the respective bank's capital and surplus
(as defined by federal regulations). California law also imposes certain
restrictions with respect to transactions involving Greater Bay and other
controlling persons of the Banks. Additional restrictions on transactions with
affiliates may be imposed on the Banks under the prompt corrective action
provisions of federal law. See "--Prompt Corrective Action and Other
Enforcement Mechanisms."
16
Capital Standards
The federal banking agencies have adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree
of risk associated with a banking organization's operations for both
transactions reported on the balance sheet as assets and transactions, such
as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of assets
and credit equivalent amounts of off balance sheet items are multiplied by one
of several risk adjustment percentages, which range from 0% for assets with
low credit risk, such as certain U.S. Treasury securities, to 100% for assets
with relatively high credit risk, such as commercial loans.
The guidelines require a minimum ratio of qualifying total capital to risk-
adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted
assets of 4%. In addition to the risk-based guidelines, federal banking
regulators require banking organizations to maintain a minimum amount of Tier
1 capital to total assets, referred to as the leverage ratio. For a banking
organization rated in the highest of the five categories used by regulators to
rate banking organizations, the minimum leverage ratio of Tier 1 capital to
total assets must be 3%. In addition to these uniform risk-based capital
guidelines and leverage ratios that apply across the industry, the regulators
have the discretion to set individual minimum capital requirements for
specific institutions at rates significantly above the minimum guidelines and
ratios.
The federal banking regulators may set capital requirements higher than the
minimums described above for holding companies whose circumstances warrant it.
For example, a financial institution experiencing or anticipating significant
growth may be expected to maintain capital positions substantially above the
minimum supervisory levels without significant reliance on intangible assets.
The Federal Reserve has also indicated that it will consider a "tangible Tier
1 capital leverage ratio" (deducting all intangibles) and other indications of
capital strength in evaluating proposals for expansion or new activities.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and other
supervisory action to resolve the problems of insured depository institutions,
including but not limited to those institutions that fall below one or more
prescribed minimum capital ratios. Each federal banking agency has promulgated
regulations defining the following five categories in which an insured
depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. At December 31, 2000, each
of the Banks and the Company exceeded the required ratios for classification
as well capitalized.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with
the agency.
17
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to:
. internal controls, information systems and internal audit systems;
. loan documentation;
. credit underwriting;
. asset growth;
. earnings; and
. compensation, fees and benefits.
In addition, the federal banking agencies have also adopted safety and
soundness guidelines with respect to asset quality and earnings standards.
These guidelines provide six standards for establishing and maintaining a
system to identify problem assets and prevent those assets from deteriorating.
Under these standards, an insured depository institution should:
. conduct periodic asset quality reviews to identify problem assets;
. estimate the inherent losses in problem assets and establish reserves
that are sufficient to absorb estimated losses;
. compare problem asset totals to capital;
. take appropriate corrective action to resolve problem assets;
. consider the size and potential risks of material asset concentrations;
and
. provide periodic asset quality reports with adequate information for
management and the board of directors to assess the level of asset
risk.
These guidelines also set forth standards for evaluating and monitoring
earnings and for ensuring that earnings are sufficient for the maintenance of
adequate capital and reserves.
Premiums for Deposit Insurance
Through the Bank Insurance Fund ("BIF"), the FDIC insures the deposits of
the Banks up to prescribed limits for each depositor. The amount of FDIC
assessments paid by each BIF member institution is based on its relative risk
of default as measured by regulatory capital ratios and other factors.
Specifically, the assessment rate is based on the institution's capitalization
risk category and supervisory subgroup category. An institution's
capitalization risk category is based on the FDIC's determination of whether
the institution is well capitalized, adequately capitalized or less than
adequately capitalized. An institution's supervisory subgroup category is
based on the FDIC's assessment of the financial condition of the institution
and the probability that FDIC intervention or other corrective action will be
required.
The assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits. The FDIC may increase or decrease the assessment rate
schedule on a semi-annual basis. An increase in the assessment rate could have
a material adverse effect on the Company's earnings, depending on the amount
of the increase. The FDIC is authorized to terminate a depository
institution's deposit insurance upon a finding by the FDIC that the
institution's financial condition is unsafe or unsound or that the institution
has engaged in unsafe or unsound practices or has violated any applicable
rule, regulation, order or condition enacted or imposed by the institution's
regulatory agency. The termination of deposit insurance for one or more of the
Banks could have a material adverse effect on the Company's earnings,
depending on the collective size of the particular institutions involved.
18
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the
Federal Housing Finance Board. The bonds, commonly referred to as FICO bonds,
were issued to capitalize the Federal Savings and Loan Insurance Corporation.
The FDIC established the FICO assessment rates effective for the third quarter
of 2000 at approximately $.021 per $100 annually for assessable deposits. The
FICO assessments are adjusted quarterly to reflect changes in the assessment
bases of the FDIC's insurance funds and do not vary depending on a depository
institution's capitalization or supervisory evaluations.
Interstate Banking and Branching
The BHCA permits bank holding companies from any state to acquire banks and
bank holding companies located in any other state, subject to certain
conditions, including certain nationwide- and state-imposed concentration
limits. The Banks have the ability, subject to certain restrictions, to
acquire by acquisition or merger branches outside their home state. The
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to certain laws
of the states in which they are located. Competition may increase further as
banks branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments
The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act activities. The Community Reinvestment Act generally requires
the federal banking agencies to evaluate the record of a financial institution
in meeting the credit needs of its local communities, including low- and
moderate-income neighborhoods. A bank may be subject to substantial penalties
and corrective measures for a violation of certain fair lending laws. The
federal banking agencies may take compliance with such laws and Community
Reinvestment Act obligations into account when regulating and supervising
other activities. In December 2000, the federal banking agencies established
annual reporting and public disclosure requirements for certain written
agreements that are entered into between insured depository institutions or
their affiliates and nongovernmental entities or persons that are made
pursuant to, or in connection with, the fulfillment of the Community
Reinvestment Act.
A bank's compliance with its Community Reinvestment Act obligations is based
on a performance-based evaluation system which bases Community Reinvestment
Act ratings on an institution's lending service and investment performance.
When a bank holding company applies for approval to acquire a bank or other
bank holding company, the Federal Reserve will review the assessment of each
subsidiary bank of the applicant bank holding company, and such records may be
the basis for denying the application. In connection with its assessment of
Community Reinvestment Act performance, the appropriate bank regulatory agency
assigns a rating of "outstanding", "satisfactory", "needs to improve" or
"substantial noncompliance. The results of the most recent exam for each of
the Banks is as follows.
Date of most
recent
Bank examination CRA rating
---- -------------- ------------
Bay Area Bank November 1999 Satisfactory
Bay Bank of Commerce October 1997 Satisfactory
Bank of Petaluma September 1998 Outstanding
Bank of Santa Clara December 2000 Satisfactory
Coast Commercial Bank May 1999 Outstanding
Cupertino National Bank October 1999 Outstanding
Golden Gate Bank November 1999 Satisfactory
Mt. Diablo National Bank February 1999 Satisfactory
Mid-Peninsula Bank November 1999 Outstanding
Peninsula Bank of Commerce November 1999 Satisfactory
19
Employees
At December 31, 2000, the Company had 1,054 full-time employees. None of the
employees are covered by a collective bargaining agreement. The Company
considers its employee relations to be satisfactory.
Factors That May Affect Future Results of Operations
In addition to the other information contained in this report, the following
risks may affect the Company. If any of these risks occurs, our business,
financial condition or operating results could be adversely affected.
Failure to successfully execute our growth strategy or to integrate recently
acquired subsidiaries could adversely affect our performance.
Our financial performance and profitability will depend on our ability to
execute our corporate growth strategy and manage our recent and possible
future growth. Although management believes that it has substantially
integrated the business and operations of recently acquired subsidiaries,
there can be no assurance that unforeseen issues relating to the assimilation
of these subsidiaries will not adversely affect us. In addition, any future
acquisitions and our continued growth may present operating and other problems
that could have an adverse effect on our business, financial condition and
results of operations. Our financial performance will also depend on our
ability to maintain profitable operations through implementation of our Super
Community Banking Philosophy, which is described earlier. Accordingly, there
can be no assurance that we will be able to execute our growth strategy or
maintain the level of profitability that we have recently experienced.
Changes in market interest rates may adversely affect our performance.
Our earnings are impacted by changing interest rates. Changes in interest
rates impact the demand for new loans, the credit profile of existing loans,
the rates received on loans and securities and rates paid on deposits and
borrowings. The relationship between the rates received on loans and
securities and the rates paid on deposits and borrowings is known as interest
rate spread. Given our current volume and mix of interest-bearing liabilities
and interest-earning assets, our interest rate spread could be expected to
increase during times of rising interest rates and, conversely, to decline
during times of falling interest rates. Based on modeling performed as part of
out interest rate risk analysis, we believe that the 50 basis point decrease
in the target Fed Funds rate by the Federal Reserve announced January 3, 2001
and the additional 50 basis point decrease announced January 31, 2001 will
likely result in a 6 to 12 basis point drop in the Company's interest rate
spread. With any further declines in interest rates, our ability to
proportionately decrease the rates on our deposit sources, particularly MMDA
and NOW accounts, may not be possible due to competitive pressures. This may
result in a larger decrease in our interest rate spread. Although we believe
our current level of interest rate sensitivity is reasonable, significant
fluctuations in interest rates may have an adverse effect on our business,
financial condition and results of operations.
Our Bay Area business focus and economic conditions in the Bay Area could
adversely affect our operations.
Our Bay Area business focus and economic conditions in the Bay Area could
adversely affect our operations. Our operations are located in Northern
California and concentrated primarily in Alameda, Contra Costa, San Francisco,
San Mateo, Santa Cruz, Santa Clara and Sonoma counties, which includes the
area known as the "Silicon Valley." As a result of this geographic
concentration, our results depend largely upon economic and business
conditions in these areas. A deterioration in economic and business conditions
in our market areas, particularly in the technology and real estate industries
on which these areas depend, could have a material adverse impact on the
quality of our loan portfolio, the demand for our products and services, which
in turn may have a material adverse effect on our results of operations.
20
Many publicly and privately held technology firms have experienced a decline
in their stock prices and valuations. At the same time, firms in the
technology industry have experienced greater difficulty than in the past in
obtaining capital and funding. The inability of such firms to obtain necessary
capital and funding would not only adversely affect existing business, but it
could also result in a significant slowdown in the growth of the technology
industry. Furthermore, the financial weakness of California's three primary
energy providers, and shortages in electrical generation capacities may
further weaken the California economy and business operations in California
and in particular the economy of and businesses operating in the Bay Area. A
downturn in the national economy might further exacerbate local economic
conditions. The extent of the future impact of these events on economic and
business conditions cannot be predicted.
Our future warrant income can not be predicted.
We have historically obtained rights to acquire stock, in the form of
warrants, in certain clients as part of negotiated credit facilities. We may
not be able to realize gains from these equity instruments in future periods
due to fluctuations in the market prices of the underlying common stock of
these companies. The timing and amount of income, if any, from the disposition
of client warrants typically depend upon factors beyond our control, including
the general condition of the public equity markets, levels of mergers and
acquisitions activity, and legal and contractual restrictions on our ability
to sell the underlying securities. Therefore, future gains cannot be predicted
with any degree of accuracy and are likely to vary materially from period to
period. In addition, a significant portion of the income we realize from the
disposition of client warrants may be offset by expenses related to our
efforts to build an infrastructure sufficient to support our present and
future business activities, as well as expenses incurred in evaluating and
pursuing new business opportunities.
We are subject to government regulation that could limit or restrict our
activities, which in turn could adversely impact our operations.
The financial services industry is regulated extensively. Federal and state
regulation is designed primarily to protect the deposit insurance funds and
consumers, and not to benefit our shareholders. These regulations can
sometimes impose significant limitations on our operations. In addition, these
regulations are constantly evolving and may change significantly over time.
Significant new laws or changes in existing laws or repeal of existing laws
may cause our results to differ materially. Further, federal monetary policy,
particularly as implemented through the Federal Reserve System, significantly
affects credit conditions for us.
Competition may adversely affect our performance.
The financial services business in our market areas is highly competitive.
It is becoming increasingly competitive due to changes in regulation,
technological advances, and the accelerating pace of consolidation among
financial services providers. We face competition both in attracting deposits
and in making loans. We compete for loans principally through the interest
rates and loan fees we charge and the efficiency and quality of services we
provide. Increasing levels of competition in the banking and financial
services businesses may reduce our market share or cause the prices we charge
for our services to fall. Our results may differ in future periods depending
upon the nature or level of competition.
If a significant number of borrowers, guarantors and related parties fail to
perform as required by the terms of their loans, we will sustain losses.
A significant source of risk arises from the possibility that losses will be
sustained if a significant number of our borrowers, guarantors and related
parties fail to perform in accordance with the terms of their loans. We have
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses,
that management believes are appropriate to minimize this risk by assessing
the likelihood of nonperformance, tracking loan performance and diversifying
our credit portfolio. These policies and procedures, however, may not prevent
unexpected losses that could materially adversely affect our results of
operations.
21
ITEM 2. PROPERTIES.
The Company occupies its administrative offices under a lease which,
including options to renew, expires in 2007. The Company owns four of its full
service banking offices and leases 48 additional offices throughout the San
Francisco Bay Area. Those leases expire under various dates, including options
to renew, through August 2023.
The Company believes its present facilities are adequate for its present
needs but anticipates the need for additional facilities as it continues to
grow. The Company believes that, if necessary, it could secure suitable
alternative facilities on similar terms without adversely affecting
operations.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in certain legal proceedings
arising in the normal course of its business. Management believes that the
outcome of these matters will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no submission of matters to a vote of security holders during the
fourth quarter of the year ended December 31, 2000.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is traded on the Nasdaq National Market System
("Nasdaq") under the symbol "GBBK". The table below reflects the high and low
closing sales prices for the Company's common stock as reported by Nasdaq and
cash dividends declared for each reported period. The following information
has been restated to reflect the 2-for-1 stock split which became effective on
October 4, 2000.
Cash
For the period dividends
indicated High Low declared
-------------- ------ ------ ---------
2000
Fourth quarter $43.31 $28.12 $0.10
Third quarter 34.72 22.38 0.10
Second quarter 24.75 20.00 0.075
First quarter 21.13 18.03 0.075
1999
Fourth quarter $21.61 $16.91 $0.06
Third quarter 18.00 15.94 0.06
Second quarter 16.63 14.13 0.06
First quarter 15.50 13.88 0.06
The Company estimates that there were approximately 2,475 shareholders of
record at December 31, 2000.
During the year ended December 31, 2000, the Company was added to the S & P
MidCap 400 Index and the Nasdaq Financial--100 Index.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Information regarding Selected Consolidated Financial Data appears on pages
A-1 through A-2 under the caption "Financial Highlights" and is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations appears on pages A-3 through A-22 under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information regarding Quantitative and Qualitative Disclosures About Market
Risk appears on page A-19 through A-22 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quantitative and Qualitative Disclosures About Market Risk" and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information regarding Financial Statements and Supplementary Data appears A-
23 through A-63 under the caption "Consolidated Balance Sheets", "Consolidated
Statements of Operations", "Consolidated Statements of Comprehensive Income",
"Consolidated Statements of Shareholders' Equity", "Consolidated Statements of
Cash Flows" and "Notes to Consolidated Financial Statements" and is
incorporated herein by reference.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company intends to file a definitive proxy statement for the 2001 Annual
Meeting of Shareholders (the "Proxy Statement") with the Securities and
Exchange Commission within 120 days of December 31, 2000. Information
regarding directors of Greater Bay will appear under the caption "Discussion
of the Proposals Recommended by the Board--Proposal 1: "Election of
Directors' " in the Proxy Statement and is incorporated herein by reference.
Information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, and executive officers will appear under the captions
"INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--Section 16(a) Beneficial
Ownership Reporting Compliance by Directors and Executive Officers" and "--
Executive Officers" in the Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear under the captions
"INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--How We Compensate
Executive Officers", "--How We Compensate Directors", "--Employment Contracts,
Termination of Employment and Change of Control Arrangements", "--Executive
Committee's Report on Executive Compensation", "--Compensation Committee
Interlocks and Insider Participation" and "--Performance Graph" in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management will appear under the caption "INFORMATION ABOUT GREATER BAY STOCK
OWNERSHIP" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions will
appear under the caption "INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--
Certain Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following documents are filed as part of this report:
Consolidated Balance Sheets at December 31, 2000 and 1999 A-23
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2000 A-24
Consolidated Statements of Comprehensive Income for each of the years
in the three-year period ended December 31, 2000 A-25
Consolidated Statements of Changes in Shareholders' Equity for each of
years in the three-year period ended December 31, 2000 A-26
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2000 A-27
Notes to Consolidated Financial Statements A-28
Report of Independent Accountants A-64
2. Financial Statement Schedules
All financial statement schedules are omitted because of the absence of the
conditions under which they are required to be provided or because the
required information is included in the financial statements listed above
and/or related notes.
3. Exhibits
See Item 14(c) below.
(b) Reports on Form 8-K
During the fourth quarter of 2000, the Company filed the following Current
Reports on Form 8-K: (1) October 12, 2000 (reporting under Item 5 third
quarter 2000 financial results); (2) October 16, 2000 (reporting under Item 5
completion of the Company's merger with Bank of Petaluma); (3) October 17,
2000 (reporting under Item 5 supplemental consolidated financial information
relating to the Company's merger with Bank of Petaluma); (4) November 28, 2000
(reporting under Items 5 and 9 mid-fourth quarter financial results and 2001
performance goals); (5) December 1, 2000 (reporting under Item 5 completion of
the Company's acquisition of The Matsco Companies Inc.); and (6) December 21,
2000 (reporting under Item 5 declaration of the Company's fourth quarter cash
dividend).
(c) Exhibits Required by Item 601 of Regulation S-K
Reference is made to the Exhibit Index on page 29 for exhibits filed as part
of this report.
(d) Additional Financial Statements
Not applicable.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 30th day
of January, 2001.
Greater Bay Bancorp
/s/ David L. Kalkbrenner
By: _________________________________
David L. Kalkbrenner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David L. Kalkbrenner President, Chief Executive January 30, 2001
____________________________________ Officer and Director
David L. Kalkbrenner (Principal Executive
Officer)
/s/ Steven C. Smith Executive Vice President, January 30, 2001
____________________________________ Chief Administrative
Steven C. Smith Officer and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
/s/ John M. Gatto Director January 30, 2001
____________________________________
John M. Gatto
/s/ John J. Hounslow Director January 30, 2001
____________________________________
John J. Hounslow
/s/ James E. Jackson Director January 30, 2001
____________________________________
James E. Jackson
/s/ Stanley A. Kangas Director January 30, 2001
____________________________________
Stanley A. Kangas
/s/ Daniel G. Libarle Director January 30, 2001
____________________________________
Daniel G. Libarle
/s/ Rex D. Lindsay Director January 30, 2001
____________________________________
Rex D. Lindsay
27
Signature Title Date
--------- ----- ----
/s/ George M. Marcus Director January 30, 2001
____________________________________
George M. Marcus
/s/ Duncan L. Matteson Director January 30, 2001
____________________________________
Duncan L. Matteson
/s/ Glen McLaughlin Director January 30, 2001
____________________________________
Glen McLaughlin
/s/ Rebecca Q. Morgan Director January 30, 2001
____________________________________
Rebecca Q. Morgan
/s/ Dick J. Randall Director January 30, 2001
____________________________________
Dick J. Randall
/s/ Donald H. Seiler Director January 30, 2001
____________________________________
Donald H. Seiler
/s/ Warren R. Thoits Director January 30, 2001
____________________________________
Warren R. Thoits
/s/ James C. Thompson Director January 30, 2001
____________________________________
James C. Thompson
/s/ Thaddeus J. Whalen, Jr. Director January 30, 2001
____________________________________
Thaddeus J. Whalen, Jr.
28
EXHIBIT INDEX
Exhibit No. Exhibit
----------- -------
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended and
restated
3.2 Bylaws of Greater Bay Bancorp, as amended and restated
4.1 Rights Agreement (1)
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee (2)
4.3 Officers' Certificate and Company Order, dated March 31, 1997 (2)
4.4 Certificate of Trust of GBB Capital I (3)
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997 (3)
4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of March 31, 1997
(2)
4.6.2 Successor Administrative Trustee and First Amendment to Amended
and Restated Trust Agreement (4)
4.7 Trust Preferred Certificate of GBB Capital I (2)
4.8 Common Securities Certificate of GBB Capital I (2)
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington
Trust Company, dated as of March 31, 1997 (2)
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997 (2)
4.11 Indenture between Greater Bay Bancorp and Wilmington Trust
Company, as Debenture Trustee, dated as of August 12, 1998 (5)
4.12 Form of Exchange Junior Subordinated Debentures (filed as Exhibit
A to Exhibit 4.11 hereto)
4.13 Certificate of Trust of GBB Capital II, dated as of May 18, 1998
(5)
4.14 Amended and Restated Trust Agreement of GBB Capital II, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of August 12, 1998
(5)
4.15 Form of Exchange Capital Security Certificate (filed as Exhibit A-
1 to Exhibit 4.11 hereto)
4.16 Common Securities Guarantee Agreement of Greater Bay Bancorp,
dated as of August 12, 1998 (5)
4.17 Series B Capital Securities Guarantee Agreement of Greater Bay
Bancorp and Wilmington Trust Company dated as of November 27,
1998 (4)
4.18 Securities Purchase Agreement, dated as of December 21, 1999,
between Greater Bay Bancorp and the investors identified therein
(6)
4.19 Registration Rights Agreement, dated as of December 22, 1999,
between Greater Bay Bancorp and the investors identified therein
(6)
4.20 Securities Purchase Agreement, dated as of March 22, 2000, by and
between Greater Bay Bancorp and the investors identified therein
(7)
4.21 Registration Rights Agreement, dated as of March 23, 2000, by and
between Greater Bay Bancorp and the investors identified therein
(7)
4.22 Amended and Restated Declaration of Trust of GBB Capital III,
dated as of March 23, 2000 (8)
4.23 Indenture, dated as of March 23, 2000, between Greater Bay Bancorp
and The Bank of New York, as Trustee (8)
4.24 Guarantee Agreement, dated as of March 23, 2000, by and between
Greater Bay Bancorp and The Bank of New York, as Trustee (8)
29
Exhibit No. Exhibit
----------- -------
4.25 Amended and Restated Declaration of Trust of GBB Capital IV, dated
as of May 19, 2000 (9)
4.26 Indenture, dated as of May 19, 2000, between Greater Bay Bancorp
and Wilmington Trust Company, as Trustee (9)
4.27 Common Securities Guarantee Agreement, dated as of May 19, 2000
between Greater Bay Bancorp and Wilmington Trust Company, as
Trustee (9)
4.28 Capital Securities Guarantee Agreement, dated as of November 20,
2000, between Greater Bay Bancorp and Wilmington Trust Company,
as Trustee
4.29 Junior Subordinated Debenture Certificate, dated November 20, 2000
4.30 Capital Security Certificate, Series B, dated November 20, 2000
10.1.1 Employment Agreement with David L. Kalkbrenner, dated as of
January 1, 1999 (10)(11)
10.1.2 Amendment No. 1 to Employment Agreement with David L. Kalkbrenner,
dated as of December 11, 2000 (10)
10.2 Employee Supplemental Compensation Benefits Agreement, dated as of
January 1, 1998, between Greater Bay Bancorp and David L.
Kalkbrenner (10)(11)
10.3 Employee Supplemental Compensation Benefits Agreement, dated as of
January 1, 1998, between Mid-Peninsula Bank and Susan K. Black
(10)(11)
10.4 Employee Supplemental Compensation Benefits Agreement, dated as of
January 1, 1998, between Cupertino National Bank and David R.
Hood (10)(11)
10.5 Employee Supplemental Compensation Benefits Agreement, dated as of
April 6, 1998, between Greater Bay Bancorp and Gregg A. Johnson
(10)(11)
10.6 Employee Supplemental Compensation Benefits Agreement, dated as of
January 1, 1998, between Greater Bay Bancorp and Steven C. Smith
(10)(11)
10.7 Greater Bay Bancorp 401(k) Profit Sharing Plan (10) (12)
10.8 Greater Bay Bancorp Employee Stock Purchase Plan, as amended (10)
10.9 Greater Bay Bancorp Change in Control Pay Plan I (10)(12)
10.10.1 Greater Bay Bancorp Change in Control Pay Plan II (10)(12)
10.10.2 Amendment No. 1 to Greater Bay Bancorp Change in Control Pay Plan
II (10)(13)
10.11 Greater Bay Bancorp Termination and Layoff Pay Plan I (10)(12)
10.12.1 Greater Bay Bancorp Termination and Layoff Pay Plan II (10)(12)
10.12.2 Amendment No. 1 to Greater Bay Bancorp Termination and Layoff Pay
Plan II (10)(13)
10.13 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan, as
amended (10)
10.14 Greater Bay Bancorp 1996 Stock Option Plan, as amended (10)
10.15 Form of Indemnification Agreement between Greater Bay Bancorp and
with directors and certain executive officers (2)
10.16.1 Agreement, dated November 4, 1999, between Greater Bay Bancorp and
Wells Fargo Bank, National Association (13)
10.16.2 Letter Amendment and Revolving Line of Credit Note, effective
October 19, 2000, between Greater Bay Bancorp and Wells Fargo
Bank, National Association
10.17 Line of Credit Agreement and Note, dated as of November 1, 2000,
by and between Greater Bay Bancorp and Union Bank of California,
N.A.
12.1 Statement re Computation of Ratios of Earnings to Fixed Charges
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
30
- --------
(1) Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed
with the SEC on November 25, 1998.
(2) Incorporated by reference from Greater Bay Bancorp's Current Report on
Form 8-K dated June 5, 1997.
(3) Incorporated by reference from Greater Bay Bancorp's Registration
Statement on Form S-1 (File No. 333-22783) filed with the SEC on March 5,
1997.
(4) Incorporated by reference from Greater Bay Bancorp's 1998 Annual Report
on Form 10-K filed with the SEC on February 17, 1999.
(5) Incorporated by reference from Greater Bay Bancorp's Current Report on
Form 8-K filed with the SEC on August 28, 1998.
(6) Incorporated by reference from Greater Bay Bancorp's Current Report on
Form 8-K filed with the SEC on December 28, 1999.
(7) Incorporated herein by reference from Greater Bay Bancorp's Current
Report on Form 8-K filed with the SEC on March 24, 2000.
(8) Incorporated herein by reference from Greater Bay Bancorp's Quarterly
Report on Form 10-Q filed with the SEC on May 12, 2000.
(9) Incorporated by reference from Greater Bay Bancorp's Quarterly Report on
Form 10-Q filed with the SEC on August 1, 2000.
(10) Represents executive compensation plans and arrangements of Greater Bay
Bancorp.
(11) Incorporated by reference from Greater Bay Bancorp's Annual Report on
Form 10-K filed with the SEC on January 31, 2000.
(12) Incorporated by reference from Greater Bay Bancorp's Annual Report on
Form 10-K filed with the SEC on March 31, 1998.
(13) Incorporated by reference from Greater Bay Bancorp's Quarterly Report on
Form 10-Q filed with the SEC on May 4, 1999.
31
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table represents the selected consolidated financial
information at and for the five years ended December 31, 2000:
2000 1999* 1998* 1997* 1996*
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Statement of Operations
Data
Interest income $ 368,363 $ 255,377 $ 205,189 $ 165,783 $ 129,559
Interest expense 136,400 90,817 73,918 56,847 43,044
---------- ---------- ---------- ---------- ----------
Net interest income 231,963 164,560 131,271 108,936 86,515
Provision for loan
losses 28,096 14,039 8,279 9,131 5,095
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses 203,867 150,521 122,992 99,805 81,420
Other income 32,539 28,471 20,996 18,179 16,972
Nonrecurring--warrant
income 12,986 14,508 945 1,162 92
---------- ---------- ---------- ---------- ----------
Total other income 45,525 42,979 21,941 19,341 17,064
Operating expenses 122,612 105,114 89,029 77,727 67,948
Other expenses--
nonrecurring -- 12,160 1,341 (1,700) --
---------- ---------- ---------- ---------- ----------
Total operating
expenses 122,612 117,274 90,370 76,027 67,948
---------- ---------- ---------- ---------- ----------
Income before income tax
expense & merger and
other related
nonrecurring costs 126,780 76,226 54,563 43,119 30,536
Income tax expense 48,537 25,468 19,105 15,643 10,963
---------- ---------- ---------- ---------- ----------
Income before merger and
other related
nonrecurring costs and
extraordinary items 78,243 50,758 35,458 27,476 19,573
Merger and other related
nonrecurring costs, net
of tax (19,703) (6,486) (1,674) (2,282) (1,991)
---------- ---------- ---------- ---------- ----------
Net income before
extraordinary items 58,540 44,272 33,784 25,194 17,582
Extraordinary items -- (88) -- -- --
---------- ---------- ---------- ---------- ----------
Net income $ 58,540 $ 44,184 $ 33,784 $ 25,194 $ 17,582
========== ========== ========== ========== ==========
Per Share Data(1)
Income per share (before
merger, nonrecurring
and extraordinary
items)
Basic $ 1.71 $ 1.21 $ 0.95 $ 0.73 $ 0.57
Diluted 1.62 1.15 0.89 0.68 0.53
Net income per share
Basic $ 1.42 $ 1.16 $ 0.91 $ 0.70 $ 0.51
Diluted 1.35 1.10 0.85 0.66 0.48
Cash dividends per
share(2) $ 0.35 $ 0.24 $ 0.19 $ 0.15 $ 0.11
Book value per common
share 7.69 6.38 5.37 4.78 4.30
Shares outstanding at
year end 41,929,173 39,635,048 37,342,950 35,886,162 33,865,656
Average common shares
outstanding 41,229,000 38,245,000 37,049,000 35,835,000 34,634,000
Average common and
common equivalent
shares outstanding 43,505,000 40,304,000 39,639,000 38,198,000 36,599,000
- --------
* Restated on a historical basis to reflect the mergers described in Notes 1
and 2 of Notes to Consolidated Financial Statements on a pooling-of-
interest basis.
(1) Restated to reflect 2-for-1 stock splits effective on April 30, 1998 and
October 4, 2000.
(2) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the completion of
their mergers with Greater Bay.
A-1
2000 1999* 1998* 1997* 1996*
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Performance Ratios
Return on average assets
(before merger,
nonrecurring and
extraordinary items) 1.61% 1.39% 1.37% 1.33% 1.26%
Return on average common
shareholders' equity
(before merger
nonrecurring and
extraordinary items) 24.08% 21.08% 19.02% 16.24% 14.13%
Return on average assets 1.34% 1.33% 1.32% 1.29% 1.13%
Return on average common
shareholders' equity 19.95% 20.16% 18.29% 15.75% 12.69%
Net interest margin 5.72% 5.39% 5.56% 5.96% 6.11%
Balance Sheet Data--At
Period End
Assets $5,130,378 $3,736,729 $2,857,246 $2,235,907 $1,791,754
Loans, net 3,517,408 2,416,423 1,740,158 1,358,514 1,089,477
Investment securities 962,277 750,516 667,531 464,703 345,107
Deposits 4,165,061 3,262,888 2,463,484 1,935,405 1,570,087
Subordinated debt -- -- 3,000 3,000 3,000
Trust Preferred
Securities 99,500 49,000 49,000 20,000 --
Common shareholders'
equity 322,365 252,895 200,697 171,465 145,722
Asset Quality Ratios
Nonperforming assets**
to total loans and
other real estate owned 0.35% 0.28% 0.33% 0.54% 1.01%
Nonperforming assets**
to total assets 0.25% 0.18% 0.20% 0.34% 0.63%
Allowance for loan
losses to total loans 2.32% 1.94% 1.85% 1.91% 1.66%
Allowance for loan
losses to non-
performing assets 493.59% 690.23% 550.02% 341.80% 133.91%
Net charge-offs to
average loans 0.38% 0.09% 0.13% 0.20% 0.14%
Regulatory Capital
Ratios
Leverage Ratio 8.77% 8.24% 8.13% 8.82% 8.42%
Tier 1 Capital 9.40% 9.75% 10.70% 11.31% 10.89%
Total Capital 10.70% 11.07% 12.59% 12.67% 12.24%
- --------
* Restated on a historical basis to reflect the mergers described in Notes 1
and 2 of Notes to Consolidated Financial Statements on a pooling-of-
interest basis.
** Excludes accruing loans past due 90 days or more.
A-2
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" or "we", on a consolidated basis) is a bank holding company with 10
bank subsidiaries (the "Banks"): Bank of Petaluma, Bank of Santa Clara, Bay
Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National
Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank and
Peninsula Bank of Commerce.
GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV, which are
Delaware statutory business trusts formed for the exclusive purpose of issuing
and selling trust preferred securities, are also subsidiaries of the Company.
The Company also owns Matsco Lease Finance, Inc. II and Matsco Lease
Finance, Inc. III, which are special purpose corporations formed for the
exclusive purpose of securitizing leases and issuing lease-backed notes.
The Company also operates through the following 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, Matsco, 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 the San Francisco Bay Area including Silicon Valley, San Francisco
and the San Francisco Peninsula, the East Bay, Santa Cruz and Sonoma County,
with 37 full service banking offices located in Aptos, Blackhawk, Capitola,
Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Milpitas, Palo
Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco,
San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz, Scotts
Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville.
At December 31, 2000, the Company had total assets of $5.1 billion, total
loans, net, of $3.5 billion and total deposits of $4.2 billion.
The Company has participated in nine mergers during the three-year period
ended December 31, 2000, as described in Note 2 of Notes to Consolidated
Financial Statements. With the exception of the merger with The Matsco
Companies, Inc., all of these mergers were accounted for as a pooling-of-
interests and, accordingly, all of the financial information of the Company
for the periods prior to the mergers has been restated as if the mergers had
occurred at the beginning of the earliest period presented. The merger with
The Matsco Companies, Inc. was accounted for using the purchase accounting
method and accordingly The Matsco Companies, Inc.'s results of operations have
been included in the consolidated financial statements since the date of
acquisition.
All outstanding and weighted average share amounts presented in this report
have been restated to reflect the 2-for-1 stock splits effective on April 30,
1998 and October 4, 2000.
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 and
other factors discussed in the Annual Report on Form 10-K for the year ended
December 31, 2000 under "Item 1. Business--Factors That May Affect Future
Results of Operations."
A-3
Results of Operations
The following table summarizes income, income per share and key financial
ratios for the periods indicated using three different measurements:
Core earnings (income before
nonrecurring warrant income, merger
and other related nonrecurring costs,
other nonrecurring expenses and
extraordinary items)
--------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(Dollars in thousands, except
per share amounts)
Income $70,667 $46,195 $35,141
Income per share:
Basic $ 1.71 $ 1.21 $ 0.95
Diluted $ 1.62 $ 1.15 $ 0.89
Return on average assets 1.61% 1.39% 1.37%
Return on average shareholders'
equity 24.08% 21.08% 19.02%
Income (including nonrecurring warrant
income) before merger and other
related nonrecurring costs and
extraordinary items
--------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(Dollars in thousands, except
per share amounts)
Income $78,243 $50,758 $35,458
Income per share:
Basic $ 1.90 $ 1.33 $ 0.96
Diluted $ 1.80 $ 1.26 $ 0.89
Return on average assets 1.79% 1.53% 1.38%
Return on average shareholders'
equity 26.66% 23.16% 19.19%
Net income (including non-recurring
warrant income, merger and other
nonrecurring costs, other nonrecurring
expenses and extraordinary items)
--------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
------------ ------------ ------------
(Dollars in thousands, except
per share amounts)
Income $58,540 $44,184 $33,784
Income per share:
Basic $ 1.42 $ 1.16 $ 0.91
Diluted $ 1.35 $ 1.10 $ 0.85
Return on average assets 1.34% 1.33% 1.32%
Return on average shareholders'
equity 19.95% 20.16% 18.29%
Net income for 2000 increased 32.5% to $58.5 million, or $1.35 per diluted
share, compared to net income of $44.2 million, or $1.10 per diluted share,
for 1999. 2000 results included nonrecurring warrant income of $13.0 million
($7.6 million, net of taxes) compared to $14.5 million during 1999. In
addition, 2000 results included merger and other related nonrecurring costs of
$30.1 million ($19.7 million, net of taxes) compared to $10.3 million ($6.5
million, net of taxes) in 1999.
Income, including nonrecurring warrant income and before merger and other
related nonrecurring costs and extraordinary items, increased 54.1% to $78.2
million, or $1.80 per diluted share, in 2000, compared to $50.8 million, or
$1.26 per diluted share, in 1999.
A-4
The Company's core earnings (income before nonrecurring warrant income,
merger and other related nonrecurring costs, other nonrecurring expenses and
extraordinary items) for 2000 increased 53.0% to $70.7 million, or $1.62 per
diluted share, compared to $46.2 million, or $1.15 per diluted share for 1999.
Based on its core earnings for 2000, the Company's return on average
shareholders' equity was 24.08% and its return on average assets was 1.61%.
During 1999, the Company's core earnings resulted in a return on average
shareholders' equity of 21.08% and a return on average assets of 1.39%.
The 53.0% increase in core earnings during 2000 as compared to 1999 was the
result of significant growth in loans and investments. For 2000, net interest
income increased 41.0% as compared to 1999. This increase was primarily due to
a 32.7% increase in average interest-earning assets for 2000 as compared to
1999. The increases in loans, trust assets and deposits also contributed to
the 33.0% increase in loan and international banking fees, service charges and
other fees, and trust fees. Increases in operating expenses were required to
service and support the Company's growth. As a result, increases in revenue
were partially offset for 2000 by a 16.6% increase in recurring operating
expenses, as compared to 1999.
Net income for 1999 increased 30.8% to $44.2 million, or $1.10 per diluted
share, compared to net income of $33.8 million, or $0.85 per diluted share,
for 1998. 1999 results included nonrecurring warrant income of $14.5 million
($8.4 million, net of taxes) compared to $945,000 during 1998. In addition,
1999 results included merger and other related nonrecurring costs of $10.3
million ($6.5 million, net of taxes) compared to $2.7 million ($1.7 million,
net of taxes) in 1998.
Income, including nonrecurring warrant income and before merger and other
related nonrecurring costs and extraordinary items, increased 43.1% to $50.8
million, or $1.26 per diluted share, in 1999, compared to $35.5 million, or
$0.89 per diluted share, in 1998.
The Company's core earnings for 1999 increased 31.5% to $46.2 million, or
$1.15 per diluted share, compared to $35.1 million, or $0.89 per diluted share
for 1998. Based on its core earnings for 1999, the Company's return on average
shareholders' equity was 21.08% and its return on average assets was 1.39%.
During 1998, the Company's core earnings resulted in a return on average
shareholders' equity of 19.02% and a return on average assets of 1.37%.
The 31.5% increase in core earnings during 1999 as compared to 1998 was the
result of significant growth in loans and investments. For 1999, net interest
income increased 25.3% as compared to 1998. This increase was primarily due to
a 29.3% increase in average interest-earning assets for 1999 as compared to
1998. The increases in loans, trust assets and deposits also contributed to
the 25.3% increase in loan and international banking fees, service charges and
other fees, and trust fees. Increases in operating expenses were required to
service and support the Company's growth. As a result, increases in revenue
were partially offset for 1999 by a 18.0% increase in recurring operating
expenses, as compared to 1998.
Net Interest Income
Net interest income increased 41.0% to $232.0 million in 2000 from $164.6
million in 1999. This increase was primarily due to the $1.0 billion, or
32.7%, increase in average interest-earning assets and a 33 basis point
increase in the Company's net yield on interest-earning assets. Net interest
income increased 25.3% in 1999 from $131.3 million in 1998. This increase was
primarily due to the $692.9 million, or 29.3%, increase in average interest-
earning assets, which was partially offset by the 17 basis point decrease in
the Company's net yield on interest-earning assets.
A-5
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.
Years ended December 31,
------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- ---------------------------
Average Average Average
Average yield/ Average yield/ Average yield/
balance(1) Interest rate balance(1) Interest rate balance(1) Interest rate
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Fed funds sold $ 196,073 $ 11,954 6.10% $ 203,554 $ 10,518 5.17% $ 156,649 $ 8,367 5.34%
Other short term
securities 24,817 1,663 6.70% 70,847 3,830 5.41% 97,229 5,480 5.64%
Investment securities:
Taxable 765,324 55,235 7.22% 559,077 37,000 6.62% 494,019 30,709 6.22%
Tax-exempt(2) 167,884 8,754 5.21% 129,971 6,549 5.04% 98,728 5,090 5.16%
Loans(3) 2,901,647 290,757 10.02% 2,092,024 197,480 9.44% 1,515,965 155,543 10.26%
---------- -------- ---------- -------- ---------- --------
Total interest-earning
assets 4,055,745 368,363 9.08% 3,055,473 255,377 8.36% 2,362,590 205,189 8.68%
Noninterest-earning
assets 320,950 258,584 203,022
---------- -------- ---------- -------- ---------- --------
Total assets $4,376,695 368,363 $3,314,057 255,377 $2,565,612 205,189
========== -------- ========== -------- ========== --------
INTEREST-BEARING
LIABILITIES:
Deposits:
MMDA, NOW and Savings $2,112,564 82,918 3.92% $1,650,227 55,292 3.35% $1,223,414 41,980 3.43%
Time deposits, over
$100,000 649,667 35,611 5.48% 461,085 21,677 4.70% 326,242 16,436 5.04%
Other time deposits 158,896 8,288 5.22% 166,446 7,873 4.73% 168,606 8,342 4.95%
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits 2,921,127 126,817 4.34% 2,277,758 84,842 3.72% 1,718,262 66,758 3.89%
Other borrowings 159,696 9,583 6.00% 109,872 5,907 5.38% 114,063 6,815 5.97%
Subordinated debt -- -- 0.00% 607 68 11.20% 3,000 345 11.50%
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities 3,080,823 136,400 4.43% 2,388,237 90,817 3.80% 1,835,325 73,918 4.03%
Noninterest-bearing
deposits 848,897 620,555 489,520
Other noninterest-bearing
liabilities 71,618 37,090 24,729
Trust Preferred
Securities 81,913 49,000 31,293
---------- ---------- ----------
Shareholders' equity 293,444 219,175 184,745
---------- -------- ---------- ---------- --------
Total shareholders'
equity and
liabilities $4,376,695 136,400 $3,314,057 90,817 $2,565,612 73,918
========== -------- ========== -------- ========== --------
Net interest income $231,963 $164,560 $131,271
======== ======== ========
Interest rate spread 4.66% 4.56% 4.66%
Contribution of interest
free funds 1.06% 0.83% 0.90%
----- ----- -----
Net yield on interest-
earnings assets(4) 5.72% 5.39% 5.56%
- -------
(1) Nonaccrual loans are excluded from the average balance and only collected
interest on nonaccrual loans is included in the interest column.
(2) Tax equivalent yields earned on the tax exempt securities are 7.55%, 7.42%
and 7.58% for the years ended December 31, 2000, 1999 and 1998,
respectively, using the federal statutory rate of 34%.
(3) Loan fees totaling $8.1 million, $7.5 million and $6.8 million are
included in loan interest income for 2000, 1999 and 1998, respectively.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
A-6
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 net interest income due to changes in
average asset and liability balances (volume) and changes in average interest
rates (rate). Changes in interest income and expense which are not
attributable specifically to either volume or rate are allocated
proportionately between both variances. Nonaccrual loans are excluded in
average loans.
Year ended December 31, Year ended December 31,
2000 compared with 1999 compared with
December 31, 1999 December 31, 1998
favorable / (unfavorable) favorable / (unfavorable)
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
INTEREST EARNED ON
INTEREST-EARNING ASSETS
Federal funds sold $ (398) $ 1,834 $ 1,436 $ 2,432 $ (281) $ 2,151
Other short term
investments (2,924) 757 (2,167) (1,434) (216) (1,650)
Investment securities:
Taxable 14,642 3,593 18,235 4,219 2,072 6,291
Tax-exempt 1,970 235 2,205 1,577 (118) 1,459
Loans 80,483 12,794 93,277 55,200 (13,263) 41,937
-------- -------- -------- -------- -------- --------
Total interest income 93,772 19,214 112,986 61,995 (11,807) 50,188
-------- -------- -------- -------- -------- --------
INTEREST EXPENSE ON
INTEREST-BEARING
LIABILITIES
Deposits:
MMDA, NOW and savings (17,138) (10,488) (27,626) (14,322) 1,010 (13,312)
Time deposits over
$100,000 (9,912) (4,022) (13,934) (6,403) 1,162 (5,241)
Other time deposits 368 (783) (415) 106 363 469
-------- -------- -------- -------- -------- --------
Total interest-
bearing deposits (26,683) (15,292) (41,975) (20,619) 2,535 (18,084)
Other borrowings (2,926) (750) (3,676) 244 664 908
Subordinated debt 34 34 68 268 9 277
-------- -------- -------- -------- -------- --------
Total interest
expense (29,575) (16,008) (45,583) (20,107) 3,208 (16,899)
-------- -------- -------- -------- -------- --------
Net increase
(decrease) in net
interest income $ 64,198 $ 3,205 $ 67,403 $ 41,888 $ (8,599) $ 33,289
======== ======== ======== ======== ======== ========
Interest income in 2000 increased 44.2% to $368.4 million from $255.4
million in 1999. 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 enhanced by an
increase in the yield earned on average interest-earning assets. Average
interest-earning assets increased $1.0 billion, or 32.7%, to $4.1 billion in
2000, compared to $3.1 billion in 1999. Average loans increased $809.6
million, or 38.7%, to $2.9 billion in 2000 from $2.1 billion in 1999. Average
investment securities, Federal funds sold and other short-term securities,
increased 19.8% to $1.2 billion in 2000 from $963.4 million in 1999.
The average yield on interest-earning assets increased 72 basis points to
9.08% in 2000 from 8.36% in 1999 primarily due to an increase in the average
yield on loans. Loans represented approximately 71.5% of total interest-
earning assets in 2000 compared to 68.5% in 1999. The average yield on loans
increased 58 basis points to 10.02% in 2000 from 9.44% in 1999.
A-7
Interest expense in 2000 increased 50.2% to $136.4 million from $90.8
million in 1999. This increase was due to greater volumes of interest-bearing
liabilities and higher interest rates paid on interest-bearing liabilities.
Average interest-bearing liabilities increased 29.0% to $3.1 billion in 2000
from $2.4 billion in 1999. The increase in volume was due primarily to the
efforts of the Banks' relationship managers in generating core deposits from
their client relationships and the deposits derived from the activities of the
Greater Bay Trust Company and the Venture Banking Group. Interest rates
increased primarily as a result of increases in market interest rates and as a
result of competitive pressures.
During 2000, average noninterest-bearing deposits increased to $848.9
million from $620.6 million in 1999.
As a result of the foregoing, the Company's interest rate spread increased
to 4.66% in 2000 from 4.56% in 1999, and the net yield on interest-earning
assets increased in 2000 to 5.72% from 5.39% in 1999.
Interest income increased 24.4% to $255.4 million in 1999 from $205.2
million in 1998, as a result of the increase in average interest-earning
assets offset by a decline in the yields earned. Average interest-earning
assets increased 29.3% to $3.1 billion in 1999 from $2.4 billion in 1998
principally as a result of increase in loans. The yield on the higher volume
of average interest-earning assets declined 32 basis points to 8.36% in 1999
from 8.68% in 1998, primarily as a result of increased competition for loans.
Interest expense in 1999 increased 22.9% to $90.8 million from $73.9 million
in 1998 primarily as a result of the increase in the volume of interest-
bearing liabilities offset in part by a decline in the rates paid on interest-
bearing liabilities. Corresponding to the growth in average interest-earning
assets, average interest-bearing liabilities increased 30.1% to $2.4 billion
in 1999 from $1.8 billion in 1998.
As a result of the foregoing, the Company's interest rate spread declined to
4.56% in 1999 from 4.66% in 1998 and the net yield on interest-earning assets
declined to 5.39% in 1999 from 5.56% in 1998.
Based on modeling performed as part of out interest rate risk analysis, we
believe that the 50 basis point decrease in the target Fed Funds rate by the
Federal Reserve announced January 3, 2001 and the additional 50 basis point
decrease announced January 31, 2001 will likely result in a 6 to 12 basis
point drop in the Company's interest rate spread. With any further declines in
interest rates, our ability to proportionately decrease the rates on our
deposit sources, particularly MMDA and NOW accounts, may not be possible due
to competitive pressures. This may result in a larger decrease in our interest
rate spread. Although we believe our current level of interest rate
sensitivity is reasonable, significant fluctuations in interest rates may have
an adverse effect on our business, financial condition and results of
operations.
The Company incurred certain client service expenses with respect to its
noninterest-bearing liabilities. These expenses include courier and armored
car services, check supplies and other related items that are included in
operating expenses. If these expenses had been included in interest expense,
the Company's net yield on interest-earning assets would have been as follows
for each of the years presented.
Years ended December 31,
------------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Average noninterest bearing demand
deposits $848,897 $620,555 $489,520
Client service expenses 2,081 3,226 2,520
Client service expenses, as a percentage
of average noninterest bearing demand
deposits 0.25 % 0.52 % 0.51 %
Impact on net yield of interest-earning
assets:
Net yield on interest-earning assets 5.72 % 5.39 % 5.56 %
Impact of client service expense (0.05)% (0.11)% (0.11)%
-------- -------- --------
Adjusted net yield on interest-earning
assets 5.67 % 5.28 % 5.45 %
======== ======== ========
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to manage its interest expense.
A-8
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 2000 was $28.1 million, compared to $14.0
million in 1999 and $8.3 million in 1998. In addition, in connection with the
mergers described in Note 2 of Notes to Consolidated Financial Statements, the
Company made an additional provision for loan losses of $8.1 million, $2.7
million and $183,000 in 2000, 1999 and 1998, respectively, to conform to the
Company's allowance methodology.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "Financial Condition--Nonperforming and
Classified Assets."
Other Income
Total other income increased to $45.5 million in 2000, compared to $43.0
million in 1999 and $21.9 million in 1998. The following table sets forth
information by category of other income for the years indicated.
Years ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Service charges and other fees $ 8,594 $ 7,931 $ 6,906
Loan and international banking fees 8,162 4,275 2,752
Trust fees 3,450 2,990 2,473
ATM network revenue 2,891 2,682 2,440
Gain on sale of SBA loans 2,190 2,058 3,490
Gain on investments, net 81 87 473
Other income 7,171 8,448 2,462
------- ------- -------
Total, recurring 32,539 28,471 20,996
Warrant income 12,986 14,508 945
------- ------- -------
Total $45,525 $42,979 $21,941
======= ======= =======
The increase in other income in 2000 as compared to 1999 was a result of
$3.9 million increase in loan and international banking fees, a $663,000
increase in service charges and other fees, and a $460,000 increase in trust
fees. These increases were a result of significant growth in total loans,
total deposits and trust assets. Other income in 2000 and 1999 includes $2.1
million and $4.0 million, respectively, 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 1999 as compared to 1998 was a result of
$1.5 million increase in loan and international banking fees, a $1.0 million
increase in service charges and other fees, and a $517,000 increase in trust
fees. These increases were a result of significant growth in total loans,
total deposits and trust assets.
A-9
Other income in 2000, 1999 and 1998 included warrant income of $13.0
million, $14.5 million and $945,000 net of related employee incentives of $4.5
million, $7.3 million and $396,000, respectively. At December 31, 2000, the
Company held approximately 145 warrant positions. The Company occasionally
receives warrants to acquire common stock from companies that are in the
start-up or development phase. The timing and amount of income derived from
the exercise and sale of client warrants typically depend upon factors beyond
the control of the Company, and cannot be predicted with any degree of
accuracy and are likely to vary materially from period to period.
Operating Expenses
The following table sets forth the major components of operating expenses
for the years indicated.
Years ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
(Dollars in thousands)
Compensation and benefits $ 64,324 $ 56,488 $47,617
Occupancy and equipment 21,688 17,545 13,386
Dividends paid on TPS 7,842 4,201 2,824
Client service expenses 2,081 3,226 2,520
Legal and other professional fees 4,704 3,371 3,416
FDIC insurance and regulatory assessments 1,236 622 553
Expenses on other real estate owned 56 13 157
Other 20,681 19,648 18,556
-------- -------- -------
Total operating expenses excluding nonrecurring
costs 122,612 105,114 89,029
Contribution to the Greater Bay Bancorp
Foundation and related expenses -- 12,160 1,341
Mergers and other related nonrecurring costs 30,102 10,331 2,661
-------- -------- -------
Total operating expenses $152,714 $127,605 $93,031
======== ======== =======
Efficiency ratio 55.03% 61.48% 60.72%
Efficiency ratio (before merger, nonrecurring and
extraordinary items) 46.36% 54.45% 58.47%
Total operating expenses to average assets 3.49% 3.85% 3.63%
Total operating expenses to average assets
(before merger, nonrecurring and extraordinary
items) 2.80% 3.17% 3.47%
Operating expenses totaled $152.7 million for 2000, compared to $127.6
million for 1999 and $93.0 million for 1998. The ratio of operating expenses
to average assets was 3.49% in 2000, 3.85% in 1999, and 3.63% in 1998. Total
operating expenses include merger and other related nonrecurring costs and
contributions to the Foundation and related expenses.
The efficiency ratio is computed by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio before merger,
nonrecurring and extraordinary items for 2000 was 46.36%, compared to 54.45%
in 1999 and 58.47% in 1998.
During 1998, Greater Bay established the Greater Bay Bancorp Foundation
("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 expenses of
$12.2 million in 1999 and $1.3 million in 1998 in connection with its
Foundation donations which is included in operating expenses.
A-10
As indicated by the improvements in the efficiency ratio, the Company has
been able to achieve increasing economies of scale. In 2000, average assets
increased 32.1% from 1999, while operating expenses, excluding merger, and
other nonrecurring items, increased only 16.6%. From 1998 to 1999, average
assets increased 29.2%, while operating expenses, excluding merger and
nonrecurring costs increased only 18.1%.
Compensation and benefits expenses increased in 2000 to $64.3 million,
compared to $56.5 million in 1999 and $47.6 million in 1998. The increase in
compensation and benefits is due primarily to the additions in personnel made
in 2000 and 1999 to accommodate the growth of the Company.
The increase in occupancy and equipment, legal and other professional fees,
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. The increase in the dividends paid
on Trust Preferred Securities was a result of the $50.5 million in Trust
Preferred Securities issued in 2000.
Income Taxes
The Company's effective income tax rate for 2000 was 39.4%, compared to
32.8% in 1999 and 34.9% in 1998. 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
Pacific Rim Bancorporation.
Financial Condition
Total assets increased 37.3% to $5.1 billion at December 31, 2000, compared
to $3.7 billion at December 31, 1999. Total assets increased 30.8% in 1999
from $2.9 billion at December 31, 1998. The increases in 2000 and 1999 were
primarily due to increases in the Company's loan portfolio funded by growth in
deposits.
Loans
Total gross loans increased 45.9% to $3.6 billion at December 31, 2000,
compared to $2.5 billion at December 31, 1999. Total gross loans increased
38.8% in 1999 from $1.8 billion at year-end 1998. The increases in loan
volumes in 2000 and 1999 were primarily due to a strong economy in the
Company's market areas coupled with the business development efforts by the
Company's relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the
balance in leases and 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.
A-11
The following table presents the composition of the Company's loan portfolio
at the dates indicated.
As of December 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
Commercial $1,562,712 44.4 % $ 926,075 38.3 % $ 657,300 37.8 % $ 547,083 40.3 % $ 462,894 42.5 %
Term Real Estate--
Commercial 967,428 27.5 764,034 31.6 562,388 32.3 412,412 30.4 313,203 28.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Commercial 2,530,140 71.9 1,690,109 69.9 1,219,688 70.1 959,495 70.7 776,097 71.2
Real estate
construction and land 691,912 19.7 479,163 19.8 301,641 17.3 206,448 15.2 152,607 14.0
Real estate other 176,568 5.0 140,852 5.8 114,553 6.6 83,404 6.1 68,434 6.3
Consumer and other 216,459 6.2 167,257 6.9 149,287 8.6 146,930 10.8 121,478 11.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, gross 3,615,079 102.8 2,477,381 102.4 1,785,169 102.6 1,396,277 102.8 1,118,616 102.7
Deferred fees and
discounts, net (13,657) (0.4) (12,911) (0.5) (11,916) (0.7) (11,157) (0.8) (10,567) (1.0)
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net of
deferred fees 3,601,422 102.4 2,464,470 101.9 1,773,253 101.9 1,385,120 102.0 1,108,049 101.7
Allowance for loan
losses (84,014) (2.4) (48,047) (1.9) (33,095) (1.9) (26,606) (2.0) (18,572) (1.7)
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net $3,517,408 100.0 % $2,416,423 100.0 % $1,740,158 100.0 % $1,358,514 100.0 % $1,089,477 100.0 %
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
The following table presents the maturity distribution of the Company's
commercial, real estate construction and land, term real estate--commercial
and real estate other portfolios and the sensitivity of such loans to changes
in interest rates at December 31, 2000.
Term real Real estate Real
estate-- construction estate
Commercial commercial and land other
---------- ---------- ------------ --------
(Dollars in thousands)
Loans maturing in:
One year or less:
Fixed rate $ 271,756 $ 23,859 $ 48,155 $ 1,547
Variable rate 525,118 57,944 584,196 26,686
One to five years:
Fixed rate 133,063 117,496 1,929 6,257
Variable rate 259,718 113,348 38,170 28,163
After five years:
Fixed rate 237,592 356,687 3,639 11,767
Variable rate 135,465 298,094 15,823 102,148
---------- -------- -------- --------
Total $1,562,712 $967,428 $691,912 $176,568
========== ======== ======== ========
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued
and not collected is generally reversed from income. Loans are charged off
when management determines that collection has become unlikely. Restructured
loans are those where the Banks have granted a concession on the interest paid
or original repayment terms due to financial difficulties of the borrower.
Other real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
A-12
The following table sets forth information regarding nonperforming assets at
the dates indicated.
As of December 31,
----------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ------ -------
(Dollars in thousands)
Nonperforming loans:
Nonaccrual loans $12,593 $5,744 $4,011 $4,437 $ 7,186
Restructured loans -- 807 796 1,533 1,828
------- ------ ------ ------ -------
Total nonperforming loans 12,593 6,551 4,807 5,970 9,014
OREO -- 271 966 1,541 2,224
------- ------ ------ ------ -------
Total nonperforming assets $12,593 $6,822 $5,773 $7,511 $11,238
======= ====== ====== ====== =======
Accruing loans past due 90 days
or more $ 4,428 $ 139 $ 244 $ 273 $ 2,651
======= ====== ====== ====== =======
Nonperforming assets to total
loans and OREO 0.35% 0.28% 0.33% 0.54% 1.01%
Nonperforming assets to total
assets 0.25% 0.18% 0.20% 0.34% 0.63%
Nonperforming assets and accruing
loans past due 90 days or more
to total loans and OREO 0.47% 0.28% 0.34% 0.56% 1.25%
Nonperforming assets and accruing
loans past due 90 days or more
to total assets 0.33% 0.19% 0.21% 0.35% 0.78%
At December 31, 2000 and 1999, the Company had $12.6 million and $5.7
million in nonaccrual loans, respectively. At December 31, 2000, accruing
loans past due 90 days or more included three loans totaling $3.7 million
which were brought current or paid in full in the first two weeks of 2001. All
three of these loans had matured in 2000 and were awaiting either payoff or
renewal. Excluding these three loans, the Company's ratio of nonperforming
assets and accruing loans past due 90 days or more to total loans and OREO was
0.37%.
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 uncollectable and its continuance as an asset is not warranted.
Of the $46 million in classified loans at December 31, 2000, approximately
$13 million in loans are secured by real estate, $29 million in loans are
secured by accounts receivable, inventory and equipment and $4 million in
other loans are secured by personal guarantees and related assets. The
classified loans include a variety of borrower types and are not concentrated
in any particular industry or niche business. Based on recent appraisals, the
average loan to value ratio of the real estate secured loans is 60% and
management does not believe that any material losses will be recognized in
these classified loans. With respect to the secured commercial loans and the
other secured loans, management believes that the related commercial business
assets, personal assets securing these loans and the personal guarantees,
combined with the allowance for loan losses are adequate to absorb any
possible loan losses.
A-13
The following table sets forth the classified loans and other real estate
owned at the dates indicated.
As of December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Substandard $ 44,194 $ 30,725 $ 18,834
Doubtful 1,759 1,850 1,376
Loss -- 2 --
OREO -- 271 966
-------- -------- --------
Classified loans and OREO $ 45,953 $ 32,848 $ 21,176
======== ======== ========
Classified to total loans and OREO 1.28% 1.33% 1.19%
Allowance for loan losses to total
classified loans and OREO 182.83% 146.27% 156.29%
With the exception of these classified loans, management was not aware of
any loans outstanding as of December 31, 2000 where the known credit problems
of the borrower would cause management to have doubts as to the ability of
such borrowers to comply with their present loan repayment terms and which
would result in such loans being included in nonperforming or classified asset
tables at some future date. Management cannot, however, predict the extent to
which economic conditions in the Company's market areas may worsen or the full
impact that such an environment may have on the Company's loan portfolio.
Accordingly, there can be no assurance that other loans will not become 90
days or more past due, be placed on nonaccrual, become restructured loans, or
other real estate owned in the future.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio. The allowance is increased by provisions charged against current
earnings and reduced by net charge-offs. Loans are charged off when they are
deemed to be uncollectible; recoveries are generally recorded only when cash
payments are received.
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.
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.
A-14
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, 2000. However, future changes in circumstances, economic
conditions or other factors could cause management to increase or decrease the
allowance for loan losses as necessary.
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the years indicated.
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Period end loans
outstanding $3,615,079 $2,477,381 $1,785,169 $1,396,277 $1,118,616
Average loans
outstanding 2,909,204 2,097,090 1,519,643 1,237,733 886,275
Allowance for loan
losses:
Balance at beginning
of period 48,047 33,095 26,606 18,599 13,905
Allowance of entities
acquired through
mergers accounted for
under purchase
accounting method 10,927 -- -- -- --
Charge-offs:
Commercial (11,729) (2,880) (2,155) (2,136) (1,483)
Term real estate--
commercial -- (12) (51) (59) (85)
---------- ---------- ---------- ---------- ----------
Total commercial (11,729) (2,892) (2,206) (2,195) (1,568)
Real estate
construction and land -- -- (7) (243) (127)
Real estate other -- -- -- -- --
Consumer and other (354) (501) (397) (428) (540)
---------- ---------- ---------- ---------- ----------
Total charge-offs (12,083) (3,393) (2,610) (2,866) (2,235)
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial 798 1,182 540 278 523
Term real estate--
commercial -- 1 11 6 27
---------- ---------- ---------- ---------- ----------
Total commercial 798 1,183 551 284 550
Real estate
construction and land -- 7 -- 6 328
Real estate other -- 7 -- -- --
Consumer and other 151 364 86 101 156
---------- ---------- ---------- ---------- ----------
Total recoveries 949 1,561 637 391 1,034
---------- ---------- ---------- ---------- ----------
Net charge-offs (11,134) (1,832) (1,973) (2,475) (1,201)
Provision charged to
income(1) 36,174 16,784 8,462 10,482 5,895
---------- ---------- ---------- ---------- ----------
Balance at end of period $ 84,014 $ 48,047 $ 33,095 $ 26,606 $ 18,599
========== ========== ========== ========== ==========
Net charge-offs to
average loans
outstanding during the
period 0.38% 0.09% 0.13% 0.20% 0.14%
Allowance as a
percentage of average
loans outstanding 2.89% 2.29% 2.18% 2.15% 2.10%
Allowance as a
percentage of period
end loans outstanding 2.32% 1.94% 1.85% 1.91% 1.66%
Allowance as a
percentage of
non-performing loans 493.59% 718.19% 655.22% 426.17% 159.44%
- --------
(1) Includes $8.1 million, $2.7 million, $183,000, $1.4 million and $800,000
in 2000, 1999, 1998, 1997 and 1996, respectively, to conform to the
Company's allowance methodologies which are included in mergers and other
related nonrecurring costs.
A-15
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.
As of December 31,
------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- ----------------
% of % of % of % of % of
Category Category Category Category Category
to Gross to Gross to Gross to Gross to Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- -------- ------- -------- ------- -------- ------- -------- ------- --------
(Dollars in thousands)
Commercial $32,812 43.23% $16,419 37.38% $12,341 36.82% $ 9,422 39.18% $ 7,927 41.38%
Term real estate--
commercial 14,511 26.76% 7,850 30.84% 3,763 31.50% 2,939 29.54% 2,178 28.00%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total commercial 47,323 69.99% 24,269 68.22% 16,104 68.32% 12,361 68.72% 10,105 69.38%
Real estate construction
and land 10,379 19.14% 4,620 19.34% 3,477 16.90% 2,239 14.79% 2,346 13.64%
Real estate term 1,766 4.88% 2,166 5.69% 1,574 6.42% 1,284 5.97% 706 6.12%
Consumer and other 5,412 5.99% 3,969 6.75% 2,817 8.36% 2,006 10.52% 2,067 10.86%
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total allocated 64,880 35,024 23,972 17,890 15,224
Unallocated 19,134 13,023 9,123 8,716 3,375
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $84,014 100.00% $48,047 100.00% $33,095 100.00% $26,606 100.00% $18,599 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
At December 31, 2000, the allowance for loan losses was $84.0 million,
consisting of a $64.9 million allocated allowance and a $19.1 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.
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 local subdivisions, securities
sold under repurchase agreements, and Federal Home Loan Bank ("FHLB")
advances. The portfolio is comprised of U.S. Treasury securities, U.S.
government agency securities, mortgage-backed securities, obligations of
states and political subdivisions, corporate debt instruments and a modest
amount of equity securities, including Federal Reserve Bank stock and FHLB
stock. The Company does not include Federal Funds sold and certain other
short-term securities as investment securities. These other investments are
included in cash and cash equivalents. Investment securities classified as
available for sale are recorded at fair value, while investment securities
classified as held to maturity are recorded at cost. Unrealized gains or
losses on available for sale securities, net of the deferred tax effect, are
reported as increases or decreases in shareholders' equity.
For the amortized cost and estimated fair value of the investment
securities, the maturity of investment securities by security type and
additional information concerning the investments portfolio, see Note 3 of
Notes to Consolidated Financial Statements.
A-16
Deposits
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached $4.2
billion at December 31, 2000, an increase of 27.6% compared to deposits of
$3.3 billion at December 31, 1999. In 1999, deposits increased 32.5% from $2.5
billion at December 31, 1998. The increase in deposits was primarily due to
the continued marketing efforts directed at commercial business clients in the
Company's market areas.
The Company's noninterest-bearing demand deposit accounts increased 38.0% to
$1.0 billion at December 31, 2000, compared to $727.6 million a year earlier.
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts reached $2.1 billion at year-end 2000,
an increase of 13.3% from $1.8 billion at December 31, 1999. MMDA, NOW and
savings accounts were 50.0% of total deposits at December 31, 2000, as
compared to 56.4% at December 31, 1999.
Time certificates of deposit totaled $1.1 billion, or 25.9% of total
deposits, at December 31, 2000, compared to $696.4 million, or 21.3% of total
deposits, at December 31, 1999.
As of December 31, 2000 and 1999, the Company had $136.8 million and $19.3
million, respectively in brokered deposits outstanding.
Other Borrowings
At December 31, 2000 other borrowings consisted of securities sold under
agreements to repurchase, FHLB advances, advances under credit lines, and
other notes payable. Note 10 of Notes to 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 the Company's 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 can utilize brokered deposit lines, sell securities under agreements to
repurchase, FHLB advances or purchase overnight Federal Funds.
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are
obtained from management fees, interest received on its investments and
dividends declared and paid by the Banks. There are statutory and regulatory
provisions that could limit the ability of the Banks to pay dividends to
Greater Bay. At December 31, 2000, the Banks had approximately $96.0 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, 2000, Greater Bay did not have any material commitments for capital
expenditures.
Net cash provided by operating activities, consisting primarily of net
income, totaled $115.2 million for 2000, $58.7 million for 1999 and $38.8
million for 1998. Cash used for investing activities totaled $1.4 billion in
2000, $812.6 million in 1999 and $626.9 million in 1998. The funds used for
investing activities primarily represent increases in loans and investment
securities for each year reported.
A-17
For the year ended December 31, 2000, net cash provided by financing
activities was $1.3 billion, compared to $821.8 million in 1999 and $579.5
million in 1998. Historically, the primary financing activity of the Company
has been through deposits. In 2000, 1999 and 1998, deposit gathering
activities generated cash of $902.2 million, $799.4 million and $528.1
million, respectively. This represents a total of 70.7%, 97.3% and 91.1% of
the financing cash flows for 2000, 1999 and 1998, respectively. The 2000
increase in financing activities other than deposits are a result of proceeds
from issuance of Trust Preferred Securities of $50.5 million and the proceeds
from the sale of stock of $30.4 million, as compared to $26.8 million in 1999.
In 1998 the Company entering into $70.0 million in long-term low cost
repurchase agreements and issued Trust Preferred Securities of $30.0 million
which were issued principally to provide capital to the Company (see "--
Capital Resources", below).
Capital Resources
Shareholders' equity at December 31, 2000 increased to $322.4 million from
$252.9 million at December 31, 1999 and from $200.7 million at December 31,
1998. Greater Bay paid dividends of $0.35, $0.24 and $0.19 per share for the
year December 31, 2000, 1999 and 1998, respectively, excluding dividends paid
by subsidiaries prior to the completion of their mergers.
On March 23, 2000, Greater Bay completed a private offering of 648,648
shares of restricted common stock to institutional investors. Proceeds from
the offering were $12,000,000 less placement agent's fees of $514,000. On
December 22, 1999, Greater Bay completed a private offering of 1,070,000
shares of restricted common stock to institutional investors. Proceeds from
the offering were $19,795,000 less placement agent's fees of $834,000. Greater
Bay intends to use the net proceeds from both offerings for general corporate
purposes.
In 2000, the Company completed two offerings of Trust Preferred Securities
in an aggregate amount of $50.5 million to enhance its regulatory capital
base, while also providing added liquidity. In 1998, the Company issued $30.0
million in additional Trust Preferred Securities. Under applicable regulatory
guidelines, the Trust Preferred Securities qualifies as Tier I capital up to a
maximum of 25% of Tier I capital. Any additional portion of Trust Preferred
Securities would qualify as Tier 2 capital. As of December 31, 2000, all
outstanding Trust Preferred Securities qualified as Tier I capital. As the
Company's shareholders' equity increases, the amount of Tier I capital that
can be comprised of Trust Preferred Securities will increase.
A banking organization's total qualifying capital includes two components:
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities and minority interests, less goodwill. Supplementary capital
includes the allowance for loan losses (subject to certain limitations), other
perpetual preferred stock, trust preferred securities, certain other capital
instruments and term subordinated debt. The Company's major capital components
are shareholders' equity and Trust Preferred Securities in core capital, and
the allowance for loan losses in supplementary capital.
At December 31, 2000, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for
total capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by
average total assets (not risk-adjusted) for the preceding quarter. 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.
A-18
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the Office of the Comptroller of the Currency 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, 2000 and the two highest
levels recognized under these regulations are as follows:
Tier 1 Total
Leverage risk- based risk- based
ratio capital ratio capital ratio
-------- ------------- -------------
Company 8.77% 9.40% 10.70%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
The Company's leverage ratio was 8.77% at December 31, 2000, compared to
8.24% at December 31, 1999. At December 31, 2000, the Company's risk-based
capital ratios were 9.40% for Tier 1 risk-based capital and 10.70% for total
risk-based capital, compared to 9.75% and 11.07%, respectively, as of December
31, 1999.
In addition, at December 31, 2000, each of the Banks, 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 18 of Notes to Consolidated Financial Statements.
Quantitative and Qualitative Disclosures about Market Risk
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on an extensive loan review process
and its allowance for loan losses. See "--Allowance for Loan Losses" herein.
Interest rate risk is the change in value due to changes in interest rates.
This risk is addressed by the Company's Asset & Liability Management Committee
"ALCO", which includes senior management representatives. The ALCO monitors
interest rate risk by analyzing the potential impact to the net portfolio of
equity value and net interest income from potential changes to interest rates
and considers the impact of alternative strategies or changes in balance sheet
structure. The ALCO manages the Company's balance sheet in part to maintain
the potential impact on net portfolio value and net interest income within
acceptable ranges despite changes in interest rates.
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. If potential changes to net portfolio value and net
interest income resulting from hypothetical interest rate changes 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 implemented strategies to more closely match its balance sheet. The
Company has generally focused its investment activities on securities with
terms or average lives between five and eight years to lengthen the average
duration of its assets. The Company has utilized short-term borrowings and
deposit marketing programs to shorten the effective duration of its
liabilities. In addition, the Company has utilized an interest rate swap to
manage the interest rate risk of the Floating Rate Trust Preferred Securities,
Series B issued August 12, 1998. This interest rate swap is not an
"ineffective hedge" and is accounted for under Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" as amended by SFAS No. 138, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133 and 138").
A-19
Market Value of Portfolio Equity
Interest rate sensitivity is computed by estimating the changes in net
portfolio of equity value, or market value over a range of potential changes
in interest rates. The market value of equity is the market value of the
Company's assets minus the market value of its liabilities plus the market
value of any off-balance sheet items. The market value of each asset,
liability, and off-balance sheet item is its net present value of expected
cash flows discounted at market rates after adjustment for rate changes. The
Company measures the impact on market value for an immediate and sustained 100
basis point increase and decrease (shock) in interest rates. The following
table shows the Company's projected change in net portfolio value for this set
of rate shocks as of December 31, 2000.
Projected change
Net portfolio -------------------
Change in interest rates value Dollars Percentage
------------------------ ------------- ------- ----------
(Dollars in thousands)
100 basis point increase $896,779 $(7,025) -0.78%
Base scenario 903,804 -- --
100 basis point decrease 899,801 (4,003) -0.44%
The preceding table indicates that as of December 31, 2000 an immediate and
sustained 100 basis point increase or decrease in interest rates would
decrease the Company's net portfolio value by less than 1%. The foregoing
analysis attributes significant value to the Company's non-interest-bearing
deposit balances.
The market value of portfolio equity is based on the net present values of
each product in the portfolio, which in turn is based on cash flows factoring
in recent market prepayment estimates from public sources. The discount rates
are based on recently observed spread relationships and adjusted for the
assumed interest rate changes. Some valuations are provided directly from
independent broker quotations.
Net Interest Income Simulation
The impact of interest rate changes on net interest income and net income
are measured using income simulation. The various products in the Company's
balance sheet are modeled to simulate their income (and cash flow) behavior in
relation to interest rates. Income for the next 12 months is calculated for
current interest rates and for immediate and sustained rate shocks.
The income simulation model includes various assumptions regarding the
repricing relationships for each product. Many of the Company's assets are
floating rate loans, which are assumed to reprice immediately, and to the same
extent as the change in market rates according to their contracted index. The
Company's non-term deposit products reprice more slowly, usually changing less
than the change in market rates and at the discretion of the Company. As of
December 31, 2000, the analysis indicates that the Company's net interest
income for the next 12 months would increase 6.14% if rates increased 200
basis points, and decrease by 5.39% if rates decreased 200 basis points.
This analysis indicates the impact of change in net interest income for the
given set of rate changes and assumptions. It assumes the balance sheet grows
modestly, but that its structure is to remain similar to the structure at
year-end. It does not account for all the factors that impact this analysis
including changes by management to mitigate the impact of interest rate
changes or secondary impacts such as changes to the Company's credit risk
profile as interest rates change. Furthermore loan prepayment rate estimates
and spread relationships change regularly. Interest rate changes create
changes in actual loan prepayment rates that will differ from the market
estimates incorporated in the analysis. 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.
Changes that vary significantly from the assumptions may have significant
effects on the Company's net interest income.
The results of this sensitivity analysis should not be relied upon as
indicative of actual future results.
A-20
Gap Analysis
In addition to the above analysis, the Company also performs a Gap analysis
as part of the overall interest rate risk management process. This analysis is
focused on the maturity structure of assets and liabilities and their
repricing characteristics over future periods. An effective interest rate risk
management strategy seeks to match the volume of assets and liabilities
maturing or repricing during each period. Gap sensitivity is measured as the
difference between the volume of assets and liabilities in the Company's
current portfolio that is subject to repricing at various time horizons. The
main focus is usually for the one-year cumulative gap. The difference is known
as interest sensitivity gaps.
The following table shows interest sensitivity gaps for different intervals
as of December 31, 2000:
Total
Immediate 2 days to 7 months to 1 year to 4 years to More than Total rate non-rate
or one day 6 months 12 months 3 years 5 years 5 years sensitive sensitive Total
---------- ---------- ----------- --------- ---------- ---------- ---------- ----------- ----------
(Dollars in thousands)
Assets:
Cash and due from
banks $ 3,296 $ -- $ -- $ -- $ -- $ -- $ 3,296 $ 267,478 $ 270,774
Short term
investments 138,000 -- -- -- -- -- 138,000 -- 138,000
Investment
securities 22,588 25,395 25,859 163,775 117,957 615,585 971,158 (8,825) 962,333
Loans 1,994,600 671,065 129,676 346,934 291,118 179,910 3,613,303 1,776 3,615,079
Loan losses/unearned
fees -- -- -- -- -- -- -- (97,671) (97,671)
Other assets -- -- -- -- -- -- -- 241,863 241,863
---------- ---------- --------- -------- -------- ---------- ---------- ----------- ----------
Total assets $2,158,484 $ 696,460 $ 155,536 $510,708 $409,075 $ 795,495 $4,725,757 $ 404,621 $5,130,378
========== ========== ========= ======== ======== ========== ========== =========== ==========
Liabilities and
Equity:
Deposits $2,081,230 $ 890,739 $ 143,818 $ 40,718 $ 3,402 $ 1,325 $3,161,233 $ 1,003,828 $4,165,061
Other borrowings -- 429,228 -- 2,000 -- -- 431,228 -- 431,228
Trust preferred
securities -- -- -- -- -- 99,500 99,500 -- 99,500
Other liabilities -- -- -- -- -- -- -- 112,224 112,224
Shareholders'
equity -- -- -- -- -- -- -- 322,365 322,365
---------- ---------- --------- -------- -------- ---------- ---------- ----------- ----------
Total liabilities
and equity $2,081,230 $1,319,967 $ 143,818 $ 42,718 $ 3,402 $ 100,825 $3,691,961 $ 1,438,417 $5,130,378
========== ========== ========= ======== ======== ========== ========== =========== ==========
Gap $ 77,253 $ (623,507) $ 11,717 $467,991 $405,673 $ 694,669 $1,033,796 $(1,033,796) $ --
Cumulative Gap $ 77,253 $ (546,253) $(534,536) $(66,545) $339,127 $1,033,796 $1,033,796 $ -- $ --
Cumulative
Gap/total assets 1.51% -10.65% -10.42% -1.30% 6.61% 20.15% 20.15% 0.00% 0.00%
The foregoing table indicates that the Company had a one year negative gap
of $(534.5) million, or (10.4)% of total assets, at December 31, 2000. In
theory, this would indicate that at December 31, 2000, $534.5 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.
Gap analysis has certain limitations. Measuring the volume of repricing or
maturing assets and liabilities does not always measure the full impact on the
portfolio value of equity or net interest income. Gap analysis does not
account for rate caps on products; dynamic changes such as increasing prepay
speeds as interest rates decrease, basis risk, or the benefit of non-rate
funding sources. The relation between product rate repricing and market rate
changes (basis risk) is not the same for all products. The majority of the
Company's loan portfolio reprices quickly and completely following changes in
market rates, while non-term deposit rates in general move more slowly and
usually incorporate only a fraction of the change in rates. Products
categorized as non-rate sensitive, such as its noninterest-bearing demand
deposits, in the Gap analysis behave like long term fixed rate funding
sources. Both of these factors tend to make the Company's actual behavior more
asset sensitive than is indicated in the Gap analysis. In fact the Company
experiences higher net interest income when rates rise, opposite what is
indicated by the Gap analysis. Therefore management uses income simulation,
net interest income rate shocks and market value of portfolio equity as its
primary interest rate risk management tools.
A-21
Recent Accounting Developments
New Accounting Pronouncement
In September 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"), issued in June 1996. It
revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of SFAS No. 125's provisions without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after March 31, 2001. SFAS No.
140 is effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000. Disclosures about securitizations and
collateral accepted need not be reported for periods ending on or before
December 15, 2000, for which financial statements are presented for
comparative purposes. SFAS No. 140 is to be applied prospectively with certain
exceptions.
Implementation of SFAS No. 140 is not expected to have a material effect on
the Company's financial position or results of operations.
Business Combinations
In September 1999, the FASB issued an Exposure Draft of a proposed SFAS,
"Business Combinations and Intangible Assets". In December 2000, the Board
tentatively concluded that upon the effective date of the final statement on
business combinations and intangible assets, goodwill would no longer be
amortized. This conclusion includes existing goodwill as well as goodwill
arising subsequent to the effective date of the final statement. Goodwill must
be reviewed for impairment upon the occurrence of certain triggering events.
The FASB has also reached tentative conclusions on the future of the pooling-
of-interest 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 is currently redeliberating its
position as to retaining the pooling method. The FASB is currently
anticipating issuing a final statement during the second quarter of 2001.
A portion of the Company's business strategy is to pursue acquisition
opportunities so as to expand its market presence and maintain growth levels.
A change in accounting for business combinations could have a negative impact
on the Company's ability to realize those business strategies.
A-22
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------
2000 1999*
---------- ----------
(Dollars in
thousands)
ASSETS
Cash and due from banks $ 270,774 $ 147,222
Federal funds sold 138,000 219,600
Other short term securities 56 29,507
---------- ----------
Cash and cash equivalents 408,830 396,329
Investment securities:
Available for sale, at fair value 578,172 489,448
Held to maturity, at amortized cost (fair value
2000: $364,787 1999: $228,754) 354,454 236,468
Other securities 29,651 24,600
---------- ----------
Investment securities 962,277 750,516
Total loans:
Commercial 1,562,712 926,075
Term real estate--commercial 967,428 764,034
---------- ----------
Total commercial 2,530,140 1,690,109
Real estate construction and land 691,912 479,163
Real estate other 176,568 140,852
Consumer and other 216,459 167,257
Deferred loan fees and discounts (13,657) (12,911)
---------- ----------
Total loans, net of deferred fees 3,601,422 2,464,470
Allowance for loan losses (84,014) (48,047)
---------- ----------
Total loans, net 3,517,408 2,416,423
Property, premises and equipment, net 33,860 37,597
Interest receivable and other assets 208,003 135,864
---------- ----------
Total assets $5,130,378 $3,736,729
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits $4,165,061 $3,262,888
Other borrowings 431,228 117,052
Other liabilities 112,224 54,894
---------- ----------
Total liabilities 4,708,513 3,434,834
---------- ----------
Company obligated mandatorily redeemable cumulative
trust preferred securities of
subsidiary trusts holding solely junior
subordinated debentures 99,500 49,000
Commitments and contingencies
Shareholders' Equity:
Preferred stock, no par value: 4,000,000 shares
authorized; none issued -- --
Common stock, no par value **: 80,000,000 shares
authorized; 41,929,173 and 39,635,048
shares issued and outstanding as of December 31,
2000 and 1999, respectively 173,276 148,611
Accumulated other comprehensive loss (6,552) (9,158)
Retained earnings 155,641 113,442
---------- ----------
Total shareholders' equity 322,365 252,895
---------- ----------
Total liabilities and shareholders' equity $5,130,378 $3,736,729
========== ==========
- --------
*Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
**Restated to reflect 2-for-1 stock split effective on October 4, 2000.
See notes to consolidated financial statements.
A-23
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
---------------------------
2000 1999* 1998*
-------- -------- --------
(Dollars in thousands,
except per share amounts)
Interest Income
Interest on loans $290,757 $197,480 $155,543
Interest on investment securities:
Taxable 55,235 37,000 30,709
Tax--exempt 8,754 6,549 5,090
-------- -------- --------
Total interest on investment securities 63,989 43,549 35,799
Other interest income 13,617 14,348 13,847
-------- -------- --------
Total interest income 368,363 255,377 205,189
-------- -------- --------
Interest Expense
Interest on deposits 126,817 84,842 66,758
Interest on long term borrowings 1,203 4,463 3,902
Interest on other borrowings 8,380 1,512 3,258
-------- -------- --------
Total interest expense 136,400 90,817 73,918
-------- -------- --------
Net interest income 231,963 164,560 131,271
Provision for loan losses 28,096 14,039 8,279
-------- -------- --------
Net interest income after provision for loan
losses 203,867 150,521 122,992
-------- -------- --------
Other Income
Service charges and other fees 8,594 7,931 6,906
Loan and international banking fees 8,162 4,275 2,752
Trust fees 3,450 2,990 2,473
ATM network revenue 2,891 2,682 2,440
Gain on sale of SBA loans 2,190 2,058 3,490
Gain on sale of investments, net 81 87 473
Warrant income, net 12,986 14,508 945
Other income 7,171 8,448 2,462
-------- -------- --------
Total 45,525 42,979 21,941
-------- -------- --------
Operating Expenses
Compensation and benefits 64,324 56,488 47,617
Occupancy and equipment 21,688 17,545 13,386
Dividends paid on Trust Preferred Securities 7,842 4,201 2,824
Merger and other related nonrecurring costs 30,102 10,331 2,661
Contribution to the Foundation and related
expenses, net -- 12,160 1,341
Other expenses 28,758 26,880 25,202
-------- -------- --------
Total operating expenses 152,714 127,605 93,031
-------- -------- --------
Net income before provision for income taxes
and extraordinary items 96,678 65,895 51,902
Provision for income taxes 38,138 21,623 18,118
-------- -------- --------
Net income before extraordinary items 58,540 44,272 33,784
Extraordinary item--debt redemption premiums -- (88) --
-------- -------- --------
Net income $ 58,540 $ 44,184 $ 33,784
======== ======== ========
Net income per share--basic** $ 1.42 $ 1.16 $ 0.91
======== ======== ========
Net income per share--diluted** $ 1.35 $ 1.10 $ 0.85
======== ======== ========
- --------
*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 splits effective on April 30, 1998 and
October 4, 2000.
See notes to consolidated financial statements.
A-24
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
--------------------------
2000 1999* 1998*
------- -------- -------
(Dollars in thousands)
Net income $58,540 $ 44,184 $33,784
------- -------- -------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising
during period (net of taxes of $2,864,
$(8,364) and $282 for the years ended December
31, 2000, 1999 and 1998, respectively) 3,915 (12,064) (152)
Less: reclassification adjustment for gains
(losses) included in net income (net of taxes
of $34, $36 and $195 for the years ended
December 31, 2000, 1999 and 1998,
respectively) 47 51 278
------- -------- -------
Net change 3,962 (12,013) 126
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 $1,034, $1,092 and
$294 for the years ended December 31, 2000,
1999 and 1998, respectively) (1,413) 2,325 418
Less: reclassification adjustment for swap
settlements in net income (net of taxes of
$41, $(60) and $(23) for the years ended
December 31, 2000, 1999 and 1998,
respectively) 57 (144) (32)
------- -------- -------
Net change (1,356) 2,181 (677)
Other comprehensive income (loss) 2,606 (9,832) (551)
------- -------- -------
Comprehensive income $61,146 $ 34,352 $33,233
======= ======== =======
- --------
* 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 financial statements.
A-25
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
Accumulated
Common stock other Total
-------------------- comprehensive Retained shareholders'
Shares** Amount income/(loss) earnings equity
---------- -------- ------------- -------- -------------
(Dollars in thousands, except per share amounts)
Greater Bay Bancorp,
prior to pooling 16,112,364 $ 44,218 $ 338 $ 22,040 $ 66,596
Shares issued to, and
retained earnings of,
acquired entities:
Pacific Rim
Bancorporation 1,901,496 8,000 (115) 1,776 9,661
Pacific Business
Funding Corporation 596,000 51 -- 232 283
Bay Area Bancorp 2,709,943 5,376 (2) 6,614 11,988
Bay Commercial Services 1,474,179 3,671 (7) 6,509 10,173
Mt. Diablo Bancshares 2,315,633 8,592 3 311 8,906
Coast Bancorp 5,586,699 11,011 693 16,060 27,764
Bank of Santa Clara 3,658,332 13,697 -- 11,184 24,881
Bank of Petaluma 1,531,516 7,854 315 3,044 11,213
---------- -------- ------- -------- --------
Balance, December 31,
1997, restated to
reflect pooling 35,886,162 102,470 1,225 67,770 171,465
Net income -- -- -- 33,787 33,787
Other comprehensive
loss, net of taxes -- -- (551) -- (551)
Stock options exercised,
including related tax
benefit 715,153 5,169 -- (32) 5,137
Stock issued in Employee
Stock Purchase Plan 59,340 656 -- -- 656
401(k) employee stock
purchase 72,966 1,060 -- -- 1,060
Stock repurchase by Bay
Area Bancshares, Bay
Commercial Services and
Coast Bancorp (169,968) (604) -- (2,190) (2,794)
Pacific Business Funding
Corporation
distribution -- -- -- (1,163) (1,163)
Stock dividend by Coast
Bancorp and Bank of
Santa Clara 773,975 12,822 -- (12,822) --
Stock issued in Dividend
Reinvestment Plan 5,322 73 -- -- 73
Cash dividend $0.19 per
share*** -- -- -- (6,973) (6,973)
---------- -------- ------- -------- --------
Balance, December 31,
1998* 37,342,950 121,646 674 78,377 200,697
Net income -- -- -- 44,184 44,184
Other comprehensive
loss, net of taxes -- -- (9,832) -- (9,832)
Stock options exercised,
including related tax
benefit 1,036,118 5,385 -- (59) 5,326
Stock issued in Employee
Stock Purchase Plan 83,302 1,031 -- -- 1,031
401(k) employee stock
purchase 76,010 1,205 -- -- 1,205
Stock issued in Dividend
Reinvestment Plan 26,668 383 -- -- 383
Pacific Business Funding
Corporation
distribution -- -- -- (40) (40)
Stock issued through
private placement 1,070,000 18,961 -- -- 18,961
Cash dividend $0.24 per
share*** -- -- -- (9,020) (9,020)
---------- -------- ------- -------- --------
Balance, December 31,
1999* 39,635,048 148,611 (9,158) 113,442 252,895
Net income -- -- -- 58,540 58,540
Other comprehensive
loss, net of taxes -- -- 2,606 -- 2,606
Stock options exercised,
including related tax
benefit 1,451,314 9,233 -- -- 9,233
Stock issued in Employee
Stock Purchase Plan 93,356 1,538 -- -- 1,538
401(k) employee stock
purchase 82,015 1,982 -- -- 1,982
Stock issued in Dividend
Reinvestment Plan 18,792 465 -- -- 465
Stock issued through
private placement 648,648 11,476 -- -- 11,476
Cash paid in lieu of
fractional shares -- (29) -- -- (29)
Cash dividend $0.40 per
share*** -- -- -- (16,341) (16,341)
---------- -------- ------- -------- --------
Balance, December 31,
2000 41,929,173 $173,276 $(6,552) $155,641 $322,365
========== ======== ======= ======== ========
- --------
* 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 splits effective on April 30, 1998 and
October 4, 2000.
*** Excluding dividends paid by Greater Bay's subsidiaries prior to the
completion of their mergers with Greater Bay, Greater Bay paid dividends
of $0.35, $0.24 and $0.19 per share for the years ended December 31, 2000,
1999 and 1998, respectively.
See notes to consolidated financial statements.
A-26
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------
2000 1999* 1998*
---------- --------- ---------
(Dollars in thousands)
Cash flows--operating activities
Net income $ 58,540 $ 44,184 $ 33,785
Reconcilement of net income to net cash
from operations:
Provision for loan losses 47,101 16,784 8,462
Depreciation and amortization 13,442 6,726 4,286
Deferred income taxes (14,800) (7,022) (2,993)
Gain on sale of investments, net (81) (87) (473)
Gain on sale of bank premises -- (535) --
Changes in:
Accrued interest receivable and other
assets (49,424) (31,297) (15,257)
Accrued interest payable and other
liabilities 59,634 25,452 8,378
Deferred loan fees and discounts, net 746 4,505 2,551
---------- --------- ---------
Operating cash flows, provided by 115,158 58,710 38,739
---------- --------- ---------
Cash flows--investing activities
Maturities and partial paydowns on
investment securities:
Held to maturity 121,676 96,842 43,260
Available for sale 49,246 96,753 107,855
Purchase of investment securities:
Held to maturity (246,076) (126,506) (37,232)
Available for sale (184,248) (201,272) (277,145)
Other securities (5,051) (13,664) (207)
Proceeds from sale of available for sale
securities 49,730 53,471 261,812
Loans, net (874,540) (702,985) (714,748)
Loans acquired from business acquisition (274,292) -- --
Payment for business acquisition, net of
cash acquired 3,998 -- --
Purchase of property, premises and
equipment (11,250) (8,687) (10,000)
Sale of banking premises 5,502 2,637 --
Investment in other real estate owned -- -- (500)
Sale of other real estate owned 224 -- --
Purchase of insurance policies (12,749) (9,206) --
---------- --------- ---------
Investing cash flows, used in (1,377,830) (812,617) (626,905)
---------- --------- ---------
Cash flows--financing activities
Net increase in deposits 902,173 799,403 528,078
Net change in other borrowings-short term 197,867 6,389 (41,951)
Proceeds from other borrowings-long term 126,309 2,015 70,000
Principal repayment-long term borrowings (10,000) (3,775) (2,265)
Proceeds from company obligated
mandatorily redeemable preferred
securities of subsidiary trusts holding
solely junior subordinated debentures 50,500 -- 30,000
Proceeds from sale of common stock 24,665 26,759 5,305
Repurchase of common stock -- -- (2,651)
Cash dividends (16,341) (9,019) (6,973)
---------- --------- ---------
Financing cash flows, provided by 1,275,173 821,772 579,543
---------- --------- ---------
Net change in cash and cash equivalents 12,501 67,865 (8,623)
Cash and cash equivalents at beginning of
period 396,329 328,464 337,087
---------- --------- ---------
Cash and cash equivalents at end of
period $ 408,830 $ 396,329 $ 328,464
========== ========= =========
Cash flows--supplemental disclosures
Cash paid during the period for:
Interest $ 141,325 $ 100,944 $ 69,174
========== ========= =========
Income taxes $ 20,552 $ 19,146 $ 20,194
========== ========= =========
Non-cash transactions:
Additions to other real estate owned $ -- $ -- $ 450
========== ========= =========
Transfer of appreciated securities to the
Greater Bay Bancorp Foundation $ 7,200 $ 560 $ 1,341
========== ========= =========
- --------
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
See notes to consolidated financial statements.
A-27
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2000, 1999 and 1998
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" or "we", on a consolidated basis) is a bank holding company with 10
bank subsidiaries (the "Banks"): Bank of Petaluma, Bank of Santa Clara, Bay
Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National
Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank and
Peninsula Bank of Commerce.
GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV, which are
Delaware statutory business trusts formed for the exclusive purpose of issuing
and selling trust preferred securities, are also subsidiaries of the Company.
The Company also owns Matsco Lease Finance, Inc. II and Matsco Lease
Finance, Inc. III, which are special purpose corporations formed for the
exclusive purpose of securitizing leases and issuing lease-backed notes.
The Company also operates through the following 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, Matsco, 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 the San Francisco Bay Area including Silicon Valley, San Francisco
and the San Francisco Peninsula, the East Bay, Santa Cruz and Sonoma County,
with 37 full service banking offices located in Aptos, Blackhawk, Capitola,
Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Milpitas, Palo
Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco,
San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz,
Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville.
At December 31, 2000, the Company had total assets of $5.1 billion, total
loans, net, of $3.5 billion and total deposits of $4.2 billion.
The Company has participated in nine mergers during the three-year period
ended December 31, 2000, as described in Note 2. With the exception of the
merger with The Matsco Companies, Inc., all of these mergers were accounted
for as a pooling-of-interests and, accordingly, all of the financial
information of the Company for the periods prior to the mergers has been
restated as if the mergers had occurred at the beginning of the earliest
period presented. The merger with The Matsco Companies, Inc. was accounted for
using the purchase accounting method and accordingly The Matsco Companies,
Inc.'s results of operations have been included in the consolidated financial
statements since the date of acquisition.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Greater Bay,
its subsidiaries and 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
2000 presentation. The accounting and reporting policies of the Company
conform to generally accepted accounting principles and the prevailing
practices within the banking industry.
A-28
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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. The Banks are required by the Federal Reserve System
to maintain noninterest-earning cash reserves against certain of their deposit
accounts. At December 31, 2000, the required combined reserves totaled
approximately $18.0 million.
Investment Securities
The Company classifies its investment securities in accordance with 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 FHLB stocks for the Banks
and investments in venture funds are classified as other securities and are
recorded at market value.
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 or 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.
A-29
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Loans
The Company originates loans to customers under Small Business
Administration ("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.
Accounting for Direct Financing Leases
Lease contracts are categorized as direct financing leases for financial
reporting purposes if they conform to the definition of direct financing
leases set out in statement of SFAS No. 13 "Accounting for Leases". At the
time a leasing transaction is executed, the Company records on their balance
sheet the gross lease receivable, estimated residual value of leased
equipment, and unearned lease income. Unearned lease income represents the
excess of the gross lease receivable plus the estimated residual value over
the cost of the equipment leased. Unearned lease income is recognized as
leasing income over the term of the lease so as to reflect an approximate
constant periodic rate of return on the net investment in the lease.
Allowance for Loan Losses
In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), 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.
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-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.
A-30
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Derivatives and Hedging Activities
The Company adopted SFAS No. 133 and 138, effective October 1, 1998. In
accordance with the transition provisions of SFAS No. 133 and 138, 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.
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).
A-31
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Earnings Per Share and Share Amounts
Basic net earnings per common share is computed by dividing net earnings
applicable to common shareholders by the weighted-average number of common
shares outstanding during the period. Diluted net earnings per common share is
determined using the weighted-average number of common shares outstanding
during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options.
All outstanding and weighted average share amounts presented in this report
have been restated to reflect the 2-for-1 stock splits effective on April 30,
1998 and October 4, 2000.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income", the
Company classifies items of other comprehensive income by their nature in the
financial statements and display the accumulated other comprehensive income
separately from retained earnings in the equity section of the balance sheet.
The changes to the balances of accumulated other comprehensive income are as
follows:
Accumulated
Unrealized other
gains/(losses) Cash flow comprehensive
on securities hedges income (loss)
-------------- --------- -------------
(Dollars in thousands)
Balance--December 31, 1998 $ 1,351 $ (677) $ 674
Other comprehensive income 1999 (12,013) 2,181 (9,832)
-------- ------- -------
Balance--December 31, 1999 (10,662) 1,504 (9,158)
Other comprehensive income 2000 3,962 (1,356) 2,606
-------- ------- -------
Balance--December 31, 2000 $ (6,700) $ 148 $(6,552)
======== ======= =======
Segment Information
In accordance with SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131") the Company uses the "management
approach" for reporting business segment information. 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.
A-32
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 2--BUSINESS COMBINATIONS
Pooling-of-Interests Accounting Transactions
On October 13, 2000, Bank of Petaluma merged with and into DKSS Corp., as a
result of which, Bank of Petaluma became a wholly owned subsidiary of Greater
Bay. Upon consummation of the merger, the outstanding shares of Bank of
Petaluma were converted into an aggregate of approximately 1,667,000 shares of
Greater Bay's stock. The transaction was accounted for as a pooling-of-
interests. The financial information presented herein has been restated to
reflect the merger with Bank of Petaluma on a pooling-of-interests basis.
On July 21, 2000, Bank of Santa Clara merged with and into GBB Merger Corp.,
as a result of which, Bank of Santa Clara became a wholly owned subsidiary of
Greater Bay. Upon consummation of the merger, the outstanding shares of Bank
of Santa Clara were converted into an aggregate of 4,002,000 shares of Greater
Bay's stock. The transaction was accounted for as a pooling-of-interests. The
financial information presented herein has been restated to reflect the merger
with Bank of Santa Clara on a pooling-of-interests basis.
On May 18, 2000, Coast Bancorp, the former holding company of Coast
Commercial Bank, was merged with and into Greater Bay. Upon consummation of
the merger, the outstanding shares of Coast Bancorp were converted into an
aggregate of approximately 6,140,000 shares of Greater Bay's stock. The
transaction was accounted for as a pooling-of-interests. The financial
information presented herein has been restated to reflect the merger with
Coast Bancorp on a pooling-of-interests basis.
On January 31, 2000, Mt. Diablo Bancshares, the former holding company of
Mt. Diablo National Bank, merged with and into Greater Bay. Upon consummation
of the merger, the outstanding shares of Mt. Diablo Bancshares were converted
into an aggregate of 2,790,998 shares of Greater Bay's stock. The transaction
was accounted for as a pooling-of-interests. The financial information
presented herein has been restated to reflect the merger with Mt. Diablo
Bancshares on a pooling-of-interests basis.
On October 15, 1999, Bay Commercial Services, the former holding company of
Bay Bank of Commerce, merged with and into Greater Bay. Upon consummation of
the merger, the outstanding shares of Bay Commercial Services were converted
into an aggregate of 1,814,480 shares of Greater Bay's stock. The stock was
issued to former Bay Commercial Services shareholders, in a tax-free exchange
accounted for as a pooling-of-interests.
On May 21, 1999, Bay Area Bancshares, the former holding company of Bay Area
Bank, merged with and into Greater Bay. Upon consummation of the merger, the
outstanding shares of Bay Area Bank were converted into an aggregate of
2,798,642 shares of Greater Bay's stock. The stock was issued to former Bay
Area Bancshares shareholders, in a tax-free exchange accounted for as a
pooling-of-interests.
On August 31, 1998, Pacific Business Funding Corporation, an asset-based
specialty finance company, merged with a subsidiary of Greater Bay. Upon
consummation of the merger, the outstanding shares of Pacific Business Funding
Corporation were converted into an aggregate of 596,000 shares of Greater
Bay's stock. The stock was issued to former Pacific Business Funding
Corporation shareholders, in a tax-free exchange accounted for as a pooling-
of-interests.
On May 8, 1998, Pacific Rim Bancorporation, the former holding company of
Golden Gate Bank, merged with and into a subsidiary of Greater Bay. Upon
consummation of the merger, the outstanding shares of Pacific Rim
Bancorporation were converted into an aggregate of 1,901,496 shares of Greater
Bay's stock. The stock was issued to former Pacific Rim Bancorporation's sole
shareholder in a tax-free exchange accounted for as a pooling-of-interests.
A-33
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Bank of Petaluma Bank of Santa Clara Coast Bancorp
nine months ended six months ended three months ended
September 30, 2000 June 30, 2000 March 31, 2000
--------------------- ----------------------- -------------------
(Dollars in thousands)
Net interest income:
Greater Bay Bancorp $154,013 $89,047 $36,378
Acquired entity 7,101 10,195 5,538
-------- ------- -------
Combined $161,114 $99,242 $41,916
======== ======= =======
Net income:
Greater Bay Bancorp $ 38,608 $23,850 $13,473
Acquired entity 1,982 2,613 2,035
-------- ------- -------
Combined $ 40,590 $26,463 $15,508
======== ======= =======
Mt. Diablo Bancshares Bay Commercial Services Bay Area Bancshares
twelve months ended nine months ended three months ended
December 31, 1999 September 30, 1999 March 31, 1999
--------------------- ----------------------- -------------------
(Dollars in thousands)
Net interest income:
Greater Bay Bancorp $103,732 $68,498 $18,360
Acquired entity 10,009 2,007 2,180
-------- ------- -------
Combined $113,741 $70,505 $20,540
======== ======= =======
Net income:
Greater Bay Bancorp $ 27,711 $17,033 $ 5,058
Acquired entity 2,827 486 644
-------- ------- -------
Combined $ 30,538 $17,519 $ 5,702
======== ======= =======
Pacific Business Funding Corp Pacific Rim Bancorporation
six months ended three months ended
June 30, 1998 March 31, 1998
----------------------------- --------------------------
(Dollars in thousands)
Net interest income:
Greater Bay Bancorp $30,077 $13,366
Acquired entity 1,154 1,285
------- -------
Combined $31,231 $14,651
======= =======
Net income:
Greater Bay Bancorp $ 6,628 $ 3,646
Acquired entity 344 60
------- -------
Combined $ 6,972 $ 3,706
======= =======
A-34
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table sets forth the separate results of operations for
Greater Bay, Bay Area Bancshares, Bay Commercial Services, Mt. Diablo
Bancshares, Coast Bancorp, Bank of Santa Clara and Bank of Petaluma for the
periods indicated:
Net interest
income Net income
------------ ----------
(Dollars in thousands)
Year ended December 31, 1999:
Greater Bay $103,732 $27,711
Mt. Diablo Bancshares 10,009 2,827
Coast Bancorp 20,028 6,939
Bank of Santa Clara 17,962 4,403
Bank of Petaluma 8,628 2,304
-------- -------
Combined $160,359 $44,184
======== =======
Year ended December 31, 1998:
Greater Bay $ 65,448 $16,578
Bay Area Bancshares 8,170 2,365
Bay Commercial Sevices 6,107 1,215
-------- -------
Subtotal 79,725 20,158
Mt. Diablo Bancshares 7,363 1,396
Coast Bancorp 17,363 6,161
Bank of Santa Clara 16,189 3,954
Bank of Petaluma 7,807 2,115
-------- -------
Combined $128,447 $33,784
======== =======
There were no significant transactions between the Company and any of the
acquired entities prior to the mergers. All intercompany transactions have
been eliminated.
Purchase Accounting Transaction
On November 30, 2000, the Company acquired The Matsco Companies, Inc. for a
purchase price of $6.5 million in cash. As a result of post-closing mergers,
the business of The Matsco Companies, Inc. now operates as a division of
Cupertino National Bank, under the name Matsco. The Company may also be
required to pay contingent cash payments over a 5 year period of up to
$6.0 million based on the performance of Matsco subsequent to the acquisition.
The acquisition was accounted for using the purchase method of accounting and,
accordingly, Matsco's results of operations have been included in the
consolidated financial statements since the date of acquisition. The source of
funds for the acquisition was the Company's available cash.
The purchase price has been allocated to the assets acquired and liabilities
assumed based on the estimated fair values at the date of acquisition. The
excess of purchase price, totaling $15.9 million, over the estimated fair
values of the net assets acquired has been recorded as goodwill and will be
amortized on the straight-line method over twenty years.
A-35
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 3--INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities is
summarized below:
Gross Gross
Amortized unrealized unrealized Fair
As of December 31, 2000 cost gains losses value
- ----------------------- --------- ---------- ---------- --------
(Dollars in thousands)
Available For Sale Securities:
U.S. Treasury obligations $ 11,063 $ 140 $ (2) $ 11,201
U.S. agency notes 101,804 148 (422) 101,530
Mortgage-backed securities 245,334 2,734 (943) 247,125
Tax-exempt securities 83,522 1,034 (259) 84,297
Taxable municipal securities 5,980 18 (42) 5,956
Corporate securities 146,416 62 (18,415) 128,063
-------- ------- -------- --------
Total securities available for sale 594,119 4,136 (20,083) 578,172
-------- ------- -------- --------
Held To Maturity Securities:
U.S. agency notes 25,987 13 (100) 25,900
Mortgage-backed securities 237,234 7,251 (356) 244,129
Tax-exempt securities 88,387 3,496 (160) 91,723
Taxable municipal securities 2,846 189 -- 3,035
-------- ------- -------- --------
Total securities held to maturity 354,454 10,949 (616) 364,787
-------- ------- -------- --------
Other securities 24,977 4,935 (261) 29,651
-------- ------- -------- --------
Total investment securities $973,550 $20,020 $(20,960) $972,610
======== ======= ======== ========
Gross Gross
Amortized unrealized unrealized Fair
As of December 31, 1999 cost gains losses value
- ----------------------- --------- ---------- ---------- --------
(Dollars in thousands)
Available For Sale Securities:
U.S. Treasury obligations $ 19,240 $ -- $ (253) $ 18,987
U.S. agency notes 58,540 10 (1,808) 56,742
Mortgage-backed securities 249,038 95 (8,130) 241,003
Tax-exempt securities 65,646 85 (3,947) 61,784
Taxable municipal securities 3,754 1 (122) 3,633
Corporate securities 119,481 -- (12,182) 107,299
-------- ------- -------- --------
Total securities available for sale 515,699 191 (26,442) 489,448
-------- ------- -------- --------
Held To Maturity Securities:
U.S. Treasury obligations 1,498 -- -- 1,498
U.S. agency notes 58,489 9 (1,750) 56,748
Mortgage-backed securities 61,004 28 (2,048) 58,984
Tax-exempt securities 77,869 438 (3,173) 75,134
Corporate securities 37,608 15 (1,233) 36,390
-------- ------- -------- --------
Total securities held to maturity 236,468 490 (8,204) 228,754
-------- ------- -------- --------
Other securities 16,457 8,143 -- 24,600
-------- ------- -------- --------
Total investment securities $768,624 $ 8,824 $(34,646) $742,802
======== ======= ======== ========
A-36
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table shows amortized cost and estimated fair value of the
Company's investment securities by year of maturity as of December 31, 2000.
2002 2006
through through 2011 and
2001 2005 2010 thereafter Total
------- -------- ------- ---------- --------
(Dollars in thousands)
Available For Sale
Securities:
U.S. Treasury obligations $ 2,475 $ 8,588 $ -- $ -- $ 11,063
U.S. agency notes(1) 14,123 55,077 32,604 -- 101,804
Mortgage-backed
securities(2) 11 6,162 2,663 236,498 245,334
Tax-exempt securities 3,788 13,285 15,211 51,238 83,522
Taxable municipal securities 251 4,713 1,016 -- 5,980
Corporate securities 7,712 18,729 6,150 113,825 146,416
------- -------- ------- -------- --------
Total securities available
for sale 28,360 106,554 57,644 401,561 594,119
------- -------- ------- -------- --------
Fair value $28,378 $106,418 $57,316 $386,060 $578,172
------- -------- ------- -------- --------
Held To Maturity Securities:
U.S. agency notes $ 6,998 $ 16,998 $ 1,991 $ -- $ 25,987
Mortgage-backed securities -- 1,809 10,470 224,954 237,233
Tax-exempt securities 1,041 2,390 19,795 65,161 88,387
Taxable municipal securities -- -- 2,847 -- 2,847
------- -------- ------- -------- --------
Total securities held to
maturity 8,039 21,197 35,103 290,115 354,454
------- -------- ------- -------- --------
Fair value 8,015 21,141 35,977 299,654 364,787
------- -------- ------- -------- --------
Combined Investment
Securities Portfolio:
Total investment securities $36,399 $127,751 $92,747 $691,676 $948,573
======= ======== ======= ======== ========
Total fair value $36,393 $127,559 $93,293 $685,714 $942,959
======= ======== ======= ======== ========
Weighted average yield-total
portfolio 6.25% 6.36% 7.26% 7.32% 7.15%
- --------
(1) Certain notes issued by U.S. agencies may be called, without penalty, at
the discretion of the issuer. This may cause the actual maturities to
differ significantly from the contractual maturity dates.
(2) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
Investment securities with a carrying value of $564.2 million and $339.4
million were pledged to secure deposits, borrowings and for other purposes as
required by law or contract at December 31, 2000 and 1999, respectively.
Other securities includes unsold shares received through the exercise of
warrants received from clients, equity securities received in settlement of
loans, investments in funds managed by outside venture capital funds and
investments in the Federal Reserve Bank and the FHLB as required to maintain
membership and support activity levels.
A-37
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Proceeds and realized losses and gains on sales of investment securities for
the years ended December 31, 2000, 1999 and 1998 are presented below:
2000 1999 1998
------- ------- --------
(Dollars in thousands)
Proceeds from sale of available for sale
securities(1) $49,730 $53,471 $261,812
Available for sale securities-gains(2) $ 503 $ 87 $ 473
Available for sale securities-losses $ (422) $ -- $ --
- --------
(1) 1999 proceeds from the sale of available for sale securities excludes
$15.3 million related to the sale of equity securities classified as
available for sale which were acquired through the execution of a warrant
received from clients.
(2) 1999 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, 2000, 1999 and 1998:
2000 1999 1998
-------- ------- -------
(Dollars in thousands)
Balance, January 1 $ 48,047 $33,095 $26,606
Allowance of entities acquired through mergers
accounted for under purchase accounting method 10,927 -- --
Provision for loan losses(1) 36,174 16,784 8,462
Loan charge-offs (12,083) (3,393) (2,610)
Recoveries 949 1,561 637
-------- ------- -------
Balance, December 31 $ 84,014 $48,047 $33,095
======== ======= =======
- --------
(1) Includes $8.1 million, $2.7 million and $183,000 of charges in 2000, 1999
and 1998 respectively, to conform the practices of acquired entities to
the Company's allowance methodologies, which are included in mergers and
other related nonrecurring costs.
The following table sets forth nonperforming loans as of December 31, 2000,
1999, and 1998. Nonperforming loans are defined as loans which are on
nonaccrual status and loans which have been restructured. Interest income
foregone on nonperforming loans totaled $1.2 million, $535,000 and $254,000
for the years ended December 31, 2000, 1999 and 1998, respectively. Interest
income recognized on the nonperforming loans approximated $0, $537,000 and
$407,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
2000 1999 1998
------- ------ ------
(Dollars in
thousands)
Nonaccrual loans $12,593 $5,744 $4,011
Restructured loans -- 807 796
------- ------ ------
Total nonperforming loans $12,593 $6,551 $4,807
======= ====== ======
Accruing loans past due 90 days or more $ 4,428 $ 139 $ 244
======= ====== ======
A-38
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, 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 $13.3 million, $8.0 million and $5.1 million,
respectively, with corresponding valuation allowances of $3.7 million, $1.2
million and $1.0 million, respectively. For the years ended December 31, 2000,
1999 and 1998, the average recorded investment in impaired loans was
approximately $9.9 million, $2.3 million and 4.2 million, respectively. The
Company did not recognize interest income on impaired loans during the twelve
months ended December 31, 2000, 1999 and 1998.
The Company had $0 and $807,000 of restructured loans as of December 31,
2000 and 1999, respectively. There were no principal reduction concessions
allowed on restructured loans during 1999 and 1998. Interest income from
restructured loans totaled $0, $45,000 and $16,000 for the year's ended
December 31, 2000, 1999 and 1998. Foregone interest income, which totaled $0,
$0 and $11,000 for the years ended December 31, 2000, 1999 and 1998 would have
been recorded as interest income if the loans had accrued interest in
accordance with their original terms prior to the restructurings.
NOTE 5--OTHER REAL ESTATE OWNED
At December 31, 2000 and 1999, OREO consisted of properties acquired through
foreclosure with a carrying value of $0 and $271,000, respectively. These
balances are included in interest receivable and other assets in the
accompanying consolidated balance sheets. There was no allowance for estimated
losses.
The following summarizes OREO operations, which are included in operating
expenses, for the years ended December 31, 2000, 1999 and 1998.
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Real estate operations, net $ 51 $ 50 $ 24
(Gain) loss on sale of OREO 5 (37) 133
Provision for estimated losses -- -- --
------ ------- -------
Net loss from other real estate operations $ 56 $ 13 $ 157
====== ======= =======
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment at December 31, 2000 and 1999 are composed
of the following:
2000 1999
-------- --------
(Dollars in
thousands)
Land $ 2,523 $ 3,508
Buildings and premises 8,734 12,047
Furniture and equipment 34,616 33,353
Leasehold improvements 16,584 15,751
Automobiles 853 740
-------- --------
Total 63,310 65,399
Accumulated depreciation and amortization (29,450) (27,802)
-------- --------
Premises and equipment, net $ 33,860 $ 37,597
======== ========
Depreciation and amortization amounted to $7.7 million, $6.1 million and
$4.4 million for the years ended December 31, 2000, 1999 and 1998
respectively, and have been included in occupancy and equipment expense in the
accompanying consolidated statements of operations.
A-39
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
During 2000, the Company sold bank premises with a carrying value of $4.8
million for $5.4 million in a sale-lease back transaction. No gain was
recognized on the transaction. Gains of $535,000 have been deferred and will
be recognized over the term of the Company's lease. During 1999, the Company
sold bank premises with a carrying value of $2,637,000 for $4,978,000 in a
sale-lease back transaction. The Company recognized a pre-tax gain of $535,000
on the transaction. Gains of $1,806,000 have been deferred and will be
recognized over the 10 year and 5 year terms of the Company's leases. During
2000 the company recognized $303,000 of the deferred gain.
NOTE 7--DEPOSITS
Deposits as of December 31, 2000 and 1999 are as follows:
2000 1999
---------- ----------
(Dollars in
thousands)
Demand, noninterest-bearing $1,003,828 $ 727,613
MMDA, NOW and Savings 2,082,708 1,838,868
Time certificates, $100,000 and over 784,118 534,662
Other time certificates 294,407 161,745
---------- ----------
Total deposits $4,165,061 $3,262,888
========== ==========
The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 2000.
December 31, 2000
-------------------------------------------------------------
Three Four to Seven to
months six twelve One to More than
or less months months three years three years Total
-------- -------- -------- ----------- ----------- ----------
(Dollars in thousands)
Time deposits, $100,000
and over $406,963 $280,768 $ 80,982 $12,068 $3,337 $ 784,118
Other time deposits 205,985 38,945 36,001 12,015 1,461 294,407
-------- -------- -------- ------- ------ ----------
Total $612,948 $319,713 $116,983 $24,083 $4,798 $1,078,525
======== ======== ======== ======= ====== ==========
NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES
GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV (the
"Trusts") are Delaware business trusts which were formed for the purpose of
issuing Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures ("Trust
Preferred Securities"). The Trust Preferred Securities are individually
described below. Interest on the Trust Preferred Securities is payable
quarterly and is deferrable, at the option of the Company, for up to five
years. Following the issuance of each Trust Preferred Securities, the Trusts
used the proceeds from the Trust Preferred Securities 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 Trust Preferred Securities. 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 Trust Preferred
Securities will qualify as Tier I capital, and the remaining portion will
qualify as Tier II capital.
A-40
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following Trust Preferred Securities were outstanding at December 31,
2000.
Optional
Amount Date of Stated redemption
Security title Issuer outstanding original issue maturity date
-------------- --------------- ----------- --------------- -------------- --------------
9.75% Cumulative Trust
Preferred Securities GBB Capital I $20,000,000 March 30, 1997 April 1, 2027 April 1, 2002
Floating Rate Trust
Preferred Securities,
Series B GBB Capital II 29,000,000 August 12, 1998 Sept. 15, 2028 Sept. 15, 2008
10 7/8% Fixed Rate
Capital Trust Pass-
Through Securities GBB Capital III 9,500,000 March 23, 2000 March 8, 2030 March 8, 2010
10.75% Capital
Securities, Series B GBB Capital IV 41,000,000 May 18, 2001 June 1, 2010 June 1, 2030
-----------
Total TPS outstanding $99,500,000
===========
The Trust Preferred Securities are mandatorily redeemable, in whole or in
part, upon repayment of their underlying Debentures at their respective stated
maturities or their earlier redemption. The Debentures are redeemable prior to
maturity at the option of the Company on or after their respective optional
redemption dates.
The Trust Preferred Securities issued by GBB Capital I, GBB Capital III and
GBB Capital IV accrue interest at an annual rate of 9.75%, 10 7/8% and 10.75%,
receptively. The Floating Rate Trust Preferred Securities, Series B ("TPS II")
accrue interest at a variable rate of interest, initially at 7.1875%, on the
outstanding securities. 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 11 for additional disclosures
regarding the interest rate swap).
On the date of original issue, GBB Capital II and GBB Capital IV completed
issuance of series A securities. The series A securities issued in the
offering were sold in private transactions pursuant to an applicable exemption
from registration under the Securities Act. The Company, through GBB Capital
II and GBB Capital IV, completed an offer to exchange the series A securities
for a like amount of its registered series B securities. The exchange
offerings were completed in November 1998 and November 2000, respectively. The
exchange offerings were conducted in accordance with the terms of the initial
issuance of the series A securities.
GBB Capital II originally issued $30,000,000 in TPS II. In 1998, Coast
Commercial Bank purchased $1,000,000 of TPS II. The TPS II were included in
Coast Commercial Bank's investment securities at the time of its merger with
Greater Bay and subsequently transferred to Greater Bay. The $1,000,000 in TPS
II issued by the Company and Coast Commercial Bank's corresponding investment
have been eliminated in consolidation.
The total amount of Trust Preferred Securities outstanding at December 31,
2000 and 1999 was $99.5 million and $49.0 million, respectively. The dividends
paid on Trust Preferred Securities were $7.8 million, $4.2 million and $2.8
million in 2000, 1999 and 1998, respectively. The expense for these dividends
is included in operating expenses.
A-41
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 9--LEASE SECURITIZATIONS
During 1997, Matsco Lease Finance III a special purpose corporation wholly-
owned by The Matsco Companies, Inc. issued the following lease and loan backed
certificates; $55 million Series 1997-1 Class A certificates, $45 million
Series 1997-2 Class A certificates, $1.6 million Series 1997-1 Class B
certificates and $4.5 million 1997-2 Class B certificates. All Class B
certificates, which were subordinate to the Class A certificates, were paid-
off as of December 31, 2000. As of December 31, 2000, the outstanding balances
on the Series 1997-1 and Series 1997-2 Class A certificates were approximately
$28 million and $30 million, respectively. As of December 31, 1999, the
outstanding balances for Series 1997-1 and Series 1997-2 were approximately
$35 million and $38 million, respectively. All of the lease and loan contracts
placed in the 1997-2 Series were treated as a sale in accordance with SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities". The weighted average rate on the combined
series of 1997 certificates was 5.92% at December 31, 2000. The underlying
lease and loan contracts have a carrying value of $28 million and $30 million
for Series 1997-1 and Series 1997-2, respectively, at December 31, 2000. At
December 31, 2000, 0.35% of those leases and loans were 90 days or more past
due. The Class A certificates are rated "AAA" by Standards and Poor's Rating
Services and "Aaa" by Moody's Investors Service and are fully insured by MBIA
Insurance Corporation pursuant to the terms of a certificate guarantee policy.
During 1996, Matsco Lease Finance II, a special purpose corporation wholly-
owned by The Matsco Companies, Inc., issued $40 million in lease-backed notes,
Series 1996-A. As of December 31, 2000 and 1999, the note balance was $5.4
million and $23.5 million, respectively, with a weighted average interest rate
of 6.7% at December 31, 2000. The underlying leases have a carrying value of
$7.1 million at December 31, 2000. At December 31, 2000, 1.11% of those leases
were 90 days or more past due. The notes are unconditionally guaranteed by
MBIA Insurance Corporation pursuant to the terms of a note guarantee policy.
The note is rated "AAA" by Standard and Poors and "Aaa" by Moody's.
Cupertino National Bank, as servicer of the underlying leases, remits funds
collected on behalf of Matsco Lease Finance II and Matsco Lease Finance III to
the trustee on a weekly basis. The servicer receives a flat servicing fee. If
a lease or loan is delinquent or the terms are adversely modified, the
servicer has the option to repurchase the transaction or to substitute with a
similar account up to an aggregate limit of 10%. If a lease or loan contract
is found to have violated the eligibility criteria, the Company has the
obligation to repurchase it.
As a result of the Company's acquisition of The Matsco Companies, Inc.,
Matsco Lease Finance II and Matsco Lease Finance III became wholly-owned
subsidiaries of Greater Bay.
The lease and loan contracts were transferred to Matsco Lease Finance II and
Matsco Lease Finance III in transactions intended to qualify as true sales for
bankruptcy purposes and are not available to pay creditors of the Company.
A-42
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 10--BORROWINGS
Other borrowings are detailed as follows:
2000 1999
-------- --------
(Dollars in
thousands)
Other borrowings:
Short term borrowings:
Securities sold under agreements to repurchase $ 63,000 $ 68,552
Other short term notes payable 15,419 --
FHLB advances 183,000 3,000
Advances under credit lines 15,000 7,000
-------- --------
Total short term borrowings 276,419 78,552
-------- --------
Long term borrowings:
Securities sold under agreements to repurchase -- 10,000
Other long term notes payable 51,809 1,500
FHLB advances 103,000 27,000
-------- --------
Total other long term borrowings 154,809 38,500
-------- --------
Total other borrowings $431,228 $117,052
======== ========
During the years ended December 31, 2000 and 1999, the average balance of
securities sold under short term agreements to repurchase was $76.8 million
and $32.8 million, respectively, and the average interest rates during those
periods were 6.05% and 4.73%, respectively. Securities sold under short term
agreements to repurchase generally mature within 90 days of dates of purchase.
During the years ended December 31, 2000 and 1999, the average balance of
federal funds purchased was $105.3 million and $1.5 million, respectively, and
the average interest rates during those periods were 6.49% and 5.25%,
respectively. There was no such balance outstanding at December 31, 2000 and
1999.
The highest month end balance for short term borrowings during 2000 was
$305.3 million. At December 31, 2000, the weighted average interest rate on
short term borrowings was 6.50%.
The FHLB advances are collateralized by loans and securities pledged to the
FHLB. The following is a breakdown of rates and maturities at December 31,
2000:
Short
Term Long Term
--------- -----------
(Dollars in
thousands)
Amount $183,000 $103,000
Maturity 2001 2002-2003
Average Rates 6.4%-6.5% 5.08%-6.03%
The Company as of December 31, 2000 had short-term, unsecured credit
facilities from two financial institutions totaling $65.0 million. At December
31, 2000 and 1999 the Company had advances outstanding of $15.0 million and
$7.0 million under these facilities. The average rate paid on these advances
was approximately LIBOR + 0.50%. In addition, the Company was in compliance
with all related financial covenants for these credit facilities.
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.
A-43
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 11--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 and 138. 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 and 138. 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, 2000,
the unrealized gain on the cash flow hedge was $148,000, 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 and 138, 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
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 12--INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
-------- ------- -------
(Dollars in thousands)
Current:
Federal $ 40,677 $22,399 $15,571
State 14,391 7,513 5,606
-------- ------- -------
Total current 55,068 29,912 21,177
-------- ------- -------
Deferred:
Federal (12,566) (6,515) (2,346)
State (4,364) (1,774) (713)
-------- ------- -------
Total deferred (16,930) (8,289) (3,059)
-------- ------- -------
Total expense $ 38,138 $21,623 $18,118
======== ======= =======
A-44
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 2000 and 1999 are as follows:
Years ended
December 31,
-----------------------
2000 1999
----------- -----------
(Dollars in thousands)
Allowance for loan losses $ 23,658 $ 15,804
State income taxes 9,615 4,458
Deferred compensation 4,341 2,438
Unrealized (gains) losses on securities 10,732 10,128
Accumulated depreciation 1,252 576
Net operating losses 14 14
Purchase allocation adjustments 351 8
Other 1,996 322
----------- -----------
Net deferred tax asset $ 51,959 $ 33,748
=========== ===========
Management believes that the Company will fully realize its total deferred
income tax assets as of December 31, 2000 based upon the Company's recoverable
taxes from prior carryback years, and its current level of operating income.
At December 31, 2000, 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, 2000, 1999
and 1998:
Years ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Statutory federal tax rate 35.0% 35.0% 35.0%
California franchise tax expense, net of
federal income tax benefit 6.7% 5.6% 6.2%
-------- -------- --------
41.7% 40.6% 41.2%
Tax exempt income -2.8% -2.8% -3.0%
Contribution of appreciated securities -- -4.3% -1.0%
Nondeductible merger costs 1.5% 0.2% 0.6%
Other, net -1.0% -0.9% -2.9%
-------- -------- --------
Effective income tax rate 39.4% 32.8% 34.9%
======== ======== ========
A-45
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 13--OTHER INCOME AND OPERATING EXPENSES
Other income in 2000, 1999 and 1998 included warrant income of $13.0
million, $14.5 million and $945,000 net of related employee incentives of $4.5
million, $7.3 million and $396,000, 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.
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 $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.
Merger and other related nonrecurring costs for the years ended December 31,
2000, 1999 and 1998 were comprised of the following:
2000 1999 1998
------- ------- ------
(Dollars in thousands)
Financial advisory and professional fees $ 7,375 $ 1,627 $1,101
Charges to conform accounting practices 8,078 2,745 183
Other costs 14,649 5,959 1,377
------- ------- ------
Total $30,102 $10,331 $2,661
======= ======= ======
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.
Other expenses for the years ended December 31, 2000, 1999 and 1998 were
comprised of the following:
2000 1999 1998
------- ------- -------
(Dollars in thousands)
Legal and other professional fees $ 4,704 $ 3,371 $ 3,416
Telephone, postage and supplies 4,657 4,500 3,992
Marketing and promotion 4,185 3,492 3,279
Data processing 2,132 2,665 1,959
Client services 2,081 3,226 2,520
FDIC insurance and regulatory assessments 1,236 622 553
Directors fees 1,098 1,226 1,432
Insurance 462 952 889
Other real estate owned 56 13 157
Other 8,147 6,813 7,005
------- ------- -------
$28,758 $26,880 $25,202
======= ======= =======
Occupancy costs for the years ended December 31, 2000, 1999 and 1998 were
$12.7 million, $10.7 million and $9.0 million, respectively.
A-46
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 14--EMPLOYEE BENEFIT PLANS
Stock Option Plans
At December 31, 2000, the total authorized shares issuable under the Greater
Bay Bancorp 1996 Stock Option Plan, as amended (the "Bancorp Plan") was
approximately 9,831,560 shares and the number of shares available for future
grants was approximately 2,750,000 shares.
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.
On November 19, 1997, the Company's shareholders approved an amendment of
the Bancorp Plan to increase by 1,825,304 the number of shares of Greater Bay
stock issuable under the Bancorp Plan. On May 17, 2000, the Company's
shareholders approved an additional amendment of the Bancorp Plan to increase
by 5,000,000 the number of shares issuable under the Bancorp Plan. These
amendments were done to accommodate the increased number of eligible employees
as a result of the mergers.
Under the terms of the respective merger agreements, the stock option plans
of Bank of Petaluma, Coast Bancorp, Bank of Santa Clara, Bay Area Bancshares
and Bay Commercial Services were terminated at the time of merger and
substitute options were issued under the Bancorp Plan. Option holders under
the Bank of Petaluma, Coast Bancorp, Bank of Santa Clara, Bay Area Bancshares
and Bay Commercial Services plans received substitute options to purchase
239,880 shares, 379,596 shares, 471,840 shares, 59,668 shares and 216,636
shares of Greater Bay stock, respectively.
During 2000, the Company assumed the Mt. Diablo Bancshares 1992 Stock Option
Plan, as amended. Options outstanding under that plan were converted to
options to purchase 145,428 shares of Greater Bay stock. At December 31, 2000
the total number of authorized shares issuable under that plan was 686,304
shares, and the number of shares available for future grant was 51,695 shares.
A summary of the Company's stock options as of December 31, 2000, 1999, and
1998 and changes during the years ended on those dates is presented below:
2000 1999 1998
----------------- ---------------- ----------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
(000's) price (000's) price (000's) price
------- -------- ------ -------- ------ --------
Outstanding at beginning
of year 6,122 $11.65 5,360 $ 9.04 4,379 $ 5.71
Granted 1,433 35.00 1,582 17.81 1,697 15.65
Exercised (1,446) 6.28 (667) 5.06 (648) 3.85
Forfeited (220) 13.51 (153) 12.59 (67) 8.41
------ ------ ----- ------ ----- ------
Outstanding at end of year 5,889 18.58 6,122 11.65 5,361 9.04
====== ====== ===== ====== ===== ======
Options exercisable at
year-end 2,518 10.63 2,671 7.12 2,534 4.71
====== ====== ===== ====== ===== ======
Weighted average fair
value of options granted
during the year $15.34 $ 5.94 $ 5.42
====== ====== ======
A-47
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 2000.
Options outstanding Options exercisable
------------------------------ --------------------
Weighted
average Weighted Weighted
Number remaining average Number average
Exercise outstanding life exercise exercisable exercise
price range (000's) (years) price (000's) price
----------- ----------- --------- -------- ----------- --------
$0.77-$9.87 1,330 4.76 $ 5.17 1,242 $ 5.15
$10.56-$19.25 3,025 7.79 16.49 1,156 15.35
$20.56-$29.50 270 8.47 21.86 121 21.83
$30.25-$37.13 1,263 9.96 36.94 -- --
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the
provisions of SFAS No. 123, the Company is encouraged, but not required, to
measure compensation costs related to its employee stock compensation plans
under the fair value method. If the Company elects not to recognize
compensation expense under this method, it is required to disclose the pro
forma net income and net income per share effects based on the SFAS No. 123
fair value methodology. The Company implemented the requirements of SFAS No.
123 in 1997 and has elected to adopt the disclosure provisions of this
statement.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in its accounting for stock options. Accordingly, no
compensation cost has been recognized for its stock option plan. Had
compensation for the Company's stock option plan been determined consistent
with SFAS No. 123, the Company's net income per share would have been reduced
to the pro forma amounts indicated below:
December 31,
-----------------------
2000 1999 1998
------- ------- -------
(Dollars in thousands,
except per share
amounts)
Net income:
As reported $58,540 $44,184 $33,784
Pro forma $56,346 $40,835 $31,316
Basic net income per share:
As reported $ 1.42 $ 1.16 $ 0.91
Pro forma $ 1.37 $ 1.07 $ 0.85
Diluted net income per share:
As reported $ 1.35 $ 1.10 $ 0.85
Pro forma $ 1.30 $ 1.01 $ 0.79
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 2000, 1999, and 1998, respectively; dividend
yield of 1.5%, 1.5% and 1.75%, expected volatility of 48.96%, 29.69% and
39.84%; risk free rates of 4.89%, 6.29% and 4.54%. 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-48
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 2000, 1999 and 1998, the Company
contributed $1.5 million, $1.3 million and $1.1 million, respectively to the
401(k) plan.
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 729,272 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 2000, 1999 and 1998, employees
purchased 93,356, 83,302 and 59,340 shares of common stock, respectively.
There were 456,190 shares remaining in the plan available for purchase by
employees at December 31, 2000.
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 at December 31, 2000 and 1999 is approximately $5.4 million and $3.5
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, 2000, 1999 and 1998
totaled $1.5 million, $896,000 and $602,000, 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, 2000 and 1999, the Company's cash surrender
value of these policies was approximately $64.9 million and $45.4 million,
respectively and is included in other assets. The income recognized on these
polices was $2.2 million, $1.5 million and $953,000 in 2000, 1999 and 1998,
respectively, and is included in other income. A portion of the invested
assets have been placed into secular trusts established in 1999 in behalf of
the executive officers of the Company.
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, 2000 and 1999, $3.1 million and $1.9
million, 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 Bank of Petaluma, Coast Commercial Bank and Peninsula Bank of Commerce
prior to their mergers with the Company, there was approximately $2.1 million
and $1.1 million of deferred compensation which is included in other
liabilities at December 31, 2000 and 1999, respectively.
A-49
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Change in Control
In the event of a change in control, the supplemental employee compensation
benefits agreements with certain executive and senior officers may require the
Company to make certain payments under those agreements. The Company also has
plans in place, which would require certain payments be made to any employee
whose employment is terminated pursuant to a change in control. These
potential liabilities are currently not recognized in the accompanying
consolidated financial statements.
NOTE 15--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, 2000, 1999 and 1998 is shown below:
2000 1999 1998
-------- -------- -------
(Dollars in thousands)
Balance, January 1 $ 26,110 $ 46,866 $21,432
Additions 51,818 27,883 45,019
Repayments (27,178) (48,639) (19,585)
-------- -------- -------
Balance, December 31 $ 50,750 $ 26,110 $46,866
======== ======== =======
Undisbursed commitments, at year end $ 39,544 $ 11,113 $ 8,430
======== ======== =======
NOTE 16--COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under all non-cancelable operating leases as
of December 31, 2000 are below:
(Dollars
in
thousands)
Years ended December 31,
2001 $ 7,474
2002 6,191
2003 5,579
2004 4,943
2005 4,739
Thereafter 34,012
-------
Total $62,938
=======
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 2000, 1999,
and 1998 was $1.3 million, $1.3 million and $1.2 million, respectively. Gross
rental expense for the years ended December 31, 2000, 1999, and 1998 was $7.9
million, $6.9 million, and $5.4 million, respectively.
A-50
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Other Commitments and Contingencies
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 $1.2 billion and $948.8 million and
letters of credit were $116.4 million and $58.4 million, at December 31, 2000
and 1999, respectively. The Company's exposure to credit loss is limited to
amounts funded or drawn; however, at December 31, 2000, 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 $498.3 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 17--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.
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,
subject to adjustment, 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.
A-51
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 18--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). At December 31, 2000 and 1999 the Company and the Banks
met all capital adequacy requirements to which they are subject. Under the
FDICIA prompt corrective action provisions applicable to banks, the most
recent notification from the FDIC or OCC categorized each of the Banks 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.
A-52
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company and the Banks' actual 2000 and 1999 capital amounts and ratios
are as follows:
To be well
capitalized
under prompt
For capital corrective
adequacy action
Actual purposes provisions
-------------- -------------- --------------
As of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Total Capital (To Risk
Weighted Assets):
Greater Bay Bancorp $475,891 10.70% $355,806 8.00% $444,609 N/A
Bank of Petaluma 19,054 12.05 12,650 8.00 15,811 10.00%
Bank of Santa Clara 36,956 11.13 26,563 8.00 33,203 10.00
Bay Area Bank 18,664 10.49 14,234 8.00 17,790 10.00
Bay Bank of Commerce 14,111 10.55 10,700 8.00 13,380 10.00
Coast Commercial Bank 42,724 15.16 22,546 8.00 28,176 10.00
Cupertino National Bank 150,395 10.14 118,655 8.00 148,276 10.00
Golden Gate Bank 20,541 10.13 16,222 8.00 20,280 10.00
Mid-Peninsula Bank 91,401 10.19 71,757 8.00 89,670 10.00
Mt. Diablo National Bank 26,493 11.30 18,756 8.00 23,449 10.00
Peninsula Bank of Commerce 27,228 10.89 20,002 8.00 25,003 10.00
Tier 1 Capital (To Risk
Weighted Assets):
Greater Bay Bancorp $417,847 9.40% $177,807 4.00% $266,765 N/A
Bank of Petaluma 17,058 10.79 6,324 4.00 9,487 6.00%
Bank of Santa Clara 32,779 9.87 13,284 4.00 19,922 6.00
Bay Area Bank 16,419 9.23 7,115 4.00 10,674 6.00
Bay Bank of Commerce 12,422 9.28 5,354 4.00 8,028 6.00
Coast Commercial Bank 39,181 13.91 11,267 4.00 16,905 6.00
Cupertino National Bank 131,684 8.88 59,317 4.00 88,966 6.00
Golden Gate Bank 17,993 8.87 8,114 4.00 12,168 6.00
Mid-Peninsula Bank 80,155 8.94 35,864 4.00 53,802 6.00
Mt. Diablo National Bank 23,539 10.04 9,378 4.00 14,070 6.00
Peninsula Bank of Commerce 24,081 9.63 10,002 4.00 15,002 6.00
Tier 1 Capital Leverage (To
Average Assets):
Greater Bay Bancorp $417,847 8.77% $190,580 4.00% $238,331 N/A
Bank of Petaluma 17,058 8.23 8,291 4.00 10,363 5.00%
Bank of Santa Clara 32,779 8.18 16,029 4.00 20,035 5.00
Bay Area Bank 16,419 8.18 8,029 4.00 10,041 5.00
Bay Bank of Commerce 12,422 7.55 6,581 4.00 8,230 5.00
Coast Commercial Bank 39,181 9.12 17,185 4.00 21,488 5.00
Cupertino National Bank 131,684 9.06 58,139 4.00 72,693 5.00
Golden Gate Bank 17,993 6.34 11,352 4.00 14,188 5.00
Mid-Peninsula Bank 80,155 7.66 31,392 3.00 52,295 5.00
Mt. Diablo National Bank 23,539 8.15 11,553 4.00 14,443 5.00
Peninsula Bank of Commerce 24,081 7.99 12,056 4.00 15,067 5.00
A-53
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
To be well
capitalized
under prompt
For capital corrective
adequacy action
Actual purposes provisions
-------------- -------------- -------------
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- -------- ----- -------- ----- ------- -----
(Dollars in thousands)
Total Capital (To Risk
Weighted Assets):
Greater Bay Bancorp $343,091 11.07% $247,943 8.00% N/A
Bank of Petaluma 17,537 11.70 11,991 8.00 $17,537 10.00%
Bank of Santa Clara 33,672 11.91 22,618 8.00 28,272 10.00
Bay Area Bank 15,104 10.50 11,511 8.00 14,398 10.00
Bay Bank of Commerce 12,004 10.12 9,484 8.00 11,856 10.00
Coast Commercial Bank 37,426 13.80 21,771 8.00 27,213 10.00
Cupertino National Bank 97,081 11.03 70,398 8.00 87,997 10.00
Golden Gate Bank 14,645 10.19 11,494 8.00 14,368 10.00
Mid-Peninsula Bank 65,923 10.02 52,656 8.00 65,820 10.00
Mt. Diablo National Bank 15,192 8.20 14,823 8.00 18,529 10.00
Peninsula Bank of Commerce 22,458 10.86 16,544 8.00 20,680 10.00
Tier 1 Capital (To Risk
Weighted Assets):
Greater Bay Bancorp $302,073 9.75% $123,927 4.00% N/A
Bank of Petaluma 15,941 10.64 5,993 4.00 $15,941 6.00%
Bank of Santa Clara 31,368 11.09 11,314 4.00 16,971 6.00
Bay Area Bank 13,285 9.23 5,756 4.00 8,634 6.00
Bay Bank of Commerce 10,507 8.86 4,742 4.00 7,113 6.00
Coast Commercial Bank 34,020 12.50 10,885 4.00 16,328 6.00
Cupertino National Bank 82,337 9.36 35,199 4.00 52,798 6.00
Golden Gate Bank 12,846 8.94 5,747 4.00 8,621 6.00
Mid-Peninsula Bank 57,692 8.77 26,328 4.00 39,492 6.00
Mt. Diablo National Bank 12,875 6.95 7,411 4.00 11,117 6.00
Peninsula Bank of Commerce 19,859 9.60 8,272 4.00 12,408 6.00
Tier 1 Capital Leverage (To
Average Assets):
Greater Bay Bancorp $302,073 8.24% $146,637 4.00% N/A
Bank of Petaluma 15,941 8.29 7,692 4.00 $15,941 5.00%
Bank of Santa Clara 31,368 9.29 12,782 4.00 15,977 5.00
Bay Area Bank 13,285 7.80 6,815 4.00 8,519 5.00
Bay Bank of Commerce 10,507 7.12 5,900 4.00 7,375 5.00
Coast Commercial Bank 34,020 9.40 14,538 4.00 18,172 5.00
Cupertino National Bank 82,337 8.05 40,896 4.00 51,120 5.00
Golden Gate Bank 12,846 6.55 7,844 4.00 9,805 5.00
Mid-Peninsula Bank 57,692 7.47 30,883 3.00 38,604 5.00
Mt. Diablo National Bank 12,875 7.76 7,828 4.00 9,785 5.00
Peninsula Bank of Commerce 19,859 7.32 10,847 4.00 13,559 5.00
A-54
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 19--EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted
average number of common shares plus common equivalent shares outstanding
including dilutive stock options. The following table provides a
reconciliation of the numerators and denominators of the basic and diluted net
income per share computations for the years ended December 31, 2000, 1999 and
1998.
For the year ended December 31,
2000
-----------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(Dollars in thousands, except
per share amounts)
Net income $58,540
Basic net income per share:
Income available to common
shareholders 58,540 41,229,000 $1.42
Effect of dilutive securities:
Stock options -- 2,276,000
------- ---------- -----
Diluted net income per share:
Income available to common
shareholders and assumed conversions $58,540 43,505,000 $1.35
======= ========== =====
For the year ended December 31,
1999
-----------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(Dollars in thousands, except
per share amounts)
Net income $44,184
Basic net income per share:
Income available to common
shareholders 44,184 38,245,000 $1.16
Effect of dilutive securities:
Stock options -- 2,059,000
------- ---------- -----
Diluted net income per share:
Income available to common
shareholders and assumed conversions $44,184 40,304,000 $1.10
======= ========== =====
For the year ended December 31,
1998
-----------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(Dollars in thousands, except
per share amounts)
Net income $33,784
Basic net income per share:
Income available to common
shareholders 33,784 37,049,000 $0.91
Effect of dilutive securities:
Stock options -- 2,590,000
------- ---------- -----
Diluted net income per share:
Income available to common
shareholders and assumed conversions $33,784 39,639,000 $0.85
======= ========== =====
A-55
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
There were options to purchase 66,000, 1,037,000 shares and 304,000 shares
that were considered anti-dilutive whereby the options' exercise price was
greater than the average market price of the common shares, during the years
ended December 31, 2000, 1999 and 1998, respectively.
All years presented have been restated to reflect the 2-for-1 stock splits
effective on April 30, 1998 and October 4, 2000.
Weighted average shares outstanding and all per share amounts included in the
consolidated financial statements and notes thereto are based upon the
increased number of shares giving retroactive effect to the 2000 mergers with
Bank of Petaluma at a 0.5731 conversion ratio, Bank of Santa Clara at a 0.8499
conversion ratio, Coast Bancorp at a 0.6338 conversion ratio and Mt. Diablo
Bancshares at a 0.9532 conversion ratio, 1999 mergers with Bay Commercial
Services at a 0.6833 conversion ratio and Bay Area Bancshares at a 1.38682
conversion ratio, the 1998 mergers with Pacific Rim Bancorporation and Pacific
Business Funding Corporation at a total of 1,901,496 and 596,000 shares,
respectively, and the 1997 merger with PBC at a 0.96550 conversion ratio.
A-56
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 20--PARENT COMPANY ONLY--CONDENSED FINANCIAL STATEMENTS
The financial statements of Greater Bay Bancorp (parent company only) are
presented below:
PARENT COMPANY ONLY--BALANCE SHEETS
December 31,
------------------
2000 1999
-------- --------
(Dollars in
thousands)
ASSETS
------
Cash and cash equivalents $ 19,067 $ 2,837
Investment in subsidiaries 412,566 282,079
Other investments 25,634 16,143
Other assets 25,172 18,773
-------- --------
Total assets $482,439 $319,832
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Subordinated debt $103,609 $ 58,547
Other borrowings 15,000 7,000
Other liabilities 41,465 1,390
-------- --------
Total liabilities 160,074 66,937
Shareholders' equity:
Common stock 173,276 148,611
Accumulated other comprehensive income (6,552) (9,158)
Retained earnings 155,641 113,442
-------- --------
Total shareholders' equity 322,365 252,895
-------- --------
Total liabilities and shareholders' equity $482,439 $319,832
======== ========
A-57
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
PARENT COMPANY ONLY--STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Income:
Interest income $ 3,634 $ 521 $ 1,073
Cash dividend from subsidiaries 10,560 1,580 3,015
Other income 1,379 -- 71
-------- -------- --------
Total 15,573 2,101 4,159
-------- -------- --------
Expenses:
Interest expense 8,536 4,382 3,195
Salaries 22,280 17,138 8,952
Occupancy and equipment 6,416 3,821 2,031
Merger expenses 12,479 3,283 1,877
Other expenses 7,470 5,804 3,596
Less: rentals and fees received from Banks (41,480) (27,653) (15,866)
-------- -------- --------
Total 15,701 6,775 3,785
-------- -------- --------
Income (loss) before taxes and equity in
undistributed net income of subsidiaries (128) (4,674) 374
Income tax benefit (3,447) (2,685) (1,668)
-------- -------- --------
Income (loss) before equity in undistributed
net income of subsidiaries 3,319 (1,989) 2,042
-------- -------- --------
Equity in undistributed net income of
subsidiaries 55,221 46,173 31,742
-------- -------- --------
Net income $ 58,540 $ 44,184 $ 33,784
======== ======== ========
A-58
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Cash flows-operating activities
Net income $ 58,540 $ 44,184 $ 33,784
Reconciliation of net income to net cash from
operations:
Equity in undistributed net income of
subsidiaries (55,221) (46,173) (31,716)
Net change in other assets (7,495) (9,791) (4,598)
Net change in other liabilities 42,379 4,420 2,140
-------- -------- --------
Operating cash flow, net 38,203 (7,360) (390)
-------- -------- --------
Cash flows-investing activities
Purchases of available for sale securities (51,517) (20,825) (84,130)
Proceeds from sale and maturities of available
for sale securities 3,000 20,980 71,939
Proceeds from sale of OREO 224 -- 407
Dividends from subsidiaries 10,560 4,166 3,449
Capital contribution to the subsidiaries (46,800) (27,218) (17,500)
-------- -------- --------
Investing cash flows, net (84,533) (22,897) (25,835)
-------- -------- --------
Cash flows-financing activities
Net change in other borrowings 2,562 7,000 --
Repurchase of common stock -- -- (2,651)
Proceeds from issuance of subordinated debt 50,500 -- 30,000
Proceeds from sale of common stock 23,704 26,013 5,661
Payment of cash dividends (14,206) (7,622) (7,193)
-------- -------- --------
Financing cash flows, net 62,560 25,391 25,817
-------- -------- --------
Net increase in cash and cash equivalents 16,230 (4,866) (408)
Cash and cash equivalents at the beginning of
the year 2,837 7,703 8,111
-------- -------- --------
Cash and cash equivalents at end of the year $ 19,067 $ 2,837 $ 7,703
======== ======== ========
NOTE 21--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 $40.1 million at December 31, 2000. No such advances
were made during 2000 or exist as of December 31, 2000.
A-59
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 22--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, 2000 and 1999 are as follows:
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
(Dollars in thousands)
Financial assets:
Cash and due from banks $ 270,774 $ 270,774 $ 147,222 $ 147,222
Short term investments and Fed
Funds Sold 138,056 $ 138,056 249,107 249,107
Investment securities 962,277 972,610 750,516 722,262
Loans, net 3,517,408 3,545,022 2,416,423 2,396,640
Financial liabilities:
Deposits:
Demand, noninterest-bearing 1,003,828 1,003,828 727,613 756,604
MMDA, NOW and Savings 2,082,708 2,082,708 1,838,868 1,809,877
Time certificates, $100,000 and
over 784,118 784,334 534,662 528,735
Other time certificates 294,407 294,201 161,745 162,963
Other borrowings 431,228 431,572 117,052 116,242
Subordinated debt -- -- -- --
Company obligated mandatory
redeemable preferred securities of
subsidiary trust holding solely
junior subordinated debentures 99,500 92,365 49,000 48,468
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.
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.
A-60
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 are estimated by discounting future cash flows using
interest rates currently offered on time deposits 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 rates 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 above table.
Limitations
These fair value disclosures represent management's best estimates, based on
relevant market information and information about the financial instruments.
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 23--ACTIVITY OF BUSINESS SEGMENTS
The accounting policies of the segments are 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.
A-61
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table shows each segments key operating results and financial
position for the years ended or as of December 31, 2000, 1999 and 1998:
2000 1999 1998
--------------------- --------------------- ---------------------
Community Trust Community Trust Community Trust
banking operations banking operations banking operations
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Net interest income $ 236,315 $ 551 $ 156,097 $ 369 $ 128,945 $ 859
Other income 28,283 3,753 39,972 3,007 19,453 2,488
Operating expenses 83,737 2,703 149,042 2,863 104,085 2,429
Net income before income
taxes(1) 152,765 1,601 98,167 121 68,648 918
Total assets 4,647,939 -- 3,702,369 -- 3,820,326 --
Deposits 4,107,898 57,163 3,205,057 57,831 2,395,945 67,539
Assets under management -- 773,791 -- 697,435 -- 649,336
- --------
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
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, 2000,
1999 and 1998 is presented below.
As of and for year ended
December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
(Dollars in thousands)
Net interest income and other income
Total segment net interest income and
other income $ 268,902 $ 207,231 $ 151,745
Parent company net interest income and
other income (4,400) (3,893) (1,357)
---------- ---------- ----------
Consolidated net interest income and
other income $ 264,502 $ 203,338 $ 150,388
========== ========== ==========
Net income before taxes
Total segment net income before income
taxes $ 154,366 $ 98,288 $ 69,566
Parent company net income before income
taxes (40,572) (32,393) (17,664)
---------- ---------- ----------
Consolidated net income before income
taxes $ 113,794 $ 65,895 $ 51,902
========== ========== ==========
Total assets
Total segment assets $4,647,939 $3,702,369 $2,820,326
Parent company segment assets 482,439 34,360 36,920
---------- ---------- ----------
Consolidated total assets $5,130,378 $3,736,729 $2,857,246
========== ========== ==========
A-62
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
NOTE 24--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the summary results for the stated eight
quarters:
For the quarter ended
--------------------------------------------
June
December 31, September 30, 30, March 31,
2000 2000 2000 2000
------------ ------------- ------- ---------
(Dollars in thousands, except per share
data)
Interest income $104,376 $96,612 $87,538 $79,837
Net interest income 65,478 59,760 56,521 50,204
Provision for loan losses 6,316 7,844 8,312 5,624
Other income 8,790 10,842 8,657 17,236
Other expenses 33,408 30,515 29,454 29,235
Income before taxes 31,011 25,206 20,668 30,192
Net income 17,950 12,869 10,425 17,296
Net income per share:
Basic $ 0.43 $ 0.31 $ 0.25 $ 0.43
Diluted $ 0.41 $ 0.29 $ 0.24 $ 0.42
For the quarter ended
--------------------------------------------
June
December 31, September 30, 30, March 31,
1999 1999 1999 1999
------------ ------------- ------- ---------
(Dollars in thousands, except per share
data)
Interest income $ 73,124 $66,160 $60,934 $55,159
Net interest income 46,546 42,713 39,306 35,997
Provision for loan losses 6,383 3,977 2,216 1,463
Other income 23,725 7,705 5,780 5,769
Other expenses 46,326 26,744 29,833 24,705
Income before taxes 17,563 19,697 13,037 15,598
Net income 14,240 12,337 8,124 9,483
Net income per share:
Basic $ 0.36 $ 0.32 $ 0.21 $ 0.25
Diluted $ 0.34 $ 0.31 $ 0.20 $ 0.24
A-63
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Greater Bay Bancorp:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 26 present fairly, in all material
respects, the financial position of Greater Bay Bancorp and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000
in conformity with accounting principles generally accepted in the United
States of America. 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 of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
January 30, 2001
A-64