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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, 2001
[_] 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
9.00% Cumulative Trust Preferred Securities of GBB Capital V
Guarantee of Greater Bay Bancorp with respect to the
9.00% Cumulative Trust Preferred Securities of GBB Capital V
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 February 6, 2002, as
reported on the Nasdaq National Market System, was approximately
$1,179,915,000. 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 February 6, 2002, 50,029,620 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 Part III
Meeting of Shareholders to be filed within
120 days of the fiscal year ended December 31, 2001
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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 "we" or "our" 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, 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, Peninsula Bank of Commerce
and San Jose National Bank) operates, projections of future performance,
perceived opportunities in the market and statements regarding our mission and
vision. Our 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 Bancorp ("Greater Bay", on a parent-only basis, and "we" or
"our", on a consolidated basis) is a bank holding company with 11 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, Peninsula Bank of Commerce, and
San Jose National Bank.
We also conduct business through the following divisions: CAPCO, Greater Bay
Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank
Carmel, Greater Bay Bank Marin, Greater Bay Bank Santa Clara Valley 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.
We provide a wide range of commercial banking services to small and
medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. We operate throughout the San
Francisco Bay Area including Silicon Valley, San Francisco and the San
Francisco Peninsula, the East Bay, Santa Cruz, Marin, Monterey, and Sonoma
Counties, with 45 offices located in Aptos, Blackhawk, Capitola, Carmel,
Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae,
Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City,
San Francisco, San Jose, San Leandro, San Mateo, San Rafael, San Ramon, Santa
Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut
Creek and Watsonville.
At December 31, 2001, we had total assets of $7.9 billion, total loans, net,
of $4.4 billion and total deposits of $5.0 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 we have been successful in opening
key regional bank locations to respond to market and client demands, while also
selectively opening key new businesses that expand our product offerings.
The following provides a chronological listing of mergers and acquisitions
that we have completed since November 27, 1996:
Year
commenced
Date of merger Entity Former bank holding 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
March 30, 2001 CAPCO Financial Company Inc. (3) n/a 1990
October 23, 2001 San Jose National Bank SJNB Financial Corp. 1982
- --------
(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.
(3) Operates as a division of Cupertino National Bank and conducts business
under the name CAPCO.
With the exception of the acquisitions of The Matsco Companies, Inc. and
CAPCO, all of these acquisitions were accounted for as a pooling-of-interests
and, accordingly, all of our financial information for the periods prior to the
acquisitions has been restated as if the acquisitions had occurred at the
beginning of the earliest reporting period presented. The acquisitions of The
Matsco Companies, Inc. and CAPCO were accounted for using the purchase
accounting method.
On December 18, 2001, we signed a definitive merger agreement with ABD
Insurance and Financial Services, Inc. ("ABD"). ABD is the largest
independently owned insurance brokerage and employee benefits consulting
organization in the western United States. ABD has over $1.0 billion of
insurance premiums serviced and in excess of $100 million in revenue for the 11
month period ended December 31, 2001.
2
Our Goals
We strive toward six primary goals. These goals include:
. High Credit Quality. Non-performing asset levels continue to be below
our peer group. We've also implemented tighter underwriting standards
and more aggressive management of non-accruals to adjust for current
economy.
. Core Deposit Growth. In addition to pursuing acquisition-driven deposit
growth, we strive to expand our deposit franchise internally through
market penetration and cross-selling as part of our relationship banking
model.
. Net Interest Margin. Though declining rates have resulted in margin
compression, we have eased the compression with our interest rate risk
mitigation strategy and client relationship pricing initiatives. We
believe our relationship-based banking model positions us to deal with
sustained margin compression more effectively.
. Efficiency. We continue to actively manage our efficiency ratio, by
reducing expenses and increasing personal productivity.
. Relationship Management. This value proposition continues to benefit
our clients and our shareholders. As a market differentiator, the close
relationship with a knowledgeable, decision-empowered banker appeals to
business owners, managers and executives who demand a greater level of
service. And for Greater Bay Bancorp, the relationship delivers better
control, higher quality loans and continuing opportunities for revenue
development.
. Acquisition Strategy. We will continue to target well-managed, high
performing banks and other financial services companies that offer
growth and profit opportunities in key markets. Through disciplined
transaction execution, we have brought nine banks and three specialty
finance firms into the Greater Bay Bancorp family.
Regional 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 "Regional Community Banking Philosophy". Our Regional 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 Regional 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. 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,
we currently intend to continue to market our 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.
3
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, international
trade finance services, and upon the completion of our acquisition of ABD,
currently expected to close in the first quarter of 2002, business insurance
products. 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
Our primary goal is to become the preeminent independent financial services
company in Northern California. Our primary business strategy is to focus on
increasing our market share within the communities we serve through continued
internal growth. We also pursue opportunities to expand our market share
through select acquisitions that management believes complement our businesses.
Management pursues acquisition opportunities in contiguous and infill market
areas. In 2001, with the proposed acquisition of ABD, we have begun to focus on
expanding fee based products in addition to our traditional banking services.
Consistent with our operating philosophy and growth strategy, Greater Bay
regularly evaluates opportunities to acquire banks and other financial services
companies that complement our existing business, expand our market coverage and
share and enhance our client product offerings.
Greater Bay Bancorp's Family of Companies
The following provides a summary of all of our affiliated banks and
operating divisions.
Banks
Bank of Petaluma
Bank of Petaluma presently has four full service regional offices. At
December 31, 2001, Bank of Petaluma had total assets of $392.2 million, total
net loans of $136.0 million and total deposits of $230.1 million.
Bank of Santa Clara
Bank of Santa Clara presently has eight full service regional offices. At
December 31, 2001, Bank of Santa Clara had total assets of $538.5 million,
total net loans of $230.2 million and total deposits of $350.7 million.
Bay Area Bank
Bay Area Bank presently has one full service regional office. At December
31, 2001, Bay Area Bank had total assets of $367.1 million, total net loans of
$158.7 million and total deposits of $214.4 million.
Bay Bank of Commerce
Bay Bank of Commerce presently has three full service regional offices. At
December 31, 2001, Bay Bank of Commerce had total assets of $299.6 million,
total net loans of $130.4 million and total deposits of $158.2 million.
Coast Commercial Bank
Coast Commercial Bank presently has seven full service regional offices. At
December 31, 2001, Coast Commercial Bank had total assets of $565.1 million,
total net loans of $210.8 million and total deposits of $342.6 million.
4
Cupertino National Bank
Cupertino National Bank presently has seven locations, including five full
service regional offices. At December 31, 2001, Cupertino National Bank had
total assets of $2.1 billion, total net loans of $1.5 billion and total
deposits of $1.3 billion. During 2001, we formed and funded CNB Investment
Trust I ("CNBIT I") and CNB Investment Trust II ("CNBIT II"), both of which are
Maryland real estate investment trusts and subsidiaries of Cupertino National
Bank. CNBIT I and CNBIT II provides Cupertino National Bank with flexibility in
raising capital.
Golden Gate Bank
Golden Gate Bank presently has one full service regional office. On December
31, 2001, Golden Gate Bank had total assets of $437.9 million, total net loans
of $205.8 million and total deposits of $234.7 million.
Mid-Peninsula Bank
Mid-Peninsula Bank presently has five full service regional offices. On
December 31, 2001, Mid-Peninsula Bank had total assets of $1.5 billion, total
net loans of $880.2 million and total deposits of $1.0 billion.
Mt. Diablo National Bank
Mt. Diablo National Bank presently has four full service regional offices.
At December 31, 2001, Mt. Diablo National Bank had total assets of $524.1
million, total net loans of $192.0 million and total deposits of $312.6 million.
Peninsula Bank of Commerce
Peninsula Bank of Commerce presently has one full service regional office.
On December 31, 2001, Peninsula Bank of Commerce had total assets of $431.7
million, total net loans of $212.7 million and total deposits of $242.7 million.
San Jose National Bank
San Jose National Bank presently has four full service regional offices. On
December 31, 2001, San Jose National Bank had total assets of $857.2 million,
total net loans of $491.3 million and total deposits of $541.1 million.
Operating Divisions of the Banks
CAPCO
CAPCO is engaged in providing account receivable financing to small business
located in the Pacific Northwest. At December 31, 2001, CAPCO had approximately
$25.2 million in loans outstanding.
Greater Bay Bank Carmel Region, Greater Bay Bank Contra Costa Region,
Greater Bay Bank Fremont Region and Greater Bay Bank Marin Region
We believe that the East Bay, Marin County, and Monterey County have a
tremendous potential for growth. In order to establish and expand our presence
in these markets, we formed the Carmel, Contra Costa, Fremont, and Marin
regional offices. Each of these offices offers a full line of business banking
services.
5
Greater Bay Bank Santa Clara Valley Group
Greater Bay Bank Santa Clara Valley 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 our 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 that 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 $20.0 million and financing
requirements in the range of $5.0 million to $250.0 million. Greater Bay
Corporate Finance Group participates in syndicated loan transactions and direct
sourced transactions where Greater Bay Corporate Finance Group is the lead
agent. At December 31, 2001, Greater Bay Corporate Finance Group had $99.7
million in syndicated loan transactions outstanding and $69.2 million in direct
financing transactions.
Greater Bay Trust Company
Greater Bay Trust Company provides trust services to support the trust needs
of the Banks' business and private banking 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 2001, the Export-Import Bank of the United States
increased the 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 $75.0 million in loans.
Matsco
Matsco is engaged in providing financial products, primarily loans and
leases, to the dental and veterinary health professions. At December 31, 2001,
Matsco's outstanding loans and leases totaled $491.8 million. Approximately 80%
of Matsco's outstanding loans and leases were to dental businesses, with the
remainder 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 our
small business banking services.
6
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
We provide 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 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, Marin,
Monterey, 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 County 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.
. 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.
7
. Coast Commercial Bank's primary base of operations is in Santa Cruz,
California and extends through Santa Cruz County. Coast Commercial Bank
also maintains a banking office in Monterey County. Santa Cruz County
and Monterey County have populations of approximately 255,000 and
399,000 respectively.
. 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 from northern Santa Clara County through
San Mateo County. Mid-Peninsula Bank also maintains banking offices in
Alameda, Contra Costa, and Marin 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.
. San Jose National Bank's primary base of operations is centered in San
Jose, California, and includes Santa Clara County.
The commercial base of Alameda, Contra Costa, Marin, Monterey, 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 our
geographic concentration, our results depend largely upon economic conditions
in these areas. While the economy in our market areas exhibited weakness in
2001, recent employment reports and other economic indicators have offered
positive signs for the economy for the latter half of 2002. No assurance can be
given that significant improvement in the economy will occur in 2002. A
prolonged economic downturn could have a material adverse impact on the quality
of our loan portfolio and the demand for our products and services, and
accordingly on our results of operations. See "Item 1. Business--Factors That
May Affect Future Results of Operations."
Matsco markets its dental and veterinarian financing services nationally. At
December 31, 2001, approximately $338.1 million of Matsco's outstanding loans
and leases 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 loans
and leases totaling approximately $37.3 million.
Similarly, the Greater Bay Corporate Finance Group participates in
syndicated loan transactions which are originated nationally. At December 31,
2001, approximately $46.6 million in outstanding syndicated loans participated
by the Greater Bay Corporate Finance Group are with borrowers located outside
the State of California.
Our other operating divisions primarily conduct business in the San
Francisco Bay Area.
8
Lending Activities
Underwriting and Credit Administration
Each Bank's lending activities are guided by the basic lending policies
established by Greater Bay and approved by each Bank's 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 our 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, the
Senior Vice President and Chief Credit Officer of Greater Bay, and three
Regional Credit Administrators. All members of the Officers' Loan Committee are
also officers of the individual Banks. Loan requests which exceed the limits of
our Officers' Loan Committee are submitted to the Directors' Loan Committee.
The Directors' Loan Committee consists of at least one 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.
Our credit administration function includes an internal loan review and the
regular use of two outside loan review firms. In addition, our Officers' Loan
Committee, Credit Risk Management 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 our allowance for loan losses.
Loan Portfolio
The composition of our gross loan portfolio at December 31, 2001 was as
follows:
. Approximately 73.8% were commercial loans. 42.4% of the commercial loans
were commercial real estate term loans;
. Approximately 16.6% were in real estate construction and land loans,
which are split evenly between commercial properties and residential
projects;
. Approximately 5.5% were other real estate term loans, primarily secured
by residential real estate;
. The balance of the portfolio consists of consumer loans.
The interest rates the Banks charge varies 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 up to 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. In underwriting commercial
loans, we emphasize the borrower's earnings history, capitalization and
secondary sources of repayment. In some instances, we require 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.
9
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 venture capital
and 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
many of these technology companies are in the start-up or development phase,
they may not generate any revenues for several years. We often receive warrants
from these companies as part of the compensation for our services. As of
December 31, 2001, the Venture Banking Group had loans outstanding to start-up
and development stage companies of approximately $78.0 million.
The Greater Bay Corporate Finance Group specializes in providing commercial
loans to small and medium sized, non-investment grade middle market companies.
We design credit facilities to supplement ongoing working capital needs,
purchase fixed assets or finance strategic acquisitions. Loan facilities are
typically collateralized by a first priority security interest in all of the
borrower's assets and are generally underwritten based on the value of the
borrower's assets or historical cash flow. The Greater Bay Corporate Finance
Group sources its own relationships and has participated in syndicated loan
transactions led by other financial institutions. Greater Bay Corporate Finance
Group has not participated in any syndicated loan transactions led by another
financial institution since January of 2000.
We participate in many SBA programs through the Greater Bay Bank SBA Lending
Group, which 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 SBA Lending Group 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 SBA Lending Group 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 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 SBA Lending
Group generally sells the guaranteed portion of its SBA loans in the secondary
market.
Matsco offers a complete range of financial products and services to meet
the needs of dentists and veterinarians throughout their professional career.
Matsco's principal financial products, which are marketed nationwide, include
practice start-up financing, practice expansion financing, practice acquisition
financing, working capital and financing for retirement planning. These
products are structured as either equipment leases or loans.
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.
10
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.
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.
Our 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 lower of actual or
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 at a 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 our business 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
8.7% of its trust assets under management in liquid funds that are retained in
Cupertino National Bank money market demand accounts. At December 31, 2001,
these funds totaled $54.8 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, 2001, the Venture Banking Group's clients had
$419.0 million in deposits at Cupertino National Bank.
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 were $629.7 million
at December 31, 2001, compared to $773.8 million at December 31, 2000 and
$697.4 million at December 31, 1999.
11
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 order to compete with 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 45 offices located in Alameda, Contra Costa,
Marin, Monterey, San Francisco, San Mateo, Santa Clara, Santa Cruz and Sonoma
counties in California.
As of June 30, 2001, the latest date for which the FDIC branch data is
available, the Bank's deposits represented 1.17% of the deposits for all
financial service companies in Alameda County, 1.35% of the deposits for all
financial service companies in Contra Costa County, 4.73% of the deposits for
all financial service companies in San Mateo County, 8.01% of all deposits in
Santa Clara County, 11.25% of all deposits in Santa Cruz County and 2.52% of
all deposits in Sonoma County. The Bank's deposits represent less than 1% of
the deposits for all financial service companies in Marin and San Francisco
Counties. The Bank's total deposits represents 3.02% of the deposits for all
financial service companies in the San Francisco Bay Area, which includes Napa
and Solano Counties in addition to the above eight counties.
Economic Conditions, Government Policies, Legislation, and Regulation
Our 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 our
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 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") influence our business. 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. We
cannot fully predict the nature and impact on Greater Bay and the Banks of any
future changes in monetary and fiscal policies.
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."
12
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
As a registered bank holding company, Greater Bay and its subsidiaries are
subject to the Federal Reserve Board's supervision, regulation and examination
under the Bank Holding Company Act of 1956, as amended (the "BHCA"). In
addition, effective on February 1, 2002, Greater Bay became a financial holding
company under the BHCA as amended by the Gramm-Leach-Bliley Act of 1999 (the
"Financial Services Modernization Act"). For further information on the
Financial Services Modernization Act, see --"Financial Services Modernization
Legislation" below.
As a bank holding company, Greater Bay was required to seek the Federal
Reserve Board's prior approval before acquiring ownership or control of more
than 5% of the outstanding shares of any class of voting securities, or
substantially all the assets, of any company, including a bank or bank holding
company. As a financial holding company, the Federal Reserve Board's prior
approval is not required to acquire ownership or control of entities engaged in
specified financial activities. The existing restrictions, however, on directly
or indirectly acquiring a bank or bank holding company are still applicable.
Further, as a bank holding company, Greater Bay was generally allowed to
engage, directly or indirectly, only in banking and other activities that the
Federal Reserve Board deems to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. As a financial holding
company, Greater Bay is permitted to engage in a full range of financial
activities, including banking, which the Federal Reserve Board determines to be
financial in nature, incidental to such financial activities or complimentary
to a financial activity.
Greater Bay is required by the Federal Reserve to maintain certain levels of
capital. See "--Capital Standards, below."
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.
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.
13
The Banks
We have three 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 ("Commissioner") and the Federal Reserve
and are also subject to regulations of the FDIC.
If, as a result of a bank examination, 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 Banks' operations. 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 borrowers. Further, the Banks are required to
maintain certain levels of capital. See "--Capital Standards."
USA Patriot Act of 2001
On October 26, 2001, President Bush signed the USA Patriot Act of 2001.
Enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C. on September 11, 2001, the Patriot Act is intended to
strengthen U.S. law enforcement's and the intelligence communities' ability to
work cohesively to combat terrorism on a variety of fronts. The potential
impact of the Act on financial institution of all kinds is significant and wide
ranging. The Act contains sweeping anti-money laundering and financial
transparency laws and requires various regulations, including:
. due diligence requirements for financial institutions that administer,
maintain, or manage private banks accounts or correspondent accounts for
non-U.S. persons;
. standards for verifying customer identification at account opening;
. rules to promote cooperation among financial institutions, regulators,
and law enforcement entities in identifying parties that may be involved
in terrorism or money laundering;
. reports by nonfinancial trades and business filed with the Treasury
Department's Financial Crimes Enforcement Network for transactions
exceeding $10,000 and;
. filing of suspicious activities reports securities by brokers and
dealers if they believe a customer may be violating U.S. laws and
regulations.
Greater Bay is not able to predict the impact of such law on its financial
condition or results of operations at this time.
14
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 repealed 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 restricted 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;
. 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 became a financial holding company on February 1, 2002. Activities that are
financial in nature 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.
15
Prior to electing to become a financial holding company, and in order to
maintain that status, 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.
Failure to comply with the financial holding company requirements could lead
to divestiture of subsidiary banks or require all our activities 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.
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.
Merchant Banking Restrictions. While BHCA generally prohibits bank holding
companies from owning more than 5 percent of the voting stock of non-financial
companies, with limited exceptions, the Financial Services Modernization Act
authorizes merchant banking activities. Permissible merchant banking
investments are defined as investments that meet two important requirements:
. the investment may only be held for a period of time to enable the
resale of the investment (generally current regulations allow for a
10-year holding period for direct investments and a 15-year holding
period for investments in private equity funds), and
. while the investment is held by the financial holding company, the
investment financial holding company may not routinely manage or operate
the commercial firm except as necessary or required to obtain a
reasonable return on the investment on resale (regulation presumes that
officer or director interlocks involve routine management).
In addition, there are limits on bank funding of portfolio companies owned
by the bank's parent holding company, transactions between the bank and
portfolio companies and on cross-marketing activities between banks and
portfolio companies owned by the same financial holding company. However,
current rules do not prevent a depository institution from marketing the shares
of private equity funds controlled by an affiliated financial holding company,
and does not apply to situations in which the financial holding company owns
less than 5 percent of the voting shares of the portfolio company.
Furthermore, in December 2001, federal regulators adopted new capital
requirements for merchant banking activities. The rule employs a sliding scale
based on each banking organization's aggregate equity investment in
non-financial entities and Tier I capital, requiring banks or holding companies
to hold regulatory capital equal to
. 8 cents for every $1 of equity investment up to 15% of Tier 1 capital;
. 12 cents for every $1 of investments for the next 10% of Tier 1 capital;
and
. 25 cents for every $1 exceeding 25% of Tier 1 capital.
The first 15% of investments that banking companies make through
small-business investment companies (SBICs) is exempt, however, the sliding
scale applies for any such investment over 15%.
Expanded Bank Activities. The Financial Services Modernization Act also
permits national banks to engage in expanded activities through the formation
of financial subsidiaries. A national bank may have a subsidiary engaged in any
activity authorized for national banks directly or any financial activity,
except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking, which may only be conducted
through a subsidiary of a financial holding company. Financial activities
include all activities permitted under new sections of the BHCA or permitted by
regulation.
16
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized," "well-managed"
and in compliance with the Community Reinvestment Act. The total assets of all
financial subsidiaries may not exceed the lesser of 45% of a bank's total
assets, or $50 billion. A national bank must exclude from its assets and equity
all equity investments, including retained earnings, in a financial subsidiary.
The assets of the subsidiary may not be consolidated with the bank's assets.
The bank must also have policies and procedures to assess financial subsidiary
risk and protect the bank from such risks and potential liabilities.
The Financial Services Modernization Act also includes a new section of the
Federal Deposit Insurance Act governing subsidiaries of state banks that engage
in "activities as principal that would only be permissible" for a national bank
to conduct in a financial subsidiary. It expressly preserves the ability of a
state bank to retain all existing subsidiaries. Because California permits
commercial banks chartered by the state to engage in any activity permissible
for national banks, the Bank will be permitted to form subsidiaries to engage
in the activities authorized by The Financial Services Modernization Act, to
the same extent as a national bank. In order to form a financial subsidiary,
the bank must be well-capitalized, and the bank would be subject to the same
capital deduction, risk management and affiliate transaction rule as applicable
to national banks.
Privacy. Under the Financial Services Modernization Act, federal banking
regulators adopted rules that limit the ability of banks and other financial
institutions to disclose non-public information about consumers to
nonaffiliated third parties. 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.
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
Greater Bay's financial condition or results of operations.
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
$106.5 million at December 31, 2001. 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.
17
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."
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, 2001, each
of the Banks and Greater Bay exceeded the required ratios for classification as
well capitalized.
18
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.
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 new 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
Greater Bay's depository institution subsidiaries 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.
19
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 Greater Bay'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 Greater Bay's subsidiary
depository institutions could have a material adverse effect on Greater Bay's
earnings, depending on the collective size of the particular institutions
involved.
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 fourth quarter of
2001 at approximately $.0184 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 are as follows.
20
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
San Jose National Bank October 1999 Satisfactory
The regulatory agencies for Bay Bank of Commerce, Coast Commercial Bank,
Mid-Peninsula Bank, and Peninsula Bank of Commerce completed examinations of
those institutions in December 2001. The regulatory agencies have not yet
issued any reports on those examinations. Management does not expect any
significant changes in these banks' ratings.
Employees
At December 31, 2001, we had 1,160 full-time employees. None of the
employees is covered by a collective bargaining agreement. We consider our
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 us. 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 Regional 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. 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.
21
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, Marin,
Monterey, 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. The economy in our market areas has
exhibited weakness.
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 has adversely affected existing business and resulted in a
significant slowdown in the growth of the technology industry. A prolonged or
further decline in economic and business conditions in our market areas,
particularly in the technology and real estate industries on which the Bay Area
depends, could have a material impact on the quality of our loan portfolio or
the demand for our products and services, which in turn may have a material
adverse effect on our results of operations. A continued weakening 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.
22
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.
ITEM 2. PROPERTIES.
We occupy our administrative offices under a lease which, including options
to renew, expires in 2007. The Banks own eleven of their offices and lease 62
additional offices throughout the San Francisco Bay Area. Those leases expire
under various dates, including options to renew, through December 2017.
We believe our present facilities are adequate for our present needs but
anticipate the need for additional facilities as we continue to grow. We
believe that, if necessary, we could secure suitable alternative facilities on
similar terms without adversely affecting operations.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we are involved in certain legal proceedings arising in
the normal course of our business. Management believes that the outcome of
these matters will not have a material adverse effect on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) We held a special meeting of shareholders on October 23, 2001.
(b) Not applicable.
(c) At the special meeting, shareholders voted to approve (1) the merger
with SJNB Financial Corp. and (2) an increase of 4,000,000 shares reserved
for issuance under the Company's Amended and Restated 1996 Stock Option
Plan. The results of the voting were as follows:
Votes Broker
Matter Votes for against Withheld Abstentions non-votes
------ ---------- --------- -------- ----------- ---------
Merger with SJNB Financial Corp. 28,414,598 1,001,988 NA 94,130 -0-
Option share increase 21,887,712 7,333,404 NA 289,600 -0-
(d) Not applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our stock is traded on the Nasdaq National Market ("Nasdaq") under the
symbol "GBBK". The quotations shown reflect the high and low closing sales
prices for our common stock as reported by Nasdaq. The following information
has been restated to reflect the 2-for-1 stock split which became effective on
October 4, 2000.
Cash
dividends
For the period indicated High Low declared
------------------------ ------ ------ ---------
2001
Fourth quarter $29.73 $19.98 $0.115
Third quarter 28.45 21.30 0.115
Second quarter 27.46 21.00 0.10
First quarter 42.88 24.81 0.10
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
We estimate that there were approximately 4,100 shareholders of record at
December 31, 2001.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Information regarding Selected Consolidated Financial Data appears on pages
A-1 and A-2 under the caption "Selected 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-26 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 pages A-22 through A-24 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-27 through A-67 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.
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.
We intend to file a definitive proxy statement for the 2002 Annual Meeting
of Shareholders (the "Proxy Statement") with the Securities and Exchange
Commission within 120 days of December 31, 2001. 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, 2001 and 2000 A-27
Consolidated Statements of Operations for each of the years in the three-year period ended
December 31, 2001 A-28
Consolidated Statements of Comprehensive Income for each of the years in the three-year A-29
period ended December 31, 2001
Consolidated Statements of Shareholders' Equity for each of years in the three-year
period ended December 31, 2001 A-30
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2001 A-31
Notes to the Consolidated Financial Statements A-32
Report of Independent Accountants A-68
2. Financial Statement Schedules
Not applicable.
3. Exhibits
See Item 14(c) below.
(b) Reports on Form 8-K
During the fourth quarter of 2001, the Company filed the following Current
Reports on Form 8-K: (1) October 9, 2001 (reporting under Item 5 and 9 the
timing of the release of the third quarter 2001 financial results and guidance
for the quarter and year ended December 31, 2001); (2) October 17, 2001, as
amended on October 18, 2001 (reporting under Item 5 and 9 third quarter 2001
financial results and performance goals for 2001 and 2002); (3) October 24,
2001 (reporting under Item 5 completion of the Company's merger with SJNB
Financial Corp.; (4) October 26, 2001 (reporting under Item 5 supplemental
consolidated financial information relating to the Company's merger with SJNB
Financial Corp); (5) November 6, 2001 (reporting under Item 5 and 9 the
presentation for analysts' reference); and (6) December 19, 2001 (reporting
under Item 5 and 9 the acquisition of ABD Insurance and Financial Services,
Inc. and reaffirmation of guidance).
(c) Exhibits Required by Item 601 of Regulation S-K
Reference is made to the Exhibit Index on pages 29 through 31 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 15th day of
February, 2002.
GREATER BAY BANCORP
By: /s/ DAVID L. KALKBRENNER
----------------------------------
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 February 15, 2002
- ----------------------------- Officer and Director
David L. Kalkbrenner (Principal Executive
Officer)
/s/ STEVEN C. SMITH Executive Vice President, February 15, 2002
- ----------------------------- Chief Administrative
Steven C. Smith Officer and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
/s/ ROBERT A. ARCHER Director February 15, 2002
- -----------------------------
Robert A. Archer
/s/ JOHN M. GATTO Director February 15, 2002
- -----------------------------
John M. Gatto
/s/ JOHN J. HOUNSLOW Director February 15, 2002
- -----------------------------
John J. Hounslow
/s/ JAMES E. JACKSON Director February 15, 2002
- -----------------------------
James E. Jackson
/s/ STANLEY A. KANGAS Director February 15, 2002
- -----------------------------
Stanley A. Kangas
/s/ DANIEL G. LIBARLE Director February 15, 2002
- -----------------------------
Daniel G. Libarle
- ----------------------------- Director
Rex D. Lindsay
- ----------------------------- Director
Arthur K. Lund
27
ANNUAL REPORT ON FORM 10-K (CONTINUED)
Signature Title Date
--------- ----- ----
/s/ GEORGE M. MARCUS Director February 15, 2002
- -----------------------------
George M. Marcus
/s/ DUNCAN L. MATTESON Director February 15, 2002
- -----------------------------
Duncan L. Matteson
/s/ GLEN MCLAUGHLIN Director February 15, 2002
- -----------------------------
Glen McLaughlin
/s/ LINDA R. MEIER Director February 15, 2002
- -----------------------------
Linda R. Meier
/s/ DICK J. RANDALL Director February 15, 2002
- -----------------------------
Dick J. Randall
/s/ DONALD H. SEILER Director February 15, 2002
- -----------------------------
Donald H. Seiler
/s/ WARREN R. THOITS Director February 15, 2002
- -----------------------------
Warren R. Thoits
/s/ JAMES C. THOMPSON Director February 15, 2002
- -----------------------------
James C. Thompson
/s/ THADDEUS J. WHALEN, JR. Director February 15, 2002
- -----------------------------
Thaddeus J. Whalen, Jr.
28
EXHIBIT INDEX
Exhibit
No. Exhibit
- ------- -------
2 Agreement and Plan of Merger and Reorganization, dated as of December 18, 2001, by and among
Greater Bay Bancorp, Alburger Basso deGrosz Insurance Services Inc., and GBBK Corp. (15)
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended and restated (1)
3.2 Bylaws of Greater Bay Bancorp, as amended and restated
3.3 Certificate of Determination of Series A Preferred Stock of Greater Bay Bancorp (filed as Exhibit A to
Exhibit 4.1 hereto)
4.1 Rights Agreement (2)
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between Greater Bay Bancorp and
Wilmington Trust Company, as Trustee (3)
4.3(a) 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 (3)
4.3(b) Successor Administrative Trustee and First Amendment to Amended and Restated Trust Agreement (4)
4.4 Trust Preferred Certificate of GBB Capital I (3)
4.5 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust Company, dated as of
March 31, 1997 (3)
4.6 Agreement as to Expenses and Liabilities, dated as of March 31, 1997 (3)
4.7 Indenture between Greater Bay Bancorp and Wilmington Trust Company, as Debenture Trustee, dated
as of August 12, 1998 (5)
4.8 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)
4.9 Common Securities Guarantee Agreement of Greater Bay Bancorp, dated as of August 12, 1998 (5)
4.10 Series B Capital Securities Guarantee Agreement of Greater Bay Bancorp and Wilmington Trust
Company dated as of November 27, 1998 (4)
4.11 Amended and Restated Declaration of Trust of GBB Capital III, dated as of March 23, 2000 (6)
4.12 Indenture, dated as of March 23, 2000, between Greater Bay Bancorp and The Bank of New York, as
Trustee (6)
4.13 Guarantee Agreement, dated as of March 23, 2000, by and between Greater Bay Bancorp and The Bank
of New York, as Trustee (6)
4.14 Amended and Restated Declaration of Trust of GBB Capital IV, dated as of May 19, 2000 (7)
4.15 Indenture, dated as of May 19, 2000, between Greater Bay Bancorp and Wilmington Trust Company,
as Trustee (7)
4.16 Common Securities Guarantee Agreement, dated as of May 19, 2000 between Greater Bay Bancorp
and Wilmington Trust Company, as Trustee (7)
4.17 Capital Securities Guarantee Agreement, dated as of November 20, 2000, between Greater Bay
Bancorp and Wilmington Trust Company, as Trustee (1)
4.18 Form of Amended and Restated Declaration of Trust of GBB Capital V (8)
29
Exhibit
No. Exhibit
- -------- -------
4.19 Form of Indenture between Greater Bay Bancorp and Wilmington Trust Company, as Trustee (8)
4.20 Form of Capital Securities Guarantee Agreement (8)
4.21 Form of Common Securities Guarantee Agreement (8)
4.22 Amended and Restated Declaration of Trust of GBB Capital VI dated July 16, 2001 (8)
4.23 Indenture, dated as of July 16, 2001, between Greater Bay Bancorp and The Bank of New York, as
Trustee (8)
4.24 Guarantee Agreement, dated as of July 16, 2001, between Greater Bay Bancorp and The Bank of New
York, as Trustee (8)
10.1 (a) Employment Agreement with David L. Kalkbrenner, dated as of January 1, 1999 (9)(10)
10.1 (b) Amendment No. 1 to Employment Agreement with David L. Kalkbrenner, dated as of December 11,
2000 (1)(9)
10.2 Employment Agreement with Byron Scordelis, dated March 26, 2001, effective as of May 15, 2001
(9)(11)
10.3 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between
Greater Bay Bancorp and David L. Kalkbrenner (9)(10)
10.4 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between
Mid-Peninsula Bank and Susan K. Black (9)(10)
10.5 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between
Cupertino National Bank and David R. Hood (9)(10)
10.6 Employee Supplemental Compensation Benefits Agreement, dated as of April 6, 1998, between
Greater Bay Bancorp and Gregg A. Johnson (9)(10)
10.7 Employee Supplemental Compensation Benefits Agreement, dated as of January 1, 1998, between
Greater Bay Bancorp and Steven C. Smith (9)(10)
10.8 Greater Bay Bancorp 401(k) Profit Sharing Plan (9)
10.9 Greater Bay Bancorp Employee Stock Purchase Plan, as amended (1)(9)
10.10 Greater Bay Bancorp Change in Control Pay Plan I (9)(12)
10.11(a) Greater Bay Bancorp Change in Control Pay Plan II (9)(12)
10.11(b) Amendment No. 1 to Greater Bay Bancorp Change in Control Pay Plan II (9)(13)
10.12 Greater Bay Bancorp Termination and Layoff Pay Plan I (9)(12)
10.13(a) Greater Bay Bancorp Termination and Layoff Pay Plan II (9)(12)
10.13(b) Amendment No. 1 to Greater Bay Bancorp Termination and Layoff Pay Plan II (9)(13)
10.14 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan, as amended (1)(9)
10.15 Greater Bay Bancorp Amended and Restated 1996 Stock Option Plan (9)(14)
10.16 Form of Indemnification Agreement between Greater Bay Bancorp and with directors and certain
executive officers (3)
10.17(a) Agreement, dated November 4, 1999, between Greater Bay Bancorp and Wells Fargo Bank, National
Association (13)
30
Exhibit
No. Exhibit
- -------- -------
10.17(b) Letter Amendment and Revolving Line of Credit Note, effective October 19, 2000, between Greater
Bay Bancorp and Wells Fargo Bank, National Association (1)
10.17(c) Letter Amendment and Revolving Line of Credit Note, effective October 31, 2001, between Greater
Bay Bancorp and Wells Fargo Bank, National Association
10.18(a) 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. (1)
10.18(b) First Amendment to Line of Credit Agreement, dated as of October 30, 2001, 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
- --------
1. Incorporated by reference from Greater Bay Bancorp's 2000 Annual Report on
Form 10-K filed with the SEC on February 1, 2001
2. Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed with
the SEC on November 25, 1998
3. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K dated June 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 herein by reference from Greater Bay Bancorp's Quarterly
Report on Form 10-Q filed with the SEC on May 12, 2000
7. Incorporated by reference from Greater Bay Bancorp's Quarterly Report on
Form 10-Q filed with the SEC on August 1, 2000
8. Incorporated by reference from Greater Bay Bancorp's Registration Statement
on Form S-3 (File Nos. 333-65772 and 333-65772-01) filed with the SEC on
July 25, 2001
9. Represents executive compensation plans and arrangements of Greater Bay
Bancorp
10. Incorporated by reference from Greater Bay Bancorp's 1999 Annual Report on
Form 10-K filed with the SEC on January 31, 2000
11. Incorporated by reference from Greater Bay Bancorp's Quarterly Report on
Form 10-Q filed with the SEC on August 3, 2001
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
14. Incorporated by reference from Greater Bay Bancorp's Registration Statement
on Form S-8 (File No. 333-76004) filed with the SEC on December 27, 2001
15. Incorporated by reference from Greater Bay Bancorp's Current Report on Form
8-K filed with the SEC on December 19, 2001
31
SELECTED FINANCIAL INFORMATION
The following table represents the selected financial information at and for
the five years ended December 31, 2001:
2001 2000* 1999* 1998* 1997*
----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share amounts)
Statement of Operations Data
Interest income $ 507,241 $ 423,639 $ 298,634 $ 244,269 $ 202,367
Interest expense 186,232 158,050 106,509 87,395 69,869
----------- ----------- ----------- ----------- -----------
Net interest income 321,009 265,589 192,125 156,874 132,498
Provision for loan losses 54,727 28,821 14,901 8,715 9,836
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan
losses 266,282 236,768 177,224 148,159 122,662
Other income 44,261 34,145 30,337 22,820 19,669
Nonrecurring--warrant income 581 12,986 14,508 945 1,162
----------- ----------- ----------- ----------- -----------
Total other income 44,842 47,131 44,845 23,765 20,831
Operating expenses 175,591 139,544 121,328 103,491 90,613
Other expenses--nonrecurring -- -- 12,160 1,341 (1,700)
----------- ----------- ----------- ----------- -----------
Total operating expenses 175,591 139,544 133,488 104,832 88,913
----------- ----------- ----------- ----------- -----------
Income before income tax expense & merger and other
related nonrecurring costs 135,533 144,355 88,581 67,092 54,580
Income tax expense 38,106 55,340 30,485 24,145 20,392
----------- ----------- ----------- ----------- -----------
Income before merger and other related nonrecurring
costs 97,427 89,015 58,096 42,947 34,188
Merger and other related nonrecurring costs, net of tax (17,611) (21,851) (6,795) (1,674) (2,283)
----------- ----------- ----------- ----------- -----------
Net income $ 79,816 $ 67,164 $ 51,301 $ 41,273 $ 31,905
=========== =========== =========== =========== ===========
Per Share Data(1)
Net income per share
Basic $ 1.61 $ 1.40 $ 1.15 $ 0.95 $ 0.75
Diluted 1.57 1.33 1.09 0.88 0.71
Income per share (before merger and nonrecurring
items)(3)
Basic $ 1.96 $ 1.70 $ 1.20 $ 0.98 $ 0.77
Diluted 1.91 1.61 1.14 0.91 0.72
Cash dividends per share(2) $ 0.43 $ 0.35 $ 0.24 $ 0.19 $ 0.15
Book value per common share 9.31 7.92 6.63 5.73 5.13
Shares outstanding at year end 49,831,682 48,748,713 46,174,308 43,876,750 42,510,962
Average common shares outstanding 49,498,000 47,899,000 44,599,000 43,664,000 42,403,000
Average common and common equivalent shares
outstanding 50,940,000 50,519,000 47,078,000 46,741,000 45,205,000
- --------
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 of the Company's annual report on a pooling-of-interest basis.
(1) Restated to reflect 2-for-1 stock split effective as of April 30,1998 and
the 2-for-1 stock split effective as of October 4, 2000.
(2) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the completion of
their mergers with Greater Bay.
(3) In addition to the principal performance measures in accordance with
generally accepted accounting principles, we are providing these
supplemental pro forma performance measures to highlight the results of our
core operations. We believe that these calculations, which are derived from
data presented on the face of our consolidated financial statements, are
useful for investors to provide comparability from period to period with
regard to our core operations. These calculations are not intended to be a
substitute for the principal performance measures in in accordance with
generally accepted accounting principles.
A-1
2001 2000* 1999* 1998* 1997*
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Performance Ratios
Return on average assets 1.18% 1.34% 1.33% 1.36% 1.33%
Return on average common shareholders'
equity 17.77% 19.21% 18.92% 17.69% 15.67%
Return on average assets (before merger and
nonrecurring items)(1) 1.44% 1.63% 1.39% 1.40% 1.36%
Return on average common shareholders'
equity(before merger and nonrecurring
items)(1) 21.61% 23.29% 19.78% 18.28% 16.06%
Net interest margin 5.07% 5.73% 5.41% 5.61% 5.94%
Balance Sheet Data--At Period End
Assets $7,877,054 $5,818,155 $4,304,811 $3,351,982 $2,691,870
Loans, net 4,370,977 3,973,329 2,813,329 2,070,607 1,646,180
Investment securities 2,970,630 1,091,064 863,590 754,035 574,081
Deposits 4,990,071 4,750,404 3,736,621 2,869,341 2,296,796
Borrowings 2,095,896 463,267 150,577 135,095 90,272
Trust Preferred Securities 218,000 99,500 49,000 49,000 20,000
Preferred stock of real estate investment trust
subsidiaries of the Banks 15,000 -- -- -- --
Common shareholders' equity 463,684 385,948 306,114 251,436 218,229
Asset Quality Ratios
Nonperforming assets** to total loans and
other real estate owned 0.69% 0.32% 0.29% 0.29% 0.49%
Nonperforming assets** to total assets 0.39% 0.22% 0.19% 0.18% 0.31%
Allowance for loan losses to total loans 2.77% 2.24% 1.89% 1.82% 1.87%
Allowance for loan losses to non-performing
assets 402.79% 702.37% 685.36% 764.44% 469.08%
Net charge-offs to average loans 0.59% 0.33% 0.07% 0.11% 0.18%
Regulatory Capital Ratios
Leverage Ratio 8.01% 8.79% 8.32% 8.36% 8.96%
Tier 1 Capital 10.49% 9.57% 9.92% 10.86% 11.52%
Total Capital 12.79% 10.87% 11.23% 12.66% 12.87%
- --------
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 of the Company's annual report on a pooling-of-interest basis.
** Excludes accruing loans past due 90 days or more.
(1) In addition to the principal performance measures in accordance with
generally accepted accounting principles, we are providing these
supplemental pro forma performance measures to highlight the results of our
core operations. We believe that these calculations, which are derived from
data presented on the face of our consolidated financial statements, are
useful for investors to provide comparability from period to period with
regard to our core operations. These calculations are not intended to be a
substitute for the principal performance measures in in accordance with
generally accepted accounting principles.
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 "we" or
"our", on a consolidated basis) is a bank holding company with 11 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, Peninsula Bank of Commerce, and
San Jose National Bank.
We also conduct business through the following divisions: CAPCO, Greater Bay
Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank
Carmel, Greater Bay Bank Marin, Greater Bay Bank Santa Clara Valley 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.
We provide a wide range of commercial banking services to small and
medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. We operate throughout the San
Francisco Bay Area including Silicon Valley, San Francisco and the San
Francisco Peninsula, the East Bay, Santa Cruz, Marin, Monterey, and Sonoma
Counties, with 45 offices located in Aptos, Blackhawk, Capitola, Carmel,
Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae,
Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City,
San Francisco, San Jose, San Leandro, San Mateo, San Rafael, San Ramon, Santa
Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut
Creek and Watsonville.
We have participated in nine acquisitions during the three-year period ended
December 31, 2001, as described in Note 2 of the Notes To Consolidated
Financial Statements. With the exception of the acquisitions of The Matsco
Companies, Inc. and CAPCO Financial Company, Inc. ("CAPCO") all of these
acquisitions were accounted for as a pooling-of-interests and, accordingly, all
of our financial information for the periods prior to the acquisitions has been
restated as if the acquisitions had occurred at the beginning of the earliest
period presented. The acquisitions with The Matsco Companies, Inc. and CAPCO
were accounted for using the purchase accounting method and accordingly both
divisions' 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 as of April
30, 1998 and as of October 4, 2000.
The following discussion and analysis is intended to provide greater details
of our results of operations and financial condition. The following discussion
should be read in conjunction with the information under "Selected Financial
Information" and our 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. Our 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
we conduct our operations, fluctuation in interest rates, credit quality and
government regulation and other factors discuss in the annual report on
Form 10-K for the year ended December 31, 2001 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 two different measurements:
Net income
-------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(Dollars in thousands, except
per share amounts)
Income $79,816 $67,164 $51,301
Income per share:
Basic $ 1.61 $ 1.40 $ 1.15
Diluted $ 1.57 $ 1.33 $ 1.09
Return on average assets 1.18% 1.34% 1.33%
Return on average shareholders' equity 17.77% 19.21% 18.92%
Core earnings (income before nonrecurring
warrant income, merger and other related
nonrecurring
costs, and other nonrecurring expenses)
----------------------------------------
Year ended Year ended Year ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
(Dollars in thousands, except
per share amounts)
Income $97,090 $81,439 $53,621
Income per share:
Basic $ 1.96 $ 1.70 $ 1.20
Diluted $ 1.91 $ 1.61 $ 1.14
Return on average assets 1.44% 1.63% 1.39%
Return on average shareholders' equity 21.61% 23.29% 19.78%
Net income for 2001 increased 18.8% to $79.8 million, or $1.57 per diluted
share, compared to net income of $67.2 million, or $1.33 per diluted share, for
2000. Results for 2001 included nonrecurring warrant income of $581,000
($337,000, net of taxes) compared to $13.0 million ($7.6 million, net of taxes)
during 2000. In addition, 2001 results included merger and other related
nonrecurring costs of $29.2 million ($17.6 million, net of taxes) compared to
$33.5 million ($21.9 million, net of taxes) in 2000.
Our core earnings for 2001 increased 19.2% to $97.1 million, or $1.91 per
diluted share, compared to $81.4 million, or $1.61 per diluted share for 2000.
Based on 2001 core earnings, our return on average shareholders' equity was
21.61% and return on average assets was 1.44%. During 2000, our core earnings
resulted in a return on average shareholders' equity of 23.29% and a return on
average assets of 1.63%.
The 19.2% increase in core earnings during 2001 as compared to 2000 was the
result of significant growth in loans and investments. For 2001, net interest
income increased 20.9% as compared to 2000. This increase was primarily due to
a 36.4% increase in average interest-earning assets for 2001 as compared to
2000. The increases in loans, trust assets and deposits also contributed to the
8.5% increase in loan and international banking fees, service charges and other
fees, and trust fees. Increases in operating expenses were required to service
and support our growth. As a result, increases in revenue were partially offset
for 2001 by a 25.8% increase in recurring operating expenses, as compared to
2000.
Net income for 2000 increased 30.9% to $67.2 million, or $1.33 per diluted
share, compared to net income of $51.3 million, or $1.09 per diluted share, for
1999. Results for 2000 included nonrecurring warrant income of $13.0 million
($7.6 million, net of taxes) compared to $14.5 million ($8.4 million, net of
taxes) during 1999. In addition, 2000 results included merger and other related
nonrecurring costs of $33.5 million ($21.9 million, net of taxes) compared to
$10.8 million ($6.8 million, net of taxes) in 1999.
A-4
Our core earnings for 2000 increased 51.9% to $81.4 million, or $1.61 per
diluted share, compared to $53.6 million, or $1.14 per diluted share for 1999.
Based on 2000 core earnings, our return on average shareholders' equity was
23.29% and return on average assets was 1.63%. During 1999, our core earnings
resulted in a return on average shareholders' equity of 19.78% and a return on
average assets of 1.39%.
The 51.9% increase in core earnings during 2000 as compared to 1999 was also
the result of significant growth in loans and investments. For 2000, net
interest income increased 38.2% as compared to 1999. This increase was
primarily due to a 30.6% increase in average interest-earning assets for 2000
as compared to 1999. The increases in loans, trust assets and deposits also
contributed to the 31.0% 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 our growth. As a result, increases in
revenue were partially offset for 2000 by a 15.0% increase in recurring
operating expenses, as compared to 1999.
Net Interest Income-Overview
During 2001 we continued to experience compression of our net interest
margin. This was attributable primarily to the rapidly declining interest rate
environment, our asset sensitive balance sheet, slowdown in loan and deposit
growth, and to a lesser extent a shift in the mix of our interest earning
assets and interest bearing liabilities. In response to those conditions, we
changed our balance sheet mix and composition as we shifted the funding source
of our specialty finance businesses from a core deposit base to a wholesale
funding strategy. This funding shift corresponds with our original strategy for
financing these niche specialty finance businesses. The impact of this change
has allowed us to also restructure and increase the size of our investment
securities portfolio by funding a substantial portion of it with the deposits
which previously supported the specialty finance business units. The overall
impact of this funding change has been threefold. First, it has increased the
overall net interest income from operations, second it has allowed us to
improve liquidity and reduce the duration of our investment portfolio and third
it has slightly reduced our asset sensitive balance sheet. On a combined basis,
this change has positioned us to slightly reduce our exposure to declining
interest rates, while also effectively restructuring our balance sheet to take
advantage of market interest rates when they move upward.
The following table highlights the change in composition of our balance
sheet at December 31, 2001 and December 31, 2000:
Assets December 31, 2001 December 31, 2000
------ ----------------- -----------------
Loans 57.1% 69.8%
Investment securities 37.7% 18.8%
Other assets 5.2% 11.4%
----- -----
100.0% 100.0%
Liabilities & Equity December 31, 2001 December 31, 2000
-------------------- ----------------- -----------------
Total deposits 63.3% 81.6%
Other borrowing 26.6% 8.0%
Other liabilities 4.2% 3.8%
Equity 5.9% 6.6%
----- -----
100.0% 100.0%
This change in balance sheet mix produced a reduction in our net interest
margin and an increase in average earning assets. The net interest margin
during 2001 was 5.07% with average interest earning assets of $6.3 billion. If
we had not changed our balance sheet mix, our net interest margin would have
been 5.40% with interest earning assets of $5.6 billion. The overall impact on
our net interest income and interest rate risk profile has been positive.
Without the change in balance sheet mix, our net interest income for 2001 would
have been approximately $19.5 million lower.
A-5
Current modeling of our interest rate risk indicates that our net interest
margin would contract approximately 10 to 15 basis points for every 25 basis
point reduction in market interest rates. This relationship is estimated to be
reasonable through an additional 25 basis point decline in market interest
rates, assuming the mix and composition of our balance sheet remains similar.
The balance sheet restructuring has eased to some extent the downward
pressure on our net interest margin, but it has not substantially reduced the
upside if and when market interest rates begin an upward trend. For every 25
basis point increase in rates, we anticipate that our net interest margin would
increase by approximately 10 to 12 basis points. Again, this assumes a similar
mix in loans and deposits. However, in an improving economy, we believe that
our clients' demand for loans should increase, thus having the effect of
increasing the net interest margin at a more rapid pace. For further
information regarding our interest rate risk, see "Quantitative and Qualitative
Disclosures about Market Risk".
A-6
Net Interest Income
Net interest income increased 20.9% to $321.0 million in 2001 from $265.6
million in 2000. This increase was primarily due to the $1.7 billion, or 36.4%,
increase in average interest-earning assets which was partially offset by a 67
basis point decrease in our net yield on interest-earning assets. Net interest
income increased 38.2% in 2000 from $192.1 million in 1999. This increase was
primarily due to the $1.1 billion, or 30.6%, increase in average
interest-earning assets and a 32 basis point increase in our net yield on
interest-earning assets.
The following table presents, for the years indicated, our condensed average
balance sheet information 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,
----------------------------------------------------------------------------------
2001 2000 1999
-------------------------- -------------------------- --------------------------
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 $ 91,139 $ 3,660 4.02% $ 214,133 $ 13,080 6.11% $ 225,357 $ 11,614 5.15%
Other short term securities 1,389 84 6.05% 44,841 2,978 6.64% 81,121 4,327 5.33%
Investment securities:
Taxable 1,780,194 120,491 6.77% 871,627 62,250 7.14% 641,584 42,081 6.56%
Tax-exempt(2) 184,897 7,455 4.03% 185,879 9,632 5.18% 146,170 7,305 5.00%
Loans(3) 4,270,878 375,551 8.79% 3,321,682 335,699 10.11% 2,457,353 233,307 9.49%
---------- -------- ---------- -------- ---------- --------
Total interest-earning assets 6,328,497 507,241 8.02% 4,638,162 423,639 9.13% 3,551,585 298,634 8.41%
Noninterest-earning assets 418,216 372,575 299,193
---------- -------- ---------- -------- ---------- --------
Total assets $6,746,713 507,241 $5,010,737 423,639 $3,850,778 298,634
========== -------- ========== -------- ========== --------
INTEREST-BEARING
LIABILITIES:
Deposits:
MMDA, NOW and Savings $2,331,147 64,860 2.78% $2,346,598 91,643 3.91% $1,848,328 61,419 3.32%
Time deposits, over $100,000 697,806 31,277 4.48% 780,505 43,101 5.52% 561,754 26,669 4.75%
Other time deposits 814,808 36,517 4.48% 214,634 11,525 5.37% 215,600 10,500 4.87%
---------- -------- ---------- -------- ---------- --------
Total interest-bearing deposits 3,843,761 132,654 3.45% 3,341,737 146,269 4.38% 2,625,682 98,588 3.75%
Borrowings 1,225,036 53,577 4.37% 192,728 11,781 6.11% 143,033 7,921 5.54%
---------- -------- ---------- -------- ---------- --------
Total interest-bearing liabilities 5,068,797 186,231 3.67% 3,534,465 158,050 4.47% 2,768,715 106,509 3.85%
Noninterest-bearing deposits 976,666 965,131 717,178
Other noninterest-bearing liabilities 109,906 79,529 44,754
Trust Preferred Securities 142,093 81,913 49,000
---------- ---------- ----------
Shareholders' equity 449,251 349,699 271,131
---------- -------- ---------- -------- ---------- --------
Total shareholders' equity and
liabilities $6,746,713 186,231 $5,010,737 158,050 $3,850,778 106,509
========== -------- ========== -------- ========== --------
Net interest income $321,010 $265,589 $192,125
======== ======== ========
Interest rate spread 4.34% 4.66% 4.56%
Contribution of interest free funds 0.73% 1.06% 0.85%
---- ----- ----
Net yield on interest-earnings assets(4) 5.07% 5.73% 5.41%
- --------
(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 5.80%, 7.61%
and 7.46% for the years ended December 31, 2001, 2000 and 1999,
respectively, using the federal statutory rate of 35%.
(3) Loan fees amortization totaling $11.1 million, $10.2 million and $9.6
million are included in loan interest income for 2001, 2000 and 1999,
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-7
The most significant impact on our 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. 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. The table below sets forth, for the years indicated, a summary
of the changes in average asset and liability balances (volume) and changes in
average interest rates (rate).
Year ended December 31, 2001 Year ended December 31, 2000
compared with December 31, 2000 compared with December 31, 1999
favorable / (unfavorable) favorable / (unfavorable)
------------------------------ ------------------------------
Volume Rate Net Volume Rate Net
-------- -------- ------- -------- ------- --------
(Dollars in thousands)
INTEREST EARNED ON
INTEREST-EARNING ASSETS
Federal funds sold $ (5,901) $ (3,519) $(9,420) $ (601) $ 2,067 $ 1,466
Other short term investments (2,650) (244) (2,894) (2,241) 892 (1,349)
Investment securities:
Taxable 61,658 (3,417) 58,241 16,163 4,006 20,169
Tax-exempt (51) (2,126) (2,177) 2,049 278 2,327
Loans 87,361 (47,509) 39,852 86,532 15,860 102,392
-------- -------- ------- -------- ------- --------
Total interest income 140,418 (56,816) 83,602 101,902 23,103 125,005
-------- -------- ------- -------- ------- --------
INTEREST EXPENSE ON INTEREST-
BEARING LIABILITIES
Deposits:
MMDA, NOW and savings 600 26,183 26,783 (18,316) (11,908) (30,224)
Time deposits over $100,000 4,257 7,567 11,824 (11,579) (4,853) (16,432)
Other time deposits (27,196) 2,204 (24,992) 47 (1,072) (1,025)
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits (22,340) 35,955 13,615 (29,848) (17,833) (47,681)
Other borrowings (46,054) 4,258 (41,796) (2,972) (888) (3,860)
-------- -------- -------- -------- -------- --------
Total interest expense (68,394) 40,213 (28,181) (32,820) (18,721) (51,541)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net
interest income $ 72,025 $(16,604) $ 55,421 $ 69,083 $ 4,381 $ 73,464
======== ======== ======== ======== ======== ========
Interest income in 2001 increased 19.7% to $507.2 million from $423.6
million in 2000. This was primarily due to the significant increase in loans,
and investment securities. Loans increased as a result of significant business
development efforts by our relationship managers. Investment securities
increased as a result of our wholesale funding strategy and the leveraging of
our balance sheet. Average interest-earning assets increased $1.7 billion, or
36.4%, to $6.3 billion in 2001, compared to $4.6 billion in 2000. Average loans
increased $1.0 billion, or 28.6%, to $4.3 billion in 2001 from $3.3 billion in
2000. Average investment securities, Federal funds sold and other short-term
securities, increased 56.3% to $2.1 billion in 2001 from $1.3 billion in 2000.
Loans represented approximately 67.5% of total interest-earning assets in 2001
compared to 71.6% in 2000.
The average yield on interest-earning assets decreased 111 basis points to
8.02% in 2001 from 9.13% in 2000 primarily reflecting the 475 basis points
decline in the fed fund rate during the year. The average yield on loans
decreased 132 basis points to 8.79% in 2001 from 10.11% in 2000.
Interest expense in 2001 increased 17.8% to $186.2 million from $158.1
million in 2000, reflecting greater volumes of interest-bearing liabilities.
Average interest-bearing liabilities increased 43.4% to $5.1 billion in 2001
from $3.5 billion in 2000. The increase was due primarily to the increase in
brokered institutional deposit accounts and short term borrowings.
A-8
During 2001, average noninterest-bearing deposits increased to $976.7
million from $965.1 million in 2000.
As a result of the foregoing, our interest rate spread decreased to 4.34% in
2001 from 4.66% in 2000, and the net yield on interest-earning assets decreased
in 2001 to 5.07% from 5.73% in 2000.
Interest income increased 41.9% to $423.6 million in 2000 from $298.6
million in 1999, as a result of the increase in average interest-earning assets
and an increase in the yields earned. Average interest-earning assets increased
30.6% to $4.6 billion in 2000 from $3.6 billion in 1999 principally as a result
of increase in loans. The yield on the higher volume of average
interest-earning assets increased 72 basis points to 9.13% in 2000 from 8.41%
in 1999, primarily as a result of an increase in market interest rates.
Interest expense in 2000 increased 48.4% to $158.1 million from $106.5
million in 1999 primarily as a result of the increase in the volume of
interest-bearing liabilities and in the rates paid on interest-bearing
liabilities. Corresponding to the growth in average interest-earning assets,
average interest-bearing liabilities increased 27.7% to $3.5 billion in 2000
from $2.8 billion in 1999.
As a result of the foregoing, our interest rate spread increased to 4.66% in
2000 from 4.56% in 1999 and the net yield on interest-earning assets increased
to 5.73% in 2000 from 5.41% in 1999.
We incurred certain client service expenses with respect to our
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, our net
yield on interest-earning assets would have been as follows for each of the
years presented.
Years ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Average noninterest bearing demand deposits $976,666 $965,131 $717,178
Client service expenses 2,965 2,694 3,811
Client service expenses, as a percentage of average
noninterest bearing demand deposits 0.30 % 0.28 % 0.53 %
Impact On Net Yield On Interest-earning Assets:
Net yield on interest-earning assets 5.07 % 5.73 % 5.41 %
Impact of client service expense (0.04)% (0.06)% (0.11)%
-------- -------- --------
Adjusted net yield on interest-earning assets 5.03 % 5.67 % 5.30 %
======== ======== ========
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 our efforts to manage our interest expense.
Provision for Loan Losses
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The
loan loss provision for each period is dependent upon many factors, including
loan growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio,
the value of the underlying collateral on problem loans and the general
economic conditions in our market areas. 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 our systematic methodology employed in determining an adequate
allowance for loan losses.
A-9
The provision for loan losses in 2001 was $54.7 million, compared to $28.8
million in 2000 and $14.9 million in 1999. In addition, in connection with the
acquisitions described in Note 2 of Notes to Consolidated Financial Statements,
we made additional provisions for loan losses of $3.5 million in 2001, $8.1
million in 2000 and $2.7 million in 1999 to conform to our allowance
methodology.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "Financial Condition--Nonperforming Assets" and
"Financial Condition--Allowance for Loan Losses" herein.
Other Income
Total recurring other income increased to $44.3 million in 2001, compared to
$34.1 million in 2000 and $30.3 million in 1999. The following table sets forth
information by category of other income for the years indicated.
Years ended December 31,
------------------------
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Service charges and other fees $10,602 $ 9,661 $ 8,975
Loan and international banking fees 8,856 8,162 4,275
Gain (loss) on investments, net 6,304 (521) (46)
Trust fees 3,610 3,450 2,990
Gain on sale of loans 3,241 2,190 2,058
ATM network revenue 2,887 2,891 2,682
Other income 8,761 8,312 9,403
------- ------- -------
Total, recurring 44,261 34,145 30,337
Warrant income 581 12,986 14,508
------- ------- -------
Total $44,842 $47,131 $44,845
======= ======= =======
The increase in recurring other income in 2001 as compared to 2000 resulted
primarily from the $6.8 million increase in the gain on investments, a $1.1
million increase in gain on sale of loans, a $941,000 increase in service
charges and other fees and a $694,000 increase in loan and international
banking fees. The increases in service charges and other fees and loan and
international banking fees were a result of growth in our loan portfolio and
fee based deposit products and services.
During 2001, we consolidated the investment portfolios of our subsidiary
banks (see "--Financial Condition--Investment Securities" below for further
details). Primarily as a result of investment sales resulting from this
program, we recognized gains on sale of investments, net, of $6.3 million
during 2001, as compared to a loss of $521,000 during 2000.
During 2001, we recorded a $3.2 million gain on sale of loans, compared to
$2.2 million for 2000. $1.2 million of the gains for 2001 relates to the sale
of $15.0 million of Matsco's loan production. We made no such sales during
2000. We anticipate selling approximately 20% to 40% of Matsco's loan
production in the future. During the first half of 2001, the sale of investment
securities allowed us to postpone the sale of Matsco loans. With the slowing of
investment securities sales during the second half of 2001, we sold $15.0
million of Matsco's loan production in September 2001. The remainder of the
gain on sales of loans relates to the sale of SBA loans during 2001 and 2000.
The gain on sale of SBA loans decreased slightly from $2.2 million during 2000
to $2.0 million during 2001 as we elected to retain a higher portion of our SBA
production.
Other income for 2001 includes $636,000 in income recognized on derivative
instruments in accordance with SFAS No. 133. These derivative instruments had
previously been treated as interest rate hedges and the unrealized gains and
losses on those instruments had been included in other comprehensive income.
Other income in 2000 includes $2.1 million in appreciation recognized on the
conversion of equity securities received in the settlement of a loan into a
publicly traded equity security.
A-10
The increase in recurring other income in 2000 as compared to 1999 was a
result of $3.9 million increase in loan and international banking fees, a
$686,000 increase in service charges and other fees, and a $460,000 increase in
trust fees. These increases reflected significant growth in loans, deposits,
and trust assets. This increase was offset in part by the loss on investment
securities and the decline in other income offset.
Warrant income in 2001, 2000 and 1999 included income of $581,000, $13.0
million and $14.5 million net of related employee incentives of $249,000, $4.5
million and $7.3 million, respectively. At December 31, 2001, we held
approximately 112 warrant positions. We occasionally receive 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 our control, 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,
----------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Compensation and benefits $ 89,699 $ 73,966 $ 65,668
Occupancy and equipment 27,756 23,192 18,999
Dividends paid on Trust Preferred Securities 13,724 7,842 4,201
Legal and other professional fees 7,839 5,345 4,072
Client service expenses 2,965 2,694 3,811
FDIC insurance and regulatory assessments 1,762 1,472 807
Expenses on other real estate owned -- 56 (34)
Other 31,846 24,977 23,805
-------- -------- --------
Total operating expenses excluding nonrecurring costs 175,591 139,544 121,329
Contribution to the Greater Bay Bancorp Foundation and related expenses -- -- 12,160
Mergers and other related nonrecurring costs 29,249 33,526 10,818
-------- -------- --------
Total operating expenses $204,840 $173,070 $144,307
======== ======== ========
Efficiency ratio 55.99% 55.34% 60.90%
Efficiency ratio (before merger and other nonrecurring costs) 48.07% 46.56% 54.54%
Efficiency ratio excluding dividends paid on Trust Preferred Securities
(before merger and other nonrecurring costs) 44.31% 43.94% 52.65%
Total operating expenses to average assets 3.04% 3.45% 3.75%
Total operating expenses to average assets (before merger and other
nonrecurring cost) 2.60% 2.78% 3.15%
Total operating expenses to average assets excluding dividends paid on Trust
Preferred Securities (before merger and other nonrecurring cost) 2.40% 2.63% 3.04%
Operating expenses totaled $204.8 million for 2001, compared to $173.1
million for 2000 and $144.1 million for 1999. The ratio of operating expenses
to average assets was 3.04% in 2001, 3.45% in 2000, and 3.75% in 1999. 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. Our efficiency ratio for 2001 was 55.99%, compared to 55.34% in 2000
and 60.90% in 1999. Our efficiency ratio before merger, nonrecurring and
extraordinary items for 2001 was 48.07%, compared to 46.56% in 2000 and 54.54%
in 1999.
A-11
As indicated by the general trend of our efficiency ratios over the last
several years, we have been able to achieve increasing economies of scale. In
2001, average assets increased 34.6% from 2000, while operating expenses,
excluding merger, and other nonrecurring items, increased only 25.8%. From 1999
to 2000, average assets increased 30.1%, while operating expenses, excluding
merger and nonrecurring costs increased only 15.0%.
Compensation and benefits expenses increased in 2001 to $89.7 million,
compared to $74.0 million in 2000 and $65.7 million in 1999. This increase is
due primarily to the additions in personnel made in 2001 and 2000 to
accommodate our growth. The additions of Matsco and CAPCO in our results were
also a contributing factor to the increase in 2001 as compared to 2000 and 1999.
Trust Preferred Securities expense was $13.7 million for 2001, compared to
$7.8 million for 2000 and $4.2 million for 1999. This increase reflects the
sale of $118.5 million in Trust Preferred Securities in 2001 and $50.5 million
in Trust Preferred Securities in 2000. A significant portion of the increase in
the efficiency ratio in 2001 as compared to 2000 was a result of the issuance
of Trust Preferred Securities during 2000 and 2001. The Trust Preferred
Securities expense primarily represents a cost of capital, as opposed to the
remainder of the expenses which represent traditional operating expense. On a
recurring basis, our efficiency ratio increased 1.51% in 2001 as compared to
2000. Excluding the increase in dividends paid on Trust Preferred Securities
our recurring efficiency ratio increased only 0.37%.
Merger and other related nonrecurring costs include the direct expense
related to merger transactions completed and are comprised of financial
advisory and professional fees, charges to conform accounting practices and
other costs, including expenses related to employee severance, retention and
the vesting of certain benefit plans. See Note 14 to the Consolidated Financial
Statements for more detail.
During 2001, legal and other professional fees increased to $7.8 million,
compared to $5.3 million in 2000 and $4.1 million for 1999. This increase
relates to our growth and the initiation of consulting projects designed to
improve efficiency and risk management in our enterprise.
During 1998, Greater Bay established the Greater Bay Bancorp Foundation
("the Foundation"). The Foundation was formed to provide a vehicle through
which its officers and directors can provide support to the communities in
which we do business. The Foundation focuses its support on initiatives related
to education, health and economic growth. To support the Foundation, we
contributed appreciated securities which had an unrealized gain of $7.8 million
in 1999. We recorded expenses of $12.2 million in 1999 in connection with our
GBB Foundation donations which is included in operating expenses.
Our goodwill amortization was $1.3 million in 2001, $0 in 2000 and $0 in
1999. Our diluted earnings per share, excluding goodwill amortization, was
$1.58 for 2001, $1.33 in 2000 and $1.09 in 1999.
Income Taxes
Our effective income tax rate for 2001 was 24.9%, compared to 39.4% in 2000
and 34.0% in 1999. The effective rates were lower than the statutory rate of
42% due to 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 2001, we formed CNB Investment
Trust II, which qualifies as a real estate investment trust under the IRS tax
code and issued $15.0 million of the real estate investment trust's preferred
stock to raise capital. The sale of the preferred stock resulted in a one-time
$34.0 million loss for tax purposes and a corresponding $11.4 million permanent
reduction in 2001 income tax expense.
A-12
FINANCIAL CONDITION
Total assets increased 35.4% to $7.9 billion at December 31, 2001, compared
to $5.8 billion at December 31, 2000. Total assets increased 35.2% in 2000 from
$4.3 billion at December 31, 1999. The increase in 2001 was primarily due to
increases in the investment securities portfolio and to a lesser degree, the
loan portfolio which was funded by brokered institutional deposits and short
term borrowings. The increase in 2000 was primarily due to increases in our
loan portfolios funded by growth in deposits.
Investment Securities
Investment securities increased 272.3% to $3.0 billion at December 31, 2001
compared to $1.1 billion at December 31, 2000. A substantial portion of this
increase reflects the shift to wholesale funding sources for our specialty
finance divisions that allowed us to increase our investment portfolio by
funding it with deposits which previously supported our specialty finance unit
and increased leverage of our balance sheet. For further information see "Net
Interest Income--Overview" above.
During 2001, we transferred our entire portfolio of held to maturity debt
securities to the available for sale category. The amortized cost of these
securities at the time of transfer was $345.8 million and the securities had an
unrealized gain of $11.0 million ($6.4 million, net of taxes) at the time of
the transfer. Although our intention to hold a majority of our debt securities
to maturity has not changed, the transfer was made to increase our flexibility
in responding to future economic changes and to increase efficiency in managing
our investment portfolio. Subsequent to the transfer, we sold securities which
had been classified as held to maturity at December 31, 2000 with an amortized
cost of $43.2 million for a gain of $2.4 million.
During 2001, we also consolidated our subsidiary banks' investment
portfolios, and therefore liquidated a number of our smaller investment
positions. We anticipate that this consolidation will improve our operating
efficiencies and the overall yield in our portfolio as our average block sizes
increase. During 2001, we sold securities with an amortized cost of $262.9
million for a recognized gain of $6.3 million. Sales included securities
previously classified as held to maturity with an amortized cost of $43.2
million for a gain of $2.4 million. In total, these sales resulted in an
insignificant reduction in the yield on our investment portfolio despite the
declining interest rate environment. We anticipate making further investment
securities sales under this program in subsequent quarters. The average life of
the portfolio has declined from approximately 7 to approximately 3 1/2 years.
We shortened the duration of the investment portfolio to provide additional
funding for loan growth.
At December 31, 2001, $2.6 billion, or 89.8% of our total investment
securities were invested in mortgage and asset backed securities, as compared
to $546,000, or 50.0% of the entire portfolio at December 31, 2000. Although
the ultimate maturity of these securities is as long as 30 years into the
future, due to periodic principal payments and anticipated prepayments,
management estimates that the average remaining life of the these securities is
approximately 3 1/2 years.
Our investment portfolio is managed to meet our 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. We do 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.
A-13
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.
Loans
Total gross loans increased 10.1% to $4.5 billion at December 31, 2001,
compared to $4.1 billion at December 31, 2000. Total gross loans increased
41.6% in 2000 from $2.9 billion at year-end 1999. For 2002, we target a loan
growth rate of approximately 10%.
Our 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, our 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 our borrowers. This could, in turn, reduce the demand for loans and
adversely impact the borrowers' abilities to repay their loans, while also
decreasing our net interest margin.
Although gross loans increased during 2001, we continue to see a change in
our corporate borrowers' usage of their lines of credit and a slowing in the
commercial construction market, as builders postpone or delay projects that
have been in process for several months. We continue to take a conservative
posture related to credit underwriting, which we believe is a prudent course of
action, especially during slowing economic times. We believe it is in the best
interest of Greater Bay Bancorp and its shareholders to focus attention on our
quality client relationships and avoid growth on the fringe during these
uncertain times. Both of these factors have combined to cause a slowing in the
growth of our loan portfolio.
While the short-term outlook for loan growth has slowed from late 2000 and
early 2001, we are optimistic about the future, as we have continued to invest
in new businesses that we believe will bring excellent opportunities for growth
and expansion. Our acquisitions of Matsco, a dental equipment lease financing
company, at the end of 2000 and CAPCO, an asset-based financing and factoring
company, at the end of the first quarter of 2001, are showing excellent growth
opportunities as we fully integrate them into the our organization. Our new
office in Carmel is now operational and will focus on large depositors, lending
and cash management. In addition, the four banks that joined us in 2000 are now
fully integrated, both operationally and culturally into our organization.
The following table presents the composition of our loan portfolio at the
dates indicated.
As of December 31,
---------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(Dollars in thousands)
Commercial $1,909,056 43.7% $1,807,117 45.5% $1,130,635 40.2% $ 817,934 39.5% $ 709,933 43.1%
Term Real Estate--Commercial 1,407,300 32.2 1,096,576 27.6 883,749 31.4 665,595 32.1 491,322 29.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total Commercial 3,316,356 75.9 2,903,693 73.1 2,014,384 71.6 1,483,529 71.6 1,201,255 72.9
Real estate construction and land 744,127 17.0 753,936 19.0 531,529 18.9 356,931 17.2 239,925 14.6
Real estate other 246,117 5.6 187,173 4.7 156,284 5.6 121,480 5.9 91,283 5.5
Consumer and other 204,483 4.7 234,721 5.9 179,705 6.4 160,126 7.7 157,520 9.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, gross 4,511,083 103.2 4,079,523 102.7 2,881,902 102.5 2,122,066 102.4 1,689,983 102.6
Deferred fees and
discounts, net (15,362) (0.4) (14,787) (0.4) (14,114) (0.5) (12,870) (0.6) (12,126) (0.7)
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net of deferred
fees 4,495,721 102.8 4,064,736 102.3 2,867,788 102.0 2,109,196 101.8 1,677,857 101.9
Allowance for loan losses (124,744) (2.8) (91,407) (2.3) (54,459) (2.0) (38,589) (1.8) (31,677) (1.9)
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans, net $4,370,977 100.0% $3,973,329 100.0% $2,813,329 100.0% $2,070,607 100.0% $1,646,180 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
A-14
The following table presents the maturity distribution of our 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, 2001.
Term real Real estate
estate-- construction Real estate
Commercial commercial and land other
---------- ---------- ------------ -----------
(Dollars in thousands)
Loans maturing in:
One year or less:
Fixed rate $ 100,968 $ 1,788 $ 16,195 $ 15,693
Variable rate 129,742 15,606 118,987 3,049
One to five years:
Fixed rate 389,685 192,403 72,661 14,346
Variable rate 620,143 198,505 504,619 45,098
After five years:
Fixed rate 399,044 496,686 7,982 14,996
Variable rate 269,474 502,312 23,683 152,935
---------- ---------- -------- --------
Total $1,909,056 $1,407,300 $744,127 $246,117
========== ========== ======== ========
Nonperforming Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued and
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Banks have granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
The following table sets forth information regarding nonperforming assets at
the dates indicated.
As of December 31,
----------------------------------------
2001 2000 1999 1998 1997
------- ------- ------ ------ ------
(Dollars in thousands)
Nonperforming loans:
Nonaccrual loans $30,970 $13,014 $7,139 $4,208 $5,157
Restructured loans -- -- 807 840 1,596
------- ------- ------ ------ ------
Total nonperforming loans 30,970 13,014 7,946 5,048 6,753
OREO -- -- 271 966 1,541
------- ------- ------ ------ ------
Total nonperforming assets $30,970 $13,014 $8,217 $6,014 $8,294
======= ======= ====== ====== ======
Accruing loans past due 90 days or more $ 5,073 $ 4,463 $ 908 $ 244 $ 274
======= ======= ====== ====== ======
Nonperforming assets to total loans and OREO 0.69% 0.32% 0.29% 0.29% 0.49%
Nonperforming assets to total assets 0.39% 0.22% 0.19% 0.18% 0.31%
Nonperforming assets and accruing loans past
due 90 days or more to total loans and OREO 0.80% 0.43% 0.32% 0.30% 0.51%
Nonperforming assets and accruing loans past
due 90 days or more to total assets 0.46% 0.30% 0.21% 0.19% 0.32%
A-15
At December 31, 2001, 2000, and 1999, we had $31.0 million, $13.0 million,
and $8.2 million in nonperforming loans, respectively. Our ratio of
nonperforming assets to total assets at December 31, 2001 was 0.39%, as
compared to 0.22% at December 31, 2000 and 0.19% at December 31, 1999. Our
ratios compare favorably to the industry average ratio of nonperforming assets
to total assets of 0.85% at September 30, 2001, which represents the most
recently available data.
At December 31, 2001, $13.7 million of the nonperforming loans were
syndicated loan transactions. These loans are being aggressively managed. We
have not participated in any similar other syndicated loan transactions since
January 2000. An additional $6.7 million of the nonperforming loans are venture
banking credits. The allowance for loan losses attributable to the entire
nonperforming loan portfolio is approximately $16.5 million.
The balance of loans past due 90 days or more and accruing increased to $5.1
million at December 31, 2001, compared to $4.5 million at December 31, 2000. In
addition to the loans disclosed above as nonaccrual or restructured, management
has also identified approximately $12.3 million in loans that, on the basis of
information known to us, were judged to have a higher than normal risk of
becoming nonperforming. Management cannot, however, predict the extent to which
economic conditions may worsen or other factors may impact our borrowers and
our 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.
Certain financial institutions have elected to use Special Purpose Vehicles
("SPV") to dispose of problem assets. A SPV is typically a subsidiary company
with an asset and liability structure and legal status that makes its
obligations secure even if the parent company goes bankrupt. Under certain
circumstances, these financial institutions may exclude the problem assets from
their reported impaired, and nonperforming assets. We do not use those
vehicles, or any other structures, to dispose of problem assets.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of known and inherit risk in our 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 uncollectable; recoveries are generally recorded only when cash
payments are received.
A-16
The following table sets forth information concerning our allowance for loan
losses at the dates and for the years indicated.
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Period end loans outstanding $4,511,083 $4,079,523 $2,881,902 $2,122,066 $1,689,983
Average loans outstanding $4,288,751 $3,330,147 $2,463,215 $1,821,553 $1,505,065
Allowance for loan losses:
Balance at beginning of period $ 91,407 $ 54,459 $ 38,589 $ 31,677 $ 23,205
Allowance of entities acquired through
acquisitions accounted for under purchase
method of accounting 320 10,927 -- -- --
Charge-offs:
Commercial (27,243) (11,747) (3,006) (2,389) (2,466)
Term real estate--commercial -- -- (16) (51) (59)
---------- ---------- ---------- ---------- ----------
Total commercial (27,243) (11,747) (3,022) (2,440) (2,525)
Real estate construction and land -- (376) -- (7) (276)
Real estate other -- -- -- -- (13)
Consumer and other (492) (371) (536) (462) (428)
---------- ---------- ---------- ---------- ----------
Total charge-offs (27,735) (12,494) (3,558) (2,909) (3,242)
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial 2,383 946 1,337 757 410
Term real estate--commercial -- -- 5 11 10
---------- ---------- ---------- ---------- ----------
Total commercial 2,383 946 1,342 768 420
Real estate construction and land -- 379 11 -- 6
Real estate other -- -- 7 -- --
Consumer and other 142 291 423 155 101
---------- ---------- ---------- ---------- ----------
Total recoveries 2,525 1,616 1,783 923 527
---------- ---------- ---------- ---------- ----------
Net charge-offs (25,210) (10,878) (1,775) (1,986) (2,715)
Provision charged to income(1) 58,227 36,899 17,645 8,898 11,187
---------- ---------- ---------- ---------- ----------
Balance at end of period $ 124,744 $ 91,407 $ 54,459 $ 38,589 $ 31,677
========== ========== ========== ========== ==========
Net charge-offs to average loans outstanding
during the period 0.59% 0.33% 0.07% 0.11% 0.18%
Allowance as a percentage of average loans
outstanding 2.91% 2.74% 2.21% 2.12% 2.10%
Allowance as a percentage of period end
loans outstanding 2.77% 2.24% 1.89% 1.82% 1.87%
Allowance as a percentage of non-
performing loans 402.79% 702.37% 685.36% 764.44% 469.08%
- --------
(1) Includes $3.5 million, $8.1 million, $2.7 million, $183,000, and $1.4
million in 2001, 2000, 1999, 1998, and 1997, respectively, to conform to
our allowance methodologies which are included in mergers and related
nonrecurring costs.
We employ a systematic methodology for determining its allowance for loan
losses, that includes a monthly review process and monthly adjustment of the
allowance. Our 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.
A-17
Our 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 our 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 our markets
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 our methodology.
Our methodology is, and has been, consistently followed. However, as we add
new products, increase in complexity, and expand our geographic coverage, we
will enhance our methodology to keep pace with the size and complexity of the
loan portfolio. In this regard, we have periodically engaged outside firms to
independently assess our methodology, and on an ongoing basis we engages
outside firms to perform independent credit reviews of our loan portfolio.
Management believes that our systematic methodology continues to be appropriate
given our size and level of complexity.
While this methodology utilizes historical and other objective information,
the establishment of the allowance for loan losses and the classification of
loans, is to some extent, based on management's judgment and experience.
Management believes that the allowance for loan losses is adequate as of
December 31, 2001 to cover known and inherent risks in the loan portfolio.
However, future changes in circumstances, economic conditions or other factors
could cause management to increase or decrease the allowance for loan losses as
necessary.
The following table provides a summary of the allocation of the allowance
for loan losses for specific loan categories at the dates indicated. The
allocation presented should not be interpreted as an indication that charges to
the allowance for loan losses will be incurred in these amounts or proportions,
or that the portion of the allowance allocated to each loan category represents
the total amounts available for charge-offs that may occur within these
categories. The unallocated portion of the allowance for loan losses and the
total allowance is applicable to the entire loan portfolio.
As of December 31,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- --------------- --------------- --------------- ---------------
% 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 $ 66,246 42.32% $37,896 44.30% $20,454 39.23% $15,758 38.54% $12,226 42.01%
Term real estate--commercial 19,872 31.20% 15,844 26.88% 8,821 30.67% 4,631 31.37% 3,908 29.07%
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total commercial 86,118 73.52% 53,740 71.18% 29,275 69.90% 20,389 69.91% 16,134 71.08%
Real estate construction and land 9,904 16.50% 10,935 18.48% 5,590 18.44% 4,047 16.82% 2,536 14.20%
Real estate other 6,010 5.46% 1,866 4.59% 2,239 5.42% 1,639 5.72% 1,357 5.40%
Consumer and other 2,238 4.53% 5,732 5.75% 4,214 6.24% 3,056 7.55% 2,173 9.32%
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total allocated 104,270 72,273 41,318 29,131 22,200
Unallocated 20,474 19,134 13,141 9,458 9,477
-------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total $124,744 100.00% $91,407 100.00% $54,459 100.00% $38,589 100.00% $31,677 100.00%
======== ====== ======= ====== ======= ====== ======= ====== ======= ======
A-18
At December 31, 2001, the allowance for loan losses was $124.7 million,
consisting of a $104.3 million allocated allowance and a $20.5 million
unallocated allowance. The unallocated allowance recognizes the model and
estimation risk associated with the allocated allowances, and management's
evaluation of various conditions, the effects of which are not directly
measured in determining the allocated allowance. The evaluation of the inherent
loss regarding these conditions involves a higher degree of uncertainty because
they are not identified with specific problem credits or portfolio segments.
The conditions evaluated in connection with the unallocated allowance include
the following at the balance sheet date:
. The 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.
During the fourth quarter of 2001, we continued to review all significant
areas of our credit portfolio and while there continues to be pressure on the
Bay Area's real estate economy, we are not seeing systemic deterioration in our
real estate portfolio. The majority of our fourth quarter 2001 charge-offs were
related to our syndicated credit and venture banking loan portfolios, which we
continue to monitor closely. While we continue to effectively manage the credit
risk in these two portfolios, we felt it prudent to increase our loan loss
provision by approximately $21.0 million ($12.0 million net of tax) and
allocate the majority of the increase to these business areas. Should the
economy recover and the credit outlook for these businesses improve, we would
adjust our allowance for loan losses to recognize the changing economic
environment.
Deposits
We emphasize developing total client relationships in order to increase our
core deposit base. Deposits reached $5.0 billion at December 31, 2001, an
increase of 5.0% compared to deposits of $4.8 billion at December 31, 2000. In
2001, due to economic pressures on our clients' cash reserves, we saw a decline
in our core deposits. To counter this trend, we increased our use of brokered
deposit during 2001. In 2000, deposits increased 27.1% from $3.7 billion at
December 31, 1999. During 2001, the increase in deposits was primarily due to
the continued marketing efforts directed at commercial business clients in our
market areas. While we continue to anticipate deposit growth, we do not expect
the growth rate experienced during the year 2000 and 1999 to continue. For
2002, we target a deposit growth rate of 5% to 10%.
In this economic environment, we believe our clients are more likely to
utilize deposits and cash-on-hand rather than other funding sources. This is
particularly evidenced in our venture banking unit, as our business clients
focus more on managing current operations rather than business expansion, which
has resulted in a reduction in their borrowing needs. The economic slowdown has
also impacted our Trust unit as the general market conditions have reduced
investments in our money market accounts.
Our noninterest-bearing demand deposit accounts decreased 15.9% to $954.0
million at December 31, 2001, compared to $1.1 billion a year earlier.
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts were $2.3 billion at year-end 2001, a
decrease of 2.9% from $2.3 billion at December 31, 2000. MMDA, NOW and savings
accounts were 45.7% of total deposits at December 31, 2001, as compared to
49.4% at December 31, 2000.
Time certificates of deposit totaled $1.8 billion, or 35.2% of total
deposits, at December 31, 2001, compared to $1.3 billion, or 26.7% of total
deposits, at December 31, 2000.
As of December 31, 2001 and 2000, we had $686.6 million and $161.6 million,
respectively in brokered deposits outstanding.
A-19
Borrowings
Borrowings as of December 31, 2001 and 2000 was $2.1 billion and $463.3
million respectively. At December 31, 2001 borrowings consisted of securities
sold under agreements to repurchase, FHLB advances, advances under credit
lines, and other notes payable. The growth in the borrowing during 2001 was a
result of our loan growth exceeding deposit gathering activities and the
wholesale funding strategy. Note 11 of Notes to Consolidated Financial
Statements provides the amounts outstanding, the short and long term
classification, borrowings outstanding during the year and the general terms of
these borrowings.
Liquidity and Cash Flow
The objective of our liquidity management is to maintain each Bank's ability
to meet the day-to-day cash flow requirements of our clients who either wish to
withdraw funds or require funds to meet their credit needs. We 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 our shareholders. We monitor 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, obtain 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 and therefore meet its debt service obligations and fund
its operations. 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 and their subsidiaries. There are statutory and
regulatory provisions that could limit the ability of the Banks to pay
dividends to Greater Bay. At December 31, 2001, the Banks had approximately
$106.5 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. At
December 31, 2001, Greater Bay had existing credit facilities under which it
may borrow up to $75.0 million. As of December 31, 2001, Greater Bay did not
have any material commitments for capital expenditures. On December 18, 2001,
Greater Bay signed a definitive merger agreement with ABD. Under this
agreement, Greater Bay will issue convertible preferred stock and cash of
approximately $57.5 million upon completion of the merger. Greater Bay has the
ability to fund the acquisition of ABD using cash on hand and existing or
replacement lines of credit.
Net cash provided by operating activities, consisting primarily of net
income, totaled $128.6 million for 2001, $120.7 million for 2000 and $65.2
million for 1999. Cash used for investing activities totaled $2.4 billion in
2001, $1.5 billion in 2000 and $910.6 million in 1999. The funds used for
investing activities primarily represent increases in loans and investment
securities for each year reported.
For the year ended December 31, 2001, net cash provided by financing
activities was $2.0 billion, compared to $1.4 billion in 2000 and $890.6
million in 1999. Historically, our primary financing activity has been through
deposits. In 2001, 2000 and 1999, deposit gathering activities generated cash
of $240.0 million, $1.1 billion and $867.5 million, respectively. This
represents a total of 12.1%, 70.3% and 97.3% of the financing cash flows for
2001, 2000 and 1999, respectively. The 2001 increase in financing activities
other than deposits are a result of our loan growth exceeding deposit gathering
activities and the wholesale funding strategy which combined to result in a
$1.6 billion increase in borrowings and the issuance of Trust Preferred
Securities of $118.5 million in 2001. (see "--Capital Resources", below).
Capital Resources
Shareholders' equity at December 31, 2001 increased to $463.7 million from
$385.9 million at December 31, 2000 and from $306.1 million at December 31,
1999. Greater Bay paid dividends of $0.43, $0.35 and $0.24 per share in
December 31, 2001, 2000 and 1999, respectively, excluding dividends paid by
subsidiaries prior to the completion of their mergers.
A-20
In 2001 and 2000, Greater Bay completed Trust Preferred Securities offerings
in the aggregate amounts of $118.5 million and $50.5 million, respectively, to
enhance our regulatory capital base and to add liquidity. Under applicable
regulatory guidelines, the Trust Preferred Securities qualify 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, 2001,
$158.2 million of the total Trust Preferred Securities qualify as Tier I
Capital and $59.8 million of the Trust Preferred Securities qualify as Tier II
Capital.
During 2001, we formed and funded CNB Investment Trust I ("CNBIT I") and CNB
Investment Trust II ("CNBIT II"), both of which are Maryland real estate
investment trusts. CNBIT I and CNBIT II provides Cupertino National Bank with
flexibility in raising capital. During 2001, Cupertino National Bank sold
15,000 shares of the 12% Series B Preferred Stock of CNBIT II for $15.0 million
(See Note 10 of the Consolidated Financial Statements for further information
regarding this transaction).
On March 23, 2000, Greater Bay completed a private offering of 648,648
shares of 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 common stock to
institutional investors. Proceeds from the offering were $19,795,000 less
placement agent's fees of $834,000. Greater Bay used the net proceeds from both
offerings for general corporate purposes.
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. Our 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, 2001, 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 most banking organizations are expected to
exceed that amount by 1.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the 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.
Our capital levels at December 31, 2001 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
-------- ------------- -------------
Greater Bay Bancorp 8.01% 10.49% 12.79%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
Our leverage ratio was 8.01% at December 31, 2001, compared to 8.79% at
December 31, 2000. At December 31, 2001, our risk-based capital ratios were
10.49% for Tier 1 risk-based capital and 12.79% for total risk-based capital,
compared to 9.57% and 10.87%, respectively, as of December 31, 2000.
In addition, at December 31, 2001, each of the Banks, had levels of capital
that exceeded the well-capitalized guidelines. For additional information on
each Banks and our capital levels and capital ratios, see Note 19 of Notes to
Consolidated Financial Statements.
A-21
Quantitative and Qualitative Disclosures about Market Risk
Our financial performance is impacted by, among other factors, interest rate
risk and credit risk. We do not utilize derivatives to mitigate our 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 our Management Asset & Liability 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 our 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.
Our exposure to interest rate risk is reviewed on at least a quarterly basis
by the Board ALCO and the Management ALCO. Interest rate risk exposure is
measured using interest rate sensitivity analysis to determine our 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, we have
implemented strategies to more closely match our balance sheet composition.
Although we are doing so to a lesser extent than in prior years, we have
generally focused our investment activities on securities with terms or average
lives averaging at approximately 31/2 years which effectively lengthens the
average duration of our assets. We have utilized short-term borrowings and
deposit marketing programs to shorten the effective duration of our
liabilities. In addition, we have utilized interest rate swaps and caps to
manage the interest rate risk of certain long term debt instruments and deposit
liabilities. When these derivative instruments were acquired, they were not an
"ineffective hedge" and were 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"). During 2001, we
determined that the designation of these derivatives as hedges was no longer
appropriate. As a result, upon derecognition of these hedges, we recorded a
$191,000 loss to other income on these instruments. Subsequent to
derecognition, we recorded a gain of $826,000 on the appreciation of these
instruments.
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 our 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. We measure the
impact on market value for an immediate and sustained 100 basis point increase
and decrease (shock) in interest rates. The following table shows our projected
change in net portfolio value for this set of rate shocks as of December 31,
2001.
Projected change
Net portfolio ------------------
Change in interest rates value Dollars Percentage
------------------------ ------------- ------- ----------
(Dollars in thousands)
100 basis point rise $1,037,277 $(8,750) -0.84%
Base scenario 1,046,027 -- --
100 basis point decline 1,037,455 (8,571) -0.82%
The preceding table indicates that as of December 31, 2001 an immediate and
sustained 100 basis point decrease in interest rates would decrease our net
portfolio value by less than 1%. The foregoing analysis attributes significant
value to our non-interest-bearing deposit balances.
A-22
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 our 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 our 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. Our non-term
deposit products reprice more slowly, usually changing less than the change in
market rates and at our discretion. As of December 31, 2001, the analysis
indicates that our net interest income for the next 12 months would increase
2.5% if rates increased 100 basis points, and decrease by 3.7% if rates
decreased 100 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 our 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 our
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 our net interest income.
The results of this sensitivity analysis should not be relied upon as
indicative of actual future results.
Gap Analysis
In addition to the above analysis, we also perform 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 our 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.
A-23
The following table shows interest sensitivity gaps for different intervals
as of December 31, 2001:
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
---------- ----------- ----------- ---------- ---------- ---------- ---------- -----------
(Dollars in thousands)
Assets:
Cash and due from
banks $ -- $ 2,381 $ -- $ -- $ -- $ -- $ 2,381 $ 187,023.0
Short term investments 26,000 -- -- -- -- -- 26,000 --
Investment securities 89,840 482,884 439,502 970,000 305,070 680,333 2,967,629 3,300
Loans 2,172,444 842,802 245,623 628,570 472,046 134,236 4,495,721 --
Loan losses/unearned
fees -- -- -- -- -- -- -- (124,744)
Other assets -- -- -- -- -- -- -- 320,044
---------- ----------- ----------- ---------- -------- ---------- ---------- -----------
Total assets $2,288,284 $ 1,328,067 $ 685,125 $1,598,570 $777,116 $ 814,569 $7,491,731 $ 385,623
========== =========== =========== ========== ======== ========== ========== ===========
Liabilities And Equity:
Deposits $2,280,119 $ 1,410,392 $ 265,374 $ 62,375 $ 4,919 $ 12,903 $4,036,082 $ 953,989.0
Other borrowings 8,234 928,203 495,145 605,247 57,558 1,509 2,095,896 --
Trust preferred
securities -- -- -- -- -- 218,000 218,000 --
Other liabilities -- -- -- -- -- -- -- 94,403
Shareholders' equity -- -- -- -- -- -- -- 478,684
---------- ----------- ----------- ---------- -------- ---------- ---------- -----------
Total liabilities and
equity $2,288,353 $ 2,338,595 $ 760,519 $ 667,622 $ 62,477 $ 232,412 $6,349,978 $ 1,527,076
========== =========== =========== ========== ======== ========== ========== ===========
Gap $ (69) $(1,010,528) $ (75,394) $ 930,948 $714,639 $ 582,157 $1,141,753 $(1,141,453)
Cumulative Gap $ (69) $(1,010,597) $(1,085,991) $ (155,043) $559,596 $1,141,753 $1,141,753 $ --
Cumulative Gap/total
assets 0.00% -12.83% -13.79% -1.97% 7.10% 14.49% 14.49% 0.00%
Total
----------
Assets:
Cash and due from
banks $ 189,404
Short term investments 26,000
Investment securities 2,970,929
Loans 4,495,721
Loan losses/unearned
fees (124,744)
Other assets 320,044
----------
Total assets $7,877,354
==========
Liabilities And Equity:
Deposits $4,990,071
Other borrowings 2,095,896
Trust preferred
securities 218,000
Other liabilities 94,403
Shareholders' equity 478,684
----------
Total liabilities and
equity $7,877,054
==========
Gap $ 300
Cumulative Gap $ --
Cumulative Gap/total
assets 0.00%
The foregoing table indicates that we had a one year cumulative negative gap
of $(1.1) billion, or (13.8)% of total assets, at December 31, 2001. In theory,
this would indicate that at December 31, 2001, $1.1 billion 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 our 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 our actual behavior more asset sensitive than is indicated
in the Gap analysis. In fact we expect to experience 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-24
Pending Transaction
On December 18, 2001, we signed a definitive merger agreement with ABD
Insurance and Financial Services, Inc. ("ABD"). ABD is the largest
independently owned insurance brokerage and employee benefits consulting
organization in the western United States. We will issue shares of a new series
of convertible preferred stock and cash in a tax-free reorganization for an
estimated present value of approximately $193.6 million. That amount includes
an initial payment on consummation of the merger of $130 million in convertible
preferred stock and cash, and an additional $63.6 million in convertible
preferred stock (or common stock in certain instances) and cash subject to ABD
meeting specified performance goals in 2002, 2003, 2004, and 2005. The merger,
which will be accounted for as a purchase, is expected to be completed in the
first quarter of 2002. ABD has over $1.0 billion of insurance premiums serviced
and in excess of $100 million in revenue for the 11 month period ended December
31, 2001. Consummation of the acquisition is subject to the receipt of certain
regulatory approvals and approval of ABD's shareholders.
Recent Accounting Developments
Business Combinations
---------------------
On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations"
("SFAS No. 141"). The standard concludes that all business combinations within
the scope of the statement will be accounted for using the purchase method.
Previously, the pooling-of-interests method was required whenever certain
criteria were met. Because those criteria did not distinguish economically
dissimilar transactions, similar business combinations were accounted for using
different methods that produced dramatically different financial statement
results. SFAS No. 141 requires separate recognition of intangible assets apart
from goodwill if they meet one of two criteria, the contractual-legal criterion
or the separability criterion. SFAS No. 141 also requires the disclosure of the
primary reasons for a business combination and the allocation of the purchase
price paid to the assets acquired and liabilities assumed by major balance
sheet caption.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. SFAS No. 141 also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. Our definitive merger agreement with SJNB Financial
Corp. was signed on June 25, 2001, before the required implementation date, and
therefore SFAS No. 141 required us to account for that merger as a pooling of
interests, since all the criteria for pooling were met.
As a portion of our business strategy is to pursue acquisition opportunities
so as to expand our market presence and maintain growth levels, the change in
accounting could have a negative impact on our ability to realize those
business strategies. As SFAS No. 141 has recently been released, the impact of
these changes has yet to be fully determined.
Goodwill and Other Intangible Assets
------------------------------------
On July 20, 2001 the FASB also issued SFAS No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). It addressed how intangible assets that
are acquired individually or within a group of assets (but not those acquired
in business combination) should be accounted for in the financial statements
upon their acquisition. SFAS No.142 adopts a more aggregate view of goodwill
and bases the accounting on the units of the combined entity into which an
acquired entity is aggregated. SFAS No. 142 also prescribes that goodwill and
intangible assets that have indefinite useful lives will not be amortized but
rather tested at least annually for impairment. Intangible assets that have
definite lives will continue to be amortized over their useful lives, but no
longer with the constraint of the 40 year ceiling. SFAS No. 142 provides
specific guidance for the testing of goodwill for impairment which may require
re-measurement of the fair value of the reporting unit. Additional ongoing
financial statement disclosures are also required.
A-25
The provisions of the statement are required to be applied starting with
fiscal years beginning after December 15, 2001. The statement is required to be
applied at the beginning of the fiscal year and applied to all goodwill and
other intangible assets recognized in the financials at that date. Impairment
losses are to be reported as resulting from a change in accounting principle.
Based on our current level of intangible assets the impact of this standard
is not expected to be significant.
Selected Loan Loss Allowance Methodology and Documentation Issues
-----------------------------------------------------------------
A Staff Accounting Bulletin No. 102 "Selected Loan Loss Allowance
Methodology and Documentation Issues" ("SAB No. 102") was released on July 10,
2001. It expresses the staff's views on the development, documentation, and
application of a systematic methodology as required by Financial Reporting
Release No. 28, Accounting for Loan Losses by Registrants Engaged in Lending
Activities, for determining allowances for loan and lease losses in accordance
with general accepted accounting principles. In particular, SAB No. 102 focuses
on the documentation the staff normally would expect registrants to prepare and
maintain in support of their allowances for loan losses. We have a systematic
methodology for determining an appropriate allowance for loan losses,
consistently followed and supported by written documentation and policies and
procedures. None-the-less, in light of SAB No. 102, our methodology and
documentation is currently in the process of review. However, any resulting
changes are not expected to have a material impact on the financial statements.
A-26
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------
2001 2000*
---------- ----------
(Dollars in thousands)
A S S E T S
-----------
Cash and due from banks $ 189,404 $ 291,605
Federal funds sold 26,000 145,240
Other short term securities -- 39,130
---------- ----------
Cash and cash equivalents 215,404 475,975
Investment securities:
Available for sale, at fair value 2,863,009 688,332
Held to maturity, at amortized cost (fair value 2001: $0 2000: $381,701) -- 371,349
Other securities 107,621 31,383
---------- ----------
Investment securities 2,970,630 1,091,064
Total loans:
Commercial 1,909,056 1,807,117
Term real estate--commercial 1,407,300 1,096,576
---------- ----------
Total commercial 3,316,356 2,903,693
Real estate construction and land 744,127 753,936
Real estate other 246,117 187,173
Consumer and other 204,483 234,721
Deferred loan fees and discounts (15,362) (14,787)
---------- ----------
Total loans, net of deferred fees 4,495,721 4,064,736
Allowance for loan losses (124,744) (91,407)
---------- ----------
Total loans, net 4,370,977 3,973,329
Property, premises and equipment, net 48,883 39,304
Interest receivable and other assets 271,160 238,483
---------- ----------
Total assets $7,877,054 $5,818,155
========== ==========
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
----------------------------------------------------------------
Total deposits $4,990,071 $4,750,404
Borrowings 2,095,896 463,267
Other liabilities 94,403 119,036
---------- ----------
Total liabilities 7,180,370 5,332,707
---------- ----------
Company obligated mandatorily redeemable cumulative trust preferred securities of
subsidiary trusts holding solely junior subordinated debentures 218,000 99,500
Preferred stock of real estate investment trust subsidiaries of the Banks 15,000 --
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; 49,831,682 and
48,748,713 shares issued and outstanding as of December 31, 2001 and 2000,
respectively 206,294 196,121
Accumulated other comprehensive gain (loss) 3,967 (6,035)
Retained earnings 253,423 195,862
---------- ----------
Total shareholders' equity 463,684 385,948
---------- ----------
Total liabilities and shareholders' equity $7,877,054 $5,818,155
========== ==========
- --------
* 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
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
--------------------------------
2001 2000* 1999*
-------- -------- --------
(Dollars in thousands, except pe
share amounts)
Interest Income
Interest on loans $375,551 $335,699 $233,307
Interest on investment securities:
Taxable 120,491 62,250 42,081
Tax--exempt 7,455 9,632 7,305
-------- -------- --------
Total interest on investment securities 127,946 71,882 49,386
Other interest income 3,744 16,058 15,941
-------- -------- --------
Total interest income 507,241 423,639 298,634
-------- -------- --------
Interest Expense
Interest on deposits 132,655 146,269 98,588
Interest on long term borrowings 15,158 1,203 4,531
Interest on other borrowings 38,419 10,578 3,390
-------- -------- --------
Total interest expense 186,232 158,050 106,509
-------- -------- --------
Net interest income 321,009 265,589 192,125
Provision for loan losses 54,727 28,821 14,901
-------- -------- --------
Net interest income after provision for loan losses 266,282 236,768 177,224
-------- -------- --------
Other Income
Service charges and other fees 10,602 9,661 8,975
Loan and international banking fees 8,856 8,162 4,275
Trust fees 3,610 3,450 2,990
ATM network revenue 2,887 2,891 2,682
Gain on sale of loans 3,241 2,190 2,058
Gain (loss) on sale of investments, net 6,304 (521) (46)
Warrant income, net 581 12,986 14,508
Other income 8,761 8,312 9,403
-------- -------- --------
Total 44,842 47,131 44,845
-------- -------- --------
Operating Expenses
Compensation and benefits 89,699 73,966 65,668
Occupancy and equipment 27,756 23,192 18,999
Dividends paid on Trust Preferred Securities 13,724 7,842 4,201
Merger and other related nonrecurring costs 29,249 33,526 10,818
Contribution to the Foundation and related expenses, net -- -- 12,160
Other expenses 44,412 34,544 32,461
-------- -------- --------
Total operating expenses 204,840 173,070 144,307
-------- -------- --------
Net income before provision for income taxes 106,284 110,829 77,762
Provision for income taxes 26,468 43,665 26,461
-------- -------- --------
Net income $ 79,816 $ 67,164 $ 51,301
======== ======== ========
Net income per share--basic** $ 1.61 $ 1.40 $ 1.15
======== ======== ========
Net income per share--diluted** $ 1.57 $ 1.33 $ 1.09
======== ======== ========
- --------
* 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-28
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31,
--------------------------
2001 2000* 1999*
------- ------- --------
(Dollars in thousands)
Net income $79,816 $67,164 $ 51,301
------- ------- --------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period (net of taxes of
$9,691, $3,960 and $(9,659) for the years ended December 31,
2001, 2000 and 1999, respectively) 13,860 5,664 (13,814)
Less: reclassification adjustment for gains (losses) included in net
income (net of taxes of $(2,594), $214 and $19 for the years ended
December 31, 2001, 2000 and 1999, respectively) (3,710) 307 27
------- ------- --------
Net change 10,150 5,971 (13,787)
Cash flow hedge:
Change in market value of hedge during the period (net of taxes of
$(131), $(908) and $1,424 for the years ended December 31, 2001,
2000 and 1999, respectively) (187) (1,298) 2,037
Less: reclassification adjustment for swap settlements in net income
(net of taxes of $(50), $(41) and $101 for the years ended
December 31, 2001, 2000 and 1999, respectively) (73) (58) 144
Loss recognized on derecognition of derivative instruments as cash
flow hedge 112 -- --
------- ------- --------
Net change (148) (1,356) 2,181
Other comprehensive income (loss) 10,002 4,615 (11,606)
------- ------- --------
Comprehensive income $89,818 $71,779 $ 39,695
======= ======= ========
- --------
* 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-29
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999
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 19,552,274 $ 60,602 $ 48 $ 55,490 $116,140
Shares issued to, and retained earnings of, acquired entities:
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 5,978,185 20,066 693 4,354 25,113
Bank of Santa Clara 3,877,680 17,003 -- 7,878 24,881
Bank of Petaluma 1,531,516 7,854 315 3,044 11,213
SJNB Financial Corp. 6,437,340 19,943 (94) 23,173 43,022
---------- -------- -------- -------- --------
Balance, December 31, 1998, restated to reflect pooling
of interests 43,876,750 143,107 956 107,373 251,436
Net income -- -- -- 51,301 51,301
Other comprehensive loss, net of taxes -- -- (11,606) -- (11,606)
Stock options exercised, including related tax benefits 1,205,378 6,282 -- (59) 6,223
Stock issued in Employee Stock Purchase Plan 83,302 1,031 -- -- 1,031
401(k) employee stock purchases 76,010 1,205 -- -- 1,205
Stock issued in Dividend Reinvestment Plan 26,668 383 -- -- 383
Stock retired by SJNB Financial Corp. (273,000) (3,389) -- (522) (3,911)
Pacific Business Funding Corporation distribution -- -- -- (40) (40)
Stock issued through private placement 1,179,200 20,761 -- -- 20,761
Cash dividend $0.24 per share*** -- -- -- (10,669) (10,669)
---------- -------- -------- -------- --------
Balance, December 31, 1999* 46,174,308 169,380 (10,650) 147,384 306,114
Net income -- -- -- 67,164 67,164
Other comprehensive income, net of taxes -- -- 4,615 -- 4,615
Stock options exercised, including related tax benefits 1,731,594 11,309 -- -- 11,309
Stock issued in Employee Stock Purchase Plan 93,356 1,538 -- -- 1,538
401(k) employee stock purchases 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 $0.39 per share*** -- -- -- (18,686) (18,686)
---------- -------- -------- -------- --------
Balance, December 31, 2000* 48,748,713 196,121 (6,035) 195,862 385,948
---------- -------- -------- -------- --------
Net income -- -- -- 79,816 79,816
Other comprehensive income, net of taxes -- -- 10,002 -- 10,002
Stock options exercised, including related tax benefits 950,110 8,471 -- -- 8,471
Restricted stock grants 58,000 -- -- -- --
Stock issued in Employee Stock Purchase Plan 114,860 2,521 -- -- 2,521
Stock issued in Dividend Reinvestment Plan 25,179 648 -- -- 648
Stock issued in purchase accounting transaction 44,820 1,376 -- -- 1,376
Stock retired by Greater Bay Bancorp (110,000) (2,830) -- -- (2,830)
Cash paid in-lieu of fractional shares -- (13) -- -- (13)
Cash dividend $0.45 per share*** -- -- -- (22,255) (22,255)
---------- -------- -------- -------- --------
Balance, December 31, 2001 49,831,682 $206,294 $ 3,967 $253,423 $463,684
========== ======== ======== ======== ========
- --------
* 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.
*** Excluding dividends paid by Greater Bay's subsidiaries prior to the
completion of their mergers with Greater Bay, Greater Bay paid dividends of
$0.43, $0.35, and $0.24 per share for the years ended December 31, 2001,
2000, and 1999, respectively.
See notes to consolidated financial statements.
A-30
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------------------
2001 2000* 1999*
----------- ----------- ---------
(Dollars in thousands)
Cash flows--operating activities
Net income $ 79,816 $ 67,164 $ 51,301
Reconcilement of net income to net cash from operations:
Provision for loan losses 58,547 47,826 17,646
Depreciation and amortization 15,228 14,540 8,461
Deferred income taxes (13,565) (13,601) (6,661)
(Gain) loss on sale of investments, net (6,304) 521 46
Gain on sale of building -- -- (490)
Proceeds from loan sales 16,200 -- 74,420
Originations of loans held for sale -- -- (74,514)
Changes in:
Accrued interest receivable and other assets 6,064 (54,502) (34,809)
Accrued interest payable and other liabilities (28,063) 59,016 25,428
Deferred loan fees and discounts, net 663 746 4,505
----------- ----------- ---------
Operating cash flows, net 128,586 121,710 65,333
----------- ----------- ---------
Cash flows--investing activities
Maturities and partial paydowns on investment securities:
Held to maturity 18,627 125,433 103,567
Available for sale 295,689 87,882 120,176
Purchase of investment securities:
Held to maturity -- (246,226) (132,374)
Available for sale (2,344,828) (269,000) (255,263)
Other securities (77,970) (5,051) (13,664)
Proceeds from sale of available for sale securities 262,856 79,556 53,471
Loans, net (458,240) (934,438) (767,981)
Loans acquired from business acquisition (14,671) (274,292) --
Payment for business acquisition (8,668) (6,500) --
Cash acquired in business acquisition 517 10,498
Purchase of property, premises and equipment (31,761) (11,973) (12,068)
Sale of banking building -- 5,502 2,637
Sale of other real estate owned 259 224 --
Purchase of insurance policies (8,811) (21,819) (9,206)
----------- ----------- ---------
Investing cash flows, net (2,367,001) (1,460,204) (910,705)
----------- ----------- ---------
Cash flows--financing activities
Net change in deposits 239,667 1,013,783 867,270
Net change in other borrowings--short term 1,570,673 196,381 10,217
Proceeds from other borrowings--long term 83,200 126,309 2,015
Principal repayment--long term borrowings (21,501) (10,000) (3,775)
Proceeds from company obligated mandatorily redeemable preferred securities
of subsidiary trusts holding solely junior subordinated debentures 118,500 50,500 --
Proceeds from sale of common stock 12,390 26,222 29,408
Repurchase of common stock (2,830) -- (3,911)
Cash dividends (22,255) (18,686) (10,668)
----------- ----------- ---------
Financing cash flows, net 1,977,844 1,384,509 890,556
----------- ----------- ---------
Net change in cash and cash equivalents (260,571) 46,015 45,184
Cash and cash equivalents at beginning of period 475,975 429,960 384,776
----------- ----------- ---------
Cash and cash equivalents at end of period $ 215,404 $ 475,975 $ 429,960
=========== =========== =========
Cash flows--supplemental disclosures
Cash paid during the period for:
Interest $ 172,863 $ 162,283 $ 116,212
=========== =========== =========
Income taxes $ 80,557 $ 26,384 $ 24,690
=========== =========== =========
Non-cash transactions:
Additions to other real estate owned $ 3,147 $ -- $ --
=========== =========== =========
Transfer of appreciated securities to the Greater Bay
Bancorp Foundation $ -- $ 7,200 $ 560
=========== =========== =========
- --------
* 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-31
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2000 and 1999
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and "we" or
"our", on a consolidated basis) is a bank holding company with 11 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, Peninsula Bank of Commerce, and
San Jose National Bank.
We also conduct business through the following divisions: CAPCO, Greater Bay
Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank
Carmel, Greater Bay Bank Marin, Greater Bay Bank Santa Clara Valley 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.
We provide a wide range of commercial banking services to small and
medium-sized businesses, real estate developers, property managers, business
executives, professionals and other individuals. We operate throughout the San
Francisco Bay Area including Silicon Valley, San Francisco and the San
Francisco Peninsula, the East Bay, Santa Cruz, Marin, Monterey, and Sonoma
Counties, with 45 offices located in Aptos, Blackhawk, Capitola, Carmel,
Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae,
Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City,
San Francisco, San Jose, San Leandro, San Mateo, San Rafael, San Ramon, Santa
Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut
Creek and Watsonville.
We have participated in nine acquisitions during the three-year period ended
December 31, 2001, as described in Note 2, Notes To Consolidated Financial
Statements. With the exception of the acquisitions with The Matsco Companies,
Inc. and CAPCO Financial Company, Inc. ("CAPCO") all of these acquisitions were
accounted for as a pooling-of-interests and, accordingly, all our financial
information for the periods prior to the acquisitions has been restated as if
the acquisitions had occurred at the beginning of the earliest period
presented. The acquisitions with The Matsco Companies, Inc. and CAPCO were
accounted for using the purchase accounting method and accordingly both
company'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
and its subsidiaries and its operating divisions. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior years' consolidated financial statements to conform to the
2001 presentation. Our accounting and reporting policies conform to generally
accepted accounting principles and the prevailing practices within the banking
industry.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of certain revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A-32
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2001, the required combined reserves totaled
approximately $17.5 million.
Investment Securities
We classify our 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. We do 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 cost.
Loans
Loans held for investment are carried at amortized cost. Our 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
interest method proscribed in the loan agreement. Loans are generally placed on
nonaccrual status when the borrowers are past due 90 days unless the loan is
well secured and in the process of collection. Loans are also placed on
nonaccrual status 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.
We charge loan origination and commitment fees. Net loan origination fees
and costs are deferred and amortized to interest income over the life of the
loan, using the effective interest method. Loan commitment fees are amortized
to interest income over the commitment period.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the consolidated statements of operations. Other loan fees and
charges representing service costs for the repayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when earned.
A-33
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Sale and Servicing of Small Business Administration Loans
We originate loans to customers under Small Business Administration ("SBA")
programs that generally provide for SBA guarantees of 70% to 90% of each loan.
We generally sell the guaranteed portion of the majority of the loans to an
investor and retain the unguaranteed portion and servicing rights in our 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. We allocate 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, we record on our 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, a loan is considered impaired, based on
current information and events, if it is probable that we 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.
Large groups of smaller-balance homogenous loans such as credit cards,
residential mortgage, consumer installment loans and certain small business
loans are collectively evaluated for impairment. Income recognition on impaired
loans conforms to the method we use 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 and probable losses and inherent
risks in the loan portfolio. We have a systematic methodology for determining
an appropriate allowance for loan losses. The allowance is based upon a number
of factors, including prevailing and anticipated economic trends, industry
experience, estimated collateral values, management's assessment of credit risk
inherent in the portfolio, delinquency trends, historical loss experience,
specific problem loans and other relevant factors.
Additions to the allowance, in the form of provisions, are reflected in
current operating results, while charge-offs to the allowance are made when a
loss is determined to have occurred. Because the allowance for loan losses is
based on estimates, ultimate losses may vary from the current estimates.
A-34
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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.
Goodwill and Other Intangible Assets
Goodwill generated from purchase business combinations consummated prior to
the issuance of SFAS No. 142 "Goodwill and Other Intangible Assets," ("SFAS No.
142") was amortized straight-line over 20 years. SFAS No. 142 addresses the
initial recognition and measurement of intangible assets acquired outside a
business combination and the recognition of and measurement of goodwill and
other intangible assets subsequent to acquisition. Under the new standard,
goodwill and intangible assets deemed to have indefinite lives will no longer
be amortized, but instead they will be tested at least annually for impairment.
The standard is applicable for fiscal years commencing after December 15, 2001.
During first quarter 2002 we will perform the required impairment tests of
goodwill and indefinite-lived intangible assets. We do not expect these tests
to have a material effect on our financial conditions or results of operations.
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
All derivatives are recognized on the balance sheet at their fair value. On
the date the derivative contract is entered into, we designate 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-35
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We formally document 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. We also formally assess, 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, we discontinue 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 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 split effective as of October
4, 2000.
Comprehensive Income
In accordance with SFAS No. 130, "Reporting Comprehensive Income", we
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated other comprehensive income separately
from retained earnings in the equity section of the balance sheet. The after
tax 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 $ 1,633 $ (677) $ 956
Other comprehensive income 1999 (13,787) 2,181 (11,606)
-------- ------- --------
Balance--December 31, 1999 (12,154) 1,504 (10,650)
Other comprehensive income 2000 5,971 (1,356) 4,615
-------- ------- --------
Balance--December 31, 2000 (6,183) 148 (6,035)
Other comprehensive income 2001 10,150 (148) 10,002
-------- ------- --------
Balance--December 31, 2001 $ 3,967 $ -- $ 3,967
======== ======= ========
A-36
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Segment Information
In accordance with SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131") we use 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 our reportable segments. SFAS No.
131 also requires disclosures about products and services, geographic areas,
and major customers.
NOTE 2--BUSINESS COMBINATIONS
Pooling-of-Interests Accounting Transactions
On October 23, 2001, SJNB Financial Corp. the holding company of San Jose
National Bank, merged with and into Greater Bay. Upon consummation of the
merger, the outstanding shares of SJNB Financial Corp. were converted into an
aggregate of approximately 6,944,000 shares of Greater Bay's common stock. The
transaction was accounted for as a pooling-of-interests. The financial
information presented herein has been restated to reflect the merger with SJNB
Financial Corp. on a pooling-of-interests basis.
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 common 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 common 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 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 common 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 common 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 January 5, 2000, Saratoga Bancorp, the parent of Saratoga National Bank,
merged with and into SJNB Financial Corp. Upon consummation of the merger, the
outstanding shares of Saratoga Bancorp were converted into an aggregate of
1,174,249 shares of SJNB Financial Corp's common stock. The transaction was
accounted for as a pooling-of-interests. The financial information presented
herein has been restated to reflect the merger with Saratoga Bancorp on a
pooling-of-interests basis.
A-37
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 15, 1999, Bay Commercial Services, the parent 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 common stock. The transaction
was accounted for as a pooling-of-interests. The financial information
presented herein has been restated to reflect the merger with Bay Commercial
Services on a pooling-of-interests basis.
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 common stock. The transaction was accounted
for as a pooling-of-interests. The financial information presented herein has
been restated to reflect the merger with Bay Area Bancshares on a
pooling-of-interests basis.
In all mergers, certain reclassifications were made to conform to the our
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.
SJNB Financial Corp Bank of Petaluma Bank of Santa Clara
nine months ended nine months ended six months ended
September 30, 2001 September 30, 2000 June 30, 2000
------------------- --------------------- -----------------------
(Dollars in thousands)
Net interest income:
Greater Bay Bancorp $207,739 $154,013 $89,047
Acquired entity 25,378 7,101 10,195
-------- -------- -------
Combined $233,117 $161,114 $99,242
======== ======== =======
Net income:
Greater Bay Bancorp $ 64,039 $ 38,608 $23,850
Acquired entity 8,262 1,982 2,613
-------- -------- -------
Combined $ 72,301 $ 40,590 $26,463
======== ======== =======
Coast Bancorp Mt. Diablo Bancshares Bay Commercial Services
three months ended twelve months ended nine months ended
March 31, 2000 December 31, 1999 September 30, 1999
------------------- --------------------- -----------------------
(Dollars in thousands)
Net interest income:
Greater Bay Bancorp $ 36,378 $103,732 $68,498
Acquired entity 5,538 10,009 2,007
-------- -------- -------
Combined $ 41,916 $113,741 $70,505
======== ======== =======
Net income:
Greater Bay Bancorp $ 13,473 $ 27,711 $17,033
Acquired entity 2,035 2,827 486
-------- -------- -------
Combined $ 15,508 $ 30,538 $17,519
======== ======== =======
A-38
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bay Area Bancshares
three months ended
March 31, 1999
----------------------
(Dollars in thousands)
Net interest income:
Greater Bay Bancorp $18,360
Acquired entity 2,180
-------
Combined $20,540
=======
Net income:
Greater Bay Bancorp $ 5,058
Acquired entity 644
-------
Combined $ 5,702
=======
The following table sets forth the separate results of operations for
Greater Bay, Mt. Diablo Bancshares, Coast Bancorp, Bank of Santa Clara, Bank of
Petaluma, and SJNB Financial Corp. for the periods indicated:
Net interest
income Net income
---- ----------
(Dollars in thousands)
Year ended December 31, 2000
Greater Bay $231,963 $58,540
SJNB Financial Corp. 33,626 8,624
-------- -------
Combined $265,589 $67,164
======== =======
Year ended December 31, 1999
Greater Bay $107,933 $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
-------- -------
Subtotal 164,560 44,184
SJNB Financial Corp. 27,565 7,117
-------- -------
Combined $192,125 $51,301
======== =======
There were no significant transactions between us and any of the acquired
entities prior to the mergers. All intercompany transactions have been
eliminated.
Purchase Accounting Transactions
On November 30, 2000, we acquired The Matsco Companies, Inc. for a purchase
price of $6.5 million in cash. We may also be required to pay future contingent
cash payment 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, The Matsco Companies, Inc.'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 our available cash.
A-39
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 over the estimated fair values of the net assets
acquired, totaling $15.9 million, was recorded as goodwill, and through
December 31, 2001 amortized on the straight-line method over twenty years.
Prospectively, goodwill will be evaluated for possible impairment under the
provision of SFAS No. 142.
On March 30, 2001, we completed the acquisition of CAPCO for a purchase
price of $8.5 million in cash and 44,820 shares of common stock with a fair
value of $1.4 million. The acquisition was accounted for using the purchase
method of accounting and, accordingly, CAPCO's results of operations have been
included in the consolidated financial statements since the date of the
acquisition.
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 over the estimated fair values of the net assets
acquired, totaling $5.7 million, was recorded as goodwill, and through December
31, 2001 amortized on the straight-line method over twenty years.
Prospectively, goodwill will be evaluation for possible impairment under the
provision of SFAS No. 142.
Pending Transaction
On December 18, 2001, we signed a definitive merger agreement with ABD
Insurance and Financial Services, Inc. ("ABD"). ABD is the largest
independently owned insurance brokerage and employee benefits consulting
organization in the western United States. We will issue shares of a new series
of convertible preferred stock and cash in a tax-free reorganization for an
estimated present value of approximately $193.6 million. That amount includes
an initial payment on consummation of the merger of $130 million in convertible
preferred stock and cash, and an additional $63.6 million in convertible
preferred stock (or common stock in certain instances) and cash subject to ABD
meeting specified performance goals during 2002, 2003, 2004 and 2005. The
merger, which will be accounted for as a purchase, is expected to be completed
in the first quarter of 2002. ABD has over $1.0 billion of insurance premiums
serviced and in excess of $100 million in revenue for the 11 month period ended
December 31, 2001. Our status as a financial holding company alleviates the
need for approval of this acquisition by the Federal Reserve. Consummation of
the acquisition is subject to the receipt of certain other regulatory approvals
and approval of ABD's shareholders.
A-40
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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, 2001 cost gains losses value
- ----------------------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Available for Sale Securities:
U.S. Treasury obligations $ 19,123 $ 381 $ -- $ 19,504
U.S. agency notes 36,762 1,112 -- 37,874
Mortgage and asset-backed securities 2,556,557 25,292 (11,097) 2,570,752
Tax-exempt securities 120,883 2,300 (595) 122,588
Taxable municipal Securities 7,768 272 (17) 8,023
Corporate securities 117,025 59 (12,816) 104,268
---------- ------- -------- ----------
Total securities available for sale 2,858,118 29,416 (24,525) 2,863,009
---------- ------- -------- ----------
Other securities 107,640 5 (24) 107,621
---------- ------- -------- ----------
Total investment securities $2,965,118 $29,421 $(24,549) $2,970,630
========== ======= ======== ==========
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 $ 12,559 $ 171 $ (2) $ 12,728
U.S. agency notes 135,248 443 (512) 135,179
Mortgage and asset-backed securities 305,061 4,330 (1,070) 308,321
Tax-exempt securities 86,254 1,082 (263) 87,073
Taxable municipal Securities 8,456 79 (42) 8,493
Corporate securities 155,466 94 (19,022) 136,538
---------- ------- -------- ----------
Total securities available for sale 703,044 6,199 (20,911) 688,332
---------- ------- -------- ----------
Held To Maturity Securities:
U.S. agency notes 26,487 14 (100) 26,401
Mortgage and asset-backed securities 237,234 7,251 (356) 244,129
Tax-exempt securities 104,782 3,655 (301) 108,136
Corporate securities 2,846 189 -- 3,035
---------- ------- -------- ----------
Total securities held to maturity 371,349 11,109 (757) 381,701
---------- ------- -------- ----------
Other securities 26,709 4,935 (261) 31,383
---------- ------- -------- ----------
Total investment securities $1,101,102 $22,243 $(21,929) $1,101,416
========== ======= ======== ==========
The following table shows amortized cost and estimated fair value of our
investment securities by year of maturity as of December 31, 2001.
2003
through 2007 2012 and
2002 2006 through thereafter Total
------- ------- ------- ---------- ----------
(Dollars in thousands)
Available For Sale Securities:
U.S. Treasury obligations $12,527 $ 6,498 $ -- $ 98 $ 19,123
U.S. agency notes(1) 11,998 22,234 2,530 -- 36,762
Mortgage and asset-backed securities(2) 1,243 9,769 36,865 2,508,682 2,556,559
Tax-exempt securities 3,437 12,603 28,751 76,090 120,881
Taxable municipal Securities 500 6,015 330 922 7,767
Corporate securities 1,250 5,519 14,900 95,357 117,026
------- ------- ------- ---------- ----------
Total securities available for sale $30,955 $62,638 $83,376 $2,681,149 $2,858,118
------- ------- ------- ---------- ----------
Fair Value $30,029 $64,235 $86,133 $2,682,612 $2,863,009
======= ======= ======= ========== ==========
Weighted average yield-total portfolio 5.40% 6.35% 7.16% 6.57% 6.57%
- --------
(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 and asset-backed securities are shown at contractual maturity,
however, the average life of these mortgage and asset-backed securities may
offer due to principal prepayments.
A-41
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Investment securities with a carrying value of $2.4 billion and $619.1
million were pledged to secure deposits, borrowings and for other purposes as
required by law or contract at December 31, 2001 and 2000, respectively.
Other securities includes investments in the Federal Reserve Bank and the
FHLB required in order to maintain membership and support activity levels as
well as 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.
Proceeds and realized losses and gains on sales of investment securities for
the years ended December 31, 2001, 2000 and 1999 are presented below:
2001 2000 1999
-------- ------- -------
(Dollars in thousands)
Proceeds from sale of available for sale securites(1) $262,856 $79,556 $53,471
Available for sale securities-gains(2) $ 6,526 $ 548 $ 88
Available for sale securities-losses $ (222) $(1,069) $ (133)
- --------
(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 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 form clients.
Classification of Investment Portfolio
During 2001, we transferred our entire portfolio of held to maturity debt
securities to the available for sale category. The amortized cost of these
securities at the time of transfer was $345.8 million and the securities had an
unrealized gain of $11.0 million ($6.4 million, net of taxes) at the time of
the transfer. Although our intention to hold a majority of our debt securities
to maturity has not changed, the transfer was made to increase our flexibility
in responding to future economic changes and to increase our efficiency in
managing our investment portfolio. Subsequent to the transfer, we sold
securities which had been classified as held to maturity at December 31, 2000
with an amortized cost of $43.2 million for a gain of $2.4 million.
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, 2001, 2000 and 1999:
2001 2000 1999
-------- -------- -------
(Dollars in thousands)
Balance, January 1 $ 91,407 $ 54,459 $38,589
Allowance of entities acquired through mergers accounted for under
purchase accounting method 320 10,927 --
Provision for loan losses/(1)/ 58,227 36,899 17,645
Loan charge-offs (27,735) (12,494) (3,558)
Recoveries 2,525 1,616 1,783
-------- -------- -------
Balance, Dcember 31 $124,744 $ 91,407 $54,459
======== ======== =======
- --------
(1) Includes $3.5 million, $8.1 million and $2.7 million of charges in 2001,
2000 and 1999 respectively, to conform the practices of acquired entities
to our reserve methodologies, which are included in mergers and related
nonrecurring costs.
A-42
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth nonperforming loans as of December 31, 2001,
2000, and 1999. Nonperforming loans are defined as loans which are on
nonaccrual status, loans which have been restructured, and loans which are 90
days past due but are still accruing interest. Interest income foregone on
nonperforming loans totaled $1.2 million, $1.3 million and $667,000 for the
years ended December 31, 2001, 2000 and 1999, respectively. Interest income
recognized on the nonperforming loans approximated $227,000, $16,000 and
$649,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
2001 2000 1999
------- ------- ------
(Dollars in thousands)
Nonaccrual loans $30,970 $13,014 $7,139
Restructured loans -- -- 807
------- ------- ------
Total nonperforming loans $30,970 $13,014 $7,946
======= ======= ======
Accruing loans past due 90 days or more $5,073 $ 4,463 $ 908
======= ======= ======
At December 31, 2001 and 2000, the recorded investment in loans, for which
impairment has been recognized in accordance with SFAS No. 114 and No. 118, was
approximately $31.0 million and $13.0 million, respectively, with corresponding
valuation allowances of $16.5 million and $4.0 million respectively. For the
years ended December 31, 2001 and 2000, the average recorded investment in
impaired loans was approximately $17.9 million and $10.7 million, respectively.
We recognized interest income of $1.2 million, $72,000, and $41,000 for the
year ended December 31, 2001, 2000 and 1999.
We had no restructured loans as of December 31, 2001 and 2000. There were no
principal reduction concessions allowed on restructured loans during 2001,
2000, and 1999. Interest income from restructured loans totaled $0, $0 and
$45,000 for the years ended December 31, 2001, 2000 and 1999. There was no
foregone interest income for the restructured loans for the years ended
December 31, 2001, 2000 and 1999.
NOTE 5--OTHER REAL ESTATE OWNED
At December 31, 2001 and 2000, we did not hold any OREO which consists of
properties acquired through foreclosure.
The following summarizes OREO operations, which are included in operating
expenses, for the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
------ ---- ----
(Dollars in thousands)
Real estate operations, net $ -- $51 $ 57
(Gain) loss on sale of OREO -- 5 (99)
Provision for estimated losses -- -- 8
------ --- ----
Net loss from other real estate operations $ -- $56 $(34)
====== === ====
A-43
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment at December 31, 2001 and 2000 are composed
of the following:
2001 2000
-------- --------
(Dollars in thousands)
Land $ 4,300 $ 4,300
Buildings and premises 11,909 12,872
Furniture and equipment 51,470 37,239
Leasehold improvements 17,692 16,584
Vehicles 855 853
-------- --------
Total 86,226 71,848
Accumulated depreciation and amortization (37,343) (32,544)
-------- --------
Premises and equipment, net $ 48,883 $ 39,304
======== ========
Depreciation and amortization amounted to $9.2 million, $8.5 million and
$6.7 million for the years ended December 31, 2001, 2000 and 1999 respectively,
and have been included in occupancy and equipment expense in the accompanying
consolidated statements of operations.
During 2000, we sold one bank premises building 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 our lease.
During 1999, we sold one bank premises building with a carrying value of
$2,637,000 for $4,978,000 in a sale-lease back transaction. We 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 our
leases. During 2000 we recognized $303,000 of the deferred gain.
NOTE 7--DEPOSITS
Deposits as of December 31, 2001 and 2000 are as follows:
2001 2000
---------- ----------
(Dollars in thousands)
Demand, noninterest-bearing $ 953,989 $1,133,958
MMDA, NOW and Savings 2,280,119 2,349,041
Time certificates, $100,000 and over 642,073 706,535
Other time certificates 1,113,890 560,870
---------- ----------
Total deposits $4,990,071 $4,750,404
========== ==========
The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 2001.
December 31, 2001
---------------------------------------------------------------
Three Seven to
months Four to twelve One to More than
or less six months months three years three years Total
-------- ---------- -------- ----------- ----------- ----------
(Dollars in thousands)
Time deposits, $100,000 and over $330,909 $225,668 $ 65,741 $14,758 $4,997 $ 642,073
Other time deposits 448,671 322,124 300,076 40,758 2,261 1,113,890
-------- -------- -------- ------- ------ ----------
Total $779,580 $547,792 $365,817 $55,516 $7,258 $1,755,963
======== ======== ======== ======= ====== ==========
A-44
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, GBB Capital IV, GBB Capital
V and GBB Capital VI (the "Trusts") are Delaware business trusts of which all
the common securities are owned by Greater Bay and were formed for the purpose
of issuing Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures ("Trust
Preferred Securities"). The Trust Preferred Securities are individually
described below. Dividends on the Trust Preferred Securities are payable either
quarterly or semi-annually and are deferrable, at our option, for up to five
years. As of December 31, 2001, all dividend are current. 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.
The following Trust Preferred Securities were outstanding at December 31,
2001.
Amount Date of Stated Optional
Security title Issuer outstanding original issue maturity redemption 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, 2000 June 1, 2030 June 1, 2010
9% Cumulative Trust
Preferred Securities GBB Capital V 103,500,000 August 14, 2001 August 14, 2031 August 14, 2006
Floating Rate Trust Preferred
Pass-Through Securities GBB Capital VI 15,000,000 July 27, 2001 July 27, 2031 July 27, 2011
------------
Total TPS outstanding $218,000,000
============
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 our option on or after their respective optional redemption dates.
The Trust Preferred Securities issued by GBB Capital I, GBB Capital III, GBB
Capital IV and GBB Capital V accrue interest at an annual rate of 9.75%,
10 7/8%, 10.75% and 9.00 %, receptively. The Floating Rate Trust Preferred
Securities, Series B issued by GBB Capital 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 the 3-month LIBOR rate plus 150
basis points. The Floating Rate Trust Preferred Pass-Thru Securities issued by
GBB Capital VI accrue interest at a variable rate of interest, initially at
7.57% on the outstanding securities. The interest rate resets quarterly and is
equal to 6-month LIBOR plus 375 basis points.
A-45
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On the date of original issue, GBB Capital II and GBB Capital IV completed
the 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. 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 of Trust Preferred Securities.
In 1998, Coast Commercial Bank purchased $1,000,000 of those securities which
were included in Coast Commercial Bank's investment securities at the time of
its acquisition by Greater Bay. In accordance with the pooling-of-interests
method of accounting, $1,000,000 in Trust Preferred Securities issued by us and
Coast Commercial Bank's corresponding investment have been eliminated in
consolidation.
The total amount of Trust Preferred Securities outstanding at December 31,
2001 and 2000 was $218.0 million and $99.5 million, respectively. The dividends
paid on Trust Preferred Securities were $13.7 million, $7.8 million and $4.2
million in 2001, 2000 and 1999, respectively. The expense for these dividends
is included in operating expenses.
NOTE 9--LEASE SECURITIZATION
During 1997, Matsco Lease Finance III a special purpose corporation
wholly-owned by The Matsco Companies, Inc. issued the following leased-backed
notes; $55 million Series 1997-1A, $45 million Series 1997-2A, $1.6 million
Series 1997-1 B and $4.5 million 1997-2B. All Class B certificates, which were
subordinate to the Class A certificates, were paid-off as of December 31, 2000.
As of December 31, 2001, the note balance on the Series 1997-1 and Series
1997-2 were approximately $17.9 million and $19.7 million, respectively. As of
December 31, 2000, the note balances for Series 1997-1 and Series 1997-2 were
approximately $28.0 million and $30.0 million, respectively. All of the
transactions placed in 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" subsequently replaced by SFAS No. 140
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities". The weighted average rate on the combined series of 1997 notes
was 5.77% and 5.92% at December 31, 2001 and 2000, respectively. The underlying
leases had a carrying value of $16.9 million and $20.7 million for Series
1997-1 and Series 1997-2, respectively at December 31, 2001. The underlying
leases have a carrying value of $27.5 million and $30.0 million for Series
1997-1 and Series 1997-2, respectively at December 31, 2000. At December 31,
2001 and 2000, 0.02% and 0.35% of those leases were 90 days or more past due,
respectively. The start-up expenses and private placement fees associated with
the issuance of the 1997-2 lease-backed notes are expensed at funding. Such
amounts related to the 1997-1 notes are amortized over the life of the notes to
approximate a constant periodic rate of interest. 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 Municipal Bond Insurance Corporation
pursuant to the terms of a note 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. These notes were repaid in full during 2001. As of
December 31, 2000, the note balance was $5.4 million, with a weighted average
interest rate of 6.7% at December 31, 2000. The underlying leases had a
carrying value of $7.1 million at December 31, 2000. At December 31, 2000 ,
1.11% those leases were 90 days or more past due. The notes were
unconditionally guaranteed by Municipal Bond Investor Assurance Corporation
pursuant to the terms of a note guarantee policy. The start-up expenses and
private placement fees associated with the issuance of the leased-backed notes
are amortized over the life of the notes to approximate a constant periodic
rate of interest. The notes were rated "AAA" by Standard and Poors and "Aaa" by
Moody's.
A-46
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We, as servicer of the underlying leases, remit funds collected on Matsco
Lease Finance III to the trustee on a weekly basis. We receive a flat fee per
lease as the servicer. In the event an account is delinquent our terms are
modified and the servicer has the option to repurchase the transaction or to
substitute with a similar account.
Pursuant to the acquisitions of The Matsco Companies, Inc., Matsco Lease
Finance II and Matsco Lease Finance III became wholly-owned subsidiaries of
Greater Bay.
NOTE 10--REAL ESTATE INVESTMENT TRUST SUBSIDIARIES OF THE BANKS
Formation of CNB Investment Trust I and CNB Investment Trust II
During 2001, we formed and funded CNB Investment Trust I ("CNBIT I") and CNB
Investment Trust II ("CNBIT II"), both of which are Maryland real estate
investment trusts. CNBIT I and CNBIT II provide Cupertino National Bank with
flexibility in raising capital. As of December 31, 2001, the net income and
assets of CNBIT I and CNBIT II are eliminated in consolidation.
Cupertino National Bank contributed participation interests in loans with a
book value of $311.3 million, net of reserves, and $500,000 in cash to CNBIT I,
in exchange for 100% of the common and preferred stock of the CNBIT I. CNBIT I
is a wholly owned subsidiary trust of Cupertino National Bank.
Cupertino National Bank contributed participation interests in loans with a
book value of $133.4 million, net of reserves, and $15.4 million in investment
securities to CNBIT II, in exchange for 100% of the preferred stock of the
CNBIT II. The assets contributed to CNBIT II had built in losses of $33.2
million for federal income tax purposes. CNBIT I contributed participation
interests in loans with a book value of $200.8 million, net of reserves in
exchange for 100% of the common stock of CNBIT II. CNBIT I owns all the common
stock of CNBIT II. During 2001, Cupertino National Bank sold 15,000 shares of
the 12% Series B Preferred Stock of CNBIT II for $15.0 million. These
transactions resulted in recognition of a tax benefit of $11.4 million.
NOTE 11--BORROWINGS
Borrowings are detailed as follows:
2001 2000
---------- --------
(Dollars in thousands)
Short term borrowings:
Securities sold under
agreements to repurchase $ 264,727 $ 74,713
Other short term notes payable 34,402 15,419
FHLB advances 1,334,711 192,076
Advances under credit lines 6,800 15,000
---------- --------
Total short term borrowings 1,640,640 297,208
---------- --------
Long term borrowings:
Securities sold under
agreements to repurchase 57,700 --
Other long term notes payable 17,728 51,809
FHLB advances 379,828 114,250
---------- --------
Total long term borrowings 455,256 166,059
---------- --------
Total borrowings $2,095,896 $463,267
========== ========
A-47
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 2001 and 2000, the average balance of
securities sold under short term agreements to repurchase was $210.4 million
and $86.8 million, respectively, and the average interest rates during those
periods were 3.51% and 6.12%, respectively. Securities sold under short term
agreements to repurchase generally mature within 90 days of dates of purchase.
During the years ended December 31, 2001 and 2000, the average balance of
federal funds purchased was $128.4 million and $105.9 million, respectively,
and the average 2000 interest rates during those periods were 4.43% and 6.49%,
respectively. There was no such balance outstanding at December 31, 2001 and
2000.
The FHLB advances are collateralized by loans and securities pledged to the
FHLB. The following is a breakdown of rates and maturities:
Short Term Long Term
---------- ---------
(Dollars in thousands)
Amount $1,495,911 $218,628
Maturity 2002 2003-2011
Average Rates 3.08% 4.19%
In addition, as of December 31, 2001, we had short-term, unsecured credit
facilities from three financial institutions totaling $92.0 million. At
December 31, 2001 and 2000, we had advances outstanding of $27.0 million and
$15.0 million under these facilities. The average rate paid on these advances
was approximately LIBOR + 0.50%. In addition, we were in compliance with all
related financial covenants for these credit facilities.
NOTE 12--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We have two interest-rate swaps and an interest rate cap to convert our
floating-rate debt and deposits to fixed rates. These derivative instruments
were entered into concurrently with the issuance of the instruments being
hedged. At the inception of these contracts, two of these derivative
instruments were accounted for as a cash flow hedge under SFAS No. 133 and 138.
These derivative instruments possess a term equal to the non-callable term of
the hedged instrument, with a fixed pay rate and a receive rate indexed to
rates paid on the instrument and a notional amount equal to the amount of the
instruments being hedged. As the specific terms and notional amount of the
derivative instruments exactly matched those of the instruments being hedged we
meet the "no ineffectiveness" criteria of SFAS No. 133 and 138. As such, the
derivative instruments were assumed to be 100% effective and all changes in the
fair value of the hedges were recorded in other comprehensive income with no
impact on the income statement for any ineffective portion through September
30, 2001. During 2001, we determined that the designation of these derivatives
as hedges was no longer appropriate. As a result, upon derecognition of these
hedges, we recorded a $191,000 loss to other income on these instruments.
Subsequent to derecognition, we have recorded a $826,000 gain on the
appreciation of these instruments.
The notional amount of the one of the swaps is $40.0 million with a term of
up to 10 years expiring on September 15, 2008. We also have an interest rate
cap with a notional amount of $15.0 million with a term of up to ten years
expiring in July 2011. When entered into, we intended to use the swap as a
hedge for the noncallable term of the hedged instrument. The periodic
settlement date of the swap results in the reclassifying as earnings the gains
or losses that are reported in accumulated comprehensive income.
Additionally, we have a $20.0 million prime/fixed interest rate swap used as
a fair value hedge.
We minimize the credit (or repayment) risk in derivative instruments by
entering into transactions with high-quality counterparties that are reviewed
periodically.
A-48
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 2001, 2000 and 1999:
2001 2000 1999
-------- -------- -------
(Dollars in thousands)
Current:
Federal $ 33,908 $ 45,742 $26,332
State 14,103 16,052 8,780
-------- -------- -------
Total current 48,011 61,794 35,112
-------- -------- -------
Deferred:
Federal (16,102) (13,476) (6,782)
State (5,441) (4,653) (1,869)
-------- -------- -------
Total deferred (21,543) (18,129) (8,651)
-------- -------- -------
Total expense $ 26,468 $ 43,665 $26,461
======== ======== =======
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, 2001 and 2000 are as follows:
Years ended
December 31,
---------------------
2001 2000
------- -------
(Dollars in thousands
Allowance for loan losses $43,124 $26,072
State income taxes 16,853 10,142
Deferred compensation 11,195 5,616
Unrealized (gains) losses on securities (2,057) 10,387
Accumulated depreciation 1,681 1,220
Net operating losses -- 14
Purchase allocation adjustments 214 416
Leasing operations (8,225) (2,268)
Other (202) 1,885
------- -------
Net deferred tax asset $62,583 $53,484
======= =======
Management believes that we will fully realize its total deferred tax assets
as of December 31, 2001 based upon our recoverable taxes from prior carryback
years, and its current level of operating income.
A-49
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31, 2001, 2000
and 1999:
Years ended December 31,
-----------------------
2001 2000 1999
----- ---- ----
(Dollars in thousands)
Statutory federal tax rate 35.0% 35.0% 35.0%
California franchise tax expense, net of federal income tax benefit 6.1% 6.7% 5.7%
----- ---- ----
41.1% 41.7% 40.7%
Tax exempt income -2.2% -2.7% -2.7%
Contribution of appreciated securities to GBB Foundation -- -- -3.6%
Nondeductible merger costs 0.5% 1.3% 0.2%
Recognition of losses of CNBIT II in connection with sale of preferred
securities (note 10) -10.7% -- --
Life insurance cash surrender value -1.6% -1.2% -1.0%
Other, net -2.2% 0.3% 0.4%
----- ---- ----
Effective income tax rate 24.9% 39.4% 34.0%
===== ==== ====
NOTE 14--OTHER INCOME AND OPERATING EXPENSES
Other income in 2001, 2000 and 1999 included warrant income of $581,000,
$13.0 million and $14.5 million net of related employee incentives of $249,000,
$4.5 million and $7.3 million, respectively. We occasionally receive 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 our control, and cannot be
predicted with any degree of accuracy and are likely to vary materially from
period to period.
To support the GBB Foundation, we contributed appreciated securities, which
had an unrealized gain of $7.8 million in 1999. In 1999, we incurred $4.4
million in compensation and other expenses in connection with these appreciated
securities. We recorded $12.2 million in 1999 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,
2001, 2000 and 1999 were comprised of the following:
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Financial advisory and professional fees $ 6,088 $ 8,229 $ 2,114
Charges to conform accounting practices 4,241 8,156 2,745
Other costs 18,920 17,141 5,959
------- ------- -------
Total $29,249 $33,526 $10,818
======= ======= =======
A-50
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 2001, 2000 and 1999 were
comprised of the following:
2001 2000 1999
------- ------- -------
(Dollars in thousands)
Legal and other professional fees $ 7,839 $ 5,345 $ 4,072
Telephone, postage and supplies 6,027 5,410 5,146
Marketing and promotion 5,648 5,017 4,202
Data processing 4,448 2,879 3,341
Correspondent bank and ATM network fees 3,622 2,122 2,468
Client services 2,965 2,694 3,811
FDIC insurance and regulatory assessments 1,762 1,472 807
Directors fees 1,585 1,758 1,899
Goodwill amortization 1,301 -- --
Insurance 1,135 631 1,093
Other real estate owned -- 56 (34)
Other 8,080 7,160 5,656
------- ------- -------
$44,412 $34,544 $32,461
======= ======= =======
Occupancy costs for the years ended December 31, 2001, 2000 and 1999 were
$17.4 million, $13.5 million and $11.5 million, respectively.
NOTE 15--EMPLOYEE BENEFIT PLANS
Stock Option Plan
At December 31, 2001 the total authorized shares issuable under the Greater
Bay Bancorp Amended and Restated 1996 Stock Option Plan (the "Bancorp Plan")
was approximately 10,617,000 shares and the number of shares available for
future grants was approximately 3,004,000 shares.
Options and shares of restricted stock may be granted to employees,
nonemployee directors, and consultants. Options 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 our stock on the date of
grant. The term of an option may not exceed 10 years and generally vests over a
five-year period. The restrictions on shares of restricted stock generally
lapse over a five-year period.
On November 19, 1997, our 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, our shareholders approved an
additional amendment of the Bancorp Plan to increase by 5,000,000 the number of
shares issuable under the Bancorp Plan. On October 23, 2001, our shareholders
approved an additional amendment of the Bancorp Plan to increase by 4,000,000
the number of shares issuable under the Bancorp Plan to accommodate the
increased number of eligible employees as a result of the mergers and as a
result of internal growth.
A-51
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of our stock options as of December 31, 2001, 2000, and 1999 and
changes during the years ended on those dates is presented below:
2001 2000 1999
---------------- ---------------- ----------------
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 7,094 $17.54 7,489 $11.45 6,665 $ 9.02
Granted 2,442 25.53 1,602 33.05 1,870 17.43
Exercised (826) 9.04 (1,493) 6.54 (727) 5.80
Forfeited (406) 25.04 (504) 9.03 (319) 8.71
----- ------ ------ ------ ----- ------
Outstanding at end of year 8,304 20.63 7,094 17.54 7,489 11.45
===== ====== ====== ====== ===== ======
Options exercisable at year-end 3,760 14.47 3,259 10.60 3,497 7.30
===== ====== ====== ====== ===== ======
Weighted average fair value of options
granted during the year $ 9.19 $14.24 $ 6.07
====== ====== ======
The following table summarizes information about stock options outstanding
at December 31, 2001.
Options outstanding Options exercisable
--------------------------------- --------------------
Weighted Weighted Weighted
Number average average Number average
Exercise outstanding remaining exercise exercisable exercise
price range (000's) life (years) price (000's) price
----------- ----------- ------------ -------- ----------- --------
$0.00-$9.00 1,019 3.96 $ 5.21 1,007 $ 5.22
$9.20-$19.25 3,433 6.84 16.08 2,214 15.36
$19.50-$25.73 2,519 9.64 24.92 301 21.27
$25.76-$40.31 1,333 8.99 36.00 238 36.74
Under the terms of the respective mergers, the stock option plans of Bank of
Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast
Bancorp and SJNB Financial Corp. were terminated at the time of merger and
substitute options were issued under the Bancorp Plan. Option holders under the
Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce,
Coast Bancorp and SJNB Financial Corp. plans received substitute option grants
to purchase 239,880 shares, 471,840 shares, 59,668 shares, 216,636 shares, and
1,228,511 shares of Greater Bay stock, respectively. During 2000, we assumed
the Mt. Diablo National Bank Stock Option Plan. Options outstanding from the
Mt. Diablo National Bank plan were converted to options to purchase 145,428
shares of Greater Bay stock.
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, we are encouraged, but not required, to measure
compensation costs related to its employee stock compensation plans under the
fair value method. If we elect 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. We implemented
the requirements of SFAS No. 123 in 1997 and have elected to adopt the
disclosure provisions of this statement.
A-52
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
We apply Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in our accounting for stock options. Accordingly, no
compensation cost has been recognized for our stock option plan. Had
compensation for our stock option plan been determined consistent with SFAS No.
123, our net income per share would have been reduced to the pro forma amounts
indicated below:
December 31,
-----------------------------
2001 2000 1999
------- ------- -------
(Dollars in thousands, except
per share amounts)
Net income:
As reported $79,816 $67,164 $51,301
Pro forma $72,558 $64,187 $47,096
Basic net income per share:
As reported $ 1.61 $ 1.40 $ 1.15
Pro forma $ 1.47 $ 1.34 $ 1.06
Diluted net income per share:
As reported $ 1.57 $ 1.33 $ 1.09
Pro forma $ 1.42 $ 1.27 $ 1.00
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 2001, 2000, and 1999, respectively; dividend
yield of 1.5%, 1.5% and 1.5%; expected volatility of 48.89%, 48.96% and 29.69%;
risk free rates of 4.30%, 4.89% and 6.29%. 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.
401(k) Savings Plan
We have 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. We match 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). Our matching contributions are made in cash. The matching
contribution vests ratably over the first four years of employment. Our
employees are not required to maintain any portion of their 401(k) savings in
our stock.
For the years ended December 31, 2001, 2000 and 1999, we contributed $2.4
million, $1.8 million and $1.5 million, respectively to the 401(k) plan.
Employee Stock Purchase Plan
We have 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 our stock for
an aggregate total of 923,738 shares. Under the plan, the purchase price is 85%
of the lower of the fair value at the beginning or end of each three month
offering period. During 2001, 2000 and 1999, employees purchased 114,860,
93,356 and 83,302 shares of common stock, respectively. There were 317,800
shares remaining in the plan available for purchase by employees at December
31, 2001.
A-53
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Supplemental Employee Compensation Benefits Agreements
We have entered into supplemental employee compensation benefits agreements
with certain executive and senior officers. Under these agreements, we are
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, 2001 and 2000 is approximately $16.7 million and $9.1 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, 2001, 2000 and 1999 totaled
$8.2 million, $3.3 million and $1.3 million, respectively. Included for 2001
and 2000, an additional $6.7 million and $1.4 million, respectively, was
recorded as part of merger and other related nonrecurring costs in connection
with the change in control provisions under the SJNB Financial Corp. and
Saratoga supplemental employee compensation benefits agreements programs.
Depending on the agreement, the employees and we are beneficiaries of life
insurance policies that have been purchased as a method of financing the
benefits under the agreements. At December 31, 2001 and 2000, our cash
surrender value of these policies was approximately $96.8 million and $83.9
million, respectively and is included in other assets. The income recognized on
these polices was $4.1 million, $3.2 million and $1.9 million in 2001, 2000 and
1999, respectively, and is included in other income.
Deferred Compensation Plan
Effective November 19, 1997, we adopted the Greater Bay Bancorp 1997
Elective Deferral Compensation Plan (the "Deferred Plan") that allows our
eligible officers to defer a portion of their salary, bonuses and certain 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, 2001 and 2000, $6.1 million and $3.4 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 us, there was approximately $1.6 million and $2.1 million
of deferred compensation which is included in other liabilities at December 31,
2001 and 2000, respectively.
Change in Control
In the event of a change in control, the supplemental employee
compensation benefits agreements with certain executive and senior officers may
require us to make certain payments under those agreements. We also have plans
in place, which would require certain payments to be made to any employee whose
employment is terminated pursuant to a change in control. These potential
liabilities are currently not recognized in the accompanying consolidated
financial statements.
A-54
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16--RELATED PARTY TRANSACTIONS
We have, and expect 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, 2001 and 2000 is shown below:
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Balance, January 1 $ 51,323 $ 28,851 $ 48,615
Additions 40,184 51,839 30,600
Repayments (70,600) (29,367) (50,364)
-------- -------- --------
Balance, December 31 $ 20,907 $ 51,323 $ 28,851
======== ======== ========
Undisbursed commitments, at year end $ 63,724 $ 39,744 $ 11,113
======== ======== ========
NOTE 17--COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease certain facilities at which we conduct our operations. Future
minimum lease commitments under all non-cancelable operating leases as of
December 31, 2001 are below:
(Dollars in
thousands)
Years ended December 31,
2002 $ 9,835
2003 7,849
2004 7,182
2005 5,923
2006 5,373
Thereafter 25,180
-------
Total $61,342
=======
We sublease that portion of the available space that is not utilized.
Sublease rental income for the years ended December 31, 2001, 2000, and 1999
was $1.3 million, $1.5 million and $1.5 million, respectively. Gross rental
expense for the years ended December 31, 2001, 2000, and 1999 was $11.2
million, $8.3 million, and $7.5 million, respectively.
A-55
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Commitments and Contingencies
In the normal course of business, we became contractually obligated under
various commitments and contingent liabilities, such as guarantees and
commitments to extend credit, that are not reflected in the accompanying
consolidated financial statements. Generally accepted accounting principles
prohibit the recognition of these items in our consolidated balance, but
require these amounts to be disclosed. Commitments to fund loans were $1.3
billion and $1.4 billion and letter of credit were $130.0 million and $129.4
million, at December 31, 2001 and 2000, respectively. Our exposure to credit
loss is limited to amounts funded or drawn; however, at December 31, 2001, no
losses are anticipated as a result of these commitments, based on current
information.
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 $385.8 million of these commitments relate
to real estate construction 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 us. 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 our operations.
NOTE 18--SHAREHOLDERS' RIGHTS PLAN
In 1998, Greater Bay adopted a shareholder rights plan designed to maximize
our long-term value and to protect our 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 we are 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 our common shares. 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 our common share; a tender offer for 10% or more of our common shares;
or ownership of 10% or more of our common shares by a shareholder whose actions
are likely to have a material adverse impact on us 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-56
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 19--REGULATORY MATTERS
The Banks and Greater Bay 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 our 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, 2001 and 2000 the Banks and we 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-57
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Banks' and our actual 2001 and 2000 capital amounts and ratios are as
follows:
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------- ---------------- ----------------
As of December 31, 2001 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $740,653 12.79% $463,270 8.00% $579,088 N/A
Bank of Petaluma 23,893 12.10 15,797 8.00 19,746 10.00%
Bank of Santa Clara 42,225 13.46 25,097 8.00 31,371 10.00
Bay Area Bank 24,373 10.97 17,774 8.00 22,218 10.00
Bay Bank of Commerce 20,414 11.63 14,042 8.00 17,553 10.00
Coast Commercial Bank 45,520 15.14 24,053 8.00 30,066 10.00
Cupertino National Bank 190,715 10.74 142,060 8.00 177,574 10.00
Golden Gate Bank 29,697 11.18 21,250 8.00 26,563 10.00
Mid-Peninsula Bank 113,565 10.20 89,071 8.00 111,338 10.00
Mt. Diablo National Bank 32,769 12.10 21,665 8.00 27,082 10.00
Peninsula Bank of Commerce 31,571 11.43 22,097 8.00 27,621 10.00
San Jose National Bank 65,401 10.62 49,266 8.00 61,583 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $607,820 10.49% $231,771 4.00% $347,657 N/A
Bank of Petaluma 21,414 10.85 7,895 4.00 11,842 6.00%
Bank of Santa Clara 38,278 12.20 12,550 4.00 18,825 6.00
Bay Area Bank 21,581 9.71 8,890 4.00 13,335 6.00
Bay Bank of Commerce 18,211 10.38 7,018 4.00 10,527 6.00
Coast Commercial Bank 41,741 13.89 12,020 4.00 18,031 6.00
Cupertino National Bank 155,173 8.74 71,017 4.00 106,526 6.00
Golden Gate Bank 26,342 9.92 10,622 4.00 15,933 6.00
Mid-Peninsula Bank 99,570 8.94 44,550 4.00 66,826 6.00
Mt. Diablo National Bank 29,364 10.84 10,835 4.00 16,253 6.00
Peninsula Bank of Commerce 28,082 10.16 11,056 4.00 16,584 6.00
San Jose National Bank 57,656 9.36 24,639 4.00 36,959 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $607,820 8.01% $303,531 4.00% $379,413 N/A
Bank of Petaluma 21,414 6.03 14,205 4.00 17,756 5.00%
Bank of Santa Clara 38,278 7.03 21,780 4.00 27,225 5.00
Bay Area Bank 21,581 5.91 14,606 4.00 18,258 5.00
Bay Bank of Commerce 18,211 6.12 11,903 4.00 14,878 5.00
Coast Commercial Bank 41,741 7.75 21,544 4.00 26,930 5.00
Cupertino National Bank 155,173 6.36 97,593 4.00 121,991 5.00
Golden Gate Bank 26,342 6.00 17,561 4.00 21,952 5.00
Mid-Peninsula Bank 99,570 6.89 43,354 3.00 72,257 5.00
Mt. Diablo National Bank 29,364 6.02 19,511 4.00 24,389 5.00
Peninsula Bank of Commerce 28,082 6.32 17,773 4.00 22,217 5.00
San Jose National Bank 57,656 8.03 28,720 4.00 35,900 5.00
A-58
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
-------------- ---------------- ----------------
As of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
- ----------------------- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Total Capital (To Risk Weighted Assets):
Greater Bay Bancorp $542,819 10.87% $399,499 8.00% $498,915 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
San Jose National Bank 64,995 12.00 43,330 8.00 54,163 10.00
Tier 1 Capital (To Risk Weighted Assets):
Greater Bay Bancorp $477,962 9.57% $199,775 4.00% $299,350 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
San Jose National Bank 58,217 10.75 21,662 4.00 32,493 6.00
Tier 1 Capital Leverage (To Average Assets):
Greater Bay Bancorp $477,962 8.79% $217,503 4.00% $271,878 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
San Jose National Bank 58,217 8.66 26,890 4.00 33,613 5.00
A-59
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 20--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, 2001, 2000 and 1999.
For the year ended December 31, 2001
------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(Dollars in thousands, except
per share amounts)
Net income $79,816
Basic net income per share:
Income available to common shareholders 79,816 49,498,000 $1.61
Effect of dilutive securities:
Stock options -- 1,442,000
------- ---------- -----
Diluted net income per share:
Income available to common shareholders after assumed
conversions $79,816 50,940,000 $1.57
======= ========== =====
For the year ended December 31, 2000
------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(Dollars in thousands, except
per share amounts)
Net income $67,164
Basic net income per share:
Income available to common shareholders 67,164 47,899,000 $1.40
Effect of dilutive securities:
Stock options -- 2,620,000
------- ---------- -----
Diluted net income per share:
Income available to common shareholders after assumed
conversions $67,164 50,519,000 $1.33
======= ========== =====
For the year ended December 31, 1999
------------------------------------
Income Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
(Dollars in thousands, except
per share amounts)
Net income $51,301
Basic net income per share:
Income available to common shareholders 51,301 44,599,000 $1.15
Effect of dilutive securities:
Stock options -- 2,479,000
------- ---------- -----
Diluted net income per share:
Income available to common shareholders after assumed
conversions $51,301 47,078,000 $1.09
======= ========== =====
A-60
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options to purchase 1,531,000, 66,000 shares and 1,268,000 shares were
anti-dilutive whereby the options' exercise price was greater than the average
market price of the common shares, during the years ended December 31, 2001,
2000 and 1999, respectively, and were not included in the calculation of
diluted net income per share.
All years presented have been restated to reflect the 2-for-1 stock split
effective as of 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 2001 merger with
SJNB Financial Corp. at a 1.82 conversion ratio, 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, and the 1999 mergers with Bay
Commercial Services at a 0.6833 conversion ratio and Bay Area Bancshares at a
1.38682 conversion ratio.
NOTE 21--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,
---------------------
2001 2000
-------- --------
(Dollars in thousands)
ASSETS:
Cash and cash equivalents $ 59,347 $ 20,152
Investment in subsidiaries 594,660 474,252
Other investments 18,658 25,634
Other assets 48,448 25,984
-------- --------
Total assets $721,113 $546,022
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Subordinated debt $225,775 $118,609
Other borrowings 6,800 --
Other liabilities 24,854 41,465
-------- --------
Total liabilities 257,429 160,074
Shareholders' equity:
Common stock 206,294 196,121
Accumulated other comprehensive income 3,967 (6,035)
Retained earnings 253,423 195,862
-------- --------
Total shareholders' equity 463,684 385,948
-------- --------
Total liabilities and shareholders' equity $721,113 $546,022
======== ========
A-61
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PARENT COMPANY ONLY--STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Income:
Interest income $ 3,098 $ 3,694 $ 551
Cash dividends from subsidiaries 19,585 11,060 6,559
Other income 2,856 1,379 --
-------- -------- --------
Total 25,539 16,133 7,110
-------- -------- --------
Expenses:
Interest expense 1,619 8,536 4,382
Salaries 34,588 22,280 17,138
Occupancy and equipment 8,782 6,416 3,821
Merger expenses 10,034 12,479 3,283
Other expenses 24,644 7,784 6,084
Less: rentals and fees received from Banks (62,113) (41,480) (27,653)
-------- -------- --------
Total 17,554 16,015 7,055
-------- -------- --------
Income before taxes and equity in undistributed net income of subsidiaries 7,985 118 55
Income tax benefit (4,765) (3,548) (2,782)
-------- -------- --------
Income before equity in undistributed net income of subsidiaries 12,750 3,666 2,837
-------- -------- --------
Equity in undistributed net income of subsidiaries 67,066 63,498 48,464
-------- -------- --------
Net income $ 79,816 $ 67,164 $ 51,301
======== ======== ========
A-62
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(Dollars in thousands)
Cash flows-operating activities
Net income $ 79,816 $ 67,164 $ 51,301
Reconciliation of net income to net cash from operations:
Equity in undistributed net income of subsidiaries (67,066) (63,498) (48,464)
Net change in other assets (3,852) (7,939) (10,230)
Net change in other liabilities (24,608) 42,379 4,322
-------- -------- --------
Operating cash flow, net (15,710) 38,106 (3,071)
-------- -------- --------
Cash flows-investing activities
Purchases of available for sale securities (43,693) (51,517) (20,825)
Proceeds from sale and maturities of available for sale securities 6,976 3,123 21,393
Proceeds from sale of OREO - 224 -
Dividends from subsidiaries 19,585 10,560 4,166
Capital contribution to the subsidiaries (33,526) (47,736) (29,761)
-------- -------- --------
Investing cash flows, net (50,658) (85,346) (25,027)
-------- -------- --------
Cash flows-financing activities
Net change in other borrowings (4,534) 2,562 7,000
Stock retired by Greater Bay and SJNB Financial Corp. (2,830) - (3,911)
Proceeds from private placement of stock - 11,476 20,761
Proceeds from issuance of subordinated debt 122,166 52,062 -
Proceeds from sale of common stock 11,640 15,294 11,842
Stock issued in purchase accounting transaction 1,376 - -
Payment of cash dividends (22,255) (18,686) (10,669)
-------- -------- --------
Financing cash flows, net 105,563 62,708 25,023
-------- -------- --------
Net increase in cash and cash equivalents 39,195 15,468 (3,075)
Cash and cash equivalents at the beginning of the year 20,152 4,684 7,759
-------- -------- --------
Cash and cash equivalents at end of the year $ 59,347 $ 20,152 $ 4,684
======== ======== ========
A-63
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 22--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 or its affiliates unless
the loans are secured by specified types of collateral. Such secured loans and
other advances from the Banks are limited, in the aggregate, to 20% of each
Bank's capital and surplus, as defined by federal regulations, or a maximum of
$90.7 million at December 31, 2001. No such advances were made during 2001 or
exist as of December 31, 2001.
NOTE 23--FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for our
financial instruments. Our estimated fair values of financial instruments as of
December 31, 2001 and 2000 are as follows:
2001 2000
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
(Dollars in thousands)
Financial assets:
Cash and due from banks $ 189,404 $ 189,404 $ 291,605 $ 291,605
Short term investments and Fed
Funds Sold 26,000 26,000 184,370 176,542
Investment securities 2,970,630 2,970,630 1,091,064 1,101,416
Loans, net 4,370,977 4,413,079 3,973,329 4,008,905
Financial liabilities:
Deposits:
Demand, noninterest-bearing 953,989 953,989 1,133,958 1,133,958
MMDA, NOW and Savings 2,280,119 2,280,119 2,349,041 2,349,041
Time certificates, $100,000
and over 642,073 644,251 706,535 706,722
Other time certificates 1,113,890 1,117,730 560,870 561,322
Other borrowings 2,095,896 2,110,751 463,267 431,228
Company obligated mandatory
redeemable preferred securities
of subsidiary trust holding solely
junior subordinated debentures 218,000 218,000 99,500 92,365
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 long term investments, except certain state and
municipal securities, is estimated based on quoted market prices or bid
quotations from securities dealers.
A-64
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair value of performing fixed rate loans is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent
in the loan. The fair value of performing variable rate loans is judged to
approximate book value for those loans whose rates reprice in less than 90
days. Rate floors and rate ceilings are not considered for fair value purposes
as the number of loans with such limitations is not significant.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
Deposit Liabilities and Borrowings
The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits 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 our deposits as compared to the cost of borrowing funds in the
market.
Commitments to Extend Credit and Standby Letters of Credit
The majority of our commitments to extend credit carry current market
interest rates if converted to loans. Because these commitments are generally
unassignable by either the borrower or us, they only have value to the borrower
and us. 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, our entire holdings of a particular financial
instrument. Fair value estimates are based on judgments regarding future
expected loss experience, current economic condition, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have significant effect on
fair value estimates and have been considered in many of the estimates.
A-65
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 24--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. We evaluate the performance of our segments and
allocate resources to them based on net interest income, other income, net
income before income taxes, total assets and deposits.
We are organized primarily along community banking and trust divisions.
Eleven 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. Our business is conducted
principally in the U.S.; foreign operations are not material.
The following table shows each segments key operating results and financial
position for the years ended or as of December 31, 2001, 2000 and 1999:
2001 2000 1999
--------------------- --------------------- ----------------------
Community Trust Community Trust Community Trust
banking operations banking operations banking operations
---------- ---------- ---------- ---------- ----------- ----------
(Dollars in thousands)
Net interest income $ 318,385 $ 1,145 $ 269,941 $ 551 $ 183,662 $ 369
Other income 37,976 4,009 29,889 3,753 41,838 3,007
Operating expenses 104,566 3,012 104,093 2,703 165,546 2,863
Net income before income taxes(1) 178,170 1,826 166,916 1,601 110,232 121
Total assets 7,155,941 -- 5,335,716 -- 4,270,450 --
Deposits 4,935,208 54,814 4,693,241 57,163 3,678,790 57,831
Assets under management -- 629,696 -- 773,791 -- 697,435
- --------
(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, 2001, 2000
and 1999 is presented below.
As of and for year ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(Dollars in thousands)
Net interest income and other income
Total segment net interest income and other income $ 361,515 $ 317,120 $ 240,863
Parent company net interest income and other income 4,335 (4,400) (3,893)
---------- ---------- ----------
Consolidated net interest income and other income $ 365,850 $ 312,720 $ 236,970
========== ========== ==========
Net income before taxes
Total segment net income before income taxes $ 179,996 $ 151,401 $ 110,155
Parent company net income before income taxes (73,712) (40,572) (32,393)
---------- ---------- ----------
Consolidated net income before income taxes $ 106,284 $ 110,829 $ 77,762
========== ========== ==========
Total assets
Total segment assets $7,155,941 $5,335,716 $4,270,450
Parent company segment assets 721,113 482,439 34,360
---------- ---------- ----------
Consolidated total assets $7,877,054 $5,818,155 $4,304,810
========== ========== ==========
A-66
GREATER BAY BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 25--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the summary results for the stated eight
quarters:
For the quarter ended
---------------------------------------------
December 31, September 30, June 30, March 31,
2001 2001 2001 2001
------------ ------------- -------- ---------
(Dollars in thousands, except per share data)
Interest income $129,946 $131,856 $124,669 $120,770
Net interest income 87,892 80,977 77,041 75,099
Provision for loan losses 28,950 8,400 10,049 7,328
Other income 9,684 10,699 13,003 11,456
Other expenses 49,028 44,933 41,669 39,961
Income before taxes 19,598 38,343 38,326 39,266
Net income 7,515 23,826 23,943 24,532
Net income per share:
Basic $ 0.15 $ 0.48 $ 0.48 $ 0.50
Diluted $ 0.15 $ 0.46 $ 0.47 $ 0.48
For the quarter ended
---------------------------------------------
December 31, September 30, June 30, March 31,
2000 2000 2000 2000
------------ ------------- -------- ---------
(Dollars in thousands, except per share data)
Interest income $119,051 $110,812 $101,415 $ 92,361
Net interest income 74,246 68,279 65,064 58,000
Provision for loan losses 6,516 7,994 8,437 5,874
Other income 9,396 11,425 8,567 17,743
Other expenses 37,775 34,938 33,570 36,685
Income before taxes 35,818 29,735 24,880 30,795
Net income 20,913 15,638 13,002 17,611
Net income per share:
Basic $ 0.43 $ 0.32 $ 0.27 $ 0.38
Diluted $ 0.41 $ 0.31 $ 0.26 $ 0.36
A-67
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Greater Bay Bancorp:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Greater Bay Bancorp and its subsidiaries (the "Company") at
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001 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
February 13, 2002
A-68