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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-25034
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GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)
California 77-0387041
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2860 West Bayshore Road, Palo Alto, California 94303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 813-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
9.75% Cumulative Trust Preferred Securities of GBB Capital I
Guarantee of Greater Bay Bancorp with respect to the
9.75% Cumulative Trust Preferred Securities of GBB Capital I
Preferred Share Purchase Rights
(Title of classes)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Common Stock held by non-affiliates, based
upon the closing sale price of the Common Stock on January 29, 1999, as
reported on the Nasdaq National Market System, was approximately $272,319,000.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of January 29, 1999, 9,666,002 shares of the Registrant's Common Stock
were outstanding.
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DOCUMENT INCORPORATED BY REFERENCE: PART OF FORM 10-K INTO WHICH
INCORPORATED:
Definitive Proxy Statement for
Annual Meeting of Shareholders to be Part III
filed within 120 days of the fiscal
year ended December 31, 1998
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PART I
Discussions of certain matters contained in this Annual Report on Form 10-K
may constitute forward-looking statements within the meaning of the Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and as
such, may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in
which Greater Bay Bancorp (referred to as the "Company" 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, Cupertino National Bank, Mid-Peninsula
Bank, Peninsula Bank of Commerce and Golden Gate Bank) operates, projections
of future performance, perceived opportunities in the market and statements
regarding the Company's mission and vision. The Company's actual results,
performance and achievements may differ materially from the results,
performance and achievements expressed or implied in such forward-looking
statements. For a discussion of some of the factors that might cause such a
difference, see "Item 1. Business--Factors That May Affect Future Results of
Operations".
ITEM 1. BUSINESS.
Greater Bay
Greater Bay is a bank holding company operating Cupertino National Bank
("CNB"), Mid-Peninsula Bank ("MPB"), Peninsula Bank of Commerce ("PBC") and
Golden Gate Bank ("Golden Gate") along with its operating divisions Greater
Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate
Finance Group, Greater Bay Bank Contra Costa Regional Banking Office, Greater
Bay International Banking Division, Greater Bay Trust Company, Pacific
Business Funding, Venture Banking Group and the Small Business Administration
Division. The Company has 14 regional offices in San Jose, Cupertino, Santa
Clara, Palo Alto, Redwood City, San Mateo, Millbrae, San Bruno, San Francisco
and Walnut Creek, California. At December 31, 1998, the Company had total
assets of $1.6 billion, total net loans of $1.0 billion and total deposits of
$1.3 billion.
History
Greater Bay Bancorp is the result of the merger (the "1996 Merger"),
effective November 27, 1996, of Cupertino National Bancorp ("Cupertino") and
Mid-Peninsula Bancorp ("Mid-Peninsula"). Cupertino was formed in 1984 as the
holding company for CNB, a national banking association which began operating
in 1985. Mid-Peninsula was formed in 1984 under the name San Mateo County
Bancorp ("San Mateo") as the bank holding company of San Mateo County National
Bank, which subsequently changed its name to WestCal National Bank ("WestCal")
in 1991. In 1994, WestCal was merged into MPB, a California state chartered
bank organized in 1987, and San Mateo concurrently changed its name to Mid-
Peninsula Bancorp. Effective December 23, 1997, the Company completed a merger
(the "PBC Merger") with PBC, whereby PBC became a wholly-owned subsidiary of
Greater Bay. PBC was formed in 1981, as a California state chartered bank.
Effective May 8, 1998, the Company completed a merger with Pacific Rim
Bancorporation ("PRB"). PRB was formed in 1993 as the holding company for
Golden Gate Bank, whereby Golden Gate Bank became a wholly-owned banking
subsidiary of Greater Bay. Effective August 31, 1998, the Company completed a
merger with Pacific Business Funding Corporation ("PBFC"), which now operates
as a division of CNB and conducts business under the name Pacific Business
Funding ("PBF"). All mergers were accounted for as pooling-of-interests
business combinations and, accordingly, all financial data for the periods
prior to the mergers have been restated to include the results of the acquired
entities.
The Company was created with the intention of achieving seven primary goals.
These goals included:
. Developing a greater banking presence throughout the San Francisco Bay
Area by increasing the number of banking offices available to clients;
. Reaching a critical mass in the Company's market areas in order to better
meet competitive challenges inherent in the banking and financial
services industries;
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. Maximizing the utilization of capital by increasing the float and
marketability of its common stock and, by virtue of its larger size,
obtaining access to a lower cost of capital;
. Realizing operating efficiencies through a combination of the Banks;
. Generating increased loan and fee income as a result of the higher
lending limits available to the combined entity;
. Leveraging marketing expense to improve the return on the combined
entity's marketing investment; and
. Enabling the Banks to cross-sell services.
Super Community Banking Philosophy
In order to meet the demands of the increasingly competitive banking and
financial services industries, management has adopted a business philosophy
referred to as the "Super Community Banking Philosophy." The Super Community
Banking Philosophy is based on management's 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 Greater Bay's menu of products and services. Management further
believes that banks are better able to build successful client relationships
by affiliating with a holding company that provides cost effective
administrative support services while promoting bank autonomy and flexibility.
To implement this philosophy, Greater Bay operates the Banks as separate
subsidiaries by retaining their independent names and separate Boards of
Directors. The Banks have established strong reputations and customer
followings in their market areas through attention to client service and an
understanding of client needs. In an effort to capitalize on the identities
and reputations of the Banks, the Company currently intends to continue to
market its services under each Bank's name, primarily through each Bank's
relationship managers. The primary focus for the Banks' relationship managers
is to cultivate and nurture their client relationships. Relationship managers
are assigned to each borrowing client to provide continuity in the
relationship. This emphasis on personalized relationships requires that all of
the relationship managers maintain close ties to the communities in which they
serve, so they are able to capitalize on their efforts through expanded
business opportunities for the Banks.
While client service decisions and day-to-day operations are maintained at
the Banks, Greater Bay offers the advantages of affiliation with a multi-bank
holding company by providing expanded client support services, such as
business cash management, international trade services and accounting
services. In addition, Greater Bay provides centralized administrative
functions, including support in credit policy formulation and review,
investment management, data processing, accounting, loan servicing and other
specialized support functions. This allows the Banks to focus on client
service.
Corporate Growth Strategy
The Company's primary goal is to become the preeminent financial services
company based in the San Francisco Bay Area. The Company's primary business
strategy is to focus on increasing its market share within the communities it
serves through continued internal growth. The Company also will pursue
opportunities to expand its market share through select acquisitions that
management believes complement the Company's businesses. Management will
pursue acquisition opportunities to expand its presence in its current market
areas of San Francisco, Santa Clara and San Mateo Counties, and to establish a
presence in other parts of the Bay Area and California. Consistent with the
Company's operating philosophy and growth strategy, Greater Bay regularly
evaluates opportunities to acquire banks and other financial service companies
that complement the Company's existing business, expand its market coverage
and share and enhance its client product offerings.
Recent Events
On January 26, 1999 the Company and Bay Area Bancshares ("BA Bancshares"),
the holding company of Bay Area Bank, a California state charted bank ("BAB"),
signed a definitive agreement for a merger between the two
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companies. The agreement provides for BA Bancshares shareholders to receive
approximately 1,393,000 shares of Greater Bay Bancorp stock subject to certain
adjustments based on movements in the Company's stock price, in a tax-free
exchange to be accounted for as a pooling-of-interests. Following the
transaction, the shareholders of BA Bancshares will own approximately 12.7% of
the combined company. The Company expects to complete the transaction in the
second quarter of 1999, subject to the approval of BA Bancshares shareholders
and regulatory approvals. As of December 31, 1998 BA Bancshares had $155.3
million in assets, $136.5 million in deposits, and $14.4 million in
shareholders' equity. BAB's office is located in Redwood City, California. The
combined Company, on a pro-forma basis, would have had total assets of
approximately $1.8 billion and equity of over $107.0 million at December 31,
1998.
The transaction is anticipated to be slightly accretive to the Company's
core earnings in 1999 based on anticipated reductions in operating expenses
and revenue enhancements resulting from an expanded product line, increased
lending capacity and an increased market awareness that can be utilized by
BAB. Management of each of the organizations believe that significant
opportunities exist to enhance the spectrum of financial services offered to
both existing and future clients of BAB while also increasing market
penetration in the San Francisco Peninsula market areas.
The Banks and Operating Divisions
Cupertino National Bank
CNB presently has seven offices, including five full service branches. At
December 31, 1998, CNB had total assets of $688.3 million, total net loans of
$500.2 million and total deposits of $569.7 million.
Mid-Peninsula Bank
MPB presently has four offices, including three full service branches. On
December 31, 1998, MPB had total assets of $530.6 million, total net loans of
$307.0 million and total deposits of $445.5 million.
Peninsula Bank of Commerce
PBC presently has two banking offices. On December 31, 1998, PBC had total
assets of $234.0 million, total net loans of $109.8 million and total deposits
of $214.8 million. PBC holds $89.6 million from a single depositor (the
"Special Deposit"). Due to the uncertainty of the time the Special Deposit
will remain with PBC, management has invested a significant portion of the
proceeds from this deposit in agency securities with maturities of less than
90 days.
Golden Gate Bank
Golden Gate presently has one office. On December 31, 1998, Golden Gate had
total assets of $127.0 million, total net loans of $67.6 million and total
deposits of $117.4 million.
Operating Divisions
The Banks have various operating divisions. These divisions include the
Greater Bay Trust Company, the Venture Banking Group, the Small Business
Administration ("SBA") Division, and the asset-based speciality finance
division, PBF. In addition, consistent with Greater Bay's operating philosophy
and growth strategy, in 1998, the Company formed the Greater Bay Bank Santa
Clara Valley Commercial Banking Group ("SCVG"), Greater Bay Corporate Finance
Group ("CFG"), Greater Bay Bank Contra Costa Banking Office ("CCBO") and the
Greater Bay International Banking Division ("IBD").
Greater Bay Trust Company provides trust services to support the trust needs
of the Bank's business and personal clients. These services include, but are
not limited to, custodial, investment management, estate planning resources
and employee benefit plan services.
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The 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.
The SBA Division provides loans to smaller businesses that are generally 65%
to 80% guaranteed by the SBA. In 1994, the SBA named CNB's SBA Division a
Preferred Lender. The SBA awards Preferred Lender status to lenders who have
demonstrated superior ability to generate, underwrite and service loans
guaranteed by the SBA. This status results in more rapid turnaround of loan
applications submitted to the SBA for approval.
PBF is an asset-based lending and factoring division that provides
alternative funding and support programs designed to enhance the Company's
small business banking services.
SCVG offers a full line of business banking services, catering to the needs
of small to medium-sized businesses, professional firms and executives who own
and operate them. The services include a full range of deposit accounts, cash
management and credit facilities custom-tailored to meet the specific needs of
its clients. SCVG further solidifies the Company's strong presence in the
Silicon Valley.
CFG primarily focuses its efforts on obtaining middle market lending clients
that have revenues in excess of $20 million and financing requirements in the
range of $5 million to $250 million. The clients will fall into two
categories: 1.) syndicated loan transactions, and 2.) direct sourced
transactions where CFG will be the lead agent.
CCBO was formed to expand the Company's presence into the East Bay market.
The Company believes the East Bay has tremendous potential for growth and is
contiguous to its existing markets.
IBD provides a wide range of financial services to support the international
banking needs of the Bank's clients, including identifying certain risks of
conducting business abroad and, providing international letters of credit and
trade finance services.
Banking Services
Greater Bay provides a wide range of commercial banking and financial
services to small and medium-sized businesses, real estate developers and
property managers, business executives, professionals and other individuals.
The Banks offer a wide range of deposit products. These include 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 customers
and include cash management and international trade services for business
clients, traveler's checks, safe deposit and MasterCard and Visa merchant
deposits 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 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, wholesale and service
businesses. The Banks provide interim real estate loans primarily for
construction in the Banks' primary service areas of single-family residences,
which typically range between approximately $500,000 and $1.0 million, and
multi-unit projects, which typically range between approximately $1.5 million
and $4.0 million. The Banks provide medium term commercial real estate loans
or credits, typically ranging between $750,000 and $3.0 million for the
financing of commercial or industrial buildings where the owners either use
the properties for business purposes or derive income from tenants.
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Market Area
The Banks concentrate on marketing their services to small and medium-sized
businesses, professionals and individuals in Contra Costa, Santa Clara, San
Francisco and San Mateo Counties.
. CNB's primary base of operations is in Cupertino, California, which is in
the center of the geographical area referred to as "Silicon Valley," and
CNB's operations extend throughout Santa Clara County. Santa Clara County
has a population of approximately 1,690,000;
. MPB's primary base of operations is centered in Palo Alto, California and
extends north through San Mateo County. San Mateo County has a population
of approximately 715,000. MPB has recently formed an operating division
located in Contra Costa County. Contra Costa has a population of
approximately 900,000;
. PBC's primary base of operations is centered in Millbrae, California, and
includes northern San Mateo County and extends into San Francisco County;
. Golden Gate's operations are centered in the City and County of San
Francisco. San Francisco County has a population in excess of 790,000.
The commercial base of Contra Costa, Santa Clara, San Francisco and San
Mateo Counties is diverse and includes computer and semiconductor
manufacturing, professional services, biotechnology, printing and publishing,
aerospace, defense and real estate construction, as well as wholesale and
retail trade. As a result of its geographic concentration, the Company's
results depend largely upon economic conditions in these areas. While the
economy in the Company's market areas have exhibited positive economic and
employment trends, there is no assurance that such trends will continue. A
deterioration in economic conditions could have material adverse impact on the
quality of the Company's loan portfolio and the demand for its product and
services, and accordingly its results of operations. See "Item 1. Business--
Factors That May Affect Future Results of Operations."
Lending Activities
Underwriting and Credit Administration
The lending activities of each of the Banks is guided by the basic lending
policies established by its Board of Directors. Each loan must meet minimum
underwriting criteria established in the Bank's lending policy. Lending
authority is granted to officers of each Bank on a limited basis. Loan
requests exceeding individual officer approval limits are approved by the
Officers Loan Committees of the respective Banks. Loan requests exceeding
these limits are submitted to the Greater Bay 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 MPB and the Senior Vice
President and Chief Credit Officer of Greater Bay. All members of the Officers
Loan Committee are also officers of the individual Banks. Loan requests which
exceed the limits of the Greater Bay Officers Loan Committee are submitted to
the Directors Loan Committee for final approval. The Directors Loan Committee
consists of five outside directors. Each of these committees meet on a regular
basis in order to provide timely responses to the Banks' clients.
The Company's credit administration function includes an internal review and
the regular use of an outside loan review firm. In addition, the Greater Bay
Officers Loan Committee, Chief Operating 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 recommend
general reserve percentages and specific reserve allocations. The Board of
Directors of Greater Bay and each of the Banks review this same information on
a monthly basis.
Loan Portfolio
The composition of the Company's gross loan portfolio at December 31, 1998
was as follows:
. Approximately 45.3% were commercial loans;
. Approximately 17.3% were in real estate construction and land loans,
primarily for residential projects;
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. Approximately 29.7% were real estate term loans, primarily secured by
commercial properties; and
. The balance of the portfolio consists of consumer loans.
The interest rates the Banks charge for the vary with the degree of risk,
size and maturity of the loans. Rates are generally affected by competition,
associated factors stemming from the client's deposit relationship with the
Bank and the Banks' cost of funds.
Commercial Loans. In their commercial loan portfolio, the Banks provide
personalized financial services to the diverse commercial and professional
businesses in their market areas. Commercial loans, including those made by
the Venture Banking Group, consist primarily of short-term loans (normally
with a maturity of under one year) for working capital and business expansion.
The Banks' focus is on businesses with annual revenues generally between $1.0
million and $100.0 million with borrowing needs generally between $2.0 and
$10.0 million. The Banks' commercial clients are drawn from a wide variety of
manufacturing, wholesale and service businesses.
Commercial loans typically include revolving lines of credit collateralized
by inventory, accounts receivable and equipment. Emphasis is placed on the
borrower's earnings history, capitalization, secondary sources of repayment,
and in some instances, third party guarantees or highly liquid collateral
(such as time deposits and investment securities). Commercial loan pricing is
generally at a rate tied to the prime rate (as quoted in the Wall Street
Journal) or the Banks' reference rates.
The Venture Banking Group serves the needs of companies in their start-up
and development phase. Typical clients include technology companies, ranging
from multimedia, software and telecommunications providers to bio-technology
and medical device firms. The Venture Banking Group provides innovative
lending products and other financial services, tailored to the needs of start-
up and growth-stage companies. Borrowings are generally secured by minimum
cash balances, accounts receivable, intellectual property rights, inventory
and equipment of the companies. Because these companies are in the start-up or
development phase, many of them will not generate earnings for several years.
The Company often receives warrants from these companies as part of the
compensation for its services.
The Company participates in many SBA programs and, through CNB, is a
"preferred lender." Preferred lender status is granted to a lender which has
made a certain number of SBA loans and which, in the opinion of the SBA has
staff who are qualified and experienced in this area. As a preferred lender,
the Company has the authority to authorize, on behalf of the SBA, the SBA
guaranty on loans under the 7A program. This can represent a substantial
savings in serving a customer's needs. The Company utilizes both the 504
program, which is focused toward longer-term financing of buildings, and other
long-term assets, and the 7A program which is primarily used for financing of
the equipment, inventory and working capital needs of eligible businesses
generally over a three- to seven-year term. The Company's collateral position
in the SBA loans is enhanced by the SBA guaranty in the case of 7A loans, and
by lower loan-to-value ratios under the 504 program. The Company generally
sells the guaranteed portion of its SBA loans in the secondary market.
Real Estate Construction and Land Loans. The Banks' real estate construction
loan activity focuses on providing short-term (generally less than one year
maturity) loans to individuals and developers with whom the Banks have
established relationships for the construction primarily of single family
residences in the Banks' market areas. Prior to 1994, the Banks concentrated
their construction loan activity on owner-occupied custom residences. During
1994, as real estate values began to stabilize, the Banks also entered the
construction loan market for multi-unit single family residential projects.
Subsequently, the Banks continued to expand their real estate construction
portfolio with the help of the improving real estate market in Northern
California. 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
$4.0 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
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independent local appraisers and loan-to-value ratios which generally do not
exceed 65% to 75% of the appraised value of the property. The Banks monitor
projects during the construction phase through regular construction
inspections and a disbursement program tied to the percentage of completion of
each project.
The Banks also occasionally make land loans to persons who intend to
construct a single family residence on the lot generally within twelve months.
In addition, the Banks have occasionally in the past, and may to a greater
extent in the future, 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 ("owner-user properties") or derives
income from tenants ("investment properties"). The Company's loan policies
require the principal balance of the loan, generally between $400,000 and $3.0
million, to be no more than 70% of the stabilized appraised value of the
underlying real estate collateral. The loans, which are typically secured by
first deeds of trust only, generally have terms of no more than seven to ten
years and are amortized over 20 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 equity lines of credit which are often secured by
residential real estate. Installment loans tend to be fixed rate and longer-
term (one-to-five year maturity), while the equity lines of credit and home
improvement loans are generally floating rate and are reviewed for renewal on
an annual basis. The Banks also have a minimal portfolio of credit card loans,
issued as an additional service to its clients.
Deposits
The Banks obtain deposits primarily from small and medium-sized businesses,
business executives, professionals and other individuals. Each of the Banks
offers the usual and customary range of depository products provided by
commercial banks. The Banks' deposits typically are not received from a single
depositor or group of affiliated depositors, the loss of any one of which
would have a material adverse effect on the business of the Company or any of
the Banks. Rates paid on deposits vary among the categories of deposits due to
different terms, the size of the individual deposit, and rates paid by
competitors on similar deposits.
CNB has two business units that provide significant support to its deposit
base. The Greater Bay Trust Company has approximately 10% of its trust assets
under management in liquid funds that are retained in CNB money market demand
accounts. At December 31, 1998, these funds totaled $76.5 million. The Venture
Banking Group, which finances companies in their start-up and development
stage, is another source of deposits as most of the start-up phase companies
have significant liquidity that is deposited in the bank as part of the
banking relationship. At December 31, 1998, clients of the Venture Banking
Group had $106.5 million in deposits at CNB.
Trust Services
The Greater Bay Trust Company, which is a division of CNB, offers a full
range of fee-based trust services directly to its clients and administers
several types of retirement plans, including corporate pension plans, 401(k)
plans and individual retirement plans, with an emphasis on the investment
management, custodianship and trusteeship of such plans. In addition, the
Greater Bay Trust Company acts as executor, administrator, guardian and/or
trustee in the administration of the estates of individuals. Investment and
custodial services are provided for corporations, individuals and nonprofit
organizations. Total assets under management by the Greater Bay Trust Company
were $649.3 million at December 31, 1998, compared to $577.7 million at
December 31, 1997, and $418.0 million at December 31, 1996.
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Competition
The banking and financial services business 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 service 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 array of financial services than the Banks. In
order to compete with the other financial service providers, the Banks
principally rely upon local promotional activities, personal relationships
established by officers, directors and employees with its clients, and
specialized services tailored to meet its clients' needs. 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 its correspondents. The Banks
have fourteen offices, located in Contra Costa, Santa Clara, San Francisco and
San Mateo Counties. Neither the deposits nor loans of the offices of the
respective Banks exceed 1% of all financial services companies located in such
counties.
Effect of Economic Conditions, Governmental Policies and Legislation
The Company's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between
the interest rates the Banks pay on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates the Banks receive on
interest-earning assets, such as loans extended to its clients and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be
predicted.
The business of the Company is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). The Federal Reserve implements national monetary policies
(with objectives such as curbing inflation and combating recession) through
its open-market operations in U.S. Government securities by adjusting the
required level of reserves for depository institutions subject to its reserve
requirements and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the
Federal Reserve in these areas influence the growth of bank loans, investments
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on the Company
of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in the U.S.
Congress, in the state legislatures and before various bank regulatory
agencies. See "Item 1. Business--Supervision and Regulation."
Employees
At December 31, 1998, the Company had 313 full-time employees. None of the
employees are covered by a collective bargaining agreement. The Company
considers its employee relations to be satisfactory.
Supervision and Regulation
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 stockholders of the Company. Set forth below is a summary
description of certain laws which relate to the regulation
9
of Greater Bay and the Banks. The description does not purport to be complete
and is qualified in its entirety by reference to the applicable laws and
regulations.
In recent years, Congress has discussed and evaluated significant
legislative proposals and reforms affecting the financial services industry.
Such proposals include legislation to revise the Glass-Steagall Act and the
Bank Holding Company Act of 1956, as amended (the "BHCA"), and the expand
permissible activities for banks, principally to facilitate the convergence of
commercial and investment banking. Certain proposals also sought to expand
insurance activities of banks. It is unclear whether any of these proposals,
or any form of them, will be introduced in the current Congress and become
law. Consequently, it is not possible to determine what effect, if any, they
may have on Greater Bay and the Banks.
Greater Bay
Greater Bay, as a registered bank holding company, is subject to regulation
under the BHCA. Greater Bay is required to file with the Federal Reserve
quarterly and annual reports and such additional information as the Federal
Reserve may require pursuant to the BHCA. The Federal Reserve may conduct
examinations of Greater Bay and its subsidiaries.
The Federal Reserve may require that Greater Bay terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, Greater Bay must file
written notice and obtain approval from the Federal Reserve prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services. Further, Greater Bay is
required by the Federal Reserve to maintain certain levels of capital. See
"Capital Standards" herein.
Greater Bay is required to obtain the prior approval of the Federal Reserve
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve is also required for
the merger or consolidation of Greater Bay and another bank holding company.
Greater Bay is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, Greater Bay, subject to the
prior approval of the Federal Reserve, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve's policy that in serving as a source of
strength to its subsidiary banks, a bank holding company should stand ready to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve to be an unsafe and
unsound banking practice or a violation of the Federal Reserve's regulations
or both.
10
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.
The Company's securities are registered with the Securities and Exchange
Commission under the Exchange Act. As such, the Company is subject to the
information, proxy solicitation, insider trading, and other requirements and
restrictions of the Exchange Act.
The Banks
CNB, as a national banking association, is subject to primary supervision,
examination and regulation by the Office of the Comptroller of Currency (the
"Comptroller"). MPB, PBC and Golden Gate as California state chartered banks
and members of the Federal Reserve System, are subject to primary supervision,
periodic examination and regulation by the Commissioner of the Department of
Financial Institutions ("Commissioner") and the Federal Reserve. If as a
result of an examination of a bank, the bank regulatory agencies 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 the
bank 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 a bank's deposit insurance, which
would result in a revocation of the bank's charter. None of the Banks has been
subject of any such actions by their respective regulatory agencies.
The Federal Deposit Insurance Corporation ("FDIC") insures the Banks'
deposits in the manner and to the extent provided by law. For this protection,
the Banks pay a semiannual statutory assessment. See "Premium for Deposit
Insurance" herein.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Banks. State and
federal statutes and regulations relate to many aspects of the Banks'
operations, including levels of capital, reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
Dividends and Other Transfers of Funds
The Company is a legal entity separate and distinct from the Banks. The
Banks are subject to various statutory and regulatory restrictions on their
abilities to pay dividends to the Company. Under such restrictions, the amount
available for payment of dividends to the Company by the Banks totaled $24.6
million at December 31, 1998. In addition, the California Department of
Financial Institutions and the Federal Reserve Board 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 their respective opinions, 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 bank regulatory agencies could assert that the payment of dividends or
other payments might, under some circumstances, be such an unsafe or unsound
practice. Further, the bank regulatory agencies 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. See "Prompt
Corrective Action and Other Enforcement Mechanisms" herein and "Capital
Standards" herein for a discussion of these additional restrictions on capital
distributions.
11
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 or other
acceptable collateral of designated amounts. Further, such secured loans and
investments by the Banks to or in Greater Bay or to or in any other affiliate
is limited to 10% of the respective bank's capital stock and surplus (as
defined by federal regulations) and such secured loans and investments are
limited, in the aggregate, to 20% of the respective banks' capital stock 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" herein.
Capital Standards
The Federal Reserve, the Comptroller and the FDIC 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 high credit risk, such as commercial loans.
The federal banking agencies 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 risked-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%. For all banking organizations not rated in
the highest category, the minimum leverage ratio must be at least 100 to 200
basis points above the 3% minimum, or 4% to 5%. 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.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take prompt corrective
action to resolve the problems of insured depository institutions, including
but not limited to those 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 the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. At December 31, 1998, each
of the Banks, and the Company as a whole exceeded the required ratios for
classification as "well capitalized".
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. See "Potential Enforcement Action" herein.
12
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: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) 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: (i) conduct periodic asset quality reviews to identify problem assets,
(ii) estimate the inherent losses in problem assets and establish reserves
that are sufficient to absorb estimated losses, (iii) compare problem asset
totals to capital, (iv) take appropriate corrective action to resolve problem
assets, (v) consider the size and potential risks of material asset
concentrations, and (vi) 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
The Banks' deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operation, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary
regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1998, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1,
1997, the Bank began paying, in addition to its normal deposit insurance
premium as a member of the BIF, an amount equal to approximately 1.3 basis
points per $100 of insured deposits toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery
of the savings and loan industry. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, pay, in addition to their normal deposit insurance
premium, approximately 6.4 basis points. Under the Paperwork Reduction Act,
the FDIC is not permitted to establish SAIF assessment rates that are lower
than comparable BIF assessment rates. Beginning no later than January 1, 2000,
the rate paid to retire the Fico Bonds will be equal for members of the BIF
and the SAIF. The Paperwork Reduction Act also provided for the merging of the
BIF and the SAIF by January 1, 1999 provided there were no financial
institutions still chartered as savings associations at that time. However, as
of January 1, 1999, there were still financial institutions chartered as
savings associations. Should the insurance funds be merged before January 1,
2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
Interstate Banking and Branching
The BHCA currently permits bank holding companies from any state to acquire
banks and the bank holding companies located in any other state, subject to
certain conditions, including certain nationwide - and state-imposed
concentration limits. The Company has the ability, subject to certain
restrictions, to acquire by acquisition or merger branches outside its 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 ("CRA") activities. The CRA generally requires the federal
13
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. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a performance-based
evaluation system which bases CRA 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 CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to
improve" or "substantial noncompliance." Based on an examination conducted as
of March 1998, MPB was rated outstanding. Based on examinations conducted as
of March 1996, September 1995 and June 1995, CNB, PBC and Golden Gate were
rated satisfactory.
Year 2000 Compliance
The Federal Financial Institutions Examination Council issued an interagency
statement to the chief executive officers of all federally supervised
financial institutions regarding year 2000 project management awareness. It is
expected that unless financial institutions address the technology issues
relating to the coming of the year 2000, there will be major disruptions in
the operations of financial institutions. The statement provides guidance to
financial institutions, providers of data services, and all examining
personnel of the federal banking agencies regarding the year 2000 problem. The
federal banking agencies intend to conduct year 2000 compliance examinations,
and the failure to implement a year 2000 program may be seen by the federal
banking agencies as an unsafe and unsound banking practice. If a federal
banking agency determines that the Bank is operating in an unsafe and unsound
manner, the Bank may be required to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action being taken, which may include a cease and desist order and
fines.
Factors That May Affect Future Results of Operations
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Ability of Greater Bay to Execute its Business Strategy
The financial performance and profitability of the Company will depend on
its ability to execute its business strategy and manage its recent and
possible future growth. Although management believes that it has substantially
integrated the business and operations of the recently acquired Banks and PBF,
there can be no assurance that unforeseen issues relating to the assimilation
of these Banks and PBF will not adversely affect the Company. In addition, any
future acquisitions, including BAB, or continued growth may present operating
and other problems that could have an adverse effect on the Company's
business, financial condition and results of operations. The Company's
financial performance will also depend on its ability to maintain profitable
operations through implementation of its Super Community Banking Philosophy.
Accordingly, there can be no assurance that the Company will be able to
continue the growth or maintain the level of profitability it has recently
experienced.
Interest Rates
The Company's 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 the Company's current volume and mix of interest-bearing
liabilities and interest-earning assets, the Company's 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 the
Company believes its current level of interest rate sensitivity is reasonable,
significant fluctuations in interest rates may have an adverse effect on the
Company's business, financial condition and results of operations.
14
Economic Conditions and Geographic Concentration
The Company's operations are located in Northern California and concentrated
primarily in Contra Costa San Francisco, Santa Clara and San Mateo Counties,
which includes the area known as the "Silicon Valley." As a result of the
geographic concentration, the Company's results depend largely upon economic
conditions in these areas. A deterioration in economic conditions in the
Company's market areas, particularly in the technology and real estate
industries on which these areas depend, could have a material adverse impact
on the quality of the Company's loan portfolio, the demand for its products
and services, and its results of operations.
Government Regulation and Monetary Policy
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 the Company's stockholders. Significant new laws
or changes in existing laws or repeal of existing laws may cause the Company's
results to differ materially. Further, federal monetary policy, particularly
as implemented through the Federal Reserve System, significantly affects
credit conditions for the Company.
Competition
The financial services business in the Company's market areas are highly
competitive. It is becoming increasingly competitive due to changes in
regulation, technological advances, and the accelerating pace of consolidation
among financial services providers. The results of the Company may differ in
future periods depending upon the nature or level of competition.
Credit Quality
A significant source of risk arises from the possibility that losses will be
sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. The Company has 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 the
Company's credit portfolio. These policies and procedures, however, may not
prevent unexpected losses that could materially adversely affect the Company's
results of operations.
Year 2000 Compliance
Most of the Company's operations are dependent on the efficient functioning
of the Company's computer systems and software. Computer system failures or
disruption could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many computer programs were designed and developed utilizing only two digits
in date fields, thereby creating the inability to recognize the year 2000 or
years thereafter. Beginning in the year 2000, these date codes will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. This year 2000 issues creates risks for the Company from unforeseen or
unanticipated problems in its internal computer systems as well as from
computer systems of the Federal Reserve Bank, correspondent banks, customers
and suppliers. Failures of these systems or untimely corrections could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and
services. The Company's year 2000 plan includes evaluating existing hardware,
software, ATM's, vaults, alarm systems, communication systems and other
electrical devices, testing critical application programs and systems, both
internally and externally, establishing a contingency plan and upgrading
hardware and software as necessary. The initial phase of the project was to
assess and identify all internal business processes requiring modification and
to develop comprehensive renovation plans as needed. This phase was largely
15
completed in mid-1998. The second phase was to execute those renovation plans
and begin testing systems by simulating year 2000 data conditions. This phase
was largely completed in 1998. Testing and implementation is planned to be
completed during the first half of 1999. Failure to be year 2000 compliant or
incurrence of significant costs to render the Company year 2000 compliant
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is evaluating its major customers and suppliers to determine if
they are year 2000 compliant. Failure of any material customer or supplier to
be year 2000 compliant could have a material adverse effect on the Company.
Other Risks
From time to time, the Company details other risks with respect to its
business and financial results in its filings with the Securities and Exchange
Commission.
ITEM 2. PROPERTIES.
The Company occupies its administrative offices under a lease which,
including options to renew, expires in 2007. PBC owns its main office located
in Millbrae, California. The Company leases thirteen additional offices
throughout the San Francisco Bay Area under operating leases. Those leases
expire under various dates, including options to renew, through 2017.
The Company believes its present facilities are adequate for its present
needs and anticipated future growth. The Company believes that, if necessary,
it could secure suitable alternative facilities on similar terms without
adversely affecting operations.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in certain legal proceedings
arising in the normal course of its business. Management believes that the
outcome of these matters will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no submission of matters to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is traded on the Nasdaq National Market ("Nasdaq") under
the symbol "GBBK". The quotations shown reflect the high and low sales prices
for the Company's common stock as reported by Nasdaq. The following
information is restated to reflect 2-1 stock split effective as of April 30,
1998.
Cash dividends
For the period indicated High Low declared (1)
------------------------ ------ ------ --------------
1998
Fourth Quarter................................ $35.00 $24.50 $0.095
Third Quarter................................. 39.00 23.38 0.095
Second Quarter................................ 36.00 28.88 0.095
First Quarter................................. 31.38 24.13 0.095
1997
Fourth Quarter................................ $26.75 $21.00 $0.075
Third Quarter................................. 22.25 15.94 0.075
Second Quarter................................ 15.75 12.44 0.075
First Quarter................................. 13.82 11.88 0.075
- --------
(1) 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. In 1998, PBFC made a distribution of $1.2
million to its shareholders. In 1997, PBC declared an annual dividend of
$3.20 share, PRB declared and paid a dividend of $100,000 to its sole
shareholder and PBFC made a distribution of $208,000 to its shareholders.
On a consolidated basis, Greater Bay has declared dividends of $0.54 and
$0.48 in 1998 and 1997, respectively.
The Company estimates there were approximately 2,500 shareholders at
December 31, 1998.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Information regarding Selected Consolidated Financial Data appears on page
A-1 under the caption "Financial Highlights" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations appears on pages A-2 through A-23 under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information regarding Quantitative and Qualitative Disclosures About Market
Risk appears on page A-18 through A-19 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 on
pages A-24 through A-59 under the caption "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of
Comprehensive Income", "Consolidated Statements of 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.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company intends to file a definitive proxy statement for the 1999 Annual
Meeting of Shareholders (the "Proxy Statement") with the Securities and
Exchange Commission within 120 days of December 31, 1998. Information
regarding directors of Greater Bay will appear under the caption "DISCUSSION
OF THE PROPOSALS RECOMMENDED BY THE BOARD--Proposal 1: Elect Four 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.
18
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........................................... A-24
Consolidated Statements of Operations................................. A-25
Consolidated Statements of Comprehensive Income....................... A-26
Consolidated Statements of Changes in Shareholders' Equity ........... A-27
Consolidated Statements of Cash Flows................................. A-28
Notes to the Consolidated Financial Statements........................ A-29
Report of Independent Accountants..................................... A-60
2. Financial Statement Schedules
All financial statement schedules are omitted because of the absence of
the conditions under which they are required to be provided or because
the required information is included in the financial statements listed
above and/or related notes.
3. Exhibits
See Item 14(c) below.
(b) Reports on Form 8-K
During the fourth quarter of 1998 the Company filed two reports on Form
8-K as described below.
On December 8, 1998, the Company filed a report on Form 8-K reported
under Item 5. Other Event and containing three recent press
releases. Those press releases announced 1.) the adoption of a
shareholder rights plan by the Company, 2.) consummation of its
offer to exchange its $30 million aggregate principle amount of
Floating Rate Capital Securities, Series A for a like amount of its
registered Floating Rate Capital Securities, Series B and 3.) the
hiring of Fred Bailard as Senior Vice President of Cash Management
Services.
On October 19, 1998, the Company filed a report on Form 8-K reported
under Item 5. Other Event and containing two recent press releases.
Those press releases announced 1.) financial results of the Company
for the third quarter of 1998 and 2.) the hiring of Linda M. Iannone
as Senior Vice President and General Counsel of the Company.
(c) Exhibits Required by Item 601 of Regulation S-K
Exhibit
No. Exhibit
------- -------
2.1 Agreement and Plan of Reorganization by and between Greater Bay
Bancorp and Bay Area Bancshares dated January 26, 1999. (The
schedules to this agreement are not being filed herewith. Greater
Bay Bancorp agrees to furnish supplemental copies of any omitted
schedules to the SEC upon request).
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended.
3.2 Bylaws of Greater Bay Bancorp, as amended.
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.(1)
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee.(2)
19
Exhibit
No. Exhibit
------- -------
4.3 Officers' Certificate and Company Order, dated March 31, 1997.(2)
4.4 Certificate of Trust of GBB Capital I.(3)
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.(3)
4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of March 31,
1997.(2)
4.6.2 Successor Administrative Trustee and First Amendment to Amended
and Restated Trust Agreement.
4.7 Trust Preferred Certificate of GBB Capital I.(2)
4.8 Common Securities Certificate of GBB Capital I.(2)
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington
Trust Company, dated as of March 31, 1997.(2)
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997.(2)
4.11 Form of Subordinated Debentures.(4)
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp
dated as of November 22, 1996.(3)
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp.(3)
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.(2)
4.15 Indenture between Greater Bay Bancorp and Wilmington Trust
Company, as Debenture Trustee, dated as of August 12, 1998.(5)
4.16 Form of Exchange Junior Subordinated Debentures (filed as Exhibit
A to Exhibit 4.15 hereto).
4.17 Certificate of Trust of GBB Capital II, dated as of May 18,
1998.(5)
4.18 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)
4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A-
1 to Exhibit 4.18 hereto).
4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp,
dated as of August 12, 1998.(5)
4.21 Series B Capital Securities Guarantee Agreement of Greater Bay
Bancorp and Wilmington Trust Company dated as of November 27,
1998.
4.22 Liquidated Damages Agreement among Greater Bay Bancorp, GBB
Capital II, and Sandler O'Neill and Partners, L.P., dated as of
August 7, 1998.(5)
4.23 Registration Rights Agreement between Greater Bay Bancorp and The
Leo K.W. Lum PRB Revocable Trust dated May 8, 1998.(6)
10.1 Employment Agreement with David L. Kalkbrenner, dated March 3,
1992.(8), (9)
10.1.1 Amendment No. 1 to Employment Agreement with David L. Kalkbrenner,
dated March 27, 1998.(7), (8)
10.2 Employment, Severance and Retirement Benefits Agreement with
Steven C. Smith dated July 31, 1995.(3), (8)
10.2.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with Steven C. Smith, dated March 27, 1998.(7), (8)
10.3 Employment, Severance and Retirement Benefits Agreement with David
R. Hood dated July 31, 1995.(3), (8)
10.3.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with David R. Hood, dated March 27, 1998.(7), (8)
20
Exhibit
No. Exhibit
------- -------
10.4 Greater Bay Bancorp 1996 Stock Option Plan, as amended.(8)
10.5 Greater Bay Bancorp 401(k) Profit Sharing Plan.(7), (8)
10.6.1 Greater Bay Bancorp Employee Stock Purchase Plan.(8), (10)
10.6.2 Amendment to Greater Bay Bancorp Employee Stock Purchase Plan.(7),
(8)
10.7 Greater Bay Bancorp Change of Control Pay Plan I.(7), (8)
10.8 Greater Bay Bancorp Change of Control Pay Plan II.(7), (8)
10.9 Greater Bay Bancorp Termination and Layoff Plan I.(7), (8)
10.10 Greater Bay Bancorp Termination and Layoff Plan II.(7), (8)
10.11.1 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan.(7),
(8)
10.11.2 Amendment to Greater Bay Bancorp 1997 Elective Deferred
Compensation Plan.(8)
10.12 Form of Indemnification Agreement between Greater Bay Bancorp and
with directors and certain executive officers.(3)
11.1 Statements re Computation of Earnings per Share.
12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
--------
(1) Incorporated by reference from Greater Bay Bancorp's Form 8-A12G
filed with the SEC on November 25, 1998.
(2) Incorporated by reference from Greater Bay Bancorp's Current Report
on Form 8-K (File No. 000-25034) dated June 5, 1997.
(3) Incorporated by reference from Greater Bay's Registration Statement
on Form S-1 (File No. 333-22783) filed with the SEC on March 5,
1997.
(4) Incorporated herein by reference from Exhibit 1 of Cupertino
National Bancorp's Form 8-K (File No. 0-18015), filed with the SEC
on October 25, 1995.
(5) Incorporated by reference from Greater Bay's Current Report on Form
8-K (File No. 000-25034) filed with the SEC on August 28, 1998.
(6) Incorporated by reference from Greater Bay Bancorp's Current Report
on Form 8-K filed with the SEC on May 20, 1998.
(7) Incorporated by reference from Greater Bay Bancorp's Annual Report
on Form 10-K filed with the SEC on March 31, 1998.
(8) Represents executive compensation plans and arrangements of Greater
Bay Bancorp.
(9) Incorporated herein by reference from Exhibit 10.15 to Mid-
Peninsula Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 0-25034), filed with the SEC on March
30, 1995.
(10) Incorporated herein by reference from Greater Bay Bancorp's Proxy
Statement for Annual Meeting of Shareholders (File No. 000-25034),
filed with the SEC on May 13, 1997.
(d) Additional Financial Statements
Not applicable.
21
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 17th day
of February, 1999.
Greater Bay Bancorp
/s/ David L. Kalkbrenner
By: _________________________________
David L. Kalkbrenner
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 17, 1999
______________________________________ Officer and Director
David L. Kalkbrenner (Principal Executive
Officer)
/s/ Steven C. Smith Executive Vice President, February 17, 1999
______________________________________ Chief Operating Officer
Steven C. Smith and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
/s/ George R. Corey Director February 17, 1999
______________________________________
George R. Corey
/s/ John M. Gatto Director February 17, 1999
______________________________________
John M. Gatto
/s/ James E. Jackson Director February 17, 1999
______________________________________
James E. Jackson
/s/ Rex D. Lindsay Director February 17, 1999
______________________________________
Rex D. Lindsay
/s/ Leo K. W. Lum Director February 17, 1999
______________________________________
Leo K. W. Lum
/s/ George M. Marcus Director February 17, 1999
______________________________________
George M. Marcus
22
Signature Title Date
--------- ----- ----
/s/ Duncan L. Matteson Director February 17, 1999
______________________________________
Duncan L. Matteson
/s/ Glen McLaughlin Director February 17, 1999
______________________________________
Glen McLaughlin
/s/ Rebecca Q. Morgan Director February 17, 1999
______________________________________
Rebecca Q. Morgan
/s/ Dick J. Randall Director February 17, 1999
______________________________________
Dick J. Randall
/s/ Donald H. Seiler Director February 17, 1999
______________________________________
Donald H. Seiler
/s/ Warren R. Thoits Director February 17, 1999
______________________________________
Warren R. Thoits
23
SELECTED FINANCIAL INFORMATION
The following table represents the selected financial information at and for
the five years ended December 31, 1998:
Years Ended December 31,
----------------------------------------------------------
1998 1997* 1996* 1995* 1994*
---------- ---------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Statement of Operations
Data
Interest income......... $ 112,920 $ 88,527 $ 62,883 $ 53,060 $ 39,946
Interest expense........ 47,472 34,059 22,379 18,961 11,804
---------- ---------- --------- --------- ---------
Net interest income.... 65,448 54,468 40,504 34,099 28,142
Provision for loan
losses................. 6,035 6,786 2,594 1,219 1,985
---------- ---------- --------- --------- ---------
Net interest income
after provision for
loan losses........... 59,413 47,682 37,910 32,880 26,157
Other income............ 6,310 5,379 4,623 3,043 4,120
Nonrecurring--warrant
income................. 945 1,162 -- -- --
---------- ---------- --------- --------- ---------
Total other income..... 7,255 6,541 4,623 3,043 4,120
Operating expenses...... 38,711 34,083 29,416 25,962 22,724
Other expenses--
nonrecurring........... 1,341 (1,287) -- 2,135 --
---------- ---------- --------- --------- ---------
Total operating
expenses.............. 40,052 32,796 29,416 28,097 22,724
---------- ---------- --------- --------- ---------
Income before income tax
expense & merger and
other related
nonrecurring costs..... 26,616 21,427 13,117 7,826 7,553
Income tax expense...... 8,364 7,526 4,778 2,870 2,794
---------- ---------- --------- --------- ---------
Income before merger and
other related
nonrecurring costs..... 18,252 13,901 8,339 4,956 4,759
Merger and other related
nonrecurring costs, net
of tax................. 1,674 2,282 1,991 -- 608
---------- ---------- --------- --------- ---------
Net income............. $ 16,578 $ 11,619 $ 6,348 $ 4,956 $ 4,151
========== ========== ========= ========= =========
Per Share Data (1)
Income per share (before
merger and other
related nonrecurring
costs)
Basic.................. $ 1.92 $ 1.51 $ 0.94 $ 0.59 $ 0.61
Diluted................ 1.78 1.41 0.88 0.56 0.56
Net income per share
Basic.................. $ 1.75 $ 1.26 $ 0.72 $ 0.59 $ 0.53
Diluted................ 1.62 1.17 0.67 0.56 0.49
Cash dividends per share
(2).................... $ 0.38 $ 0.30 $ 0.22 $ 0.20 $ 0.11
Book value per common
share.................. $ 9.64 $ 8.23 $ 7.41 $ 7.02 $ 6.55
Shares outstanding at
year end............... 9,612,142 9,304,930 9,021,738 8,613,440 8,053,218
Average common shares
outstanding............ 9,485,000 9,196,000 8,856,000 8,334,000 7,854,000
Average common and
common equivalent
shares outstanding..... 10,231,000 9,892,000 9,443,000 8,813,000 8,485,000
Performance Ratios
Return on average assets
(before merger and
other related
nonrecurring costs)
(3).................... 1.28 % 1.33 % 1.13% 0.82 % 1.09 %
Return on average common
shareholders' equity
(before merger and
other related
nonrecurring costs)
(3).................... 21.72 % 18.86 % 12.97% 8.70 % 11.95 %
Net interest margin
(4).................... 4.96 % 5.55 % 5.91% 6.09 % 6.98 %
Balance Sheet Data--At
Period End
Assets.................. $1,582,865 $1,217,665 $ 919,924 $ 659,373 $ 552,272
Loans, net.............. 984,487 735,233 564,175 393,378 342,098
Investment securities... 342,294 213,127 135,671 141,024 117,737
Deposits................ 1,342,492 1,071,148 821,133 584,103 475,048
Subordinated debt....... 3,000 3,000 3,000 3,000 --
Trust Preferred
Securities............. 50,000 20,000 -- -- --
Common shareholders'
equity................. 92,676 76,540 66,834 60,494 52,784
Asset Quality Ratios
Nonperforming assets to
total loans and OREO... 0.31 % 0.73 % 1.62% 2.40 % 3.45 %
Allowance for loan
losses to total loans.. 2.12 % 2.18 % 1.76% 1.67 % 1.96 %
Allowance for loan
losses to non-
performing assets...... 676.10 % 298.40 % 108.36% 69.15 % 56.56 %
Net (charge-offs)
recoveries to average
loans.................. (0.16)% (0.28)% 0.01% (0.40)% (0.40)%
Regulatory Capital
Ratios
Leverage Ratio.......... 7.81 % 8.40 % 7.78% 9.53 % 9.89 %
Tier 1 Capital.......... 9.90 % 10.72 % 9.83% 12.47 % 13.05 %
Total Capital........... 12.94 % 12.31 % 11.47% 14.31 % 14.37 %
- -------
* Restated on a historical basis to reflect the mergers between Greater Bay
Bancorp and Cuperfino National Bancorp, PBC, PRB (the parent of Golden
Gate) and PBFC, on a pooling-of-interests basis.
(1) Restated to reflect 2-for-1 stock split declared for shareholders of
record at April 30, 1998.
(2) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the completion of
their mergers with Greater Bay.
(3) Including merger and other related nonrecurring costs net of tax of $1.7
million in 1998, $2.3 million in 1997, $2.0 million in 1996 and $608,000
in 1994, ROA for 1998, 1997, 1996, 1995 and 1994 would have been 1.17%,
1.11%, 0.86%, 0.82% and 0.95%, respectively, and ROE for 1998, 1997, 1996,
1995 and 1994 would have been 19.73%, 15.76%, 9.87%, 8.70%, and 10.42%,
respectively.
(4) Net interest margin for 1998, 1997 and 1996 includes the lower spread
earned on the PBC Special Deposit (see Note 7 to the Financial Statements
for details). Excluding the PBC Special Deposit, net interest margin would
have been 5.16%, 5.78% and 6.08% for 1998, 1997 and 1996, respectively.
A-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the
"Company", on a consolidated basis) was formed as the result of the merger in
November 1996 between Cupertino National Bancorp, the former holding company
for Cupertino National Bank ("CNB"), and Mid-Peninsula Bancorp, the former
holding company for Mid-Peninsula Bank ("MPB"). In December 1997 the Company
completed a merger with Peninsula Bank of Commerce ("PBC"), whereby PBC became
the third wholly owned banking subsidiary of Greater Bay. In May 1998, the
Company completed a merger with Pacific Rim Bancorporation ("PRB"), the
holding company for Golden Gate Bank ("Golden Gate"), whereby Golden Gate
became the fourth wholly owned banking subsidiary of Greater Bay. In August
1998, the Company completed a merger with Pacific Business Funding Corporation
("PBFC"), which now operates as an operating division of CNB and conducts
business under the name Pacific Business Funding. All mergers were accounted
for as a pooling of interests. All of the financial information for the
Company for the periods prior to the mergers has been restated to reflect the
pooling of interests, as if they occurred at the beginning of the earliest
reporting period presented. CNB, MPB, PBC and Golden Gate are referred to
collectively herein as the "Banks." The financial information includes the
result of the Company's operating divisions, Greater Bay Bank Santa Clara
Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater
Bay Bank Contra Costa Banking Office, Greater Bay International Banking
Division, Greater Bay Trust Company, Pacific Business Funding and Venture
Banking Group.
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Selected Financial Information" and the Company's consolidated financial data
included elsewhere in this document. Certain statements under this caption
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
in such forward-looking statements. Factors that might cause such a difference
include but are not limited to economic conditions, competition in the
geographic and business areas in which the Company conducts its operations,
fluctuation in interest rates, credit quality and government regulation.
Results of Operations
The Company reported net income of $16.6 million in 1998, a 42.7% increase
over 1997 net income of $11.6 million. The net income in 1997 was an 83.0%
increase over 1996 income of $6.3 million. Basic net income per share was
$1.75 for 1998, as compared to $1.26 for 1997 and $0.72 for 1996. Diluted net
income per share was $1.62, $1.17 and $0.67 for 1998, 1997 and 1996,
respectively. The return on average assets and return on average shareholders'
equity were 1.17% and 19.73% in 1998, compared with 1.11% and 15.76% in 1997
and 0.86% and 9.87% in 1996, respectively.
The Company's operating results included merger and other related
nonrecurring costs of $2.7 million ($1.7 million net of tax), $3.3 million
($2.3 million net of tax) and $2.8 million ($2.0 million net of tax) in 1998,
1997 and 1996, respectively. The following table summarizes net income, net
income per share and key financial ratios before and after merger and other
related nonrecurring costs for the years presented:
Before merger and
other After merger and other
related nonrecurring related nonrecurring
costs costs
------------------------ ------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------ ------- ------- ------
(Dollars in thousands, except per share
amounts)
Net income................ $18,252 $13,901 $8,339 $16,578 $11,619 $6,348
Net income per share:
Basic................... $ 1.92 $ 1.51 $ 0.94 $ 1.75 $ 1.26 $ 0.72
Diluted................. $ 1.78 $ 1.41 $ 0.88 $ 1.62 $ 1.17 $ 0.67
Return on average assets.. 1.28% 1.33% 1.13% 1.17% 1.11% 0.86%
Return on average
shareholders' equity..... 21.72% 18.86% 12.97% 19.73% 15.76% 9.87%
A-2
The increase in 1998 net income was the result of significant growth in
loans, deposits and trust assets. This growth resulted in increases in net
interest income, trust fees, depositors' service fees and other fee income.
Operating expense increases required to service and support the Company's
growth partially offset the increase in revenues.
Net income for 1998 and 1997 included $945,000 and $1.2 million,
respectively, in warrant income resulting from the warrants received from
clients of the Banks. During 1998, the Company donated appreciated warrants to
the Greater Bay Bancorp Foundation. The contribution of the warrants triggered
recognition of warrant income of $945,000, net of related employee incentives,
and a donation expense of $1.3 million. The Company recognized a tax benefit
of $551,000 from these transactions.
The increase in net income in 1997 over 1996 was due primarily to increased
growth in interest-earning assets. Additionally, warrant income increased to
$1.2 million in 1997, compared with $92,000 in 1996. Net income in 1997 also
included approximately $1.7 million ($1.0 million net of tax) of a recovery
through insurance of a litigation settlement charge incurred in 1995. The
increases were partially offset by the growth in operating expenses. In
addition, during 1997 the Company increased its allowance for loan losses to
2.18% of total loans from 1.76% of total loans in 1996. The increase in the
allowance for loan losses as a percentage of total loans accounted for $3.7
million of the increased provision for loan losses in 1997.
Net Interest Income
Net interest income increased 20.2% to $65.4 million in 1998 from $54.5
million in 1997. This increase was primarily due to the $336.5 million, or
34.3%, increase in average interest-earning assets which was partially offset
by a 56 basis point decrease in the Company's net yield on interest earning
assets. Net interest income increased 34.5% in 1997 from $40.5 million in
1996. This increase was primarily due to the $296.7 million, or 43.3%,
increase in average interest-earning assets, which was partially offset by the
36 basis point decrease in the Company's net yield on interest earning assets.
The Company's net yield on interest earning assets was reduced by the
Special Deposit (discussed in Note 7 of the Notes to the Consolidated
Financial Statements). The average deposit balances related to the Special
Deposit during 1998, 1997 and 1996 were $88.9 million, $93.4 million and $91.3
million, respectively, on which the Company earned a spread of 2.25%.
Excluding the Special Deposit, the 1998, 1997 and 1996 net yield on interest
earning assets would have been 5.16%, 5.78% and 6.08%, respectively.
A-3
The following table presents, for the years indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and
rates paid on average interest-bearing liabilities. Average balances are
average daily balances.
Years Ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
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.......... $ 85,329 $ 4,598 5.39% $ 73,223 $ 3,911 5.34% $ 64,194 $ 3,637 5.67%
Other short term
securities............. 96,765 5,454 5.64% 97,586 5,287 5.42% 12,569 691 5.50%
Investment securities:
Taxable................ 281,395 17,114 6.08% 128,856 8,199 6.36% 121,809 7,394 6.07%
Tax-exempt (3)......... 42,185 2,104 4.99% 19,064 1,095 5.74% 19,428 990 5.10%
Loans (2)............... 812,665 83,650 10.29% 663,107 70,035 10.56% 467,159 50,171 10.74%
---------- -------- ---------- ------- -------- -------
Total interest-earning
assets................ 1,318,339 112,920 8.57% 981,836 88,527 9.02% 685,159 62,883 9.18%
Noninterest-earning
assets................. 102,230 63,303 55,003
---------- -------- ---------- ------- -------- -------
Total assets........... $1,420,569 112,920 $1,045,139 88,527 $740,162 62,883
========== -------- ========== ------- ======== -------
Interest-Bearing
Liabilities:
Deposits:
MMDA, NOW and Savings.. $ 761,332 27,634 3.63% $ 575,603 20,653 3.59% $390,996 12,886 3.30%
Time deposits, over
$100,000.............. 180,626 9,300 5.15% 129,991 6,686 5.14% 94,899 4,689 4.94%
Other time deposits.... 48,217 2,464 5.11% 58,342 3,301 5.66% 58,387 3,645 6.24%
---------- -------- ---------- ------- -------- -------
Total interest-bearing
deposits.............. 990,175 39,398 3.98% 763,936 30,640 4.01% 544,282 21,220 3.90%
Other borrowings........ 74,877 4,879 6.52% 16,931 1,611 9.51% 10,854 814 7.50%
Subordinated debt....... 3,000 345 11.50% 3,000 345 11.50% 3,000 345 11.50%
Trust Preferred
Securities............. 31,671 2,850 9.00% 15,000 1,463 9.75% -- -- 0.00%
---------- -------- ---------- ------- -------- -------
Total interest-bearing
liabilities........... 1,099,723 47,472 4.32% 798,867 34,059 4.26% 558,136 22,379 4.01%
---------- -------- ---------- ------- -------- -------
Noninterest-bearing
deposits............... 220,832 161,684 112,321
Other noninterest-
bearing liabilities.... 15,987 10,865 5,412
Shareholders' equity.... 84,027 73,723 64,293
---------- ---------- --------
Total liabilities and
shareholders' equity.. $1,420,569 $ 47,472 $1,045,139 $34,059 $740,162 $22,379
========== -------- ========== ------- ======== -------
Net interest income..... $ 65,448 $54,468 $40,504
======== ======= =======
Interest rate spread.... 4.25% 4.75% 5.17%
Contribution of interest
free funds............. 0.72% 0.79% 0.74%
Net yield on interest-
earnings assets (4).... 4.96% 5.55% 5.91%
- --------
(1) Nonaccrual loans are excluded from the average balance and only collected
interest on accrual loans is included in the interest column.
(2) Loan fees totaling $3.2 million, $3.4 million and $2.5 million are
included in loan interest income for 1998, 1997 and 1996, respectively.
(3) Tax equivalent yields earned on the tax exempt securities are 7.19%, 8.34%
and 7.34% for the years ended December 31, 1998, 1997 and 1996,
respectively, using the federal statutory rate of 34%.
(4) Net yield on interest-earning assets during the period equals (a) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (b) average
interest-earning assets for the period.
A-4
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities.
The volume of interest-earning asset dollars in loans and investments,
compared to the volume of interest-bearing liabilities represented by deposits
and borrowings, combined with the spread, produces the changes in the net
interest income between periods. The table below sets forth, for the years
indicated, a summary of the changes in average asset and liability balances
(volume) and changes in average interest rates (rate).
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared with December 31, 1997 Compared with December 31, 1996
favorable (unfavorable) favorable (unfavorable)
---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
---------------------- ---------- ---------------------- ----------
(Dollars in thousands) (1)
Interest-earning assets:
Fed funds sold.......... $ 638 $ 49 $ 687 $ 483 $ (209) $ 274
Other short term
securities............. (47) 214 167 4,607 (11) 4,596
Investment securities:
Taxable................ 9,091 (176) 8,915 448 357 805
Tax-exempt............. 1,136 (127) 1,009 (21) 126 105
Loans................... 15,071 (1,456) 13,615 20,701 (837) 19,864
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning
assets............... 25,889 (1,496) 24,393 26,218 (574) 25,644
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing
liabilities:
Deposits:
MMDA, NOW and Savings.. 6,322 659 6,981 6,562 1,205 7,767
Time deposits, over
$100,000.............. 2,445 169 2,614 1,796 201 1,997
Other time deposits.... (556) (281) (837) (4) (340) (344)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
deposits............. 8,211 547 8,758 8,354 1,066 9,420
Other borrowings........ 3,348 (80) 3,268 527 270 797
Trust Preferred
Securities............. 1,370 17 1,387 967 496 1,463
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities.......... 12,929 484 13,413 9,848 1,832 11,680
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in
net interest income.. $ 12,960 $ (1,980) $ 10,980 $ 16,370 $ (2,406) $ 13,964
========== ========== ========== ========== ========== ==========
- --------
(1) The change in interest income and expense not attributable to specific
volume and rate changes has been allocated proportionately between the
volume and rate changes.
Interest income in 1998 increased 27.6% to $112.9 million from $88.5 million
in 1997. This was primarily due to the significant increase in loans, the
Company's highest yielding interest-earning asset, and investment securities.
Loan volume increases were the result of the continuing economic improvement
in the Company's market areas, as well as the addition of experienced
relationship managers and significant business development efforts by the
Company's relationship managers. The increase was partially offset by a
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $336.5 million, or 34.3%, to $1.3 billion in
1998, compared to $981.8 million in 1997. Of this total increase, average
loans increased $149.6 million, or 22.6%, to $812.7 million, or 61.6% of
average interest-earning assets, in 1998 from $663.1 million, or 67.5% of
average interest-earning assets in 1997. Investment securities, Federal funds
sold and other short-term securities, increased 58.7% to $505.7 million, or
38.4% of average interest-earning assets in 1998, from $318.7 million, or
32.5% of average interest-earning assets in 1997.
The average yield on interest-earning assets declined 45 basis points to
8.57% in 1998 from 9.02% in 1997 primarily due to a decline in the average
yield on loans which was caused by increased competition for quality borrowers
in the Company's market area and the shift in the mix between lower yielding
investments and higher yielding loans. Loans represented approximately 61.6%
of total interest-earning assets in 1998 compared to 67.5%
A-5
in 1997. If loans would have remained at 67.5% of total interest earning
assets in 1998, the yield on interest-earning assets would have been 8.83% and
the interest rate spread would have been 4.51%. The average yield on loans
declined 27 basis points to 10.29% in 1998 from 10.56% in 1997 primarily due
to declines in market interest rates.
Interest expense in 1998 increased 39.4% to $47.5 million from $34.1 million
in 1997. This increase was due to greater volumes of interest-bearing
liabilities coupled with slightly higher interest rates paid on interest-
bearing liabilities. Average interest-bearing liabilities increased 37.7% to
$1.1 billion in 1998 from $798.9 million in 1997 due primarily to the efforts
of the Banks' relationship managers in generating core deposits from their
client relationships and the deposits derived from the activities of the
Greater Bay Trust Company and the Venture Banking Group.
During 1998, average noninterest-bearing deposits increased to $220.8
million from $161.7 million in 1997. Due to that increase, noninterest-bearing
deposits comprised 18.2% of total deposits at year-end 1998, compared 17.5% at
year-end 1997.
As a result of the foregoing, the Company's interest rate spread declined to
4.25% in 1998 from 4.75% in 1997, and the net yield on interest-earning assets
declined in 1998 to 4.96% from 5.55% in 1997.
Interest income increased 40.8% to $88.5 million in 1997 from $62.9 million
in 1996, as a result of the increase in average interest-earning assets offset
by a decline in the yields earned. Average interest-earning assets increased
43.3% to $981.8 million in 1997 from $685.2 million in 1996 principally as a
result of increase in loans. The yield on the higher volume of average
interest-earning assets declined 16 basis points to 9.02% in 1997 from 9.18%
in 1996, primarily as a result of increased competition for loans.
Interest expense in 1997 increased 52.2% to $34.1 million from $22.4 million
in 1996 primarily as a result of the increase in volume of interest-bearing
liabilities in addition an increase in rates paid on interest-bearing
liabilities. As a result of the utilization of higher cost long term
borrowings which provide additional capital to the Company, the average rate
paid on average interest-bearing liabilities increased 25 basis points to
4.26% in 1997 from 4.01% in 1996. Corresponding to the growth in average
interest-earning assets, average interest-bearing liabilities increased 43.1%
to $798.9 million in 1997 from $558.1 million in 1996.
As a result of the foregoing, the Company's interest rate spread declined to
4.75% in 1997 from 5.17% in 1996 and the net yield on interest-earning assets
declined to 5.55% in 1997 from 5.91% in 1996.
Certain client service expenses were incurred by the Company with respect to
its noninterest-bearing liabilities. These expenses include messenger
services, check supplies and other related items and are included in operating
expenses. Had they been included in interest expense, the impact of these
expenses on the Company's net yield on interest-earning assets would have been
as follows for each of the years presented.
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Average noninterest bearing demand deposits..... $220,832 $161,684 $112,321
Client service expenses......................... 544 444 462
Client service expenses, annualized............. 0.25% 0.27% 0.41%
Impact on net yield on interest-earning assets:
Net yield on interest-earning assets............ 4.96% 5.55% 5.91%
Impact of client service expense................ 0.53% 0.30% 0.10%
-------- -------- --------
Adjusted net yield on interest-earning assets
(1)............................................ 5.49% 5.85% 6.01%
======== ======== ========
- --------
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield of spread
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to manage its client service expenses.
A-6
Provision for Loan Losses
The provision for loan losses creates an allowance for future loan losses.
The loan loss provision for each year is dependent on many factors, including
loan growth, net charge-offs, changes in the composition of the loan
portfolio, delinquencies, management's assessment of the quality of the loan
portfolio, the value of the underlying collateral on problem loans and the
general economic conditions in the Company's market area. The Company performs
a monthly assessment of the risk inherent in its loan portfolio, as well as a
detailed review of each asset determined to have identified weaknesses. Based
on this analysis, which includes reviewing historical loss trends, current
economic conditions, industry concentrations and specific reviews of assets
classified with identified weaknesses, the Company makes a provision for loan
losses. Specific allocations are made for loans where the probability of a
loss can be defined and reasonably determined. The balance of the provision
for loan losses is based on historical data, delinquency trends, economic
conditions in the Company's market area and industry averages. Annual
fluctuations in the provision for loan losses result from management's
assessment of the adequacy of the allowance for loan losses, and ultimate loan
losses may vary from current estimates.
The provision for loan losses in 1998 was $6.0 million, compared to $6.8
million in 1997 and $2.6 million in 1996. In addition, in connection with the
mergers, the Company made an additional provision for loan losses of $183,000,
$1.4 million and $800,000 in 1998, 1997 and 1996, respectively, to conform to
the Companys' reserve allocation methodologies. Although loans outstanding
have increased substantially, nonperforming loans, comprised of nonaccrual
loans, restructured loans, and accruing loans past due 90 days or more,
declined to $2.2 million, or 0.22% of loans outstanding, at December 31, 1998,
from $4.2 million, or 0.56% of loans outstanding, at December 31, 1997 and
$7.7 million, or 1.34% of loans outstanding, at December 31, 1996.
For further information on nonperforming and classified loans and the
allowance for loan losses, see--"Nonperforming and Classified Assets" herein.
Other Income
Total other income increased to $7.3 million in 1998, compared to $6.6
million in 1997 and $4.6 million in 1996. The following table sets forth
information by category of other income for the years indicated.
Years Ended December 31,
---------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Trust fees......................................... $ 2,473 $ 2,049 $ 1,426
Service charges and other fees..................... 1,487 1,620 1,429
Gain on sale of SBA loans.......................... 1,037 883 537
Gain (loss) on investments, net.................... 374 (5) (255)
Other income....................................... 939 832 1,394
-------- -------- --------
Total, recurring................................. 6,310 5,379 4,531
Warrant income..................................... 945 1,162 92
-------- -------- --------
Total............................................ $ 7,255 $ 6,541 $ 4,623
======== ======== ========
The increase in other income in 1998 was primarily the result of a $424,000
increase in trust fees, and a $154,000 increase in the gain on sale of SBA
loans. The increase in trust fees was due to significant growth in assets
under management by Greater Bay Trust Company. Trust assets increased to
$649.3 million at December 31, 1998, compared to $577.7 million at December
31, 1997. The increase in the gain on sale of SBA loans was due to an increase
in the origination and subsequent sale of SBA loans.
Other income in 1998 included warrant income of $945,000, net of related
employee incentives. The Company occasionally receives warrants to acquire
common stock from companies that are in the start-up or development phase. The
timing and amount of income derived form the exercise and sale of client
warrants typically depend upon factors beyond the control of the Company, and
cannot be predicted with any degree of accuracy and are likely to vary
materially from period to period.
A-7
The increase in other income in 1997 was primarily the result of $1.1
million increase in warrant income in 1997, a $623,000 increase in trust fees,
and a $346,000 increase in the gain on sale of SBA loans. The increase in
trust fees was due to significant growth in assets under management by Greater
Bay Trust Company. Trust assets increased to $577.7 million at year-end 1997,
compared to $418.0 million at December 31, 1996. The increase in the gain on
sale of SBA loans was due to an increase in the origination and subsequent
sale of SBA loans.
Operating Expenses
The following table sets forth the major components of operating expenses
for the years indicated.
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Compensation and benefits........................ $ 22,715 $ 20,495 $ 16,740
Occupancy and equipment.......................... 6,217 5,240 4,437
Professional services and legal costs............ 1,597 1,808 1,730
Client service expenses.......................... 544 444 462
FDIC insurance and regulatory assessments........ 338 285 148
Expenses on other real estate owned.............. 76 177 175
Recovery of legal settlement..................... -- (1,700) --
Other............................................ 8,566 6,048 5,724
-------- -------- --------
Total operating expenses, excluding merger and
other related nonrecurring costs.............. 40,053 32,797 29,416
Mergers and other related nonrecurring costs..... 2,661 3,333 2,791
-------- -------- --------
Total operating expenses....................... $ 42,714 $ 36,130 $ 32,207
======== ======== ========
Efficiency ratio................................. 58.75% 59.22% 71.37%
Efficiency ratio, excluding merger and other
related nonrecurring costs...................... 55.09% 53.76% 65.18%
Efficiency ratio, excluding nonrecurring items
(1)............................................. 53.95% 56.95% 65.32%
Total operating expenses to average assets....... 3.01% 3.46% 4.35%
Total operating expenses to average assets,
excluding merger and other related nonrecurring
costs........................................... 2.82% 3.14% 3.97%
- --------
(1) Nonrecurring items include warrant income of $945,000, $1.2 million and
$92,000 for 1998, 1997 and 1996, respectively, merger and related
nonrecurring items of $2.7 million, $3.3 million, and $2.8 million for
1998, 1997 and 1996, respectively, and the $1.7 million recovery of legal
settlement in 1997.
Operating expenses totaled $42.7 million for 1998, compared to $36.1 million
for 1997 and $32.2 million for 1996. The ratio of operating expenses to
average assets was 3.01% in 1998, 3.46% in 1997, and 4.35% in 1996. Excluding
these items, operating expense to average assets would have been 2.82% in
1998, 3.14% in 1997 and 3.97% in 1996.
The efficiency ratio is computed by dividing total operating expenses by net
interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same (or
greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio for 1998 was 58.75%,
compared to 59.22% in 1997 and 71.37% in 1996.
During 1998, Greater Bay established the Greater Bay Bancorp Foundation (the
"Foundation"). The Foundation was formed to provide a vehicle through which
the Company, its officers and directors can provide support to the communities
in which the Company does business. The Foundation focuses its support on
initiatives related to education, health and economic growth. To support the
Foundation, the Company contributed appreciated warrants, which had an
unrealized gain of $1.3 million. Concurrently, the Company recorded $1.3
million of expense for the contribution to the Foundation, which is included
in other expenses.
A-8
As indicated by the improvements in the efficiency ratio and ratio of total
operating expenses to average assets, the Company has been able to achieve
increasing economies of scale. In 1998, average assets increased 35.9% from
1997, while operating expenses, excluding nonrecurring cost, increased only
17.5%. From 1996 to 1997, average assets increased 41.2%, while operating
expenses, excluding nonrecurring costs increased only 15.9%.
Compensation and benefits expenses increased in 1998 to $22.7 million,
compared to $20.5 million in 1997 and $16.7 million in 1996. The increase in
compensation and benefits is due primarily to the additions in personnel made
in 1998 and 1997 to accommodate the growth of the Company.
The increase in occupancy and equipment, client service expense, FDIC
insurance and regulatory assessments and other operating expenses was related
to the growth in the Company's loans, deposits and trust assets.
Income Taxes
The Company's effective income tax rate for 1998 was 30.8%, compared to
35.8% in 1997 and 38.5% in 1996. The effective rates were lower than the
statutory rate of 41.2% due to tax-exempt income on municipal securities, the
donation of appreciated warrants to the Foundation, as discussed above and
were partially offset by the impact of merger costs and other pooling related
items.
Financial Condition
Total assets increased 30.0% to $1.6 billion at December 31, 1998, compared
to $1.2 billion at December 31, 1997. Total assets increased 32.4% in 1997
from $919.9 million at December 31, 1996. The increases in 1998 and 1997 were
primarily due to increases in the Company's loan portfolio funded by growth in
deposits.
Loans
Total gross loans increased 33.8% to $1.0 billion at December 31, 1998,
compared to $754.4 million at December 31, 1997. Total gross loans increased
30.8% in 1997 from $576.8 million at year-end 1996. The increases in loan
volumes in 1998 and 1997 were primarily due to an improving economy in the
Company's market areas coupled with the business development efforts by the
Company's relationship managers.
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the
balance in consumer loans. While no specific industry concentration is
considered significant, the Company's lending operations are located in a
market area that is dependent on the technology and real estate industries and
supporting service companies. Thus, the Company's borrowers could be adversely
impacted by a downturn in these sectors of the economy. This could, in turn,
reduce the demand for loans and adversely impact the borrowers' abilities to
repay their loans, while also decreasing the Company's net interest margin.
The following table presents the composition of the Company's loan portfolio
at the dates indicated.
As of December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in thousands)
Commercial.............. $ 455,077 46.2% $362,747 49.3% $301,436 53.4% $221,260 56.2% $198,509 57.1%
Real estate construction
and land............... 173,857 17.7 112,514 15.3 92,820 16.5 43,930 11.2 33,930 9.8
Real estate term........ 299,111 30.4 196,217 26.7 126,651 22.4 96,560 24.5 87,068 25.1
Consumer and other...... 81,089 8.2 82,914 11.3 55,893 9.9 40,409 10.3 37,534 10.8
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, gross..... 1,009,134 102.5 754,392 102.6 576,800 102.2 402,159 102.2 357,041 102.8
Deferred fees and
discounts, net......... (3,343) (0.3) (2,765) (0.4) (2,489) (0.4) (2,097) (0.5) (2,600) (0.7)
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, net of
deferred fees......... 1,005,791 102.2 751,627 102.2 574,311 101.8 400,062 101.7 354,441 102.0
Allowance for loan
losses................. (21,304) (2.2) (16,394) (2.2) (10,136) (1.8) (6,683) (1.7) (6,960) (2.0)
---------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, net....... $ 984,487 100.0% $735,233 100.0% $564,175 100.0% $393,379 100.0% $347,481 100.0%
========== ===== ======== ===== ======== ===== ======== ===== ======== =====
A-9
The following table presents the maturity distribution of the Company's
commercial, real estate construction and land and real estate term portfolios
and the sensitivity of such loans to changes in interest rates at December 31,
1998.
Real estate
construction Real estate
Commercial and land term
---------- ------------ -----------
(Dollars in thousands)
Loans maturing in:
One year or less:
Fixed rate............................ $ 62,623 $ 6,179 $ 16,190
Variable rate......................... 205,537 143,379 78,451
One to five years:
Fixed rate............................ 19,653 -- 33,494
Variable rate......................... 99,213 10,356 48,858
After five years:
Fixed rate............................ 28,911 2,311 76,755
Variable rate......................... 39,140 11,632 45,363
-------- -------- --------
Total................................ $455,077 $173,857 $299,111
======== ======== ========
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued
but not collected is generally reversed from income. Loans are charged off
when management determines that collection has become unlikely. Restructured
loans are those where the Banks have granted a concession on the interest paid
or original repayment terms due to financial difficulties of the borrower.
Other real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
The following table sets forth information regarding nonperforming assets at
the dates indicated.
As of December 31,
---------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
(Dollars in thousands)
Nonperforming loans
Nonaccrual loans..................... $1,858 $2,971 $4,616 $4,833 $ 6,601
Accruing loans past due 90 days or
more................................ -- 158 1,237 830 1,518
Restructured loans................... 327 1,062 1,828 1,530 1,972
------ ------ ------ ------ -------
Total nonperforming loans........... 2,185 4,191 7,681 7,193 10,091
Other real estate owned............... 966 1,303 1,673 2,471 2,214
------ ------ ------ ------ -------
Total nonperforming assets.......... $3,151 $5,494 $9,354 $9,664 $12,305
====== ====== ====== ====== =======
Nonperforming assets to total loans
and other real estate owned......... 0.31% 0.73% 1.62% 2.40% 3.45%
At December 31, 1998, the Company had $1.9 million in nonaccrual loans.
Interest income foregone on nonperforming loans outstanding at year-end
totaled $113,000, $479,000 and $633,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing
periodic valuation of these properties are charged to earnings through a
provision for losses on foreclosed property in the period in which they are
identified. At December 31, 1998, OREO acquired through foreclosure had a
carrying value of $966,000, compared to $1.3 million at December 31, 1997.
A-10
The Company had $327,000 and $1,062,000 of restructured loans as of December
31, 1998 and 1997, respectively. There were no principal reduction concessions
allowed on restructured loans during 1998. Principal reduction concessions
totaling $387,000 were permitted on restructured loans during the year ended
December 31, 1997. Interest income from restructured loans totaled $16,000 and
$82,000 for the years ended December 31, 1998 and 1997. Foregone interest
income, which totaled $11,000 and $10,000 for the years ended December 31,
1998 and 1997, respectively, would have been recorded as interest income if
the loans had accrued interest in accordance with their original terms prior
to the restructurings.
The policy of the Company is to review each loan in the portfolio to
identify problem credits. There are three classifications for problem loans:
"substandard," "doubtful" and "loss." Substandard loans have one or more
defined weakness and are characterized by the distinct possibility that the
Banks will sustain some loss if the deficiencies are not corrected. Doubtful
loans have the weaknesses of substandard loans with the additional
characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable; and
there is a high possibility of loss of some portion of the principal balance.
A loan classified as "loss" is considered uncollectible and its continuance as
an asset is not warranted.
The following table sets forth the classified assets at the dates indicated.
As of December 31,
-------------------------
1998 1997 1996
------- ------- -------
(Dollars in thousands)
Substandard........................................ $12,515 $15,723 $ 8,908
Doubtful........................................... 1,046 1,377 1,760
Loss............................................... -- 49 231
Other real estate owned............................ 966 1,303 1,673
------- ------- -------
Classified assets................................ $14,527 $18,452 $12,572
======= ======= =======
Classified assets to total loans and other real
estate owned...................................... 1.44% 2.45% 2.19%
Allowance for loan losses to total classified
assets............................................ 146.65% 88.85% 80.62%
With the exception of these classified assets, management was not aware of
any loans outstanding as of December 31, 1998 where the known credit problems
of the borrower would cause management to have serious doubts as to the
ability of such borrowers to comply with their present loan repayment terms
and which would result in such loans being included in nonperforming or
classified asset tables at some future date. Management cannot, however,
predict the extent to which economic conditions in the Company's market areas
may worsen or the full impact that such an environment may have on the
Company's loan portfolio. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on nonaccrual,
become restructured loans, or other real estate owned in the future.
A-11
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio and economic conditions in the Company's market areas. See
"Provision for Loan Losses" herein. The allowance is increased by provisions
charged against earnings and reduced by net loan charge-offs. Loans are
charged-off when they are deemed to be uncollectible; recoveries are generally
recorded only when cash payments are received.
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the years indicated.
1998 1997 1996 1995 1994
---------- -------- -------- -------- --------
(Dollars in thousands)
Period end loans
outstanding............ $1,009,134 $754,392 $576,800 $402,159 $357,041
Average loans
outstanding............ $ 815,952 $663,107 $467,159 $371,564 $276,254
Allowance for loan
losses:
Balance at beginning of
period................. $ 16,394 $ 10,136 $ 6,683 $ 6,960 $ 6,072
Charge-offs:
Commercial............. (1,256) (1,469) (234) (974) (800)
Real estate
construction and
land.................. (6) (243) (127) (410) (388)
Real estate term....... -- (14) (54) -- --
Consumer and other..... (157) (213) (171) (463) (166)
---------- -------- -------- -------- --------
Total charge-offs..... (1,420) (1,939) (586) (1,847) (1,354)
---------- -------- -------- -------- --------
Recoveries:
Commercial............. 111 51 343 190 191
Real estate
construction and
land.................. -- -- 283 3 1
Real estate term....... -- -- -- -- 48
Consumer and other..... 1 9 19 158 17
---------- -------- -------- -------- --------
Total recoveries...... 112 60 645 351 257
---------- -------- -------- -------- --------
Net charge-offs........ (1,308) (1,879) 59 (1,496) (1,097)
Provision charged to
income (1)............. 6,218 8,137 3,394 1,219 1,985
---------- -------- -------- -------- --------
Balance at end of
period................. $ 21,304 $ 16,394 $ 10,136 $ 6,683 $ 6,960
========== ======== ======== ======== ========
Net recoveries (charge-
offs) to average loans
outstanding during the
period................. (0.16)% (0.28)% 0.01% (0.40)% (0.40)%
Allowance as a
percentage of average
loans outstanding...... 2.61% 2.47% 2.17% 1.80% 2.52%
Allowance as a
percentage of period
end loans outstanding.. 2.12% 2.18% 1.76% 1.67% 1.96%
Allowance as a
percentage of
non-performing loans... 974.99% 391.17% 131.96% 92.91% 68.97%
- --------
(1) Includes $183,000, $1.4 million and $800,000 in 1998, 1997 and 1996,
respectively, to conform to the Companys' practices for reserve
methodologies. These amounts are included in mergers and related
nonrecurring costs.
Management considers changes in the size and character of the loan
portfolio, changes in nonperforming and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the allowance for loan losses. Although management
believes that the allowance for loan losses is adequate to provide for both
potential losses and estimated inherent losses in the portfolio, future
provisions will be subject to continuing evaluations of the inherent risk in
the portfolio and if the economy declines or asset quality deteriorates,
additional provisions could be required.
A-12
The table as follows 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 future losses 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.
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- --------------- ---------------
% 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.............. $ 8,346 45.10% $ 5,445 48.08% $ 3,703 52.26% $2,413 55.02% $3,581 55.60%
Real estate construction
and land............... 1,454 17.23 829 14.91 1,587 16.09 851 10.92 930 9.50
Real estate term........ 1,679 29.64 1,374 26.01 969 21.96 975 24.01 774 24.39
Consumer and other...... 1,529 8.04 827 10.99 1,133 9.69 802 10.05 673 10.51
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Total allocated......... 13,008 8,475 7,392 5,041 5,958
Unallocated............. 8,296 7,919 2,744 1,642 1,002
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Total.................. $21,304 100.00% $16,394 100.00% $10,136 100.00% $6,683 100.00% $6,960 100.00%
======= ====== ======= ====== ======= ====== ====== ====== ====== ======
At December 31, 1998, the allowance for credit losses was $21.3 million,
consisting of a $13.0 million allocated allowance and a $8.3 million
unallocated allowance. The unallocated allowance is composed of two elements.
The first element consists of an amount up to 20% of the allocated allowance
which recognizes the model and estimation risk associated with the allocated
allowances. The second element is based upon 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 conditions that existed December 31, 1998:
. Specific industry conditions within portfolio segments, particularly
involving the high technology sector and the impact of foreign economic
forces upon that sector;
. Seasoning of the loan portfolio and growth in loan volumes;
. The strength and duration of the current business cycle and existing
general economic and business conditions affecting our key lending
areas;
. Credit quality trends, including trends in nonperforming loans expected
to result from changes in existing conditions; and
. The results of bank regulatory examinations and the findings of our
internal credit examiners.
The Officers' Loan Committee reviews these conditions quarterly in
discussion with our senior relationship managers. If any of these conditions
is evidenced by a specifically identifiable problem credit or portfolio
segment as of the evaluation date, management's estimate of the effect of this
condition may be reflected as an allocated allowance applicable to this credit
or portfolio segment. Where any of these conditions is not evidenced by a
specifically identifiable problem credit or portfolio segment as of the
evaluation date, management's evaluation of the probable loss concerning this
condition is reflected in the unallocated allowance.
The allowance for credit losses is based upon estimates of probable losses
inherent in the loan portfolio. The amount actually observed for these losses
can vary significantly from the estimated amounts. Our methodology includes
several features that are intended to reduce the differences between estimated
and actual losses. The historical loss analysis, which reviews the losses over
1, 3 and 5 year periods, and evaluations of the current business cycle and
economic conditions are used to establish the loan loss factors for problem
graded loans which are designed to be
A-13
self-correcting by taking into account our recent loss experience. Similarly,
by basing the pass graded loan loss factors on historical loss experience, the
methodology is designed to take our recent loss experience into account. Loan
loss factors are adjusted quarterly based upon the level of net chargeoffs
expected by management in the next twelve months. Furthermore, our methodology
permits adjustments to any loss factor used in the computation of the formula
allowance in the event that, in management's judgment, significant factors
that affect the collectibility of the portfolio as of the evaluation date are
not reflected in the loss factors. By assessing the probable estimated losses
inherent in the loan portfolio on a quarterly basis, we are able to adjust
specific and inherent loss estimates based upon any more recent information
that has become available.
The Company recorded provisions in 1998 to bring the allowance for credit
losses to a level deemed appropriate by management based upon management's
application of the loan loss allowance methodology discussed above. In
particular, in the assessment as of December 31, 1998, management focused on
factors affecting elements of the high technology sector and the impact of
foreign economic forces upon that sector, including seasoning of the loan
portfolio coupled with growth in loan volumes and the strength and duration of
the current business cycle coupled with existing general economic and business
conditions affecting our key lending areas.
Investment Securities
The Company's investment portfolio is managed to meet the Company's
liquidity needs through proceeds from scheduled maturities and is utilized for
pledging requirements for deposits of state and political subdivisions and
securities sold under repurchase agreements. The portfolio is comprised of
U.S. Treasury securities, U.S. government agency securities, mortgage-backed
securities, obligations of states and political subdivisions and a modest
amount of equity securities, including Federal Reserve Bank stock and Federal
Home Loan Bank stock. The Company does not include federal funds sold and
certain other short-term securities as investment securities. These other
investments are included in cash and cash equivalents. Investment securities
classified as available for sale are recorded at fair market value, while
investment securities classified as held to maturity are recorded at cost.
Unrealized gains or losses, net of the deferred tax effect, are reported as
increases or decreases in shareholders' equity for available for sale
securities.
The amortized cost and estimated market value of investment securities at
December 31, 1998 and 1997 is as follows:
As of December 31, 1998
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
(Dollars in thousands)
Available for sale securities:
U.S. Treasury obligations............. $ 4,408 $ 26 $ -- $ 4,434
U.S. agency notes..................... 28,621 20 (2) 28,639
Mortgage-backed securities............ 152,987 988 (60) 153,915
Tax-exempt securities................. 32,952 563 -- 33,515
Corporate securities.................. 35,517 60 (597) 34,980
-------- ------ ----- --------
Total securities available for
sale............................... 254,485 1,657 (659) 255,483
-------- ------ ----- --------
Held to maturity securities:
U.S. Treasury obligations............. 1,764 2 (2) 1,764
U.S. agency notes..................... 25,490 -- (58) 25,432
Mortgage-backed securities............ 27,961 86 (179) 27,868
Tax-exempt securities................. 25,942 725 (14) 26,653
-------- ------ ----- --------
Total securities held to maturity... 81,157 813 (253) 81,717
-------- ------ ----- --------
Other securities...................... 5,654 -- -- 5,654
-------- ------ ----- --------
Total investment securities......... $341,296 $2,470 $(912) $342,854
======== ====== ===== ========
A-14
As of December 31, 1997
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
(Dollars in thousands)
Available for sale securities:
U.S. Treasury obligations............. $ 10,095 $ 52 $ (2) $ 10,145
U.S. agency notes..................... 38,833 52 (63) 38,822
Mortgage-backed securities............ 102,432 357 (185) 102,604
Tax-exempt securities................. 7,018 199 (5) 7,212
Corporate securities.................. 7,568 62 -- 7,630
-------- ------ ----- --------
Total securities available for
sale............................... 165,946 722 (255) 166,413
-------- ------ ----- --------
Held to maturity securities:
U.S. Treasury obligations............. 501 1 -- 502
U.S. agency notes..................... 17,798 182 (12) 17,968
Mortgage-backed securities............ 11,324 177 (2) 11,499
Tax-exempt securities................. 14,838 492 (53) 15,277
-------- ------ ----- --------
Total securities held to maturity... 44,461 852 (67) 45,246
-------- ------ ----- --------
Other securities...................... 2,253 -- -- 2,253
-------- ------ ----- --------
Total investment securities......... $212,660 $1,574 $(322) $213,912
======== ====== ===== ========
The tax effected net unrealized gain on available for sale securities was
$581,000 as of December 31, 1998. The following table shows the amortized cost
and estimated market value of the Company's investment securities by maturity
at December 31, 1998.
2000 2004
Through Through 2009 and
1999 2003 2008 Thereafter Total
------- ------- ------- ---------- --------
(Dollars in thousands) (1)
Available for sale securities:
U.S. Treasury obligations..... $ 4,308 $ 100 $ -- $ -- $ 4,408
U.S. agency notes (2)......... 15,829 -- 12,792 -- 28,621
Mortgage-backed securities
(3).......................... -- 3,033 8,941 141,013 152,987
Tax-exempt securities......... -- 1,601 4,561 26,790 32,952
Corporate securities.......... 4,016 991 -- 30,510 35,517
------- ------- ------- -------- --------
Total securities available
for sale................... 24,153 5,725 26,294 198,313 254,485
======= ======= ======= ======== ========
Market value.................. $24,197 $ 5,808 $26,601 $198,877 $255,483
======= ======= ======= ======== ========
Held to maturity securities:
U.S. Treasury obligations..... 1,764 -- -- -- 1,764
U.S. agency notes (2)......... -- 23,990 1,500 -- 25,490
Mortgage-backed securities
(3).......................... -- -- 7,596 20,365 27,961
Tax-exempt securities......... 1,261 3,598 5,252 15,831 25,942
------- ------- ------- -------- --------
Total securities held to
maturity................... 3,025 27,588 14,348 36,196 81,157
======= ======= ======= ======== ========
Market value.................. 3,034 27,613 7,528 43,542 81,717
======= ======= ======= ======== ========
Combined investment securities
portfolio:
Total investment securities... $27,178 $33,313 $40,642 $234,509 $335,642
======= ======= ======= ======== ========
Total market value............ $27,231 $33,421 $34,129 $242,419 $337,200
======= ======= ======= ======== ========
Weighted average yield-total
portfolio.................... 5.73% 5.74% 5.25% 6.84% 6.23%
- --------
(1) Other securities are comprised of equity investments and have no stated
maturity and therefore are excluded from this table.
(2) Certain notes issued by U.S. Agencies may be called, without penalty, at
the discretion of the issuer. This may cause the actual maturities to
differ significantly from the contractual maturity dates.
(3) Mortgage-backed securities are shown at contractual maturity; however, the
average life of these mortgage-backed securities may differ due to
principal prepayments.
For additional information concerning the investments portfolio, see Note 3
of Notes to Consolidated Financial Statements.
A-15
Deposits
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base. Deposits reached $1.3
billion at December 31, 1998, an increase of 25.3% compared to deposits of
$1.1 billion at December 31, 1997. In 1997, deposits increased 30.4% from
$821.1 million at December 31, 1996. The increase in deposits was primarily
due to the continued marketing efforts directed at commercial business clients
in the Company's market areas, coupled with an increase in deposits related to
the new business development activities of the Greater Bay Trust Company and
the Venture Banking Group.
PBC holds $89.6 million in one demand deposit account (the "Special
Deposit"). The Special Deposit represents the proposed settlement of a class
action lawsuit not involving the Company. Due to the uncertainty of the time
the Special Deposit will remain with PBC, management has invested a
significant portion of the proceeds from this deposit in agency securities
with maturities of less than 90 days. As previously discussed, the interest
rate spread on the Special Deposit was approximately 2.25%, which resulted in
a decrease in overall interest rate spreads.
Noninterest-bearing demand deposit accounts increased 22.3% to $268.4
million at December 31, 1998, compared to $219.5 million a year earlier.
Money market deposit accounts ("MMDA"), negotiable order of withdrawal
accounts ("NOW") and savings accounts reached $854.4 million at year-end 1998,
an increase of 36.2% from $627.5 million at December 31, 1997. MMDA, NOW and
savings accounts were 63.6% of total deposits at December 31, 1998, as
compared to 58.6% at December 31, 1997.
Time certificates of deposit totaled $219.7 million, or 16.4% of total
deposits, at December 31, 1998, compared to $224.2 million, or 20.9% of total
deposits, at December 31, 1997. Note 7 of the Notes to the Consolidated
Financial Statements presents the maturity distribution of time certificates
of deposits at December 31, 1998.
As of December 31, 1997, the Company had $10.0 million in brokered deposits
outstanding. There were no such deposits as of December 31, 1998.
For additional information concerning deposits, see Note 7 of Notes to
Consolidated Financial Statements.
Other Borrowings
Other borrowings consisted of Federal Funds purchased and securities sold
under agreements to repurchase, Federal Home Loan advances, and promissory
notes. Note 9 of the Notes to the Consolidated Financial Statements provides
the amounts outstanding, the short and long term classification, the weighted
interest rate and the general terms of these borrowings.
Liquidity and Cash Flow
The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients while maintaining an appropriate balance between assets and
liabilities to meet the return on investment expectations of its shareholders.
The Company monitors the sources and uses of funds on a daily basis to
maintain an acceptable liquidity position. In addition to liquidity from core
deposits and repayments and maturities of loans and investments, the Banks
utilize brokered deposit lines, sell securities under agreements to repurchase
and borrow overnight federal funds. In 1997 the Company issued $20.0 million
in Trust Preferred Securities ("TPS") to enhance its regulatory capital base,
while also providing added liquidity. In 1998, the Company completed a second
offering of TPS in an aggregate amount of $30.0 million. Greater Bay invested
$15.0 million of the net proceeds in the Company's subsidiary banks to
increase their capital level. The Company intends to use the remaining net
proceeds for general corporate purposes or to provide additional capital to
the Banks, as it is needed. Under applicable regulatory guidelines, $30.2
million of the TPS qualifies as Tier I capital, and the remaining portion
qualifies as Tier 2 capital. As the Company's shareholders' equity increases,
the amount of the additional TPS that will count as Tier I capital will
increase.
A-16
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are
obtained from management fees, interest received on its investments and
dividends declared and paid by the Banks. There are statutory and regulatory
provisions that could limit the ability of the Banks to pay dividends to
Greater Bay. At December 31, 1998, the Banks had approximately $24.6 million
in the aggregate available to be paid as dividends to Greater Bay. Management
of Greater Bay believes that such restrictions will not have an impact on the
ability of Greater Bay to meet its ongoing cash obligations. As of December
31, 1998, Greater Bay did not have any material commitments for capital
expenditures. There are statutory and regulatory provisions that could limit
the ability of the Banks to pay dividends to Greater Bay.
Net cash provided by operating activities, consisting primarily of net
income, totaled $19.9 million for 1998, $14.0 million for 1997 and $10.0
million for 1996. Cash used for investing activities totaled $411.9 million in
1998, $253.7 million in 1997 and $170.1 million in 1996. The funds used for
investing activities primarily represent increases in loans and investment
securities for each year reported.
For the year ended December 31, 1998, net cash provided by financing
activities was $341.4 million, compared to $279.8 million in 1997 and $252.3
million in 1996. Historically, the primary financing activity of the Company
has been through deposits. In 1998, 1997 and 1996, deposit gathering
activities generated cash of $271.3 million, $250.0 million and $236.5
million, respectively. This represents a total of 79.5%, 89.4% and 93.75% of
the financing cash flows for 1998, 1997 and 1996, respectively. The increase
in financing activities other than deposits are a result of the Company
entering into $70.0 million in long-term low cost borrowing agreements in
1998, and the issuance of TPS of $30.0 million and $20.0 million in 1998 and
1997, respectively, which were issued principally to provide capital to the
Company (see Capital Resources--below).
Capital Resources
Shareholders' equity at December 31, 1998 increased to $92.7 million from
$76.5 million at December 31, 1997 and from $66.8 million at December 31,
1996. Greater Bay paid dividends of $0.38, $0.30 and $0.22 per share in
December 31, 1998, 1997 and 1996, respectively. In 1998, PBFC made a
distribution of $1.2 million to its shareholders. In 1997, PBC declared an
annual dividend of $3.20 per share, PRB declared and paid a dividend of
$100,000 to its sole shareholder and PBFC made a distribution of $208,000 to
its shareholders. In 1996, Cupertino National Bancorp declared and paid a
dividend of $0.10 per share, Peninsula Bank of Commerce declared an annual
dividend of $1.35 per share and PBFC made a distribution of $227,000 to its
shareholders.
The Company has provided a substantial portion of its capital requirements
through the retention of earnings. The Company supplemented its capital base
by issuing $30.0 million of TPS in 1998 and $20.0 million of TPS in 1997,
which, subject to certain limitations, qualify as Tier 1 capital.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities and minority interests, less goodwill. Supplementary capital
includes the allowance for loan losses (subject to certain limitations), other
perpetual preferred stock, trust preferred securities, certain other capital
instruments and term subordinated debt. The Company's major capital components
are shareholders' equity and TPS in core capital, and the allowance for loan
losses and subordinated debt in supplementary capital.
At December 31, 1998, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for
total capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by
average total assets (not risk-adjusted) for the preceding quarter. The
minimum leverage ratio is 3.0%, although certain banking organizations are
expected to exceed that amount by 1.0% or more, depending on their
circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations
setting forth a five-tier system for measuring the capital adequacy of
A-17
the financial institutions they supervise. The capital levels of the Company
at December 31, 1998 and the two highest levels recognized under these
regulations are as follows.
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
-------- ------------- -------------
Company................................... 7.81% 9.90% 12.94%
Well-capitalized.......................... 5.00% 6.00% 10.00%
Adequately capitalized.................... 4.00% 4.00% 8.00%
The Company's leverage ratio was 7.81% at December 31, 1998, compared to
8.40% at December 31, 1997. At December 31, 1998, the Company's risk-based
capital ratios were 9.90% for Tier 1 risk-based capital and 12.94% for total
risk-based capital, compared to 10.72% and 12.31%, respectively, as of
December 31, 1997. These ratios all exceeded the well-capitalized guidelines
shown above.
In addition, at December 31, 1997, each of the Banks had levels of capital
that exceeded the well-capitalized guidelines. For additional information on
the capital levels and capital ratios of the Company and each of the Banks,
see Note 17 of Notes to Consolidated Financial Statements.
The Company anticipates that the economic and business conditions in its
market areas will continue to expand in 1999, resulting in continued growth in
earnings and deposits. To support this continuing growth or future acquisition
opportunities, it may be necessary for the Company to raise additional capital
through the sale of either debt or equity securities in order for the Company
and each of the Banks to remain well-capitalized under applicable regulations.
Quantitative and Qualitative Disclosures about Market Risk
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and an adequate loan
loss reserve see "--Allowance for Loan Losses" herein.
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in net portfolio values ("NPV") and net interest income under various
interest rate scenarios. The ALCO attempts to manage the various components of
the Company's balance sheet to minimize the impact of sudden and sustained
changes in interest rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in NPV in the event of hypothetical changes in interest rates
and interest liabilities. If potential changes to NPV and net interest income
resulting from hypothetical interest rate swings are not within the limits
established by the Board, the Board may direct management to adjust its asset
and liability mix to bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, lengthen the effective
maturities of certain interest-earning assets, and shorten the effective
maturities of certain interest-bearing liabilities. The Company has focused
its investment activities on securities with generally medium-term (7 years to
10 years) maturities or average lives. The Company has utilized short-term
borrowings and deposit marketing programs to adjust the term to repricing of
its liabilities.
Interest rate sensitivity analysis is used to measure the Company's interest
rate risk by computing estimated changes in NPV of its cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates. NPV represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for core deposit valuations and off-balance
sheet items. This analysis assesses the risk of loss in market rate sensitive
instruments in the event of sudden and
A-18
sustained increases and decreases in market interest rates of 100 basis
points. The following table presents the Company's projected change in NPV for
these rate shock levels as of December 31, 1998. All market rate sensitive
instruments presented in this table are classified as either held to maturity
or available for sale. The Company has no trading securities.
Projected Change
------------------
Change in Interest Rates NPV Dollars Percentage
------------------------ -------- ------- ----------
100 basis point rise................................ $106,437 $1,818 1.7%
Base scenario....................................... 104,619 -- 0.0%
100 basis point decline............................. 107,212 2,593 2.5%
The preceding table indicates that at December 31, 1998, in the event of a
sudden and sustained increase in prevailing market interest rates, the
Company's NPV would be expected to increase.
NPV is calculated based on the net present value of estimated cash flows
utilizing market prepayment assumptions and market rates of interest provided
by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposits decay, and should be not relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
computation of NPV. Actual values may differ from those projections presented
should market conditions vary from assumptions used in the calculation of the
NPV. Certain assets, such as adjustable-rate loans, which represent one of the
Company's loan products, have features which restrict changes in interest rate
on a short-term basis and over the life of the assets. In addition, the
proportion of adjustable-rate loans in the Company's portfolio could decrease
in future periods if market interest rates remain at or decrease below current
levels due to refinancing activity. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in the NPV. Finally, the ability of many
borrowers to repay their adjustable-rate mortgage loans may decrease in the
event of significant interest rate increases.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. Interest rate risk
management focuses on the maturity structure of assets and liabilities and
their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both
assets and liabilities respond to changes in interest rates within an
acceptable time frame, thereby minimizing the effect of interest rate
movements on net interest income. Interest rate sensitivity is measured as the
difference between the volumes of assets and liabilities in the Company's
current portfolio that are subject to repricing at various time horizons: one
day or immediate, two days to six months, seven to twelve months, one to three
years, four to five years, over five years and on a cumulative basis. The
differences are known as interest sensitivity gaps.
A-19
The following table shows interest sensitivity gaps for different intervals
as of December 31, 1998.
Total
Immediate 2 Days to 7 Months to 1 Year 4 Years More than Total Rate Non-Rate
or One Day 6 Months 12 Months to 3 Years to 5 Years 5 Years Sensitive Sensitive Total
---------- --------- ----------- ---------- ---------- --------- ---------- --------- ----------
(Dollars in thousands)
Assets
Cash and due from
banks................ $ 386 $ -- $ -- $ -- $ -- $ -- $ 386 $ 59,589 $ 59,975
Fed funds sold........ 43,600 -- -- -- -- -- 43,600 -- 43,600
Investment
securities........... 110,307 27,002 43,225 90,715 17,810 125,157 414,216 -- 414,216
Other securities...... -- -- -- -- -- -- -- 5,654 5,654
Loans................. 607,116 245,448 27,613 54,351 22,737 51,869 1,009,134 -- 1,009,134
Loan losses/unearned
fees................. -- -- -- -- -- -- -- (24,647) (24,647)
Other assets.......... -- -- -- -- -- -- -- 74,933 74,933
-------- -------- -------- -------- -------- -------- ---------- --------- ----------
Total assets......... $761,409 $272,450 $ 70,838 $145,066 $ 40,547 $177,026 $1,467,336 $ 115,529 $1,582,865
======== ======== ======== ======== ======== ======== ========== ========= ==========
Liabilities and Equity
Deposits.............. $857,945 $196,357 $ 26,810 $ 17,370 $ 668 $ 32 $1,099,182 $ 243,310 $1,342,492
Other borrowings...... -- -- 40,135 32,450 -- -- 72,585 -- 72,585
Subordinated debt..... -- -- -- -- 3,000 -- 3,000 -- 3,000
Trust preferred
securities........... -- -- -- -- -- 50,000 50,000 -- 50,000
Other liabilities..... -- -- -- -- -- -- -- 22,112 22,112
Shareholders' equity.. -- -- -- -- -- -- -- 92,676 92,676
-------- -------- -------- -------- -------- -------- ---------- --------- ----------
Total liabilities and
equity.............. $857,945 $196,357 $ 66,945 $ 49,820 $ 3,668 $ 50,032 $1,224,767 $ 358,098 $1,582,865
======== ======== ======== ======== ======== ======== ========== ========= ==========
Gap................... $(96,536) $ 76,093 $ 3,893 $ 95,246 $ 36,879 $126,994 $ 242,569 $(242,569) --
Cumulative Gap........ $(96,536) $(20,443) $(16,550) $ 78,696 $115,575 $242,569 $ 242,569 $ -- --
Cumulative Gap/total
assets............... (6.10)% (1.29)% (1.05)% 4.97% 7.30% 15.32% 15.32% -- --
The foregoing table indicates that the Company had a one year gap of $(16.6)
million, or (1.05)% of total assets, at December 31, 1998. In theory, this
would indicate that at December 31, 1998, $16.6 million more in liabilities
than assets would reprice if there was 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 higher net interest margin. However, changes in the mix of earning
assets or supporting liabilities can either increase or decrease the net
interest margin without affecting interest rate sensitivity. In addition, the
interest rate spread between an asset and its supporting liability can vary
significantly while the timing of repricing of both the asset and its
supporting liability can remain the same, thus impacting net interest income.
This characteristic is referred to as a basis risk and, generally, relates to
the repricing characteristics of short-term funding sources such as
certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected next
twelve month net interest income and net income has been evaluated through an
interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing
rate environments. As of December 31, 1998, the analysis indicates that the
Company's net interest income would increase a maximum of 10.2% if rates rose
200 basis points immediately and would decrease a maximum of 11.2% if rates
declined 200 basis points immediately. In addition, the results indicate that
notwithstanding the Company's gap position, which would indicate that the net
interest margin increases when rates rise, the Company's net interest margin
increases during rising rate periods due to the basis risk imbedded in the
Company's interest-bearing liabilities.
In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that would impact this analysis. These factors
would include management's and ALCO's actions to mitigate the impact to the
Company and the impact of the Company's credit risk profile during periods of
significant interest rate movements.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors and
others, an interest sensitivity gap report may not provide a complete
assessment of the Company's exposure to changes in interest rates.
A-20
Year 2000 Compliance
State of Readiness
The Company has undertaken a major project to ensure that its internal
operating systems will be fully capable of processing year 2000 transactions.
This project is overseen by the Greater Bay Year 2000 Project Team (the "Year
2000 Project Team"), which reports monthly progress to the Company's Board of
Directors.
The Company is determining the potential impact of the year 2000 on the
ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation.
The initial phase of the project was to assess and identify all internal
business processes requiring modification and to develop comprehensive
renovation plans as needed. This phase was largely completed in mid-1998. The
second phase was to execute those renovation plans and begin testing systems
by simulating year 2000 data conditions. This phase was largely completed in
1998. Final testing and implementation is planned to be completed during the
first half of 1999.
The Company relies upon third-party software vendors and service providers
for substantially all of its electronic data processing and does not operate
any proprietary programs which are critical to the Company's operations. Thus,
the focus of the Company is to monitor the progress of its primary software
providers towards compliance with year 2000 issues and prepare to test actual
data of the company in simulated processing of future sensitive dates.
As well as evaluating its own internal operating systems, the Company has
also initiated discussions with its major customers and suppliers as to their
ability to meet year 2000 requirements. The Year 2000 Project Team previously
has identified and sought information from significant third party suppliers
regarding their year 2000 compliance. Suppliers providing system
interdependencies also have been identified, and testing with such suppliers
also will occur during this phase of the project. The Year 2000 Project Team
continues to work with all targeted suppliers to determine their year 2000
status. As of this time, the Year 2000 Project Team has not identified any
significant issues with the identified suppliers.
The Company also has identified customers who have a material relationship
with the Company and requested such customers to complete a year 2000 survey,
which will be used by the Company to assess the overall risk to the Company
resulting from such customers' year 2000 compliance.
Costs to Address the Year 2000 Issue
The Company has budgeted anticipated expenditures of $300,000 to $500,000 in
1998 and 1999 to ensure that its systems are ready for processing information
in the year 2000. The Company estimates that it has incurred out-of-pocket
expenses of approximately $146,000 in 1998 in connection with year 2000
issues. In addition, the Company has incurred certain costs relating to
reallocation of internal resources to address year 2000 issues. The Company
expects that the cost of remedial action for its noncompliant year 2000 IT
systems will not be material.
The Company has not completed its assessment of the year 2000 issue, but
currently believes that costs of addressing it will not have a material
adverse impact on the Company's financial position. However, if the Company
and third parties upon which it relies are unable to address this issue in a
timely manner, it could result in a material financial risk to the Company. In
order to assure that this does not occur, the Company plans to devote all
resources required to resolve any significant year 2000 issues in a timely
manner.
Risks Presented by the Year 2000 Issue
As the Company continues to assess the year 2000 issue, it may identify
systems that present a year 2000 risk. In addition, if any third-party
software vendors and service providers upon who the Company relies fail to
A-21
appropriately address their year 2000 issues, such failure could have a
material adverse effect on the Company's business, financial condition and
operating results.
Should the Company and/or its significant suppliers fail to timely identify,
address and correct material year 2000 issues, such failure could have a
material adverse impact on the Company's ability to operate. The range of
adverse impacts may include the requirement to pay significant overtime to
manually process certain transactions and added costs to process certain
banking activity through a centralized administrative function. In addition,
if corrections made by such suppliers to address year 2000 issues are
incompatible with the Company's systems, the year 2000 issue could have a
material adverse impact on the Company's operations.
Despite the Company's activities in regards to the year 2000 issue, there
can be no assurance that partial or total systems interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon the Company's business, financial condition, results of operations
and business prospects.
Contingency Plans
The Year 2000 Project Team currently is in the process of developing
contingency plans for year 2000 readiness. The Company has engaged a third
party company, which specializes in developing contingency plans for financial
institutions for year 2000, to assist the Company in analyzing the impact of
year 2000 on its business. This business impact analysis was completed in 1998
and the Company's contingency plans for year 2000 readiness currently are
substantially complete. There can be no assurance, however, that such
contingency plans will be successful.
Recent Events
On January 26, 1999 the Company and Bay Area Bancshares ("BA Bancshares"),
the holding company of Bay Area Bank, a California state charted bank ("BAB"),
signed a definitive agreement for a merger between the two companies. The
agreement provides for BA Bancshares shareholders to receive approximately
1,393,000 shares of Greater Bay stock subject to the approval of BA Bancshares
shareholders and certain adjustments based on movements in the Company's stock
price, in a tax-free exchange to be accounted for as a pooling-of-interests.
Following the transaction, the shareholders of BA Bancshares will own
approximately 12.7% of the combined company. The transaction is expected to be
completed early in the second quarter of 1999 subject to regulatory approvals.
As of December 31, 1998 BA Bancshares had $155.3 million in assets, $136.5
million in deposits, and $14.4 million in shareholders' equity. BAB's office
is located in Redwood City, California. The combined Company, on a pro-forma
basis would have had total assets of approximately $1.8 billion and equity of
over $107.0 million at December 31, 1998.
The transaction is anticipated to be accretive to the Company's core
earnings in 1999 based on anticipated reductions in operating expenses and
revenue enhancements resulting from an expanded product line, increased
lending capacity and an increased market awareness that can be utilized by
BAB. Management of each of the organizations believe that significant
opportunities exist to enhance the spectrum of financial services offered to
both existing and future clients of BAB while also increasing market
penetration in the San Francisco Peninsula market areas.
Recent Accounting Developments
In July 1998, the Financial Accounting Standards Board reconfirmed its
decision to review the accounting for business combinations. That approach
includes considering either adopting one method to account for business
combinations or reducing the difference in accounting outcomes between the
pooling and purchase methods rather than just modifying the conditions
specific for pooling-of-interests accounting.
The Board issued an Invitation to Comment on a position paper entitled,
Methods of Accounting for Business Combinations: Recommendation of the G4+1
for Achieving Convergence, on December 15, 1998, in order to solicit comments
on certain issues that will be addressed by the Board as part of its business
combinations project. This position paper concludes that the use of a single
method of accounting is preferable and that the purchase method is
A-22
the appropriate method to use. As such there is a possibility that the pooling
of interests method of accounting that the Company has used to account for its
previous mergers may not be available at some point in the future. A portion
of the Company's business strategy is to pursue acquisition opportunities so
as to expand its market presence and maintain growth levels. A change in the
accounting for business combinations could have a negative impact on the
Company's ability to realize those business strategies.
A-23
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
------------------------
1998 1997*
----------- -----------
(Dollars in thousands)
ASSETS
Cash and due from banks.............................. $ 59,975 $ 53,167
Federal funds sold................................... 43,600 75,000
Other short term securities.......................... 77,576 103,549
----------- -----------
Cash and cash equivalents........................ 181,151 231,716
Investment securities:
Available for sale, at fair value.................. 255,483 166,413
Held to maturity, at amortized cost (fair value
1998: $81,717 1997: $45,246)...................... 81,157 44,461
Other securities................................... 5,654 2,253
----------- -----------
Investment securities............................ 342,294 213,127
Total loans:
Commercial......................................... 455,077 362,747
Real estate construction and land.................. 173,857 112,514
Real estate term................................... 299,111 196,217
Consumer and other................................. 81,089 82,914
Deferred loan fees and discounts................... (3,343) (2,765)
----------- -----------
Total loans, net of deferred fees................ 1,005,791 751,627
Allowance for loan losses.......................... (21,304) (16,394)
----------- -----------
Total loans, net................................. 984,487 735,233
Property, premises and equipment..................... 10,961 8,498
Interest receivable and other assets................. 63,972 29,091
----------- -----------
Total assets..................................... $ 1,582,865 $ 1,217,665
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits....................................... $ 1,342,492 $ 1,071,148
Other borrowings..................................... 72,585 32,355
Subordinated debt.................................... 3,000 3,000
Company obligated mandatorily redeemable cumulative
trust preferred securities of subsidiary trusts
holding solely junior subordinated debentures....... 50,000 20,000
Other liabilities.................................... 22,112 14,622
----------- -----------
Total liabilities................................ 1,490,189 1,141,125
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares
authorized; none issued............................. -- --
Common stock, no par value: 24,000,000 shares
authorized; 9,612,142 and 9,304,930 shares issued
and outstanding as of December 31, 1998 and 1997,
respectively**...................................... 57,283 52,269
Accumulated other comprehensive income (loss)........ (96) 223
Retained earnings.................................... 35,489 24,048
----------- -----------
Total shareholders' equity....................... 92,676 76,540
----------- -----------
Total liabilities and shareholders' equity....... $ 1,582,865 $ 1,217,665
=========== ===========
- --------
* Restated on a historical basis to reflect the mergers with Pacific Rim
Bancorporation and Pacific Business Funding Corporation on a pooling of
interests basis.
** Restated to reflect 2-for-1 stock split declared for shareholders of record
at April 30, 1998.
See notes to consolidated financial statements.
A-24
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------
1998 1997* 1996*
--------- -------- --------
(Dollars in thousands,
except per share amounts)
INTEREST INCOME
Interest on loans................................ $ 83,650 $ 70,035 $ 50,171
Interest on investment securities:
Taxable........................................ 17,114 8,199 7,394
Tax-exempt..................................... 2,104 1,095 990
--------- -------- --------
Total interest on investment securities...... 19,218 9,294 8,384
Other interest income............................ 10,052 9,198 4,328
--------- -------- --------
Total interest income........................ 112,920 88,527 62,883
--------- -------- --------
INTEREST EXPENSE
Interest on deposits............................. 39,398 30,640 21,220
Interest on long term borrowings................. 6,650 2,137 355
Interest on other borrowings..................... 1,424 1,282 804
--------- -------- --------
Total interest expense....................... 47,472 34,059 22,379
--------- -------- --------
Net interest income.......................... 65,448 54,468 40,504
Provision for loan losses........................ 6,035 6,786 2,594
--------- -------- --------
Net interest income after provision for loan
losses...................................... 59,413 47,682 37,910
--------- -------- --------
OTHER INCOME
Trust fees....................................... 2,473 2,049 1,426
Service charges and other fees................... 1,487 1,620 1,429
Gain on sale of SBA loans........................ 1,037 883 537
Warrant income................................... 945 1,162 92
Gain (loss) on sale of investments, net.......... 374 (5) (255)
Other income..................................... 939 832 1,394
--------- -------- --------
Total other income........................... 7,255 6,541 4,623
--------- -------- --------
OPERATING EXPENSES
Compensation and benefits........................ 22,715 20,495 16,740
Occupancy and equipment.......................... 6,217 5,240 4,437
Merger and other related nonrecurring costs...... 2,661 3,333 2,791
Recovery of legal settlement..................... -- (1,700) --
Other expenses................................... 11,121 8,762 8,239
--------- -------- --------
Total operating expenses..................... 42,714 36,130 32,207
--------- -------- --------
Net income before provision for income
taxes....................................... 23,954 18,093 10,326
Provision for income taxes....................... 7,376 6,474 3,978
--------- -------- --------
Net income................................... $ 16,578 $ 11,619 $ 6,348
========= ======== ========
Net income per share--basic**.................... $ 1.75 $ 1.26 $ 0.72
========= ======== ========
Net income per share--diluted**.................. $ 1.62 $ 1.17 $ 0.67
========= ======== ========
- --------
* Restated on a historical basis to reflect the mergers with Peninsula Bank of
Commerce, Pacific Rim Bancorporation and Pacific Business Funding
Corporation on a pooling of interests basis.
** Restated to reflect 2-for-1 stock split declared for shareholders of record
at April 30, 1998.
See notes to consolidated financial statements.
A-25
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands)
Net income........................................ $ 16,578 $ 11,619 $ 6,348
-------- -------- -------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period
(net of taxes of $420, $157 and $323 for the
years ended December 31, 1998, 1997 and 1996,
respectively)................................ 578 310 462
Less: reclassification adjustment for gains
(losses) included in net income (net of taxes
of $154, $(2) and $(105) for the years ended
December 31, 1998, 1997 and 1996,
respectively)................................ 220 (3) (150)
-------- -------- -------
Net change...................................... 358 313 612
Cash flow hedge:
Cumulative transition effect of adopting SFAS
No. 133 (net of taxes of $(744) as of October
1, 1998...................................... (1,063) -- --
Change in market value of hedge during the
period (net of taxes of $294 for the year
ended December 31, 1998)..................... 418 -- --
Less: reclassification adjustment for swap
settlements included in net income (net of
taxes of $(23) for the year ended December
31, 1998).................................... (32) -- --
-------- -------- -------
Net change...................................... (677) -- --
Other comprehensive income (loss)............. (319) 313 612
-------- -------- -------
Comprehensive income.......................... $ 16,259 $ 11,932 $ 6,960
======== ======== =======
See notes to consolidated financial statements.
A-26
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
Common Stock Accumulated Other Total
----------------- Comprehensive Retained Shareholders'
Shares** Amount Income (Loss) Earnings Equity
--------- ------- ----------------- -------- -------------
(Dollars in thousands, except per share amounts)
Greater Bay Bancorp,
prior to pooling....... 7,364,692 $40,108 $(609) $12,885 $52,384
Shares issued to Pacific
Rim Bancorporation
shareholders........... 950,748 8,000 -- -- 8,000
Pacific Rim
Bancorporation
accumulated other
comprehensive income
and retained earnings
prior to pooling....... -- -- (93) 338 245
Shares issued to Pacific
Business Funding
Corporation
shareholders........... 298,000 51 -- -- 51
Pacific Business Funding
Corporation retained
earnings prior
to pooling............. -- -- -- (185) (185)
--------- ------- ----- ------- -------
Balance, December 31,
1995, restated to
reflect pooling....... 8,613,440 48,159 (702) 13,038 60,495
Net income.............. -- -- -- 6,348 6,348
Other comprehensive
income, net of taxes... -- -- 612 -- 612
Stock options exercised,
including related tax
benefit................ 376,478 1,693 -- -- 1,693
Stock issued in Employee
Stock Purchase Plan.... 21,264 137 -- -- 137
401(k) employee stock
purchase............... 10,556 87 -- -- 87
Cash dividend $0.29 per
share ***.............. -- -- -- (2,536) (2,536)
--------- ------- ----- ------- -------
Balance, December 31,
1996*................. 9,021,738 50,076 (90) 16,850 66,836
Net income.............. -- -- -- 11,619 11,619
Other comprehensive
income, net of taxes... -- -- 313 -- 313
Stock options exercised,
including related tax
benefit................ 216,720 1,315 -- -- 1,315
Stock issued in Employee
Stock Purchase Plan.... 30,320 347 -- -- 347
401(k) employee stock
purchase............... 36,152 531 -- -- 531
Cash dividend $0.48 per
share ***.............. -- -- -- (4,421) (4,421)
--------- ------- ----- ------- -------
Balance, December 31,
1997*................. 9,304,930 52,269 223 24,048 76,540
Net income.............. -- -- -- 16,578 16,578
Other comprehensive
loss, net of taxes..... -- -- (319) -- (319)
Stock options exercised,
including related tax
benefit................ 241,059 3,298 -- -- 3,298
Stock issued in Employee
Stock Purchase Plan.... 29,670 656 -- -- 656
401(k) employee stock
purchase............... 36,483 1,060 -- -- 1,060
Cash dividend $0.54 per
share ***.............. -- -- -- (5,137) (5,137)
--------- ------- ----- ------- -------
Balance, December 31,
1998.................. 9,612,142 $57,283 $ (96) $35,489 $92,676
========= ======= ===== ======= =======
- --------
* Restated on a historical basis to reflect the mergers with Cupertino
National Bancorp, Peninsula Bank of Commerce, Pacific Rim Bancorporation
and Pacific Business Funding Corporation on a pooling of interests basis.
** Restated to reflect 2-for-1 stock split declared for shareholders of
record at April 30, 1998.
*** Excluding dividends paid by Greater Bays subsidiaries prior to the
completion of their mergers with Greater Bay, Greater Bay paid dividends
of $0.38, $0.30 and $0.22 per share in December 31, 1998, 1997 and 1996,
respectively. In 1998, Pacific Business Funding Corporation made a
distribution of $1.2 million to its shareholders. In 1997, Peninsula Bank
of Commerce declared an annual dividend of $3.20 per share, Pacific Rim
Bancorporation declared and paid a dividend of $100,000 to its sole
shareholder and Pacific Business Funding Corporation made a distribution
of $208,000 to its shareholders. In 1996, Cupertino National Bancorp
declared and paid a dividend of $0.10, Peninsula Bank of Commerce
declared an annual dividend of $1.35 per share and Pacific Business
Funding Corporation made a distribution of $227,000 to its shareholders.
See notes to consolidated financial statements.
A-27
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-------------------------------
1998 1997* 1996*
--------- --------- ---------
(Dollars in thousands)
Cash flows--operating activities
Net income.................................... $ 16,578 $ 11,619 $ 6,348
Reconcilement of net income to net cash from
operations:
Provision for loan losses.................... 6,035 6,786 2,594
Depreciation and amortization................ 1,541 1,487 1,253
Deferred income taxes........................ (2,020) (4,200) (1,382)
(Gain) loss on sale of investments, net...... (374) 5 255
Changes in:
Accrued interest receivable and other
assets...................................... (8,803) (8,168) (1,029)
Accrued interest payable and other
liabilities................................. 6,341 6,170 1,750
Deferred loan fees and discounts, net........ 578 276 188
--------- --------- ---------
Operating cash flows, net..................... 19,876 13,975 9,977
--------- --------- ---------
Cash flows--investing activities
Maturities and partial paydowns on of
investment securities:
Held to maturity............................. 55,507 25,899 25,976
Available for sale........................... 441,778 47,145 32,990
Purchase of investment securities:
Held to maturity............................. (91,903) (9,851) (27,254)
Available for sale........................... (725,442) (150,740) (54,269)
Other securities............................. (3,401) -- --
Proceeds from sale of available for sale
securities................................... 195,863 14,598 31,430
Loans, net.................................... (256,221) (177,917) (176,863)
Investment in other real estate owned......... -- (500) 1,266
Purchase of property, premises and equipment.. (4,591) (2,341) (3,109)
Purchase of insurance policies................ (23,480) -- (240)
--------- --------- ---------
Investing cash flows, net..................... (411,890) (253,707) (170,073)
--------- --------- ---------
Cash flows--financing activities
Net change in deposits........................ 271,343 250,015 236,526
Net change in other borrowings--short term.... (27,506) 9,830 15,150
Proceeds from other borrowings--long term..... 70,000 3,025 2,015
Principal repayment--long term borrowings..... (2,265) (865) (775)
Proceeds from company obligated madatorily
redeemable preferred securities of subsidiary
trusts holding solely junior subordinated
debentures................................... 30,000 20,000 --
Proceeds from sale of common stock............ 5,014 2,193 1,917
Cash dividends................................ (5,137) (4,421) (2,536)
--------- --------- ---------
Financing cash flows, net..................... 341,449 279,777 252,297
--------- --------- ---------
Net change in cash and cash equivalents....... (50,565) 40,045 92,201
Cash and cash equivalents at beginning of
period....................................... 231,716 191,671 99,470
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 181,151 $ 231,716 $ 191,671
========= ========= =========
Cash flows--supplemental disclosures
Cash paid during the period for:
Interest..................................... $ 46,195 $ 33,760 $ 22,399
========= ========= =========
Income taxes................................. $ 10,305 $ 11,190 $ 5,228
========= ========= =========
Non-cash transactions:
Additions to other real estate owned......... $ 450 $ 853 $ 687
========= ========= =========
- --------
* Restated on a historical basis to reflect the mergers with Peninsula Bank of
Commerce, Pacific Rim Bancorporation and Pacific Business Funding
Corporation on a pooling of interests basis.
See notes to consolidated financial statements.
A-28
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1997 and 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Greater Bay Bancorp ("Greater Bay," on a parent-only basis, and the
"Company" on a consolidated basis) is a California corporation and bank
holding company that was incorporated on November 14, 1984 as San Mateo County
Bancorp. The name was changed to Mid-Peninsula Bancorp on October 7, 1994 as a
result of the merger between Mid-Peninsula Bank and San Mateo County Bancorp
and its wholly owned subsidiary, WestCal National Bank. The name was further
changed to Greater Bay Bancorp on November 27, 1996 as a result of the merger
between Mid-Peninsula Bancorp and Cupertino National Bancorp (see Note 2).
Upon consummation of the merger with Cupertino National Bancorp, Greater Bay
became a multi-bank holding company for two wholly owned subsidiaries. On
December 23, 1997 the Company merged with Peninsula Bank of Commerce, adding a
third wholly owned banking subsidiary to the group. On May 8, 1998, the
Company merged with Pacific Rim Bancorporation ("PRB"), the former holding
company of Golden Gate Bank ("Golden Gate"), adding a fourth wholly owned
banking subsidiary to the group. The four wholly owned bank subsidiaries are
Mid-Peninsula Bank ("MPB"), Cupertino National Bank ("CNB"), Peninsula Bank of
Commerce ("PBC"), and Golden Gate, collectively the "Banks." On August 31,
1998, the Company merged with Pacific Business Funding Corporation ("PBFC").
Subsequent to the completion of the merger the assets and liabilities of PBFC
were assigned to CNB. PBFC has been reformed as an operating division of CNB
and conducts business under the name Pacific Business Funding.
MPB commenced operations in October 1987 and is a state chartered bank
regulated by the Federal Reserve Bank ("FRB") and Department of Financial
Institutions of the State of California ("DFI"). CNB commenced operations in
May 1985 and is a national banking association regulated by the Office of the
Comptroller of Currency ("OCC"). PBC commenced operations in September 1981
and is a state chartered bank regulated by the FRB and the DFI. Golden Gate
commenced operations in 1976 and is a state chartered bank regulated by the
FRB and the DFI.
On March 3, 1997 GBB Capital I, a statutory business trust, was formed for
the exclusive purpose of issuing and selling Cumulative Trust Preferred
Securities ("TPS") (see Note 8) and using the proceeds from the sale of the
TPS to acquire Junior Subordinated Debentures issued by Greater Bay. On May
18, 1998 GBB Capital II, a statutory business trust, was formed for the
exclusive purpose of issuing and selling additional TPS and using the proceeds
from the sale of the TPS to acquire Junior Subordinated Debentures issued by
Greater Bay.
The Company provides a wide range of commercial banking services to small
and medium-sized businesses, real estate developers, property managers,
business executives, professionals and other individuals. The Company operates
throughout Silicon Valley, the San Francisco Peninsula and the Contra Costa
Tri Valley Region, with offices located in San Jose, Cupertino, Santa Clara,
Palo Alto, Redwood City, San Mateo, Millbrae, San Bruno, San Francisco and
Walnut Creek.
Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Greater Bay
and its wholly owned subsidiaries, MPB, CNB, PBC, Golden Gate, GBB Capital I
and GBB Capital II and its operating divisions Greater Bay Bank Santa Clara
Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater
Bay Bank Contra Costa Banking Office, Greater Bay International Banking
Division, Greater Bay Trust Company, Pacific Business Funding and Venture
Banking Group. All significant intercompany transactions and balances have
been eliminated. Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the 1998 presentation. The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and the prevailing practices within the banking
industry.
A-29
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of certain revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold and agency securities
with original maturities of less than ninety days. Generally, federal funds
are sold for one-day periods. As discussed in Note 7, PBC holds $89.6 million
in one demand deposit account whose funds are comprised of proceeds from a
lawsuit settlement. Due to the uncertainty of the time this special deposit
(the "Special Deposit") will remain with PBC, management has invested a
significant portion of the proceeds in agency securities with maturities of
less than 90 days. Those securities have been classified as cash and
equivalents. MPB, CNB, PBC, and Golden Gate are required by the Federal
Reserve System to maintain noninterest-earning cash reserves against certain
of their deposit accounts. At December 31, 1998, the required combined
reserves totaled approximately $19.4 million.
Investment Securities
The Company classifies its investment securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Investment securities
classified as held to maturity are reported at amortized cost; available for
sale securities are reported at fair value with net unrealized gains and
losses reported (net of taxes) as a component of shareholders' equity. The
Company does not have any trading securities.
A decline in the market 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 are recognized when earned. Realized
gains and losses for securities classified as available for sale and held to
maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
Required investments in Federal Reserve Bank and Federal Home Loan Bank
stocks for MPB, CNB, PBC, and Golden Gate are recorded at cost.
Loans
Loans held for investment are carried at amortized cost. The Company's loan
portfolio consists primarily of commercial and real estate loans generally
collateralized by first and second deeds of trust on real estate as well as
business assets and personal property.
Interest income is accrued on the outstanding loan balances using the simple
interest method. Loans are generally placed on nonaccrual status when the
borrowers are past due 90 days and when full payment of principal or interest
in 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.
A-30
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Company charges loan origination and commitment fees. Net loan
origination fees and costs are deferred and amortized to interest income over
the life of the loan, using the effective interest method. Loan commitment
fees are amortized to interest income over the commitment period.
When a loan is sold, unamortized fees and capitalized direct costs are
recognized in the consolidated statements of operations. Other loan fees and
charges representing service costs for the repayment of loans, for delinquent
payments or for miscellaneous loan services are recognized when earned.
Sale and Servicing of Small Business Administration ("SBA") Loans
The Company originates loans to customers under SBA programs that generally
provide for SBA guarantees of 70% to 90% of each loan. The Company generally
sells the guaranteed portion of the majority of the loans to an investor and
retains the unguaranteed portion and servicing rights in its own portfolio.
Funding for the SBA programs depend on annual appropriations by the U.S.
Congress.
Gains on these sales are earned through the sale of the guaranteed portion
of the loan for an amount in excess of the adjusted carrying value of the
portion of the loan sold. The Company allocates the carrying value of such
loans between the portion sold, the portion retained and a value assigned to
the right to service the loan. The difference between the adjusted carrying
value of the portion retained and the face amount of the portion retained is
amortized to interest income over the life of the related loan using a method
which approximates the interest method.
Allowance for Loan Losses
The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), on January
1, 1995. Under these standards, a loan is considered impaired, based on
current information and events, if it is probable that the Company will be
unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Under these
standards, any allowance on impaired loans is generally based on one of three
methods. It requires that impaired loans be measured at either, 1) the present
value of expected cash flows at the loan's effective interest rate, 2) the
loan's observable market price, or 3) the fair market value of the collateral
of the loan. In general, these statements are not applicable to large groups
of smaller-balance loans that are collectively evaluated for impairment such
as credit cards, residential mortgage and/or consumer installment loans.
Income recognition on impaired loans conforms to the method the Company uses
for income recognition on nonaccrual loans.
The allowance for loan losses is maintained at a level deemed appropriate by
management to adequately provide for known losses in the loan portfolio. The
allowance is based upon a number of factors, including prevailing and
anticipated economic trends, industry experience, industry and geographic
concentrations, estimated collateral values, management's assessment of credit
risk inherent in the portfolio, delinquency trends, historical loss
experience, specific problem loans and other relevant factors.
Additions to the allowance, in the form of provisions, are reflected in
current operating results, while charge-offs to the allowance are made when a
loss is determined to have occurred. Because the allowance for loan losses is
based on estimates, ultimate losses may vary from the current estimates.
Other Real Estate Owned
Other real estate owned ("OREO") consists of properties acquired through
foreclosure and is stated at the lower of carrying value or fair value less
estimated costs to sell. Development and improvement costs relating to the
OREO are capitalized. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to current earnings with a provision
for losses on foreclosed property in the period in which they are identified.
The
A-31
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
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............................................... 5-7 years
Amortization of leasehold improvements is computed on a straight-line basis
over the shorter of the lease term or the estimated useful lives of the asset,
which is generally 10 years.
Income Taxes
Deferred incomes taxes reflect the estimated future tax effects of temporary
differences between the amount of assets and liabilities for financial
reporting purposes and such amounts as measured by tax laws and regulations.
Derivatives and Hedging Activities
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"), effective October 1, 1998. In accordance
with the transition provisions of SFAS No. 133, the Company recorded a net-of-
tax cumulative-effect-type adjustment of $1,063,000 in accumulated other
comprehensive income to recognize at fair value all derivatives that are
designated as cash-flow hedging instruments. There were no net gains or losses
on derivatives that had been previously deferred or gains and losses on
derivatives that were previously deferred as adjustments to the carrying
amount of hedged items.
All derivatives are recognized on the balance sheet at their fair value. On
the date the derivative contract is entered into, the Company designates the
derivative as a hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to a recognized asset or liability
("cash flow" hedge). Changes in the fair value of a derivative that is highly
effective as--and that is designated and qualifies as--a cash-flow hedge are
recorded in other comprehensive income, until earnings are affected by the
variability of cash flows (e.g., when periodic settlements on a variable-rate
asset or liability are recorded in earnings).
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk-management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as cash-flow hedges to specific liabilities on
the balance sheet. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in cash flows
of hedged items.
When it is determined that a derivative is not highly effective as a hedge
or that it has ceased to be a highly effective hedge, the Company discontinues
hedge accounting prospectively when (1) it is determined that the derivative
is no longer effective in offsetting changes in the cash flows of a hedged
item; (2) the derivative expires or
A-32
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
is sold, terminated, or exercised; or (3) management determines that
designation of the derivative as a hedge instrument is no longer appropriate.
In these situations where hedge accounting is discontinued, the derivative
will be carried at its fair value on the balance sheet, with changes in its
fair value recognized in current-period earnings. All gains or losses that
were accumulated in other comprehensive income will be recognized immediately
in earnings upon the discontinuance of hedge accounting.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires companies to classify items of
other comprehensive income by their nature in the financial statements and
display the accumulated other comprehensive income separately from retained
earnings in the equity section of the balance sheet. The changes to the
balances of accumulated other comprehensive income are as follows:
Accumulated
Other
Unrealized Gain Cash Flow Comprehensive
on Securities Hedges Income (Loss)
--------------- --------- -------------
(Dollars in thousands)
Balance--December 31, 1997........... $223 $ -- $ 223
Current period change................ 358 (677) (319)
---- ----- -----
Balance--December 31, 1998........... $581 $(677) $ (96)
==== ===== =====
Per Share Data
Net income per share is stated in accordance with SFAS No. 128 "Earnings per
Share". Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted
average number of common shares plus common equivalent shares outstanding
including dilutive stock options. All years presented include the effect of
the 2-for-1 stock split effective as of April 30, 1998.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for
the years ended December 31, 1998, 1997 and 1996.
For the year ended December 31,
1998
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(Dollars in thousands, except per
share amounts)
Net income............................. $16,578
Basic net income per share:
Income available to common
shareholders........................ 16,578 9,485,000 $1.75
Effect of dilutive securities:
Stock options........................ -- 746,000 --
------- ---------- -----
Diluted net income per share:
Income available to common
shareholders and assumed
conversions......................... $16,578 10,231,000 $1.62
======= ========== =====
A-33
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
For the year ended December 31,
1997
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(Dollars in thousands, except per
share amounts)
Net income............................. $11,619
Basic net income per share:
Income available to common
shareholders........................ 11,619 9,196,000 $1.26
Effect of dilutive securities:
Stock options........................ -- 696,000 --
------- --------- -----
Diluted net income per share:
Income available to common
shareholders and assumed
conversions......................... $11,619 9,892,000 $1.17
======= ========= =====
For the year ended December 31,
1996
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
(Dollars in thousands, except per
share amounts)
Net income............................. $ 6,348
Basic net income per share:
Income available to common
shareholders........................ 6,348 8,856,000 $0.72
Effect of dilutive securities:
Stock options........................ -- 587,000 --
------- --------- -----
Diluted net income per share:
Income available to common
shareholders and assumed
conversions......................... $ 6,348 9,443,000 $0.67
======= ========= =====
There were options to purchase 51,000 shares that were considered anti-
dilutive whereby the options' exercise price was greater than the average
market price of the common shares, during the year ended December 31, 1998.
There were no options that were considered anti-dilutive during the years
ended December 31, 1997 and 1996.
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 1996 merger with
Cupertino National Bancorp at a 0.81522 conversion ratio, the 1997 merger with
PBC at a 0.96550 conversion ratio and the 1998 mergers with PRB and PBFC at a
total of 950,748 and 298,000 shares, respectively.
Segment Information
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major
customers. The adoption of SFAS No. 131 did not affect results of operations
or financial position but did affect the disclosure of segment information.
A-34
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
NOTE 2--MERGERS
On August 31, 1998, PBFC, an asset-based specialty finance company merged
with and into the Company. Upon consummation of the merger, the outstanding
shares of PBFC were converted into an aggregate of 298,000 shares of the
Company's stock. The stock was issued to former PBFC shareholders, in a tax-
free exchange accounted for as a pooling-of-interests.
On May 8, 1998, PRB, the former holding company of Golden Gate, merged with
and into the Company. Upon consummation of the merger, the outstanding shares
of PRB were converted into an aggregate of 950,748 shares of the Company's
stock. The stock was issued to former PRB's sole shareholder in a tax-free
exchange accounted for as a pooling-of-interests.
On December 23, 1997, the Company consummated a merger with PBC. Pursuant to
terms of the merger agreement, the Company issued approximately 664,000 shares
(approximately 1,328,000 shares, as adjusted to reflect the 2-for-1 stock
split) of its common stock in exchange for the outstanding common stock of PBC
at an exchange ratio of 0.9655 of the Company's common stock for each share of
PBC's common stock. The merger was accounted for as a pooling-of-interests.
On November 27, 1996, the Company consummated a merger with Cupertino
National Bancorp. Pursuant to the terms of the merger agreement, the Company
issued approximately 1,586,000 shares (approximately 3,172,000 shares, as
adjusted for the 2-for-1 stock split) of its common stock in exchange for the
outstanding common stock of Cupertino National Bancorp at an exchange ratio of
0.81522 of the Company's common stock for each share of Cupertino National
Bancorp's common stock. The merger was accounted for as a pooling-of-
interests.
The following table sets forth the separate results of operations for
Greater Bay, PBC, PRB and PBFC for the periods indicated:
Year ended December 31, Net Interest Income Net Income
----------------------- ------------------- ----------
(Dollars in thousands)
1997:
Greater Bay........................... $47,776 $10,013
PRB................................... 4,750 996
PBFC.................................. 1,942 610
------- -------
Combined............................ $54,468 $11,619
======= =======
1996:
Greater Bay........................... $28,824 $3,503
PBC................................... 6,149 1,835
PRB................................... 4,039 541
PBFC.................................. 1,492 469
------- -------
Combined............................ $40,504 $6,348
======= =======
In all mergers, certain reclassifications were made to conform to the
Company's financial presentation. The results of operations previously
reported by the separate enterprises for the periods before the merger was
consummated and that are included in the current combined amounts presented in
the accompanying consolidated financial statements are summarized below.
A-35
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following table sets forth the composition of the operations of the
Company and PBFC, PRB and PBC for the periods indicated.
PBFC PRB PBC
---------------- ------------------ ------------------
Six months ended Three months ended Nine months ended
June 30, 1998 March 31, 1998 September 30, 1997
---------------- ------------------ ------------------
(Dollars in thousands)
Net interest income:
Greater Bay Bancorp... $30,077 $13,366 $27,922
Acquired entity....... 1,154 1,285 6,851
------- ------- -------
Combined............ $31,231 $14,651 $34,773
======= ======= =======
Provision for loan
losses:
Greater Bay Bancorp... $ 2,243 $ 866 $ 5,287
Acquired entity....... 100 70 105
------- ------- -------
Combined............ $ 2,343 $ 936 $ 5,392
======= ======= =======
Net income:
Greater Bay Bancorp... $ 6,628 $ 3,646 $ 6,097
Acquired entity....... 344 60 2,573
------- ------- -------
Combined............ $ 6,972 $ 3,706 $ 8,670
======= ======= =======
The following table sets forth the composition of the combined operations of
Mid-Peninsula Bancorp and Cupertino National Bancorp for the period indicated.
Nine months ended
September 30, 1996
----------------------
(Dollars in thousands)
Net interest income:
Mid-Peninsula Bancorp............................... $ 8,878
Cupertino National Bancorp.......................... 11,487
-------
Combined.......................................... $20,365
=======
Provision for loan losses:
Mid-Peninsula Bancorp............................... $ 427
Cupertino National Bancorp.......................... 864
-------
Combined.......................................... $ 1,291
=======
Net income:
Mid-Peninsula Bancorp............................... $ 2,373
Cupertino National Bancorp.......................... 1,548
-------
Combined.......................................... $ 3,921
=======
There were no significant transactions between the Company and PBFC, the
Company and PRB, the Company and PBC or between Mid-Peninsula Bancorp and
Cupertino National Bancorp prior to the mergers. All intercompany transactions
have been eliminated.
A-36
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
NOTE 3--INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities is
summarized below:
As of December 31, 1998
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
(Dollars in thousands)
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations......... $ 4,408 $ 26 $ -- $ 4,434
U.S. agency notes................. 28,621 20 (2) 28,639
Mortgage-backed securities........ 152,987 988 (60) 153,915
Tax-exempt securities............. 32,952 563 -- 33,515
Corporate securities.............. 35,517 60 (597) 34,980
-------- ------ ----- --------
Total securities available for
sale........................... 254,485 1,657 (659) 255,483
-------- ------ ----- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations......... 1,764 2 (2) 1,764
U.S. agency notes................. 25,490 -- (58) 25,432
Mortgage-backed securities........ 27,961 86 (179) 27,868
Tax-exempt securities............. 25,942 725 (14) 26,653
-------- ------ ----- --------
Total securities held to
maturity....................... 81,157 813 (253) 81,717
-------- ------ ----- --------
Other securities.................. 5,654 -- -- 5,654
-------- ------ ----- --------
Total investment securities..... $341,296 $2,470 $(912) $342,854
======== ====== ===== ========
As of December 31, 1997
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
(Dollars in thousands)
AVAILABLE FOR SALE SECURITIES:
U.S. Treasury obligations......... $ 10,095 $ 52 $ (2) $ 10,145
U.S. agency notes................. 38,833 52 (63) 38,822
Mortgage-backed securities........ 102,432 357 (185) 102,604
Tax-exempt securities............. 7,018 199 (5) 7,212
Corporate securities.............. 7,568 62 -- 7,630
-------- ------ ----- --------
Total securities available for
sale........................... 165,946 722 (255) 166,413
-------- ------ ----- --------
HELD TO MATURITY SECURITIES:
U.S. Treasury obligations......... 501 1 -- 502
U.S. agency notes................. 17,798 182 (12) 17,968
Mortgage-backed securities........ 11,324 177 (2) 11,499
Tax-exempt securities............. 14,838 492 (53) 15,277
-------- ------ ----- --------
Total securities held to
maturity....................... 44,461 852 (67) 45,246
-------- ------ ----- --------
Other securities.................. 2,253 -- -- 2,253
-------- ------ ----- --------
Total investment securities..... $212,660 $1,574 $(322) $213,912
======== ====== ===== ========
A-37
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following table shows amortized cost and estimated market value of the
Company's investment securities by year of maturity as of December 31, 1998.
2000 2004
Through Through 2009 and
1999 2003 2008 Thereafter Total
------- ------- ------- ---------- --------
(Dollars in thousands) (1)
AVAILABLE FOR SALE
SECURITIES:
U.S. Treasury obligations.. $ 4,308 $ 100 $ -- $ -- $ 4,408
U.S. agency notes (2)...... 15,829 -- 12,792 -- 28,621
Mortgage-backed securities
(3)....................... -- 3,033 8,941 141,013 152,987
Tax-exempt securities...... -- 1,601 4,561 26,790 32,952
Corporate securities....... 4,016 991 -- 30,510 35,517
------- ------- ------- -------- --------
Total securities
available for sale...... 24,153 5,725 26,294 198,313 254,485
======= ======= ======= ======== ========
Market value............... $24,197 $ 5,808 $26,601 $198,877 $255,483
======= ======= ======= ======== ========
HELD TO MATURITY
SECURITIES:
U.S. Treasury obligations.. 1,764 -- -- -- 1,764
U.S. agency notes (2)...... -- 23,990 1,500 -- 25,490
Mortgage-backed securities
(3)....................... -- -- 7,596 20,365 27,961
Tax-exempt securities...... 1,261 3,598 5,252 15,831 25,942
------- ------- ------- -------- --------
Total securities held to
maturity................ 3,025 27,588 14,348 36,196 81,157
======= ======= ======= ======== ========
Market value............... 3,034 27,613 7,528 43,542 81,717
======= ======= ======= ======== ========
COMBINED INVESTMENT
SECURITIES PORTFOLIO:
Total investment
securities................ $27,178 $33,313 $40,642 $234,509 $335,642
======= ======= ======= ======== ========
Total market value......... $27,231 $33,421 $34,129 $242,419 $337,200
======= ======= ======= ======== ========
Weighted average yield-
total portfolio........... 5.73% 5.74% 5.25% 6.84% 6.23%
--------
(1) Other securities are comprised of equity investments and have no
stated maturity and therefore are excluded from this table.
(2) Certain notes issued by U.S. Agencies may be called, without
penalty, at the discretion of the issuer. This may cause the
actual maturities to differ significantly from the contractual
maturity dates.
(3) Mortgage-backed securities are shown at contractual maturity;
however, the average life of these mortgage-backed securities may
differ due to principal prepayments.
Investment securities with a carrying value of $104.2 million and $34.9
million were pledged to secure deposits, borrowings and for other purposes as
required by law or contract at December 31, 1998 and 1997, respectively.
Investments in the FRB and the FHLB are required in order to maintain
membership and support activity levels.
A-38
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Proceeds and realized losses and gains on sales of investment securities for
the years ended December 31, 1998, 1997 and 1996 are presented below:
1998 1997 1996
-------- ------- -------
(Dollars in thousands)
Proceeds from sale of available for sale
securities.................................... $195,863 $14,598 $31,430
Available for sale securities-gains (losses)
(1)........................................... $ 374 $ (5) $ (255)
--------
(1) Includes $466,000 of charges in 1996 to conform accounting
practices, which is included in merger and other related
nonrecurring costs.
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, 1998, 1997 and 1996:
1998 1997 1996
------- ------- -------
(Dollars in thousands)
Balance, January 1................................ $16,394 $10,136 $ 6,683
Provision for loan losses (1)................... 6,218 8,137 3,394
Loan charge-offs................................ (1,420) (1,939) (586)
Recoveries...................................... 112 60 645
------- ------- -------
Balance, December 31.............................. $21,304 $16,394 $10,136
======= ======= =======
--------
(1) Includes $183,000, $1.4 million and $800,000 of charges in 1998,
1997 and 1996, respectively, to conform accounting practices for
the Banks' reserve methodologies and is included in merger and
related nonrecurring costs in the consolidated statements of
operations.
The following table sets forth nonperforming loans as of December 31, 1998,
1997 and 1996. 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 outstanding at year end totaled $114,000, $479,000, and
$633,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Interest income recognized on the nonperforming loans approximated $80,000,
$206,000, and $508,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
1998 1997 1996
------- ------- -------
(Dollars in thousands)
Nonaccrual loans.................................... $ 1,858 $ 2,971 $ 4,616
Accruing loans past due 90 days or more............. -- 158 1,237
Restructured loans.................................. 327 1,062 1,828
------- ------- -------
Total nonperforming loans........................... $ 2,185 $ 4,191 $ 7,681
======= ======= =======
At December 31, 1998 and 1997, the recorded investment in loans, for which
impairment has been recognized in accordance with SFAS No. 114 and No. 118,
was approximately $1.9 million and $2.8 million, respectively, with
corresponding valuation allowances of $696,000 and $568,000, respectively. For
the years ended December 31, 1998 and 1997, the average recorded investment in
impaired loans was approximately $3.3 million and $4.4 million, respectively.
The Company did not recognize interest income on impaired loans during the
twelve months ended December 31, 1998, 1997 and 1996.
A-39
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Company had $327,000 and $1,062,000 of restructured loans as of December
31, 1998 and 1997, respectively. Principal reduction concessions totaling
$387,000 were permitted on restructured loans during the year ended December
31, 1997. There were no principal reduction concessions allowed on
restructured loans during 1998. Interest income from restructured loans
totaled $16,000, $82,000 and $317,000 for the years ended December 31, 1998,
1997 and 1996. Foregone interest income, which totaled $11,000, $10,000 and
$8,000 for the years ended December 31, 1998, 1997 and 1996 would have been
recorded as interest income if the loans had accrued interest in accordance
with their original terms prior to the restructurings.
NOTE 5--OTHER REAL ESTATE OWNED
At December 31, 1998 and 1997, other real estate owned ("OREO") consisted of
properties acquired through foreclosure with a carrying value of $966,000 and
$1.3 million, respectively. These balances are included in interest receivable
and other assets in the accompanying consolidated balance sheets. There was no
allowance for estimated losses.
The following summarizes OREO operations, which are included in operating
expenses, for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996
------- -------- -------
(Dollars in thousands)
Real estate operations, net...................... $ 77 $ 247 $ 190
Gain on sale of other real estate owned.......... (1) (124) (15)
Provision for estimated losses................... -- 54 --
------- -------- -------
Net loss from other real estate operations....... $ 76 $ 177 $ 175
======= ======== =======
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT
Property, premises and equipment at December 31, 1998 and 1997 are composed
of the following:
1998 1997
------- -------
(Dollars
in thousands)
Land....................................................... $ 417 $ 417
Building and premises...................................... 1,561 1,377
Leasehold improvements..................................... 4,703 4,771
Furniture and equipment.................................... 9,794 7,951
Automobiles................................................ 124 123
------- -------
Total.................................................... 16,599 14,639
Accumulated depreciation and amortization.................. (5,638) (6,141)
------- -------
Premises and equipment, net.............................. $10,961 $ 8,498
======= =======
Depreciation and amortization amounted to $2.1 million, $1.9 million and
$1.5 million for the years ended December 31, 1998, 1997 and 1996,
respectively, and have been included in occupancy and equipment expense in the
accompanying consolidated statements of operations.
A-40
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
NOTE 7--DEPOSITS
Deposits as of December 31, 1998 and 1997 are as follows:
1998 1997
---------- ----------
(Dollars
in thousands)
Demand, noninterest-bearing........................... $ 268,448 $ 219,495
MMDA, NOW and Savings................................. 854,392 627,475
Time certificates, $100,000 and over.................. 168,075 183,147
Other time certificates............................... 51,577 41,031
---------- ----------
Total deposits...................................... $1,342,492 $1,071,148
========== ==========
The following table sets forth the maturity distribution of time
certificates of deposit at December 31, 1998.
December 31, 1998
-------------------------------------------------------------
Seven to One to More
Three months Four to six twelve three than
or less months months years three years Total
------------ ----------- -------- ------ ----------- --------
(Dollars in thousands)
Time deposits, $100,000
and over............... $123,309 $27,502 $13,930 $3,334 $-- $168,075
Other time deposits..... 25,231 11,717 10,222 4,375 32 51,577
-------- ------- ------- ------ ---- --------
Total................. $148,540 $39,219 $24,152 $7,709 $ 32 $219,652
======== ======= ======= ====== ==== ========
At December 31, 1998 and 1997, the Company held $89.6 million and $88.1
million, respectively from a single depositor. Due to the uncertainty of the
time the deposit will remain outstanding, management has invested a
significant portion in agency securities with maturities of less than 90 days.
NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED
DEBENTURES
GBB Capital I and GBB Capital II (the "Trusts") are Delaware business trusts
wholly-owned by Greater Bay and were formed for the purpose of issuing Company
Obligated Manditorily Redeemable Preferred Securities of Subsidiary Trusts
Holding Soley Junior Subordinated Debentures ("TPS"). The TPS are individually
described below. Interest on the TPS are payable quarterly and is deferrable,
at the option of the Company, for up to five years. Following the issuance of
each TPS, the Trusts used the proceeds from the TPS offerings to purchase a
like amount of Junior Subordinated Deferrable Interest Debentures (the
"Debentures") of Greater Bay. The Debentures bear the same terms and interest
rates as the related TPS. The Debentures are the sole assets of the Trusts and
are eliminated, along with the related income statement effects, in the
consolidated financial statements. Greater Bay has fully and unconditionally
guaranteed all of the obligations of the Trusts. Under applicable regulatory
guidelines, a portion of the TPS will qualify as Tier I capital, and the
remaining portion will qualify as Tier II capital.
On March 30, 1997, GBB Capital I completed a public offering of 800,000
shares of 9.75% Cumulative Trust Preferred Securities ("TPS I") in an
aggregate amount of $20.0 million. The TPS I accrue interest at an annual rate
of 9.75% on the $20.0 million liquidation amount of $25 per share of TPS I.
The TPS I are mandatorily redeemable, in whole or in part, upon repayment of
the Debentures at their stated maturity of April 1, 2027 or their earlier
redemption. The Debentures are redeemable prior to maturity at the option of
the Company, on or after April 1, 2002, in whole at any time or in part from
time to time.
A-41
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
On August 12, 1998, GBB Capital II completed an offering of 30,000 shares of
Floating Rate Trust Preferred Securities, Series A ("the Series A Securities")
in an aggregate amount of $30.0 million. The Series A Securities issued in the
offering were sold in a private transaction pursuant to an applicable
exemption from registration under the Securities Act. In November 1998, the
Company, through GBB Capital II, completed an offer to exchange the Series A
Securities for a like amount of its registered Floating Rate Trust Preferred
Securities, Series B ("TPS II"). The exchange offer was conducted in
accordance with the terms of the initial issuance of the Series A Securities.
The TPS II accrue interest at a variable rate of interest, initially at
7.1875%, on the liquidation amount of $1,000 per share of TPS II. The interest
rate resets quarterly and is equal to 3-month LIBOR plus 150 basis points. As
part of this transaction, the Company concurrently entered into an interest
rate swap to fix the cost of the offering at 7.55% for 10 years (see note 10).
The TPS II are mandatorily redeemable, in whole or in part, upon repayment of
the Debentures at their stated maturity of September 15, 2028 or their earlier
redemption. The Debentures are redeemable prior to maturity at the option of
the Company, on or after September 15, 2008, in whole at any time or in part
from time to time.
The total amount of TPS outstanding at December 31, 1998 and 1997 was $50.0
million and $20.0 million, respectively and the dividends paid on TPS was $2.8
million and $1.5 million in 1998 and 1997, respectively.
NOTE 9--BORROWINGS
Other borrowings are detailed as follows:
1998 1997
----------- -----------
(Dollars in thousands)
Other borrowings:
Short term borrowings:
Securities sold under agreements to
repurchase.................................... $ -- $ 19,480
Other short term notes payable................. 135 2,675
Advances under credit line..................... -- 7,750
----------- -----------
Total short term borrowings.................. 135 29,905
----------- -----------
Long term borrowings:
Securities sold under agreements to repurchase... 50,000 --
FHLB advances.................................... 20,000 --
Promissory notes................................. 2,450 2,450
----------- -----------
Total other long term borrowings............. 72,450 2,450
----------- -----------
Total other borrowings............................. $ 72,585 $ 32,355
=========== ===========
Subordinated notes, due September 15, 2005......... $ 3,000 $ 3,000
----------- -----------
Total subordinated debt............................ $ 3,000 $ 3,000
=========== ===========
During the years ended December 31, 1998 and 1997, the average balance of
securities sold under short term agreements to repurchase was $11,648,000 and
$5,278,000, respectively, and the average interest rates during those periods
were 5.35% and 5.71%, respectively. Securities sold under short term
agreements to repurchase generally mature within 90 days of dates of purchase.
The maximum outstanding at any month end was $30.2 million and $19.5 million
for the years ended December 31, 1998 and 1997 respectively.
During the years ended December 31, 1998 and 1997, the average balance of
federal funds purchased was $293,000 and $1,523,000, respectively, and the
average interest rates during those periods were 5.53% and 5.32%,
A-42
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
respectively. There were no such balances outstanding at December 31, 1998 or
1997. The maximum amount outstanding at any month end was $0 and $9.2 million
for the years ended December 31, 1998 and 1997 respectively.
The Company has sold securities under long term agreements to repurchase
which mature in the year 2003 and have an average interest rate of 5.21%. The
counterparties to these agreements have put options which give them the right
to demand early repayment. As of December 31, 1998, $40.0 million of these
borrowings are subject to early repayment beginning in 1999 and $10.0 million
are subject to early repayment beginning in 2000.
The FHLB advances will mature in the year 2003 and have an average interest
rate of 5.13%. The advances are collateralized by securities pledge to the
FHLB. Under the terms of the advances, the FHLB has a put option which gives
it the right to demand early repayment beginning in 1999.
The promissory notes, which bear an interest rate of 13.76% and will mature
April 15, 2000, were offered to PBFC's officers along with other accredited
investors within the definition of Rule 501 under the Securities Act of 1933,
as amended. The notes are redeemable by the Company at any time.
The subordinated notes, which will mature on September 15, 2005, were
offered to members of Cupertino National Bank's Board of Directors and bank
officers along with other accredited investors within the definition of Rule
501 under the Securities Act of 1933, as amended. The notes bear an interest
rate of 11.5%. The notes are redeemable by the Company any time after
September 30, 1998 at a premium ranging from 0% to 5%. The notes qualify as
Tier 2 capital for the Company.
NOTE 10--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company currently uses a single interest-rate swap to convert its
floating-rate debt (the TPS II) to fixed rates. This swap was entered into
concurrently with the issuance of the debt being hedged. This swap is
accounted for as a cash flow hedge under SFAS No. 133. This swap possesses a
term equal to the non-callable term of the debt, with a fixed pay rate and a
receive rate indexed to rates paid on the debt and a notional amount equal to
the amount of the debt being hedged. As the specific terms and notional amount
of the swap exactly match those of the debt being hedged the Company meets the
"no ineffectiveness" criteria of SFAS No. 133. As such the swap is assumed to
be 100% effective and all changes in the market value of the hedge are
recorded in other comprehensive income with no impact on the income statement
for any ineffective portion. As of December 31, 1998, the unrealized loss on
the cash flow hedge was $677,000, net of income taxes, which was included in
the balance of accumulated other comprehensive income. The floating rate TPS
II combined with the cash flow hedge created a synthetic fixed rate debt
instrument. The unrealized loss on the cash flow hedge approximated the
unrealized loss the Company would have incurred if it had issued a fixed rate
debt instrument. Under current accounting practices, as required by SFAS No.
133, the Company was required to record the unrealized loss on the synthetic
fixed rate debt instrument, but it would not have been required to record an
unrealized loss if it had issued fixed rate debt.
The notional amount of the swap is $30.0 million with a term of 10 years
expiring on September 15, 2008. The Company intends to use the swap as a hedge
of the related debt for 10 years. The periodic settlement date of the swap
results in the reclassifying as earnings the gains or losses that are reported
in accumulated comprehensive income. For the year ended December 31, 1998 the
Company recognized a net settlement expense of $55,000 for the swap. The
estimated net amount of the existing losses at December 31, 1998 that is
expected to be reclassified as earnings within the next twelve months,
assuming no change in interest rates, would be approximately $147,000, net of
taxes. For the years ended December 31, 1997 and 1996, the Company did not
have any derivative instruments.
The Company minimizes the credit (or repayment) risk in derivative
instruments by entering into transactions with high-quality counterparties
that are reviewed periodically by the Company's credit committee.
A-43
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
NOTE 11--INCOME TAXES
Income tax expense was comprised of the following for the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
------- ------- -------
(Dollars in thousands)
Current:
Federal......................................... $ 7,537 $ 8,248 $ 4,276
State........................................... 2,721 2,426 1,084
------- ------- -------
Total current................................. 10,258 10,674 5,360
Deferred:
Federal......................................... (2,255) (3,243) (1,244)
State........................................... (627) (957) (138)
------- ------- -------
Total deferred................................ (2,882) (4,200) (1,382)
------- ------- -------
Total expense................................. $ 7,376 $ 6,474 $ 3,978
======= ======= =======
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, 1998 and 1997 are as follows:
Years Ended
December 31,
---------------
1998 1997
------- ------
(Dollars in
thousands)
Loan loss reserves.......................................... $ 7,301 $5,061
State income taxes.......................................... 2,276 1,943
Deferred compensation....................................... 1,380 997
Net operating losses........................................ 167 336
Unrealized gains............................................ 70 (247)
Purchase accounting adjustments............................. 22 72
Accumulated depreciation.................................... 5 61
Other....................................................... (237) (445)
------- ------
Net deferred tax asset.................................... $10,984 $7,778
======= ======
Management believes that the Company will fully realize its total deferred
income tax assets as of December 31, 1998 based upon the Company's recoverable
taxes from prior carryback years, its total deferred income tax liabilities
and its current level of operating income.
At December 31, 1998, the Company had a federal tax net operating loss
carryforward of approximately $478,000 expiring in years 2010, 2011, and 2012.
Under provisions of the United States income tax laws these loss carryovers
are subject to limitation due to the acquisition of Pacific Rim Bancorporation
in 1998. Management does not believe that these limitations will prevent the
realization of the benefit of the loss carryovers during the carryover
periods.
A-44
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
A reconciliation from the statutory income tax rate to the consolidated
effective income tax rate follows, for the years ended December 31, 1998, 1997
and 1996:
Years Ended
December 31,
------------------
1998 1997 1996
---- ---- ----
(Dollars in
thousands)
Statutory federal tax rate............................ 35.0% 35.0% 35.0%
California franchise tax expense, net of federal
income tax benefit................................... 5.7% 6.2% 7.1%
Tax exempt income..................................... (2.6)% (2.0)% (4.2)%
Nondeductible merger costs, net....................... (0.4)% 0.0% 2.6%
Contribution of appreciated securities................ (2.0)% 0.0% 0.0%
Other, net............................................ (4.9)% (3.4)% (2.0)%
---- ---- ----
Effective income tax rate........................... 30.8% 35.8% 38.5%
==== ==== ====
NOTE 12--OPERATING EXPENSES
Merger and other related nonrecurring costs for the years ended December 31,
1998, 1997 and 1996 were comprised of the following:
1998 1997 1996
------ ------ ------
(Dollars in
thousands)
Financial advisory and professional fees............... $1,101 $1,083 $1,000
Charges to conform accounting practices................ 183 1,350 1,266
Other costs............................................ 1,377 900 525
------ ------ ------
Total................................................ $2,661 $3,333 $2,791
====== ====== ======
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.
In July 1995, the Company settled a lawsuit of $1.1 million, net of tax. The
Company recovered those losses through insurance coverage for this settlement
in 1997. However, due to the uncertainty associated with the recovery, the
Company reflected the settlement expense as a charge to 1995 earnings, and the
associated recovery in 1997 as a recovery to earnings.
Other expenses for the years ended December 31, 1998, 1997 and 1996 were
comprised of the following:
1998 1997 1996
------- ------ ------
(Dollars in
thousands)
Telephone, postage and supplies....................... $ 1,775 $1,383 $1,163
Legal and other professional fees..................... 1,597 1,808 1,730
Marketing and promotion............................... 1,203 1,237 989
Directors fees........................................ 559 657 515
Client services....................................... 544 444 462
Data processing....................................... 430 478 514
Insurance............................................. 339 313 225
FDIC insurance and regulatory assessments............. 338 285 148
Other real estate owned............................... 76 177 175
Other................................................. 2,919 1,980 2,318
------- ------ ------
9,780 8,762 8,239
Contribution to GBB Foundation........................ 1,341 -- --
------- ------ ------
Total............................................... $11,121 $8,762 $8,239
======= ====== ======
A-45
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
NOTE 13--EMPLOYEE BENEFIT PLANS
Stock Option Plan
On November 19, 1997, the Company's shareholders approved an amendment of
the Greater Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan"), to
increase by 912,652 the number of shares of Greater Bay stock issuable under
the Bancorp Plan. This was done to accommodate the increased number of
eligible employees as a result of the merger with PBC.
Effective November 27, 1996, the Company's shareholders approved the
original Bancorp Plan and authorized an increase in the number of shares
previously available for issuance under the Mid-Peninsula Bancorp Plan from
914,074 to 1,503,128 shares to accommodate the merger of Mid-Peninsula Bancorp
and Cupertino National Bancorp. Under the terms of the merger, all stock
option plans of Cupertino National Bancorp and Mid-Peninsula Bancorp were
terminated at the time of the merger and all outstanding options from these
plans were assumed by the Bancorp Plan. Outstanding options from the Mid-
Peninsula Bancorp plan of 432,652 and outstanding options from the Cupertino
National Bancorp plan of 502,146 (converted at a ratio of 0.81522) were
assumed by the Bancorp Plan.
Options issued under the Bancorp Plan may be granted to employees and
nonemployee directors and may be either incentive or nonqualified stock
options as defined under current tax laws. The exercise price of each option
must equal the market price of the Company's stock on the date of grant. The
term of an option may not exceed 10 years and generally vest over a five year
period.
At December 31, 1998 the total authorized shares issuable under the Bancorp
Plan was approximately 2,260,000 shares and the number of shares available for
future grants was approximately 715,000 shares.
All shares amounts have been restated to reflect the 2-for-1 stock split
declared for shareholders of record as of April 30, 1998.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the
provisions of SFAS No. 123, the Company is encouraged, but not required, to
measure compensation costs related to its employee stock compensation plans
under the fair market value method. If the Company elects not to recognize
compensation expense under this method, it is required to disclose the pro
forma net income and net income per share effects based on the SFAS No. 123
fair value methodology. The Company implemented the requirements of SFAS No.
123 in 1996 and has elected to adopt the disclosure provisions of this
statement.
A-46
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
At December 31, 1998, the Company had one stock option plan, which is
described above. The Company applies Accounting Principles Board ("APB")
Opinion No. 25 and related interpretations in accounting the Bancorp Plan.
Accordingly, no compensation cost has been recognized for its stock option
plan. Had compensation for the Company's stock option plan been determined
consistent with SFAS No. 123, the Company's net income per share would have
been reduced to the pro forma amounts indicated below (the following reflects
the impact of the 2-for-1 stock split):
December 31,
--------------------------
1998 1997 1996
-------- -------- --------
(Dollars in thousands,
except per share amounts)
Net Income:
As reported..................................... $ 16,578 $ 11,619 $ 6,348
Pro forma....................................... $ 15,778 $ 11,210 $ 6,107
Basic net income per share
As reported..................................... $ 1.75 $ 1.26 $ 0.72
Pro forma....................................... $ 1.66 $ 1.22 $ 0.69
Diluted net income per share
As reported..................................... $ 1.62 $ 1.17 $ 0.67
Pro forma....................................... $ 1.54 $ 1.13 $ 0.65
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 1998, 1997 and 1996, respectively; dividend
yield of 1.75%, 1.8% and 2.0%; expected volatility of 39.84%, 22.9% and 19.3%;
risk free rates of 4.54%, 6.3% and 6.0%. No adjustments have been made for
forfeitures. The actual value, if any, that the option holder will realize
from these options will depend solely on the increase in the stock price over
the option price when the options are exercised.
A summary of the Company's stock option plan as of December 31, 1998, 1997,
and 1996 and changes during the years ended on those dates is presented below
(as adjusted for the 2 for 1 stock split):
1998 1997 1996
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding at beginning
of year................ 1,390 $11.27 1,316 $ 7.62 1,242 $ 5.46
Granted................. 558 31.29 312 24.11 482 10.12
Exercised............... (241) 7.15 (217) 4.92 (376) 3.95
Forfeited............... (65) 16.39 (21) 5.27 (32) 6.03
----- ------ ----- ------ ----- ------
Outstanding at end of
year................... 1,642 17.83 1,390 11.27 1,316 7.62
===== ====== ===== ====== ===== ======
Options exercisable at
year-end............... 676 8.63 750 6.97 624 6.32
===== ====== ===== ====== ===== ======
Weighted average fair
value of options
granted during the
year................... $11.63 $ 6.31 $ 2.87
====== ====== ======
A-47
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The following table summarizes information about stock options outstanding
at December 31, 1998 (as adjusted for the 2-for-1 stock split).
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Number Number
Exercise Outstanding Weighted Average Weighted Average Exercisable Weighted Average
Price Range (000's) Exercise Price Remaining Life (years) (000's) Exercise Price
------------- ----------- ---------------- ---------------------- ----------- ----------------
$ 3.06-$ 4.68 71 $ 3.75 1.4 71 $ 3.75
$ 4.86-$ 9.38 512 6.78 5.7 426 6.57
$10.88-$17.00 221 11.34 7.8 121 11.49
$17.13-$25.00 286 24.26 9.0 58 24.27
$25.38-$30.00 78 27.85 9.4 -- --
$31.50-$38.50 474 33.61 9.9 -- --
401(k) Savings Plan
The Company has a 401(k) tax deferred savings plan under which eligible
employees may elect to defer a portion of their salary (up to 15%) as a
contribution to the plan. The Company matches the employees contributions at a
rate set by the Board of Directors (currently 62.5% of the first 8% of
deferral of an individual's total compensation). The matching contribution
vests ratably over the first four years of employment. The Company has merged
the 401(k) plans of PBC and Golden Gate into the Company's plan.
For the years ended December 31, 1998, 1997 and 1996, the Company
contributed $812,000, $672,000 and $379,000, respectively to the 401(k) plans.
Employee Stock Purchase Plan
The Company has established an Employee Stock Purchase Plan, as amended,
under section 423(b) of the Internal Revenue Code which allows eligible
employees to set aside up to 15% of their compensation toward the purchase of
the Company's stock for an aggregate total of 267,868 shares. Under the plan
the purchase price is 85% of the lower of the fair market value at the
beginning or end of each three month offering period. During 1998, employees
purchased 29,670 shares of common stock for an aggregate purchase price of
$656,000 compared to the purchase of 30,320 shares of common stock for an
aggregate purchase price of $347,000 in 1997 and 21,264 shares of common stock
for an aggregate purchase price of $137,000 in 1996. There were 104,646 shares
remaining in the plan available for purchase by employees at December 31,
1998.
All shares amounts have been restated to reflect the 2-for-1 stock split
declared to shareholders of record as of April 30, 1998.
Supplemental Employee Compensation Benefits Agreements
The Company has entered into supplemental employee compensation benefits
agreements with certain executive and senior officers. Under these agreements,
the Company is generally obligated to provide for each such employee or their
beneficiaries, during a period of up to 15 to 20 years after the employee's
death, disability or retirement, annual benefits as defined in each specific
agreement. The estimated present value of future benefits to be paid is being
accrued over the vesting period of the participants. Expenses accrued for this
plan for the years ended December 31, 1998, 1997 and 1996 totaled $540,000,
$503,000 and $310,000, respectively. The related accumulated accrued liability
of at December 31, 1998 is approximately $2.2 million. Depending on the
agreement, the Company and the employees are beneficiaries of life insurance
policies that have been purchased as a method of financing the benefits under
the agreements. At December 31, 1998 and 1997, the Company's cash surrender
value of these policies was approximately $32.0 million and $9.4 million,
respectively and is included in other assets.
A-48
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Deferred Compensation Plan
Effective November 19, 1997, the Company adopted the Greater Bay Bancorp
1997 Elective Deferral Compensation Plan (the "Deferred Plan") that allows
eligible officers and directors of the Company to defer a portion of their
bonuses, director fees and other compensation. The deferred compensation will
earn interest calculated annually based on a short-term interest reference
rate. All participants are fully vested at all times in their contributions to
the Deferred Plan. At December 31, 1998, $834,000 of deferred compensation
under this plan is included in other liabilities in the accompanying
consolidated balance sheets.
Additionally, under deferred compensation agreements that were established
at PBC prior to its merger with the Company, there was approximately $1.1
million of deferred compensation which is included in other liabilities.
Change of Control
In the event of a change in control, the supplemental employee compensation
benefits agreements with certain executive and senior officers may require
payments to be made by the Company that are currently not recognized in the
accompanying consolidated financial statements.
NOTE 14--RELATED PARTY TRANSACTIONS
Loans made to executive officers, directors and their affiliates, are made
subject to approval by the Directors' Loan Committee and the Board of
Directors. An analysis of total loans to related parties for the years ended
December 31, 1998 and 1997 is shown below:
1998 1997
----------- -----------
(Dollars in thousands)
Balance, January 1.................................. $ 16,309 $ 10,374
Additions........................................... 32,729 15,658
Repayments.......................................... (12,376) (9,723)
----------- ----------
Balance, December 31................................ $ 36,662 $ 16,309
=========== ==========
Undisbursed commitments, at year end................ $ 5,707 $ 8,296
=========== ==========
NOTE 15--COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitments
The Company leases certain facilities at which it conducts its operations.
Future minimum lease commitments under all noncancelable operating leases as
of December 31, 1998 are below:
Years Ended
December 31,
------------
(Dollars in
thousands)
1999............................................................ $ 3,515
2000............................................................ 3,597
2001............................................................ 3,629
2002............................................................ 3,152
2003............................................................ 1,871
Thereafter...................................................... 8,864
-------
Total......................................................... $24,628
=======
A-49
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
The Company subleases that portion of the available space that is not
utilized. Sublease rental income for the years ended December 31, 1998, 1997,
and 1996 was $607,000, $882,000, and $309,000, respectively. Gross rental
expense for the years ended December 31, 1998, 1997, and 1996 was $3.0
million, $2.8 million, and $2.0 million, respectively.
Other Commitments and Contingent Liabilities
In the normal course of business, various commitments and contingent
liabilities are outstanding, such as guarantees and commitments to extend
credit, that are not reflected in the accompanying consolidated financial
statements. Commitments to fund loans were $488.1 million and $332.9 million
and standby letters of credit were $16.3 million and $15.1 million, at
December 31, 1998 and 1997, respectively. The Company's exposure to credit
loss is limited to amounts funded or drawn; however, at December 31, 1998, no
losses are anticipated as a result of these commitments.
Loan commitments which have fixed expiration dates and require the payment
of a fee are typically contingent upon the borrower meeting certain financial
and other covenants. Approximately $xx million of these commitments relate to
real estate construction and land loans and are expected to fund within the
next 12 months. However, the remainder relates primarily to revolving lines of
credit or other commercial loans, and many of these commitments are expected
to expire without being drawn upon, therefore the total commitments do not
necessarily represent future cash requirements. The Banks evaluate each
potential borrower and the necessary collateral on an individual basis.
Collateral varies, but may include real property, bank deposits, debt or
equity securities, or business assets.
Stand-by letters of credit are conditional commitments written by the Banks
to guarantee the performance of a client to a third party. These guarantees
are issued primarily related to purchases of inventory by the Banks'
commercial clients, and are typically short-term in nature. Credit risk is
similar to that involved in extending loan commitments to clients, and the
Banks accordingly use evaluation and collateral requirements similar to those
for loan commitments.
In the ordinary course of business there are various assertions, claims and
legal proceedings pending against the Company. Management is of the opinion
that the ultimate resolution of these proceedings will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
NOTE 16--SHAREHOLDERS' RIGHTS PLAN
In 1998 Greater Bay adopted a shareholder rights plan designed to maximize
the long-term value of the Company and to protect the Company's shareholders
from improper takeover tactics and takeover bids that are not fair to all
shareholders.
In accordance with the plan, preferred share purchase rights were
distributed as a dividend at the rate of one right for each common share held
of record as of the close of business on November 28, 1998. The rights, which
are not immediately exercisable, entitle the holders to purchase one one-
hundredth of a share of Series A Preferred Stock at a price of $145.00 upon
the occurrence of certain triggering events. In the event of an acquisition
not approved by the Board, each right enables its holder (other than the
acquirer) to purchase the Preferred Stock at 50% of the market price. Further,
in the event the Company is acquired in an unwanted merger or business
combination, each right enables the holder to purchase shares of the acquiring
entity at a similar discount. Under certain circumstances, the rights may be
exchanged for common shares of the Company. The Board may, in its sole
discretion, redeem the rights at any time prior to any of the triggering
events.
The rights can be exercised and separate rights certificates distributed
only if any of the following events occur: acquisition by a person of 10% or
more of the Company's common share; a tender offer for 10% or more of the
A-50
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Company's common shares; or ownership of 10% or more of the Company's common
shares by a shareholder whose actions are likely to have a material adverse
impact on the Company or shareholder interests. The rights will initially
trade automatically with the common shares. The rights are not deemed by the
Board of Directors to be presently exercisable.
NOTE 17--REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and regulatory framework for prompt
corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum capital amounts and ratios (as defined
in the regulations) and are set forth in the table below. At December 31, 1998
and 1997 the Company and the Banks met all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from the regulators
categorized the Company and the Banks as well-capitalized under the regulatory
framework for prompt corrective action. To be categorized as well-capitalized,
the Company and the Banks must maintain minimum total risk-based, Tier 1 risk-
based and Tier 1 leverage ratios as set forth in the following table. There
are no conditions or events since that determination that management believes
have changed the institution's category. The Company and the Bank's actual
1998 and 1997 capital amounts and ratios are as follows:
A-51
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
As of December 31, 1998
--------------------------------------------
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
(Dollars in thousands)
Total Capital (To Risk Weighted
Assets):
Greater Bay Bancorp........... $161,103 12.94% $99,627 8.00% N/A
Cupertino National Bank....... 59,224 10.12 46,822 8.00 $58,527 10.00%
Golden Gate Bank.............. 10,194 11.01 7,406 8.00 9,257 10.00
Mid-Peninsula Bank............ 47,111 11.51 32,747 8.00 40,934 10.00
Peninsula Bank of Commerce.... 18,256 12.37 11,809 8.00 14,761 10.00
Tier 1 Capital (To Risk Weighted
Assets):
Greater Bay Bancorp........... $123,287 9.90% $49,813 4.00% N/A
Cupertino National Bank....... 48,845 8.35 23,411 4.00 $35,116 6.00%
Golden Gate Bank.............. 9,036 9.76 3,703 4.00 5,554 6.00
Mid-Peninsula Bank............ 41,990 10.26 16,373 4.00 24,560 6.00
Peninsula Bank of Commerce.... 16,408 11.12 5,904 4.00 8,857 6.00
Tier 1 Capital/Leverage (To
Average Assets):
Greater Bay Bancorp........... $123,287 7.81% $63,132 4.00% N/A
Cupertino National Bank....... 48,845 7.47 26,138 4.00 $32,673 5.00%
Golden Gate Bank.............. 9,036 6.89 5,243 4.00 6,554 5.00
Mid-Peninsula Bank............ 41,990 7.91 15,927 3.00 26,544 5.00
Peninsula Bank of Commerce.... 16,408 6.93 9,759 4.00 12,198 5.00
As of December 31, 1997
--------------------------------------------
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
(Dollars in thousands)
Total Capital (To Risk Weighted
Assets):
Greater Bay Bancorp........... $110,595 12.31% $71,882 8.00% N/A
Cupertino National Bank....... 40,201 10.03 32,118 8.00 $40,147 10.00%
Golden Gate Bank.............. 9,408 12.80 5,878 8.00 7,347 10.00
Mid-Peninsula Bank............ 34,727 11.88 23,416 8.00 29,269 10.00
Peninsula Bank of Commerce.... 15,252 14.33 8,525 8.00 10,657 10.00
Tier 1 Capital (To Risk Weighted
Assets):
Greater Bay Bancorp........... $ 96,316 10.72% $35,941 4.00% N/A
Cupertino National Bank....... 32,126 8.02 16,059 4.00 $24,088 6.00%
Golden Gate Bank.............. 8,523 11.60 2,939 4.00 4,408 6.00
Mid-Peninsula Bank............ 31,064 10.63 11,708 4.00 17,562 6.00
Peninsula Bank of Commerce.... 13,917 13.08 4,263 4.00 6,394 6.00
Tier 1 Capital/Leverage (To
Average Assets):
Greater Bay Bancorp........... $ 96,316 8.40% $45,873 4.00% N/A
Cupertino National Bank....... 32,126 7.08 18,189 4.00 $22,737 5.00%
Golden Gate Bank.............. 8,523 9.30 3,666 4.00 4,582 5.00
Mid-Peninsula Bank............ 31,064 8.54 10,935 3.00 18,225 5.00
Peninsula Bank of Commerce.... 13,917 6.65 8,401 4.00 10,501 5.00
A-52
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
NOTE 18--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS
Total dividends which may be declared by the Banks without receiving prior
approval from regulatory authorities are limited to the lesser of the Banks'
retained earnings or the net income of the Banks for the latest three fiscal
years, less dividends previously declared during that period.
The Banks are subject to certain restrictions under the Federal Reserve Act,
including restrictions on the extension of credit to affiliates. In
particular, the Banks are prohibited from lending to Greater Bay unless the
loans are secured by specified types of collateral. Such secured loans and
other advances from the Banks are limited to 10% of the Bank's shareholders'
equity, or a maximum of $9.3 million at December 31, 1998. No such advances
were made during 1998 or exist as of December 31, 1998.
NOTE 19--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,
------------------
1998 1997*
-------- --------
(Dollars
in thousands)
Assets:
Cash and cash equivalents................................ $ 5,284 $ 4,804
Investment in subsidiaries............................... 118,601 86,592
Other investments........................................ 17,936 5,717
Subordinated debentures issued by subsidiary............. 3,000 3,000
Other assets............................................. 8,834 3,198
-------- --------
Total assets......................................... $153,655 $103,311
======== ========
Liabilities and shareholders' equity:
Subordinated debt........................................ $ 54,547 $ 23,618
Other liabilities........................................ 6,432 3,153
-------- --------
Total liabilities........................................ 60,979 26,771
Shareholders' equity:
Common stock........................................... 57,283 52,269
Accumulated other comprehensive income................. (96) 223
Retained earnings...................................... 35,489 24,048
-------- --------
Total shareholders' equity........................... 92,676 76,540
-------- --------
Total liabilities and shareholders' equity........... $153,655 $103,311
======== ========
--------
* Restated on a historical basis to reflect the mergers with Pacific Rim
Bancorporation and Pacific Business Funding Corporation.
A-53
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Parent Company Only--Income Statements
Years Ended December 31,
---------------------------
1998 1997* 1996*
-------- -------- -------
(Dollars in thousands)
Income:
Interest income............................. $ 969 $ 389 $ 531
Other income................................ 47 27 142
-------- -------- -------
Total..................................... 1,016 416 673
-------- -------- -------
Provision for loan losses..................... -- -- 113
Expenses:
Interest expense............................ 3,195 1,458 --
Salaries.................................... 8,908 5,978 135
Occupancy and equipment..................... 1,966 1,154 461
Other expenses.............................. 5,242 2,532 1,651
Less: rentals and fees received from Banks.. (15,866) (10,201) (460)
-------- -------- -------
Total..................................... 3,445 921 1,787
-------- -------- -------
Loss before taxes and equity in undistributed
net income of subsidiaries................... (2,429) (505) (1,227)
Income tax expense............................ (1,616) (249) 21
-------- -------- -------
Income (loss) before equity in undistributed
net income of subsidiaries................... (813) (256) (1,248)
-------- -------- -------
Equity in undistributed net income of
subsidiaries................................. 17,391 11,875 7,596
-------- -------- -------
Net income.................................... $ 16,578 $ 11,619 $ 6,348
======== ======== =======
- --------
* Restated on a historical basis to reflect the mergers with Peninsula Bank of
Commerce, Pacific Rim Bancorporation and Pacific Business Funding
Corporation.
A-54
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
Parent Company Only--Statements of Cash Flows
Years Ended December 31,
---------------------------
1998 1997* 1996*
-------- -------- -------
(Dollars in thousands)
Cash flows-operating activities
Net income.................................... $ 16,578 $ 11,619 $ 6,348
Reconciliation of net income to net cash from
operations:
Equity in undistributed net income of
subsidiaries............................... (17,391) (11,875) (7,596)
Provision for loan losses................... -- -- 113
Net change in other assets.................. (4,678) (1,601) 271
Net change in other liabilities............. 2,128 2,524 142
-------- -------- -------
Operating cash flow, net...................... (3,363) 667 (722)
-------- -------- -------
Cash flows-investing activities
Purchases of available for sale securities.... (84,130) (8,293) --
Proceeds from sale and maturities of available
for sale securities.......................... 71,940 3,156 --
Proceeds from sale of OREO.................... 407 -- --
Principal repayment of loans receivable....... -- -- 113
Dividends from subsidiaries................... 3,249 3,617 769
Capital contribution to the subsidiaries...... (17,500) (13,818) (1,003)
-------- -------- -------
Investing cash flows, net..................... (26,034) (15,338) (121)
-------- -------- -------
Cash flows-financing activities
Proceeds from issuance of subordinated debt... 30,000 20,618 --
Proceeds from exercise of stock options and
employees stock purchases.................... 5,014 2,193 1,954
Payment of cash dividends..................... (5,137) (3,986) (2,311)
-------- -------- -------
Financing cash flows, net..................... 29,877 18,825 (357)
-------- -------- -------
Net increase in cash and cash equivalents..... 480 4,154 (1,200)
Cash and cash equivalents at the beginning of
the year..................................... 4,804 650 1,850
-------- -------- -------
Cash and cash equivalents at end of the year.. $ 5,284 $ 4,804 $ 650
======== ======== =======
- --------
* Restated on a historical basis to reflect the mergers with Peninsula Bank of
Commerce, Pacific Rim Bancorporation and Pacific Business Funding
Corporation.
A-55
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
NOTE 20--FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments. The estimated fair value of financial
instruments of the Company as of December 31, 1998 and 1997 are as follows:
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)
Financial assets:
Cash and due from banks.................. $ 59,975 $ 59,975 $ 53,167 $ 53,167
Short term investments................... 121,176 121,176 178,549 178,380
Investment securities.................... 342,294 343,846 213,127 215,912
Loans, net............................... 984,487 990,408 735,233 718,670
Financial liabilities:
Deposits:
Demand, noninterest-bearing............ 268,448 268,448 219,495 219,495
MMDA, NOW and Savings.................. 854,392 854,392 627,475 627,476
Time certificates, $100,000 and over... 168,075 163,419 183,147 183,103
Other time certificates................ 51,577 65,821 41,031 41,013
Other borrowings......................... 72,585 74,156 32,355 19,480
Subordinated debt........................ 3,000 2,999 3,000 3,337
Company obligated mandatory redeemable
preferred securities of subsidiary trust
holding solely junior subordinated
debentures.............................. 50,000 49,829 20,000 21,210
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Cash Equivalents
The carrying value reported in the balance sheet for cash and cash
equivalents approximates fair value.
Investment Securities
The carrying amounts for short-term investments approximate fair value
because they mature in 90 days or less and do not present unanticipated credit
concerns. The fair value of longer term investments, except certain state and
municipal securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The fair value
of certain state and municipal securities is not readily available through
market sources other than dealer quotations, as such, fair value estimates are
based on quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage and consumer. Each loan category is further
segmented into fixed and adjustable rate interest terms.
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
A-56
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
loan. The estimate of maturity is based on the Company's historical experience
with repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions. The fair
value of performing variable rate loans is judged to approximate book value
for those loans whose rates reprice in less than 90 days. Rate floors and rate
ceilings are not considered for fair value purposes as the number of loans
with such limitations is not significant.
Fair value for significant nonperforming loans is based on recent external
appraisals. If appraisals are not available, estimated cash flows are
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market information
and specific borrower information.
Deposit Liabilities and Borrowings
The fair value for all deposits without fixed maturities and short term
borrowings is considered to be equal to the carrying value. The fair value for
fixed rate time deposits and subordinated debt are estimated by discounting
future cash flows using interest rates currently offered on time deposits or
subordinated debt with similar remaining maturities.
Derivative Instruments
The fair value of the single interest rate swap the Company uses as a cash
flow hedge on the TPS II is estimated by discounting future cash flows using
current interest rates. The fair value of the hedge is presented in the above
table with the fair value of the related TPS II.
Commitments to Extend Credit and Standby Letters of Credit
The majority of the Company's commitments to extend credit carry current
market interest rate if converted to loans. Because these commitments are
generally unassignable by either the Company or the borrower, they only have
value to the Company and the borrower. The estimated fair value approximates
the recorded deferred fee amounts and is excluded from the table.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale, at one time, the Company's entire holdings of a particular
financial instrument. Fair value estimates are based on judgments regarding
future expected loss experience, current economic condition, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have significant
effect on fair value estimates and have been considered in many of the
estimates.
NOTE 21--SUBSEQUENT EVENT
On January 26, 1999 the Company and Bay Area Bancshares ("BA Bancshares"),
the holding company of Bay Area Bank ("BAB"), signed a definitive agreement
for a merger between the two companies. The terms of the
A-57
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
agreement provide for BA Bancshares shareholders to receive approximately
1,393,000 shares of Greater Bay Bancorp stock subject to certain adjustments,
in a tax-free exchange to be accounted for as a pooling-of-interest. Following
the transaction, the shareholders of BA Bancshares will own approximately
12.7% of the combined company. The transaction is expected to be completed
early in the second quarter of 1999, subject to approval of BA Bancshares
shareholders and regulatory approvals. BAB's office is located in Redwood
City, California.
NOTE 22--ACTIVITY OF BUSINESS SEGMENTS
In 1998 the Company adopted SFAS No. 131. The prior year's segment
information has been restated to present the Company's two reportable
segments, community banking and trust operations.
The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." Segment data includes
intersegment revenue, as well as charges allocating all corporate-headquarters
costs to each of its operating segments. The Company evaluates the
performances of its segments and allocates resources to them based on net
interest income, other income, net income before income taxes, total assets
and deposits.
The Company is organized primarily along community banking and trust
divisions. Ten of the divisions have been aggregated into the "community
banking" segment. Community banking provides a range of commercial banking
services to small and medium-sized businesses, real estate developers,
property managers, business executives, professional and other individuals.
The GBB Trust division has been shown as the "trust operations" segment. The
Company's business is conducted principally in the U.S.; foreign operations
are not material.
The following table shows each segments key operating results and financial
position for the years ended or as of December 31, 1998, 1997 and 1996:
1998 1997 1996
--------------------- --------------------- --------------------
Community Trust Community Trust Community Trust
Banking Operations Banking Operations Banking Operations
---------- ---------- ---------- ---------- --------- ----------
(Dollars in thousands)
Net interest income
(1).................... $ 66,815 $ 859 $ 55,396 $ 141 $ 39,472 $ 501
Other income............ 4,720 2,488 4,422 2,092 3,141 1,340
Operating expenses, ex-
cluding merger and
other related nonrecur-
ring costs............. 37,374 2,429 31,367 1,966 25,731 1,898
Net income before income
taxes (1).............. 25,465 918 18,331 267 11,610 (57)
Total assets............ 1,550,811 -- 1,203,946 -- 917,677 --
Deposits................ 1,274,953 67,539 1,004,827 66,321 779,416 41,717
Assets under manage-
ment................... -- 649,336 -- 577,746 -- 418,053
- --------
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation
A-58
GREATER BAY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1998, 1997 and 1996
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, 1998, 1997
and 1996 is presented below.
1998 1997 1996
---------- ---------- --------
(Dollars in thousands)
Net interest income and other income
Total segment net interest income and other
income.................................... $ 74,882 $ 62,051 $ 44,454
Parent company net interest income and
other income.............................. (2,179) (1,042) 673
---------- ---------- --------
Consolidated net interest income and
other income............................ $ 72,703 $ 61,009 $ 45,127
========== ========== ========
Net income before taxes
Total segment net income before income
taxes..................................... $ 26,383 $ 18,598 $ 11,553
Parent company net income before income
taxes..................................... (2,429) (505) (1,227)
---------- ---------- --------
Consolidated net income before income
taxes................................... $ 23,954 $ 18,093 $ 10,326
========== ========== ========
Total assets
Total segment assets....................... $1,550,811 $1,203,946 $917,677
Parent company assets...................... 32,054 13,719 2,247
---------- ---------- --------
Consolidated total assets................ $1,582,865 $1,217,665 $919,924
========== ========== ========
NOTE 23--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
December 31, September 30, June 30, March 31,
--------------- --------------- --------------- ---------------
1998 1997 1998 1997 1998 1997 1998 1997
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per share data) (1)
Interest income......... $29,989 $24,853 $29,861 $23,024 $27,510 $21,521 $25,560 $19,129
Net interest income..... 17,494 15,237 16,908 14,179 15,918 12,975 15,128 12,077
Provision for loan
losses................. 1,901 1,109 1,791 1,284 1,347 2,340 996 2,053
Other income............ 2,497 1,573 1,661 1,565 1,571 2,564 1,526 839
Other expenses.......... 11,114 12,898 10,573 8,491 11,245 8,357 9,782 6,384
Income before taxes..... 6,976 2,803 6,205 5,969 4,897 4,842 5,876 4,479
Net income.............. 4,983 1,809 4,394 3,822 3,222 3,125 3,979 2,863
Net income per share:
Basic.................. $ 0.52 $ 0.20 $ 0.46 $ 0.41 $ 0.34 $ 0.34 $ 0.43 $ 0.31
Diluted................ $ 0.48 $ 0.18 $ 0.43 $ 0.38 $ 0.31 $ 0.32 $ 0.40 $ 0.29
- --------
(1) Quarterly amounts have been restated on a historical basis to reflect the
mergers with Peninsula Bank of Commerce, Pacific Rim Bancorporation and
Pacific Business Funding Corporation on a pooling of interests basis.
A-59
REPORT OF INDEPENDENT ACCOUNTANTS
San Francisco, California
February 8, 1999
The Board of Directors and Shareholders
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 Subsidiaries (the Company) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 generally accepted auditing
standards, which require that we plan and perform the audits 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 the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments in 1998.
/s/ PricewaterhouseCoopers LLP
A-60
EXHIBIT INDEX
Exhibit
No. Exhibit
------- -------
2.1 Agreement and Plan of Reorganization by and between Greater Bay
Bancorp and Bay Area Bancshares dated January 26, 1999. (The schedules
to this agreement are not being filed herewith. Greater Bay Bancorp
agrees to furnish supplemental copies of any omitted schedules to the
SEC upon request.)
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended.
3.2 Bylaws of Greater Bay Bancorp, as amended.
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.(1)
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee.(2)
4.3 Officers' Certificate and Company Order, dated March 31, 1997.(2)
4.4 Certificate of Trust of GBB Capital I.(3)
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.(3)
4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among Greater
Bay Bancorp, Wilmington Trust Company and the Administrative Trustees
named therein dated as of March 31, 1997.(2)
4.6.2 Successor Administrative Trustee and First Amendment to Amended and
Restated Trust Agreement.
4.7 Trust Preferred Certificate of GBB Capital I.(2)
4.8 Common Securities Certificate of GBB Capital I.(2)
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington Trust
Company, dated as of March 31, 1997.(2)
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997.(2)
4.11 Form of Subordinated Debentures.(4)
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp dated
as of November 22, 1996.(3)
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp.(3)
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.(2)
4.15 Indenture between Greater Bay Bancorp and Wilmington Trust Company, as
Debenture Trustee, dated as of August 12, 1998.(5)
4.16 Form of Exchange Junior Subordinated Debentures (filed as Exhibit A to
Exhibit 4.15 hereto).
4.17 Certificate of Trust of GBB Capital II, dated as of May 18, 1998.(5)
4.18 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)
4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A-1 to
Exhibit 4.18 hereto).
4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp, dated as
of August 12, 1998.(5)
4.21 Series B Capital Securities Guarantee Agreement of Greater Bay Bancorp
and Wilmington Trust Company dated as of November 27, 1998.
4.22 Liquidated Damages Agreement among Greater Bay Bancorp, GBB Capital
II, and Sandler O'Neill and Partners, L.P., dated as of August 7,
1998.(5)
4.23 Registration Rights Agreement between Greater Bay Bancorp and The Leo
K.W. Lum PRB Revocable Trust dated May 8, 1998.(6)
10.1 Employment Agreement with David L. Kalkbrenner, dated March 3,
1992.(8), (9)
10.1.1 Amendment No. 1 to Employment Agreement with David L. Kalkbrenner,
dated March 27, 1998.(7), (8)
10.2 Employment, Severance and Retirement Benefits Agreement with Steven C.
Smith dated July 31, 1995.(3), (8)
Exhibit
No. Exhibit
------- -------
10.2.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with Steven C. Smith, dated March 27, 1998.(7), (8)
10.3 Employment, Severance and Retirement Benefits Agreement with David R.
Hood dated July 31, 1995.(3), (8)
10.3.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with David R. Hood, dated March 27, 1998.(7), (8)
10.4 Greater Bay Bancorp 1996 Stock Option Plan, as amended.(8)
10.5 Greater Bay Bancorp 401(k) Profit Sharing Plan.(7), (8)
10.6.1 Greater Bay Bancorp Employee Stock Purchase Plan.(8), (10)
10.6.2 Amendment to Greater Bay Bancorp Employee Stock Purchase Plan.(7), (8)
10.7 Greater Bay Bancorp Change of Control Pay Plan I.(7), (8)
10.8 Greater Bay Bancorp Change of Control Pay Plan II.(7), (8)
10.9 Greater Bay Bancorp Termination and Layoff Plan I.(7), (8)
10.10 Greater Bay Bancorp Termination and Layoff Plan II.(7), (8)
10.11.1 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan.(7), (8)
10.11.2 Amendment to Greater Bay Bancorp 1997 Elective Deferred Compensation
Plan.(8)
10.12 Form of Indemnification Agreement between Greater Bay Bancorp and with
directors and certain executive officers.(3)
11.1 Statements re Computation of Earnings per Share.
12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
- --------
(1) Incorporated by reference from Greater Bay Bancorp's Form 8-A12G filed
with the SEC on November 25, 1998.
(2) Incorporated by reference from Greater Bay Bancorp's Current Report on
Form 8-K (File No. 000-25034) dated June 5, 1997.
(3) Incorporated by reference from Greater Bay's Registration Statement on
Form S-1 (File No. 333-22783) filed with the SEC on March 5, 1997.
(4) Incorporated herein by reference from Exhibit 1 of Cupertino National
Bancorp's Form 8-K (File No. 0-18015), filed with the SEC on October 25,
1995.
(5) Incorporated by reference from Greater Bay's Current Report on Form 8-K
(File No. 000-25034) filed with the SEC on August 28, 1998.
(6) Incorporated by reference from Greater Bay Bancorp's Current Report on
Form 8-K filed with the SEC on May 20, 1998.
(7) Incorporated by reference from Greater Bay Bancorp's Annual Report on
Form 10-K filed with the SEC on March 31, 1998.
(8) Represents executive compensation plans and arrangements of Greater Bay
Bancorp.
(9) Incorporated herein by reference from Exhibit 10.15 to Mid-Peninsula
Bancorp's Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 0-25034), filed with the SEC on March 30, 1995.
(10) Incorporated herein by reference from Greater Bay Bancorp's Proxy
Statement for Annual Meeting of Shareholders (File No. 000-25034), filed
with the SEC on May 13, 1997.