-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GMHD2QtiR4O6zpz+QdrGzifNyTz/JF7por7O2+l5pQYnvijVNWMbFFW8tA9Z+4fp TMrzfK5FLdXRtyUQQr0P0w== 0001012870-97-001375.txt : 19970804 0001012870-97-001375.hdr.sgml : 19970804 ACCESSION NUMBER: 0001012870-97-001375 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970801 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATER BAY BANCORP CENTRAL INDEX KEY: 0000775473 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 942952485 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25034 FILM NUMBER: 97649666 BUSINESS ADDRESS: STREET 1: 2860 WEST BAYSHORE ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4153751555 MAIL ADDRESS: STREET 1: 2860 BAYSHORE CITY: PALO ALTO STATE: CA ZIP: 943011504 FORMER COMPANY: FORMER CONFORMED NAME: MID PENINSULA BANCORP DATE OF NAME CHANGE: 19941031 FORMER COMPANY: FORMER CONFORMED NAME: SAN MATEO COUNTY BANCORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 For the transition period from to . ---- ---- Commission file number 0-25034 GREATER BAY BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 77-0387041 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2860 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303 (Address of principal executive offices) (Zip Code) (415) 813-8200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No --- --- Outstanding shares of Common Stock, no par value, as of June 30, 1997: 3,328,450 This report contains a total of 24 pages. 1 of 24 GREATER BAY BANCORP INDEX
PART I. FINANCIAL INFORMATION Item 1. Interim Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996.................... 3 Consolidated Statements of Income for the Three Months and Six Months Ended June 30, 1997 and 1996................................. 4 Consolidated Statements of Cash Flows for the Three Months and Six Months Ended June 30, 1997 and 1996................................. 5 Notes to Interim Consolidated Financial Statements..... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 8 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K....................... 23 Signatures............................................. 24
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PART I. FINANCIAL INFORMATION GREATER BAY BANCORP AND SUBSIDIARIES June 30, December 31, CONSOLIDATED BALANCE SHEETS 1997 1996 ----------------------- (Dollars in thousands) (Unaudited) ASSETS Cash and due from banks ..................................................... $ 33,428 $ 39,896 Federal funds sold .......................................................... 42,200 14,000 --------- --------- Cash and cash equivalents .............................................. 75,628 53,896 Investment securities: Held to maturity (Market value $48,072 at June 30, 1997; $57,294 at December 31, 1996) ...................................... 47,111 56,965 Available for sale (Amortized cost $53,977 at June 30, 1997; $46,987 at December 31, 1996) ..................................... 54,169 47,104 Other securities ....................................................... 2,115 1,451 --------- --------- Total investment securities ....................................... 103,395 105,520 Loans: Commercial ............................................................. 282,159 257,042 Real estate-construction ............................................... 100,422 78,278 Real estate-other ...................................................... 99,509 72,802 Consumer and other ..................................................... 44,908 42,702 Deferred loan fees and discounts ....................................... (2,257) (1,952) --------- --------- Total Loans ............................................................ 524,741 448,872 Allowance for loan losses .............................................. (10,895) (7,312) --------- --------- Net Loans .............................................................. 513,846 441,560 Premises and equipment, net ................................................. 4,799 4,688 Accrued interest receivable and other assets ................................ 21,383 16,380 --------- --------- TOTAL ASSETS ................................................................ $ 719,051 $ 622,044 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest-bearing ............................................ $ 135,797 $ 139,940 NOW .................................................................... 31,272 26,936 Money Market Demand Accounts ........................................... 287,427 271,749 Savings ................................................................ 46,997 13,599 Other time certificates ................................................ 36,110 38,889 Time certificates, $100 and over ....................................... 102,134 68,170 --------- --------- Total deposits .................................................... 639,737 559,283 Accrued interest payable and other liabilities .............................. 7,818 15,079 Subordinated debentures ..................................................... 3,000 3,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures ........ 20,000 -- --------- --------- Total Liabilities ........................................................... 670,555 577,362 Shareholders' equity: Preferred stock, no par value: 4,000,000 shares authorized; none issued -- -- Common stock, no par value: 6,000,000 shares authorized; shares outstanding: 3,328,450 at June 30, 1997 and 3,238,887 at December 31, 1996 ................................. 35,957 34,884 Unrealized gain on available-for-sale securities, net of taxes ......... 112 71 Retained earnings ...................................................... 12,427 9,727 --------- --------- Total shareholders' equity .................................................. 48,496 44,682 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................. $ 719,051 $ 622,044 ========= ========= See notes to consolidated financial statements. - ------------------------------------------------------------------------------------------------------
3 of 24 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- -------------------------- 1997 1996 1997 1996 ---------- ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) Interest income: Interest on loans ....................... $ 13,051 $ 8,318 $ 24,304 $ 16,253 Interest on investment securities: Taxable .............................. 1,425 1,336 2,709 2,836 Non-taxable .......................... 197 138 385 294 -------- -------- -------- -------- Total investment securities .......... 1,622 1,474 3,094 3,130 Other interest income ................... 714 575 1,070 948 -------- -------- -------- -------- Total interest income ............... 15,387 10,367 28,468 20,331 Interest expense: Interest on deposits .................... 5,322 3,600 9,846 7,168 Other interest expense .................. 764 87 1,056 191 -------- -------- -------- -------- Total interest expense .............. 6,086 3,687 10,902 7,359 -------- -------- -------- -------- Net interest income ............. 9,301 6,680 17,566 12,972 Provision for loan losses ............... 2,130 365 4,078 685 -------- -------- -------- -------- Net interest income after provision for loan losses ..................... 7,171 6,315 13,488 12,287 Other income: Trust fees .............................. 481 344 935 653 Gain on sale of SBA loans ............... 181 123 339 253 Depositor service fees .................. 180 277 443 506 Other loan fees ......................... 16 34 22 49 Investment gains (losses) ............... 2 (110) (49) (97) Other ................................... 254 236 385 351 -------- -------- -------- -------- Sub-total other income ............. 1,114 904 2,075 1,715 Warrant income .......................... 1,115 -- 1,115 -- -------- -------- -------- -------- Total other income ................. 2,229 904 3,190 1,715 Operating expenses: Compensation and benefits ............... 3,632 2,976 7,329 5,630 Occupancy and equipment ................. 1,040 777 2,102 1,534 Professional services ................... 362 334 712 606 Marketing ............................... 232 187 464 349 Client services ......................... 72 95 154 215 FDIC insurance and regulatory assessments 60 27 101 54 Data Processing ......................... 53 65 118 146 Other real estate, net .................. 3 6 5 30 Other ................................... 815 605 1,421 1,199 -------- -------- -------- -------- Sub-total operating expenses ........ 6,269 5,072 12,406 9,763 Legal settlement recovery ............... -- -- (1,700) -- -------- -------- -------- -------- Total operating expenses ............ 6,269 5,072 10,706 9,763 -------- -------- -------- -------- Income before income tax expense ............ 3,131 2,147 5,972 4,239 Income tax expense ...................... 1,180 839 2,282 1,681 -------- -------- -------- -------- Net income ................................. $ 1,951 $ 1,308 $ 3,690 $ 2,558 ======== ======== ======== ======== Net income per common and common equivalent share ................ $ 0.55 $ 0.40 $ 1.05 $ 0.78 ======== ======== ======== ======== See notes to consolidated financial statement. - ---------------------------------------------------------------------------------------------------
4 of 24 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Six Months Ended June 30, ---------------------- 1997 1996 -------- -------- Operating Activities: Net income .................................................. $ 3,690 $ 2,558 Reconciliation of net income to net cash from operations: Provision for loan losses ............................. 4,078 685 Depreciation and amortization ......................... 429 416 Accrued interest receivable and other assets .......... (3,224) (1,462) Accrued interest payable and other liabilities ........ 4,739 (180) Net change in deferred loan fees ...................... 350 70 Stock dividends on other securities ................... (24) (48) Accrued deferred income taxes ......................... (1,639) (148) Loss on sale of securities ............................ 49 97 -------- -------- Cash provided by operating activities ............. 8,448 1,988 Investing Activities: Maturities and principle reductions on investment securities: Held-to-maturity ...................................... 12,379 8,293 Available-for-sale .................................... 25,009 18,570 Purchase of investment securities: Held-to-maturity ...................................... (2,472) (4,534) Available-for-sale .................................... (34,554) (11,366) Net change in loans ......................................... (76,887) 44,858 Sale of available-for-sale securities ....................... 1,948 5,490 Purchase of life insurance policies ......................... -- (297) Purchase of premises and equipment, net ..................... (676) (1,894) -------- -------- Cash used in investing activities ..................... (75,253) 30,596 Financing Activities: Net change in deposits ...................................... 80,454 45,571 Net change in short-term borrowings ......................... (12,000) -- Proceeds from issuance of Trust Preferred Securities ........ 20,000 -- Stock purchased by employees and stock options exercised .... 1,077 1,596 Cash dividends .............................................. (994) (827) -------- -------- Cash provided by financing activities .................. 88,537 46,340 -------- -------- Net increase in cash and cash equivalents ....................... 21,732 17,732 Cash and cash equivalents at beginning of period ................ 53,896 58,111 -------- -------- Cash and cash equivalents at end of period ...................... $ 75,628 $ 75,843 ======== ======== Cash Flows--Supplemental Disclosures: Cash paid during the period for: Interest on deposits and other borrowings ............... $ 5,621 $ 7,612 Income taxes ............................................ 3,300 1,630 Non-cash transactions: Additions to other real estate owned .................... 173 217 See notes to consolidated financial statements. - --------------------------------------------------------------------------------------------
5 of 24 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. BASIS OF PRESENTATION Greater Bay Bancorp (referred to as the "Company" when such reference includes Greater Bay Bancorp and its subsidiaries, collectively, or "Greater Bay" when referring only to the parent company) 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 San Mateo County Bancorp and Mid-Peninsula Bancorp. Subsequently, the name was changed to Greater Bay Bancorp on November 27, 1996, as a result of the merger between Mid-Peninsula Bancorp and Cupertino National Bancorp. Upon consummation of the merger with Cupertino National Bancorp, the Company became a multi-bank holding company with wholly owned bank subsidiaries, Mid-Peninsula Bank ("MPB") and Cupertino National Bank & Trust ("CNB"), collectively the "Banks". MPB commenced operations in October 1987 and is a state chartered bank regulated by the Federal Reserve Bank (FRB) and the California State Banking Department. CNB commenced operations in May 1985 and is a national banking association regulated by the Office of the Comptroller of Currency (OCC). The mergers were accounted for as a pooling of interests. Accordingly, all of the financial information for the Company for the periods prior to the merger have been restated to reflect the pooling of interests as if it occurred at the beginning of the earliest reporting period presented. The accompanying unaudited consolidated financial statements include the accounts of the Company. These financial statements reflect, in management's opinion, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Company's financial position and the results of its operations and cash flows for the periods presented. Certain amounts for prior periods have been reclassified to conform to current period presentation. The results of operations for the quarter and year-to-date periods ended June 30, 1997 are not necessarily indicative of the results expected for any subsequent quarter or for the entire year ending December 31, 1997. These financial statements should be read in conjunction with the financial statements included in the 1996 Annual Report to Shareholders. 2. CONSOLIDATION AND BASIS OF PRESENTATION The consolidation financial statements include the accounts of GBB and its wholly-owned subsidiaries, CNB and MPB. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' consolidation financial statements to conform to the 1996 presentation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and to prevailing practices within the banking industry. 3. 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 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. 4. COMPANY OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES OF GBB CAPITAL I On March 30, 1997, GBB Capital I (the "Trust"), a Delaware business trust wholly-owned by Greater Bay completed a public offering of 800,000 shares of 9.75% cumulative trust preferred securities ("TPS"). The Trust used the proceeds from the offering to purchase a like amount of 9.75% Junior Subordinated Deferrable Interest Debentures (the "Debentures") of Greater Bay. The Debentures are the sole assets of the Trust and are eliminated along with the related income statement effects, in the consolidated financial statements. Greater Bay 6 of 24 invested approximately 58.5% of the proceeds in CNB and MPB to increase their capital levels to support future growth. The remaining proceeds will be used for general corporate purposes. The TPS accrue and pay distributions quarterly at an annual rate of 9.75% of the liquidation amount of $25 per TPS share. Greater Bay has fully and unconditionally guaranteed all of the obligations of the Trust. The TPS are mandatory redeemable, in whole or in part, upon repayment of the Debentures at the stated maturity or their earlier redemption. The Debentures are redeemable prior to maturity (April 1, 2027) at the option of Greater Bay, on or after April, 2002, in whole at any time or in part from time to time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Capital Resources" for discussion of Tier I Capital. 5. SHARE AND PER SHARE AMOUNTS Earnings per common and common equivalent shares are calculated based upon the weighted average number of shares outstanding during the period, plus equivalent shares representing the effect of dilutive stock options. The number of shares used to compute earnings per share were 3,555,992 and 3,262,295 for the three months ended June 30, 1997 and 1996, respectively. The number of shares used to compute earnings per share were 3,526,140 and 3,267,000 for the six months ended June 30, 1997 and 1996, respectively. Earnings per share are based on the weighted average shares of common stock outstanding plus common equivalent shares using the treasury stock method. The treasury stock method calculation assumes all dilutive common stock equivalent are exercised and the funds generated by the exercise are used to buy back outstanding common stock at the average market price during the reporting period, for primary earnings per share, or at the end of period market price if higher, for fully diluted earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earning Per Share" ("SFAS 128"). SFAS 128 is designed to improve the earnings per share ("EPS") information provided in the financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of EPS data on an international basis. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. The Company will implement SFAS 128 in its December 31, 1997 financial statements. The Company believes the impact of SFAS 128 will not have a material effect on its earnings per share calculation. 6. CASH DIVIDEND The Company paid a quarterly cash dividend of $.15 per share on April 21, 1997 to shareholders of record on April 7, 1997 and a quarterly cash dividend of $.15 per share on July 15, 1997 to shareholders of record on June 30, 1997. 7 of 24 GREATER BAY BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company was formed as a result of a merger between Cupertino National Bancorp, the holding company for CNB, and Mid-Peninsula Bancorp, the holding company for MPB. The merger, which has been accounted for as a pooling of interests, was consummated in late November 1996. All of the financial information of the Company for the periods prior to the merger has been restated as if it occurred at the beginning of the earliest reporting periods presented. The following discussion and analysis is intended to provide greater details of the results of operations and financial condition of the Company. The following discussion should be read in conjunction with the information in the Company's consolidated financial statements and notes thereto and other financial data included elsewhere herein. Certain statements under this caption constitute "forward-looking statements" within the meaning of the Private Securities Reform Act of 1995, and as such, may involve risks and uncertainties. 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 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, fluctuations in interest rates, credit quality and governmental regulation. OVERVIEW The Company reported net income for the second quarter of 1997 of $1.95 million or $0.55 per common and common equivalent share, compared to net income of $1.3 million or $0.40 per common and common equivalent share, reported in the second quarter of last year. Return on average assets annualized for the second quarters of 1997 and 1996 were 1.11% and 1.04% respectively, while the annualized return on average common equity was 16.30% for the second quarter of 1997, compared with 12.48% for the second quarter of 1996. The earnings for the second quarter of 1997 includes $1.1 million in warrant income resulting from the exercise of warrants and sale of the underlying shares of common stock in two of the clients of the Banks. The Company occasionally receives warrants to acquire common stock from companies that are in the start- up or development phase. The timing and amount of income derived from the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. For the six months ended June 30, 1997, the Company reported net income of $3.7 million, or $1.05 per common and common equivalent share, compared to net income of $2.6 million, or $0.78 per common and common equivalent share for the comparable period in 1996. The annualized return on average assets and return on average equity for the first six months of 1997 were 1.12% and 15.64%, respectively. Non performing assets (including nonaccrual loans, loans 90 days past due and still accruing and other real estate owned ("OREO")) totaled $3.5 million at June 30, 1997, an increase of $233,000 from December 31, 1996, and a decrease of $290,000 from June 30, 1996. The ratio of nonperforming assets to loans plus foreclosed properties was .67% at June 30, 1997, down from .73% at December 31, 1996 and down from 1.14% at June 30, 1996. The reserve for loan losses was $10.9 million at June 30, 1997, compared with $7.3 million at December 31, 1996 and $5.0 million at June 30, 1996. The provision for loan losses was $2.1 million for the second quarter of 8 of 24 1997, compared to $365,000 recorded in the second quarter of 1996 (see discussion below). Net charge-offs were $306,000 for the second quarter of 1997 and $168,000 for the second quarter of 1996. The ratio of the reserve for loan losses to nonperforming assets was 312% at June 30, 1997, compared with 224% at December 31, 1996 and 131% at June 30, 1996. The ratio of the reserve for loan losses to total loans was 2.08% at June 30, 1997 compared with 1.63% at December 31, 1996 and 1.49% at June 30, 1996. The provision for loan losses 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. Specific allocations are made for loans where the probability of a loss can be defined and reasonably determined, while 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. Shareholders' equity increased $3.8 million to $48.5 million, or 6.74% of assets, at June 30, 1997, from $44.7 million or 7.18% of assets at December 31, 1996. The increase was primarily due to net earnings and stock purchased by directors and employees through stock option and stock purchase plans and partially offset by the first quarter cash dividend payment of $.15 per common share that was declared on March 17, 1997 to shareholders of record as of April 7, 1997, totaling $495,000, and the second quarter cash dividend of $.15 per common share that was declared on June 18, 1997 to shareholders of record as of June 30, 1997, totaling $499,000. The Company's Tier 1 and total risk-based capital ratios were 11.69% and 13.46% at June 30, 1997, respectively, compared with 8.75% and 10.54% at December 31, 1996, respectively. The leverage ratio increased to 9.74% at June 30, 1997, from 7.27% at December 31, 1996. At June 30, 1997, the Company's risk-based capital and leverage ratios, as well as those of the Banks, exceeded the ratios for a well-capitalized financial institution as defined in FDICIA under the prompt corrective action regulations. The Company will seek to maintain its well capitalized position to ensure flexibility in its operations. GBB's common stock closed at $30.75 per share on June 30, 1997, representing approximately 211% of the $14.57 book value per common share, compared with $24.38 per share and 177% of the $13.80 book value per common share at December 31, 1996. 9 of 24 RESULTS OF OPERATIONS NET INTEREST INCOME The following table presents the Company's average balance sheet, net interest income and the resultant yields for the quarterly periods presented:
Three Months Ended Three Months Ended June 30, 1997 March 31, 1997 --------------------------------- --------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate ---------- -------- ------- ---------- -------- ------- Interest-earning assets: Loans (2) (3) $ 505,225 $ 13,051 10.36% $ 462,595 $ 11,253 9.87% Taxable investments 89,505 1,429 6.38% 78,609 1,284 6.53% Non-taxable investments (4) 15,133 269 7.10% 14,650 252 6.87% Federal funds sold 52,311 709 5.44% 27,713 356 5.21% ---------- -------- ------- ---------- -------- ------- Total interest-earning assets 662,264 15,458 9.36% 583,567 13,145 8.79% Noninterest-earning assets 40,124 41,185 ---------- ---------- Total Assets $ 702,388 $ 624,752 ========== ========== Interest-bearing liabilities: Deposits: NOW and MMDA $ 315,232 $ 3,032 3.86% $ 318,716 $ 2,977 3.79% Savings deposits 36,576 362 3.97% 18,270 174 3.87% Time deposits 141,003 1,928 5.48% 107,811 1,372 5.16% ---------- -------- ------- ---------- -------- ------- Total Deposits 492,817 5,322 4.36% 444,797 4,523 4.12% Borrowings: 32,567 764 9.41% 17,731 292 6.68% ---------- -------- ------- ---------- -------- ------- Total interest-bearing liabilities 525,378 6,086 4.68% 462,528 4,815 4.22% ---------- -------- ------- ---------- -------- ------- Noninterest-bearing deposits 123,695 113,816 Other noninterest-bearing liabilities 5,306 2,731 ---------- ---------- Total noninterest-bearing liabilities 129,001 116,547 Shareholders' equity 48,009 45,677 ---------- ---------- Total liabilities and shareholders' equity $ 702,388 $ 624,752 ========== ========== Net interest income; interest rate spread $ 9,372 4.69% $ 8,330 4.57% ======== ======= ======== ======= Net interest-earning assets; net yield (5) $ 136,886 5.68% $ 121,039 5.79% ========== ======= ========== =======
Three Months Ended June 30, 1996 --------------------------------- Average Average Yield/ (Dollars in thousands) Balance(1) Interest Rate ---------- -------- ------- Interest-earning assets: Loans (2) (3) $ 319,155 $ 8,318 10.48% Taxable investments 87,178 1,337 6.13% Non-taxable investments (4) 11,915 208 6.98% Federal funds sold 44,316 575 5.22% ---------- -------- ------- Total interest-earning assets 462,564 10,438 9.08% Noninterest-earning assets 41,335 ---------- Total Assets $ 503,899 ========== Interest-bearing liabilities: Deposits: NOW and MMDA $ 245,320 $ 2,222 3.64% Savings deposits 16,075 142 3.55% Time deposits 95,463 1,236 5.21% ---------- -------- ------- Total Deposits 356,858 3,600 4.06% Borrowings: 3,113 87 11.24% ---------- -------- ------- Total interest-bearing liabilities 359,971 3,687 4.12% ---------- -------- ------- Noninterest-bearing deposits 98,294 Other noninterest-bearing liabilities 3,487 ---------- Total noninterest-bearing liabilities 101,781 Shareholders' equity 42,147 ---------- Total liabilities and shareholders' equity $ 503,899 ========== Net interest income; interest rate spread $ 102,593 $ 6,751 4.96% ========== ======== ======= Net interest-earning assets; net yield (5) 5.87% =======
(1) Average balances are computed using an average of the daily balances during the period. (2) Non-accrual loans are included in the average balance column; however, only collected interest is included in the interest column. (3) Loan fees totaling $694,000, $497,000 and $575,000 are included in loan interest income for the periods ended June 30, 1997, March 31, 1997 and June 30, 1996, respectively. (4) Tax exempt interest income includes $71,000, $64,000 and $71,000 for the 3 month periods ending June 30, 1997, March 31, 1997, and June 30, 1996 respectively, to adjust to a fully taxable equivalent basis using the Federal statutory rate of 34%. (5) The net yield on interest-earning assets during the period equals net interest income divided by average interest-earning assets for the period. 10 of 24 The following table presents the dollar amount of certain changes in interest income and interest expense for each major component of interest-earning assets and interest-bearing liabilities and the difference attributable to changes in average rates and volumes for the quarterly periods indicated:
Three months ended June 30, 1997 Three months ended June 30, 1997 compared with March 31, 1997 compared with June 30, 1996 favorable (unfavorable) favorable (unfavorable) -------------------------------- -------------------------------- (Dollars in thousands) Volume Rate Total Volume Rate Total --------- --------- ---------- --------- --------- ---------- Interest income on loans $ 1,164 $ 634 $ 1,798 $ 4,831 $ (98) $ 4,733 Taxable investments 175 (30) 145 38 54 92 Non taxable investments 9 8 17 57 4 61 Federal funds sold 337 16 353 108 25 133 --------- --------- ---------- --------- --------- --------- Changes in total interest income 1,685 628 2,313 5,034 (15) 5,019 Interest expense on deposits NOW and MMDA (21) 76 55 671 139 810 Savings deposits 183 5 188 201 19 220 Time deposits 462 94 556 623 69 692 --------- --------- ---------- --------- --------- --------- 624 175 799 1,495 227 1,722 Interest expense on borrowings 317 155 472 693 (16) 677 --------- --------- ---------- --------- --------- --------- Change in total interest expense 941 330 1,271 2,188 211 2,399 --------- --------- ---------- --------- --------- --------- Increase (decrease) in net interest income $ 744 $ 299 $ 1,042 $ 2,846 $ (226) $ 2,620 ========= ========= ========== ========= ========= =========
In the analysis, the change due to both the rate and volume have been allocated proportionately. The Company's net interest income for the second quarter of 1997 was $9.4 million, a $1.0 million increase over the first quarter of 1997 and a $2.6 million increase over the second quarter of 1996. When compared to the first quarter of 1997, average earning assets increased by $78.6 million, while the net yield on average earning assets decreased from 5.79% in the first quarter of 1997 to 5.68% in the second quarter of 1997. The increase in net interest income was primarily due to an increase in the volume of interest-earning assets. Compared to the second quarter of 1996, average earning assets during the second quarter of 1997 increased by $193.9 million. Average loans in the second quarter of 1997 increased by $186.1 million, or 58.3% over the second quarter of 1996, which was also the primary reason average interest-earning assets increased. The Company's average interest-bearing deposits grew $136 million and non-interest bearing deposits grew by $25.4 million compared to the second quarter of 1996. 11 of 24 The following tables present the Company's average balance sheet, net interest income and interest rates for the six-month periods presented, as well as the analysis of variances due to rate and volume:
Six Months Ended Six Months Ended June 30, 1997 June 30, 1996 -------------------------------- -------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate ------------ -------- -------- ------------ --------- -------- Interest-earning assets: Loans (2) (3) $484,615 $ 24,304 10.11% $311,774 $ 16,253 10.48% Taxable investments 83,453 2,713 6.50% 91,440 2,836 6.20% Non-taxable investments (4) 14,896 515 6.92% 12,003 445 7.41% Federal funds sold 39,934 1,065 5.38% 37,362 948 5.10% -------- -------- ----- -------- -------- ------ Total interest-earning assets 622,898 28,597 9.26% 452,579 20,482 9.10% Noninterest-earning assets 44,109 38,913 -------- -------- Total Assets $667,007 $491,492 ======== ======== Interest-bearing liabilities: Deposits: NOW and MMDA $318,909 $ 6,010 3.80% $241,022 $ 4,437 3.70% Savings deposits 27,467 536 3.94% 16,093 280 3.50% Time deposits 124,480 3,300 5.35% 93,656 2,451 5.26% -------- -------- ----- -------- -------- ------ Total Deposits 470,856 9,846 4.22% 350,771 7,168 4.11% Borrowings 25,685 1,056 8.29% 3,309 191 11.61% -------- -------- ----- -------- -------- ------ Total interest-bearing liabilities 496,541 10,902 4.43% 354,080 7,359 4.18% -------- -------- Noninterest-bearing deposits 118,656 92,890 Other noninterest-bearing liabilities 4,240 3,009 -------- -------- Total noninterest-bearing liabilites 122,896 95,899 Shareholders' equity 47,570 41,513 -------- -------- Total liabilities and shareholders' equity $667,007 491,492 ======== ======== Net interest income; Interest rate spread $ 17,696 4.83% $ 13,123 4.92% ======== ===== ======== ====== Net interest-earning assets; net yield (5) $126,357 5.73% $ 98,499 5.83% ======== ===== ======== ======
(1) Average balances are computed using an average of the daily balances during the period. (2) Non-accrual loans are included in the average balance column; however, only collected interest is included in the interest column. (3) Loan fees totaling $1,191,000 and $1,085,000 are included in loan interest income for the periods ended June 30, 1997 and June 30, 1996, respectively. (4) Tax exempt interest income includes $130,000 and $151,000 for the 6 month periods ending June 30 1997 and June 30, 1996 respectively, to adjust to a fully taxable equivalent basis using the Federal statutory rate of 34%. (5) The net yield on interest-earning assets during the period equals net interest income divided by average interest-earning assets for the period. 12 of 24 The following table presents the dollar amount of certain changes in interest income and interest expense for each major component of interest-earning assets and interest-bearing liabilities and the difference attributable to changes in average rates and volumes for the six months periods indicated:
Six months ended June 30, 1997 compared with June 30, 1996 favorable (unfavorable) ------------------------------------ (Dollars in thousands) Volume Rate Total ---------- -------- --------- Interest income on loans $ 8,654 $ (603) $ 8,051 Taxable investments (256) 133 (123) Non taxable investments 102 (32) 70 Federal funds sold 66 51 117 ---------- -------- --------- Change in total interest income 8,566 (451) 8,115 Interest expense on deposits NOW and MMDA 1,454 119 1,573 Savings deposits 218 38 256 Time deposits 810 39 849 ---------- -------- --------- 2,482 196 2,677 Interest expense on borrowings 935 (70) 865 ---------- -------- --------- Change in total interest expense 3,417 126 3,542 ---------- -------- --------- Increase (decrease) in net interest income $ 5,149 $ (577) $ 4,573 ========== ======== =========
13 of 24 For the six month period ended June 30, 1997, the Company experienced an increase in net interest income of $4.6 million when compared to the first half of 1996. This increase was mainly due to the increased volume in the loan portfolio, partially offset by reduced yields on loans, and the increased volume of interest-bearing deposits. For the first half of 1997, average other borrowings primarily consisted of $3.0 million of subordinated debt which was issued at 11.5% in the Fall of 1996 and $20.0 million Trust Preferred Securities which was issued at 9.75% in the first quarter of 1997. The Trust Preferred Securities qualify for Tier I capital, and the subordinated debt qualifies for Tier II Capital. For the six months ended June 30, 1997, the Company's net interest spread of 4.83% reflected a decrease from 4.92% for the same period in 1996. The Company provides client services to several of its noninterest-bearing demand deposit customers. The amount of credit available to clients is based on a calculation of their average noninterest-bearing deposit balance, adjusted for float and reserves, multiplied by an earnings credit rate, generally the average of the month's 90 day T-Bill rate. The credit can be utilized to pay for services including messenger service, account reconciliation and other similar services. If the cost of the services provided exceeds the available credit, the customer is charged for the difference. The impact of this expense on the Company's net interest spread and net yield on interest-earning assets was as follows:
Three Months Ended June 30, Six Months Ended June 30, (Dollars in thousands) 1997 1996 1997 1996 --------------------------- ------------------------- Average noninterest-bearing demand deposits $123,695 $98,294 $118,656 $92,890 Client Service expense 72 95 154 215 Client Service cost annualized 0.23% 0.38% 0.26% 0.47% Impact on Net Yield - ------------------- Net yield on interest-earning assets 5.68% 5.87% 5.73% 5.83% Impact of client services -0.04% -0.15% -0.05% -0.10% -------- ------- -------- ------- Adjusted net yield (1) 5.63% 5.72% 5.68% 5.74% ======== ======= ======== =======
(1) Noninterest-bearing liabilities are included in the cost of funds calculation to determine adjusted spread. The negative impact on the net yield on interest earning assets is caused by off-setting net interest income by the cost of client service expenses, which reduces the yield on interest-earning assets. The cost for client service expense has decreased in 1997 due to decreased volume of activity in services to noninterest-bearing demand deposit clients. INTEREST RATE RISK MANAGEMENT Interest rate risk sensitivity 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, six to twelve months, one to three years, three to five years, over five years and on a cumulative basis. The differences are known as interest sensitivity gaps. 14 of 24 The following table shows interest sensitivity gaps for different intervals as of June 30, 1997: INTEREST SENSITIVITY ANALYSIS Repricing Periods
Immediate 2 Days To > 6 months >1 Year > 3 Yrs Total Rate (Dollars in thousands) One Day 6 Months to 1 year to 3 Yrs to 5 Yrs > 5 Yrs Sensitive ----------------------------------------------------------------------------------------- Assets: Cash and due from banks $ -- $ -- $ -- $ -- $ -- $ -- $ -- Short term investments 42,200 -- -- 42,200 Investment securities -- 14,574 8,296 8,558 36,334 33,515 101,277 Loans 421,667 9,397 7,414 12,843 12,291 57,909 521,521 Loan loss/unearned fees -- -- -- -- -- -- -- Other assets -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Total assets $ 463,867 $ 23,971 $ 15,710 $ 21,401 48,625 $ 91,424 $ 664,998 ========= ========= ========= ========= ========= ========= ========= Liabilities and Equity: Deposits Demand $ -- $ -- $ -- $ -- $ -- $ -- $ -- NOW, MMDA, and savings 365,696 -- -- -- -- -- 365,696 Time Deposits -- 123,043 13,885 971 165 182 138,246 Subordinated debt (1) -- -- -- -- -- -- -- Trust preferred securities (2) -- -- -- -- -- -- -- Other liabilities 2,969 -- -- -- -- -- 2,969 Shareholders' equity -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Total liabilities and equity $ 368,665 $ 123,043 $ 13,885 $ 971 $ 165 $ 182 $ 506,911 ========= ========= ========= ========= ========= ========= ========= Gap $ 95,202 $ (99,072) $ 1,825 $ 20,430 $ 48,460 $ 91,242 $ 158,087 Cumulative Gap $ 95,202 $ (3,870) $ (2,045) $ 18,385 $ 66,845 $ 158,087 $ 158,087 Cumulative Gap/total assets 13.24% -0.54% -0.28% 2.56% 9.30% 21.99% 21.99% - ---------------------------------------------------------------------------------------------------------------------------
Total Non-rate (Dollars in thousands) Sensitive Total ----------------------- Assets: Cash and due from banks $ 33,428 $ 33,428 Short term investments -- 42,200 Investment securities 2,118 103,395 Loans 5,477 526,998 Loan loss/unearned fees (13,152) (13,152) Other assets 26,182 26,182 --------- --------- Total assets $ 54,053 $ 719,051 ========= ========= Liabilities and Equity: Deposits Demand $ 135,795 $ 135,795 NOW, MMDA, and savings -- 365,696 Time Deposits -- 138,244 Subordinated debt (1) 3,000 3,000 Trust preferred securities (2) 20,000 20,000 Other liabilities 4,849 7,818 Shareholders' equity 48,496 48,496 --------- --------- Total liabilities and equity $ 212,142 $ 719,053 ========= ========= Gap $(158,089) $ -- Cumulative Gap $ -- $ -- Cumulative Gap/total assets 0.00% -- - ---------------------------------------------------------
(1) On or after October 1, 1998, the Company, at its option, may redeem any or all of the Debentures, in whole or in part. (2) On or after April 1, 2002, the Company, at its option, may redeem any or all of the Trust Preferred Securities, in whole or in part. The foregoing table demonstrates that the Company had a negative cumulative one year gap of $2.0 million of total assets or .28%, at June 30, 1997. In theory, this would indicate that at June 30, 1997, $2.0 million more in liabilities than assets would reprice if there was a change in interest rates over the next 360 days. If interest rates were to increase, the negative gap would tend to result in a lower net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net 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. 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, an interest sensitivity gap report may not provide a complete assessment of the Company's exposure to changes in interest rates. 15 of 24 NON-INTEREST INCOME The following table provides details of non-interest income for the quarters presented:
Quarter Ended ---------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 1997 1997 1996 1996 1996 ---------- --------- ------------ ------------- -------- Trust fees $ 481 $ 454 $ 397 $ 375 $ 344 Gain on sale of SBA loans 181 158 144 122 123 Depositor service fees 180 263 265 275 277 Loan fees 16 6 24 59 34 Investment gains (losses) 2 (51) (44) (122) (110) Other 254 131 158 163 236 ---------- --------- ------------ ------------- -------- Sub-total other income 1,114 961 944 872 904 Warrant income 1,115 - - - - ---------- --------- ------------ ------------- -------- Total other income $2,229 $ 961 $ 944 $ 872 $ 904 ========== ========= ============ ============= ========
Non-interest income was $2.2 million for the second quarter of 1997, an increase of $1.3 million from the first quarter of 1997, and an increase of $1.3 million from the second quarter of 1996. The increase in the 1997 second quarter from the first quarter of 1997 and from the second quarter of 1996 was primarily due to warrant income and an increase in trust fee income. Non-interest income was $3.2 million for the six month period ended June 30, 1997, an increase of $1.4 million from the same period in 1996. The increase was primarily due to warrant income and an increase in trust fee income. 16 of 24 NON-INTEREST EXPENSE The following table provides details of non-interest expense for the quarters presented:
Quarter Ended ---------------------------------------------------------- June 30, March 31, December 3, September 30, June 30, (Dollars in thousands) 1997 1997 1996 1996 1996 --------- --------- ----------- ------------- --------- Compensation and benefits $ 3,632 $ 3,697 $ 3,269 $ 2,982 $ 2,976 Occupancy and equipment 1,040 1,062 1,021 846 777 Professional services 362 350 457 264 334 Supplies, telephone and postage 267 240 187 209 208 Marketing 232 232 252 184 187 Client services 72 82 90 105 95 FDIC insurance and assessments 60 41 26 22 27 Director fees 53 51 59 57 62 Other real estate, net 3 2 -- 5 6 Other 548 381 658 654 400 ------- ------- ------- ------- ------- Sub-total operating expenses 6,269 6,138 6,019 5,328 5,072 Legal settlement recovery -- (1,700) -- -- -- ------- ------- ------- ------- ------- Total operating expenses $ 6,269 $ 4,438 $ 6,019 $ 5,328 $ 5,072 ======= ======= ======= ======= =======
Non-interest expenses were $6.3 million for the second quarter of 1997, an increase of $131,000, excluding the legal settlement recovery from the first quarter of 1997, and an increase of $1.2 million from the second quarter of 1996. Non-interest expenses, exclusive of the legal settlement recovery were $12.4 million and $9.8 million for the six month periods ended June 30, 1997 and 1996, respectively. The increase in non-interest expenses are mainly attributable to the significant growth that has occurred from the second quarter of 1996 to the second quarter of 1997 and the corresponding increase in employees and the related increase in occupancy expense. The legal settlement recovery is attributed to the $1.70 million recovery from the Company's insurance coverage related to the $1.70 million legal settlement charge that occurred in the second quarter of 1995. INCOME TAXES The provision for income taxes for the second quarter of 1997 of $1.2 million reflects an effective tax rate for the quarter of approximately 38%, compared to a tax provision recorded for the second quarter of 1996 of $839,000 with an effective tax rate of 39%. The provision for income taxes for the six month period ended June 30, 1997 was $2.3 million, as compared to $1.7 million for the six month period ended June 30, 1996. Those provisions reflect effective tax rates of 38% and 40%, respectively. 17 of 24 FINANCIAL CONDITION Total assets increased 15.6% to $719.0 million at June 30, 1997 compared to $622 million at December 31, 1996. The increases were primarily due to increases in the Company's loan portfolio funded by growth in deposits. LOANS Total gross loans increased 16.9% to $527.0 million at June 30, 1997 compared to $450.8 million at December 31, 1996. The increases in loan volume 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 the Company's market areas that are dependent on the technology and real estate industries and their supporting companies. Thus, the Company's borrowers could be adversely impacted by a downturn in these sectors of the economy which could reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans. PROVISION AND ALLOWANCE FOR LOAN LOSSES The following schedule details the activity in the Company's allowance for loan losses and related ratios for each of the quarters:
Quarter ended -------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in millions) 1997 1997 1996 1996 1996 -------------------------------------------------------------------- Allowance for loan losses at beginning of period $ 9,066 $ 7,312 $ 5,591 $ 4,976 $ 4,743 Provision for loan losses 2,130 1,948 1,545 606 365 Loans charged off (306) (207) (56) (74) (168) Loan recoveries 5 13 232 83 36 -------- -------- -------- -------- -------- Allowance for loan losses at end of period $ 10,895 $ 9,066 $ 7,312 $ 5,591 $ 4,976 ======== ======== ======== ======== ======== Ratio of: Allowance for loan losses to loan 2.08% 1.85% 1.63% 1.45% 1.49% Allowance for loan losses to nonperforming assets 312% 207% 224% 178% 131% - -----------------------------------------------------------------------------------------------------------
The provision for loan losses was $2.1 million in the second quarter of 1997, an increase of $182,000 from the $2.0 million in the first quarter of 1997, and a $1.8 million increase from the $365,000 in the second quarter of 1996. The provision for loan losses was $4.1 million for the six month period ended June 30, 1997, as compared to $685,000 for the same period in 1996. 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 loan loss reserve. The reserve for loan losses was $10.9 million at June 30, 1997, compared with $9.1 million at March 31, 1997, and $7.3 million at December 31, 1996. During the first two quarters in 1997, the Company has increased the provision and allowance for loan losses to reflect the 18 of 24 emergence of certain risk factors within its loan portfolio. The principal risk factor is the lack of seasoning within the Company's loan portfolio due to the dramatic growth in the size of the loan portfolio. Total gross loans have increased from $290.2 million to $527.0 million, or 81.6% in the 18 month period ended June 30, 1997. The ratio of the reserve for loan losses to total loans was 2.08% at June 30, 1997, compared with 1.63% at December 31, 1996, and 1.49% at June 30, 1996. The ratio of the allowance for loan losses to total nonperforming assets, including foreclosed real estate, was 312% at June 30, 1997, compared to 224% at December 31, 1996 and 131% at June 30, 1996. NONPERFORMING ASSETS The following table provides the Company's nonperforming assets for the quarters presented:
Quarter ended -------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in millions) 1997 1997 1996 1996 1996 -------- --------- ------------ ------------ --------- Non-accruing loans $3,170 $3,166 1,875 $2,457 $2,214 Restructuring loans -- -- -- -- -- Accruing loans past due 90 days or more 3 933 1,237 686 1,356 -------- --------- ------------ ------------ --------- Total nonperforming loans 3,172 4,099 3,112 3,143 3,570 OREO 325 289 152 -- 217 -------- --------- ------------ ------------ --------- Total nonperforming assets $3,498 $4,388 $3,264 $3,143 $3,787 ======== ========= ============ ============ ========= Total nonperforming assets to total assets 0.49% 0.66% 0.52% 0.54% 0.72% - ------------------------------------------------------------------------------------------------------------
Total nonperforming assets, which includes nonperforming loans (see below) and OREO, was $3.5 million at June 30, 1997, compared with $3.3 million at December 31, 1996, and $3.8 million at June 30, 1996. Nonperforming loans, which includes non-accrual loans, restructured loans, and accrual loans which are past due 90 days or more, were $3.2 million at June 30, 1997, compared with $3.1 million at December 31, 1996, and $3.6 million at June 30, 1996. Accruing loans past due 90 days or more, which are well secured and in the process of collection, were $3,000 at June 30, 1997, compared with $1.2 million at December 31, 1996, and $1.4 million at June 30, 1996. It is the Company's policy to discontinue the accrual of interest when the ability of a borrower to repay principal or interest is in doubt, or when a loan is past due 90 days or more, except when, in management's judgment, the loan is well secured and in the process of collection. Total classified assets increased to $13.8 million at June 30, 1997, from $9.4 million at December 31, 1996. The $4.4 million increase is primarily due to an increase in classified technology loans. The Company has focused strategically on technology loans through the Venture Lending department, and the volume of this type of loan has increased significantly. As of June 30, 1997, the Company had four foreclosed properties for $325,000 compared with $152,000 at December 31, 1996, and $217,000 at June 30, 1996. The Company has an active credit administration function which includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. Senior management and an internal asset review committee review problem loans on a regular basis. 19 of 24 DEPOSITS The Company emphasizes developing total client relationships with its customers in order to increase its core deposit base. Deposits reached $639.7 million at June 30, 1997, an increase of 14.3% compared to deposits of $559.3 million at December 31, 1996. Total average interest-bearing deposits increased 34.2% to $470.9 million for the six month period ended June 30, 1997, compared to an average of $350.8 million for the same period in 1996. The increase in deposits was 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 activities of the Greater Bay Trust Company and the Venture Lending Group. Non-interest-bearing deposits were $135.8 million at June 30, 1997, compared to $139.9 million at December 31, 1996. As its regional offices expand, the Company anticipates this funding source to increase. CAPITAL RESOURCES A banking organization's total qualifying capital includes two components, core capital (Tier I capital) and supplementary capital (Tier II capital). Core capital, which must comprise at least half of total capital, includes common shareholders' equity, qualifying perpetual preferred stock, and minority interests, less goodwill. Supplementary capital includes the allowance for loan losses (subject to certain limitations), other perpetual preferred stock, certain other capital instruments, and term subordinated debt. The Company's major capital components are shareholders' equity in core capital, and the allowance for loan losses and subordinated debt in supplementary capital. The Company's and the Bank's total risk-based capital and leverage ratios were as follows at the dates indicated:
June 30, 1997 ------------------------------------------------------------------------------ Tier 1 Capital Tier 1 Capital to Total Capital to to Average Risk-weighted Risk-weighted Quarterly Assets Assets Assets ------------------------------------------------------------------------------ Balance Percent Balance Percent Balance Percent (Dollar in thousands) Greater Bay Bancorp $ 68,384 9.74% $ 68,384 11.69% $ 78,740 13.46% Well capitalized requirement $ 35,119 5.00% $ 35,202 6.00% $ 58,670 10.00% ------------------------------------------------------------------------------ Excess capital $ 33,265 4.74% $ 33,182 5.66% $ 20,070 3.42% ============================================================================== Mid-Peninsula Bank $ 29,140 8.98% $ 29,140 11.59% $ 32,285 12.84% Well capitalized requirement $ 16,228 5.00% $ 15,089 6.00% $ 25,149 10.00% ------------------------------------------------------------------------------ Excess capital $ 12,912 3.98% $ 14,051 5.59% $ 7,136 2.84% ============================================================================== Cupertino National Bank $ 29,660 7.93% $ 29,660 8.90% $ 36,872 11.06% Well capitalized requirement $ 18,709 5.00% $ 20,010 6.00% $ 33,350 10.00% ------------------------------------------------------------------------------ Excess capital $ 10,951 2.93% $ 9,650 2.90% $ 3,522 1.06% ============================================================================== December 31, 1996 ------------------------------------------------------------------------------ Tier 1 Capital Tier 1 Capital to Total Capital to to Average Risk-weighted Risk-weighted Quarterly Assets Assets Assets ------------------------------------------------------------------------------ Balance Percent Balance Percent Balance Percent (Dollar in thousands) Greater Bay Bancorp $ 44,530 7.27% $ 44,530 8.75% $ 53,638 10.54% Well capitalized requirement $ 30,620 5.00% $ 30,540 6.00% $ 50,901 10.00% ------------------------------------------------------------------------------ Excess capital $ 13,910 2.27% $ 13,990 2.75% $ 2,738 0.54% ============================================================================== Mid-Peninsula Bank $ 22,810 8.23% $ 22,810 9.94% $ 25,415 11.07% Well capitalized requirement $ 13,853 5.00% $ 13,769 6.00% $ 22,949 10.00% ------------------------------------------------------------------------------ Excess capital $ 8,957 3.23% $ 9,041 3.94% $ 2,466 1.07% ============================================================================== Cupertino National Bank $ 21,515 6.42% $ 21,515 7.70% $ 28,022 10.03% Well capitalized requirement $ 16,765 5.00% $ 16,769 6.00% $ 27,932 10.00% ------------------------------------------------------------------------------ Excess capital $ 4,750 1.42% $ 4,756 1.70% $ 90 0.03% ==============================================================================
The Company and the Banks seek to maintain capital ratios at levels that will maintain their status as a well-capitalized financial institution. On October 21, 1996, the Federal Reserve announced that certain qualifying amounts of cumulative preferred securities having the characteristics of the Trust Preferred Securities could be included as Tier I capital. Accordingly, the Company's Tier I and total risk-based capital ratios include the $20 million Trust Preferred Securities. 20 of 24 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 requirements 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. The Company maintains $50 million in inter-bank Fed Fund purchase lines, as well as $233 million in institutional deposit or brokered deposit lines, and $40 million in reverse repurchase lines. As of June 30, 1997, the Company had $17.1 million in institutional deposits outstanding and no outstanding federal funds purchased. 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 interest received 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. Management believes that such restrictions will not have an impact on the ability of Greater Bay to meet its ongoing cash obligations. As of June 30, 1997, the Company did not have any material commitments for capital expenditures. Net cash provided by operating activities, primarily representing net interest income, totaled $8.4 million for the six months ended June 30, 1997, as compared to $2.0 million for the same period in 1996. Cash used for investing activities totaled $75.0 million for the six months ended June 30, 1997, as compared to $30.6 million for the same period in 1996. The funds used for investing activities primarily represent increases in loans and investment for each year reported. For the period ended June 30, 1997 net cash provided by financing activities was $88.5 million. Historically, the primary financing activity of the Company has been deposits and short-term borrowings. Deposits increased $80.4 million for the period ended June 30, 1997 and short-term borrowing decreased $12.0 million for the same period. Net proceeds from trust preferred securities issued in 1997 provided an additional $20.0 million. For the period ended June 30, 1996, net cash provided by financing activities was $46.3 million. Deposits increased $45.6 million, while short-term borrowings were unchanged. EFFECTS OF INFLATION The impact of inflation on a financial institution differs significantly from that exerted on industrial concerns, primarily because its assets and liabilities consist largely of monetary items. The most direct effect of inflation on a financial institution is fluctuation in interest rates. However, net interest income is affected by the spread between interest rates received on assets and those paid on interest bearing liabilities, rather than the absolute level of interest rates. Additionally, there may be some upward pressure on the Company's operating expenses, such as increases in occupancy expenses based on consumer price indices. In the opinion of management, inflation has not had a material effect on the operating results of the Company. 21 of 24 PART II. OTHER INFORMATION ITEM 1 - ITEM 3, ITEM 5 Not applicable ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 1. Solicitation for Written Consents The solicitation of written consents of the shareholders of record as of March 27, 1997 to approve certain proposals to amend the Company's Articles of Incorporation and Bylaws were mailed to the shareholders on or about April 15, 1997. On May 12, the following results were announced: (a) A proposal to amend the Company's Articles of Incorporation to eliminate cumulative voting in the election of directors, was approved with 1,796,217 shares consenting, 78,535 shares opposed and 6,437 shares abstaining. (b) A proposal to amend the Company's Bylaws to provide for the classification of the Company's Board of Directors for the purpose of the election of directors, was approved with 1,799,138 shares consenting, 64,270 shares opposed and 17,781 shares abstaining. 2. Annual Meeting of Shareholders (a) The Annual Meeting of Shareholders of the Company was held on June 18, 1997 and 2,308,103 shares were represented at the meeting in person or by proxy. (b) The following 10 persons nominated by management were elected as directors at the meeting: Class I - Term expiring 1998 James E. Jackson Duncan L. Matteson Edwin E. van Bronkhorst Class II - Term expiring 1999 John M. Gatto Dick J. Randall Donald H. Seiler Class III - Term expiring 2000 David L. Kalkbrenner Rex D. Lindsay Glen McLaughlin Warren R. Thoits (c) A proposal to approve an amendment to the Company's Employee Stock Purchase Plan to increase the number of shares of the Company's common stock reserved for issuance thereunder by 100,000 shares, was approved by a vote of 2,066,069 shares in favor, 79,873 shares opposed and 22,689 shares abstaining and subject to broker non-votes. 22 of 24 (d) A proposal to ratify the appointment of Coopers & Lybrand L.L.P. as the Company's independent accountants for the current fiscal year was approved by a vote of 2,281,193 shares in favor, 18,537 shares opposed and 8,373 shares abstaining or subject to broker non-votes. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Report. (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K for the quarter covered by this report On June 5, 1997, the Company filed a form 8-K reporting that (a) effective May 12, 1997 a majority of the outstanding shares of common stock approved by written consent proposals to amend the Company's Articles of Incorporation to eliminate cumulative voting in the election of directors, and (ii) amend the Company's Bylaws to provide for the classification of the Company's Board of Directors for purposes of the election of directors, and (b) the Company, through its wholly-owned subsidiary, GBB Capital I, consummated a $20 million offering of 9.75% cumulative trust preferred securities. GBB Capital I invested the proceeds of the Offering in 9.75% Junior Subordinated Deferrable Interest Debentures issued by the Company. 23 of 24 SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. GREATER BAY BANCORP (Registrant) By: /s/ Steven C. Smith - --------------------- Steven C. Smith Executive Vice President, Chief Operating Officer and Chief Financial Officer Date: July 30, 1997 24 of 24 EX-27 2 ARTICLE 9
9 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 33,428 0 42,200 0 54,169 47,111 48,072 513,846 (10,895) 719,051 639,737 0 7,818 23,000 0 0 35,957 12,539 719,051 24,304 3,094 1,070 28,468 9,846 10,902 17,566 4,078 (49) 10,706 5,972 5,972 0 0 3,690 1.05 1.05 9.36 3,170 3 0 0 7,312 513 18 10,895 10,895 0 0
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