-----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, Ag1C3fMO82gq03ml6fRdasOq/8SNL1dRPVd8VHQJIlaq1AH5jFDbQs+5cCkRTKNV 6skgCxe5G8rPiFdKwnS/5A== 0001012870-99-001396.txt : 19990505 0001012870-99-001396.hdr.sgml : 19990505 ACCESSION NUMBER: 0001012870-99-001396 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATER BAY BANCORP CENTRAL INDEX KEY: 0000775473 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 770387041 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25034 FILM NUMBER: 99610346 BUSINESS ADDRESS: STREET 1: 2860 WEST BAYSHORE ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4153751555 MAIL ADDRESS: STREET 1: 2860 BAYSHORE ROAD STREET 2: 420 COWPER ST 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 March 31, 1999 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) (650) 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 April 23, 1999: 9,767,572 GREATER BAY BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.................... 3 Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998................................. 4 Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 1999 and 1998................................. 5 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998.............. 6 Notes to Consolidated Financial Statements.............. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risks................................................... 27 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................... 33 Signatures.............................................. 34
2 ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 1999 December 31, (Dollars in thousands) (unaudited) 1998 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 68,185 $ 59,975 Federal funds sold 90,400 43,600 Other short term securities 67,209 77,576 ------------------------------------- Cash and cash equivalents 225,794 181,151 Investment securities: Available for sale, at fair value 262,954 255,483 Held to maturity, at amortized cost (fair value $84,793 and $81,717 at March 31, 1999 and December 31, 1998, respectively) 84,859 81,157 Other securities 5,701 5,654 ------------------------------------- Investment securities 353,514 342,294 Loans: Commercial 560,913 455,077 Real estate construction and land 177,939 173,857 Real estate term 320,637 299,111 Consumer and other 89,418 81,089 Deferred loan fees and discounts (4,358) (3,343) ------------------------------------- Total loans, net of deferred fees 1,144,549 1,005,791 Allowance for loan losses (21,915) (21,304) ------------------------------------- Total loans, net 1,122,634 984,487 Property, premises and equipment 12,620 10,961 Interest receivable and other assets 66,734 63,972 ------------------------------------- Total assets $ 1,781,296 $ 1,582,865 ===================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest-bearing $ 280,747 $ 268,448 MMDA, NOW and savings 931,256 854,392 Time certificates, $100,000 and over 275,639 168,075 Other time certificates 51,435 51,577 ------------------------------------- Total deposits 1,539,077 1,342,492 Other borrowings 70,135 72,585 Subordinated debt - 3,000 Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trust holding solely junior subordinated debentures 50,000 50,000 Other liabilities 23,827 22,112 ------------------------------------- Total liabilities 1,683,039 1,490,189 ------------------------------------- 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; 9,736,602 and 9,612,142 shares issued and outstanding as of March 31, 1999 and December 31, 1998, respectively 58,496 57,283 Accumulated other comprehensive income (loss) 387 (96) Retained earnings 39,374 35,489 ------------------------------------- Total shareholders' equity 98,257 92,676 ------------------------------------- Total liabilities and shareholders' equity $ 1,781,296 $ 1,582,865 =====================================
See notes to consolidated financial statements. 3 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, ---------------------------------- (Dollars in thousands, except per share amounts) (unaudited) 1999 1998* - ---------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on loans $ 24,670 $ 19,396 Interest on investment securities: Taxable 4,404 3,364 Tax - exempt 726 316 ---------------------------------- Total interest on investment securities 5,130 3,680 Other interest income 1,541 2,484 ---------------------------------- Total interest income 31,341 25,560 ---------------------------------- INTEREST EXPENSE Interest on deposits 10,892 8,749 Interest on long term borrowings 1,983 874 Interest on other borrowings 106 809 ---------------------------------- Total interest expense 12,981 10,432 ---------------------------------- Net interest income 18,360 15,128 Provision for loan losses 861 996 ---------------------------------- Net interest income after provision for loan losses 17,499 14,132 ---------------------------------- OTHER INCOME Trust fees 721 550 Service charges and other fees 352 420 Gain on sale of SBA loans 284 244 Gain on sale of investments, - 8 net Other income (loss) 573 (193) ---------------------------------- Total, recurring 1,930 1,029 Warrant income 4 497 ---------------------------------- Total other income 1,934 1,526 ---------------------------------- OPERATING EXPENSES Compensation and benefits 6,380 5,426 Occupancy and equipment 2,072 1,389 Telephone, postage and supplies 534 451 Legal and other professional fees 489 385 Marketing and promotion 346 122 Client services 252 151 FDIC insurance and regulatory assessments 92 89 Insurance 57 79 Other real estate owned 21 23 Contribution to the GBB Foundation - 701 Other 792 967 ---------------------------------- Total operating expenses 11,035 9,783 ---------------------------------- Income before provision for income taxes and extraordinary items 8,398 5,875 Provision for income taxes 3,252 1,896 ---------------------------------- Net income before extraordinary items 5,146 3,979 Extraordinary items (88) - ---------------------------------- Net income $ 5,058 $ 3,979 ================================== Net income per share - basic** $ 0.52 $ 0.43 ================================== Net income per share - diluted** $ 0.49 $ 0.39 ==================================
* Restated on an historical basis to reflect the merger with Pacific Rim Bancorporation ("PRB") and Pacific Business Funding Corporation on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split declared for shareholders of record as of April 30, 1998. See notes to consolidated financial statements. 4 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, ------------------------------------ (Dollars in thousands) (unaudited) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------- Net income $ 5,058 $ 3,979 ------------------------------------ Other comprehensive income: Unrealized gains on securities: Unrealized holding gains arising during period (net of taxes of $(278) and $78 for the three months ended March 31, (398) 111 1999 and 1998, respectively) Less: reclassification adjustment for gains included in net income (net of taxes of $0 and $3 for the three months ended March 31, 1999 and 1998, respectively) - 5 ------------------------------------ Net change (398) 106 Cash flow hedge: Net derivative gains arising during period (net of taxes of $586 for the three months ended March 31, 1999) 838 - Less: reclassification adjustment for swap settlements included in net income (net of taxes of $(30) for the three months ended March 31, 1998) (43) - ------------------------------------ Net change 881 - ------------------------------------ Other comprehensive income 483 106 ------------------------------------ Comprehensive income $ 5,541 $ 4,085 ====================================
See notes to consolidated financial statements. 5 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, ----------------------------------------- (Dollars in thousands) (unaudited) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS - OPERATING ACTIVITIES Net income $ 5,058 $ 3,979 Reconcilement of net income to net cash from operations: Provision for loan losses 861 996 Depreciation and amortization 1,015 640 Deferred income taxes (251) (17) (Gain) loss on sale of investments, net - 44 Changes in: Accrued interest receivable and other assets (1,260) (2,115) Accrued interest payable and other liabilities 3,215 12,284 Deferred loan fees and discounts, net 1,015 169 ------------- ------------- Operating cash flows, net 9,653 15,980 ------------- ------------- CASH FLOWS - INVESTING ACTIVITIES Maturities and partial paydowns on of investment securities: Held to maturity 2,221 6,407 Available for sale 16,487 25,145 Purchase of investment securities: Held to maturity (5,905) - Available for sale (43,600) (59,381) Other securities (47) (44) Proceeds from sale of available for sale securities 18,595 2,308 Loans, net (140,023) (32,419) Proceeds from sale of other real estate owned 345 - Purchase of property, premises and equipment (2,320) (654) Purchase of insurance policies (1,935) (18,122) ------------- ------------- Investing cash flows, net (156,182) (76,760) ------------- ------------- CASH FLOWS - FINANCING ACTIVITIES Net change in deposits 196,585 35,335 Net change in other borrowings - short term (2,451) (7,213) Proceeds from other borrowings - long term - 60,000 Principal repayment - long term borrowings (3,000) - Proceeds from sale of common stock 1,213 698 Cash dividends (1,175) (1,027) ------------- ------------- Financing cash flows, net 191,172 87,793 ------------- ------------- Net change in cash and cash equivalents 44,643 27,013 Cash and cash equivalents at beginning of period 181,151 231,549 ------------- ------------- Cash and cash equivalents at end of period $ 225,794 $ 258,562 ============= ============= CASH FLOWS - SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 13,388 $ 10,274 Income taxes $ 400 $ 1,830 Non-cash transactions: Additions to other real estate owned $ - $ 105
See notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The results of operations for the quarter ended March 31, 1999 are not necessarily indicative of the results expected for any subsequent quarter or for the entire year ended December 31, 1999. The financial statements should be read in conjunction with the consolidated financial statements, and the notes thereto, included in the Annual Report on Form 10-K for the year ended December 31, 1998. CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial statements include the accounts of Greater Bay Bancorp ("Greater Bay" on a parent-only basis, and the "Company" on a consolidated basis) and its wholly owned subsidiaries, Mid-Peninsula Bank ("MPB"), Cupertino National Bank ("CNB"), Peninsula Bank of Commerce ("PBC"), Golden Gate Bank ("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 current presentation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and the prevailing practices within the banking industry. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 Unrealized Gains Cash Flow Other Comprehensive (Dollars in thousands) on Securities Hedges Income (Loss) - ------------------------------------------------------------------------------------------------------ Balance - as of December 31, 1998 $ 581 $ (677) $ (96) Current period change (398) 881 483 -------------------------------------------------------- Balance - as of March 31, 1999 $ 183 $ 204 $ 387 ========================================================
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 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 three months ended March 31, 1999 and 1998.
For the three months ended March 31, 1999 For the three months ended March 31, 1998 ----------------------------------------- ----------------------------------------- Average Average Income Shares Per Share Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------- ------------------------------------- Net income $ 5,058 $ 3,979 Basic net income per share: Income available to common shareholders 5,058 9,688,000 $ 0.52 3,979 9,356,000 $ 0.43 Effect of dilutive securities: Stock options - 588,000 - - 898,000 - --------------------------------------- ------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 5,058 10,276,000 $ 0.49 $ 3,979 10,254,000 $ 0.39 --------------------------------------- -------------------------------------
There were options to purchase 475,125 shares that were considered anti-dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the three months ended March 31, 1999. There were no options that were considered anti-dilutive during the three months ended March 31, 1998. 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 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. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 NOTE 2-MERGERS On January 26, 1999 Greater Bay 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 agreement provide for BA Bancshares shareholders to receive approximately 1,393,000 shares of Greater Bay 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 in May 1999. BAB's office is located in Redwood City, California. 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. The following table sets forth the composition of the operations of the Company and BAB for the period indicated.
As of (Dollars in thousands) March 31, 1999 - ------------------------------------------------------ Net interest income: Greater Bay Bancorp $ 18,360 Bay Area Bancshares 2,180 --------- Combined $ 20,540 ========= Provision for loan losses: Greater Bay Bancorp $ 861 Bay Area Bancshares 60 --------- Combined $ 921 ========= Net income: Greater Bay Bancorp $ 5,058 Bay Area Bancshares 645 --------- Combined $ 5,703 =========
There were no significant transactions between the Company and BAB prior to the merger. All intercompany transactions have been eliminated. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 NOTE 3--BORROWINGS Other borrowings are detailed as follows:
March 31, December 31, (Dollars in thousands) 1999 1998 - ------------------------------------------------------------------------------ Other borrowings: Short term borrowings: Short term notes payable $ 135 $ 135 -------------------------- Total short term borrowings 135 135 -------------------------- Long term borrowings: Securities sold under agreements to repurchase 50,000 50,000 FHLB advances 20,000 20,000 Promissory notes - 2,450 -------------------------- Total other long term borrowings 70,000 72,450 -------------------------- Total other borrowings $ 70,135 $ 72,585 ========================== Subordinated notes, due September 15, 2005 $ - $ 3,000 ========================== Total subordinated debt $ - $ 3,000 ==========================
During the three months ended March 31, 1998, the average balance of securities sold under short term agreements to repurchase was $23.3 million and the average interest rate during that period was 5.65%. No such borrowings were outstanding during the three months ended March 31, 1999. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. During the three months ended March 31, 1998, the average balance of federal funds purchased was $547,000 and the average interest rate during that period was 5.25%. There were no such balances outstanding during the three months ended March 31, 1999. 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. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 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. These notes were redeemed by the Company in January 1999. On March 15, 1999 the Company redeemed the $3.0 million in subordinated debt issued in 1995. The Company paid a premium of $150,000 ($88,000 net of tax) on the payoff of the debt. The premium was recorded, net of taxes, as an extraordinary item in March 1999. NOTE 4--ACTIVIY 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 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 segment's key operating results and financial position for the three month ended March 31, 1999 and 1998:
Three Months Ended Three Months Ended March 31, 1999 March 31, 1998 -------------------------------- ---------------------------- Community Trust Community Trust (Dollars in thousands) Banking Operations Banking Operations - ------------------------------------------------------------------------------------------------------------------------- Net interest income (1) $ 19,186 $ 57 $ 15,488 $ 177 Other income 1,131 725 960 562 Operating expenses, excluding merger and other related nonrecurring costs 10,778 719 9,596 558 Net income before income taxes (1) 8,677 64 5,856 181 Total assets 1,760,071 - 1,311,541 - Deposits 1,493,600 45,477 1,051,133 55,298 Assets under management - 630,840 - 578,290
(1) Includes intercompany earnings allocation charge which is eliminated in consolidation. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MARCH 31, 1999 AND 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 NOTE 5--CASH DIVIDEND The Company declared a cash dividend of $0.12 cents per share payable on April 15, 1999 to shareholders of record as of March 31, 1999. 12 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 results 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 $5.1 million for the first quarter of 1999, a 27.1% increase over the first quarter of 1998 net income of $4.0 million. Basic net income per share was $0.52 for the first quarter of 1999, as compared to $0.43 for the first quarter of 1998. Diluted net income per share was $0.49 and $0.39 for the first quarter of 1999 and 1998, respectively. The return on average assets and return on average shareholders' equity were 1.23% and 21.40% for the first quarter of 1999, compared with 1.30% and 20.84% for the first quarter in 1998, respectively. The Company's operating results included extraordinary items of $150,000 ($88,000 net of tax) for the first quarter of 1999 related to the early retirement of $3.0 million of subordinated debt of the Company. The following table summarizes net income, net income per share and key financial ratios before and after extraordinary items for the three months ended March 31, 1999: 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Before After extraordinary extraordinary (Dollars in thousands, except per share amounts) items items ---------------- ---------------- Net income $ 5,146 $ 5,058 Net income per share: Basic $ 0.53 $ 0.52 Diluted $ 0.50 $ 0.49 Return on average assets 1.25% 1.23% Return on average shareholders' equity 21.78% 21.40%
The increase in first quarter 1999 net income as compared to the same period in 1998 was principally the result of significant growth in loans and deposits. This growth, partially offset by a decline in interest rate spreads, resulted in a $3.2 million increase in net interest income. Operating expenses increased by $2.0 million, excluding the contribution to the Greater Bay Bancorp Foundation (the "Foundation") discussed below. Operating expense increases reflect additional efforts required to service and support the Company's growth. Net income for the three months ended March 31, 1999 and 1998 included $4,000 and $497,000, respectively, in warrant income resulting from the warrants received from clients of the Banks. During 1998, the Company donated appreciated warrants to the Foundation. The contribution of the warrants triggered recognition of warrant income of $497,000, net of related employee incentives, and a donation expense of $701,000. The Company recognized a tax benefit of $288,000 from these transactions. The 1999 increase in other income relates to a 1998 write-down on equity securities in accordance with APB 18 of $484,000. This increase was partially offset by a decrease in Warrant income. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) NET INTEREST INCOME Net interest income increased 21.4% to $18.4 million for the first quarter of 1999 from $15.1 million for the first quarter of 1998. This increase was primarily due to the $378.4 million, or 32.5%, increase in average interest- earning assets which was partially offset by a 45 basis point decrease in the Company's net yield on interest earning assets. The following table presents, for the quarters 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.
Three Months Ended Three Months Ended March 31, 1999 December 31, 1998 ------------------------ ---------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------- -------------------------------- INTEREST-EARNING ASSETS: Federal funds sold $ 58,143 $ 682 4.76% $ 67,083 $ 870 5.15% Other short term investments 68,743 859 5.07% 86,477 1,313 6.02% Investment securities: Taxable 277,956 4,404 6.43% 337,761 4,880 5.73% Tax-exempt (1) 61,210 726 4.81% 57,473 697 4.81% Loans (2), (3) 1,075,401 24,670 9.30% 905,675 22,229 9.74% ------------ ----------- ----------- --------- Total interest-earning assets 1,541,453 31,341 8.25% 1,454,468 29,989 8.18% Noninterest-earning assets 125,716 124,040 ------------ ----------- ----------- --------- Total assets $ 1,667,169 31,341 $ 1,578,508 29,989 ============ ----------- ========= INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and savings $ 865,779 7,311 3.42% $ 843,004 7,208 3.39% Time deposits, over $100,000 254,090 2,944 4.70% 187,629 2,337 4.94% Other time deposits 51,282 637 5.04% 50,665 632 4.95% ------------ ----------- ----------- --------- Total interest-bearing deposits 1,171,151 10,892 3.77% 1,081,298 10,177 3.73% Other borrowings 70,980 1,018 5.82% 80,181 1,143 5.66% Subordinated debt 2,443 71 11.79% 3,000 86 11.37% Trust Preferred Securities 50,000 1,000 8.11% 51,998 1,089 8.31% ------------ ----------- ----------- --------- Total interest-bearing liabilities 1,294,574 12,981 4.07% 1,216,476 12,495 4.08% Noninterest bearing deposits 253,689 252,506 Other noninterest-bearing liabilities 23,066 18,902 Shareholders' equity 95,840 90,624 ------------ ----------- ----------- --------- Total shareholders' equity and liabilities $ 1,667,169 12,981 $ 1,578,508 12,495 ============ ----------- =========== --------- Net interest income $ 18,360 $ 17,494 =========== ========= Interest rate spread 4.18% 4.11% Contribution of interest free funds 0.65% 0.67% Net yield on interest-earning assets (4) 4.83% 4.77% Three Months Ended March 31, 1998 -------------------------- Average Average Yield/ (Dollars in thousands) Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Federal funds sold $ 77,598 $ 1,026 5.36% Other short term investments 102,475 1,765 6.99% Investment securities: Taxable 205,360 3,364 6.64% Tax-exempt (1) 25,217 316 5.08% Loans (2), (3) 752,381 19,089 10.29% ----------- ----------- Total interest-earning assets 1,163,031 25,560 8.91% Noninterest-earning assets 77,476 ----------- ----------- Total assets $ 1,240,507 25,560 =========== ----------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and savings $ 672,855 $ 6,196 3.73% Time deposits, over $100,000 171,183 2,192 5.19% Other time deposits 46,323 603 5.28% ----------- ---------- Total interest-bearing deposits 890,361 8,991 4.10% Other borrowings 56,004 867 6.28% Subordinated debt 3,000 86 11.63% Trust Preferred Securities 20,000 488 9.90% ----------- ---------- Total interest-bearing liabilities 969,365 10,432 4.36% Noninterest bearing deposits 178,238 Other noninterest-bearing liabilities 15,479 Shareholders' equity 77,425 ----------- ----------- Total shareholders' equity and liabilities $ 1,240,507 10,432 ----------- ----------- Net interest income $ 15,128 =========== Interest rate spread 4.55% Contribution of interest free funds 0.73% Net yield on interest-earning assets (4) 5.28%
(1) The tax equivalent yields earned on the tax exempt securities are 6.96%, 6.96% and 7.35% for the quarters ended March 31, 1999, December 31, 1998 and March 31, 1998, respectively, using the federal statuary rate of 34%. (2) Nonaccrual loans are excluded in the average balance. (3) Interest income includes loan fees of $890,000, $800,000 and $810,000 for the quarters ended March 31, 1999, December 31, 1998 and March 31, 1998, respectively. (4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 quarters indicated, a summary of the changes in average asset and liability balances (volume) and changes in average interest rates (rate).
Three Months Ended March 31, 1999 Three Months Ended March 31, 1999 Compared with December 31, 1998 Compared with March 31, 1998 favorable / (unfavorable) favorable / (unfavorable) (Dollars in thousands)(1) Volume Rate Net Volume Rate Net - ------------------------------------------------------------------------------------------- ----------------------------------- INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ (120) $ (68) $ (188) $ (237) $ (107) $ (344) Other short term investments (256) (198) (454) (494) (412) (906) Investment securities: Taxable (977) 501 (476) 1,156 (116) 1,040 Tax-exempt 30 (1) 29 428 (18) 410 Loans 3,556 (1,115) 2,441 7,587 (2,006) 5,581 ------------------------------------ ----------------------------------- Total interest income 2,233 (881) 1,352 8,440 (2,659) 5,781 ------------------------------------ ----------------------------------- INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (77) (26) (103) (1,671) 556 (1,115) Time deposits over $100,000 (733) 126 (607) (981) 229 (752) Other time deposits (2) (3) (5) (63) 29 (34) ------------------------------------ ------------------------------------- Total interest-bearing deposits (812) 97 (715) (2,715) 814 (1,901) Other borrowings 152 (27) 125 (220) 69 (151) Subordinated debt 18 (3) 15 16 (1) 15 TPS 55 34 89 (616) 104 (512) ------------------------------------ ------------------------------------- Total interest expense (587) 101 (486) (3,536) 987 (2,549) ------------------------------------ ------------------------------------- Net increase (decrease) in net interest income $ 1,646 $ (780) $ 866 $ 4,905 $ (1,673) $ 3,232 ==================================== =====================================
(1) Changes in interest income and expense which are not attributable specifically to either volume or rate, are allocated proportionately between both variances. Nonaccrual loans are excluded in average loans. Interest income for the first quarter of 1999 increased 22.6% to $31.3 million from $25.6 million for the first quarter of 1998. This was primarily due to the significant increase in loans, the Company's highest yielding interest- earning asset, and investment securities. Loan volume increases were the result of the continuing economic improvement in the Company's market areas, as well as the addition of experienced relationship managers and significant business development efforts by the Company's relationship managers. The increase was partially offset by a decline in the yield earned on average interest-earning assets. Average interest-earning assets increased $378.4 million, or 32.5%, to $1.5 billion for the first quarter of 1999, compared to $1.2 million for the first quarter of 1998. Of this total increase, average loans increased $324.0 million, or 42.9%, to $1.1 billion, or 69.8% of average interest-earning assets, for the first quarter of 1999 from $752.4 million, or 64.7% of average interest- earning assets for the first quarter of 1998. Investment securities, Federal funds sold and other short-term securities, increased 13.5% to $466.1 million, or 30.2% of average interest-earning assets for the first quarter of 1999, from $410.7 million, or 35.3% of average interest-earning assets for the first quarter of 1998. The average yield on interest-earning assets declined 66 basis points to 8.25% for the first quarter of 1999 from 8.91% for the first quarter of 1998 primarily due to a decline in the average yield on loans. The average yield on loans declined 99 basis points to 9.30% for the first quarter of 1999 from 10.29% for the first quarter of 1998 primarily due to declines in market interest rates and increased competition for quality borrowers in the Company's market area. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Interest expense for the first quarter of 1999 increased 24.4% to $13.0 million from $10.4 million for the first quarter of 1998. This increase was due to greater volumes of interest-bearing liabilities offset by lower interest rates paid on interest-bearing liabilities. Average interest-bearing liabilities increased 33.5% to $1.3 billion for the first quarter of 1999 from $969.4 million for the first quarter of 1998 due primarily to the efforts of the Banks' relationship managers in generating core deposits from their client relationships. During the first quarter of 1999, average noninterest-bearing deposits increased to $253.7 million from $178.2 million for the first quarter of 1998. Due to that increase, noninterest-bearing deposits comprised 17.8% of total deposits at March 31, 1999, compared to 16.7% at March 31, 1998. As a result of the foregoing, the Company's interest rate spread declined to 4.18% for the first quarter of 1999 from 4.55% for the first quarter of 1998, and the net yield on interest-earning assets declined for the first quarter of 1999 to 4.83% from 5.28% for the first quarter 1998. 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 funds from this deposit in agency securities with maturities of less than 90 days. The Company's net yield on interest earning assets was reduced by the Special Deposit. The average deposit balances related to the Special Deposit during the the first quarter of 1999 and 1998 were $89.9 million and $91.6 million, respectively, on which the Company earned a spread of 1.76%. Excluding the Special Deposit, the first quarter 1999 and 1998 net yield on interest earning assets would have been 5.02% and 5.53%, respectively. Excluding the Special Deposit, the first quarter 1999 and 1998 interest rate spread would have been 4.32% and 4.73%, respectively. 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 quarters presented.
Three Months Ended March 31, ----------------------------------------- (Dollars in thousands) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Average noninterest bearing demand deposits $ 253,689 $ 178,238 Client service expenses 252 151 Client service expenses, annualized 0.40% 0.34% IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS: Net yield on interest-earning assets 4.83% 5.28% Impact of client service expense (0.07)% (0.05)% ----------------------------------------- Adjusted net yield on interest-earning assets (1) 4.76% 5.22% =========================================
(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 control its interest expense. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 for the first quarter of 1999 was $861,000, compared to $996,000 for the first quarter of 1998. Although loans outstanding have increased substantially, nonperforming loans, comprised of nonaccrual loans, restructured loans, and accruing loans past due 90 days or more, declined from $4.2 million, or 0.54% of loans outstanding, at March 31, 1998, to $3.3 million or 0.29% of loans outstanding at March 31, 1999. 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 $1.9 million for the first quarter of 1999 compared to $1.5 million for the first quarter of 1998. The following table sets forth information by category of other income for the quarters indicated.
At and for the three month periods ended March 31, December 31, September 30, June 30, March 31, ---------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------- Trust fees $ 721 $ 664 $ 642 $ 617 $ 550 Service charges and other fees 352 357 361 349 420 Gain on sale of SBA loans 284 282 290 221 244 Gain on sale of investments, net - 320 4 42 8 Other 573 560 230 342 (193) ---------------------------------------------------------------------------- Total, recurring 1,930 2,183 1,527 1,571 1,029 Warrant income 4 314 134 - 497 ---------------------------------------------------------------------------- Total $ 1,934 $ 2,497 $ 1,661 $ 1,571 $ 1,526 ============================================================================
18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The increase in other income for the first quarter of 1999 as compared to the same period in 1998 was primarily the result of a $171,000 increase in trust fees, and a $40,000 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 $630.8 million at March 31, 1999, compared to $576.3 million at March 31, 1998. 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 other income for the first quarter of 1998 included a $484,000 writedown on equity securities in accordance with APB 18. Excluding the write- down on equity securities, other income would have been $291,000 for the first quarter of 1998. Other income in 1998 included warrant income of $497,000, 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 from the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. OPERATING EXPENSES The following table sets forth the major components of operating expenses for the quarters indicated.
At and for the three month periods ended March 31, December 31, September 30, June 30, March 31, ----------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Compensation and benefits $ 6,380 $ 5,807 $ 5,753 $ 5,729 $ 5,426 Occupancy and equipment 2,072 1,751 1,542 1,535 1,389 Telephone, postage and supplies 534 510 429 392 451 Professional services and legal costs 489 432 403 377 385 Marketing and promotion 346 825 368 335 122 Client services 252 140 122 131 151 Directors' fees 121 146 133 142 151 FDIC insurance and regulatory assessments 92 84 88 77 89 Expenses on other real estate owned 21 (6) 43 (8) 23 Contribution to GBB Foundation - 448 192 - 701 Other 728 977 810 562 895 ------------------------------------------------------------------------ Total operating expenses, excluding merger costs $ 11,035 $ 11,114 $ 9,883 $ 9,272 $ 9,783 Merger costs - - 537 1,974 - ------------------------------------------------------------------------ Total operating expenses $ 11,035 $ 11,114 $ 10,420 $ 11,246 $ 9,783 ------------------------------------------------------------------------ Efficiency ratio 54.39% 55.60% 56.12% 64.30% 58.74% Efficiency ratio, before merger costs 54.39% 55.60% 53.22% 53.02% 58.74% Total operating expenses to average assets* 2.68% 2.79% 2.77% 3.28% 3.20% Total operating expenses to average assets, before merger costs* 2.68% 2.79% 2.63% 2.70% 3.20%
*Annualized Operating expenses totaled $11.0 million for the first quarter of 1999, compared to $9.8 million for the first quarter of 1998. The ratio of operating expenses to average assets was 2.68% for the first quarter of 1999 and 3.20% for the first quarter of 1998. 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 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) (or greater) volume of income while a decrease would indicate a more efficient allocation of resources. The Company's efficiency ratio for the first quarter of 1999 was 54.39%, compared to 58.74% for the first quarter of 1998. 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. For the first quarter of 1999, average assets increased 34.4% from the first quarter of 1998, while operating expenses, excluding nonrecurring cost, increased only 12.8%. Compensation and benefits expenses increased for the first quarter of 1999 to $6.4 million, compared to $5.4 million for the first quarter of 1998. The increase in compensation and benefits is due primarily to the addition of personnel in the first quarter of 1999 to accommodate the growth of the Company. The increase in occupancy and equipment; telephone, postage, and supplies; professional services and legal costs; marketing and promotion; and client service expense was related to the growth in the Company's loans, deposits and assets. INCOME TAXES The Company's effective income tax rate for the first quarter of 1999 was 38.7%, compared to 32.3% in the first quarter of 1998. The effective rates were lower than the statutory rate of 41.2% due to tax-exempt income on municipal securities, and were partially offset by the impact of merger and other related nonrecurring costs. For the first quarter of 1998, the Company was able to reduce its effective tax rate through the donation of appreciated warrants to the Foundation, as discussed above. FINANCIAL CONDITION Total assets increased 12.5% to $1.8 billion at March 31, 1999, compared to $1.6 billion at December 31, 1998. The increase in the first quarter of 1999 was primarily due to increases in the Company's loan portfolio funded by growth in deposits. LOANS Total gross loans increased 56.0%, on an annualized basis, to $1.1 billion at March 31, 1999, compared to $1.0 billion at December 31, 1998. The increases in the loan volume in the first quarter of 1999 was primarily due to an improving economy in the Company's market areas coupled with the business development efforts of 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. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table presents the composition of the Company's loan portfolio at the dates indicated.
March 31, December 31, 1999 1998 -------------------------------------------------------- (Dollars in thousands) Amount % Amount % - ----------------------------------------------------------------------------------------------------------- Commercial $ 560,913 50.0% $ 455,077 46.2% Real estate construction and land 177,939 15.8 173,857 17.7 Real estate term 320,637 28.6 299,111 30.4 Consumer and other 89,418 8.0 81,089 8.2 -------------------------------------------------------- Total loans, gross 1,148,907 102.4 1,009,134 102.5 Deferred fees and discounts, net (4,358) -0.4 (3,343) -0.3 -------------------------------------------------------- Total loans, net of deferred fees 1,144,549 102.0 1,005,791 102.2 Allowance for loan losses (21,915) -2.0 (21,304) -2.2 -------------------------------------------------------- Total loans, net $ 1,122,634 100.0% $ 984,487 100.0% --------------------------------------------------------
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. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth information regarding nonperforming assets at the dates indicated.
At and for the three month periods ended March 31, December 31, September 30, June 30, March 31, ----------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Nonperfroming loans Nonaccrual loans $ 2,847 $ 1,858 $ 2,919 $ 3,758 $ 3,152 Accruing loans past due 90 days or more - - - 75 108 Restructured loans 482 327 377 531 903 ---------------------------------------------------------------------------- Total nonperforming loans 3,329 2,185 3,296 4,364 4,163 Other real estate owned 620 966 905 1,001 1,001 ---------------------------------------------------------------------------- Total nonperforming assets $ 3,949 $ 3,151 $ 4,201 $ 5,365 $ 5,164 ---------------------------------------------------------------------------- Nonperforming assets to total loans and other real estate owned 0.34% 0.31% 0.49% 0.65% 0.66%
At March 31, 1999, the Company had $2.8 million in nonaccrual loans. Interest income foregone on nonaccrual loans outstanding totaled $64,000 and $96,000 for the three months ended March 31, 1999 and 1998, 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 March 31, 1999, OREO acquired through foreclosure had a carrying value of $620,000, compared to $1.1 million at December 31, 1998. The Company had $482,000 and $327,000 of restructured loans as of March 31, 1999 and December 31, 1998, respectively. There were no principal reduction concessions allowed on restructured loans during the first quarter of 1999 or 1998. Interest income from restructured loans totaled $9,000 and $4,000 for the three months ended March 31, 1999 and 1998. Foregone interest income, which totaled $8,000 and $3,000 for the three months ended March 31, 1999 and 1998, respectively, would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. The 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. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth the classified assets at the dates indicated.
At and for the three month periods ended March 31, December 31, September 30, June 30, March 31, ------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1998 1998 1998 - -------------------------------------------------------------------------------------------------------------------------------- Substandard $ 15,284 $ 12,515 $ 12,807 $ 9,068 $ 9,138 Doubtful 877 1,046 1,129 1,041 1,092 Loss - - - - 47 Other real estate owned 620 966 905 1,001 1001 ------------------------------------------------------------------------- Classified assets $ 16,781 $ 14,527 $ 14,841 $ 11,110 $ 11,278 ------------------------------------------------------------------------- Classified assets to total loans and other real 1.47% 1.44% 1.72% 1.35% 1.44% estate owned Allowance for loan losses to total classified assets 130.59% 146.65% 133.82% 161.88% 146.88%
With the exception of these classified assets, management was not aware of any loans outstanding as of March 31, 1999 where the known credit problems of the borrower would cause management to have serious doubts as to the ability of such borrowers to comply with their present loan repayment terms and which would result in such loans being included in nonperforming or classified asset tables at some future date. Management cannot, however, predict the extent to which economic conditions in the Company's market areas may worsen or the full impact that such an environment may have on the Company's loan portfolio. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured loans, or other real estate owned in the future. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established through a provision for loan losses based on management's evaluation of risk inherent in the Company's loan portfolio 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. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth information concerning the Company's allowance for loan losses at the dates and for the quarters indicated.
At and for the three month periods ended March 31, December 31, September 30, June 30, March 31, ------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1998 1998 1998 - ---------------------------------------------------------------------------------------------------------------------------------- Period end loans outstanding $ 1,144,549 $ 1,005,791 $ 859,519 $ 819,736 $ 782,948 Average loans outstanding $ 1,072,348 $ 908,767 $ 827,644 $ 798,591 $ 758,003 Allowance for loan losses: Balance at beginning of period $ 21,304 $ 19,861 $ 17,985 $ 16,565 $ 16,394 Charge-offs: Commercial (224) (51) (14) - (734) Real estate construction and land - - - (4) - Real estate term - - - - (2) Consumer and other (39) (453) (27) (13) (120) ------------------------------------------------------------------------- Total charge-offs (263) (504) (41) (17) (856) ------------------------------------------------------------------------- Recoveries: Commercial - - 13 19 22 Real estate construction and land - - - - - Real estate term - - - - - Consumer and other 13 46 - 1 9 ------------------------------------------------------------------------- Total recoveries 13 46 13 20 31 ------------------------------------------------------------------------- Net charge-offs (250) (458) (28) 3 (825) Provision charged to income (1) 861 1,901 1,904 1,417 996 ------------------------------------------------------------------------- Balance at end of period $ 21,915 $ 21,304 $ 19,861 $ 17,985 $ 16,565 ------------------------------------------------------------------------- Quarterly net charge-offs to average loans outstanding during the period, annualized 0.09% 0.20% 0.01% 0.00% 0.44% Year to date net charge-offs to average loans outstanding during the period, annualized 0.09% 0.21% 0.20% 0.30% 0.44% Allowance as a percentage of average loans outstanding 2.04% 2.34% 2.40% 2.25% 2.19% Allowance as a percentage of period end loans outstanding 1.91% 2.12% 2.31% 2.19% 2.12% Allowance as a percentage of non-performing loans 658.31% 975.01% 602.58% 412.12% 397.91%
_______________________ (1) Includes $113,000 in the third quarter of 1998 and $70,000 in the second quarter of 1998 to conform practices to the Company's reserve methodologies, which is 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. At March 31, 1999, the allowance for credit losses was $21.9 million, consisting of a $13.4 million allocated allowance and a $8.5 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 March 31, 1999: . Specific industry conditions within portfolio segments, particularly involving the high technology sector and the impact of foreign economic forces upon that sector; 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) . 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 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 charge-offs 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 judgement, significant factors that affect the collectibility of the portfolio as 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 1999 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 March 31, 1999, 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. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 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, $32.6 million of the TPS qualifies as Tier 1 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 1 capital will increase. 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 March 31, 1999, the Banks had approximately $27.7 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 March 31, 1999, 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 $9.7 million for the first quarter of 1999 and $15.9 million for the first quarter 1998. Cash used for investing activities totaled $156.2 million for the first quarter of 1999 and $76.8 million for the first quarter 1998. The funds used for investing activities primarily represent increases in loans and investment securities for each year reported. For the three months ended March 31, 1999, net cash provided by financing activities was $191.2 million, compared to $87.8 million for the first quarter of 1998. Historically, the primary financing activity of the Company has been through deposits. For the first quarter 1999 and 1998, deposit gathering activities generated cash of $196.6 million and $35.3 million, respectively. This represents a total of 102.8% and 40.2% of the financing cash flows for the first quarter of 1999 and 1998, respectively. CAPITAL RESOURCES Shareholders' equity at March 31, 1999 increased to $98.3 million from $92.7 million at December 31, 1998. Greater Bay paid dividends of $0.12 and $0.38 per share during the three months ended March 31, 1999 and the twelve months ended December 31, 1998, respectively. In 1998, PBFC made a distribution of $227,000 to its shareholders. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 March 31, 1999, the minimum risk-based capital requirements to be considered adequately capitalized were 4.0% for core capital and 8.0% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. The capital levels of the Company at March 31, 1999 and the two highest levels recognized under these regulations are as follows. These ratios all exceeded the well-capitalized guidelines shown below.
Tier 1 Total Leverage Risk-Based Risk-Based Ratio Capital Ratio Capital Ratio ----- ------------- ------------- Company 7.81% 9.23% 11.72% Well-capitalized 5.00% 6.00% 10.00% Adequately capitalized 4.00% 4.00% 8.00%
In addition, at March 31, 1999, each of the Banks had levels of capital that exceeded the well-capitalized guidelines. 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). 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 off-balance sheet items. This analysis assesses the risk of loss in market rate sensitive instruments in the event of sudden and sustained increases and decreases in market interest rates of 100 basis points. The following table presents the Company's projected change in NPV for these rate shock levels as of March 31, 1999. All market rate sensitive instruments presented in this table are classified as either held to maturity or available for sale. The Company has no trading securities.
(Dollars in thousands) Change in Projected Change ------------------------- Interest Rates MVPE Dollars Percentage - ------------------------------------------------------------------ 100 basis point rise $ 174,380 $ 7,135 4.3% Base scenario 167,245 - - 100 basis point decline 160,295 6,950 (4.2)%
The preceding table indicates that at March 31, 1999, in the event of a sudden and sustained decrease in prevailing market interest rates, the Company's NPV would be expected to decrease. 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 not be relied upon as indicative of actual future results. Further, the computations do not contemplate any actions the ALCO could undertake in response to changes in interest rates. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. The following table shows interest sensitivity gaps for different intervals as of March 31, 1999.
Immediate or 2 Days to 6 7 Months to 1 Year to 3 More than One Day Months 12 Months Years 6 Years ------------------------------------------------------------------------ (Dollars in thousands) Assets Cash and Due $ 9,388 $ - $ - $ - $ - Federal Funds Sold 90,400 - - - - Investment Securities - 135,198 38,710 79,747 23,416 Loans 674,155 303,858 38,347 49,072 27,495 Allowance for Loan Losses/Unearned Fees - - - - - Other Assets - - - - - ------------------------------------------------------------------------ Total Assets $ 773,943 $ 439,056 $ 77,057 $ 128,819 $ 50,911 ======================================================================== Liabilities and Equity Deposits $ 931,256 $ 285,944 $ 33,084 $ 7,429 $ 617 Other Borrowings - - 134 - 70,000 Trust Preferred Securities 30,000 - - - - Other Liabilities - - - - - Shareholders Equity - - - - - ----------------------------------------------------------------------- Total Liab/Equity $ 961,256 $ 285,944 $ 33,218 $ 7,429 $ 70,617 ======================================================================= Gap $ (187,313) $ 153,112 $ 43,839 $ 121,390 $ (19,706) Cumulative Gap $ (187,313) $ (34,201) $ 9,638 $ 131,028 $ 111,322 Cumulative Gap/Total Assets -10.5% -1.9% 0.5% 7.4% 6.2% More than Total Rate Non-Rate 6 Years Sensitive Sensitive Total --------------------------------------------------------- Assets Cash and Due $ - $ 9,388 $ 58,797 $ 68,185 Federal Funds Sold - 90,400 - 90,400 Investment Securities 137,951 415,022 5,701 420,723 Loans 47,212 1,140,139 8,768 1,148,907 Allowance for Loan Losses/Unearned Fees - - (26,273) (26,273) Other Assets - - 79,354 79,354 --------------------------------------------------------- Total Assets $ 185,163 $ 1,654,949 $ 126,347 $ 1,781,296 ========================================================= Liabilities and Equity Deposits $ - $ 1,258,330 $ 280,747 $ 1,539,077 Other Borrowings - 70,134 - 70,134 Trust Preferred Securities 20,000 50,000 - 50,000 Other Liabilities - - 23,828 23,828 Shareholders Equity - - 98,257 98,257 -------------------------------------------------------- Total Liab/Equity $ 20,000 $ 1,378,464 $ 402,832 $ 1,781,296 ======================================================== Gap Cumulative Gap $ 165,163 $ 276,485 $ (276,485) $ - Cumulative Gap/Total Assets $ 276,485 $ 552,970 $ - $ - 15.5% 31.0% - -
29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The foregoing table indicates that the Company had a one year gap of $131 million, or 7.4% of total assets, at March 31, 1999. In theory, this would indicate that at March 31, 1999, $131 million more in assets than liabilities 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 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 March 31, 1999, the analysis indicates that the Company's net interest income would increase a maximum of 23.0% if rates rose 200 basis points immediately and would decrease a maximum of 23.2% 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. 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. Testing and implementation is planned to be completed during the first half of 1999. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 an anticipated total expenditure of $300,000 in 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 $118,000 and $146,000 in the three months ended March 31, 1999 and the year ended December 31, 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 systems will not be material. Greater Bay completed the Awareness and Assessment Phases, as defined by the FFIEC, for its computer systems and bank facilities in 1998 and continues to update its assessment as needed. We have identified our mission-critical systems, assessed the state of Year 2000 compliance of those systems and implemented a plan to repair or replace non-compliant systems. The Company currently believes that costs of addressing year 2000 issues 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 whom the Company relies fail to 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. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 April 30, 1999 the Company and Bay Commercial Services, the parent of Bay Bank of Commerce, signed a definitive agreement for a merger between the two companies. The agreement provides for Bay Commercial Services shareholders to receive approximately 1,322,000 shares of Greater Bay stock subject to the approval of Bay Commercial Services 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 Bay Commercial Services will own approximately 11.9% of the combined company. The transaction is expected to be completed in the fourth quarter of 1999 subject to regulatory approvals. As of December 31, 1998, Bay Commercial Services had $144.0 million in assets, $123.0 million in deposits, and $12.0 million in shareholders' equity. Bay Bank of Commerce has banking offices in San Leandro, San Ramon and Hayward, California. The combined Company, on a pro-forma basis after giving effect to the merger of Bay Area Bancshares and Bay Commercial Services, would have had total assets of approximately $2.1 billion and equity of over $125.0 million at March 31, 1999. The transaction is anticipated to be accretive to the Company's core earnings (excluding one-time merger costs) 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 Bay Commercial Services. Management believes that significant opportunities exist to enhance the spectrum of financial services offered to both existing and future clients of Bay Commercial Services while also increasing market penetration in the East Bay market areas. RECENT ACCOUNTING DEVELOPMENTS In April 1999, the Financial Accounting Standards Board ("FASB") reached tentative conclusions on the future of the pooling-of-interests method of accounting for business combinations. These tentative decisions include the decision that the pooling-of-interests method of accounting will no longer be an acceptable method to account for business combinations between independent parties and that there should be a single method of accounting for all business combinations, and that method is the purchase method. The FASB agreed that the purchase method should be applied prospectively to business combination transactions that are initiated after the final standard is issued. The FASB has indicated that it expects an exposure draft to be issued during the third quarter of 1999 and expects a final standard will be issued and become effective in the fourth quarter of 2000. A portion of the Company's business strategy is to pursue acquisition opportunities so as to expand its market presence and maintain growth levels. A change in the accounting for business combinations could have a negative impact on the Company's ability to realize those business strategies. 32 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -- NOT APPLICABLE ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - NOT APPLICABLE ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NOT APPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NOT APPLICABLE ITEM 5. Other Information -- Not applicable 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 EXHIBIT NO. EXHIBITS - ------- -------- 10.1 Employment Agreement with David L. Kalkbrenner, dated as of January 1, 1999. 10.8.2 Amendment No. 1 to Greater Bay Bancorp Change in Control Pay Plan II. 10.10.2 Amendment No. 1 to Greater Bay Bancorp Termination and Layoff Pay Plan II. 11 Statement re Computation of Earnings Per Share. 27 Financial Data Schedule. 99.1 Press Release issued on February 25, 1999. 99.2 Press Release issued on April 13, 1999. - -------- (b) Reports on Form 8-K for the quarter covered by this report. During the quarter ended March 31, 1999, the Company filed the following report on Form 8-K: report dated February 4, 1999 filing press releases related to fourth quarter 1998 dividend declaration, year-end earnings and Bay Area Bancshares merger. 33 SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. GREATER BAY BANCORP (REGISTRANT) BY: /s/ Steven C. Smith - ------------------- STEVEN C. SMITH EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER DATE: MAY 4, 1999 34 EX-10.1 2 EMPLOYMENT AGREEMENT EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Agreement is made and entered into as of January 1, 1999 by and between GREATER BAY BANCORP ("Employer"), a California corporation and DAVID L. KALKBRENNER ("Employee"). RECITALS -------- WHEREAS, Employer is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and subject to the supervision and regulation of the Board of Governors of the Federal Reserve System ("FRB"); WHEREAS, Employer is the sole shareholder and owner of 100% of the outstanding capital voting stock of various subsidiary banking corporations chartered under California and federal banking laws (collectively, the "Subsidiary Banks"); WHEREAS, the Subsidiary Banks are subject to the supervision and regulation, as applicable, of the California Department of Financial Institutions ("CDFI"), Federal Deposit Insurance Corporation ("FDIC"), FRB and the Office of the Comptroller of the Currency ("OCC"); WHEREAS, Employer and Employee desire to terminate that certain employment agreement with Employee dated March 3, 1992 and as amended by amendment dated March 27, 1998, and enter into a new employment agreement for the purposes of engaging the services of Employee by reason of his experience, training and ability in the commercial banking industry and to delineate the rights, obligations and responsibilities of the Employer and Employee; and NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Employer and Employee agree as follows: AGREEMENT --------- 1. Termination of Existing Agreement/Term of Employment. Employer and ---------------------------------------------------- Employee acknowledge and agree that the existing employment agreement between Employer's banking subsidiary, Mid-Peninsula Bank and its predecessor parent bank holding company, Mid-Peninsula Bancorp (subsequently re-named Greater Bay Bancorp), and Employee dated March 3, 1992 and amendment no. 1 thereto dated March 27, 1998, is hereby terminated effective with the date of this Agreement. Employer hereby employs Employee and Employee hereby accepts employment with Employer, upon the terms and conditions hereinafter set forth, for a period of five (5) years from the date hereof. 2. Duties and Obligations of Employee. Employee shall serve as the ---------------------------------- President and Chief Executive Officer of Employer and shall perform the customary duties of such office as may from time to time be reasonably requested of him by the Board of Directors of Employer, in addition to the following: -2- (a) Voting as a member of the Board of Directors of Employer and the Subsidiary Banks and such committees thereof as the Board of Directors of Employer shall designate; (b) Participating in community affairs which are beneficial to the Employer and the Subsidiary Banks; (c) Maintaining a good relationship with Employer's shareholders and the Boards of Directors of Employer and the Subsidiary Banks; (d) Maintaining a good relationship with regulatory agencies and governmental authorities having jurisdiction over Employer and the Subsidiary Banks; (f) Providing leadership in planning and implementing the conduct of business and the affairs of the Employer and the Subsidiary Banks; (g) Hiring and firing of all employees other than executive officers of the Employer, subject at all times to the policies and directives set by the Employer's Board of Directors. 3. Devotion to Employer's Business. ------------------------------- (a) Employee shall devote his full business time, ability, and attention to the business of Employer during the term of this Agreement and shall not during the term of this Agreement engage in any other business activities, duties, or pursuits whatsoever, or directly or indirectly render any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of Employer's Board of Directors. However, the expenditure of reasonable amounts of time for educational, charitable, or professional activities shall not be deemed a breach of this Agreement if those activities do not materially interfere with the services required of Employee under this Agreement. Nothing in this Agreement shall be interpreted to prohibit Employee from making passive personal investments. However, Employee shall not directly or indirectly acquire, hold, or retain any interest in any business competing with or similar in nature to the business of Employer. Employer acknowledges that Employee currently serves as a member of the Board of Directors of Thoits Insurance Services, Inc. and hereby consents to such service by Employee. (b) Employee agrees to conduct himself at all times with due regard to public conventions and morals. Employee further agrees not to do or commit any act that will reasonably tend to shock or offend the community and have a material adverse effect upon Employer. (c) Employee hereby represents and agrees that the services to be performed under the terms of this Agreement are of a special, unique, unusual, extraordinary, and intellectual character that gives them a peculiar value, the loss of which cannot be reasonably or adequately compensated in damages in an action at law. Employee therefore expressly agrees that Employer, in addition to any other rights or remedies that Employer may possess, shall be entitled to injunctive and other equitable relief to prevent or remedy a breach of this Agreement by Employee. 4. Noncompetition by Employee. Employee shall not, during the term of --------------------------- this Agreement, directly or indirectly, either as an employee, employer, consultant, agent, principal, stockholder, officer, director, or in any other individual or representative capacity, engage or participate in any competitive banking or financial services business without the prior written consent of Employer. 5. Indemnification. --------------- (a) Employee shall indemnify and hold Employer harmless from all liability for loss, damage, or injury to persons or property resulting from the gross negligence or intentional misconduct of the Employee. (b) To the extent permitted by law, Employer shall indemnify Employee if he was or is a party or is threatened to be made a party in any action brought by a third party against Employee (whether or not Employer is joined as a party defendant) against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with said action if Employee acted in good faith and in a manner Employee reasonably believed to be in the best interest of Employer (and with respect to a criminal proceeding if Employee had no reasonable cause to believe his conduct was unlawful), provided that the alleged conduct of Employee arose out of and was within the course and scope of his employment as an officer or employee of Employer. 6. Disclosure of Information. Employee shall not, either before or after ------------------------- termination of this Agreement, without the prior written consent of Employer's Board of Directors or except as required by law to comply with legal process including, without limitation, by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process, disclose to anyone any financial information, trade or business secrets, customer lists, computer software or other information not otherwise publicly available concerning the business or operations of Employer and/or one or all of the Subsidiary Banks. Employee further recognizes and acknowledges that any financial information concerning any customers of Employer or the Subsidiary Banks, as it may exist from time to time, is strictly confidential and is a valuable, special and unique asset of Employer's business. Employee shall not, either before or after termination of this Agreement, without such consent or except as required by law, disclose to anyone said financial information or any part thereof, for any reason or purpose whatsoever. In the event Employee is required by law to disclose such information described in this paragraph 6, Employee will provide Employer and its respective counsel with immediate notice of such request so that they may consider seeking a protective order. If in the absence of a protective order or the receipt of a waiver hereunder Employee is nonetheless, in the written opinion of knowledgeable counsel, compelled to disclose any of such information to any tribunal or any other party or else stand liable for contempt or suffer other material censure or material penalty, then Employee may disclose (on an "as needed" basis only) such information to such tribunal or other party without liability hereunder. This paragraph 6 shall survive the expiration or termination of this Agreement. 7. Written, Printed or Electronic Material. All written, printed or --------------------------------------- electronic material, notebooks and records including, without limitation, computer disks used by Employee in performing duties for Employer, other than Employee's personal notes and diaries, are and shall remain the sole property of Employer. Upon termination of employment, Employee shall promptly return all such material (including all copies, extracts and summaries thereof) to Employer. This paragraph 7 shall survive expiration or termination of this Agreement. 8. Surety Bond. Employee agrees that he will furnish all information and ----------- take any other steps necessary from time to time to enable Employer to obtain or maintain a fidelity bond conditional on the rendering of a true account by Employee of all monies, goods, or other property which may come into the custody, charge, or possession of Employee during the term of his employment. The surety company issuing the bond and the amount of the bond must be acceptable to Employer. All premiums on the bond shall be paid by Employer. Employer shall have no obligation to pay severance benefits to Employee in accordance with paragraph 16 (d) of this Agreement in the event that the Employee's employment is terminated in connection with the Employee's failure to qualify for a surety bond at any time during the term of this Agreement and such failure to qualify results from an occurrence described in paragraph 16(a) (5), (6) or (7, to the extent of an Employee breach). 9. Base Salary. In consideration for the services to be performed ----------- hereunder, Employee shall receive a salary at the rate of Three Hundred Sixty Thousand Dollars ($360,000) per annum, payable in substantially equal installments during the term of this Agreement of approximately Fifteen Thousand Dollars ($15,000.00) on the first and fifteenth days of each month, subject to applicable adjustments for withholding taxes and prorations for any partial employment period. Employee shall receive such annual adjustments in salary, if any, as may be determined by Employer's Board of Directors, in its sole discretion. -5- 10. Salary Continuation During Disability. If Employee for any reason ------------------------------------- (except as expressly provided below) becomes temporarily or permanently disabled so that he is unable to perform the duties under this Agreement, Employer agrees to pay Employee the base salary otherwise payable to Employee pursuant to paragraph 9 of this Agreement, reduced by the amounts received by Employee from state disability insurance, or worker's compensation or other similar insurance benefits through policies provided by Employer, for a period of one (1) year from the date of disability. For purposes of this paragraph 10, "disability" shall be defined as provided in Employer's disability insurance program. Notwithstanding anything herein to the contrary, Employer shall have no obligation to make payments for a disability resulting from the deliberate, intentional actions of Employee, such as, but not limited to, attempted suicide or chemical dependence of Employee. 11. Incentive Compensation. The Executive Committee of the Board of ---------------------- Directors of Employer will determine the amount, if any, of pre-tax net profit of Employer available for allocation and distribution as incentive compensation pursuant to the executive incentive compensation program (the "Program"). Pre- tax net profit for purposes of the determination is defined as actual pre-tax net profit before allocation of any incentive compensation. Distribution of any incentive compensation pursuant to the Program shall be made only to employees of Employer eligible to participate in the Program and who are employed by Employer at the time of any such distribution. Any such distribution of incentive compensation shall be prorated for any partial year in accordance with the terms of the Program. 12. Stock Options. Employer has previously granted stock options to the ------------- Employee and the Employer may, but is not obligated to, grant additional stock options to the Employee in the future. Any such grants shall be evidenced by a Stock Option Agreement entered into between Employer and Employee and a copy of each such Stock Option Agreement shall be attached to this Agreement as an exhibit. Notwithstanding any contrary provision of any such Stock Option Agreement or any related Stock Option Plan of Employer, no rights of employment shall be conferred upon Employee or result from any such Stock Option Agreement or Stock Option Plan of Employer. Any employment rights and corresponding duties of Employee pursuant to his employment by Employer shall be limited to and interpreted solely in accordance with the terms and provisions of this Agreement. 13. Other Benefits. Employee shall be entitled to those employee benefits -------------- adopted by Employer for all employees of Employer, subject to applicable qualification requirements and regulatory approval requirements, if any. Employee shall be further entitled to the -6- following additional benefits which shall supplement or replace, to the extent duplicative of any part or all of the general employee benefits, the benefits otherwise provided to Employee: (a) Vacation. Employee shall be entitled to five (5) weeks annual -------- vacation leave at his then existing rate of full salary each year during the term of this Agreement. Employee may be absent from his employment for vacation as long as such leave is reasonable and does not jeopardize his responsibilities and duties specified in this Agreement. The length of vacation should not exceed two (2) weeks without the approval of Employer's Executive Committee of the Board of Directors. Vacation time will accrue in accordance with Employer's personnel policies. -7- (b) Automobile Allowance and Insurance. Employer shall pay to ---------------------------------- Employee an automobile allowance of Twelve Thousand Dollars ($12,000) per year during the term of this Agreement, payable at the rate of One Thousand Dollars ($1,000) per month. Employee shall acquire or otherwise make available for his business and personal use an automobile, suitable to his position, and (i) maintain it in good condition and repair; (ii) maintain public liability insurance and property damage insurance policies with insurer(s) acceptable to Employer and such coverages in such amounts as may be acceptable to Employer from time to time; and (iii) such policies shall name Employer as an additional insured, subject to the requirement that Employee's allowance described above shall be increased in an amount equal to the additional premium expense, if any, resulting from Employer being named as an additional insured. Employer may, in its sole discretion, elect to provide and pay for such insurance policies in lieu of Employee maintaining such policies. (c) Personal Insurance. Employer shall provide during the term of ------------------ this Agreement at Employer's sole cost, policies of universal life insurance in the amount of Five Hundred Thousand Dollars ($500,000) and group life, health (including medical, dental and hospitalization), accident and disability insurance coverage for Employee and his dependents through a policy or policies provided by insurer(s) selected by Employer in its sole discretion. (d) Supplemental Compensation. Employer shall provide as soon as ------------------------- practicable, but not later than March 31, 1999 unless extended by written consent of Employee, an agreement satisfactory to Employee providing supplemental compensation benefits to Employee payable upon retirement or as otherwise set forth in such agreement. Employee agrees to waive any rights under his existing Salary Continuation Agreement between Employer's banking subsidiary, Mid-Peninsula Bank, and Employee dated April 26, 1995, as a condition to the effectiveness of such supplemental compensation benefits agreement. 14. Annual Physical Examination. Employer shall pay or reimburse Employee --------------------------- for the cost of an annual physical examination conducted by a California licensed physician selected by Employee and reasonably acceptable to Employer. Employee shall report the general substance of the physician's overall evaluation of Employee's physical condition to the Employer's Executive Committee of the Board of Directors of Employer as soon as reasonably practicable following Employee's receipt of such information from the physician. 15. Business Expenses. Employee shall be reimbursed for all ordinary and ----------------- necessary expenses incurred by Employee in connection with his employment. Employee shall also be reimbursed for expenses incurred in activities associated with promoting the business of Employer, including expenses for club memberships, entertainment, travel and other expenses for attendance at conventions and education programs, and similar items. Employer will pay for or will reimburse Employee for such expenses upon presentation by Employee from time to time of receipts or other appropriate evidence of such expenditures. Any club memberships shall be approved in advance of purchase by the Employer's Executive Committee of the Board of Directors (the "Executive Committee"). During the term of this Agreement, Employee shall have an option to purchase any club memberships from the Employer if the Executive Committee decides to terminate any such membership. Upon termination of employment, the Employee shall have an option to purchase any club memberships from the Employer during the six (6) month period following such termination. Any purchase by Employee from Employer of a club membership, either during the term of this Agreement or upon termination of employment, shall be at the same purchase price paid by the Employer to acquire each club membership, unless otherwise agreed by the Executive Committee. 16. Termination of Agreement. ------------------------ (a) Automatic Termination. This Agreement shall terminate --------------------- automatically without further act of the parties and immediately upon the occurrence of any one of the following events, subject to either party's right, without any obligation whatsoever, to waive an event reasonably susceptible of waiver, and the obligation of Employer to pay the amounts which would otherwise be payable to Employee under this Agreement through the end of the month in which the event occurs, except that only in the event of termination based upon subparagraphs (1), (4) or (7, to the extent of Employer's breach) below shall Employee be entitled to receive severance payments pursuant to paragraph 16 (d) of this Agreement: (1) The occurrence of circumstances that make it impossible or impractical for Employer to conduct or continue its business. (2) The death of Employee. (3) The loss by Employee of legal capacity. (4) The loss by Employer of legal capacity to contract. (5) Employee's deliberate violation of (i) any state or federal banking or securities laws, or the Bylaws, rules, policies or resolutions of the Employer, or (ii) the rules or regulations of the CDFI, FDIC, FRB or OCC, or other regulatory agency or governmental authority having jurisdiction over the Employer and/or the Subsidiary Banks, which has a material adverse effect upon the Employer and/or the Subsidiary Banks. (6) Employee's conviction of any felony which has a material adverse effect upon Employer. (7) Either party breaches the terms or provisions of this Agreement and such breach has a material adverse effect upon the non-breaching party. -10- (b) Termination by Employer. Employer may, at its election and in its ----------------------- sole discretion, terminate this Agreement for any reason, or for no reason, by giving not less than thirty (30) days' prior written notice of termination to Employee, without prejudice to any other remedy to which Employer may be entitled either at law, in equity or under this Agreement. Upon such termination, Employee shall be entitled to receive any employment benefits which shall have accrued prior to such termination and the severance pay specified in paragraph 16 (d) below. (c) Termination by Employee. This Agreement may be terminated by ----------------------- Employee for any reason, or no reason, by giving not less than thirty (30) days' prior written notice of termination to Employer. Upon such termination, all rights and obligations accruing to Employee under this Agreement shall cease, except that such termination shall not prejudice Employee's rights regarding employment benefits which shall have accrued prior to such termination and any other remedy which Employee may have at law, in equity or under this Agreement, which remedy accrued prior to such termination. (d) Severance Pay - Termination by Employer. In the event of --------------------------------------- termination by Employer pursuant to paragraph 16 (b) or automatic termination based upon paragraph 16 (a) (1), (4) or (7, to the extent of Employer's breach) of this Agreement, Employee shall be entitled to receive severance pay at Employee's rate of salary immediately preceding such termination equal to thirty-six (36) months' salary (in addition to incentive compensation or bonus payments due Employee, if any), payable in substantially equal monthly installments on the first and fifteenth days of each month for a period of thirty-six (36) months. Notwithstanding the foregoing, in the event of a "change in control" as defined in subparagraph (e) below, Employee shall not be entitled to severance pay pursuant to this subparagraph (d) and any rights of Employee to severance pay shall be limited to such rights as are specified in subparagraph (e) below. Employee acknowledges and agrees that severance pay pursuant to this subparagraph (d) is in lieu of all damages, payments and liabilities on account of the early termination of this Agreement and the sole and exclusive remedy for Employee terminated at the will of Employer pursuant to paragraph 16(b) or pursuant to certain provisions of paragraph 16 (a) described herein. (e) Severance Pay - Change in Control. In the event of a "change in --------------------------------- control" as defined herein and within a period of three (3) years following consummation of such a change in control (i) Employee's employment is terminated; or (ii) any adverse change occurs in the nature and scope of Employee's position, responsibilities, duties, salary, benefits or location of employment; or (iii) any event occurs which reasonably constitutes a demotion, significant diminution or constructive termination (by resignation or otherwise) of Employee's employment, Employee shall be entitled to receive severance pay in addition to any bonus or incentive compensation payments due Employee. Any such severance pay due Employee shall be in an amount equal to two and ninety-nine one hundredths (2.99) times Employee's average annual compensation for the five (5) years immediately preceding the change in control. Employee's average annual compensation shall be determined by the product of the average of the aggregate compensation paid by Employer to Employee which was includable in Employee's gross income for federal income tax purposes for the five (5) tax years ending immediately prior to the change in control divided by five (5). If Employee was employed by Employer for fewer than five (5) years immediately preceding the change in control, Employee's average annual compensation shall be determined by the product of the aggregate compensation paid to Employee by Employer and includable in Employee's gross income for federal income tax purposes for the years less than such five (5) year period that Employee was employed by Employer preceding the change in control divided by the aggregate number of such years less than the five (5) year period. In addition to the change in control severance payment rights of Employee described above and notwithstanding any other provisions of this Agreement, Employee shall be entitled to receive the severance payments specified in this paragraph 16 (e) in the event that Employee voluntarily terminates his employment with Employer or its successor effective on a date within the thirty (30) day period immediately after the expiration of the sixth month following a change in control. Employee shall deliver written notice to Employer of his intention to terminate employment specifying the effective date within such thirty (30) day period described above, which notice must be received by Employer not less than twenty (20) days prior to the expiration of the sixth month following such a change in control. If all or any portion of the amounts payable to the Employee under this Agreement, either alone or together with other payments which the Employee has the right to receive from the Employer, constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), that are subject to the excise tax imposed by Section 4999 of the Code (or similar tax and/or assessment), the Employer (and its successor) shall increase the amounts payable under this Agreement to the extent necessary to afford the Employee substantially the same economic benefit under this Agreement as the Employee would have received had no such excise tax been imposed on the payments due the Employee under this Agreement. The determination of the amount of any such excise taxes shall be made initially by the independent accounting firm employed by the Employer immediately prior to the occurrence of the event constituting a change in control. If, at a later date, it is determined (pursuant to final regulations or published rulings of the Internal Revenue Service, final judgment of a court of competent jurisdiction, or otherwise) that the amount of excise taxes payable to the Employee is greater than the amount initially so determined, then the Employer (or its successor) shall pay to the Employee an amount equal to the sum of such additional excise taxes and any interest, fines and penalties resulting from such underpayment, plus an amount necessary to reimburse the Employee substantially for any income, excise or other taxes payable by the Employee with respect to such amounts. -12- Any such severance shall be payable in substantially equal monthly installments on the first and fifteenth days of each month for a period of thirty-six (36) months. Such severance payments, if any, shall be in lieu of all damages, payments and liabilities on account of the events described above for which such severance payments, if any, may be due Employee and any severance payment rights of Employee under paragraph 16 (d) of this Agreement. This subparagraph (e) shall be binding upon and inure to the benefit of the parties and any successors or assigns of Employer or any "person" as defined herein. -13- Notwithstanding the foregoing, Employee shall not be entitled to receive nor shall Employer, its successors, assigns or any "person" as defined herein be obligated to pay severance payments pursuant to this subparagraph (e) in the event of an occurrence described in paragraph 16 (a)(5), (6) or (7, to the extent of an Employee breach), or in the event Employee terminates employment in accordance with paragraph 16 (c) and the termination is not a result of or based upon the occurrence of any event described in paragraph 16 (e)(ii) or (iii) above or a voluntary termination within the thirty (30) day period immediately after the expiration of the sixth month following a change in control as described above. 17. Change in Control Definition. The term "change in control" ----------------------------- shall mean the first to occur of any of the following events with respect to the Employer: (a) Any "person" (as such term is used in sections 13 and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which becomes the beneficial owner (as that term is used in section 13(d) of the Exchange Act), directly or indirectly, of twenty-five percent (25%) or more of the Employer's capital stock entitled to vote in the election of directors, other than a group of two or more persons not (i) acting in concert for the purpose of acquiring, holding or disposing of such stock or (ii) otherwise required to file any form or report with any governmental agency or regulatory authority having jurisdiction over the Employer which requires the reporting of any change in control; (b) During any period of not more than two (2) consecutive years, not including any period prior to the date of this Agreement, individuals who, at the beginning of such period, constitute the Board of Directors of the Employer, and any new director (other than a director designated by a person who has entered into an agreement with the Employer to effect a transaction described in paragraph 17 (a), (c), (d) or (e) of this subparagraph 1.4) whose appointment to the Board of Directors or nomination for election to the Board of Directors was approved by a vote of at least three-fourths (3/4ths) of the directors then still in office, either were directors at the beginning of such period or whose appointment or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; (c) The effective date of any consolidation or merger of the Employer (after all requisite shareholder, applicable regulatory and other approvals and consents have been obtained), other than a consolidation or merger of the Employer in which the holders of the voting capital stock of the Employer immediately prior to the consolidation or merger hold more than fifty percent (50%) of the voting capital stock of the surviving entity immediately after the consolidation or merger; (d) The shareholders of the Employer approve any plan or proposal for the liquidation or dissolution of the Employer; or (e) The shareholders of the Employer approve the sale or transfer of substantially all of the Employer's assets to parties that are not within a "controlled group of corporations" (as that term is defined in section 1563 of the Code) in which the Employer is a member. 18. Notices. Any notices to be given hereunder by either party to the ------- other shall be in writing and may be transmitted by personal delivery or by U.S. mail, registered or certified, -14- postage prepaid with return receipt requested. Mailed notices shall be addressed to the parties at the addresses listed as follows: Employer: Principal place of business Employee: Principal place of business as shown in Employer's Personnel Records and Employee's personal file. Each party may change the address for receipt of notices by written notice in accordance with this paragraph 18. Notices delivered personally shall be deemed communicated as of the date of actual receipt; mailed notices shall be deemed communicated as of three (3) days after the date of mailing. -15- 19. Arbitration. All claims, disputes and other matters in question ----------- arising out of or relating to this Agreement or the breach or interpretation thereof, other than those matters which are to be determined by the Employer in its sole and absolute discretion, shall be resolved by binding arbitration before a representative member, selected by the mutual agreement of the parties, of the Judicial Arbitration and Mediation Services, Inc., San Francisco, California ("JAMS"), in accordance with the rules and procedures of JAMS then in effect. In the event JAMS is unable or unwilling to conduct such arbitration, or has discontinued its business, the parties agree that a representative member, selected by the mutual agreement of the parties, of the American Arbitration Association, San Francisco, California ("AAA"), shall conduct such binding arbitration in accordance with the rules and procedures of the AAA then in effect. Notice of the demand for arbitration shall be filed in writing with the other party to this Agreement and with JAMS (or AAA, if necessary). In no event shall the demand for arbitration be made after the date when institution of legal or equitable proceedings based on such claim, dispute or other matter in question would be barred by the applicable statute of limitations. Any award rendered by JAMS or AAA shall be final and binding upon the parties, and as applicable, their respective heirs, beneficiaries, legal representatives, agents, successors and assigns, and may be entered in any court having jurisdiction thereof. The obligation of the parties to arbitrate pursuant to this clause shall be specifically enforceable in accordance with, and shall be conducted consistently with, the provisions of Title 9 of Part 3 of the California Code of Civil Procedure. Any arbitration hereunder shall be conducted in Palo Alto, California, unless otherwise agreed to by the parties. 20. Attorneys' Fees and Costs. In the event of litigation, arbitration or ------------------------- any other action or proceeding between the parties to interpret or enforce this Agreement or any part thereof or otherwise arising out of or relating to this Agreement, the prevailing party shall be entitled to recover its costs related to any such action or proceeding and its reasonable fees of attorneys, accountants and expert witnesses incurred by such party in connection with any such action or proceeding. The prevailing party shall be deemed to be the party which obtains substantially the relief sought by final resolution, compromise or settlement, or as may otherwise be determined by order of a court of competent jurisdiction in the event of litigation, an award or decision of one or more arbitrators in the event of arbitration, or a decision of a comparable official in the event of any other action or proceeding. Every obligation to indemnify under this Agreement includes the obligation to pay reasonable fees of attorneys, accountants and expert witnesses incurred by the indemnified party in connection with matters subject to indemnification. 21. Entire Agreement. This Agreement supersedes any and all other ---------------- agreements, either oral or in writing, between the parties with respect to the employment of Employee by Employer and contains all of the covenants and agreements between the parties with respect to -16- the employment of Employee by Employer. Each party to this Agreement acknowledges that no other representations, inducements, promises, or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not set forth herein, and that no other agreement, statement, or promise not contained in this Agreement shall be valid or binding on either party. 22. Modifications. Any modification of this Agreement will be effective ------------- only if it is in writing and signed by a party or its authorized representative. 23. Waiver. The failure of either party to insist on strict compliance ------ with any of the terms, provisions, covenants, or conditions of this Agreement by the other party shall not be deemed a waiver of any term, provision, covenant, or condition, individually or in the aggregate, unless such waiver is in writing, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times. 24. Partial Invalidity. If any provision in this Agreement is held by a ------------------ court of competent jurisdiction to be invalid, void, or unenforceable, the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way. 25. Interpretation. This Agreement shall be construed without regard to -------------- the party responsible for the preparation of the Agreement and shall be deemed to have been prepared jointly by the parties. Any ambiguity or uncertainty existing in this Agreement shall not be interpreted against either party, but according to the application of other rules of contract interpretation, if an ambiguity or uncertainty exists. -17- 26. Governing Law and Venue. The laws of the State of California, other ----------------------- than those laws denominated choice of law rules, shall govern the validity, construction and effect of this Agreement. Any action which in any way involves the rights, duties and obligations of the parties hereunder shall be brought in the courts of the State of California and venue for any action or proceeding shall be in Santa Clara County or in the United States District Court for the Northern District of California, and the parties hereby submit to the personal jurisdiction of said courts. 27. Payments Due Deceased Employee. If Employee dies prior to the ------------------------------ expiration of the term of his employment, any payments that may be due Employee from Employer under this Agreement as of the date of death shall be paid to Employee's executors, administrators, heirs, personal representatives, successors, or assigns. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. EMPLOYER: EMPLOYEE: GREATER BAY BANCORP By: /s/ Duncan L. Matteson /s/ David L. Kalkbrenner ---------------------- ------------------------ Duncan L. Matteson David L. Kalkbrenner Co-Chairman of the Board By: /s/ John M. Gatto ----------------- John M. Gatto Co-Chairman of the Board -18- EX-10.8.2 3 CHANGE IN CONTROL PAY PLAN EXHIBIT 10.8.2 AMENDMENT NO. 1 CHANGE IN CONTROL PAY PLAN II This Amendment No. 1 to the Greater Bay Bancorp (the "Company") Change in Control Pay Plan II (the "Plan") is effective as of March 23, 1999. RECITALS: -------- A. The Board of Directors adopted the Plan to provide benefits to certain key executives of the Company in the event of a Change in Control (as defined in the Plan). At the effective date of the Plan (January 1, 1998), only the Company's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Chief Lending Officer were identified as Eligible Employees under the Plan. B. As a result of promotions within the Company, the Board of Directors has determined to amend the definition of Eligible Employees to cover other key executives and to provide benefits to such executives under the Plan. NOW, THEREFORE, in consideration of the foregoing, the Plan is hereby amended as follows: 1. Section 3.11 of the Plan is hereby amended to read in its entirety as follows: Eligible Employees means an Employee who is a key executive of the Company ------------------ and who is eligible to participate in the Plan. The only Employees who are deemed "Eligible Employees" for purposes of the Plan are the Chief Executive Officer ("CEO"), Chief Operating Officer ("COO"), Chief Financial Officer ("CFO"), Chief Lending Officer ("CLO") and the other executive officers of the Company (the "Executive Officers"). 2. Section 5.1(c) of the Plan is hereby amended to read in its entirety as follows: CLO and Executive Officers. A Participant who is the CLO or an Executive -------------------------- Officer shall be entitled to receive a Base Benefit equal to eighteen (18) months of Pay and an Added Benefit of two (2) weeks of Pay for each full Year of Service, provided, however, that the total Base Benefit and Added Benefit payable to such Participant shall not exceed two (2) years of Pay. 3. Section 8.2 is hereby deleted. 4. Except as specifically amended hereby, the terms of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned has executed this Amendment No. 1 on behalf of the Company as of the date first above written. GREATER BAY BANCORP By: /s/ David L. Kalkbrenner ------------------------ David L. Kalkbrenner President and Chief Executive Officer EX-10.10.2 4 TERMINATION AND LAYOFF PLAN EXHIBIT 10.10.2 AMENDMENT NO. 1 TERMINATION & LAYOFF PAY PLAN II This Amendment No. 1 to the Greater Bay Bancorp (the "Company") Termination & Layoff Pay Plan II (the "Plan") is effective as of March 23, 1999. RECITALS: -------- A. The Board of Directors adopted the Plan to provide benefits to certain key executives of the Company in the event of a Termination or Layoff (as defined in the Plan). At the effective date of the Plan (January 1, 1998), only the Company's Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Chief Lending Officer were identified as Eligible Employees under the Plan. B. As a result of promotions within the Company, the Board of Directors has determined to amend the definition of Eligible Employees to cover other key executives and to provide benefits to such executives under the Plan. NOW, THEREFORE, in consideration of the foregoing, the Plan is hereby amended as follows: 1. Section 3.9 of the Plan is hereby amended to read in its entirety as follows: Eligible Employees means an Employee who is a key executive of the Company ------------------ and who is eligible to participate in the Plan. The only Employees who are deemed "Eligible Employees" for purposes of the Plan are the Chief Executive Officer ("CEO"), Chief Operating Officer ("COO"), Chief Financial Officer ("CFO"), Chief Lending Officer ("CLO") and the other executive officers of the Company (the "Executive Officers"). 2. Section 5.1(c) of the Plan is hereby amended to read in its entirety as follows: CLO and Executive Officers. A Participant who is the CLO or an Executive -------------------------- Officer shall be entitled to receive a Base Benefit equal to eighteen (18) months of Pay. 3. Section 8.2 is hereby deleted. 4. Except as specifically amended hereby, the terms of the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned has executed this Amendment No. 1 on behalf of the Company as of the date first above written. GREATER BAY BANCORP By: /s/ David L. Kalkbrenner ------------------------ David L. Kalkbrenner President and Chief Executive Officer EX-11 5 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 Greater Bay Bancorp Form 10-Q Statements Re Computation of Earnings Per Share
Three Months Ended March 31, (Dollars and shares in thousands, except per share amounts) 1999 1998 - ------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE: Income available to common shareholders $ 5,058 $ 3,979 Weighted average common shares outstanding 9,688,000 9,356,000 -------------------------------- Basic earnings per share $ 0.52 $ 0.43 ================================ DILUTED EARNINGS PER SHARE: Income available to common shareholders $ 5,058 $ 3,979 Weighted average common shares outstanding 9,688,000 9,356,000 Effect of dilutive securities 588,000 898,000 -------------------------------- Weighted average common and common equivalent shares outstanding 10,276,000 10,254,000 -------------------------------- Diluted earnings per share $ 0.49 $ 0.39 ================================
EX-27 6 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM GREATER BAY BANCORP FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 68,185 0 90,400 0 262,954 84,859 84,793 1,144,549 (21,915) 1,781,296 1,539,077 0 93,962 50,000 0 0 58,496 39,761 1,781,296 24,670 5,130 1,541 31,341 10,892 12,981 18,360 861 0 11,035 8,398 5,146 (88) 0 5,058 0.52 0.49 4.83 2,847 0 482 0 21,304 (263) 13 21,915 21,915 0 0
EX-99.1 7 PRESS RELEASE DATED FEB.25, 1999 EXHIBIT 99.1 For Immediate Release For Information Contact: - --------------------- ------------------------ February 25, 1999 David L. Kalkbrenner, President & CEO Greater Bay Bancorp (650) 614-5767 Steven C. Smith, EVP, COO & CFO Greater Bay Bancorp (650) 813-8222 GREATER BAY BANCORP DECLARES 26% INCREASE IN FIRST QUARTER DIVIDEND PALO ALTO, California -- Greater Bay Bancorp (NASDAQ: GBBK), a $1.6 billion in assets financial services holding company, has declared a twelve cent ($.12) per share cash dividend for the first quarter of 1999. The cash dividend will be payable on April 15, 1999, to shareholders of record as of March 31, 1999. This dividend represents a 26% increase over the company's previous quarterly dividend of nine and one half cents ($.095) per share. "We are very pleased to announce an increased cash dividend for the first quarter of 1999," stated David L. Kalkbrenner, President and Chief Executive Officer of Greater Bay Bancorp. "The company's continuing solid earnings performance and strong capital ratios allow us to reward our valued shareholders for their continued support and confidence." Greater Bay Bancorp and its financial services subsidiaries, Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce and Golden Gate Bank, along with its operating divisions, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay Bank Contra Costa Business Banking (continued) Office, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and Venture Banking Group, serve clients 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. This document may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. For a discussion of factors that could cause actual results to differ, please see the publicly available Securities and Exchange Commission filings of Greater Bay Bancorp, including the Annual Report on Form 10-K for the year ended December 31, 1998, and particularly the discussion of risk factors within such documents. "WE INVEST IN RELATIONSHIPS" # # # EX-99.2 8 PRESS RELEASE DATED APRIL 13, 1999 Exhibit 99.2 For Information Contact - ----------------------- At Greater Bay Bancorp At Financial Relations Board David L. Kalkbrenner Lise Needham (general information) President and CEO Stephanie Mishra (analyst contact) (650) 614-5767 (415) 986-1591 Steven C. Smith EVP, COO and CFO (650) 813-8222 FOR IMMEDIATE RELEASE --------------------- GREATER BAY BANCORP ANNOUNCES 29% INCREASE IN CORE EARNINGS PALO ALTO, CA, April 13, 1999 -- Greater Bay Bancorp (Nasdaq: GBBK), a $1.8 billion in assets financial services holding company, today announced results for the first quarter ended March 31, 1999. Core earnings for the first quarter increased 29% to $5.1 million or $0.50 per diluted share, compared to earnings of $4.0 million or $0.39 per diluted share for the first quarter of 1998. Including the one-time extraordinary charge related to the early retirement of subordinated debt, first quarter 1999 net earnings were $5.0 million or $0.49 per diluted share. At March 31, 1999, Greater Bay Bancorp's total assets were $1.8 billion, an increase of 35% or approximately $460 million from March 31, 1998. Total loans grew to $1.1 billion, an increase of $362 million or 46% compared to total loans at March 31, 1998. Total deposits increased to $1.5 billion at quarter end, a $433 million or 39% increase since March 31, 1998. For the first quarter 1999, Greater Bay Bancorp's return on average equity and average assets before the one-time extraordinary charge were 21.78% and 1.25%, respectively, compared to 20.84% and 1.30%, respectively, for the first quarter of 1998. Mr. David L. Kalkbrenner, President and Chief Executive Officer, stated, "This has been a great quarter for Greater Bay Bancorp. Our Super-Community Banking strategy is clearly working. Greater Bay's earnings remain strong, our loan growth is rapid and we continue to achieve superior asset quality." Mr. Kalkbrenner continued, "We are also focusing our efforts on diversifying our revenue stream while seeking ways to improve our competitive edge." Mr. Kalkbrenner added, "During the quarter, we signed a definitive merger agreement, which is expected to close in May 1999, with Bay Area Bancshares. We also announced the grand opening of the Greater Bay Bank Santa Clara Valley Commercial Banking Group. These developments further demonstrate our continued commitment to increasing market share within the communities we serve." GREATER BAY BANCORP ANNOUNCES 29% INCREASE IN CORE EARNINGS APRIL 13, 1999 PAGE 2 Operating results for the three months ended March 31, 1999, include approximately $118,000 excluding internal staff time, related to the correction of the year 2000 "millennium bug" which impacts all companies. The company has budgeted an anticipated total expenditure of $300,000 in fiscal 1999 to address the year 2000 issues. Reflecting the high quality of its expanding loan portfolio, Greater Bay Bancorp's ratio of non-performing assets to total assets was 0.22% at March 31, 1999, compared to 0.39% at March 31, 1998. In addition, the allowance for loan losses represented 1.91% of total loans and 554.95% of total non-performing assets at March 31, 1999, compared to 2.12% and 320.78% at March 31, 1998. During the quarter, the Company's trust fees, depositor services fees, gain on sale of SBA loans, and loan and international banking fees were $1.7 million, up 23% from $1.4 million in the first quarter of 1998. Greater Bay Bancorp's capital ratios continue to be above the well-capitalized guidelines established by the bank regulatory agencies. Greater Bay Bancorp and its financial service subsidiaries, Cupertino National Bank, Mid-Peninsula Bank, Peninsula Bank of Commerce and Golden Gate Bank, along with its operating divisions, Greater Bay Bank Santa Clara Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay Bank Contra Costa Regional Banking Office, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and Venture Banking Group, serve clients throughout Silicon Valley, the San Francisco Peninsula and the Contra Costa Tri Valley Region, with offices located in San Jose, Cupertino, Santa Clara, Palo Alto, Redwood City, San Mateo, Millbrae, San Bruno, San Francisco and Walnut Creek. SAFE HARBOR This document may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. For a discussion of factors that could cause actual results to differ, please see the Company's publicly available Securities and Exchange Commission filings, including its Annual Report on Form 10-K for the year ended December 31, 1998, and particularly the discussion of risk factors within that document. For investor information on Greater Bay Bancorp at no charge, call our automated shareholder information line at 1-800-679-2606 or via fax, dial 1-800-PRO-INFO and enter code GBBK. For international access, dial 1-732-544-2850. - FINANCIAL TABLES FOLLOW - Greater Bay Creater Bay Bancrop Announces 29% Increase In Core Earnings April 13, 1999 Page 3 GREATER BAY BANCORP MARCH 31, 1999 - FINANCIAL SUMMARY ($ in 000's, except share and per share data)
- --------------------------------------------------------------------------------------------------------------------------------- SELECTED QUARTERLY CONSOLIDATED FINANCIAL CONDITION DATA: Mar 31 Dec 31 Sept 30 Jun 30 Mar 31 1999 1998 1998 1998 1998 ----------- ----------- ----------- ----------- ----------- Cash and Due From Banks $ 68,185 $ 59,975 $ 55,399 $ 70,010 $ 71,152 Investments 511,123 463,470 574,636 558,335 426,098 Loans: Commercial 560,913 455,077 388,094 372,930 367,384 Construction 177,939 173,857 153,378 139,850 121,446 Real Estate 320,637 299,111 245,340 227,652 217,845 Consumer and Other 89,418 81,089 75,673 81,750 79,177 Deferred Loan Fees, Net (4,358) (3,343) (2,966) (2,446) (2,904) ----------- ----------- ----------- ----------- ----------- Total Loans 1,144,549 1,005,791 859,519 819,736 782,948 Allowance for Loan Losses (21,915) (21,304) (19,861) (17,985) (16,565) ----------- ----------- ----------- ----------- ----------- Total Loans, Net 1,122,634 984,487 839,658 801,751 766,383 Other Assets 79,354 74,933 65,690 56,773 58,092 ----------- ----------- ----------- ----------- ----------- Total Assets $ 1,781,296 $ 1,582,865 $ 1,535,383 $ 1,486,869 $ 1,321,725 =========== =========== =========== =========== =========== Deposits: Demand, Non-Interest Bearing $ 280,747 $ 268,448 $ 237,596 $ 263,121 $ 208,277 NOW, MMDA and Savings 931,256 854,392 802,220 809,594 676,730 Time Certificates, $100,000 and over 275,639 168,075 198,286 180,891 175,381 Other Time Certificates 51,435 51,577 49,830 31,009 46,043 ----------- ----------- ----------- ----------- ----------- Total Deposits 1,539,077 1,342,492 1,287,932 1,284,615 1,106,431 ----------- ----------- ----------- ----------- ----------- Other Borrowings 69,788 73,734 89,735 82,275 85,142 Other Liabilities 24,174 20,963 15,764 14,556 26,857 ----------- ----------- ----------- ----------- ----------- Total Liabilities 1,633,039 1,437,189 1,393,431 1,381,446 1,218,430 ----------- ----------- ----------- ----------- ----------- Long-term Subordinated Debt - 3,000 3,000 3,000 3,000 Trust Preferred Securities 50,000 50,000 50,000 20,000 20,000 Stockholders' Equity 98,257 92,676 88,952 82,423 80,295 ----------- ----------- ----------- ----------- ----------- Regulatory Capital 148,257 145,676 141,952 105,423 103,295 ----------- ----------- ----------- ----------- ----------- Total Liabilities and Shareholders' Equity $ 1,781,296 $ 1,582,865 $ 1,535,383 $ 1,486,869 $ 1,321,725 =========== =========== =========== =========== =========== Average Quarterly Total Loans, excluding Nonaccrual $ 1,075,401 $ 905,675 $ 824,356 $ 794,786 $ 752,381 Average Quarterly Investments $ 466,052 $ 548,793 $ 585,654 $ 475,082 $ 410,650 Average Quarterly Interest Bearing Liabilities $ 1,298,993 $ 1,216,476 $ 1,148,268 $ 1,015,659 $ 969,365 Average Quarterly Assets $ 1,667,169 $ 1,578,508 $ 1,489,844 $ 1,375,328 $ 1,240,507 Average Quarterly Equity $ 95,840 $ 90,624 $ 86,577 $ 80,667 $ 77,425 Regulatory Capital Tier I or Leverage Capital $ 130,279 $ 123,287 $ 115,951 $ 102,025 $ 99,755 Total Capital $ 165,354 $ 161,103 $ 154,597 $ 120,281 $ 117,031 Nonperforming Assets Nonaccrual Loans $ 2,847 $ 1,858 $ 2,919 $ 3,758 $ 3,152 Loans 90 Days Past Due & Accruing - - - 75 108 Restructured Loans 482 327 377 531 903 OREO 620 966 905 1,001 1,001 ----------- ----------- ----------- ----------- ----------- Total Nonperforming Assets $ 3,949 $ 3,151 $ 4,201 $ 5,365 $ 5,164 =========== =========== =========== =========== =========== Greater Bay Trust Company Assets $ 630,840 $ 649,336 $ 581,437 $ 636,362 $ 576,290 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- SELECTED QUARTERLY CONSOLIDATED FINANCIAL CONDITION RATIOS: Mar 31 Dec 31 Sept 30 Jun 30 Mar 31 1999 1998 1998 1998 1998 ----------- ----------- ----------- ----------- ----------- Loan to Deposit Ratio 74.37% 74.92% 66.74% 63.81% 70.76% Ratio of Allowance for Loan Losses to: Total Loans 1.91% 2.12% 2.31% 2.19% 2.12% Total Nonperforming Assets 554.95% 676.10% 472.77% 335.24% 320.78% Total Nonperforming Assets to Total Assets 0.22% 0.20% 0.27% 0.36% 0.39% Ratio of Quarterly Net Charge-offs to Average Loans, annualized 0.10% 0.22% 0.02% 0.01% 0.01% Ratio of YTD Net Charge-offs to Average Loans , annualized 0.10% 0.21% 0.20% 0.30% 0.61% Earning Assets to Total Assets 93.03% 92.92% 93.41% 92.59% 91.46% Earning Assets to Interest-Bearing Liabilities 120.25% 122.48% 120.21% 122.19% 120.12% Capital Ratios: Leverage 7.81% 7.81% 7.78% 7.42% 8.04% Tier 1 Risk Based Capital 9.23% 9.90% 10.99% 10.08% 10.57% Total Risk Based Capital 11.72% 12.94% 14.65% 11.88% 12.41% Risk Weighted Assets $ 1,411,340 $ 1,245,336 $ 1,055,323 $ 1,012,545 $ 943,348 Book Value Per Share $ 10.09 $ 9.64 $ 9.28 $ 8.69 $ 8.55 Total Shares Outstanding 9,736,602 9,612,141 9,584,634 9,489,134 9,395,764
Note: Prior periods have been restated to reflect the mergers between Greater Bay Bancorp, Pacific Rim Bancorporation and Pacific Business Funding Corporation, on a pooling-of-interests basis. - -------------------------------------------------------------------------------- Greater Bay Creater Bay Bancrop Announces 29% Increase In Core Earnings April 13, 1999 Page 4 GREATER BAY BANCORP MARCH 31, 1999 - FINANCIAL SUMMARY ($ in 000's, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------ SELECTED QUARTERLY CONSOLIDATED OPERATING DATA: First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter 1999 1998 1998 1998 1998 ---------- --------- --------- --------- --------- Interest Income $ 31,341 $ 29,969 $ 29,861 $ 27,510 $ 25,560 Interest Expense 12,981 12,495 12,953 11,592 10,432 ---------- --------- --------- --------- --------- Net Interest Income before Provision for Loan Losses 18,360 17,494 16,908 15,918 15,128 Provision for Loan Losses 861 1,901 1,791 1,347 996 ---------- --------- --------- --------- --------- Net Interest Income after Provision for Loan Losses 17,499 15,593 15,117 14,571 14,132 Other Income: Trust Fees 721 664 642 617 550 Depositor Service Fees 352 357 361 349 420 Loan and International Banking Fees 309 176 165 190 146 Gain on Sale of SBA Loans 284 282 290 221 244 Gain/(loss) on Investments - 320 4 42 8 Other Income (1) 264 384 65 152 (339) ---------- --------- --------- --------- --------- 1,930 2,183 1,527 1,571 1,029 Nonrecurring - Warrant Income 4 314 134 - 497 ---------- --------- --------- --------- --------- Other Income 1,934 2,497 1,661 1,571 1,526 Operating Expenses: Compensation and Benefits 6,380 5,807 5,753 5,729 5,426 Occupancy and Equipment 2,072 1,751 1,542 1,535 1,389 Professional Services & Legal 489 432 403 377 385 Client Services 252 140 122 131 151 FDIC Insurance and Assessments 92 84 88 77 89 Other Real Estate, Net 21 (6) 43 (8) 24 Other Expenses 1,729 2,458 1,740 1,431 1,618 ---------- --------- --------- --------- --------- 11,035 10,666 9,691 9,272 9,082 Nonrecurring Expenses (2) - 448 192 - 701 ---------- --------- --------- --------- --------- Total Operating Expenses 11,035 11,114 9,883 9,272 9,783 ---------- --------- --------- --------- --------- Income before Income Taxes, Merger and Other Related Nonrecurring Costs and Extraordinary Items 8,398 6,976 6,895 6,870 5,875 Income Tax Expense 3,252 1,993 2,141 2,334 1,896 ---------- --------- --------- --------- --------- Income before Merger and Other Related Nonrecurring Costs and Extraordinary Items 5,146 4,983 4,754 4,536 3,979 Merger and Other Related Nonrecurring Costs, net of tax - - 360 1,314 - ---------- --------- --------- --------- --------- Income before Extraordinary Items 5,146 4,983 4,394 3,222 3,979 Extraordinary Items, net of tax (3) (88) - - - - ---------- --------- --------- --------- --------- Net Income $ 5,058 4,983 $ 4,394 $ 3,222 $ 3,979 ========== ========= ========= ========= ========= - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ SELECTED QUARTERLY CONSOLIDATED OPERATING RATIOS: First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter 1999 1998 1998 1998 1998 ------------ --------- --------- --------- --------- Income Per Share (Before Merger and Other Related Nonrecurring Costs and Extraordinary Items) (4) (5) Basic $ 0.53 0.52 $ 0.50 $ 0.48 $ 0.43 Diluted $ 0.50 0.48 $ 0.47 $ 0.44 $ 0.39 Net Income Per Share (4) (5) Basic $ 0.52 0.52 $ 0.46 $ 0.34 $ 0.43 Diluted $ 0.49 0.48 $ 0.43 $ 0.31 $ 0.39 Weighted Average Common Shares Outstanding (5) 9,688,000 9,595,000 9,525,000 9,460,000 9,356,000 Weighted Average Common & Common Equivalent Shares Outstanding (5) 10,276,000 10,306,000 10,223,000 10,254,000 10,254,000 Return on Quarterly Average Assets, annualized (6) 1.25% 1.25% 1.27% 1.32% 1.30% Return on Quarterly Average Equity, annualized (6) 21.78% 21.82% 21.79% 22.55% 20.84% Net Interest Margin - Average Earning Assets 4.83% 4.77% 4.76% 5.03% 5.28% Operating Expense Ratio (Before Merger and Other Related Nonrecurring Costs and Extraordinary Items) 2.68% 2.68% 2.58% 2.70% 2.97% Efficiency Ratio (Before Merger and Other Related Nonrecurring Costs and Extraordinary Items) 54.39% 54.21% 52.57% 53.02% 56.21% - -----------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Q1 and Q3 of 1998 includes a $700,000 and $100,000 write-down of an equity investment in accordance with APB 18, respectively. (2) Q1, Q3 and Q4 of 1998 nonrecurring expenses are comprised of $701,000, $192,000 and $448,000 in donations to the GBB Foundation, respectively. (3) Includes $88,000 loss on early retirement of subordinated debt. (4) Net income per share for prior periods have been restated as required by the adoption of SFAS No. 128. In accordance with the newly adopted accounting standard, Net income Per Share is now presented on a Basic and Diluted basis. (5) Restated to reflect the 2-for-1 stock split declared for shareholders of record as of April 30, 1998. (6) Before Merger and Other Related Nonrecurring Costs and Extraordinary Items of $88,000, net of tax, in Q1 1999, $360,000, net of tax, in Q3 of 1998, and $1.31 million, net of tax, in Q2 of 1998. Note: Prior periods have been restated to reflect the mergers between Greater Bay Bancorp, Pacific Rim Bancorporation and Pacific Business Funding Corporation, on a pooling-of-interests basis. - -------------------------------------------------------------------------------- Greater Bay Greater Bay Bancorp Announces 29% Increase In Core Earnings April 13, 1999 Page 5 GREATER BAY BANCORP MARCH 31, 1999 - FINANCIAL SUMMARY ($ in 000's, except shar data) - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- SELECTED YEAR TO DATE CONSOLIDATED OPERATING DATA: MARCH 31, MARCH 31, 1999 1998 --------- --------- Interest Income $ 31,341 $ 25,560 Interest Expense 12,981 10,432 -------- -------- Net Interest Income Before Provision for Loan Losses 18,360 15,128 Provision for Loan Losses 861 996 -------- -------- Net Interest Income After Provision for Loan Losses 17,499 14,132 Other Income (1) 1,930 1,029 Nonrecurring - Warrant Income 4 497 -------- -------- Total Other Income 1,934 1,526 Operating Expenses 11,035 9,082 Other Expenses - nonrecurring (2) - 701 -------- -------- Total Operating Expenses 11,035 9,783 -------- -------- Income Before Income Taxes and Extraordinary Items 8,398 5,875 Income Tax Expense 3,252 1,896 -------- -------- Income Before Extraordinary Items 5,146 3,979 Extraordinary Items (3) (88) - -------- -------- Net Income $ 5,058 $ 3,979 -------- -------- - ------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------- SELECTED YEAR TO DATE CONSOLIDATED OPERATING RATIOS: MARCH 31, MARCH 31, 1999 1998 ---------- ----------- Income Per Share (Before Extraordinary Items) (4) (5) Basic $ 0.53 $ 0.43 Diluted $ 0.50 $ 0.39 Net Income Per Share (4) (5) Basic $ 0.52 $ 0.43 Diluted $ 0.49 $ 0.39 Weighted Average Common Shares Outstanding (5) 9,688,000 9,356,000 Weighted Average Common & Common Equivalent Shares Outstanding (5) 10,276,000 10,254,000 Return on Average Assets, annualized (6) 1.25% 1.30% Return on Average Equity, annualized (6) 21.78% 20.84% Net Interest Margin - Average Earning Assets 4.83% 5.28% Operating Expense Ratio (Before Extraordinary Items) 2.68% 2.87% Efficiency Ratio (Before Extraordinary Items) 54.39% 56.21%
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Q1 of 1998 includes a $700,000 write-down of an equity investment in accordance with APB 18. (2) Q1 of 1998 nonrecurring expenses are comprised of a $701,000 donation to the GBB Foundation. (3) Includes $88,000 loss on early retirement of subordinated debt. (4) Net income per share for prior periods have been restated as required by the adoption of SFAS No. 128. In accordance with the newly adopted accounting standard, Net income per share is now presented on a Basic and Diluted basis. (5) Restated to reflect the 2-for-1 stock split declared for shareholders of record as of April 30, 1998. (6) Before Extraordinary Items of $88,000, net of tax in Q1 of 1999. Note: Prior periods have been restated to reflect the mergers between Greater Bay Bancorp, Pacific Rim Bancorporation and Pacific Business Funding Corporation, on a pooling-of-interests basis. - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----