EX-99.1 5 0005.txt SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99.1 SELECTED FINANCIAL INFORMATION The following table represents the selected financial information at and for the five years ended December 31, 1999:
Years Ended December 31, ------------------------------------------------------------------- (Dollars in thousands, except per share amuonts) 1999* 1998* 1997* 1996* 1995* ------------------------------------------------------------------- Statement of Operations Data Interest income $ 255,377 $ 205,189 $ 165,783 $ 129,559 $ 112,115 Interest expense 95,018 76,742 58,310 43,044 36,658 ------------------------------------------------------------------- Net interest income 160,359 128,447 107,473 86,515 75,457 Provision for loan losses 14,039 8,279 9,131 5,095 3,084 ------------------------------------------------------------------- Net interest income after provision for loan losses 146,320 120,168 98,342 81,420 72,373 Other income 28,471 20,996 18,179 16,972 13,342 Nonrecurring - warrant income 14,508 945 1,162 92 - ------------------------------------------------------------------- Total other income 42,979 21,941 19,341 17,064 13,342 Operating expenses 100,913 86,205 76,264 67,948 61,521 Other expenses - nonrecurring 12,160 1,341 (1,700) - 2,135 ------------------------------------------------------------------- Total operating expenses 113,073 87,546 74,564 67,948 63,656 ------------------------------------------------------------------- Income before income tax expense & merger and other related nonrecurring costs 76,226 54,563 43,120 30,536 22,059 Income tax expense 25,468 19,105 15,643 10,963 7,894 ------------------------------------------------------------------- Income before merger and other related nonrecurring costs and extraordinary items 50,758 35,458 27,476 19,573 14,165 Merger and other related nonrecurring costs, net of tax (6,486) (1,674) (2,282) (1,991) - ------------------------------------------------------------------- Net income before extraordinary items 44,272 33,784 25,194 17,582 14,165 Extraordinary items (88) - - - - ------------------------------------------------------------------- Net income $ 44,184 $ 33,784 $ 25,194 $ 17,582 $ 14,165 =================================================================== Per Share Data (1) Income per share (before merger, nonrecurring and extraordinary items) Basic $ 1.21 $ 0.95 $ 0.73 $ 0.57 $ 0.46 Diluted 1.15 0.89 0.68 0.53 0.45 Net income per share Basic $ 1.16 $ 0.91 $ 0.70 $ 0.51 $ 0.42 Diluted 1.10 0.85 0.66 0.48 0.41 Cash dividends per share (2) $ 0.24 $ 0.19 $ 0.15 $ 0.11 $ 0.10 Book value per common share 6.38 5.37 4.78 4.30 4.00 Shares outstanding at year end 39,635,048 37,342,950 35,886,162 33,865,656 32,857,882 Average common shares outstanding 38,245,000 37,049,000 35,835,000 34,634,000 33,421,000 Average common and common equivalent shares outstanding 40,304,000 39,639,000 38,198,000 36,599,000 34,802,000 Performance Ratios Return on average assets (before merger, nonrecurring and extraordinary items) 1.39% 1.37% 1.33% 1.26% 1.25% Return on average common shareholders' equity (before merger nonrecurring and extraordinary items) 21.08% 19.02% 16.24% 14.13% 13.35% Return on average assets 1.33% 1.32% 1.29% 1.13% 1.14% Return on average common shareholders' equity 20.16% 18.29% 15.75% 12.69% 12.20% Net interest margin (3) 5.25% 5.44% 5.88% 6.11% 6.75% Balance Sheet Data - At Period End Assets $3,736,729 $2,857,246 $2,235,907 $1,791,754 $1,436,234 Loans, net 2,416,423 1,740,158 1,358,514 1,089,477 829,017 Investment securities 750,516 667,531 464,703 345,107 356,361 Deposits 3,262,888 2,463,484 1,935,405 1,570,087 1,248,687 Subordinated debt - 3,000 3,000 3,000 3,000 Trust Preferred Securities 49,000 49,000 20,000 - - Common shareholders' equity 252,895 200,697 171,465 145,722 131,322 Asset Quality Ratios Nonperforming assets to total loans and OREO 0.28% 0.34% 0.56% 1.25% 1.49% Nonperforming assets to total assets 0.19% 0.21% 0.35% 0.78% 0.88% Allowance for loan losses to total loans 1.94% 1.85% 1.91% 1.66% 1.63% Allowance for loan losses to non- performing assets 690.23% 550.02% 341.80% 133.91% 110.27% Net charge-offs to average loans 0.09% 0.13% 0.20% 0.14% 0.32% Regulatory Capital Ratios Leverage Ratio 8.24% 8.13% 8.82% 8.42% 9.24% Tier 1 Capital 9.75% 10.70% 11.31% 10.89% 12.69% Total Capital 11.07% 12.59% 12.67% 12.24% 14.06%
* Restated on a historical basis to reflect the mergers between Greater Bay Bancorp and CNB, MPB, PBC, PRB (the parent of Golden Gate), PBFC, BA Bancshares (the parent of BAB), BCS (the parent of BBC), MD Bancshares (the parent of MDNB) Coast Bancorp (the parent of CCB), BSC and BOP on a pooling- of-interests basis. (1) Restated to reflect 2 - for - 1 stock split effective as of April 30,1998 and the 2 - for - 1 stock split effective as of October 4, 2000. (2) Includes only those dividends declared by Greater Bay, and excludes those dividends paid by Greater Bay's subsidiaries prior to the completion of their mergers with Greater Bay. (3) Net interest margin for 1999, 1998, 1997 and 1996 includes the lower spread earned on the PBC Special Deposit (see Note 7 to the Financial Statements for details). Excluding the PBC Special Deposit, net interest margin would have been 5.46%, 5.49%, 6.14% and 6.32% for 1999, 1998, 1997 and 1996, respectively. A-1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the "Company", on a consolidated basis) is a bank holding company operating Bank of Petaluma ("BOP"), Bank of Santa Clara ("BSC"), Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast Commercial Bank ("CCB"), Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB"), Mt. Diablo National Bank ("MDNB") and Peninsula Bank of Commerce ("PBC"). The Company also owns GBB Capital I and GBB Capital II, which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities ("TPS"). Greater Bay also includes the operating divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and the Venture Banking Group. The Company provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout Silicon Valley, the San Francisco Peninsula and the East Bay Region, with 37 offices located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. At December 31, 1999, the Company had total assets of $3.7 billion, total net loans of $2.4 billion and total deposits of $3.3 billion. All of the Company's mergers were accounted for as a pooling-of-interests and, accordingly, all of the financial information for the Company for the periods prior to the mergers has been restated as if the mergers had occurred at the beginning of the earliest reporting period presented. The 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's operating results included merger, nonrecurring and extraordinary items of $8.1 million ($2.0 million net of tax), $3.1 million ($1.4 million net of tax) and $884,000 ($788,000 net of tax) in 1999, 1998 and 1997, respectively. The following table summarizes net income, net income per share and key financial ratios before and after merger, nonrecurring and extraordinary items for the years presented.
Before merger, nonrecurring After merger, nonrecurring and extraordinary items and extraordinary items (Dollars in thousands, ----------------------------------------------------------------------------------- except per share amounts) 1999 1998 1997 1999 1998 1997 ----------------------------------------------------------------------------------------------------------------------------- Net income $ 46,195 $ 35,141 $ 25,983 $ 44,184 $ 33,784 $ 25,194 Net income per share: Basic $ 1.21 $ 0.95 $ 0.73 $ 1.16 $ 0.91 $ 0.70 Diluted $ 1.15 $ 0.89 $ 0.68 $ 1.10 $ 0.85 $ 0.66 Return on average assets 1.39% 1.37% 1.33% 1.33% 1.32% 1.29% Return on average shareholders' equity 21.08% 19.02% 16.24% 20.16% 18.29% 15.75%
A-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company reported net income of $44.2 million in 1999, a 30.8% increase over 1998 net income of $33.8 million. The net income in 1998 was a 34.1% increase over 1997 income of $25.2 million. Basic net income per share was $1.21 for 1999, as compared to $0.91 for 1998 and $0.70 for 1997. Diluted net income per share was $1.10, $0.85 and $0.66 for 1999, 1998 and 1997, respectively. The return on average assets and return on average shareholders' equity were 1.33% and 20.16% in 1999, compared with 1.32% and 18.29% in 1998 and 1.29% and 15.75% in 1997, respectively. The 30.8% increase in 1999 net income as compared to 1998 was the result of significant growth in loans, investments, trust assets and deposits. In 1999, net interest income, excluding Cumulative Trust Preferred Securities issued ("capital securities"), increased 25.4% as compared to 1998. This increase was primarily due to a 29.3% increase in average interest-earning assets in 1999 compared to the prior year. The impact on income of the increase in average interest-earning assets was partially offset by the decline the net yield earned on interest-earning assets to 5.39% in 1999 as compared to 5.56% in 1998 (see "- Net Interest Income" for additional information on the increase in net interest income). The increases in loans, trust assets and deposits also contributed to the 25.3% increase in trust fees, loan and international banking fees, service charges and other fees. Other income includes $4.0 million in appreciation recognized on the conversion of equity securities received in the settlement of a loan into a publicly traded equity security. Increases in operating expenses were required to service and support the Company's growth. As a result, increases in revenue were partially offset in 1999 by a 17.1% increase in recurring operating expenses, as compared to 1998. Net income in 1999 included nonrecurring expenses, net of nonrecurring income and taxes, of $2.0 million, an increase of $654,000 compared to 1998. In 1999, merger and related nonrecurring costs were $6.5 million, an increase of $4.8 million from 1998. Warrant income, net of related expenses and taxes, was $5.8 million in 1999, an increase of $5.3 million compared to 1998. In 1999, the Company donated $7.8 million in appreciated securities to the Greater Bay Bancorp Foundation (the "Foundation"). This resulted in $1.2 million in donation expense, net of a tax benefit derived on the transaction, which is a $1.0 million increase compared to 1998. The 34.1% increase in 1998 net income as compared to 1997 was the result of significant growth in loans, investments, trust assets and deposits. In 1998, net interest income, excluding capital securities, increased 20.5% as compared to 1997. This increase was primarily due to a 29.2% increase in average interest-earning assets in 1998 compared to the prior year. The impact on income of the increase in average interest-earning assets was partially offset by the decline the net yield earned on interest-earning assets to 5.56% in 1998 as compared to 5.96% in 1997 (see "- Net Interest Income" for additional information on the increase in net interest income). The increases in loans, trust assets and deposits also contributed to the 6.9% increase in trust fees, loan and international banking fees, service charges and other fees. Increases in operating expenses were required to service and support the Company's growth. As a result, increases in revenue were partially offset in 1998 by a 15.6% increase in recurring operating expenses, as compared to 1997. Net income in 1998 included nonrecurring expenses, net of nonrecurring income and taxes, of $1.4 million, an increase of $569,000 compared to 1997. In 1998, merger and related nonrecurring costs were $1.7 million, a decrease of $608,000 from 1997. Warrant income, net of related expenses and taxes, was $554,000 in 1998, a decrease of $155,000 compared to 1997. In 1998, the Company donated $1.3 million in appreciated securities to the Greater Bay Bancorp Foundation. This resulted in $237,000 in donation expense, net of a tax benefit derived on the transaction. There was no such donation in 1997. In 1997, the Company had nonrecurring income of $1.0 million, net of taxes, related to payment from an insurance carrier of a litigation settlement charge taken in 1995. A-3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net Interest Income Net interest income, excluding capital securities, increased 25.4% to $164.6 million in 1999 from $131.3 million in 1998. This increase was primarily due to the $692.9 million, or 29.3%, increase in average interest-earning assets which was partially offset by a 17 basis point decrease in the Company's net yield on interest-earning assets. Net interest income, excluding capital securities, increased 20.5% in 1998 from $108.9 million in 1997. This increase was primarily due to the $533.3 million, or 29.2%, increase in average interest- earning assets, which was partially offset by the 40 basis point decrease in the Company's net yield on interest-earning assets. The capital securities were Trust Preferred Securities issued in 1998 and 1997 which cost 8.57% and 9.02% in 1999 and 1998, respectively. Including the capital securities, net interest income increased 24.8% to $160.4 million in 1999, and 19.5% to $128.4 million in 1998. The capital securities were issued primarily as a source of capital and not as a source of liquidity. The following table presents, for the years indicated, condensed average balance sheet information for the Company, together with interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities. Average balances are average daily balances.
Years Ended December 31, ------------------------------------------------------------------------------ 1999 1998 ------------------------------------- ------------------------------------- Average Average Average Yield/ Average Yield/ (Dollars in thousands) Balance (1) Interest Rate Balance (1) Interest Rate --------------------------------------------------------------------------------- ------------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 203,554 $ 10,518 5.17% $ 156,649 $ 8,367 5.34% Other short term securities 70,847 3,830 5.41% 97,229 5,480 5.64% Investment securities: Taxable 559,077 37,000 6.62% 494,019 30,709 6.22% Tax-exempt (2) 129,971 6,549 5.04% 98,728 5,090 5.16% Loans (3) 2,092,024 197,480 9.44% 1,515,965 155,543 10.26% ---------- -------- ---------- -------- Total interest-earning assets 3,055,473 255,377 8.36% 2,362,590 205,189 8.68% Noninterest-earning assets 258,584 203,022 ---------- -------- ---------- -------- Total assets $3,314,057 255,377 $2,565,612 205,189 ========== -------- ========== -------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $1,650,227 55,292 3.35% $1,223,414 41,980 3.43% Time deposits, over $100,000 461,085 21,677 4.70% 326,242 16,436 5.04% Other time deposits 166,446 7,873 4.73% 168,606 8,342 4.95% ---------- -------- ---------- -------- Total interest-bearing deposits 2,277,758 84,842 3.72% 1,718,262 66,758 3.89% Other borrowings 109,872 5,907 5.38% 114,063 6,815 5.97% Subordinated debt 607 68 11.20% 3,000 345 11.50% ---------- -------- ---------- -------- Total interest-bearing liabilities 2,388,237 90,817 3.80% 1,835,325 73,918 4.03% Trust Preferred Securities 49,000 4,201 8.57% 31,293 2,824 9.02% ---------- -------- ---------- -------- Total interest-bearing liabilities and capital securities 2,437,237 95,018 3.90% 1,866,618 76,742 4.11% Noninterest-bearing deposits 620,555 489,520 Other noninterest-bearing liabilities 37,090 24,729 Shareholders' equity 219,175 184,745 ---------- -------- ---------- -------- Total shareholders' equity and liabilities $3,314,057 $ 95,018 $2,565,612 $ 76,742 ========== -------- ========== -------- Net interest income $160,359 $128,447 ======== ======== Including capital securities: ----------------------------- Interest rate spread 4.46% 4.57% Contribution of interest free funds 0.79% 0.86% ----- ----- Net yield on interest-earnings assets(4) 5.25% 5.44% Excluding capital securities: ----------------------------- Interest rate spread 4.56% 4.66% Contribution of interest free funds 0.83% 0.90% ----- ----- Net yield on interest-earnings assets(4) 5.39% 5.56%
Years Ended December 31, --------------------------------------------------- 1997 --------------------------------------------------- Average Average Yield/ (Dollars in thousands) Balance (1) Interest Rate ------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 122,992 $ 6,633 5.39% Other short term securities 97,955 5,307 5.42% Investment securities: Taxable 318,702 20,823 6.53% Tax-exempt (2) 57,426 3,210 5.59% Loans (3) 1,232,223 129,810 10.53% ---------- -------- Total interest-earning assets 1,829,298 165,783 9.06% Noninterest-earning assets 130,652 ---------- -------- Total assets $1,959,950 165,783 ========== -------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $ 951,949 32,476 3.41% Time deposits, over $100,000 212,768 11,811 5.55% Other time deposits 149,581 8,366 5.59% ---------- -------- Total interest-bearing deposits 1,314,298 52,653 4.01% Other borrowings 60,615 3,849 6.35% Subordinated debt 3,000 345 11.50% ---------- -------- Total interest-bearing liabilities 1,377,913 56,847 4.13% Trust Preferred Securities 15,000 1,463 9.75% ---------- -------- Total interest-bearing liabilities and capital securities 1,392,913 58,310 4.19% Noninterest-bearing deposits 382,989 Other noninterest-bearing liabilities 24,087 Shareholders' equity 159,961 ---------- -------- Total shareholders' equity and liabilities $1,959,950 $ 58,310 ========== -------- Net interest income $107,473 ======== Including capital securities: ----------------------------- Interest rate spread 4.88% Contribution of interest free funds 1.00% ----- Net yield on interest-earnings assets(4) 5.88% Excluding capital securities: ----------------------------- Interest rate spread 4.94% Contribution of interest free funds 1.02% ----- Net yield on interest-earnings assets(4) 5.96%
(1) Nonaccrual loans are excluded from the average balance and only collected interest on nonaccrual loans is included in the interest column. (2) Tax equivalent yields earned on the tax exempt securities are 7.42%, 7.58% and 7.42% for the years ended December 31, 1999, 1998 and 1997, respectively, using the federal statutory rate of 34%. (3) Loan fees totaling $7.5 million, $6.8 million and $6.7 million are included in loan interest income for 1999, 1998 and 1997, respectively. (4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest- earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. A-4 The most significant impact on the Company's net interest income between periods is derived from the interaction of changes in the volume of and rate earned or paid on interest-earning assets and interest-bearing liabilities. The volume of interest-earning asset dollars in loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in the net interest income between periods. The table sets forth, for the years indicated, a summary of the changes in average asset and liability balances (volume) and changes in average interest rates (rate).
Year Ended December 31, 1999 Year Ended December 31, 1999 Compared with December 31, 1998 Compared with December 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 $ 2,432 $ (281) $ 2,151 $ 1,798 $ (64) $ 1,734 Other short term investments (1,434) (216) (1,650) (40) 213 173 Investment securities: Taxable 4,219 2,072 6,291 10,943 (1,057) 9,886 Tax-exempt 1,577 (118) 1,459 2,147 (267) 1,880 Loans 55,200 (13,263) 41,937 29,192 (3,459) 25,733 ------------------------------------- -------------------------------------- Total interest income 61,994 (11,806) 50,188 44,042 (4,636) 39,406 ------------------------------------- -------------------------------------- INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (14,322) 1,010 (13,312) (9,314) (190) (9,504) Time deposits over $100,000 (6,403) 1,162 (5,241) (5,803) 1,178 (4,625) Other time deposits 106 363 469 (1,000) 1,024 24 ------------------------------------- ------------------------------------------- Total interest-bearing deposits (20,620) 2,536 (18,084) (16,117) 2,012 (14,105) Other borrowings 244 664 908 (3,206) 240 (2,966) Subordinated debt 268 9 277 - - - TPS (1,525) 148 (1,377) (1,478) 117 (1,361) ------------------------------------- ------------------------------------------- Total interest expense (21,632) 3,356 (18,276) (20,802) 2,370 (18,432) ------------------------------------- ------------------------------------------- Net increase (decrease) in net interest income $ 40,363 $ (8,451) $ 31,912 $ 23,240 $ (2,266) $ 20,974 ===================================== ===========================================
(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 in 1999 increased 24.5% to $255.4 million from $205.2 million in 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 $692.9 million, or 29.3%, to $3.1 billion in 1999, compared to $2.4 billion in 1998. Average loans increased $576.1 million, or 38.0%, to $2.1 billion in 1999 from $1.5 billion in 1998. Average investment securities, Federal funds sold and other short-term securities, increased 13.8% to $963.4 million in 1999 from $846.6 million in 1998. The average yield on interest-earning assets declined 32 basis points to 8.36% in 1999 from 8.68% in 1998 primarily due to a decline in the average yield on loans which was caused by increased competition and the impact of the Company's focus on slightly larger client credits that generally result in improved client financial controls, but also result in tighter pricing. Loans represented approximately 68.5% of total interest-earning assets in 1999 compared to 64.2% in 1998. The average yield on loans declined 82 basis points to 9.44% in 1999 from 10.26% in 1998. Interest expense, excluding capital securities, in 1999 increased 22.9% to $90.8 million from $73.9 million in 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, excluding capital securities, increased 30.1% to $2.4 billion in 1999 from $1.8 billion in 1998. The increase was due primarily to the efforts of the Banks' relationship managers in generating core deposits from their client relationships and the deposits derived from the activities of the Greater Bay Trust Company and the Venture Banking Group. A-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During 1999, average noninterest-bearing deposits increased to $620.6 million from $489.5 million in 1998. However, due to the larger increase in interest-bearing deposits, noninterest-bearing deposits decreased to 21.4% of total deposits at year-end 1999, compared to 22.2% at year-end 1998. As a result of the foregoing, the Company's interest rate spread, excluding capital securities, declined to 4.56% in 1999 from 4.66% in 1998, and the net yield on interest-earning assets declined in 1999 to 5.39% from 5.56% in 1998. Interest income increased 23.8% to $205.2 million in 1998 from $165.8 million in 1997, as a result of the increase in average interest-earning assets offset by a decline in the yields earned. Average interest-earning assets increased 29.2% to $2.4 billion in 1998 from $1.8 billion in 1997 principally as a result of increase in loans. The yield on the higher volume of average interest-earning assets declined 38 basis points to 8.68% in 1998 from 9.06% in 1997, primarily as a result of increased competition for loans. Interest expense, excluding capital securities, in 1998 increased 30.0% to $73.9 million from $56.8 million in 1997 primarily as a result of the increase in the volume of interest-bearing liabilities and in the rates paid on interest- bearing liabilities. Corresponding to the growth in average interest-earning assets, average interest-bearing liabilities, excluding capital securities, increased 33.2% to $1.8 billion in 1998 from $1.4 billion in 1997. As a result of the foregoing, the Company's interest rate spread, excluding capital securities, declined to 4.66% in 1998 from 4.94% in 1997 and the net yield on interest-earning assets declined to 5.56% in 1998 from 5.96% in 1997. 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 1999, 1998 and 1997 were $99.0 million, $90.0 million and $95.0 million, respectively, on which the Company earned a spread of 3.1%, 2.25% and 2.5%, respectively. Excluding the Special Deposit, the 1999, 1998, 1997 net yield on interest-earning assets, excluding capital securities, would have been 5.46%, 5.69% and 6.14% respectively. The purchase of bank-owned life insurance ("BOLI") also reduced the Company's net interest spread since the earnings of BOLI are included in other income, while the cost of funding BOLI is included in interest expense. A-6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company incurred certain client service expenses with respect to its noninterest-bearing liabilities. These expenses include courier and armored car services, check supplies and other related items that are included in operating expenses. If these expenses had been included in interest expense, the Company's net yield on interest-earning assets would have been as follows for each of the years presented.
Years Ended December 31, ---------------------------------------------- (Dollars in thousands) 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------------- Average noninterest bearing demand deposits $ 620,555 $ 489,520 $ 382,989 Client service expenses 3,226 2,520 1,873 Client service expenses, as a percentage of average noninterest bearing demand deposits 0.52% 0.51% 0.49% IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS (EXCLUDING CAPITAL SECURITIES): Net yield on interest-earning assets 5.39% 5.56% 5.96% Impact of client service expense (0.11)% (0.11)% (0.11)% ---------------------------------------------- Adjusted net yield on interest-earning assets 5.28% 5.45% 5.85% ==============================================
The impact on the net yield on interest-earning assets is determined by offsetting net interest income by the cost of client service expense, which reduces the yield on interest-earning assets. The cost for client service expense reflects the Company's efforts to manage its interest expense. Provision for Loan Losses The provision for loan losses represents the current period credit cost associated with maintaining an appropriate allowance for credit losses. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in the Company's market area. Periodic fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary from current estimates. Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for a description of the systematic methodology employed by the Company in determining an adequate allowance for loan losses. The provision for loan losses in 1999 was $14.0 million, compared to $8.3 million in 1998 and $9.1 million in 1997. In addition, in connection with the mergers, the Company made an additional provision for loan losses of $2.7 million, $183,000 and $1.4 million in 1999, 1998 and 1997, respectively, to conform to the Company's allowance methodology. Although loans outstanding have increased substantially, nonperforming loans, comprised of nonaccrual loans, restructured loans, and accruing loans past due 90 days or more have remained relatively low, totaling $6.7 million, or 0.27% of loans outstanding, at December 31, 1999, from $5.1 million, or 0.28% of loans outstanding, at December 31, 1998 and $6.2 million, or 0.45% of loans outstanding, at December 31, 1997. For further information on nonperforming and classified loans and the allowance for loan losses, see "- Nonperforming and Classified Assets" herein. A-7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other Income Total other income increased to $43.0 million in 1999, compared to $21.9 million in 1998 and $19.3 million in 1997. The following table sets forth information by category of other income for the years indicated.
Years Ended December 31, ----------------------------------------- (Dollars in thousands) 1999 1998 1997 ---------------------------------------------------------------------------------------------- Service charges and other fees $ 7,931 $ 6,906 $ 6,642 Loan and international banking fees 4,275 2,752 2,654 Trust fees 2,990 2,473 2,049 ATM network revenue 2,682 2,440 2,607 Gain on sale of SBA loans 2,058 3,490 2,189 Gain (loss) on investments, net 87 473 (87) Other income 8,448 2,462 2,125 ----------------------------------------- Total, recurring 28,471 20,996 18,179 Warrant income 14,508 945 1,162 ----------------------------------------- Total $ 42,979 $ 21,941 $ 19,341 =========================================
The increase in other income in 1999 as compared to 1998 was a result of $1.5 million increase in loan and international banking fees, a $1.0 million increase in service charges and other fees, and a $517,000 increase in trust fees. These increases were a result of significant growth in total loans, total deposits and trust assets. Other income includes $4.0 million in appreciation recognized on the conversion of equity securities received in the settlement of a loan into a publicly traded equity security. As discussed further below, the warrant income resulted from the sale of stock acquired from clients in connection with financing activities. The increase in other income in 1998 as compared to 1997 was primarily the result of a $1.3 million increase in the gain on sale of Small Business Administration ("SBA") loans and a $424,000 increase in trust fees. The increase in trust fees was due to significant growth in assets under management by Greater Bay Trust Company. Trust assets increased to $649.3 million at December 31, 1998, compared to $577.7 million at December 31, 1997. The increase in the gain on sale of SBA loans was due to an increase in the origination and subsequent sale of SBA loans. Other income in 1999, 1998 and 1997 included warrant income of $14.5 million, $945,000 and $1.2 million, net of related employee incentives of $7.3 million, $396,000 and $500,000, respectively. At December 31, 1999, the Company held approximately 100 warrant positions. The Company occasionally receives warrants to acquire common stock from companies that are in the start-up or development phase. The timing and amount of income derived from the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. A-8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating Expenses The following table sets forth the major components of operating expenses for the years indicated.
Years Ended December 31, ----------------------------------------------- (Dollars in thousands) 1999 1998 1997 -------------------------------------------------------------------------------------------------------------------- Compensation and benefits $ 56,488 $ 47,617 $ 41,923 Occupancy and equipment 17,545 13,386 11,989 Client service expenses 3,226 2,520 1,873 Legal and other professional fees 3,371 3,416 3,456 FDIC insurance and regulatory assessments 622 553 504 Expenses on other real estate owned 13 157 211 Other 19,648 18,556 16,308 ----------------------------------------------- Total operating expenses excluding nonrecurring costs 100,913 86,205 76,264 Contribution to the GBB Foundation and related expenses 12,160 1,341 - Mergers and other related nonrecurring costs 10,331 2,661 3,333 Recovery of legal settlement - - (1,700) ----------------------------------------------- Total operating expenses $ 123,404 $ 90,207 $ 77,897 =============================================== Efficiency ratio 60.69% 59.98% 61.43% Efficiency ratio (before merger, nonrecurring and extraordinary items) 53.44% 57.68% 60.69% Total operating expenses to average assets 3.72% 3.52% 3.97% Total operating expenses to average assets (before merger, nonrecurring and extraordinary items) 3.04% 3.36% 3.89%
A-9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating expenses totaled $123.4 million for 1999, compared to $90.2 million for 1998 and $77.9 million for 1997. The ratio of operating expenses to average assets was 3.72% in 1999, 3.52% in 1998, and 3.97% in 1997. Total operating expenses include merger and other related nonrecurring costs and contributions to the Foundation and related expenses. The efficiency ratio is computed by dividing total operating expenses by net interest income and other income. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same (or greater) volume of income while a decrease would indicate a more efficient allocation of resources. The Company's efficiency ratio before merger, nonrecurring and extraordinary items for 1999 was 53.44%, compared to 57.68% in 1998 and 60.69% in 1997. During 1998, Greater Bay established the Foundation. The Foundation was formed to provide a vehicle through which the Company, its officers and directors can provide support to the communities in which the Company does business. The Foundation focuses its support on initiatives related to education, health and economic growth. To support the Foundation, the Company contributed appreciated securities which had an unrealized gain of $7.8 million in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4 million in compensation and other expenses in connection with these appreciated securities. The Company recorded expense of $12.2 million in 1999 and $1.3 million in 1998 which is included in operating expenses. As indicated by the improvements in the efficiency ratio, the Company has been able to achieve increasing economies of scale. In 1999, average assets increased 29.2% from 1998, while operating expenses, excluding merger, and other nonrecurring items, increased only 17.1%. From 1997 to 1998, average assets increased 30.9%, while operating expenses, excluding merger and nonrecurring costs increased only 13.0%. Compensation and benefits expenses increased in 1999 to $56.5 million, compared to $47.6 million in 1998 and $41.9 million in 1997. The increase in compensation and benefits is due primarily to the additions in personnel made in 1999 and 1998 to accommodate the growth of the Company. The increase in occupancy and equipment, client service expense, Federal Deposit Insurance Corporation ("FDIC") insurance and regulatory assessments and other operating expenses was related to the growth in the Company's loans, deposits and trust assets. Income Taxes The Company's effective income tax rate for 1999 was 32.8%, compared to 34.9% in 1998 and 36.7% in 1997. The effective rates were lower than the statutory rate of 42% due to the donation of appreciated securities to the Foundation, state enterprise zone tax credits and tax-exempt income on municipal securities. The reductions were partially offset by the impact of nondeductible merger and other related nonrecurring costs. In 1998, the Company was able to further reduce its effective tax rate through the recognition of certain net operating losses acquired in its merger with PRB. A-10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCIAL CONDITION Total assets increased 30.8% to $3.7 billion at December 31, 1999, compared to $2.9 billion at December 31, 1998. Total assets increased 27.8% in 1998 from $2.2 billion at December 31, 1997. The increases in 1999 and 1998 were primarily due to increases in the Company's loan portfolio funded by growth in deposits. Loans Total gross loans increased 38.8% to $2.5 billion at December 31, 1999, compared to $1.8 billion at December 31, 1998. Total gross loans increased 27.9% in 1998 from $1.4 billion at year-end 1997. The increases in loan volumes in 1999 and 1998 were primarily due to a strong economy in the Company's market areas coupled with the business development efforts by the Company's relationship managers. The Company's loan portfolio is concentrated in commercial (primarily manufacturing, service and technology) and real estate lending, with the balance in consumer loans. While no specific industry concentration is considered significant, the Company's lending operations are located in a market area that is dependent on the technology and real estate industries and supporting service companies. Thus, a downturn in these sectors of the economy could adversely impact the Company's borrowers. This could, in turn, reduce the demand for loans and adversely impact the borrowers' abilities to repay their loans, while also decreasing the Company's net interest margin. The following table presents the composition of the Company's loan portfolio at the dates indicated.
As of December 31, ------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------ (Dollars in thousands) Amount % Amount % Amount % Amount % Amount % ---------------------------------------------------------------------------------------------------------------------------------- Commercial $ 926,075 38.3% $ 657,300 37.8% $ 547,083 40.3% $ 462,894 42.5% $ 345,353 41.7% Term Real Estate - Commercial 764,034 31.6 562,388 32.3 412,412 30.4 313,203 28.7 249,411 30.1 ------------------------------------------------------------------------------------------------ Total Commercial 1,690,109 69.9 1,219,688 70.1 959,495 70.7 776,097 71.2 594,764 71.8 Real estate construction and land 479,163 19.9 301,641 17.3 206,448 15.2 152,607 14.0 87,841 10.5 Real estate other 140,852 5.8 114,553 6.6 83,404 6.1 68,434 6.3 67,714 8.2 Consumer and other 167,257 6.9 149,287 8.6 146,930 10.8 121,478 11.2 101,931 12.3 ------------------------------------------------------------------------------------------------ Total loans, gross 2,477,381 102.5 1,785,169 102.6 1,396,277 102.8 1,118,616 102.7 852,250 102.8 Deferred fees and discounts, net (12,911) (0.5) (11,916) (0.7) (11,157) (0.8) (10,567) (1.0) (9,328) (1.1) ------------------------------------------------------------------------------------------------ Total loans, net of deferred fees 2,464,470 102.0 1,773,253 101.9 1,385,120 102.0 1,108,049 101.7 842,922 101.7 Allowance for loan losses (48,047) (2.0) (33,095) (1.9) (26,606) (2.0) (18,572) (1.7) (13,905) (1.7) ------------------------------------------------------------------------------------------------ Total loans, net $2,416,423 100.0% $1,740,158 100.0% $1,358,514 100.0% $1,089,477 100.0% $ 829,017 100.0% ================================================================================================
A-11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table presents the maturity distribution of the Company's commercial, real estate construction and land, term real estate - commercial and real estate other portfolios and the sensitivity of such loans to changes in interest rates at December 31, 1999.
Term Real estate real estate- construction Real estate (Dollars in thousands) Commercial commercial and land other -------------------------------------------------------------------------------------------------- Loans maturing in: One year or less: Fixed rate $ 174,657 $ 23,913 $ 22,856 $ 7,568 Variable rate 432,058 70,471 380,054 29,240 One to five years: Fixed rate 70,360 58,085 2,214 2,378 Variable rate 147,381 77,158 48,582 35,385 After five years: Fixed rate 32,628 294,173 3,722 10,024 Variable rate 68,991 240,234 21,735 56,257 --------------------------------------------------------------- Total $ 926,075 $ 764,034 $ 479,163 $ 140,852 ===============================================================
Nonperforming and Classified Assets Management generally places loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is generally reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where the Banks have granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. Other real estate owned ("OREO") consists of real property acquired through foreclosure on the related collateral underlying defaulted loans. The following table sets forth information regarding nonperforming assets at the dates indicated.
As of December 31, ------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 ---------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans Nonaccrual loans $ 5,744 $ 4,011 $ 4,437 $ 7,186 $ 6,383 Accruing loans past due 90 days or more 139 244 273 2,651 1,037 Restructured loans 807 796 1,533 1,828 1,530 ------------------------------------------------------------------------- Total nonperforming loans 6,690 5,051 6,243 11,665 8,950 Other real estate owned 271 966 1,541 2,224 3,660 ------------------------------------------------------------------------- Total nonperforming assets $ 6,961 $ 6,017 $ 7,784 $ 13,889 $ 12,610 ========================================================================= Nonperforming assets to total loans and other real estate owned 0.28% 0.34% 0.56% 1.25% 1.49% Nonperforming assets to total assets 0.19% 0.21% 0.35% 0.78% 0.88%
At December 31, 1999 and 1998, the Company had $5.7 million and $4.0 million in nonaccrual loans, respectively. Interest income foregone on nonperforming loans totaled $535,000, $254,000 and $655,000 for the years ended December 31, 1999, 1998 and 1997, respectively. A-12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company records OREO at the lower of carrying value or fair value less estimated costs to sell. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings through a provision for losses on foreclosed property in the period in which they are identified. At December 31, 1999, OREO acquired through foreclosure had a carrying value of $271,000 compared to $966,000 at December 31, 1998. The Company had $807,000 and $796,000 of restructured loans as of December 31, 1999 and 1998, respectively. There were no principal reduction concessions allowed on restructured loans during 1999 and 1998. Interest income from restructured loans totaled $45,000, $16,000 and $82,000 for the years ended December 31, 1999, 1998 and 1997. Foregone interest income, which totaled $0, $11,000 and $10,000 for the years ended December 31, 1999, 1998 and 1997, respectively, would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. The Company has three classifications for problem loans: "substandard", "doubtful" and "loss". Substandard loans have one or more defined weakness and are characterized by the distinct possibility that the Banks will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of substandard loans with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable; and there is a high possibility of loss of some portion of the principal balance. A loan classified as "loss" is considered uncollectible and its continuance as an asset is not warranted. A-13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table sets forth the classified loans and other real estate owned at the dates indicated.
As of December 31, ------------------------------------------- (Dollars in thousands) 1999 1998 1997 ---------------------------------------------------------------------------------------------------- Substandard $ 30,725 $ 18,834 $ 21,322 Doubtful 1,850 1,376 2,165 Loss 2 - 49 Other real estate owned 271 966 1,541 ------------------------------------------- Classified loans and other real estate owned $ 32,848 $ 21,176 $ 25,077 =========================================== Classified to total loans and other real estate owned 1.33% 1.19% 1.81% Allowance for loan losses to total classified 146.27% 156.29% 106.10% loans and other real estate owned
With the exception of these classified loans, management was not aware of any loans outstanding as of December 31, 1999 where the known credit problems of the borrower would cause management to have doubts as to the ability of such borrowers to comply with their present loan repayment terms and which would result in such loans being included in nonperforming or classified asset tables at some future date. Management cannot, however, predict the extent to which economic conditions in the Company's market areas may worsen or the full impact that such an environment may have on the Company's loan portfolio. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured loans, or other real estate owned in the future. Allowance For Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of risk inherent in the Company's loan portfolio. The allowance is increased by provisions charged against current earnings and reduced by net charge-offs. Loans are charged off when they are deemed to be uncollectible; recoveries are generally recorded only when cash payments are received. A-14 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 years indicated.
(Dollars in thousands) 1999 1998 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------------------ Period end loans outstanding $ 2,477,381 $ 1,785,169 $ 1,396,277 $ 1,118,616 $ 852,250 Average loans outstanding $ 2,097,090 $ 1,519,643 $ 1,237,733 $ 886,275 $ 735,358 Allowance for loan losses: Balance at beginning of period $ 33,095 $ 26,606 $ 18,599 $ 13,905 $ 13,149 Charge-offs: Commercial (2,880) (2,155) (2,136) (1,483) (2,146) Term Real Estate - Commercial (12) (51) (59) (85) (25) --------------------------------------------------------------------------- Total Commercial (2,892) (2,206) (2,195) (1,568) (2,171) Real estate construction and land - (7) (243) (127) (410) Real estate other - - - - (49) Consumer and other (501) (397) (428) (540) (790) --------------------------------------------------------------------------- Total charge-offs (3,393) (2,610) (2,866) (2,235) (3,420) --------------------------------------------------------------------------- Recoveries: Commercial 1,182 540 278 523 781 Term Real Estate - Commercial 1 11 6 27 - --------------------------------------------------------------------------- Total Commercial 1,183 551 284 550 781 Real estate construction and land 7 - 6 328 19 Real estate other 7 - - - - Consumer and other 364 86 101 156 292 --------------------------------------------------------------------------- Total recoveries 1,561 637 391 1,034 1,092 --------------------------------------------------------------------------- Net charge-offs (1,832) (1,973) (2,475) (1,201) (2,328) Provision charged to income (1) 16,784 8,462 10,482 5,895 3,084 --------------------------------------------------------------------------- Balance at end of period $ 48,047 $ 33,095 $ 26,606 $ 18,599 $ 13,905 =========================================================================== Net charge-offs to average loans outstanding during the period 0.09% 0.13% 0.20% 0.14% 0.32% Allowance as a percentage of average loans outstanding 2.29% 2.18% 2.15% 2.10% 1.89% Allowance as a percentage of period end loans outstanding 1.94% 1.85% 1.91% 1.66% 1.63% Allowance as a percentage of non-performing loans 718.19% 655.22% 426.17% 159.44% 155.36%
(1) Includes $2.7 million, $183,000, $1.4 million and $800,000 in 1999, 1998, 1997 and 1996, respectively, to conform to the Company's reserve methodologies which are included in mergers and related nonrecurring costs. The Company employs a systematic methodology for determining its allowance for loan losses, which includes a monthly review process and monthly adjustment of the allowance. The Company's process includes a periodic loan by loan review for loans that are individually evaluated for impairment as well as detailed reviews of other loans (either individually or in pools). This includes an assessment of known problem loans, potential problem loans, and other loans that exhibit indicators of deterioration. The Company's methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans including borrowers' sensitivity to interest rate movements and borrowers' sensitivity to quantifiable external factors including commodity and finished goods prices as well as acts of nature (earthquakes, fires, etc.) that occur in a particular period. Qualitative factors include the general economic environment in the Company's marketplace, and in particular, the state of the technology industries based in the Silicon Valley and other key industries in the San Francisco Bay Area. Size and complexity of individual credits in relation to lending officers' background and experience levels, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the Company's methodology. A-15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company's methodology is, and has been consistently followed. However, as the Company adds new products, increases in complexity, and expands its geographic coverage, the Company will enhance its methodology to keep pace with the size and complexity of the loan portfolio. In this regard, the Company has periodically engaged outside firms to independently assess the Company's methodology, and on an ongoing basis the Company engages outside firms to perform independent credit reviews of its loan portfolio. Management believes that the Company's systematic methodology continues to be appropriate given the Company's size and level of complexity. While this methodology utilizes historical and other objective information, the establishment of the allowance for loan losses and the classification of loans, is to some extent, based on the judgment and experience of management. In general, management feels that the allowance for loan losses is adequate as of December 31, 1999. However, future changes in circumstances, economic conditions or other factors could cause management to increase or decrease the allowance for loan losses as necessary. The following table provides a summary of the allocation of the allowance for loan losses for specific loan categories at the dates indicated. The allocation presented should not be interpreted as an indication that charges to the allowance for loan losses will be incurred in these amounts or proportions, or that the portion of the allowance allocated to each loan category represents the total amounts available for charge-offs that may occur within these categories. The unallocated portion of the allowance for loan losses and the total allowance is applicable to the entire loan portfolio.
As of December 31, -------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------------------------------------------------------------------------------------- % of Category % of Category % of Category % of Category % of Category to Gross to Gross to Gross to Gross to Gross (Dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------------------------------------------------------------------------------------------------------------------------------------ Commercial $16,419 37.38% $12,341 36.82% $9,422 39.18% $7,927 41.38% $5,376 40.52% Term real estate - commerci 7,850 30.84% 3,763 31.50% 2,939 29.54% 2,178 28.00% 1,827 29.27% ----------------------------------------------------------------------------------------- Total commercial 24,269 68.22% 16,104 68.32% 12,361 68.72% 10,105 69.38% 7,203 69.79% Real estate construction and land 4,620 19.34% 3,477 16.90% 2,239 14.79% 2,346 13.64% 1,561 10.31% Real estate term 2,166 5.69% 1,574 6.42% 1,284 5.97% 706 6.12% 1,186 7.95% Consumer and other 3,969 6.75% 2,817 8.36% 2,006 10.52% 2,067 10.86% 1,593 11.96% ----------------------------------------------------------------------------------------- Total allocated 35,024 23,972 17,890 15,224 11,543 Unallocated 13,023 9,123 8,716 3,375 2,362 ----------------------------------------------------------------------------------------- Total $48,047 100.00% $33,095 100.00% $26,606 100.00% $18,599 100.00% $13,905 100.00% =========================================================================================
At December 31, 1999, the allowance for loan losses was $48.0 million, consisting of a $35.0 million allocated allowance and a $13.0 million unallocated allowance. The unallocated allowance recognizes the model and estimation risk associated with the allocated allowances, and management's evaluation of various conditions, the effects of which are not directly measured in determining the allocated allowance. The evaluation of the inherent loss regarding these conditions involves a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following at the balance sheet date: . The strength and duration of the current business cycle and existing general economic and business conditions affecting our key lending areas; economic and business conditions affecting our key lending portfolios; . Seasoning of the loan portfolio, growth in loan volumes and changes in loan terms; and . The results of bank regulatory examinations. A-16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Investment Securities The Company's investment portfolio is managed to meet the Company's liquidity needs through proceeds from scheduled maturities and is utilized for pledging requirements for deposits of state and political subdivisions and securities sold under repurchase agreements. The portfolio is comprised of U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, corporate debt instruments and a modest amount of equity securities, including Federal Reserve Bank stock and Federal Home Loan Bank stock. The Company does not include Federal Funds sold and certain other short-term securities as investment securities. These other investments are included in cash and cash equivalents. Investment securities classified as available for sale are recorded at fair value, while investment securities classified as held to maturity are recorded at cost. Unrealized gains or losses on available for sale securities, net of the deferred tax effect, are reported as increases or decreases in shareholders' equity. The amortized cost and estimated fair value of investment securities at December 31, 1999 and 1998 is as follows:
Gross Gross As of December 31, 1999 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 19,240 $ - $ (253) $ 18,987 U.S. agency notes 58,540 10 (1,808) 56,742 Mortgage-backed securities 249,038 95 (8,130) 241,003 Tax-exempt securities 65,646 85 (3,947) 61,784 Taxable municipal securities 3,754 1 (122) 3,633 Corporate securities 119,481 - (12,182) 107,299 --------------------------------------------------------------- Total securities available for sale 515,699 191 (26,442) 489,448 --------------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 1,498 - - 1,498 U.S. agency notes 58,489 9 (1,750) 56,748 Mortgage-backed securities 61,004 28 (2,048) 58,984 Tax-exempt securities 77,869 438 (3,173) 75,134 Corporate securities 37,608 15 (1,233) 36,390 --------------------------------------------------------------- Total securities held to maturity 236,468 490 (8,204) 228,754 --------------------------------------------------------------- Other securities 16,457 8,143 - 24,600 --------------------------------------------------------------- Total investment securities $ 768,624 $ 8,824 $ (34,646) $ 742,802 =============================================================== Gross Gross As of December 31, 1998 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 29,161 $ 139 $ - $ 29,300 U.S. agency notes 79,350 238 (76) 79,512 Mortgage-backed securities 226,257 1,799 (157) 227,899 Tax-exempt securities 57,809 1,219 - 59,028 Taxable municipal securities 6,434 187 (13) 6,608 Corporate securities 73,980 116 (1,164) 72,932 --------------------------------------------------------------- Total securities available for sale 472,991 3,698 (1,410) 475,279 --------------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 3,762 28 (2) 3,788 U.S. agency notes 49,519 166 (92) 49,593 Mortgage-backed securities 40,055 189 (206) 40,038 Tax-exempt securities 62,805 1,953 (15) 64,743 Corporate securities 27,547 260 (34) 27,773 --------------------------------------------------------------- Total securities held to maturity 183,688 2,596 (349) 185,935 --------------------------------------------------------------- Other securities 8,564 - - 8,564 --------------------------------------------------------------- Total investment securities $ 665,243 $ 6,294 $ (1,760) $ 669,778 ===============================================================
A-17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The declines in fair value of the Company's investment portfolio are a result of the increase in overall interest rates which occurred throughout 1999. The maturities of investment securities at December 31, 1999 and 1998 are as follows. Other securities are comprised of equity investments and have no stated maturity and therefore are excluded from this table.
2001 2005 Through Through 2010 and (Dollars in thousands) 2000 2004 2009 Thereafter Total ------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 5,125 $ 14,115 $ - $ - $ 19,240 U.S. agency notes (1) 1,756 43,503 13,281 - 58,540 Mortgage-backed securities (2) 1,268 6,882 7,796 233,092 249,038 Tax-exempt securities 891 7,775 11,113 45,867 65,646 Taxable municipal securities - 3,495 259 - 3,754 Corporate securities 996 3,650 1,012 113,823 119,481 -------------------------------------------------------------------------------- Total securities available for sale 10,036 79,420 33,461 392,782 515,699 -------------------------------------------------------------------------------- Fair value $ 9,989 $ 78,338 $ 32,421 $ 368,698 $ 489,448 -------------------------------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 1,498 - - - 1,498 U.S. agency notes (1) 3,009 40,992 14,488 - 58,489 Mortgage-backed securities (2) 75 2,082 9,082 49,765 61,004 Tax-exempt securities 3,150 12,226 19,443 43,050 77,869 Corporate securities 5,484 17,305 11,769 3,050 37,608 -------------------------------------------------------------------------------- Total securities held to maturity 13,216 72,605 54,782 95,865 236,468 -------------------------------------------------------------------------------- Fair value 13,228 71,337 53,339 90,850 228,754 -------------------------------------------------------------------------------- COMBINED INVESTMENT SECURITIES PORTFOLIO: Total investment securities $ 23,252 $ 152,025 $ 88,243 $ 488,647 $ 752,167 ================================================================================ Total fair value $ 23,217 $ 149,675 $ 85,760 $ 459,548 $ 718,200 ================================================================================ Weighted average yield-total portfolio 5.34% 5.78% 6.37% 7.18% 6.74%
(1) Certain notes issued by U.S. agencies may be called, without penalty, at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates. (2) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed securities may differ due to principal prepayments. For additional information concerning the investments portfolio, see Note 3 of Notes to Supplemental Consolidated Financial Statements. Deposits The Company emphasizes developing total client relationships with its customers in order to increase its core deposit base. Deposits reached $3.3 billion at December 31, 1999, an increase of 32.5% compared to deposits of $2.5 billion at December 31, 1998. In 1998, deposits increased 27.3% from $1.9 billion at December 31, 1997. The increase in deposits was primarily due to the continued marketing efforts directed at commercial business clients in the Company's market areas, coupled with an increase in deposits related to the new business development activities of the Greater Bay Trust Company and the Venture Banking Group. A-18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PBC held deposits from a single customer (the "Special Deposit") of $111.1 million and $89.6 million at December 31, 1999 and 1998, respectively. The Special Deposit represents the proposed settlement of a class action lawsuit not involving the Company. Due to the uncertainty of the time the Special Deposit will remain with PBC, management has invested a significant portion of the proceeds from this deposit in agency securities with maturities of less than 90 days. As previously discussed, the interest rate spread on the Special Deposit was approximately 3.10% and 2.25% for December 31, 1999 and 1998, which resulted in a decrease in overall interest rate spreads. The Company's noninterest-bearing demand deposit accounts increased 26.9% to $727.6 million at December 31, 1999, compared to $573.6 million a year earlier. Money market deposit accounts ("MMDA"), negotiable order of withdrawal accounts ("NOW") and savings accounts reached $1.8 billion at year-end 1999, an increase of 32.5% from $1.4 billion at December 31, 1998. MMDA, NOW and savings accounts were 56.4% of total deposits at December 31, 1999, as compared to 56.4% at December 31, 1998. Time certificates of deposit totaled $696.4 million, or 21.3% of total deposits, at December 31, 1999, compared to $501.7 million, or 20.4% of total deposits, at December 31, 1998. As of December 31, 1999, the Company had $19.3 million in brokered deposits outstanding. There were no such deposits as of December 31, 1998. For additional information concerning deposits, see Note 7 of Notes to Supplemental Consolidated Financial Statements. Other Borrowings At December 31, 1999 other borrowings consisted of Federal Funds purchased and securities sold under agreements to repurchase, Federal Home Loan Bank advances, and advances under credit lines. Note 9 of the Notes to the Supplemental Consolidated Financial Statements provides the amounts outstanding, the short and long term classification, other borrowings outstanding during the year and the general terms of these borrowings. Liquidity and Cash Flow The objective of 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, sells securities under agreements to repurchase and borrows overnight Federal Funds. A-19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Greater Bay is a company separate and apart from the Banks. It must provide for its own liquidity. Substantially all of Greater Bay's revenues are obtained from management fees, interest received on its investments and dividends declared and paid by the Banks. There are statutory and regulatory provisions that could limit the ability of the Banks to pay dividends to Greater Bay. At December 31, 1999, the Banks had approximately $78.6 million in the aggregate available to be paid as dividends to Greater Bay. Management of Greater Bay believes that such restrictions will not have an impact on the ability of Greater Bay to meet its ongoing cash obligations. As of December 31, 1999, Greater Bay did not have any material commitments for capital expenditures. Net cash provided by operating activities, consisting primarily of net income, totaled $58.7 million for 1999, $38.8 million for 1998 and $30.5 million for 1997. Cash used for investing activities totaled $812.6 million in 1999, $626.9 million in 1998 and $400.2 million in 1997. The funds used for investing activities primarily represent increases in loans and investment securities for each year reported. For the year ended December 31, 1999, net cash provided by financing activities was $821.8 million, compared to $579.5 million in 1998 and $412.8 million in 1997. Historically, the primary financing activity of the Company has been through deposits. In 1999, 1998 and 1997, deposit gathering activities generated cash of $799.4 million, $528.1 million and $365.3 million, respectively. This represents a total of 97.3%, 91.1% and 88.5% of the financing cash flows for 1999, 1998 and 1997, respectively. The 1999 increase in financing activities other than deposits are a result of proceeds from the sale of stock of $26.8 million, the Company entering into $70.0 million in long- term low cost repurchase agreements in 1998, and the issuance of TPS of $30.0 million and $20.0 million in 1998 and 1997, respectively, which were issued principally to provide capital to the Company (see "- Capital Resources", below). Capital Resources Shareholders' equity at December 31, 1999 increased to $252.9 million from $200.7 million at December 31, 1998 and from $171.5 million at December 31, 1997. Greater Bay paid dividends of $0.24, $0.19 and $0.15 per share in December 31, 1999, 1998 and 1997, respectively, excluding dividends paid by subsidiaries prior to the completion of their mergers. In 1999 the Company issued, in a private placement, 1,070,000 shares of common stock (as restated for the 2-for-1 stock split effective on October 4, 2000). The proceeds from the offering were $19.0 million, net of issuance costs. Greater Bay intends to use the net proceeds from the offering for general corporate purposes. In 1997, the Company issued $20.0 million in 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. Under applicable regulatory guidelines, the TPS qualifies as Tier I capital up to a maximum of 25% of Tier I capital. Any additional portion of TPS would qualify as Tier 2 capital. As of December 31, 1999, all outstanding TPS qualified as Tier I capital. As the Company's shareholders' equity increases, the amount of Tier I capital that can be comprised of TPS will increase. In 2000, the Company completed two additional offerings of TPS in an aggregate amount of $50.5 million. the Company also issued 648,648 shares of common stock in a private placement. The proceeds from the offering were $12.0 million, net of issuance costs. For additional information on these capital transactions, see Note 23 of the Notes to Supplemental Consolidated Financial Statements. A-20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 in supplementary capital. At December 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. The minimum leverage ratio is 3.0%, although certain banking organizations are expected to exceed that amount by 1.0% or more, depending on their circumstances.
Tier 1 Total Leverage Risk-Based Risk-Based Ratio Capital Ratio Capital Ratio --------------------------------------------------------------------- Company 8.24% 9.75% 11.07% Well-capitalized 5.00% 6.00% 10.00% Adequately capitalized 4.00% 4.00% 8.00%
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 December 31, 1999 and the two highest levels recognized under these regulations are as follows: The Company's leverage ratio was 8.24% at December 31, 1999, compared to 8.13% at December 31, 1998. At December 31, 1999, the Company's risk-based capital ratios were 9.75% for Tier 1 risk-based capital and 11.07% for total risk-based capital, compared to 10.70% and 12.59%, respectively, as of December 31, 1998. In addition, at December 31, 1999, each of the Banks, with the exception of MDNB, had levels of capital that exceeded the well-capitalized guidelines. For additional information on the capital levels and capital ratios of the Company and each of the Banks, see Note 17 of Notes to the Supplemental Consolidated Financial Statements. Quantitative and Qualitative Disclosures about Market Risk The Company's financial performance is impacted by, among other factors, interest rate risk and credit risk. The Company utilizes no derivatives to mitigate its credit risk, relying instead on loan review and its allowance for loan losses see "--Allowance for Loan Losses" herein. A-21 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 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 net portfolio value 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 net portfolio value in the event of hypothetical changes in interest rates and interest liabilities. If potential changes to net portfolio value 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 (8 years to 12 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. In addition, the Company has utilized an interest rate swap to manage the interest rate risk of the TPS II securities. This interest rate swap is not an "ineffective hedge" and is accounted for under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". Interest rate sensitivity analysis is used to measure the Company's interest rate risk by computing estimated changes in net portfolio value 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. Net portfolio value 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 net portfolio value for these rate shock levels as of December 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.
Change in Projected Change Interest Rates Net Portfolio ----------------------------- (Dollars in thousands) (1) Value Dollars Percentage --------------------------------------------------------------------------- 100 basis point rise $ 365,830 $ 7,770 2.2% Base scenario 358,020 - 0.0% 100 basis point decline 350,469 (7,591) -2.1%
(1) Evaluation excludes MD Bancshares, Coast Bancorp, BSC and BOP. See further discussion below. The preceding table indicates that at December 31, 1999, in the event of a sudden and sustained decrease in prevailing market interest rates, the Company's net portfolio value would be expected to decrease. However, the foregoing analysis does not attribute additional value to the Company's noninterest- bearing deposit balances, which have a significantly higher market value during periods of increasing interest rates. Net portfolio value 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 is 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. A-22 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 net portfolio value. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the net portfolio value. 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 net portfolio value. 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 December 31, 1999:
Immediate 2 Days To 7 Months to 1 Year 4 Years More than (Dollars in thousands) or One Day 6 Months 12 Months to 3 Years to 5 Years 5 Years -------------------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 794 $ 296 $ - $ - $ - $ - Short term investments 249,107 - - - - Investment securities 80,483 81,050 34,422 165,295 73,277 291,388 Other securities - - - - - - Loans 1,293,396 604,150 51,759 145,981 148,958 233,138 Loan losses/unearned fees - - - - - - Other assets - - - - - - ---------------------------------------------------------------------------------------------- Total assets $1,623,780 $ 685,496 $ 86,181 $311,276 $222,235 $524,526 ============================================================================================== Liabilities and Equity: Deposits $1,810,296 $ 582,266 $ 106,247 $ 33,781 $ 2,650 $ 35 Other borrowings 13,452 63,600 3,000 - 37,000 - Trust preferred securities - - - - - 49,000 Other liabilities - - - - - - Shareholders' equity - - - - - - ---------------------------------------------------------------------------------------------- Total liabilities and equity $1,823,748 $ 645,866 $ 109,247 $ 33,781 $ 39,650 $ 49,035 ============================================================================================== Gap $ (199,968) $ 39,630 $ (23,066) $277,495 $182,585 $475,491 Cumulative Gap $ (199,968) $(160,338) $(183,404) $ 94,091 $276,676 $752,167 Cumulative Gap/total assets -5.35% -4.29% -4.91% 2.52% 7.40% 20.13%
Total Total Rate Non-Rate (Dollars in thousands) Sensitive Sensitive Total ---------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 794 $ 146,131 $ 146,925 Short term investments 249,403 - 249,403 Investment securities 725,915 - 725,915 Other securities - 24,600 24,600 Loans 2,477,382 - 2,477,382 Loan losses/unearned fees - (60,958) (60,958) Other assets - 173,462 173,462 -------------------------------------------------- Total assets $3,453,494 $ 283,235 $3,736,729 ================================================== Liabilities and Equity: Deposits $2,535,275 $ 727,613 $3,262,888 Other borrowings 117,052 - 117,052 Trust preferred securities 49,000 - 49,000 Other liabilities - 54,893 54,893 Shareholders' equity - 252,896 252,896 -------------------------------------------------- Total liabilities and equity $2,701,327 $1,035,402 $3,736,729 ================================================== Gap $ 752,167 $ (752,167) - Cumulative Gap $ 752,167 $ - - Cumulative Gap/total assets 20.13% - -
The foregoing table indicates that the Company had a one year gap of $(183.4) million, or (4.91)% of total assets, at December 31, 1999. In theory, this would indicate that at December 31, 1999, $183.4 million more in liabilities than assets would reprice if there were a change in interest rates over the next 365 days. Thus, if interest rates were to increase, the gap would tend to result in a lower net interest margin. However, changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing of both the asset and its supporting liability can remain the same, thus impacting net interest income. This characteristic is referred to as a basis risk and, generally, relates to the repricing characteristics of short-term funding sources such as certificates of deposit. A-23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The impact of fluctuations in interest rates on the Company's projected next twelve month net interest income and net income has been evaluated through an interest rate shock simulation modeling analysis that includes various assumptions regarding the repricing relationship of assets and liabilities, as well as the anticipated changes in loan and deposit volumes over differing rate environments. As of December 31, 1999, the analysis indicates that the Company's net interest income would increase a maximum of 14.1% (excluding MD Bancshares, Coast Bancorp, BSC and BOP) if rates rose 200 basis points immediately and would decrease a maximum of 13.6%, (excluding MD Bancshares, Coast Bancorp, BSC and BOP) 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. The above quantified evaluations exclude the impact of MD Bancshares, Coast Bancorp, BSC and BOP because those institutions had not been converted to risk management system as to net portfolio value and interest rate shock simulation analysis at December 31, 1999. The Company has performed a preliminary analysis of MD Bancshares', Coast Bancorp's and BSC's risk profile and has determined that their exposure to interest rate risk is equal to or lower than that of the Company as a whole. Year 2000 State of Readiness The Company's mission critical systems successfully responded to the century date change. Accordingly, the Company's core banking systems, including the application software for its deposit, loan and trust computer systems, as well as the electronic funds transfers system with the Federal Reserve, were fully operational and accurately processing customer information and transactions. The Company will continue to monitor its systems and those of its major vendors, suppliers and clients over the coming months. Recent Events On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former holding company of MDNB, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of MD Bancshares were converted into an aggregate of 2,790,998 shares of Greater Bay's stock (as restated for the 2-for- 1 stock split effective as of October 4, 2000). The stock was issued to MD Bancshares' shareholders in a tax-free exchange. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with MD Bancshares on a pooling-of-interests basis. As of December 31, 1999, MD Bancshares had $221.1 million in assets, $205.5 million in deposits and $12.8 million in shareholders' equity. MDNB has offices located in Danville, Pleasanton and Lafayette, California. A-24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On May 18, 2000, Greater Bay and Coast Bancorp, the former holding company of CCB, were merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Coast Bancorp were converted into an aggregate of approximately 6,140,000 shares of Greater Bay's stock (as restated for the 2-for-1 stock split effective as of October 4, 2000). The stock was issued to Coast Bancorp's shareholders in a tax-free exchange. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Coast Bancorp on a pooling- of-interests basis. As of December 31, 1999, Coast Bancorp had $370.0 million in assets, $300.6 million in deposits and $33.0 million in shareholders' equity. CCB's offices are located in Aptos, Capitola, Santa Cruz, Scotts Valley and Watsonville, California. On July 21, 2000, Greater Bay and BSC, was merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of BSC were converted into an aggregate of approximately 4,002,000 shares of Greater Bay's stock (as restated for the 2-for-1 stock split effective as of October 4, 2000). The stock was issued to BSC's shareholders in a tax-free exchange. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with BSC on a pooling-of-interests basis. As of December 31, 1999, BSC had $326.9 million in assets, $293.7 million in deposits and $31.4 million in shareholders' equity. BSC has offices in Milpitas, San Jose, Santa Clara and Sunnyvale, California. On October 13, 2000, BOP was merged with and into DKSS Corp., as a result of which BOP became a wholly owned subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of BOP were converted into an aggregate of approximately 1,667,000 shares of Greater Bay's stock (as restated for the 2-for-1 stock split effective as of October 4, 2000). The stock was issued to BOP's shareholders in a tax-free exchange. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with BOP on a pooling-of-interests basis. As of and for the year ended December 31, 1999, BOP had $8.6 million in net interest income, $2.3 million in net income, $194.7 million in assets, $162.2 million in deposits and $14.9 million in shareholder's equity. On August 8, 2000 Greater Bay and The Matsco Companies Inc. ("Matsco") signed a definite agreement for a stock purchase agreement between Greater Bay and Matsco, a financial services company headquartered in Emeryville, California which specializes in financial services for dental and veterinary markets. Greater Bay Bancorp will pay the Matsco shareholders $6.5 million in cash and up to an additional $6.0 million in an earn-out arrangement over a 5 year period. The acquisition is subject to regulatory approval and is expected to close in the fourth quarter of this year. Assuming the acquisition of Matsco had been completed at December 31, 1999, Greater Bay would have had proforma assets of $3.9 billion, deposits of $3.4 billion and $269.0 million of shareholders' equity. Recent Accounting Developments New Accounting Pronouncement -- In September 2000, the FASB issued Statement ---------------------------- 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The new Statement replaces Statement 125, issued in June 1996. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125's provisions without reconsideration. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This Statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Disclosures about securitizations and collateral accepted need not be reported for periods ending on or before December 15, 2000, for which financial statements are presented for comparative purposes. This Statement is to be applied prospectively with certain exceptions. Implementation of FASB Statement No. 140 is not expected to have a material effect on the Company's financial position or results of operations. Business Combinations -- In September 1999, the Financial Accounting Standards --------------------- Board ("FASB") issued an Exposure Draft of a proposed Statement, Business Combinations and Intangible Assets. The Board is currently redeliberating the provisions in that proposed Statement. The FASB is in the process of researching and discussing the various alternatives proposed by constituents about the best method of accounting for goodwill. The FASB expects to discuss the accounting for goodwill and other issues related to the purchase method at public meetings through November 2000. The FASB will redeliberate the related issue of whether to retain the pooling method, but not until it has reached a set of tentative decisions with respect to the accounting for goodwill. The FASB will not make a final decision about the Exposure Draft or consider whether to issue a final standard until it has addressed all of the substantive issues raised by constituents, including Members of Congress, and has considered the entire set of tentative decisions reached during its redeliberations. While the FASB currently estimates that it will be able to complete its redeliberations in January 2001, that estimate may not be met depending on the progress of its redeliberations. The FASB has no "deadline" for completing the project; however, they currently expect to issue a final Statement near the end of the first quarter of 2001. A portion of the Company's business strategy is to pursue acquisition opportunities so as to expand its market presence and maintain growth levels. A change in accounting for business combinations could have a negative impact on the Company's ability to realize those business strategies. A-25 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
As of December 31, ------------------------------------- (Dollars in thousands) 1999* 1998* ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 147,222 $ 138,484 Federal funds sold 219,600 112,020 Other short term securities 29,507 77,960 ------------------------------------- Cash and cash equivalents 396,329 328,464 Investment securities: Available for sale, at fair value 489,448 475,279 Held to maturity, at amortized cost (fair value 1999: $228,754 1998: $185,935) 236,468 183,688 Other securities 24,600 8,564 ------------------------------------- Investment securities 750,516 667,531 Total loans: Commercial 926,075 657,300 Term real estate - commercial 764,034 562,388 ------------------------------------- Total commercial 1,690,109 1,219,688 Real estate construction and land 479,163 301,641 Real estate other 140,852 114,553 Consumer and other 167,257 149,287 Deferred loan fees and discounts (12,911) (11,916) ------------------------------------- Total loans, net of deferred fees 2,464,470 1,773,253 Allowance for loan losses (48,047) (33,095) ------------------------------------- Total loans, net 2,416,423 1,740,158 Property, premises and equipment, net 37,597 33,156 Interest receivable and other assets 135,864 87,937 ------------------------------------- Total assets $ 3,736,729 $ 2,857,246 ===================================== LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits $ 3,262,888 $ 2,463,484 Other borrowings 117,052 109,423 Subordinated debt - 3,000 Other liabilities 54,894 31,642 ------------------------------------- Total liabilities 3,434,834 2,607,549 ------------------------------------- Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trusts holding solely junior subordinated debentures 49,000 49,000 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, no par value: 4,000,000 shares authorized; none issued - - Common stock, no par value**: 80,000,000 shares authorized; 39,635,048 and 37,342,950 shares issued and outstanding as of December 31, 1999 and 1998, respectively 148,611 121,646 Accumulated other comprehensive income (loss) (9,158) 674 Retained earnings 113,442 78,377 ------------------------------------- Total shareholders' equity 252,895 200,697 ------------------------------------- Total liabilities and shareholders' equity $ 3,736,729 $ 2,857,246 =====================================
* Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. See notes to supplemental consolidated financial statements. ** Restated to reflect 2 - for - 1 stock split declared for shareholders effective on October 4, 2000. A-26 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, -------------------------------------------------- (Dollars in thousands, except per share amounts) 1999* 1998* 1997* ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on loans $ 197,480 $ 155,543 $ 129,810 Interest on investment securities: Taxable 37,000 30,709 20,823 Tax - exempt 6,549 5,090 3,210 -------------------------------------------------- Total interest on investment securities 43,549 35,799 24,033 Other interest income 14,348 13,847 11,940 -------------------------------------------------- Total interest income 255,377 205,189 165,783 -------------------------------------------------- INTEREST EXPENSE Interest on deposits 84,842 66,758 52,653 Interest on long term borrowings 4,269 3,169 1,808 Interest on other borrowings 5,907 6,815 3,849 -------------------------------------------------- Total interest expense 95,018 76,742 58,310 -------------------------------------------------- Net interest income 160,359 128,447 107,473 Provision for loan losses 14,039 8,279 9,131 -------------------------------------------------- Net interest income after provision for loan losses 146,320 120,168 98,342 -------------------------------------------------- OTHER INCOME Service charges and other fees 7,931 6,906 6,642 Loan and international banking fees 4,275 2,752 2,654 Trust fees 2,990 2,473 2,049 ATM network revenue 2,682 2,440 2,607 Gain on sale of SBA loans 2,058 3,490 2,189 Gain (loss) on investments, net 87 473 (87) Warrant income, net 14,508 945 1,162 Other income 8,448 2,462 2,125 -------------------------------------------------- Total 42,979 21,941 19,341 -------------------------------------------------- OPERATING EXPENSES Compensation and benefits 56,488 47,617 41,923 Occupancy and equipment 17,545 13,386 11,989 Contribution to the GBB Foundation and related expenses, net 12,160 1,341 - Merger and other related nonrecurring costs 10,331 2,661 3,333 Recovery of legal settlement - - (1,700) Other expenses 26,880 25,202 22,352 -------------------------------------------------- Total operating expenses 123,404 90,207 77,897 -------------------------------------------------- Net income before provision for income taxes and extraordinary items 65,895 51,902 39,786 Provision for income taxes 21,623 18,118 14,592 -------------------------------------------------- Net income before extraordinary items 44,272 33,784 25,194 Extraordinary items (88) - - -------------------------------------------------- Net income $ 44,184 $ 33,784 $ 25,194 ================================================== Net income per share - basic** $ 1.16 $ 0.91 $ 0.70 ================================================== Net income per share - diluted** $ 1.10 $ 0.85 $ 0.66 ==================================================
* Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split effective on April 30, 1998 and 2 - for - 1 stock split effective on October 4, 2000. See notes to supplemental consolidated financial statements. A-27 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, ------------------------------------------------ (Dollars in thousands) 1999* 1998* 1997* ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 44,184 $ 33,784 $ 25,195 ------------------------------------------------ Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during period (net of taxes of $(8,364), $282, and $796 for the years ended December 31, 1999, 1998 and 1997, respectively) (12,064) (152) 1,240 Less: reclassification adjustment for gains (losses) included in net income (net of taxes of $36, $195 and $(36) for the years ended December 31, 1999, 1998 and 1997, respectively) 51 278 (51) ------------------------------------------------ Net change (12,013) (126) 1,189 ------------------------------------------------ Cash flow hedge: Cumulative transition effect of adopting SFAS No. 133 (net of taxes of $(744)) as of October 1, 1998 (1,063) Change in market value of hedge during the period (net of taxes of $1,092 and $294 for the years ended December 31, 1999 and 1998, respectively) 2,325 418 Less: reclassification adjustment for swap settlements in net income (net of taxes of $(60) and $(23) for the years ended December 31, 1999 and 1998, respectively) (144) (32) - ------------------------------------------------ Net change 2,181 (677) - ------------------------------------------------ Other comprehensive income (loss) (9,832) (551) 1,189 ------------------------------------------------ Comprehensive income $ 34,352 $ 33,233 $ 26,384 ================================================
* Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. See notes to supplemental consolidated financial statements. A-28 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997 Common Stock Accumulated Other Total (Dollars in thousands, --------------------------------- Comprehensive Retained Shareholders' except per share amounts) Shares** Amount Income (Loss) Earnings Equity ---------------------------------------------------------------------------------------------------------------------------------- Greater Bay Bancorp, prior to pooling 12,955,548 $ 34,884 $ 71 $ 9,727 $ 44,682 Shares issued to Peninsula Bank of Commerce shareholders 2,590,432 7,141 - - 7,141 Peninsula Bank of Commerce retained earnings prior to pooling - - (53) 6,186 6,133 Shares issued to Pacific Rim Bancorporation shareholders 1,901,496 8,000 - - 8,000 Pacific Rim Bancorporation retained earnings prior to pooling - - (108) 879 771 Shares issued to Pacific Business Funding Corporation shareholders 596,000 51 - - 51 Pacific Business Funding Corporation retained earnings prior to pooling - - - 59 59 Shares issued to Bay Area Bancorp shareholders 2,328,854 4,143 - - 4,143 Bay Area Bancorp retained earnings prior to pooling - - (5) 5,143 5,138 Shares issued to Bay Commercial Services shareholders 1,471,446 3,662 - - 3,662 Bay Commercial Services retained earnings prior to pooling - - (15) 5,771 5,756 Shares issued to Mt.Diablo Bancshares shareholders 1,715,742 5,939 - - 5,939 Mt. Diablo Bancshares retained earnings prior to pooling - - 5 (403) (398) Shares issued to Coast Bancorp shareholders 5,601,927 11,041 - - 11,041 Coast Bancorp retained earnings prior to pooling - - 130 12,022 12,152 Shares issued to Bank of Santa Clara shareholders 3,324,912 10,330 - - 10,330 Bank of Santa Clara retained earnings prior to pooling - - - 11,749 11,749 Shares issued to Bank of Petaluma shareholders 1,379,299 6,532 196 - 6,728 Bank of Petaluma retained earnings prior to pooling - - - 2,648 2,648 ------------------------------------------------------------------------------------------- Balance, December 31, 1996, restated to reflect pooling 33,865,656 91,723 221 53,781 145,725 Net income - - - 25,194 25,194 Other comprehensive income, net of taxes - - 1,004 - 1,004 Stock offering by Mt. Diablo Bancshares 571,960 2,555 - - 2,555 Stock options exercised, including related tax benefit 1,051,557 3,732 - 59 3,571 Stock issued in Employee Stock Purchase Plan 60,664 347 - - 347 401(k) employee stock purchase 72,304 531 - - 531 Stock repurchase by Bay Area Bancshares and Coast Bancorp (15,223) (119) - (100) (219) Stock dividend by Bank of Santa Clara and Bank of Petaluma 279,284 3,701 - (3,707) (6) Pacific Business Funding Corporation distribution - - - (208) (208) Cash dividend $0.20 per share*** - - - (7,031) (7,031) ------------------------------------------------------------------------------------------- Balance, December 31, 1997* 35,886,162 102,470 1,225 67,770 171,465 Net income - - - 33,784 33,784 Other comprehensive loss, net of taxes - - (551) - (551) Stock options exercised, including related tax benefit 715,153 5,169 - (29) 5,140 Stock issued in Employee Stock Purchase Plan 59,340 656 - - 656 401(k) employee stock purchase 72,966 1,060 - - 1,060 Stock repurchase by Bay Area Bancshares, Bay Commercial Services and Coast Bancorp (169,968) (604) - (2,190) (2,794) Pacific Business Funding Corporation distribution - - - (1,163) (1,163) Stock dividend by Coast Bancorp and Bank of Santa Clara 773,975 12,822 0 (12,822) _ Stock issued in Dividend Reinvestment Plan 5,322 73 - - 73 Cash dividend $0.19 per share*** - - - (6,973) (6,973) ------------------------------------------------------------------------------------------- Balance, December 31, 1998* 37,342,950 121,646 674 78,377 200,697 Net income - - - 44,184 44,184 Other comprehensive loss, net of taxes - - (9,832) - (9,832) Stock options exercised, including related tax benefit 1,036,118 5,385 - (59) 5,326 Stock issued in Employee Stock Purchase Plan 83,302 1,031 - - 1,031 401(k) employee stock purchase 76,010 1,205 - - 1,205 Stock issued in Dividend Reinvestment Plan 26,668 383 - - 383 Pacific Business Funding Corporation distribution - - - (40) (40) Stock issued through private placement 1,070,000 18,961 - - 18,961 Cash dividend $0.24 per share*** - - - (9,020) (9,020) ------------------------------------------------------------------------------------------- Balance, December 31, 1999* 39,635,048 $ 148,611 $ (9,158) $ 113,442 $ 252,895 ===========================================================================================
* Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split effective on April 30, 1998 and 2 - for - 1 stock split declared effective on October 4, 2000. *** Excluding dividends paid by Greater Bays subsidiaries prior to the completion of their mergers with Greater Bay, Greater Bay paid dividends of $0.24, $0.19 and $0.15 per share for the years ended December 31, 1999, 1998 and 1997, respectively. A-29 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------------------------------- (Dollars in thousands) 1999* 1998* 1997* ------------------------------------------------------------------------------------------------------------------------ Cash flows - operating activities Net income $ 44,184 $ 33,784 $ 25,194 Reconcilement of net income to net cash from operations: Provision for loan losses 16,784 8,462 10,482 Depreciation and amortization 6,726 4,286 3,680 Deferred income taxes (7,022) (2,993) (4,478) (Gain) loss on sale of investments, net (87) (473) 87 Gain on sale of building (535) - - Proceeds from loan sales 74,420 82,870 48,256 Origination of loans held for sale (74,514) (84,432) (52,827) Changes in: Accrued interest receivable and other assets (31,203) (13,694) (7,538) Accrued interest payable and other liabilities 25,452 8,378 5,463 Deferred loan fees and discounts, net 4,505 2,551 2,224 --------------- ---------------- ---------------- Operating cash flows, net 58,710 38,739 30,543 --------------- ---------------- ---------------- Cash flows - investing activities Maturities and partial paydowns on investment securities: Held to maturity 96,842 43,260 43,260 Available for sale 96,753 107,855 105,137 Purchase of investment securities: Held to maturity (126,506) (37,232) (26,910) Available for sale (201,272) (277,145) (280,421) Other securities (13,664) (207) (607) Proceeds from sale of available for sale securities 53,471 261,812 41,493 Loans, net (702,985) (741,748) (271,644) Purchase of property, premises and equipment (8,687) (10,000) (9,978) Sale of banking building 2,637 - - Investment in other real estate owned - (500) (500) Purchase of insurance policies (9,206) - - --------------- ---------------- ---------------- Investing cash flows, net (812,617) (626,905) (400,170) --------------- ---------------- ---------------- Cash flows - financing activities Net change in deposits 799,403 528,078 365,318 Net change in other borrowings - short term 6,389 (41,951) 25,547 Proceeds from other borrowings - long term 2,015 70,000 3,025 Principal repayment - long term borrowings (3,775) (2,265) (865) Proceeds from company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures - 30,000 20,000 Proceeds from sale of common stock 26,759 5,305 6,955 Repurchase of common stock - (2,651) (130) Cash dividends (9,019) (6,973) (7,037) --------------- ---------------- ---------------- Financing cash flows, net 821,772 579,543 412,813 --------------- ---------------- ---------------- Net change in cash and cash equivalents 67,865 (8,623) 43,186 Cash and cash equivalents at beginning of period 328,464 337,087 293,901 --------------- ---------------- ---------------- Cash and cash equivalents at end of period $ 396,329 $ 328,464 $ 337,087 =============== ================ ================ Cash flows - supplemental disclosures Cash paid during the period for: Interest $ 100,944 $ 69,174 $ 57,453 =============== ================ ================ Income taxes $ 19,146 $ 20,194 $ 19,706 =============== ================ ================ Non-cash transactions: Additions to other real estate owned $ - $ 450 $ 1,723 =============== ================ ================ Transfer of appreciated securities to Greater Bay Bancorp Foundation $ 560 $ 1,341 $ - =============== ================ ================
* Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. See notes to supplemental consolidated financial statements. A-30 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1999, 1998 and 1997 NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the "Company", on a consolidated basis) is a bank holding company operating Bank of Petaluma ("BOP"), Bank of Santa Clara ("BSC"), Bay Area Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast Commercial Bank ("CCB"), Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB"), Mt. Diablo National Bank ("MDNB") and Peninsula Bank of Commerce ("PBC"). The Company also owns GBB Capital I and GBB Capital II, which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities ("TPS"). Greater Bay also includes the operating divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and the Venture Banking Group. The Company provides a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout Silicon Valley, the San Francisco Peninsula and the East Bay Region, with 37 offices located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. All of the Company's mergers were accounted for as a pooling-of-interests and, accordingly, all of the financial information for the Company for the periods prior to the mergers had been restated as if the mergers had occurred at the beginning of the earliest reporting period presented. Consolidation and Basis of Presentation The consolidated financial statements include the accounts of Greater Bay and its wholly owned subsidiaries, BOP, BSC, BAB, BBC, CCB, CNB, Golden Gate, MDNB, MPB, PBC, GBB Capital I and GBB Capital II and its operating divisions. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 1999 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. A - 31 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal Funds sold and agency securities with original maturities of less than ninety days. Generally, Federal Funds are sold for one-day periods. As discussed in Note 7, PBC holds $111.1 million in one demand deposit account whose funds are comprised of proceeds from a lawsuit settlement. Due to the uncertainty of the time this special deposit (the "Special Deposit") will remain with PBC, management has invested a significant portion of the proceeds in agency securities with maturities of less than 90 days. These securities have been classified as cash and equivalents. BOP, BSC, BAB, BBC, CCB, CNB, Golden Gate, MDNB, MPB and PBC are required by the Federal Reserve System to maintain noninterest-earning cash reserves against certain of their deposit accounts. At December 31, 1999, the required combined reserves totaled approximately $4.5 million. Investment Securities The Company classifies its investment securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investment securities classified as held to maturity are reported at amortized cost; available for sale securities are reported at fair value with net unrealized gains and losses reported (net of taxes) as a component of shareholders' equity. The Company does not have any trading securities. A decline in the fair value of any available for sale or held to maturity security below cost that is deemed other than temporary, results in a charge to earnings and the corresponding establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned. Realized gains and losses for securities classified as available for sale and held to maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Required investments in Federal Reserve Bank and Federal Home Loan Bank stocks for the Banks are classified as other securities and are recorded at cost. A - 32 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Loans Loans held for investment are carried at amortized cost. The Company's loan portfolio consists primarily of commercial and real estate loans generally collateralized by first and second deeds of trust on real estate as well as business assets and personal property. Interest income is accrued on the outstanding loan balances using the simple interest method. Loans are generally placed on nonaccrual status when the borrowers are past due 90 days and when full payment of principal or interest is not expected. At the time a loan is placed on nonaccrual status, any interest income previously accrued but not collected is generally reversed and amortization of deferred loan fees is discontinued. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. The Company charges loan origination and commitment fees. Net loan origination fees and costs are deferred and amortized to interest income over the life of the loan, using the effective interest method. Loan commitment fees are amortized to interest income over the commitment period. When a loan is sold, unamortized fees and capitalized direct costs are recognized in the consolidated statements of operations. Other loan fees and charges representing service costs for the repayment of loans, for delinquent payments or for miscellaneous loan services are recognized when earned. Sale and Servicing of Small Business Administration ("SBA") Loans The Company originates loans to customers under SBA programs that generally provide for SBA guarantees of 70% to 90% of each loan. The Company generally sells the guaranteed portion of the majority of the loans to an investor and retains the unguaranteed portion and servicing rights in its own portfolio. Funding for the SBA programs depend on annual appropriations by the U.S. Congress. Gains on these sales are earned through the sale of the guaranteed portion of the loan for an amount in excess of the adjusted carrying value of the portion of the loan sold. The Company allocates the carrying value of such loans between the portion sold, the portion retained and a value assigned to the right to service the loan. The difference between the adjusted carrying value of the portion retained and the face amount of the portion retained is amortized to interest income over the life of the related loan using a method which approximates the interest method. Allowance for Loan Losses The Company adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), on January 1, 1995. Under these standards, a loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Under these standards, any allowance on impaired loans is generally based on one of three methods. It requires that impaired loans be measured at either, 1) the present value of expected cash flows at the loan's effective interest rate, 2) the loan's observable market price, or 3) the fair value of the collateral of the loan. In general, these statements are not applicable to large groups of smaller-balance loans that are collectively evaluated for impairment such as credit cards, residential mortgage, consumer installment loans and certain small business loans. Income recognition on impaired loans conforms to the method the Company uses for income recognition on nonaccrual loans. A - 33 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The allowance for loan losses is maintained at a level deemed appropriate by management to adequately provide for known losses in the loan portfolio. The allowance is based upon a number of factors, including prevailing and anticipated economic trends, industry experience, estimated collateral values, management's assessment of credit risk inherent in the portfolio, delinquency trends, historical loss experience, specific problem loans and other relevant factors. Additions to the allowance, in the form of provisions, are reflected in current operating results, while charge-offs to the allowance are made when a loss is determined to have occurred. Because the allowance for loan losses is based on estimates, ultimate losses may vary from the current estimates. Other Real Estate Owned Other real estate owned ("OREO") consists of properties acquired through foreclosure and is stated at the lower of carrying value or fair value less estimated costs to sell. Development and improvement costs relating to the OREO are capitalized. Estimated losses that result from the ongoing periodic valuation of these properties are charged to current earnings with a provision for losses on foreclosed property in the period in which they are identified. The resulting allowance for OREO losses is decreased when the property is sold. Operating expenses of such properties, net of related income, are included in other expenses. Gains and losses on the disposition of OREO are included in other income. Property, Premises and Equipment Property, premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, which is determined by asset classification, as follows: Buildings 40 years Building improvements 10 years Furniture and fixtures 7 years Automobiles 5 years Computer equipment 2 - 5 years Other equipment 2 - 7 years Amortization of leasehold improvements is computed on a straight-line basis over the shorter of the lease term or the estimated useful lives of the asset, which is generally 10 years. Income Taxes Deferred incomes taxes reflect the estimated future tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. A - 34 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Derivatives and Hedging Activities The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), effective October 1, 1998. In accordance with the transition provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative-effect-type adjustment of $1.1 million in accumulated other comprehensive income to recognize at fair value all derivatives that are designated as cash-flow hedging instruments. There were no net gains or losses on derivatives that had been previously deferred or gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items. All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge). Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash-flow hedges to specific liabilities on the balance sheet. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; or (3) management determines that designation of the derivative as a hedge instrument is no longer appropriate. In these situations where hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current-period earnings. All gains or losses that were accumulated in other comprehensive income will be recognized immediately in earnings upon the discontinuance of hedge accounting. A - 35 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement requires companies to classify items of other comprehensive income by their nature in the financial statements and display the accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. The changes to the balances of accumulated other comprehensive income are as follows: Accumulated Other Unrealized Gains Cash Flow Comprehensive (Dollars in thousands) on Securities Hedges Income (Loss) -------------------------------------------------------------------------------- Balance - December 31, 1997 $ 1,225 $ - $ 1,225 Other comprehensive income 1998 126 (677) (551) -------------------------------------------------------------------------------- Balance - December 31, 1998 1,351 (677) 674 Other comprehensive income 1999 (12,013) 2,181 (9,832) -------------------------------------------------------------------------------- Balance - December 31, 1999 $ (10,662) $ 1,504 $ (9,158) ================================================================================ 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. NOTE 2-MERGER Completed Mergers (as adjusted to reflect the 2-for-1 stock splits effective on April 30, 1998 and October 4, 2000) On October 13, 2000, BOP merged with and into DKSS Corp., as a result of which, BOP became a wholly owned subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of BOP were converted into an aggregate of approximately 1,667,000 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with BOP on a pooling-of- interests basis. On July 21, 2000, BSC merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of BSC were converted into an aggregate of 4,002,000 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with BSC on a pooling-of-interests basis. On May 18, 2000, Coast Bancorp, the holding company of CCB, was merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Coast Bancorp were converted into an aggregate of approximately 6,140,000 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Coast Bancorp on a pooling-of-interests basis. A - 36 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 On January 31, 2000, Mt. Diablo Bancshares ("MD Bancshares"), the former holding company of Mt. Diablo National Bank ("MDNB"), merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of MD Bancshares were converted into an aggregate of 2,790,998 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with MD Bancshares on a pooling-of-interests basis. On October 15, 1999, Bay Commercial Services ("BCS"), the parent of Bay Bank of Commerce, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of BCS were converted into an aggregate of 1,814,480 shares of Greater Bay's stock. The stock was issued to former BCS shareholders, in a tax-free exchange accounted for as a pooling-of-interests. On May 21, 1999, Bay Area Bancshares ("BA Bancshares"), the former holding company of Bay Area Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of BAB were converted into an aggregate of 2,798,642 shares of Greater Bay's stock. The stock was issued to former BA Bancshares shareholders, in a tax-free exchange accounted for as a pooling-of-interests. On August 31, 1998, Pacific Business Funding Corporation ("PBFC"), an asset-based specialty finance company, merged with a subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of PBFC were converted into an aggregate of 596,000 shares of Greater Bay's stock. The stock was issued to former PBFC shareholders, in a tax-free exchange accounted for as a pooling-of-interests. On May 8, 1998, Pacific Rim Bancorporation ("PRB"), the former holding company of Golden Gate, merged with and into a subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of PRB were converted into an aggregate of 1,901,496 shares of Greater Bay's stock. The stock was issued to former PRB's sole shareholder in a tax-free exchange accounted for as a pooling-of-interests. On December 23, 1997, PBC merged with a subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of PBC were converted into an aggregate of 2,656,000 shares of Greater Bay's stock. The stock was issued to former PBC shareholders, in a tax-free exchange accounted for as a pooling-of-interests. Pending Mergers (unaudited) On August 8, 2000, Greater Bay and The Matsco Companies Inc. ("Matsco") signed a definitive agreement for a stock purchase agreement between Greater Bay and Matsco, a financial services company headquartered in Emeryville, California which specializes in financial services for the dental and veterinary markets. Greater Bay Bancorp will pay the Matsco shareholders $6.5 million in cash and up to an additional $6.0 million in an earn-out arrangement over a 5 year period. The acquisition is subject to regulatory approval and is expected to close in the fourth quarter of this year. A - 37 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The following table sets forth the separate results of operations for Greater Bay, BA Bancshares, BCS, PBFC, PRB, MD Bancshares, Coast Bancorp, BSC and BOP for the periods indicated: Year ended December 31, Net Interest Income Net Income 1999 (Dollars in thousands) Greater Bay $103,732 $ 27,711 MD Bancshares 10,009 2,827 Coast Bancorp 20,028 6,939 BSC 17,962 4,403 BOP 8,628 2,304 -------- -------- Combined $160,359 $ 44,184 ======== ======== 1998 Greater Bay $ 65,448 $ 16,578 BA Bancshares 8,170 2,365 BCS 6,107 1,215 -------- -------- Subtotal 79,725 20,158 MD Bancshares 7,363 1,396 Coast Bancorp 17,363 6,161 BSC 16,189 3,954 BOP 7,807 2,115 -------- -------- Combined $128,447 $ 33,784 ======== ======== 1997 Greater Bay $ 47,776 $ 10,013 PRB 4,750 996 PBFC 1,942 610 BA Bancshares 6,781 1,805 BCS 5,389 1,062 -------- -------- Subtotal 66,638 14,486 MD Bancshares 4,295 714 Coast Bancorp 15,183 5,155 BSC 14,813 3,364 BOP 6,544 1,475 -------- -------- Combined $107,473 $ 25,194 ======== ======== Assuming the acquisition of Matsco had been completed at December 31, 1999, Greater Bay would have had 1999 proforma net interest income of $166.7 million and proforma net income of $44.2 million. A - 38 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 In all mergers, certain reclassifications were made to conform to the Companies' financial presentation. The results of operations previously reported by the separate enterprises for the periods before the merger was consummated and that are included in the current combined amounts presented in the accompanying consolidated financial statements are summarized below.
Bank of Petaluma Bank of Santa Clara Coast Bancorp Twelve months ended Twelve months ended Twelve months ended (Dollars in thousands) December 31, 1999 December 31,1999 December 31,1999 ---------------------------- -------------------------------------------------------------------------------------------------- Net Interest Income: Greater Bay Bancorp $ 151,731 $ 133,769 $ 113,741 Acquired Entity 8,628 17,962 20,028 ----------------------- ---------------------- ----------------------- Combined $ 160,359 $ 151,731 $ 133,769 ======================= ====================== ======================= Net Income: Greater Bay Bancorp $ 41,880 $ 37,477 $ 30,538 Acquired Entity 2,304 4,403 6,939 ----------------------- ---------------------- ----------------------- Combined $ 44,184 $ 41,880 $ 37,477 ======================= ====================== =======================
MD Bancshares BCS BA Bancshares Twelve months ended Nine months ended Three months ended December 31,1999 September 30, 1999 March 31, 1999 ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income: Greater Bay Bancorp $ 103,732 $ 68,498 $ 18,360 Acquired Entity 10,009 2,007 2,180 ----------------------- ---------------------- ----------------------- Combined $ 113,741 $ 70,505 $ 20,540 ======================= ====================== ======================= Net Income: Greater Bay Bancorp $ 27,711 $ 17,033 $ 5,058 Acquired Entity 2,827 486 644 ----------------------- ---------------------- ----------------------- Combined $ 30,538 $ 17,519 $ 5,702 ======================= ====================== =======================
PBFC PRB PBC Six months ended Three months ended Nine months ended June 30, 1998 March 31, 1998 September 30, 1997 ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income: Greater Bay Bancorp $ 30,077 $ 13,366 $ 27,922 Acquired Entity 1,154 1,285 6,851 ----------------------- ---------------------- ----------------------- Combined $ 31,231 $ 14,651 $ 34,773 ======================= ====================== ======================= Net Income: Greater Bay Bancorp $ 6,628 $ 3,646 $ 6,097 Acquired Entity 344 60 2,573 ----------------------- ---------------------- ----------------------- Combined $ 6,972 $ 3,706 $ 8,670 ======================= ====================== =======================
There were no significant transactions between the Company and any of the acquired entities prior to the mergers. All intercompany transactions have been eliminated. A - 39 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 3-INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities is summarized below:
Gross Gross As of December 31, 1999 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 19,240 $ - $ (253) $ 18,987 U.S. agency notes 58,540 10 (1,808) 56,742 Mortgage-backed securities 249,038 95 (8,130) 241,003 Tax-exempt securities 65,646 85 (3,947) 61,784 Taxable municipal securities 3,754 1 (122) 3,633 Corporate securities 119,481 - (12,182) 107,299 -------------------------------------------------------------- Total securities available for sale 515,699 191 (26,442) 489,448 -------------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 1,498 - - 1,498 U.S. agency notes 58,489 9 (1,750) 56,748 Mortgage-backed securities 61,004 28 (2,048) 58,984 Tax-exempt securities 77,869 438 (3,173) 75,134 Corporate securities 37,608 15 (1,233) 36,390 -------------------------------------------------------------- Total securities held to maturity 236,468 490 (8,204) 228,754 -------------------------------------------------------------- Other securities 16,457 8,143 - 24,600 -------------------------------------------------------------- Total investment securities $ 768,624 $ 8,824 $ (34,646) $ 742,802 ==============================================================
Gross Gross As of December 31, 1998 Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 29,161 $ 139 $ - $ 29,300 U.S. agency notes 79,350 238 (76) 79,512 Mortgage-backed securities 226,257 1,799 (157) 227,899 Tax-exempt securities 57,809 1,219 - 59,028 Taxable municipal securities 6,434 187 (13) 6,608 Corporate securities 73,980 116 (1,164) 72,932 -------------------------------------------------------------- Total securities available for sale 472,991 3,698 (1,410) 475,279 -------------------------------------------------------------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 3,762 28 (2) 3,788 U.S. agency notes 49,519 166 (92) 49,593 Mortgage-backed securities 40,055 189 (206) 40,038 Tax-exempt securities 62,805 1,953 (15) 64,743 Corporate securities 27,547 260 (34) 27,773 -------------------------------------------------------------- Total securities held to maturity 183,688 2,596 (349) 185,935 -------------------------------------------------------------- Other securities 8,564 - - 8,564 -------------------------------------------------------------- Total investment securities $ 665,243 $ 6,294 $ (1,760) $ 669,778 ==============================================================
A - 40 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The following table shows amortized cost and estimated fair value of the Company's investment securities by year of maturity as of December 31, 1999.
2001 2005 Through Through 2010 and (Dollars in thousands) 2000 2004 2009 Thereafter Total --------------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 5,125 $ 14,115 $ - $ - $ 19,240 U.S. agency notes (1) 1,756 43,503 13,281 - 58,540 Mortgage-backed securities (2) 1,268 6,882 7,796 233,092 249,038 Tax-exempt securities 891 7,775 11,113 45,867 65,646 Taxable municipal securities - 3,495 259 - 3,754 Corporate securities 996 3,650 1,012 113,823 119,481 ------------------------------------------------------------------------------ Total securities available for sale 10,036 79,420 33,461 392,782 515,699 ------------------------------------------------------------------------------ Fair value $ 9,989 $ 78,338 $ 32,421 $ 368,698 $ 489,448 ------------------------------------------------------------------------------ HELD TO MATURITY SECURITIES: U.S. Treasury obligations 1,498 - - - 1,498 U.S. agency notes (1) 3,009 40,992 14,488 - 58,489 Mortgage-backed securities (2) 75 2,082 9,082 49,765 61,004 Tax-exempt securities 3,150 12,226 19,443 43,050 77,869 Corporate securities 5,484 17,305 11,769 3,050 37,608 ------------------------------------------------------------------------------ Total securities held to maturity 13,216 72,605 54,782 95,865 236,468 ------------------------------------------------------------------------------ Fair value 13,228 71,337 53,339 90,850 228,754 ------------------------------------------------------------------------------ COMBINED INVESTMENT SECURITIES PORTFOLIO: Total investment securities $ 23,252 $ 152,025 $ 88,243 $ 488,647 $ 752,167 ============================================================================== Total fair value $ 23,217 $ 149,675 $ 85,760 $ 459,548 $ 718,200 ============================================================================== Weighted average yield-total portfolio 5.34% 5.78% 6.37% 7.18% 6.74%
(1) Certain notes issued by U.S. agencies may be called, without penalty, at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates. (2) Mortgage-backed securities are shown at contractual maturity; however, the average life of these mortgage-backed securities may differ due to principal prepayments. Investment securities with a carrying value of $339.4 million and $212.4 million were pledged to secure deposits, borrowings and for other purposes as required by law or contract at December 31, 1999 and 1998, respectively. Other securities includes unsold shares received through the exercise of warrant received from clients, equity securities received in settlement of loans and, investments in the FRB and the FHLB required in order to maintain membership and support activity levels. A - 41 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Proceeds and realized losses and gains on sales of investment securities for the years ended December 31, 1999, 1998 and 1997 are presented below: (Dollars in thousands) 1999 1998 1997 ------------------------------------------------------------------------------- Proceeds from sale of available for sale securities (1) $ 53,471 $ 261,812 $ 41,493 Available for sale securities-gains (losses) (2) $ 87 $ 473 $ (87) (1) Proceeds from the sale of available for sale securities excludes $15.3 million related to the sale of equity securities classified as available for sale which were acquired through the execution of a warrant received from clients. (2) Warrant income includes additional gains of $21.2 million related to equity securities classified as available for sale which were acquired through the execution of warrants received from clients. NOTE 4--LOANS AND ALLOWANCE FOR LOAN LOSSES The following summarizes the activity in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997: (Dollars in thousands) 1999 1998 1997 --------------------------------------------------------------------------- Balance, January 1 $ 33,095 $ 26,606 $ 18,599 Provision for loan losses (1) 16,784 8,462 10,482 Loan charge-offs (3,393) (2,610) (2,866) Recoveries 1,561 637 391 ------------------------------------- Balance, December 31 $ 48,047 $ 33,095 $ 26,606 ===================================== (1) Includes $2.7 million and $183,000, and $1.4 million of charges in 1999, 1998 and 1997, respectively, to conform the practices of acquired entities to the Company's reserve methodologies, which are included in mergers and related nonrecurring costs. A - 42 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The following table sets forth nonperforming loans as of December 31, 1999, 1998 and 1997. Nonperforming loans are defined as loans which are on nonaccrual status, loans which have been restructured, and loans which are 90 days past due but are still accruing interest. Interest income foregone on nonperforming loans totaled $535,000, $254,000, and $655,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Interest income recognized on the nonperforming loans approximated $537,000, $407,000, and $247,000 for the years ended December 31, 1999, 1998 and 1997, respectively. (Dollars in thousands) 1999 1998 1997 ----------------------------------------------------------------------------- Nonaccrual loans $ 5,744 $ 4,011 $ 4,437 Accruing loans past due 90 days or more 139 244 273 Restructured loans 807 796 1,533 ------------------------------------- Total nonperforming loans $ 6,690 $ 5,051 $ 6,243 ===================================== At December 31, 1999 and 1998, the recorded investment in loans, for which impairment has been recognized in accordance with SFAS No. 114 and No. 118, was approximately $8.0 million and $5.1 million, respectively, with corresponding valuation allowances of $1.2 million and $1.0 million respectively. For the years ended December 31, 1999 and 1998, the average recorded investment in impaired loans was approximately $2.3 million and $4.2 million, respectively. The Company did not recognize interest income on impaired loans during the twelve months ended December 31, 1999, 1998 and 1997. The Company had $807,000 and $796,000 of restructured loans as of December 31, 1999 and 1998, respectively. There were no principal reduction concessions allowed on restructured loans during 1999 and 1998. Interest income from restructured loans totaled $45,000, $16,000 and $82,000 for the years ended December 31, 1999, 1998 and 1997. Foregone interest income, which totaled $0, $11,000 and $10,000 for the years ended December 31, 1999, 1998 and 1997 would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 5--OTHER REAL ESTATE OWNED At December 31, 1999 and 1998, other real estate owned ("OREO") consisted of properties acquired through foreclosure with a carrying value of $271,000 and $966,000, respectively. These balances are included in interest receivable and other assets in the accompanying consolidated balance sheets. There was no allowance for estimated losses. The following summarizes OREO operations, which are included in operating expenses, for the years ended December 31, 1999, 1998 and 1997. (Dollars in thousands) 1999 1998 1997 -------------------------------------------------------------------------------- Real estate operations, net $ 50 $ 24 $ 281 (Gain) loss on sale of other real estate owned (37) 133 (124) Provision for estimated losses - - 54 --------------------------- Net loss from other real estate operations $ 13 $ 157 $ 211 =========================== NOTE 6--PROPERTY, PREMISES AND EQUIPMENT Property, premises and equipment at December 31, 1999 and 1998 are composed of the following: (Dollars in thousands) 1999 1998 ----------------------------------------------------------------------- Land $ 3,508 $ 4,055 Buildings and premises 12,047 12,088 Furniture and equipment 33,353 29,998 Leasehold improvements 15,751 11,147 Automobiles 740 732 --------------------------- Total 65,399 58,020 Accumulated depreciation and amortization (27,802) (24,864) --------------------------- Premises and equipment, net $ 37,597 $ 33,156 =========================== Depreciation and amortization amounted to $6.1 million, $4.4 million and $4.1 million for the years ended December 31, 1999, 1998 and 1997, respectively, and have been included in occupancy and equipment expense in the accompanying consolidated statements of operations. During 1999, the Company sold bank premises with a carrying value of $2,637,000 for $4,978,000 in a sale-lease back transaction. The Company recognized a pre-tax gain of $535,000 on the transaction. Gains of $1,806,000 have been deferred and will be recognized over the 10 year and 5 year terms of the Company's leases. A-44 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 7--DEPOSITS Deposits as of December 31, 1999 and 1998 are as follows: (Dollars in thousands) 1999 1998 ----------------------------------------------------------------------------- Demand, noninterest-bearing $ 727,613 $ 573,552 MMDA, NOW and Savings 1,838,868 1,388,260 Time certificates, $100,000 and over 534,662 324,517 Other time certificates 161,745 177,155 ---------------------------------- Total deposits $ 3,262,888 $ 2,463,484 ================================== The following table sets forth the maturity distribution of time certificates of deposit at December 31, 1999.
December 31, 1999 ------------------------------------------------------------------------------------------ Seven to One to More Three months Four to six twelve three than (Dollars in thousands) or less months months years three years Total --------------------------------------------------------------------------------------------------------------------------------- Time deposits, $100,000 and over $ 403,016 $ 77,646 $ 44,446 $ 8,904 $ 650 $ 534,691 Other time deposits 70,895 43,078 33,476 13,639 657 161,716 ------------------------------------------------------------------------------------------ Total $ 473,911 $ 120,724 $ 77,922 $ 22,543 $ 1,307 $ 696,407 ==========================================================================================
At December 31, 1999 and 1998, the Company held $111.1 million and $89.6 million, respectively from a single depositor on which the Company earned a spread of 3.1% and 2.25%, respectively. Due to the uncertainty of the time the deposit will remain outstanding, management has invested a significant portion in agency securities with maturities of less than 90 days. NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES GBB Capital I and GBB Capital II (the "Trusts") are Delaware business trusts wholly-owned by Greater Bay and were formed for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures ("TPS"). The TPS are individually described below. Interest on the TPS are payable quarterly and is deferrable, at the option of the Company, for up to five years. Following the issuance of each TPS, the Trusts used the proceeds from the TPS offerings to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (the "Debentures") of Greater Bay. The Debentures bear the same terms and interest rates as the related TPS. The Debentures are the sole assets of the Trusts and are eliminated, along with the related income statement effects, in the consolidated financial statements. Greater Bay has fully and unconditionally guaranteed all of the obligations of the Trusts. Under applicable regulatory guidelines, a portion of the TPS will qualify as Tier I capital, and the remaining portion will qualify as Tier II capital. A-45 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 On March 30, 1997, GBB Capital I completed a public offering of 800,000 shares of 9.75% Cumulative Trust Preferred Securities ("TPS I") in an aggregate amount of $20 million. The TPS I accrue interest at an annual rate of 9.75% on the $20 million liquidation amount of $25 per share of TPS I. The TPS I are mandatorily redeemable, in whole or in part, upon repayment of the Debentures at their stated maturity of April 1, 2027 or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company, on or after April 1, 2002, in whole at any time or in part from time to time. On August 12, 1998, GBB Capital II completed an offering of 30,000 shares of Floating Rate Trust Preferred Securities, Series A ("the Series A Securities") in an aggregate amount of $29 million. The Series A Securities issued in the offering were sold in a private transaction pursuant to an applicable exemption from registration under the Securities Act. In November 1998, the Company, through GBB Capital II, completed an offer to exchange the Series A Securities for a like amount of its registered Floating Rate Trust Preferred Securities, Series B ("TPS II"). The exchange offer was conducted in accordance with the terms of the initial issuance of the Series A Securities. The TPS II accrue interest at a variable rate of interest, initially at 7.1875%, on the liquidation amount of $1,000 per share of TPS II. The interest rate resets quarterly and is equal to 3-month LIBOR plus 150 basis points. As part of this transaction, the Company concurrently entered into an interest rate swap to fix the cost of the offering at 7.55% for 10 years (see note 10). The TPS II are mandatorily redeemable, in whole or in part, upon repayment of the Debentures at their stated maturity of September 15, 2028 or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company, on or after September 15, 2008, in whole at any time or in part from time to time. The total amount of TPS outstanding at December 31, 1999 and 1998 was $49 million and the dividends paid on TPS was $4.3 million, $2.8 million and $1.5 million in 1999, 1998 and 1997, respectively. A-46 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 9--BORROWINGS Other borrowings are detailed as follows: (Dollars in thousands) 1999 1998 ------------------------------------------------------------------------------- Other borrowings: Short term borrowings: Securities sold under agreements to repurchase $ 68,552 $ 18,513 Other short term notes payable 1,500 1,760 FHLB advances 3,000 3,000 Advances under credit lines 7,000 1,700 ------------------------------ Total short term borrowings 80,052 24,973 ------------------------------ Long term borrowings: Securities sold under agreements to repurchase 10,000 50,000 FHLB advances 27,000 32,000 Promissory notes - 2,450 ------------------------------ Total other long term borrowings 37,000 84,450 ------------------------------ Total other borrowings $ 117,052 $ 109,423 ============================== Subordinated notes $ - $ 3,000 ------------------------------ Total subordinated debt $ - $ 3,000 ============================== During the years ended December 31, 1999 and 1998, the average balance of securities sold under short term agreements to repurchase was $32.8 million and $32.7 million, respectively, and the average interest rates during those periods were 4.73% and 4.77%, respectively. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. During the years ended December 31, 1999 and 1998, the average balance of federal funds purchased was $1.5 million and $993,000, respectively, and the average interest rates during those periods were 5.25% and 5.53%, respectively. There were $1.2 million in federal fund purchases outstanding at December 31, 1998. There was no such balance outstanding at December 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 5.32%. The counterparties to these agreements have put options which give them the right to demand early repayment. The FHLB advances will mature in the year 2003 and have an average interest rate of 5.47%. The advances are collateralized by securities pledged 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. $1.3 million of the short term notes payable outstanding at December 31, 1998, which bore an interest rate of 13.76% and provided for maturity on April 15, 2000, were issued to PBFC's officers along with other accredited investors within the definition of Rule 501 under the Securities Act of 1933, as amended. The Company redeemed these notes in January 1999. A-47 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 On March 15, 1999 the Company redeemed the $3.0 million in subordinated debt issued in 1995. The Company paid a premium of $150,000 ($88,000 net of tax) on the pay off of the debt. The premium was recorded, net of taxes, as an extraordinary item in March 1999. NOTE 10 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company currently uses a single interest-rate swap to convert its floating-rate debt (the TPS II) to fixed rates. This swap was entered into concurrently with the issuance of the debt being hedged. This swap is accounted for as a cash flow hedge under SFAS No. 133. This swap possesses a term equal to the non-callable term of the debt, with a fixed pay rate and a receive rate indexed to rates paid on the debt and a notional amount equal to the amount of the debt being hedged. As the specific terms and notional amount of the swap exactly match those of the debt being hedged the Company meets the "no ineffectiveness" criteria of SFAS No. 133. As such the swap is assumed to be 100% effective and all changes in the fair value of the hedge are recorded in other comprehensive income with no impact on the income statement for any ineffective portion. As of December 31, 1999, the unrealized gain on the cash flow hedge was $1,528,000, net of income taxes, which was included in the balance of accumulated other comprehensive income. The floating rate TPS II combined with the cash flow hedge created a synthetic fixed rate debt instrument. The unrealized gain on the cash flow hedge approximated the unrealized gain the Company would have incurred if it had issued a fixed rate debt instrument. Under current accounting practices, as required by SFAS No. 133, the Company was required to record the unrealized gain on the synthetic fixed rate debt instrument, but it would not have been required to record an unrealized gain if it had issued fixed rate debt. The notional amount of the swap is $30.0 million with a term of 10 years expiring on September 15, 2008. The Company intends to use the swap as a hedge of the related debt for 10 years. The periodic settlement date of the swap results in the reclassifying as earnings the gains or losses that are reported in accumulated comprehensive income. For the year ended December 31, 1997, the Company did not have any derivative instruments. The Company minimizes the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties that are reviewed periodically by the Company's credit committee. NOTE 11--INCOME TAXES Income tax expense was comprised of the following for the years ended December 31, 1999, 1998 and 1997: (Dollars in thousands) 1999 1998 1997 ------------------------------------------------------------------------------ Current: Federal $ 22,399 $ 15,571 $ 14,244 State 7,513 5,606 4,733 -------------------------------------- Total current 29,912 21,177 18,977 -------------------------------------- Deferred: Federal (6,515) (2,346) (3,459) State (1,774) (713) (926) -------------------------------------- Total deferred (8,289) (3,059) (4,385) -------------------------------------- Total expense $ 21,623 $ 18,118 $ 14,592 ====================================== A-48 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 1999, 1998 and 1997 are as follows: Years Ended December 31, --------------------------- (Dollars in thousands) 1999 1998 ------------------------------------------------------------------------------ Allowance for loan losses $ 15,804 $ 11,065 State income taxes 4,458 2,952 Deferred compensation 2,438 1,726 Unrealized (gains) losses on securities 10,128 (445) Accumulated depreciation 576 275 Net operating losses 14 159 Purchase allocation adjustments 8 22 Other 322 (280) --------------------------- Net deferred tax asset $ 33,748 $ 15,474 =========================== Management believes that the Company will fully realize its total deferred income tax assets as of December 31, 1999 based upon the Company's recoverable taxes from prior carryback years, and its current level of operating income. At December 31, 1999, the Company had a federal tax net operating loss carryforward of approximately $40,000 expiring in the beginning of the year 2010. Under provisions of the United States income tax laws these loss carryovers are subject to limitation due to the acquisition of Pacific Rim Bancorporation in 1998. Management does not believe that these limitations will prevent the realization of the benefit of the loss carryovers during the carryover periods. A reconciliation from the statutory income tax rate to the consolidated effective income tax rate follows, for the years ended December 31, 1999, 1998 and 1997: Years Ended December 31, -------------------------------- (Dollars in thousands) 1999 1998 1997 -------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 35.0% California franchise tax expense, net of federal income tax benefit 5.6% 6.2% 6.4% -------------------------------- 40.6% 41.2% 41.4% Tax exempt income -2.8% -3.0% -2.7% Contribution of appreciated securities -4.3% -1.0% 0.0% Nondeductible merger costs 0.2% 0.6% 1.3% Other, net -0.9% -2.9% -3.3% -------------------------------- Effective income tax rate 32.8% 34.9% 36.7% ================================ A-49 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 12--OTHER INCOME AND OPERATING EXPENSES Other income in 1999, 1998 and 1997 included warrant income of $14.5 million, $945,000 and $1.2 million net of related employee incentives of $7.3 million, $396,000 and $500,000, respectively. The Company occasionally receives warrants to acquire common stock from companies that are in the start-up or development phase. The timing and amount of income derived from the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. Occupancy costs for the years ended December 31, 1999, 1998 and 1997 were $10.7 million, $9.0 million and $8.5 million, respectively. Merger and other related nonrecurring costs for the years ended December 31, 1999, 1998 and 1997 were comprised of the following: (Dollars in thousands) 1999 1998 1997 -------------------------------------------------------------------------------- Financial advisory and professional fees $ 1,627 $ 1,101 $ 1,083 Charges to conform accounting practices 2,745 183 1,350 Other costs 5,959 1,377 900 ---------------------------------- Total $ 10,331 $ 2,661 $ 3,333 ================================== Other costs include severance and other compensation expenses, charges for the write-off of assets retired as a result of the merger, and other expenses including printing costs and filing fees. A-50 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Other expenses for the years ended December 31, 1999, 1998 and 1997 were comprised of the following: (Dollars in thousands) 1999 1998 1997 -------------------------------------------------------------------------------- Telephone, postage and supplies $ 4,500 $ 3,992 $ 3,174 Legal and other professional fees 3,371 3,416 3,456 Marketing and promotion 3,492 3,279 3,038 Client services 3,226 2,520 1,873 Data processing 2,665 1,959 1,529 Directors fees 1,226 1,432 1,398 Insurance 952 889 800 FDIC insurance and regulatory assessments 622 553 504 Other real estate owned 13 157 211 Other 6,813 7,005 6,369 ------------------------------------ $ 26,880 $ 25,202 $ 22,352 ==================================== To support the Greater Bay Bancorp Foundation (the "Foundation"), the Company contributed appreciated securities, which had an unrealized gain of $7.8 million in 1999 and $1.3 million in 1998. In 1999, the Company incurred $4.4 million in compensation and other expenses in connection with these appreciated securities. The Company recorded $12.2 million in 1999 and $1.3 million in 1998 of expense for the contribution to the Foundation, which is included in operating expenses. In July 1995, the Company settled a lawsuit of $1.0 million, net of tax. The Company recovered those losses through insurance coverage for this settlement in 1997. However, due to the uncertainty associated with the recovery, the Company reflected the settlement expense as a charge to 1995 earnings, and the associated recovery in 1997 as a recovery to earnings. NOTE 13--EMPLOYEE BENEFIT PLANS (All share amounts have been restated to reflect the 2-for-1 stock split declared to shareholders of record as of April 30, 1998 and the 2-for-1 stock split declared to shareholders of record as of October 4, 2000). Stock Option Plan On November 19, 1997, the Company's shareholders approved an amendment of the Greater Bay Bancorp 1996 Stock Option Plan (the "Bancorp Plan"), to increase by 1,825,304 the number of shares of Greater Bay stock issuable under the Bancorp Plan. On May 17, 2000, the Company's shareholders approved an additional amendment to the Bancorp Plan to increase by 2,500,000, the number of shares issuable by the Bancorp Plan. These were done to accommodate the increased number of eligible employees as a result of the mergers. Under the terms of the respective mergers, all stock option plans of BOP, BSC, BAB and BBC were terminated at the time of merger and all outstanding options from these plans were assumed by the Bancorp Plan. The CCB Stock Option Plan and the MDNB Stock Option Plan were assumed by the company. Options outstanding from the BOP plan of 239,880 (converted at a ratio of 0.5731), outstanding options from the BSC plan of 471,840 (converted at a ratio of 0.8499), options outstanding from the CCB plan of 379,596 (converted at a ratio of 0.6338), options outstanding from the MDNB plan of 145,428 (converted at a ratio of 0.9532), outstanding options from the BAB plan of 59,668 shares (converted at a ratio of 1.38682) and outstanding options from the BBC plan of 216,636 shares (converted at a ratio of 0.6833) were assumed by the Bancorp Plan. A-51 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Options issued under the Bancorp Plan may be granted to employees and nonemployee directors and may be either incentive or nonqualified stock options as defined under current tax laws. The exercise price of each option must equal the market price of the Company's stock on the date of grant. The term of an option may not exceed 10 years and generally vests over a five year period. At December 31, 1999 the total authorized shares issuable under the Bancorp Plan was approximately 4,558,000 shares and the number of shares available for future grants was approximately 220,000 shares. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions of SFAS No. 123, the Company is encouraged, but not required, to measure compensation costs related to its employee stock compensation plans under the fair value method. If the Company elects not to recognize compensation expense under this method, it is required to disclose the pro forma net income and net income per share effects based on the SFAS No. 123 fair value methodology. The Company implemented the requirements of SFAS No. 123 in 1997 and has elected to adopt the disclosure provisions of this statement. The Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in its accounting for stock options. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation for the Company's stock option plan been determined consistent with SFAS No. 123, the Company's net income per share would have been reduced to the pro forma amounts indicated below:
December 31, ----------------------------------------------- (Dollars in thousands, except per share amounts) 1999 1998 1997 ------------------------------------------------------------------------------------------------------- Net income: As reported $ 44,184 $ 33,784 $ 25,195 Pro forma $ 40,835 $ 31,316 $ 24,164 Basic net income per share: As reported $ 1.16 $ 0.91 $ 0.70 Pro forma $ 1.07 $ 0.85 $ 0.67 Diluted net income per share: As reported $ 1.10 $ 0.85 $ 0.66 Pro forma $ 1.01 $ 0.79 $ 0.63
A-52 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1999, 1998 and 1997, respectively; dividend yield of 1.5%, 1.75% and 1.8%; expected volatility of 29.69%, 39.84% and 22.9%; risk free rates of 6.29%, 4.54% and 6.3%. The weighted average expected life is 5 years. No adjustments have been made for forfeitures. The actual value, if any, that the option holder will realize from these options will depend solely on the increase in the stock price over the option price when the options are exercised. A summary of the Company's stock options as of December 31, 1999, 1998, and 1997 and changes during the years ended on those dates is presented below:
1999 1998 1997 ---------------------------------------------------------------------------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price ---------------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 5,360 $ 9.04 4,379 $ 5.71 3,684 $ 3.72 Granted 1,582 17.81 1,697 15.65 1,364 9.45 Exercised (667) 5.06 (648) 3.85 (599) 3.01 Forfeited (153) 12.59 (67) 8.41 (67) 4.11 ---------------------------------------------------------------------------------------- Outstanding at end of year 6,122 11.65 5,361 9.04 4,382 5.59 ======================================================================================== Options exercisable at year-end 2,671 7.12 2,534 4.71 2,443 3.82 ======================================================================================== Weighted average fair value of options granted during the year $ 5.94 $ 5.42 $ 3.20 ================== ============= ==================
The following table summarizes information about stock options outstanding at December 31, 1999.
Options Outstanding Options Exercisable --------------------------------------------------------------- ------------------------------- Number Number Exercise Outstanding Weighted Average Weighted Average Exercisable Weighted Average Price Range (000's) Exercise Price Remaining Life (years) (000's) Exercise Price -------------------------------------------------------------------------------------- ------------------------------- $1.53 - $4.69 1,575 $ 3.42 4.61 1,293 $ 3.33 $5.11 - $8.79 779 6.55 6.78 661 6.15 $9.87 - $14.75 1,274 12.22 6.75 408 12.10 $14.78 - $17.52 1,180 16.62 8.18 180 16.79 $17.94 - $21.93 1,314 19.51 9.82 128 21.89
401(k) Savings Plan The Company has a 401(k) tax deferred savings plan under which eligible employees may elect to defer a portion of their salary (up to 15%) as a contribution to the plan. The Company matches the employees' contributions at a rate set by the Board of Directors (currently 62.5% of the first 8% of deferral of an individual's total compensation). The matching contribution vests ratably over the first four years of employment. For the years ended December 31, 1999, 1998 and 1997, the Company contributed $1.3 million, $1.1 million and $844,000, respectively to the 401(k) plan. A-53 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Employee Stock Purchase Plan The Company has established an Employee Stock Purchase Plan, as amended, under section 423(b) of the Internal Revenue Code which allows eligible employees to set aside up to 15% of their compensation toward the purchase of the Company's stock for an aggregate total of 923,738 shares. Under the plan the purchase price is 85% of the lower of the fair value at the beginning or end of each three month offering period. During 1999, employees purchased 83,302 shares of common stock for an aggregate purchase price of $1,031,000 compared to the purchase of 59,340 shares of common stock for an aggregate purchase price of $656,000 in 1998 and 60,640 shares of common stock for an aggregate purchase price of $347,000 in 1997. There were 525,986 shares remaining in the plan available for purchase by employees at December 31, 1999. Supplemental Employee Compensation Benefits Agreements The Company has entered into supplemental employee compensation benefits agreements with certain executive and senior officers. Under these agreements, the Company is generally obligated to provide for each such employee or their beneficiaries, during their life for a period of up to 15 to 20 years after the employee's disability or retirement, benefits as defined in each specific agreement. The agreement also provides for a death benefit for the employee. The estimated present value of future benefits to be paid is being accrued over the vesting period of the participants. The related accumulated accrued liability of at December 31, 1999 and 1998 is approximately $3.5 million and $2.6 million, respectively. The actuarial assumptions used for determining the present value of the projected benefit obligation include a 7% discount rate. Expenses accrued for this plan for the years December 31, 1999, 1998 and 1997 totaled $896,000, $602,000 and $557,000, respectively. Depending on the agreement, the Company and the employees are beneficiaries of life insurance policies that have been purchased as a method of financing the benefits under the agreements. At December 31, 1999 and 1998, the Company's cash surrender value of these policies was approximately $45.4 million and $33.5 million, respectively and is included in other assets. The income recognized on these policies was $1.5 million, $953,000 and $406,000 in 1999, 1998 and 1997, respectively, and is included in other income. Deferred Compensation Plan Effective November 19, 1997, the Company adopted the Greater Bay Bancorp 1997 Elective Deferral Compensation Plan (the "Deferred Plan") that allows eligible officers and directors of the Company to defer a portion of their bonuses, director fees and other compensation. The deferred compensation will earn interest calculated annually based on a short-term interest reference rate. All participants are fully vested at all times in their contributions to the Deferred Plan. At December 31, 1999 and 1998, $1.9 million and $834,000, respectively, of deferred compensation under this plan is included in other liabilities in the accompanying consolidated balance sheets. Additionally, under deferred compensation agreements that were established at BOP, CCB and PBC prior to its merger with the Company, there was approximately $1.1 million and $1.3 million of deferred compensation which is included in other liabilities at December 31, 1999 and 1998, respectively. A-54 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Change in Control In the event of a change in control, the supplemental employee compensation benefits agreements with certain executive and senior officers may require the Company to make certain payments under those agreements. The Company also has plans in place which would require certain payments be made to any employee whose employment is terminated pursuant to a change in control. These potential liabilities are currently not recognized in the accompanying consolidated financial statements. NOTE 14--RELATED PARTY TRANSACTIONS The Company has, and expects to have in the future, banking transactions in the ordinary course of business with directors, executive officers and their affiliates. These transactions are entered into under terms and conditions equal to those entered into in arms length transactions and are made subject to approval by the Directors' Loan Committee and the Board of Directors of the Bank extending the credit. An analysis of total loans to related parties for the years ended December 31, 1999 and 1998 is shown below: (Dollars in thousands) 1999 1998 ------------------------------------------------------------- Balance, January 1 $ 46,866 $ 21,431 Additions 27,883 45,019 Repayments (48,639) (19,585) ---------------------------- Balance, December 31 $ 26,110 $ 46,865 ============================ Undisbursed commitments, at year end $ 11,113 $ 8,430 ============================ NOTE 15 - COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under all noncancelable operating leases as of December 31, 1999 are below: (Dollars in thousands) Years Ended December 31, ---------------------------------------------------------- 2000 $ 5,694 2001 5,938 2002 4,860 2003 2,650 2004 2,232 Thereafter 10,803 ------------- Total $ 32,177 ============= A-55 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 The Company subleases that portion of the available space that is not utilized. Sublease rental income for the years ended December 31, 1999, 1998, and 1997 was $1.3 million, $1.2 million, and $1.2 million, respectively. Gross rental expense for the years ended December 31, 1999, 1998, and 1997 was $6.9 million, $5.4 million, and $5.0 million, respectively. Other Commitments and Contingencies The Company occasionally receives warrants to acquire common stock from borrowers that are in the start-up or development phase as consideration for provided financing. As of December 31, 1999, the Company had a portion of its warrants and common stock of these clients in escrow with an approximate fair value of $2.8 million. These equity securities are being held in escrow for the Company's benefit pending resolution of certain contingencies. Although realization is not assured, Management believes it is more likely than not that this amount will be realized. The amount considered realizable could be reduced if stock prices of the companies fall. In the normal course of business, various commitments and contingent liabilities are outstanding, such as guarantees and commitments to extend credit, that are not reflected in the accompanying consolidated financial statements. Commitments to fund loans were $948.8 million and $742.7 million and letters of credit were $58.4 million and $28.2 million, at December 31, 1999 and 1998, respectively. The Company's exposure to credit loss is limited to amounts funded or drawn; however, at December 31, 1999, no losses are anticipated as a result of these commitments. Loan commitments which have fixed expiration dates and require the payment of a fee are typically contingent upon the borrower meeting certain financial and other covenants. Approximately $265.1 million of these commitments relate to real estate construction and land loans and are expected to fund within the next 12 months. However, the remainder relates primarily to revolving lines of credit or other commercial loans, and many of these commitments are expected to expire without being drawn upon, therefore the total commitments do not necessarily represent future cash requirements. The Banks evaluate each potential borrower and the necessary collateral on an individual basis. Collateral varies, but may include real property, bank deposits, debt or equity securities, or business assets. Stand-by letters of credit are conditional commitments written by the Banks to guarantee the performance of a client to a third party. These guarantees are issued primarily related to purchases of inventory by the Banks' commercial clients, and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to clients, and the Banks accordingly use evaluation and collateral requirements similar to those for loan commitments. In the ordinary course of business there are various assertions, claims and legal proceedings pending against the Company. Management is of the opinion that the ultimate resolution of these proceedings will not have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE 16 - SHAREHOLDERS' RIGHTS PLAN In 1998 Greater Bay adopted a shareholder rights plan designed to maximize the long-term value of the Company and to protect the Company's shareholders from improper takeover tactics and takeover bids that are not fair to all shareholders. A-56 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right for each common share held of record as of the close of business on November 28, 1998. The rights, which are not immediately exercisable, entitle the holders to purchase one one-hundredth of a share of Series A Preferred Stock at a price of $145.00 upon the occurrence of certain triggering events. In the event of an acquisition not approved by the Board, each right enables its holder (other than the acquirer) to purchase the Preferred Stock at 50% of the market price. Further, in the event the Company is acquired in an unwanted merger or business combination, each right enables the holder to purchase shares of the acquiring entity at a similar discount. Under certain circumstances, the rights may be exchanged for common shares of the Company. The Board may, in its sole discretion, redeem the rights at any time prior to any of the triggering events. The rights can be exercised and separate rights certificates distributed only if any of the following events occur: acquisition by a person of 10% or more of the Company's common share; a tender offer for 10% or more of the Company's common shares; or ownership of 10% or more of the Company's common shares by a shareholder whose actions are likely to have a material adverse impact on the Company or shareholder interests. The rights will initially trade automatically with the common shares. The rights are not deemed by the Board of Directors to be presently exercisable. NOTE 17--REGULATORY MATTERS The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum capital amounts and ratios (as defined in the regulations) and are set forth in the table below. At December 31, 1999 and 1998 the Company and the Banks met all capital adequacy requirements to which they are subject. A-57 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Under the FDICIA prompt corrective action provisions applicable to banks, the most recent notification from the FDIC or OCC categorized each of the Banks, with the exception of MDNB, as well-capitalized. To be categorized as well-capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. There are no conditions or events since that notification that management believes have changed the risk-based capital category of any of the Banks. The Company and the Banks' actual 1999 and 1998 capital amounts and ratios are as follows:
To Be Well Capitalized For Capital Under Prompt Corrective As of December 31, 1998 Actual Adequacy Purposes Action Provisions ------------------------- ------------------------- -------------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------- ------------------------- -------------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 343,091 11.07% $ 247,943 8.00% N/A Bank of Petaluma 17,537 11.70 11,991 8.00 $ 17,537 10.00% Bank of Santa Clara 33,672 11.91 22,618 8.00 28,272 10.00 Bay Area Bank 15,104 10.50 11,511 8.00 14,398 10.00 Bay Bank of Commerce 12,004 10.12 9,484 8.00 11,856 10.00 Coast Commercial Bank 37,426 13.80 21,771 8.00 27,213 10.00 Cupertino National Bank 97,081 11.03 70,398 8.00 87,997 10.00 Golden Gate Bank 14,645 10.19 11,494 8.00 14,368 10.00 Mid-Peninsula Bank 65,923 10.02 52,656 8.00 65,820 10.00 Mt. Diablo National Bank 15,192 8.20 14,823 8.00 18,529 10.00 Peninsula Bank of Commerce 22,458 10.86 16,544 8.00 20,680 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 302,073 9.75% $ 123,927 4.00% N/A Bank of Petaluma 15,941 10.64 5,993 4.00 $ 15,941 6.00% Bank of Santa Clara 31,368 11.09 11,314 4.00 16,971 6.00 Bay Area Bank 13,285 9.23 5,756 4.00 8,634 6.00 Bay Bank of Commerce 10,507 8.86 4,742 4.00 7,113 6.00 Coast Commercial Bank 34,020 12.50 10,885 4.00 16,328 6.00 Cupertino National Bank 82,337 9.36 35,199 4.00 52,798 6.00 Golden Gate Bank 12,846 8.94 5,747 4.00 8,621 6.00 Mid-Peninsula Bank 57,692 8.77 26,328 4.00 39,492 6.00 Mt. Diablo National Bank 12,875 6.95 7,411 4.00 11,117 6.00 Peninsula Bank of Commerce 19,859 9.60 8,272 4.00 12,408 6.00 Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $ 302,073 8.24% $ 146,637 4.00% N/A Bank of Petaluma 15,941 8.29 7,692 4.00 $ 15,941 5.00% Bank of Santa Clara 31,368 9.29 12,782 4.00 15,977 5.00 Bay Area Bank 13,285 7.80 6,815 4.00 8,519 5.00 Bay Bank of Commerce 10,507 7.12 5,900 4.00 7,375 5.00 Coast Commercial Bank 34,020 9.40 14,538 4.00 18,172 5.00 Cupertino National Bank 82,337 8.05 40,896 4.00 51,120 5.00 Golden Gate Bank 12,846 6.55 7,844 4.00 9,805 5.00 Mid-Peninsula Bank 57,692 7.47 30,883 3.00 38,604 5.00 Mt. Diablo National Bank 12,875 7.76 7,828 4.00 9,785 5.00 Peninsula Bank of Commerce 19,859 7.32 10,847 4.00 13,559 5.00
To Be Well Capitalized For Capital Under Prompt Corrective As of December 31, 1998 Actual Adequacy Purposes Action Provisions ------------------------- ------------------------- -------------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------- ------------------------- -------------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 276,666 12.59% $ 175,800 8.00% N/A Bank of Petaluma 14,723 11.01 10,698 8.00 $ 14,723 10.00% Bank of Santa Clara 29,698 11.95 19,882 8.00 24,852 10.00 Bay Area Bank 15,800 13.77 9,179 8.00 11,474 10.00 Bay Bank of Commerce 11,817 9.50 9,976 8.00 12,470 10.00 Coast Commercial Bank 31,198 14.80 16,856 8.00 21,069 10.00 Cupertino National Bank 59,224 10.12 46,822 8.00 58,527 10.00 Golden Gate Bank 10,194 11.01 7,406 8.00 9,257 10.00 Mid-Peninsula Bank 47,111 11.51 32,747 8.00 40,963 10.00 Mt. Diablo National Bank 11,716 9.00 10,416 8.00 13,021 10.00 Peninsula Bank of Commerce 18,256 12.37 11,809 8.00 14,761 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 235,144 10.70% $ 87,904 4.00% N/A Bank of Petaluma 13,297 9.94 5,351 4.00 $ 13,297 6.00% Bank of Santa Clara 27,860 11.21 9,941 4.00 14,912 6.00 Bay Area Bank 14,365 12.52 4,590 4.00 6,885 6.00 Bay Bank of Commerce 10,837 8.70 4,988 4.00 7,482 6.00 Coast Commercial Bank 28,549 13.60 8,248 4.00 12,642 6.00 Cupertino National Bank 48,845 8.35 23,411 4.00 35,116 6.00 Golden Gate Bank 9,036 9.76 3,703 4.00 5,554 6.00 Mid-Peninsula Bank 41,990 10.26 16,373 4.00 24,560 6.00 Mt. Diablo National Bank 10,115 7.77 5,208 4.00 7,812 6.00 Peninsula Bank of Commerce 16,408 11.12 5,904 4.00 8,857 6.00 Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $ 235,144 8.13% $ 115,692 4.00% N/A Bank of Petaluma 13,297 7.36 7,227 4.00 $ 13,297 5.00% Bank of Santa Clara 27,860 9.26 12,035 4.00 15,043 5.00 Bay Area Bank 14,365 10.34 4,590 4.00 6,948 5.00 Bay Bank of Commerce 10,837 7.90 5,520 4.00 6,901 5.00 Coast Commercial Bank 28,549 9.10 12,574 4.00 15,717 5.00 Cupertino National Bank 48,845 7.47 26,138 4.00 32,673 5.00 Golden Gate Bank 9,036 9.30 5,243 4.00 6,554 5.00 Mid-Peninsula Bank 41,990 8.54 15,927 3.00 26,544 5.00 Mt. Diablo National Bank 10,115 6.08 6,658 4.00 8,323 5.00 Peninsula Bank of Commerce 16,408 6.65 9,759 4.00 12,198 5.00
A-58 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 18--RESTRICTIONS ON SUBSIDIARY TRANSACTIONS Total dividends which may be declared by the Banks without receiving prior approval from regulatory authorities are limited to the lesser of the Banks' retained earnings or the net income of the Banks for the latest three fiscal years, less dividends previously declared during that period. The Banks are subject to certain restrictions under the Federal Reserve Act, including restrictions on the extension of credit to affiliates. In particular, the Banks are prohibited from lending to Greater Bay unless the loans are secured by specified types of collateral. Such secured loans and other advances from the Banks are limited to 10% of the Banks' shareholders' equity, or a maximum of $75.6 million at December 31, 1999. No such advances were made during 1999 or exist as of December 31, 1999. A-59 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 19-EARNINGS PER SHARE 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 and the 2-for-1 stock split effective on October 4, 2000. The following table provides a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the years ended December 31, 1999, 1998 and 1997.
For the year ended December 31, 1999 ------------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount ---------------------------------------------------------------------------------------------------------------- Net income $ 44,184 Basic net income per share: Income available to common shareholders 44,184 38,245,000 $ 1.16 Effect of dilutive securities: Stock options - 2,059,000 ------------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 44,184 40,304,000 $ 1.10 =================================================
For the year ended December 31, 1998 ------------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount ---------------------------------------------------------------------------------------------------------------- Net income $ 33,784 Basic net income per share: Income available to common shareholders 33,784 37,049,000 $ 0.91 Effect of dilutive securities: Stock options - 2,590,000 ------------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 33,784 39,639,000 $ 0.85 =================================================
For the year ended December 31, 1997 ------------------------------------------------- Income Shares Per Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount ---------------------------------------------------------------------------------------------------------------- Net income $ 25,194 Basic net income per share: Income available to common shareholders 25,194 35,835,000 $ 0.70 Effect of dilutive securities: Stock options - 2,363,000 ------------------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 25,194 38,198,000 $ 0.66 =================================================
A-60 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 There were options to purchase 1,037,000 shares and 304,000 shares that were considered anti-dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the years ended December 31, 1999 and 1998, respectively. There were no options that were considered anti-dilutive during the year ended December 31, 1997. Weighted average shares outstanding and all per share amounts included in the consolidated financial statements and notes thereto are based upon the increased number of shares giving retroactive effect to the 2000 mergers with BOP at a 0.5731 conversion ratio, BSC at a 0.8499 conversion ratio, Coast Bancorp at a 0.6338 conversion ratio and MD Bancshares at a 0.9532 conversion ratio, 1999 mergers with BCS at a 0.6833 conversion ratio and BA Bancshares at a 1.38682 conversion ratio, the 1998 mergers with PRB and PBFC at a total of 1,901,496 and 596,000 shares, respectively, and the 1997 merger with PBC at a 0.96550 conversion ratio. NOTE 20--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS The financial statements of Greater Bay Bancorp (parent company only) are presented below: PARENT COMPANY ONLY--BALANCE SHEETS December 31, (Dollars in thousands) 1999 1998 -------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 2,837 $ 7,703 Investment in subsidiaries 282,079 223,722 Other investments 16,143 17,936 Subordinated debentures issued by subsidiary - 3,000 Other assets 18,773 9,811 --------------------------------- Total assets $ 319,832 $ 262,172 ================================= Liabilities and shareholders' equity: Subordinated debt 58,547 54,547 Other liabilities 8,410 6,928 --------------------------------- Total liabilities 66,957 61,475 Shareholders' equity: Common stock 148,611 121,646 Accumulated other comprehensive income (9,158) 674 Retained earnings 113,422 78,377 --------------------------------- Total shareholders' equity 252,875 200,697 --------------------------------- Total liabilities and shareholders' equity $ 319,832 $ 262,172 ================================= A-61 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 PARENT COMPANY ONLY-STATEMENTS OF OPERATIONS Years Ended December 31, (Dollars in thousands) 1999 1998 1997 -------------------------------------------------------------------------------- Income: Interest income $ 521 $ 1,073 $ 485 Cash dividend from subsidiaries 1,580 3,015 1,413 Other income - 71 501 --------------------------------- Total 2,101 4,159 2,399 --------------------------------- Expenses: Interest expense 4,382 3,195 1,458 Salaries 17,138 8,952 5,978 Occupancy and equipment 3,821 2,031 1,218 Merger expenses 3,283 1,877 712 Other expenses 5,804 3,596 2,041 Less: rentals and fees received from Banks (27,653) (15,866) (10,201) --------------------------------- Total 6,775 3,785 1,206 --------------------------------- Income (loss) before taxes and equity in undistributed net income of subsidiaries (4,674) 374 1,193 Income tax benefit (2,685) (1,668) (270) --------------------------------- Income (loss) before equity in undistributed net income of subsidiaries (1,989) 2,042 1,463 --------------------------------- Equity in undistributed net income of subsidiaries 46,173 31,742 23,732 --------------------------------- Net income $ 44,184 $ 33,784 $ 25,195 ================================= A-62 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------ (Dollars in thousands) 1999 1998 1997 ---------------------------------------------------------------------------------------- Cash flows-operating activities Net income $ 44,184 $ 33,784 $ 25,194 Reconciliation of net income to net cash from operations: Equity in undistributed net income of subsidiaries (46,173) (31,716) (23,731) Net change in other assets (9,791) (4,598) (1,984) Net change in other liabilities 4,420 2,140 2,442 ------------------------------------------ Operating cash flow, net (7,360) (390) 1,921 ------------------------------------------ Cash flows-investing activities Purchases of available for sale securities (20,825) (84,130) (8,293) Proceeds from sale and maturities of available for sale securities 20,980 71,939 3,136 Proceeds from sale of OREO - 407 - Dividends from subsidiaries 4,166 3,449 3,617 Capital contribution to the subsidiaries (27,218) (17,500) (13,818) ------------------------------------------ Investing cash flows, net (22,897) (25,835) (15,358) ------------------------------------------ Cash flows-financing activities Net change in other borrowings - short term 7,000 - - Repurchase of common stock - (2,651) (130) Proceeds from private placement of stock 18,954 - - Proceeds from issuance of subordinated debt - 30,000 20,618 Stock issued in dividend reinvestment plan 171 - - Proceeds from exercise of stock options and employees stock purchases 6,888 5,661 2,985 Payment of cash dividends (7,622) (7,193) (5,660) ------------------------------------------ Financing cash flows, net 25,391 25,817 17,813 ------------------------------------------ Net increase in cash and cash equivalents (4,866) (408) 4,376 Cash and cash equivalents at the beginning of the year 7,703 8,111 3,735 Cash and cash equivalents at end of the year ------------------------------------------ $ 2,837 $ 7,703 $ 8,111 ==========================================
A-63 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 21--FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. The estimated fair value of financial instruments of the Company as of December 31, 1999 and 1998 are as follows:
1999 1998 ----------------------------------- ---------------------------------- Carrying Carrying (Dollars in thousands) Amount Fair Value Amount Fair Value ------------------------------------------------------------------------------------------- ---------------------------------- Financial assets: Cash and due from banks $ 147,222 $ 147,222 $ 138,484 $ 149,554 Short term investments and Fed Funds Sold 249,107 249,107 189,980 178,910 Investment securities 750,516 722,262 667,531 669,777 Loans, net 2,416,423 2,396,640 1,740,158 1,735,073 Accrued interest receivable 24,130 24,130 17,033 17,033 Financial liabilities: Deposits: Demand, noninterest-bearing 727,613 756,604 573,552 599,360 MMDA, NOW and Savings 1,838,868 1,809,877 1,388,260 1,362,451 Time certificates, $100,000 and over 534,662 528,735 324,517 330,710 Other time certificates 161,745 162,963 177,155 190,983 Other borrowings 117,052 116,242 109,423 108,053 Subordinated debt - - 3,000 2,999 Company obligated mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures 49,000 48,468 49,000 47,829
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Cash Equivalents The carrying value reported in the balance sheet for cash and cash equivalents approximates fair value. Investment Securities The carrying amounts for short-term investments approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer term investments, except certain state and municipal securities, is estimated based on quoted market prices or bid quotations from securities dealers. A-64 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 Loans Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value of performing variable rate loans is judged to approximate book value for those loans whose rates reprice in less than 90 days. Rate floors and rate ceilings are not considered for fair value purposes as the number of loans with such limitations is not significant. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities and Borrowings The fair value for all deposits without fixed maturities and short term borrowings is considered to be equal to the carrying value. The fair value for fixed rate time deposits and subordinated debt are estimated by discounting future cash flows using interest rates currently offered on time deposits or subordinated debt with similar remaining maturities. The fair value of core deposits does not reflect the market core deposits premium of approximately 10% - 12%. Additionally, the fair value of deposits does not include the benefit that results from the low cost of funding provided by the Company's deposits as compared to the cost of borrowing funds in the market. Commitments to Extend Credit and Standby Letters of Credit The majority of the Company's commitments to extend credit carry current market interest rate if converted to loans. Because these commitments are generally unassignable by either the Company or the borrower, they only have value to the Company and the borrower. The estimated fair value approximates the recorded deferred fee amounts and is excluded from the table. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, the Company's entire holdings of a particular financial instrument. Fair value estimates are based on judgments regarding future expected loss experience, current economic condition, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have been considered in many of the estimates. A-65 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 22--ACTIVITY OF BUSINESS SEGMENTS In 1998 the Company adopted SFAS No. 131. The prior year's segment information has been restated to present the Company's two reportable segments, community banking and trust operations. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." Segment data includes intersegment revenue, as well as charges allocating all corporate-headquarters costs to each of its operating segments. Intersegment revenue is recorded at prevailing market terms and rates and is not significant to the results of the segments. This revenue is eliminated in consolidation. The Company evaluates the performances of its segments and allocates resources to them based on net interest income, other income, net income before income taxes, total assets and deposits. The Company is organized primarily along community banking and trust divisions. Ten of the divisions have been aggregated into the "community banking" segment. Community banking provides a range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professional and other individuals. The GBB Trust division has been shown as the "trust operations" segment. The Company's business is conducted principally in the U.S.; foreign operations are not material. The following table shows each segments key operating results and financial position for the years ended or as of December 31, 1999, 1998 and 1997:
1999 1998 1997 ------------------------------- -------------------------------- --------------------------- Community Trust Community Trust Community Trust (Dollars in thousands) banking operations banking operations banking operations ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $ 156,097 $ 369 $ 128,945 $ 859 $ 107,023 $ 141 Other income 39,972 3,007 19,453 2,488 17,249 2,092 Operating expenses 149,042 2,863 104,085 2,429 85,726 1,966 Net income before income taxes (1) 98,167 121 68,648 918 49,006 267 Total assets 3,702,369 - 3,820,326 - 2,220,574 - Deposits 3,205,057 57,831 2,395,945 67,539 1,869,084 66,321 Assets under management - 697,435 - 649,336 - 577,746
(1) Includes intercompany earnings allocation charge which is eliminated in consolidation A-66 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 A reconciliation of total segment net interest income and other income combined, net income before income taxes, and total assets to the consolidated numbers in each of these categories for the years ended December 31, 1999, 1998 and 1997 is presented below.
As of and for Year Ended December 31, (Dollars in thousands) 1999 1998 1997 ------------------------------------------------------------------------------------------------------------ Net interest income and other income Total segment net interest income and other income $ 207,231 $ 151,745 $ 126,505 Parent company net interest income and other income (3,893) (1,357) 309 ---------------------------------------------------- Consolidated net interest income and other income $ 203,338 $ 150,388 $ 126,814 ==================================================== Net income before taxes Total segment net income before income taxes $ 98,288 $ 69,566 $ 49,273 Parent company net income before income taxes (32,393) (17,664) (9,486) ---------------------------------------------------- Consolidated net income before income taxes $ 65,895 $ 51,902 $ 39,787 ==================================================== Total assets Total segment assets $ 3,702,369 $ 2,820,326 $ 2,220,574 Parent company segment assets 34,360 36,920 15,333 ---------------------------------------------------- Consolidated total assets $ 3,736,729 $ 2,857,246 $ 2,235,907 ====================================================
NOTE 23--SUBSEQUENT EVENTS On March 23, 2000, we completed an offering of 10.875% capital securities in an aggregate amount of $9.5 million through GBB Capital III, a wholly owned trust subsidiary formed for the purpose of the offering. On May 18, 2000, we completed an additional offering of 10.75% capital securities in an aggregate amount of $41.0 million through GBB Capital IV, a wholly owned trust subsidiary formed for the purpose of the offering. The securities issued in the offering were sold in a private transaction pursuant to an applicable exemption from registration under the Securities Act. As a result of the transaction, we have $100.5 million in capital securities outstanding. On March 23, 2000, we also consummated the sale of 648,648 shares of our common stock in a private transaction pursuant to a Securities Purchase Agreement dated as of March 22, 2000, between us and certain investors identified therein. The shares were sold at a purchase price of $18.50 per share, or approximately $12.0 million, net of issuance costs. On April 26, 2000, we filed a registration statement to register the shares for resale. A-67 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 NOTE 24--QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table presents the summary results for the stated eight quarters:
December 31, September 30, June 30, March 31, --------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1999 1998 1999 1998 1999 1998 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 73,124 $ 54,413 $ 66,160 $ 53,916 $ 60,934 $ 49,893 $ 55,159 $ 46,966 Net interest income 45,490 20,079 41,670 20,743 38,257 18,788 34,942 17,130 Provision for loan losses 6,608 2,406 3,902 2,492 2,141 1,937 1,388 1,444 Other income 23,725 6,331 7,705 5,448 5,780 5,452 5,769 4,710 Other expenses 34,938 23,657 25,701 22,369 28,784 22,831 23,650 21,350 Income before taxes 18,390 14,602 19,697 13,761 13,037 11,789 14,771 11,752 Net income 14,240 9,697 12,337 8,919 8,124 7,434 9,483 7,737 Net income per share: Basic $ 0.36 $ 0.26 $ 0.32 $ 0.24 $ 0.21 $ 0.20 $ 0.27 $ 0.21 Diluted $ 0.35 $ 0.24 $ 0.30 $ 0.22 $ 0.20 $ 0.19 $ 0.25 $ 0.20
A-68 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Greater Bay Bancorp: We have audited the accompanying supplemental consolidated balance sheets of Greater Bay Bancorp and its subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related supplemental consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the merger of Greater Bay Bancorp and Bank of Petaluma on October 13, 2000, which has been accounted for as a pooling of interests as described in Note 2 to the supplemental consolidated financial statements. Accounting principles generally accepted in the United States proscribe giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of Greater Bay Bancorp and subsidiaries after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Greater Bay Bancorp and its subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ PricewaterhouseCoopers LLP San Francisco, California October 17, 2000 A-69