0001012870-01-502474.txt : 20011030 0001012870-01-502474.hdr.sgml : 20011030 ACCESSION NUMBER: 0001012870-01-502474 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011023 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20011026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATER BAY BANCORP CENTRAL INDEX KEY: 0000775473 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 770387041 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25034 FILM NUMBER: 1767627 BUSINESS ADDRESS: STREET 1: 2860 WEST BAYSHORE ROAD CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4153751555 MAIL ADDRESS: STREET 1: 2860 BAYSHORE ROAD STREET 2: 420 COWPER ST CITY: PALO ALTO STATE: CA ZIP: 943011504 FORMER COMPANY: FORMER CONFORMED NAME: MID PENINSULA BANCORP DATE OF NAME CHANGE: 19941031 FORMER COMPANY: FORMER CONFORMED NAME: SAN MATEO COUNTY BANCORP DATE OF NAME CHANGE: 19920703 8-K 1 d8k.txt FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): October 23, 2001 GREATER BAY BANCORP (Exact name of registrant as specified in its charter) California 77-0387041 (State or other jurisdiction of (IRS Employer Identification No.) Incorporation or organization) COMMISSION FILE NUMBER: 0-25034 2860 West Bayshore Road, Palo Alto, California 94303 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (650) 813-8200 ITEM 5. OTHER ITEMS. On October 23, 2001, Greater Bay Bancorp (the "Registrant") completed the acquisition of SJNB Financial Corp. which was accounted for as a pooling-of-interests. Shareholders of SJNB Financial Corp. received 1.82 shares of the Registrant's Common Stock for each outstanding share of SJNB Financial Corp. Common Stock. A total of approximately 6,944,000 shares were issued in the transaction. The supplemental consolidated financial statements filed herewith have been prepared accounting for the merger using the pooling-of-interests method of accounting. Upon publication of the Registrant's financial statements for a period which includes October 23, 2001, these supplemental consolidated financial statements will become the historical financial statements of the Registrant. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
EXHIBIT NO. EXHIBITS ------- -------- 23.1 Consent of PricewaterhouseCoopers LLP 99.1 Supplemental Consolidated Financial Statements and Supplementary Data (restated to include SJNB Financial Corp.) For the Years Ended December 31, 2000, 1999, and 1998: Selected Financial Data Management's Discussion and Analysis Supplemental Consolidated Balance Sheets as of December 31, 2000 and 1999 Supplemental Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999, and 1998 Supplemental Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, 1999, and 1998 Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999, and 1998 Notes to Supplemental Consolidated Financial Statements Report of Independent Accountants
2 SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. GREATER BAY BANCORP (Registrant) By: /s/ Steven C. Smith ------------------- Steven C. Smith Executive Vice President, Chief Administrative Officer and Chief Financial Officer Date: October 25, 2001 3 EXHIBIT INDEX Exhibits. 23.1 Consent of PricewaterhouseCoopers LLP 99.1 Supplemental Consolidated Financial Statements and Supplementary Data (restated to include SJNB Financial Corp.) For the Years Ended December 31, 2000, 1999, and 1998: Selected Financial Data Management's Discussion and Analysis Supplemental Consolidated Balance Sheets as of December 31, 2000 and 1999 Supplemental Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999, and 1998 Supplemental Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2000, 1999, and 1998 Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999, and 1998 Notes to Supplemental Consolidated Financial Statements Report of Independent Accountants 4 EX-23.1 3 dex231.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-30913, 333-67677, 333-30915, 333-16967, 333-47747, 333-30812 and 333-37722) and Form S-3 (Nos. 333-61679, 333-70025, 333-94343 and 333-35622) of Greater Bay Bancorp of our report dated October 25, 2001 relating to the supplemental consolidated financial statements, which appears in this Current Report on Form 8-K. /s/ PricewaterhouseCoopers LLP San Francisco, California October 25, 2001 EX-99.1 4 dex991.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, 2000:
(Dollars in thousands, except per share amounts) 2000* 1999* 1998* 1997* 1996* ---------------------------------------------------------------------------------------------------------------------------------- Statement of Operations Data Interest income $ 423,639 $ 298,634 $ 244,269 $ 202,367 $ 161,671 Interest expense 158,050 106,509 87,395 69,869 54,661 -------------------------------------------------------------- Net interest income 265,589 192,125 156,874 132,498 107,010 Provision for loan losses 28,821 14,901 8,715 9,836 5,135 -------------------------------------------------------------- Net interest income after provision for loan losses 236,768 177,224 148,159 122,662 101,875 Other income 34,145 30,337 22,820 19,669 18,171 Nonrecurring - warrant income 12,986 14,508 945 1,162 92 -------------------------------------------------------------- Total other income 47,131 44,845 23,765 20,831 18,263 Operating expenses 139,544 121,328 103,491 90,613 80,453 Other expenses - nonrecurring - 12,160 1,341 (1,700) - -------------------------------------------------------------- Total operating expenses 139,544 133,488 104,832 88,913 80,453 -------------------------------------------------------------- Income before income tax expense & merger and other related nonrecurring costs 144,355 88,581 67,092 54,580 39,685 Income tax expense 55,340 30,485 24,145 20,392 14,720 -------------------------------------------------------------- Income before merger and other related nonrecurring costs 89,015 58,096 42,947 34,188 24,965 Merger and other related nonrecurring costs, net of tax (21,851) (6,795) (1,674) (2,283) (1,991) -------------------------------------------------------------- Net income $ 67,164 $ 51,301 $ 41,273 $ 31,905 $ 22,974 ============================================================== Per Share Data (1) Income per share (before merger, nonrecurring and extraordinary items) Basic $ 1.70 $ 1.20 $ 0.98 $ 0.77 $ 0.61 Diluted 1.61 1.14 0.91 0.72 0.57 Net income per share Basic $ 1.40 $ 1.15 $ 0.95 $ 0.75 $ 0.56 Diluted 1.33 1.09 0.88 0.71 0.53 Cash dividends per share (2) $ 0.35 $ 0.24 $ 0.19 $ 0.15 $ 0.11 Book value per common share 7.92 6.63 5.73 5.13 4.66 Shares outstanding at year end 48,748,713 46,174,308 43,876,750 42,510,962 40,525,036 Average common shares outstanding 47,899,000 44,599,000 43,664,000 42,403,000 41,126,000 Average common and common equivalent shares outstanding 50,519,000 47,078,000 46,741,000 45,205,000 43,570,000
---------- * Restated on a historical basis to reflect the mergers described in notes 1 and 2 of the Company's annual report on a pooling-of-interest basis. (1) Restated to reflect 2-for-1 stock split effective as of April 30, 1998 and the 2-for-1 stock split effective as of October 4, 2000. (2) Includes only those dividends declared by Greater Bay, and excludes those dividends paid by Greater Bay's subsidiaries prior to the completion of their mergers with Greater Bay. A-1 SELECTED FINANCIAL INFORMATION (CONTINUED)
(Dollars in thousands, except per share amounts) 2000* 1999* 1998* 1997* 1996* --------------------------------------------------------------------------------------------------------------------------------- Performance Ratios Return on average assets (before merger and nonrecurring items) 1.63% 1.39% 1.40% 1.36% 1.29% Return on average common shareholders' equity (before merger and nonrecurring items) 23.29% 19.78% 18.28% 16.06% 14.01% Return on average assets 1.34% 1.33% 1.36% 1.33% 1.19% Return on average common shareholders' equity 19.21% 18.92% 17.69% 15.67% 12.89% Net interest margin 5.73% 5.41% 5.61% 5.94% 6.07% Balance Sheet Data - At Period End Assets $ 5,818,155 $ 4,304,811 $ 3,351,982 $ 2,691,870 $ 2,222,941 Loans, net 3,973,329 2,813,329 2,070,607 1,646,180 1,336,132 Investment securities 1,091,064 863,590 754,035 574,081 450,283 Deposits 4,750,404 3,736,621 2,869,341 2,296,796 1,904,170 Subordinated debt - - 3,000 3,000 3,000 Trust Preferred Securities 99,500 49,000 49,000 20,000 - Common shareholders' equity 385,948 306,114 251,436 218,229 188,879 Asset Quality Ratios Nonperforming assets** to total loans and other real estate owned 0.32% 0.29% 0.29% 0.49% 0.87% Nonperforming assets** to total assets 0.22% 0.19% 0.18% 0.31% 0.53% Allowance for loan losses to total loans 2.24% 1.89% 1.82% 1.87% 1.69% Allowance for loan losses to non-performing assets 523.01% 596.81% 616.63% 369.71% 160.76% Net charge-offs to average loans 0.33% 0.07% 0.11% 0.18% 0.12% Regulatory Capital Ratios Leverage Ratio 8.79% 8.32% 8.36% 8.96% 8.70% Tier 1 Capital 9.57% 9.92% 10.86% 11.52% 11.32% Total Capital 10.87% 11.23% 12.66% 12.87% 12.64%
---------- * Restated on a historical basis to reflect the mergers described in notes 1 and 2 of the Company's annual report on a pooling-of-interest basis. ** Excludes accruing loans past due 90 days or more. A-2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Greater Bay Bancorp ("Greater Bay", on a parent-only basis, and the "Company", on a consolidated basis) is a bank holding company with 11 bank subsidiaries: Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank, Peninsula Bank of Commerce and San Jose National Bank. The Company owns GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV, which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities. The Company also owns Matsco Lease Finance, Inc. II and Matsco Lease Finance, Inc. III, which are special purpose corporations, which were formed for the exclusive purpose of securitizing leases and issuing lease-backed notes. We also operate through the following 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, Matsco, Pacific Business Funding and the Venture Banking Group. We provide a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout the San Francisco Bay Area including Silicon Valley, San Francisco and the San Francisco Peninsula, the East Bay, Santa Cruz and Sonoma County, with 41 offices located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. At December 31, 2000, we had total assets of $5.8 billion, total loans, net, of $4.0 billion and total deposits of $4.8 billion. The Company has participated in nine mergers during the three-year period ended December 31, 2000, as described in Note 2, Notes To Consolidated Financial Statements. With the exception of the merger with The Matsco Companies, Inc., all of these mergers were accounted for as a pooling-of-interests and, accordingly, all of the financial information of the Company for the periods prior to the mergers has been restated as if the mergers had occurred at the beginning of the earliest period presented. The merger with The Matsco Companies, Inc. was accounted for using the purchase accounting method and accordingly The Matsco Companies, Inc.'s results of operations have been included in the consolidated financial statements since the date of acquisition. All outstanding and weighted average share amounts presented in this report have been restated to reflect the 2-for-1 stock splits effective as of April 30, 1998 and as of October 4, 2000. The following discussion and analysis is intended to provide greater details of 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 and other factors discussed in the annual report on Form 10-K for the year ended December 31, 2000 under Item 1. Business - Factors That May Affect Future Results of Operations. A-3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS The following table summarizes income, income per share and key financial ratios for the periods indicated using three different measurements:
Core earnings (income before nonrecurring warrant income, and merger and other related nonrecurring costs, other nonrecurring expenses) ------------------------------------------------------------------ Year ended Year ended Year ended (Dollars in thousands, except per share amounts) December 31, 2000 December 31, 1999 December 31, 1998 ------------------------------------------------------------------------------------------------------------------------- Income $ 81,439 $ 53,621 $ 42,630 Income per share: Basic $ 1.70 $ 1.20 $ 0.98 Diluted $ 1.61 $ 1.14 $ 0.91 Return on average assets 1.63% 1.39% 1.40% Return on average shareholders' equity 23.29% 19.78% 18.28%
Income including nonrecurring warrant income and before merger and other related nonrecurring costs ------------------------------------------------------------------ Year ended Year ended Year ended (Dollars in thousands, except per share amounts) December 31, 2000 December 31, 1999 December 31, 1998 ------------------------------------------------------------------------------------------------------------------------- Income $ 89,015 $ 58,096 $ 42,947 Income per share: Basic $ 1.86 $ 1.30 $ 0.98 Diluted $ 1.76 $ 1.23 $ 0.92 Return on average assets 1.78% 1.51% 1.42% Return on average shareholders' equity 25.45% 21.43% 18.41%
Net income (including non-recurring warrant income and merger and other nonrecurring costs) --------------------------------------------------------------- Year ended Year ended Year ended (Dollars in thousands, except per share amounts) December 31, 2000 December 31, 1999 December 31, 1998 ------------------------------------------------------------------------------------------------------------------------- Income $ 67,164 $ 51,301 $ 41,273 Income per share: Basic $ 1.40 $ 1.15 $ 0.95 Diluted $ 1.33 $ 1.09 $ 0.88 Return on average assets 1.34% 1.33% 1.36% Return on average shareholders' equity 19.21% 18.92% 17.69%
Net income for 2000 increased 30.9% to $67.2 million, or $1.33 per diluted share, compared to net income of $51.3 million, or $1.09 per diluted share, for 1999. 2000 results included nonrecurring warrant income of $13.0 million ($7.6 million, net of taxes) compared to $14.5 million ($8.4 million, net of taxes) during 1999. In addition, 2000 results included merger and other related nonrecurring costs of $33.5 million ($21.9 million, net of taxes) compared to $10.8 million ($6.8 million, net of taxes) in 1999. Income, including nonrecurring warrant income and before nonrecurring merger related expenses and extraordinary items, increased 53.2% to $89.0 million, or $1.76 per diluted share, in 2000, compared to $58.1 million, or $1.23 per diluted share, in 1999. A-4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company's core earnings for 2000 increased 51.9% to $81.4 million, or $1.61 per diluted share, compared to $53.6 million, or $1.14 per diluted share for 1999. Based on its core earnings for 2000, the Company's return on average shareholders' equity was 23.29% and its return on average assets was 1.63%. During 1999, the Company's core earnings resulted in a return on average shareholders' equity of 19.78% and a return on average assets of 1.39%. The 51.9% increase in core earnings during 2000 as compared to 1999 was the result of significant growth in loans and investments. For 2000, net interest income increased 38.2% as compared to 1999. This increase was primarily due to a 30.6% increase in average interest-earning assets for 2000 as compared to 1999. The increases in loans, trust assets and deposits also contributed to the 31.0% increase in loan and international banking fees, service charges and other fees, and trust fees. Increases in operating expenses were required to service and support the Company's growth. As a result, increases in revenue were partially offset for 2000 by a 15.0% increase in recurring operating expenses, as compared to 1999. Net income for 1999 increased 24.4% to $51.3 million, or $1.09 per diluted share, compared to net income of $41.3 million, or $0.88 per diluted share, for 1998. 1999 results included nonrecurring warrant income of $14.5 million ($8.4 million, net of taxes) compared to $945,000 during 1998. In addition, 1999 results included merger and other related nonrecurring costs of $10.8 million ($6.8 million, net of taxes) compared to $2.7 million ($1.7 million, net of taxes) in 1998. Income, including nonrecurring warrant income and before nonrecurring merger related expenses and extraordinary items, increased 35.3% to $58.1 million, or $1.23 per diluted share, in 1999, compared to $42.9 million, or $0.92 per diluted share, in 1998. The Company's core earnings for 1999 increased 25.8% to $53.6 million, or $1.14 per diluted share, compared to $42.6 million, or $0.91 per diluted share for 1998. Based on its core earnings for 1999, the Company's return on average shareholders' equity was 19.78% and its return on average assets was 1.39%. During 1998, the Company's core earnings resulted in a return on average shareholders' equity of 18.28% and a return on average assets of 1.40%. The 25.8% increase in core earnings during 1999 as compared to 1998 was the result of significant growth in loans and investments. For 1999, net interest income increased 22.5% as compared to 1998. This increase was primarily due to a 26.9% increase in average interest-earning assets for 1999 as compared to 1998. The increases in loans, trust assets and deposits also contributed to the 22.4% increase in loan and international banking fees, service charges and other fees, and trust fees. Increases in operating expenses were required to service and support the Company's growth. As a result, increases in revenue were partially offset for 1999 by a 32.0% increase in recurring operating expenses, as compared to 1998. A-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net Interest Income Net interest income increased 38.2% to $265.6 million in 2000 from $192.1 million in 1999. This increase was primarily due to the $1.1 billion, or 30.6%, increase in average interest-earning assets and a 32 basis point increase in the Company's net yield on interest-earning assets. Net interest income increased 22.5% in 1999 from $156.9 million in 1998. This increase was primarily due to the $753.0 million, or 26.9%, increase in average interest-earning assets, which was partially offset by the 20 basis point decrease in the Company's net yield on interest-earning assets. 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, --------------------------------------------------------------------------- 2000 1999 ----------------------------------- -------------------------------------- Average Average Average yield / Average yield / (Dollars in thousands) balance (1) Interest rate balance (1) Interest rate ----------------------------------------------------------------------------------------- ----------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 214,133 $ 13,080 6.11% $ 225,357 $ 11,614 5.15% Other short term securities 44,841 2,978 6.64% 81,121 4,327 5.33% Investment securities: Taxable 871,627 62,250 7.14% 641,584 42,081 6.56% Tax-exempt (2) 185,879 9,632 5.18% 146,170 7,305 5.00% Loans (3) 3,321,682 335,699 10.11% 2,457,353 233,307 9.49% ------------ --------- ---------- -------- Total interest-earning assets 4,638,162 423,639 9.13% 3,551,585 298,634 8.41% Noninterest-earning assets 372,575 299,193 ------------ --------- ---------- -------- Total assets $ 5,010,737 423,639 $3,850,778 298,634 ============ --------- ========== -------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $ 2,346,598 91,643 3.91% $1,848,328 61,419 3.32% Time deposits, over $100,000 780,505 43,101 5.52% 561,754 26,669 4.75% Other time deposits 214,634 11,525 5.37% 215,600 10,500 4.87% ------------ --------- ---------- -------- Total interest-bearing deposits 3,341,737 146,269 4.38% 2,625,682 98,588 3.75% Other borrowings 192,728 11,781 6.11% 142,426 7,853 5.51% Subordinated debt - - 0.00% 607 68 11.20% ------------ --------- ---------- -------- Total interest-bearing liabilities 3,534,465 158,050 4.47% 2,768,715 106,509 3.85% Noninterest-bearing deposits 965,131 717,178 Other noninterest-bearing liabilities 79,529 44,754 Trust Preferred Securities 81,913 49,000 ------------- ---------- Shareholders' equity 349,699 271,131 ------------- ---------- Total shareholders' equity and liabilities $ 5,010,737 158,050 $3,850,778 106,509 ============= --------- ========== -------- Net interest income $ 265,589 $192,125 ========= ======== Interest rate spread 4.66% 4.56% Contribution of interest free funds 1.06% 0.85% ---- ----- Net yield on interest-earnings assets (4) 5.73% 5.41% ==== ==== --------------------------------------------- 1998 -------------------------------------------- Average Average yield / (Dollars in thousands) balance (1) Interest rate ------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Fed funds sold $ 177,190 $ 9,455 5.34% Other short term securities 111,755 6,302 5.64% Investment securities: Taxable 581,934 36,110 6.21% Tax-exempt (2) 110,316 5,607 5.08% Loans (3) 1,817,416 186,795 10.28% ------------ -------- Total interest-earning assets 2,798,611 244,269 8.73% Noninterest-earning assets 236,318 ------------ -------- Total assets $ 3,034,929 244,269 ============ -------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $ 1,413,812 48,069 3.40% Time deposits, over $100,000 401,247 20,509 5.11% Other time deposits 198,169 9,946 5.02% ------------ -------- Total interest-bearing deposits 2,013,228 78,524 3.90% Other borrowings 141,895 8,526 6.01% Subordinated debt 3,000 345 11.50% ------------ -------- Total interest-bearing liabilities 2,158,123 87,395 4.05% Noninterest-bearing deposits 580,441 Other noninterest-bearing liabilities 31,816 Trust Preferred Securities 31,293 ------------ Shareholders' equity 233,256 ------------ -------- Total shareholders' equity and liabilities $ 3,034,929 87,395 ============ -------- Net interest income $156,874 ======== Interest rate spread 4.68% Contribution of interest free funds 0.93% ----- Net yield on interest-earnings assets (4) 5.61% =====
---------- (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 7.61%, 7.46% and 7.56% for the years ended December 31, 2000, 1999 and 1998, respectively, using the federal statutory rate of 34%. (3) Loan fees totaling $10.2 million, $9.6 million and $8.4 million are included in loan interest income for 2000, 1999 and 1998, respectively. (4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. A-6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The most significant impact on the Company's net interest income between periods is derived from the interaction of changes in the volume of and rate earned or paid on interest-earning assets and interest-bearing liabilities. The volume of interest-earning asset dollars in loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in the net interest income between periods. The table below sets forth, for the 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, 2000 Year ended December 31, 1999 compared with December 31, 1999 compared with December 31, 1998 ---------------------------------- -------------------------------- favorable / (unfavorable) favorable / (unfavorable) ---------------------------------- -------------------------------- (Dollars in thousands) Volume Rate Net Volume Rate Net ------------------------------------------------------------------------------------------------ -------------------------------- INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ (601) $ 2,067 $ 1,466 $ 2,492 $ (333) $ 2,159 Other short term investments (2,241) 892 (1,349) (1,649) (326) (1,975) Investment securities: Taxable 16,163 4,006 20,169 3,837 2,134 5,971 Tax-exempt 2,049 278 2,327 1,793 (95) 1,698 Loans 86,532 15,860 102,392 61,650 (15,138) 46,512 ----------------------------------- ------------------------------- Total interest income 101,901 23,104 125,005 68,124 (13,759) 54,365 ----------------------------------- ------------------------------- INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (18,316) (11,908) (30,224) (14,462) 1,112 (13,350) Time deposits over $100,000 (11,579) (4,853) (16,432) (7,708) 1,548 (6,160) Other time deposits 47 (1,072) (1,025) (855) 301 (554) ----------------------------------- ------------------------------- Total interest-bearing deposits (29,849) (17,832) (47,681) (23,025) 2,961 (20,064) Other borrowings (3,004) (924) (3,928) (32) 705 673 Subordinated debt 34 34 68 268 9 277 ----------------------------------- ------------------------------- Total interest expense (32,818) (18,723) (51,541) (22,789) 3,675 (19,114) ----------------------------------- ------------------------------- Net increase (decrease) in net interest income $ 69,084 $ 4,380 $ 73,464 $ 45,335 $(10,084) $ 35,251 =================================== ===============================
Interest income in 2000 increased 41.9% to $423.6 million from $298.6 million in 1999. 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 enhanced by an increase in the yield earned on average interest-earning assets. Average interest-earning assets increased $1.1 billion, or 30.6%, to $4.6 billion in 2000, compared to $3.6 billion in 1999. Average loans increased $864.3 million, or 35.2%, to $3.3 billion in 2000 from $2.5 billion in 1999. Average investment securities, Federal funds sold and other short-term securities, increased 20.3% to $1.3 billion in 2000 from $1.1 billion in 1999. The average yield on interest-earning assets increased 72 basis points to 9.13% in 2000 from 8.41% in 1999 primarily due to an increase in the average yield on loans. Loans represented approximately 71.6% of total interest-earning assets in 2000 compared to 69.2% in 1999. The average yield on loans increased 62 basis points to 10.11% in 2000 from 9.49% in 1999. Interest expense in 2000 increased 48.4% to $158.1 million from $106.5 million in 1999. This increase was due to greater volumes of interest-bearing liabilities and higher interest rates paid on interest-bearing liabilities. Average interest-bearing liabilities increased 27.7% to $3.5 billion in 2000 from $2.8 billion in 1999. 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-7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During 2000, average noninterest-bearing deposits increased to $965.1 million from $717.2 million in 1999. As a result of the foregoing, the Company's interest rate spread increased to 4.66% in 2000 from 4.56% in 1999, and the net yield on interest-earning assets increased in 2000 to 5.73% from 5.41% in 1999. Interest income increased 22.3% to $298.6 million in 1999 from $244.3 million in 1998, as a result of the increase in average interest-earning assets offset by a decline in the yields earned. Average interest-earning assets increased 26.9% to $3.6 billion in 1999 from $2.8 billion in 1998 principally as a result of increase in loans. The yield on the higher volume of average interest-earning assets declined 32 basis points to 8.41% in 1999 from 8.73% in 1998, primarily as a result of increased competition for loans. Interest expense in 1999 increased 21.9% to $106.5 million from $87.4 million in 1998 primarily as a result of the increase in the volume of interest-bearing liabilities and in the rates paid on interest-bearing liabilities. Corresponding to the growth in average interest-earning assets, average interest-bearing liabilities increased 28.3% to $2.8 billion in 1999 from $2.2 billion in 1998. As a result of the foregoing, the Company's interest rate spread declined to 4.56% in 1999 from 4.68% in 1998 and the net yield on interest-earning assets declined to 5.41% in 1999 from 5.61% in 1998. 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) 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------- Average noninterest bearing demand deposits $ 965,131 $ 717,178 $ 580,441 Client service expenses 2,694 3,811 3,015 Client service expenses, as a percentage of average noninterest bearing demand deposits 0.28% 0.53% 0.52% IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS (EXCLUDING CAPITAL SECURITIES): Net yield on interest-earning assets 5.73% 5.41% 5.61% Impact of client service expense (0.06)% (0.11)% (0.11)% ---------- ---------- ------------- Adjusted net yield on interest-earning assets 5.67% 5.30% 5.50% ========== ========== =============
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. A-8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 2000 was $28.8 million, compared to $14.9 million in 1999 and $8.7 million in 1998. In addition, in connection with the mergers described in Note 2 of Notes to Consolidated Financial Statements, the Company made an additional provision for loan losses of $8.1 million, $2.7 million and $183,000 in 2000, 1999 and 1998, respectively, to conform to the Company's allowance methodology. For further information on nonperforming and classified loans and the allowance for loan losses, see "Financial Condition -- Nonperforming and Classified Assets" herein. Other Income Total other income increased to $47.1 million in 2000, compared to $44.8 million in 1999 and $23.8 million in 1998. The following table sets forth information by category of other income for the years indicated.
Years ended December 31, ------------------------------------------- (Dollars in thousands) 2000 1999 1998 ---------------------------------------------------------------------------------------- Service charges and other fees $ 9,661 $ 8,975 $ 7,856 Loan and international banking fees 8,162 4,275 2,935 Trust fees 3,450 2,990 2,473 ATM network revenue 2,891 2,682 2,440 Gain on sale of SBA loans 2,190 2,058 3,490 Gain (loss) on investments, net (521) (46) 623 Other income 8,312 9,403 3,003 --------- --------- --------- Total, recurring 34,145 30,337 22,820 Warrant income 12,986 14,508 945 --------- --------- --------- Total $ 47,131 $ 44,845 $ 23,765 ========= ========= =========
A-9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The increase in other income in 2000 as compared to 1999 was a result of $3.9 million increase in loan and international banking fees, a $686,000 increase in service charges and other fees, and a $460,000 increase in trust fees. These increases were a result of significant growth in total loans, total deposits and trust assets. Other income in 2000 and 1999 includes $2.1 million and $4.0 million, respectively, 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 1999 as compared to 1998 was a result of $1.3 million increase in loan and international banking fees, a $1.1 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 in 2000, 1999 and 1998 included warrant income of $13.0 million, $14.5 million and $945,000 net of related employee incentives of $4.5 million, $7.3 million and $396,000, respectively. At December 31, 2000, the Company held approximately 145 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. Operating Expenses The following table sets forth the major components of operating expenses for the years indicated.
Years ended December 31, -------------------------------------------- (Dollars in thousands) 2000 1999 1998 ---------------------------------------------------------------------------------------------------- Compensation and benefits $ 73,966 $ 65,668 $ 55,665 Occupancy and equipment 23,192 18,999 14,696 Dividends paid on Trust Preferred Securities 7,842 4,201 2,824 Client service expenses 2,694 3,811 3,015 Legal and other professional fees 5,345 4,072 3,936 FDIC insurance and regulatory assessments 1,472 807 723 Expenses on other real estate owned 56 (34) 161 Other 24,977 23,805 22,471 ---------- ---------- -------- Total operating expenses excluding nonrecurring costs 139,544 121,329 103,491 Contribution to the Greater Bay Bancorp Foundation and related expenses - 12,160 1,341 Mergers and other related nonrecurring costs 33,526 10,818 2,661 ---------- ---------- -------- Total operating expenses $ 173,070 $ 144,307 $107,493 ========== ========== ======== Efficiency ratio 55.34% 60.90% 59.51% Efficiency ratio (before merger, nonrecurring and extraordinary items) 46.56% 54.54% 57.59% Total operating expenses to average assets 3.45% 3.75% 3.54% Total operating expenses to average assets (before merger, nonrecurring and extraordinary items) 2.78% 3.15% 3.41%
A-10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating expenses totaled $173.1 million for 2000, compared to $144.1 million for 1999 and $107.5 million for 1998. The ratio of operating expenses to average assets was 3.45% in 2000, 3.75% in 1999, and 3.54% in 1998. 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 2000 was 46.56%, compared to 54.54% in 1999 and 57.59% in 1998. During 1998, Greater Bay established the Greater Bay Bancorp Foundation ("the Foundation"). The Foundation was formed to provide a vehicle through which the Company, its officers and directors can provide support to the communities in which the Company does business. The Foundation focuses its support on initiatives related to education, health and economic growth. To support the Foundation, the Company contributed appreciated 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 expenses of $12.2 million in 1999 and $1.3 million in 1998 in connection with its Foundation donations 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 2000, average assets increased 30.1% from 1999, while operating expenses, excluding merger, and other nonrecurring items, increased only 15.0%. From 1998 to 1999, average assets increased 26.9%, while operating expenses, excluding merger and nonrecurring costs increased only 17.2%. Compensation and benefits expenses increased in 2000 to $74.0 million, compared to $65.7 million in 1999 and $55.7 million in 1998. The increase in compensation and benefits is due primarily to the additions in personnel made in 2000 and 1999 to accommodate the growth of the Company. The increase in occupancy and equipment, legal and other professional fees, 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. The increase in the dividends paid on Trust Preferred Securities was a result of the $50.5 million in Trust Preferred Securities issued in 2000. Income Taxes The Company's effective income tax rate for 2000 was 39.4%, compared to 34.0% in 1999 and 35.9% in 1998. 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 Pacific Rim Bancorporation. A-11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCIAL CONDITION Total assets increased 35.2% to $5.8 billion at December 31, 2000, compared to $4.3 billion at December 31, 1999. Total assets increased 28.4% in 1999 from $3.4 billion at December 31, 1998. The increases in 2000 and 1999 were primarily due to increases in the Company's loan portfolio funded by growth in deposits. Loans Total gross loans increased 41.6% to $4.1 billion at December 31, 2000, compared to $2.9 billion at December 31, 1999. Total gross loans increased 35.8% in 1999 from $2.1 billion at year-end 1998. The increases in loan volumes in 2000 and 1999 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 leases and 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, --------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------------- (Dollars in thousands) Amount % Amount % Amount % Amount % Amount % ------------------------------------------------------------------------------------------------------------------------------------ Commercial $ 1,807,117 45.5% $1,130,635 40.2% $ 817,934 39.5% $ 709,933 43.1% $ 598,951 44.8% Term Real Estate - Commercial 1,096,576 27.6 883,749 31.4 665,595 32.1 491,322 29.8 380,517 28.5 -------------------------------------------------------------------------------------------------- Total Commercial 2,903,693 73.1 2,014,384 71.6 1,483,529 71.6 1,201,255 72.9 979,468 73.3 Real estate construction and land 753,936 19.0 531,529 18.9 356,931 17.2 239,925 14.6 181,664 13.6 Real estate other 187,173 4.7 156,284 5.6 121,480 5.9 91,283 5.5 77,803 5.8 Consumer and other 234,721 5.9 179,705 6.4 160,126 7.7 157,520 9.6 131,961 9.9 -------------------------------------------------------------------------------------------------- Total loans, gross 4,079,523 102.7 2,881,902 102.5 2,122,066 102.4 1,689,983 102.6 1,370,896 102.6 Deferred fees and discounts, net (14,787) (0.4) (14,114) (0.5) (12,870) (0.6) (12,126) (0.7) (11,559) (0.9) -------------------------------------------------------------------------------------------------- Total loans, net of deferred fees 4,064,736 102.3 2,867,788 102.0 2,109,196 101.8 1,677,857 101.9 1,359,337 101.7 Allowance for loan losses (91,407) (2.3) (54,459) (2.0) (38,589) (1.8) (31,677) (1.9) (23,205) (1.7) -------------------------------------------------------------------------------------------------- Total loans, net $ 3,973,329 100.0% $2,813,329 100.0% $ 2,070,607 100.0% $1,646,180 100.0% $1,336,132 100.0% ==================================================================================================
A-12 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, 2000.
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 $ 295,856 $ 28,664 $ 56,950 $ 2,080 Variable rate 613,276 65,948 625,615 27,504 One to five years: Fixed rate 175,849 132,334 2,362 7,499 Variable rate 296,819 138,067 40,211 30,068 After five years: Fixed rate 250,932 385,488 5,274 14,177 Variable rate 174,385 346,075 23,523 105,845 ----------------- ------------------ ----------------- ----------------- Total $ 1,807,117 $ 1,096,576 $ 753,936 $ 187,173 ================= ================== ================= =================
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) 2000 1999 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans: Nonaccrual loans $ 13,014 $ 7,139 $ 4,208 $ 5,157 $ 7,643 Restructured loans - 807 840 1,596 1,917 ----------------------------------------------------------------------- Total nonperforming loans 13,014 7,946 5,048 6,753 9,560 OREO - 271 966 1,541 2,224 ----------------------------------------------------------------------- Total nonperforming assets $ 13,014 $ 8,217 $ 6,014 $ 8,294 $ 11,784 ======================================================================= Accruing loans past due 90 days or more $ 4,463 $ 908 $ 244 $ 274 $ 2,651 ======================================================================= Nonperforming assets to total loans and OREO 0.32% 0.29% 0.29% 0.49% 0.87% Nonperforming assets to total assets 0.22% 0.19% 0.18% 0.31% 0.53%
A-13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) At December 31, 2000 and 1999, the Company had $13.0 million and $7.1 million in nonaccrual loans, respectively. At December 31, 2000, accruing loans past due 90 days or more included three loans totaling $3.7 million which were brought current on in the first two weeks of 2001. All three of these loans had matured in 2000 and were awaiting either payoff or renewal. 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 uncollectable and its continuance as an asset is not warranted. Of the $46 million in classified loans at December 31, 2000, approximately $13 million in loans are secured by real estate, $29 million in loans are secured by accounts receivable, inventory and equipment and $4 million in other loans are secured by personal guarantees and related assets. The classified loans include a variety of borrower types and are not concentrated in any particular industry or niche business. Based on recent appraisals, the average loan to value ratio of the real estate secured loans is 60% and management does not believe that any material losses will be recognized in these classified loans. With respect to the secured commercial loans and the other secured loans, management believes that the related commercial business assets, personal assets securing these loans and the personal guarantees, combined with the allowance for loan losses are adequate to absorb any possible loan losses. The following table sets forth the classified loans and other real estate owned at the dates indicated.
As of December 31, ---------------------------------------- (Dollars in thousands) 2000 1999 1998 -------------------------------------------------------------------------------- Substandard $ 46,658 $ 32,892 $ 23,144 Doubtful 1,758 1,850 1,376 Less - 2 - OREO - 271 966 ----------- ---------- --------- Classified loans and OREO $ 48,417 $ 35,015 $ 25,486 =========== ========== ========= Classified to total loans and OREO 1.19% 1.22% 1.21% Allowance for loan losses to total classified loans and OREO 188.79% 155.53% 151.41%
With the exception of these classified loans, management was not aware of any loans outstanding as of December 31, 2000 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. A-14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 uncollectable; recoveries are generally recorded only when cash payments are received. The following table sets forth information concerning the Company's allowance for loan losses at the dates and for the years indicated.
(Dollars in thousands) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------------------------------- Period end loans outstanding $ 4,079,523 $ 2,881,902 $ 2,122,066 $ 1,689,983 $ 1,370,896 Average loans outstanding $ 3,330,147 $ 2,463,215 $ 1,821,553 $ 1,505,065 $ 1,110,955 Allowance for loan losses: Balance at beginning of period $ 54,459 $ 38,589 $ 31,677 $ 23,205 $ 18,501 Allowance of entities acquired through mergers accounted for under purchase accounting method 10,927 - - - 50 Charge-offs: Commercial (11,747) (3,006) (2,389) (2,466) (1,831) Term Real Estate - Commercial - (16) (51) (59) (154) ------------------------------------------------------------------------ Total Commercial (11,747) (3,022) (2,440) (2,525) (1,985) Real estate construction and land (376) - (7) (276) (127) Real estate other - - - (13) - Consumer and other (371) (536) (462) (428) (600) ------------------------------------------------------------------------ Total charge-offs (12,494) (3,558) (2,909) (3,242) (2,712) ------------------------------------------------------------------------ Recoveries: Commercial 946 1,337 757 410 813 Term Real Estate - Commercial - 5 11 10 28 ------------------------------------------------------------------------ Total Commercial 946 1,342 768 420 841 Real estate construction and land 379 11 - 6 328 Real estate other - 7 - - - Consumer and other 291 423 155 101 262 ------------------------------------------------------------------------ Total recoveries 1,616 1,783 923 527 1,431 ------------------------------------------------------------------------ Net charge-offs (10,878) (1,775) (1,986) (2,715) (1,281) Provision charged to income (1) 36,899 17,645 8,898 11,187 5,935 ------------------------------------------------------------------------ Balance at end of period $ 91,407 $ 54,459 $ 38,589 $ 31,677 $ 23,205 ======================================================================== Net charge-offs to average loans outstanding during the period 0.33% 0.07% 0.11% 0.18% 0.12% Allowance as a percentage of average loans outstanding 2.74% 2.21% 2.12% 2.10% 2.09% Allowance as a percentage of period end loans outstanding 2.24% 1.89% 1.82% 1.87% 1.69% Allowance as a percentage of non-performing loans 523.01% 615.08% 729.20% 450.79% 190.03%
---------- (1) Includes $8.1 million, $2.7 million, $183,000, $1.4 million and $800,000 in 2000, 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. A-15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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, 2000. 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, -------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------------------------------------------------------------------------------------------------- % of % of % of % of % of Category Category Category Category 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 $ 37,896 44.30% $20,454 39.23% $ 15,758 38.54% $ 12,226 42.01% $ 10,327 43.69% Term real estate - commercial 15,844 26.88% 8,821 30.67% 4,631 31.37% 3,908 29.07% 3,155 27.76% -------------------------------------------------------------------------------------------------- Total commercial 53,740 71.18% 29,275 69.90% 20,389 69.91% 16,134 71.08% 13,482 71.45% Real estate construction and land 10,935 18.48% 5,590 18.44% 4,047 16.82% 2,536 14.20% 2,639 13.25% Real estate other 1,866 4.59% 2,239 5.42% 1,639 5.72% 1,357 5.40% 779 5.68% Consumer and other 5,732 5.75% 4,214 6.24% 3,056 7.55% 2,173 9.32% 2,206 9.63% -------------------------------------------------------------------------------------------------- Total allocated 72,273 41,318 29,131 22,200 19,106 Unallocated 19,134 13,141 9,458 9,477 4,099 -------------------------------------------------------------------------------------------------- Total $ 91,407 100.00% $54,459 100.00% $ 38,589 100.00% $ 31,677 100.00% $ 23,205 100.00% ==================================================================================================
A-16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) At December 31, 2000, the allowance for loan losses was $91.4 million, consisting of a $72.3 million allocated allowance and a $19.1 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. 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 local subdivisions, securities sold under repurchase agreements, and Federal Home Loan Bank ("FHLB") advances. The portfolio is comprised of U.S. Treasury securities, U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, corporate debt instruments and a modest amount of equity securities, including Federal Reserve Bank stock and FHLB stock. 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. For the amortized cost and estimated fair value of the investment securities, the maturity of investment securities by security type and additional information concerning the investments portfolio, see Note 3 of Notes to Consolidated Financial Statements. Deposits The Company emphasizes developing total client relationships with its customers in order to increase its core deposit base. Deposits reached $4.8 billion at December 31, 2000, an increase of 27.1% compared to deposits of $3.7 billion at December 31, 1999. In 1999, deposits increased 30.2% from $2.9 billion at December 31, 1998. The increase in deposits was primarily due to the continued marketing efforts directed at commercial business clients in the Company's market areas. The Company's noninterest-bearing demand deposit accounts increased 37.9% to $1.1 billion at December 31, 2000, compared to $822.3 million a year earlier. Money market deposit accounts ("MMDA"), negotiable order of withdrawal accounts ("NOW") and savings accounts reached $2.3 billion at year-end 2000, an increase of 14.1% from $2.1 billion at December 31, 1999. MMDA, NOW and savings accounts were 49.4% of total deposits at December 31, 2000, as compared to 55.1% at December 31, 1999. Time certificates of deposit totaled $1.3 billion, or 26.7% of total deposits, at December 31, 2000, compared to $856.1 million, or 22.9% of total deposits, at December 31, 1999. As of December 31, 2000 and 1999, the Company had $161.6 million and $39.2 million, respectively in brokered deposits outstanding. A-17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other Borrowings At December 31, 2000 other borrowings consisted of securities sold under agreements to repurchase, FHLB advances, advances under credit lines, and other notes payable. Note 10 of Notes to 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 the Company's 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 can utilize brokered deposit lines, sell securities under agreements to repurchase, FHLB advances or purchase overnight Federal Funds. Greater Bay is a company separate and apart from the Banks. It must provide for its own liquidity. 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, 2000, the Banks had approximately $112.0 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, 2000, Greater Bay did not have any material commitments for capital expenditures. Net cash provided by operating activities, consisting primarily of net income, totaled $121.7 million for 2000, $65.3 million for 1999 and $48.8 million for 1998. Cash used for investing activities totaled $1.5 billion in 2000, $910.2 million in 1999 and $433.7 million in 1998. The funds used for investing activities primarily represent increases in loans and investment securities for each year reported. For the year ended December 31, 2000, net cash provided by financing activities was $1.4 billion, compared to $890.6 million in 1999 and $608.0 million in 1998. Historically, the primary financing activity of the Company has been through deposits. In 2000, 1999 and 1998, deposit gathering activities generated cash of $1.1 billion, $867.3 million and $572.5 million, respectively. This represents a total of 70.3%, 97.3% and 91.1% of the financing cash flows for 2000, 1999 and 1998, 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 in 1998, which were issued principally to provide capital to the Company (see "- Capital Resources", below). Capital Resources Shareholders' equity at December 31, 2000 increased to $385.9 million from $306.1 million at December 31, 1999 and from $251.4 million at December 31, 1998. Greater Bay paid dividends of $0.35, $0.24 and $0.19 per share in December 31, 2000, 1999 and 1998, respectively, excluding dividends paid by subsidiaries prior to the completion of their mergers. On March 23, 2000, Greater Bay completed a private offering of 648,648 shares of restricted common stock to institutional investors. Proceeds from the offering were $12,000,000 less placement agent's fees of $514,000. On December 22, 1999, Greater Bay completed a private offering of 1,070,000 shares of restricted common stock to institutional investors. Proceeds from the offering were $19,795,000 less placement agent's fees of $834,000. Greater Bay intends to use the net proceeds from both offerings for general corporate purposes. A-18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In 1998, the Company issued $30.0 million in Trust Preferred Securities to enhance its regulatory capital base, while also providing added liquidity. In 2000, the Company completed two additional offerings of TPS in an aggregate amount of $50.5 million. Under applicable regulatory guidelines, the Trust Preferred Securities qualify as Tier I capital up to a maximum of 25% of Tier I capital. Any additional portion of Trust Preferred Securities would qualify as Tier 2 capital. As of December 31, 2000, all outstanding Trust Preferred Securities qualified as Tier I capital. As the Company's shareholders' equity increases, the amount of Tier I capital that can be comprised of Trust Preferred Securities will increase. 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 Trust Preferred Securities in core capital, and the allowance for loan losses in supplementary capital. At December 31, 2000, the minimum risk-based capital requirements to be considered adequately capitalized were 4.0% for core capital and 8.0% for total capital. Federal banking regulators have also adopted leverage capital guidelines to supplement risk-based measures. The leverage ratio is determined by dividing Tier 1 capital as defined under the risk-based guidelines by average total assets (not risk-adjusted) for the preceding quarter. The minimum leverage ratio is 3.0%, although certain banking organizations are expected to exceed that amount by 1.0% or more, depending on their circumstances. Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. The capital levels of the Company at December 31, 2000 and the two highest levels recognized under these regulations are as follows:
Tier 1 Total Leverage risk-based risk-based ratio capital ratio capital ratio ------------------------------------------------------------------ Company 8.79% 9.57% 10.87% Well-capitalized 5.00% 6.00% 10.00% Adequately capitalized 4.00% 4.00% 8.00%
The Company's leverage ratio was 8.79% at December 31, 2000, compared to 8.32% at December 31, 1999. At December 31, 2000, the Company's risk-based capital ratios were 9.57% for Tier 1 risk-based capital and 10.87% for total risk-based capital, compared to 9.92% and 11.23%, respectively, as of December 31, 1999. In addition, at December 31, 2000, each of the Banks, had levels of capital that exceeded the well-capitalized guidelines. For additional information on the capital levels and capital ratios of the Company and each of the Banks, see Note 18 of Notes to Consolidated Financial Statements. A-19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 an extensive loan review process and its allowance for loan losses. See "--Allowance for Loan Losses" herein. Interest rate risk is the change in value due to changes in interest rates. This risk is addressed by the Company's Asset & Liability Management Committee "ALCO", which includes senior management representatives. The ALCO monitors interest rate risk by analyzing the potential impact to the net portfolio of equity value and net interest income from potential changes to interest rates and considers the impact of alternative strategies or changes in balance sheet structure. The ALCO manages the Company's balance sheet in part to maintain the potential impact on net portfolio value and net interest income within acceptable ranges despite changes in interest rates. 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. If potential changes to net portfolio value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits. In order to reduce the exposure to interest rate fluctuations, the Company has implemented strategies to more closely match its balance sheet. The Company has generally focused its investment activities on securities with terms or average lives between five and eight years to lengthen the average duration of its assets. The Company has utilized short-term borrowings and deposit marketing programs to shorten the effective duration of its liabilities. In addition, the Company has utilized an interest rate swap to manage the interest rate risk of the Floating Rate Trust Preferred Securities, Series B issued August 12, 1998. This interest rate swap is not an "ineffective hedge" and is accounted for under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133 and 138"). Market Value of Portfolio Equity Interest rate sensitivity is computed by estimating the changes in net portfolio of equity value, or market value over a range of potential changes in interest rates. The market value of equity is the market value of the Company's assets minus the market value of its liabilities plus the market value of any off-balance sheet items. The market value of each asset, liability, and off-balance sheet item is its net present value of expected cash flows discounted at market rates after adjustment for rate changes. The Company measures the impact on market value for an immediate and sustained 100 basis point increase and decrease (shock) in interest rates. The following table shows the Company's projected change in net portfolio value for this set of rate shocks as of December 31, 2000.
Change in interest rates Projected change Net portfolio ----------------------------- (Dollars in thousands) (1) value Dollars Percentage -------------------------------------------------------------------------- 100 basis point rise $ 896,779 $ (7,025) -0.78% Base scenario 903,804 - - 100 basis point decline 899,801 (4,003) -0.44%
----------- (1) Evaluation excludes SJNB Financial Corp. See further discussion below. A-20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The preceding table indicates that as of December 31, 2000 an immediate and sustained 100 basis point decrease in interest rates would decrease the Company's net portfolio value by less than 1%. The foregoing analysis attributes significant value to the Company's non-interest-bearing deposit balances. The market value of portfolio equity is based on the net present values of each product in the portfolio, which in turn is based on cash flows factoring in recent market prepayment estimates from public sources. The discount rates are based on recently observed spread relationships and adjusted for the assumed interest rate changes. Some valuations are provided directly from independent broker quotations. Net Interest Income Simulation The impact of interest rate changes on net interest income and net income are measured using income simulation. The various products in the Company's balance sheet are modeled to simulate their income (and cash flow) behavior in relation to interest rates. Income for the next 12 months is calculated for current interest rates and for immediate and sustained rate shocks. The income simulation model includes various assumptions regarding the repricing relationships for each product. Many of the Company's assets are floating rate loans, which are assumed to reprice immediately, and to the same extent as the change in market rates according to their contracted index. The Company's non-term deposit products reprice more slowly, usually changing less than the change in market rates and at the discretion of the Company. As of December 31, 2000, the analysis indicates that the Company's net interest income for the next 12 months would increase 6.14% (excluding SJNB Financial Corp.) if rates increased 200 basis points, and decrease by 5.39% (excluding SJNB Financial Corp.) if rates decreased 200 basis points. This analysis indicates the impact of change in net interest income for the given set of rate changes and assumptions. It assumes the balance sheet grows modestly, but that its structure is to remain similar to the structure at year-end. It does not account for all the factors that impact this analysis including changes by management to mitigate the impact of interest rate changes or secondary impacts such as changes to the Company's credit risk profile as interest rates change. Furthermore loan prepayment rate estimates and spread relationships change regularly. Interest rate changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in the analysis. In addition, the proportion of adjustable-rate loans in the Company's portfolio could decrease in future periods if market interest rates remain at or decrease below current levels. Changes that vary significantly from the assumptions may have significant effects on the Company's net interest income. The results of this sensitivity analysis should not be relied upon as indicative of actual future results. The above quantified evaluations exclude the impact of SJNB Financial Corp. because that institution had not been converted to risk management system as to net portfolio value and interest rate shock simulation analysis at December 31, 2000. The Company has performed a preliminary analysis of SJNB Financial Corp.'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. Gap Analysis In addition to the above analysis, the Company also performs a Gap analysis as part of the overall interest rate risk management process. This analysis is focused on the maturity structure of assets and liabilities and their repricing characteristics over future periods. An effective interest rate risk management strategy seeks to match the volume of assets and liabilities maturing or repricing during each period. Gap sensitivity is measured as the difference between the volume of assets and liabilities in the Company's current portfolio that is subject to repricing at various time horizons. The main focus is usually for the one-year cumulative gap. The difference is known as interest sensitivity gaps. A-21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following table shows interest sensitivity gaps for different intervals as of December 31, 2000:
Immediate 2 days To 7 months to 1 Year 4 years (Dollars in thousands) or one day 6 months 12 months to 3 years to 5 years -------------------------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 3,296 $ 45,715 $ - $ - $ - Short term investments 138,000 - - - - Investment securities 22,588 33,174 34,033 236,491 117,957 Loans 1,994,600 995,232 175,694 418,345 291,118 Loan losses/unearned fees - - - - - Other assets - - - - - --------------------------------------------------------------------------------------- Total assets $ 2,158,484 $ 1,074,121 $ 209,727 $ 654,836 $ 409,075 ======================================================================================= Liabilities and Equity: Deposits $ 2,081,230 $ 1,256,647 $ 207,346 $ 65,531 $ 3,402 Other borrowings - 433,344 17,338 6,863 - Trust preferred securities - - - - - Other liabilities - - - - - Shareholders' equity - - - - - --------------------------------------------------------------------------------------- Total liabilities and equity $ 2,081,230 $ 1,689,991 $ 224,684 $ 72,394 $ 3,402 ======================================================================================= Gap $ 77,254 $ (615,870) $ (14,957) $ 582,442 $ 405,673 Cumulative Gap $ 77,254 $ (538,616) $ (553,573) $ 28,869 $ 434,542 Cumulative Gap/total assets 1.33% -9.26% -9.51% 0.50% 7.47% Total More than Total rate non-rate (Dollars in thousands) 5 years sensitive sensitive Total ------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ - $ 49,011 $ 267,478 $ 316,489 Short term investments - 138,000 - 138,000 Investment securities 655,703 1,099,946 (8,825) 1,091,121 Loans 201,628 4,076,617 1,776 4,078,393 Loans losses/unearned fees - - (97,671) (97,671) Other assets - - 291,823 291,823 -------------------------------------------------------------------- Total assets $ 857,331 $ 5,363,574 $ 454,581 $ 5,818,155 ==================================================================== Liabilities and Equity: Deposits $ 2,289 $ 3,616,445 $ 1,133,958 $ 4,750,403 Other borrowings 5,722 463,267 - 463,267 Trust preferred securities 99,500 99,500 - 99,500 Other liabilities - - 119,036 119,036 Shareholders' equity - - 385,949 385,949 -------------------------------------------------------------------- Total liabilities and equity $ 107,511 $ 4,179,212 $ 1,638,943 $ 5,818,155 ==================================================================== Gap $ 749,820 $ 1,184,362 $(1,184,362) $ - Cumulative Gap $1,184,362 $ 1,184,362 $ - $ - Cumulative Gap/total assets 20.36% 20.36% 0.00% 0.00%
The foregoing table indicates that the Company had a one year negative gap of $(553.6) million, or (9.51)% of total assets, at December 31, 2000. In theory, this would indicate that at December 31, 2000, $553.6 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. Gap analysis has certain limitations. Measuring the volume of repricing or maturing assets and liabilities does not always measure the full impact on the portfolio value of equity or net interest income. Gap analysis does not account for rate caps on products; dynamic changes such as increasing prepay speeds as interest rates decrease, basis risk, or the benefit of non-rate funding sources. The relation between product rate repricing and market rate changes (basis risk) is not the same for all products. The majority of the Company's loan portfolio reprices quickly and completely following changes in market rates, while non-term deposit rates in general move more slowly and usually incorporate only a fraction of the change in rates. Products categorized as non-rate sensitive, such as its noninterest-bearing demand deposits, in the Gap analysis behave like long term fixed rate funding sources. Both of these factors tend to make the Company's actual behavior more asset sensitive than is indicated in the Gap analysis. In fact the Company experiences higher net interest income when rates rise, opposite what is indicated by the Gap analysis. Therefore management uses income simulation, net interest income rate shocks and market value of portfolio equity as its primary interest rate risk management tools. A-22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Recent Accounting Developments Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ------------------------------------------------------------------------------ In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). SFAS No. 140 replaces SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 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 SFAS No. 125's provisions without reconsideration. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after June 30, 2001. SFAS No. 140 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. SFAS No. 140 is to be applied prospectively with certain exceptions. Implementation of SFAS No. 140 is not expected to have a material effect on our financial position or results of operations. Business Combinations --------------------- On July 20, 2001, the FASB issued SFAS No. 141 "Business Combinations" ("SFAS No. 141"). The standard concludes that all business combinations within the scope of the statement will be accounted for using the purchase method. Previously, the pooling-of-interests method was required whenever certain criteria were met. Because those criteria did not distinguish economically dissimilar transactions, similar business combinations were accounted for using different methods that produced dramatically different financial statement results. SFAS No. 141 requires separate recognition of intangible assets apart from goodwill if they meet one of two criteria, the contractual-legal criterion or the separability criterion. SFAS No. 141 also requires the disclosure of the primary reasons for a business combination and the allocation of the purchase price paid to the assets acquired and liabilities assumed by major balance sheet caption. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. SFAS No. 141 also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. Our definitive merger agreement with SJNB Financial Corp. was signed on June 25, 2001, before the required implementation date, and therefore SFAS No. 141 will require us to account for that merger as a pooling of interests. As a portion of our business strategy is to pursue acquisition opportunities so as to expand our market presence and maintain growth levels, the change in accounting could have a negative impact on our ability to realize those business strategies. As SFAS No. 141 has just been released, the impact of these changes has yet to be fully determined. A-23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Goodwill and Other Intangible Assets ------------------------------------ On July 20, 2001 the FASB also issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). It addressed how intangible assets that are acquired individually or within a group of assets (but not those acquired in business combination) should be accounted for in the financial statements upon their acquisition. SFAS No. 142 adopts a more aggregate view of goodwill and bases the accounting on the units of the combined entity into which an acquired entity is aggregated. SFAS No. 142 also prescribes that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather tested at least annually for impairment. Intangible assets that have definite lives will continue to be amortized over their useful lives, but no longer with the constraint of the 40 year ceiling. SFAS No. 142 provides specific guidance for the testing of goodwill for impairment which may require re-measurement of the fair value of the reporting unit. Additional ongoing financial statement disclosures are also required. The provisions of the statement are required to be applied starting with fiscal years beginning after December 15, 2001. The statement is required to be applied at the beginning of the fiscal year and applied to all goodwill and other intangible assets recognized in the financials at that date. Impairment losses are to be reported as resulting from a change in accounting principle. As SFAS No. 142 has just been released, the impact of these changes has yet to be fully determined. Selected Loan Loss Allowance Methodology and Documentation Issues ----------------------------------------------------------------- A Staff Accounting Bulletin No. 102 "Selected Loan Loss Allowance Methodology and Documentation Issues" ("SAB No. 102") was released on July 10, 2001. It expresses certain of the staff's views on the development, documentation, and application of a systematic methodology as required by Financial Reporting Release No. 28, Accounting for Loan Losses by Registrants Engaged in Lending Activities, for determining allowances for loan and lease losses in accordance with general accept accounting principals. In particular, SAB No. 102 focuses on the documentation the staff normally would expect registrants to prepare and maintain in support of their allowances for loan losses. We have a systematic methodology for determining an appropriate allowance for loan losses, consistently followed and supported by written documentation and policies and procedures. None-the-less, in light of SAB No. 102, our methodology and documentation is currently in the process of review. However, any resulting changes are not expected to have a material impact on the financial statements. A-24 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
As of December 31, ------------------------------------------ (Dollars in thousands) 2000* 1999* ---------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 291,605 $ 166,160 Federal funds sold 145,240 226,600 Other short term securities 39,130 37,200 ------------------ ------------------- Cash and cash equivalents 475,975 429,960 Investment securities: Available for sale, at fair value 688,332 580,326 Held to maturity, at amortized cost (fair value 2000: $381,701; 1999: $246,250) 371,349 255,452 Other securities 31,383 27,812 ------------------ ------------------- Investment securities 1,091,064 863,590 Total loans: Commercial 1,807,117 1,130,635 Term real estate - commercial 1,096,576 883,749 ------------------ ------------------- Total commercial 2,903,693 2,014,384 Real estate construction and land 753,936 531,529 Real estate other 187,173 156,284 Consumer and other 234,721 179,705 Deferred loan fees and discounts (14,787) (14,114) ------------------ ------------------- Total loans, net of deferred fees 4,064,736 2,867,788 Allowance for loan losses (91,407) (54,459) ------------------ ------------------- Total loans, net 3,973,329 2,813,329 Property, premises and equipment, net 39,304 43,162 Interest receivable and other assets 238,483 154,770 ------------------ ------------------- Total assets $ 5,818,155 $ 4,304,811 ================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY Total deposits $ 4,750,404 $ 3,736,621 Other borrowings 463,267 150,577 Other liabilities 119,036 62,499 ------------------ ------------------- Total liabilities 5,332,707 3,949,697 ------------------ ------------------- Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trusts holding solely junior subordinated debentures 99,500 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; 48,748,713 and 46,174,308 shares issued and outstanding as of December 31, 2000 and 1999, respectively 196,121 169,380 Accumulated other comprehensive loss (6,035) (10,650) Retained earnings 195,862 147,384 ------------------ ------------------- Total shareholders' equity 385,948 306,114 ------------------ ------------------- Total liabilities and shareholders' equity $ 5,818,155 $ 4,304,811 ================== ===================
---------- * Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split effective on October 4, 2000. See notes to consolidated financial statements. A-25 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, ----------------------------------------------------- (Dollars in thousands, except per share amounts) 2000* 1999* 1998* ------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest on loans $335,699 $233,307 $186,795 Interest on investment securities: Taxable 62,250 42,081 36,110 Tax - exempt 9,632 7,305 5,607 -------------- -------------- -------------- Total interest on investment securities 71,882 49,386 41,717 Other interest income 16,058 15,941 15,757 -------------- -------------- -------------- Total interest income 423,639 298,634 244,269 -------------- -------------- -------------- INTEREST EXPENSE Interest on deposits 146,269 98,588 78,524 Interest on long term borrowings 1,203 4,531 4,247 Interest on other borrowings 10,578 3,390 4,624 -------------- -------------- -------------- Total interest expense 158,050 106,509 87,395 -------------- -------------- -------------- Net interest income 265,589 192,125 156,874 Provision for loan losses 28,821 14,901 8,715 -------------- -------------- -------------- Net interest income after provision for loan losses 236,768 177,224 148,159 -------------- -------------- -------------- OTHER INCOME Service charges and other fees 9,661 8,975 7,856 Loan and international banking fees 8,162 4,275 2,935 Trust fees 3,450 2,990 2,473 ATM network revenue 2,891 2,682 2,440 Gain on sale of SBA loans 2,190 2,058 3,490 Gain (loss) on sale of investments, net (521) (46) 623 Warrant income, net 12,986 14,508 945 Other income 8,312 9,403 3,003 -------------- -------------- -------------- Total 47,131 44,845 23,765 -------------- -------------- -------------- OPERATING EXPENSES Compensation and benefits 73,966 65,668 55,665 Occupancy and equipment 23,192 18,999 14,696 Dividends paid on Trust Preferred Securities 7,842 4,201 2,824 Merger and other related nonrecurring costs 33,526 10,818 2,661 Contribution to the Foundation and related expenses, net - 12,160 1,341 Other expenses 34,544 32,461 30,306 -------------- -------------- -------------- Total operating expenses 173,070 144,307 107,493 -------------- -------------- -------------- Net income before provision for income taxes and extraordinary items 110,829 77,762 64,431 Provision for income taxes 43,665 26,461 23,158 -------------- -------------- -------------- Net income $ 67,164 $ 51,301 $ 41,273 ============== ============== ============== Net income per share - basic** $ 1.40 $ 1.15 $ 0.95 ============== ============== ============== Net income per share - diluted** $ 1.33 $ 1.09 $ 0.88 ============== ============== ==============
---------- * 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 consolidated financial statements. A-26 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, ----------------------------------- (Dollars in thousands) 2000 1999* 1998* --------------------------------------------------------------------------------------------------------------- Net income $ 67,164 $ 51,301 $ 41,273 -------- -------- -------- Other comprehensive income: Unrealized gains on securities: Unrealized holding gains (losses) arising during period (net of taxes of $3,960, $(9,659) and $608 for the years ended December 31, 2000, 1999 and 1998, respectively) 6,278 (13,760) 135 Less: reclassification adjustment for gains (losses) included in net income (net of taxes of $(307), $(27) and $367 for the years ended December 31, 2000, 1999 and 1998, respectively) (307) (27) 367 -------- -------- -------- Net change 5,971 (13,787) 502 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 $(908), $1,424 and $(496) for the years ended December 31, 2000, 1999 and 1998, respectively) (1,414) 2,325 418 Less: reclassification adjustment for swap settlements in net income (net of taxes of $58, $(144) and $(32) for the years ended December 31, 2000, 1999 and 1998, respectively) 58 (144) (32) -------- -------- -------- Net change (1,356) 2,181 (677) Other comprehensive income (loss) 4,615 (11,606) (175) -------- -------- -------- Comprehensive income $ 71,779 $ 39,695 $ 41,098 ======== ======== ========
----------------- * Restated on a historical basis to reflect the mergers described in notes 1 and 2 on a pooling of interests basis. See notes to consolidated financial statements. A-27 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common stock Accumulated other Total For the years ended December 31, 2000, 1999 and 1998 ------------------------ comprehensive Retained shareholders' (Dollars in thousands, except per share amounts) Shares ** Amount income /(loss) earnings equity ----------------------------------------------------------------------------------------------------------------------------------- Greater Bay Bancorp, prior to pooling 16,112,364 $ 44,218 $ 338 $ 22,040 $ 66,596 Shares issued to, and retained earnings of, acquired entities: Pacific Rim Bancorporation 1,901,496 8,000 (115) 1,776 9,661 Pacific Business Funding Corporation 596,000 51 -- 232 283 Bay Area Bancorp 2,709,943 5,376 (2) 6,614 11,988 Bay Commercial Services 1,474,179 3,671 (7) 6,509 10,173 Mt. Diablo Bancshares 2,315,633 8,592 3 311 8,906 Coast Bancorp 5,586,699 11,011 693 16,060 27,764 Bank of Santa Clara 3,658,332 13,697 -- 11,184 24,881 Bank of Petaluma 1,531,516 7,854 315 3,044 11,213 SJNB Financial Corp. 6,624,800 23,505 (94) 23,353 46,764 ----------------------------------------------------------------------- Balance, December 31, 1997, restated to reflect pooling 42,510,962 125,975 1,131 91,123 218,229 Net income -- -- -- 41,276 41,276 Other comprehensive loss, net of taxes -- -- (175) -- (175) Stock options exercised, including related tax benefit 789,773 6,186 -- (32) 6,154 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, Coast Bancorp, and SJNB Financial Corp. (357,428) (4,166) -- (2,370) (6,536) Pacific Business Funding Corporation distribution -- -- -- (1,163) (1,163) Stock dividend by Coast Bancorp and Bank of Santa Clara 773,975 12,822 -- (12,822) -- Stock issued in Dividend Reinvestment Plan 5,322 73 -- -- 73 Stock issued through private placement 21,840 501 -- -- 501 Cash dividend $0.20 per share*** -- -- -- (8,639) (8,639) ----------------------------------------------------------------------- Balance, December 31, 1998* 43,876,750 143,107 956 107,373 251,436 Net income -- -- -- 51,301 51,301 Other comprehensive loss, net of taxes -- -- (11,606) -- (11,606) Stock options exercised, including related tax benefit 1,205,378 6,282 -- (59) 6,223 Stock issued in Employee Stock Purchase Plan 83,302 1,031 -- -- 1,031 401(k) employee stock purchase 76,010 1,205 -- -- 1,205 Stock issued in Dividend Reinvestment Plan 26,668 383 -- -- 383 Stock repurchase by SJNB Financial Corp. (273,000) (3,389) -- (522) (3,911) Pacific Business Funding Corporation distribution -- -- -- (40) (40) Stock issued through private placement 1,179,200 20,761 -- -- 20,761 Cash dividend $0.24 per share*** -- -- -- (10,669) (10,669) ----------------------------------------------------------------------- Balance, December 31, 1999* 46,174,308 169,380 (10,650) 147,384 306,114 Net income -- -- -- 67,164 67,164 Other comprehensive income, net of taxes -- -- 4,615 -- 4,615 Stock options exercised, including related tax benefit 1,731,594 11,309 -- -- 11,309 Stock issued in Employee Stock Purchase Plan 93,356 1,538 -- -- 1,538 401(k) employee stock purchase 82,015 1,982 -- -- 1,982 Stock issued in Dividend Reinvestment Plan 18,792 465 -- -- 465 Stock issued through private placement 648,648 11,476 -- -- 11,476 Cash paid in-lieu of fractional shares -- (29) -- -- (29) Cash dividend $0.39 per share*** -- -- -- (18,686) (18,686) ----------------------------------------------------------------------- Balance, December 31, 2000 48,748,713 $ 196,121 $ (6,035) $ 195,862 $ 385,948 =======================================================================
----------------- * 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. *** Excluding dividends paid by Greater Bay's subsidiaries prior to the completion of their mergers with Greater Bay. Greater Bay paid dividends of $0.35, $0.24 and $0.19 per share for the years ended December 31, 2000, 1999 and 1998, respectively. See notes to consolidated financial statements. A-28 GREATER BAY BANCORP AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, --------------------------------------------------- (Dollars in thousands) 2000 1999* 1998* ----------------------------------------------------------------------------------------------------------------------- Cash flows - operating activities Net income $ 67,164 $ 51,301 $ 41,273 Reconcilement of net income to net cash from operations: Provision for loan losses 47,826 17,646 8,898 Depreciation and amortization 14,540 8,461 5,483 Deferred income taxes (13,601) (6,661) (2,936) (Gain) loss on sale of investments, net 521 46 (623) Gain on sale of building - (490) - Proceeds from loan sales - 74,420 82,869 Originations of loans held for sale - (74,514) (84,432) Changes in: Accrued interest receivable and other assets (54,502) (34,809) (14,149) Accrued interest payable and other liabilities 59,016 25,428 10,080 Deferred loan fees and discounts, net 746 4,505 2,551 -------------- ------------ ------------ Operating cash flows, net 121,710 65,333 49,014 -------------- ------------ ------------ Cash flows - investing activities Maturities and partial paydowns on investment securities: Held to maturity 125,433 103,567 54,615 Available for sale 87,882 120,176 166,829 Purchase of investment securities: Held to maturity (246,226) (132,374) (43,935) Available for sale (239,174) (255,263) (317,216) Other securities (5,051) (13,664) (207) Proceeds from sale of available for sale securities 49,730 53,471 261,812 Loans, net (934,438) (767,981) (757,818) Loans acquired from business acquisition (274,292) - - Payment for business acquisition, net of cash acquired 3,998 - (206) Purchase of property, premises and equipment (11,973) (12,068) (10,908) Sale of banking building 5,502 2,637 - Investment in other real estate owned - - (500) Sale of other real estate owned 224 - - Purchase of insurance policies (21,819) (9,206) (3,953) -------------- ------------ ------------ Investing cash flows, net (1,460,204) (910,705) (651,487) -------------- ------------ ------------ Cash flows - financing activities Net change in deposits 1,013,783 867,270 572,544 Net change in other borrowings - short term 196,381 10,217 (42,238) Proceeds from other borrowings - long term 126,309 2,015 59,000 Principal repayment - long term borrowings (10,000) (3,775) (2,265) Proceeds from company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 50,500 - 30,000 Proceeds from sale of common stock 26,222 29,408 5,877 Repurchase of common stock - (3,911) (6,393) Cash dividends (18,686) (10,668) (8,639) -------------- ------------ ------------ Financing cash flows, net 1,384,509 890,556 607,886 -------------- ------------ ------------ Net change in cash and cash equivalents 46,015 45,184 5,413 Cash and cash equivalents at beginning of period 429,960 384,776 379,363 -------------- ------------ ------------ Cash and cash equivalents at end of period $ 475,975 $ 429,960 $ 384,776 ============== ============ ============ Cash flows - supplemental disclosures Cash paid during the period for: Interest $ 162,283 $ 116,212 $ 82,624 ============== ============ ============ Income taxes $ 26,384 $ 24,690 $ 24,210 ============== ============ ============ Non-cash transactions: Additions to other real estate owned $ - $ - $ 951 ============== ============ ============ Transfer of appreciated securities to the Greater Bay Bancorp Foundation $ 7,200 $ 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 consolidated financial statements. A-29 GREATER BAY BANCORP AND SUBSIDIARIES NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2000, 1999 and 1998 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 with 11 bank subsidiaries: Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, Coast Commercial Bank, Cupertino National Bank, Golden Gate Bank, Mid-Peninsula Bank, Mt. Diablo National Bank, Peninsula Bank of Commerce, and San Jose National Bank. The Company owns GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV, which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities. The Company also owns Matsco Lease Finance, Inc. II and Matsco Lease Finance, Inc. III, which are special purpose corporations, which were formed for the exclusive purpose of securitizing leases and issuing lease-backed notes. We also operate through the following 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, Matsco, Pacific Business Funding and the Venture Banking Group. We provide a wide range of commercial banking services to small and medium-sized businesses, real estate developers, property managers, business executives, professionals and other individuals. The Company operates throughout the San Francisco Bay Area including Silicon Valley, San Francisco and the San Francisco Peninsula, the East Bay, Santa Cruz and Sonoma County, with 41 offices located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Los Gatos, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San Ramon, Santa Clara, Santa Cruz, Saratoga, Scotts Valley, Sunnyvale, Valley Ford, Walnut Creek and Watsonville. At December 31, 2000, we had total assets of $5.8 billion, total loans, net, of $4.0 billion and total deposits of $4.8 billion. The Company has participated in nine mergers during the three-year period ended December 31, 2000, as described in Note 2. With the exception of the merger with The Matsco Companies, Inc., all of these mergers were accounted for as a pooling-of-interests and, accordingly, all of the financial information of the Company for the periods prior to the mergers has been restated as if the mergers had occurred at the beginning of the earliest period presented. The merger with The Matsco Companies, Inc. was accounted for using the purchase accounting method and accordingly The Matsco Companies, Inc.'s results of operations have been included in the consolidated financial statements since the date of acquisition. Consolidation and Basis of Presentation The consolidated financial statements include the accounts of Greater Bay and its subsidiaries and its operating divisions. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the 2000 presentation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and the prevailing practices within the banking industry. A-30 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, Federal Funds sold and agency securities with original maturities of less than ninety days. Generally, Federal Funds are sold for one-day periods. The Banks are required by the Federal Reserve System to maintain noninterest-earning cash reserves against certain of their deposit accounts. At December 31, 2000, the required combined reserves totaled approximately $18.7 million. Investment Securities The Company classifies its investment securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Investment securities classified as held to maturity are reported at amortized cost; available for sale securities are reported at fair value with net unrealized gains and losses reported, net of taxes, as a component of shareholders' equity. 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 FHLB stocks for the Banks and investments in venture funds are classified as other securities and are recorded at cost. Loans Loans held for investment are carried at amortized cost. 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. A-31 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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 Loans The Company originates loans to customers under Small Business Administration ("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. Accounting for Direct Financing Leases Lease contracts are categorized as direct financing leases for financial reporting purposes if they conform to the definition of direct financing leases set out in statement of SFAS No. 13 "Accounting for Leases". At the time a leasing transaction is executed, the Company records on their balance sheet the gross lease receivable, estimated residual value of leased equipment, and unearned lease income. Unearned lease income represents the excess of the gross lease receivable plus the estimated residual value over the cost of the equipment leased. Unearned lease income is recognized as leasing income over the term of the lease so as to reflect an approximate constant periodic rate of return on the net investment in the lease. Allowance for Loan Losses In accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118 ("SFAS No. 114 and No. 118"), 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. 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. A-32 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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. Derivatives and Hedging Activities The Company adopted SFAS No. 133 and 138, effective October 1, 1998. In accordance with the transition provisions of SFAS No. 133 and 138, 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). A-33 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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. Earnings Per Share and Share Amounts Basic net earnings per common share is computed by dividing net earnings applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting of shares that might be issued upon exercise of common stock options. All outstanding and weighted average share amounts presented in this report have been restated to reflect the 2-for-1 stock split declared for shareholders of record as of April 30, 1998 and the 2-for-1 stock split declared for shareholders of record as of October 4, 2000. Comprehensive Income In accordance with SFAS No. 130, "Reporting Comprehensive Income", the Company classifies items of other comprehensive income by their nature in the financial statements and display the accumulated other comprehensive income separately from retained earnings in the equity section of the balance sheet. The changes to the balances of accumulated other comprehensive income are as follows:
Accumulated Unrealized other gains / (loses) Cash flow comprehensive (Dollars in thousands) on securities hedges income (loss) ---------------------------------------------------------------------------------------------------------- Balance - December 31, 1998 $ 1,633 $ (677) $ 956 Other comprehensive income 1999 (13,787) 2,181 (11,606) ---------------- ----------------- ----------------- Balance - December 31, 1999 (12,154) 1,504 (10,650) Other comprehensive income 2000 5,971 (1,356) 4,615 ---------------- ----------------- ----------------- Balance - December 31, 2000 $ (6,183) $ 148 $ (6,035) ================ ================= =================
A-34 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 Segment Information In accordance with SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") the Company uses the "management approach" for reporting business segment information. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas, and major customers. NOTE 2--BUSINESS COMBINATIONS Pooling-of-Interests Accounting Transactions On October 23, 2001, SJNB Financial Corp. the holding company of San Jose National Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of SJNB Financial Corp. were converted into an aggregate of approximately 6,944,000 shares of Greater Bay's stock. The transaction was accounted for as pooling-of-interests. The financial information presented herein has been restated to reflect the merger with SJNB Financial Corp. on a pooling-of-interests basis. On October 13, 2000, Bank of Petaluma merged with and into DKSS Corp., as a result of which, Bank of Petaluma became a wholly owned subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of Bank of Petaluma were converted into an aggregate of approximately 1,667,000 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Bank of Petaluma on a pooling-of-interests basis. On July 21, 2000, Bank of Santa Clara merged with and into GBB Merger Corp., as a result of which, Bank of Santa Clara became a wholly owned subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of Bank of Santa Clara were converted into an aggregate of 4,002,000 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Bank of Santa Clara on a pooling-of-interests basis. On May 18, 2000, Coast Bancorp, the holding company of Coast Commercial Bank, was merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Coast Bancorp were converted into an aggregate of approximately 6,140,000 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Coast Bancorp on a pooling-of-interests basis. On January 31, 2000, Mt. Diablo Bancshares, the former holding company of Mt. Diablo National Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Mt. Diablo Bancshares were converted into an aggregate of 2,790,998 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Mt. Diablo Bancshares on a pooling-of-interests basis. On January 5, 2000, Saratoga Bancorp, the parent of Saratoga National Bank, merged with and into SJNB Financial Corp. Upon consummation of the merger, the outstanding shares of Saratoga Bancorp were converted into an aggregate of 1,174,249 shares of SJNB Financial Corp's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has been restated to reflect the merger with Saratoga Bancorp on a pooling-of-interests basis. On October 15, 1999, Bay Commercial Services, the parent of Bay Bank of Commerce, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Bay Commercial Services were converted into an aggregate of 1,814,480 shares of Greater Bay's stock. The stock was issued to former Bay Commercial Services shareholders, in a tax-free exchange accounted for as a pooling-of-interests. A-35 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 On May 21, 1999, Bay Area Bancshares, the former holding company of Bay Area Bank, merged with and into Greater Bay. Upon consummation of the merger, the outstanding shares of Bay Area Bank were converted into an aggregate of 2,798,642 shares of Greater Bay's stock. The stock was issued to former Bay Area Bancshares shareholders, in a tax-free exchange accounted for as a pooling-of-interests. On August 31, 1998, Pacific Business Funding Corporation, an asset-based specialty finance company, merged with a subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of Pacific Business Funding Corporation were converted into an aggregate of 596,000 shares of Greater Bay's stock. The stock was issued to former Pacific Business Funding Corporation shareholders, in a tax-free exchange accounted for as a pooling-of-interests. On May 8, 1998, Pacific Rim Bancorporation, the former holding company of Golden Gate Bank, merged with and into a subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of Pacific Rim Bancorporation were converted into an aggregate of 1,901,496 shares of Greater Bay's stock. The stock was issued to former Pacific Rim Bancorporation's sole shareholder in a tax-free exchange accounted for as a pooling-of-interests. 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.
SJNB Financial Corp Bank of Petaluma Bank of Santa Clara nine months ended nine months ended six months ended (Dollars in thousands) September 30, 2001 September 30, 2000 June 30, 2000 ---------------------------------------------------------------------------------------------------------------------- Net interest income: Greater Bay Bancorp $ 207,739 $ 154,013 $ 89,047 Acquired entity 25,378 7,101 10,195 ------------------------ ----------------------- ----------------------- Combined $ 233,117 $ 161,114 $ 99,242 ======================== ======================= ======================= Net income: Greater Bay Bancorp $ 64,039 $ 38,608 $ 23,850 Acquired entity 8,262 1,982 2,613 ------------------------ ----------------------- ----------------------- Combined $ 72,301 $ 40,590 $ 26,463 ======================== ======================= =======================
Coast Bancorp Mt. Diablo Bancshares Bay Commercial Services three months ended twelve months ended nine months ended (Dollars in thousands) March 31, 2000 December 31, 1999 September 30, 1999 ----------------------------------------------------------------------------------------------------------------------- Net interest income: Greater Bay Bancorp $ 36,378 $ 103,732 $ 68,498 Acquired entity 5,538 10,009 2,007 ------------------------ ----------------------- ------------------------ Combined $ 41,916 $ 113,741 $ 70,505 ======================== ======================= ======================== Net income: Greater Bay Bancorp $ 13,473 $ 27,711 $ 17,033 Acquired entity 2,035 2,827 486 ------------------------ ----------------------- ------------------------ Combined $ 15,508 $ 30,538 $ 17,519 ======================== ======================= ========================
Bay Area Bancshares Pacific Business Funding Corp Pacific Rim Bancorporation three months ended six months ended three months ended (Dollars in thousands) March 31, 1999 June 30, 1998 March 31, 1998 ------------------------------------------------------------------------------------------------------------------------ Net interest income: Greater Bay Bancorp $ 18,360 $ 30,077 $ 13,366 Acquired entity 2,180 1,154 1,285 ------------------------ ----------------------- ------------------------ Combined $ 20,540 $ 31,231 $ 14,651 ======================== ======================= ======================== Net income: Greater Bay Bancorp $ 5,058 $ 6,628 $ 3,646 Acquired entity 644 344 60 ------------------------ ----------------------- ------------------------ Combined $ 5,702 $ 6,972 $ 3,706 ======================== ======================= ========================
A-36 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 The following table sets forth the separate results of operations for Greater Bay, Bay Area Bancshares, Bay Commercial Services, Mt. Diablo Bancshares, Coast Bancorp, Bank of Santa Clara, Bank of Petaluma, and SJNB Financial Corp. for the periods indicated:
(Dollars in thousands) Net interest income Net income ---------------------------------------------------------------------------- Year ended December 31, 2000 ---------------------------- Greater Bay $ 231,963 $ 58,540 SJNB Financial Corp. 33,626 8,624 ------------------ -------------------- Combined $ 265,589 $ 67,164 ================== ==================== Year ended December 31, 1999 ---------------------------- Greater Bay $ 107,933 $ 27,711 Mt. Diablo Bancshares 10,009 2,827 Coast Bancorp 20,028 6,939 Bank of Santa Clara 17,962 4,403 Bank of Petaluma 8,628 2,304 ------------------ -------------------- Subtotal 164,560 44,184 SJNB Financial Corp. 27,565 7,117 ------------------ -------------------- Combined $ 192,125 $ 51,301 ================== ==================== Year ended December 31, 1998 ---------------------------- Greater Bay $ 68,272 $ 16,578 Bay Area Bancshares 8,170 2,365 Bank of Santa Clara 6,107 1,215 Mt. Diablo Bancshares 7,363 1,396 Coast Bancorp 17,363 6,161 Bank of Santa Clara 16,189 3,954 Bank of Petaluma 7,807 2,115 ------------------ -------------------- Subtotal 131,271 33,784 SJNB Financial Corp. 25,603 7,489 ------------------ -------------------- Combined $ 156,874 $ 41,273 ================== ====================
There were no significant transactions between the Company and any of the acquired entities prior to the mergers. All intercompany transactions have been eliminated. Purchase Accounting Transaction On November 30, 2000, the Company acquired The Matsco Companies, Inc. for a purchase price of $6.5 million in cash. The Company may also be required to pay future contingent cash payment of up to $6.0 million based on the performance of Matsco subsequent to the acquisition. The acquisition was accounted for using the purchase method of accounting and, accordingly, The Matsco Companies, Inc.'s results of operations have been included in the consolidated financial statements since the date of acquisition. The source of funds for the acquisition was the Company's available cash. The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of purchase price over the estimated fair values of the net assets acquired, totaling $15.9 million, has been recorded as goodwill and will be amortized on the straight-line method over twenty years. A-37 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 3--INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities is summarized below:
Gross Gross As of December 31, 2000 Amortized unrealized unrealized Fair (Dollars in thousands) cost gains losses value -------------------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 12,559 $ 171 $ (2) $ 12,728 U.S. agency notes 135,248 443 (512) 135,179 Mortgage and asset-backed securities 305,061 4,330 (1,070) 308,321 Tax-exempt securities 86,254 1,082 (263) 87,073 Taxable municipal securities 8,456 79 (42) 8,493 Corporate securities 155,466 94 (19,022) 136,538 ---------- --------- -------- ----------- Total securities available for sale 703,044 6,199 (20,911) 688,332 ---------- --------- -------- ----------- HELD TO MATURITY SECURITIES: U.S. agency notes 26,487 14 (100) 26,401 Mortgage and asset-backed securities 237,234 7,251 (356) 244,129 Tax-exempt securities 104,782 3,655 (301) 108,136 Taxable municipal securities 2,846 189 - 3,035 ---------- --------- -------- ----------- Total securities held to maturity 371,349 11,109 (757) 381,701 ---------- --------- -------- ----------- Other securities 26,709 4,935 (261) 31,383 ---------- --------- -------- ----------- Total investment securities $1,101,102 $ 22,243 $(21,929) $ 1,101,416 ========== ========= ======== =========== 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 $ 21,736 $ 3 $ (253) $ 21,486 U.S. agency notes 99,837 18 (2,909) 96,946 Mortgage and asset-backed securities 291,284 95 (8,784) 282,595 Tax-exempt securities 65,646 85 (3,947) 61,784 Taxable municipal securities 3,754 1 (122) 3,633 Corporate securities 126,543 - (12,661) 113,882 ---------- --------- -------- ----------- Total securities available for sale 608,800 202 (28,676) 580,326 ---------- --------- -------- ----------- HELD TO MATURITY SECURITIES: U.S. Treasury obligations 1,498 - - 1,498 U.S. agency notes 58,988 12 (1,750) 57,250 Mortgage and asset-backed securities 61,661 41 (2,048) 59,654 Tax-exempt securities 95,697 446 (4,685) 91,458 Corporate securities 37,608 15 (1,233) 36,390 ---------- --------- -------- ----------- Total securities held to maturity 255,452 514 (9,716) 246,250 ---------- --------- -------- ----------- Other securities 19,669 8,143 - 27,812 ---------- --------- -------- ----------- Total investment securities $ 883,921 $ 8,859 $(38,392) $ 854,388 ========== ========= ======== ===========
A-38 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 The following table shows amortized cost and estimated fair value of the Company's investment securities by year of maturity as of December 31, 2000.
2002 2006 through through 2011 and (Dollars in thousands) 2001 2005 2010 thereafter Total ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE SECURITIES: U.S. Treasury obligations $ 2,475 $ 10,084 $ - $ - $ 12,559 U.S. agency notes (1) 14,123 85,522 35,603 - 135,248 Mortgage and asset-backed securities (2) 10,090 35,528 12,128 247,315 305,061 Tax-exempt securities 3,788 15,392 15,211 51,863 86,254 Taxable municipal securities 251 6,694 1,016 495 8,456 Corporate securities 9,710 18,729 6,150 120,877 155,466 -------------- -------------- ------------- -------------- -------------- Total securities available for sale 40,437 171,949 70,108 420,550 703,044 -------------- -------------- ------------- -------------- -------------- Fair value $ 40,661 $ 173,214 $ 69,780 $ 404,677 $ 688,332 -------------- -------------- ------------- -------------- -------------- HELD TO MATURITY SECURITIES: U.S. agency notes $ 7,498 $ 16,998 $ 1,991 $ - $ 26,487 Mortgage and asset-backed securities - 1,809 10,470 224,954 237,233 Tax-exempt securities 1,456 4,457 21,278 77,591 104,782 Taxable municipal securities - - 2,846 - 2,846 -------------- -------------- ------------- -------------- -------------- Total securities held to maturity 8,954 23,264 36,585 302,545 371,348 -------------- -------------- ------------- -------------- -------------- Fair value 8,933 23,233 37,475 312,060 381,701 -------------- -------------- ------------- -------------- -------------- COMBINED INVESTMENT SECURITIES PORTFOLIO: Total investment securities $ 49,391 $ 195,213 $ 106,693 $ 723,095 $ 1,074,392 ============== ============== ============= ============== ============== Total fair value $ 49,594 $ 196,447 $ 107,255 $ 716,737 $ 1,070,033 ============== ============== ============= ============== ============== Weighted average yield-total portfolio 6.38% 6.39% 7.17% 7.33% 6.30%
---------- (1) Certain notes issued by U.S. agencies may be called, without penalty, at the discretion of the issuer. This may cause the actual maturities to differ significantly from the contractual maturity dates. (2) Mortgage and asset-backed securities are shown at contractual maturity; however, the average life of these mortgage and asset-backed securities may differ due to principal prepayments. Investment securities with a carrying value of $619.1 million and $376.3 million were pledged to secure deposits, borrowings and for other purposes as required by law or contract at December 31, 2000 and 1999, respectively. Other securities includes unsold shares received through the exercise of warrant received from clients, equity securities received in settlement of loans, investments in funds managed by outside venture capital funds and investments in the Federal Reserve Bank and the FHLB required in order to maintain membership and support activity levels. A-39 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 Proceeds and realized losses and gains on sales of investment securities for the years ended December 31, 2000, 1999 and 1998 are presented below:
(Dollars in thousands) 2000 1999 1998 -------------------------------------------------------------------------------------------- Proceeds from sale of available for sale securities (1) $ 49,730 $ 53,471 $261,812 Available for sale securities-gains (2) $ 503 $ 88 $ 623 Available for sale securities-losses $ (1,024) $ (133) $ -
---------- (1) 1999 proceeds from the sale of available for sale securities excludes $15.3 million related to the sale of equity securities classified as available for sale which were acquired through the execution of a warrant received from clients. (2) 1999 warrant income includes additional gains of $21.2 million related to equity securities classified as available for sale which were acquired through the execution of warrants received 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, 2000, 1999 and 1998:
(Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------- Balance, January 1 $ 54,459 $ 38,589 $ 31,677 Allowance of entities acquired through mergers accounted for under purchase accounting method 10,927 - - Provision for loan losses (1) 36,899 17,645 8,898 Loan charge-offs (12,494) (3,558) (2,909) Recoveries 1,616 1,783 923 ---------- ---------- ---------- Balance, December 31 $ 91,407 $ 54,459 $ 38,589 ========== ========== ==========
---------- (1) Includes $8.1 million, $2.7 million and $183,000 of charges in 2000, 1999 and 1998 respectively, to conform the practices of acquired entities to the Companies" reserve methodologies, which are included in mergers and related nonrecurring costs. The following table sets forth nonperforming loans as of December 31, 2000, 1999, and 1998. Nonperforming loans are defined as loans which are on nonaccrual status, loans which have been restructured, and loans which are 90 days past due but are still accruing interest. Interest income foregone on nonperforming loans totaled $1.3 million, $667,000 and $276,000 for the years ended December 31, 2000, 1999 and 1998, respectively. Interest income recognized on the nonperforming loans approximated $16,000, $649,000 and $428,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
(Dollars in thousands) 2000 1999 1998 --------------------------------------------------------------------------------------------------------------- Nonaccrual loans $ 13,014 $ 7,139 $ 4,208 Restructured loans - 807 840 ---------------- ----------------- ----------------- Total nonperforming loans $ 13,014 $ 7,946 $ 5,048 ================ ================= ================= Accruing loans past due 90 days or more $ 4,463 $ 908 $ 244 ================ ================= =================
A-40 NOTES TO SUPPLEMENTAL SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 At December 31, 2000 and 1999, the recorded investment in loans, for which impairment has been recognized in accordance with SFAS No. 114 and No. 118, was approximately $13.7 million and $9.4 million, respectively, with corresponding valuation allowances of $4.0 million and $1.5 million respectively. For the years ended December 31, 2000 and 1999, the average recorded investment in impaired loans was approximately $10.7 million and $2.8 million, respectively. The Company recognize interest income of $72,000, $41,000, and $8,000 for the year ended December 31, 2000, 1999 and 1998. The Company had $0 and $807,000 of restructured loans as of December 31, 2000 and 1999, respectively. There were no principal reduction concessions allowed on restructured loans during 1999 and 1998. Interest income from restructured loans totaled $0, $45,000 and $16,000 for the year's ended December 31, 2000, 1999 and 1998. Foregone interest income, which totaled $0, $0 and $11,000 for the years ended December 31, 2000, 1999 and 1998 would have been recorded as interest income if the loans had accrued interest in accordance with their original terms prior to the restructurings. NOTE 5--OTHER REAL ESTATE OWNED At December 31, 2000 and 1999, OREO consisted of properties acquired through foreclosure with a carrying value of $0 and $271,000, 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, 2000, 1999 and 1998.
(Dollars in thousands) 2000 1999 1998 -------------------------------------------------------------------------------------------------- Real estate operations, net $ 51 $ 57 $ 31 (Gain) loss on sale of OREO 5 (99) 133 Provision for estimated losses - 8 - ---------------- ---------------- ---------------- Net loss from other real estate operations $ 56 $ (34) $ 164 ================ ================ ================
NOTE 6--PROPERTY, PREMISES AND EQUIPMENT Property, premises and equipment at December 31, 2000 and 1999 are composed of the following:
(Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------------ Land $ 4,300 $ 5,285 Buildings and premises 12,872 16,398 Furniture and equipment 37,239 36,800 Leasehold improvements 16,584 15,751 Automobiles 853 740 ------------------ ------------------- Total 71,848 74,974 Accumulated depreciation and amortization (32,544) (31,813) ------------------ ------------------- Premises and equipment, net $ 39,304 $ 43,161 ================== ===================
A-41 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 Depreciation and amortization amounted to $8.5 million, $6.7 million and $5.0 million for the years ended December 31, 2000, 1999 and 1998 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. During 2000 the company recognized $303,000 of the deferred gain. NOTE 7--DEPOSITS Deposits as of December 31, 2000 and 1999 are as follows:
(Dollars in thousands) 2000 1999 ----------------------------------------------------------------------------------- Demand, noninterest-bearing $ 1,133,958 $ 822,300 MMDA, NOW and Savings 2,349,041 2,058,262 Time certificates, $100,000 and over 706,535 640,142 Other time certificates 560,870 215,917 --------------- ----------------- Total deposits $ 4,750,404 $ 3,736,621 =============== =================
The following table sets forth the maturity distribution of time certificates of deposit at December 31, 2000.
December 31, 2000 ------------------------------------------------------------------------------------------------ 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 $ 275,379 $ 309,639 $ 97,320 $ 19,915 $ 4,282 $ 706,535 Other time deposits 437,144 47,696 45,569 17,345 13,116 560,870 -------------- -------------- --------------- ------------- -------------- ---------------- Total $ 712,523 $ 357,335 $ 142,889 $ 37,260 $ 17,398 $ 1,267,405 ============== ============== =============== ============= ============== ================
A-42 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 8--COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV (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 ("Trust Preferred Securities"). The Trust Preferred Securities are individually described below. Interest on the Trust Preferred Securities are payable quarterly and is deferrable, at the option of the Company, for up to five years. Following the issuance of each Trust Preferred Securities, the Trusts used the proceeds from the Trust Preferred Securities offerings to purchase a like amount of Junior Subordinated Deferrable Interest Debentures (the "Debentures") of Greater Bay. The Debentures bear the same terms and interest rates as the related Trust Preferred Securities. The Debentures are the sole assets of the Trusts and are eliminated, along with the related income statement effects, in the consolidated financial statements. Greater Bay has fully and unconditionally guaranteed all of the obligations of the Trusts. Under applicable regulatory guidelines, a portion of the Trust Preferred Securities will qualify as Tier I capital, and the remaining portion will qualify as Tier II capital. The following Trust Preferred Securities were outstanding at December 31, 2000.
Amount Date of Stated Optional Security title Issuer outstanding original issue maturity redemption date ------------------------------------------------------------------------------------------------------------------------------------ 9.75% Cumulative Trust Preferred Securities GBB Capital I $20,000,000 March 30, 1997 April 1, 2027 April 1, 2002 Floating Rate Trust Preferred Securities, Series B GBB Capital II 29,000,000 August 12, 1998 Sept. 15, 2028 Sept. 15, 2008 10 7/8% Fixed Rate Capital Trust Pass-Through Securities GBB Capital III 9,500,000 March 23, 2000 March 8, 2030 March 8, 2010 10.75% Capital Securities, Series B GBB Capital IV 41,000,000 May 18, 2001 June 1, 2030 June 1, 2010 ------------------- Total TPS outstanding $99,500,000 ===================
The Trust Preferred Securities are mandatorily redeemable, in whole or in part, upon repayment of their underlying Debentures at their respective stated maturities or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company on or after their respective optional redemption dates. The Trust Preferred Securities issued by GBB Capital I, GBB Capital III and GBB Capital IV accrue interest at an annual rate of 9.75%, 10 7/8% and 10.75 %, receptively. The Floating Rate Trust Preferred Securities, Series B ("TPS II") accrue interest at a variable rate of interest, initially at 7.1875%, on the outstanding securities. The interest rate resets quarterly and is equal to 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 11 for additional disclosures regarding the interest rate swap). On the date of original issue, GBB Capital II and GBB Capital IV completed issuance of series A securities. The series A securities issued in the offering were sold in private transactions pursuant to an applicable exemption from registration under the Securities Act. The Company, through GBB Capital II and GBB Capital IV, completed an offer to exchange the series A securities for a like amount of its registered series B securities. The exchange offerings were completed in November 1998 and November 2000, respectively. The exchange offerings were conducted in accordance with the terms of the initial issuance of the series A securities. A-43 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 GBB Capital II originally issued $30,000,000 in TPS II. In 1998, Coast Commercial Bank purchased $1,000,000 of TPS II. The TPS II were included in Coast Commercial Bank's investment securities at the time of its merger with Greater Bay. In accordance pooling-of-interests accounting, $1,000,000 in TPS II issued by the Company and Coast Commercial Bank's corresponding investment have been eliminated in consolidation. The total amount of Trust Preferred Securities outstanding at December 31, 2000 and 1999 was $99.5 million and $49.0 million, respectively. The dividends paid on Trust Preferred Securities were $7.8 million, $4.2 million and $2.8 million in 2000, 1999 and 1998, respectively. The expense for these dividends is included in operating expenses. NOTE 9--LEASE SECURITIZATION During 1997, Matsco Lease Finance III a special purpose corporation wholly-owned by The Matsco Companies, Inc. issued the following leased-backed notes; $55 million Series 1997-1A, $45 million Series 1997-2A, $1.6 million Series 1997-1 B and $4.5 million 1997-2B. All Class B certificates, which were subordinate to the Class A certificates, were paid-off as of December 31, 2000. As of December 31, 2000, the note balance on the Series 1997-1 and Series 1997-2 were approximately $28 million and $30 million, respectively. As of December 31, 1999, the notes balance for Series 1997-1 and Series 1997-2 were approximately $35 million and $38 million, respectively. All of the transactions placed in 1997-2 Series were treated as a sale in accordance with SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". The weighted average rate on the combined series of 1997 notes was 5.92% at December 31, 2000. The underlying leases have a carrying value of $28 million and $30 million for Series 1997-1 and Series 1997-2, respectively at December 31, 2000. At December 31, 2000, 0.35% those leases were 90 days or more past due. The start-up expenses and private placement fees associated with the issuance of the 1997-2 leased-backed notes are expensed at funding. Such amounts related to the 1997-1 notes are amortized over the life of the notes to approximate a constant periodic rate of interest. The Class A certificates are rated "AAA" by Standards and Poor's Rating Services and "Aaa" by Moody's Investors Service and are fully insured by Municipal Bond Insurance Corporation pursuant to the terms of a note guarantee policy. The Class B certificates are not covered by insurance. During 1996, Matsco Lease Finance II, a special purpose corporation by wholly-owned The Matsco Companies, Inc., issued $40 million in lease-backed notes, Series 1996-A. As of December 31, 2000 and 1999, the note balance was $5.4 million and $23.5 million, respectively, with a weighted average interest rate of 6.7% at December 31, 2000. The underlying leases have a carrying value of $7.1 million at December 31, 2000. At December 31, 2000, 1.11% those leases were 90 days or more past due. The notes are unconditionally guaranteed by Municipal Bond Investor Assurance Corporation pursuant to the terms of a note guarantee policy. The start-up expenses and private placement fees associated with the issuance of the leased-backed notes are amortized over the life of the notes to approximate a constant periodic rate of interest. The note is rated "AAA" by Standard and Poors and "Aaa" by Moody's. The Company, as servicer of the underlying leases, remits funds collected on Matsco Lease Finance II and III to the trustee on a weekly basis. The Company receives a flat fee per lease as the servicer. In the event an account is delinquent our the terms are modified the servicer has the option to repurchase the transaction or to substitute with a similar account. Pursuant to the merger between the Company and The Matsco Companies, Inc., Matsco Lease Finance II and Matsco Lease Finance III became wholly-owned by Greater Bay. A-44 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 10--BORROWINGS Other borrowings are detailed as follows:
(Dollars in thousands) 2000 1999 ---------------------------------------------------------------------------------------------- Other borrowings: Short term borrowings: Securities sold under agreements to repurchase $ 74,713 $ 79,574 Other short term notes payable 15,419 - FHLB advances 192,076 5,000 Advances under credit lines 15,000 7,000 ------------------ ------------------ Total short term borrowings 297,208 91,574 ------------------ ------------------ Long term borrowings: Securities sold under agreements to repurchase 0 30,503 Other long term notes payable 51,809 1,500 FHLB advances 114,250 27,000 ------------------ ------------------ Total other long term borrowings 166,059 59,003 ------------------ ------------------ Total other borrowings $ 463,267 $ 150,577 ================== ==================
During the years ended December 31, 2000 and 1999, the average balance of securities sold under short term agreements to repurchase was $86.8 million and $40.2 million, respectively, and the average interest rates during those periods were 6.12% and 4.89%, respectively. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. During the years ended December 31, 2000 and 1999, the average balance of federal funds purchased was $105.9 million and $3.3 million, respectively, and the average 1999 interest rates during those periods were 6.49% and 5.41%, respectively. There was no such balance outstanding at December 31, 2000 and 1999. The FHLB advances are collateralized by loans and securities pledged to the FHLB. The following is a breakdown of rates and maturities:
(Dollars in thousands) Short Term Long Term ---------------------------------------- -------------------------------------- -------------------------------------- Amount $192,000 $114,250 Maturity 2001 2002-2011 Average Rates 5.7%-6.9% 5.08%-7.59%
The Company as of December 31, 2000 had short-term, unsecured credit facilities from two financial institutions totaling $87.0 million. At December 31, 2000 and 1999 the Company had advances outstanding of $15.0 million and $7.0 million under these facilities. The average rate paid on these advances was approximately LIBOR + 0.50%. In addition, the Company was in compliance with all related financial covenants for these credit facilities. A-45 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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 11--DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company uses interest-rate swaps to convert its floating-rate debt and deposits to fixed rates. These swaps were entered into concurrently with the issuance of the instruments being hedged. These swaps are accounted for as a cash flow hedge under SFAS No. 133 and 138. These swaps possess a term equal to the non-callable term of the hedged instrument, with a fixed pay rate and a receive rate indexed to rates paid on the instrument and a notional amount equal to the amount of the instruments being hedged. As the specific terms and notional amount of the swap exactly match those of the instruments being hedged the Company meets the "no ineffectiveness" criteria of SFAS No. 133 and 138. As such the swaps are assumed to be 100% effective and all changes in the fair value of the hedges are recorded in other comprehensive income with no impact on the income statement for any ineffective portion. As of December 31, 2000, the unrealized gain on the cash flow hedges was $148,000, net of income taxes, which was included in the balance of accumulated other comprehensive income. The floating rate instruments combined with the cash flow hedges created synthetic fixed rate instruments. The unrealized gain on the cash flow hedges approximated the unrealized gain the Company would have incurred if it had issued fixed rate instruments. Under current accounting practices, as required by SFAS No. 133 and 138, the Company was required to record the unrealized gain on the synthetic fixed rate instrument, but it would not have been required to record an unrealized gain if it had issued a fixed rate instrument. The notional amount of the swaps are $40.0 million with a terms of up to 10 years expiring on September 15, 2008. The Company intends to use the swap as a hedge for the noncallable term of the hedged instrument. The periodic settlement date of the swap results in the reclassifying as earnings the gains or losses that are reported in accumulated comprehensive income. Additionally, the Company has a $20.0 million prime/fixed interest rate swap used as a fair value hedge. 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 12--INCOME TAXES Income tax expense was comprised of the following for the years ended December 31, 2000, 1999 and 1998:
(Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------- Current: Federal $ 45,742 $ 26,332 $ 19,470 State 16,052 8,780 6,804 ----------------- ---------------- ------------------ Total current 61,794 35,112 26,274 ----------------- ---------------- ------------------ Deferred: Federal (13,476) (6,781) (2,394) State (4,653) (1,869) (722) ----------------- ---------------- ------------------ Total deferred (18,129) (8,650) (3,116) ----------------- ---------------- ------------------ Total expense $ 43,665 $ 26,462 $ 23,158 ================= ================ ==================
A-46 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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, 2000 and 1999 are as follows:
Years ended December 31, --------------------------------------------- (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------------------- Allowance for loan losses $ 26,072 $ 17,997 State income taxes 10,142 4,884 Deferred compensation 5,616 2,791 Unrealized (gains) losses on securities 10,387 11,064 Accumulated depreciation 1,220 533 Net operating losses 14 14 Purchase allocation adjustments 416 103 Other 1,885 237 -------------------- -------------------- Net deferred tax asset $ 55,752 $ 37,623 ==================== ====================
Management believes that the Company will fully realize its total deferred income tax assets as of December 31, 2000 based upon the Company's recoverable taxes from prior carryback years, and its current level of operating income. At December 31, 2000, 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, 2000, 1999 and 1998:
Years ended December 31, --------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 ----------------------------------------------------------------------------------------------------------- Statutory federal tax rate 35.0% 35.0% 35.0% California franchise tax expense, net of federal income tax benefit 6.7% 5.7% 6.2% ---------------- --------------- ---------------- 41.7% 40.7% 41.2% Tax exempt income -2.7% -2.7% -2.7% Contribution of appreciated securities - -3.6% -0.8% Nondeductible merger costs 1.3% 0.2% 0.5% Other, net -0.9% -0.6% -2.2% ---------------- --------------- ---------------- Effective income tax rate 39.4% 34.0% 36.0% ================ =============== ================
A-47 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 13--OTHER INCOME AND OPERATING EXPENSES Other income in 2000, 1999 and 1998 included warrant income of $13.0 million, $14.5 million and $945,000 net of related employee incentives of $4.5 million, $7.3 million and $396,000, 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. 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 $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. Merger and other related nonrecurring costs for the years ended December 31, 2000, 1999 and 1998 were comprised of the following:
(Dollars in thousands) 2000 1999 1998 --------------------------------------------------------------------------------------------------------------- Financial advisory and professional fees $ 8,229 $ 2,114 $ 1,101 Charges to conform accounting practices 8,156 2,745 183 Other costs 17,141 5,959 1,377 ---------------- ----------------- ----------------- Total $ 33,526 $ 10,818 $ 2,661 ================ ================= =================
Other costs include severance and other compensation expenses, charges for the write-off of assets retired as a result of the merger, and other expenses including printing costs and filing fees. Other expenses for the years ended December 31, 2000, 1999 and 1998 were comprised of the following:
(Dollars in thousands) 2000 1999 1998 --------------------------------------------------------------------------------------------------------------- Legal and other professional fees $ 5,345 $ 4,072 $ 3,936 Telephone, postage and supplies 5,410 5,146 4,627 Marketing and promotion 5,017 4,202 3,946 Data processing 2,879 3,341 2,700 Client services 2,694 3,811 3,015 FDIC insurance and regulatory assessments 1,472 807 723 Directors fees 1,758 1,899 1,927 Insurance 631 1,093 1,070 Other real estate owned 56 (34) 161 Other 9,282 8,124 8,201 ---------------- ---------------- ---------------- $ 34,544 $ 32,461 $ 30,306 ================ ================ ================
Occupancy costs for the years ended December 31, 2000, 1999 and 1998 were $13.5 million, $11.5 million and $9.9 million, respectively. A-48 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 14--EMPLOYEE BENEFIT PLANS Stock Option Plan At December 31, 2000 the total authorized shares issuable under the Bancorp Plan was approximately 9,381,560 shares and the number of shares available for future grants was approximately 2,750,000 shares. 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. 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 of the Bancorp Plan to increase by 5,000,000 the number of shares issuable under the Bancorp Plan. These were done to accommodate the increased number of eligible employees as a result of the mergers. A summary of the Company's stock options as of December 31, 2000, 1999, and 1998 and changes during the years ended on those dates is presented below:
2000 1999 1998 --------------------- --------------------- -------------------- Weighted Weighted Weighted average average average Shares exercise Shares exercise Shares exercise (000's) price (000's) price (000's) price ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 7,489 $11.45 6,665 $ 9.02 5,338 $ 5.87 Granted 1,602 33.05 1,870 17.43 2,478 15.93 Exercised (1,493) 6.54 (727) 5.80 (1,008) 9.40 Forfeited (504) 9.03 (319) 8.71 (142) 7.99 -------------------- -------------------- -------------------- Outstanding at end of year 7,094 17.54 7,489 11.45 6,666 9.02 ==================== ==================== ==================== Options exercisable at year-end 3,259 10.60 3,497 7.30 3,207 4.80 ==================== ==================== ==================== Weighted average fair value of options granted during the year $14.24 $ 6.07 $ 5.84 ========== ========== ==========
A-49 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 The following table summarizes information about stock options outstanding at December 31, 2000.
Options outstanding Options exercisable --------------------------------------------------------------- ------------------------------------ Number Weighted Weighted Number Exercise outstanding average average exercisable Weighted average price range (000's) remaining life (years) exercise price (000's) exercise price -------------------------------------------------------------------------------------------------------------------------------- $ 0.77 - $ 9.87 1,648 4.66 $ 5.24 1,560 $ 5.23 $ 10.37 - $19.25 3,913 7.84 16.13 1,563 15.21 $ 20.56 - $29.50 270 8.47 21.86 121 21.83 $ 30.25 - $37.13 1,263 9.96 36.94 - -
Under the terms of the respective mergers, the stock option plans of Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, and San Jose National Bank were terminated at the time of merger and substitute options were issued by the Bancorp Plan. Option holders under the Bank of Petaluma, Bank of Santa Clara, Bay Area Bank, Bay Bank of Commerce, and San Jose National Bank plans received substitute option grants to purchase 239,880 shares, 471,840 shares, 59,668 shares, 216,636 shares, and 1,228,511 shares of Greater Bay stock, respectively. During 2000, the Coast Commercial Bank Stock Option Plan and Mt. Diablo National Bank Stock Option Plan were assumed by the Company. Options outstanding from the Coast Commercial Bank plan were converted to option to purchase 379,596 shares of Greater Bay stock. Options outstanding from the Mt. Diablo National Bank plan were converted to option to purchase 145,428 shares of Greater Bay stock. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under the provisions of SFAS No. 123, 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:
(Dollars in thousands, except December 31, ------------------------------------------------------ per share amounts) 2000 1999 1998 ------------------------------------------------------------------------------------------ Net income: As reported $ 67,164 $ 51,301 $ 41,273 Pro forma $ 64,187 $ 47,096 $ 37,748 Basic net income per share: As reported $ 1.40 $ 1.15 $ 0.95 Pro forma $ 1.34 $ 1.06 $ 0.86 Diluted net income per share: As reported $ 1.33 $ 1.09 $ 0.88 Pro forma $ 1.27 $ 1.00 $ 0.81
A-50 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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 2000, 1999, and 1998, respectively; dividend yield of 1.5%, 1.5% and 1.75%, expected volatility of 48.96%, 29.69% and 39.84%; risk free rates of 4.89%, 6.29% and 4.54%. The weighted average expected life is 5 years. No adjustments have been made for forfeitures. The actual value, if any, that the option holder will realize from these options will depend solely on the increase in the stock price over the option price when the options are exercised. 401(k) Savings Plan 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, 2000, 1999 and 1998, the Company contributed $1.8 million, $1.5 million and $1.3 million, respectively to the 401(k) plan. 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 2000, 1999 and 1998, employees purchased 93,356, 83,302 and 59,340 shares of common stock, respectively. There were 432,660 shares remaining in the plan available for purchase by employees at December 31, 2000. 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, 2000 and 1999 is approximately $7.4 million and $3.8 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, 2000, 1999 and 1998 totaled $1.7 million, $1.1 million and $656,000, 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, 2000 and 1999, the Company's cash surrender value of these policies was approximately $79.9 million and $51.2 million, respectively and is included in other assets. The income recognized on these polices was $2.7 million, $1.7 million and $1.0 million in 2000, 1999 and 1998, respectively, and is included in other income. A-51 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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, 2000 and 1999, $3.4 million and $2.2 million, respectively, of deferred compensation under this plan is included in other liabilities in the accompanying consolidated balance sheets. Additionally, under deferred compensation agreements that were established at Bank of Petaluma, Coast Commercial Bank and Peninsula Bank of Commerce prior to its merger with the Company, there was approximately $2.1 million and $1.1 million of deferred compensation which is included in other liabilities at December 31, 2000 and 1999, respectively. Change in Control In the event of a change in control, the supplemental employee compensation benefits agreements with certain executive and senior officers may require 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 15--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, 2000 and 1999 is shown below:
(Dollars in thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------- Balance, January 1 $ 28,851 $ 48,615 $ 22,655 Additions 51,839 30,600 46,359 Repayments (29,367) (50,364) (20,399) --------------- --------------- --------------- Balance, December 31 $ 51,323 $ 28,851 $ 48,615 =============== =============== =============== Undisbursed commitments, at year end $ 39,544 $ 11,113 $ 8,575 =============== =============== ===============
A-52 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 16--COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases certain facilities at which it conducts its operations. Future minimum lease commitments under all non-cancelable operating leases as of December 31, 2000 are below: (Dollars in thousands) Years ended December 31, --------------------------------------------------- 2001 $ 7,879 2002 6,600 2003 5,921 2004 5,163 2005 4,739 Thereafter 34,012 ------------- Total $ 64,314 ============= The Company subleases that portion of the available space that is not utilized. Sublease rental income for the years ended December 31, 2000, 1999, and 1998 was $1.5 million, $1.5 million and $1.4 million, respectively. Gross rental expense for the years ended December 31, 2000, 1999, and 1998 was $8.3 million, $7.5 million, and $5.9 million, respectively. Other Commitments and Contingencies 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 $1.4 billion and $1.1 billion and letters of credit were $129.4 million and $64.0 million, at December 31, 2000 and 1999, respectively. The Company's exposure to credit loss is limited to amounts funded or drawn; however, at December 31, 2000, 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 $499.4 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. A-53 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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 17--SHAREHOLDERS' RIGHTS PLAN In 1998 Greater Bay adopted a shareholder rights plan designed to maximize the long-term value of the Company and to protect the Company's shareholders from improper takeover tactics and takeover bids that are not fair to all shareholders. In accordance with the plan, preferred share purchase rights were distributed as a dividend at the rate of one right for each common share held of record as of the close of business on November 28, 1998. The rights, which are not immediately exercisable, entitle the holders to purchase one one-hundredth of a share of Series A Preferred Stock at a price of $145.00 upon the occurrence of certain triggering events. In the event of an acquisition not approved by the Board, each right enables its holder (other than the acquirer) to purchase the Preferred Stock at 50% of the market price. Further, in the event the Company is acquired in an unwanted merger or business combination, each right enables the holder to purchase shares of the acquiring entity at a similar discount. Under certain circumstances, the rights may be exchanged for common shares of the Company. The Board may, in its sole discretion, redeem the rights at any time prior to any of the triggering events. The rights can be exercised and separate rights certificates distributed only if any of the following events occur: acquisition by a person of 10% or more of the Company's common share; a tender offer for 10% or more of the 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 18--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). At December 31, 2000 and 1999 the Company and the Banks met all capital adequacy requirements to which they are subject. Under the FDICIA prompt corrective action provisions applicable to banks, the most recent notification from the FDIC or OCC categorized each of the Banks as well-capitalized. To be categorized as well-capitalized, the institution must maintain a total risk-based capital ratio as set forth in the following table and not be subject to a capital directive order. There are no conditions or events since that notification that management believes have changed the risk-based capital category of any of the Banks. A-54 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 The Company and the Banks' actual 2000 and 1999 capital amounts and ratios are as follows:
To be well capitalized For capital under prompt corrective As of December 31, 2000 Actual adequacy purposes action provisions ---------------------------- ----------------------- --------------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $542,819 10.87% $399,499 8.00% $498,915 N/A Bank of Petaluma 19,054 12.05% 12,650 8.00% 15,811 10.00% Bank of Santa Clara 36,956 11.13% 26,563 8.00% 33,203 10.00% Bay Area Bank 18,664 10.49% 14,234 8.00% 17,790 10.00% Bay Bank of Commerce 14,111 10.55% 10,700 8.00% 13,380 10.00% Coast Commercial Bank 42,724 15.16% 22,546 8.00% 28,176 10.00% Cupertino National Bank 150,395 10.14% 118,655 8.00% 148,276 10.00% Golden Gate Bank 20,541 10.13% 16,222 8.00% 20,280 10.00% Mid-Peninsula Bank 91,401 10.19% 71,757 8.00% 89,670 10.00% Mt. Diablo National Bank 26,493 11.30% 18,756 8.00% 23,449 10.00% Peninsula Bank of Commerce 27,228 10.89% 20,002 8.00% 25,003 10.00% San Jose National Bank 64,995 12.00% 43,330 8.00% 54,163 10.00% Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $477,962 9.57% $199,775 4.00% $299,350 N/A Bank of Petaluma 17,058 10.79% 6,324 4.00% 9,487 6.00% Bank of Santa Clara 32,779 9.87% 13,284 4.00% 19,922 6.00% Bay Area Bank 16,419 9.23% 7,115 4.00% 10,674 6.00% Bay Bank of Commerce 12,422 9.28% 5,354 4.00% 8,028 6.00% Coast Commercial Bank 39,181 13.91% 11,267 4.00% 16,905 6.00% Cupertino National Bank 131,684 8.88% 59,317 4.00% 88,966 6.00% Golden Gate Bank 17,993 8.87% 8,114 4.00% 12,168 6.00% Mid-Peninsula Bank 80,155 8.94% 35,864 4.00% 53,802 6.00% Mt. Diablo National Bank 23,539 10.04% 9,378 4.00% 14,070 6.00% Peninsula Bank of Commerce 24,081 9.63% 10,002 4.00% 15,002 6.00% San Jose National Bank 58,217 10.75% 21,662 4.00% 32,493 6.00% Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $477,962 8.79% $217,503 4.00% $271,878 N/A Bank of Petaluma 17,058 8.23% 8,291 4.00% 10,363 5.00% Bank of Santa Clara 32,779 8.18% 16,029 4.00% 20,035 5.00% Bay Area Bank 16,419 8.18% 8,029 4.00% 10,041 5.00% Bay Bank of Commerce 12,422 7.55% 6,581 4.00% 8,230 5.00% Coast Commercial Bank 39,181 9.12% 17,185 4.00% 21,488 5.00% Cupertino National Bank 131,684 9.06% 58,139 4.00% 72,693 5.00% Golden Gate Bank 17,993 6.34% 11,352 4.00% 14,188 5.00% Mid-Peninsula Bank 80,155 7.66% 31,392 3.00% 52,295 5.00% Mt. Diablo National Bank 23,539 8.15% 11,553 4.00% 14,443 5.00% Peninsula Bank of Commerce 24,081 7.99% 12,056 4.00% 15,067 5.00% San Jose National Bank 58,217 8.66% 26,890 4.00% 33,613 5.00%
A-55 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998
To be well capitalized For capital under prompt corrective As of December 31, 1999 Actual adequacy purposes action provisions ---------------------------- ------------------------ -------------------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------------------------------------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $399,151 11.23% $284,346 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% San Jose National Bank 53,740 11.82% 36,372 8.00% 45,465 10.00% Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $352,444 9.92% $142,115 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% San Jose National Bank 48,050 10.57% 18,184 4.00% 27,275 6.00% Tier 1 Capital Leverage (To Average Assets): Greater Bay Bancorp $352,444 8.32% $169,444 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% San Jose National Bank 48,050 8.47% 22,692 4.00% 28,365 5.00%
A-56 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 19-EARNINGS PER SHARE Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing net income by the weighted average number of common shares plus common equivalent shares outstanding including dilutive stock options. The following table provides a reconciliation of the numerators and denominators of the basic and diluted net income per share computations for the years ended December 31, 2000, 1999 and 1998.
For the year ended December 31, 2000 ----------------------------------------------------- Income Shares Per share (Dollars in thousands, except per share amounts) (numerator) (denominator) amount ----------------------------------------------------------------------------------------------------------- Net income $ 67,164 Basic net income per share: Income available to common shareholders 67,164 47,899,000 $ 1.40 Effect of dilutive securities: Stock options - 2,620,000 ---------- ------------- --------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 67,164 50,519,000 $ 1.33 ========== ============= =========
For the year ended December 31, 1999 ----------------------------------------------------- Income Shares Per share (Dollars in thousands, except per share amounts) (numerator) (denominator) amount ----------------------------------------------------------------------------------------------------------- Net income $ 51,301 Basic net income per share: Income available to common shareholders 51,301 44,599,000 $ 1.15 Effect of dilutive securities: Stock options - 2,479,000 ------------ ------------ -------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 51,301 47,078,000 $ 1.09 ============ ============ ========
For the year ended December 31, 1998 ---------------------------------------------------- Income Shares Per share (Dollars in thousands, except per share amounts) (numerator) (denominator) amount ---------------------------------------------------------------------------------------------------------- Net income $ 41,273 Basic net income per share: Income available to common shareholders 41,273 43,664,000 $ 0.95 Effect of dilutive securities: Stock options - 3,077,000 ------------ ------------ -------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 41,273 46,741,000 $ 0.88 ============ ============ ========
There were options to purchase 66,000, 1,268,000 shares and 571,000 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, 2000, 1999 and 1998, respectively. All years presented have been restated to reflect the 2-for-1 stock split effective as of April 30, 1998 and the 2-for-1 stock split effective as of October 4, 2000. Weighted average shares outstanding and all per share amounts included in the consolidated financial statements and notes thereto are based upon the increased number of shares giving retroactive effect to the 2000 mergers with San Jose National Bank at a 1.82 conversion ratio, Bank of Petaluma at a 0.5731 conversion ratio, Bank of Santa Clara at a 0.8499 conversion ratio, Coast Bancorp at a 0.6338 conversion ratio and Mt. Diablo Bancshares at a 0.9532 conversion ratio, 1999 mergers with Bay Commercial Services at a 0.6833 conversion ratio and Bay Area Bancshares at a 1.38682 conversion ratio, the 1998 mergers with Pacific Rim Bancorporation and Pacific Business Funding Corporation at a total of 1,901,496 and 596,000 shares, respectively, and the 1997 merger with PBC at a 0.96550 conversion ratio. A-57 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 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) 2000 1999 -------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 20,152 $ 4,684 Investment in subsidiaries 474,252 332,977 Other investments 25,634 16,266 Other assets 25,984 19,124 -------------- -------------- Total assets $ 546,022 $ 373,051 ============== ============== Liabilities and shareholders' equity: Subordinated debt $ 118,609 $ 58,547 Other borrowings - - Other liabilities 41,465 8,430 -------------- -------------- Total liabilities 160,074 66,977 Shareholders' equity: Common stock 196,121 169,379 Accumulated other comprehensive income (6,035) (10,650) Retained earnings 195,862 147,345 -------------- -------------- Total shareholders' equity 385,948 306,074 -------------- -------------- Total liabilities and shareholders' equity $ 546,022 $ 373,051 ============== ==============
A-58 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 PARENT COMPANY ONLY--STATEMENTS OF OPERATIONS
Years ended December 31, ------------------------------------------------- (Dollars in thousands) 2000 1999 1998 ---------------------------------------------------------------------------------------------------- Income: Interest income $ 3,694 $ 551 $ 1,152 Cash dividend from subsidiaries 11,060 6,559 7,485 Other income 1,379 - 71 ------------ ---------- ---------- Total 16,133 7,110 8,708 ------------ ---------- ---------- Expenses: Interest expense 8,536 4,382 3,195 Salaries 22,280 17,138 8,952 Occupancy and equipment 6,416 3,821 2,031 Merger expenses 12,479 3,283 1,877 Other expenses 7,784 6,084 3,818 Less: rentals and fees received from Banks (41,480) (27,653) (15,866) ------------ ---------- ---------- Total 16,015 7,055 4,007 ------------ ---------- ---------- Income (loss) before taxes and equity in undistributed net income of subsidiaries 118 55 4,701 Income tax benefit (3,548) (2,782) (1,726) ------------ ---------- ---------- Income (loss) before equity in undistributed net income of subsidiaries 3,666 2,837 6,427 ------------ ---------- ---------- Equity in undistributed net income of subsidiaries 63,498 48,464 34,846 ------------ ---------- ---------- Net income $ 67,164 $ 51,301 $ 41,273 ============ ========== ==========
A-59 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 PARENT COMPANY ONLY--STATEMENTS OF CASH FLOWS
Years ended December 31, --------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------- Cash flows-operating activities Net income $ 67,164 $ 51,301 $ 41,275 Reconciliation of net income to net cash from operations: Equity in undistributed net income of subsidiaries (63,498) (48,464) (34,822) Net change in other assets (7,939) (10,230) (5,207) Net change in other liabilities 42,379 4,322 2,771 ----------------- ----------------- ----------------- Operating cash flow, net 38,106 (3,071) (4,017) ----------------- ----------------- ----------------- Cash flows-investing activities Purchases of available for sale securities (51,517) (20,825) (84,130) Proceeds from sale and maturities of available for sale securities 3,123 21,393 72,063 Proceeds from sale of OREO 224 - 407 Dividends from subsidiaries 10,560 4,166 3,449 Capital contribution to the subsidiaries (46,800) (27,218) (17,500) ----------------- ----------------- ----------------- Investing cash flows, net (84,410) (22,484) (25,711) ----------------- ----------------- ----------------- Cash flows-financing activities Net change in other borrowings 2,562 7,000 - Repurchase of common stock - (3,911) (2,651) Proceeds from private placement of stock 23,704 18,954 0 Proceeds from issuance of subordinated debt 50,500 - 30,000 Proceeds from sale of common stock 1,557 3,278 910 Proceeds from exercise stock purchase - 6,430 1,581 Payment of cash dividends (16,551) (9,271) (8,859) ----------------- ----------------- ----------------- Financing cash flows, net 61,772 22,480 20,981 ----------------- ----------------- ----------------- Net increase in cash and cash equivalents 15,468 (3,075) (713) Cash and cash equivalents at the beginning of the year 4,684 7,759 8,472 ----------------- ----------------- ----------------- Cash and cash equivalents at end of the year $ 20,152 $ 4,684 $ 7,759 ================= ================= =================
A-60 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 21--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 $46.3 million at December 31, 2000. No such advances were made during 2000 or exist as of December 31, 2000. NOTE 22--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, 2000 and 1999 are as follows:
2000 1999 --------------------------------------- -------------------------------------- Carrying Carrying (Dollars in thousands) Amount Fair Value Amount Fair Value ------------------------------------------------------------------------------------------------------------------------------------ Financial assets: Cash and due from banks $ 291,605 $ 291,605 $ 166,160 $ 166,160 Short term investments and Fed Funds Sold 184,370 176,542 263,800 261,762 Investment securities 1,091,064 1,101,416 863,590 833,848 Loans, net 3,973,329 4,008,905 2,813,329 2,794,116 Financial liabilities: Deposits: Demand, noninterest-bearing 1,133,958 1,133,958 822,300 851,291 MMDA, NOW and Savings 2,349,041 2,349,041 2,058,261 2,029,271 Time certificates, $100,000 and over 706,535 919,010 640,142 634,557 Other time certificates 560,870 349,034 215,917 217,310 Other borrowings 463,267 431,228 150,577 116,242 Company obligated mandatory redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures 99,500 92,365 49,000 48,468
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-61 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 Loans Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The fair value of performing variable rate loans is judged to approximate book value for those loans whose rates reprice in less than 90 days. Rate floors and rate ceilings are not considered for fair value purposes as the number of loans with such limitations is not significant. Fair value for significant nonperforming loans is based on recent external appraisals. If appraisals are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities and Borrowings The fair value for all deposits without fixed maturities and short term borrowings is considered to be equal to the carrying value. The fair value for fixed rate time deposits are estimated by discounting future cash flows using interest rates currently offered on time deposits with similar remaining maturities. The fair value of core deposits does not reflect the market core deposits premium of approximately 10% - 12%. Additionally, the fair value of deposits does not include the benefit that results from the low cost of funding provided by 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 rates 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 above table. Limitations These fair value disclosures represent management's best estimates, based on relevant market information and information about the financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, 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-62 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 23--ACTIVITY OF BUSINESS SEGMENTS The accounting policies of the segments are described in the "Summary of Significant Accounting Policies." Segment data includes intersegment revenue, as well as charges allocating all corporate-headquarters costs to each of its operating segments. Intersegment revenue is recorded at prevailing market terms and rates and is not significant to the results of the segments. This revenue is eliminated in consolidation. 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, 2000, 1999 and 1998:
2000 1999 1998 ------------------------------ ------------------------------ ---------------------------- Community Trust Community Trust Community Trust (Dollars in thousands) banking operations banking operations banking operations --------------------------------------------------------------------------------------------------------------------------------- Net interest income $ 269,941 $ 551 $ 183,662 $ 369 $ 154,548 $ 859 Other income 29,889 3,753 41,838 3,007 21,277 2,488 Operating expenses 104,093 2,703 165,546 2,863 118,547 2,429 Net income before income taxes (1) 166,916 1,601 110,232 121 81,177 918 Total assets 5,335,716 - 4,270,450 - 4,315,062 - Deposits 4,693,241 57,163 3,678,790 57,831 2,801,802 67,539 Assets under management - 773,791 - 697,435 - 649,336
---------- (1) Includes intercompany earnings allocation charge which is eliminated in consolidation A reconciliation of total segment net interest income and other income combined, net income before income taxes, and total assets to the consolidated numbers in each of these categories for the years ended December 31, 2000, 1999 and 1998 is presented below.
As of and for year ended December 31, ----------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------- Net interest income and other income Total segment net interest income and other income $ 317,120 $ 240,863 $ 181,996 Parent company net interest income and other income (4,400) (3,893) (1,357) -------------- ----------------- ----------------- Consolidated net interest income and other income $ 312,720 $ 236,970 $ 180,639 ============== ================= ================= Net income before taxes Total segment net income before income taxes $ 151,401 $ 110,155 $ 82,095 Parent company net income before income taxes (40,572) (32,393) (17,664) -------------- ----------------- ----------------- Consolidated net income before income taxes $ 110,829 $ 77,762 $ 64,431 ============== ================= ================= Total assets Total segment assets $ 5,335,716 $ 4,270,450 $ 3,315,062 Parent company segment assets 482,439 34,360 36,920 -------------- ----------------- ----------------- Consolidated total assets $ 5,818,155 $ 4,304,810 $ 3,351,982 ============== ================= =================
A-63 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 NOTE 24--SUBSEQUENT EVENTS Business Acquisition On March 30, 2001, we completed the acquisition of CAPCO for a purchase price of $8.5 million in cash and 44,820 shares of common stock with a fair value of $1.4 million. The acquisition was accounted for using the purchase method of accounting and, accordingly, CAPCO's results of operations have been included in the consolidated financial statements since the date of the acquisition. The source of funds for the acquisition was a $6.9 million advance on an existing credit line, with the remainder paid from our available cash. The purchase price has been allocated to the assets acquired and liabilities assumed based on the estimated fair values at the date of acquisition. The excess of purchase price over the estimated fair values of the net assets acquired, totaling $5.7 million, has been recorded as goodwill and is being amortized on the straight-line method over twenty years. Issuance of Additional Trust Preferred Securities On July 16, 2001, we completed a $15.0 million trust preferred securities private offering. We issued the trust preferred securities through a newly created trust subsidiary, GBB Capital VI, to a qualified institutional buyer. The trust preferred securities bear an interest rate of 6-month LIBOR plus 3.75% payable semi-annually. GBB Capital VI used the proceeds from the sale of the trust preferred securities to purchase junior subordinated deferrable interest debentures of Greater Bay. Greater Bay intends to invest a portion of the net proceeds in one or more of our subsidiary banks to increase their capital levels and intends to use the remaining net proceeds for general corporate purposes. Under applicable regulatory guidelines, we expect that the trust preferred securities will qualify as Tier I Capital. In connection with this transaction, we concurrently entered into an interest rate swap agreement to cap the cost of the offering at 8.75% for 10 years. On August 20, 2001, we completed a $103.5 million trust preferred securities public offering. We issued the trust preferred securities through a newly created trust subsidiary, GBB Capital V, to a qualified institutional buyer. The trust preferred securities bear an interest rate of 9.00% payable semi-annually. GBB Capital V used the proceeds from the sale of the trust preferred securities to purchase junior subordinated deferrable interest debentures of Greater Bay. Greater Bay intends to invest a portion of the net proceeds in one or more of our subsidiary banks to increase their capital levels and intends to use the remaining net proceeds for general corporate purposes. Under applicable regulatory guidelines, we expect $14.5 million of the trust preferred securities will qualify as Tier I Capital and $89.0 million of the trust preferred securities will qualify as Tier II Capital. Formation of CNB Investment Trust I During the third quarter of 2001, we formed and funded CNB Investment Trust I ("CNBIT I"), a Maryland real estate investment trust. CNBIT I provides Cupertino National Bank with flexibility in raising capital. The bank contributed participation interests in loans with a book value of $311.3 million, net of reserves, and $500,000 in cash to CNBIT I, in exchange for 100% of the common and preferred stock of the CNBIT I. CNBIT I is a wholly owned subsidiary trust of Cupertino National Bank. As of September 30, 2001, the net income, assets and equity of CNBIT I are eliminated in consolidation. A-64 NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Years Ended December 31, 2000, 1999 and 1998 During the first quarter of 2001, we transferred our entire portfolio of held to maturity debt securities to the available for sale category. The amortized cost of these securities at the time of transfer was $345.8 million and the securities had an unrealized gain of $11.0 million ($6.4 million, net of taxes) at the time of the transfer. Although our intention to hold a majority of our debt securities to maturity has not changed, the transfer was made to increase our flexibility in responding to future economic changes and to increase our efficiency in managing our investment portfolio. Subsequent to the transfer, we sold securities which had been classified as held to maturity at December 31, 2000 with an amortized cost of $43.2 million for a gain of $2.5 million. NOTE 25--QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table presents the summary results for the stated eight quarters:
For the quarter ended ---------------------------------------------------------------------------- (Dollars in thousands, December 31, September 30, June 30, March 31, except per share data) 2000 2000 2000 2000 ------------------------------------------------------------------------------------------------------------------------ Interest income $ 119,051 $ 110,812 $ 101,415 $ 92,361 Net interest income 74,246 68,279 65,064 58,000 Provision for loan losses 6,516 7,994 8,437 5,874 Other income 9,396 11,425 8,567 17,743 Other expenses 37,775 34,938 33,570 36,685 Income before taxes 35,818 29,735 24,880 30,795 Net income 20,913 15,638 13,002 17,611 Net income per share: Basic $ 0.43 $ 0.32 $ 0.27 $ 0.38 Diluted $ 0.41 $ 0.31 $ 0.26 $ 0.36 For the quarter ended ---------------------------------------------------------------------------- (Dollars in thousands, December 31, September 30, June 30, March 31, except per share data) 1999 1999 1999 1999 ------------------------------------------------------------------------------------------------------------------------ Interest income $ 84,903 $ 77,490 $ 71,322 $ 64,919 Net interest income 53,903 49,875 45,950 42,399 Provision for loan losses 6,928 4,127 2,243 1,603 Other income 24,034 8,173 6,218 6,420 Other expenses 50,870 30,940 33,797 28,552 Income before taxes 20,140 22,981 16,128 18,664 Net income 16,249 14,321 9,980 10,751 Net income per share: Basic $ 0.35 $ 0.32 $ 0.23 $ 0.24 Diluted $ 0.33 $ 0.30 $ 0.21 $ 0.23
A-65 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, 2000 and 1999, 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, 2000. 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 SJNB Financial Corp. on October 23, 2001, 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 of America 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ PricewaterhouseCoopers LLP San Francisco, California October 25, 2001 A-66