SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ________________
Commission file number 0-25034
GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)
California 77-0387041
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Outstanding shares of Common Stock, no par value, as of July 31, 2001:
42,740,871
GREATER BAY BANCORP
INDEX
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000.......................................................... 3
Consolidated Statements of Operations
for the Three Months and Six Months Ended
June 30, 2001 and 2000....................................................................... 4
Consolidated Statements of Comprehensive Income
for the Three Months and Six Months Ended
June 30, 2001 and 2000....................................................................... 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000...................................................... 6
Notes to Consolidated Financial Statements................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 38
Part II. Other Information
Item 1. Legal Proceedings................................................................................. 43
Item 2. Changes in Securities and Use of Proceeds......................................................... 43
Item 3. Defaults Upon Senior Securities................................................................... 43
Item 4. Submission of Matters to a Vote of Security Holders............................................... 43
Item 5. Other Information................................................................................. 44
Item 6. Exhibits and Reports on Form 8-K.................................................................. 44
Signatures................................................................................... 45
2
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31,
(Dollars in thousands) (unaudited) 2000
---------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 201,598 $ 270,774
Federal funds sold 55,000 138,000
Other short term securities 58 56
----------- -----------
Cash and cash equivalents 256,656 408,830
Investment securities:
Available for sale, at fair value 1,913,990 578,172
Held to maturity, at amortized cost (fair value 2000: $364,787) - 354,454
Other securities 68,449 29,651
----------- -----------
Investment securities 1,982,439 962,277
Total loans:
Commercial 1,620,541 1,562,712
Term real estate - commercial 1,041,530 967,428
----------- -----------
Total commercial 2,662,071 2,530,140
Real estate construction and land 723,394 691,912
Real estate other 236,927 176,568
Consumer and other 204,939 216,459
Deferred loan fees and discounts (13,759) (13,657)
----------- -----------
Total loans, net of deferred fees 3,813,572 3,601,422
Allowance for loan losses (88,190) (84,014)
----------- -----------
Total loans, net 3,725,382 3,517,408
Property, premises and equipment, net 37,905 33,860
Interest receivable and other assets 222,595 208,003
----------- -----------
Total assets $ 6,224,977 $ 5,130,378
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 846,505 $ 1,003,828
MMDA, NOW and savings 2,058,234 2,082,708
Time certificates, $100,000 and over 770,826 784,118
Other time certificates 641,187 294,407
----------- -----------
Total deposits 4,316,752 4,165,061
Other borrowings 1,344,926 431,228
Other liabilities 92,157 112,224
----------- -----------
Total liabilities 5,753,835 4,708,513
----------- -----------
Company obligated mandatorily redeemable cumulative trust preferred securities
of subsidiary trusts holding solely junior
subordinated debentures 99,500 99,500
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;
42,625,248 and 41,929,173 shares issued and outstanding
as of June 30, 2001 and December 31, 2000, respectively 178,598 173,276
Accumulated other comprehensive income (loss) 3,227 (6,552)
Retained earnings 189,817 155,641
----------- -----------
Total shareholders' equity 371,642 322,365
----------- -----------
Total liabilities and shareholders' equity $ 6,224,977 $ 5,130,378
=========== ===========
-----------------
See notes to consolidated financial statements.
3
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
-------------------------------------- -----------------------------------
(Dollars in thousands, except per share amounts) 2001 2000* 2001 2000*
---------------------------------------------------------------------------------------------- -----------------------------------
INTEREST INCOME
Interest on loans $ 84,599 $ 69,006 $ 173,543 $ 130,583
Interest on investment securities:
Taxable 23,127 12,901 37,629 24,572
Tax - exempt 1,653 2,225 3,783 4,228
-------------- -------------- -------------- --------------
Total interest on investment securities 24,780 15,126 41,412 28,800
Other interest income 2,428 3,406 3,546 7,992
-------------- -------------- -------------- --------------
Total interest income 111,807 87,538 218,501 167,375
-------------- -------------- -------------- --------------
INTEREST EXPENSE
Interest on deposits 31,393 29,293 65,871 57,153
Interest on long term borrowings 3,159 353 5,302 496
Interest on other borrowings 8,514 1,330 12,341 3,001
-------------- -------------- -------------- --------------
Total interest expense 43,066 30,976 83,514 60,650
-------------- -------------- -------------- --------------
Net interest income 68,741 56,562 134,987 106,725
Provision for loan losses 9,849 8,312 16,777 13,936
-------------- -------------- -------------- --------------
Net interest income after provision for
loan losses 58,892 48,250 118,210 92,789
-------------- -------------- -------------- --------------
OTHER INCOME
Gain on sale of investments, net 3,944 58 5,522 57
Service charges and other fees 2,091 2,194 4,104 4,341
Loan and international banking fees 2,085 1,927 4,626 3,103
Trust fees 978 827 1,864 1,674
ATM network revenue 766 676 1,428 1,326
Gain on sale of SBA loans 375 753 1,210 1,449
Other income 1,588 1,482 3,804 4,594
-------------- -------------- -------------- --------------
Total recurring 11,827 7,917 22,558 16,544
Warrant income, net 504 740 504 9,349
-------------- -------------- -------------- --------------
Total 12,331 8,657 23,062 25,893
-------------- -------------- -------------- --------------
OPERATING EXPENSES
Compensation and benefits 19,060 15,258 37,465 31,083
Occupancy and equipment 6,286 5,117 12,149 10,402
Trust Preferred Securities 2,454 1,783 4,912 2,841
Legal and other professional fees 1,532 1,199 2,919 2,309
Telephone, postage and supplies 1,382 1,182 2,705 2,322
Marketing and promotion 1,272 1,086 2,507 2,021
Client services 653 496 1,297 1,041
FDIC insurance and regulatory assessments 330 251 603 501
Directors fees 203 242 470 475
Other real estate owned - 41 - 51
Other 4,200 2,840 7,935 5,643
-------------- -------------- -------------- --------------
Total, recurring 37,372 29,495 72,962 58,689
Merger and other related nonrecurring costs - 10,203 - 14,084
-------------- -------------- -------------- --------------
Total operating expenses 37,372 39,698 72,962 72,773
-------------- -------------- -------------- --------------
Income before provision for income taxes 33,851 17,209 68,310 45,909
Provision for income taxes 12,703 6,784 25,631 18,188
-------------- -------------- -------------- --------------
Net income $ 21,148 $ 10,425 $ 42,679 $ 27,721
============== ============== ============== ==============
Net income per share - basic** $ 0.50 $ 0.25 $ 1.01 $ 0.68
============== ============== ============== ==============
Net income per share - diluted** $ 0.48 $ 0.24 $ 0.97 $ 0.65
============== ============== ============== ==============
_______________
*Restated on a historical basis to reflect the mergers described in note 1 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.
4
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ---------------------------
(Dollars in thousands) 2001 2000 2001 2000
------------------------------------------------------------------------------------------------------ ---------------------------
Net income $ 21,148 $ 10,425 $ 42,679 $ 27,721
----------------------- -------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding gains arising during period (net of taxes of $34
and $(3,558) for the three months ended June 30, 2001 and
2000, and $5,783 and $(4,786) for the six months ended
June 30, 2001 and 2000, respectively) 48 (5,089) 8,270 (6,845)
less: reclassification adjustment for gains
included in net income 557 34 1,486 34
----------------------- -------------------------
Net change 605 (5,055) 9,756 (6,811)
----------------------- -------------------------
Cash flow hedges:
Net derivative gains arising during period (net of taxes of $734
and $(38) for the three months ended June 30, 2001 and 2000,
and $48 and $139 for the six months ended
June 30, 2001 and 2000, respectively) 1,050 (54) 68 199
Less: reclassification adjustment for expenses
included in income (net of taxes of $(16) and $(3) for the
three months ended June 30, 2001 and 2000, and $(32) and $(5)
for the six months ended June 30, 2001 and
2000, respectively) (24) (5) (45) (7)
----------------------- -------------------------
Net change 1,026 (59) 23 192
----------------------- -------------------------
Other comprehensive income 1,631 (5,114) 9,779 (6,619)
----------------------- -------------------------
Comprehensive income $ 22,779 $ 5,311 $ 52,458 $ 21,102
======================= =========================
See notes to consolidated financial statements.
5
GREATER BAY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
------------------------------------
(Dollars in thousands) 2001 2000*
-----------------------------------------------------------------------------------------------------------------------------
Cash flows - operating activities
Net income $ 42,679 $ 27,721
Reconcilement of net income to net cash from operations:
Provision for loan losses 17,097 13,936
Depreciation and amortization 5,292 4,084
Deferred income taxes (1,718) (4,035)
(Gain) loss on sale of investments, net 3,224 (5)
Changes in:
Accrued interest receivable and other assets (9,156) (3,785)
Accrued interest payable and other liabilities (20,028) (4,482)
Deferred loan fees and discounts, net 102 1,642
------------ ----------
Operating cash flows, net 37,492 35,076
------------ ----------
Cash flows - investing activities
Maturities and partial paydowns on investment securities:
Held to maturity - 18,548
Available for sale 185,433 22,929
Other securities - 3,866
Purchase of investment securities:
Held to maturity - (237,148)
Available for sale (1,341,933) (74,047)
Other securities (38,798) -
Proceeds from sale of available for sale securities 190,810 -
Loans, net (210,761) (379,884)
Loan acquired from business acquisition (14,671) 5,502
Payment for business acquisitions, net of cash acquired (7,983) (5,766)
Sale of other real estate owned 259 -
Purchase of property, premises and equipment (7,993) (73)
Purchase of insurance policies (4,861) (4,555)
------------ ----------
Investing cash flows, net (1,250,498) (650,628)
------------ ----------
Cash flows - financing activities
Net change in deposits 151,691 453,648
Net change in other borrowings - short term 851,999 38,985
Proceeds from other borrowings - long term 83,200 -
Principal repayment - long term borrowings (21,501) -
Proceeds from company obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely junior
subordinated debentures - 50,500
Proceeds from sale of common stock 3,946 18,262
Cash dividends (8,503) (5,231)
------------ ----------
Financing cash flows, net 1,060,832 556,164
------------ ----------
Net change in cash and cash equivalents (152,174) (59,388)
Cash and cash equivalents at beginning of period 408,830 396,329
------------ ----------
Cash and cash equivalents at end of period $ 256,656 $ 336,941
============ ==========
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 73,677 $ 63,792
============ ==========
Income taxes $ 43,891 $ 12,981
============ ==========
Non-cash transactions:
Additions to other real estate owned $ 259 $ -
============ ==========
Transfer of appreciated securities to GBB Foundation $ - $ 7,200
============ ==========
-------------
* Restated on a historical basis to reflect the mergers described in note 1 on a
pooling of interests basis.
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of June 30, 2001, the Consolidated
Statements of Operations and Comprehensive Income for the three months and six
months ended June 30, 2001, and the Consolidated Statements of Cash Flows for
the six months ended June 30, 2001 have been prepared by Greater Bay Bancorp
("Greater Bay" on a parent-only basis, and "we" or "our" on a consolidated
basis) and are not audited. The results of operations for the quarter and six
months ended June 30, 2001 are not necessarily indicative of the results
expected for any subsequent quarter or for the entire year ended December 31,
2001.
Consolidation and Basis of Presentation
The unaudited financial information presented was prepared on the same
basis as the audited financial statements for the year ended December 31, 2000.
The consolidated financial statements include the accounts of Greater Bay
Bancorp and our wholly owned 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, GBB Capital I, GBB Capital II, GBB Capital III, GBB
Capital IV, GBB Capital V, GBB Capital VI, Matsco Lease Finance, Inc. II, and
Matsco Lease Finance, Inc. III, and our operating divisions. All significant
intercompany transactions and balances have been eliminated. Certain
reclassifications have been made to prior periods consolidated financial
statements to conform to the current presentation. In the opinion of management
such unaudited financial statements reflect all adjustments necessary for fair
statement of the results of operations and balances for the interim period
presented. Our accounting and reporting policies conform to generally accepted
accounting principles and the prevailing practices within the banking industry.
We have completed six mergers and acquisitions since December 31, 1999.
The mergers with Mt. Diablo Bancshares, Coast Bancorp, Bank of Santa Clara and
Bank of Petaluma were accounted for as a pooling-of-interests and, accordingly,
all of our financial information 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 acquisitions of The Matsco Companies, Inc. and CAPCO Financial
Company, Inc. ("CAPCO") were accounted for using the purchase accounting method
and accordingly The Matsco Companies, Inc.'s and CAPCO's results of operations
have been included in the consolidated financial statements since the date of
acquisition.
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.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires us to classify items of other comprehensive
income by their nature in the financial statements and display the accumulated
other comprehensive income separately from retained earnings in the equity
section of the balance sheet. The changes to the balances of accumulated other
comprehensive income are as follows:
Accumulated
Unrealized other
gains on Cash flow comprehensive
(Dollars in thousands) securities hedges income
--------------------------------------------------------------------------------------------------
Balance - December 31, 2000 $ (6,700) $ 148 $ (6,552)
Current period change 9,756 23 9,779
--------------------------------------------------------
Balance - June 30, 2001 $ 3,056 $ 171 $ 3,227
========================================================
Balance - December 31, 1999 $ (10,662) $ 1,504 $ (9,158)
Current period change (6,811) 192 (6,619)
--------------------------------------------------------
Balance - June 30, 2000 $ (17,473) $ 1,696 $ (15,777)
========================================================
Balance - March 31, 2001 $ 2,451 $ (855) $ 1,596
Current period change 605 1,026 1,631
--------------------------------------------------------
Balance - June 30, 2001 $ 3,056 $ 171 $ 3,227
========================================================
Balance - March 31, 2000 $ (12,418) $ 1,755 $ (10,663)
Current period change (5,055) (59) (5,114)
--------------------------------------------------------
Balance - June 30, 2000 $ (17,473) $ 1,696 $ (15,777)
========================================================
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
Segment Information
In accordance with SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), we use 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 our reportable
segments. SFAS No. 131 also requires disclosures about products and services,
geographic areas, and major customers.
NOTE 2--BUSINESS COMBINATIONS
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.
On June 25, 2001, we signed a definitive merger agreement with SJNB
Financial Corp., the holding company for San Jose National Bank. The agreement
provides for SJNB Financial Corp. shareholders to receive approximately 6.9
million shares of our stock subject to certain adjustments based on changes in
our stock price in a tax-free exchange to be accounted for as a pooling-of-
interest. The transaction is expected to be completed in the fourth quarter of
2001, subject to Greater Bay and SJNB Financial Corp. shareholders' and
regulatory approvals. As of and for the six month ended June 30, 2001, SJNB
Financial Corp. had $17.2 million in net interest income, $5.8 million in net
income, $660.5 million in assets, $562.8 in deposits and $70.5 million in
shareholders' equity.
NOTE 3--INVESTMENT SECURITIES
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 $42.3 million for a gain of $2.4
million.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
NOTE 4--BORROWINGS
Other borrowings are detailed as follows:
June 30, December 31,
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------
Other borrowings:
Short term borrowings:
Securities sold under
agreements to repurchase $ 186,050 $ 63,000
Other short term notes payable - 15,419
FHLB advances 980,600 183,000
Advances under credit lines 48,000 15,000
------------------- -------------------
Total short term borrowings 1,214,650 276,419
------------------- -------------------
Long term borrowings:
Other long term notes payable 27,276 51,809
FHLB advances 103,000 103,000
------------------- -------------------
Total other long term
borrowings 130,276 154,809
------------------- -------------------
Total other borrowings $ 1,344,926 $ 431,228
=================== ===================
During the six months ended June 30, 2001 and the year ended December 31,
2000, the average balance of securities sold under short term agreements to
repurchase was $84.2 million and $76.8 million, respectively, and the average
interest rates during those periods were 4.17% and 6.05%, respectively.
Securities sold under short term agreements to repurchase generally mature
within 90 days of dates of purchase.
During the six months ended June 30, 2001 and the year ended December 31,
2000, the average balance of federal funds purchased was $97.8 million and
$105.3 million, respectively, and the average interest rates during those
periods were 5.78% and 6.49%, respectively. There was no such balance
outstanding at June 30, 2001 and December 31, 2000.
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 $ 980,600 $ 103,000
Maturity 2001 2002 - 2003
Average rates 4.43% 5.92%
As of June 30, 2001, we had short-term, unsecured credit facilities from
two financial institutions totaling $65.0 million. At June 30, 2001 and December
31, 2000, we had advances outstanding of $48.0 million and $15.0 million,
respectively, under these facilities. The average rate paid on these advances
was approximately LIBOR + 0.50%. In addition, we were in compliance with all
related financial covenants for these credit facilities.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
NOTE 5--SUBSEQUENT EVENTS: ISSUANCE OF ADDITIONAL COMPANY OBLIGATED
MANDITORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUST
HOLDING SOLEY JUNIOR SUBORDINATED DEBENTURES
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 July 25, 2001, we filed a Registration Statement on Form S-3, plus a 15%
over allotment option, with the Securities Exchange Commission relating to a
proposed sale of $75.0 million, plus a 15% overallotment option, in trust
preferred securities in an underwritten public offering. We expect the sale of
these securities to occur during the third quarter of 2001.
NOTE 6--PER SHARE DATA
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 three and six months ended June 30, 2001 and 2000.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
For the three months ended June 30, 2001
-------------------------------------------------------------
Income Shares Per share
(Dollars in thousands, except per share amounts) (numerator) (denominator) amount
-------------------------------------------------------------------------------------------------------------------------
Basic net income per share:
Income available to common shareholders $ 21,148 42,562,000 $ 0.50
Effect of dilutive securities:
Stock options - 1,123,000
-------- -----------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 21,148 43,685,000 $ 0.48
======== ===========
For the three months ended June 30, 2000
-------------------------------------------------------------
Income Shares Per share
(Dollars in thousands, except per share amounts) (numerator) (denominator) amount
-------------------------------------------------------------------------------------------------------------------------
Basic net income per share:
Income available to common shareholders $ 10,425 41,207,000 $ 0.25
Effect of dilutive securities:
Stock options - 1,706,000
-------- -----------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 10,425 42,913,000 $ 0.24
======== ===========
For the six months ended June 30, 2001
-------------------------------------------------------------
Income Shares Per share
(Dollars in thousands, except per share amounts) (numerator) (denominator) amount
--------------------------------------------------------------------------------------------------------------------------
Basic net income per share:
Income available to common shareholders $ 42,679 42,445,000 $ 1.01
Effect of dilutive securities:
Stock options - 1,646,000
--------- -----------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 42,679 44,091,000 $ 0.97
========= ==========
For the six months ended June 30, 2000
-------------------------------------------------------------
Income Shares Per share
(Dollars in thousands, except per share amounts) (numerator) (denominator) amount
--------------------------------------------------------------------------------------------------------------------------
Basic net income per share:
Income available to common shareholders $ 27,721 40,752,000 $ 0.68
Effect of dilutive securities:
Stock options - 1,805,000
--------- -----------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 27,721 42,557,000 $ 0.65
========= ===========
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
There were options to purchase 1,370,127 shares and 0 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the three months ended
June 30, 2001 and 2000, respectively. There were options to purchase 1,311,947
shares and 2,156 shares that were considered anti-dilutive during the six months
ended June 30, 2001 and 2000, respectively.
The three and six month periods ended June 30, 2000 has been retroactively
restated to reflect 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
Bank of Petaluma at a 0.5731 conversion ratio and Bank of Santa Clara at a
0.8499 conversion ratio.
NOTE 7--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 our
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. We evaluate the performances of our segments and
allocate resources to them based on net interest income, other income, net
income before income taxes, total assets and deposits.
We are organized primarily along community banking and trust divisions.
Thirteen 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, professionals and other individuals. The trust division has
been shown as the "trust operations" segment. Our business is conducted in the
U.S.
The following table shows each segment's key operating results and
financial position for the six months ended June 30, 2001 and 2000:
Six months ended Six months ended
June 30, 2001 June 30, 2000
---------------------------------- ------------------------------
Community Trust Community Trust
(Dollars in thousands) banking operations banking operations
------------------------------------------------------------------------------------------------------
Net interest income $ 134,755 $ 458 $ 105,010 $ 300
Other income 20,242 2,083 23,904 1,761
Operating expenses 43,276 1,474 37,932 1,348
Net income before income taxes (1) 95,073 938 70,467 620
Total assets 5,679,942 - 3,964,444 -
Deposits 4,316,752 55,460 3,652,276 64,034
Assets under management - 683,306 - 795,042
____________
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of June 30, 2001 and December 31, 2000 and for the
Three Months and Six Months Ended June 30, 2001 and 2000
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 six months ended June 30, 2001 and
2000 is presented below.
Six months ended Six months ended
(Dollars in thousands) June 30, 2001 June 30, 2000
------------------------------------------------------------------------------------------------------------------
Net interest income and other income
Total segment net interest income and other income $ 157,538 $ 130,975
Parent company net interest income and other income 511 1,643
----------- -----------
Consolidated net interest income and other income $ 158,049 $ 132,618
=========== ===========
Net income before taxes
Total segment net income before income taxes $ 96,011 $ 71,087
Parent company net income before income taxes (27,701) (25,178)
----------- -----------
Consolidated net income before income taxes $ 68,310 $ 45,909
=========== ===========
Total assets
Total segment assets $ 5,679,942 $ 3,964,444
Parent company segment assets 545,035 354,641
----------- -----------
Consolidated total assets $ 6,224,977 $ 4,319,085
=========== ===========
NOTE 8--CASH DIVIDEND
We declared a cash dividend of $0.10 cents per share payable on July
16, 2001 to shareholders of record as of June 29, 2001.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay is a bank holding company with ten 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 and Peninsula Bank of Commerce.
As of June 30, 2001, we owned GBB Capital I, GBB Capital II, GBB Capital
III, GBB Capital IV, GBB Capital V and GBB Capital VI, which are Delaware
statutory business trusts formed for the exclusive purpose of issuing and
selling Cumulative Trust Preferred Securities.
We also own Matsco Lease Finance, Inc. II and Matsco Lease Finance, Inc.
III, which are special purpose corporations formed for the exclusive purpose of
securitizing leases and issuing lease-backed notes.
We also operate through the following divisions: CAPCO, Greater Bay Bank
Contra Costa Region, Greater Bay Bank Fremont Region, Greater Bay Bank Marin,
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. We operate throughout the San
Francisco Bay Area including Silicon Valley, San Francisco and the San Francisco
Peninsula, the East Bay, Santa Cruz, Marin and Sonoma Counties, with 38 offices
located in Aptos, Blackhawk, Capitola, Cupertino, Danville, Fremont, Hayward,
Lafayette, Millbrae, Milpitas, Palo Alto, Petaluma, Pleasanton, Point Reyes
Station, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San
Ramon, San Rafael, Santa Clara, Santa Cruz, Scotts Valley, Sunnyvale, Valley
Ford, Walnut Creek and Watsonville.
At June 30, 2001, we had total assets of $6.2 billion, total loans, net, of
$3.7 billion and total deposits of $4.3 billion.
We have completed six mergers and acquisitions since December 31, 1999.
The mergers with Mt. Diablo Bancshares, Coast Bancorp, Bank of Santa Clara and
Bank of Petaluma were accounted for as a pooling-of-interests and, accordingly,
all of our financial information 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 acquisitions of The Matsco Companies, Inc. and CAPCO were
accounted for using the purchase accounting method and accordingly The Matsco
Companies, Inc.'s and CAPCO's results of operations have been included in the
consolidated financial statements since the date of acquisition.
The three and six month periods ended June 30, 2000 have been retroactively
restated to reflect the 2-for-1 stock split effective October 4, 2000.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following discussion and analysis is intended to provide greater
details of our results of operations and financial condition. The following
discussion should be read in conjunction with our 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. Our 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 we conduct our operations, fluctuation in interest rates, credit
quality and government regulation and other factors discussed in our Annual
Report on Form 10-K for the year ended December 31, 2000.
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, merger and
other related nonrecurring costs, other
nonrecurring expenses and extraordinary items)
------------------------------------------------------
Three months ended Three months ended
(Dollars in thousands, except per share amounts) June 30, 2001 June 30, 2000
-------------------------------------------------------------------------------------------------------------
Income $ 20,856 $ 16,719
Income per share:
Basic $ 0.49 $ 0.41
Diluted $ 0.48 $ 0.39
Return on average assets 1.45% 1.60%
Return on average shareholders' equity 23.00% 23.62%
Income including nonrecurring warrant
income and before merger and other related
nonrecurring costs, other nonrecurring
expenses and extraordinary items
------------------------------------------------------
Three months ended Three months ended
(Dollars in thousands, except per share amounts) June 30, 2001 June 30, 2000
-------------------------------------------------------------------------------------------------------------
Income $ 21,148 $ 17,169
Income per share:
Basic $ 0.50 $ 0.42
Diluted $ 0.48 $ 0.40
Return on average assets 1.47% 1.64%
Return on average shareholders' equity 23.32% 24.26%
Net income (including non-recurring
warrant income and merger and other related
nonrecurring costs, other nonrecurring
expenses and extraordinary items)
-------------------------------------------------------
Three months ended Three months ended
(Dollars in thousands, except per share amounts) June 30, 2001 June 30, 2000
-------------------------------------------------------------------------------------------------------------
Income $ 21,148 $ 10,425
Income per share:
Basic $ 0.50 $ 0.25
Diluted $ 0.48 $ 0.24
Return on average assets 1.47% 1.00%
Return on average shareholders' equity 23.32% 14.73%
Core earnings (income before
nonrecurring warrant income, merger and
other related nonrecurring costs, other
nonrecurring expenses and extraordinary items)
-------------------------------------------------------
Six months ended Six months ended
(Dollars in thousands, except per share amounts) June 30, 2001 June 30, 2000
-------------------------------------------------------------------------------------------------------------
Income $ 42,387 $ 31,385
Income per share:
Basic $ 1.00 $ 0.77
Diluted $ 0.96 $ 0.74
Return on average assets 1.57% 1.54%
Return on average shareholders' equity 24.27% 22.78%
Income including nonrecurring warrant
income and before merger and other related
nonrecurring costs, other nonrecurring
expenses and extraordinary items
--------------------------------------------------
Six months ended Six months ended
(Dollars in thousands, except per share amounts) June 30, 2001 June 30, 2000
-------------------------------------------------------------------------------------------------------------
Income $ 42,679 $ 36,854
Income per share:
Basic $ 1.01 $ 0.90
Diluted $ 0.97 $ 0.87
Return on average assets 1.58% 1.81%
Return on average shareholders' equity 24.43% 26.75%
Net income (including non-recurring
warrant income and merger and other related
nonrecurring costs, other nonrecurring
expenses and extraordinary items)
-------------------------------------------------------
Six months ended Six months ended
(Dollars in thousands, except per share amounts) June 30, 2001 June 30, 2000
-------------------------------------------------------------------------------------------------------------
Income $ 42,679 $ 27,721
Income per share:
Basic $ 1.01 $ 0.68
Diluted $ 0.97 $ 0.65
Return on average assets 1.58% 1.36%
Return on average shareholders' equity 24.43% 20.12%
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Quarter to Date
Net income for the second quarter of 2001 increased 102.9% to $21.1
million, or $0.48 per diluted share, compared to net income of $10.4 million, or
$0.24 per diluted share, for the second quarter of 2000.
The second quarter 2001 results included nonrecurring warrant income of
$504,000 ($292,000 net of taxes) compared to $740,000 ($450,000, net of taxes)
during the second quarter of 2000. In addition, for the second quarter of 2001
there were no merger and other related nonrecurring costs as compared to $10.2
million ($6.7 million, net of taxes) in the second quarter of 2000.
Income including nonrecurring warrant income and before nonrecurring merger
and other related expenses and extraordinary items, increased 23.2% to $21.1
million, or $0.48 per diluted share, in the second quarter of 2001, compared to
$17.2 million, or $0.40 per diluted share, in the second quarter of 2000.
Our core earnings for the second quarter of 2001 increased 24.7% to $20.9
million, or $0.48 per diluted share, compared to $16.7 million, or $0.39 per
diluted share, in the second quarter of 2000. Based on our core earnings for
second quarter of 2001, our return on average shareholders' equity was 23.00%
and our return on average assets was 1.45%. During the second quarter of 2000,
our core earnings resulted in a return on average shareholders' equity of 23.62%
and a return on average assets of 1.60%.
The 24.7% increase in core earnings during second quarter of 2001 as
compared to second quarter of 2000 was the result of significant growth in loans
and investments. For the second quarter of 2001, net interest income increased
21.5% as compared to the second quarter of 2000. This increase was primarily
due to a 35.8% increase in average interest-earning assets for the second
quarter of 2001 as compared to 2000. The increases in loans, trust assets, and
deposits also contributed to the 4.2% 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 our growth. As a result,
increases in revenue were partially offset for the second quarter of 2001 by a
26.7% increase in recurring operating expenses, as compared to second quarter of
2000.
Year to Date
Net income for the six months ended June 30, 2001 increased 54.0% to $42.7
million, or $0.97 per diluted share, compared to net income of $27.7 million, or
$0.65 per diluted share, for the six months ended June 30, 2000.
The six months ended June 30, 2001 results included nonrecurring warrant
income of $504,000 ($292,000 net of taxes) as compared to $9.3 million ($5.5
million, net of taxes) during the six months ended June 30, 2000. In addition,
for the six months ended June 30, 2001 there were no merger and other related
nonrecurring costs as compared to $14.1 million ($9.1 million, net of taxes) in
the six months ended June 30, 2000.
Income including nonrecurring warrant income and before nonrecurring merger
and other related expenses and extraordinary items, increased 15.8% to $42.7
million, or $0.97 per diluted share, for the six months ended June 30 2001,
compared to $36.9 million, or $0.87 per diluted share, for the six months ended
June 30, 2000.
Our core earnings for the six months ended June 30, 2001 increased 35.1% to
$42.4 million, or $0.96 per diluted share, compared to $31.4 million, or $0.74
per diluted share, for the six months ended June 30, 2000. Based on our core
earnings for the six months ended June 30, 2001, our return on average
shareholders' equity was 24.27% and our return on average assets was 1.57%.
During the six months ended June 30, 2000, our core earnings resulted in a
return on average shareholders' equity of 22.78% and a return on average assets
of 1.54%.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The 35.1% increase in core earnings for the six months ended June 30,
2001 as compared to the six months ended June 30, 2000 was the result of
significant growth in loans and investments. For the six months ended June 30,
2001, net interest income increased 26.5% as compared to the six months ended
June 30, 2000. This increase was primarily due to a 32.9% increase in average
interest-earning assets during the six months ended June 30, 2001 as compared to
the six months ended June 30, 2000. The increases in loans, trust assets, and
deposits also contributed to the 16.2% 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 our growth. As a result,
increases in revenue were partially offset for the six months ended June 30,
2001 by a 24.3% increase in recurring operating expenses, as compared to the six
months ended June 30, 2000.
Net Interest Income-Overview
We are subject to continued pressure on our net interest margin,
primarily attributable to the rapidly declining interest rate environment, our
asset sensitive balance sheet, slowdown in loan and deposit growth, combined
with a shift in the mix of our interest earning assets and interest bearing
liabilities. In response to those conditions, during the second quarter of 2001,
we changed our balance sheet mix and composition as we have shifted the funding
source of our specialty finance businesses from a core deposit base to a
wholesale funding strategy. This shift in funding corresponds with our original
strategy for financing these niche specialty finance businesses. The impact of
this change has allowed us to also restructure and increase the size of our
investment portfolio by funding it with the deposits which previously supported
the specialty finance business units. The overall impact of this funding change
has been threefold. First, it has increased the overall net interest income from
operations, second it has allowed us to improve liquidity and reduce the
duration of our investment portfolio and third it has slightly reduced our asset
sensitive balance sheet. On a combined basis, this change has positioned us to
slightly reduce our exposure to declining interest rates, while also effectively
restructuring our balance sheet to take advantage of market interest rates when
they move upward.
The following table highlights the change in composition of our balance
sheet at June 30, 2001 and December 31, 2000:
Assets
(Dollars in thousands) June 30, 2001 December 31, 2000
--------------------------------------------------------------------------------
Loans 60.4% 69.1%
Investments 31.4% 18.4%
Other assets 8.2% 12.5%
--------------------------------------------------------------------------------
100.0% 100.0%
Deposits
(Dollars in thousands) June 30, 2001 December 31, 2000
--------------------------------------------------------------------------------
Demand, non-interest bearing 19.6% 24.1%
NOW, MMDA and savings 47.7% 50.0%
Time certificates 32.7% 25.9%
--------------------------------------------------------------------------------
100.0% 100.0%
Liabilities & Equity
(Dollars in thousands) June 30, 2001 December 31, 2000
--------------------------------------------------------------------------------
Total deposits 68.4% 79.9%
Other borrowing 21.3% 8.3%
Other liabilities 2.9% 3.7%
Equity 7.4% 8.1%
--------------------------------------------------------------------------------
100.0% 100.0%
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The impact on our net interest margin from this change in balance sheet mix
has been a reduction in the net interest margin, offset by an increase in
average earning assets. The overall impact on our net interest income and
interest rate risk profile has been positive, net interest income has increased,
while the asset sensitive nature of the balance sheet has been slightly reduced.
Current modeling of our interest rate risk indicates that our net interest
margin will contract approximately 5 to 7 basis points for every 25 basis point
reduction in market interest rates. This relationship is estimated to be
reasonable through an additional 50 basis point decline in market interest
rates, assuming the mix and composition of our balance sheet remains similar.
The restructuring of the balance sheet has reduced a small portion of the
downward pressure on our net interest margin, but it has not substantially
reduced the upside when market interest rates begin their upward trend. For
every 25 basis point increase in rates, it is anticipated that our net interest
margin will increase by approximately 10 to 12 basis points. Again, this
assumes a similar mix in loans and deposits. However, in an improving economy,
our clients' demand for loans should increase, thus having the effect of
increasing the net interest margin at a more rapid pace. For further
information regarding our interest rate risk, see "Quantitative and Qualitative
Disclosures about Market Risk".
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Interest Income-Quarterly
Net interest income increased 21.5% to $68.7 million for the second quarter
of 2001 from $56.6 million for the second quarter of 2000. This increase was
primarily due to the $1.4 billion, or 35.8%, increase in average interest-
earning assets which was partially offset by a 61 basis point decrease in our
net yield on interest-earning assets. Net interest income increased 3.8% in the
second quarter of 2001 from $66.2 million from the first quarter of 2001. This
increase was primarily due to the $720.7 million, or 15.4%, increase in average
interest-earning assets, which was partially offset by the 63 basis point
decrease in our net yield on interest-earning assets.
The following table presents, for the periods indicated, our condensed
average balance sheet information together with interest income and yields
earned on average interest-earning assets and interest expense and rates paid on
average interest-bearing liabilities. Average balances are average daily
balances.
Three months ended Three months ended
June 30, 2001 March 31, 2001
--------------------------------------------- --------------------
Average
Average yield / Average
(Dollars in thousands) balance (1) Interest rate balance (1)
---------------------------------------------------------------------------------------------------- --------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 87,372 $ 942 4.32% $ 79,910
Other short term securities 57 1 7.04% 57
Investment securities:
Taxable 1,422,065 24,612 6.94% 792,628
Tax-exempt (2) 139,571 1,653 4.75% 176,022
Loans (3) 3,759,151 84,599 9.03% 3,638,946
----------------- -------------- --------------------
Total interest-earning
assets 5,408,216 111,807 8.29% 4,687,563
Noninterest-earning assets 362,568 400,816
----------------- -------------- --------------------
Total assets $ 5,770,784 111,807 $ 5,088,379
================= -------------- ====================
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 2,080,286 15,492 2.99% $ 2,156,195
Time deposits, over $100,000 649,212 7,870 4.86% 630,483
Other time deposits 666,652 8,031 4.83% 448,760
----------------- -------------- --------------------
Total interest-bearing deposits 3,396,150 31,393 3.71% 3,235,438
Other borrowings 957,798 11,673 4.89% 407,587
----------------- -------------- --------------------
Total interest-bearing liabilities 4,353,948 43,066 3.97% 3,643,025
Noninterest-bearing deposits 859,178 891,537
Other noninterest-bearing liabilities 94,373 113,735
Trust Preferred Securities 99,500 99,500
----------------- --------------------
Shareholders' equity 363,785 340,582
----------------- -------------- --------------------
Total shareholders' equity and liabilities $ 5,770,784 43,066 $ 5,088,379
================= -------------- =====================
Net interest income $ 68,741
==============
Interest rate spread 4.32%
Contribution of interest free funds 0.77%
----------
Net yield on interest-earnings assets(4) 5.10%
==========
Three months ended
June 30, 2000
-------------------------- -----------------------------------------------
Average Average
yield / Average yield /
(Dollars in thousands) Interest rate balance (1) Interest rate
--------------------------------------------------------------------------------- -----------------------------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 1,117 5.67% $ 212,495 $ 3,174 6.01%
Other short term securities 1 7.12% 17,021 232 5.48%
Investment securities:
Taxable 14,502 7.42% 758,602 12,901 6.84%
Tax-exempt (2) 2,130 4.91% 166,706 2,225 5.37%
Loans (3) 88,944 9.91% 2,826,612 69,006 9.82%
---------- --------------- -------------
Total interest-earning
assets 106,694 9.23% 3,981,436 87,538 8.84%
Noninterest-earning assets 231,767
---------- --------------- -------------
Total assets 106,694 $ 4,213,203 87,538
---------- =============== -------------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings 19,303 3.63% $ 2,088,108 19,044 3.67%
Time deposits, over $100,000 8,677 5.58% 618,666 8,361 5.44%
Other time deposits 6,498 5.87% 157,539 1,888 4.82%
---------- --------------- -------------
Total interest-bearing deposits 34,478 4.32% 2,864,313 29,293 4.11%
Other borrowings 5,970 5.94% 108,225 1,683 6.25%
---------- --------------- -------------
Total interest-bearing liabilities 40,448 4.50% 2,972,538 30,976 4.19%
Noninterest-bearing deposits 823,334
Other noninterest-bearing liabilities 54,354
Trust Preferred Securities 78,324
---------------
Shareholders' equity 284,653
---------- --------------- -------------
Total shareholders' equity and liabilities 40,448 $ 4,213,203 30,976
---------- =============== -------------
Net interest income $ 66,246 $ 56,562
========== =============
Interest rate spread 4.73% 4.65%
Contribution of interest free funds 1.00% 1.06%
---------- -------------
Net yield on interest-earnings assets(4) 5.73% 5.71%
========== =============
_____________
(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 6.87%, 7.08%
and 7.81% for the three months ended June 30, 2001, March 31, 2001, and
June 30, 2000, respectively, using the federal statutory rate of 34%.
(3) Loan fees totaling $2.1 million, $3.3 million and $2.0 million are included
in loan interest income for three months ended June 30, 2001, March 31,
2001 and June 31, 2000, 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.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The most significant impact on our 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 periods indicated a summary of the
changes in average asset and liability balances (volume) and changes in average
interest rates (rate).
Three months ended June 30, 2001
compared with March 31, 2001
favorable / (unfavorable)
(Dollars in thousands) Volume Rate Net
--------------------------------------------------------------------------------------------------------------------
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ 558 $ (733) $ (175)
Other short term investments - - -
Investment securities:
Taxable 16,363 (6,253) 10,110
Tax-exempt (414) (63) (477)
Loans 16,228 (20,573) (4,345)
-----------------------------------------------
Total interest income 32,735 (27,622) 5,113
-----------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings 632 3,179 3,811
Time deposits over $100,000 (1,548) 2,355 807
Other time deposits (7,965) 6,432 (1,533)
-----------------------------------------------
Total interest-bearing deposits (8,881) 11,966 3,085
Other borrowings (12,623) 6,920 (5,703)
-----------------------------------------------
Total interest expense (21,504) 18,886 (2,618)
-----------------------------------------------
Net increase (decrease) in net interest income $ 11,231 $ (8,736) $ 2,495
===============================================
Three months ended June 30, 2001
compared with June 30, 2000
favorable / (unfavorable)
(Dollars in thousands) Volume Rate Net
--------------------------------------------------------------------------------------------------------------------
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ (1,513) $ (719) $ (2,232)
Other short term investments (592) 361 (231)
Investment securities:
Taxable 11,515 196 11,711
Tax-exempt (336) (236) (572)
Loans 48,514 (32,921) 15,593
------------------------------------------------
Total interest income 57,588 (33,319) 24,269
------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings 70 3,482 3,552
Time deposits over $100,000 (2,105) 2,596 491
Other time deposits (6,139) (4) (6,143)
------------------------------------------------
Total interest-bearing deposits (8,174) 6,074 (2,100)
Other borrowings (12,597) 2,607 (9,990)
------------------------------------------------
Total interest expense (20,771) 8,681 (12,090)
------------------------------------------------
Net increase (decrease) in net interest income $ 36,817 $(24,638) $ 12,179
================================================
The Quarter Ended June 30, 2001 Compared to June 30, 2000
---------------------------------------------------------
Interest income in the second quarter ended June 30, 2001 increased
27.7% to $111.8 million from $87.5 million in the quarter ended June 30, 2000.
This was primarily due to the significant increase in loans and investment
securities. Average interest-earning assets increased $1.4 billion, or 35.8%, to
$5.4 billion in the three months ended June 30, 2001, compared to $4.0 billion
in the same period of 2000. Average loans increased $932.5 million, or 33.0%, to
$3.8 billion for the three months ended June 30, 2001 from $2.8 billion in the
same period of 2000. Average investment securities, Federal funds sold and other
short-term securities, increased 42.8% to $1.6 billion in the second quarter of
2001 from $1.2 billion in the same period of 2000. The impact of the increase in
average assets was partially offset by a decrease in the yield earned on
interest-earning assets.
During the first six months of 2001, interest rates declined, due to
the Federal Reserve Board's reduction of the key Fed Funds Rate by 275 basis
points. As a result, the average yield on interest-earning assets decreased 55
basis points to 8.29% in the second quarter of 2001 from 8.84% in the same
period of 2000. The average yield on loans decreased 79 basis points to 9.03% in
the same period of 2001 from 9.82% in the same period of 2000.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Interest expense in the second quarter of 2001 increased 39.0% to $43.1
million from $31.0 million in the same period of 2000. This increase was due to
greater volumes of interest-bearing liabilities. Average interest-bearing
liabilities increased 46.5% to $4.4 billion in the second quarter of 2001 from
$3.0 billion in the same period of 2000. The increase was due primarily to the
increase in other borrowings which was a result of the implementation of our
wholesale funding strategy, described above. The increase in borrowings was
augmented by deposit growth resulting from the efforts of our 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. The impact of the increase in average liabilities was
partially offset by a decrease in the rate paid on interest bearing liabilities.
The average yield on interest-earning liabilities decreased 22 basis
points to 3.97% in the second quarter of 2001 from 4.19% in the same period of
2000. The average yield on interest bearing deposits decreased 40 basis points
to 3.71% in the same period of 2001 from 4.11% in the same period of 2000.
During the second quarter of 2001, average noninterest-bearing deposits
increased to $859.2 million from $823.3 million in the same period of 2000.
As a result of the foregoing, our interest rate spread decreased to 4.32%
in the second quarter of 2001 from 4.65% in the same period of 2000. The net
yield on interest-earning assets decreased in the second quarter of 2001 to
5.10% from 5.71% in the same period of 2000.
The Quarter Ended June 30, 2001 Compared to March 31, 2001
----------------------------------------------------------
Interest income in the second quarter ended June 30, 2001 increased 4.8% to
$111.8 million from $106.7 million in the quarter ended March 31, 2001. This
was primarily due to the significant increase in investment securities. Average
interest-earning assets increased $720.7 million, or 15.4%, to $5.4 billion in
the quarter ended June 30, 2001, compared to $4.7 billion in the previous
quarter. Average loans increased $120.2 million, or 3.3%, to $3.8 billion for
the quarter ended June 30, 2001 from $3.6 billion in the previous quarter.
Average investment securities, Federal funds sold and other short-term
securities, increased 57.3% to $1.6 billion in the second quarter of 2001 from
$1.0 billion in the previous quarter. The impact of the increase in average
assets was partially offset by a decrease in the yield earned on interest-
earning assets.
During the quarter ended June 30, 2001, interest rates declined, due to the
Federal Reserve Board's reduction of the key Fed Funds Rate by 125 basis points.
As a result, the average yield on interest-earning assets decreased 94 basis
points to 8.29% in the second quarter of 2001 from 9.23% in the previous
quarter. The average yield on loans decreased 88 basis points to 9.03% in second
quarter of 2001 from 9.91% in the previous quarter.
Interest expense in the second quarter of 2001 increased 6.5% to $43.1
million from $40.4 million in the previous quarter. This increase was due to
greater volumes of interest-bearing liabilities. Average interest-bearing
liabilities increased 19.5% to $4.4 billion in the second quarter of 2001 from
$3.6 billion in the previous quarter. The increase was due primarily to the
increase in other borrowings which was a result of the implementation of our
wholesale funding strategy, described above. The impact of the increase in
average liabilities was partially offset by a decrease in the rate paid on
interest bearing liabilities.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The average yield on interest-earning liabilities decreased 53 basis points
to 3.97% in the second quarter of 2001 from 4.50% in the previous quarter of
2001. The average yield on interest bearing deposits decreased 61 basis points
to 3.71% in the second quarter from 4.32% in the previous quarter.
During the second quarter of 2001, average noninterest-bearing deposits
decreased to $859.2 million from $891.5 million in the previous quarter.
As a result of the foregoing, our interest rate spread decreased to 4.32%
in the second quarter of 2001 from 4.73% in the previous quarter. The net yield
on interest-earning assets decreased in the second quarter of 2001 to 5.10% from
5.73% in the previous quarter.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Interest Income-Year to Date
Net interest income increased 26.5% to $135.0 million for the six
months ended June 30, 2001 from $106.7 million for the six months ended June 30,
2000. This increase was primarily due to the $1.3 billion, or 32.9%, increase in
average interest-earning assets, which was partially offset by a 26 basis point
decrease in our net yield on interest-earning assets.
The following table presents, for the periods indicated, our condensed
average balance sheet information 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.
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------------------------------- ----------------------------------------
Average Average
Average yield / Average yield /
(Dollars in thousands) balance (1) Interest rate balance (1) Interest rate
---------------------------------------------------------------------------------------- -----------------------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 83,665 $ 2,054 4.95% $ 246,311 $ 7,292 5.95%
Other short term securities 57 2 7.08% 23,802 700 5.91%
Investment securities:
Taxable 1,109,048 39,119 7.11% 717,113 24,572 6.89%
Tax-exempt (2) 157,696 3,783 4.84% 159,407 4,228 5.33%
Loans (3) 3,700,410 173,543 9.46% 2,652,703 130,583 9.90%
------------ --------- ----------- --------
Total interest-earning
assets 5,050,876 218,501 8.72% 3,799,336 167,375 8.86%
Noninterest-earning assets 380,402 298,179
------------ --------- ----------- --------
Total assets $ 5,431,278 218,501 $ 4,097,515 167,375
============ --------- =========== --------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 2,118,027 34,787 3.31% $ 2,035,728 38,405 3.79%
Time deposits, over $100,000 640,603 16,549 5.21% 586,509 15,029 5.15%
Other time deposits 557,610 14,535 5.26% 158,529 3,719 4.72%
------------ --------- ----------- --------
Total interest-bearing deposits 3,316,240 65,871 4.01% 2,780,766 57,153 4.13%
Other borrowings 684,117 17,643 5.20% 119,354 3,497 5.89%
------------ --------- ----------- --------
Total interest-bearing liabilities 4,000,357 83,514 4.21% 2,900,120 60,650 4.21%
Noninterest-bearing deposits 875,264 797,130
Other noninterest-bearing liabilities 103,913 59,041
Trust Preferred Securities 99,500 64,132
------------ -----------
Shareholders' equity 352,244 277,092
------------ --------- ----------- --------
Total shareholders' equity and liabilities $ 5,431,278 83,514 $ 4,097,515 60,650
============ --------- =========== --------
Net interest income $ 134,987 $106,725
========= ========
Interest rate spread 4.51% 4.65%
Contribution of interest free funds 0.88% 1.00%
----- -----
Net yield on interest-earnings assets(4) 5.39% 5.65%
===== =====
-----------------
(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 6.99% and
7.77% for the six months ended June 30, 2001 and June 30, 2000,
respectively, using the federal statutory rate of 34%.
(3) Loan fees totaling $5.4 million and $4.1 million are included in loan
interest income for six months ended June 30, 2001, and June 30, 2000
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.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The table below sets forth, for the periods indicated, a summary of the
changes in average asset and liability balances (volume) and changes in average
interest rates (rate).
Six months ended June 30, 2001
compared with June 30, 2000
favorable / (unfavorable)
(Dollars in thousands) Volume Rate Net
--------------------------------------------------------------------------------------------------------------------
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ (4,174) $ (1,064) $ (5,238)
Other short term investments (1,045) 347 (698)
Investment securities:
Taxable 13,737 810 14,547
Tax-exempt (46) (399) (445)
Loans 59,665 (16,705) 42,960
-----------------------------------------------
Total interest income 68,136 (17,010) 51,126
-----------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (3,863) 7,481 3,618
Time deposits over $100,000 (1,359) (161) (1,520)
Other time deposits (10,347) (469) (10,816)
-----------------------------------------------
Total interest-bearing deposits (15,569) 6,851 (8,718)
Other borrowings (15,415) 1,269 (14,146)
-----------------------------------------------
Total interest expense (30,984) 8,120 (22,864)
-----------------------------------------------
Net increase (decrease) in net interest income $ 37,152 $ (8,890) $ 28,262
===============================================
The Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
-----------------------------------------------------------------------------
Interest income in the six months ended June 30, 2001 increased 30.5%
to $218.5 million from $167.4 million in the same period of 2000. This was
primarily due to the significant increase in loans and investment securities.
Average interest-earning assets increased $1.3 billion, or 32.9%, to $5.1
billion in the six months ended June 30, 2001, compared to $3.8 billion in the
same period of 2000. Average loans increased $1.0 billion, or 39.5%, to $3.7
billion for the six months ended June 30, 2001 from $2.7 billion in the same
period of 2000. Average investment securities, Federal funds sold and other
short-term securities, increased 17.8% to $1.4 billion in the six months ended
2001 from $1.1 billion in the same period of 2000. The impact of the increase in
average assets was offset by a decrease in the yield earned on average interest-
earning assets.
During the first six months of 2001, interest rates declined, due to
the Federal Reserve Board's reduction of the key Fed Funds Rate by 275 basis
points. As a result, the average yield on interest-earning assets decreased 14
basis points to 8.72% in the six months ended June 30, 2001 from 8.86% in the
same period of 2000 primarily due to lower interest rate. The average yield on
loans decreased 44 basis points to 9.46% in the same period of 2001 from 9.90%
for the same period of 2000.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Interest expense in the six months ended June 30, 2001 increased 37.7%
to $83.5 million from $60.7 million for the same period of 2000. This increase
was due to greater volumes of interest-bearing liabilities. Average
interest-bearing liabilities increased 37.9% to $4.0 billion in the six months
ended June 30, 2001 from $2.9 billion in the same period of 2000. The increase
was due primarily to the increase in other borrowings which was a result of the
implementation of our wholesale funding strategy, described above. The increase
in borrowings was augmented by deposit growth resulting from the efforts of our
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.
The average yield on interest-bearing liabilities did not change for
the six months ended June 30, 2001, as compared to the same period of 2000. The
average yield on interest bearing deposits decreased 12 basis points to 4.01% in
the same period of 2001 from 4.13% for the same period in 2000.
During the six months ended June 30, 2001, average noninterest-bearing
deposits increased to $875.3 million from $797.1 million in the same period of
2000.
As a result of the foregoing, our interest rate spread decreased to
4.51% in the six months ended June 30, 2001 from 4.65% in the same period of
2000. The net yield on interest-earning assets decreased in the six months ended
June 30, 2001 to 5.39% from 5.65% in the same period of 2000.
We incurred certain client service expenses with respect to our
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, our net yield
on interest-earning assets would have been as follows for each of the periods
presented.
Three months ended June 30, Six months ended June 30,
----------------------------------- -----------------------------------
(Dollars in thousands) 2001 2000 2001 2000
----------------------------------------------------------------------------------------- -----------------------------------
Average noninterest bearing demand deposits $ 859,178 $ 823,334 $ 875,264 $ 797,130
Client service expenses 653 496 1,297 1,041
Client service expenses, as a percentage of
average noninterest bearing demand deposits 0.30% 0.24% 0.30% 0.26%
IMPACT ON NET YIELD ON INTEREST-EARNING
ASSETS:
Net yield on interest-earning assets 5.10% 5.71% 5.39% 5.65%
Impact of client service expense (0.05)% (0.05)% (0.05)% (0.06)%
---------------- --------------- --------------- ---------------
Adjusted net yield on interest-earning assets 5.05% 5.66% 5.34% 5.59%
================ =============== =============== ===============
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 our efforts to manage interest expense.
Provision for Loan Losses
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in our 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.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Refer to the section "Financial Condition - Allowance for Loan Losses"
for a description of our systematic methodology employed in determining an
adequate allowance for loan losses.
The provision for loan losses for the second quarter of 2001 was $9.8
million, compared to $6.9 million for the first quarter of 2001 and $8.3 million
for the second quarter of 2000. The provision for loan losses for the six months
ended June 30, 2001 was $16.8 million as compared to $13.9 million for the six
months ended June 30, 2000. In addition, in connection with the Coast Bancorp
merger and the Mt. Diablo Bancshares merger, we made an additional provision for
loan losses of $1.5 million in the second quarter of 2000 and $2.4 million for
the six months ended June 30, 2000, respectively, to conform to our allowance
methodology.
For further information on nonperforming and classified loans and the
allowance for loan losses, see "Financial Condition -- Nonperforming and
Classified Assets".
Other Income
Total recurring income increased to $11.8 million in the second quarter
of 2001, compared to $10.7 million for the first quarter of 2001 and $7.9
million for the second quarter of 2000. The following table sets forth
information by category of other income for the periods indicated.
At and for the three month periods ended
----------------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2001 2001 2000 2000 2000
---------------------------------------------------------------------------------------------------------------------------------
Loan and international banking fees $ 2,085 $ 2,541 $ 2,562 $ 2,497 $ 1,927
Service charges and other fees 2,091 2,013 2,034 2,219 2,194
Gain on sale of investments, net 3,944 1,578 21 3 58
Trust fees 978 886 954 822 827
Gain on sale of SBA loans 375 835 312 429 753
ATM network revenue 766 662 748 817 676
Other income 1,588 2,216 1,289 1,288 1,482
--------------- ---------------- --------------- ---------------- --------------
Total, recurring 11,827 10,731 7,920 8,075 7,917
Warrant income 504 - 870 2,767 740
--------------- ---------------- --------------- ---------------- --------------
Total $ 12,331 $ 10,731 $ 8,790 $ 10,842 $ 8,657
=============== ================ =============== ================ ==============
The increase in recurring income in the second quarter of 2001 as
compared to the first quarter of 2001 and second quarter of 2000 was primarily
the result of gain on sale of investments which increased to $3.9 million during
the second quarter of 2001. That increase during the second quarter of 2001
compared to the first quarter of 2001 was partially offset by a decrease in loan
and international banking fees, gain on sales of loans and other income.
During the second quarter of 2001, we recorded a $3.9 million gain on
the sale of investments, as compared to $1.6 million during the first quarter of
2001 and $58,000 during the second quarter of 2000.
The gain on sale of investments allowed us to postpone the planned sale
of Matsco loans. Our future plans would indicate selling approximately 20% to
40% of Matsco's loan production. By retaining all of Matsco's loan production
during the six months ended June 30, 2001, we have retained higher yielding
assets with an increase in net interest income and greater flexibility for
future Matsco loan sales.
During the second quarter of 2001, we recorded $2.1 million of loan and
international banking fees, as compared to $2.5 million in the first quarter of
2001 and to $1.9 million in the second quarter of 2000. Approximately $788,000
of this increase in the second quarter of 2001, as compared to the second
quarter of 2000, relates to fee income earned by Matsco and CAPCO. A significant
portion of the remaining growth from the second quarter of 2001 as compared to
the second quarter of 2000 is a result of the growth in our overall loan
portfolio.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
During the second quarter of 2001, we recorded a $375,000 gain on sale
of SBA loans, as compared to $835,000 in the first quarter of 2001, and $753,000
in the second quarter of 2000. We originate SBA loans with the intention of
selling a significant portion of those loans into the secondary market.
Occasionally, weakness in the market for these loans will cause us to retain
newly originated loans in our portfolio until such time that the secondary
market for these loans strengthens. Such a weakness in the secondary market for
these loans took place in the latter half of 2000, causing us to reduce the pace
of our SBA loan sales. In the first quarter of 2001, we increased the amount of
the sales of SBA loans as market conditions for these sales had improved. In the
second quarter of 2001, originations declined and market conditions continued to
weaken and as a result, our pace of sales declined.
Other income in the second quarter of 2001 and the second quarter of
2000 included warrant income of $504,000 and $740,000, which is net of related
employee incentives of $216,000 and $668,000, respectively. At June 30, 2001, we
held approximately 135 warrant positions for which we do not have a significant
recorded investment. We occasionally receive 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 our control, 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 periods indicated.
At and for the three month periods ended
-------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2001 2001 2000 2000 2000
----------------------------------------------------------------------------------------------------------------------------------
Compensation and benefits $ 19,060 $ 18,405 $ 17,449 $ 15,792 $ 15,258
Occupancy and equipment 6,286 5,863 5,711 5,575 5,117
Trust Preferred Securities 2,454 2,458 2,412 2,585 1,783
Legal and other professional fees 1,532 1,387 1,083 1,312 1,199
Client service expenses 653 644 563 477 496
FDIC insurance and regulatory assessments 330 273 356 379 251
Expenses on other real estate owned - - 5 - 41
Other 7,057 6,560 5,770 4,450 5,350
------------- -------------- ----------- ---------------- -------------
Total operating expenses excluding
nonrecurring costs $ 37,372 35,590 33,349 30,570 29,495
Mergers and other related nonrecurring costs - - 4,606 11,412 10,203
------------- -------------- ----------- ---------------- -------------
Total operating expenses $ 37,372 $ 35,590 $ 37,955 $ 41,982 $ 39,698
============= ============== =========== ================ =============
Efficiency ratio 46.10% 46.23% 51.15% 59.42% 60.87%
Efficiency ratio (before merger, nonrecurring
and extraordinary items) 46.39% 46.23% 45.47% 45.03% 45.74%
Efficiency ratio (excluding Matsco) 45.77% 44.67% 50.66% 59.42% 60.87%
Efficiency ratio (excluding Matsco and before merger,
nonrecurring and extraordinary items) 46.08% 44.67% 44.84% 45.03% 45.74%
Total operating expenses to average assets 2.60% 2.84% 3.16% 3.68% 3.79%
Total operating expenses to average assets (before
merger, nonrecurring and extraordinary items) 2.60% 2.84% 2.77% 2.68% 2.82%
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses totaled $37.4 million for the second quarter of 2001,
compared to $35.6 million for the first quarter of 2001 and $36.5 million for
the second quarter of 2000. The ratio of operating expenses to average assets
was 2.60% in the second quarter of 2001, 2.84% in the first quarter of 2001, and
3.79% in the second quarter of 2000. Total operating expenses include merger and
other related nonrecurring costs.
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. Our efficiency ratio before merger, nonrecurring and
extraordinary items for the second quarter of 2001 was 46.39%, compared to
46.23% for the first quarter of 2001 and 45.74% for the second quarter of 2000.
Compensation and benefits expenses increased in the second quarter of 2001
to $19.1 million, compared to $18.4 million in the first quarter of 2001 and
$15.3 million in the second quarter of 2000. The increase in the second quarter
of 2001, as compared to the first quarter is the result of an increase in full
time equivalent employees from 1,023 to 1,047 during that period, which equates
to an annualized growth rate in staffing of less than 10%. We believe future
growth will be less in subsequent quarters. An additional contributing factor to
the increase in compensation and benefits for the second quarter of 2001 as
compared to the same period in 2000 is due to the addition of Matsco and CAPCO
in our results. The remainder of the increase is due to additions in personnel
made during the prior twelve months.
Trust Preferred Securities expense was $2.5 million for the first and
second quarters of 2001 compared to $1.8 million for the second quarter of 2000.
The increase in this expense was the result of the $50.5 million in Trust
Preferred Securities issued in 2000.
The increases in occupancy and equipment, legal and other professional
fees, Federal Deposit Insurance Corporation ("FDIC") insurance and regulatory
assessments and other operating expenses were related to the growth in our
staffing levels, loans, deposits and trust assets.
Our goodwill amortization for the second quarter of 2001 was $272,000,
compared to $199,000 in the first quarter of 2001. Our diluted earnings per
share excluding goodwill amortization was $0.49 for the second quarter of 2001.
Income Taxes
Our effective income tax rate for the second quarter of 2001 was 37.5%,
compared to 37.5% in the first quarter of 2001 and 39.4% in the second quarter
of 2000. The effective rates were lower than the statutory rate of 42% due to
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.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FINANCIAL CONDITION
Total assets increased 21.3% to $6.2 billion at June 30, 2001, compared to
$5.1 billion at December 31, 2000. The increase in the six months ended June 30,
2001 was primarily due to increases in our investment and loan portfolios funded
by growth in deposits and other borrowings.
Investment Securities
Investment securities increased to $2.0 billion at June 30, 2001 compared
to $962.3 million at December 31, 2000. The increase is a result of the shift in
our funding sources for our specialty finance divisions. This change allowed us
to increase the size of the investment portfolio by funding it with deposits
which previously supported our specialty finance units. For further information
see "Net Interest Income - Overview" above.
During the first quarter of 2001, we began a program to consolidate the
investment portfolios of our ten subsidiary banks. As a result of this program,
we liquidated a number of our smaller investment positions. We anticipate that
this will result in improved operating efficiencies as well as improving the
overall yield, as our average block sizes increase. During the first quarter of
2001, we sold 51 securities with an amortized cost of $64.3 million for a
recognized gain of $1.6 million. Those sales include 22 securities previously
classified as held to maturity with an amortized cost of $20.4 million for a
gain of $1.1 million. During the second quarter of 2001, we sold 73 securities
with an amortized cost of $69.3 million for a recognized gain of $1.6 million.
Those sales include 30 securities previously classified as held to maturity with
an amortized cost of $21.9 million for a gain of $1.3 million. In total, these
sales resulted in an insignificant reduction in the yield on our investment
portfolio. We anticipate making further investment securities sales under this
program in subsequent quarters. The average life of the portfolio has declined
from approximately 7 to approximately 3 1/2 years. Shortening the duration of
the investment portfolio will result in an increase in the proceeds from
maturities and prepayments in the next year which will provide additional
funding for loan growth when the economy begins its recovery.
Loans
Total gross loans increased to $3.8 billion at June 30, 2001, compared to
$3.6 billion at December 31, 2000 and $2.9 billion at June 30, 2000. While
continue to anticipate loan growth, we do not expect the growth rate of over
30% experienced during the last three years to continue. Our performance goals
for 2001 (included in a Current Report on Form 8-K filed on June 26, 2001)
indicated a target loan growth rate of 10% to 15%. At June 30, 2001, our loan
pipeline was approximately $630 million. Historically, we have funded between
65% and 70% of our pipeline. Although historical experience is not a guarantee
of future performance, our relationship officers who work with individual
clients are cautiously optimistic that there will continue to be a demand for
credits without requiring us to sacrifice credit quality.
We have continued to see strong loan demand during the second quarter of
2001, as evidenced by May 2001 being the most active month in our history in new
loan documents processed. However, even with the significant volume increase, we
are seeing a change in our corporate borrowers' usage of their lines of credit
and we are also seeing a slowing in the commercial construction market, as
builders postpone or delay projects that have been in process for several
months. We continue to take a conservative posture related to credit
underwriting, which we believe is a prudent course of action, especially during
slowing economic times. We believe it is in the best interest of Greater Bay
Bancorp and its shareholders to focus attention on our quality client
relationships and avoid growth on the fringe during these uncertain times. Both
of these factors have combined to cause a slowing in the growth of our loan
portfolio.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
While the short-term outlook for loan growth has slowed from late 2000 and
early 2001, we are optimistic about the future, as we have continued to invest
in new businesses that we believe will bring excellent opportunities for growth
and expansion. Our acquisitions of Matsco, a dental equipment lease financing
company, at the end of 2000 and CAPCO, an asset-based financing and factoring
company, at the end of the first quarter of this year, are showing excellent
growth opportunities as they become fully integrated into the our organization.
Our new office in Marin County is now operational as a loan production office
and our Carmel office is targeted to open in September of this year. In
addition, the four banks that joined us last year are now fully integrated, both
operationally and culturally into our organization. We expect solid growth from
all of these sources in the latter part of 2001 and into 2002.
The following table presents the composition of our loan portfolio at the
dates indicated.
June 30, December 31, June 30,
2001 2000 2000
--------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
--------------------------------------------------------------------------------------------------------------------------------
Commercial $ 1,620,541 43.5% $1,562,712 44.4% $ 1,130,322 40.6%
Term real estate - commercial 1,041,530 28.0 967,428 27.5 869,226 31.3
--------------------------------------------------------------------------------
Total Commercial 2,662,071 71.5 2,530,140 71.9 1,999,548 71.9
Real estate construction and land 723,394 19.4 691,912 19.7 516,998 18.6
Real estate other 236,927 6.4 176,568 5.0 127,571 4.6
Consumer and other 204,939 5.5 216,459 6.2 209,019 7.5
--------------------------------------------------------------------------------
Total loans, gross 3,827,331 102.8 3,615,079 102.8 2,853,136 102.6
Deferred fees and discounts, net (13,759) (0.4) (13,657) (0.4) (13,829) (0.5)
--------------------------------------------------------------------------------
Total loans, net of deferred fees 3,813,572 102.4 3,601,422 102.4 2,839,307 102.1
Allowance for loan losses (88,190) (2.4) (84,014) (2.4) (58,578) (2.1)
--------------------------------------------------------------------------------
Total loans, net $ 3,725,382 100.0% $3,517,408 100.0% $ 2,780,729 100.0%
================================================================================
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Our 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, our 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 our borrowers. This could, in turn, reduce the demand for loans and
adversely impact the borrowers' abilities to repay their loans, while also
decreasing our net interest margin.
The following table presents the maturity distribution of our 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 June 30, 2001.
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 $ 254,703 $ 32,784 $ 34,098 $ 13,271
Variable rate 259,828 29,780 497,886 25,611
One to five years:
Fixed rate 186,050 129,024 1,984 11,367
Variable rate 417,053 136,430 175,411 31,236
After five years:
Fixed rate 348,481 370,005 3,414 37,934
Variable rate 154,426 343,507 10,601 117,508
---------- ---------- --------- ---------
Total $1,620,541 $1,041,530 $ 723,394 $ 236,927
========== ========== ========= =========
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Nonperforming Assets
We generally place 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.
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2001 2001 2000 2000 2000
--------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans:
Nonaccrual loans $ 7,221 $ 17,874 $ 12,593 $ 14,884 $ 8,779
Restructured loans - - - 420 420
---------------------------------------------------------------------------
Total nonperforming loans 7,221 17,874 12,593 15,304 9,199
OREO - 259 - 395 229
---------------------------------------------------------------------------
Total nonperforming assets $ 7,221 $ 18,133 $ 12,593 $ 15,699 $ 9,428
===========================================================================
Accruing loans past due 90 days or more $ 833 $ 1,307 $ 723 $ 641 $ 712
===========================================================================
Nonperforming assets to total loans
and OREO 0.19% 0.49% 0.35% 0.51% 0.33%
Nonperforming assets to total assets 0.12% 0.34% 0.25% 0.35% 0.22%
Nonperforming assets and accruing loans past
due 90 days or more to total loans and OREO 0.21% 0.52% 0.37% 0.53% 0.36%
Nonperforming assets and accruing loans past
due 90 days or more to total assets 0.13% 0.36% 0.26% 0.36% 0.23%
At June 30, 2001, we had $7.2 million in nonperforming assets, as compared
to $12.6 million at December 31, 2000 and $9.4 million at June 30, 2000. Our
ratio of nonperforming assets to total assets at June 30, 2001 was 0.12%, as
compared to 0.25% at December 31, 2000 and 0.22% at June 30, 2000. Our ratios
compare favorably to the industry average ratio of nonperforming assets to total
assets of 0.83% at December 31, 2000, which represents the most recently
available data.
In addition to the loans disclosed above as nonaccrual or restructured,
management has also identified approximately $16.5 million in loans that, on the
basis of information known to us, were judged to have a higher than normal risk
of becoming nonperforming. Management cannot, however, predict the extent to
which economic conditions may worsen or other factors may have on our borrowers
and on our 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.
33
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 our 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 our allowance for
loan losses at the dates and for the periods indicated.
At and for the three month periods ended
---------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 2001 2001 2000 2000 2000
---------------------------------------------------------------------------------------------------------------------------------
Period end loans outstanding $ 3,813,572 $ 3,725,625 $ 3,601,422 $ 3,090,328 $ 2,839,307
Average loans outstanding $ 3,759,151 $ 3,638,946 $ 3,326,505 $ 2,962,402 $ 2,826,612
Allowance for loan losses:
Balance at beginning of period $ 85,914 $ 84,014 $ 67,637 $ 58,578 $ 52,852
Allowance of entities acquired
through mergers accounted
for under purchase accounting method - 320 10,927 - -
Charge-offs:
Commercial (7,757) (6,008) (2,987) (2,790) (4,223)
Term Real Estate - Commercial - - - - -
------------------------------------------------------------------------------
Total Commercial (7,757) (6,008) (2,987) (2,790) (4,223)
Real estate construction and
land - - - - -
Real estate other - - - - -
Consumer and other (109) (46) (67) (20) (137)
------------------------------------------------------------------------------
Total charge-offs (7,866) (6,054) (3,054) (2,810) (4,360)
------------------------------------------------------------------------------
Recoveries:
Commercial 273 683 386 31 223
Term Real Estate - Commercial - - - - -
------------------------------------------------------------------------------
Total Commercial 273 683 386 31 223
Real estate construction and land - - - - -
Real estate other - - - - -
Consumer and other 20 23 37 36 47
------------------------------------------------------------------------------
Total recoveries 293 706 423 67 270
------------------------------------------------------------------------------
Net charge-offs (7,573) (5,348) (2,631) (2,743) (4,090)
Provision charged to income (1) 9,849 6,928 8,081 11,802 9,816
------------------------------------------------------------------------------
Balance at end of period $ 88,190 $ 85,914 $ 84,014 $ 67,637 $ 58,578
==============================================================================
Quarterly net charge-offs to average loans
outstanding during the period, annualized 0.79% 0.59% 0.31% 0.37% 0.58%
Year to date net charge-offs to average loans
outstanding during the period, annualized 0.69% 0.59% 0.38% 0.41% 0.44%
Allowance as a percentage of average loans
outstanding 2.34% 2.35% 2.52% 2.27% 2.07%
Allowance as a percentage of period end loans
outstanding 2.30% 2.30% 2.32% 2.18% 2.05%
Allowance as a percentage of non-performing loans 1221.30% 473.80% 667.15% 430.84% 621.32%
___________________
(1) Includes $1.5 million, $3.9 million, and $1.5 million during the quarters
ended December 31, 2000, September 30, 2000, and June 30, 2000 respectively,
to conform to the Company's reserve methodologies which are included in
mergers and related nonrecurring costs.
During the second quarter of 2001, our ratio of net charge-offs to
average loans outstanding increased to 0.79%, as compared to 0.59% for the first
quarter of 2001 and 0.58% for the second quarter of 2000.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
We employ a systematic methodology for determining our allowance for
loan losses, which includes a monthly review process and monthly adjustment of
the allowance. Our 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.
Our 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 our 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.
In view of the increasing uncertainties regarding general economic and
business conditions in our primary market areas, and in particular with respect
to the real estate and technology industries, and uncertainties specifically
related to the impact of the California energy crisis, we instituted additional
review procedures during the first quarter of 2001. As a normal part of our
ongoing analysis of loans in our real estate loan portfolio, we request and
review on an annual basis updated financial and other information from the
borrower, including updated rent rolls and lease rates.
In addition, as part of our ongoing analysis of commercial and real
estate loans, we perform stress tests on the financial condition of the borrower
to determine what magnitude of change in income or expenses of the borrower
could impact the borrower's ability to service the debt. To supplement this
analysis, we have requested our loan officers to review their loan portfolios to
identify borrowers whom they believe could suffer significant adverse effects
from either increasing energy costs or periodic power outages. We have not to
date identified any such borrowers.
Qualitative factors include the general economic environment in our
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 our methodology.
Our methodology is, and has been, consistently followed. However, as we
add new products, increase in complexity, and expand our geographic coverage, we
will enhance our methodology to keep pace with the size and complexity of the
loan portfolio. In this regard, we have periodically engaged outside firms to
independently assess our methodology, and on an ongoing basis we engage outside
firms to perform independent credit reviews of our loan portfolio. Management
believes that our systematic methodology continues to be appropriate given our
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 believes feels that the allowance for loan
losses is adequate as of June 30, 2001. However, future changes in
circumstances, economic conditions or other factors could cause management to
increase or decrease the allowance for loan losses as necessary.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
At June 30, 2001, the allowance for loan losses was $88.2 million,
consisting of a $63.8 million allocated allowance and a $24.4 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:
. Business cycles 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.
Deposits
Total deposits increased tO $4.3 billion at June 30, 2001, compared to
$4.2 billion at December 31, 2000 and $3.7 billion at June 30, 2000. While
continue to anticipate strong deposit growth, we do not expect the growth rate
experienced during the last three years to continue. Our performance goals for
2001 (included in a Current Report on Form 8-K filed on June 26, 2001) indicated
a target deposit growth rate of 5% to 10%.
In this economic environment, we believe our clients are more likely to
utilize deposits and cash- on-hand rather than other funding sources. This is
particularly evidenced in our venture banking unit, as our business clients
focus more on managing current operations rather than business expansion, which
has resulted in a reduction in their borrowing needs. The economic slowdown has
also impacted our Trust unit as the general market conditions have reduced
investments in our money market accounts.
Liquidity and Cash Flow
The objective of our liquidity management is to maintain each Bank's
ability to meet the day-to-day cash flow requirements of our clients who either
wish to withdraw funds or require funds to meet their credit needs. We must
manage our 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 our shareholders. We monitor
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 our 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 June 30, 2001, the Banks had approximately $112.2 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 June 30,
2001, Greater Bay did not have any material commitments for capital
expenditures.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net cash provided by operating activities, consisting primarily of net
income, totaled $37.5 million for second quarter of 2001 and $35.1 million for
the same period of 2000. Cash used for investing activities totaled $1.3 billion
in the second quarter of 2001 and $650.6 million in the same period of 2000. The
funds used for investing activities primarily represent increases in loans and
investment securities for each year reported.
For the six months ended June 30, 2001, net cash provided by financing
activities was $1.1 billion, compared to $556.2 million in the same period of
2000. Historically, our primary financing activity has been through deposits.
For the six months ended June 30, 2001 and 2000, deposit gathering activities
generated cash of $151.7 million and $453.6 million, respectively. This
represents a total of 14.3% and 81.6% of the financing cash flows for the six
months ended June 30, 2001 and 2000, respectively. As a result of our wholesale
funding strategy, the increase in borrowings generated cash of $913.8 million
during the six months ended 2001, as compared to $39.0 million for the same
period in 2000.
Capital Resources
Shareholders' equity at June 30, 2001 increased to $371.6 million from
$322.4 million at December 31, 2000. Greater Bay paid dividends of $0.10, and
$0.35 per share during the three months ended June 30, 2001 and the twelve
months ended December 31, 2000, respectively, excluding dividends paid by
subsidiaries prior to the completion of their mergers.
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 (subject to regulatory limitations) 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. Our major capital components are shareholders' equity and Trust Preferred
Securities in core capital, and the allowance for loan losses in supplementary
capital.
At June 30, 2001, 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. Our capital
levels at June 30, 2001 and the two highest levels recognized under these
regulations are as follows:
Tier 1 Total
Leverage risk-based risk-based
ratio capital ratio capital ratio
------------------------------------------------------------------
Company 7.76% 9.19% 10.46%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In order to strengthen our capital position, we issued $15.0 million in
trust preferred securities in a private placement on July 16, 2001. On July 25,
2001, we filed a Registration Statement on Form S-3 with the Securities Exchange
Commission relating to a proposed sale of $75.0 million, plus a 15%
overallotment option, in trust preferred securities in an underwritten public
offering. We expect the sale of these securities to occur during the third
quarter of 2001. If these trust preferred securities had been issued prior to
quarter end, our June 30, 2001 proforma capital positions would have been as
follows:
Tier 1 Total
Leverage risk-based risk-based
ratio capital ratio capital ratio
-----------------------------------------------------------------------------------
Proforma capital ratios including $15.0
million in trust preferred securities
issued July 16, 2001 8.03% 9.47% 10.73%
In addition, at June 30, 2001, each of our subsidiary banks had levels
of capital that exceeded the well-capitalized guidelines.
Quantitative and Qualitative Disclosures about Market Risk
Our financial performance is impacted by, among other factors, interest
rate risk and credit risk. We utilize no derivatives to mitigate our credit
risk, relying instead on an extensive loan review process and our 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 our 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 our 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.
Our 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 our 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 our asset and liability mix to
bring interest rate risk within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, we have
implemented strategies to more closely match our balance sheet. We are currently
focusing our investment activities on securities with terms or average lives
between three and six years to shorten the average duration of our assets. We
have utilized short-term borrowings and deposit marketing programs to shorten
the effective duration of our liabilities. In addition, we have utilized
interest rate swaps to manage the interest rate risk of the trust preferred
securities, offerings issued August 12, 1998 and July 16, 2001. These interest
rate swaps are not an "ineffective hedge" and are 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").
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 our assets
minus the market value of our liabilities plus the market value of any off-
balance sheet items. The market value of each asset, liability, and off-balance
sheet item is our net present value of expected cash flows discounted at market
rates after adjustment for rate changes. We measure the impact on market value
for an immediate and sustained 100 basis point increase and decrease (shock) in
interest rates. The following table shows our projected change in net portfolio
value for this set of rate shocks as of June 30, 2001.
Change in
interest rates Net portfolio Projected change
----------------------
(Dollars in millions) value Dollars Percentage
---------------------------------------------------------------
100 basis point rise $ 791.1 $ (33.7) -4.09%
Base scenario 824.7 - -
100 basis point decline 797.7 (27.0) -3.28%
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 foregoing analysis
attributes significant value to our non-interest-bearing deposit balances. 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 our 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 our 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. Our non-term deposit
products reprice more slowly, usually changing less than the change in market
rates and at our discretion. As of June 30, 2001, the analysis indicates that
our net interest income for the next 12 months would increase 6.7% if rates
increased 200 basis points, and decrease by 4.6% if rates decreased 200 basis
points.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 our structure is to remain similar to the structure created
during the second quarter of 2001. 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 our 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 our 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 our net interest income.
The results of this sensitivity analysis should not be relied upon as
indicative of actual future results.
Gap Analysis
In addition to the above analysis, we also perform 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 our 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.
The following table shows interest sensitivity gaps for different intervals
as of June 30, 2001:
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 $ - $ 723 $ - $ - $ -
Federal Funds Sold 55,058 - - - -
Investment securities 61,932 271,269 215,186 589,147 306,564
Loans 1,879,475 784,847 258,090 558,063 264,444
Loan losses/unearned fees - - - - -
Other assets - 562 562 2,249 2,249
----------------------------------------------------------------------------------------
Total assets $ 1,996,465 $ 1,057,401 $ 473,838 $ 1,149,459 $ 573,257
========================================================================================
Liabilities and Equity:
Deposits $ 2,051,652 $ 1,132,279 $ 255,162 $ 26,680 $ 3,402
Other borrowings - 920,896 296,200 103,000 24,830
Trust preferred securities - - - - -
Other liabilities - - - - -
Shareholders' equity - - - - -
----------------------------------------------------------------------------------------
Total liabilities and equity $ 2,051,652 $ 2,053,175 $ 551,362 $ 129,680 $ 28,232
========================================================================================
Gap $ (55,187) $ (995,774) $ (77,524) $ 1,019,779 $ 545,025
Cumulative Gap $ (55,187) $ (1,050,961) $ (1,128,485) $ (108,706) $ 436,319
Cumulative Gap/total assets -0.89% -16.88% -18.13% -1.75% 7.01%
Total
More than Total rate non-rate
(Dollars in thousands) 5 years sensitive sensitive Total
-----------------------------------------------------------------------------------------------------
Assets:
Cash and due from banks $ - $ 723 $ 200,875 $ 201,598
Federal Funds Sold - 55,058 - 55,058
Investment securities 532,322 1,976,420 6,019 1,982,439
Loans 68,657 3,813,576 (4) 3,813,572
Loan losses/unearned fees - - (88,190) (88,190)
Other assets 16,167 21,789 238,711 260,500
----------------------------------------------------------------------
Total assets $ 617,146 $ 5,867,566 $ 357,411 $ 6,224,977
======================================================================
Liabilities and Equity:
Deposits $ 1,072 $ 3,470,247 $ 846,505 $ 4,316,752
Other borrowings - 1,344,926 - 1,344,926
Trust preferred securities 99,500 99,500 - 99,500
Other liabilities - - 92,157 92,157
Shareholders' equity - - 371,642 371,642
----------------------------------------------------------------------
Total liabilities and equity $ 100,572 $ 4,914,673 $ 1,310,304 $ 6,224,977
======================================================================
Gap $ 516,574 $ 952,893 $ (952,893) $ -
Cumulative Gap $ 952,893 $ 952,893 $ - $ -
Cumulative Gap/total assets 15.31% 15.31% 0.00% 0.00%
The foregoing table indicates that we had a one year negative gap of
$(1.1) billion, or (18.13)% of total assets, at June 30, 2001. In theory, this
would indicate that at June 30, 2001, $1.1 billion 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 decline, the gap would indicate a
resulting increase in 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 our supporting liability can vary
significantly while the timing of repricing of both the asset and our 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.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 our 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 our
noninterest-bearing demand deposits, in the Gap analysis behave like long term
fixed rate funding sources. Both of these factors tend to make our actual
behavior more assets sensitive than is indicated in the Gap analysis. In fact,
we experience higher net interest income when rates rise, opposite what is
indicated by the Gap analysis. In fact, during the recent period of declines in
interest rates, our net interest earning assets has declined. See "Results of
Operations Net Interest Income - The Quarter Ended June 30, 2001 Compared to
March 31, 2001". Therefore, management uses income simulation, net interest
income rate shocks and market value of portfolio equity as our primary interest
rate risk management tools.
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.
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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.
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.
42
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings -- Not applicable
ITEM 2. Changes in Securities and Use of Proceeds -- Not applicable
ITEM 3. Defaults Upon Senior Securities -- Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders -
(a) Greater Bay Bancorp held its annual meeting of
shareholders on May 15, 2001.
(b) The following directors were elected at the annual
meeting to serve for a three-year term:
James E. Jackson
Stanley A. Kangas
George M. Marcus
Duncan L. Matteson
Rebecca Q. Morgan
The following directors continued in office after the
annual meeting:
John M. Gatto
John J. Hounslow
David L. Kalkbrenner
Daniel G. Libarle
Rex D. Lindsay
George M. Marcus
Glen McLaughlin
Linda R. Meier
James C. Thompson
Warren R. Thoits
Dick J. Randall
Donald H. Seiler
T. John Whalen
(c) At the annual meeting, shareholders voted on (1) the
election of Greater Bay Bancorp's Class I directors; (2)
the amendment of Greater Bay Bancorp's Bylaws to
increase the range of authorized directors; and (3) the
ratification of the selection of PricewaterhouseCoopers
LLP as Greater Bay Bancorp's independent public
accountants for the fiscal year ending December 31,
2001. The results of the voting were as follows:
43
PART II. OTHER INFORMATION (CONTINUED)
Votes Broker
Matter Votes For Against Withheld Abstentions Non-Votes
------ --------- ------- -------- ----------- ---------
Election of Directors
James E. Jackson 35,933,579 -- 522,597 -- --
Stanley A. Kangas 35,957,448 -- 498,728 -- --
George M. Marcus 35,944,465 -- 461,771 -- --
Duncan L. Matteson 35,525,982 -- 930,194 -- --
Rebecca Q. Morgan 36,003,041 -- 453,135 -- --
Bylaws Amendment 33,885,168 2,371,788 -- 199,220 0
Independent Public
Accountants 36,132,844 203,871 -- 119,461 0
(d) Not applicable.
ITEM 5. Other Information -- Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
The Exhibits listed below are filed or incorporated by reference as part of this
Report.
(a) Exhibits
EXHIBIT
NO. EXHIBITS
------- -------
2 Agreement and Plan of Reorganization, dated as of
June 25, 2001, by and between Greater Bay Bancorp and
SJNB Financial Corp. (incorporated by reference to
Exhibit 2 from Registrant's Current Report on Form 8-
K dated as of June 25, 2001).
10.1 Stock Option Agreement dated as of June 25, 2001, by
and between Greater Bay Bancorp and SJNB Financial
Corp. (incorporated by reference to Exhibit 10.1 from
Registrant's Current Report on Form 8-K dated June
25, 2001).
10.2 Employment Agreement, dated as of March 26, 2001
(effective as of May 15, 2001), by and between
Greater Bay Bancorp and Byron Scordelis.
99.1 Press release issued by July 25, 2001 re trust
preferred securities offering.
(b) Reports on Form 8-K
During the quarter ended June 30, 2001, the Registrant filed the following
Current Reports on Form 8-K: (1) Form 8-K dated March 30, 2001 (reporting
completion of the Registrant's acquisition of CAPCO Financial Company, Inc.);
(2) Form 8-K dated April 16, 2001 (containing press releases regarding first
quarter earnings and appointment of Chief Operating Officer); (3) Form 8-K dated
April 26, 2001 (containing first quarter 2001 slide presentation); and (4) Form
8-K dated June 25, 2001 (reporting the proposed merger with SJNB Financial Corp.
and updated guidance.)
44
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES 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: August 2, 2001
45