EXHIBIT 99.2
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
March 31,
2000 December 31,
(Dollars in thousands) (unaudited) 1999
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 154,301 $ 125,886
Federal funds sold 308,700 215,550
Other short term securities 805 30,257
--------------------------
Cash and cash equivalents 463,806 371,693
Investment securities:
Available for sale, at fair value 479,817 444,897
Held to maturity, at amortized cost (fair value $220,587 and $136,481 at
March 31, 2000 and December 31, 1999, respectively) 225,892 141,725
Other securities 19,817 21,311
--------------------------
Investment securities 725,526 607,933
Loans:
Commercial 956,341 845,422
Term real estate-commercial 641,163 595,499
--------------------------
Total commercial 1,597,504 1,440,921
Real estate construction and land 474,916 459,349
Real estate-other 117,628 111,703
Consumer and other 116,880 128,120
Deferred loan fees and discounts (11,255) (10,604)
--------------------------
Total loans, net of deferred fees 2,295,673 2,129,489
Allowance for loan losses (48,650) (44,147)
--------------------------
Total loans, net 2,247,023 2,085,342
Property, premises and equipment 23,285 25,872
Interest receivable and other assets 147,597 125,256
--------------------------
Total assets $3,607,237 $3,216,096
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 704,486 $ 598,428
MMDA, NOW and savings 1,845,627 1,628,127
Time certificates, $100,000 and over 524,432 474,914
Other time certificates 84,555 105,530
--------------------------
Total deposits 3,159,100 2,806,999
Other borrowings 97,124 100,600
Other liabilities 58,698 51,863
--------------------------
Total liabilities 3,314,922 2,959,462
--------------------------
Company obligated mandatorily redeemable cumulative trust preferred
securities of subsidiary trust holding solely junior subordinated debentures 59,500 50,000
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock, no par value: 4,000,000 shares authorized;
none issued - -
Common stock, no par value: 24,000,000 shares authorized;
17,517,905 and 17,019,475 shares issued and outstanding
as of March 31, 2000 and December 31, 1999, respectively 134,024 122,152
Accumulated other comprehensive loss (9,463) (8,055)
Retained earnings 108,254 92,537
--------------------------
Total shareholders' equity 232,815 206,634
--------------------------
Total liabilities and shareholders' equity $3,607,237 $3,216,096
==========================
See notes to supplemental consolidated financial statements.
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
(Dollars in thousands, except per share amounts)(unaudited) 2000 1999
- ---------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest on loans $ 53,380 $ 36,370
Interest on investment securities:
Taxable 10,004 6,399
Tax - exempt 1,548 1,067
-----------------------------
Total interest on investment securities 11,552 7,466
Other interest income 4,521 2,350
-----------------------------
Total interest income 69,453 46,186
-----------------------------
INTEREST EXPENSE
Interest on deposits 24,803 15,299
Interest on long term borrowings 1,076 1,054
Interest on other borrowings 1,658 1,227
-----------------------------
Total interest expense 27,537 17,580
-----------------------------
Net interest income 41,916 28,606
Provision for loan losses 5,314 1,163
-----------------------------
Net interest income after provision for loan losses 36,602 27,443
-----------------------------
OTHER INCOME
Service charges and other fees 1,351 1,214
Loan and international banking fees 1,176 673
Trust fees 924 721
ATM network revenue 569 645
Gain on sale of SBA loans 452 813
Gain (Loss) on sale of investments, net (1) 61
Other income 2,931 463
-----------------------------
Total, recurring 7,402 4,590
Warrant income, net 8,609 4
-----------------------------
Total other income 16,011 4,594
-----------------------------
OPERATING EXPENSES
Compensation and benefits 12,835 10,521
Occupancy and equipment 4,357 3,415
Legal and other professional fees 920 659
Telephone, postage and supplies 864 845
Client services 702 609
Marketing and promotion 686 567
FDIC insurance and regulatory assessments 240 139
Directors fees 153 250
Other real estate owned 10 21
Other 1,985 1,611
-----------------------------
Total, recurring 22,752 18,637
Merger and other related nonrecurring costs 3,881 -
-----------------------------
Total operating expenses 26,633 18,637
-----------------------------
Income before provision for income taxes and extraordinary items 25,980 13,400
Provision for income taxes 10,472 5,280
-----------------------------
Net income before extraordinary items 15,508 8,120
Extraordinary items - (88)
-----------------------------
Net income 15,508 8,032
=============================
Net income per share - basic $ 0.91 $ 0.50
=============================
Net income per share - diluted $ 0.87 $ 0.47
=============================
See notes to supplemental consolidated financial statements.
2
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31,
(Dollars in thousands) (unaudited) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 15,508 $ 8,032
------------------------------------
Other comprehensive income:
Unrealized gains on securities:
Unrealized holding losses arising during period (net of taxes
of $(852) and $(179) for the three months ended March 31,
2000 and 1999, respectively) (1,658) (649)
Reclassification adjustment for gains included in
net income 1 -
-----------------------------------
Net change (1,659) (649)
Cash flow hedge:
Net derivative gains arising during period (net of taxes of
$177 and $586 for the three months ended March 31, 2000 and 1999,
respectively) 253 838
Reclassification adjustment for expenses included
in net income (net of taxes of $1 and $(30) for the three
months ended March 31, 2000 and 1999, respectively) 2 (43)
-----------------------------------
Net change 251 881
-----------------------------------
Other comprehensive income (1,408) 232
-----------------------------------
Comprehensive income $ 14,100 $ 8,264
===================================
See notes to supplemental consolidated financial statements.
3
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
(Dollars in thousands) (unaudited) 2000 1999
- ------------------------------------------------------------------------------------------------------
Cash flows - operating activities
Net income $ 15,508 $ 8,032
Reconcilement of net income to net cash from operations:
Provision for loan losses 5,314 1,163
Depreciation and amortization 1,218 1,002
Deferred income taxes (1,856) (209)
(Gain) loss on sale of investments, net - (61)
Proceeds from loan sales 20,205
Origination of loans held for sale (16,459)
Changes in:
Accrued interest receivable and other assets (16,958) (1,710)
Accrued interest payable and other liabilities 7,262 4,201
Deferred loan fees and discounts, net 1,054 1,445
---------------- ----------------
Operating cash flows, net 15,288 13,863
---------------- ----------------
Cash flows - investing activities
Maturities and partial paydowns on of investment securities:
Held to maturity 13,904 4,094
Available for sale 1,978 25,302
Purchase of investment securities:
Held to maturity (98,098) (7,320)
Available for sale (40,006) (106,386)
Other securities 1,494 (47)
Proceeds from sale of available for sale securities 194 71,690
Loans, net (171,392) (165,668)
Purchase of property, premises and equipment 1,069 (2,752)
Purchase of insurance policies (2,524) (1,935)
---------------- ----------------
Investing cash flows, net (293,381) (183,022)
---------------- ----------------
Cash flows - financing activities
Net change in deposits 352,101 218,657
Net change in other borrowings - short term (3,476) (5,399)
Principal repayment - long term borrowings - (3,000)
Company obligated madatorially redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures issued 9,500 -
Proceeds from sale of common stock 14,782 1,875
Cash dividends (2,701) (2,146)
---------------- ----------------
Financing cash flows, net 370,206 209,987
---------------- ----------------
Net change in cash and cash equivalents 92,113 44,282
Cash and cash equivalents at beginning of period 371,693 291,369
---------------- ----------------
Cash and cash equivalents at end of period $ 463,806 $ 335,651
================ ================
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 28,619 $ 37,552
Income taxes $ 1,172 $ 7,729
Non-cash transactions:
Additions to other real estate owned $ - $ 105
See notes to supplemental consolidated financial statements.
4
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Balance Sheet as of March 31, 2000, and the Consolidated
Statements of Operations, Comprehensive Income and Cash Flows for the three
months ended March 31, 2000 and March 31, 1999 have been prepared by Greater Bay
Bancorp (the "Company") and are not audited. The results of operations for the
quarter ended March 31, 2000 are not necessarily indicative of the results
expected for any subsequent quarter or for the entire year ended December 31,
2000. The supplemental consolidated financial statements should be read in
conjunction with the supplemental consolidated financial statements for the year
ended December 31, 1999 included in this Current Report on Form 8-K file as of
March 31, 2000.
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, 1999.
The consolidated financial statements include the accounts of Greater Bay
Bancorp ("Greater Bay" on a parent-only basis, and the "Company" on a
consolidated basis) and its wholly owned subsidiaries, Bay Area Bank ("BAB"),
Bay Bank of Commerce ("BBC"), Coast Commercial Bank ("CCB"), Cupertino National
Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank ("MPB"), Mt.
Diablo National Bank ("MDNB"), Peninsula Bank of Commerce ("PBC"), GBB Capital
I, GBB Capital II and GBB Capital III and its 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. The accounting and reporting policies of the Company conform to
generally accepted accounting principles and the prevailing practices within the
banking industry.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" requires the Company to classify items of other
comprehensive income by their nature in the financial statements and display the
accumulated other comprehensive income separately from retained earnings in the
equity section of the balance sheet. The changes to the balances of accumulated
other comprehensive income are as follows:
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income
- ---------------------------------------------------------------------------------------------
Balance - December 31, 1999 $ (9,559) $ 1,504 $ (8,055)
Current period change (1,659) 251 (1,408)
--------------------------------------------------------
Balance - March 31, 2000 $ (11,218) $ 1,755 $ (9,463)
========================================================
Accumulated
Other
Unrealized Gains Cash Flow Comprehensive
(Dollars in thousands) on Securities Hedges Income
- ---------------------------------------------------------------------------------------------
Balance - December 31, 1998 $ 1,026 $ (677) $ 349
Current period change (649) 881 232
--------------------------------------------------------
Balance - March 31, 1999 $ 377 $ 204 $ 581
========================================================
5
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
Segment Information
In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131".) SFAS No. 131 supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise",
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information.
NOTE 2--MERGERS
On January 26, 2000, Greater Bay, Bank of Santa Clara ("BSC") and GBB
Merger Corp. signed a definitive agreement for a merger between BSC and GBB
Merger Corp., as a result of which BSC will become a wholly owned subsidiary of
Greater Bay. The agreement provides for BSC shareholders to receive
approximately 2,017,000 shares of Greater Bay stock subject to certain
adjustments based on movements in Greater Bay's stock price in a tax-free
exchange to be accounted for as a pooling-of-interests. The transaction is
expected to be completed in the early third quarter of 2000, subject to
regulatory and shareholder approvals.
On March 21, 2000, Greater Bay, Bank of Petaluma ("BOP") and DKSS Corp.
signed a definitive agreement for a merger between BOP and DKSS, as a result of
which BOP will become a wholly owned subsidiary of Greater Bay. The agreement
provides for BOP shareholders to receive approximately 990,000 shares of Greater
Bay stock subject to certain adjustments based on changes in the Company's stock
price in a tax-free exchange to be accounted for as a pooling-of-interests. The
transaction is expected to be completed in the fourth quarter of 2000, subject
to BOP's shareholders and regulatory approvals.
6
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
The following table sets forth certain historical information concerning
the operations of the Company, BSC and BOP for the period indicated and proforma
combined information assuming the acquisitions had been consummated at the
beginning of the period presented.
For the three months ended
(Dollars in thousands) March 31, 2000
- -----------------------------------------------------------
Net interest income:
Greater Bay Bancorp $ 41,916
BSC 4,958
BOP 2,231
----------------------------
Combined $ 49,105
============================
Provision for loan
losses:
Greater Bay Bancorp $ 5,314
BSC 225
BOP 15
----------------------------
Combined $ 5,554
============================
Net income:
Greater Bay Bancorp $ 15,508
BSC 1,221
BOP 567
----------------------------
Combined $ 17,296
============================
There are currently no significant transactions between the Company and each of
BSC and BOP.
7
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
NOTE 3--PROPERTY, PREMISES AND EQUIPMENT
During the first quarter of 2000, the Company sold bank premises with a
carrying value of $4.8 million for $5.4 million in a sale-lease back
transaction. No gain was recognized on the transaction. Gains of $535,000 have
been deferred and will be recognized over the term of the Company's lease.
NOTE 4--BORROWINGS
Other borrowings are detailed as follows:
March 31, December 31,
(Dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------
Other borrowings:
Short term borrowings:
Securities sold under agreements
to repurchase $45,000 $ 55,100
Short term notes payable 1,124 1,500
Fed Fund Purchases 14,000 -
Advances under credit lines 25,000 7,000
------------------------------------
Total short term borrowings 85,124 63,600
------------------------------------
Long term borrowings:
Securities sold under agreements
to repurchase - 10,000
FHLB advances 12,000 27,000
------------------------------------
Total other long term borrowings 12,000 37,000
------------------------------------
Total other borrowings $97,124 $ 100,600
====================================
During the three month period ended March 31, 2000 and the twelve month
period ended December 31, 1999, the average balance of securities sold under
short term agreements to repurchase were $69.4 million and $25.5 million,
respectively, and the average interest rates during those periods were 5.79% and
5.49%, respectively. Securities sold under short term agreements to repurchase
generally mature within 90 days of dates of purchase.
During the three month period ended March 31, 2000 and the twelve month
period ended December 31, 1999, the average balance of federal funds purchased
was $154,000 and $186,000, respectively, and the average interest rates during
those periods were 6.50% and 5.29%, respectively. There were $14.0 million
outstanding at March 31, 2000 and no such balances outstanding at December 31,
1999.
The $10.0 million FHLB advances will mature in 2002. They are callable by
the FHLB beginning in November 2000 and bear interest at a weighted average rate
of 5.8%. The remaining FHLB advances of $2.0 million will mature in the year
2003 and have an average interest rate of 5.47%. The advances are collateralized
by securities pledged to the FHLB. Under the terms of the advances, the FHLB has
a put option which gives it the right to demand early repayment.
8
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
NOTE 5--PER SHARE DATA
Net income per share is stated in accordance with SFAS No. 128 "Earnings
Per Share". Basic net income per share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
net income per share is computed by dividing net income by the weighted average
number of common shares plus common equivalent shares outstanding including
dilutive stock options.
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted net income per share computations for the
three months ended March 31, 2000 and 1999.
For the three months ended For the three months ended
March 31, 2000 March 31, 1999
------------------------------------- -------------------------------------
Average Average
Income Shares Per Share Income Shares Per Share
(Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------- -------------------------------------
Net income $ 15,508 $ 8,032
Basic net income per share:
Income available to common shareholders 15,508 17,088,000 $ 0.91 8,032 16,078,000 $ 0.50
Effect of dilutive securities:
Stock options - 821,000 - - 986,000 -
------------------------------------- -------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 15,508 17,909,000 $ 0.87 $ 8,032 17,064,000 $ 0.47
===================================== =====================================
There were options to purchase 6,475 and 475,125 shares that were
considered anti-dilutive whereby the options' exercise price was greater than
the average market price of the common shares, during the three months ended
March 31, 2000 and 1999, respectively.
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
Coast Commercial Bank ("CCB") at a 0.6338 conversion ratio and Mt. Diablo
Bancshares ("MD Bancshares") at a 0.9532 conversion ratio and the 1999 mergers
with Bay Commercial Services ("BCS") at a 0.6833 conversion ratio and Bay Area
Bancshares ("BA Bancshares") at a 1.38682 conversion ratio.
NOTE 6--ACTIVITY OF BUSINESS SEGMENTS
The Company adopted SFAS No. 131. The accounting policies of the segments
are the same as those described in the "Summary of Significant Accounting
Policies." Segment data includes intersegment revenue, as well as charges
allocating all corporate-headquarters costs to each of its operating segments.
The Company evaluates the performances of its segments and allocates resources
to them based on net interest income, other income, net income before income
taxes, total assets and deposits.
9
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000 and December 31, 1999 and for the
Three Months Ended March 31, 2000 and 1999
The Company is organized primarily along community banking and trust
divisions. Fourteen of the divisions have been aggregated into the "community
banking" segment. Community banking provides a range of commercial banking
services to small and medium-sized businesses, real estate developers, property
managers, business executives, professional and other individuals. The trust
division has been shown as the "trust operations" segment. The Company's
business is conducted principally in the U.S.; foreign operations are not
material.
The following table shows each segment's key operating results and
financial position for the three months ended March 31, 2000 and 1999:
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
--------------------------------------------------------------------------
Community Trust Community Trust
(Dollars in thousands) Banking Operations Banking Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 42,437 $ 118 $ 29,424 $ 57
Other income 14,671 863 3,411 725
Operating expenses, excluding
merger and
other related nonrecurring 23,564 650 18,354 718
costs
Net income before income taxes (1) 28,275 286 13,391 (9)
Total assets 3,504,655 - 2,539,520 -
Deposits 3,096,997 62,103 2,212,297 45,477
Assets under management - 751,677 - 630,490
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
A reconciliation of total segment net interest income and other income
combined, net income before income taxes, and total assets to the consolidated
numbers in each of these categories for the three months ended March 31, 2000
and 1999 is presented below.
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------- ------------------
Net interest income and other income
Total segment net interest income and other income $ 58,089 $ 33,617
Parent company net interest income and other income (162) (417)
-------------- --------------
Consolidated net interest income and other income $ 57,927 $ 33,200
============== ==============
Net income before taxes, merger
related nonrecurring costs and extraordinary items
Total segment net income before taxes $ 28,561 $ 13,382
Parent company net income before taxes 1,300 18
-------------- --------------
Consolidated net income before taxes,
merger and other related costs and
extraordinary items $ 29,861 $ 13,400
============== ==============
Total assets
Total segment assets $3,504,655 $2,539,520
Parent company assets 102,582 55,501
-------------- --------------
Consolidated total assets $3,607,237 $2,595,021
============== ==============
10
NOTE 7--CASH DIVIDEND
The Company declared a cash dividend of $0.15 cents per share payable on
April 15, 2000 to shareholders of record as of March 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay is a bank holding company operating BAB, BBC, CCB, CNB, Golden
Gate, MPB, MDNB, and PBC. The Company also owns and operates GBB Capital I, GBB
Capital II, and GBB Capital III which are Delaware statutory business trusts,
which were formed for the exclusive purpose of issuing and selling Cumulative
Trust Preferred Securities ("TPS"). Greater Bay also includes the operating
divisions: Greater Bay Bank Contra Costa Region, Greater Bay Bank Fremont
Region, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater
Bay Bank SBA Lending Group, Greater Bay Corporate Finance Group, Greater Bay
International Banking Division, Greater Bay Trust Company, Pacific Business
Funding and the Venture Banking Group. The Company provides a wide range of
commercial banking services to small and medium-sized businesses, real estate
developers, property managers, business executives, professionals and other
individuals. The Company operates throughout Silicon Valley, the San Francisco
Peninsula and the East Bay Region, with 27 offices located in Aptos, Blackhawk,
Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Millbrae, Palo Alto,
Pleasanton, Redwood City, San Francisco, San Jose, San Leandro, San Mateo, San
Ramon, Santa Clara, Santa Cruz, Scotts Valley, Walnut Creek, and Watsonville.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the Company's
consolidated financial data included elsewhere in this document. Certain
statements under this caption constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include but are not limited to economic conditions,
competition in the geographic and business areas in which the Company conducts
its operations, fluctuation in interest rates, credit quality and government
regulation.
RESULTS OF OPERATIONS
Net income for the first quarter of 2000 increased 93.1% to $15.5 million,
or $0.87 per diluted share, compared to net income of $8.0 million, or $0.47 per
diluted share, for the first quarter of 1999. The first quarter 2000 results
included nonrecurring warrant income of $8.6 million compared to nonrecurring
warrant income of $4,000 during the first quarter of 1999. In addition, the
first quarter of 2000 included nonrecurring merger related costs and
extraordinary items of $2.4 million compared to nonrecurring merger related
costs and extraordinary items of $88,000 in the first quarter of 1999. As a
result, net income, including nonrecurring warrant income and excluding
nonrecurring merger related expenses and extraordinary items, increased 120.5%
to $17.9 million, or $1.00 per diluted share, for the first quarter of 2000,
compared to $8.1 million, or $0.48 per diluted share, in the first quarter of
1999.
Greater Bay Bancorp's core earnings, which is its net income, excluding
nonrecurring warrant income, merger related costs and extraordinary items, for
the first quarter of 2000 increased 58.64% to $12.9 million, or $0.72 per
diluted share, compared to $8.1 million, or $0.48 per diluted share, in the
first quarter of 1999. Based on its core earnings for the first quarter of
2000, Greater Bay Bancorp's return on average equity was 23.17%, its return on
average assets was 1.50% and its efficiency ratio was 45.98%. During the first
quarter of 1999, Greater Bay Bancorp's core earnings resulted in return on
average equity of 20.13%, return on average assets of 1.35% and an efficiency
ratio of 56.14%.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table summarizes net income, net income per share and key
financial ratios inclusive of and exclusive of merger, nonrecurring and
extraordinary items for the three month periods presented:
Income before merger, Income after technology gains Income after merger,
nonrecurring and before merger and nonrecurring
and extraordinary items extraordinary items and extraordinary items
---------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) March 31, March 31, March 31, March 31, March 31, March 31,
2000 1999 2000 1999 2000 1999
---------------------------------------------------------------------------------
Net income $12,878 $ 8,118 $17,897 $ 8,116 $ 15,508 $ 8,032
Net income per share
Basic $ 0.75 $ 0.50 $ 1.05 $ 0.50 $ 0.91 $ 0.50
Diluted $ 0.72 $ 0.48 $ 1.00 $ 0.48 $ 0.87 $ 0.47
Return on average assets 1.50% 1.35% 2.08% 1.34% 1.81% 1.33%
Return on average shareholders' equity 23.17% 20.13% 32.20% 20.12% 27.90% 19.91%
The Company reported net income of $15.5 million for the three months ended
March 31, 2000, a 93.1% increase over the three months ended March 31, 1999 net
income of $8.0 million. Basic net income per share was $0.91 for the three
months ended March 31, 2000, as compared to $0.50 for the three months ended
March 31, 1999. Diluted net income per share was $0.87 and $0.47 for the three
months ended March 31, 2000 and 1999, respectively. The return on average assets
and return on average shareholders' equity were 1.81% and 27.90% for the three
months ended March 31, 2000, compared with 1.33% and 19.91% for the three months
ended March 31, 1999.
The 93.1% increase in 2000 net income as compared to 1999 was the result of
significant growth in loans, investments, trust assets and deposits. For the
three months ended March 31, 2000, net interest income increased 46.5% as
compared to the three months ended March 31, 1999. This increase was primarily
due to a 41.7% increase in average interest-earning assets for the three months
ended March 31, 2000 compared to the three months ended March 31, 1999. The
increases in loans, trust assets and deposits also contributed to the 32.3%
increase in trust fees, loan and international banking fees, service charges and
other fees. Other income includes $2.1 million in appreciation recognized on
the conversion of equity securities received in the settlement of a loan into a
publicly traded equity security. Increases in operating expenses were required
to service and support the Company's growth. As a result, increases in revenue
were partially offset for the three months ended March 31, 2000 by a 22.1%
increase in recurring operating expenses, as compared to the three months ended
March 31, 1999.
For the three months ended March 31, 2000, merger and related nonrecurring
costs were $2.4 million, net of taxes, as compared to $0 the three months ended
March 31, 1999. Warrant income, net of related expenses and taxes, was $5.1
million for the three months ended March 31, 2000 as compared to $2,000 for the
three months ended March 31, 1999.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net Interest Income
The following table presents, for the quarters indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets and interest expense and rates
paid on average interest-bearing liabilities. Average balances are average
daily balances.
Three Months Ended Three Months Ended Three Months Ended
March 31, 2000 December 31, 1999 March 31, 1999
----------------- -------------------- --------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
- ------------------------------------------------------------------ ------------------------------- -----------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 275,679 $ 4,053 5.90% $ 278,843 $ 4,355 6.20% $ 110,955 $ 1,288 4.71%
Other short term securities 30,583 468 6.14% 17,365 300 6.85% 69,493 1,062 6.20%
Investment securities:
Taxable 568,025 10,004 7.06% 527,332 8,594 6.47% 420,943 6,399 6.17%
Tax-exempt (1) 117,549 1,548 5.28% 106,852 1,300 4.83% 91,846 1,067 4.71%
Loans (2), (3) 2,208,556 53,380 9.69% 2,017,723 48,940 9.62% 1,565,961 36,370 9.42%
---------- ------- ---------- ------- ---------- ------
Total interest-earning assets 3,200,392 69,453 8.70% 2,948,115 63,489 8.54% 2,259,198 46,186 8.29%
Noninterest-earning assets 243,902 228,857 188,211
---------- ------- ---------- ------- ---------- ------
Total assets $3,444,294 69,453 $3,176,972 63,489 $2,447,409 46,186
========== ------- ========== ------- ========== ------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $1,771,550 17,263 3.91% $1,645,959 15,391 3.71% 1,197,128 9,750 3.30%
Time deposits, over $100,000 490,693 6,257 5.11% 451,614 5,459 4.80% 357,715 4,115 4.67%
Other time deposits 105,138 1,283 4.89% 109,050 1,282 4.66% 129,365 1,434 4.50%
---------- ------- ---------- ------- ---------- ------
Total interest-bearing deposits 2,367,381 24,803 4.20% 2,206,623 22,132 3.98% 1,684,208 15,299 3.68%
Other borrowings 107,512 1,658 6.19% 100,173 1,456 5.77% 86,274 1,156 5.43%
Subordinated debt - - - - 2,443 71 11.79%
---------- ------- ---------- ------- ---------- ------
Total interest-bearing
liabilities 2,474,893 26,461 4.29% 2,306,796 23,588 4.06% 1,772,925 16,526 3.78%
Trust Preferred Securities 50,940 1,076 8.47% 50,000 1,054 8.36% 50,000 1,054 8.55%
---------- ------- ---------- ------- ---------- ------
Total interest-bearing
liabilities and capital
securities 2,525,833 27,537 4.37% 2,356,796 24,642 4.15% 1,822,925 17,580 3.91%
Noninterest-bearing deposits 635,374 594,811 431,170
Other noninterest-bearing
liabilities 60,163 40,419 29,742
Shareholders' equity 222,924 184,946 163,572
---------- ---------- ----------
Total liabilities and
shareholders' equity $3,444,294 27,537 $3,176,972 24,642 $2,447,409 17,580
========== ------- ========== ------- ========== -------
Net interest income $41,916 $38,847 $28,606
======= ======= =======
Including capital securities:
----------------------------------
Interest rate spread 4.33% 4.40% 4.38%
Contribution of interest free funds 0.92% 0.83% 0.76%
Net yield on interest-earnings assets (4) 5.25% 5.23% 5.14%
Excluding capital securities:
-----------------------------------
Interest rate spread 4.42% 4.49% 4.51%
Contribution of interest free funds 0.97% 0.88% 0.81%
Net yield on interest-earnings assets (5) 5.39% 5.37% 5.32%
(1) The tax equivalent yields earned on the tax exempt securities are 7.66%,
6.99% and 6.83% for the quarters ended March 31, 2000, December 31, 1999
and March 31, 1999, respectively, using the federal statuory rate of 34%.
(2) Nonaccrual loans are excluded in the average balance.
(3) Interest income includes loan fees of $1,739,000, $1,597,000 and $1,491,000
for the quarters ended March 31, 2000, December 31, 1999 and March 31,
1999, respectively.
(4) Equals (a) the difference between interest income on interest-earning
assets and the interest expense on interest-bearing liabilities and capital
securities, divided by (b) average interest-earning assets for the period.
(5) 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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net interest income, excluding interest expense on the Trust Preferred
Securities issued by the Company ("capital securities"), for the first quarter
of 2000 was $43.0 million, a $3.1 million increase over the fourth quarter of
1999 and a $13.3 million increase over the first quarter of 1999. The increase
from the first quarter of 1999 to the first quarter of 2000 was primarily due to
the $941.2 million, or 41.7% increase in average interest-earning assets. The
increase from the fourth quarter of 1999 to the first quarter of 2000 was
primarily due to the $252.3 million, or 8.6% increase in average interest-
earning assets, which was further increased by a 2 basis points increase in the
Company's net yield on interest-earning assets from 5.37% in the fourth quarter
of 1999 to 5.39% in the first quarter of 2000.
The interest rate spread for the quarters ended March 31, 2000, December
31, 1999 and March 31, 1999, were reduced by the low spread earned on PBC's
Special Deposits (discussed in Note 7 to the consolidated financial statements
and notes thereto included in the Current Report on Form 8-K filed on February
1, 2000. As of March 31, 2000, PBC held $99.7 million in two demand deposits
accounts (the "Special Deposits"). The Special Deposits represent the proposed
settlement of class action lawsuits not involving the Company. Due to the
uncertainty of the time the Special Deposits will remain with PBC, management
has invested a significant portion of the funds from this deposit in agency
securities with maturities of less than 90 days. The average deposit balances
related to the Special Deposits were $101.1 million, $121.5 million and $99.0
million for the quarters ended March 31, 2000, December 31, 1999 and March 31,
1999 respectively, on which the Company earned a spread of approximately 3.05%,
3.10% and 3.00%, respectively. Excluding PBC's Special Deposits, the net yield
on interest earning assets would have been 5.46%, 5.47% and 5.43% for the
quarters ended March 31, 2000, December 31, 1999 and March 31, 1999
respectively. Excluding the Special Deposits, the approximate interest rate
spread would have been 4.36%, 4.43% and 4.46% for the quarters ended March 31,
2000, December 31, 1999 and March 31, 1999 respectively. The purchase of bank-
owned life insurance ("BOLI") also reduced the Company's net interest spread
since the earnings of BOLI are included in other income while the cost of
funding BOLI is included in interest expense.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and investments, compared to
the volume of interest-bearing liabilities represented by deposits and
borrowings, combined with the spread, produces the changes in the net interest
income between periods. The table below sets forth, for the quarters indicated,
a summary of the changes in interest income and interest expense due to average
asset and liability balances (volume) and due to changes in average interest
rates (rate). Changes in interest income and expense which are not attributable
specifically to either volume or rate, are allocated proportionately between
both variances. Nonaccrual loans are excluded from average loans. The impact of
capital securities is not included in this table.
Three months Ended March 31, 2000 Three months Ended March 31, 2000
Compared with December 31, 1999 Compared with March 31, 1999
favorable (unfavorable) favorable (unfavorable)
------------------------------------- -------------------------------------
(Dollars in thousands) Volume Rate Net Volume Rate Net
- --------------------------------------------------------------- -------- -------- ----------- -------- -------
INTEREST-EARNING ASSETS:
Fed funds sold $ (57) $ (245) $ (302) $ 2,363 $ 402 $ 2,765
Other short term securities 202 (34) 168 (584) (10) (594)
Investment securities:
Taxable 641 769 1,410 2,543 1,062 3,605
Tax-exempt 128 120 248 336 145 481
Loans 4,117 323 4,440 15,879 1,131 17,010
----------- -------- -------- ----------- -------- -------
Total interest-earning assets 5,031 933 5,964 20,537 2,730 23,267
----------- -------- -------- ----------- -------- -------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings (1,100) (772) (1,872) (5,436) (2,077) (7,513)
Time deposits, over $100,000 (451) (347) (798) (1,701) (441) (2,142)
Other time deposits 52 (53) (1) 277 (126) 151
----------- -------- -------- ----------- -------- -------
Total interest-bearing deposits (1,499) (1,172) (2,671) (6,860) (2,644) (9,504)
Other borrowings (101) (101) (202) (321) (181) (502)
Subordinated debt - - - 36 35 71
----------- -------- -------- ----------- -------- -------
Total interest-bearing liabilities: (1,600) (1,273) (2,873) (7,145) (2,790) (9,935)
----------- -------- -------- ----------- -------- -------
Increase (decrease) in net interest income $ 3,431 $ (340) $ 3,091 $ 13,392 $ (60) $13,332
=========== ======== ======== =========== ======== =======
The Quarter Ended March 31, 2000 compared to March 31, 1999
-----------------------------------------------------------
Interest income in the first quarter ended March 31, 2000 increased 50.4%
to $69.5 million from $46.2 million in the same period in 1999. This was
primarily due to the $20.5 million favorable volume variance which resulted from
a $941.2 million, or 41.7%, increase in average interest-earning assets over the
comparable prior year. Average loans increased $642.6 million, or 41.0%, to 2.2
billion for the first quarter of 2000 as compared to $1.6 billion for the first
quarter of 1999.
The average yield on interest-earning assets increased 41 basis points to
8.70% in the first quarter of 2000 from 8.29% in the same period of 1999
primarily due to the increase on the yields on loans. Average yields on loans
increased 27 basis points to 9.69% in the three months ended March 31, 2000 from
9.42% for the same period in 1999, primarily as a result of increases in market
rates of interest.
Interest expense, excluding capital securities, in the first quarter of
2000 increased 60.1% to $26.5 million from $16.5 million for the same period in
1999. This increase was due to an increase in average interest-bearing
liabilities and higher interest rates paid on interest-bearing liabilities.
Average interest-bearing liabilities increased 39.6% to $2.5 billion in the
first quarter of 2000 from $1.8 billion in the same period for 1999 due to the
efforts of the Company's relationship managers in generating core deposits from
their client relationships, deposits derived from the activities of the Greater
Bay Trust Company and the Venture Banking Group.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
As a result of the foregoing, the Company's interest rate spread excluding
capital securities was 4.42% in the first quarter of 2000 compared to 4.51% in
the same quarter one year earlier and the net yield on interest-earning assets
increased to 5.39% from 5.32%.
During the first quarter of 2000, average noninterest-bearing deposits
increased to $635.4 million from $431.2 million in the same period in 1999.
Average noninterest-bearing deposits comprised 21.2% of total deposits for the
first quarter in 2000, compared to 20.4% for the same period in 1999.
The Quarter Ended March 31, 2000, compared to December 31, 1999
---------------------------------------------------------------
Interest income increased 9.4% to $69.5 million for the first quarter of
2000, as compared to $63.5 million for the previous quarter. Average interest-
earning assets increased 8.6% in the first quarter of 2000 from $2.9 billion for
the previous quarter. The increase in interest income for the first quarter of
2000, as compared to the prior quarter, was primarily the result of an increase
in the average balances of loans which increased $190.8 million and investment
securities which grew $51.4 million from the prior quarter. The impact of
increases in average balances on loans was enhanced by an increase in the yield
earned on those assets. The yield on the average interest-earning assets
increased 16 basis points to 8.70% in the first quarter of 2000 from 8.54% in
the fourth quarter of 1999, primarily as a result of increases in market rates
of interest.
Interest expense, excluding capital securities, in the first quarter of
2000 increased 12.2% to $26.5 million from $23.6 million in the prior quarter.
The increase is the result of increased interest-bearing liabilities, which rose
to $2.5 billion for the first quarter of 2000, as compared to $2.3 billion for
the prior quarter, and a 23 basis point increase in the cost of funds which
increased to 4.29% in the first quarter of 2000.
As a result of the foregoing, the Company's interest rate spread excluding
capital securities was 4.42% in the first quarter of 2000 compared to 4.49% in
the prior quarter and the net yield on interest-earning assets increased to
5.39% from 5.37%.
During the first quarter of 2000, average noninterest-bearing deposits
increased to $635.4 million from $594.8 million in the fourth quarter of 1999.
Average noninterest-bearing deposits comprised 21.2% of total deposits for the
first quarter in 2000 and for the prior quarter.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Certain client service expenses were incurred by the Company with respect
to its noninterest-bearing liabilities. These expenses include messenger
services, check supplies and other related items and are included in operating
expenses. Had they been included in interest expense, the impact of these
expenses on the Company's net yield on interest-earning assets would have been
as follows for each of the quarters presented.
Three Months Ended March 31,
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------------------------
Average noninterest bearing demand deposits $ 635,374 $ 431,170
Client service expenses 702 609
Client service expenses, annualized 0.44% 0.57%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS:
Net yield on interest-earning assets 5.25% 5.14%
Impact of client service expense (0.09)% (0.11)%
---------------------------
Adjusted net yield on interest-earning assets (1) 5.17% 5.03%
============================
(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield of spread.
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to control its interest expense.
Provision for Loan Losses
The provision for loan losses represents the current period credit cost
associated with maintaining an appropriate allowance for credit losses. The loan
loss provision for each period is dependent upon many factors, including loan
growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's market area. Periodic fluctuations in the provision
for loan losses result from management's assessment of the adequacy of the
allowance for loan losses; however, actual loan losses may vary from current
estimates.
Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for
a description of the methodology the Company uses in determining an adequate
allowance for loan losses.
The provision for loan losses for the first quarter of 2000 was $5.3
million, compared to $1.2 million for the first quarter of 1999. In addition, in
connection with the MD Bancshares merger, the Company made an additional
provision for loan losses of $860,000 in the first quarter of 2000 to conform to
the Company's allowance methodology. Nonperforming loans, comprised of
nonaccrual loans, restructured loans, and accruing loans past due 90 days or
more, increased from $5.1 million, or 0.31% of loans outstanding, at March 31,
1999, to $7.0 million or 0.30% of loans outstanding at March 31, 2000.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For further information on nonperforming and classified loans and the
allowance for loan losses, see--"Nonperforming and Classified Assets" herein.
Other Income
Total other income increased to $16.0 million for the first quarter of 2000
compared to $4.6 million for the first quarter of 1999. The following table sets
forth information by category of other income for the quarters indicated.
At and for the three month periods ended
----------------------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
=================================================================================================================================
Service charges and other fees 1,351 1,436 1,351 1,192 1,214
Loan and international banking fees $ 1,176 915 1,070 865 673
Trust fees 924 774 768 727 721
ATM network revenue 569 634 789 613 645
Gain on sale of SBA loans 452 72 675 470 813
Gain (loss) on sale of investments, net (1) (23) 4 (9) 61
Other 2,931 4,046 1,876 631 463
------------------------------------------------------------------------------------
Total, recurring 7,402 7,854 6,533 4,489 4,590
Warrant income 8,609 14,278 - 226 4
------------------------------------------------------------------------------------
Total $ 16,011 $ 22,132 $ 6,533 $ 4,715 $ 4,594
====================================================================================
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
For the first quarter of 2000 as compared to the same period in 1999, the
increase in other income was a result of $503,000 increase in loan and
international banking fees, a $137,000 increase in service charges and other
fees, and a $203,000 increase in trust fees. These increases were a result of
significant growth in total loans, total deposits and trust assets. The gains on
sale of SBA loans has declined to $452,000 as compared to $813,000 for the same
quarter in 1999. The average premiums paid on SBA loans sold has declined
reducing the gains earned by the Company. Other income for the first quarter of
2000 and the fourth quarter of 1999 includes $2.1 million and $3.1 million in
appreciation recognized on equity securities received in the settlement of a
loan. As discussed further below, the warrant income resulted from the sale of
stock acquired from clients in connection with financing activities.
In November 1999, the voters of San Francisco adopted an ordinance which
prohibits financial institutions in San Francisco from imposing surcharges of
any kind to noncustomers who access automated teller machines to conduct
electronic transactions, including cash withdrawals and fund transfers. Other
cities in California have either adopted or are considering similar proposals.
The Company estimates that approximately $37,000 of ATM network revenue during
the first quarter of 2000 was derived from such type of surcharges in the City
and County of San Francisco. While the implementation of this ordinance has been
blocked through legal challenges and is not material, the adoption of similar
laws in other areas where the Company operates ATMs could cause a more
substantial reduction in ATM network revenue in the future.
Other income for the first quarter of 2000 and the first quarter of 1999
included warrant income of $8.6 million and $4,000, respectively, net of related
employee incentives. The Company holds in excess of 100 warrant positions. We
have historically obtained rights to acquire stock, in the form of warrants, in
certain clients as part of negotiated credit facilities. We may not be able to
realize gains form these equity instruments in future periods due to
fluctuations in the market prices of the underlying common stock of these
companies. The timing and amount of income, if any, from the disposition of
client warrants typically depend upon factors beyond our control, including the
general condition of the public equity markets, levels of mergers and
acquisitions activity, and legal and contractual restrictions on our ability to
sell the underlying securities. Therefore, future gains cannot be predicted with
any degree of accuracy and are likely to vary materially from period to period.
In addition, a significant portion of the income we realize from the disposition
of client warrants may be offset by expenses related to our efforts to build an
infrastructure sufficient to support our present and future business activities,
as well as expenses incurred in evaluating and pursuing new business
opportunities, or by increases to the provision for loan losses.
Operating Expenses
The following table sets forth the major components of operating expenses
for the quarters indicated.
At and for the three month periods ended
---------------------------------------------------
March 31, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
Compensation and benefits $ 12,835 $ 12,665 $ 11,411
Occupancy and equipment 4,357 3,902 3,413
Legal and other professional fees 920 585 850
Telephone, postage and supplies 864 878 893
Client services 702 628 500
Marketing and promotion 686 685 581
FDIC insurance and regulatory assessments 240 187 183
Directors' fees 153 398 213
Expenses on other real estate owned 10 (53) 30
Other 1,985 2,000 2,368
---------------------------------------------------
Total operating expenses, excluding merger costs 22,752 21,875 20,442
Contribution to the GBB Foundation and related expense, net - 11,837 -
Merger costs 3,881 6,367 -
---------------------------------------------------
Total operating expenses $ 26,633 $ 40,079 $ 20,442
===================================================
Efficiency ratio, excluding trust operations 45.63% 65.62% 55.94%
Efficiency ratio, excluding trust operations and before merger costs 38.81% 35.32% 55.94%
Total operating expenses to average assets* 3.10% 5.01% 3.20%
Total operating expenses to average assets, before
merger costs* 2.65% 2.73% 3.20%
*Annualized
At and for the three month periods ended
-------------------------------------------
June 30, March 31,
(Dollars in thousands) 1999 1999
- -----------------------------------------------------------------------------------------------------------------
Compensation and benefits $ 10,862 $ 10,521
Occupancy and equipment 3,160 3,415
Legal and other professional fees 700 659
Telephone, postage and supplies 852 845
Client services 310 609
Marketing and promotion 597 567
FDIC insurance and regulatory assessments 142 139
Directors' fees 91 250
Expenses on other real estate owned 15 21
Other 2,653 1,611
-------------------------------------------
Total operating expenses, excluding merger costs 19,382 18,637
Contribution to the GBB Foundation and related expense, net 323 -
Merger costs 3,965 -
Total operating expenses $ 23,670 $ 18,637
-------------------------------------------
Efficiency ratio, excluding trust operations 74.43% 55.27%
===========================================
Efficiency ratio, excluding trust operations and before merger costs 60.50% 55.27%
Total operating expenses to average assets* 3.98% 3.09%
Total operating expenses to average assets, before
merger costs* 3.26% 3.09%
*Annualized
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Operating expenses totaled $26.6 million for the first quarter of 2000,
compared to $18.6 million for the first quarter of 1999. The ratio of operating
expenses to average assets, before merger costs, was 2.65% for the first quarter
of 2000 and 3.09% for the first quarter of 1999.
The efficiency ratio is computed by dividing total operating expenses by
net interest income and other income. An increase in the efficiency ratio
indicates that more resources are being utilized to generate the same
(or greater) volume of income while a decrease would indicate a more efficient
allocation of resources. The Company's efficiency ratio, excluding trust
operations and nonrecurring items, for the first quarter of 2000 was 38.81%,
compared to 55.27% for the first quarter of 1999. The Company's efficiency ratio
for the first quarter of 2000 was lowered in part by the impact of the $2.1
million in appreciation on equity securities received in settlement of a loan.
Excluding this income, the Company's efficiency ratio would have been 47.71%.
As indicated by the improvements in the efficiency ratio and ratio of total
operating expenses to average assets, the Company has been able to achieve
increasing economies of scale. For the first quarter of 2000, average assets
increased 40.7% from the first quarter of 1999, while operating expenses,
excluding nonrecurring cost, increased only 22.1%.
Compensation and benefits expenses increased for the first quarter of 2000
to $12.8 million, compared to $10.5 million for the first quarter of 1999. The
increase in compensation and benefits is due primarily to the addition of
personnel to accommodate the growth of the Company.
The increase in occupancy and equipment; telephone, postage, and supplies;
marketing and promotion; and client service expense was related to the Company's
growth.
Income Taxes
The Company's effective income tax rate for the first quarter of 2000 was
40.3%, compared to 39.4% in the first quarter of 1999. The effective rates were
lower than the statutory rate of 42.0% due to tax-exempt income on municipal
securities, state enterprise zone credits and the preferential tax treatment of
the donation of appreciated warrants to the Foundation. The reductions were
partially offset by the impact of merger and other related nonrecurring costs.
FINANCIAL CONDITION
Total assets increased 12.2% to $3.6 billion at March 31, 2000, compared to
$3.2 billion at December 31, 1999. The increase in the first quarter of 2000 was
primarily due to increases in the Company's loan portfolio funded by growth in
deposits.
Loans
Total gross loans increased 7.8% (31.3% annualized) to $2.3 billion at
March 31, 2000, compared to $2.1 billion at December 31, 1999. The increase in
the loan volume during the first three months of 2000 was primarily due to the
continued strength of the economy in the Company's market areas coupled with the
business development efforts of the Company's relationship managers.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's loan portfolio is concentrated in commercial (primarily
manufacturing, service and technology) and real estate lending, with the balance
in consumer loans. While no specific industry concentration is considered
significant, the Company's lending operations are located in a market area that
is dependent on the technology and real estate industries and supporting service
companies. Thus, the Company's borrowers could be adversely impacted by a
downturn in these sectors of the economy. This could, in turn, reduce the
demand for loans and adversely impact the borrowers' abilities to repay their
loans, while also decreasing the Company's net interest margin.
The following table presents the composition of the Company's loan
portfolio at the dates indicated.
March 31, December 31, March 31,
2000 1999 1999
--------------------------------------------------------------------------------------------
(Dollars in thousands) Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial $ 956,341 42.6% $ 845,422 40.5% $ 690,330 42.8 %
Team real-Commercial 641,163 28.5 595,499 28.6 451,599 28.0
--------------------------------------------------------------------------------------------
Total commercial 1,597,504 71.1 1,440,921 69.1 1,141,929 70.8
Real estate construction and land 474,916 21.1 459,349 22.0 297,119 18.4
Real estate term - other 117,628 5.2 111,703 5.4 104,400 6.5
Consumer and other 116,880 5.2 128,120 6.1 110,017 6.8
--------------------------------------------------------------------------------------------
Total loans, gross 2,306,928 102.7 2,140,093 102.6 1,653,465 102.5
Deferred fees and discounts, net (11,255) (0.5) (10,604) (0.5) (9,202) (0.6)
--------------------------------------------------------------------------------------------
Total loans, net of
deferred fees 2,295,673 102.2 2,129,489 102.1 1,644,263 101.9
Allowance for loan losses (48,650) (2.2) (44,147) (2.1) (30,748) (1.9)
-------------------------------------------------------------------------------------------
Total loans, net $2,247,023 100.0% $2,085,342 100.0% $1,613,515 100.0%
===========================================================================================
Nonperforming and Classified Assets
Management generally places loans on nonaccrual status when they become 90
days past due, unless they are well secured and in the process of collection.
When a loan is placed on nonaccrual status, any interest previously accrued but
not collected is generally reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Banks have granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. Other
real estate owned ("OREO") consists of real property acquired through
foreclosure on the related collateral underlying defaulted loans.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information regarding nonperforming assets
at the dates indicated.
At and for the three month periods ended
-------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
Nonperforming loans
Nonaccrual loans $6,203 $5,516 $ 7,864 $5,578 $4,137
Accruing loans past due 90 days or more 10 51 353 209 -
Restructured loans 743 807 1,492 1,034 951
-------------------------------------------------------------------
Total nonperforming loans 6,956 6,374 9,709 6,821 5,088
Other real estate owned 271 271 515 595 620
-------------------------------------------------------------------
Total nonperforming assets $7,227 $6,645 $10,224 $7,416 $5,708
===================================================================
Nonperforming assets to total loans
and other real estate owned 0.31% 0.31% 0.53% 0.42% 0.35%
Nonperforming assets to total assets 0.20% 0.21% 0.34% 0.27% 0.22%
At March 31, 2000, the Company had $6.2 million in nonaccrual loans.
Interest income foregone on nonaccrual loans outstanding totaled $311,000 and
$110,000 for the three months ended March 31, 2000 and 1999, respectively.
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings through a provision for
losses on foreclosed property in the period in which they are identified. At
March 31, 2000, OREO acquired through foreclosure had a carrying value of
$271,000, same as December 31, 1999.
The Company had $743,000 and $807,000 of restructured loans as of March 31,
2000 and December 31, 1999, respectively. There were no principal reduction
concessions allowed on restructured loans during the first quarter of 2000 or
1999. Interest income from restructured loans totaled $20,000 and $9,000 for the
three months ended March 31, 2000 and 1999, respectively. Foregone interest
income, which totaled $241,000 and $8,000 for the three months ended March 31,
2000 and 1999, respectively, would have been recorded as interest income if the
loans had accrued interest in accordance with their original terms prior to the
restructurings.
The Company has three classifications for problem loans: "substandard,"
"doubtful" and "loss." Substandard loans have one or more defined weaknesses and
are characterized by the distinct possibility that the Banks will sustain some
loss if the deficiencies are not corrected. Doubtful loans have the weaknesses
of substandard loans with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable; and there is a high possibility of loss of
some portion of the principal balance. A loan classified as "loss" is considered
uncollectible and its continuance as an asset is not warranted.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth the classified assets at the dates
indicated.
At and for the three month periods ended
-------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
Substandard $27,720 $28,679 $29,299 $27,203 $19,434
Doubtful 5,772 1,850 2,316 1,579 1,212
Loss - - - - -
Other real estate owned 271 271 515 595 620
-------------------------------------------------------------------
Classified assets $33,763 $30,800 $32,130 $29,377 $21,266
===================================================================
Classified assets to total loans and other real 1.47% 1.45% 1.66% 1.65% 1.29%
estate owned
Allowance for loan losses to total classified assets 144.09% 143.33% 114.21% 112.39% 144.59%
With the exception of these classified assets, management was not aware of
any loans outstanding as of March 31, 2000 where the known credit problems of
the borrower would cause management to have serious doubts as to the ability of
such borrowers to comply with their present loan repayment terms and which would
result in such loans being included in nonperforming or classified asset tables
at some future date. Management cannot, however, predict the extent to which
economic conditions in the Company's market areas may worsen or the full impact
that such an environment may have on the Company's loan portfolio. Accordingly,
there can be no assurance that other loans will not become 90 days or more past
due, be placed on nonaccrual, become restructured loans, or other real estate
owned in the future.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in the Company's loan
portfolio. The allowance is increased by provisions charged against earnings
and reduced by net loan charge-offs. Loans are charged-off when they are deemed
to be uncollectible; recoveries are generally recorded only when cash payments
are received.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The following table sets forth information concerning the Company's
allowance for loan losses at the dates and for the quarters indicated.
At and for the three month periods ended
---------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 2000 1999 1999 1999 1999
- ---------------------------------------------- ---------------------------------------------------------------------
Period end loans outstanding $2,295,673 $2,129,489 $1,940,662 $1,784,111 $1,647,867
Average loans outstanding $2,208,556 $2,017,723 $1,868,109 $1,721,483 $1,565,961
Allowance for loan losses:
Balance at beginning of period $ 44,147 $ 36,696 $ 33,016 $ 30,748 $ 29,831
Charge-offs:
Commercial (1,694) (1,334) (776) (278) (226)
Real estate construction and land - - - - -
Real estate term - - - - -
Consumer and other (97) (81) (103) (43) (72)
---------------------------------------------------------------------
Total charge-offs (1,791) (1,415) (879) (321) (298)
---------------------------------------------------------------------
Recoveries:
Commercial 127 59 760 218 34
Real estate construction and land - - 1 2 1
Real estate term - - - 1 -
Consumer and other 3 280 43 5 17
---------------------------------------------------------------------
Total recoveries 130 339 804 226 52
---------------------------------------------------------------------
Net charge-offs (1,661) (1,076) (75) (95) (246)
Provision charged to income /(1)/ 6,164 8,527 3,755 2,363 1,163
---------------------------------------------------------------------
Balance at end of period $ 48,650 $ 44,147 $ 36,696 $ 33,016 $ 30,748
=====================================================================
Quarterly net charge-offs to average loans outstanding
during the period, annualized 0.30% 0.21% 0.02% 0.02% 0.06%
Year to date net charge-offs to average loans outstanding
during the period, annualized 0.30% 0.07% 0.03% 0.04% 0.06%
Allowance as a percentage of average loans outstanding 2.20% 2.19% 1.96% 1.92% 1.96%
Allowance as a percentage of period end loans outstanding 2.12% 2.07% 1.89% 1.85% 1.87%
Allowance as a percentage of non-performing loans 699.40% 692.61% 377.96% 484.03% 604.32%
_______________________
(1) Includes $860,000 in the first quarter of 2000, $2,300,000 in the fourth
quarter of 1999 and $400,000 in the second quarter of 1999 to conform practices
to the Company's reserve methodologies, which is included in mergers and
related nonrecurring costs.
The Company employs a systematic methodology for determining its allowance
for loan losses, which includes a monthly review process and monthly adjustment
of the allowance. The Company's process includes a periodic loan by loan review
for loans that are individually evaluated for impairment as well as detailed
reviews of other loans (either individually or in pools). This includes an
assessment of known problem loans, potential problem loans, and other loans that
exhibit indicators of deterioration.
The Company's methodology incorporates a variety of risk considerations,
both quantitative and qualitative, in establishing an allowance for loan losses
that management believes is appropriate at each reporting date. Quantitative
factors include the Company's historical loss experience, delinquency and
charge-off trends, collateral values, changes in non-performing loans, and other
factors. Quantitative factors also incorporate known information about
individual loans including borrowers' sensitivity to interest rate movements and
borrowers' sensitivity to quantifiable external factors including commodity and
finished goods prices as well as acts of nature (earthquakes, fires, etc.) that
occur in a particular period.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Qualitative factors include the general economic environment in the
Company's marketplace, and in particular, the state of the technology industries
based in the Silicon Valley and other key industries in the San Francisco Bay
Area. Size and complexity of individual credits in relation to lending officers'
background and experience levels, loan structure, extent and nature of waivers
of existing loan policies and pace of portfolio growth are other qualitative
factors that are considered in the Company's methodology. The Company's
methodology is, and has been, consistently followed. However, as the Company
adds new products, increases in complexity, and expands its geographic coverage,
the Company intends to enhance its methodology to keep pace with the size and
complexity of the loan portfolio. In this regard, the Company has periodically
engaged outside firms to independently assess the Company's methodology, and on
an ongoing basis the Company engages outside firms to perform independent credit
reviews of its loan portfolio. Management believes that the Company's systematic
methodology continues to be appropriate given the Company's size and level of
complexity.
While this methodology utilizes historical and other objective information,
the establishment of the allowance for loan losses and the classification of
loans, is to some extent, based on the judgment and experience of management. In
general, management feels that the allowance for loan losses is adequate as of
March 31, 2000. However, future changes in circumstances, economic conditions or
other factors could cause management to increase or decrease the allowance for
loan losses as necessary.
At March 31, 2000, the allowance for loan losses was $48.7 million,
consisting of a $33.5 million allocated allowance and a $15.2 million
unallocated allowance. The unallocated allowance recognizes the model and
estimation risk associated with the allocated allowances, and management's
evaluation of various conditions, the effects of which are not directly measured
in determining the allocated allowance. The evaluation of the inherent loss
regarding these conditions involves a higher degree of uncertainty because they
are not identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the
following at the balance sheet date:
. The strength and duration of the current business cycle and existing
general economic and business conditions affecting our key lending areas;
economic and business conditions affecting our key lending portfolios;
. Seasoning of the loan portfolio, growth in loan volumes and changes in loan
terms; and
. The results of bank regulatory examinations.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Liquidity and Cash Flow
The objective of liquidity management is to maintain each Bank's ability to
meet the day-to-day cash flow requirements of its clients who either wish to
withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to allow the Banks to meet the needs of their
clients while maintaining an appropriate balance between assets and liabilities
to meet the return on investment expectations of its shareholders. The Company
monitors the sources and uses of funds on a daily basis to maintain an
acceptable liquidity position. In addition to liquidity from core deposits and
repayments and maturities of loans and investments, the Banks utilize brokered
deposit lines, sell securities under agreements to repurchase and borrow
overnight federal funds.
Greater Bay is a company separate and apart from the Banks. It must provide
for its own liquidity. Substantially all of Greater Bay's revenues are obtained
from management fees, interest received on its investments and dividends
declared and paid by the Banks. There are statutory and regulatory provisions
that could limit the ability of the Banks to pay dividends to Greater Bay. At
March 31, 2000, the Banks had approximately $62.9 million in the aggregate
available to be paid as dividends to Greater Bay. Management of Greater Bay
believes that such restrictions will not have an impact on the ability of
Greater Bay to meet its ongoing cash obligations. As of March 31, 2000, Greater
Bay did not have any material commitments for capital expenditures.
Net cash provided by operating activities, consisting primarily of net
income and increases in interest payable and other liabilities, totaled $15.3
million and $13.9 million for the three months ended March 31, 2000 and 1999,
respectively. Cash used for investing activities totaled $293.4 million and
$183.0 million for the three months ended March 31, 2000 and 1999, respectivley.
The funds used for investing activities primarily represent increases in loans
and investment securities for each year reported.
For the three months ended March 31, 2000 net cash provided by financing
activities was $370.2 million, compared to $210.0 million for the three months
ended March 31, 2000. Historically, the primary financing activity of the
Company has been through deposits. For the three months ended March 31, 2000 and
1999, deposit gathering activities generated cash of $352.1 million and $218.9
million, respectively. This represents a total of 95.1% and 104.1% of the
financing cash flows for the three months ended March 31, 2000 and 1999,
respectively. The Company has supplemented its financing activities through the
issuance of Trust Preferred Securities and common stock. See "Capital Resources"
for further discussion below.
Capital Resources
Shareholders' equity at March 31, 2000 increased to $232.8 million from
$206.6 million at December 31, 1999. Greater Bay paid dividends of $0.15 and
$0.48 per share during the three months ended March 31, 2000 and the twelve
months ended December 31, 1999, respectively, excluding dividends paid by
subsidiaries prior to the completion of their mergers.
In the first quarter of 2000 and the fourth quarter of 1999 the Company
issued 324,324 and 535,000 shares of common stock in a private placement,
respectively. The proceeds from the offering were $11.5 million and $19.0
million, respectively, net of issuance costs. Greater Bay used a portion of the
net proceeds from the offering to supplement the capital of the Banks and
intends to use the remainder for general corporate purposes.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
In 1997, the Company issued $20.0 million in TPS to enhance its regulatory
capital base, while also providing added liquidity. In 1998, the Company
completed a second offering of TPS in an aggregate amount of $30.0 million. In
the first quarter of 2000, the Company completed a third offering of TPS in an
aggregate amount of $9.5 million. Under applicable regulatory guidelines, the
TPS qualifies as Tier I capital up to a maximum of 25% of Tier I capital. Any
additional portion of TPS would qualify as Tier 2 capital. As of March 31, 2000,
$59.5 million of the TPS qualified as Tier I capital. As the Company's
shareholders' equity increases, the amount of Tier I capital that can be
comprised of TPS will increase.
The Company is committed to remaining well-capitalized as defined by
regulatory guidelines. To support continued deposit and loan growth the Company
expects to complete a private offering of $41.0 million of 10 3/4% TPS in May
2000. We anticipate that we will be able to leverage this issuance of TPS
and therefore we do not anticipate that the additional TPS would be dilutive to
future net income per share. However, the impact of the additional TPS on net
income per share will depend on a number of factors, including the time period
required to invest the capital funds into earning-assets and the type of assets
funded.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
shareholders' equity, qualifying perpetual preferred stock, trust preferred
securities and minority interests, less goodwill. Supplementary capital includes
the allowance for loan losses (subject to certain limitations), other perpetual
preferred stock, trust preferred securities, certain other capital instruments
and term subordinated debt. The Company's major capital components are
shareholders' equity and TPS in core capital, and the allowance for loan losses
in supplementary capital.
At March 31, 2000, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the OCC and the FDIC have adopted regulations setting
forth a five-tier system for measuring the capital adequacy of the financial
institutions they supervise. The capital levels of the Company at March 31, 2000
and the two highest levels recognized under these regulations are as follows.
These ratios all exceeded the well-capitalized guidelines shown below.
Tier 1 Total
Leverage Risk-Based Risk-Based
Ratio Capital Ratio Capital Ratio
------ ------------- -------------
Company 8.92% 10.39% 11.76%
Well-capitalized 5.00% 6.00% 10.00%
Adequately capitalized 4.00% 4.00% 8.00%
In addition, at March 31, 2000, each of the Banks had levels of capital that
exceeded the well-capitalized guidelines.
27
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial performance is impacted by, among other factors,
interest rate risk and credit risk. The Company utilizes no derivatives to
mitigate its credit risk, relying instead on loan review and an adequate loan
loss reserve (see "--Allowance for Loan Losses" herein).
Interest rate risk is the risk of loss in value due to changes in interest
rates. This risk is addressed by the Company's Asset Liability Management
Committee ("ALCO"), which includes senior management representatives. The ALCO
monitors and considers methods of managing interest rate risk by monitoring
changes in net portfolio values and net interest income under various interest
rate scenarios. The ALCO attempts to manage the various components of the
Company's balance sheet to minimize the impact of sudden and sustained changes
in interest rates on net portfolio value and net interest income.
The Company's exposure to interest rate risk is reviewed on at least a
quarterly basis by the Board of Directors and the ALCO. Interest rate risk
exposure is measured using interest rate sensitivity analysis to determine the
Company's change in net portfolio value in the event of hypothetical changes in
interest rates and interest liabilities. If potential changes to net portfolio
value and net interest income resulting from hypothetical interest rate swings
are not within the limits established by the Board, the Board may direct
management to adjust its asset and liability mix to bring interest rate risk
within Board-approved limits.
In order to reduce the exposure to interest rate fluctuations, the Company
has developed strategies to manage its liquidity, lengthen the effective
maturities of certain interest-earning assets, and shorten the effective
maturities of certain interest-bearing liabilities. The Company has focused its
investment activities on securities with generally medium-term (8 years to 12
years) maturities or average lives. The Company has utilized short-term
borrowings and deposit marketing programs to adjust the term to repricing of its
liabilities. In addition, the Company has utilized an interest rate swap to
manage the interest rate risk of the TPS II securities. This interest rate swap
is not an "ineffective hedge" and is accounted for under Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities".
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in net portfolio value of its
cash flows from assets, liabilities and off-balance sheet items in the event of
a range of assumed changes in market interest rates. Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for off-
balance sheet items. This analysis assesses the risk of loss in market rate
sensitive instruments in the event of sudden and sustained increases and
decreases in market interest rates of 100 basis points. The following table
presents the Company's projected change in net portfolio value for these rate
shock levels as of March 31, 2000. All market rate sensitive instruments
presented in this table are classified as either held to maturity or available
for sale. The Company has no trading securities.
(Dollars in thousands)
Change in Projected Change
--------------------
Interest Rates Net Portfolio Value Dollars Percentage
-------------------------------------------------------------------------
100 basis point rise $ 582,547 $ 10,415 1.82%
Base scenario 572,133 - -
100 basis point decline 563,041 (9,091) -1.59%
28
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The preceding table indicates that at March 31, 2000, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
net portfolio value would be expected to increase. However, the foregoing
analysis does not attribute additional value to the Company's noninterest-
bearing deposit balances, which have a significantly higher market value during
periods of increasing interest rates.
Net portfolio value is calculated based on the net present value of
estimated cash flows utilizing market prepayment assumptions and market rates of
interest provided by independent broker quotations and other public sources.
Computation of forecasted effects of hypothetical interest rate changes is
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual future results. Further, the computations do not
contemplate any actions the ALCO could undertake in response to changes in
interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of net portfolio value. Actual values may differ from those
projections presented should market conditions vary from assumptions used in the
calculation of the net portfolio value. Certain assets, such as adjustable-rate
loans, which represent one of the Company's loan products, have features which
restrict changes in interest rate on a short-term basis and over the life of the
assets. In addition, the proportion of adjustable-rate loans in the Company's
portfolio could decrease in future periods if market interest rates remain at or
decrease below current levels due to refinancing activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the net portfolio value.
Finally, the ability of many borrowers to repay their adjustable-rate mortgage
loans may decrease in the event of significant interest rate increases.
Interest Rate Risk Management
Interest rate risk management is a function of the repricing
characteristics of the Company's portfolio of assets and liabilities. Interest
rate risk management focuses on the maturity structure of assets and liabilities
and their repricing characteristics during periods of changes in market interest
rates. Effective interest rate risk management seeks to ensure that both assets
and liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Company's current portfolio that are
subject to repricing at various time horizons: one day or immediate, two days to
six months, seven to twelve months, one to three years, four to five years, over
five years and on a cumulative basis. The differences are known as interest
sensitivity gaps.
29
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
The following table shows interest sensitivity gaps for different intervals
as of March 31, 2000.
Immediate or 2 Days to 7 Months to 1 Year to 4 Years to More than
One Day 6 Months 12 Months 3 Years 5 Years 5 Years
-------------------------------------------------------------------------------------------------
Assets (Dollars in thousands)
Cash and Due $ 1,475 $ - $ - $ - $ - $ -
Federal Funds Sold 309,505 - - - - -
Investment Securities - 28,750 27,722 137,075 89,873 455,580
Loans 1,186,082 541,370 81,325 160,248 146,368 182,690
Allowance for Loan - - - - - -
Losses/Unearned Fees
Other Assets - - - - - -
------------------------------------------------------------------------------------------------
Total Assets $1,497,062 $ 570,120 $ 109,047 $ 297,323 $ 236,241 $638,270
================================================================================================
Liabilities and Equity
Deposits $2,472,644 $ 525,245 $ 71,397 $ 10,912 $ 1,366 $ 166
Other Borrowings 14,100 71,024 - 10,000 2,000 -
Trust Preferred Securities - - - - - 59,500
Other Liabilities - - - - - -
Shareholders Equity - - - - - -
------------------------------------------------------------------------------------------------
Total Liab/Equity $2,486,744 $ 596,269 $ 71,397 $ 20,912 $ 3,366 $ 59,666
================================================================================================
Gap $ (989,682) $ (26,149) $ 37,650 $ 276,411 $ 232,875 $578,604
Cumulative Gap $ (989,682) $(1,015,831) $(978,181) $(701,770) $(468,895) $109,709
Cumulative Gap/Total Assets -27.4% -28.2% -27.1% -19.5% -13.0% 3.0%
Total Rate Non- Rate
Sensitive Sensitive Total
----------------------------------------------------------
Assets
Cash and Due $ 1,475 $ 152,826 $ 154,301
Federal Funds Sold 309,505 - 309,505
Investment Securities 739,000 (13,474) 725,526
Loans 2,298,082 1,525 2,299,607
Allowance for Loan - (52,584) (52,584)
Losses/Unearned Fees
Other Assets - 170,881 170,881
---------------------------------------------------------
Total Assets $3,348,062 $ 259,175 $3,607,237
=========================================================
Liabilities and Equity
Deposits $3,081,730 $ 77,370 $3,159,100
Other Borrowings 97,124 - 97,124
Trust Preferred Securities 59,500 - 59,500
Other Liabilities - 58,698 58,698
Shareholders Equity - 232,815 232,815
---------------------------------------------------------
Total Liab/Equity $3,238,354 $ 368,883 $3,607,237
=========================================================
Gap $ 109,708 $(109,708) $ -
Cumulative Gap $ 109,708 $ - $ -
Cumulative Gap/Total Assets 3.0% - -
The foregoing table indicates that the Company had a one year gap of $978.2
million, or 27.1% of total assets, at March 31, 2000. In theory, this would
indicate that at March 31, 2000, $978.2 million more in liabilities than assets
would reprice if there was a change in interest rates over the next year. Thus,
if interest rates were to increase, the gap would tend to result in a higher net
interest margin. Conversely, if interest rates decreased, the gap may result in
decreases net interest margin. However, changes in the mix of earning assets or
supporting liabilities can either increase or decrease the net interest margin
without affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can vary significantly
while the timing of repricing of both the asset and its supporting liability can
remain the same, thus impacting net interest income. This characteristic is
referred to as basis risk and, generally, relates to the repricing
characteristics of short-term funding sources such as certificates of deposit.
The impact of fluctuations in interest rates on the Company's projected
next twelve month net interest income and net income has been evaluated through
an interest rate shock simulation modeling analysis that includes various
assumptions regarding the repricing relationship of assets and liabilities, as
well as the anticipated changes in loan and deposit volumes over differing rate
environments. As of March 31, 2000, the analysis indicates that the Company's
net interest income would increase a maximum of 11.64% (excluding CCB) if rates
rose 200 basis points immediately and would decrease a maximum of 11.27%
(excluding CCB) if rates declined 200 basis points immediately. In addition, the
results indicate that notwithstanding the Company's gap position, which would
indicate that the net interest margin increases when rates rise, the Company's
net interest margin increases during rising rate periods due to the basis risk
imbedded in the Company's interest- bearing liabilities. The Company has
revised the assumptions used in performing this analysis following a detailed
review of its ALCO pricing history. As a result, the anticipated impact of
interest rate changes on the Company's net interest income has increased since
December 31, 1998.
The above quantified evaluations exclude the impact of CCB because that
institution had not been converted to risk management system as to net portfolio
value and interest rate shock simulation analysis at March 31, 2000. The
Company has performed a preliminary analysis of CCB's risk profile and has
determined that CCB's exposure to interest rate risk is equal to or lower than
that of the Company as a whole.
30
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
In addition, while this analysis indicates the probable impact of interest
rate movements on the Company's net interest income, it does not take into
consideration other factors that would impact this analysis. These factors would
include management's and ALCO's actions to mitigate the impact to the Company
and the impact of the Company's credit risk profile during periods of
significant interest rate movements.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors and
others, an interest sensitivity gap report may not provide a complete assessment
of the Company's exposure to changes in interest rates.
Year 2000 State of Readiness
The Company's mission critical systems successfully responded to the
century date change. Accordingly, the Company's core banking systems, including
the application software for its deposit, loan and trust computer systems, as
well as the electronic funds transfers system with the Federal Reserve, were
fully operational and accurately processing customer information and
transactions. During 2000, the Company will monitor its systems and those of its
major vendors, suppliers and clients over the coming months to ensure continued
compliance.
Recent Accounting Developments
In April 1999, the Financial Accounting Standards Board ("FASB") reached
tentative conclusions on the future of the pooling-of-interests method of
accounting for business combinations. These tentative decisions include the
decision that the pooling-of-interests method of accounting will no longer be an
acceptable method to account for business combinations between independent
parties and that there should be a single method of accounting for all business
combinations, and that method is the purchase method. The FASB agreed that the
purchase method should be applied prospectively to business combination
transactions that are initiated after the final standard is issued. The FASB has
issued an exposure draft during the third quarter of 1999 and expects a final
standard will be issued and become effective in the fourth quarter of 2000. A
portion of the Company's business strategy is to pursue acquisition
opportunities so as to expand its market presence and maintain growth levels. A
change in the accounting for business combinations could have a negative impact
on the Company's ability to realize those business strategies.
31