UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND - --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ______ to ______. Commission file number 0-25034 GREATER BAY BANCORP (Exact name of registrant as specified in its charter) California 77-0387041 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2860 West Bayshore Road, Palo Alto, California 94303 (Address of principal executive offices) (Zip Code) (650) 813-8200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Outstanding shares of Common Stock, no par value, as of July 27, 2000: 19,892,665 GREATER BAY BANCORP INDEX Part I. Financial Information Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999...................... 3 Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2000 and 1999..................................................................... 4 Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended June 30, 2000 and 1999..................................................................... 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999...... 6 Notes to Consolidated Financial Statements................................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 32 Part II. Other Information Item 1. Legal Proceeding............................................................................. 36 Item 2. Changes in Securities and Use of Proceeds.................................................... 36 Item 3. Default Upon Senior Securities............................................................... 36 Item 4. Submission of Matters to a Vote of Securities Holders........................................ 36 Item 5. Other Information............................................................................ 37 Item 6. Exhibits and Reports on Form 8-K............................................................. 37 Signature.................................................................................. 38 2 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2000 December 31, (Dollars in thousands) (unaudited) 1999 - ------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 197,425 $ 125,886 Federal funds sold 58,000 216,300 Other short term securities 55 29,507 ------------------------------ Cash and cash equivalents 255,480 371,693 Investment securities: Available for sale, at fair value 483,090 441,290 Held to maturity, at amortized cost (fair value $359,875 and $136,481 at June 30, 2000 and December 31, 1999, respectively) 366,272 141,725 Other securities 20,052 23,918 ------------------------------ Investment securities 869,414 606,933 Loans: Commercial 1,037,383 845,424 Term real estate-commercial 679,457 595,214 ------------------------------ Total commercial 1,716,840 1,440,638 Real estate construction and land 497,823 459,633 Real estate-other 119,904 123,346 Consumer and other 140,311 116,476 Deferred loan fees and discounts (12,459) (10,604) ------------------------------ Total loans, net of deferred fees 2,462,419 2,129,489 Allowance for loan losses (54,020) (44,147) ------------------------------ Total loans, net 2,408,399 2,085,342 Property, premises and equipment 23,262 25,872 Interest receivable and other assets 150,537 125,256 ------------------------------ Total assets $ 3,707,092 $3,215,096 ============================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest-bearing $ 689,912 $ 598,428 MMDA, NOW and savings 1,813,152 1,628,127 Time certificates, $100,000 and over 575,338 474,884 Other time certificates 101,404 105,560 ------------------------------ Total deposits 3,179,806 2,806,999 Other borrowings 133,500 100,600 Other liabilities 56,990 51,863 ------------------------------ Total liabilities 3,370,296 2,959,462 ------------------------------ Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trust holding solely junior subordinated debentures 99,500 49,000 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, no par value: 4,000,000 shares authorized; none issued - - Common stock, no par value: 40,000,000 shares authorized; 17,820,348 and 17,019,474 shares issued and outstanding as of June 30, 2000 and December 31, 1999, respectively 135,596 122,152 Accumulated other comprehensive loss (14,722) (8,055) Retained earnings 116,422 92,537 ------------------------------ Total shareholders' equity 237,296 206,634 ------------------------------ Total liabilities and shareholders' equity $ 3,707,092 $3,215,096 ============================== See notes to consolidated financial statements. 3 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended June 30, Six months ended June 30, (Dollars in thousands, except per share amounts) (unaudited) 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------- ------------------------------ INTEREST INCOME Interest on loans $ 60,052 $ 40,065 $ 113,432 $ 76,435 Interest on investment securities: Taxable 11,219 7,321 21,205 13,702 Tax - exempt 1,789 1,085 3,337 2,152 ----------------------------- ------------------------------ Total interest on investment securities 13,008 8,406 24,542 15,854 Other interest income 3,178 3,231 7,699 5,581 ----------------------------- ------------------------------ Total interest income 76,238 51,702 145,673 97,870 ----------------------------- ------------------------------ INTEREST EXPENSE Interest on deposits 25,855 17,335 50,658 32,634 Interest on Trust Preferred Securities 1,783 919 2,841 1,955 Interest on other borrowings 1,469 1,680 3,127 2,907 ----------------------------- ------------------------------ Total interest expense 29,107 19,934 56,626 37,496 ----------------------------- ------------------------------ Net interest income 47,131 31,768 89,047 60,374 Provision for loan losses 7,982 1,916 13,296 3,079 ----------------------------- ------------------------------ Net interest income after provision for loan losses 39,149 29,852 75,751 57,295 ----------------------------- ------------------------------ OTHER INCOME Loan and international banking fees 1,927 697 3,103 1,370 Service charges and other fees 1,148 1,202 2,331 2,416 Trust fees 905 727 1,829 1,448 Gain on sale of SBA loans 675 446 1,294 1,259 ATM network revenue 584 613 1,154 1,258 Gain (loss) on sale of investments, net 58 (9) 57 52 Warrant income, net 740 226 9,349 230 Other income 1,289 628 4,220 1,091 ----------------------------- ------------------------------ Total other income 7,326 4,530 23,337 9,124 ----------------------------- ------------------------------ OPERATING EXPENSES Compensation and benefits 12,320 10,896 25,155 21,417 Occupancy and equipment 4,386 3,403 8,922 7,012 Legal and other professional fees 999 729 1,919 1,388 Telephone, postage and supplies 925 852 1,789 1,697 Marketing and promotion 792 597 1,478 1,164 Client services 490 478 1,029 1,087 FDIC insurance and regulatory assessments 210 146 450 285 Directors fees 157 217 284 467 Other real estate owned 41 15 51 36 Contribution to GBB Foundation and related expenses, net - 323 - 323 Merger and other related nonrecurring costs 10,203 3,965 14,084 3,965 Other 1,986 2,074 3,981 3,491 ----------------------------- ------------------------------ Total operating expenses 32,509 23,695 59,142 42,332 ----------------------------- ------------------------------ Income before provision for income taxes and extraordinary items 13,966 10,687 39,946 24,087 Provision for income taxes 5,624 4,125 16,096 9,405 ----------------------------- ------------------------------ Net income before extraordinary items 8,342 6,562 23,850 14,682 Extraordinary items - - - (88) ----------------------------- ------------------------------ Net income $ 8,342 $ 6,562 $ 23,850 $ 14,594 ============================= ============================== Net income per share - basic $ 0.47 $ 0.40 $ 1.36 $ 0.90 ============================= ============================== Net income per share - diluted $ 0.45 $ 0.38 $ 1.30 $ 0.85 ============================= =============================== See notes to consolidated financial statements. 4 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended June 30, Six Months Ended June 30, --------------------------------- ------------------------------ (Dollars in thousands) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------- ------------------------------ Net income $ 8,342 $ 6,562 $ 23,850 $ 14,594 ------------------------------- ----------------------------- Other comprehensive income: Unrealized gains on securities: Unrealized holding gains arising during period (net of taxes of $(3,660) and $(2,945) for the three months ended June 30, 2000 and 1999, and $(4,820) and $(3,458) for the six months ended June 30, 2000 and 1999, respectively) (5,234) (4,212) (6,893) (4,946) less: reclassification adjustment for gains included in net income 34 (5) 34 31 ------------------------------- ----------------------------- Net change (5,200) (4,217) (6,859) (4,915) ------------------------------- ----------------------------- Cash flow hedges: Net derivative gains arising during period (net of taxes of $(45) and $480 for the three months ended June 30, 2000 and 1999, and $129 and $1,126 for the six months ended June 30, 2000 and 1999, respectively) (64) 686 185 1,610 Less: reclassification adjustment for expenses included in income (net of taxes of $5 and $(46) for the three months ended June 30, 2000 and 1999, and $7 and $(89) for the six months ended June 30, 2000 and 1999, respectively) 5 (46) 7 (89) ------------------------------- ----------------------------- Net change (59) 640 192 1,521 ------------------------------- ----------------------------- Other comprehensive loss (5,259) (3,577) (6,667) (3,394) ------------------------------- ----------------------------- Comprehensive income $ 3,083 $ 2,985 $ 17,183 $ 11,200 =============================== ============================= See notes to consolidated financial statements. 5 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, (Dollars in thousands) (unaudited) 2000 1999 - -------------------------------------------------------------------------------------------- Cash flows - operating activities Net income $ 23,850 $ 14,594 Reconcilement of net income to net cash from operations: Provision for loan losses 13,296 2,878 Depreciation and amortization 3,183 1,294 Deferred income taxes (4,063) (1,379) Loss on sale of investments, net - (52) Changes in: Accrued interest receivable and other assets (13,121) (3,893) Accrued interest payable and other liabilities (4,801) 6,002 Deferred loan fees and discounts, net 1,855 2,496 ------- --------- Operating cash flows, net 29,801 21,673 ------- --------- Cash flows - investing activities Maturities and partial paydowns on of investment securities: Held to maturity 12,549 7,889 Available for sale 15,206 119,038 Other securities 3,866 - Purchase of investment securities: Held to maturity (237,148) (8,629) Available for sale (67,572) (184,349) Other securities - (498) Proceeds from sale of available for sale securities - 36,895 Loans, net (338,208) (285,527) Sale of bank building 5,502 0 Purchase of property, premises and equipment 42 (5,619) Proceeds from sale of other real estate owned (5,766) 345 Purchase of insurance policies (4,555) (4,776) ------- --------- Investing cash flows, net (616,084) (325,231) ------- --------- Cash flows - financing activities Net change in deposits 372,807 365,209 Net change in other borrowings - short term 32,900 18,290 Principal repayment - long term borrowings - (3,000) Company obligated mandatorially redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures issued 50,500 - Proceeds from sale of common stock 17,611 4,040 Cash dividends (3,748) (3,971) ------- --------- Financing cash flows, net 470,070 380,568 ------- --------- Net change in cash and cash equivalents (116,213) 77,010 Cash and cash equivalents at beginning of period 371,693 295,917 ------- --------- Cash and cash equivalents at end of period $ 255,480 $ 372,927 ======= ========= Cash flows - supplemental disclosures Cash paid during the period for: Interest $ 56,997 $ 36,117 Income taxes $ 11,772 $ 9,315 Non-cash transactions: Tax benefit of exercise of nonqualified stock options $ - $ 345 Transfer of appreciated securities to Greater Bay Bancorp Foundation $ 7,200 $ - See notes to consolidated financial statements. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of June 30, 2000 and December 31, 1999 and for the Three Months and Six Months Ended June 30, 2000 and 1999 NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Consolidated Balance Sheet as of June 30, 2000, and the Consolidated Statements of Operations, Comprehensive Income and Cash Flows for the three months and six months ended June 30, 2000 and June 30, 1999 have been prepared by Greater Bay Bancorp and are not audited. The results of operations for the quarter and six months ended June 30, 2000 are not necessarily indicative of the results expected for any subsequent quarter or for the entire year ended December 31, 2000. The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 1999 included in the Current Report on Form 8-K filed as of May 18, 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 included in the Current Report on Form 8-K filed as of May 18, 2000. 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, GBB Capital III and GBB Capital IV and its operating divisions. On July 21, 2000, the Bank of Santa Clara ("BSC") was merged with and into Greater Bay. On July 24, 2000 the Company filed a Current Report on Form 8- K containing Supplemental Consolidated Financial Statements which accounted for the merger on a pooling-of-interests basis. The financial statements contained herein have not been restated to include BSC. 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. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2000 and December 31, 1999 and for the Three Months and Six Months Ended June 30, 2000 and 1999 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 Accumulated Unrealized other Unrealized Other gains on Cash flow comprehensive gains on Cash flow comprehensive (Dollars in thousands) securities hedges income (Dollars in thousands) securities hedges income - -------------------------------------------------------------------- -------------------------------------------------------------- Balance - December 31, 1999 $ (9,559) $ 1,504 $ (8,055) Balance - March 31, 2000 $ (11,218) $ 1,755 $ (9,463) Current period change (6,859) 192 (6,667) Current period change (5,200) (59) (5,259) ------------------------------------- ------------------------------------ Balance - June 30, 2000 $ (16,418) $ 1,696 $ (14,722) Balance - June 30, 2000 $ (16,418) $ 1,696 $ (14,722) ===================================== ==================================== Accumulated Accumulated Unrealized other Unrealized Other gains on Cash flow comprehensive gains on Cash flow comprehensive (Dollars in thousands) securities hedges income (Dollars in thousands) securities hedges income - -------------------------------------------------------------------- -------------------------------------------------------------- Balance - December 31, 1998 $ 1,026 $ (677) $ 349 Balance - March 31, 1999 $ 328 $ 204 $ 532 Current period change (4,915) 1,521 (3,394) Current period change (4,217) 640 (3,577) ------------------------------------- ------------------------------------ Balance - June 30, 1999 $ (3,889) $ 844 $ (3,045) Balance - June 30, 1999 $ (3,889) $ 844 $ (3,045) ===================================== ==================================== 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 May 18, 2000, Greater Bay completed its merger with Coast Bancorp, the holding company for Coast Commercial Bank, Santa Cruz, California. Each Coast Bancorp shareholder received 0.6338 shares of Greater Bay stock for each share of Coast Bancorp in a tax-free exchange. The merger was accounted for as a pooling of interests. As a result of the merger, Coast Commercial Bank operates as a wholly owned subsidiary of Greater Bay. 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 shareholders' and regulatory approvals. As of and for the six months ended June 30, 2000, BOP had $4.6 million in net interest income, $1.3 million in net income, $212.8 million in assets, $172.7 million in deposits and $16.4 million in shareholders' equity. On July 21, 2000, Bank of Santa Clara ("BSC") merged with and into GBB Merger Corp., as a result of which BSC became a wholly owned subsidiary of Greater Bay. Upon consummation of the merger, the outstanding shares of BSC were converted into an aggregate of approximately 2,001,000 shares of Greater Bay's stock. The transaction was accounted for as a pooling-of-interests. The financial information presented herein has not been restated to reflect the merger with BSC on a pooling-of-interests basis. As of and for the six months ended June 30, 2000, BSC had $10.2 million in net interest income, $2.6 million in net income, $399.2 million in assets, $364.0 million in deposits and $33.0 million in shareholders' equity. Assuming the acquisitions of BSC and BOP had been completed at June 30, 2000, the Company would have had on a pooled basis, proforma net interest income of $103.8 million and proforma net income of $27.7 million. 8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2000 and December 31, 1999 and for the Three Months and Six Months Ended June 30, 2000 and 1999 The results of operations previously reported by the separate enterprises for the periods before the merger was consummated and that are included in the current combined amounts presented in the accompanying consolidated financial statements are summarized below. For the three months ended (Dollars in thousands) March 31, 2000 - --------------------------------------------------------- Net interest income: Greater Bay Bancorp $ 36,378 Coast Bancorp 5,538 ------------ Combined $ 41,916 ============ Net income: Greater Bay Bancorp $ 13,473 Coast Bancorp 2,035 ------------ Combined $ 15,508 ============ There are no significant transactions between the Company and Coast Bancorp. All intercompany transactions have been eliminated. 9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2000 and December 31, 1999 and for the Three Months and Six Months Ended June 30, 2000 and 1999 NOTE 3--BORROWINGS Other borrowings are detailed as follows: June 30, December 31, (Dollars in thousands) 2000 1999 - --------------------------------------------------------------------------- Other borrowings: Short term borrowings: FHLB advances $ 80,000 $ - Securities sold under agreements to repurchase 40,000 55,100 Short term notes payable 1,500 1,500 Advances under credit lines - 7,000 ------------------------- Total short term borrowings 121,500 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 $ 133,500 $ 100,600 ========================= During the six month period ended June 30, 2000, the average balance of short term Federal Home Loan Bank ("FHLB") advances were $13.3 million and the average interest rates during that period was 6.29%. There were no such borrowings outstanding during the year ended December 31, 1999. Short term FHLB advances generally mature within 90 days. During the six month period ended June 30, 2000 and the twelve month period ended December 31, 1999, the average balance of securities sold under short term agreements to repurchase were $17.0 million and $21.1 million, respectively, and the average interest rates during those periods were 5.97% and 5.57%, respectively. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. During the six month period ended June 30, 2000 and the twelve month period ended December 31, 1999, the average balance of advances under credit lines were $16.7 million and $614,000 respectively, and the average interest rates during those periods were 6.35% and 6.26% respectively. Advances under credit lines generally require repayment within one year. During the six month period ended June 30, 2000 and the twelve month period ended December 31, 1999, the average balance of federal funds purchased was $4.2 million and $719,000, respectively, and the average interest rates during those periods were 5.77% and 5.38%, respectively. Federal funds purchased generally mature in one business day. There were no such balances outstanding at June 30, 2000 or December 31, 1999. FHLB advances in the amount of $10.0 million will mature in 2002. The remaining FHLB advances of $2.0 million will mature in the year 2003. Under the terms of the advances, the FHLB has a put option which gives it the right to demand early repayment. The FHLB advances bear a weighted average interest rate of 5.73% at June 30, 2000 and December 31, 1999. The advances are collateralized by loans and securities pledged to the FHLB. 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2000 and December 31, 1999 and for the Three Months and Six Months Ended June 30, 2000 and 1999 NOTE 4--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 and six months ended June 2000 and 1999. For the three months ended June 30, 2000 For the three months ended June 30, 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 $ 8,342 $ 6,562 Basic net income per share: Income available to common shareholders 8,342 17,788,000 $ 0.47 6,562 16,261,000 $ 0.40 Effect of dilutive securities: Stock options - 715,000 - - 916,000 - ---------------------------------------- ---------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 8,342 18,503,000 $ 0.45 $ 6,562 17,177,000 $ 0.38 ======================================== ======================================== For the six months ended June 30, 2000 For the six months ended June 30, 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 $ 23,850 $ 14,594 Basic net income per share: Income available to common shareholders 23,850 17,566,000 $ 1.36 14,594 16,163,000 $ 0.90 Effect of dilutive securities: Stock options - 773,000 - - 948,000 - ---------------------------------------- ---------------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 23,850 18,339,000 $ 1.30 $ 14,594 17,111,000 $ 0.85 ======================================== ======================================== There were options to purchase 0 and 533,674 shares that were considered anti-dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the three months ended June 30, 2000 and 1999, respectively. There were options to purchase 2,156 and 477,245 shares that were considered anti-dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the six months ended June 30, 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 Bancorp 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. 11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2000 and December 31, 1999 and for the Three Months and Six Months Ended June 30, 2000 and 1999 NOTE 5--ACTIVIY 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. 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 six months ended June 30, 2000 and 1999: Six months ended Six months ended June 30, 2000 June 30, 1999 ----------------------------- ----------------------------- Community Trust Community Trust (Dollars in thousands) Banking Operations Banking Operations - ------------------------------------------------------------------------ ----------------------------- Net interest income $ 90,277 $ 300 $ 61,743 $ 140 Other income 21,229 1,761 5,987 1,455 Operating expenses, excluding merger and other related nonrecurring costs 46,434 1,348 37,983 1,482 Net income before income taxes (1) 51,869 620 27,120 113 Total assets 3,629,732 - 2,725,554 - Deposits 3,115,772 64,034 2,366,205 56,921 Assets under management - 795,042 - 659,414 (1) Includes intercompany earnings allocation charge which is eliminated in consolidation. 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) As of June 30, 2000 and December 31, 1999 and for the Three Months and Six Months Ended June 30, 2000 and 1999 A reconciliation of total segment net interest income and other income combined, net income before income taxes, and total assets to the consolidated numbers in each of these categories for the six months ended June 30, 2000 and 1999 is presented below. Six months ended Six months ended June 30, 2000 June 30, 1999 ---------------- ---------------- Net interest income and other income Total segment net interest income and other income $ 113,567 $ 69,325 Parent company net interest income and other income (1,183) (173) ----------- ----------- Consolidated net interest income and other income $ 112,384 $ 69,498 =========== =========== Net income before taxes, merger related nonrecurring costs and extraordinary items Total segment net income before taxes $ 52,489 $ 27,233 Parent company net income before taxes 1,541 819 Consolidated net income before taxes, ----------- ----------- merger and other related costs and extraordinary items $ 54,030 $ 28,052 =========== =========== Total assets Total segment assets $ 3,629,732 $ 2,725,554 Parent company assets 77,360 61,364 ----------- ----------- Consolidated total assets $ 3,707,092 $ 2,786,918 =========== =========== NOTE 6--CASH DIVIDEND The Company declared a cash dividend of $0.15 cents per share payable on July 15, 2000 to shareholders of record as of June 30, 2000. 13 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, GBB Capital III, and GBB Capital IV which are Delaware statutory business trusts, which were formed for the exclusive purpose of issuing and selling Cumulative Trust Preferred Securities ("TPS"). Greater Bay also includes the following 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, San Francisco, the San Francisco Peninsula, the East Bay Region, and the Coastal 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. On July 21, 2000 Greater Bay completed its merger with BSC. The financial information included in this report does not include the results of BSC. 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 The following table summarizes income, income per share and key financial ratios using the company's core earnings, income including technology gains, and net income for the three month and six month periods presented: Core earnings Income including Net income (before merger, nonrecurring technology gains and before (after merger, nonrecurring and extraordinary items) merger and extraordinary items and extraordinary items) ---------------------------- ------------------------------ ----------------------------- Three Three Three Three Three Three months ended months ended months ended months ended months ended months ended (Dollars in thousands, except per share June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ---------------------------- ------------------------------ ----------------------------- amounts) Income $ 14,636 $ 8,977 $ 15,086 $ 9,054 $ 8,342 $ 6,562 Income per share: Basic $ 0.82 $ 0.55 $ 0.84 $ 0.56 $ 0.46 $ 0.40 Diluted $ 0.79 $ 0.52 $ 0.81 $ 0.53 $ 0.45 $ 0.38 Return on average assets 1.62% 1.33% 1.67% 1.34% 0.92% 0.97% Return on average shareholders' equity 24.86% 20.44% 25.63% 20.61% 14.17% 14.94% Core earnings Income including Net income (before merger, nonrecurring technology gains and before (after merger, nonrecurring and extraordinary items) merger and extraordinary items and extraordinary items) ---------------------------- ------------------------------ ----------------------------- Six Six Six Six Six Six months ended months ended months ended months ended months ended months ended (Dollars in thousands, except per share June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ---------------------------- ------------------------------ ----------------------------- amounts) Income $ 27,514 $ 17,095 $ 32,983 $ 17,174 $ 23,850 $ 14,594 Income per share: Basic $ 1.57 $ 1.06 $ 1.88 $ 1.06 $ 1.36 $ 0.90 Diluted $ 1.51 $ 1.00 $ 1.81 $ 1.00 $ 1.30 $ 0.85 Return on average assets 1.56% 1.34% 1.87% 1.34% 1.35% 1.14% Return on average shareholders' equity 24.07% 20.29% 28.86% 20.38% 20.87% 17.32% 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net income for the second quarter of 2000 increased 27.1% to $8.3 million, or $0.45 per diluted share, compared to net income of $6.6 million, or $0.38 per diluted share, for the second quarter of 1999. The second quarter 2000 results included nonrecurring warrant income of $740,000 ($450,000, net of taxes) compared to $226,000 ($77,000, net of taxes and other related expenses) during the second quarter of 1999. In addition, the second quarter of 2000 included merger and other related nonrecurring costs of $10.2 million ($6.7 million, net of taxes) compared to $4.0 million ($2.5 million, net of taxes) in the second quarter of 1999. Net income, including technology gains and before nonrecurring merger related expenses and extraordinary items, increased 66.6% to $15.1 million, or $0.81 per diluted share, for the second quarter of 2000, compared to $9.1 million, or $0.53 per diluted share, in the second quarter of 1999. The Company's core earnings, which is its net income, excluding nonrecurring warrant income, merger and other related nonrecurring costs and extraordinary items, for the second quarter of 2000 increased 63.0% to $14.6 million, or $0.79 per diluted share, compared to $9.0 million, or $0.52 per diluted share, in the second quarter of 1999. Based on its core earnings for the second quarter of 2000, the Company's return on average shareholders' equity was 24.86% and its return on average assets was 1.62%. During the second quarter of 1999, the Company's core earnings resulted in a return on average shareholders' equity of 20.44% and a return on average assets of 1.33%. The 63.0% increase in core earnings during the second quarter of 2000 as compared to 1999 was the result of significant growth in loans, investments and trust assets. For the second quarter of 2000, net interest income increased 48.4% as compared to the second quarter of 1999. This increase was primarily due to a 34.4% increase in average interest-earning assets for the second quarter of 2000 as compared to the second quarter of 1999. The increases in loans, trust assets and deposits also contributed to the 51.6% increase in loan and international banking fees, service charges and other fees, and trust fees. Increases in operating expenses were required to service and support the Company's growth. As a result, increases in revenue were partially offset for the second quarter of 2000 by a 14.9% increase in recurring operating expenses, as compared to the second quarter of 1999. Net income for the six months ended June 30, 2000 increased 63.4% to $23.8 million, or $1.30 per diluted share, compared to net income of $14.6 million, or $0.85 per diluted share, for the six months ended June 30, 1999. The six months ended June 30, 2000 results included nonrecurring warrant income of $9.3 millions ($5.5 million, net of taxes) compared to $230,000 ($79,000 net of taxes and other related expenses) during the six months ended June 30, 1999. In addition, the six months ended June 30, 2000 included merger and other related nonrecurring cost of $14.1 million ($9.1 million, net of taxes) compared to $4.0 ($2.5 million, net of taxes) in the six months ended June 30, 1999. Net income, including technology gains and before nonrecurring merger related expenses and extraordinary items, increased 92.1% to $33.0 million, or $1.81 per diluted share, for the six months ended June 30, 2000, compared to $17.2 million, or $1.00 per diluted share, in the six months ended June 30, 1999. The Company's core earnings, for the six months ended June 30, 2000 increased 60.9% to $27.5 million, or $1.51 per diluted share, compared to $17.1 million, or $1.00 per diluted share, in the six months ended June 30, 1999. Based on its core earnings for the six months ended June 30, 2000, the Company's return on average shareholders' equity was 24.07% and its return on average assets was 1.56%. During the six months ended June 30, 1999, the Company's core earnings resulted in a return on average shareholders' equity of 20.29% and a return on average assets of 1.34%. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The 60.9% increase in core earnings in the six months ended June 30, 2000 as compared to 1999 was the result of significant growth in loans, investments, and trust assets. For the six months ended June 30, 2000, net interest income increased 47.5% as compared to the six months ended June 30, 1999. This increase was primarily due to a 37.5% increase in average interest-earning assets for the six months ended June 30, 2000 as compared to the six months ended June 30, 1999. The increases in loans, trust assets and deposits also contributed to the 38.8% increase in loan and international banking fees, service charges and other fees, and trust 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 six months ended June 30, 2000 by a 18.4% increase in recurring operating expenses, as compared to the six months ended June 30, 1999. Net Interest Income-Quarterly 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 June 30, 2000 March 31, 2000 June 30, 1999 ----------------------------------- --------------------------------- ------------------------------ Average Average Average Average yield/ Average yield/ Average yield/ (Dollars in thousands) balance Interest rate balance Interest rate balance Interest rate - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST-EARNING ASSETS: Fed funds sold $ 197,501 $ 2,946 6.00% $ 275,679 $ 4,053 5.91% $ 192,243 $ 2,355 4.91% Other short term securities 17,021 232 5.48% 30,583 468 6.15% 61,280 876 5.73% Investment securities: Taxable 652,285 11,219 6.92% 567,025 9,986 7.08% 451,522 7,321 6.50% Tax-exempt (1) 132,939 1,789 5.41% 117,549 1,548 5.30% 91,786 1,085 4.74% Loans (2), (3) 2,381,626 60,052 10.14% 2,207,501 53,380 9.73% 1,719,484 40,065 9.35% ---------- -------- ---------- ------- ---------- -------- Total interest-earning assets assets 3,381,372 76,238 9.07% 3,198,337 69,435 8.73% 2,516,315 51,702 8.24% Noninterest-earning assets 260,658 244,957 192,672 ---------- -------- ---------- ------- ---------- -------- Total assets $3,642,030 76,238 $3,443,294 69,435 $2,708,987 51,702 ========== -------- ========== ------- ========== -------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $1,871,750 17,425 3.74% $1,771,550 17,263 3.92% $1,360,085 11,145 3.29% Time deposits, over $100,000 535,339 7,299 5.48% 491,645 6,203 5.07% 402,737 4,710 4.69% Other time deposits 102,014 1,131 4.46% 104,186 1,337 5.16% 125,583 1,480 4.73% ---------- -------- ---------- ------- ---------- -------- Total interest-bearing deposits 2,509,103 25,855 4.14% 2,367,381 24,803 4.21% 1,888,405 17,335 3.68% Other borrowings 89,992 1,469 6.57% 107,512 1,658 6.20% 103,792 1,680 6.49% Subordinated debt - - - - - - ---------- -------- ---------- ------- ---------- -------- Total interest-bearing liabilities 2,599,095 27,324 4.23% 2,474,893 26,461 4.30% 1,992,197 19,015 3.83% Trust Preferred Securities 78,324 1,783 9.16% 49,940 1,058 8.52% 49,000 919 7.52% ---------- -------- ---------- ------- ---------- -------- Total interest-bearing liabilities and capital securities 2,677,419 29,107 4.37% 2,524,833 27,519 4.38% 2,041,197 19,934 3.92% Noninterest-bearing deposits 676,424 635,374 462,560 Other noninterest-bearing liabilities 51,409 60,163 29,061 Shareholders' equity 236,778 222,924 176,169 ---------- -------- ---------- ------- ---------- -------- Total shareholders' equity and liabilities $3,642,030 29,107 $3,443,294 27,519 $2,708,987 19,934 ========== -------- ========== ------- ========== -------- Net interest income $ 47,131 $41,916 $ 31,768 ======== ======= ======== Including capital securities: - ----------------------------- Interest rate spread 4.70% 4.35% 4.32% Contribution of interest free funds 0.89% 0.91% 0.74% ------ ------ ------ Net yield on interest-earnings assets(4) 5.61% 5.26% 5.06% Excluding capital securities: - ----------------------------- Interest rate spread 4.84% 4.43% 4.41% Contribution of interest free funds 0.98% 0.97% 0.80% ------ ------ ------ Net yield on interest-earnings assets(4) 5.82% 5.40% 5.21% (1) The tax equivalent yields earned on the tax exempt securities are 7.98%, 7.71% and 6.95% for the quarters ended June 30, 2000, March 31, 2000 and June 30, 1999, respectively, using the federal statuary rate of 34%. (2) Nonaccrual loans are excluded in the average balance. (3) Interest income includes loan fees of $1,706,000, $1,739,000 and $1,822,000 for the quarters ended June 30, 2000, March 31, 2000 and June 30, 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. 16 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 second quarter of 2000 was $48.9 million, a $5.9 million increase over the first quarter of 2000 and a $16.2 million increase over the second quarter of 1999. The increase from the second quarter of 1999 to the second quarter of 2000 was primarily due to the $865.1 million, or 34.4% increase in average interest-earning assets. The increase in net interest income was further enhanced by a 61 basis points increase in the Company's net yield on interest-earning assets, excluding capital securities, from 5.21% in the second quarter of 1999 to 5.82% in the second quarter of 2000. The increase from the first quarter of 2000 to the second quarter of 2000 was due to the $183.0 million, or 5.7% increase in average interest-earning assets and a 42 basis points increase in the Company's net yield on interest-earning assets, excluding capital securities, from 5.40% in the first quarter of 2000 to 5.82% in the second quarter of 2000. 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 June 30, 2000 Three months ended June 30, 2000 compared with March 31, 2000 compared with June 30, 1999 favorable (unfavorable) favorable (unfavorable) ------------------------------------------- ----------------------------------------- (Dollars in thousands) Volume Rate Net Volume Rate Net - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ (1,506) $ 399 $ (1,107) $ 65 $ 526 $ 591 Other short term investments (190) (46) (236) (608) (36) (644) Investment securities: Taxable 2,693 (1,460) 1,233 3,410 488 3,898 Tax-exempt 207 34 241 536 168 704 Loans 4,328 2,344 6,672 16,370 3,617 19,987 ------------------------------------------- --------------------------------------- Total interest income 5,532 1,271 6,803 19,774 4,762 24,536 ------------------------------------------- --------------------------------------- INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (3,556) 3,394 (162) (4,584) (1,696) (6,280) Time deposits over $100,000 (575) (521) (1,096) (1,711) (878) (2,589) Other time deposits 27 179 206 269 80 349 ------------------------------------------- --------------------------------------- Total interest-bearing deposits (4,104) 3,052 (1,052) (6,027) (2,493) (8,520) Other borrowings 713 (524) 189 335 (124) 211 ------------------------------------------- --------------------------------------- Total interest expense (3,391) 2,528 (863) (5,693) (2,616) (8,309) ------------------------------------------- --------------------------------------- Net increase (decrease) in net interest income $ 2,141 $ 3,799 $ 5,940 $14,081 $ 2,146 $ 16,227 =========================================== ======================================= 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Quarter Ended June 30, 2000 Compared to June 30, 1999 --------------------------------------------------------- Interest income in the second quarter of June 30, 2000 increased 47.5% to $76.2 million from $51.7 million in the same period in 1999. This was primarily due to the $19.8 million favorable volume variance which resulted from a $865.1 million, or 34.4%, increase in average interest-earning assets over the comparable prior year. The average yield on interest-earning assets increased 83 basis points to 9.07% in the second quarter of 2000 from 8.24% in the same period of 1999 primarily due to the increase on the yields on loans. Average yields on loans increased 79 basis points to 10.14% in the quarter ended June 30, 2000 from 9.35% for the same period in 1999, primarily as a result of increases in market rates of interest. Interest expense, excluding capital securities, in the second quarter of 2000 increased 43.7% to $27.3 million from $19.0 million for the same period in 1999. The increase is the result of increased interest-bearing liabilities, which rose to $2.6 billion for the second quarter of 2000, as compared to $2.0 billion for the quarter ended June 30, 1999, and a 40 basis point increase in the cost of funds which increased to 4.23% in the second quarter of 2000. During the second quarter of 2000, average noninterest-bearing deposits increased to $676.4 million from $462.6 million in the same period in 1999. Average noninterest-bearing deposits comprised 21.2% of total deposits for the second quarter in 2000, compared to 19.7% for the same period in 1999. As a result of the foregoing, the Company's interest rate spread excluding capital securities was 4.84% in the second quarter of 2000 compared to 4.41% in the same quarter one year earlier and the net yield on interest-earning assets increased to 5.82% from 5.21%. The Quarter Ended June 30, 2000 Compared to March 31, 2000 ---------------------------------------------------------- Interest income increased 9.8% to $76.2 million for the second quarter of 2000, as compared to $69.4 million for the previous quarter. This was primarily due to the $5.5 million favorable volume variance which resulted from a $183.0 million, or 5.7%, increase in average interest-earning assets over the prior quarter. The average yield on interest-earning assets increased 34 basis points to 9.07% in the second quarter of 2000 from 8.73% in the previous quarter primarily due to the increase on the yields on loans. Average yields on loans increased 41 basis points to 10.14% in the quarter ended June 30, 2000 from 9.73% for the quarter ended March 31, 2000, primarily as a result of increases in market rates of interest. Interest expense, excluding capital securities, in the second quarter of 2000 increased 3.3% to $27.3 million from $26.5 million in the prior quarter. The increase is the result of increased interest-bearing liabilities, which rose to $2.6 billion for the second quarter of 2000, as compared to $2.5 billion for the prior quarter. This increase was slightly offset by a 7 basis point decrease in the cost of funds which dropped to 4.23% in the second quarter of 2000. During the second quarter of 2000, average noninterest-bearing deposits increased to $676.4 million from $635.4 million in the first quarter of 2000. Average noninterest-bearing deposits comprised 21.2% of total deposits for the second quarter in 2000 which is unchanged from the prior quarter. As a result of the foregoing, the Company's interest rate spread excluding capital securities was 4.84% in the second quarter of 2000 compared to 4.43% in the prior quarter and the net yield on interest-earning assets increased to 5.82% from 5.40%. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The following tables present the Company's average balance sheet, net interest income and interest income and interest rate for the six months presented, as well as the analysis of variances due to rate and volume: Six months ended Six months ended June 30, 2000 June 30, 1999 --------------------------------------- -------------------------------------- Average Average Average yield/ Average yield/ (Dollars in thousands) balance Interest rate balance Interest rate - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Fed funds sold $ 236,590 $ 6,999 5.95% $ 151,823 $ 3,643 4.84% Other short term securities 23,802 700 5.91% 65,364 1,938 5.98% Investment securities: Taxable 609,655 21,205 6.99% 435,819 13,702 6.34% Tax-exempt (1) 125,244 3,337 5.36% 91,815 2,152 4.73% Loans (2), (3) 2,294,564 113,432 9.94% 1,642,636 76,435 9.38% ---------- -------- ---------- -------- Total interest-earning assets 3,289,855 145,673 8.90% 2,387,457 97,870 8.27% Noninterest-earning assets 252,807 190,965 ---------- -------- ---------- -------- Total assets $3,542,662 145,673 8.27% $2,578,422 97,870 ========== -------- ========== -------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and Savings $1,821,650 34,688 3.83% $1,279,056 20,895 3.29% Time deposits, over $100,000 513,492 13,502 5.29% 380,936 8,825 4.67% Other time deposits 103,100 2,468 4.81% 126,878 2,914 4.63% ---------- -------- ---------- -------- Total interest-bearing deposits 2,438,242 50,658 4.18% 1,786,870 32,634 3.68% Other borrowings 98,752 3,127 6.37% 95,081 2,836 6.01% Subordinated debt - - 1,215 71 11.78% ---------- -------- ---------- -------- Total interest-bearing liabilities 2,536,994 53,785 4.26% 1,883,166 35,541 3.81% Trust Preferred Securities 64,132 2,841 8.91% 49,000 1,955 8.05% ---------- -------- ---------- -------- Total interest-bearing liabilities and capital securities 2,601,126 56,626 4.38% 1,932,166 37,496 3.91% Noninterest-bearing deposits 655,899 446,160 Other noninterest-bearing liabilities 55,786 30,191 Shareholders' equity 229,851 169,905 ---------- -------- ---------- -------- Total shareholders' equity and liabilities $3,542,662 56,626 $2,578,422 37,496 ========== -------- ========== -------- Net interest income $ 89,047 $ 60,374 ======== ======== Including capital securities: - ---------------------------- Interest rate spread 4.53% 4.35% Contribution of interest free funds 0.92% 0.75% ----- ----- Net yield on interest-earnings assets(4) 5.44% 5.10% Excluding capital securities: - ---------------------------- Interest rate spread 4.64% 4.46% Contribution of interest free funds 0.98% 0.80% ----- ----- Net yield on interest-earnings assets(4) 5.62% 5.26% (1) The tax equivalent yields earned on the tax exempt securities are 7.73% and 6.91% for the periods ended June 30, 2000 and June 30, 1999, respectively, using the federal statuary rate of 34%. (2) Nonaccrual loans are excluded in the average balance. (3) Interest income includes loan fees of $3,445,000 and $3,509,000 for the periods ended June 30, 2000 and June 30, 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net Interest Income - Year to Date Net interest income, excluding capital securities, for the six months ended June 30, 2000 was $91.9 million, a $29.6 million increase over the six months ended June 30, 1999. The increase was due to the $902.4 million, or 37.8%, increase in average interest-earning assets. The increase in net interest income was further enhanced by a 34 basis points increase in the Company's net yield on interest-earning assets, excluding capital securities, from 5.26% in the six months ended June 30, 1999 to 5.62% in the six months ended June 30, 2000. The table below sets forth, for the six months 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. Six months ended June 30, 2000 Compared with June 30, 1999 favorable (unfavorable) ------------------------------------------------------------- (Dollars in thousands) Volume Rate Net - ------------------------------------------------------------------------------------------------------------------------------ INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ 2,389 $ 967 $ 3,356 Other short term investments (1,213) (25) (1,238) Investment securities: Taxable 5,997 1,506 7,503 Tax-exempt 873 312 1,185 Loans 32,383 4,614 36,997 ------------------------------------------------------------- Total interest income 40,429 7,374 47,803 ------------------------------------------------------------- INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (10,029) (3,764) (13,793) Time deposits over $100,000 (3,414) (1,263) (4,677) Other time deposits 733 (287) 446 ------------------------------------------------------------- Total interest-bearing deposits (12,711) (5,313) (18,024) Other borrowings (119) (172) (291) Subordinated debt 36 35 71 ------------------------------------------------------------- Total interest expense (12,794) (5,450) (18,244) ------------------------------------------------------------- Net increase (decrease) in net interest income $ 27,634 $ 1,925 $ 29,559 ============================================================= MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED The Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 ----------------------------------------------------------------------------- Interest income in the six months ended June 30, 2000 increased 48.8% to $145.7 million from $97.9 million in the same period in 1999. This was primarily due to the $40.4 million favorable volume variance which resulted from a $902.4 million, or 37.8%, increase in average interest-earning assets over the comparable prior year. The average yield on interest-earning assets increased 63 basis points to 8.90% in the six months ended June 30, 2000 from 8.27% in the same period of 1999 primarily due to the increase on the yields on loans. Average yields on loans increased 56 basis points to 9.94% in the six months ended June 30, 2000 from 9.38% for the same period in 1999, primarily as a result of increases in market rates of interest. Interest expense, excluding capital securities, in the six months ended June 30, 2000 increased 51.3% to $53.8 million from $35.5 million for the same period in 1999. The increase is the result of increased average interest-bearing liabilities, which rose to $2.5 billion for the six months ended June 30, 2000, as compared to $1.9 billion for the same period in 1999, and a 45 basis point increase in the cost of funds which increased to 4.26% in the six months ended June 30, 2000. As a result of the foregoing, the Company's interest rate spread excluding capital securities was 4.64% in the six months ended June 30, 2000 compared to 4.46% in the same period one year earlier and the net yield on interest-earning assets increased to 5.62% from 5.26%. Certain client service expenses were incurred by the Company with respect to its noninterest-bearing liabilities. These expenses include courier and armored car services, check supplies and other related items that are included in operating expenses. 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 periods presented. Three months ended June 30, Six months ended June 30, ------------------------------ ------------------------------ (Dollars in thousands) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Average noninterest bearing demand deposits $ 676,424 $ 462,560 $ 655,899 $ 446,160 Client service expenses 490 478 1,029 1,087 Client service expenses, annualized 0.32% 0.41% 0.32% 0.49% IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS (EXCLUDING CAPITAL SECURITIES): Net yield on interest-earning assets 5.82% 5.21% 5.60% 5.26% Impact of client service expense (0.06)% (0.08)% (0.05)% (0.09)% ----------------------------- ----------------------------- Adjusted net yield on interest-earning assets (1) 5.76% 5.13% 5.55% 5.17% ============================= ============================= (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 manage its interest expense. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Provision for Loan Losses The provision for loan losses represents the current period credit cost associated with maintaining an appropriate allowance for credit losses. The loan loss provision for each period is dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the value of the underlying collateral on problem loans and the general economic conditions in the Company's market area. Periodic fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses; however, actual loan losses may vary from current estimates. Refer to the section "FINANCIAL CONDITION - Allowance for Loan Losses" for a description of the methodology the Company uses in determining an adequate allowance for loan losses. The provision for loan losses for the second quarter of 2000 was $8.0 million, compared to $1.9 million for the second quarter of 1999. In addition, in connection with the Coast Bancorp merger and the Bay Area Bancshares merger, the Company made an additional provision for loan losses of $1.5 million and $400,000 in the second quarter of 2000 and 1999, respectively to conform to the Company's allowance methodology. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Other Income Total other income increased to $7.3 million for the second quarter of 2000 compared to $4.5 million for the second 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 -------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 2000 2000 1999 1999 1999 - ----------------------------------------------------------------------------------------------------------------------- Loan and international banking fees $ 1,927 $ 1,176 1,208 946 697 Service charges and other fees 1,148 1,183 1,542 1,235 1,202 Trust fees 905 924 774 768 727 Gain on sale of SBA loans 675 619 114 656 446 ATM network revenue 584 570 635 789 613 Gain (loss) on sale of investments, net 58 (1) (19) - (9) Other 1,289 2,931 3,905 2,021 628 -------------------------------------------------------------------------- Total, recurring 6,586 7,402 8,159 6,415 4,304 Warrant income 740 8,609 14,278 - 226 -------------------------------------------------------------------------- Total $ 7,326 $ 16,011 $ 22,437 $ 6,415 $4,530 ========================================================================== For the second quarter of 2000 as compared to the same period in 1999, the increase in other income was a result of $1.3 million increase in loan and international banking fees, a $229,000 increase in gain on sale of SBA loans and a $178,000 increase in trust fees. These increases were a result of significant growth in total loans, total deposits and trust assets. 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. Other income for the second quarter of 2000 and the second quarter of 1999 included warrant income of $740,000 million and $226,000, respectively, net of related employee incentives. The Company holds in excess of 100 warrant positions. The Company has historically obtained rights to acquire stock, in the form of warrants, in certain clients as part of negotiated credit facilities. The Company may not be able to realize gains from 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 the Company realizes 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. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Operating Expenses The following table sets forth the major components of operating expenses for the quarters indicated. At and for the three month periods ended ------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 2000 2000 1999 1999 1999 - --------------------------------------------------------------------------------------------------------------------------------- Compensation and benefits $ 12,320 $ 12,835 $ 12,620 $ 11,423 $ 10,896 Occupancy and equipment 4,386 4,536 3,946 3,668 3,403 Legal and other professional fees 999 920 572 835 729 Telephone, postage and supplies 925 864 492 892 852 Marketing and promotion 792 686 539 574 597 Client services 490 539 431 529 478 FDIC insurance and regulatory assessments 210 240 137 196 146 Directors' fees 157 127 269 216 217 Expenses on other real estate owned 41 10 (53) 30 15 Other 1,986 1,995 2,973 2,091 2,074 ------------------------------------------------------------------------- Total operating expenses, excluding merger costs and contribution to the GBB Foundation 22,306 22,752 21,926 29,454 19,407 Contribution to the GBB Foundation and related expense, net - - 11,837 - 323 Merger and other related nonrecurring costs 10,203 3,881 6,367 - 3,965 ------------------------------------------------------------------------- Total operating expenses $ 32,509 $ 26,633 $ 40,130 $ 20,454 $ 23,695 ========================================================================= Efficiency ratio 59.70% 45.98% 65.85% 49.52% 65.28% Efficiency ratio, before merger, nonrecurring and extraordinary items 41.53% 46.13% 46.99% 49.52% 53.80% Total operating expenses to average assets* 3.59% 3.11% 5.01% 2.83% 3.51% Total operating expenses to average assets, before nonrecurring costs* 2.46% 2.66% 2.74% 2.83% 2.87% *Annualized Operating expenses totaled $32.5 million for the second quarter of 2000, compared to $23.7 million for the second quarter of 1999. Operating expenses included merger and other related nonrecurring costs and contributions to the Greater Bay Bancorp Foundation of $10.2 million and $4.3 million for the second quarter of 2000 and 1999, respectively. Excluding these nonrecurring items, operating expenses were $22.3 million and $19.4 million for those periods. The ratio of operating expenses to average assets, before nonrecurring items was 2.46% for the second quarter of 2000 and 2.87% for the second 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 nonrecurring items, for the second quarter of 2000 was 41.53%, compared to 53.80% for the second quarter of 1999. 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 second quarter of 2000, average assets increased 34.4% from the second quarter of 1999, while operating expenses, excluding nonrecurring costs, increased only 14.9%. The Company believes that it may not be able to sustain the low efficiency ratio that it achieved in the second quarter of 2000. The Company believes that in the future the efficiency ratio will stabilize at approximately 45%. Compensation and benefits expenses increased for the second quarter of 2000 to $12.3 million, compared to $10.9 million for the second 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. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Income Taxes The Company's effective income tax rate for the second quarter of 2000 was 40.3%, compared to 38.6% in the second quarter of 1999. The effective rates were lower than the statutory rate of 42.0% due to tax-exempt income on municipal securities and state enterprise zone credits. The reductions were partially offset by the impact of merger and other related nonrecurring costs. The Company's effective income tax rate for the six months ended June 30, 2000 was 40.3%, compared to 39.0% in the six months ended June 30, 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 tax treatment of the donation of appreciated warrants to the Greater Bay Bancorp Foundation. The reductions were partially offset by the impact of merger and other related nonrecurring costs. FINANCIAL CONDITION Total assets increased 15.3% (30.8% annualized) to $3.7 billion at June 30, 2000, compared to $3.2 billion at December 31, 1999. The increase in the six months ended June 30, 2000 was primarily due to increases in the Company's loan portfolio funded by growth in deposits. Loans Total gross loans increased 15.6% (31.5% annualized) to $2.4 billion at June 30, 2000, compared to $2.1 billion at December 31, 1999. The increase in the loan volume during the first six 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. 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. June 30, December 31, June 30, 2000 1999 1999 ------------------------------------------------------------------------ (Dollars in thousands) Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------------------- Commercial $ 1,037,383 43.1% $ 845,424 40.5% $ 745,404 42.7% Term real estate - commercial 679,457 28.2 595,214 28.5 465,617 26.6 ------------------------------------------------------------------------ Total commercial 1,716,840 71.3 1,440,638 69.0 1,211,021 69.3 Real estate construction and land 497,823 20.7 459,633 22.0 346,882 19.9 Real estate term - other 119,904 5.0 123,346 5.9 116,873 6.7 Consumer and other 140,311 5.8 116,476 5.6 114,611 6.6 ------------------------------------------------------------------------ Total loans, gross 2,474,878 102.8 2,140,093 102.5 1,789,387 102.5 Deferred fees and discounts, net (12,459) (0.5) (10,604) (0.5) (9,039) (0.5) ------------------------------------------------------------------------ Total loans, net of deferred fees 2,462,419 102.3 2,129,489 102.0 1,780,348 102.0 Allowance for loan losses (54,020) (2.3) (44,147) (2.0) (33,016) (2.0) ------------------------------------------------------------------------ Total loans, net $ 2,408,399 100.0% $2,085,342 100.0% $1,747,332 100.0% ======================================================================== 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Nonperforming and Classified Assets Management generally places loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is generally reversed from income. Loans are charged off when management determines that collection has become unlikely. Restructured loans are those where the Banks have granted a concession on the interest paid or original repayment terms due to financial difficulties of the borrower. Other real estate owned ("OREO") consists of real property acquired through foreclosure on the related collateral underlying defaulted loans. The following table sets forth information regarding nonperforming assets at the dates indicated. At and for the three month periods ended -------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 2000 2000 1999 1999 1999 - -------------------------------------------------------------------------------------------------------------------------------- Nonperforming loans Nonaccrual loans $ 8,715 $ 6,203 $ 5,516 $ 7,864 $ 5,578 Accruing loans past due 90 days or more - 10 51 353 209 Restructured loans 407 743 807 1,492 1,034 -------------------------------------------------------------------------------- Total nonperforming loans 9,122 6,956 6,374 9,709 6,821 Other real estate owned 229 271 271 515 595 -------------------------------------------------------------------------------- Total nonperforming assets $ 9,351 $ 7,227 $ 6,645 $ 10,224 $ 7,416 ================================================================================ Nonperforming assets to total loans and other real estate owned 0.38% 0.31% 0.31% 0.53% 0.41% Nonperforming assets to total assets 0.25% 0.20% 0.21% 0.34% 0.27% At June 30, 2000 and December 31, 1999, the Company had $8.7 million and $5.5 million in nonaccrual loans respectively. Interest income foregone on nonaccrual loans outstanding totaled $125,000 and $101,000 for the three months ended June 30, 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. OREO acquired through foreclosure had a carrying value of $229,000 and $271,000 at June 30, 2000 and December 31, 2000 respectively. The Company had $407,000 and $807,000 of restructured loans as of June 30, 2000 and December 31, 2000, respectively. There were no principal reduction concessions allowed on restructured loans during the second quarter of 2000 or 1999. Interest income from restructured loans totaled $9,000 and $14,000 for the six months ended June 30, 2000 and 1999, respectively. Foregone interest income, which totaled $1,000 and $0 for the six months ended June 30, 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. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 uncollectable and its continuance as an asset is not warranted. The following table sets forth the classified assets at the dates indicated. At and for the three month periods ended ------------------------------------------------------------------------------- June 30, March 31, December 31, September 30, June 30, (Dollars in thousands) 2000 2000 1999 1999 1999 - ------------------------------------------------------------------------------------------------------------------- Substandard $ 22,955 $ 27,536 $ 28,679 $ 29,299 $ 26,613 Doubtful 7,633 4,925 1,850 2,316 1,579 Loss - - - - - Other real estate owned 229 271 271 515 595 ------------------------------------------------------------------------------- Classified assets $ 30,817 $ 32,732 $ 30,800 $ 32,130 $ 28,787 =============================================================================== Classified assets to total loans and other real estate owned 1.25% 1.42% 1.44% 1.65% 1.61% Allowance for loan losses to total classified assets 175.29% 148.63% 143.33% 114.21% 114.69% With the exception of these classified assets, management was not aware of any loans outstanding as of June 30, 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. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Allowance For Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of risk inherent in the Company's loan portfolio. The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged-off when they are deemed to be uncollectable; recoveries are generally recorded only when cash payments are received. The following table sets forth information concerning the Company's allowance for loan losses at the dates and for the quarters indicated. At and for the three month periods ended ------------------------------------------------------------- June 30, March 31, December 31, (Dollars in thousands) 2000 2000 1999 - --------------------------------------------------------------------------------------------------------------------------- Period end loans outstanding, net of deferred fees $ 2,462,419 $ 2,295,673 $ 2,129,489 Average loans outstanding $ 2,349,364 $ 2,213,386 $ 2,024,479 Allowance for loan losses: Balance at beginning of period $ 48,650 $ 44,147 $ 36,696 Charge-offs: Commercial (4,223) (1,694) (1,289) Real estate construction and land - - - Real estate term - - - Consumer and other (119) (97) (75) ------------------------------------------------------------- Total charge-offs (4,342) (1,791) (1,364) ------------------------------------------------------------- Recoveries: Commercial 223 127 - Real estate construction and land - - - Real estate term - - 7 Consumer and other 3 3 277 ------------------------------------------------------------- Total recoveries 226 130 284 ------------------------------------------------------------- Net charge-offs (4,116) (1,661) (1,080) Provision charged to income (1) 9,486 6,164 8,531 ------------------------------------------------------------- Balance at end of period $ 54,020 $ 48,650 $ 44,147 ============================================================= Quarterly net charge-offs to average loans outstanding during the period, annualized 0.69% 0.30% 0.21% Year to date net charge-offs to average loans outstanding during the period, annualized 0.49% 0.30% 0.07% Allowance as a percentage of average loans outstanding 2.30% 2.20% 2.18% Allowance as a percentage of period end loans outstanding 2.19% 2.12% 2.07% Allowance as a percentage of non-performing loans 592.19% 699.40% 692.61% September 30, June 30, (Dollars in thousands) 1999 1999 - ------------------------------------------------------------------------------------------------------------- Period end loans outstanding $ 1,936,517 $ 1,780,349 Average loans outstanding $ 1,872,490 $ 1,729,590 Allowance for loan losses: Balance at beginning of period $ 33,016 $ 30,748 Charge-offs: Commercial (812) (288) Real estate construction and land - - Real estate term - - Consumer and other (106) (46) ----------------------------------------------- Total charge-offs (918) (334) ----------------------------------------------- Recoveries: Commercial 796 231 Real estate construction and land 4 3 Real estate term - - Consumer and other 46 5 ----------------------------------------------- Total recoveries 846 239 ----------------------------------------------- Net charge-offs (72) (95) Provision charged to income (1) 3,752 2,363 ----------------------------------------------- Balance at end of period $ 36,696 $ 33,016 =============================================== Quarterly net charge-offs to average loans outstanding during the period, annualized 0.02% 0.02% Year to date net charge-offs to average loans outstanding during the period, annualized 0.03% 0.04% Allowance as a percentage of average loans outstanding 1.96% 1.91% Allowance as a percentage of period end loans outstanding 1.89% 1.85% Allowance as a percentage of non-performing loans 377.96% 484.03% - ----------------------- (1) Includes $1.5 million in the second quarter of 2000, $860,000 in the first quarter of 2000, $2.3 million in the fourth quarter of 1999 and $400,000 in the second quarter of 1999 to conform practices of acquired entities to the Company's reserve methodologies, which are included in mergers and related nonrecurring costs. The Company employs a systematic methodology for determining its allowance for loan losses, which includes a monthly review process and monthly adjustment of the allowance. The Company's process includes a periodic loan by loan review for loans that are individually evaluated for impairment as well as detailed reviews of other loans (either individually or in pools). This includes an assessment of known problem loans, potential problem loans, and other loans that exhibit indicators of deterioration. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company's methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for loan losses that management believes is appropriate at each reporting date. Quantitative factors include the Company's historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans, and other factors. Quantitative factors also incorporate known information about individual loans including borrowers' sensitivity to interest rate movements and borrowers' sensitivity to quantifiable external factors including commodity and finished goods prices as well as acts of nature (earthquakes, fires, etc.) that occur in a particular period. Qualitative factors include the general economic environment in the Company's marketplace, and in particular, the state of the technology industries based in the Silicon Valley and other key industries in the San Francisco Bay Area. Size and complexity of individual credits in relation to lending officers' background and experience levels, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in the Company's methodology. The Company's methodology is, and has been, consistently followed. However, as the Company adds new products, increases in complexity, and expands its geographic coverage, the Company 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. Management believes that the allowance for loan losses is adequate as of June 30, 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 June 30, 2000, the allowance for loan losses was $54.0 million, consisting of a $37.3 million allocated allowance and a $16.7 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. 29 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 June 30, 2000, the Banks had approximately $83.6 million in the aggregate available to be paid as dividends to Greater Bay. Management of Greater Bay believes that such restrictions will not have an impact on the ability of Greater Bay to meet its ongoing cash obligations. As of June 30, 2000, Greater Bay did not have any material commitments for capital expenditures. Net cash provided by operating activities, consisting primarily of net income, totaled $29.8 million and $21.9 million for the six months ended June 30, 2000 and 1999, respectively. Cash used for investing activities totaled $616.1 million and $325.2 million for the six months ended June 30, 2000 and 1999, respectivley. The funds used for investing activities primarily represent increases in loans and investment securities for each period reported. For the six months ended June 30, 2000 net cash provided by financing activities was $470.1 million, compared to $380.6 million for the six months ended June 30, 2000. Historically, the primary financing activity of the Company has been through deposits. For the six months ended June 30, 2000 and 1999, deposit gathering activities generated cash of $372.8 million and $365.2 million, respectively. This represents a total of 79.8% and 96.0% of the financing cash flows for the six months ended June 30, 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 June 30, 2000 increased to $237.3 million from $206.6 million at December 31, 1999. Greater Bay paid dividends of $0.30 and $0.48 per share during the six months ended June 30, 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. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) On March 23, 2000, the Company completed an offering of 10.875% capital securities in an aggregate amount of $9.5 million through GBB Capital III, a wholly owned trust subsidiary formed for the purpose of the offering. On May 19, 2000, the Company completed an additional offering of 10.75% capital securities in an aggregate amount of $41.0 million through GBB Capital IV, a wholly owned trust subsidiary formed for the purpose of the offering. The securities issued in the offering were sold in a private transaction pursuant to an applicable exemption from registration under the Securities Act. Under applicable regulatory guidelines, the TPS qualifies as Tier 1 capital up to a maximum of 25% of Tier I capital. Any additional portion of TPS would qualify as Tier 2 capital. As of June 30, 2000, $83.9 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. 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 June 30, 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 June 30, 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 9.21% 10.93% 12.78% Well-capitalized 5.00% 6.00% 10.00% Adequately capitalized 4.00% 4.00% 8.00% In addition, at June 30, 2000, each of the Banks had levels of capital that exceeded the well-capitalized guidelines. 31 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. Change in Projected change (Dollars in thousands) ------------------------ interest rates Net porfolio value Dollars Percentage ---------------------------------------------------------------------- 100 basis point rise $ 595,600 $ 1,167 0.20% Base scenario 594,433 - - 100 basis point decline 591,759 2,674 -0.45% 32 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED) The preceding table indicates that at June 30, 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. 33 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED) The following table shows interest sensitivity gaps for different intervals as of June 30, 2000. Immediate or 2 Days to 6 7 Months to 12 1 Year to 3 4 Years to 5 (Dollars in thousands) One Day Months Months Years Years - ---------------------------------------------------------------------------------------------------------- Assets: Cash and due $ 3,760 $ - $ - $ - $ - Federal funds sold and other short term investments 58,055 - - - - Investment securities 12,237 21,729 19,732 147,458 105,244 Loans 1,068,343 828,252 79,099 187,709 135,682 Allowance for loan losses/ unearned fees - - - - - Other assets - - - - - ------------------------------------------------------------------------ Total Assets $ 1,142,395 $ 849,981 $ 98,831 $ 335,167 $ 240,926 ======================================================================== Liabilities and equity: Deposits $ 1,814,523 $ 585,622 $ 75,357 $ 11,889 $ 1,331 Other borrowings - 126,755 5,745 500 1,500 Trust Preferred Securities - - - - - Other liabilities - - - - - Shareholders equity - - - - - ------------------------------------------------------------------------ Total Liabilities/equity $ 1,814,523 $ 712,377 $ 81,102 $ 12,389 $ 2,831 ======================================================================== Gap $ (672,128) $ 137,604 $ 17,729 $ 322,778 $ 238,095 Cumulative gap $ (672,128) $ (534,524) $ (516,795) $ (194,017) $( 44,078) Cumulative gap/total assets -18.1% -14.4% -13.9% -5.2% -1.2% More than 5 Total Rate Non-Rate (Dollars in thousands) Years Sensitive Sensitive Total - ----------------------------------------------------------------------------------------- Assets: Cash and due $ - $ 3,760 $ 193,665 $ 197,425 Federal funds sold and other short term investments - 58,055 - 58,055 Investment securities 563,014 869,414 - 869,414 Loans 163,334 2,462,419 - 2,462,419 Allowance for loan losses/ unearned fees - - (54,020) (54,020) Other assets - - 173,799 173,799 -------------------------------------------------------- Total Assets $ 726,348 $ 3,393,648 $ 313,444 $3,707,092 ======================================================== Liabilities and equity: Deposits $ 172 $ 2,489,894 $ 689,912 $3,179,806 Other borrowings - 133,500 - 133,500 Trust Preferred Securities 99,500 99,500 - 99,500 Other liabilities - - 56,990 56,990 Shareholders equity - - 237,296 237,296 -------------------------------------------------------- Total Liabilities/equity $ 99,672 $ 2,722,894 $ 984,198 $3,707,092 ======================================================== Gap $ 626,676 $ (670,754) $ (670,754) $ - Cumulative gap $ (670,754) $ (670,754) $ - $ - Cumulative gap/total assets -18.1% 18.1% 0.0% 0.0% The foregoing table indicates that the Company had a one year gap of $(516.8) million or 13.9% assets, at June 30, 2000. In theory, this would indicate that at June 30, 2000, $(516.8) 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 June 30, 2000, the analysis indicates that the Company's net interest income would increase a maximum of 10.2% if rates rose 200 basis points immediately and would decrease a maximum of (10.3)% 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. 34 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. 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 conclusions 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 issued an exposure draft during the third quarter of 1999 and expects that a final standard may be issued and become effective in the first quarter of 2001. A portion of the Company's business strategy is to pursue acquisition opportunities so as to expand its market presence and maintain growth levels. A change in the accounting for business combinations could have a negative impact on the Company's ability to realize those business strategies. 35 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings -- Not applicable ITEM 2. Changes in Securities and Use of Proceeds - Not applicable ITEM 3. Defaults Upon Senior Securities -- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders (a) The Company held its annual meeting of shareholders on May 17, 2000. (b) The following directors were elected at the annual meeting to serve for a three-year term: David L. Kalkbrenner Rex D. Lindsay Glen McLaughlin Warren R. Thoits The following directors continued in office after the annual meeting: George R. Corey John M. Gatto John J. Hounslow James E. Jackson Stanley A. Kangas George M. Marcus Duncan L. Matteson Rebecca Q. Morgan Dick J. Randall Donald H. Seiler (c) At the annual meeting, shareholders voted on (1) the election of the Company's Class III directors; (2) the merger of Coast Bancorp with and into the Company; (3) the amendment of the Company's 1996 Stock Option Plan, as amended, to increase by 2,500,000 the number of shares reserved for issuance under the plan; (4) the amendment of the Company's Articles of Incorporation to increase the number of authorized shares of common stock from 24,000,000 to 40,000,000; and (5) the ratification of the selection of PricewaterhouseCoopers LLP as the Company's independent public accountants for the fiscal year ending December 31, 2000. The results of the voting were as follows: Votes Broker Matter Votes For Against Withheld Abstentions Non-Votes Election of Directors David L. Kalkbrenner 11,291,363 -- 258,563 -- -- Rex D. Lindsay 10,757,940 -- 791,986 -- -- Glen McLaughlin 11,414,894 -- 135,032 -- -- Warren R. Thoits 11,462,607 -- 87,319 -- -- Merger with Coast 8,808,327 755,842 -- 49,453 1,936,303 Option Plan Amendment 7,195,916 2,162,870 -- 254,836 1,936,303 Articles Amendment 10,307,237 1,119,820 -- 122,868 -- Independent Public 11,378,625 147,679 -- 23,622 -- Accountants (d) Not applicable. 36 ITEM 5. Other Information -- Not applicable ITEM 6. Exhibits and Reports on Form 8-K The Exhibits listed below are filed or incorporated by reference as part of this Report. (a) Exhibits EXHIBIT NO. EXHIBITS - ------- -------- 3.1 Certificate of Amendment of Articles of Incorporation 4.31 Amended and Restated Declaration of Trust of GBB Capital IV dated as of May 19, 2000 4.32 Indenture, dated as of May 19, 2000, between Greater Bay Bancorp and Wilmington Trust Company, as trustee 4.33 Common Securities Guarantee Agreement, dated as of May 19, 2000, between Greater Bay Bancorp and Wilmington Trust Company, as trustee 4.34 Capital Securities Guarantee Agreement, dated as of May 19, 2000, between Greater Bay Bancorp and Wilmington Trust Company, as trustee 4.35 Liquidated Damages Agreement, dated as of May 16, 2000, by and among GBB Capital IV, Greater Bay Bancorp and Sandler O'Neill and Partners, L.P. 4.36 Registration Rights Agreement, dated as of May 16, 2000, by and among GBB Capital IV, Greater Bay Bancorp and Sandler O'Neill and Partners, L.P. 27 Financial Data Schedule. - -------- (b) Reports on Form 8-K During the quarter ended June 30, 2000, the Registrant filed the following Current Reports on Form 8-K: (1) Form 8-K dated April 6, 2000 (containing pro-forma financial information related to the pending mergers with Coast Bancorp, Bank of Santa Clara and Bank of Petaluma); (2) Form 8-K dated April 20, 2000 (reporting first quarter earnings) ;(3) Form 8-K dated May 18, 2000 (reporting the completion of the merger with Coast Bancorp and containing selected pro-forma financial information); (4) Form 8-K dated May 18, 2000 (containing supplemental consolidated financial statements reflecting the merger with Coast Bancorp). 37 SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. GREATER BAY BANCORP (Registrant) By: /s/ Steven C. Smith - ------------------- Steven C. Smith Executive Vice President, Chief Administrative Officer and Chief Financial Officer Date: August 1, 2000 38