Exhibit 99.1
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
June 30,
2000* December 31,
(Dollars in thousands) (unaudited) 1999*
- --------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 221,250 $ 137,130
Federal funds sold 87,400 216,300
Other short term securities 55 29,507
---------------------------------------
Cash and cash equivalents 308,705 382,937
Investment securities:
Available for sale, at fair value 483,090 441,290
Held to maturity, at amortized cost (fair value $438,998 and $222,394 at
June 30, 2000 and December 31, 1999, respectively) 448,187 229,742
Other securities 20,052 23,918
---------------------------------------
Investment securities 951,329 694,950
Loans:
Commercial 1,103,847 900,943
Term real estate - commercial 797,702 696,707
---------------------------------------
Total commercial 1,901,549 1,597,650
Real estate construction and land 507,192 466,577
Real estate - other 123,708 133,256
Consumer and other 195,799 159,679
Deferred loan fees and discounts (13,731) (12,599)
---------------------------------------
Total loans, net of deferred fees 2,714,517 2,344,563
Allowance for loan losses (56,769) (46,451)
---------------------------------------
Total loans, net 2,657,748 2,298,112
Property, premises and equipment 33,043 35,958
Interest receivable and other assets 155,434 130,073
---------------------------------------
Total assets $ 4,106,259 $ 3,542,030
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand, noninterest-bearing $ 811,774 $ 690,860
MMDA, NOW and savings 1,924,782 1,737,002
Time certificates, $100,000 and over 665,539 527,766
Other time certificates 141,719 145,069
---------------------------------------
Total deposits 3,543,814 3,100,697
Other borrowings 133,500 100,600
Other liabilities 59,177 53,731
---------------------------------------
Total liabilities 3,736,491 3,255,028
---------------------------------------
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;
19,814,173 and 18,989,511 shares issued and outstanding
as of June 30, 2000 and December 31, 1999, respectively 153,704 139,754
Accumulated other comprehensive loss (14,722) (8,055)
Retained earnings 131,286 106,303
---------------------------------------
Total shareholders' equity 270,268 238,002
---------------------------------------
Total liabilities and shareholders' equity $ 4,106,259 $ 3,542,030
=======================================
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts) Three months ended June 30, Six months ended June 30,
(unaudited) 2000* 1999* 2000* 1999*
- ------------------------------------------------------------------------------------------- --------------------------
INTEREST INCOME
Interest on loans $ 66,034 $ 44,445 $ 124,866 $ 85,189
Interest on investment securities:
Taxable 12,236 8,354 23,275 15,538
Tax - exempt 2,042 1,391 3,856 2,777
---------------------------- ---------------------------
Total interest on investment securities 14,278 9,745 27,131 18,315
Other interest income 3,324 3,388 7,845 5,901
-------------- ------------- ------------ -------------
Total interest income 83,636 57,578 159,842 109,405
---------------------------- ---------------------------
INTEREST EXPENSE
Interest on deposits 27,955 18,859 54,571 35,607
Interest on Trust Preferred Securities 1,783 919 2,841 1,955
Interest on other borrowings 1,530 1,680 3,188 2,907
-------------- ------------- ------------ -------------
Total interest expense 31,268 21,458 60,600 40,469
---------------------------- ---------------------------
Net interest income 52,368 36,120 99,242 68,936
Provision for loan losses 8,207 2,141 13,746 3,529
-------------- ------------- ------------ -------------
Net interest income after provision for loan losses 44,161 33,979 85,496 65,407
---------------------------- ---------------------------
OTHER INCOME
Loan and international banking fees 1,927 697 3,103 1,370
Service charges and other fees 2,005 1,989 3,978 3,922
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 1,456 795 4,554 1,397
---------------------------- ---------------------------
Total other income 8,350 5,484 25,318 10,936
---------------------------- ---------------------------
OPERATING EXPENSES
Compensation and benefits 14,422 12,810 29,385 25,243
Occupancy and equipment 4,880 3,886 9,911 7,989
Legal and other professional fees 1,068 786 2,046 1,498
Telephone, postage and supplies 1,086 1,022 2,123 2,027
Marketing and promotion 997 767 1,856 1,494
Client services 765 761 1,593 1,637
FDIC insurance and regulatory assessments 233 146 473 285
Directors fees 193 274 378 577
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 2,426 2,467 4,825 4,257
---------------------------- ---------------------------
Total operating expenses 36,314 27,222 66,725 49,331
---------------------------- ---------------------------
Income before provision for income taxes and
extraordinary items 16,197 12,241 44,089 27,012
Provision for income taxes 6,463 4,650 17,626 10,395
---------------------------- ---------------------------
Net income before extraordinary items 9,734 7,591 26,463 16,617
Extraordinary items - - - (88)
---------------------------- --------------------------
Net income $ 9,734 $ 7,591 $ 26,463 $ 16,529
============================ ===========================
Net income per share - basic $ 0.49 $ 0.42 $ 1.35 $ 0.91
============================ ===========================
Net income per share - diluted $ 0.47 $ 0.40 $ 1.30 $ 0.87
============================ ===========================
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended June 30, Six months ended June 30,
---------------------------------------------------------
(Dollars in thousands) 2000* 1999* 2000* 1999*
- ------------------------------------------------------------------------------------ ----------------------------
Net income $ 9,734 $ 7,591 $ 26,463 $ 16,529
------------------------- ----------------------------
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 $ 4,475 $ 4,014 $ 19,796 $ 13,135
========================= ============================
* Restated on a historical basis to reflect the mergers described in notes 1
and 2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
GREATER BAY BANCORP AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
(Dollars in thousands) (unaudited) 2000* 1999*
- -----------------------------------------------------------------------------------------------------------
Cash flows - operating activities
Net income $ 26,463 $ 16,529
Reconcilement of net income to net cash from operations:
Provision for loan losses 13,746 3,529
Depreciation and amortization 3,907 1,661
Deferred income taxes (4,063) (1,661)
Gain on sale of investments, net -- (52)
Changes in:
Accrued interest receivable and other assets (3,827) (5,133)
Accrued interest payable and other liabilities (4,481) 5,941
Deferred loan fees and discounts, net 1,855 2,496
-------------- ---------------
Operating cash flows, net 33,595 23,310
-------------- ---------------
Cash flows - investing activities
Maturities and partial paydowns on of investment securities:
Held to maturity 18,548 12,784
Available for sale 15,206 119,038
Other securities 3,866 -
Purchase of investment securities:
Held to maturity (237,148) (23,348)
Available for sale (67,572) (184,349)
Other securities - (498)
Proceeds from sale of available for sale securities - 36,895
Loans, net (375,238) (288,958)
Sale of bank building 5,502 -
Purchase of property, premises and equipment (40) (5,763)
Proceeds from sale of other real estate owned (5,766) 345
Purchase of insurance policies (4,555) (4,776)
-------------- ---------------
Investing cash flows, net (647,197) (338,630)
-------------- ---------------
Cash flows - financing activities
Net change in deposits 443,117 371,741
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 17,997 4,045
Cash dividends (5,144) (3,971)
-------------- ---------------
Financing cash flows, net 539,370 387,105
-------------- ---------------
Net change in cash and cash equivalents (74,232) 71,785
Cash and cash equivalents at beginning of period 382,937 322,805
-------------- ---------------
Cash and cash equivalents at end of period $ 308,705 $ 394,590
============== ===============
Cash flows - supplemental disclosures
Cash paid during the period for:
Interest $ 60,937 $ 40,525
Income taxes $ 12,830 $ 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 $ -
* Restated on a historical basis to reflect the mergers described in notes 1 and
2 on a pooling of interests basis.
See notes to supplemental consolidated financial statements.
NOTES TO SUPPLEMENTAL 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 Supplemental Consolidated Balance Sheet as of June 30, 2000, and the
Supplemental 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 Supplemental Consolidated
Financial Statements should be read in conjunction with the Supplemental
Consolidated Financial Statements for the year ended December 31, 1999 included
in the Current Report on Form 8-K filed as of July 26, 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 July 26, 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, Bank of Santa Clara ("BSC"), Bay Area
Bank ("BAB"), Bay Bank of Commerce ("BBC"), Coast Commercial Bank ("CCB"),
Cupertino National Bank ("CNB"), Golden Gate Bank ("Golden Gate"), Mid-Peninsula
Bank ("MPB"), Mt. Diablo National Bank ("MDNB"), Peninsula Bank of Commerce
("PBC"), GBB Capital I, GBB Capital II, GBB Capital III and GBB Capital IV and
its operating divisions. All significant intercompany transactions and balances
have been eliminated. Certain reclassifications have been made to prior periods
consolidated financial statements to conform to the current presentation. In
the opinion of management such unaudited financial statements reflect all
adjustments necessary for fair statement of the results of operations and
balances for the interim period presented. The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
the prevailing practices within the banking industry.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of certain revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTES TO SUPPLEMENTAL 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
other other
Unrealized compre- Unrealized compre-
gains on Cash flow hensive gains on Cash flows hensive
(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
other other
Unrealized compre- Unrealized compre-
gains on Cash flow hensive gains on Cash flows hensive
(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 July 21, 2000, GBB Merger Corp., merged with and into BSC 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 been restated to reflect the merger with BSC on a pooling-of-
interests basis.
On May 18, 2000, Greater Bay completed its merger with Coast Bancorp, the
holding company for CCB. As a result of the merger, CCB operates as a wholly
owned subsidiary of Greater Bay. Upon consumption of the merger, the outstanding
shares of Coast Bancorp were converted into an aggregate amount of approximately
3,070,000 shares of Greater Bay's stock. The merger was accounted for as a
pooling of interests. The financial information presented herein has been
restated to reflect the merger with Coast Bancorp on a pooling-of-interests
basis.
NOTES TO SUPPLEMENTAL 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
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.
Assuming the acquisition of 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.
The results of operations previously reported by the separate entities 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.
Coast Bancorp Bank of Santa Clara
For the three months ended For the six months ended
(Dollars in thousands) March 31, 2000 June 30, 2000
- -------------------------------------------------------------------------------------------------------
Net interest income:
Greater Bay Bancorp $ 36,378 $ 47,131
Acquired entity 5,538 5,237
------------------- ---------------------
Combined $ 41,916 $ 52,368
=================== =====================
Net income:
Greater Bay Bancorp $ 14,865 $ 8,342
Acquired entity 2,035 1,392
------------------- ---------------------
Combined $ 16,900 $ 9,734
=================== =====================
There are no significant transactions between the Company and BSC or Coast
Bancorp. All intercompany transactions have been eliminated.
NOTES TO SUPPLEMENTAL 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
$10.2 million and $719,000, respectively, and the average interest rates during
those periods were 5.80% 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.
NOTES TO SUPPLEMENTAL 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 $ 9,734 $ 7,591
Basic net income per share:
Income available to common shareholders 9,734 19,775,000 $ 0.49 7,591 18,223,000 $ 0.42
Effect of dilutive securities:
Stock options - 813,000 - - 933,000 -
---------------------------------------- ----------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $ 9,734 20,588,000 $ 0.47 $ 7,591 19,156,000 $ 0.40
======================================== ========================================
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 $26,463 $16,529
Basic net income per share:
Income available to common shareholders 26,463 19,548,000 $ 1.35 16,529 18,123,000 $ 0.91
Effect of dilutive securities:
Stock options - 865,000 - - 959,000 -
---------------------------------------- ----------------------------------------
Diluted net income per share:
Income available to common shareholders
and assumed conversions $26,463 20,413,000 $ 1.30 $16,529 19,082,000 $ 0.87
======================================== ========================================
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
BSC at a 0.8499 conversion ratio, 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.
NOTES TO SUPPLEMENTAL 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--ACTIVITY OF BUSINESS SEGMENTS
The Company adopted SFAS No. 131. The accounting policies of the segments
are the same as those described in the "Summary of Significant Accounting
Policies." Segment data includes intersegment revenue, as well as charges
allocating all corporate-headquarters costs to each of its operating segments.
The Company evaluates the performances of its segments and allocates resources
to them based on net interest income, other income, net income before income
taxes, total assets and deposits.
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 $ 100,472 $ 300 $ 70,305 $ 140
Other income 23,210 1,761 7,799 1,455
Operating expenses, excluding merger and
other related nonrecurring costs 54,017 1,348 44,982 1,482
Net income before income taxes (1) 56,012 620 30,045 113
Total assets 4,106,259 - 3,102,471 -
Deposits 3,479,780 64,034 2,651,955 56,921
Assets under management - 795,042 - 659,414
(1) Includes intercompany earnings allocation charge which is eliminated in
consolidation.
NOTES TO SUPPLEMENTAL 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 $ 125,743 $ 79,699
Parent company net interest income and other income (1,183) 173
------------------- ------------------
Consolidated net interest income and other income $ 124,560 $ 79,872
=================== ==================
Net income before taxes, merger
related nonrecurring costs and extraordinary items
Total segment net income before taxes $ 56,632 $ 30,158
Parent company net income before taxes 1,541 819
Consolidated net income before taxes,
merger and other related costs and
extraordinary items ------------------- ------------------
$ 58,173 $ 30,977
=================== ==================
Total assets
Total segment assets $ 4,028,899 $ 3,041,107
Parent company assets 77,360 61,364
------------------- ------------------
Consolidated total assets $ 4,106,259 $ 3,102,471
=================== ==================
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Greater Bay is a bank holding company operating BSC, 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 33 offices located in Aptos, Blackhawk,
Capitola, Cupertino, Danville, Fremont, Hayward, Lafayette, Milpitas, Millbrae,
Palo Alto, Pleasanton, Redwood City, San Francisco, San Jose, San Leandro, San
Mateo, San Ramon, Santa Clara, Santa Cruz, Scotts Valley, Sunnyvale, Walnut
Creek and Watsonville.
The following discussion and analysis is intended to provide greater
details of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the Company's
consolidated financial data included elsewhere in this document. Certain
statements under this caption constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include but are not limited to economic conditions,
competition in the geographic and business areas in which the Company conducts
its operations, fluctuation in interest rates, credit quality and government
regulation.
RESULTS OF OPERATIONS
The following table summarizes income, income per share and key financial
ratios using the Company's core earnings, income including technology gains, and
snet income for the three month and six month periods presented:
Core earnings Income including
(before merger, nonrecurring technology gains and before
and extraordinary items) merger and extraordinary items
------------------------------------------ -----------------------------------------
Three Three Three Three
(Dollars in thousands, except per months ended months ended months ended months ended
per share amounts) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------------------------------ -----------------------------------------
Income $ 16,028 $ 9,949 $ 16,478 $ 10,083
Income per share:
Basic $ 0.81 $ 0.55 $ 0.83 $ 0.55
Diluted $ 0.78 $ 0.52 $ 0.80 $ 0.53
Return on average assets 1.61% 1.32% 1.65% 1.34%
Return on average shareholders' equity 23.96% 19.51% 24.63% 19.77%
Core earnings Income including
(before merger, nonrecurring technology gains and before
and extraordinary items) merger and extraordinary items
------------------------------------------ -----------------------------------------
Six Six Six Six
(Dollars in thousands, except per months ended months ended months ended months ended
share amounts) June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------------------------------ -----------------------------------------
Income $ 30,069 $ 18,420 $ 35,538 $ 19,056
Income per share:
Basic $ 1.54 $ 1.02 $ 1.82 $ 1.05
Diluted $ 1.47 $ 0.97 $ 1.74 $ 1.00
Return on average assets 1.55% 1.29% 1.83% 1.33%
Return on average shareholders' equity 23.10% 18.77% 27.30% 19.42%
Net income
(after merger, nonrecurring
and extraordinary items)
------------------------------------------
Three Three
(Dollars in thousands, except per months ended months ended
per share amounts) June 30, 2000 June 30, 1999
------------------------------------------
Income $ 9,734 $ 7,591
Income per share:
Basic $ 0.49 $ 0.42
Diluted $ 0.47 $ 0.40
Return on average assets 0.98% 1.01%
Return on average shareholders' equity 14.55% 14.88%
Net income
(after merger, nonrecurring
and extraordinary items)
------------------------------------------
Six Six
(Dollars in thousands, except per months ended months ended
share amounts) June 30, 2000 June 30, 1999
------------------------------------------
Income $ 26,463 $ 16,529
Income per share:
Basic $ 1.35 $ 0.91
Diluted $ 1.30 $ 0.87
Return on average assets 1.36% 1.16%
Return on average shareholders' equity 20.33% 16.84%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Net income for the second quarter of 2000 increased 28.2% to $9.7 million,
or $0.47 per diluted share, compared to net income of $7.6 million, or $0.40 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 63.4% to $16.5 million, or
$0.80 per diluted share, for the second quarter of 2000, compared to $10.1
million, or $0.53 per diluted share, in the second quarter of 1999.
The Company's core earnings, which is its income, excluding nonrecurring
warrant income, merger and other related nonrecurring costs and extraordinary
items, for the second quarter of 2000 increased 61.1% to $16.0 million, or $0.78
per diluted share, compared to $9.9 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 23.96% and its
return on average assets was 1.61%. During the second quarter of 1999, the
Company's core earnings resulted in a return on average shareholders' equity of
19.51% and a return on average assets of 1.32%.
The 61.1% 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
45.0% as compared to the second quarter of 1999. This increase was primarily due
to a 32.8% 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 41.7% 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 13.9% increase in recurring operating expenses,
as compared to the second quarter of 1999.
Net income for the six months ended June 30, 2000 increased 60.1% to $26.5
million, or $1.30 per diluted share, compared to net income of $16.5 million, or
$0.87 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
million ($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 86.5% to $35.5 million, or
$1.74 per diluted share, for the six months ended June 30, 2000, compared to
$19.1 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 63.2% to $30.1 million, or $1.47 per diluted share, compared to $18.4
million, or $0.97 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 23.10% and its return on average
assets was 1.55%. During the six months ended June 30, 1999, the Company's core
earnings resulted in a return on average shareholders' equity of 18.77% and a
return on average assets of 1.29%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The 63.2% 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 44.0% as compared to the six months ended June 30, 1999. This increase
was primarily due to a 35.6% 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
32.2% 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 16.9% 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
June 30, 2000
-----------------------------------------------------
Average
Average yield/
(Dollars in thousands) balance Interest rate
- ---------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 206,513 $ 3,092 6.02%
Other short term securities 17,021 232 5.48%
Investment securities:
Taxable 717,028 12,236 6.86%
Tax-exempt (1) 152,018 2,042 5.40%
Loans (2) (3) 2,628,025 66,034 10.11%
------------------- ------------------
Total interest-earning assets 3,720,605 83,636 9.04%
Noninterest-earning assets 291,155
------------------- ------------------
Total assets $ 4,011,760 83,636
=================== ------------------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 1,980,577 18,024 3.66%
Time deposits, over $100,000 609,263 8,271 5.46%
Other time deposits 141,777 1,660 4.71%
------------------- ------------------
Total interest-bearing deposits 2,731,617 27,955 4.12%
Other borrowings 93,952 1,530 6.55%
------------------- ------------------
Total interest-bearing liabilities 2,825,569 29,485 4.20%
Trust Preferred Securities 78,324 1,783 9.16%
------------------- ------------------
Total interest-bearing liabilities and
capital securities 2,903,893 31,268 4.33%
Noninterest-bearing deposits 785,716
Other noninterest-bearing liabilities 53,093
Shareholders' equity 269,058
------------------- ------------------
Total shareholders' equity and liabilities $ 4,011,760 31,268
=================== ------------------
Net interest income $ 52,368
==================
Including capital securities:
- ----------------------------
Interest rate spread 4.71%
Contribution of interest free funds 0.95%
-----------
Net yield on interest-earnings assets(4) 5.66%
Excluding capital securities:
- ----------------------------
Interest rate spread 4.84%
Contribution of interest free funds 1.01%
-----------
Net yield on interest-earnings assets(4) 5.85%
Three months ended
March 31, 2000
-----------------------------------------------------
Average
Average yield/
(Dollars in thousands) balance Interest rate
- ---------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 275,679 $ 4,053 5.91%
Other short term securities 30,583 468 6.15%
Investment securities:
Taxable 634,038 11,039 7.00%
Tax-exempt (1) 137,466 1,814 5.31%
Loans (2) (3) 2,433,473 58,832 9.72%
------------------- ------------------
Total interest-earning assets 3,511,239 76,206 8.73%
Noninterest-earning assets 272,980
------------------- ------------------
Total assets $ 3,784,219 76,206
=================== ------------------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 1,881,078 18,423 3.94%
Time deposits, over $100,000 544,922 6,562 4.84%
Other time deposits 143,435 1,631 4.57%
------------------- ------------------
Total interest-bearing deposits 2,569,435 26,616 4.17%
Other borrowings 107,512 1,658 6.20%
------------------- ------------------
Total interest-bearing liabilities 2,676,947 28,274 4.25%
Trust Preferred Securities 49,940 1,058 8.52%
------------------- ------------------
Total interest-bearing liabilities and
capital securities 2,726,887 29,332 4.33%
Noninterest-bearing deposits 734,606
Other noninterest-bearing liabilities 68,263
Shareholders' equity 254,463
------------------- ------------------
Total shareholders' equity and liabilities $ 3,784,219 29,332
=================== ------------------
Net interest income $ 46,874
==================
Including capital securities:
- ----------------------------
Interest rate spread 4.40%
Contribution of interest free funds 0.97%
-----------
Net yield on interest-earnings assets(4) 5.37%
Excluding capital securities:
- ----------------------------
Interest rate spread 4.48%
Contribution of interest free funds 1.01%
-----------
Net yield on interest-earnings assets(4) 5.49%
Three months ended
June 30, 1999
-----------------------------------------------------
Average
Average yield/
(Dollars in thousands) balance Interest rate
- ---------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 205,540 $ 2,441 4.76%
Other short term securities 61,663 947 6.16%
Investment securities:
Taxable 516,333 8,354 6.49%
Tax-exempt (1) 114,102 1,391 4.89%
Loans (2) (3) 1,904,970 44,445 9.36%
------------------- ------------------
Total interest-earning assets 2,802,608 57,578 8.24%
Noninterest-earning assets 220,620
------------------- ------------------
Total assets $ 3,023,228 57,578
=================== ------------------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 1,472,606 12,141 3.31%
Time deposits, over $100,000 449,266 5,000 4.46%
Other time deposits 164,662 1,718 4.18%
------------------- ------------------
Total interest-bearing deposits 2,086,534 18,859 3.63%
Other borrowings 103,792 1,680 6.49%
------------------- ------------------
Total interest-bearing liabilities 2,190,326 20,539 3.76%
Trust Preferred Securities 49,000 919 7.52%
------------------- ------------------
Total interest-bearing liabilities an
capital securities 2,239,326 21,458 3.84%
Noninterest-bearing deposits 550,211
Other noninterest-bearing liabilities 29,124
Shareholders' equity 204,567
------------------- ------------------
Total shareholders' equity and liabilities $ 3,023,228 21,458
=================== ------------------
Net interest income $ 36,120
==================
Including capital securities:
- ----------------------------
Interest rate spread 4.40%
Contribution of interest free funds 0.77%
-----------
Net yield on interest-earnings assets(4) 5.17%
Excluding capital securities:
- ----------------------------
Interest rate spread 4.48%
Contribution of interest free funds 0.82%
-----------
Net yield on interest-earnings assets(4) 5.30%
(1) The tax equivalent yields earned on the tax exempt securities are 7.94%,
7.72% and 7.15% 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 $1,974,000, $2,010,000 and $2,035,000
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.
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 $54.2 million, a $6.2 million increase over the first quarter of
2000 and a $17.1 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 $918.0 million, or 32.8% increase in average interest-earning assets. The
increase in net interest income was further enhanced by a 55 basis points
increase in the Company's net yield on interest-earning assets, excluding
capital securities, from 5.30% in the second quarter of 1999 to 5.85% in the
second quarter of 2000. The increase from the first quarter of 2000 to the
second quarter of 2000 was due to the $209.4 million, or 6.0% increase in
average interest-earning assets and a 36 basis points increase in the Company's
net yield on interest-earning assets, excluding capital securities, from 5.49%
in the first quarter of 2000 to 5.85% 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
compared with March 31, 2000
favorable (unfavorable)
-------------------------------------------------------
(Dollars in thousands) Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------
INTEREST EARNED ON INTEREST-EARNING ASSETS
Federal funds sold $ (1,455) $ 494 $ (961)
Other short term investments (190) (46) (236)
Investment securities:
Taxable 2,571 (1,374) 1,197
Tax-exempt 196 32 228
Loans 4,828 2,374 7,202
-------------------------------------------------------
Total interest income 5,950 1,480 7,430
-------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (4,316) 4,715 399
Time deposits over $100,000 (823) (886) (1,709)
Other time deposits 101 (130) (29)
-------------------------------------------------------
Total interest-bearing deposits (5,039) 3,700 (1,339)
Other borrowings 606 (478) 128
-------------------------------------------------------
Total interest expense (4,433) 3,222 (1,211)
-------------------------------------------------------
Net increase in net interest income $ 1,517 $ 4,702 $ 6,219
=======================================================
Three 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 $ 11 $ 640 $ 651
Other short term investments (621) (94) (715)
Investment securities:
Taxable 3,382 500 3,882
Tax-exempt 495 156 651
Loans 17,835 3,754 21,589
-------------------------------------------------------
Total interest income 21,103 4,955 26,058
-------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (4,492) (1,391) (5,883)
Time deposits over $100,000 (2,011) (1,260) (3,271)
Other time deposits 939 (881) 58
-------------------------------------------------------
Total interest-bearing deposits (5,565) (3,531) (9,096)
Other borrowings 247 (97) 150
-------------------------------------------------------
Total interest expense (5,319) (3,627) (8,946)
-------------------------------------------------------
Net increase in net interest income $ 15,783 $ 1,329 $ 17,112
=======================================================
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 45.3% to
$83.6 million from $57.6 million in the same period in 1999. This was primarily
due to the $21.1 million favorable volume variance which resulted from a $918.0
million, or 32.8%, increase in average interest-earning assets over the
comparable prior year. The average yield on interest-earning assets increased 80
basis points to 9.04% 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 75 basis points to 10.11% in the quarter ended June
30, 2000 from 9.36% 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 43.6% to $29.5 million from $20.5 million for the same period in
1999. The increase is the result of increased interest-bearing liabilities,
which rose to $2.8 billion for the second quarter of 2000, as compared to $2.2
billion for the quarter ended June 30, 1999, and a 44 basis point increase in
the cost of funds which increased to 4.20% in the second quarter of 2000.
During the second quarter of 2000, average noninterest-bearing deposits
increased to $785.7 million from $550.2 million in the same period in 1999.
Average noninterest-bearing deposits comprised 22.3% of total deposits for the
second quarter in 2000, compared to 20.9% 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 4.48% in
the same quarter one year earlier and the net yield on interest-earning assets
increased to 5.85% from 5.30%.
The Quarter Ended June 30, 2000 Compared to March 31, 2000
----------------------------------------------------------
Interest income increased 9.8% to $83.6 million for the second quarter of
2000, as compared to $76.2 million for the previous quarter. This was primarily
due to the $6.0 million favorable volume variance which resulted from a $209.4
million, or 6.0%, increase in average interest-earning assets over the prior
quarter. The average yield on interest-earning assets increased 31 basis points
to 9.04% 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 39 basis points to 10.11% in the quarter ended June 30, 2000 from
9.72% 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 4.3% to $29.5 million from $28.3 million in the prior quarter.
The increase is the result of increased interest-bearing liabilities, which rose
to $2.8 billion for the second quarter of 2000, as compared to $2.7 billion for
the prior quarter. This increase was slightly offset by a 5 basis point decrease
in the cost of funds which dropped to 4.20% in the second quarter of 2000.
During the second quarter of 2000, average noninterest-bearing deposits
increased to $785.7 million from $734.6 million in the first quarter of 2000.
Average noninterest-bearing deposits comprised 22.3% of total deposits for the
second quarter in 2000 as compared to 22.2% 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 4.48% in
the prior quarter and the net yield on interest-earning assets increased to
5.85% from 5.49%.
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
June 30, 2000
-----------------------------------------------------
Average
Average yield/
(Dollars in thousands) balance Interest rate
- --------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 241,096 $ 7,145 5.96%
Other short term securities 23,802 700 5.91%
Investment securities:
Taxable 675,533 23,275 6.93%
Tax-exempt (1) 144,742 3,856 5.36%
Loans (2) (3) 2,530,798 124,866 9.92%
------------------- ------------------
Total interest-earning assets 3,615,971 159,842 8.89%
Noninterest-earning assets 282,845
------------------- ------------------
Total assets $ 3,898,816 159,842
=================== ------------------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 1,930,827 36,447 3.80%
Time deposits, over $100,000 577,093 14,833 5.17%
Other time deposits 142,606 3,291 4.64%
------------------- ------------------
Total interest-bearing deposits 2,650,526 54,571 4.14%
Other borrowings 104,782 3,188 6.12%
Subordinated debt - -
------------------- ------------------
Total interest-bearing liabilities 2,755,308 57,759 4.22%
Trust Preferred Securities 64,132 2,841 8.91%
------------------- ------------------
Total interest-bearing liabilities and
capital securities 2,819,440 60,600 4.32%
Noninterest-bearing deposits 760,161
Other noninterest-bearing liabilities 57,454
Shareholders' equity 261,761
------------------- ------------------
Total shareholders' equity and liabilities $ 3,898,816 60,600
=================== ------------------
Net interest income $ 99,242
==================
Including capital securities:
- ----------------------------
Interest rate spread 4.57%
Contribution of interest free funds 0.95%
----------
Net yield on interest-earnings assets(4) 5.52%
Excluding capital securities:
- ----------------------------
Interest rate spread 4.67%
Contribution of interest free funds 1.00%
----------
Net yield on interest-earnings assets(4) 5.68%
Six months ended
June 30, 1999
-----------------------------------------------------
Average
Average yield/
(Dollars in thousands) balance Interest rate
- ---------------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS:
Fed funds sold $ 165,444 $ 3,880 4.73%
Other short term securities 65,747 2,021 6.20%
Investment securities:
Taxable 493,675 15,538 6.35%
Tax-exempt (1) 114,695 2,777 4.88%
Loans (2) (3) 1,827,954 85,189 9.40%
------------------- ------------------
Total interest-earning assets 2,667,515 109,405 8.27%
Noninterest-earning assets 217,871
------------------- ------------------
Total assets $ 2,885,386 109,405
=================== ------------------
INTEREST-BEARING LIABILITIES:
Deposits:
MMDA, NOW and Savings $ 1,389,937 22,854 3.32%
Time deposits, over $100,000 425,586 9,382 4.45%
Other time deposits 165,365 3,371 4.11%
------------------- ------------------
Total interest-bearing deposits 1,980,888 35,607 3.62%
Other borrowings 95,081 2,839 6.02%
Subordinated debt 1,215 68 11.29%
------------------- ------------------
Total interest-bearing liabilities 2,077,184 38,514 3.74%
Trust Preferred Securities 49,000 1,955 8.05%
------------------- ------------------
Total interest-bearing liabilities an
capital securities 2,126,184 40,469 3.84%
Noninterest-bearing deposits 531,076
Other noninterest-bearing liabilities 30,233
Shareholders' equity 197,893
------------------- ------------------
Total shareholders' equity and liabilities $ 2,885,386 40,469
=================== ------------------
Net interest income $ 68,936
==================
Including capital securities:
- ----------------------------
Interest rate spread 4.43%
Contribution of interest free funds 0.78%
-----------
Net yield on interest-earnings assets(4) 5.21%
Excluding capital securities:
- ----------------------------
Interest rate spread 4.53%
Contribution of interest free funds 0.83%
-----------
Net yield on interest-earnings assets(4) 5.36%
(1) The tax equivalent yields earned on the tax exempt securities are 7.73% and
7.13% 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 $3,984,000 and $3,844,000 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 $102.1 million, a $31.2 million increase over the six months
ended June 30, 1999. The increase was due to the $948.5 million, or 35.6%,
increase in average interest-earning assets. The increase in net interest income
was further enhanced by a 32 basis points increase in the Company's net yield on
interest-earning assets, excluding capital securities, from 5.36% in the six
months ended June 30, 1999 to 5.68% 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 $ 2,081 $ 1,184 $ 3,265
Other short term investments (1,233) (88) (1,321)
Investment securities:
Taxable 6,196 1,541 7,737
Tax-exempt 787 292 1,079
Loans 34,652 5,025 39,677
-------------------------------------------------------
Total interest income 42,484 7,953 50,437
-------------------------------------------------------
INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES
Deposits:
MMDA, NOW and savings (9,906) (3,687) (13,593)
Time deposits over $100,000 (3,741) (1,710) (5,451)
Other time deposits 946 (866) 80
-------------------------------------------------------
Total interest-bearing deposits (12,702) (6,262) (18,964)
Other borrowings (302) (47) (349)
Subordinated debt 34 34 68
-------------------------------------------------------
Total interest expense (12,970) (6,275) (19,245)
-------------------------------------------------------
Net increase in net interest income $ 29,514 $ 1,678 $ 31,192
=======================================================
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 46.1% to
$159.8 million from $109.4 million in the same period in 1999. This was
primarily due to the $42.5 million favorable volume variance which resulted from
a $948.5 million, or 35.6%, increase in average interest-earning assets over the
comparable prior year. The average yield on interest-earning assets increased
62 basis points to 8.89% 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 52 basis points to 9.92% in the six months
ended June 30, 2000 from 9.40% 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 50.0% to $57.8 million from $38.5 million for the same
period in 1999. The increase is the result of increased average interest-bearing
liabilities, which rose to $2.8 billion for the six months ended June 30, 2000,
as compared to $2.1 billion for the same period in 1999, and a 48 basis point
increase in the cost of funds which increased to 4.22% in the six months ended
June 30, 2000.
As a result of the foregoing, the Company's interest rate spread, excluding
capital securities, was 4.67% in the six months ended June 30, 2000 compared to
4.53% in the same period one year earlier and the net yield on interest-earning
assets increased to 5.68% from 5.36%.
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 $ 785,716 $ 550,211 $ 760,161 $ 531,076
Client service expenses 765 761 1,593 1,637
Client service expenses, annualized 0.39% 0.55% 0.42% 0.62%
IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS
(EXCLUDING CAPITAL SECURITIES):
Net yield on interest-earning assets 5.85% 5.30% 5.68% 5.36%
Impact of client service expense (0.08)% (0.11)% (0.09)% (0.12)%
-------------------------------- -------------------------------
Adjusted net yield on interest-earning assets (1) 5.77% 5.19% 5.59% 5.24%
================================ ===============================
(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.
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 $8.2
million, compared to $2.1 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.
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
- ------------------------------------------------------------------------------------------------------------------------------------
Service charges and other fees $ 2,005 $ 1,973 $ 1,242 $ 2,071 $ 1,989
Loan and international banking fees 1,927 1,176 1,699 946 697
Trust fees 905 924 774 768 727
Gain on sale of SBA loans 675 619 143 656 446
ATM network revenue 584 570 635 789 613
Gain (loss) on sale of investments, net 58 (1) (3) - (9)
Other 1,456 3,098 4,630 2,219 795
------------------------------------------------------------------------------------------
Total, recurring 7,610 8,359 9,120 7,449 5,258
Warrant income 740 8,609 14,278 - 226
------------------------------------------------------------------------------------------
Total $ 8,350 $ 16,968 $ 23,398 $ 7,449 $ 5,484
==========================================================================================
For the second quarter of 2000 as compared to the same period in 1999, the
increase in other income was a result of $1.2 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.
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 $ 14,422 $ 14,963 $ 14,636 $ 13,416 $ 12,810
Occupancy and equipment 4,880 5,031 4,367 4,167 3,886
Legal and other professional fees 1,068 978 740 894 786
Telephone, postage and supplies 1,086 1,037 1,008 1,069 1,022
Marketing and promotion 997 859 1,011 751 767
Client services 765 828 764 825 761
FDIC insurance and regulatory assessments 233 240 244 196 146
Directors' fees 193 185 141 275 274
Expenses on other real estate owned 41 10 (53) 30 15
Other 2,426 2,399 2,688 2,506 2,467
-------------------------------------------------------------------
Total operating expenses, excluding merger costs
and contribution to the GBB Foundation 26,111 26,530 25,546 24,129 22,934
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 $ 36,314 $ 30,411 $ 43,750 $ 24,129 $ 27,222
===================================================================
Efficiency ratio 59.81% 47.63% 65.57% 51.42% 65.43%
Efficiency ratio, before merger, nonrecurring and
extraordinary items 43.53% 48.03% 48.71% 51.42% 55.43%
Total operating expenses to average assets* 3.64% 3.23% 4.87% 3.00% 3.61%
Total operating expenses to average assets,
before nonrecurring items* 2.62% 2.82% 2.85% 3.00% 3.04%
* Annualized
Operating expenses totaled $36.3 million for the second quarter of 2000,
compared to $27.2 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 $26.1 million and $22.9 million for these periods. The
ratio of operating expenses to average assets, before nonrecurring items, was
2.62% for the second quarter of 2000 and 3.04% 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 43.53%, compared to 55.43% 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 32.8% from the second quarter of 1999, while operating expenses,
excluding nonrecurring costs, increased only 13.9%. 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 $14.4 million, compared to $12.8 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.
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
39.9%, compared to 38.0% 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 40.0%, compared to 38.5% 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 15.9% (32.0% annualized) to $4.1 billion at June 30,
2000, compared to $3.5 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 15.7% (31.7% annualized) to $2.7 billion at
June 30, 2000, compared to $2.4 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 $ 1,103,847 41.5% $ 900,943 39.2% $ 803,490 41.6%
Term real estate - commercial 797,702 30.0 696,707 30.3 551,896 28.5
---------------------------------------------------------------------------------------------
Total commercial 1,901,549 71.5 1,597,650 69.5 1,355,386 70.1
Real estate construction and land 507,192 19.1 466,577 20.3 350,011 18.1
Real estate term - other 123,708 4.7 133,256 5.8 120,428 6.2
Consumer and other 195,799 7.4 159,679 6.9 154,355 8.0
---------------------------------------------------------------------------------------------
Total loans, gross 2,728,248 102.7 2,357,162 102.5 1,980,180 102.4
Deferred fees and discounts, net (13,731) (0.5) (12,599) (0.5) (11,549) (0.6)
---------------------------------------------------------------------------------------------
Total loans, net of deferred fees 2,714,517 102.2 2,344,563 102.0 1,968,631 101.8
Allowance for loan losses (56,769) (2.2) (46,451) (2.0) (35,207) (1.8)
---------------------------------------------------------------------------------------------
Total loans, net $ 2,657,748 100.0% $ 2,298,112 100.0% $ 1,933,424 100.0%
=============================================================================================
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 $ 8,720 $ 6,266 $ 5,682 $ 7,928 $ 5,598
Accruing loans past due 90 days or more 706 37 139 406 246
Restructured loans 420 743 807 1,492 1,034
---------------------------------------------------------------------------
Total nonperforming loans 9,846 7,046 6,628 9,826 6,878
Other real estate owned 229 271 271 515 595
---------------------------------------------------------------------------
Total nonperforming assets $ 10,075 $ 7,317 $ 6,899 $ 10,341 $ 7,473
===========================================================================
Nonperforming assets to total loans
and other real estate owned 0.37% 0.29% 0.29% 0.48% 0.42%
Nonperforming assets to total assets 0.25% 0.18% 0.19% 0.31% 0.24%
At June 30, 2000 and December 31, 1999, the Company had $8.7 million and
$5.7 million in nonaccrual loans respectively. Interest income foregone on
nonaccrual loans outstanding totaled $161,000 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 $420,000 and $807,000 of restructured loans as of June 30,
2000 and December 31, 1999, 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.
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 $ 24,049 $ 29,115 $ 30,282 $ 31,240 $ 29,242
Doubtful 7,633 4,925 1,850 2,316 1,579
Loss - 4 2 10 10
Other real estate owned 229 271 271 515 595
-------------------------------------------------------------------------
Classified assets $ 31,911 $ 34,315 $ 32,405 $ 34,081 $ 31,426
=========================================================================
Classified assets to total loans and other real 1.17% 1.36% 1.37% 1.58% 1.76%
estate owned
Allowance for loan losses to total classified assets 177.90% 149.05% 143.35% 114.45% 112.03%
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.
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, September 30, June 30,
(Dollars in thousands) 2000 2000 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Period end loans outstanding $ 2,728,248 $ 2,518,306 $ 2,357,162 $ 2,152,668 $ 1,980,180
Average loans outstanding $ 2,635,797 $ 2,439,421 $ 2,217,490 $ 2,066,962 $ 1,915,096
Allowance for loan losses:
Balance at beginning of period $ 51,148 $ 46,451 $ 39,007 $ 35,207 $ 32,792
Charge-offs:
Commercial (4,223) (1,729) (1,289) (812) (288)
Real estate construction and land - - - - -
Real estate term - - - - -
Consumer and other (137) (121) (178) (175) (187)
----------------------------------------------------------------------------
Total charge-offs (4,360) (1,850) (1,967) (987) (475)
----------------------------------------------------------------------------
Recoveries:
Commercial 223 127 0 796 231
Real estate construction and land - - - - -
Real estate term and other - - 7 4 3
Consumer and other 47 31 298 85 68
----------------------------------------------------------------------------
Total recoveries 270 158 305 885 302
----------------------------------------------------------------------------
Net charge-offs (4,090) (1,692) (1,162) (102) (173)
Provision charged to income (1) 9,711 6,389 8,606 3,902 2,588
----------------------------------------------------------------------------
Balance at end of period $ 56,769 $ 51,148 $ 46,451 $ 39,007 $ 35,207
============================================================================
Quarterly net charge-offs to average loans
outstanding during the period, annualized 0.62% 0.28% 0.08% 0.02% 0.04%
Year to date net charge-offs to average loans
outstanding during the period, annualized 0.44% 0.28% 0.05% 0.03% 0.02%
Allowance as a percentage of average loans
outstanding 2.15% 2.10% 2.09% 1.89% 2.04%
Allowance as a percentage of period end loans
outstanding 2.08% 2.03% 1.97% 1.81% 1.98%
Allowance as a percentage of non-performing loans 576.57% 725.92% 700.83% 396.98% 511.88%
- -----------------------
(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.
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 $56.8 million,
consisting of a $39.2 million allocated allowance and a $17.6 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.
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 $92.5 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 $33.6million and $23.3 million for the six months ended June 30,
2000 and 1999, respectively. Cash used for investing activities totaled $647.2
million and $338.7 million for the six months ended June 30, 2000 and 1999,
respectively. 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 $539.4 million, compared to $387.1 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 $443.1 million and $371.7
million, respectively. This represents a total of 82.2% 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 $270.3 million from
$238.0 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.
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 9.18% 10.86% 12.62%
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.
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 interest rates Projected change
----------------------------
(Dollars in thousands) (1) Net portfolio 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%
(1) Evaluation excludes BSC. See further discussion below.
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.
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 7 Months to 1 Year to 4 Years to
(Dollars in thousands) One Day 6 Months 12 Months 3 Years 5 Years
- -----------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and due $ 3,760 $ - $ - $ - $ -
Federal funds sold and
other short term investments 87,455 - - - -
Investment securities 12,237 26,266 27,485 169,702 122,532
Loans 1,127,964 835,816 82,995 214,446 219,389
Allowance for loan losses/
unearned fees - - - - -
Other assets - - - - -
----------------------------------------------------------------------------------------------
Total Assets $ 1,231,416 $ 862,082 $ 110,480 $ 384,148 $ 341,921
==============================================================================================
Liabilities and equity:
Deposits $ 1,926,152 $ 679,999 $ 101,694 $ 21,986 $ 2,036
Other borrowings - 125,755 5,745 500 1,500
Trust Preferred Securities - - - - -
Other liabilities - - - - -
Shareholders equity - - - - -
----------------------------------------------------------------------------------------------
Total Liabilities/equity $ 1,926,152 $ 805,754 $ 107,439 $ 22,486 $ 3,536
==============================================================================================
Gap $ (694,736) $ 56,328 $ 3,041 $ 361,662 $ 338,385
Cumulative gap $ (694,736) $ (638,408) $ (635,367) $ (273,705) $ 64,680
Cumulative gap/total assets -16.9% -15.5% -15.5% -6.7% 1.6%
More than Total Rate Non-Rate
(Dollars in thousands) 5 Years Sensitive Sensitive Total
- ---------------------------------------------------------------------------------------------------------------
Assets:
Cash and due $ - $ 3,760 $ 217,490 $ 221,250
Federal funds sold and
other short term investments - 87,455 - 87,455
Investment securities 593,107 951,329 - 951,329
Loans 233,902 2,714,512 5 2,714,517
Allowance for loan losses/
unearned fees - - (56,769) (56,769)
Other assets - - 188,477 188,477
--------------------------------------------------------------------------
Total Assets $ 827,009 $ 3,757,056 $ 349,203 $ 4,106,259
==========================================================================
Liabilities and equity:
Deposits $ 172 $ 2,732,039 $ 811,775 $ 3,543,814
Other borrowings - 133,500 - 133,500
Trust Preferred Securities 99,500 99,500 - 99,500
Other liabilities - - 59,177 59,177
Shareholders equity - - 270,268 270,268
--------------------------------------------------------------------------
Total Liabilities/equity $ 99,672 $ 2,965,039 $ 1,141,220 $ 4,106,259
==========================================================================
Gap $ 727,337 $ 792,017 $ (792,017) $ -
Cumulative gap $ 792,017 $ 792,017 $ - $ -
Cumulative gap/total assets 19.3% 19.3% 0.0% 0.0%
The foregoing table indicates that the Company had a one year gap of
$(635.4) million, or -15.8% of total assets, at June 30, 2000. In theory, this
would indicate that at June 30, 2000, $(635.4) 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% (excluding BSC) if rates rose
200 basis points immediately and would decrease a maximum of (10.3)% (excluding
BSC) if rates declined 200 basis points immediately. In addition, the results
indicate that notwithstanding the Company's gap position, which would indicate
that the net interest margin increases when rates rise, the Company's net
interest margin increases during rising rate periods due to the basis risk
imbedded in the Company's interest- bearing liabilities.
The above quantified evaluations exclude the impact of BSC because this
institution has not been converted to risk management system as to net portfolio
value and interest rate shock simulation analysis at June 30, 2000. The Company
has performed a preliminary analysis of BSC's risk profile and has determined
that BSC's exposure to interest rate risk is equal to or lower than that of the
Company as a whole.
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.