EXHIBIT 99.2
Management's Discussion of Trends and Performance Guidance
To assist investors, financial analysts and other interested parties in their
analysis of Greater Bay Bancorp ("Greater Bay" or the "Company"), we have
developed the following update of Greater Bay Bancorp's last quarter of 2001 and
full year 2002 performance guidance. The guidance is based on the most current
information available to the Company through the end of September 2001 and is
predicated on the current economic environment with a continued weakening in the
economy through mid 2002 and a very slow recovery beginning in late 2002. If the
current economic slowdown intensifies and we fall into a recession, Greater Bay
along with many other companies would have to revisit our 2002 forecasts.
General Overview
Greater Bay's outlook for the last quarter of 2001 and for the full year 2002
continues to be adversely impacted by the economy. Before the tragic events of
September 11, 2001, we were seeing signs that the economy in certain sectors was
stabilizing with indications that future prospects were becoming more positive.
However, since September 11, 2001, uncertainty has replaced the previously
indicated stabilization. This uncertainty has caused Greater Bay to critically
review its previously disclosed performance goals for the balance of 2001 and
into 2002.
For 2001 Greater Bay believes there is no change required in its earnings,
return on equity, return on assets or growth performance guidance; however, net
charge-offs are anticipated to be in the 55 basis point to 65 basis point range
of average loans, with the increase exclusively centered in our continued
aggressive review of the non-relationship shared national credit portfolio,
which is now less than 3.5% of the total loan portfolio.
Based on current economic conditions, and in anticipation of a continuing slow
economy through much of 2002, Greater Bay's outlook is as follows:
o Earnings Growth: Greater Bay continues to see its earnings growth
being at the top end of its peer group range, as the bank analyst
group covering Greater Bay Bancorp (Lehman Bros., Inc., Dain Rauscher
Wessels, Salomon Smith Barney, Legg Mason Wood Walker, Inc., US
Bancorp Piper Jaffray, Inc., Hoefer & Arnett, Inc. and Sandler O'Neill
& Partners, L.P.)/1/ indicates mid-cap banks will generate earnings
per share growth averaging 8% to 10%. Based on the current economic
environment and incorporating an additional 25 basis point to 50 basis
point decline in market interest rates, Greater Bay anticipates
earnings per share growth in the range of 11% to 17% for 2002.
/1/ Jefferies & Company, Inc. and Keefe, Bruyette & Woods, Inc. did not
currently have this information available.
o Revenue Growth: Greater Bay also sees its revenue growth being at the
top end of its peer group range, as the bank analyst group believes
mid-cap banks will generate revenue growth averaging 6% to 9%. Based
on the current economic environment and incorporating an additional 25
basis points to 50 basis points decline in market interest rates,
Greater Bay sees its revenue growth in the range of 9% to 15% for
2002.
o Net Interest Margin: Greater Bay Bancorp's net interest margin
continues to be adversely impacted by slower economic growth and the
continued downward pressure on market interest rates.
As previously indicated in a Form 8-K filed on June 26, 2001, during
periods of declining market interest rates, the Company's net interest
margin is pressured, as many of its loan assets which are tied to the
prime rate move downward immediately upon a market rate decline,
compared to its interest bearing liabilities, which do not re-price
downward as quickly.
Our previous discussions detailed in the Company's Form 8-K filed June
26, 2001 related to our shift in funding and restructuring of the
investment portfolio continue to be valid. During the third quarter of
2001, we completed approximately 80% of our investment portfolio
restructuring and the wholesale financing of our specialty finance
businesses. The continued impact of this change has been threefold.
First, it has increased the overall net interest income from
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operations, second it has allowed the Company to improve liquidity and
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reduce the duration of its investment portfolio and third it has
slightly reduced the Company's asset sensitive balance sheet. On a
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combined basis, this change has positioned the Company to slightly
reduce its exposure to declining interest rates, while also
effectively restructuring its balance sheet to take advantage of
market interest rates when they move upward.
The following table highlights the change in composition of the
Company's balance sheet at June 30, 2001 when compared to September
30, 2001:
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($ in 000's) % of Total Assets
Assets 6/30/01 9/30/01
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Loans 61.2% 56.9%
Investments 32.8% 37.1%
Other Assets 6.0% 6.0%
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100.0% 100.0%
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Total Assets $6,224,977 $6,843,524
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($ in 000's) % of Total Deposits
Deposits 6/30/01 9/30/01
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Demand, Non-interest Bearing 19.6% 19.7%
NOW,MMDA and Savings 47.7% 46.8%
Time Certificates 32.7% 33.5%
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100.0% 100.0%
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Total Deposits $4,316,752 $4,314,351
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($ in 000's) % of Total Liabilities & Equity
Liabilities & Equity 6/30/01 09/30/00
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Total Deposits 69.3% 63.1%
Other Borrowings 21.6% 25.9%
Other Liabilities 3.1% 5.1%
Equity 6.0% 5.9%
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100.0% 100.0%
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Total Liabilities & Equity $6,224,977 $6,843,524
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The impact on the Company's net interest margin from this change in
balance sheet mix has been a reduction in the net interest margin,
offset by the increase in average interest earning assets. The overall
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impact on the Company's net interest income and interest rate risk
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profile has been positive, as pro forma total net interest income
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increased from the restructuring, while the asset sensitive nature of
the balance sheet has been slightly reduced.
The following table details the Company's actual net interest margin
for the second quarter of 2001 compared to the Company's net interest
margin for the third quarter of 2001. The "no mix change" column
assumes that the composition and mix of the balance sheet had remained
constant from the second quarter of 2001, while the "current position"
column, details the Company's actual average net interest margin for
the third quarter of 2001.
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Q2 2001 Actual Q3 2001 Actual
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No Mix Change Current Position
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Average Average Average
($ in 000's) Balance Yield Balance Yield Balance Yield
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Loans & leases $3,759,152 9.03% $3,838,288 8.54% $3,838,288 8.54%
Investments 1,561,260 6.71% 1,601,394 6.49% 2,219,737 6.52%
Cash and cash equivalents 87,805 4.65% 82,386 4.14% 82,386 4.14%
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Interest-earning assets $5,408,217 8.29% $5,522,068 7.86% $6,140,411 7.73%
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Deposits $3,396,149 3.71% $3,488,586 3.38% $3,488,586 3.38%
Borrowings 957,798 4.89% 897,810 4.61% 1,516,153 4.50%
Non-interest bearing deposits and
other free funds 1,054,270 1,135,672 1,135,672
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Cost of funds $5,408,217 3.19% $5,522,068 2.88% $6,140,411 3.03%
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Net interest margin 5.10% 4.98% 4.70%
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Pro forma Net Interest
Income - Annualized $ 275,819 $ 274,999 $ 288,599
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The table above indicates that the balance sheet mix change reduced
the margin 28 basis points, while the impact of market interest rate
declines reduced the net interest margin by 12 basis points.
While the change in balance sheet mix and market rates have combined
to reduce the net interest margin, it has actually increased pro forma
net interest income by $13 million on an annualized basis. This has
been accomplished while still allowing the Company's balance sheet to
take advantage of the economy when interest rates rise.
The net interest margin table above details the impact on the
Company's average quarterly net interest margin, while the following
table details the end of period or static net interest margins for
June 30, 2001 compared to September 30, 2001:
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June 30, 2001 September 30, 2001
Actual Forecast
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No Mix Change Current Position
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End of End of End of
Period Period Period
($ in 000's) Balance Yield Balance Yield Balance Yield
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Loans & leases $3,778,584 8.88% $3,866,637 8.46% $3,866,637 8.46%
Investments 1,841,621 6.81% 1,882,823 6.51% 2,360,603 6.52%
Cash and cash equivalents 66,982 4.12% 70,256 4.02% 70,256 4.02%
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Interest-earning assets $5,687,187 8.15% $5,819,716 7.81% $6,297,496 7.72%
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Deposits $3,456,424 3.55% $3,492,165 3.18% $3,492,165 3.18%
Borrowings 1,200,488 4.65% 1,114,011 4.46% 1,591,791 4.39%
Non-interest bearing deposits and
other free funds 1,030,275 1,213,540 1,213,540
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Cost of funds $5,687,187 3.14% $5,819,716 2.76% $6,297,496 2.87%
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Net interest margin 5.01% 5.04% 4.84%
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Pro forma Net Interest
Income - Annualized $ 284,928 $ 293,314 $ 304,799
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The table above indicates that the end of period no mix change net
interest margin for September 30, 2001 actually increases slightly
from the end of the second quarter. This is due to funds cost
declining slightly more than yields on interest earning assets. The
end of period current mix net interest margin declines by 17 basis
points to 4.84%, due to a combination of lower asset yields and higher
funds costs. However, once again pro forma net interest income is
enhanced by the current balance sheet as pro forma annualized net
interest income based on the third quarter net interest margin
compared to the second quarter increased by $20 million.
On a prospective basis, the Company believes its net interest margin
will decline to the 4.55% to 4.60% range once the impact of the rate
changes in late September and early October are fully accounted for.
For every additional 25 basis point reduction in market interest
rates, the Company anticipates a corresponding 10 basis point to 15
basis point decline in its net interest margin. This relationship is
estimated to be reasonable through an additional 50 basis point
decline in market interest rates, assuming the mix and composition of
the balance sheet remains similar.
As previously indicated, the restructuring of the balance sheet has
reduced a small portion of the downward pressure on the Company's net
interest margin, but it has not substantially reduced the upside when
market interest rates begin their upward
trend. For every 25 basis point increase in rates, it is anticipated
that the Company's net interest margin will increase by approximately
10 to 12 basis points. Again, this assumes a similar mix in loans and
deposits. However, in an improving economy, our clients' demand for
loans should also increase, thus having the effect of increasing the
net interest margin at a more rapid pace.
o ROE: Greater Bay continues to see return on equity exceeding 20% for
2002.
o ROA: Greater Bay sees its return on assets goal of 1.4% being at the
upper end of its target range for 2002, given the current and
anticipated economic environment and the related impact of market
interest rates on the net interest margin. Based on this we currently
believe our return on assets for 2002 will be in the 1.3% to 1.4%
range, with upside potential when the economy recovers and rates begin
to increase.
o Loan Growth: Greater Bay's loan growth for 2002 will continue to
reflect our conservative underwriting approach, as we believe economic
conditions will continue to be difficult, at least until late 2002.
Based on these factors, we anticipate loan growth in the 10% range.
Currently the bank analysts who cover Greater Bay believe mid-cap
banks will have average loan growth in the 5% to 7% range for 2002.
o Deposit Growth: Greater Bay continues to focus on deposit growth and
we believe deposit growth for the full year 2002 will be in the 5% to
10% range. Currently the bank analysts who cover Greater Bay believe
mid-cap banks will generate average deposit growth in the 6% to 8%
range for 2002.
o Credit Quality: Credit quality continues to be a primary focus as we
believe this is an area where our style of relationship banking can
mitigate loss exposure. Our goal is to maintain non-performing assets
at less than 0.50% of total assets. This is lower than the Uniform
Bank Performance Report ratio of 0.62% at June 30, 2001 for peer banks
of Greater Bay.
o Net Charge-Offs: We recognize that credit quality is critical to
future performance. Based on our current review of economic conditions
and trends in our loan portfolio we believe Greater Bay will incur net
charge-offs in the range of 45 basis points to 55 basis points of
average loans in 2002. This is slightly below the 55 basis points to
65 basis points range projected for 2001. The reduction from 2001 is
predicated on the fact that the majority of the 2001 losses were in
the shared national credit (SNC) portfolio, which we believe will slow
in 2002 as this portfolio in our company continues to shrink as a
percentage of loans outstanding. We anticipate that the reduction of
losses in the shared national credit portfolio will be offset by
slightly higher charge-offs in other sectors of the loan portfolio.
o Summary: Greater Bay anticipates continuing to report operating
results on a historical basis that will place it in the top 10% of its
peers for 2002. We believe Greater Bay is positioned to take advantage
of the economic growth everyone hopes will occur in late 2002;
however, our plans and current goals do not assume a turn around
occurs. Should the economy strengthen, we believe loan and deposit
growth will increase, market interest rates will increase and our net
interest margin will expand, which will correspondingly have a
substantial increase in our net interest income. However, we also
recognize that should economic growth falter and our economy enter a
protracted recessionary period that Greater Bay and many other
companies would have to revisit their forecasts for 2002.
Our ability to continue providing excellent returns to our
shareholders during one of the sharpest declines in the economy and
market interest rates in our history is positive recognition of the
success of our clients, our people and our strategy.
Safe Harbor
Certain matters discussed in this Form 8-K constitute forward looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward looking statements relate to the Company's current expectations
regarding future operating results, growth in loans, deposits and assets, asset
quality, net loan charge-offs, level of loan loss reserves, loan quality,
continued success of its Super Community Banking strategy and the strength of
the local economy. These forward looking statements are subject to certain risks
and uncertainties that could cause the actual results, performance or
achievements to differ materially from those expressed, suggested or implied by
the forward looking statements. These risks and uncertainties include, but are
not limited to: (1) the impact of changes in interest rates, a decline in
economic conditions at the international, national and local levels and
increased competition among financial service providers on the Company's results
of operations, the Company's ability to continue its internal growth at
historical rates, the Company's ability to maintain its net interest spread, and
the quality of the Company's earning assets; (2) when and if any pending mergers
are consummated, as well as any difficulties that may be encountered in
integrating newly acquired businesses and in realizing operating efficiencies;
(3) government regulation; (4) the risks relating to the Company's warrant
positions; and (5) the other risks set forth in the Company's reports filed with
the Securities and Exchange Commission, including its Annual Report on Form 10-K
for the year ended December 31, 2000.