UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR __ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from ____ to ____. Commission file number 0-25034 GREATER BAY BANCORP (Exact name of registrant as specified in its charter) CALIFORNIA 77-0387041 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 2860 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303 (Address of principal executive offices) (Zip Code) (650) 813-8200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X No --- --- Outstanding shares of Common Stock, no par value, as of October 30, 1998: 9,596,331 This report contains a total of 38 pages. GREATER BAY BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997..................................................... 3 Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 1998 and 1997..................................................... 4 Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended September 30, 1998 and 1997..................................................... 5 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997............ 6 Notes to Consolidated Financial Statements............................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................... 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................... 36 Signatures............................................... 37 2 ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 1998 December 31, (Dollars in thousands) (unaudited) 1997* - --------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 55,399 $ 53,167 Federal funds sold 79,300 75,000 Other short term securities 91,412 103,549 ----------------------------- Cash and cash equivalents 226,111 231,716 Investment securities: Available for sale (amortized cost $313,741 and $166,169 at September 30, 1998 and December 31, 1997, respectively) 310,218 166,413 Held to maturity (market value $90,030 and $45,246 at September 30, 1998 and December 31, 1997, respectively) 88,914 44,461 Other securities 4,792 2,253 ----------------------------- Investment securities 403,924 213,127 Loans: Commercial 388,094 362,747 Real estate construction and land 153,378 112,514 Real estate term 245,340 196,217 Consumer and other 75,673 82,914 Deferred loan fees and discounts (2,966) (2,765) ----------------------------- Total loans, net of deferred fees 859,519 751,627 Allowance for loan losses (19,861) (16,394) ----------------------------- Total loans, net 839,658 735,233 Property, premises and equipment 10,650 8,498 Interest receivable and other assets 55,040 29,091 ----------------------------- Total assets $ 1,535,383 $ 1,217,665 ============================= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand, noninterest-bearing $ 237,596 $ 219,495 MMDA, NOW and savings 802,220 627,475 Time certificates, $100,000 and over 198,286 183,147 Other time certificates 49,830 41,031 ----------------------------- Total deposits 1,287,932 1,071,148 Other borrowings 89,735 32,355 Subordinated debt 3,000 3,000 Other liabilities 15,764 14,623 Company obligated mandatorily redeemable cumulative trust preferred securities of subsidiary trust holding solely junior subordinated debentures 50,000 20,000 ----------------------------- Total liabilities 1,446,431 1,141,126 ----------------------------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, no par value: 4,000,000 shares authorized; none issued - - Common stock, no par value: 24,000,000 shares authorized; 9,584,634 and 9,303,930 shares issued and outstanding as of September 30, 1998 and December 31, 1997, respectively** 55,548 52,268 Accumulated other comprehensive income 1,779 223 Retained earnings 31,625 24,048 ----------------------------- Total shareholders' equity 88,952 76,539 ----------------------------- Total liabilities and shareholders' equity $ 1,535,383 $ 1,217,665 ============================= *Restated to reflect the merger with Pacific Rim Bancorporation and Pacific Business Funding Corporation on a pooling of interests basis. **Restated to reflect 2-for-1 stock split declared for shareholders of record as of April 30, 1998. See notes to consolidated financial statements. 3 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------------- (Dollars in thousands, except per share amounts) (unaudited) 1998 1997* 1998 1997* - ------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on loans $21,199 $ 18,458 $ 61,429 $ 50,350 Interest on investment securities: Taxable 5,382 3,008 12,234 9,220 Tax - exempt 611 286 1,407 823 ------- ------- -------- ------- Total interest on investment securities 5,993 3,294 13,641 10,043 Other interest income 2,669 1,272 7,869 3,071 ------- ------- -------- ------- Total interest income 29,861 23,024 82,939 63,464 ------- ------- -------- ------- INTEREST EXPENSE Interest on deposits 10,968 7,939 29,221 22,489 Interest on long term borrowings 1,873 654 4,490 1,481 Interest on other borrowings 112 252 1,266 499 ------- ------- -------- ------- Total interest expense 12,953 8,845 34,977 24,469 ------- ------- -------- ------- Net interest income 16,908 14,179 47,962 38,995 Provision for loan losses 1,791 1,284 4,134 5,677 ------- ------- -------- ------- Net interest income after provision for loan losses 15,117 12,895 43,828 33,318 ------- ------- -------- ------- OTHER INCOME Trust fees 642 550 1,809 1,485 Service charges and other fees 361 433 1,130 1,207 Gain on sale of SBA loans 290 216 755 559 Gain (loss) on investments, net 4 5 54 (32) Warrant income 134 34 631 1,148 Other income 230 327 380 967 ------- ------- -------- ------- Total other income 1,661 1,565 4,759 5,334 OPERATING EXPENSES Compensation and benefits 5,753 5,137 16,974 15,038 Occupancy and equipment 1,542 1,391 4,472 4,036 Telephone, postage and supplies 429 342 1,268 1,013 Legal and other professional fees 403 526 1,165 1,476 Contribution to the GBB Foundation 192 - 893 - Marketing and promotion 368 344 853 896 Directors' fees 133 104 426 373 Client services 122 111 404 285 Insurance 87 - 262 - FDIC insurance and regulatory assessments 88 70 254 210 Other real estate owned 43 (10) 81 89 Legal settlement recovery - - - (1,700) Other 723 476 2,046 1,661 ------- ------- -------- ------- Total operating expenses, excluding merger costs 9,883 8,491 29,098 23,377 Merger costs 537 - 2,511 - ------- ------- -------- ------- Total operating expenses 10,420 8,491 31,609 23,377 ------- ------- -------- ------- Income before provision for income taxes 6,358 5,969 16,978 15,275 Provision for income taxes 1,964 2,147 5,383 5,453 ------- ------- -------- ------- Net income $ 4,394 $ 3,822 $ 11,595 $ 9,822 ======= ======= ======== ======= Net income per share - basic** $ 0.46 $ 0.41 $ 1.23 $ 1.06 ======= ======= ======== ======= Net income per share - diluted** $ 0.43 $ 0.38 $ 1.14 $ 1.00 ======= ======= ======== ======= * Restated on an historical basis to reflect the merger with Peninsula Bank of Commerce, Pacific Rim Bancorportion and Pacific Business Funding Corporation on a pooling of interests basis. ** Restated to reflect 2-for-1 stock split declared for shareholders of record as of April 30, 1998. See notes to consolidated financial statements. 4 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ (Dollars in thousands) (unaudited) 1998 1997* 1998 1997* - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 4,394 $ 3,822 $ 11,595 $ 9,822 Other comprehensive income: Unrealized holding gains (losses) arising during period (net of taxes of $1,112 and $(39) for the three months ended September 30, 1998 and 1997, and $1,066 and $13 for the nine months ended September 30, 1998 and 1997, respectively) 1,591 (56) 1,524 19 Reclassification adjustment for gains (losses) included in net income (net of taxes of $2 and $2 for the three months ended 1998 and 1997, and $22 and $(12) for the nine month ended 1998 and 1997, respectively) 2 3 32 (18) ------------------ ------------------ Other comprehensive income (losses) 1,593 (53) 1,556 1 ------------------ ------------------ Comprehensive income $ 5,987 $ 3,769 $ 13,151 $ 9,823 ================== ================== * Restated on an historical basis to reflect the merger with Peninsula Bank of Commerce, Pacific Rim Bancorporation and Pacific Business Funding Corporation on a pooling of interests basis. See notes to consolidated financial statements. 5 GREATER BAY BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, -------------------------------- (Dollars in thousands) (unaudited) 1998 1997* - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS - OPERATING ACTIVITIES Net income $ 11,595 $ 9,822 Reconcilement of net income to net cash from operations: Provision for loan losses 4,134 5,677 Depreciation and amortization 999 1,038 Deferred income taxes (1,427) (1,876) (Gain) loss on sale of investment, net - 58 Changes in: Accrued interest receivable and other assets (2,496) (4,456) Accrued interest payable and other liabilities 1,141 1,426 Deferred loan fees and discounts, net 201 518 ---------------------------- Operating cash flows, net 14,147 12,207 ---------------------------- CASH FLOWS - INVESTING ACTIVITIES Maturities and partial paydowns on of investment securities: Held to maturity 26,816 22,682 Available for sale 217,402 44,719 Purchase of investment securities: Held to maturity (70,986) (2,472) Available for sale (522,298) (93,215) Other securities (2,539) (559) Proceeds from sale of available for sale securities 162,872 10,948 Loans, net (108,770) (130,743) Purchase of property, premises and equipment (3,691) (1,129) Purchase of insurance policies (21,985) - ---------------------------- Investing cash flows, net (323,179) (149,769) ---------------------------- CASH FLOWS - FINANCING ACTIVITIES Net change in deposits 216,784 149,301 Net change in other borrowings - short-term (12,620) (7,175) Proceeds on other borrowings - long term 70,000 (500) Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures issued 30,000 20,000 Proceeds from sale of stock 3,281 1,875 Cash dividends (4,018) (2,050) ---------------------------- Financing cash flows, net 303,427 161,451 ---------------------------- Net change in cash and cash equivalents (5,605) 23,890 Cash and cash equivalents at beginning of period 231,716 191,600 ---------------------------- Cash and cash equivalents at end of period $ 226,111 $ 215,490 ============================ CASH FLOWS - SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest $ 33,801 $ 24,615 ============================ Income taxes $ 7,320 $ 6,825 ============================ Non-cash transactions: Additions to other real estate owned $ 105 $ 469 ============================ *Restated on an historical basis to reflect the merger with Peninsula Bank of Commerce, Pacific Rim Corporation and Pacific Business Funding Corporation on a pooling of interests basis. See notes to consolidated financial statements. 6 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The results of operations for the quarter ended September 30, 1998 are not necessarily indicative of the results expected for any subsequent quarter or for the entire year ended December 31, 1998. The financial statements should be read in conjunction with the consolidated financial statements, and the notes thereto, included in the 1997 annual report to shareholders. Consolidation and Basis of Presentation 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, Cupertino National Bank, Golden Gate Bank ("Golden Gate"), Mid-Peninsula Bank, Peninsula Bank of Commerce ("PBC"), GBB Capital I and GBB Capital II. All significant intercompany transactions and balances have been eliminated. Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current presentation. The accounting and reporting policies of the Company conform to generally accepted accounting principles and the prevailing practices within the banking industry. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of certain revenues and expenses during the reporting period. Actual results could differ from those estimates. Comprehensive Income On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS No. 130"). This statement requires companies to classify items of other comprehensive income by their nature in the financial statement and display the accumulated other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. As of September 30, 1998 and December 31, 1997, the only component of accumulated other comprehensive income was unrealized gains on securities available for sale. The changes to the balances of accumulated other comprehensive income are as follows: Accumulated Other Comprehensive (Dollars in thousands) Income - ------------------------------------------------------------------ Balance - as of December 31, 1997 $ 223 Current period change 1,556 ------- Balance - as of September 30, 1998 $ 1,779 ======= Per Share Data Net income per share is stated in accordance with Statement of Financial Accounting Standards No. 128 Earnings per Share. Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted net income per share is computed by dividing diluted net income available to common shareholders by the weighted average number of common shares and common equivalent shares outstanding including dilutive stock options. The computation of common stock equivalent shares is based on the weighted average market price of the Company's common stock throughout the period. All periods presented include the effect of the 2-for-1 stock split declared on March 24, 1998 and effective for shareholders of record on April 30, 1998 (see Note 4). 7 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 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 nine month periods ended September 30, 1998 and 1997: For the three months ended For the three months ended September 30, 1998 September 30, 1997 -------------------------------------- -------------------------------------- Average Average Per Income Shares* Per Share Income Shares* Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------ -------------------------------------- Net income $ 4,394 $ 3,822 Basic net income per share: Income available to common shareholders 4,394 9,525,000 $ 0.46 3,822 9,220,000 $ 0.41 Effect of dilutive securities: Stock options - 698,000 - - 723,000 - ----------------------------------- ----------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 4,394 10,223,000 $ 0.43 $ 3,822 9,943,000 $ 0.38 =================================== =================================== For the nine months ended For the nine months ended September 30, 1998 September 30, 1997 -------------------------------------- -------------------------------------- Average Average Per Income Shares* Per Share Income Shares* Share (Dollars in thousands, except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount - ------------------------------------------------------------------------------------------ -------------------------------------- Net income $ 11,595 $ 9,822 Basic net income per share: Income available to common shareholders 11,595 9,448,000 $ 1.23 9,822 9,181,000 $ 1.06 Effect of dilutive securities: Stock options - 756,000 - - 609,000 - ----------------------------------- ----------------------------------- Diluted net income per share: Income available to common shareholders and assumed conversions $ 11,595 10,204,000 $ 1.14 $ 9,822 9,790,000 $ 1.00 =================================== =================================== * Restated to reflect 2-for-1 stock split declared for shareholders of record as of April 30, 1998. Options to purchase 60,000 and 23,000 shares that were considered anti-dilutive whereby the options' exercise price was greater than the average market price of the common shares, during the quarter ended and year to date September 30, 1998, respectively, were excluded from this computation. 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 1997 merger with PBC and the 1998 mergers with Pacific Rim Bancorporation ("PRB"), the former parent of Golden Gate, and Pacific Business Funding Corporation ("PBFC"). Recent Accounting Pronouncements In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards, Employers' Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132"). This statement standardizes the disclosure requirements for pensions and other postretirement benefits and presents them in one footnote; requires that additional information be disclosed regarding changes in the benefit obligation and fair values of plan assets; eliminates certain disclosures that are no longer considered useful, including general descriptions of the plan and permits the aggregation of information about certain plans. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 132 is not expected to have a significant impact on the Company. 8 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 On June 15, 1998, FASB issued Statement of Financial Accounting Standards, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company intends to adopt SFAS No. 133 in the fourth quarter of 1998. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The adoption of SFAS No. 133 is not expected to have a significant impact on the Company . NOTE 2 -- MERGERS On August 31, 1998, PBFC, an asset-based specialty finance company merged with and into the Company. Upon consumation of the merger, the outstanding shares of PBFC were converted into an aggregate of 298,000 shares of the Company's stock. The stock was issued to former PBFC shareholders, in a tax-free exchange accounted for as a pooling-of-interests. 9 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 The following table sets forth the composition of the operations of the Company and PBFC for the six months ended June 30, 1998, prior to the consummation of the merger on August 31, 1998: As of (Dollars in thousands) June 30, 1998 - --------------------------------------------------------------- Net interest income: Greater Bay Bancorp $ 30,077 Pacific Business Funding Corporation 1,154 -------- Combined $ 31,231 ======== Provision for loan losses: Greater Bay Bancorp $ 2,243 Pacific Business Funding Corporation 100 ------- Combined $ 2,343 ======= Net income: Greater Bay Bancorp $ 6,628 Pacific Business Funding Corporation* 344 ------- Combined $ 6,972 ======= * Shown on a proforma basis to reflect taxes for PBFC which would have been incurred had PBFC been a C-Corporation. On May 8, 1998, PRB, the former holding company of Golden Gate, merged with and into the Company. Upon consumation of the merger, the outstanding shares of PRB were converted into an aggregate of 950,748 shares (as adjusted to reflect the stock split) of the Company's stock. The stock was issued to former PRB's sole shareholder, the Leo K. W. Lum PRB Revocable Trust (the "Trust"), in a tax-free exchange accounted for as a pooling-of-interest. The securities issued in the merger were sold in a private transaction pursuant to an applicable exemption from registration under the Securities Act of 1933, as amended (the "Securities Act"). 10 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 The following table sets forth the composition of the operations of the Company and PRB, on a consolidated basis with Golden Gate, for the three months ended March 31, 1998, prior to the consummation of the merger on May 8, 1998: As of (Dollars in thousands) March 31, 1998 - ------------------------------------------------------------------- Net interest income: Greater Bay Bancorp $ 13,366 Pacific Rim Bancorporation 1,285 -------- Combined $ 14,651 ======== Provision for loan losses: Greater Bay Bancorp $ 866 Pacific Rim Bancorporation 70 -------- Combined $ 936 ======== Net income: Greater Bay Bancorp $ 3,646 Pacific Rim Bancorporation 60 -------- Combined $ 3,706 ======== There were no significant transactions between the Company and PRB prior to the merger. All intercompany transactions have been eliminated. 11 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 NOTE 3 -- COMPANY OBLIGATED MANDATORILY REDEEMABLE CUMULATIVE TRUST PREFERRED SECURITIES OF AFFILIATE TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES On August 12, 1998, the Company completed an offering of Cumulative Trust Preferred Securities Series A ("TPS II - Series A") in an aggregate amount of $30 million through GBB Capital II, a wholly owned trust affiliate of the Company formed for the purpose of the offering. The securities issued in the offering were sold in a private transaction pursuant to an applicable exemption form registration under the Securities Act. In October 1998, the Company through GBB Capital II, commenced an offer to exchange its TPS II - Series A for a like amount of its registered Cumulative Trust Preferred Securities Series B ("TPS II - Series B"). The exchange offer was conducted in accordance with the terms of the initial issuance of the TPS II - Series A. The exchange offer is scheduled to expire at 5:00 p.m., Eastern Standard Time, on November 23, 1998, unless extended. The securities have an offering price (liquidation amount) of $1,000 per security and will receive distributions at a variable rate of interest, initially at 7.1875%. The interest rate will reset quarterly, equal to 3-month LIBOR plus 150 basis points, and interest will be cumulative and payable quarterly. As part of this transaction, the Company negotiated an interest rate swap to fix the cost of the offering at 7.55% for 10 years. The TPS II - Series A and B accrue and pay distributions quarterly beginning December 15, 1998 at a floating rate equal to the 3-month LIBOR plus 150 basis points on the liquidation amount of $1,000 per share TPS II - Series A and B. The expense for those distributions will be included in interest on long term borrowings. Greater Bay has fully and unconditionally guaranteed all of the obligations of GBB Capital II. The net proceeds from the sale of the TPS II - Series A and B have been invested by GBB Capital II in Junior Subordinated Debentures (the "Debentures") of Greater Bay. The TPS II - Series A and B are mandatorily redeemable, in whole or in part, upon repayment of the Debentures at their stated maturity of September 15, 2028 or their earlier redemption. The Debentures are redeemable prior to maturity at the option of the Company, on or after September 15, 2008, in whole at any time or in part from time to time. Greater Bay invested approximately $15 million of the net proceeds in the Company's subsidiary banks to increase their capital levels. The Company intends to use the remaining net proceeds for general corporate purposes. Under applicable regulatory guidelines, Greater Bay expects that a certain portion of the TPS II - Series A and B will qualify as Tier I Capital, and the remaining portion will qualify as Tier 2 capital. 12 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 NOTE 4 -- BORROWINGS The Company's borrowings are detailed as follows: September 30, December 31, (Dollars in thousands) 1998 1997 - -------------------------------------------------------------------------------- Other borrowings: Short term borrowings: Securities sold under agreements to repurchase $ 17,150 $ 19,480 Other short term notes payable 135 2,675 Advances under credit line - 7,750 -------- -------- Total short term borrowings 17,285 29,905 -------- -------- Long term borrowings: Securities sold under agreements to repurchase 50,000 - FHLB advances 20,000 - Promissory notes 2,450 2,450 -------- -------- Total other long term borrowings 72,450 2,450 -------- -------- Total other borrowings $ 89,735 $ 32,355 ======== ======== Subordinated notes, due September 15, 2005 $ 3,000 $ 3,000 -------- -------- Total subordinated debt $ 3,000 $ 3,000 ======== ======== During the nine month period ended September 30, 1998 and the twelve month period ended December 31, 1997, the average balance of securities sold under short term agreements to repurchase was $15,337,000 and $5,278,000, respectively, and the average interest rates during those periods were 5.35% and 5.71%, respectively. Securities sold under short term agreements to repurchase generally mature within 90 days of dates of purchase. During the nine month period ended September 30, 1998 and the twelve month period ended December 31, 1997, the average balance of federal funds purchased was $681,000 and $1,523,000, respectively, and the average interest rates during those periods were 5.53% and 5.32%, respectively. The Company has sold securities under long term agreements to repurchase which mature in the year 2003 and have an average interest rate of 5.21%. The counterparties to these agreements have put options which give them the right to demand early repayment. As of September 30, 1998, $40.0 million of these borrowings are subject to early repayment beginning in 1999 and $10.0 million are subject to early repayment beginning in 2000. The FHLB advances will mature in the year 2003 and have an average interest rate of 5.13%. The advances are collateralized by securities pledged to the FHLB. Under the terms of the advances, the FHLB has a put option which gives it the right to demand early repayment beginning in 1999. The promissory notes, which bear an interest rate of 13.76% and will mature April 15, 2000, were offered to PBFC's officers along with other accredited investors within the definition of Rule 501 under the Securities Act of 1933, as amended. The notes are redeemable by the Company at any time. The subordinated notes, which will mature on September 15, 2005, were offered to members of Cupertino National Bank's Board of Directors and bank officers along with other accredited investors within the definition of Rule 501 under the Securities Act of 1933, as amended. The notes bear an interest rate of 11.5%. The notes are redeemable by the Company any time after September 30, 1998 at a premium ranging from 0% to 5%. The notes qualify as Tier 2 capital for the Company. 13 Notes To Consolidated Financial Statements As of September 30, 1998 and 1997 and for the Three and Nine Months Ended September 30, 1998 and 1997 NOTE 5 -- STOCK SPLIT On March 24, 1998 the Company announced a 2-for-1 stock split of its common stock. This split was effective for shareholders of record as of April 30, 1998 with a payment date of May 15, 1998. All share and per share information has been retroactively restated to reflect this split. NOTE 6 -- CASH DIVIDEND The Company declared a cash dividend of $0.095 cents per share payable on October 15, 1998 to shareholders of record as of September 30, 1998. 14 Item 2--Management's Discussion and Analysis of Financial Condition And Results of Operations OVERVIEW Greater Bay Bancorp ("Greater Bay," on a parent-only basis, and the "Company," on a consolidated basis) was formed as the result of the merger in November 1996 between Cupertino National Bancorp, the former holding company for Cupertino National Bank ("CNB"), and Mid-Peninsula Bancorp, the former holding company for Mid-Peninsula Bank ("MPB"). In December 1997, the Company completed a merger with Peninsula Bank of Commerce ("PBC"), whereby PBC joined CNB and MPB as the third wholly owned banking subsidiary of Greater Bay. In May 1998, the Company completed a merger with Pacific Rim Bancorporation ("PRB"), the holding company for Golden Gate Bank ("Golden Gate"), whereby Golden Gate joined CNB, MPB and PBC as the fourth wholly owned banking subsidiary of Greater Bay. In August 1998, the Company completed a merger with Pacific Business Funding Corporation ("PBFC"). All mergers were accounted for as pooling of interests. All of the financial information for the Company for the periods prior to the mergers has been restated to reflect the pooling of interests, as if they occurred at the beginning of the earliest reporting period presented. The financial information includes the results of the Company's operating divisions, Greater Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater Bay International Banking Division, Greater Bay Trust Company, Pacific Business Funding and Venture Banking Group. 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 information under "Financial Highlights" and the Company's consolidated financial data included in the Company's 1997 Annual Report to Shareholders. 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 Company reported net income of $4.9 million (excluding merger costs, net of taxes) for the third quarter of 1998, compared with net income of $3.8 million, for the third quarter of 1997. Diluted net income per share was $0.47 (excluding merger costs, net of taxes) and $0.38 for the quarters ended September 30, 1998 and 1997, respectively. The Company reported net income, including merger costs of $4.4 million, and diluted net income per share of $0.43 for the quarter ended September 30, 1998. The annualized return on average assets and return on average shareholders' equity excluding merger costs net of tax was 1.27% and 21.79% for the third quarter of 1998, compared with 1.41% and 19.54%, respectively, for the comparable prior year period. The earnings for the third quarter of 1997 include $134,000 in warrant income. The Company occasionally receives warrants to acquire common stock from companies that are in the start-up or development phase. The timing and amount of income derived from the exercise and sale of client warrants typically depend upon factors beyond the control of the Company, and cannot be predicted with any degree of accuracy and are likely to vary materially from period to period. Net income totaled $13.3 million, (excluding merger costs, net of taxes) for the nine months ended September 30, 1998, versus $9.8 million for the respective 1997 period. Diluted net income per share was $1.30 (excluding merger costs, net of taxes) and $1.00 for the nine months ended 1998 and 1997, respectively. For the nine months of 1998, the annualized return on average assets, excluding merger costs, was 1.30% and the return on average shareholders' equity was 21.74% versus 1.29% and 17.85%, respectively, for the comparable prior year period. The Company's net income, including merger costs, was $11.6 million and its diluted net income per share was $1.14 for the year to date September 30, 1998. The increase in 1998 net income was the result of significant loan and deposit growth, which resulted in increased net interest income, and increases in trust fees, depositors' service fees and other fee income. Operating expense increases required to service and support the Company's growth partially offset the increase in revenues. 15 Management's Discussion and Analysis of Results of Operations And Financial Condition During the first quarter of 1998, Greater Bay established the Greater Bay Bancorp Foundation (the "Foundation"). The Foundation was formed to provide a vehicle through which the Company, its officers and directors can provide support to the communities in which the Company does business. The Foundation focuses its support on initiatives related to education, health and economic growth. To support the Foundation, the Company contributed appreciated warrants, which had an unrealized gain of $192,000 and $701,000 in the third and first quarter of 1998, respectively. The contribution of the warrants triggered recognition of warrant income of $893,000 ($631,000 net of related employee incentives). Concurrently, the Company recorded $893,000 of expense for the contribution to the GBB Foundation. For income tax purposes, the Company is not required to recognize the warrant income, however it is allowed to deduct the fair market value of the contributed warrants. As a result, the Company recognized a tax benefit of $385,000 from this transaction. In the first quarter of 1998, the Company recorded a $484,000 write down on equity securities in accordance with APB 18. The provision for loan losses was $4.1 million for the nine months ended September 30, 1998 and $5.7 million for the same period ended September 30, 1997. For the quarter ended September 30, 1998, the Company's provision for loan losses was $1.8 million, as compared to $1.3 million for the preceding quarter and $1.3 million for the quarter ended September 30, 1997. The ratio of loan loss reserve to total loans was 2.31% at September 30, 1998 compared to 2.18% at December 31, 1997 and 2.09% at September 30, 1997. Net Interest Income Net interest income for the third quarter of 1998 was $16.9 million, a $1.0 million increase over the second quarter of 1998 and a $2.8 million increase over the third quarter of 1997. The increase from the third quarter of 1997 to the third quarter of 1998 was primarily due to the $382.5 million, or 38.0% increase in average interest-earning assets which is partially offset by a 54 basis point decrease in the Company's yield on interest-earning assets from 9.06% in the third quarter of 1997 to 8.52% in the third quarter of 1998. Net interest income increased 19.2% in the quarter ended September 30, 1998 from the same quarter in 1997 despite the 64 basis point decrease in the Company's interest rate spread. The Company's interest rate spread was affected by a higher percentage of interest-earning assets in Investment Securities during the third quarter of 1998 compared to the same quarter in 1997. The interest rate spread for these periods was further reduced by the low spread earned on PBC's Special Deposit (discussed in Note 7 to the Financial Statements contained in the Company's Annual Report to Shareholders). The average investment and deposit balances related to the Special Deposit during these periods were $88.7 million and $91.5 million, respectively, on which the Company earned spreads of approximately 1.50%. Excluding PBC's Special Deposit, the interest rate spread would have been 4.27% and 5.02% for the third quarter of 1998 and 1997, respectively. 16 Management's Discussion and Analysis of Results of Operations And Financial Condition The following table presents, for the quarterly periods 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 September 30, 1998 ---------------------------------------- Average Average Yield/ (Dollars in thousands) Balance Interest Rate - -------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Federal funds sold $ 95,787 $ 1,396 5.78% Other short term investments 90,974 1,273 5.55% Investment securities: Taxable 328,811 5,382 6.49% Tax-exempt (1) 50,555 611 4.79% Loans (2), (3) 824,356 21,199 10.20% -------------------------- Total interest-earning assets 1,390,483 29,861 8.52% Noninterest-earning assets 128,106 -------------------------- Total assets $ 1,518,589 29,861 ============== ----------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and savings $ 809,352 7,645 3.75% Time deposits, over $100,000 204,859 2,698 5.23% Other time deposits 48,478 625 5.11% -------------------------- Total interest-bearing deposits 1,062,689 10,968 4.09% Other borrowings 72,692 1,112 6.07% Subordinated debt 3,000 87 11.51% TPS 37,428 786 8.33% -------------------------- Total interest-bearing liabilities 1,175,809 12,953 4.37% Noninterest bearing deposits 233,392 Other noninterest-bearing liabilities 23,990 Shareholders' equity 85,398 -------------------------- Total shareholders' equity and liabilities $ 1,518,589 12,953 ============== ----------- Net interest income $ 16,908 ======== Interest rate spread 4.15% Contribution of interest free funds 0.67% Net yield on interest-earning assets (4) 4.82% Three Months Ended June 30, 1998 ---------------------------------------- Average Average Yield/ (Dollars in thousands) Balance Interest Rate - -------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Federal funds sold $ 102,223 $ 1,403 5.51% Other short term investments 97,823 1,383 5.67% Investment securities: Taxable 238,025 3,636 6.13% Tax-exempt (1) 37,872 480 5.08% Loans (2), (3) 765,019 20,608 10.80% ------------------------- Total interest-earning assets 1,240,962 27,510 8.89% Noninterest-earning assets 135,022 ------------------------- Total assets $ 1,375,984 27,510 ============== ----------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and savings $ 735,456 6,826 3.72% Time deposits, over $100,000 154,721 2,072 5.37% Other time deposits 47,365 603 5.11% ------------------------- Total interest-bearing deposits 937,542 9,501 4.06% Other borrowings 97,870 1,517 6.22% Subordinated debt 3,000 87 11.60% TPS 20,000 487 9.77% ------------------------- Total interest-bearing liabilities 1,058,412 11,592 4.39% Noninterest bearing deposits 217,839 Other noninterest-bearing liabilities 20,193 Shareholders' equity 79,540 ------------------------- Total shareholders' equity and liabilities $ 1,375,984 11,592 ============== ----------- Net interest income $ 15,918 ======== Interest rate spread 4.50% Contribution of interest free funds 0.65% Net yield on interest-earning assets (4) 5.14% Three Months Ended September 30, 1997 ---------------------------------------- Average Average Yield/ (Dollars in thousands) Balance Interest Rate - -------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Federal funds sold $ 93,420 $ 1,239 5.26% Other short term investments 96,314 1,198 4.93% Investment securities: Taxable 115,705 1,843 6.32% Tax-exempt (1) 21,783 286 5.21% Loans (2), (3) 680,724 18,458 10.76% -------------------------- Total interest-earning assets 1,007,946 23,024 9.06% Noninterest-earning assets 63,840 -------------------------- Total assets $ 1,071,786 23,024 ============== ----------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and savings $ 596,712 $ 5,502 3.66% Time deposits, over $100,000 132,343 1,693 5.08% Other time deposits 57,488 744 5.13% -------------------------- Total interest-bearing deposits 786,543 7,939 4.00% Other borrowings 11,235 337 11.90% Subordinated debt 3,000 87 11.51% TPS 20,000 482 9.56% -------------------------- Total interest-bearing liabilities 820,778 8,845 4.28% Noninterest bearing deposits 165,265 Other noninterest-bearing liabilities 13,409 Shareholders' equity 72,334 -------------------------- Total shareholders' equity and liabilities $ 1,071,786 8,845 ============== ----------- Net interest income $ 14,179 ========= Interest rate spread 4.79% Contribution of interest free funds 0.79% Net yield on interest-earning assets (4) 5.58% (1) The tax equivalent yields earned on the tax exempt securities are 6.91%, 7.35% and 7.56% for the quarters ended September 30, 1998, June 30, 1998 and September 30, 1997, respectively, using the federal statuary rate of 34%. (2) Nonaccrual loans are excluded in the average balance. (3) Interest income includes loan fees of $690,000, $871,000 and $1,014,000 for the quarters ended September 30, 1998, June 30, 1998 and September 30, 1997, respectively. (4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. 17 Management's Discussion and Analysis of Results of Operations And Financial Condition 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 in loans and investments, compared to the volume of interest-bearing liabilities represented by deposits and borrowings, combined with the spread, produces the changes in the net interest income between periods. The table below sets forth, for the periods indicated, a summary of the changes in average asset and liability balances (volume) and changes in average interest rates (rate): Three Months Ended September 30, 1998 Compared with June 30, 1998 favorable / (unfavorable) (Dollars in thousands)(1) Volume Rate Net - ----------------------------------------------------------------------------------------------------- INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ (82) $ 75 $ (7) Other short term investments (85) (25) (110) Investment securities: Taxable 1,509 237 1,746 Tax-exempt 159 (28) 131 Loans 1,681 (1,090) 591 ----------------------------- Total interest income 3,182 (831) 2,351 ----------------------------- INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (768) (51) (819) Time deposits over $100,000 (682) 56 (626) Other time deposits (20) (2) (22) ----------------------------- Total interest-bearing deposits (1,470) 3 (1,467) Other borrowings 371 34 405 Subordinated debt - - - TPS (378) 79 (299) ----------------------------- Total interest expense (1,477) 116 (1,361) ----------------------------- Net increase (decrease) in net interest income $1,705 $ (715) $ 990 ============================= Three Months Ended September 30, 1998 Compared with September 30, 1997 favorable / (unfavorable) (Dollars in thousands)(1) Volume Rate Net - ---------------------------------------------------------------------------------------------------- INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ 32 $ 125 $ 157 Other short term investments (68) 143 75 Investment securities: Taxable 3,487 52 3,539 Tax-exempt 349 (24) 325 Loans 3,717 (976) 2,741 ------------------------------ Total interest income 7,517 (680) 6,837 ------------------------------ INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (2,005) (138) (2,143) Time deposits over $100,000 (954) (51) (1,005) Other time deposits 116 3 119 ------------------------------ Total interest-bearing deposits (2,843) (186) (3,029) Other borrowings (1,012) 237 (775) Subordinated debt - - - TPS (372) 68 (304) ------------------------------ Total interest expense (4,227) 119 (4,108) ------------------------------ Net increase (decrease) in net interest income $ 3,290 $ (561) $ 2,729 ============================== (1) 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 in average loans. THE QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997 ------------------------------------------------------------------- Interest income in the third quarter ended September 30, 1998 increased 29.7% to $29.8 million from $23.0 million in the same period in 1997. This was primarily due to the $7.5 million favorable volume variance which resulted from a $382.5 million, or 38.0%, increase in average interest-earning assets over the comparable prior year. Average loans increased $143.7 million, or 21.1%, to $824.4 million for the third quarter of 1998 as compared to $680.7 million for the third quarter of 1997. The average yield on interest-earning assets decreased 54 basis points to 8.52% in the third quarter of 1998 from 9.06% in the same period of 1997 primarily due to the decrease on the yields on loans. Average yields on loans decreased 56 basis points to 10.20% in the three months ended September 30, 1998 from 10.76% for the same period in 1997. Interest expense in the third quarter of 1998 increased 46.4% to $12.9 million from $8.8 million for the same period in 1997. This increase was due to greater volumes of interest-bearing liabilities offset by slightly lower interest rates paid on interest-bearing liabilities. Average interest-bearing liabilities increased 43.3% to $1.2 billion in the third quarter of 1998 from $820.8 million in the same period for 1997 due to the efforts of the Company's relationship managers in generating core deposits from their client relationships, deposits derived from the activities of the Greater Bay Trust Company and the Venture Banking Group, both divisions of CNB, and increases in other borrowings. 18 Management's Discussion and Analysis of Results of Operations And Financial Condition During the third quarter of 1998, average noninterest-bearing deposits increased to $233.4 million from $165.3 million in the same period in 1997. Average noninterest-bearing deposits comprised 18.0% of total deposits for the third quarter of 1998, compared to 17.4% for the same period in 1997. THE QUARTER ENDED SEPTEMBER 30, 1998 COMPARED TO JUNE 30, 1998 -------------------------------------------------------------- Interest income increased 8.6% to $29.8 million for the third quarter of 1998, as compared to $27.5 million for the previous quarter. Average interest- earning assets increased 12.0% in the third quarter of 1998 from $1.2 billion for the previous quarter. The increase in interest income for the third quarter of 1998, as compared to the prior quarter, was primarily the result of an increase in the average balances of loans which increased $59.3 million and investments which grew $96.6 million from the prior quarter. The impact of increases in average balances on loans was offset by a decrease in the yield earned on those assets. The yield on the higher volume of average interest- earning assets declined 37 basis points to 8.52% in the third quarter of 1998 from 8.89% in the second quarter of 1998, primarily as a result of decreases in market rates of interest and the purchase of investments with shorter maturities. Interest expense in the third quarter of 1998 increased 11.7% to $12.9 million from $11.5 million in the prior quarter. The increase is primarily the result of increased average deposits, which rose to $1.1 billion for the third quarter of 1998, as compared to $937.5 million for the prior quarter. As a result of the changes in the liability mix, the average rate paid on average interest-bearing liabilities decreased 2 basis points to 4.37% in the third quarter of 1998 from 4.39% in the prior quarter. Corresponding to the growth in average interest-earning assets, average interest-bearing liabilities increased 11.1% to $1.2 billion in the third quarter of 1998 from $1.1 billion for the second quarter of 1998. As a result of the foregoing, the Company's interest rate spread declined to 4.15% in the third quarter of 1998 compared to 4.50% in the prior quarter and the net yield on interest-earning assets declined to 4.82% from 5.14%. 19 Management's Discussion and Analysis of Results of Operations And Financial Condition The following tables present the Company's average balance sheet, net interest income and interest rates for the nine month periods presented, as well as the analysis of variances due to rate and volume: Nine Months Ended September 30, 1998 ------------------------------------ Average Average Yield/ (Dollars in thousands) Balance Interest Rate - ----------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Federal funds sold $ 91,478 $ 3,728 5.45% Other short term investments 100,192 4,141 5.53% Investment securities: Taxable 262,400 12,234 6.23% Tax-exempt (1) 37,033 1,407 5.08% Loans (2), (3) 788,743 61,429 10.41% Total interest-earning assets 1,279,846 82,939 8.66% Noninterest-earning assets 89,627 ------------------------ Total assets $ 1,369,473 82,939 ============= ---------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and savings $ 733,809 20,426 3.72% Time deposits, over $100,000 178,266 6,963 5.22% Other time deposits 47,392 1,832 5.17% ------------------------ Total interest-bearing deposits 959,467 29,221 4.07% Other borrowings 73,959 3,736 6.75% Subordinated debt 3,000 259 11.54% TPS 25,495 1,761 9.23% ------------------------ Total interest-bearing liabilities 1,061,921 34,977 4.40% Noninterest bearing deposits 210,158 Other noninterest-bearing liabilities 15,804 Shareholders' equity 81,590 ------------------------ Total shareholders' equity and liabilities $ 1,369,473 34,977 ============= ---------- Net interest income $ 47,962 ======== Interest rate spread 4.26% Contribution of interest free funds 0.75% Net yield on interest-earning assets (4) 5.01% Nine Months Ended September 30, 1997 --------------------------------------- Average Average Yield/ (Dollars in thousands) Balance Interest Rate - ----------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS: Federal funds sold $ 74,253 $ 2,952 5.32% Other short term investments 97,675 3,783 5.18% Investment securities: Taxable 118,766 5,557 6.26% Tax-exempt (1) 21,419 823 5.14% Loans (2), (3) 628,139 50,350 10.72% ------------------------ Total interest-earning assets 940,253 63,464 9.02% Noninterest-earning assets 135,397 ------------------------ Total assets $ 1,075,650 63,464 ============= ---------- INTEREST-BEARING LIABILITIES: Deposits: MMDA, NOW and savings $ 556,597 15,421 3.70% Time deposits, over $100,000 116,500 4,471 5.13% Other time deposits 64,105 2,597 5.42% ------------------------ Total interest-bearing deposits 737,202 22,489 4.08% Other borrowings 22,263 751 4.51% Subordinated debt 3,000 259 11.54% TPS 13,480 970 9.62% ------------------------ Total interest-bearing liabilities 775,945 24,469 4.22% Noninterest bearing deposits 154,642 Other noninterest-bearing liabilities 10,400 Shareholders' equity 134,663 ------------------------ Total shareholders' equity and liabilities $ 1,075,650 24,469 ============= ---------- Net interest income $ 38,995 ======== Interest rate spread 4.81% Contribution of interest free funds 0.74% Net yield on interest-earning assets (4) 5.54% (1) The tax equivalent yields earned on the tax exempt securities are 7.21% and 7.29% at September 30, 1998 and September 30, 1997, respectively, using the federal statuary rate of 34%. (2) Nonaccrual loans are excluded in the average balance. (3) Interest income includes loan fees of $2,431,000, and $2,633,000 for the nine months ended September 30, 1998 and September 30, 1997, respectively. (4) Net yield on interest-earning assets during the period equals (a) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (b) average interest-earning assets for the period. 20 Management's Discussion and Analysis of Results of Operations And Financial Condition Nine Months Ended September 30, 1998 Compared with September 30, 1997 favorable / (unfavorable) (Dollars in thousands)(1) Volume Rate Net - --------------------------------------------------------------------------------------------------- INTEREST EARNED ON INTEREST-EARNING ASSETS Federal funds sold $ 700 $ 76 $ 776 Other short term investments 99 259 358 Investment securities: Taxable 6,697 (20) 6,677 Tax-exempt 593 (9) 584 Loans 12,547 (1,468) 11,079 -------- -------- -------- Total interest income 20,636 (1,162) 19,474 -------- -------- -------- INTEREST EXPENSE ON INTEREST-BEARING LIABILITIES Deposits: MMDA, NOW and savings (4,932) (73) (5,005) Time deposits over $100,000 (2,411) (81) (2,492) Other time deposits 651 114 765 -------- -------- -------- Total interest-bearing deposits (6,692) (40) (6,732) Other borrowings (2,458) (527) (2,985) Subordinated debt - - - TPS (831) 40 (791) -------- -------- -------- Total interest expense (9,981) (527) (10,508) -------- -------- -------- Net increase (decrease) in net interest income $ 10,655 $ (1,689) $ 8,966 ======== ======== ======== (1) 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 YEAR TO DATE SEPTEMBER 30, 1998 COMPARED TO SEPTEMBER 30, 1997 ------------------------------------------------------------------ Net interest income totaled $48.0 million for the nine months of 1998, an increase of $9.0 million, or 23.0%, from the $39.0 million total for the nine months of 1997. The increase in net interest income was attributable to a $19.5 million, or 30.7%, increase in interest income, offset by a $10.5 million, or 42.9%, increase in interest expense over the comparable prior year end. The $19.5 million increase in interest income for the nine months of 1998, as compared to the nine months of 1997, was primarily due to a $20.6 million favorable volume variance and a $1.2 million unfavorable rate variance. The favorable volume variance was attributable to growth in average interest-earning assets, which increased $339.6 million, or 36.1%, from the prior year comparable period. The increase was offset by a decrease in the yield on average interest- earning assets of approximately 36 basis points for the nine months of 1998, as compared to the respective prior year period. Total interest expense for the nine months of 1998 increased $10.5 million from the nine months of 1997. This increase was primarily due to an unfavorable volume variance of $10.0 million which resulted from a $286.0 million, or 36.9%, increase in average interest-bearing liabilities for the nine months of 1998 over the comparable prior year period. For the nine months ended September 30, 1998, the Company's net interest spread of 4.26% reflected a decrease from 4.81%, as compared to the respective prior year. 21 Management's Discussion and Analysis of Results of Operations And Financial Condition Certain client service expenses were incurred by the Company with respect to its noninterest-bearing liabilities. These expenses include messenger services, check supplies and other related items and are included in operating expenses. Had they been included, 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 September 30, -------------------------------- (Dollars in thousands) 1998 1997 - ----------------------------------------------------------------------------------------------- Average noninterest bearing demand deposits $ 233,392 $ 165,265 Client service expenses 122 83 Client service expenses, annualized 0.21% 0.20% IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS: Net yield on interest-earning assets 4.82% 5.58% Impact of client service expense (0.03)% (0.03)% -------------------------------- Adjusted net yield on interest-earning assets (1) 4.79% 5.55% ================================ Nine Months Ended September 30, -------------------------------- (Dollars in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------ Average noninterest bearing demand deposits $ 210,158 $ 154,642 Client service expenses 404 268 Client service expenses, annualized 0.26% 0.23% IMPACT ON NET YIELD ON INTEREST-EARNING ASSETS: Net yield on interest-earning assets 5.01% 5.54% Impact of client service expense (0.04)% (0.04)% -------------------------------- Adjusted net yield on interest-earning assets (1) 4.97% 5.50% -------------------------------- (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. Provision for Loan Losses The provision for loan losses creates an allowance for future loan losses. The loan loss provision for each year is dependent on 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. The Company performs a regular assessment of the risk inherent in its loan portfolio, as well as a detailed review of each asset determined to have identified weaknesses. Based on this analysis, which includes reviewing historical loss trends, current economic conditions, industry concentrations and specific reviews of assets classified with identified weaknesses, the Company makes a provision for potential loan losses. Specific allocations are made for loans where the probability of a loss can be defined and reasonably determined, while the balance of the provisions for loan losses are based on historical data, delinquency trends, economic conditions in the Company's market area and industry averages. Annual fluctuations in the provision for loan losses result from management's assessment of the adequacy of the allowance for loan losses, and ultimate loan losses may vary from current estimates. The provision for loan losses was $1.8 million in the third quarter of 1998, an increase of $444,000 from the $1.3 million in the second quarter of 1998, and a $507,000 increase from the $1.3 million in the third quarter of 1997. Nonperforming loans, comprised of nonaccrual loans, accruing loans past due 90 days or more, and restructured loans were $3.3 million at September 30, 1998, compared with $4.2 million at December 31, 1997, and $6.6 million at September 30, 1997. Simultaneously, the Company's ratio of loan loss reserve to total loans was 2.31% at September 30, 1998 compared to 2.18% at December 31, 1997 and 2.09% at September 30, 1997. For further information on nonperforming and classified loans and the allowance for loan losses, see - "Nonperforming and Classified Assets" herein. 22 Management's Discussion and Analysis of Results of Operations And Financial Condition Other Income Total other income was $1.7 million for the third quarter of 1998, an increase of $90,000 from the second quarter of 1998, and an increase of $96,000 from the third quarter of 1997. The following table sets forth information by category of other income for the periods indicated. At and for the quarters ended September 30, June 30, March 31, December 31, September 30, --------------------------------------------------------------------------- (Dollars in thousands) 1998 1998 1998 1997 1997 - --------------------------------------------------------------------------------------------------------------------- Trust fees $ 642 $ 617 $ 550 $ 603 $ 550 Service charges and other fees 361 349 420 394 433 Gain on sale of SBA loans 290 221 244 269 216 Gain (loss) on investments, net 4 42 8 25 5 Other 230 342 (193) 268 327 -------------------------------------------------------------------------- 1,527 1,571 1,029 1,559 1,531 Warrant income 134 - 497 14 34 -------------------------------------------------------------------------- Total $ 1,661 $ 1,571 $ 1,526 $ 1,573 $ 1,565 ========================================================================== Operating Expenses The following table represents the major components of operating expenses for the periods indicated: At and for the periods ended September 30, June 30, March 31, ---------------------------------------- (Dollars in thousands) 1998 1998 1998 - ------------------------------------------------------------------------------------------------------------- Compensation and benefits $ 5,753 $ 5,689 $ 5,532 Occupancy and equipment 1,542 1,514 1,416 Legal and other professional fees 403 386 376 Telephone, postage and supplies 429 392 447 Contribution to GBB Foundation 192 - 701 Marketing and promotion 368 335 150 Directors' fees 133 142 151 Client services 122 116 166 FDIC insurance and regulatory assessments 88 77 89 Expenses on other real estate owned 43 15 23 Other 810 814 684 ---------------------------------------- Total operating expenses, excluding merger costs $ 9,883 $ 9,480 $ 9,735 Merger costs 537 1,974 - ---------------------------------------- Total operating expenses $ 10,420 $ 11,454 $ 9,735 ======================================== Efficiency ratio 56.12% 65.49% 58.45% Efficiency ratio, before merger costs 53.22% 54.21% 58.45% Total operating expenses to average assets* 2.72% 3.34% 3.18% Total operating expenses to average assets, before merger costs* 2.58% 2.76% 3.18% At and for the periods ended December 31, September 30, ------------------------------------- (Dollars in thousands) 1997 1997 - ------------------------------------------------------------------------------------------------- Compensation and benefits $ 5,449 $ 5,137 Occupancy and equipment 1,357 1,391 Legal and other professional fees 417 526 Telephone, postage and supplies 362 342 Contribution to GBB Foundation - - Marketing and promotion 335 344 Directors' fees 119 104 Client services 80 111 FDIC insurance and regulatory assessments 73 70 Expenses on other real estate owned 25 (10) Other 1,348 476 ------------------------ Total operating expenses, excluding merger costs $ 9,565 $ 8,491 Merger costs 3,333 - ------------------------ Total operating expenses $ 12,898 $ 8,491 ======================== Efficiency ratio 76.73% 53.93% Efficiency ratio, before merger costs 56.90% 53.93% Total operating expenses to average assets* 4.50% 3.14% Total operating expenses to average assets, before merger costs* 3.34% 3.14% *Annualized Operating expenses totaled $9.9 million for the third quarter of 1998, an increase of $403,000 from the second quarter of 1998, and an increase of $1.4 million from the third quarter of 1997. The ratio of operating expenses to average assets at September 30, 1998 and 1997 was 2.72% and 3.14%, respectively. 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 volume of income while a decrease would indicate a more efficient allocation of resources. The Company's efficiency ratio for the third quarter of 1998 was 56.12%, compared to 53.93% 23 Management's Discussion and Analysis of Results of Operations And Financial Condition for the same period in 1997. Excluding merger costs, the Company's efficiency ratios were 53.22% and 53.93% for quarters ended September 30, 1998 and 1997, respectively. Compensation and benefits expenses increased in the three months ended September 30, 1998 to $5.8 million compared to $5.7 million at June 30, 1998 and $5.1 million at September 30, 1997. The increase in compensation and benefits is due primarily to the additions in personnel made to accommodate the growth of the Company. Income Taxes The Company's effective income tax rate for the quarter ended September 30, 1998 was 30.89%, compared to 35.97% for the same period in 1997. The effective rate in 1998 was lower than the statutory rate due to tax-exempt income on municipal securities, the tax benefit of the donation of appreciated warrants to the Foundation and the utilization of PRB's NOL carry-forward. The effective income tax rate for the nine month period ended September 30, 1998 was 31.71%, as compared to 34.67% for the nine month period ended September 30, 1997. FINANCIAL CONDITION Total assets increased 26.1% to $1.5 billion at September 30, 1998, compared to $1.2 billion at December 31, 1997. The increases in 1998 were primarily due to increases in the Company's investment and loan portfolio funded by long term borrowings as well as growth in deposits. Included in total assets at September 30, 1998 and December 31, 1997 were the invested proceeds of a Special Deposit of $89.2 million and $88.1 million, respectively. This deposit was received in late 1996 and management anticipates that a significant portion of this deposit may be withdrawn at some point in 1998. Loans Total loans, net of deferred fees, increased 19.2%, on an annualized basis, to $859.5 million at September 30, 1998, compared to $751.6 million at December 31, 1997. The increases in loan volumes in 1998 were primarily due to the strong economy in the Company's market areas coupled with the business development efforts by 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, which could 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: 24 Management's Discussion and Analysis of Results of Operations And Financial Condition September 30, December 31, 1998 1997 -------------------------------------------------- (Dollars in thousands) Amount % Amount % - ------------------------------------------------------------------------------------------------------- Commercial $ 388,094 46.4% $ 362,747 49.3% Real estate construction and land 153,378 18.3 112,514 15.3 Real estate term 245,340 29.2 196,217 26.7 Consumer and other 75,673 8.9 82,914 11.3 ------------------------------------------------ Total loans, gross 862,485 102.8 754,392 102.6 Deferred fees and discounts, net (2,966) -0.4 (2,765) -0.4 ------------------------------------------------ Total loans, net of deferred fees 859,519 102.4 751,627 102.2 Allowance for loan losses (19,861) -2.4 (16,394) -2.2 ------------------------------------------------ Total loans $ 839,658 100.0% $ 735,233 100.0% ================================================ Nonperforming and Classified Assets Management generally places loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is generally reversed from income. Loans are charged-off when management determines that collection has become unlikely. Restructured loans are those where the Company 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 periods ended September 30, June 30, March 31, --------------------------------------- (Dollars in thousands) 1998 1998 1998 - ----------------------------------------------------------------------------------------------------------- Nonperforming loans Nonaccrual loans $ 2,919 $ 3,758 $ 3,152 Accruing loans past due 90 days or more - 75 108 Restructured loans 377 531 903 ------------------------------------- Total nonperforming loans 3,296 4,364 4,163 Other real estate owned 905 1,001 1,001 ------------------------------------- Total nonperforming assets $ 4,201 $ 5,365 $ 5,164 ===================================== Nonperforming assets to total loans and other real estate owned 0.50% 0.63% 0.67% At and for the periods ended December 31, September 30, -------------------------- (Dollars in thousands) 1997 1997 - ---------------------------------------------------------------------------------------------- Nonperforming loans Nonaccrual loans $ 2,971 $ 4,565 Accruing loans past due 90 days or more 158 575 Restructured loans 1,062 1,453 -------------------------- Total nonperforming loans 4,191 6,593 Other real estate owned 1,303 1,069 -------------------------- Total nonperforming assets $ 5,494 $ 7,662 ========================== Nonperforming assets to total loans and other real estate owned 0.75% 1.11% At September 30, 1998, the Company had $2.9 million in nonaccrual loans. Interest income forgone on nonperforming loans outstanding totaled $86,000 and $110,000 for the quarter ended September 30, 1998 and 1997, respectively. Interest income recognized for the quarter on nonperforming loans at September 30, 1998 and September 30, 1997 was $7,000 and $11,000, respectively. The Company records OREO at the lower of carrying value or fair value less estimated costs to sell. Estimated losses that result from the ongoing periodic valuation of these properties are charged to earnings through a provision for losses on foreclosed property in the period in which they are identified. At September 30, 1998, OREO consisted of six properties acquired through foreclosure with a carrying value of $905,000. The policy of the Company is to review each loan in the portfolio to identify problem credits. There are three classifications for problem loans: "substandard," "doubtful" and "loss." Substandard loans have one or more defined weakness 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 25 Management's Discussion and Analysis of Results of Operations And Financial Condition 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 "loss" is considered uncollectible 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 periods ended September 30, June 30, March 31, December 31, September 30, --------------------------------------------------------------------------- (Dollars in thousands) 1998 1998 1998 1997 1997 - ----------------------------------------------------------------------------------------------------------------- Substandard $ 12,807 $ 9,068 $ 9,138 $ 15,723 $ 17,119 Doubtful 1,129 1,041 1,092 1,377 714 Loss - - 47 49 272 Other real estate owned 905 1,001 1001 1,303 1,069 --------------------------------------------------------------------------- Classified assets $ 14,841 $ 11,110 $ 11,278 $ 18,452 $ 19,174 =========================================================================== Classified assets to total loans and other real estate owned 1.72% 1.29% 1.44% 2.45% 2.72% Allowance for loan losses to total classified assets 133.82% 161.88% 146.88% 88.85% 76.63% With the exception of these classified loans, management was not aware of any loans as of September 30, 1998 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 as nonperforming or classified assets 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 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. The Company has an active credit administration function which includes, in addition to internal reviews, the regular use of an outside loan review firm to review the quality of the loan portfolio. Senior management, the officer's loan committee and the director's loan committee review credit quality issues on a regular basis. 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 and economic conditions in the Company's market areas. See - "Provision for Loan Losses" herein. The allowance is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged-off when they are deemed to be uncollectible; recoveries are generally recorded only when cash payments are received. The following table sets forth information concerning the Company's allowance for loan losses at the dates and for the periods indicated: 26 Management's Discussion and Analysis of Results of Operations And Financial Condition At and for the periods ended September 30, June 30, March 31, ------------------------------------------------ (Dollars in thousands) 1998 1998 1998 - -------------------------------------------------------------------------------------------------------------- Period end loans outstanding $ 859,519 $ 819,736 $ 782,948 Average loans outstanding $ 824,256 $ 794,786 $ 752,381 Allowance for loan losses: Balance at beginning of period $ 17,985 $ 16,565 $ 16,394 Charge-offs: Commercial (13) - (734) Real estate construction and land - (4) - Real estate term - - (2) Consumer and other (27) (14) (119) ------------------------------------------------ Total charge-offs (40) (18) (855) ------------------------------------------------ Recoveries: Commercial 13 19 22 Real estate construction and land - - - Real estate term - - - Consumer and other - 1 9 ------------------------------------------------ Total recoveries 13 20 31 ------------------------------------------------ Net charge-offs (27) 2 (824) Provision charged to income (1) 1,903 1,418 995 ------------------------------------------------ Balance at end of period $ 19,861 $ 17,985 $ 16,565 ================================================ Quarterly net charge-offs to average loans outstanding during the period, annualized 0.02% 0.01% 0.61% Year to date net charge-offs to average loans outstanding during the period, annualized 0.20% 0.30% 0.61% Allowance as a percentage of average loans outstanding 2.41% 2.26% 2.20% Allowance as a percentage of period end loans outstanding 2.31% 2.19% 2.12% Allowance as a percentage of non-performing loans 602.58% 412.11% 397.92% At and for the periods ended December 31, September 30, --------------------------- (Dollars in thousands) 1997 1997 - ------------------------------------------------------------------------------------------ Period end loans outstanding $ 751,627 $ 703,295 Average loans outstanding $ 714,594 $ 674,733 Allowance for loan losses: Balance at beginning of period $ 14,694 13,824 Charge-offs: Commercial (533) (303) Real estate construction and land - - Real estate term (50) (62) Consumer and other (234) (62) --------------------------- Total charge-offs (817) (427) --------------------------- Recoveries: Commercial 7 7 Real estate construction and land - - Real estate term - - Consumer and other 1 5 --------------------------- Total recoveries 8 12 --------------------------- Net charge-offs (809) (415) Provision charged to income (1) 2,509 1,285 --------------------------- Balance at end of period $ 16,394 $ 14,694 --------------------------- Quarterly net charge-offs to average loans outstanding during the period, annualized 0.26% 0.20% Year to date net charge-offs to average loans outstanding during the period, annualized 0.26% 0.26% Allowance as a percentage of average loans outstanding 2.29% 2.18% Allowance as a percentage of period end loans outstanding 2.18% 2.09% Allowance as a percentage of non-performing loans 391.17% 222.87% (1) Includes $113,000 in the third quarter of 1998, $70,000 in the second quarter of 1998 and $1.4 million in the fourth quarter of 1997 to conform practices for the Company's reserve methodologies, which is included in mergers and related nonrecurring costs. Management considers changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, and the existing and prospective economic conditions when determining the adequacy of the allowance for loan losses. Although management believes that the allowance for loan losses is adequate to provide for both potential losses and estimated inherent losses in the portfolio, future provisions will be subject to continuing evaluations of the inherent risk in the portfolio and if the economy declines or asset quality deteriorates, additional provisions could be required. Liquidity and Cash Flow The objective of liquidity management is to maintain the Company'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 its credit needs. The Company must manage its liquidity position to meet the needs of its 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 Company utilizes brokered deposit lines, sells securities under agreements to repurchase and borrows overnight federal funds. In the first quarter of 1997, the Company issued $20.0 million in TPS to enhance its regulatory capital base, while also providing added liquidity. On August 12, 1998, the Company completed a second offering of TPS in an aggregate amount of $30.0 million through GBB Capital II, a trust affiliate of the Company 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. In October 1998, the Company through GBB Capital II commenced an offer to exchange its $30.0 million in TPS for a like amount of its registered TPS. The exchange offer is scheduled to expire at 5:00 p.m. Eastern Standard Time on November 23, 1998. 27 Management's Discussion and Analysis of Results of Operations And Financial Condition Greater Bay invested $15.0 million of the net proceeds in the Company's subsidiary banks to increase their capital levels. The Company intends to use the remaining net proceeds for general corporate purposes. Under applicable regulatory guidelines, $29.0 million of the TPS qualifies as Tier 1 capital, and the remaining portion qualifies as Tier 2 capital. As the Company's shareholders' equity increases, the amount of the additional TPS that will count as Tier 1 capital will increase. Net cash provided by operating activities, consisting primarily of net interest income, totaled $14.0 million for the nine months ended September 30, 1998 and $12.2 for the same period in 1997. Cash used for investing activities totaled $323.2 million for the nine months ended September 30, 1998 and $149.8 million for the same period in 1997. The funds used for investing activities primarily represent increases for loans and investments for each year reported. For the nine months ended September 30, 1998, net cash provided by financing activities was $303.4 million. Historically, the primary financing activity of the Company has been deposits and borrowings. Deposits increased $216.8 million for the nine months ended September 30, 1998 and other borrowings increased $57.4 million for the same period. During the period there were also proceeds from the issuance of TPS of $30.0 million. For the nine months ended September 30, 1997, net cash provided by financing activities was $161.5 million. Deposits increased $149.3 million, while other borrowings decreased $7.7 million. During that period there were also proceeds from the issuance of TPS of $20.0 million. Greater Bay is a company separate and apart from its subsidiary banks. It must provide for its own liquidity. Substantially all of Greater Bay's revenues are obtained from management fees, interest received and dividends declared and paid by the banks. As of September 30, 1998, Greater Bay did not have any material commitments for capital expenditures. There are statutory and regulatory provisions that could limit the ability of the Banks to pay 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. Capital Resources Shareholders' equity at September 30, 1998 increased to $88.9 million from $76.5 million at December 31, 1997. During the first three quarters of 1998 and the twelve months ended December 31, 1997, Greater Bay paid aggregate cash dividends of $0.285 and $0.30 per share, respectively, as adjusted for the 2-for-1 stock split effective April 30, 1998. In 1997, prior to the completion of its merger with the Company, PBC declared a cash dividend of $3.20 per share. PBFC, was an S-Corporpation prior to its merger with the Company. As an S-Corporation, PBFC was required to distribute a significant portion of its income to its shareholders. Under these requirements, PBFC made distributions of $964,000 and $208,000 through the date of the merger in 1998 and in 1997, respectively. The Company has provided a substantial portion of its capital requirements through the retention of earnings. In the second quarter of 1998 and first quarter of 1997, the Company increased its capital base by issuing $30.0 and $20.0 million of TPS, which, subject to certain limitations, qualify as Tier 1 capital, respectively. The Company's equity to asset ratio at September 30, 1998 and December 31, 1997 was 5.79% and 6.29%, respectively. 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 stock 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 trust preferred securities in core capital, and the allowance for loan losses and subordinated debt in supplementary capital. At September 30, 1998, the minimum risk-based capital requirements to be considered adequately capitalized are 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- 28 Management's Discussion and Analysis of Results of Operations And Financial Condition adjusted) for the preceding quarter. The minimum leverage ratio is 3.0%, although certain banking organizations are expected to exceed that amount by 1.0% or more, depending on their circumstances. 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 September 30, 1998 and the requirements to qualify for well capitalized and adequately capitalized status under these regulations are as follows: 29 Management's Discussion and Analysis of Results of Operations And Financial Condition To Be Well Capitalize For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions As of September 30, 1998 ------------------------- ---------------------- --------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------ ---------------------- --------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 154,648 14.60% $ 84,759 8.00% N/A Cupertino National Bank 56,595 11.41 39,677 8.00 $ 49,596 10.00% Golden Gate Bank 9,910 12.48 6,352 8.00 7,940 10.00 Mid-Peninsula Bank 45,560 13.16 27,700 8.00 34,625 10.00 Peninsula Bank of Commerce 17,300 12.67 10,924 8.00 13,655 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 115,951 10.94% $ 42,380 4.00% N/A Cupertino National Bank 46,820 9.44 19,838 4.00 $ 29,758 6.00% Golden Gate Bank 8,916 11.23 3,176 4.00 4,764 6.00 Mid-Peninsula Bank 40,417 11.67 13,850 4.00 20,775 6.00 Peninsula Bank of Commerce 15,558 11.39 5,462 4.00 8,193 6.00 Tier 1 Capital (To Average Quarterly Assets): Greater Bay Bancorp $ 115,951 7.78% $ 59,585 4.00% N/A Cupertino National Bank 46,820 7.51 24,928 4.00 31,161 5.00% Golden Gate Bank 8,916 6.49 5,492 4.00 6,865 5.00 Mid-Peninsula Bank 40,417 7.78 15,388 3.00 25,646 5.00 Peninsula Bank of Commerce 15,558 6.78 9,178 4.00 11,472 5.00 To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions As of December 31, 1997 ------------------------- ---------------------- --------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------ ---------------------- --------------------- Total Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 109,614 12.31% $ 69,710 8.00% N/A Cupertino National Bank 40,201 10.03 32,118 8.00 $ 40,147 10.00% Golden Gate Bank 9,408 12.79 5,882 8.00 7,353 10.00 Mid-Peninsula Bank 34,727 11.88 23,416 8.00 29,269 10.00 Peninsula Bank of Commerce 15,252 14.33 8,525 8.00 10,657 10.00 Tier 1 Capital (To Risk Weighted Assets): Greater Bay Bancorp $ 95,709 10.72% $ 34,855 4.00% N/A Cupertino National Bank 32,126 8.02 16,059 4.00 $ 24,088 6.00% Golden Gate Bank 8,523 11.59 2,941 4.00 4,412 6.00 Mid-Peninsula Bank 31,064 10.63 11,708 4.00 17,562 6.00 Peninsula Bank of Commerce 13,917 13.08 4,263 4.00 6,394 6.00 Tier 1 Capital (To Average Annual Assets): Greater Bay Bancorp $ 95,709 8.50% $ 41,113 4.00% N/A Cupertino National Bank 32,126 7.08 18,189 4.00 $ 22,737 5.00% Golden Gate Bank 8,523 9.51 3,652 4.00 4,565 5.00 Mid-Peninsula Bank 31,064 8.54 10,935 3.00 18,225 5.00 Peninsula Bank of Commerce 13,917 6.65 8,401 4.00 10,501 5.00 At September 30, 1998, the Company's risk-based capital ratios were 10.94% for Tier 1 risk-based capital and 14.60% for total risk-based capital, compared to 10.72% and 12.31% respectively, as of December 31, 1997. The Company's leverage ratio was 7.78% at September 30, 1998, compared to 8.50% at December 31, 1997. These ratios all exceeded the well-capitalized guidelines shown above. In addition, at September 30, 1998, each of the subsidiary banks had levels of capital which exceeded the well-capitalized guidelines. For additional information on the capital levels and capital ratios 30 Management's Discussion and Analysis of Results of Operations And Financial Condition of the Company and each of the banks, see Note 13 of Notes to Consolidated Financial Statements included in the Consolidated Financial Statements contained in the Company's 1997 Annual Report to Shareholders. The Company anticipates that the economic and business conditions in its market areas will continue to expand in 1998, resulting in continued growth in earnings and deposits. To support this continuing growth or future acquisition opportunities, it may be necessary for the Company to raise additional capital through the sale of either debt or equity securities in order for the Company and each of the banks to remain well-capitalized under applicable regulations. 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 the market value of portfolio equity ("MVPE") 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 MVPE 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 MVPE in the event of hypothetical changes in interest rates and interest liabilities. If potential changes to MVPE 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 (5 years to 7 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. Interest rate sensitivity analysis is used to measure the Company's interest rate risk by computing estimated changes in MVPE 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. MVPE 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. 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. The following table presents the Company's projected change in MVPE for the these rate shock levels as of September 30, 1998: (Dollars in thousands) Projected Change Change in ---------------------------- Interest Rates MVPE Dollars Percentage - -------------------------------------------------------------------------------- 100 basis point rise $ 119,985 $ (14,989) -11.1% Base scenario 134,974 - - 100 basis point decline 147,327 12,353 9.2% The preceding table indicates that, at September 30, 1998, in the event of a sudden and sustained increase or decrease in prevailing market interest rates, the Company's MVPE would be expected to decrease. However, the foregoing analysis does not attribute additional value to the Company's 31 Management's Discussion and Analysis of Results of Operations And Financial Condition noninterest-bearing deposit balances, which have a significantly higher market value during periods of increasing interest rates. MVPE 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 are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposits 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 MVPE. Actual values may differ from those projections presented should market conditions vary from assumptions used in the calculation of the MVPE. Certain assets, such as adjustable-rate loans, which represent one of the Company's loan products, have features which restrict changes in interest rates 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 refinance 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 MVPE. 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. 32 Management's Discussion and Analysis of Results of Operations And Financial Condition The following table shows interest sensivity gaps for different intervals as of September 30, 1998. Immediate 2 Days To 7 Months to 1 Year to 4 Years to More than Total Rate Non-Rate (Dollars in thousands) or One Day 6 Months 12 Months 3 Years 5 Years 5 Years Sensitive Sensitive Total - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 919 $ - $ - $ - $ - $ - $ 919 $ 54,480 $ 55,399 Short term investments 79,300 - - - - - 79,300 - 79,300 Investment securities 99,320 131,839 38,247 88,019 32,519 105,392 495,336 - 495,336 Loans 542,034 192,635 29,023 49,854 17,043 31,896 862,485 - 862,485 Loan losses/unearned - - - - - - - (22,827) (22,827) fees Other assets - - - - - - - 65,690 65,690 ------------------------------------------------------------------------------------------------------------- Total assets $ 721,573 $ 324,474 $ 67,270 $ 137,873 $ 49,562 $137,288 $1,438,04 $ 97,343 $1,535,383 ------------------------------------------------------------------------------------------------------------- LIABILITIES AND EQUITY Deposits: DDA $ - $ - $ - $ - $ - $ - $ - $ 237,596 $ 237,596 NOW, MMDA, and savings 802,220 - - - - - 802,220 - 802,220 Time deposits - 205,578 34,689 6,994 855 - 248,116 - 248,116 Other borrowings - 17,285 60,000 10,000 - 2,450 89,735 - 89,735 Subordinated debt - - - - - 3,000 3,000 - 3,000 Trust preferred security - - - - - 50,000 50,000 - 50,000 Other liabilities - - - - - - - 15,764 15,764 Shareholders' equity - - - - - - - 88,952 88,952 -------------------------------------------------------------------------------------------------------- Total liabilities and equity $ 802,220 $ 222,863 $ 94,689 $ 16,994 $ 855 $ 55,450 $1,193,071 $ 342,312 $1,535,383 -------------------------------------------------------------------------------------------------------- Gap $ (80,647) $ 101,611 (27,419) $ 120,879 $ 48,707 $ 81,838 $ 244,969 $(244,969) - Cumulative Gap $ (80,647) $ 20,964 $ (6,455) $ 114,424 $163,131 $244,969 $ 244,969 - - Cumulative Gap/total assets -5.25% 1.37% -0.42% 7.45% 10.62% 15.95% 15.95% - - The foregoing table indicates that the Company had a one year negative gap of $27.4 million, or 0.42% of total assets, at September 30, 1998. In theory, this would indicate that at September 30, 1998, $27.4 million more in liabilities than assets would reprice if there was a change in interest rates over the next 365 days. Thus, if interest rates were to increase, the gap would tend to result in a lower 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 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 September 30, 1998, the analysis indicates that the Company's net interest income would increase a maximum of 9.2% if rates rose 200 basis points immediately and would decrease a maximum of 10.2% 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. 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 but not be limited to management and ALCOs 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. 33 Management's Discussion and Analysis of Results of Operations And Financial Condition Year 2000 Compliance State of Readiness Greater Bay is working to resolve the potential impact of the year 2000 on the ability of Greater Bay's computerized information systems to accurately process information that may be date-sensitive. Any of Greater Bay's programs that recognize a date using "00" as the year 1900 rather than the year 2000 could result in errors or system failures. Greater Bay utilizes a number ofcomputer programs across its entire operation. Specifically, Greater Bay has undertaken a major project to ensure that its internal operating systems will be fully capable of processing year 2000 transactions. This project is overseen by the Greater Bay Year 2000 Project Team (the "Year 2000 Project Team"), which reports monthly progress to the Company's Board of Directors. The initial phase of the project was to assess and identify all internal business processes requiring modification and to develop comprehensive renovation plans as needed. This phase was largely completed in mid-1998. The second phase, expected to be accomplished by the end of 1998, will be to execute those renovation plans and begin testing systems by simulating year 2000 data conditions. Testing and implementation is planned to be completed during the first half of 1999. Greater Bay has commenced the testing phase of the year 2000 project and is completing the tasks involving the testing of its essential information technology ("IT") systems. As part of this phase, Greater Bay is working with external vendors to test and certify their systems as year 2000 compliant. The testing phase also includes implementation of a new release of deposit and lending software by the end of 1998. In addition, Greater Bay plans to test targeted non-IT systems, such as facilities, vaults, security services and other building related services, by the end of 1998. Greater Bay relies upon third-party software vendors and service providers for substantially all of its electronic data processing and does not operate any proprietary programs which are critical to the Company's operations. Thus, the focus of Greater Bay is to monitor the progress of its primary software providers towards compliance with year 2000 issues and prepare to test actual data of Greater Bay in simulated processing of future sensitive dates. As well as evaluating its own internal operating systems, Greater Bay has also initiated discussions with its major customers and suppliers as to their ability to meet year 2000 requirements. The Year 2000 Project Team previously has identified and sought information from significant third party suppliers regarding their year 2000 compliance. Suppliers providing system interdependencies also have been identified, and testing with such suppliers also will occur during this phase of the project. The Year 2000 Project Team continues to work with all targeted suppliers to determine their year 2000 status. As of this time, the Year 2000 Project Team has not identified any significant issues with the identified suppliers. Greater Bay also has identified customers who have a material relationship with the Company and requested such customers to complete a year 2000 survey, which will be used by Greater Bay to assess the overall risk to the Company resulting from such customers' year 2000 compliance. Costs to Address the Year 2000 Issue Greater Bay has budgeted anticipated expenditures of $300,000 to $500,000 in 1998 and 1999 to ensure that its systems are ready for processing information in the year 2000. Greater Bay estimates that it has incurred out-of-pocket expenses of approximately $40,000 to date this year in connection with year 2000 issues, which expenses may reach approximately $150,000 by the end of 1998. In addition, the Company has incurred certain costs relating to reallocation of internal resources to address year 2000 issues. The Company expects that the cost of remedial action for its noncompliant year 2000 IT systems will not be material. Greater Bay has not completed its assessment of the year 2000 issue, but currently believes that costs of addressing it will not have a material adverse impact on Greater Bay's financial position. However, if Greater Bay and third parties upon which it relies are unable to address this issue in a timely manner, it could result in a material financial risk to Greater Bay. In order to assure that this does not occur, Greater Bay plans to devote all resources required to resolve any significant year 2000 issues in a timely manner. Risks Presented by the Year 2000 Issue As Greater Bay continues to assess the year 2000 issue, it may identify systems that present a year 2000 risk. In addition, if any third-party software vendors and service providers upon who the Company relies fail to appropriately address their year 2000 issues, such failure could have a material adverse effect on the Company's business, financial condition and operating results. Should Greater Bay and/or its significant suppliers fail to timely identify, address and correct material year 2000 issues, such failure could have a material adverse impact on the Company's ability to operate. The range of adverse impacts may include the requirement to pay significant overtime to manually process certain transactions and added costs to process certain banking activity through a centralized administrative function. In addition, if corrections made by such suppliers to address year 2000 issues are incompatible with Greater Bay's systems, the year 2000 issue could have a material adverse impact on the Company's operations. Despite Greater Bay's activities in regards to the year 2000 issue, there can be no assurance that partial or total systems interruptions or the costs necessary to update hardware and software would not have a material adverse effect upon the Company's business, financial condition, results of operations and business prospects. Contingency Plans The Year 2000 Project Team currently is in the process of developing contingency plans for year 2000 readiness. The Company has engaged a third party company, which specializes in developing contingency plans for financial institutions for year 2000, to assist Greater Bay in analyzing the impact of year 2000 on its business. This business impact analysis is expected to be completed by the third quarter of 1998 and Greater Bay's contingency plans for year 2000 readiness currently are scheduled to be complete by the end of 1998. There can be no assurance, however, that such contingency plans will be successful. Common Stock Price and Dividend History The Company's stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "GBBK". The Company's common stock was listed on Nasdaq on September 9, 1996. Prior to September 9, 1996, the Company's common stock was not listed on any exchange nor was it quoted by Nasdaq. It was, however, listed with the National Quotation Service and on the Over The Counter Bulletin Board. Based on information provided to the Company from Hoefer & Arnett, the range of high and low bid quotations for the Common Stock for the first three quarters of 1996 are set forth below. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Quotations subsequent to September 30, 1996 reflect the high and low sales prices for the Company's common stock as reported by Nasdaq. Hoefer & Arnett, Incorporated, BT Alex. Brown, Keefe Bruyette & Woods, Incorporated, Sandler O'Neill & Partners and Van Kasper & Company act as the primary market makers and facilitate trades in the Company's common stock. 34 Management's Discussion and Analysis of Results of Operations And Financial Condition Cash dividends For the period indicated(1) High Low declared (2) - -------------------------------------------------------------------------- 1998 Third Quarter $ 39.00 $ 23.38 $ 0.095 Second Quarter 36.00 28.88 0.095 First Quarter 31.38 24.13 0.095 1997 Fourth Quarter $ 26.75 $ 21.00 $ 0.075 Third Quarter 22.25 15.94 0.075 Second Quarter 15.75 12.44 0.075 First Quarter 13.82 11.88 0.075 1996 Fourth Quarter $ 12.19 $ 10.57 $ 0.055 Third Quarter 10.50 9.00 0.055 Second Quarter 11.07 8.88 0.055 First Quarter 9.38 8.25 0.055 (1) Restated to reflect the 2-for-1 stock split declared for shareholders of record as of April 30, 1998. (2) Includes only those dividends declared by Greater Bay, and excludes those dividends paid by Cupertino National Bancorp prior to the 1996 merger and by PBC prior to the 1997 merger. In 1996, Cupertino National Bancorp declared and paid dividends of $0.10 to its shareholders. PBC declared dividends of $3.20 and $1.35 per share, in 1997 and 1996, respectively, to its shareholders. On a consolidated basis, the Company has declared dividends of $0.52 and $0.30 per share in 1997 and 1996, respectively. The Company estimates it has approximately 2,200 shareholders as of September 30, 1998. 35 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -- NOT APPLICABLE ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS -- NOT APPLICABLE ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- NOT APPLICABLE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- NOT APPLICABLE ITEM 5. OTHER INFORMATION -- NOT APPLICABLE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Report. (a) Exhibits EXHIBIT NO. EXHIBITS ------- -------- 11 Statement re Computation of Earnings Per Share. 27 Financial Data Schedule. 99 Press Release issued on October 23, 1998. - -------- (b) Reports on Form 8-K for the quarter covered by this report. During the quarter ended September 30, 1998, the Company filed the following reports on Form 8-K: (1) report dated July 16, 1998 filing second quarter earnings release; (2) report dated August 28, 1998 reporting completion of offering of Cumulative Trust Preferred Securities; and (3) report dated September 29, 1998 filing consolidated financial statements, which were restated on a historical basis to give retroactive effect to the Company's merger with PRB. 36 SIGNATURES IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED. GREATER BAY BANCORP (REGISTRANT) BY: /S/ STEVEN C. SMITH - ------------------- STEVEN C. SMITH EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER AND CHIEF FINANCIAL OFFICER DATE: NOVEMBER 13, 1998 37