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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-25034
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GREATER BAY BANCORP
(Exact name of registrant as specified in its charter)
California 77-0387041
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2860 West Bayshore Road, Palo Alto, California 94303
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 813-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
9.75% Cumulative Trust Preferred Securities of GBB Capital I
Guarantee of Greater Bay Bancorp with respect to the
9.75% Cumulative Trust Preferred Securities of GBB Capital I
Preferred Share Purchase Rights
(Title of classes)
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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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Common Stock held by non-affiliates, based
upon the closing sale price of the Common Stock on January 29, 1999, as
reported on the Nasdaq National Market System, was approximately $272,319,000.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. Such determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of January 29, 1999, 9,666,002 shares of the Registrant's Common Stock
were outstanding.
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DOCUMENT INCORPORATED BY REFERENCE: PART OF FORM 10-K INTO WHICH
INCORPORATED:
Definitive Proxy Statement for
Annual Meeting of Shareholders to be Part III
filed within 120 days of the fiscal
year ended December 31, 1998
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PART I
Discussions of certain matters contained in this Annual Report on Form 10-K
may constitute forward-looking statements within the meaning of the Section
27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), and as
such, may involve risks and uncertainties. These forward-looking statements
relate to, among other things, expectations of the business environment in
which Greater Bay Bancorp (referred to as the "Company" when such reference
includes Greater Bay Bancorp and its subsidiaries, collectively, "Greater Bay"
when referring only to the parent company and "the Banks" when referring only
to Greater Bay's banking subsidiaries, Cupertino National Bank, Mid-Peninsula
Bank, Peninsula Bank of Commerce and Golden Gate Bank) operates, projections
of future performance, perceived opportunities in the market and statements
regarding the Company's mission and vision. The Company's actual results,
performance and achievements may differ materially from the results,
performance and achievements expressed or implied in such forward-looking
statements. For a discussion of some of the factors that might cause such a
difference, see "Item 1. Business--Factors That May Affect Future Results of
Operations".
ITEM 1. BUSINESS.
Greater Bay
Greater Bay is a bank holding company operating Cupertino National Bank
("CNB"), Mid-Peninsula Bank ("MPB"), Peninsula Bank of Commerce ("PBC") and
Golden Gate Bank ("Golden Gate") along with its operating divisions Greater
Bay Bank Santa Clara Valley Commercial Banking Group, Greater Bay Corporate
Finance Group, Greater Bay Bank Contra Costa Regional Banking Office, Greater
Bay International Banking Division, Greater Bay Trust Company, Pacific
Business Funding, Venture Banking Group and the Small Business Administration
Division. The Company has 14 regional offices in San Jose, Cupertino, Santa
Clara, Palo Alto, Redwood City, San Mateo, Millbrae, San Bruno, San Francisco
and Walnut Creek, California. At December 31, 1998, the Company had total
assets of $1.6 billion, total net loans of $1.0 billion and total deposits of
$1.3 billion.
History
Greater Bay Bancorp is the result of the merger (the "1996 Merger"),
effective November 27, 1996, of Cupertino National Bancorp ("Cupertino") and
Mid-Peninsula Bancorp ("Mid-Peninsula"). Cupertino was formed in 1984 as the
holding company for CNB, a national banking association which began operating
in 1985. Mid-Peninsula was formed in 1984 under the name San Mateo County
Bancorp ("San Mateo") as the bank holding company of San Mateo County National
Bank, which subsequently changed its name to WestCal National Bank ("WestCal")
in 1991. In 1994, WestCal was merged into MPB, a California state chartered
bank organized in 1987, and San Mateo concurrently changed its name to Mid-
Peninsula Bancorp. Effective December 23, 1997, the Company completed a merger
(the "PBC Merger") with PBC, whereby PBC became a wholly-owned subsidiary of
Greater Bay. PBC was formed in 1981, as a California state chartered bank.
Effective May 8, 1998, the Company completed a merger with Pacific Rim
Bancorporation ("PRB"). PRB was formed in 1993 as the holding company for
Golden Gate Bank, whereby Golden Gate Bank became a wholly-owned banking
subsidiary of Greater Bay. Effective August 31, 1998, the Company completed a
merger with Pacific Business Funding Corporation ("PBFC"), which now operates
as a division of CNB and conducts business under the name Pacific Business
Funding ("PBF"). All mergers were accounted for as pooling-of-interests
business combinations and, accordingly, all financial data for the periods
prior to the mergers have been restated to include the results of the acquired
entities.
The Company was created with the intention of achieving seven primary goals.
These goals included:
. Developing a greater banking presence throughout the San Francisco Bay
Area by increasing the number of banking offices available to clients;
. Reaching a critical mass in the Company's market areas in order to better
meet competitive challenges inherent in the banking and financial
services industries;
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. Maximizing the utilization of capital by increasing the float and
marketability of its common stock and, by virtue of its larger size,
obtaining access to a lower cost of capital;
. Realizing operating efficiencies through a combination of the Banks;
. Generating increased loan and fee income as a result of the higher
lending limits available to the combined entity;
. Leveraging marketing expense to improve the return on the combined
entity's marketing investment; and
. Enabling the Banks to cross-sell services.
Super Community Banking Philosophy
In order to meet the demands of the increasingly competitive banking and
financial services industries, management has adopted a business philosophy
referred to as the "Super Community Banking Philosophy." The Super Community
Banking Philosophy is based on management's belief that banking clients value
doing business with locally managed institutions that can provide a full
service commercial banking relationship through an understanding of the
clients' financial needs and the flexibility to deliver customized solutions
through Greater Bay's menu of products and services. Management further
believes that banks are better able to build successful client relationships
by affiliating with a holding company that provides cost effective
administrative support services while promoting bank autonomy and flexibility.
To implement this philosophy, Greater Bay operates the Banks as separate
subsidiaries by retaining their independent names and separate Boards of
Directors. The Banks have established strong reputations and customer
followings in their market areas through attention to client service and an
understanding of client needs. In an effort to capitalize on the identities
and reputations of the Banks, the Company currently intends to continue to
market its services under each Bank's name, primarily through each Bank's
relationship managers. The primary focus for the Banks' relationship managers
is to cultivate and nurture their client relationships. Relationship managers
are assigned to each borrowing client to provide continuity in the
relationship. This emphasis on personalized relationships requires that all of
the relationship managers maintain close ties to the communities in which they
serve, so they are able to capitalize on their efforts through expanded
business opportunities for the Banks.
While client service decisions and day-to-day operations are maintained at
the Banks, Greater Bay offers the advantages of affiliation with a multi-bank
holding company by providing expanded client support services, such as
business cash management, international trade services and accounting
services. In addition, Greater Bay provides centralized administrative
functions, including support in credit policy formulation and review,
investment management, data processing, accounting, loan servicing and other
specialized support functions. This allows the Banks to focus on client
service.
Corporate Growth Strategy
The Company's primary goal is to become the preeminent financial services
company based in the San Francisco Bay Area. The Company's primary business
strategy is to focus on increasing its market share within the communities it
serves through continued internal growth. The Company also will pursue
opportunities to expand its market share through select acquisitions that
management believes complement the Company's businesses. Management will
pursue acquisition opportunities to expand its presence in its current market
areas of San Francisco, Santa Clara and San Mateo Counties, and to establish a
presence in other parts of the Bay Area and California. Consistent with the
Company's operating philosophy and growth strategy, Greater Bay regularly
evaluates opportunities to acquire banks and other financial service companies
that complement the Company's existing business, expand its market coverage
and share and enhance its client product offerings.
Recent Events
On January 26, 1999 the Company and Bay Area Bancshares ("BA Bancshares"),
the holding company of Bay Area Bank, a California state charted bank ("BAB"),
signed a definitive agreement for a merger between the two
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companies. The agreement provides for BA Bancshares shareholders to receive
approximately 1,393,000 shares of Greater Bay Bancorp stock subject to certain
adjustments based on movements in the Company's stock price, in a tax-free
exchange to be accounted for as a pooling-of-interests. Following the
transaction, the shareholders of BA Bancshares will own approximately 12.7% of
the combined company. The Company expects to complete the transaction in the
second quarter of 1999, subject to the approval of BA Bancshares shareholders
and regulatory approvals. As of December 31, 1998 BA Bancshares had $155.3
million in assets, $136.5 million in deposits, and $14.4 million in
shareholders' equity. BAB's office is located in Redwood City, California. The
combined Company, on a pro-forma basis, would have had total assets of
approximately $1.8 billion and equity of over $107.0 million at December 31,
1998.
The transaction is anticipated to be slightly accretive to the Company's
core earnings in 1999 based on anticipated reductions in operating expenses
and revenue enhancements resulting from an expanded product line, increased
lending capacity and an increased market awareness that can be utilized by
BAB. Management of each of the organizations believe that significant
opportunities exist to enhance the spectrum of financial services offered to
both existing and future clients of BAB while also increasing market
penetration in the San Francisco Peninsula market areas.
The Banks and Operating Divisions
Cupertino National Bank
CNB presently has seven offices, including five full service branches. At
December 31, 1998, CNB had total assets of $688.3 million, total net loans of
$500.2 million and total deposits of $569.7 million.
Mid-Peninsula Bank
MPB presently has four offices, including three full service branches. On
December 31, 1998, MPB had total assets of $530.6 million, total net loans of
$307.0 million and total deposits of $445.5 million.
Peninsula Bank of Commerce
PBC presently has two banking offices. On December 31, 1998, PBC had total
assets of $234.0 million, total net loans of $109.8 million and total deposits
of $214.8 million. PBC holds $89.6 million from a single depositor (the
"Special Deposit"). Due to the uncertainty of the time the Special Deposit
will remain with PBC, management has invested a significant portion of the
proceeds from this deposit in agency securities with maturities of less than
90 days.
Golden Gate Bank
Golden Gate presently has one office. On December 31, 1998, Golden Gate had
total assets of $127.0 million, total net loans of $67.6 million and total
deposits of $117.4 million.
Operating Divisions
The Banks have various operating divisions. These divisions include the
Greater Bay Trust Company, the Venture Banking Group, the Small Business
Administration ("SBA") Division, and the asset-based speciality finance
division, PBF. In addition, consistent with Greater Bay's operating philosophy
and growth strategy, in 1998, the Company formed the Greater Bay Bank Santa
Clara Valley Commercial Banking Group ("SCVG"), Greater Bay Corporate Finance
Group ("CFG"), Greater Bay Bank Contra Costa Banking Office ("CCBO") and the
Greater Bay International Banking Division ("IBD").
Greater Bay Trust Company provides trust services to support the trust needs
of the Bank's business and personal clients. These services include, but are
not limited to, custodial, investment management, estate planning resources
and employee benefit plan services.
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The Venture Banking Group serves the needs of companies in their start-up
and development phase, allowing them to access a banking relationship early in
their development. The loans to this target group of clients are generally
secured by the accounts receivable, inventory and equipment of the companies.
The financial strength of these companies also tends to be bolstered by the
presence of venture capital investors among their shareholders.
The SBA Division provides loans to smaller businesses that are generally 65%
to 80% guaranteed by the SBA. In 1994, the SBA named CNB's SBA Division a
Preferred Lender. The SBA awards Preferred Lender status to lenders who have
demonstrated superior ability to generate, underwrite and service loans
guaranteed by the SBA. This status results in more rapid turnaround of loan
applications submitted to the SBA for approval.
PBF is an asset-based lending and factoring division that provides
alternative funding and support programs designed to enhance the Company's
small business banking services.
SCVG offers a full line of business banking services, catering to the needs
of small to medium-sized businesses, professional firms and executives who own
and operate them. The services include a full range of deposit accounts, cash
management and credit facilities custom-tailored to meet the specific needs of
its clients. SCVG further solidifies the Company's strong presence in the
Silicon Valley.
CFG primarily focuses its efforts on obtaining middle market lending clients
that have revenues in excess of $20 million and financing requirements in the
range of $5 million to $250 million. The clients will fall into two
categories: 1.) syndicated loan transactions, and 2.) direct sourced
transactions where CFG will be the lead agent.
CCBO was formed to expand the Company's presence into the East Bay market.
The Company believes the East Bay has tremendous potential for growth and is
contiguous to its existing markets.
IBD provides a wide range of financial services to support the international
banking needs of the Bank's clients, including identifying certain risks of
conducting business abroad and, providing international letters of credit and
trade finance services.
Banking Services
Greater Bay provides a wide range of commercial banking and financial
services to small and medium-sized businesses, real estate developers and
property managers, business executives, professionals and other individuals.
The Banks offer a wide range of deposit products. These include the normal
range of personal and business checking and savings accounts, time deposits
and individual retirement accounts. The Banks also offer a wide range of
specialized services designed to attract and service the needs of customers
and include cash management and international trade services for business
clients, traveler's checks, safe deposit and MasterCard and Visa merchant
deposits services.
The Banks also engage in the full complement of lending activities,
including commercial, real estate and consumer loans. The Banks provide
commercial loans for working capital and business expansion to small and
medium-sized businesses with annual revenues generally in the range of $1.0
million to $100.0 million with a focus on business clients with borrowing
needs between $2.0 million and $10.0 million. The Banks' commercial clients
are drawn from a wide variety of manufacturing, wholesale and service
businesses. The Banks provide interim real estate loans primarily for
construction in the Banks' primary service areas of single-family residences,
which typically range between approximately $500,000 and $1.0 million, and
multi-unit projects, which typically range between approximately $1.5 million
and $4.0 million. The Banks provide medium term commercial real estate loans
or credits, typically ranging between $750,000 and $3.0 million for the
financing of commercial or industrial buildings where the owners either use
the properties for business purposes or derive income from tenants.
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Market Area
The Banks concentrate on marketing their services to small and medium-sized
businesses, professionals and individuals in Contra Costa, Santa Clara, San
Francisco and San Mateo Counties.
. CNB's primary base of operations is in Cupertino, California, which is in
the center of the geographical area referred to as "Silicon Valley," and
CNB's operations extend throughout Santa Clara County. Santa Clara County
has a population of approximately 1,690,000;
. MPB's primary base of operations is centered in Palo Alto, California and
extends north through San Mateo County. San Mateo County has a population
of approximately 715,000. MPB has recently formed an operating division
located in Contra Costa County. Contra Costa has a population of
approximately 900,000;
. PBC's primary base of operations is centered in Millbrae, California, and
includes northern San Mateo County and extends into San Francisco County;
. Golden Gate's operations are centered in the City and County of San
Francisco. San Francisco County has a population in excess of 790,000.
The commercial base of Contra Costa, Santa Clara, San Francisco and San
Mateo Counties is diverse and includes computer and semiconductor
manufacturing, professional services, biotechnology, printing and publishing,
aerospace, defense and real estate construction, as well as wholesale and
retail trade. As a result of its geographic concentration, the Company's
results depend largely upon economic conditions in these areas. While the
economy in the Company's market areas have exhibited positive economic and
employment trends, there is no assurance that such trends will continue. A
deterioration in economic conditions could have material adverse impact on the
quality of the Company's loan portfolio and the demand for its product and
services, and accordingly its results of operations. See "Item 1. Business--
Factors That May Affect Future Results of Operations."
Lending Activities
Underwriting and Credit Administration
The lending activities of each of the Banks is guided by the basic lending
policies established by its Board of Directors. Each loan must meet minimum
underwriting criteria established in the Bank's lending policy. Lending
authority is granted to officers of each Bank on a limited basis. Loan
requests exceeding individual officer approval limits are approved by the
Officers Loan Committees of the respective Banks. Loan requests exceeding
these limits are submitted to the Greater Bay Officers Loan Committee, which
consists of the President and Chief Executive Officer of Greater Bay, the
Executive Vice President and Chief Lending Officer of Greater Bay, the
Executive Vice President and Chief Credit Officer of MPB and the Senior Vice
President and Chief Credit Officer of Greater Bay. All members of the Officers
Loan Committee are also officers of the individual Banks. Loan requests which
exceed the limits of the Greater Bay Officers Loan Committee are submitted to
the Directors Loan Committee for final approval. The Directors Loan Committee
consists of five outside directors. Each of these committees meet on a regular
basis in order to provide timely responses to the Banks' clients.
The Company's credit administration function includes an internal review and
the regular use of an outside loan review firm. In addition, the Greater Bay
Officers Loan Committee, Chief Operating Officer/Chief Financial Officer and
Controller review information at least once a month related to delinquencies,
nonperforming assets, classified assets and other pertinent information to
evaluate credit risk within each Bank's loan portfolio and to recommend
general reserve percentages and specific reserve allocations. The Board of
Directors of Greater Bay and each of the Banks review this same information on
a monthly basis.
Loan Portfolio
The composition of the Company's gross loan portfolio at December 31, 1998
was as follows:
. Approximately 45.3% were commercial loans;
. Approximately 17.3% were in real estate construction and land loans,
primarily for residential projects;
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. Approximately 29.7% were real estate term loans, primarily secured by
commercial properties; and
. The balance of the portfolio consists of consumer loans.
The interest rates the Banks charge for the vary with the degree of risk,
size and maturity of the loans. Rates are generally affected by competition,
associated factors stemming from the client's deposit relationship with the
Bank and the Banks' cost of funds.
Commercial Loans. In their commercial loan portfolio, the Banks provide
personalized financial services to the diverse commercial and professional
businesses in their market areas. Commercial loans, including those made by
the Venture Banking Group, consist primarily of short-term loans (normally
with a maturity of under one year) for working capital and business expansion.
The Banks' focus is on businesses with annual revenues generally between $1.0
million and $100.0 million with borrowing needs generally between $2.0 and
$10.0 million. The Banks' commercial clients are drawn from a wide variety of
manufacturing, wholesale and service businesses.
Commercial loans typically include revolving lines of credit collateralized
by inventory, accounts receivable and equipment. Emphasis is placed on the
borrower's earnings history, capitalization, secondary sources of repayment,
and in some instances, third party guarantees or highly liquid collateral
(such as time deposits and investment securities). Commercial loan pricing is
generally at a rate tied to the prime rate (as quoted in the Wall Street
Journal) or the Banks' reference rates.
The Venture Banking Group serves the needs of companies in their start-up
and development phase. Typical clients include technology companies, ranging
from multimedia, software and telecommunications providers to bio-technology
and medical device firms. The Venture Banking Group provides innovative
lending products and other financial services, tailored to the needs of start-
up and growth-stage companies. Borrowings are generally secured by minimum
cash balances, accounts receivable, intellectual property rights, inventory
and equipment of the companies. Because these companies are in the start-up or
development phase, many of them will not generate earnings for several years.
The Company often receives warrants from these companies as part of the
compensation for its services.
The Company participates in many SBA programs and, through CNB, is a
"preferred lender." Preferred lender status is granted to a lender which has
made a certain number of SBA loans and which, in the opinion of the SBA has
staff who are qualified and experienced in this area. As a preferred lender,
the Company has the authority to authorize, on behalf of the SBA, the SBA
guaranty on loans under the 7A program. This can represent a substantial
savings in serving a customer's needs. The Company utilizes both the 504
program, which is focused toward longer-term financing of buildings, and other
long-term assets, and the 7A program which is primarily used for financing of
the equipment, inventory and working capital needs of eligible businesses
generally over a three- to seven-year term. The Company's collateral position
in the SBA loans is enhanced by the SBA guaranty in the case of 7A loans, and
by lower loan-to-value ratios under the 504 program. The Company generally
sells the guaranteed portion of its SBA loans in the secondary market.
Real Estate Construction and Land Loans. The Banks' real estate construction
loan activity focuses on providing short-term (generally less than one year
maturity) loans to individuals and developers with whom the Banks have
established relationships for the construction primarily of single family
residences in the Banks' market areas. Prior to 1994, the Banks concentrated
their construction loan activity on owner-occupied custom residences. During
1994, as real estate values began to stabilize, the Banks also entered the
construction loan market for multi-unit single family residential projects.
Subsequently, the Banks continued to expand their real estate construction
portfolio with the help of the improving real estate market in Northern
California. Real estate construction loans for single family residences
typically range between approximately $500,000 and $1.0 million, and for
multi-unit projects typically range between approximately $1.5 million and
$4.0 million.
Residential real estate construction loans are typically secured by first
deeds of trust and require guarantees of the borrower. The economic viability
of the project and the borrower's credit-worthiness are primary considerations
in the loan underwriting decision. Generally, these loans provide an
attractive yield, but may carry a higher than normal risk of loss or
delinquency, particularly if general real estate values decline. The Banks
utilize approved
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independent local appraisers and loan-to-value ratios which generally do not
exceed 65% to 75% of the appraised value of the property. The Banks monitor
projects during the construction phase through regular construction
inspections and a disbursement program tied to the percentage of completion of
each project.
The Banks also occasionally make land loans to persons who intend to
construct a single family residence on the lot generally within twelve months.
In addition, the Banks have occasionally in the past, and may to a greater
extent in the future, make commercial real estate construction loans to high
net worth clients with adequate liquidity for construction of office and
warehouse properties. Such loans are typically secured by first deeds of trust
and require guarantees of the borrower.
Real Estate Term Loans. The Banks provide medium-term commercial real estate
loans secured by commercial or industrial buildings where the owner either
uses the property for business purposes ("owner-user properties") or derives
income from tenants ("investment properties"). The Company's loan policies
require the principal balance of the loan, generally between $400,000 and $3.0
million, to be no more than 70% of the stabilized appraised value of the
underlying real estate collateral. The loans, which are typically secured by
first deeds of trust only, generally have terms of no more than seven to ten
years and are amortized over 20 years. Most of these loans have rates tied to
the prime rate, with many adjusting whenever the prime rate changes; the
remaining loans adjust every two or three years depending on the term of the
loan.
Consumer and Other Loans. The Banks' consumer and other loan portfolio is
divided between installment loans secured by automobiles and aircraft, and
home improvement loans and equity lines of credit which are often secured by
residential real estate. Installment loans tend to be fixed rate and longer-
term (one-to-five year maturity), while the equity lines of credit and home
improvement loans are generally floating rate and are reviewed for renewal on
an annual basis. The Banks also have a minimal portfolio of credit card loans,
issued as an additional service to its clients.
Deposits
The Banks obtain deposits primarily from small and medium-sized businesses,
business executives, professionals and other individuals. Each of the Banks
offers the usual and customary range of depository products provided by
commercial banks. The Banks' deposits typically are not received from a single
depositor or group of affiliated depositors, the loss of any one of which
would have a material adverse effect on the business of the Company or any of
the Banks. Rates paid on deposits vary among the categories of deposits due to
different terms, the size of the individual deposit, and rates paid by
competitors on similar deposits.
CNB has two business units that provide significant support to its deposit
base. The Greater Bay Trust Company has approximately 10% of its trust assets
under management in liquid funds that are retained in CNB money market demand
accounts. At December 31, 1998, these funds totaled $76.5 million. The Venture
Banking Group, which finances companies in their start-up and development
stage, is another source of deposits as most of the start-up phase companies
have significant liquidity that is deposited in the bank as part of the
banking relationship. At December 31, 1998, clients of the Venture Banking
Group had $106.5 million in deposits at CNB.
Trust Services
The Greater Bay Trust Company, which is a division of CNB, offers a full
range of fee-based trust services directly to its clients and administers
several types of retirement plans, including corporate pension plans, 401(k)
plans and individual retirement plans, with an emphasis on the investment
management, custodianship and trusteeship of such plans. In addition, the
Greater Bay Trust Company acts as executor, administrator, guardian and/or
trustee in the administration of the estates of individuals. Investment and
custodial services are provided for corporations, individuals and nonprofit
organizations. Total assets under management by the Greater Bay Trust Company
were $649.3 million at December 31, 1998, compared to $577.7 million at
December 31, 1997, and $418.0 million at December 31, 1996.
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Competition
The banking and financial services business in California generally, and in
the Banks' market areas specifically, is highly competitive. The increasingly
competitive environment is a result primarily of changes in regulation,
changes in technology and product delivery systems, and the accelerating pace
of consolidation among financial service providers. The Banks compete for
loans, deposits and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader array of financial services than the Banks. In
order to compete with the other financial service providers, the Banks
principally rely upon local promotional activities, personal relationships
established by officers, directors and employees with its clients, and
specialized services tailored to meet its clients' needs. In those instances
where the Banks are unable to accommodate a customer's needs, the Banks may
arrange for those services to be provided by its correspondents. The Banks
have fourteen offices, located in Contra Costa, Santa Clara, San Francisco and
San Mateo Counties. Neither the deposits nor loans of the offices of the
respective Banks exceed 1% of all financial services companies located in such
counties.
Effect of Economic Conditions, Governmental Policies and Legislation
The Company's profitability, like most financial institutions, is primarily
dependent on interest rate differentials. In general, the difference between
the interest rates the Banks pay on interest-bearing liabilities, such as
deposits and other borrowings, and the interest rates the Banks receive on
interest-earning assets, such as loans extended to its clients and securities
held in its investment portfolio, comprise the major portion of the Company's
earnings. These rates are highly sensitive to many factors that are beyond the
control of the Company and the Bank, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company and the Bank cannot be
predicted.
The business of the Company is also influenced by the monetary and fiscal
policies of the federal government and the policies of regulatory agencies,
particularly the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). The Federal Reserve implements national monetary policies
(with objectives such as curbing inflation and combating recession) through
its open-market operations in U.S. Government securities by adjusting the
required level of reserves for depository institutions subject to its reserve
requirements and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the
Federal Reserve in these areas influence the growth of bank loans, investments
and deposits and also affect interest rates earned on interest-earning assets
and paid on interest-bearing liabilities. The nature and impact on the Company
of any future changes in monetary and fiscal policies cannot be predicted.
From time to time, legislative acts, as well as regulations, are enacted
which have the effect of increasing the cost of doing business, limiting or
expanding permissible activities, or affecting the competitive balance between
banks and other financial services providers. Proposals to change the laws and
regulations governing the operations and taxation of banks, bank holding
companies and other financial institutions are frequently made in the U.S.
Congress, in the state legislatures and before various bank regulatory
agencies. See "Item 1. Business--Supervision and Regulation."
Employees
At December 31, 1998, the Company had 313 full-time employees. None of the
employees are covered by a collective bargaining agreement. The Company
considers its employee relations to be satisfactory.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both
federal and state law. This regulation is intended primarily for the
protection of depositors and the deposit insurance fund and not for the
benefit of stockholders of the Company. Set forth below is a summary
description of certain laws which relate to the regulation
9
of Greater Bay and the Banks. The description does not purport to be complete
and is qualified in its entirety by reference to the applicable laws and
regulations.
In recent years, Congress has discussed and evaluated significant
legislative proposals and reforms affecting the financial services industry.
Such proposals include legislation to revise the Glass-Steagall Act and the
Bank Holding Company Act of 1956, as amended (the "BHCA"), and the expand
permissible activities for banks, principally to facilitate the convergence of
commercial and investment banking. Certain proposals also sought to expand
insurance activities of banks. It is unclear whether any of these proposals,
or any form of them, will be introduced in the current Congress and become
law. Consequently, it is not possible to determine what effect, if any, they
may have on Greater Bay and the Banks.
Greater Bay
Greater Bay, as a registered bank holding company, is subject to regulation
under the BHCA. Greater Bay is required to file with the Federal Reserve
quarterly and annual reports and such additional information as the Federal
Reserve may require pursuant to the BHCA. The Federal Reserve may conduct
examinations of Greater Bay and its subsidiaries.
The Federal Reserve may require that Greater Bay terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the Federal Reserve believes the activity or the control of the
subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, Greater Bay must file
written notice and obtain approval from the Federal Reserve prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve, a bank
holding company and its nonbanking subsidiaries are prohibited from requiring
certain tie-in arrangements in connection with any extension of credit, lease
or sale of property or furnishing of services. Further, Greater Bay is
required by the Federal Reserve to maintain certain levels of capital. See
"Capital Standards" herein.
Greater Bay is required to obtain the prior approval of the Federal Reserve
for the acquisition of more than 5% of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve is also required for
the merger or consolidation of Greater Bay and another bank holding company.
Greater Bay is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control
of more than 5% of the outstanding voting shares of any company that is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. However, Greater Bay, subject to the
prior approval of the Federal Reserve, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve to be
so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In
addition, it is the Federal Reserve's policy that in serving as a source of
strength to its subsidiary banks, a bank holding company should stand ready to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital-raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary
banks will generally be considered by the Federal Reserve to be an unsafe and
unsound banking practice or a violation of the Federal Reserve's regulations
or both.
10
Greater Bay is also a bank holding company within the meaning of Section
3700 of the California Financial Code. As such, Greater Bay and its
subsidiaries are subject to examination by, and may be required to file
reports with, the California Department of Financial Institutions.
The Company's securities are registered with the Securities and Exchange
Commission under the Exchange Act. As such, the Company is subject to the
information, proxy solicitation, insider trading, and other requirements and
restrictions of the Exchange Act.
The Banks
CNB, as a national banking association, is subject to primary supervision,
examination and regulation by the Office of the Comptroller of Currency (the
"Comptroller"). MPB, PBC and Golden Gate as California state chartered banks
and members of the Federal Reserve System, are subject to primary supervision,
periodic examination and regulation by the Commissioner of the Department of
Financial Institutions ("Commissioner") and the Federal Reserve. If as a
result of an examination of a bank, the bank regulatory agencies should
determine that the financial condition, capital resources, asset quality,
earnings prospects, management, liquidity or other aspects of the bank's
operations are unsatisfactory or that the bank or its management is violating
or has violated any law or regulation, various remedies are available to the
bank regulatory agencies. Such remedies include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order
that can be judicially enforced, to direct an increase in capital, to restrict
the growth of the bank, to assess civil monetary penalties, to remove officers
and directors and ultimately to terminate a bank's deposit insurance, which
would result in a revocation of the bank's charter. None of the Banks has been
subject of any such actions by their respective regulatory agencies.
The Federal Deposit Insurance Corporation ("FDIC") insures the Banks'
deposits in the manner and to the extent provided by law. For this protection,
the Banks pay a semiannual statutory assessment. See "Premium for Deposit
Insurance" herein.
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Banks. State and
federal statutes and regulations relate to many aspects of the Banks'
operations, including levels of capital, reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
Dividends and Other Transfers of Funds
The Company is a legal entity separate and distinct from the Banks. The
Banks are subject to various statutory and regulatory restrictions on their
abilities to pay dividends to the Company. Under such restrictions, the amount
available for payment of dividends to the Company by the Banks totaled $24.6
million at December 31, 1998. In addition, the California Department of
Financial Institutions and the Federal Reserve Board have the authority to
prohibit the Banks from paying dividends, depending upon the Banks' financial
condition, if such payment is deemed to constitute an unsafe or unsound
practice.
The bank regulatory agencies also have authority to prohibit the Banks from
engaging in activities that, in their respective opinions, constitute unsafe
or unsound practices in conducting its business. It is possible, depending
upon the financial condition of the bank in question and other factors, that
the bank regulatory agencies could assert that the payment of dividends or
other payments might, under some circumstances, be such an unsafe or unsound
practice. Further, the bank regulatory agencies have established guidelines
with respect to the maintenance of appropriate levels of capital by banks or
bank holding companies under their jurisdiction. Compliance with the standards
set forth in such guidelines and the restrictions that are or may be imposed
under the prompt corrective action provisions of federal law could limit the
amount of dividends which the Banks or Greater Bay may pay. See "Prompt
Corrective Action and Other Enforcement Mechanisms" herein and "Capital
Standards" herein for a discussion of these additional restrictions on capital
distributions.
11
The Banks are subject to certain restrictions imposed by federal law on any
extensions of credit to, or the issuance of a guarantee or letter of credit on
behalf of, Greater Bay or other affiliates, the purchase of or investments in
stock or other securities thereof, the taking of such securities as collateral
for loans and the purchase of assets of Greater Bay or other affiliates. Such
restrictions prevent Greater Bay and such other affiliates from borrowing from
the Banks unless the loans are secured by marketable obligations or other
acceptable collateral of designated amounts. Further, such secured loans and
investments by the Banks to or in Greater Bay or to or in any other affiliate
is limited to 10% of the respective bank's capital stock and surplus (as
defined by federal regulations) and such secured loans and investments are
limited, in the aggregate, to 20% of the respective banks' capital stock and
surplus (as defined by federal regulations). California law also imposes
certain restrictions with respect to transactions involving Greater Bay and
other controlling persons of the Banks. Additional restrictions on
transactions with affiliates may be imposed on the Banks under the prompt
corrective action provisions of federal law. See "Prompt Corrective Action and
Other Enforcement Mechanisms" herein.
Capital Standards
The Federal Reserve, the Comptroller and the FDIC have adopted risk-based
minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's
operations for both transactions reported on the balance sheet as assets and
transactions, such as letters of credit and recourse arrangements, which are
recorded as off balance sheet items. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying total
capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to
risk-adjusted assets of 4%. In addition to the risked-based guidelines,
federal banking regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the leverage ratio.
For a banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. For all banking organizations not rated in
the highest category, the minimum leverage ratio must be at least 100 to 200
basis points above the 3% minimum, or 4% to 5%. In addition to these uniform
risk-based capital guidelines and leverage ratios that apply across the
industry, the regulators have the discretion to set individual minimum capital
requirements for specific institutions at rates significantly above the
minimum guidelines and ratios.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take prompt corrective
action to resolve the problems of insured depository institutions, including
but not limited to those that fall below one or more prescribed minimum
capital ratios. Each federal banking agency has promulgated regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. At December 31, 1998, each
of the Banks, and the Company as a whole exceeded the required ratios for
classification as "well capitalized".
An institution that, based upon its capital levels, is classified as "well
capitalized," "adequately capitalized" or "undercapitalized" may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
"critically undercapitalized" unless its capital ratio actually warrants such
treatment.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement
actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation or
any condition imposed in writing by the agency or any written agreement with
the agency. See "Potential Enforcement Action" herein.
12
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the
federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth
operational and managerial standards relating to: (i) internal controls,
information systems and internal audit systems, (ii) loan documentation, (iii)
credit underwriting, (iv) asset growth, (v) earnings, and (vi) compensation,
fees and benefits. In addition, the federal banking agencies have also adopted
safety and soundness guidelines with respect to asset quality and earnings
standards. These guidelines provide six standards for establishing and
maintaining a system to identify problem assets and prevent those assets from
deteriorating. Under these standards, an insured depository institution
should: (i) conduct periodic asset quality reviews to identify problem assets,
(ii) estimate the inherent losses in problem assets and establish reserves
that are sufficient to absorb estimated losses, (iii) compare problem asset
totals to capital, (iv) take appropriate corrective action to resolve problem
assets, (v) consider the size and potential risks of material asset
concentrations, and (vi) provide periodic asset quality reports with adequate
information for management and the board of directors to assess the level of
asset risk. These new guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are sufficient for the
maintenance of adequate capital and reserves.
Premiums for Deposit Insurance
The Banks' deposit accounts are insured by the Bank Insurance Fund ("BIF"),
as administered by the FDIC, up to the maximum permitted by law. Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operation, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary
regulator.
The FDIC charges an annual assessment for the insurance of deposits, which
as of December 31, 1998, ranged from 0 to 27 basis points per $100 of insured
deposits, based on the risk a particular institution poses to its deposit
insurance fund. The risk classification is based on an institution's capital
group and supervisory subgroup assignment. Pursuant to the Economic Growth and
Paperwork Reduction Act of 1996 (the "Paperwork Reduction Act"), at January 1,
1997, the Bank began paying, in addition to its normal deposit insurance
premium as a member of the BIF, an amount equal to approximately 1.3 basis
points per $100 of insured deposits toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980s to assist in the recovery
of the savings and loan industry. Members of the Savings Association Insurance
Fund ("SAIF"), by contrast, pay, in addition to their normal deposit insurance
premium, approximately 6.4 basis points. Under the Paperwork Reduction Act,
the FDIC is not permitted to establish SAIF assessment rates that are lower
than comparable BIF assessment rates. Beginning no later than January 1, 2000,
the rate paid to retire the Fico Bonds will be equal for members of the BIF
and the SAIF. The Paperwork Reduction Act also provided for the merging of the
BIF and the SAIF by January 1, 1999 provided there were no financial
institutions still chartered as savings associations at that time. However, as
of January 1, 1999, there were still financial institutions chartered as
savings associations. Should the insurance funds be merged before January 1,
2000, the rate paid by all members of this new fund to retire the Fico Bonds
would be equal.
Interstate Banking and Branching
The BHCA currently permits bank holding companies from any state to acquire
banks and the bank holding companies located in any other state, subject to
certain conditions, including certain nationwide - and state-imposed
concentration limits. The Company has the ability, subject to certain
restrictions, to acquire by acquisition or merger branches outside its home
state. The establishment of new interstate branches is also possible in those
states with laws that expressly permit it. Interstate branches are subject to
certain laws of the states in which they are located. Competition may increase
further as banks branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments
The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
13
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures
that may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a performance-based
evaluation system which bases CRA ratings on an institution's lending service
and investment performance. When a bank holding company applies for approval
to acquire a bank or other bank holding company, the Federal Reserve will
review the assessment of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application. In
connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to
improve" or "substantial noncompliance." Based on an examination conducted as
of March 1998, MPB was rated outstanding. Based on examinations conducted as
of March 1996, September 1995 and June 1995, CNB, PBC and Golden Gate were
rated satisfactory.
Year 2000 Compliance
The Federal Financial Institutions Examination Council issued an interagency
statement to the chief executive officers of all federally supervised
financial institutions regarding year 2000 project management awareness. It is
expected that unless financial institutions address the technology issues
relating to the coming of the year 2000, there will be major disruptions in
the operations of financial institutions. The statement provides guidance to
financial institutions, providers of data services, and all examining
personnel of the federal banking agencies regarding the year 2000 problem. The
federal banking agencies intend to conduct year 2000 compliance examinations,
and the failure to implement a year 2000 program may be seen by the federal
banking agencies as an unsafe and unsound banking practice. If a federal
banking agency determines that the Bank is operating in an unsafe and unsound
manner, the Bank may be required to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action being taken, which may include a cease and desist order and
fines.
Factors That May Affect Future Results of Operations
The following discusses certain factors which may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Ability of Greater Bay to Execute its Business Strategy
The financial performance and profitability of the Company will depend on
its ability to execute its business strategy and manage its recent and
possible future growth. Although management believes that it has substantially
integrated the business and operations of the recently acquired Banks and PBF,
there can be no assurance that unforeseen issues relating to the assimilation
of these Banks and PBF will not adversely affect the Company. In addition, any
future acquisitions, including BAB, or continued growth may present operating
and other problems that could have an adverse effect on the Company's
business, financial condition and results of operations. The Company's
financial performance will also depend on its ability to maintain profitable
operations through implementation of its Super Community Banking Philosophy.
Accordingly, there can be no assurance that the Company will be able to
continue the growth or maintain the level of profitability it has recently
experienced.
Interest Rates
The Company's earnings are impacted by changing interest rates. Changes in
interest rates impact the demand for new loans, the credit profile of existing
loans, the rates received on loans and securities and rates paid on deposits
and borrowings. The relationship between the rates received on loans and
securities and the rates paid on deposits and borrowings is known as interest
rate spread. Given the Company's current volume and mix of interest-bearing
liabilities and interest-earning assets, the Company's interest rate spread
could be expected to increase during times of rising interest rates and,
conversely, to decline during times of falling interest rates. Although the
Company believes its current level of interest rate sensitivity is reasonable,
significant fluctuations in interest rates may have an adverse effect on the
Company's business, financial condition and results of operations.
14
Economic Conditions and Geographic Concentration
The Company's operations are located in Northern California and concentrated
primarily in Contra Costa San Francisco, Santa Clara and San Mateo Counties,
which includes the area known as the "Silicon Valley." As a result of the
geographic concentration, the Company's results depend largely upon economic
conditions in these areas. A deterioration in economic conditions in the
Company's market areas, particularly in the technology and real estate
industries on which these areas depend, could have a material adverse impact
on the quality of the Company's loan portfolio, the demand for its products
and services, and its results of operations.
Government Regulation and Monetary Policy
The financial services industry is regulated extensively. Federal and State
regulation is designed primarily to protect the deposit insurance funds and
consumers, and not to benefit the Company's stockholders. Significant new laws
or changes in existing laws or repeal of existing laws may cause the Company's
results to differ materially. Further, federal monetary policy, particularly
as implemented through the Federal Reserve System, significantly affects
credit conditions for the Company.
Competition
The financial services business in the Company's market areas are highly
competitive. It is becoming increasingly competitive due to changes in
regulation, technological advances, and the accelerating pace of consolidation
among financial services providers. The results of the Company may differ in
future periods depending upon the nature or level of competition.
Credit Quality
A significant source of risk arises from the possibility that losses will be
sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. The Company has adopted
underwriting and credit monitoring procedures and credit policies, including
the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Company's credit portfolio. These policies and procedures, however, may not
prevent unexpected losses that could materially adversely affect the Company's
results of operations.
Year 2000 Compliance
Most of the Company's operations are dependent on the efficient functioning
of the Company's computer systems and software. Computer system failures or
disruption could have a material adverse effect on the Company's business,
financial condition and results of operations.
Many computer programs were designed and developed utilizing only two digits
in date fields, thereby creating the inability to recognize the year 2000 or
years thereafter. Beginning in the year 2000, these date codes will need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. This year 2000 issues creates risks for the Company from unforeseen or
unanticipated problems in its internal computer systems as well as from
computer systems of the Federal Reserve Bank, correspondent banks, customers
and suppliers. Failures of these systems or untimely corrections could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's computer systems and programs are designed and supported by
companies specifically in the business of providing such products and
services. The Company's year 2000 plan includes evaluating existing hardware,
software, ATM's, vaults, alarm systems, communication systems and other
electrical devices, testing critical application programs and systems, both
internally and externally, establishing a contingency plan and upgrading
hardware and software as necessary. 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
15
completed in mid-1998. The second phase was to execute those renovation plans
and begin testing systems by simulating year 2000 data conditions. This phase
was largely completed in 1998. Testing and implementation is planned to be
completed during the first half of 1999. Failure to be year 2000 compliant or
incurrence of significant costs to render the Company year 2000 compliant
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is evaluating its major customers and suppliers to determine if
they are year 2000 compliant. Failure of any material customer or supplier to
be year 2000 compliant could have a material adverse effect on the Company.
Other Risks
From time to time, the Company details other risks with respect to its
business and financial results in its filings with the Securities and Exchange
Commission.
ITEM 2. PROPERTIES.
The Company occupies its administrative offices under a lease which,
including options to renew, expires in 2007. PBC owns its main office located
in Millbrae, California. The Company leases thirteen additional offices
throughout the San Francisco Bay Area under operating leases. Those leases
expire under various dates, including options to renew, through 2017.
The Company believes its present facilities are adequate for its present
needs and anticipated future growth. The Company believes that, if necessary,
it could secure suitable alternative facilities on similar terms without
adversely affecting operations.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is involved in certain legal proceedings
arising in the normal course of its business. Management believes that the
outcome of these matters will not have a material adverse effect on the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no submission of matters to a vote of security holders during the
fourth quarter of the year ended December 31, 1998.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is traded on the Nasdaq National Market ("Nasdaq") under
the symbol "GBBK". The quotations shown reflect the high and low sales prices
for the Company's common stock as reported by Nasdaq. The following
information is restated to reflect 2-1 stock split effective as of April 30,
1998.
Cash dividends
For the period indicated High Low declared (1)
------------------------ ------ ------ --------------
1998
Fourth Quarter................................ $35.00 $24.50 $0.095
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
- --------
(1) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the completion of
their mergers with Greater Bay. In 1998, PBFC made a distribution of $1.2
million to its shareholders. In 1997, PBC declared an annual dividend of
$3.20 share, PRB declared and paid a dividend of $100,000 to its sole
shareholder and PBFC made a distribution of $208,000 to its shareholders.
On a consolidated basis, Greater Bay has declared dividends of $0.54 and
$0.48 in 1998 and 1997, respectively.
The Company estimates there were approximately 2,500 shareholders at
December 31, 1998.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
Information regarding Selected Consolidated Financial Data appears on page
A-1 under the caption "Financial Highlights" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations appears on pages A-2 through A-23 under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information regarding Quantitative and Qualitative Disclosures About Market
Risk appears on page A-18 through A-19 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quantitative and Qualitative Disclosures About Market Risk" and is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information regarding Financial Statements and Supplementary Data appears on
pages A-24 through A-59 under the caption "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of
Comprehensive Income", "Consolidated Statements of Equity," "Consolidated
Statements of Cash Flows" and "Notes to Consolidated Financial Statements" and
is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company intends to file a definitive proxy statement for the 1999 Annual
Meeting of Shareholders (the "Proxy Statement") with the Securities and
Exchange Commission within 120 days of December 31, 1998. Information
regarding directors of Greater Bay will appear under the caption "DISCUSSION
OF THE PROPOSALS RECOMMENDED BY THE BOARD--Proposal 1: Elect Four Directors"
in the Proxy Statement and is incorporated herein by reference. Information
regarding compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, and executive officers will appear under the captions
"INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--Section 16(a) Beneficial
Ownership Reporting Compliance by Directors and Executive Officers" and "--
Executive Officers" in the Proxy Statement and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation will appear under the captions
"INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--How We Compensate
Executive Officers", "--How We Compensate Directors" "--Employment Contracts,
Termination of Employment and Change of Control Arrangements,"--"Executive
Committee's Report on Executive Compensation", "--Compensation Committee
Interlocks and Insider Participation" and "--Performance Graph" in the Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners and
management will appear under the caption "INFORMATION ABOUT GREATER BAY STOCK
OWNERSHIP" in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions will
appear under the caption "INFORMATION ABOUT DIRECTORS AND EXECUTIVE OFFICERS--
Certain Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)1. Financial Statements
The following documents are filed as part of this report:
Consolidated Balance Sheets........................................... A-24
Consolidated Statements of Operations................................. A-25
Consolidated Statements of Comprehensive Income....................... A-26
Consolidated Statements of Changes in Shareholders' Equity ........... A-27
Consolidated Statements of Cash Flows................................. A-28
Notes to the Consolidated Financial Statements........................ A-29
Report of Independent Accountants..................................... A-60
2. Financial Statement Schedules
All financial statement schedules are omitted because of the absence of
the conditions under which they are required to be provided or because
the required information is included in the financial statements listed
above and/or related notes.
3. Exhibits
See Item 14(c) below.
(b) Reports on Form 8-K
During the fourth quarter of 1998 the Company filed two reports on Form
8-K as described below.
On December 8, 1998, the Company filed a report on Form 8-K reported
under Item 5. Other Event and containing three recent press
releases. Those press releases announced 1.) the adoption of a
shareholder rights plan by the Company, 2.) consummation of its
offer to exchange its $30 million aggregate principle amount of
Floating Rate Capital Securities, Series A for a like amount of its
registered Floating Rate Capital Securities, Series B and 3.) the
hiring of Fred Bailard as Senior Vice President of Cash Management
Services.
On October 19, 1998, the Company filed a report on Form 8-K reported
under Item 5. Other Event and containing two recent press releases.
Those press releases announced 1.) financial results of the Company
for the third quarter of 1998 and 2.) the hiring of Linda M. Iannone
as Senior Vice President and General Counsel of the Company.
(c) Exhibits Required by Item 601 of Regulation S-K
Exhibit
No. Exhibit
------- -------
2.1 Agreement and Plan of Reorganization by and between Greater Bay
Bancorp and Bay Area Bancshares dated January 26, 1999. (The
schedules to this agreement are not being filed herewith. Greater
Bay Bancorp agrees to furnish supplemental copies of any omitted
schedules to the SEC upon request).
3.1 Articles of Incorporation of Greater Bay Bancorp, as amended.
3.2 Bylaws of Greater Bay Bancorp, as amended.
3.3 Certificate of Determination of Series A Preferred Stock of
Greater Bay Bancorp (filed as Exhibit A to Exhibit 4.1 hereto).
4.1 Rights Agreement.(1)
4.2 Junior Subordinated Indenture dated as of March 31, 1997 between
Greater Bay Bancorp and Wilmington Trust Company, as Trustee.(2)
19
Exhibit
No. Exhibit
------- -------
4.3 Officers' Certificate and Company Order, dated March 31, 1997.(2)
4.4 Certificate of Trust of GBB Capital I.(3)
4.5 Trust Agreement of GBB Capital I dated as of February 28, 1997.(3)
4.6.1 Amended and Restated Trust Agreement of GBB Capital I, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of March 31,
1997.(2)
4.6.2 Successor Administrative Trustee and First Amendment to Amended
and Restated Trust Agreement.
4.7 Trust Preferred Certificate of GBB Capital I.(2)
4.8 Common Securities Certificate of GBB Capital I.(2)
4.9 Guarantee Agreement between Greater Bay Bancorp and Wilmington
Trust Company, dated as of March 31, 1997.(2)
4.10 Agreement as to Expenses and Liabilities, dated as of March 31,
1997.(2)
4.11 Form of Subordinated Debentures.(4)
4.12 Supplemental Debenture Agreement of Cupertino National Bancorp
dated as of November 22, 1996.(3)
4.13 Supplemental Debenture Agreement dated November 27, 1996 between
Cupertino National Bancorp and Mid-Peninsula Bancorp.(3)
4.14 Supplemental Debenture Agreement, dated as of March 27, 1997.(2)
4.15 Indenture between Greater Bay Bancorp and Wilmington Trust
Company, as Debenture Trustee, dated as of August 12, 1998.(5)
4.16 Form of Exchange Junior Subordinated Debentures (filed as Exhibit
A to Exhibit 4.15 hereto).
4.17 Certificate of Trust of GBB Capital II, dated as of May 18,
1998.(5)
4.18 Amended and Restated Trust Agreement of GBB Capital II, among
Greater Bay Bancorp, Wilmington Trust Company and the
Administrative Trustees named therein dated as of August 12,
1998.(5)
4.19 Form of Exchange Capital Security Certificate (filed as Exhibit A-
1 to Exhibit 4.18 hereto).
4.20 Common Securities Guarantee Agreement of Greater Bay Bancorp,
dated as of August 12, 1998.(5)
4.21 Series B Capital Securities Guarantee Agreement of Greater Bay
Bancorp and Wilmington Trust Company dated as of November 27,
1998.
4.22 Liquidated Damages Agreement among Greater Bay Bancorp, GBB
Capital II, and Sandler O'Neill and Partners, L.P., dated as of
August 7, 1998.(5)
4.23 Registration Rights Agreement between Greater Bay Bancorp and The
Leo K.W. Lum PRB Revocable Trust dated May 8, 1998.(6)
10.1 Employment Agreement with David L. Kalkbrenner, dated March 3,
1992.(8), (9)
10.1.1 Amendment No. 1 to Employment Agreement with David L. Kalkbrenner,
dated March 27, 1998.(7), (8)
10.2 Employment, Severance and Retirement Benefits Agreement with
Steven C. Smith dated July 31, 1995.(3), (8)
10.2.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with Steven C. Smith, dated March 27, 1998.(7), (8)
10.3 Employment, Severance and Retirement Benefits Agreement with David
R. Hood dated July 31, 1995.(3), (8)
10.3.1 Amendment No. 1 to Employment, Severance and Retirement Benefits
Agreement with David R. Hood, dated March 27, 1998.(7), (8)
20
Exhibit
No. Exhibit
------- -------
10.4 Greater Bay Bancorp 1996 Stock Option Plan, as amended.(8)
10.5 Greater Bay Bancorp 401(k) Profit Sharing Plan.(7), (8)
10.6.1 Greater Bay Bancorp Employee Stock Purchase Plan.(8), (10)
10.6.2 Amendment to Greater Bay Bancorp Employee Stock Purchase Plan.(7),
(8)
10.7 Greater Bay Bancorp Change of Control Pay Plan I.(7), (8)
10.8 Greater Bay Bancorp Change of Control Pay Plan II.(7), (8)
10.9 Greater Bay Bancorp Termination and Layoff Plan I.(7), (8)
10.10 Greater Bay Bancorp Termination and Layoff Plan II.(7), (8)
10.11.1 Greater Bay Bancorp 1997 Elective Deferred Compensation Plan.(7),
(8)
10.11.2 Amendment to Greater Bay Bancorp 1997 Elective Deferred
Compensation Plan.(8)
10.12 Form of Indemnification Agreement between Greater Bay Bancorp and
with directors and certain executive officers.(3)
11.1 Statements re Computation of Earnings per Share.
12.1 Statement re Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
--------
(1) Incorporated by reference from Greater Bay Bancorp's Form 8-A12G
filed with the SEC on November 25, 1998.
(2) Incorporated by reference from Greater Bay Bancorp's Current Report
on Form 8-K (File No. 000-25034) dated June 5, 1997.
(3) Incorporated by reference from Greater Bay's Registration Statement
on Form S-1 (File No. 333-22783) filed with the SEC on March 5,
1997.
(4) Incorporated herein by reference from Exhibit 1 of Cupertino
National Bancorp's Form 8-K (File No. 0-18015), filed with the SEC
on October 25, 1995.
(5) Incorporated by reference from Greater Bay's Current Report on Form
8-K (File No. 000-25034) filed with the SEC on August 28, 1998.
(6) Incorporated by reference from Greater Bay Bancorp's Current Report
on Form 8-K filed with the SEC on May 20, 1998.
(7) Incorporated by reference from Greater Bay Bancorp's Annual Report
on Form 10-K filed with the SEC on March 31, 1998.
(8) Represents executive compensation plans and arrangements of Greater
Bay Bancorp.
(9) Incorporated herein by reference from Exhibit 10.15 to Mid-
Peninsula Bancorp's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 0-25034), filed with the SEC on March
30, 1995.
(10) Incorporated herein by reference from Greater Bay Bancorp's Proxy
Statement for Annual Meeting of Shareholders (File No. 000-25034),
filed with the SEC on May 13, 1997.
(d) Additional Financial Statements
Not applicable.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 17th day
of February, 1999.
Greater Bay Bancorp
/s/ David L. Kalkbrenner
By: _________________________________
David L. Kalkbrenner
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David L. Kalkbrenner President, Chief Executive February 17, 1999
______________________________________ Officer and Director
David L. Kalkbrenner (Principal Executive
Officer)
/s/ Steven C. Smith Executive Vice President, February 17, 1999
______________________________________ Chief Operating Officer
Steven C. Smith and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
/s/ George R. Corey Director February 17, 1999
______________________________________
George R. Corey
/s/ John M. Gatto Director February 17, 1999
______________________________________
John M. Gatto
/s/ James E. Jackson Director February 17, 1999
______________________________________
James E. Jackson
/s/ Rex D. Lindsay Director February 17, 1999
______________________________________
Rex D. Lindsay
/s/ Leo K. W. Lum Director February 17, 1999
______________________________________
Leo K. W. Lum
/s/ George M. Marcus Director February 17, 1999
______________________________________
George M. Marcus
22
Signature Title Date
--------- ----- ----
/s/ Duncan L. Matteson Director February 17, 1999
______________________________________
Duncan L. Matteson
/s/ Glen McLaughlin Director February 17, 1999
______________________________________
Glen McLaughlin
/s/ Rebecca Q. Morgan Director February 17, 1999
______________________________________
Rebecca Q. Morgan
/s/ Dick J. Randall Director February 17, 1999
______________________________________
Dick J. Randall
/s/ Donald H. Seiler Director February 17, 1999
______________________________________
Donald H. Seiler
/s/ Warren R. Thoits Director February 17, 1999
______________________________________
Warren R. Thoits
23
SELECTED FINANCIAL INFORMATION
The following table represents the selected financial information at and for
the five years ended December 31, 1998:
Years Ended December 31,
----------------------------------------------------------
1998 1997* 1996* 1995* 1994*
---------- ---------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Statement of Operations
Data
Interest income......... $ 112,920 $ 88,527 $ 62,883 $ 53,060 $ 39,946
Interest expense........ 47,472 34,059 22,379 18,961 11,804
---------- ---------- --------- --------- ---------
Net interest income.... 65,448 54,468 40,504 34,099 28,142
Provision for loan
losses................. 6,035 6,786 2,594 1,219 1,985
---------- ---------- --------- --------- ---------
Net interest income
after provision for
loan losses........... 59,413 47,682 37,910 32,880 26,157
Other income............ 6,310 5,379 4,623 3,043 4,120
Nonrecurring--warrant
income................. 945 1,162 -- -- --
---------- ---------- --------- --------- ---------
Total other income..... 7,255 6,541 4,623 3,043 4,120
Operating expenses...... 38,711 34,083 29,416 25,962 22,724
Other expenses--
nonrecurring........... 1,341 (1,287) -- 2,135 --
---------- ---------- --------- --------- ---------
Total operating
expenses.............. 40,052 32,796 29,416 28,097 22,724
---------- ---------- --------- --------- ---------
Income before income tax
expense & merger and
other related
nonrecurring costs..... 26,616 21,427 13,117 7,826 7,553
Income tax expense...... 8,364 7,526 4,778 2,870 2,794
---------- ---------- --------- --------- ---------
Income before merger and
other related
nonrecurring costs..... 18,252 13,901 8,339 4,956 4,759
Merger and other related
nonrecurring costs, net
of tax................. 1,674 2,282 1,991 -- 608
---------- ---------- --------- --------- ---------
Net income............. $ 16,578 $ 11,619 $ 6,348 $ 4,956 $ 4,151
========== ========== ========= ========= =========
Per Share Data (1)
Income per share (before
merger and other
related nonrecurring
costs)
Basic.................. $ 1.92 $ 1.51 $ 0.94 $ 0.59 $ 0.61
Diluted................ 1.78 1.41 0.88 0.56 0.56
Net income per share
Basic.................. $ 1.75 $ 1.26 $ 0.72 $ 0.59 $ 0.53
Diluted................ 1.62 1.17 0.67 0.56 0.49
Cash dividends per share
(2).................... $ 0.38 $ 0.30 $ 0.22 $ 0.20 $ 0.11
Book value per common
share.................. $ 9.64 $ 8.23 $ 7.41 $ 7.02 $ 6.55
Shares outstanding at
year end............... 9,612,142 9,304,930 9,021,738 8,613,440 8,053,218
Average common shares
outstanding............ 9,485,000 9,196,000 8,856,000 8,334,000 7,854,000
Average common and
common equivalent
shares outstanding..... 10,231,000 9,892,000 9,443,000 8,813,000 8,485,000
Performance Ratios
Return on average assets
(before merger and
other related
nonrecurring costs)
(3).................... 1.28 % 1.33 % 1.13% 0.82 % 1.09 %
Return on average common
shareholders' equity
(before merger and
other related
nonrecurring costs)
(3).................... 21.72 % 18.86 % 12.97% 8.70 % 11.95 %
Net interest margin
(4).................... 4.96 % 5.55 % 5.91% 6.09 % 6.98 %
Balance Sheet Data--At
Period End
Assets.................. $1,582,865 $1,217,665 $ 919,924 $ 659,373 $ 552,272
Loans, net.............. 984,487 735,233 564,175 393,378 342,098
Investment securities... 342,294 213,127 135,671 141,024 117,737
Deposits................ 1,342,492 1,071,148 821,133 584,103 475,048
Subordinated debt....... 3,000 3,000 3,000 3,000 --
Trust Preferred
Securities............. 50,000 20,000 -- -- --
Common shareholders'
equity................. 92,676 76,540 66,834 60,494 52,784
Asset Quality Ratios
Nonperforming assets to
total loans and OREO... 0.31 % 0.73 % 1.62% 2.40 % 3.45 %
Allowance for loan
losses to total loans.. 2.12 % 2.18 % 1.76% 1.67 % 1.96 %
Allowance for loan
losses to non-
performing assets...... 676.10 % 298.40 % 108.36% 69.15 % 56.56 %
Net (charge-offs)
recoveries to average
loans.................. (0.16)% (0.28)% 0.01% (0.40)% (0.40)%
Regulatory Capital
Ratios
Leverage Ratio.......... 7.81 % 8.40 % 7.78% 9.53 % 9.89 %
Tier 1 Capital.......... 9.90 % 10.72 % 9.83% 12.47 % 13.05 %
Total Capital........... 12.94 % 12.31 % 11.47% 14.31 % 14.37 %
- -------
* Restated on a historical basis to reflect the mergers between Greater Bay
Bancorp and Cuperfino National Bancorp, PBC, PRB (the parent of Golden
Gate) and PBFC, on a pooling-of-interests basis.
(1) Restated to reflect 2-for-1 stock split declared for shareholders of
record at April 30, 1998.
(2) Includes only those dividends declared by Greater Bay, and excludes those
dividends paid by Greater Bay's subsidiaries prior to the completion of
their mergers with Greater Bay.
(3) Including merger and other related nonrecurring costs net of tax of $1.7
million in 1998, $2.3 million in 1997, $2.0 million in 1996 and $608,000
in 1994, ROA for 1998, 1997, 1996, 1995 and 1994 would have been 1.17%,
1.11%, 0.86%, 0.82% and 0.95%, respectively, and ROE for 1998, 1997, 1996,
1995 and 1994 would have been 19.73%, 15.76%, 9.87%, 8.70%, and 10.42%,
respectively.
(4) Net interest margin for 1998, 1997 and 1996 includes the lower spread
earned on the PBC Special Deposit (see Note 7 to the Financial Statements
for details). Excluding the PBC Special Deposit, net interest margin would
have been 5.16%, 5.78% and 6.08% for 1998, 1997 and 1996, respectively.
A-1
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 became
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
became the fourth wholly owned banking subsidiary of Greater Bay. In August
1998, the Company completed a merger with Pacific Business Funding Corporation
("PBFC"), which now operates as an operating division of CNB and conducts
business under the name Pacific Business Funding. All mergers were accounted
for as a 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. CNB, MPB, PBC and Golden Gate are referred to
collectively herein as the "Banks." The financial information includes the
result of the Company's operating divisions, Greater Bay Bank Santa Clara
Valley Commercial Banking Group, Greater Bay Corporate Finance Group, Greater
Bay Bank Contra Costa Banking Office, 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
"Selected Financial Information" and the Company's consolidated financial data
included elsewhere in this document. Certain statements under this caption
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
in such forward-looking statements. Factors that might cause such a difference
include but are not limited to economic conditions, competition in the
geographic and business areas in which the Company conducts its operations,
fluctuation in interest rates, credit quality and government regulation.
Results of Operations
The Company reported net income of $16.6 million in 1998, a 42.7% increase
over 1997 net income of $11.6 million. The net income in 1997 was an 83.0%
increase over 1996 income of $6.3 million. Basic net income per share was
$1.75 for 1998, as compared to $1.26 for 1997 and $0.72 for 1996. Diluted net
income per share was $1.62, $1.17 and $0.67 for 1998, 1997 and 1996,
respectively. The return on average assets and return on average shareholders'
equity were 1.17% and 19.73% in 1998, compared with 1.11% and 15.76% in 1997
and 0.86% and 9.87% in 1996, respectively.
The Company's operating results included merger and other related
nonrecurring costs of $2.7 million ($1.7 million net of tax), $3.3 million
($2.3 million net of tax) and $2.8 million ($2.0 million net of tax) in 1998,
1997 and 1996, respectively. The following table summarizes net income, net
income per share and key financial ratios before and after merger and other
related nonrecurring costs for the years presented:
Before merger and
other After merger and other
related nonrecurring related nonrecurring
costs costs
------------------------ ------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------ ------- ------- ------
(Dollars in thousands, except per share
amounts)
Net income................ $18,252 $13,901 $8,339 $16,578 $11,619 $6,348
Net income per share:
Basic................... $ 1.92 $ 1.51 $ 0.94 $ 1.75 $ 1.26 $ 0.72
Diluted................. $ 1.78 $ 1.41 $ 0.88 $ 1.62 $ 1.17 $ 0.67
Return on average assets.. 1.28% 1.33% 1.13% 1.17% 1.11% 0.86%
Return on average
shareholders' equity..... 21.72% 18.86% 12.97% 19.73% 15.76% 9.87%
A-2
The increase in 1998 net income was the result of significant growth in
loans, deposits and trust assets. This growth resulted in increases in net
interest income, 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.
Net income for 1998 and 1997 included $945,000 and $1.2 million,
respectively, in warrant income resulting from the warrants received from
clients of the Banks. During 1998, the Company donated appreciated warrants to
the Greater Bay Bancorp Foundation. The contribution of the warrants triggered
recognition of warrant income of $945,000, net of related employee incentives,
and a donation expense of $1.3 million. The Company recognized a tax benefit
of $551,000 from these transactions.
The increase in net income in 1997 over 1996 was due primarily to increased
growth in interest-earning assets. Additionally, warrant income increased to
$1.2 million in 1997, compared with $92,000 in 1996. Net income in 1997 also
included approximately $1.7 million ($1.0 million net of tax) of a recovery
through insurance of a litigation settlement charge incurred in 1995. The
increases were partially offset by the growth in operating expenses. In
addition, during 1997 the Company increased its allowance for loan losses to
2.18% of total loans from 1.76% of total loans in 1996. The increase in the
allowance for loan losses as a percentage of total loans accounted for $3.7
million of the increased provision for loan losses in 1997.
Net Interest Income
Net interest income increased 20.2% to $65.4 million in 1998 from $54.5
million in 1997. This increase was primarily due to the $336.5 million, or
34.3%, increase in average interest-earning assets which was partially offset
by a 56 basis point decrease in the Company's net yield on interest earning
assets. Net interest income increased 34.5% in 1997 from $40.5 million in
1996. This increase was primarily due to the $296.7 million, or 43.3%,
increase in average interest-earning assets, which was partially offset by the
36 basis point decrease in the Company's net yield on interest earning assets.
The Company's net yield on interest earning assets was reduced by the
Special Deposit (discussed in Note 7 of the Notes to the Consolidated
Financial Statements). The average deposit balances related to the Special
Deposit during 1998, 1997 and 1996 were $88.9 million, $93.4 million and $91.3
million, respectively, on which the Company earned a spread of 2.25%.
Excluding the Special Deposit, the 1998, 1997 and 1996 net yield on interest
earning assets would have been 5.16%, 5.78% and 6.08%, respectively.
A-3
The following table presents, for the years 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.
Years Ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance (1) Interest Rate Balance (1) Interest Rate Balance (1) Interest Rate
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Interest-Earning Assets:
Fed funds sold.......... $ 85,329 $ 4,598 5.39% $ 73,223 $ 3,911 5.34% $ 64,194 $ 3,637 5.67%
Other short term
securities............. 96,765 5,454 5.64% 97,586 5,287 5.42% 12,569 691 5.50%
Investment securities:
Taxable................ 281,395 17,114 6.08% 128,856 8,199 6.36% 121,809 7,394 6.07%
Tax-exempt (3)......... 42,185 2,104 4.99% 19,064 1,095 5.74% 19,428 990 5.10%
Loans (2)............... 812,665 83,650 10.29% 663,107 70,035 10.56% 467,159 50,171 10.74%
---------- -------- ---------- ------- -------- -------
Total interest-earning
assets................ 1,318,339 112,920 8.57% 981,836 88,527 9.02% 685,159 62,883 9.18%
Noninterest-earning
assets................. 102,230 63,303 55,003
---------- -------- ---------- ------- -------- -------
Total assets........... $1,420,569 112,920 $1,045,139 88,527 $740,162 62,883
========== -------- ========== ------- ======== -------
Interest-Bearing
Liabilities:
Deposits:
MMDA, NOW and Savings.. $ 761,332 27,634 3.63% $ 575,603 20,653 3.59% $390,996 12,886 3.30%
Time deposits, over
$100,000.............. 180,626 9,300 5.15% 129,991 6,686 5.14% 94,899 4,689 4.94%
Other time deposits.... 48,217 2,464 5.11% 58,342 3,301 5.66% 58,387 3,645 6.24%
---------- -------- ---------- ------- -------- -------
Total interest-bearing
deposits.............. 990,175 39,398 3.98% 763,936 30,640 4.01% 544,282 21,220 3.90%
Other borrowings........ 74,877 4,879 6.52% 16,931 1,611 9.51% 10,854 814 7.50%
Subordinated debt....... 3,000 345 11.50% 3,000 345 11.50% 3,000 345 11.50%
Trust Preferred
Securities............. 31,671 2,850 9.00% 15,000 1,463 9.75% -- -- 0.00%
---------- -------- ---------- ------- -------- -------
Total interest-bearing
liabilities........... 1,099,723 47,472 4.32% 798,867 34,059 4.26% 558,136 22,379 4.01%
---------- -------- ---------- ------- -------- -------
Noninterest-bearing
deposits............... 220,832 161,684 112,321
Other noninterest-
bearing liabilities.... 15,987 10,865 5,412
Shareholders' equity.... 84,027 73,723 64,293
---------- ---------- --------
Total liabilities and
shareholders' equity.. $1,420,569 $ 47,472 $1,045,139 $34,059 $740,162 $22,379
========== -------- ========== ------- ======== -------
Net interest income..... $ 65,448 $54,468 $40,504
======== ======= =======
Interest rate spread.... 4.25% 4.75% 5.17%
Contribution of interest
free funds............. 0.72% 0.79% 0.74%
Net yield on interest-
earnings assets (4).... 4.96% 5.55% 5.91%
- --------
(1) Nonaccrual loans are excluded from the average balance and only collected
interest on accrual loans is included in the interest column.
(2) Loan fees totaling $3.2 million, $3.4 million and $2.5 million are
included in loan interest income for 1998, 1997 and 1996, respectively.
(3) Tax equivalent yields earned on the tax exempt securities are 7.19%, 8.34%
and 7.34% for the years ended December 31, 1998, 1997 and 1996,
respectively, using the federal statutory rate of 34%.
(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.
A-4
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rate
earned or paid on interest-earning assets and interest-bearing liabilities.
The volume of interest-earning asset dollars in loans and investments,
compared to the volume of interest-bearing liabilities represented by deposits
and borrowings, combined with the spread, produces the changes in the net
interest income between periods. The table below sets forth, for the years
indicated, a summary of the changes in average asset and liability balances
(volume) and changes in average interest rates (rate).
Year Ended December 31, 1998 Year Ended December 31, 1997
Compared with December 31, 1997 Compared with December 31, 1996
favorable (unfavorable) favorable (unfavorable)
---------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
---------------------- ---------- ---------------------- ----------
(Dollars in thousands) (1)
Interest-earning assets:
Fed funds sold.......... $ 638 $ 49 $ 687 $ 483 $ (209) $ 274
Other short term
securities............. (47) 214 167 4,607 (11) 4,596
Investment securities:
Taxable................ 9,091 (176) 8,915 448 357 805
Tax-exempt............. 1,136 (127) 1,009 (21) 126 105
Loans................... 15,071 (1,456) 13,615 20,701 (837) 19,864
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning
assets............... 25,889 (1,496) 24,393 26,218 (574) 25,644
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing
liabilities:
Deposits:
MMDA, NOW and Savings.. 6,322 659 6,981 6,562 1,205 7,767
Time deposits, over
$100,000.............. 2,445 169 2,614 1,796 201 1,997
Other time deposits.... (556) (281) (837) (4) (340) (344)
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
deposits............. 8,211 547 8,758 8,354 1,066 9,420
Other borrowings........ 3,348 (80) 3,268 527 270 797
Trust Preferred
Securities............. 1,370 17 1,387 967 496 1,463
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities.......... 12,929 484 13,413 9,848 1,832 11,680
---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in
net interest income.. $ 12,960 $ (1,980) $ 10,980 $ 16,370 $ (2,406) $ 13,964
========== ========== ========== ========== ========== ==========
- --------
(1) The change in interest income and expense not attributable to specific
volume and rate changes has been allocated proportionately between the
volume and rate changes.
Interest income in 1998 increased 27.6% to $112.9 million from $88.5 million
in 1997. This was primarily due to the significant increase in loans, the
Company's highest yielding interest-earning asset, and investment securities.
Loan volume increases were the result of the continuing economic improvement
in the Company's market areas, as well as the addition of experienced
relationship managers and significant business development efforts by the
Company's relationship managers. The increase was partially offset by a
decline in the yield earned on average interest-earning assets. Average
interest-earning assets increased $336.5 million, or 34.3%, to $1.3 billion in
1998, compared to $981.8 million in 1997. Of this total increase, average
loans increased $149.6 million, or 22.6%, to $812.7 million, or 61.6% of
average interest-earning assets, in 1998 from $663.1 million, or 67.5% of
average interest-earning assets in 1997. Investment securities, Federal funds
sold and other short-term securities, increased 58.7% to $505.7 million, or
38.4% of average interest-earning assets in 1998, from $318.7 million, or
32.5% of average interest-earning assets in 1997.
The average yield on interest-earning assets declined 45 basis points to
8.57% in 1998 from 9.02% in 1997 primarily due to a decline in the average
yield on loans which was caused by increased competition for quality borrowers
in the Company's market area and the shift in the mix between lower yielding
investments and higher yielding loans. Loans represented approximately 61.6%
of total interest-earning assets in 1998 compared to 67.5%
A-5
in 1997. If loans would have remained at 67.5% of total interest earning
assets in 1998, the yield on interest-earning assets would have been 8.83% and
the interest rate spread would have been 4.51%. The average yield on loans
declined 27 basis points to 10.29% in 1998 from 10.56% in 1997 primarily due
to declines in market interest rates.
Interest expense in 1998 increased 39.4% to $47.5 million from $34.1 million
in 1997. This increase was due to greater volumes of interest-bearing
liabilities coupled with slightly higher interest rates paid on interest-
bearing liabilities. Average interest-bearing liabilities increased 37.7% to
$1.1 billion in 1998 from $798.9 million in 1997 due primarily to the efforts
of the Banks' relationship managers in generating core deposits from their
client relationships and the deposits derived from the activities of the
Greater Bay Trust Company and the Venture Banking Group.
During 1998, average noninterest-bearing deposits increased to $220.8
million from $161.7 million in 1997. Due to that increase, noninterest-bearing
deposits comprised 18.2% of total deposits at year-end 1998, compared 17.5% at
year-end 1997.
As a result of the foregoing, the Company's interest rate spread declined to
4.25% in 1998 from 4.75% in 1997, and the net yield on interest-earning assets
declined in 1998 to 4.96% from 5.55% in 1997.
Interest income increased 40.8% to $88.5 million in 1997 from $62.9 million
in 1996, as a result of the increase in average interest-earning assets offset
by a decline in the yields earned. Average interest-earning assets increased
43.3% to $981.8 million in 1997 from $685.2 million in 1996 principally as a
result of increase in loans. The yield on the higher volume of average
interest-earning assets declined 16 basis points to 9.02% in 1997 from 9.18%
in 1996, primarily as a result of increased competition for loans.
Interest expense in 1997 increased 52.2% to $34.1 million from $22.4 million
in 1996 primarily as a result of the increase in volume of interest-bearing
liabilities in addition an increase in rates paid on interest-bearing
liabilities. As a result of the utilization of higher cost long term
borrowings which provide additional capital to the Company, the average rate
paid on average interest-bearing liabilities increased 25 basis points to
4.26% in 1997 from 4.01% in 1996. Corresponding to the growth in average
interest-earning assets, average interest-bearing liabilities increased 43.1%
to $798.9 million in 1997 from $558.1 million in 1996.
As a result of the foregoing, the Company's interest rate spread declined to
4.75% in 1997 from 5.17% in 1996 and the net yield on interest-earning assets
declined to 5.55% in 1997 from 5.91% in 1996.
Certain client service expenses were incurred by the Company with respect to
its noninterest-bearing liabilities. These expenses include messenger
services, check supplies and other related items and are included in operating
expenses. Had they been included in interest expense, the impact of these
expenses on the Company's net yield on interest-earning assets would have been
as follows for each of the years presented.
1998 1997 1996
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(Dollars in thousands)
Average noninterest bearing demand deposits..... $220,832 $161,684 $112,321
Client service expenses......................... 544 444 462
Client service expenses, annualized............. 0.25% 0.27% 0.41%
Impact on net yield on interest-earning assets:
Net yield on interest-earning assets............ 4.96% 5.55% 5.91%
Impact of client service expense................ 0.53% 0.30% 0.10%
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Adjusted net yield on interest-earning assets
(1)............................................ 5.49% 5.85% 6.01%
======== ======== ========
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(1) Noninterest-bearing liabilities are included in cost of funds calculations
to determine adjusted net yield of spread
The impact on the net yield on interest-earning assets is determined by
offsetting net interest income by the cost of client service expense, which
reduces the yield on interest-earning assets. The cost for client service
expense reflects the Company's efforts to manage its client service expenses.
A-6
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