Magazine article American Banker

Greater Bay's Good News Spoiled

Magazine article American Banker

Greater Bay's Good News Spoiled

Article excerpt

Despite a big second-quarter earnings gain, the three-month slide in Greater Bay Bancorp's stock is continuing as investors fret about its real estate exposure amid rising vacancy rates in Northern California.

The $8.5 billion-asset multibank holding company said last week that its second-quarter net income rose 40%, to $33.5 million, or 62 cents a share, because of higher loan and deposit volumes, and fee income from the newly acquired ABD Insurance and Financial Services.

But it also reported that nonperforming assets rose to 0.50% of the total, versus 0.35% in the first quarter and 0.12% a year earlier.

Greater Bay shares were trading at $21.45 midday Tuesday, down 42% from its peak of $37.18 on April 18.

The stock price began to fall in April, after the Palo Alto, Calif., company posted its third straight quarter of nonperforming loans above 0.30%. Company officials and analysts have attributed the increase to a steady climb in commercial vacancy rates -- in particular, office vacancies have risen to nearly 20% in many of the markets of its 11 community banks. About 35% of the banks' combined $4.5 billion loan portfolio is collateralized by commercial real estate.

But analysts differ on whether continued credit issues will affect the company's earnings and whether its problems warrant a stock decline of over 40%.

Campbell Chaney, an analyst with Sander Morris Harris in San Francisco, said investors are right to worry about credit quality. According to a recent report from the real estate broker Grubb & Ellis, vacancy rates should drop further, then bottom out before the end of the year.

"Investors are starting to anticipate that this problem is not going to go away and will likely get worse, which may have an impact on earnings," Mr. Chaney said.

Charlotte Chamberlain, an analyst at Jefferies & Co. …

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